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Tuesday, December 5, 2023

Fed chair Yellen faces first test before Congress

Janet Yellen. (REUTERS/Gary Cameron)
Janet Yellen. (REUTERS/Gary Cameron)

The health of the U.S. economy and the extraordinary and controversial measures the Federal Reserve has taken to support it will top the agenda on Tuesday when Janet Yellen testifies to lawmakers for the first time as head of the Federal Reserve.

Yellen, in just her second week on the job since succeeding Ben Bernanke earlier this month, will want to reinforce the central bank’s determination to halt the money-printing presses later this year while ensuring investors that a rise in interest rates remains a long way off, economists say.

She is expected to strike a tone of cautious optimism after a decidedly mixed run of data that has raised questions about the prospects for the world’s largest economy.

Yellen’s prepared testimony on the Fed’s semiannual monetary policy report will be released at 8:30 a.m. The hearing before the Republican-controlled House of Representatives Financial Services Committee starts at 10 a.m.

New Fed chairs sometimes set monetary policy on a different path, as Paul Volcker did in 1979. But Yellen, who was vice chair under Bernanke, was a co-author of the Fed’s current accommodative policy and effectively wrote the book on how the central bank communicates, so she will probably change little so soon after taking the reins.

We expect her “to strike neither a more dovish nor a more hawkish tone,” said Roberto Perli, a former Fed official who is now partner at policy research firm Cornerstone Macro. “That might come as a surprise to a number of investors who view her as more dovish than Bernanke.”

More than four years after the end of the 2007-2009 recession, the Fed has embarked on perhaps its most difficult policy shift as it tries to back away from flooding the financial system with ultra-easy money. While it expects to keep interest rates near zero until well into next year, it has begun scaling back its bond-buying stimulus, though the measured pace could frustrate some Republicans who think the program is reckless.

One possible pitfall for Yellen would be to get ensnared in debate with lawmakers over fiscal policy, an area over which the Fed has no jurisdiction even though decisions last year in Congress have slowed the economic recovery. Others include the politically charged area of bank supervision, and the persistent worries that the Fed’s easy money has stoked potentially dangerous asset-price bubbles.

“She hasn’t been in the limelight really – even as vice chair she has made speeches here and there but she hasn’t been really in the hot seat,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

“I don’t think there’s going to be any honeymoon period for her,” he added. “I think she will get some pointed questions.”

Yellen, the first woman to chair the Fed in its 100-year history, will testify to the Democratic-controlled Senate Banking Committee on Thursday.


Encouraged by momentum in the economy last year, the Fed has trimmed asset purchases twice since December. It is now buying $65 billion in Treasuries and mortgage bonds each month in its bid to keep long-term borrowing costs low and encourage investment and hiring.

But two months of weak U.S. jobs growth, a disappointing reading on factory activity, and a recent selloff in emerging markets that also hit Wall Street will be fodder for the House committee. Its chairman, Jeb Hensarling, a Republican of Texas, is a long-standing critic of the aggressive Fed stimulus, which he argues has enabled a huge run-up in the United States’ debt.

Republicans have signaled they want to press Yellen on what they see as the limited effectiveness, and even dangers, of a central bank balance sheet now worth $4 trillion and counting.

Yellen is expected to calmly point to the longer-term trend of improvement in the labor market, including the quick drop to 6.6 unemployment, and to low but stable inflation as reasons for cautious optimism and for steady reductions in the stimulus.

Long concerned with the pain the recession caused American workers, she will also probably stress that policy will remain broadly accommodative for some time.

She is not, however, expected to tip her hand on how the Fed might re-craft its delicately worded promise to keep rates low based on levels of employment and inflation. The Fed has said it would not consider raising rates at least until the jobless rate hit 6.5 percent, as long as inflation was well contained.

Yellen will chair her first meeting of the Fed’s policy-setting committee in mid-March, and will hold a press conference after the close of the two-day meeting.

Yet after eight years of Bernanke at the helm of the world’s most influential central bank, the testimony could set the stage for at least four years under Yellen.

Said Zach Pandl, senior rates strategist at Columbia Management: “The testimony will help clarify how she plans to govern the (Fed’s policy-setting) committee, and how much airspace there was between Bernanke and Yellen on the big policy questions.”

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