Janet Yellen's speech fueled some significant market moves. The US Dollar Index has rallied 1% and yields on US 10 year notes rose to 2.43%. 

Here is a summary of some of the main points that focused market attention and how they relate to current market pricing. 

Yellen comments on the current econonomy and Fed policy

  • The economy is near maximum employment and inflation is moving toward our goal
    • The unemployment rate is less than 5% and roughly back to where it was before the recession
    • Inflation has been running below 2% target for quite some time but we have seen it inching back toward 2% last year
  • At the last Fed meeting, Yellen and most of her colleagues were expecting to increase the Fed rate a few times a year until by the end of 2019 it is close to the neutral rate of 3%
    • There is still underemployment and inflation remains below target. However, as the economy approaches target, it makes sense to have gradual rate increases so as not to risk waiting too long. Changes in monetary policy take time to work their way into the economy
  • All this comes with the very large caveat that Fed’s interest outlook will change if their outlook for the economy changes.  The economy is vast and vasty complex so there is a lot of room for future uncertainty. That's why the Fed can't tell you what they are going to do in the future. They don't know

You can read Chair Yellen's speech here The Goals of Monetary Policy and How We Pursue Them

Comment

A gradual increase in the Fed rate to 3% by the end of 2019 could see an average of 3 rate hikes per year for the next 3 years

The market is current pricing only a 23% probability of 3 rate increases this year (see table above). If there are going to be 3 increases this year it would seem likely that the Fed wil make its first move at the May or perhaps June  meeting. The market is currently pricing a 42% probability that the Fed will move in May and a 71% chance they will move by June.

Overall, the market still appears to be more conservative than the Fed, If the market is wrong this could ultimately result in more upside pressure on the US Dollar and bond yields.