Add a Greek debt crisis and the Chinese stock market to the long list of economic conditions Federal Reserve Chair Janet Yellen will touch on this week as she explains central bank monetary policy to two separate Congressional committees.
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If history repeats itself, most of the committee members will prod Yellen for clues as to the timing of an interest rate hike. A handful of others – most likely conservative Republicans -- will ask for justification for keeping rates at historic lows for six-and-a-half years.
The Fed has taken an extremely cautious approach toward raising rates, vowing to hold off until the economy is strong enough to absorb the higher borrowing costs that will follow a rate hike.
The debt crisis in Greece and the rapid decline in the value of Chinese stocks are sure to be raised as additional reasons the economy may not be ready for higher rates. Both situations likely played a large role in the Fed’s decision last month to delay an interest rate hike beyond June.
Members of the House Financial Services Committee on Wednesday and members of the Senate Banking Committee on Thursday will be grilling Yellen primarily on what conditions need to be met for the Fed to OK a rate hike.
Yellen is certain to stick to the same answer she’s been giving for months.
“Chair Yellen delivers her semi-annual testimony on the economic and monetary policy outlook to Congress on Wednesday and Thursday and she will undoubtedly say that the Fed continues to be ‘data dependent’ in considering the timing of any liftoff in short-term interest rates,” said David Kelly, chief global strategist at J.P. Morgan Funds.
Since Yellen has reiterated her position many times in recent months and as recently as Friday in a speech in Cleveland, there aren’t expected to be any surprises or fireworks during her testimony. But the committee members will want updates on how these recent events overseas may have complicated the Fed’s decision.
With an agreement pending in Greece, the situation remains uncertain but far more stable than a week ago. And the struggling Chinese stock market isn’t expected to have much impact outside of Beijing.
Yellen and her Fed colleagues have said repeatedly that the decision to raise rates will be based on an array of domestic economic indicators drawn from the key labor, housing and manufacturing sectors.
For instance, Fed policy makers long ago moved beyond the headline unemployment rate and have looked for labor market improvement in more obscure figures such as the labor force participation rate and wage growth.
The latter figure has grown increasingly important because of the key role it will play in lifting inflation toward the Fed’s goal of a 2% annual growth rate.
Kelly, who is predicting a September rate liftoff, said data released this week should keep the momentum heading in that direction.
Defending the Process
“June retail sales on Tuesday should still look strong following a surge in May and Housing Starts on Friday should log a third consecutive strong number, reflecting a more general surge in housing activity,” Kelly said.
“Manufacturing numbers, including the Industrial Production report for June and July numbers from the Philly Fed and Empire State indices, should show some stabilization after some weak months. Meanwhile, inflation data, and particularly the CPI report on Friday, should show inflation beginning to rise, both overall and excluding food and energy,” he added.
The Fed was widely expected to raise rates in June, but a soft first quarter in terms of economic growth forced central bankers to reconsider. The Greece debt crisis and the Chinese stock market turbulence might be serving as similar causes for delaying a rate hike until later this year or even 2016.
Yellen will be explaining how all of these factors play into the Fed’s decision, and then she’ll be defending that process to committee members who believe the Fed should act more swiftly.
The fear among some economists (and conservative politicians) is that keeping rates too high for too long will lead to runaway inflation.