With the world's financial markets watching, Yellen, who succeeded
Ben Bernanke last week, will have a chance to set a mostly upbeat
tone and point to signs of steady economic progress, despite some
recent bumps in the road.
The Fed has embarked on perhaps its most difficult policy shift
after five years of ultra-easy money. It has begun scaling back its
bond-buying stimulus, but at a measured pace that could frustrate
some Republicans who think the program is reckless.
Those concerns will be aired on Tuesday, when Yellen appears before
the Republican-controlled House Financial Services Committee to
testify on the Fed's semiannual monetary policy report. Her
testimony will be released at 8:30 a.m., although the hearing does
not begin until 10 a.m.
She testifies to the Democrat-controlled Senate Banking Committee on
The Fed has trimmed its asset purchases twice since December,
encouraged by momentum in the economy late last year. But two months
of weak U.S. jobs growth, a slump in manufacturing and a recent
selloff in emerging markets now complicate things for the new Fed
Yellen, the former Fed vice chair who is the first woman to run the
central bank in its 100-year history, is expected to calmly point to
a longer-term trend toward improvement in the labor market and to
low but stable inflation as reasons for cautious optimism and for
steady reductions in the stimulus.
Long concerned with the pain the 2007-2009 recession caused for
American workers, she will also probably stress that near-zero
interest rates will not be raised any time soon.
"I don't think there's anything she's not going to be ready for,"
said Paul Ashworth, chief North American economist at research firm
"These are sometimes political theater," he added. "It's a mid-term
election year ... so you are going to get some grandstanding from
REPUBLICANS VS. FED
Underlining Republican unease with the Fed's aggressive response to
the financial crisis and recession, the House panel invited
witnesses to react to Yellen's testimony immediately afterward.
Three of the four are critics of the bond-buying program, including
Stanford University's John Taylor.
Conservatives worry the years of near-zero interest rates and
trillions of dollars in money-printing risk weakening the U.S.
dollar, while setting the stage for asset price bubbles and an
explosion in inflation.
Jeb Hensarling, chairman of the House committee, has been holding
hearings on the asset purchases, which are currently running at $65
billion per month. In the Senate, fellow Republican Rand Paul wants
to establish audits of the Fed's policy deliberations — a notion
Bernanke and others have slammed as a threat to central bank
independence from politics.
Committee Republicans said they want Yellen to give details on how
she will balance the Fed's responsibilities to keep inflation in
check while pushing for full employment.
"I'm sure she'll be hearing questions on the lack of effective
monetary policy and the impact going forward," said Rep. Scott
Garrett, the Republican chairman of the Financial Services' capital
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Another Republican panel member, Rep. Shelley Moore Capito, said
Yellen must do more to help senior citizens build safe investment
returns. "No one can create any wealth with interest rates squashed
as they are," she said.
PARSING HER WORDS
For all the criticism, most economists blame Congress for slowing
the U.S. recovery from recession with cuts to government spending,
tax increases and a series of budget battles that tested investors'
confidence in the United States.
Frustrated with the recovery, the Fed has launched three rounds of
asset purchases, swelling its balance sheet to more than $4
trillion. If the labor market doesn't stumble badly and inflation
doesn't weaken, the Fed aims to shelve the purchases by year end and
will likely raise rates sometime next year.
The trick for Yellen will be clearly articulating this on live
television in a pressure-filled question-and-answer session that is
likely to cover anything from Wall Street regulation to fiscal
policy and the gold standard.
Markets will be keenly attuned after a few weeks of high volatility
sparked by drops in emerging-market currencies, and after a
decidedly mixed batch of U.S. data that has raised questions over
the economy's strength.
"We'll all be trying to get a sense of how the Fed is reading recent
developments," said Carl Tannenbaum, chief economist at
Chicago-based Northern Trust. "We have had some news that while it
is almost certainly affected by the weather, it has not been
While it is her first public appearance since a Senate nomination
hearing in November, Yellen's style is well known on Wall Street
after more than three years as the central bank's No. 2 official and
six years running the San Francisco Fed.
In November, she made plain that aggressive efforts to spur growth
and hiring remained important. This week, she will probably try to
again stick to the script ahead of chairing her first Fed
policy-setting meeting on March 18-19.
Capito said that while she would like Yellen to give more specific
answers to questions than her predecessor did, the new chair will
likely be spared the contentious jabs Bernanke took from committee
"She will be treated respectfully," Capito said. "I don't think
there will be a lot of fireworks."
(Reporting by Jonathan Spicer;
additional reporting by Patrick Temple-West in Washington and Ann Saphir in San Francisco;
editing by Tim Ahmann and Andrew Hay)
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