Updated: 02-27-2015Federal Reserve Chair Janet Yellen appeared before the Senate Banking Committee on February 24 to provide her semiannual testimony on the economy and monetary policy. Per usual, she will go before the House Financial Services Committee in a second day of testimony on February 25 that is more often than not a reprisal of the first day of testimony. That is, there aren't typically any surprises on the second day.

For the most part, there weren't any surprises on the first day of testimony this time around either.

In her prepared remarks, Ms. Yellen emphasized the improvement in the labor market while at the same time calling attention to inflation trends that continue to fall short of the Fed's 2% inflation objective.

She reiterated that the Federal Open Market Committee's (FOMC) assessment that it can be patient in beginning to normalize policy means that it is unlikely economic conditions will warrant an increase in the fed funds rate for at least the next couple of FOMC meetings. The next two FOMC meetings are scheduled for March 17-18 and April 28-29.

Fed Chair Yellen also stipulated that the Committee will change its forward guidance before an increase in the fed funds rate, but that doing so does not mean a rate hike will happen in the next couple meetings. Rather, it should be understood to mean that the FOMC thinks conditions have improved to the point where it will soon be the case that a rate hike could happen at any meeting.

In other words, the FOMC reserves the right still to do nothing with the fed funds rate for quite some time or to raise it sooner than some think if the data warrant such a move.

Ms. Yellen justifiably took a middle-of-the-road approach, following a consistent path of data dependency she has preached for some time.

Her prepared remarks were initially greeted with a favorable response. That is, they were seen as dovish.

Stock prices went up, Treasury prices went up (and yields went down), and the U.S. Dollar Index dropped from higher levels.

We didn't read Ms. Yellen's remarks as indisputably dovish. The markets, however, seemed to favor a dovish interpretation of her remarks simply because there was nothing in them that was decidedly hawkish.

A June rate hike has not been taken off the table if going by the "couple of meetings" perspective, but with Fed Chair Yellen acknowledging in the Q&A portion of her testimony that she doesn't see any evidence of inflation heading above 2%, the market doesn't appear to be sitting on knife's edge thinking a rate hike will happen in June, even though she qualified that the FOMC has to be forward-looking in setting monetary policy.

In fact, following her remarks, the fed funds futures market showed the probability of a rate hike happening in September dropping to 47% from 56% the day before Ms. Yellen's testimony. That currently leaves the October meeting in the market's mind as the most likely date for the first rate hike.

Those expectations are certain to change with each passing economic release and particularly the inflation data. For now, though, rate hike fears have been quelled by Ms. Yellen's even-keeled testimony and reliance on a data-dependent approach for setting policy as participants recognize most data of late has been weaker than expected.

--Patrick J. O'Hare, Briefing.com
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