Having warned of "excessive risk-taking" in her earlier released prepared remarks, Janet Yellen's relatively hawkish testimony before the Joint Economic Committee (96% odds of Dec rate hike) will perhaps be most-watched for the Q&A. With Jeb Hensarling wanting to reform The Fed and "throw FSOC in the bin" and Trump allies demanding The Fed reduce its balance sheet (notwithstanding questions over Fed independence), we are sure to see some fireworks.
As we detailed earlier, here is a framework of 5 key items to look for courtesy of the WSJ.
1. December Signal
All ears will be listening for Ms. Yellen to affirm recent statements from her colleagues that the Fed remains on track for a December rate increase. Officials signaled after their last meeting that they were getting closer to lifting rates, and needed only a little more evidence that the economy was improving to convince them to move next month. She could point to a handful of indicators the Fed has received since its Nov. 1-2 meeting: employers continued to add jobs at a steady clip in October, annual wage gains accelerated at the fastest pace since June 2009 and consumer spending at retail stores advanced at a healthy pace this fall.
2. Election Fallout
Several Fed officials raised concerns before their November meeting about the possibility for market volatility following the presidential election. Many investors were stunned by Donald Trump’s victory, but stocks have rallied on hopes that the new administration’s policies will boost economic growth along with inflation and interest rates. Still, lawmakers will likely want Ms. Yellen’s view of the market’s reaction – including a rise in government bond yields.
3. Trump Effect
Ms. Yellen will likely be asked to weigh in on the potential economic effects of Mr. Trump’s proposed fiscal policies, including plans to boost infrastructure spending and slash taxes. While the Fed is often reluctant to comment on legislation, there is precedent for Fed chairmen signaling their approval for fiscal stimulus. Central-bank officials have made clear in recent years that they need Congress’s help to further boost economic growth. But some officials have warned that a surge in spending could force Fed officials to raise interest rates faster than they currently expect.
4. Fed Independence
The Fed could face significant political pressure next year under a Trump administration. Republican efforts to alter the Fed’s operations and subject it to greater congressional scrutiny have gained broader support in recent years, and Mr. Trump has made no secret of his disapproval of the Fed. Expect Ms. Yellen to make the case against those efforts, which she has said would erode the Fed’s independence and subject it to political interference that could ultimately harm the economy.
5. Inflation Firming
Republicans on Capitol Hill have complained for years that the Fed’s easy money policies could push inflation up to dangerous levels, but price increases have remained subdued. Recent signs of firming inflation could give GOP lawmakers a new opening to press Ms. Yellen on the Fed’s low-rate policies. Fed officials said in their November policy statement that inflation has “increased somewhat since earlier this year.” They also noted that some investors’ expectations of future inflation “have moved up but remain low.” Ms. Yellen could offer new insight Thursday into how officials view the risk of a sharp upturn in inflation.
As a reminder, here is the chart to pay attention to as she speaks - notice anything odd? As economic growth expectations collapse, The Fed jawbones rate-hike expectations higher?
Yellen is due to deliver her prepared remarks at 10am, Q&A will follow...