When Janet Yellen makes her first public remarks Tuesday since succeeding Ben Bernanke as Federal Reserve chair, her every word will come under scrutiny.
Will she embrace all of Bernanke’s policies? When will the Fed raise short-term interest rates? Is she worried about the economy or the stock market?
Don’t expect many direct answers when Yellen addresses a House Financial Services Committee hearing. Her replies most likely will boil down to a single overarching point: The Fed will keep all its options open.
Below are issues Yellen likely will be pressed on this week. For each issue, here is what investors would like to hear and what Yellen is likely to say.
OUTLOOK FOR ECONOMY
Investors: The Dow Jones industrial average has sunk nearly 5 percent this year in part because sectors of the economy like manufacturing have shown signs of weakening. Investors worry that 2014 may not be the breakout year for the economy that many had foreseen. They hope Yellen will signal that she expects a more robust economy.
Yellen: She won’t likely disappoint. It’s the nature of Fed leaders to err on the side of optimism.
Investors: They have yanked money from emerging economies from Turkey to Argentina. They’ve done so in part because they fear that a pullback in the Fed’s stimulus will send U.S. interest rates up and draw investor money from overseas in search of higher returns. Currency and stock values in emerging markets have dropped.
Yellen: She may point out that some developing nations have moved to support their currencies by boosting rates and pursuing economic reforms. She may also note a sometimes-forgotten fact: That the Fed’s mandate is to maximize employment and keep prices stable in the United States, not the rest of the world.
FED’S BOND PURCHASES
Investors: The Fed said in December that it would start paring its monthly bond purchases in light of steady economic gains. Investors want to know that the Fed’s pullback isn’t on automatic pilot.
Yellen: She’ll likely provide such assurance, invoking language the Fed has stressed: That its reductions in bond purchases are “not on a preset course” and depend on how the economy and job market fare. On the other hand, Yellen likely won’t dampen expectations that the Fed will keep trimming its purchases if the economy improves.
Investors: Financial markets would like Yellen to stress explicitly that the Fed won’t start raising its benchmark short-term rate any time soon. That rate has been near zero for five years.
Yellen: She’ll likely give investors the message they want.