Following the Federal Reserve’s June decision to raise interest rates for the third time in six months, Fed Chair Janet Yellen is set to testify in front of Congress on Wednesday and Thursday. Congress will likely press Yellen on her plan to normalize interest rates and unwind the Federal Reserve’s balance sheet, and investors could get some clarity about exactly what they can expect in the quarters ahead.
Last Friday, the Federal Reserve released a new report outlining its long-term plan for interest rates and its expectations for the U.S. economy. The Fed expects that it should be able to continue its gradual interest rate hike schedule without impacting the economy’s potential to “expand at a moderate pace.”
But even after the three recent rate hikes, the current federal funds target rate range of between 1 and 1.25 percent is still well below its historical level. The Fed said that interest rates will likely “remain, for some time, below levels that are expected to prevail in the longer run.”
Congress will likely ask Yellen for details on the Fed’s recently-announced balance sheet unwinding. In its most recent meeting minutes, the Fed noted that several members were in favor of announcing asset sales within “a couple of months.”
Yellen will also likely be pressed on persistently low U.S. inflation. Despite robust jobs growth and U.S. unemployment at just 4.4 percent, inflation has stayed below the Fed’s target rate of 2 percent. On Friday, the Fed said it expects inflation will stay “somewhat below 2 percent in the near term” but will “stabilize around the Committee’s 2 percent objective over the medium term.”
Concerns over inflation have investors skeptical of the Fed’s interest rate targets. The Fed is targeting another 1 percentage-point increase in interest rates by the end of 2018, but the bond market is currently pricing in an increase of just 45 basis points.
Yellen’s opening statement for her testimony in front of the House Financial Services Committee will be released…
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