If you needed the Federal Reserve (Fed) Chair to say it for you, Janet Yellen didn’t disappoint.

Joining a chorus of Fed speakers over the past few weeks, Yellen sounded the klaxon for an eventual rate rise in comments at Harvard University on May 27 and left little doubt that she’s prepared to move soon. As is her style, Yellen was careful to ensure that she kept all options open, including the possibility of a rate hike at the June 14-15 meeting of the Federal Open Market Committee (FOMC) and any meeting thereafter.

Nevertheless, her tone was not sharp enough for the markets to assign more than even odds of a policy tightening move in June, especially as the final act of the Brexit drama plays out and the world waits to see whether British voters will approve the June 23 referendum that would force Britain to exit the European Union and what the fallout might be. Yellen’s and the Fed’s credibility would take a major hit if they tightened policy and then reversed themselves should bad things occur in the global economy, and I am sure that is how they are approaching Brexit.

Rate Hike Likely in July or September

The bottom line is that the Fed is set to tighten in July or September, barring a meaningful surprise in U.S. economic data, which I believe is unlikely. It would be a risky policy move, in my view. There is no overwhelming inflation-driven need to go down that path, but with few exceptions, such as Fed Governor Lael Brainard, most FOMC members seem to be moving on.

To be sure, one tightening in and of itself is unlikely to change the direction of the markets. Based on the current cyclical data flow, such a move can be easily justified and the markets are unlikely to overreact. And given lower data volatility on a global basis, I would expect the markets to continue to chug along to the upside. However, that will be the case only if the markets are convinced of the deliberate pace of tightening that Yellen has articulated so forcefully.

That said, the risks of a policy mistake are still very much a possibility. A repeat of Fed Vice Chairman Stanley Fischer’s, “there are more hikes coming this year,” or something even remotely like that, and we have the potential for a smaller version of the first quarter’s market tantrum. I believe the Fed has learned a lot from the last few quarters and will successfully hug the markets to keep them calm. Nevertheless, that risk will be with us for some time until the U.S. economy inevitably starts to slow down.

At the end of the day, given a decent cyclical backdrop, this still muddied picture argues for investors being long on risk assets, but only modestly so, in light of current valuations and policy risks.

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