Yellen Heads to Capitol Hill to Discuss Economy for Likely Last Time as Fed Chief

By Nick Timiraos Features Dow Jones Newswires

When Federal Reserve Chairwoman Janet Yellen last testified before Congress in July, questions loomed over how a couple of weak inflation reports would shape the path of monetary policy and whether she would continue to lead the central bank next year.

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When Ms. Yellen returns to Congress on Wednesday to address the Joint Economic Committee, for what is likely her final testimony as the Fed chief, the succession plan is much clearer but the inflation outlook remains muddy. Here's what to watch at the hearing, which begins at 10 a.m. EST:

Inflation Noise

There is little suspense about whether the Fed will raise interest rates in December. Fed governor Jerome Powell, at his Senate confirmation hearing Tuesday, indicated that a third and final rate increase for 2017 is likely.

The bigger questions surround the course of policy next year, and though Ms. Yellen will leave the Fed in February, her thinking likely reflects the consensus view within the central bank.

For months, Ms. Yellen has explained her view that a recent soft patch in inflation is likely to prove transitory, in part due to a tight labor market. But each month that inflation pressures appear subdued, the search for alternative explanations becomes more intriguing. Ms. Yellen told an audience in New York last week that she still believes the soft price pressures are transitory, but added she was by no means certain. Ms. Yellen also might weigh in on a recent debate over how and whether the Fed might revisit its 2% inflation target or develop alternate tools, such as a price-level target, when interest rates are pinned near zero.

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Taxing Decisions

The Senate is considering a tax-cut proposal that could add to federal budget deficits, though economists are debating just how much red ink could spill from the legislation being considered. Lawmakers often press Ms. Yellen with partisan-tinged questions designed to show why the policy they support is right and the other party is wrong. Democratic senators on Tuesday unsuccessfully tried to press Mr. Powell to criticize GOP tax proposals that they oppose, and it will be interesting to see if Ms. Yellen wades into that scrum.

While Fed officials generally try to avoid getting drawn into political brawling, Ms. Yellen could offer clues on how Fed officials might view any deficit-financed stimulus program if enacted -- and the degree to which it might lead the them to raise rates more aggressively to prevent the economy from overheating.

Financial Conditions

If surprisingly soft inflation numbers are giving fodder to Fed officials who want to go slower on raising interest rates, easier financial conditions and concerns about rising asset values and low market volatility are providing ammunition to those who want to keep up -- or pick up -- the pace of rate increases. Ms. Yellen in the past has put more emphasis on labor-market indicators, such as the unemployment rate, in arguing for the Fed to make its gradual retreat from the Fed's postcrisis stimulus campaign. Will Ms. Yellen offer parting thoughts on how the Fed balances risks surrounding financial stability concerns?

Regulatory Defense

Ms. Yellen offered a defense of regulatory changes enacted since the financial crisis at the Kansas City Fed's annual monetary policy symposium in Jackson Hole, Wyo., in August.

She also expressed satisfaction that the financial system is more stable in a letter to President Donald Trump last week in which she said she would leave the Fed board of governors once the new leader of the central bank is sworn in. Ms. Yellen's term as governor ends in 2024.

Ms. Yellen has been careful to lay out areas where she believes regulations could be eased slightly, but these are relatively modest in comparison with the bulk of the postcrisis financial-regulatory architecture she helped to build.

A Friendly Send-Off

Mr. Trump broke with recent precedent in not offering Ms. Yellen a second term as chairwoman, instead nominating Mr. Powell to succeed her next February. Democrats will certainly fete Ms. Yellen for her tenure at the Fed, one that for now looks relatively successful. If current trends hold, she would leave during a moment when the economy is expanding solidly and unemployment is low. Republicans who at times clashed with her might take a more charitable view on her time at the Fed now that it is nearing its end. Ms. Yellen has served either as president of the San Francisco Fed or as a member of the Fed's board of governors since 2004. She also was a Fed governor in the mid-1990s.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

November 29, 2017 05:14 ET (10:14 GMT)