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Yellen's balanced approach, soothes doves, encourages hawks

Federal Reserve Chair Janet Yellen, right, arrives for a dinner during the Jackson Hole Economic Policy Symposium at the Jackson Lake Lodge in Grand Teton National Park near Jackson, Wyo. Thursday, Aug. 21, 2014.

Fed Chair Janet Yellen managed to appease doves interested in maintaining easy central bank policy, but gave slight encouragement to hawks who want to see an acknowledgement the Fed would raise rates sooner if necessary.

In what arguably was the most anticipated Fed speech of the summer, Yellen carefully constructed a picture of a still poorly functioning labor market that requires easy Fed policy. But she also said the economy is getting closer to the central bank's objectives, and the Fed is "naturally shifting" to the debate on when to raise rates.

The dollar firmed after Yellen's comments. Stocks initially rose, but were trading at lower levels in late morning trading as the market focused on Ukraine. The bond market reaction was most telling, with rates rising on the short end of the curve, and the two-year yield briefly touching 0.50 percent.

"This is her arguably taking a step to the middle," said Ian Lyngen, senior Treasury strategist at CRT Capital. "We do see an increase in Fed funds futures rates, and that's reflected in the two- and three-year sector in Treasurys, and it's consistent with the notion that we're continuing on the path of a rate increase in the middle of next year. "