Rebel Yell(en)

Fed Chair Janet Yellen will present her monetary policy testimony to Congress on Tuesday and Wednesday. We may not learn much new regarding the pace of future rate increases (which will remain data-dependent) and she’s certain to avoid getting into any discussion of fiscal policy. However, the Fed is now the chief supervisor of the financial system and, even if she is viewed as a lame duck (her term as Fed chair ends February 3, 2018), she ought to have a lot to say about financial regulation.

After some second-guessing in recent weeks, stock market participants remain generally enthusiastic. The Trump trade is back in gear. However, most economists are less enthusiastic. Expectations of near-term economic growth have been raised, but there are constraints ahead in the labor market, fiscal policy changes have to come through a contentious and difficult process, and there is a danger of a major mistake on global trade. It’s uncertain how these two conflicting views will be resolved. Yellen may not provide much clarity, but it will interesting to hear the Fed’s views on the outlook, as well as the risks and uncertainties. Remember, she’s there to present the view of all Fed policymakers, not just to give her own opinions.

Fed officials did not formally update their economic projections at the recent policy meeting, so Yellen may simply rehash the mid-December outlook. At that meeting, some officials, but not all, incorporated fiscal stimulus into their forecasts. Most Fed officials see the economy as being near full employment. Hence, fiscal stimulus may not add much to the growth outlook. Still, Yellen should take note that the size, composition, and timing of fiscal stimulus is uncertain. The Fed is not going to base monetary policy decisions on what Congress might do. There’s a strong belief that the central bank has the ability to wait to see what Congress does. There’s little danger of the Fed falling behind the curve.