That it was a year ago that former Federal Reserve Chairman Ben Bernanke first dropped his hints about the tapering to the Fed’s bond purchases is probably elevating the attention a bit more than usual on tomorrow’s appearance by Chair Janet Yellen before the Joint Economic Committee.
But for all the attention, Yellen is highly unlikely to offer anything as dramatic, or as hawkish, as Bernanke’s “in the next few meetings” line that nearly doubled the ten year yield and sent the Emerging Markets into a spasm.
*** Chair Yellen is likely to repeat her mid-April ECoNY speech in being as upbeat as possible on the outlook for the recovery while steering well clear of any suggestions on the timing of the lift-off in rate hikes. To deflect any hawkish read into her appearance before the JEC, she is likely to point to the persistence of low inflation, which is being monitored closely, and the absence of significant upward pressure on wages. She will be the un-Bernanke, in other words. ***
*** The dramatic fall in the labor participation rate last week is unlikely to deflect Chair Yellen from repeating her base case that there remains considerable slack in the labor markets. For Yellen and the majority of the Federal Open Market Committee, the base case remains that there are still plenty of part-time or discouraged workers, long-term unemployed, and the young to enter or be steadily drawn back into the labor force with the steady growth just above trend that will be slowly lifting the participation rate and keeping badly needed wage growth from becoming excessive. ***
*** With the midterm elections looming, Yellen is also of course likely to get even more questions than usual on fiscal policy, each side pressing for answers that support their own views and undercut the other side. But in particular, JEC Committee Chairman Kevin Brady may make the case and get a nod of approval for jettisoning the sequester in return for a more broadly-based, longer term fiscal discipline built around a budget target based on a percentage of the GDP. ***
*** Yellen is likely to skirt answering questions she will get over the Fed’s still evolving Exit plans and its management of the balance sheet. The FOMC seems to have started its discussions on revisions to the June 2011 Exit Principles and the tools to be used in the Exit at the April meeting, but Yellen is unlikely to offer much in detail. She may face some questions from the Republican side pressing for further disclosure on the breakdown of the assets on the balance sheet beyond what is already provided, but she is unlikely to go into much detail yet on the Exit strategy or sequencing. ***