WASHINGTON: For the first time since the election of Donald Trump, who has harshly criticised the Federal Reserve, Fed Chair Janet Yellen appears before Congress on Thursday, when she may signal a December rate hike.
Yellen will testify before the Joint Economic Committee on the outlook for the economy, and by extension the chances of an increase in the key interest rate.
But she also may be obliged to defend the independence of the central bank and its financial regulation efforts, which have been subject to attack by Republicans who have retained control of both chambers of Congress.
The central bank and its leader also were the target of criticism of the Republican billionaire during the campaign, when he accused Yellen of keeping interest rates low to help Democrats.
And the JEC includes among its members Republican Senator Ted Cruz, a one-time presidential candidate, and visitor to Trump Tower this week where the transition team is at work.
The president cannot dismiss the head of the central bank, except in cases of serious misconduct, and analysts do not expect the first woman to serve as Fed chair will resign.
But Yellen's four-year term as chair expires in February 2018, which will give Trump the opportunity to make his mark on the direction of monetary policy.
Yellen could continue to serve as a Fed governor, since her term as a board member does not expire until January 2024.
On the issue of financial regulation, Trump's goals have been ambivalent, even contradictory. He called for dismantling the Dodd-Frank law, which was passed in the aftermath of the 2008 financial crisis, and forces banks to put more capital aside and submit to stress tests.
But he also has called for reinstatement of the Depression-era Glass-Steagall Act, which separated deposit banks from investment banks.
Most of all, markets are looking to Yellen to clarify the Fed's policy intentions.
The Fed chair will give "the green light to expect a tightening move in December," said Jim O'Sullivan, chief economist at High Frequency Economics.
A rate increase at the monetary policy meeting Dec 13-14, a year after the only hike since the crisis, is "almost a done deal," he said, unless there is an unforeseen event in the markets.
Inflation is certainly on an upward slope as the labour market approaches full employment, key factors in the Fed's decision making.
On the pace of rate increases, "she'll presumably emphasise that they expect to be gradual," he said. "I think 100 basis point a year, four times a year is pretty gradual."
REFORMING THE FED
On bank regulation, the hearing in Congress will undoubtedly again highlight several areas where Republicans want reform. These proposals, by Republican Senators Rand Paul and Richard Shelby, would require the Fed to use a strict economic formula to determine interest rates, or require regular audits of the policy decisions, or reform of its structure.
One of Yellen's most vehement critics, Senator Jeb Hensarling, chairman of the Financial Services Committee, criticised the process for bank stress tests, citing a report from the General Accountability Office (GAO).
"When it comes to the Fed's stress tests, not only are they not transparent, they are often duplicative and impose unnecessary costs and burdens on financial institutions that are ultimately passed on to consumers," the senator said on Tuesday.
The Texas Republican, who is not on the JEC, is among those names being considered for Treasury secretary in the Trump administration, along with former Goldman Sachs executive, Steve Mnuchin.
Hensarling said the "devastating" conclusions of the GAO report "demonstrates the absolute need for the new president to designate a vice chairman for supervision at the Federal Reserve who will have the power to 'oversee the supervision and regulation' of financial firms supervised by the Federal Reserve."
Fed Governor Daniel Tarullo currently handles the financial regulation portfolio, a role traditionally assigned to one of the Fed board members. But carrying out those duties does not require confirmation by Congress.
Markets predict Tarullo could leave the Fed early if he is not chosen to oversee the banking regulation. His term ends in January 2022. With two other positions on the Fed board still unfilled, this would offer some early opportunities for the new US president to leave his imprint on the world's most powerful central bank.