The Federal Reserve Chairwoman, Janet Yellen gave her two-day annual testimony to Congress last week where she defended the central bank’s monetary policy and reiterated the Fed’s view that rate hikes will be coming.

The Fed Chair Janet Yellen concluded her two-day semi-annual testimony to the U.S. Congress last week as she defended the Fed's monetary policy actions and the post-2008 financial crisis banking rules which the current Trump administration is expected to undo. The rather complacent markets got a jolt after the Fed chair signaled that a March rate hike was still on the table.

Speaking to lawmakers, the Federal Reserve Chair Janet Yellen sounded determined to keep the rate hikes coming this year as she hinted that a rate hike at the next policy meeting is still on the table. Considering that the markets were giving low odds for a March rate hike, Ms. Yellen's comments caught the market by surprise, and this was later supported by fresh data that showed U.S. consumer prices shot past the Fed’s 2% inflation target rate alongside rising retail sales figures as well.

The Fed Chair also clarified during the Senate questioning that the central bank doesn't have to wait for the fiscal stimulus in order to hike interest rates. “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,” Ms. Yellen said.

Following her hawkish comments, U.S. Treasuries fell as the 10-year note yields rose to nearly 2.48% on Tuesday and also pushed the probability of a March rate hike slightly higher, alongside pushing the U.S. dollar index to post a fresh one-month high. The markets are still skeptical about the Fed’s three rate hikes this year with the probability of a June rate hike higher than that of March, which also indicates a faster pace of rate hikes, contrary to what Ms. Yellen told lawmakers this week.

U.S. Consumer prices jump the highest in 4-years

Supporting Yellen's views, economic data yesterday included the release of the consumer price data for January. Official records showed that higher gas prices pushed inflation to the highest levels in nearly four years in January as the data was supportive of additional rate hikes by the Fed.

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U.S. Inflation Rate y/y 2.5%, January 2017

The headline consumer price index increased 0.6% on a seasonally adjusted basis in January compared a month ago. It has been the highest monthly reading on inflation since February 2013. Excluding food and energy, core consumer prices rose 0.3%, which was also the largest recorded jump since August 2016. Both the headline and core inflation data beat economists' expectations and pushed the annual inflation rate to 2.5% and the core inflation rate to 2.3% in January, marking the highest 12-month jump since March of 2012.

The January data pushed inflation above the Fed's 2% target rate and comes alongside the U.S. unemployment rate, which is running at 4.8% in January, similar to the Fed's long-run projections, although other measures of the labor market suggested that there was still some slack left in the economy.

Pushing inflation higher was a 7.8% increase in gasoline prices on a month over month basis, while other items such as shelter, apparel, and new vehicles also posted strong gains, contributing to the higher consumer prices. The energy index, which comprises of gasoline, fuel oil, natural gas service, etc. was up 10.8% on the year, marking the highest 12-month increase since November of 2011.

In a separate report, retail sales for January showed a broad improvement suggesting that the job gains alongside rising incomes were boosting consumer spending. Retail sales data for the month of January showed an increase of 0.4% on a seasonally adjusted basis compared to the previous month and rising above the median estimates of 0.1%. Retail sales gained with an increase in clothing and restaurant sales, which posted the biggest 11-month gain in January. Excluding gasoline, retail sales rose 0.2% and 0.8% excluding motor vehicles.