Federal Reserve Chairwoman Janet Yellen goes to Capitol Hill this week to deliver her semiannual testimony on monetary policy and the economy. Every utterance is potentially market-moving, coming at a time when the Fed is considering when to start raising short-term interest rates after holding them near zero since late 2008. Here is a smattering of the types of questions she is likely to get from lawmakers—and the sorts of answers Ms. Yellen can be expected to deliver. She testifies before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. 1 How Long Will the Fed's Patience Last? The big question investors around the world want to ask is: When will the Fed start raising rates? Ms. Yellen won't give a specific answer, but lawmakers will try to draw her out on the Fed's thinking about how it will decide. They might ask how much longer the Fed will promise to "be patient" on deciding when to move. Ms. Yellen has said the phrase means no increase for two meetings, so if the Fed wants to formally open the door to a June rate increase, it would drop or significantly alter the "patient" language at its March meeting. She could repeat the phrase at the hearing or give some hint of how the Fed might change it. She could stress that losing patience would not mean a pledge to raise rates after two meetings. 2 Views on Inflation? Fed officials are optimistic about growth and employment this year. The one thing giving them pause about raising interest rates is that inflation that has long run under the Fed's 2% target and is heading lower, at least in the near term. The Fed said in its January statement it expects inflation to gradually rise to its target. Lawmakers could press Ms. Yellen to elaborate on why the Fed remains so confident. 3 How Close Are We to Full Employment? The U.S. unemployment rate was 5.7% last month, down from 6.6% a year earlier, a decline that has outpaced the expectations of most Fed policy makers. That's close to the 5.2% to 5.5% range Fed officials forecast in December as the likely rate over the long term—a proxy for the Fed's view of full employment, or the level at which the labor market creates neither upward or downward pressure on inflation. Some Fed officials have said recently they might lower their estimates of the range. Ms. Yellen could be pressed for her view and its implications for interest rate policy. 4 Views on Financial Regulation While the topic du jour is interest rates, expect politicians to spend plenty of time on regulatory issues, including the Volcker rule, community bank exemptions from postcrisis rules aimed at curbing big banks' riskier activities and how regulators identify large financial institutions that merit extra regulatory attention. 5 Fed on Defense Ms. Yellen has said in previous testimony she opposes legislative proposals that would allow the Government Accountability Office to audit the central bank's monetary policy positions. Expect her to repeat that position if asked about the latest such bill, introduced last month by Sen. Rand Paul (R., Ky.). She also could be asked about legislation introduced Monday by Sen. Jack Reed (D., R.I.) to require the president of the New York Fed be nominated by the U.S. president and confirmed by the Senate. And she could get questions on proposals by Dallas Fed President Richard Fisher to shift power from the New York Fed to the other regional Fed reserve banks. Source: The Wall Street Journal
