In her first press conference as Fed chair yesterday, Yellen emphasized that dropping a 6.5 percent unemployment threshold for considering an interest-rate increase “does not indicate any change in the committee’s policy intentions.”

Rather than paying heed to Yellen’s assertion, investors seized on an increase in Fed officials’ own interest-rate forecasts and Yellen’s comment that borrowing costs could start rising “around six months” after it stops buying bonds. Yields on two-year Treasury notes climbed as much as 10 basis points yesterday, the most since June 2011.

“With the shift to qualitative guidance, the only quantitative metric we have is the fed funds projections from the Fed,” said Dean Maki, chief U.S. economist for Barclays Plc in New York and formerly an economist at the central bank. “So while the statement and Chair Yellen in the press conference said little had changed, the Fed’s projections suggested that there was a notable change in the Fed’s outlook.”

And:

“We know we’re not close to full employment, not close to an employment level consistent with our mandate, and unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate target,” Yellen said at the press conference in Washington.

David Fuller's view

Wall Street has been all but bullet proof for most of the last year.  One reason for this is that investors felt they could not see a potential starting date for higher interest rates, despite QE tapering.  Therefore, Yellen’s comment on interest rates above put an approximate date for a short-term rate increase on the horizon, although this has yet to affect medium-term trend consistency for the major US Indices, as you can see from this weekly chart of the S&P 500.

Yellen’s last quote shown above - about employment and the Fed’s mandate - may have been issued for political reasons.  She knows that smart machines are replacing both blue and white collar jobs faster than any other time in history.  A stronger economy would help, particularly in terms of employment by services industries, but Yellen also knows that inflation pressures are likely to rise before new jobs are created at a healthy rate.

For indications that investors are anticipating somewhat higher inflation levels in the USA, I would pay particular attention to the US 10-Yr Treasury Bond Yield and also the Continuous Commodity Index (Old CRB).  Currently, USGG10YR is ranging in a benign fashion but the eventual sustained break above 3% would confirm upward pressure on rates.  CCI is temporarily overextended following this year’s strong rise and a consolidation has commenced.  However, people are no longer citing it as a harbinger of deflationary pressures.