Look Ahead: Could Fed's Yellen sound like a hawk?

Janet Yellen
Andrew Harrer | Blooberg | Getty Images
Janet Yellen

Fed Vice Chair Janet Yellen will likely stick to a tight script Thursday when she appears on Capitol Hill, but her comments could still make waves in markets.

Yellen testifies at her confirmation hearing before the Senate Banking Committee at 10 a.m. Ahead of the testimony, she released a statement, in which she noted that the economy has made progress with the Fed's support, but that there is farther to go. She also spoke to the Fed's dual mandate, saying unemployment at 7.3 percent was too high and inflation is below the Fed's 2 percent target.

Yellen was nominated to replace Fed Chairman Ben Bernanke when he leaves at the end of January. She is not expected to make any policy declarations, or go into detail on Fed programs, though she is likely to be grilled about the Fed's unconventional policies.

"I don't think she's going to volunteer the information that the market wants to get some clarity on , meaning when is the Fed going to taper, when is QE going to end and when are rates going to go up. The timing of the taper and the path of the taper is what's most important to people right now," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

(Read more: What to watch for in the Yellen hearing: El-Erian)

LaVorgna said if Yellen sounds more middle of the road in the question-and-answer session, the market might take that as a signal she is less dovish and could be supportive of the Fed moving towards tapering back its bond buying program sooner rather than later. Fed watchers have been debating whether the Fed could move to cut back its $85 billion a month quantitative easing program sooner than expected, after Friday's surprisingly strong October jobs report.

While Yellen's statement to the Senate committee echoed the Fed's recent statements, as expected, the market reacted to its dovish tone by driving the 10-year yield to the day's low of 2.70 percent. Yellen is viewed as a core member of the FOMC, closely aligned with Bernanke.

Speculation that Yellen would lean dovish in the statement — favoring an easy policy stance — helped send stocks higher even before the statement was released at 4:30 p.m. ET. The speculation coincided with reports midday that Yellen's opening statement would be released after the market close.

(Read more: Yellen says more to be done)

The Dow and S&P 500 both closed at record highs, and the Nasdaq was at a new 13-year high of 3965. The Dow was up 70 at 15,821, its thirty-sixth record close in 2013, while the S&P was up 14 at 1782.

"It's nothing off message from what we've heard from the committee in the last few months. It echoes the voice of the FOMC's voting body," said Ian Lyngen, senior Treasury strategist at CRT Capital. "I think the market was generally expecting it to be more balanced and, or hawkish and it just came out as more of the same of what we've been hearing form the Fed."

Yellen is expected to win confirmation but she could face some tough questioning. Critics of the Fed say it has kept its easy policies in place too long, overbloating its balance sheet and threatening to create bubbles.

"She doesn't have any control over what the questions are so there's always an opportunity and when you're trying to speak off the cuff to say something that could be misconstrued, and that could lead to volatility," said Tom Simons, Jefferies money market economist. "On the margin, she is going to sound dovish. I would be surprised if she spoke on the hawkish side…If she was to lean hawkish on one answer, she 'll double down on the dovish side in the next one.

J.P. Morgan chief U.S. economist Michael Feroli, however, said Yellen may come off as hawkish unintentionally. For one, she could be lured in to sounding hawkish by having to defend against charges of being too soft on inflation, even though inflation is running below the Fed's goal. "This allows her to argue that she is both serious about the Fed's price stability mandate, and also comfortable with a very accommodative policy stance," he wrote in a note.

Feroli said unlike other Fed nominees, who were not on the Fed, she could rely heavily on the Fed's statements to make points. "This allows her to make statements without saying anything new to the market," he wrote.

Besides the Senate testimony, markets are watching earnings from Wal-Mart to see if Macy's stronger than expected performance will be repeated. Kohl's, Tyco, Viacom , Vivendi and Royal Ahold also report before the bell. Applied Materials and Nordstrom report after the close.

Economic data includes jobless claims, trade deficit and productivity and costs, all at 8:30 a.m. ET.

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.