Just a week after utterly embarrassing herself in a frenzied hour of mumbling and incoherent babble, Fed Chair Janet Yellen will begin Day 1 of her semi-annual testimony (so-called "Humphrey-Hawkins" hearings) playing defense as all the promises she has made in the past six months fade into reality. Expectations are for a stable dose of muted confidence with no over-promising from The Chair but the Q&A is likely to be fireworks-prone as this is the last scheduled chance lawmakers, many of whom face re-election, will have to publicly question the Fed chief before voters head to the polls in November.
Headlines from Prepared remarks:
- *YELLEN: FED TO ASSESS `WHETHER' GROWTH, JOBS, INFLATION TO GAIN
- *YELLEN SAYS BREXIT COULD HAVE SIGNIFICANT ECONOMIC REPERCUSSION
- *YELLEN: SPENDING HAS PICKED UP SMARTLY, HOUSING IS RECOVERING
- *YELLEN: OPTIMISTIC ON FURTHER IMPROVEMENT IN LABOR MKT, ECONOMY
- *YELLEN REITERATES FED TO PROCEED CAUTIOUSLY IN RAISING RATES
But then there is this...
- *FED: STOCKS' FORWARD P/E RATIOS WELL ABOVE THREE-DECADE MEDIAN
- *FED REPORT SAYS U.S. FINANCIAL VULNERABILITIES REMAIN MODERATE
- *FED: STOCKS VULNERABLE TO A TERM PREMIUM RETURN TO NORMAL
- *FED: COMMERCIAL REAL ESTATE MORE VULNERABLE TO NEGATIVE SHOCKS
As The Wall Street Journal notes, this could be an especially uncomfortable visit to Capitol Hill for Ms. Yellen, who likely will face grilling on a range of issues, such as the economic effects of increasingly stringent bank regulation, the Fed’s cybersecurity controls and its focus on global developments in setting U.S. monetary policy.
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On monetary policy, Ms. Yellen likely will repeat the comments she made at her recent press conference and in her latest speech. Although she spent nearly an hour taking questions from the press last week, she still left plenty of material for lawmakers to pick over.
Republicans will want to press the Fed chief to explain the reversal in officials’ thinking from just a month ago, when many Fed officials were flagging a potential rate increase in June and Ms. Yellen herself said a rate rise was probable “in the coming months,” to last week’s press conference, when Ms. Yellen said policy makers were now “quite uncertain” about where rates are headed. And Democrats will seek clarity on how much slack she still sees in the labor market at a time when the jobless rate is near what many officials consider full employment.
The Fed and the Rest of the World
Global economic and financial developments have played an important role in shaping Fed officials’ recent thinking about the path of policy, especially in the early months of the year when overseas market turbulence rippled through U.S. financial markets.
Lawmakers may push Ms. Yellen to explain how officials’ international concerns are shaping their domestic policy decisions, and how they can accomplish the goals set by Congress if doing so would have negative consequences for the rest of the world.
“I think this hearing will be a key moment to look at the Fed’s dual mandate domestically and its role globally,” said Aaron Klein, a fellow at the Brookings Institution and former Senate Banking Committee economist.
Ms. Yellen underscored those global concerns at her press conference last week when she said the so-called Brexit vote, scheduled for Thursday, was a factor in officials’ decision not to raise rates at their June meeting. A vote to leave the EU could have consequences for global financial markets and economies, she said.
“If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy,” she said.
Lawmakers could ask Ms. Yellen to be more specific about what potential financial stability risks she foresees for the U.S. if the U.K. votes to leave the EU, and what, if anything, the Fed is doing to prepare.
The Economy and Regulation
Regulatory questions have tended to dominate the Fed chief’s two-day appearance in recent years, and this time will be no exception.
At the same time that Fed officials focus on sustaining a tepid, seven-year-old expansion, they are proposing to ratchet up banks’ capital requirements. Expect GOP legislators to press Ms. Yellen on whether the Fed’s two efforts are at odds.
Lawmakers will want more details about recent comments from senior Fed officials suggesting that in the future the biggest banks will have to bulk up their balance sheets further to pass the central bank’s annual stress tests exams. This is especially timely, with the Fed set to release the results of this year’s tests on Thursday.
Don’t be surprised if much of Wednesday’s hearing revolves around a new proposal from House Financial Services Committee Chairman Jeb Hensarling (R., Texas) to roll back provisions of the 2010 Dodd-Frank law.
The plan, released earlier this month, would strip the government of its power to regulate systemically important nonbanks and would free big banks from the so-called Volcker rule that attempts to bar banks from betting with taxpayer-insured deposits, among other provisions.
Lawmakers always aim to have regulators weigh in on their bills, but don’t expect Ms. Yellen to take the bait so easily. Democrats will offer plenty of leading questions for the Fed chief to explain how Dodd-Frank, and the rules enforcing it, have made the financial system safer.
Congress has already requested more details from the Fed about its handling of a recent cyberheist from the central bank of Bangladesh’s account at the New York Fed.
That development, coupled with a recent Reuters report of cybersecurity incidents at the Fed board in Washington, is prime territory for lawmakers focused on Fed accountability and transparency issues. They will want to know why the Fed hasn’t given them more information already—especially related to past incidents at the board—and may press Ms. Yellen to explain what the Fed is doing in the wake of the heist to ensure its systems are airtight.
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Full prepared remarks...