Yellen to battle the 'dark side'

Yellen speaks Tuesday in a much anticipated midday appearance before the Economic Club of New York — just days after several Fed officials surprised markets by saying a rate hike could be coming soon. The problem is that the U.S. central bank on March 16 released a post-meeting statement that markets viewed as dovish, and most Fed watchers see June as the first time it would consider raising rates.

The dollar, while weaker Monday, has firmed in recent sessions on comments from St. Louis Fed President James Bullard and others who said the Fed could consider a rate hike in April. "All the FOMC members seem to be swinging back and forth in their sentiment, probably reflecting market conditions," said Mark Zandi, chief economist at Moody's Analytics. "Bottom line the economy is strong and it's rapidly approaching full employment, and inflation is much more likely to be heading north than south."

But Monday's economic data raised questions about the strength of the economy and whether it can endure rate hikes. Economists trimmed first-quarter GDP forecasts after a downward revision to January's consumption data and a wider trade gap. The median first-quarter growth tracking estimate was sliced by a sharp half percent to 0.9 percent, according to the CNBC/Moody's Analytics rapid update of economists' estimates.

"She has to acknowledge that the economic growth is more uneven than the Fed would like," said Diane Swonk, founder and CEO of DS Economics. "The hawkishness existed obviously at the meeting as well or we would not have gotten the dissent." Kansas City Fed President Esther George dissented at the March gathering. The Fed also issued new forecasts that day, including an interest rate projection that showed two hikes in 2016, revised down from four.

While some Fed watchers expect Yellen to re-emphasize that April will be a "live meeting," meaning the central bank could raise rates, the market is placing low odds on it actually moving. Zandi said a key will be whether Yellen starts to discuss what would happen if the Fed does not start moving to normalcy. That would not mean the Fed would be ready to raise rates in April, but would signal that it intends to hike soon and keep hiking, he said.

"This economy is pretty close to full employment It's not consistent with where rates are today," said Zandi. Economists expect to see 205,000 nonfarm payrolls for March when jobs data are released Friday.