What will Yellen say if Congress quizzes her on the economy?

by 21 Jun 2016
In an election year when dissatisfaction about the economy has been at the heart of presidential campaigns, Federal Reserve Chair Janet Yellen will probably face a grilling about the shortcomings of monetary policy when she testifies before Senate and House lawmakers in Washington today and Wednesday.

In many cases, the Fed chair has data to speak in her defense. Here are the facts to know when lawmakers take Yellen to task.

The Job Market is Healing
Politicians often question the U.S. jobs record, and after a very weak May jobs report, she’s almost sure to be asked about the labor outlook again.

Fortunately for Yellen, the trend is actually broadly positive. Both unemployment and a broader gauge of underemployment have fallen -- the former is back to its pre-crisis level, and the latter is at its lowest since 2008. While Yellen herself points out that the decline has come as people have left the labor market, how much of the drop in participation is caused by demographics and other structural forces is a real question.

Minority Unemployment Has Fallen
Another common complaint in the jobs category is that while overall unemployment has come down, joblessness for minority groups remains much higher than those for white, non-Hispanic Americans. This is undoubtedly true -- but it isn’t a change from before the crisis, suggesting that elevated minority unemployment is structural rather than a result of economic weakness.

The Fed, tasked with guiding business cycles, argues it can do little about structural job market issues. In fact, that’s a mission reserved to fiscal policy.

Republican lawmakers are wont to warn Fed chairs about the specter of high inflation, and have long argued that loose monetary policy will eventually unleash price rises. For the first time in many months, they may have a finger hold in the data. 

Monetary policy works with a lag, so some legislators may use the uptick in prices to argue the Fed ought to get back to hiking rates. But that will hardly persuade Yellen, who hasn’t voiced much concern that the Fed will overshoot on inflation. And she’ll get plenty of back-up from Democrats who’d rather the Fed keep its foot on the gas to make sure the recovery doesn’t falter. We’re likely to hear Democrat Sherrod Brown, the Senate Banking Committee’s minority leader from Ohio, say something similar to this statement from a year ago: “I see lots of evidence of underemployment, unemployment; virtually no evidence of inflation.”

Financial Stability
The other threat from persistently low rates is to financial stability. If credit is too easy, it can feed asset bubbles, potentially tipping the economy into recession when they burst. While some pockets, like commercial real estate, show high valuations and house prices are up, critics have little to point to in terms of tangible, destabilizing bubbles. Indeed, household balance sheets are in better shape than they’ve been since 2002.

Yellen’s Vulnerabilities
Nonetheless, Yellen will feel the angst of lawmakers whose constituents don’t quite believe the economy has recovered. Annual growth has averaged just 2 percent over the past five years, and is expected to slow again this year to 1.8 percent, according to the mean estimate in a Bloomberg survey of 89 economists.

Underlying that are historically weak levels of growth in productivity, a measure of the efficiency of workers, low rates of business investment and, until very recently, disappointing consumer spending despite a windfall to households from the drop in fuel prices. The economy also faces drags from slow growth outside the U.S., a shortage of skilled workers and negative demographic trends, namely the aging of America’s baby-boom generation and a declining birth rate.

For many of those headwinds, however, monetary policy has little, if any, relevance. That’s led many economists, in and outside the Fed, to call for fiscal stimulus not only in the U.S. but from governments in developed economies around the world.

Yellen is also likely to field questions on the regulation of Wall Street, the June 23 referendum in the U.K. over whether to remain in the European Union and the November U.S. presidential election’s impact on the economy.

Bloomberg News



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