Federal Reserve Chair Janet Yellen will deliver her semi-annual testimony to House and Senate committees this week. Her remarks will be closely monitored, especially in light of the recent increase in global economic insecurity — which has intensified talk of a recession threat — and global financial volatility.
Here are five questions that she should be asked as part of her broader evaluation of economic developments, the outlook and prospects for Fed policy.
1. How is international weakness influencing U.S. economic prospects? The jobs report for January released on Friday suggested that the economy is in relatively good (though not great) shape, despite mounting worries about the global outlook. There will be lots of interest in Yellen's forward-looking assessment of U.S. economic resilience, particularly given the recent sharp fall in Treasury yields, which is viewed by many as a signal of future weakness.
2. Is the recent acceleration in wage growth sustainable? Although the U.S. has been one of the world's most powerful engines of job creation in recent years, the recovery of the labor market has not yet been accompanied by solid increases in wages. Data in the January employment report — particularly the increase in both hourly earnings and hours worked — have led to predictions of more robust wage growth ahead. Employees and investors will be eager for Yellen's assessment of how this is likely to play out.
3. Is inflation or deflation the main risk to the U.S. economy? The possibility of higher wage growth suggests an upward trend for inflation. But there also are forces pushing in the other direction, including the further fall in oil prices over the last few months, which has added to the deflationary trends in Europe in particular. Several countries continue to be inclined to rely on policies that export deflation, such as currency devaluations, as they struggle to maintain domestic growth. And companies remain quite risk averse, and are hesitant to deploy their considerable cash holdings for expansionary spending on new plants and equipment. Yellen could provide guidance on how the balance of these forces evolves.
