US dollar slightly higher after speech but deep down inside, Yellen remains 'patient'.
The market is hung up on talk of a rate hike in the speech from Janet Yellen but the bulk of the speech and concluding remarks are a call for patience.
She explains her caution by arguing that a policy error in hiking too soon could be more costly than the opposite.
"The experience of Japan over the past 20 years, and Sweden more recently, demonstrates that a tightening of policy when the equilibrium real rate remains low can result in appreciable economic costs, delaying the attainment of a central bank's price stability objective. International experience therefore counsels caution in removing accommodation until the Committee is more confident that aggregate demand will continue to expand in line with its expectations--a view that is also supported by the research literature," she said.
Even if/when a rate hike comes, she argues that the path of hikes will be slow and gradual. However that contrasts with her continued assumption that rates will return to an equilibrium rate that the FOMC judges to be around 3.75%.
She notes that financial markets don't appear to believe rates will ever get that high.
"It is sobering to note that many market participants appear to assess the risks to the outlook quite differently. For example, respondents to the Survey of Primary Dealers in late January thought there was a 20 percent probability that, after liftoff, the funds rate would fall back to zero sometime at or before late 2017," she said, also noting low long-term yields.
Bottom line: More talk about being 'data dependent' and Yellen still wants to be patient but without making any promises. If economic data is soft, the Fed will wait.
Also note Yellen's interesting comments on the importance of jobs growth over wages and inflation.
FX impact: The US dollar is fractionally higher but data remains key.