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It could be a tough week for Janet Yellen

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Fed Chair Janet Yellen has the tough task in the week ahead of speaking to markets that are looking for more guidance than she may be able to provide.

Yellen's speech in Jackson Hole, Wyoming, on Friday has been anticipated for weeks, and especially in the last several days after Fed speakers suggested the Fed could raise rates as early as September. The annual Fed symposium has sometimes been used by Fed chairs to make important policy pronouncements.

"They're going to raise rates this year. I think the only open question is whether September is on the table. The Fed funds futures don't think it is. They ran out of excuses. Brexit didn't stop the world from spinning, and the election shouldn't be a factor," said Art Hogan, chief market strategist at Wunderlich Securities. However, the dominant view on Wall Street is that if the Fed hikes rates this year, it will be in December rather than September.

U.S. Federal Reserve Chair Janet Yellen
Chip Somodevilla | Getty Images

Markets in the coming week will also focus on oil, which has surged since OPEC said it would meet next month to discuss possible action. West Texas Intermediate crude futures have gained 24 percent in less than three weeks. WTI ended the week at $48.52 per barrel.

Stocks were flattish in the past week, with the barely changed at 2,183, and the Dow off 0.1 percent at 18,552. The S&P energy sector rose nearly 2 percent for the week and is now up 15.5 percent for the year, making it the best performing major sector.

"I think [stocks] will be very much like this week. We'll have sell-offs that become muted and rallies that become muted," Hogan said. "What could change it is more jawboning around Saudi Arabia and the September meeting and production cut rumors. That played itself out this week. We have a 9 percent gain in energy prices this week, almost all of it on that."

But the big action will be around Yellen, and the oil market could also respond if her comments move the dollar. The dollar has been sinking on low expectations for a rate hike. For the week, the dollar index was down 1.3 percent and was at 94.50 late Friday. Treasurys could also respond, with the Fed-sensitive two-year at 0.74 percent late Friday and the 10-year at 1.57 percent.

"I wish we had a Fed speak [volatility index]. I'm telling you it just spiked through the roof. It's all over the map. I'm confused about what they're trying to do," said James Paulsen, chief investment strategist with Wells Capital Management. "We've got people talking out of every side of their mouth. The Fed VIX is at its highest ever."

Paulsen said the comments by two Fed officials in the past week were particularly confusing. San Francisco Fed President John Williams said in a letter that the Fed should consider raising its inflation target to 3 percent and allow interest rates to be lower for longer. New York Fed President William Dudley then said in a television interview that the market was too complacent and the Fed could raise rates as early as September. Then Williams spoke again, suggesting the Fed could move soon to hike rates.

"The bigger story might be does the bond market break out as opposed to stocks? I'm not so sure a more hawkish Fed is necessarily bad for the financial markets," said Paulsen.

Economists say Williams' first comments were more for consideration and about longer term policy changes that could be discussed at Jackson Hole, but they did confuse some market participants when first reported. The Fed's inflation target is 2 percent, and its preferred measure of inflation, the PCE deflator, has been running at about 1.6 percent.

"The markets didn't react to them almost at all. That tells me the Fed has a credibility problem. When you have two strong individuals speaking … and the markets say I don't believe you, that's a big problem. Actions might have to be taken to correct that. If we can't take them at their word, that's a problem," said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management.

Caron said part of the credibility issue stems from central bankers using extreme policy. Critics say there has been little positive effect to stimulate the economy. Negative yields in Japan and Europe created a surge in buying in U.S. Treasurys and now long-term yields are extremely low.

"I think the important thing that's going on right now, and this is all conjecture, nothing's been official. What it seems like to me is the monetary policy experiment of low and negative interest rates is coming to an end. It doesn't mean they're going to hike rates. It's just that they believe that persistently lowering and lowering rates isn't the answer. It's got to be something else," Caron said. "They've got to change tact a little bit."

Caron said if the Fed were to raise the inflation target, it could change expectations, causing long end yields to rise. Even the suggestion of a change in its thinking could affect the market, he said.

"People bought a lot of bonds on the premise that rates are negative and even more negative going forward," Caron said. "The risk in the market right now is that we've been lulled into longer positions in bonds and flatter curves."

Barclays' chief U.S. economist, Michael Gapen, is among a minority on Wall Street who believe the Fed could raise rates in September and he's looking to Yellen to give a strong speech.

"I hope she steps up and gives an interesting speech. Don't give me this blah-dity blah. The markets need to hear from her. She's lost some credibility with investors. There are many market participants that believe she will never see sufficient data to make her move," he said.

Gapen said Yellen should sound a bit more hawkish and more confident in the economy when she speaks, but he said she can't give the nod to a September hike because of the pending August jobs report, released the following Friday.

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