By Mark DeCambre and Victor Reklaitis, MarketWatch

Yellen sees the case for a rate increase strengthening

U.S. stocks stepped firmly higher Friday as Federal Reserve Chairwoman Janet Yellen said the case for an increase of benchmark interest rates is gaining traction.

However, the central-bank chief's lack of a specific timetable and her optimism over the U.S. economy in her comments during a speech at an economics retreat in Jackson Hole, Wyo (http://www.marketwatch.com/story/feds-yellen-says-case-for-another-interest-rate-hike-has-strenghtened-2016-08-26)., appeared to provide support to investors, who have enjoyed a protracted period of ultraloose monetary policy.

"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months," Yellen said in a speech prepared for delivery to the Jackson Hole summit.

Frank.Cappelleri, sales trader and market strategist at Instinet, said investors focused on Yellen's positive remarks about the labor market and other segments of the economy.

"The theme from Ms. Yellen's remarks seems to confirm what the market has been telling us the last few months--economic conditions have improved," he said.

Wall Street's reaction may suggest that investors are becoming inured to the idea of higher rates.

"The last two solid jobs numbers were strong, but importantly, the [S&P 500's] reaction to those numbers were strong, too. That suggests the market could be warming to the idea of higher rates," Cappelleri said.

The Dow Jones Industrial Average rose 90 points, or 0.5%, to 18,538, propelled into positive territory on the back of a climb in shares of Intel Corp. (INTC) and Caterpillar Inc.(CAT).

The S&P 500 index advanced 10 points, or 0.5%, at 2,183. All 10 of the large-cap's sectors were firmly in the green, led by energy and materials.

"This is the most dovish-hawkish speech we could have possibly have expected," Megan Greene, chief economist at Manulife, told CNBC during an interview, noting that Yellen reiterated the Fed's dependence on coming economic reports.

"Yellen never paints herself into a corner when she doesn't need to" she said.

The climb for stocks put the three main indexes on track to erase weekly losses, with the S&P 500 on pace to post a modest 0.1% weekly climb, while the Dow is on track to end where it started the week. The Nasdaq Composite's recent gains makes a nine-week win streak a possibility for the tech-laden benchmark.

Corners of the market seemed skeptical that a rate increase was in the offing.

A 1.3% jump in the price of gold futures and yields for benchmark U.S. Treasury notes holding at 1.55%, after briefly rising, suggest that traders there are betting that the Fed will maintain a lower-for-longer stance. And the dollar, which had briefly popped higher, was most recently off flat at 94.74, as measured by the ICE U.S. Dollar Index . The dollar usually climbs amid prospects that the Fed could lift rates, as investors anticipate higher returns on dollar-based deposits.

Wall Street sees the chance of rate increase at the Fed's Sept. 20-21 meeting is 18%, down from 21% on Thursday, according to the CME Group's FedWatch too (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html)l. The market sees the likelihood of a rate increase in December at 43% from 41% the day prior.

Ahead of the speech, a second estimate of second-quarter gross domestic product underscored that the U.S. economy is still muddling along, growing at a lackluster 1.1% pace--slower than preliminary reading of 1.2% (http://www.marketwatch.com/story/second-quarter-gdp-rises-just-12-well-below-forecast-2016-07-29) as corporate profits fell.

Meanwhile, Cleveland Fed President Loretta Mester on Friday on CNBC echoed the recent hawkish sentiments of other Fed members, saying "it makes sense" to start moving interest rates higher.

Read more:Yellen to say 'ready' for another rate increase in Jackson Hole (http://www.marketwatch.com/story/yellen-to-say-ready-for-another-rate-hike-in-jackson-hole-2016-08-19)

And see:Fed might raise interest rates despite market objections (http://www.marketwatch.com/story/fed-going-out-to-jackson-hole-to-get-divorce-from-markets-2016-08-23)

On Thursday, the S&P 500 index closed 0.1% lower, while the Dow shed 0.2%, and the Nasdaq Composite Index was down 5.49 points, or 0.1%, to 5,212.20, as investors seemed reluctant to make big bets (http://www.marketwatch.com/story/wall-street-set-for-losses-as-yellen-speech-draws-closer-2016-08-25) on the eve of the Fed chairwoman's speech. The S&P is down 0.5% for the week, as of Thursday's close, and the Dow is 0.6% lower. The tech-heavy Nasdaq is on track to snap an eight week win streak, down 0.5% on the week.

Individual movers: Shares in Herbalife Ltd.(HLF) tumbled 7% following news that billionaire investor Carl Icahn has recently discussed selling his stake (http://www.marketwatch.com/story/carl-icahn-considered-selling-herbalife-stake-to-arch-nemesis-bill-ackman-2016-08-26) in the nutritional-products company to a group including Herbalife's arch-nemesis Bill Ackman.

Anheuser-Busch InBev NV(ABI.BT)(ABI.BT) warned Friday its beer megamerger with SABMiller PLC(SAB.JO) could lead to thousands of job losses (http://www.marketwatch.com/story/ab-inbev-warns-3-to-be-laid-off-in-merger-2016-08-26) in the coming years.

Software company (http://www.marketwatch.com/story/splunk-beats-expectations-and-raises-forecast-but-stock-still-slumps-2016-08-25)Splunk Inc.(SPLK), beauty products seller (http://www.marketwatch.com/story/ulta-shares-weaken-as-outlook-offsets-earnings-beat-2016-08-25)Ulta Salon Cosmetics & Fragrance Inc.(ULTA) and videogame retailer (http://www.marketwatch.com/story/gamestop-shares-slide-after-revenue-falls-short-of-street-view-2016-08-25)GameStop Corp.(GME) all look on track for down days after each company's stock suffered an earnings-driven drop late Thursday.

Other markets: Oil futures (SPLK) pivoted higher in early Friday trade, European stocks also tilted up after oil turned positive after trading lower for much of the morning, while Asia closed mixed.

Other economic reports: Meanwhile, the trade gap narrowed (http://www.marketwatch.com/story/us-trade-gap-narrows-in-july-advance-report-shows-2016-08-26)to a seasonally adjusted $59.3 billion in July from $64.5 billion in June, the Commerce Department said Friday.

And a The University of Michigan's final August reading of consumer sentiment (http://www.marketwatch.com/story/consumer-sentiment-dips-as-americans-divide-on-election-impact-on-economy-2016-08-26)slipped to 89.8 from 90.0 in July. The index is 2.3% lower than a year ago. Economists surveyed by MarketWatch had forecast a reading of 91.0.

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(END) Dow Jones Newswires

August 26, 2016 10:58 ET (14:58 GMT)

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