* In Yellen’s second week as chair, expect cautious optimism
* Republican-controlled House committee could test Yellen
* Testimony at 8:30 a.m. (1330 GMT), hearing at 10 a.m.
By Jonathan Spicer
WASHINGTON, Feb 11 (Reuters) – The health of the U.S.
economy and the extraordinary and controversial measures the
Federal Reserve has taken to support it will top the agenda on
Tuesday when Janet Yellen testifies to lawmakers for the first
time as head of the Federal Reserve.
Yellen, in just her second week on the job since succeeding
Ben Bernanke earlier this month, will want to reinforce the
central bank’s determination to halt the money-printing presses
later this year while ensuring investors that a rise in interest
rates remains a long way off, economists say.
She is expected to strike a tone of cautious optimism after
a decidedly mixed run of data that has raised questions about
the prospects for the world’s largest economy.
Yellen’s prepared testimony on the Fed’s semiannual monetary
policy report will be released at 8:30 a.m. (1330 GMT). The
hearing before the Republican-controlled House of
Representatives Financial Services Committee starts at 10 a.m.
(1500 GMT).
New Fed chairs sometimes set monetary policy on a different
path, as Paul Volcker did in 1979. But Yellen, who was vice
chair under Bernanke, was a co-author of the Fed’s current
accommodative policy and effectively wrote the book on how the
central bank communicates, so she will probably change little so
soon after taking the reins.
We expect her “to strike neither a more dovish nor a more
hawkish tone,” said Roberto Perli, a former Fed official who is
now partner at policy research firm Cornerstone Macro. “That
might come as a surprise to a number of investors who view her
as more dovish than Bernanke.”
More than four years after the end of the 2007-2009
recession, the Fed has embarked on perhaps its most difficult
policy shift as it tries to back away from flooding the
financial system with ultra-easy money. While it expects to keep
interest rates near zero until well into next year, it has begun
scaling back its bond-buying stimulus, though the measured pace
could frustrate some Republicans who think the program is
reckless.
One possible pitfall for Yellen would be to get ensnared in
debate with lawmakers over fiscal policy, an area over which the
Fed has no jurisdiction even though decisions last year in
Congress have slowed the economic recovery. Others include the
politically charged area of bank supervision, and the persistent
worries that the Fed’s easy money has stoked potentially
dangerous asset-price bubbles.
“She hasn’t been in the limelight really – even as vice
chair she has made speeches here and there but she hasn’t been
really in the hot seat,” said Scott Anderson, chief economist at
Bank of the West in San Francisco.
“I don’t think there’s going to be any honeymoon period for
her,” he added. “I think she will get some pointed questions.”
Yellen, the first woman to chair the Fed in its 100-year
history, will testify to the Democratic-controlled Senate
Banking Committee on Thursday.
EARLY TEST
Encouraged by momentum in the economy last year, the Fed has
trimmed asset purchases twice since December. It is now buying
$65 billion in Treasuries and mortgage bonds each month in its
bid to keep long-term borrowing costs low and encourage
investment and hiring.
But two months of weak U.S. jobs growth, a disappointing
reading on factory activity, and a recent selloff in emerging
markets that also hit Wall Street will be fodder for the House
committee. Its chairman, Jeb Hensarling, a Republican of Texas,
is a long-standing critic of the aggressive Fed stimulus, which
he argues has enabled a huge run-up in the United States’ debt.
Republicans have signaled they want to press Yellen on what
they see as the limited effectiveness, and even dangers, of a
central bank balance sheet now worth $4 trillion and counting.
Yellen is expected to calmly point to the longer-term trend
of improvement in the labor market, including the quick drop to
6.6 unemployment, and to low but stable inflation as reasons for
cautious optimism and for steady reductions in the stimulus.
Long concerned with the pain the recession caused American
workers, she will also probably stress that policy will remain
broadly accommodative for some time.
She is not, however, expected to tip her hand on how the Fed
might re-craft its delicately worded promise to keep rates low
based on levels of employment and inflation. The Fed has said it
would not consider raising rates at least until the jobless rate
hit 6.5 percent, as long as inflation was well contained.
Yellen will chair her first meeting of the Fed’s
policy-setting committee in mid-March, and will hold a press
conference after the close of the two-day meeting.
Yet after eight years of Bernanke at the helm of the world’s
most influential central bank, the testimony could set the stage
for at least four years under Yellen.
Said Zach Pandl, senior rates strategist at Columbia
Management: “The testimony will help clarify how she plans to
govern the (Fed’s policy-setting) committee, and how much
airspace there was between Bernanke and Yellen on the big policy
questions.”
