Yellen signals reduction of Fed balance sheet reduction is still far off

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United States stocks opened lower and the dollar rallied on Tuesday as Federal Reserve chair Janet Yellen told Congress that interest rate hikes could rise gradually in 2017.

In her testimony, Yellen also said that the U.S. central bank would decide at its upcoming monetary policy meetings - due to be held on March 14 and 15 - whether to raise the key interest rate once inflation rises closer to the Fed's two percent target and as employment continues to strengthen.

"Changes in fiscal policy or other economic policies could potentially affect the economic outlook", she said. But she said the Fed also recognizes the dangers of waiting too long to tighten credit.

After the release of her remarks at 10 a.m., the Dow Jones Industrial Average shifted from fractional losses to slim gains in afternoon trading on the stock market today.

Financial markets specialist Professor James Angel from Georgetown University explained why: "Often politicians will want central banks to do things that are short term expedient, but long term unsafe for the economy".

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The rate-setting Federal Open Market Committee (FOMC) "expects the evolution of the economy to warrant further gradual increases in the federal funds rate" as it continues to expand at a "moderate pace", Yellen said.

Yellen is testifying Tuesday to the Senate Banking Committee and will do so Wednesday to the House Finances Services Committee.

The banking sector jumped after Yellen's comments on interest rates, while rate-sensitive sectors such as utilities and real estate slumped.

ANALYST'S OPINION: "A growing number of investors are anxious that potential trade wars with Mexico and China could lead to tariffs and higher prices", analyst David Woo of Bank of America Merrill Lynch said in a research note.

On comments that Fed will evaluate the incoming data and potential fiscal policy changes "at upcoming meetings", Shepherdson said this mean all meetings were "live".

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USA stocks on Tuesday had small gains and losses. With Governor Tarullo, a notable dove, departing the board, we might see Washington increasingly eager for a hand in the impending Fed merry-go-round and policies taking a cautious turn as a result.

United States unemployment now stands at 4.8 per cent, while inflation rose to an annual rate of 2.1 per cent in December.

BOND MARKET: Bond prices fell.

Meanwhile, former Goldman Sachs Group president Gary Cohn is leading the effort to craft Trump's tax reform plan, Bloomberg reported, citing a White House official requesting anonymity because the plan is still under development. On Tuesday, Yellen sounded more like she did in 2015, when the Fed wanted to be proactive to avoid getting too far behind the curve. "This suggests that the Fed is reasonably confident that the trend is rising", he added.

Senators pressed Yellen about the Fed's views on how limiting immigration would potentially impact the US economy. Yellen also noted that Donald Trump's call for two regulations to be scrapped for every one introduced would not apply to independent agencies.

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While the president fights against sending U.S.jobs overseas, another battle is brewing for the labor market: Automation of human jobs.

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