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This is what markets should be listening for as Congress grills Yellen

Traders are buzzing about whether Fed Chair Janet Yellen will sound a bit hawkish Tuesday and indicate that the Fed could consider raising interest rates at its next meeting in March — three months sooner than most Fed watchers are forecasting.

If she does, interest rates could jump and stocks could wobble.

But analysts say what they should also be weighing, as Yellen testifies before the new Congress for the first time this week, is that the Fed this year may no longer be the only central bank to move away from extraordinarily easy policies. That could have a much bigger and lasting impact on world financial markets.

Janet Yellen
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Janet Yellen

"I do think the market underestimates that a bit. For 10 years, global central banks have been easing," said Michael Arone, chief investment strategist at State Street Global Advisors.

That's important since the easy policies of the European Central Bank and Bank of Japan have helped keep U.S. interest rates low, particularly at the long end, as investors looked around the world and bought Treasurys for relative value and higher yields. That has had the effect of holding down rates that affect things like mortgages in the U.S.

"The market's thinking central banks aren't going to matter this year. I don't see that as realistic," said Peter Boockvar, chief market analyst at The Lindsey Group. "We're increasing the probability of rate hikes. The ECB is cutting [quantitative easing] QE this year, the Bank of England is going to end QE this year and possibly raise rates. You have the Bank of Japan getting tested every night in their yield curve control experiment. I think that central banks don't matter is unrealistic," he said.

That makes listening for Yellen's views and confidence level about the U.S. and global economies even more important, when she appears before the Senate Banking Committee at 10 a.m. Tuesday and the House Finance Committee Wednesday. Since the election, the Fed has taken a back seat to the market optimism around the pro-growth tax and stimulus policies of President Donald Trump.

That could change, if interest rates start to rise and the market perceives that they are moving too quickly. The Fed has forecast three rate hikes for this year, and economists are expecting more like two with the next hike in June. Arone said if global growth is improving, the markets could take the central bank actions in stride.

Yellen is appearing before the Republican-controlled Congress for the first time. She is expected to be asked about changes to banking regulation, the proposal to audit Federal Reserve policy moves and the Trump fiscal stimulus and tax reform proposals.

"There's been a lot of chatter about how she's going to put March back on the table," said Ian Lyngen, head of U.S. rate strategy at BMO Capital. "Of course, she's going to say every meeting is live. I think it's a matter of nuance; how much jawboning does she attempt to do; how adamantly does she stress that a March rate hike is a possibility, how emphatically is she going to tell us each meeting is in play?"

Lyngen said the Treasury market has been pricing in the possibility of a hawkish comment from Yellen. The 10-year yield rose to 2.43 percent Monday.

The Fed chair is also expected to be asked a lot of questions about the Fed itself, questions that could give clues to how Congress may deal with the Federal Reserve in coming months.

"I think she's going to want to demonstrate the need for the Fed's independence, so I expect comments on that, particularly given it's been called into question by some Republicans and even the president himself," said Arone. "She'll continue to talk up three rate hikes this year, and she'll continue to suggest the Fed remains on track to raise rates gradually."

Arone said Yellen is also likely to mention that it is time for the Fed to discuss moving to normalization by reducing its balance sheet. The Fed has disclosed that it's been talking about the future of its program of replacing securities on its balance sheet instead of letting them roll off. If ended, the net effect would be to gradually reduce the $4.5 trillion Fed balance sheet, but it could also be supportive of higher rates.

Yellen's testimony Tuesday and Wednesday before Senate and House committees comes as stocks burst to news highs. Stocks Monday closed at record highs for a third day. The S&P 500 was up 12 at 2,328, the Dow was up 142 at 20,412, while Nasdaq was up 29 at 5,770. Shares of Apple rose 0.9 percent to an all-time closing high of $133.29 per share.

"I don't think Janet Yellen will provide anything of shock value. I think if she's perceived in any way of being more hawkish, it's probably because the market has had an awfully good run here," said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management. "When she senses animal spirits in the market, she'll step up to the plate and indicate the Fed can raise rates as well as lower rates, and just cool the animal spirits a little."

Stoltzfus said the market should have a bullish tilt because the Fed is moving away from super easy policy. The S&P 500 reached its last cycle high of 1565 on Oct. 9, 2007, he said. "The market is up 49 percent since that high, or 4.36 percent annualized. That's not a raging bull market. it's a recovering market and it's climbed a wall of worry. Now I think we're getting ready for a bull market because we're getting rid of the monetary policy stimulus. We're moving toward normalization and we're moving toward fiscal stimulus," Stoltzfus said.

Data on Tuesday includes NFIB small business survey at 6 a.m. ET, and the PPI producer price inflation at 8:30 a.m.

There are earnings expected from Discovery Communications, Dr. Pepper Snapple, Generac, T-Mobile US, Credit Suisse, Martin Marietta and TransUnion ahead of the market open. After the close, AIG, Express Scripts, Lending Club and Devon Energy report.