Yellen Testimony Guide From Payrolls Report to Emerging Markets

Here’s what to look for when Janet Yellen testifies before the House Financial Services Committee today in her first public remarks since becoming Federal Reserve chairman on Feb. 3. Yellen’s prepared remarks will be released at 8:30 a.m., and the hearing will begin at 10 a.m. Yellen plans to speak to the Senate Banking Committee on Feb. 13 in a second day of semi-annual testimony.

-- No Panic Over Payrolls: Yellen probably will indicate she plans to press on with a strategy to trim bond buying by $10 billion at coming policy meetings even after a weaker-than-forecast report for payroll growth in January, according to Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. and a former New York Fed economist. Employers added 113,000 jobs last month, below economists’ anticipated 180,000 gain, Labor Department figures showed last week.

-- “While the last couple of payroll readings have been disappointing, we do not expect this to change the current course of asset-purchase tapering,” Lavorgna said in a research note. “We view the recent payroll weakness as temporary and likely to reverse.”

-- Stepping away from threshold: Yellen will probably back further away from the Federal Open Market Committee’s promise to begin considering raising the main interest rate when unemployment falls below 6.5 percent, Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York and former Fed economist, said in an interview. The FOMC in December said it probably won’t raise the federal funds rate until “well past the time” the jobless rate falls below 6.5 percent. “Most” panel members didn’t favor moving the threshold, according to minutes of the meeting.

Moving Away

-- A decline in unemployment, which fell to 6.6 percent last month, threatens to make the 6.5 percent jobless rate threshold obsolete, Hanson said. The Fed’s likely “to move away from these specific numerical thresholds and I would expect her to echo that sentiment,” Hanson said.

-- Steady Helm: Yellen, 67, will probably emphasize that she’ll continue former Chairman Ben S. Bernanke’s policy of holding the main rate near zero and gradually tapering monthly bond purchases, according to Robert Eisenbeis, chief monetary economist at Cumberland Advisors in Sarasota, Florida. While vice chairman, Yellen backed every FOMC decision, including its Jan. 29 statement announcing a reduction in monthly bond purchases to $65 billion.

Smooth Transition

-- “She will probably try to convey the fact that this is a smooth transition,” Eisenbeis, a former research director at the Atlanta Fed, said in an interview. “She certainly is not going to break new ground,” especially since this is her first time testifying as Fed chairman, he said.

-- Pressure points: Republican lawmakers will probably urge Yellen to ease up on regulation of financial institutions and “be more aggressive in reversing” record stimulus, said David M. Jones, president of DMJ Advisors LLC, a Denver-based economic consulting firm, and a former Fed economist. Democrats will probably call for the opposite: tougher regulation and a slower pace of tapering to so-called quantitative easing, he said.

-- “Republicans will be strongly in favor of a more hawkish stance by the Fed after its highly accommodative actions, but I’d think the liberal Democrats would try to play on Yellen’s sympathies” over income inequality and persistent joblessness, Jones said.

Messaging Battle

-- The Fed chairman will probably face an “all-out messaging battle” by both parties, and respond by playing it “straight down the middle,” said Sarah Binder, a senior fellow in governance studies at the Brookings Institution in Washington who focuses on Congress’s relationship with the central bank.

-- Trouble abroad: Fed reductions in bond buying have helped prompt a decline this year in emerging market stocks, with the MSCI Emerging Markets Index falling 6.7 percent this year through yesterday. The FOMC didn’t mention emerging markets in its Jan. 29 statement, and Fed regional bank presidents including Richmond’s Jeffrey Lacker and Chicago’s Charles Evans said have said they don’t anticipate the FOMC will change its tapering strategy in response to financial turmoil in developing nations.

-- Still, Yellen may discuss the possibility of greater policy coordination with other central banks, according to Brian Jacobsen, who helps oversee $241 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “The Fed’s just not making the jobs of some of these EM central bankers any easier,” he said, using the abbreviation for emerging markets.

Stress Tests

-- Regulatory clout: Lawmakers may also probe Yellen about the Fed’s expanded powers as a banking supervisor and regulator, said John Ryding, chief economist and co-founder of RDQ Economics in New York. Since the financial crisis the central bank has subjected the largest banks to annual stress tests, stepped up capital and liquidity requirements and intensified monitoring of risks to the financial system.

-- “Her message is going to be, the banks are in a much stronger position,” Ryding said. “The Fed has emphasized that the single best protection is well-capitalized banks,” and Yellen will focus on the “slow healing” of the banking industry.

-- Take sides: Lawmakers may press Yellen to take a stand on the Affordable Care Act, especially its potential impact on employment, according to Lindsey Piegza, the Chicago-based chief economist at Sterne, Agee & Leach Inc. The Congressional Budget Office said last week the national health-care law will reduce the hours Americans work by the equivalent of 2 million full-time jobs in 2017, sparking renewed Republican criticism and a fresh defense from the White House.

-- “She’s written a lot about income equality, and proponents of the ACA are going to try to push her and twist her words to say, ‘aren’t you in favor of an act that continues to subsidize lower income workers to have access to health care?’” Piegza said. Opponents will try to coax her into decrying how the program may crimp job growth, she said.

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