Federal Reserve Chair Janet Yellen probably won’t drop a heavy hint on the timing of the next interest-rate increase when she speaks to Congress this week, but expect her to defend post-crisis banking rules the Trump administration has sworn to undo.
Yellen’s semi-annual testimony to lawmakers in Washington on Tuesday and Wednesday will be her first such performance since Donald Trump became president, a shift in power that may expose the U.S. central bank to deep changes favored by some in his Republican party, which remains in control of both houses of Congress.
The hearings could also serve to shed light on where the Senate Banking Committee’s new chair, Idaho Republican Michael Crapo, stands on proposed changes to the central bank’s authority and structure.
On monetary policy, Yellen is expected to keep the Fed’s options open ahead of its next policy meeting. While few investors anticipate a move when officials gather in mid-March, several Fed policy makers have argued a rate increase should not be ruled out.
“We think Yellen will leave the possibility of a March rate hike on the table and won’t back down from the three hikes this year” penciled in by Fed officials when they last submitted economic forecasts in December, Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients.
The policy-setting Federal Open Market Committee raised rates by a quarter percentage point in December. It next meets March 14-15.
With a year left in her current term as Fed chair, Yellen is seeking to guide rates carefully upward in synch with a slowly improving economy while wrestling with the uncertainty posed by the Trump administration’s still undetailed plans to boost economic growth. Trump said Feb. 9 he would announce a “phenomenal” tax plan in coming weeks.
Yellen is scheduled to testify before the Senate Banking Committee at 10 a.m. Tuesday, and before the House Financial Services Committee at 10 a.m. Wednesday. She is expected to deliver a prepared statement and answer questions from lawmakers.
In her most recent public remarks, Yellen said Jan. 19 the U.S. economy had made “considerable progress” toward the Fed’s objectives of 2 percent inflation and full employment, but was not at risk of overheating. She said the Fed would continue to adjust rates “gradually.”
Since then, January’s employment report showed the jobless rate had ticked up to 4.8 percent and wages rose only modestly, supplying no evidence of mounting inflation pressures. Excluding food and energy, prices rose 1.7 percent in the 12 months through December, according to the Fed’s preferred gauge of inflation.
Fiscal policy, however, looms as a wild card that has already driven up investor expectations for growth and inflation. On the campaign trail, Trump promised tax cuts, higher spending on defense and infrastructure and regulatory reform. The Fed chair will almost surely be asked how she intends to respond.
“It’s a difficult situation for the Fed to be in,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. “There’s not much Yellen can do because she’s got to wait and see what’s in the fiscal plan and if it gets a favorable response in Congress.”
There are also political risks. If pressed on how the Fed will react to expansionary fiscal policy, Perli said, she may have little choice but to point out, as she has in the past, that fiscal stimulus that arrives when the economy is near full employment will probably require higher interest rates.
“There’s a risk that she would sound like she was somehow being obstructionist, that the FOMC was standing in the way of economic growth that could be achieved through fiscal expansion,” said William Nelson, a former senior Fed staffer and now chief economist at The Clearing House, a banking trade group in New York and Washington.
For that reason, Nelson said he expects Yellen to emphasize that any response to fiscal policy will be aimed at hitting the Fed’s statutory targets, which are set by Congress.
What else to watch for:
– Balance sheet plans: Several FOMC members have called publicly for a discussion on when, how and the extent the central bank should reduce the size of its $4.5 trillion balance sheet. Yellen’s remarks could reveal whether that discussion began at the January FOMC meeting, and possibly hint at where she stands on the main questions.
– Dodd-Frank defense: The principle regulatory response to the financial crisis of 2008-09 is on the chopping block now that Republicans control both houses of Congress and the White House. Yellen may be prompted by Democrats to offer a vigorous defense of the 2010 law that imposed a raft of new obligations on banks aimed at making the financial system safer, but many of them seen as unnecessarily harsh by bankers who have the ear of the party in power.
– Sen. Michael Crapo: The new chairman of the Senate Banking Committee, a Republican from Idaho, is expected to play a central role in determining the legislative agenda of his party with respect to financial regulation and potential changes to rules governing the central bank. He could reveal some of his thinking on those issues through his opening statement or his questions for Yellen.
– Yellen’s future: Many Fed watchers expect Trump to appoint a replacement next February when Yellen’s four-year term as chair expires, but the administration hasn’t confirmed that or commented since the election on Yellen’s future. She has declined to say whether she wants a second term or whether she would stay if asked. Nor has she ruled out remaining on the Fed Board if Trump names a new chair, an unusual move but one allowed since her 14-year term as a governor doesn’t expire until 2024.
(c) 2017, Bloomberg · Christopher Condon