Yellen more likely to lean dovish

Fed's view amid shifting data
Fed's view amid shifting data   

Fed Chair Janet Yellen has some explaining to do.

Yellen speaks Tuesday in a much anticipated midday appearance before the Economic Club of New York — just days after several Fed officials surprised markets by saying a rate hike could be coming soon. The problem is that the U.S. central bank on March 16 released a post-meeting statement that markets viewed as dovish, and most Fed watchers see June as the first time it would consider raising rates.

"This is the dark side of transparency. People talk and the market thinks the Fed is going to tell us, that the Fed is all-knowing and clear," said Deutsche Bank's chief U.S. economist, Joseph LaVorgna. "And what we're finding is transparency doesn't make the market any more comfortable or confident in what the Fed is going to do. ... The Fed has wrong-footed the market consistently."

The dollar, while mostly weaker Tuesday morning, has firmed in recent sessions on comments from St. Louis Fed President James Bullard and others who said the Fed could consider a rate hike in April.

"The risks are if anything that she's going to offset some of the more hawkish rhetoric we've seen," said Ian Lyngen, senior Treasury strategist at CRT Capital. Lyngen expects Yellen to reiterate the recent FOMC statement, and she could sound dovish in the process. But he expects no new proclamation from the Fed chair.

"Some people call her the fairy godmother...she seems to have a knack of making the markets go higher," said Randy Frederick, managing director, trading and derivatives at Charles Schwab. Frederick said Yellen was more consistently positive for stocks earlier in her tenure but she could be positive for the market Tuesday.

"She likes to talk dovish and the markets seems to love it," he said.

Treasury yields were lower in early Tuesday trading, as oil futures weakened.

Even though Yellen is not expected to make news, Fed watchers are looking for some clarity.

"All the FOMC members seem to be swinging back and forth in their sentiment, probably reflecting market conditions," said Mark Zandi, chief economist at Moody's Analytics. "Bottom line the economy is strong and it's rapidly approaching full employment, and inflation is much more likely to be heading north than south."

But Monday's economic data raised questions about the strength of the economy and whether it can endure rate hikes. Economists trimmed first-quarter GDP forecasts after a downward revision to January's consumption data and a wider trade gap. The median first-quarter growth tracking estimate was sliced by a sharp half percent to 0.9 percent, according to the CNBC/Moody's Analytics rapid update of economists' estimates.

"She has to acknowledge that the economic growth is more uneven than the Fed would like," said Diane Swonk, founder and CEO of DS Economics. "The hawkishness existed obviously at the meeting as well or we would not have gotten the dissent." Kansas City Fed President Esther George dissented at the March gathering. The Fed also issued new forecasts that day, including an interest rate projection that showed two hikes in 2016, revised down from four.

While some Fed watchers expect Yellen to re-emphasize that April will be a "live meeting," meaning the central bank could raise rates, the market is placing low odds on it actually moving. Zandi said a key will be whether Yellen starts to discuss what would happen if the Fed does not start moving to normalcy. That would not mean the Fed would be ready to raise rates in April, but would signal that it intends to hike soon and keep hiking, he said.

"This economy is pretty close to full employment It's not consistent with where rates are today," said Zandi. Economists expect to see 205,000 nonfarm payrolls for March when jobs data are released Friday.

Swonk, however, said there is more labor slack than meets the eye, and that's clear in a reluctant consumer. "I think she'll reaffirm her concern about wages and that growth is tepid. She's argued there's still a slack in the labor market and she's been proven right on that," Swonk said. "It's not a 4.9 percent unemployment rate economy."

The Fed has looked for a growth rate of 2 percent but the economy is falling short, she said. "I think it keeps June in the game but even though hawks will still have an itchy trigger finger in April they're not going to move," Swonk said.

Zandi said the Fed is not paying much attention to gross domestic product. He took issue with the way GDP is calculated in the first place, as it misses information services and technology.

But he did say the Fed's message has been confusing. "I am perplexed by the communicating. It does feel like it's been a bit of a pingpong match." he said. "It seems her tone is swinging more than I would have thought."

Besides Yellen's speech and question and answer session, there are two other Fed speakers. San Francisco Fed President John Williams gives remarks at 5:15 a.m. ET in Singapore, and Dallas Fed President Rob Kaplan speaks at 1 p.m. in Austin, Texas. He also has a 4 p.m. appearance.

There is S&P/Case-Shiller home price data at 9 a.m., and consumer confidence at 10 a.m. ET.