This week, Federal Reserve Chair Janet Yellen will trot out in front of Congressional committees—first the House Financial Services Committee on Wednesday, and then the Senate Banking Committee on Thursday—to make her milquetoast, middle-of-the-road pitch about the health of the U.S. economy.
Both hearings will begin at 10 am ET, as members of both chambers of Congress will pepper the Fed Chair with questions about the economy and about the efficacy of the unconventional and seemingly inconsistent policies the Fed has pursued under her leadership.
The widespread carnage in the financial markets (across the globe, not just in the U.S.) through the first six weeks of the year have caused a great deal of anxiety and muddied the outlook for the Federal Reserve's next steps. It only complicates matters that the other central banks around the world are all leaning in the opposite direction of the Fed (loosening monetary policy as opposed to tightening it) at the moment.
We can expect Ms. Yellen to attempt to balance confidence with caution, boasting about the bright spots of the economy while walking back any notions of more rate hikes this year. In typical Fedspeak, she is sure to equivocate all of her answers in order to say next to nothing.
The market-implied probability of a March rate hike has fallen from 50% at the beginning of the fiscal year to just 2% now. The FOMC will make its next policy decision announcement on March 16, six days after the next ECB meeting.
Yellen Boxed Into a Corner
Yellen and the Fed increasingly seem to be boxed in based on recent economic data. Unemployment is down (below 5% for the first time since before the recession), but productivity and labor participation are still stagnant. Wage growth has picked up of late, but this only brings wages back in line with the pace they've been growing over the course of the past year. The outlook for consumers is improving while things look worse for U.S. corporations at the same time.
While it is hardly radical to suggest that the Fed helped cause the financial crisis, most in the mainstream accept that the measures it took thereafter helped the U.S. recover. However, it's also true that the timing and nature of the Fed's response actually made the Great Recession worse, and last for longer. These missteps happened before Yellen took the helm as Fed Chair, but are nonetheless part of the legacy of how U.S. monetary policy is crafted.
Addressing these harsh realities is surely not going to happen at this week's hearings in front of Congress. However, for all of its evils of central planning and the Federal Reserve's unofficial role as the "Fourth Branch" of government, the Fed and Congress could greatly improve upon the transparency, accountability, and cooperation involved in the process. Some key changes worth considering would be holding the hearings quarterly; sharing more information with the committee members beforehand; allotting more time for questioning; and allowing the opinions of outside experts to enter the discussion, among other things.
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