PA ANALYSIS: Hawkish Yellen should act ASAP

Janet Yellen could trigger a bond selloff with her remarks at the Senate Banking Committee

Investors then turned to Fed Reserve Chair Janet Yellen's congressional testimony along with the presentation of the central bank's semiannual monetary report hoping for any hint as to where the federal reserve will raise interest rates again.

The financial world has been put on notice by the U.S. central bank to get ready for interest rate rises, but there is still no word on when.

U.S. retail sales rose more than expected in January, while other data showed consumer prices recorded their biggest increase in almost four years last month and manufacturing output steadily rising. The broad-based S&P 500 rose nine points, or 0.40%, to close at 2,338, while the tech-rich Nasdaq Composite Index climbed 19 points, or 0.32%, to 5,783. Yellen added that the industrial and commercial borrowing rose by 75%, underscoring the strength of US banking system and the availability of liquidity and capital. The survey of consumer expectations, an increasingly influential gauge of prices for the US central bank, figured out that inflation expectations increased to 3% last month from 2.8% in December and 2.5% in November.

The average 15-year mortgage rate was unchanged at 3.15%, equating to a $697.82 monthly payment per $100,000 borrowed.

7-year +6.3 bps @ 2.304%.

Ms. Yellen, testifying before the House Financial Services Committee, also touted the economy's improvement since the financial crisis, including a substantially lower jobless rate, but acknowledged that economic growth overall had been "quite disappointing". According to Kaplan, the US central bank should increase rates sooner rather than later, in order to avoid rapid rate hikes. It has increased its benchmark interest rate only twice in the last decade, in December 2015 and December 2016, by 25 basis points on both occasions.




However, not all Fed policymakers are convinced, that the US central bank should act soon to tighten monetary policy.

According to Yellen, an interest rate hike would have to be gradual, so that it disrupts inflationary pressure without hurting the economy. Lockhart added, that "I don't really see compelling reasons to move ahead in March".

Typically, that sort of pronouncement would send stocks, which have benefited from a protracted period of ultralow interest rates and who aren't eagerly pricing in a rate increase next month, decidedly lower.

"While the run of USA activity data is more likely to slightly disappoint market expectations, bouncing inflation could still add to Yellen's hawkish guidance".

The odds of a Fed rate increase in March have risen to 30 percent from 20 percent previously, Goldman Sachs Group Inc. economists led by Jan Hatzius wrote Wednesday.

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