Yellen's Congressional Testimony to Shed Light on State of US Economy

Federal Reserve Chair Janet Yellen is set to testify before Congress on 21 and 22 June, providing clues on economic growth prospects and further policy moves amidst political implications imposed by the coming elections.

Kristian Rouz — Whilst the Federal Reserve's approach to monetary policy remains "data-dependent," as the regulator put it, the recent Federal Open Market Committee's (FOMC) decision to leave rates on hold after having exercised some hawkish rhetoric just a month prior seems incoherent. The US macroeconomic data suggested some strength in May, however, the job market figures were a sheer frustration, and the ever-shrinking manufacturing and corporate earnings remain a concern.

Janet Yellen, the Fed Chair, is scheduled to testify before Congress on Tuesday and Wednesday and investors are looking forward to the testimony seeking clues on both the regulator's next policy moves and the Fed's assessment of the overall economic situation — historically, the Fed view on the macro situation is more accurate that that suggested by statistics.

Janet Yellen has changed the tone of her public speech dramatically over the past two months, having swayed from a tightening hawk in late April, saying the hikes next to that undertaken in December are to happen "in the coming months" to a "data-dependent" dove, justifying the protractions in further hikes with the dismal expansion in hiring. Her upcoming congressional testimony will eventually bring more clarity of the Fed's view of the broader economy, suggesting what to expect policy-wise (particularly so after a speculation of a rate cut instead of hikes started to brew in the recent weeks), and in terms of the economy's performance in the short-to-mid-term (especially after the recession trends have become apparent in manufacturing, corporate sector and construction). Besides, there is also an international dimension to the Fed's policy impact.

"I think this hearing will be a key moment to look at the Fed's dual mandate domestically and its role globally," Aaron Klein of the Brookings Institution and formerly of Senate Banking Committee said.

The fact that this is an election year is complicating the Fed Chair's situation, as Yellen has to be increasingly cautious wording the policy outline and her assessments of the state of the economy. Put into office under the Obama administration, Yellen can hardly afford an overly pessimistic view, ruining the electoral appeal of the Democrats. The presumptive GOP presidential nominee Donald Trump once noted he would replace Yellen as the Fed Chair as her policies have thus far benefitted Wall Street, leaving Main Street behind, stuck in underperformance amidst whopping stock market gains.

Meanwhile, the macro data is hardly encouraging. According to the official Labor Department stats, US underemployment (nicely referred to as "the nascent gig economy") is way above unemployment, at roughly 10 and 4.6 percent, respectively. Whilst the trend is rather optimistic, with both declining absorbed by the gradually rising amount of payrolls, the stickiness in wages and prices (low inflation) is, again, the factor benefitting Wall Street rather than the non-financial sector.

US inflation, on the other hand, is undermined by the dollar's strength, stemming from the Fed's perceived adamancy to keep tightening monetary policies. A stronger dollar render imported goods cheaper, exacerbating US balance sheet deficit, hindering expansion in prices, and, most importantly, hitting domestic manufacturing. Cheap fuel is another factor. Whilst US core price index is at 1.7 percent, slightly below the Fed's inflation target of 2 percent, the headline inflation index is at 1.2 percent, still undershooting the desired levels. 

Therefore, the Congress might question Yellen of the still persistent under- and unemployment, as well as lack in expansion in consumer prices, hindering retail sales, among other things, and, ultimately, hampering the overall growth outlook.

Labor efficiency is another concern. While the economy has grown an average of 2 percent during the past five years, compared to historical average of 3.3 percent, it is again poised to slow to 1.8 per cent in 2016, should the current trends prevail — and that said, unless the economy slides into a recession due to manufacturing and corporate dismay.