US rate-setters have been deeply divided on how fast interest rates should rise since a shaky start to the year on equities markets brought into question the hawkish tone struck by the Fed last December, when it raised rates for the first time in seven years and prepared the market for four more hikes during 2016.
Market volatility has forced the Fed to wind in its expectations, with the latest minutes from the rate-setting Federal Open Market Committee (FOMC), published in mid-March, indicating that its members now expect just two further bouts of monetary tightening this year.
Ahead of the speech, which will be made to the Economic Club of New York later today, the US dollar swung back-and-forth but was unchanged on the day, following a 0.4 per cent slide against a basket of currencies on Monday.
Today will be Yellen’s first opportunity to respond the latest US inflation data, which showed prices ticked up by one per cent over the year - or 1.7 per cent on the Fed’s preferred measure of ‘core’ inflation, which strips out the most volatile price movements - below the central bank’s two per cent target.
The Fed chair will also want to address signs of division among FOMC members, which has left the market “bewildered,” according to Lukman Otunga, Research Analyst at FXTM.
James Bullard, president of the St. Louis Federal Reserve said last week that the Fed should stand ready to raise rates at its next meeting, scheduled for 26-27 April, since economic growth looks healthy, the unemployment rate is “very good” and “inflation will start to rise". This was in contrast to Yellen’s own warning that rates should only rise gradually since “global economic and financial developments continue to pose risks.”
Analysts were also divided on what course interest rates would take in the US.
Capital Economics said Yellen’s dovish stance “strikes us as a remarkably cavalier view to take when the economy is either at, or very close to, full employment and when the annual growth rate of unit labour costs has accelerated".
RDQ Economics also warned that “the Fed is being overly cautious and risks falling behind the curve”, after their decision to hold the federal funds rate at between 0.25-0.5 per cent this month.
BNP Paribas, however, said it does not expect rates to go up in either April or June, and financial markets put the chances of a rate rise next month at just 12 per cent.