Yellen Hawkish, but Rate Hike Chances Still 50/50

U.S. government bond yields moved higher after Fed Chair Janet Yellen delivered her much-anticipated speech Friday at the central bankers’ annual symposium at Jackson Hole, Wyoming. This is a sign that investors read her tone as hawkish.

In her speech, Yellen voiced optimism about the economy, another key phrase signaling that interest rate hikes are coming in the future. Although setting a hawkish tone and perhaps trying to sound balanced, Yellen did issue a few cautionary words, but for the most part, she indicated that more rate hikes were on the horizon.

In her prepared remarks, Yellen said that the Federal Open Market Committee “continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.”

More importantly, she added, “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Yellen also said the jobs market is nearing full employment and inflation is inching toward the Fed’s 2 percent goal, despite downward pressure from the “the transitory effects of earlier declines in energy and import prices.”

Taking a precautionary tone, Yellen defended the Fed’s position, though she did acknowledge some limitations.

“In addition to taking the federal funds rate back down to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly – although with long-term-interest rates already quite low, the net stimulus that would result might be somewhat reduced,” she said.

Based on the movement in the financial markets after Yellen’s speech, she may have sounded hawkish, but the price action suggests a December rate hike is still a coin-toss.