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.

Rising Rates

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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.

Yellen's Future

Unless President Donald Trump nominates her to a second term, Ms. Yellen's time as Fed leader will end in early February 2018. That means this could be her last round of Humphrey Hawkins hearings. But she could remain on the Fed's board after her term as chairwoman ends, a move that would create one fewer vacancy for Mr. Trump to fill. Expect some statements of praise and gratitude toward Ms. Yellen, particularly from Democrats. And expect some probing questions, particularly from Republicans, about whether she would leave the Fed if not renominated.

Monetary Policy Rules

Republicans have been pushing for legislation to force the Fed to adopt a mathematical formula such as the Taylor rule to guide its monetary policy-making. Fed officials have pushed back, saying a rule would limit their independence and make it harder for them to react to unexpected shocks in the economy. On Friday, the Fed took a pre-emptive defensive step by including a long discussion on the drawbacks of monetary policy rules in its semiannual monetary policy report. That probably won't stop Republicans from pressing the Fed chairwoman on policy rules.

Fiscal Policies

Ms. Yellen's visit to Congress comes as lawmakers grapple with ambitious and divisive legislative goals, such as rewriting the 2010 health-care overhaul, rewriting the U.S. tax code and increasing infrastructure spending programs. Those proposals, if enacted, could have a significant economic impact. If they stimulate growth and fan inflation too much, the Fed could respond by raising rates more aggressively to prevent the economy from overheating. Expect lawmakers to try to get the Fed chief to weigh in on these debates and to offer support for their priorities. But Ms. Yellen has been through these hearings before. Don't expect her to tip her hand.

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

July 11, 2017 12:23 ET (16:23 GMT)