Wed, Feb 25, 2015 page15

• Yellen to address Congress as Fed faces transition

  RATE HIKE? The Fed is likely to adopt a wait-and-see stance amid concern over low inflation, a weak job market and troubles abroad, most analysts say

  • AP, WASHINGTON
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  After winning praise for how she handled her first year as head of the US Federal Reserve, Janet Yellen is facing a tougher challenge this year.

  Yellen must navigate a delicate transition from record-low interest rates to a period when the Fed will start raising rates while trying to keep financial markets calm. Yellen was scheduled to deliver the Fed’s semiannual economic report to the US Congress yesterday and today, and investors are awaiting any hints that might clarify the timetable for a rate hike.

  They may come away disappointed. Yellen is likely to adopt a wait-and-see stance that echoes a message the Fed has sent of late: That while employment and other economic gauges have brightened, the Fed remains concerned about excessively low inflation, lingering weaknesses in the job market and troubles overseas.

  Yellen’s testimony yesterday to a Senate committee and today to a House of Representatives committee could produce a battle of wills: Lawmakers will likely push for clarity, and Yellen may counter by citing the hazy economic landscape the Fed is navigating.

  Beyond rates, Yellen could face questions about legislation to expand Congress’ oversight of the Fed. The measure has support among conservative Republicans, but is opposed by Fed officials who say it would compromise the central bank’s independence.

  Many analysts think Yellen’s testimony is likely to hew closely to the minutes of the Fed’s most recent meeting. The minutes depicted policymakers as struggling to assess when the economy might strengthen enough for them to raise rates and how best to signal their intentions.

  The Fed risks triggering financial turbulence as it shifts from a period of ultra-low rates to one in which it must choose how soon, how fast and how long to raise rates to avoid future high inflation. Higher Fed rates will, in turn, affect rates on many consumer and business loans and could depress stock and bond prices.

  In its two most recent policy statements, the Fed expressed its intention to be “patient” about raising rates. Many economists have predicted it will raise rates in June, but the minutes of their last meeting showed that some Fed officials feared that removing “patient” from their policy statement could spur investors to raise long-term rates to “undesirably tight” levels.

  Yellen is likely to note progress in reducing unemployment while repeating her dissatisfaction with tepid pay increases, a shortage of full-time jobs and inflation persistently below the Fed’s 2 percent target.

  She might also stress the many uncertainties the Fed must assess, including a harsh winter in some parts of the country that could slow home building. There is also concern about weaker growth in US export markets, such as China and Europe, and whether a preliminary deal giving Greece more time to repay debts will hold.

  While various Fed officials have discussed a potential June start for rate increases, many analysts say that target may now be slipping, especially given that inflation has slowed further, reflecting cheaper energy and a rising US dollar.

  “The Fed wants to see the temperatures thaw and more certainty in other areas before they move rates,” said Diane Swonk, chief economist at Mesirow Financial in Chicago, who thinks the Fed will raise rates by September.
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