Taper caper: Why investors don't fear Janet Yellen

(MoneyWatch) Call it a "sugar high." Call it a feast for investors and a famine for savers. Call it, as Janet Yellen did last week in her Senate confirmation hearing to head the Federal Reserve, a key monetary policy lever for putting the economic recovery into higher gear. Whatever your view, it's clear financial markets still love quantitative easing, as the central bank continues to hoover up U.S. Treasury and mortgage bonds in a bid to unloose the economy's animal spirits.

Buoyed by Yellen's pledge to keep the stimulus flowing, spirited investors on Friday pushed stocks toward new milestones. Last Friday, the Standard & Poor's 500 Index, closed at 1,798 -- a mere 2 points shy of the 1,800 milestone. Meantime, the Dow Jones industrial average closed at 15,962. That was just 38 points from the 16,000 hurdle.

Yellen's turn before the Senate Banking Committee was as notable for what she didn't say as for what she did -- namely, anything remotely to do with when the Fed would start scaling back its $85 billion-a-month bond purchase program. Yellen steadfastly refused to bite when pressed by lawmakers to pinpoint when she, as the new Fed chair, would start to "taper."

Instead, she offered the kind of circular rationale for the ongoing torrent of easy money that is better at tying pesky lawmakers into rhetorical knots than in previewing Fed plans. "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy," Yellen said.

Wherever you go, there you are. 

Her reluctance to be hemmed in is, of course, partly tactical -- why hitch yourself to a plan before you even get the job? But it also reflects something more fundamental: For the Fed, tapering no longer poses the same threat to the economy that it did in mid-summer, when stocks recoiled at the bare mention of the word.

"Since tapering talk started, short-term interest rates remain anchored near zero along with most consumer interest rates, the stock market has continued to rise about 2 percent per month, home prices have continued to rise about 1 percent per month, credit spreads have narrowed, bank lending standards have eased slightly and the dollar has been essentially flat on a trade-weighted basis," said Bank of America Merrill Lynch analyst Ethan Harris in a research note. "Put it all together and financial conditions have eased since the Fed started talking about tapering."

In other words, there is reason to think financial markets will do just fine when the time finally comes for the central bank to withdraw its drip feed. In the meantime, the less weight Yellen and other Fed officials place on tapering as they communicate with investors, the less it will hurt when the needle slides out.

This week's key economic releases include the minutes from the Fed's latest policy meeting and October retail sales, which could show damage from last month's government shutdown. 

Monday, Nov. 18

- National Association of Home Builders market index

Tuesday, Nov. 19

- U.S. Labor Department Employment Cost Index (Q3)

Wednesday, Nov. 20

- U.S. Department of Commerce retail sales (October)

- U.S. Labor Department Consumer Price Index

- Federal Open Market Committee minutes (October 29-30 meeting) 

Thursday, Nov. 21

- U.S. Labor Department weekly jobless claims

- Philadelphia Federal Reserve Bank business outlook survey

- Conference Board leading economic indicators

Friday, Nov. 22

- U.S. Labor Department job openings and labor turnover survey (September)