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A Guide to Yellen Testimony: No Rush to Tighten

Janet Yellen, chair of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg
Janet Yellen, chair of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

July 15 (Bloomberg) -- Here’s what to look for when Federal Reserve Chair Janet Yellen testifies before the Senate Banking Committee at 10 a.m. today and before the House Financial Services Committee tomorrow.

-- Sticking to policy: Yellen is likely to emphasize the need to keep interest rates near zero for a considerable period, even after a report this month showed unemployment fell to an almost six-year low, said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago and a former Chicago Fed economist.

Yellen will probably say that, while the jobless rate has fallen faster than the Fed expected, the presence of part-time and discouraged workers and long-term unemployed “represents a reservoir of potential supply and accounts for wages not growing rapidly at all,” Tannenbaum said in an interview yesterday. “That will probably justify the message that the Federal Reserve is in no rush to begin to raise interest rates.”

-- Inflation outlook: While unemployment fell to 6.1 percent last month and inflation has risen closer to the Fed’s 2 percent target, “there is still too much uncertainty for her to change the tone materially,” said Roberto Perli, a partner at Cornerstone Macro LP in Washington.

Yellen will be questioned on the recent pickup in price gains, Perli said. “She might say that it is too soon to tell that inflation is about to take off,” he said. “She will probably continue to buy time.”

Bank Bailouts

-- Too-big-to-fail: Senator Elizabeth Warren, a Massachusetts Democrat, may ask Yellen, as she did in February, about progress ending the possibility of bailouts for large U.S. financial institutions. “The-Too-Big-to-Fail debate will be front and center in the hearings,” Keefe Bruyette & Woods Inc. senior vice president Brian Gardner wrote in a report.

Kansas City Fed President Esther George, in comments in Oklahoma last week, said, “I remain concerned that Too-Big-to-Fail has not ended. We do not have a way yet to effectively resolve these institutions.”

-- Community banker: Yellen also could be asked about the need for a community banker on the Fed’s board of governors. Senator David Vitter, a Republican from Louisiana, has proposed requiring the Fed board have at least one member with community banking or community-bank supervision experience.

-- Policy rules: Yellen may be asked about a proposal by House Republicans to limit how the Fed makes policy by requiring the Federal Open Market Committee to describe a rule or guideline for adjusting interest rates, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. Currently, the Fed doesn’t bind itself to a formula, preferring flexibility in an economy that continues to elude their forecasts of where it is headed.

‘Clip Wings’

“They are looking to clip wings,” Swonk said. “She can explain that policy is contingent on a potpourri of variables. Simplistic rules don’t work in the post-crisis economy.”

In a 2012 speech, Yellen said that while policy rules are “a useful starting point in determining appropriate policy, they by no means deserve the last word.”

-- Better data: Yellen’s prepared remarks will largely reflect the economic assessment of the FOMC at its June meeting, said Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. Her comments could be “modestly more upbeat,” reflecting recent improved data, and “she will acknowledge that progress has been made.”

Because her remarks reflect the views of the full FOMC, “there is a risk she is less dovish than what the financial markets assume are her underlying views,” he said.

Continued Slack

Discussion of the labor market will emphasize continued slack rather than the jobless rate, which she will indicate is a “very incomplete measure of strength,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008.

-- Wages as key: “Chair Yellen and other key policymakers are wedded to the idea that inflation can’t pick up unless wages accelerate,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics Inc. in White Plains, New York. “We expect no significant shift in view at Chair Yellen’s testimony.” Average hourly earnings increased 2 percent in the 12 months through June, Labor Department figures showed.

Two Tools

-- Exit discussion: Yellen is unlikely to go much beyond the FOMC’s minutes in discussing the plans for an eventual exit from record stimulus because “they are still being finalized,” said Gennadiy Goldberg, U.S. strategist with TD Securities in New York. Minutes of the June meeting released last week indicated FOMC members plan to use the interest rate on excess bank reserves held at the Fed as the principal tool for managing borrowing costs in the exit. Another tool, known as the overnight reverse repurchase facility, would play a “supporting role,” according to the minutes.

-- Asset bubbles: Yellen is likely to repeat her view that financial-stability concerns shouldn’t prompt a change in monetary policy, and supervision and regulation are the primary means of dealing with asset-price bubbles, said Wright. “She will pour cold water on the idea that financial-stability conditions warrant tighter monetary policy,” he said.

To contact the reporter on this story: Steve Matthews in Atlanta at

To contact the editors responsible for this story: Chris Wellisz at Mark Rohner

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