Fed's Yellen likely to discuss rates, balance sheet in congressional testimony

Federal Reserve Chairwoman Janet Yellen heads to Capitol Hill on Wednesday to address the House Financial Services Committee in her twice-yearly Humphrey Hawkins testimony and to take questions from lawmakers. She will deliver the same testimony at a separate hearing of the Senate Banking Committee on Thursday. Here is what to watch for in Ms. Yellen's appearance Wednesday, which begins at 10 a.m. ET.

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Rising Rates

Fed officials have signaled they plan to keep raising short-term interest rates as the economy gains strength. The Fed already has lifted rates twice this year and penciled in a third move later this year. That could make some Democrats nervous. Some lawmakers and activists have argued the Fed should keep interest rates lower for longer to generate more momentum in the economy to help minority and low-income groups, who are usually the last to benefit from economic expansions and the first to suffer in downturns. Some Fed policy makers also have indicated they want to hold off on raising rates again until they see inflation rebound after weakening in recent months. Lawmakers are likely to press Ms. Yellen on whether she still expects inflation to pick up and justify another rate increase this year.

Balance-Sheet Timing

For years, Republicans have been uncomfortable with the Fed's efforts to boost the economy by buying and holding bonds. The central bank launched three rounds of asset purchases, known as quantitative easing, in 2008 and accumulated a $4.5 trillion balance sheet. Now, Fed officials have announced a plan to slowly shrink those holdings beginning this year but haven't specified when exactly the unwinding will start or how large their balance sheet will be once they are done. Expect Republicans to press Ms. Yellen for more details on the Fed's balance-sheet plans.

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