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Yellen nudges markets slightly on rates

Fed Chair Janet Yellen may have slightly recalibrated expectations for a rate rise, by saying she personally anticipates a hike this year.

Yellen spoke after the market close Thursday in a much awaited speech that traders had hoped would clarify the central bank's position on rate hikes, after last week's FOMC meeting and a week of volatile markets. Stock traders covered shorts ahead of the 5 p.m. ET speech, expecting Yellen might give the market a boost.

The Fed chair said it would likely be appropriate to raise rates from near zero "sometime later this year," though the decision would continue to rely on economic data. In her comments last week, she had not identified herself as part of the group favoring rate hikes this year, but she had made a similar comment during the summer.

Federal Reserve Board Chairwoman Janet Yellen speaks during a news conference December 17, 2014 at the headquarters of Federal Reserve Board of Governors in Washington, DC.
Getty Images
Federal Reserve Board Chairwoman Janet Yellen speaks during a news conference December 17, 2014 at the headquarters of Federal Reserve Board of Governors in Washington, DC.

"It's called the 'Yellen Fed' for a reason, and she's owning it. I think it was consistent with her press conference, which was slightly more hawkish than what we saw in the [Fed] statement," said Diane Swonk, chief economist at Mesirow Financial. "I think it underscores where she stands which clearly wasn't as waffling as the statement."

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Yellen did not take questions after the speech, as planned. There was some temporary concern for the Fed chair after she fumbled over the last part of her speech and said she felt lightheaded. Yellen received medical attention, and central bank officials said she was fine and continuing with her schedule.

The Fed spooked markets last week when it held off lifting rates for the first time in nine years, citing concerns that international and financial developments could hurt the U.S. economy. That reference to China's slowdown and the fact the Fed lowered its own economic and inflation forecasts sent a very dovish message. Yellen re-emphasized Thursday that the Fed sees the lack of inflation as transitory.

"I think it's fairly hawkish. She seemed committed to raising rates this year. I think net-net, I think it's a concerted effort to signal a hike remains on the table," said Eric Stein, co-director of global fixed income at Eaton Vance Management. "To the extent the market takes this as the Fed getting back on track the market could take it as more constructive."

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He said given the reaction last week when the message was dovish but confusing, getting back on track for a rate hike will help the market.

Since the Fed meeting, commodities like copper and oil have sold off sharply, while gold rose about 3 percent. The S&P 500 was down 2.8 percent in the week since the meeting.

"I didn't see the comments as being all that substantial. Yellen went out of her way to associate herself with other members that they see a rate hike this year. When she mentioned 'transitory factors,' that's a real puff phrase. Nobody's going to know what that means two weeks from now, two months from now," said Mark Newton, chief technical analyst/partner at Greywolf Execution Partners

Newton noted that the fed funds futures did not move initially on the comments. The odds for a December rate hike were still at 41 percent, and October was at 18 percent just after 5 p.m., he said. Stock futures were initially mixed to slightly higher, and the dollar edged higher. Treasury yields were steady.

After her 5 p.m. ET speech became public, the dollar moved slightly higher but Treasury yields were steady, including the 2-year note, which is most sensitive to Fed rate talk.

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Stocks closed lower Thursday but well off the lows of the day, as traders covered shorts into the close, ahead of Yellen's speech. The Dow was down 78 to 16,201. The S&P 500 was down 6 at 1,932, but it had traded as low as 1,908. Newton said stocks recovered losses into the close because traders were concerned about being too short the market ahead of Yellen.

Newton said investors pay way too much attention to the Fed. "This is the most widely discussed Fed hike. Dissected to death," he said. Newton noted that he does not think the central bank will hike rates this year unless the stock market calms down.

Treasury yields Thursday were lower on the day ahead of her speech. The 10-year was at 2.12 percent.

West Texas Intermediate crude oil futures closed up 43 cents at $44.91 per barrel, their first gain in three days. They are down about 4 percent since the Fed meeting last week. Copper firmed slightly Thursday, but it is still down 6 percent from the level it was at a week ago.

Friday's data includes the third look at second-quarter GDP, expected to show growth at 3.7 percent when it's released at 8:30 a.m. ET. Consumer sentiment is also expected at 10 a.m.

"I think University of Michigan sentiment could be more interesting than GDP. We already know we had a really good second quarter," said Tom Simons, chief money market economist at Jefferies.

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"Consumer sentiment, kind of pivoting off the GDP, is much more interesting on what's going on in the third quarter. The August numbers were not good at all. You have competing forces. On one hand, lower gas prices may keep consumers feeling pretty good. On the other hand, lower stock prices make people feel pretty poor."

BlackBerry and Finish Line report earnings.

Traders concerned about China will be watching for headlines from Chinese President Xi Jinping, who is in Washington for a state visit.

Pope Francis will be in New York.