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Yellen says a rate hike is coming—but markets say not now

Greene: 'Most dovish, hawkish speech' from Yellen

Fed Chair Janet Yellen signaled a rate hike could be coming this year, but December is still seen as more likely even though Yellen opened the door wider for September and markets increased the odds of an earlier rate hike.

The markets initially read Yellen's much-anticipated Jackson Hole, Wyoming, speech as slightly hawkish, but then saw it as benign with no impact on expectations the Fed would move sooner than December. Stocks rallied, bond yields drifted lower and the dollar fell.

But many of those moves were reversed after Fed Vice Chair Stanley Fischer put the focus on next week's August jobs report and forward data, in an interview with CNBC. Stocks turned lower and the dollar turned positive as Fischer spoke just before midday. Fischer noted that the economic data has strengthened with strong jobs growth in the last three months.

"In our view, if the employment report continues to indicate an improving labor market, the FOMC may well raise rates at the September meeting," wrote Goldman Sachs economists. "As a result, we have increased our subjective odds of a hike at next month's meeting to 40 percent from 30 percent previously."

In the interview, Fischer said that Yellen's comments were consistent with a September rate hike and possibly two hikes this year, but the Fed won't know the course of normalization until it sees the data. He said that inflation is increasing though it remains below the Fed's 2 percent target. "We're reasonably close to what is thought of as full employment," Fischer said. On Monday, the Fed's preferred inflation measure, the PCE deflator will be released and on Friday, August nonfarm payrolls are reported.

"Fischer didn't say anything different than he said earlier. (Yellen) had put everyone on notice for a rate hike in September," said Peter Boockvar, chief market analyst at The Lindsey Group.

But Boockvar said Fischer's emphasis on the upcoming data made market participants rethink the potential for an earlier rate hike. Fed funds futures showed market odds swinging higher to 34 percent for September, from less than 30 percent, and to 60 percent for December, from less than 55 percent.

"All she said was the case for a rate hike has strengthened in recent months," said Ward McCarthy, chief financial economist at Jefferies. "The lack of specificity on a timetable looks like it's going to happen later rather than sooner."