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Pisani: The new phase in Fed policy has begun

Bob Pisani
Kamil Krzaczynski | Reuters

A new phase in Fed policy has clearly begun. Janet Yellen said so Friday.

Here's the key sentence in her speech to the Executives Club of Chicago: "The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective."

In other words, the economy has essentially met the Fed's goals .

This is a remarkable change in tone, but even more remarkable is the market reaction: no change in equities.

The S&P 500 (^GSPC), down 2 points before the speech, was essentially unchanged.

Had something close to this been said a year ago, the Dow (Dow Jones Global Indexes: .DJI) would have dropped 200 points immediately.

The difference is the Fed has been prepping markets for some time, and judging by the market reaction, the prep has been successful. It began a few months ago, but it began in earnest during Yellen's Congressional testimony. This week Fed official after Fed official has sounded eager to raise rates — the only question was, would she be?

She is.

This new phase in Fed policy means they are not as worried about inflation or global risks. During the question and answer portion, Yellen surveyed the global economic outlook and concluded, "Risks are more balanced than I have seen in some time."

She's right about that. It began before Donald Trump's electoral victory. The real reflation trade began in the summer, when interest rates finally began rising and better economic data began materializing in many countries, much of it driven by higher commodity prices.

But the Trump victory was the icing on the cake. The Fed finally has an ally: fiscal stimulus, which has convinced the markets that the economy can suddenly levitate to 3 percent growth, from 2 percent.

That means investors believe the economy can withstand higher interest rates without dramatically slowing economic activity.

The jury is still out on whether this can be accomplished. The irony is Yellen clearly owes a tip of her hat to Donald Trump , who is no friend of hers.