24/7 Wall St.

Federal Reserve Chair Janet Yellen gave her semi-annual monetary policy report to Congress on Tuesday. This was before the Senate Banking Committee, and some might interpret her words as a tad more hawkish or less dovish than in prior statements.

The introduction of the testimony noted that the economy has continued to make progress toward the Fed’s dual-mandate objectives of maximum employment and price stability. There is talk of waiting too long on the interest rate hikes but there is really no mention of how the Fed will handle its $4 trillion or so balance sheet.

On the jobs front, monthly gains averaged 190,000 over the second half of 2016 and rose a sharper 227,000 in January. The unemployment rate is now 4.8%.

Yellen also signaled that inflation moved up over the past year, but this was shown to be mainly due to diminishing effects of the earlier declines in energy and import prices. The total personal consumption expenditures index gains of 1.6% in the 12 months ending in December was still below Federal Open Market Committee’s (FOMC’s) 2% objective, but it was up a percentage point from its pace in 2015. The core personal consumption expenditures (PCE) inflation was up by about 1.75%.

The wording around expectations is worth looking at:

My colleagues on the FOMC and I expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2 percent. This judgment reflects our view that U.S. monetary policy remains accommodative, and that the pace of global economic activity should pick up over time, supported by accommodative monetary policies abroad. Of course, our inflation outlook also depends importantly on our assessment that longer-run inflation expectations will remain reasonably well anchored. It is reassuring that while market-based measures of inflation compensation remain low, they have risen from the very low levels they reached during the latter part of 2015 and first half of 2016. Meanwhile, most survey measures of longer-term inflation expectations have changed little, on balance, in recent months.

One issue that may have ticked bond yields higher were two comments inside of the formal statement:

As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. … At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.

Yellen’s statements also continue to signal that the FOMC’s view that gradual increases in the federal funds rate will likely be appropriate reflects the expectation that the neutral federal funds rate will rise somewhat over time.

Still, there remains a signal that interest rates probably will remain well under historical averages:

The Committee anticipates that the depressing effect of these factors will diminish somewhat over time, raising the neutral funds rate, albeit to levels that are still low by historical standards.

For more detail, see the full testimony.