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What to expect when Federal Reserve Chairwoman Janet Yellen testifies on Capitol Hill

Federal Reserve Chairwoman Janet L. Yellen hasn't spoken publicly since mid-December, when the central bank raised its benchmark short-term interest rate for the first time in nearly a decade.

A lot's happened since then. And the world is hoping to learn on Wednesday what she thinks about those developments.

LIVE COVERAGE: Yellen indicates Fed could delay interest rate hikes

Financial markets in the U.S. and abroad began tumbling at the start of the year, mirroring a steep drop in oil prices, and have been roiling ever since.

On top of that, new data shows that U.S. economic growth slowed at the end of last year as the economies of China and other nations have faltered.

So there's great anticipation for Yellen's appearance at a House Financial Services Committee hearing, where she will testify about the monetary policy and the economy in the first of two days on Capitol Hill.

Here's what to expect when the hearing begins at 7 a.m.

Talk of market mayhem

In her prepared testimony, Yellen is almost certain to address the recent stock market turmoil and indicate how much it concerns the Fed. If she doesn't, one of the committee members is sure to ask about it.

When central bank policymakers opted to hold the so-called federal funds rate steady last month, they warned in their written statement that “global economic and financial developments may restrain economic activity somewhat” and probably would push down already-low inflation.

Yellen needs to say more than that but must be careful not to rattle investors further.

"Markets are tumultuous and anything she says could make things worse," said Mark Hamrick, senior economic analyst at Bankrate.com, a financial information website. "I think her primary concern right now is to do no harm.

The means she'll probably provide the same basic answer, with the words carefully chosen ahead of time, no matter how many different ways lawmakers try to get her to say more. The reaction of major stock indexes will help determine how well she threads the needle.

"She has demonstrated that she is adept at walking the fine line between saying too little and saying too much," Hamrick said. "But this might be the greatest challenge she’s faced yet."

March madness

Before the recent global economic troubles, most analysts expected the Fed to nudge the federal funds rate up another 0.25 percentage point in March. Now, many expect the Fed will wait to avoid making the situation worse by further tightening credit.

Yellen will be pressed about whether Fed policymakers still will consider a rate hike at their March meeting.

If she indicated Fed officials planned to wait, that would signal a greater concern about the effects of the global slowdown and market turmoil on the U.S. economy.

But the meeting is still five weeks away, and a lot can happen before then.

Lindsey M. Piegza, chief economist at brokerage firm Stifel Nicolaus & Co., thinks Yellen will keep a rate hike on the table.

But with inflation extremely low, economist Bluford Putnam thinks Yellen will signal a March rate hike is unlikely.

“We don’t have any inflation, and if you don’t have any inflation you’re not going to want to raise rates,” said Putnam, who is managing director at CME Group, the futures market operator based in Chicago. 

Going negative?

After holding the federal funds rate near zero since late 2008, central bank policymakers only inched up its target range by 0.25 percentage point.

That means the rate is still extremely low and Fed officials could only inch it back down if they wanted to try to boost the economy.

Unless they took the extreme step of pushing the rate into negative territory.

The Fed's never done that. But the Bank of Japan did last week for the first time.

The move meant banks have to pay to stash their reserves, giving them more impetus to lend money.

Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, said in a blog post Tuesday that a negative rate in the U.S. would be "daring but appropriate monetary policy."

Yellen could be asked about the possibility but is unlikely to give any indication that a  negative interest rate is a possibility at this point.

Jobs versus inflation

Since the Great Recession, Fed policymakers have been focused on boosting job growth and reducing unemployment. That's one half of the central bank's mandate.

Significant improvements in the labor market in 2014 and 2015 paved the way for the Fed's interest rate hike in December.

But wages have been slow to catch up and liberals have argued that the Fed shouldn't pull back too much from its stimulative policies until they do.

The other half of the mandate is to maintain stable prices. And inflation has been running well below the Fed's 2% annual target.

Yellen and other Fed officials said the key reason for low inflation is falling oil prices and the effects will be temporary.

With low inflation and sluggish wage growth, Democrats on the committee could press Yellen to delay future rate increases until there are signs inflation is rising.

Republican criticism

Most Congressional Republicans weren't happy with the Fed's unprecedented stimulus policies, which included seven years of a near zero interest rate and a bond-buying program that more than quadrupled the central bank's assets since 2008 to $4.5 trillion.

"Unsustainably low interest rates clearly didn’t solve the problem or else Americans today wouldn’t be stuck in the slowest, worst-performing economic recovery of our lifetimes," Rep. Jeb Hensarling (R-Texas), chairman of the Financial Services Committee, said after the Fed's December rate hike.

In November, the Republican-controlled House passed legislation that would require the Fed to develop a more predictable, rules-based strategy for interest rates.

The legislation also would allow the Government Accountability Office to audit the Fed's monetary policy actions. The Fed's finances already are subject to audits.

Yellen opposes those measures, saying they infringe on the Fed's independence.

Hensarling or others on the committee could question Yellen about whether the changes in the legislation would reduce market turmoil by giving investors a clearer sense of where Fed policy is headed.

jim.puzzanghera@latimes.com

Follow @JimPuzzanghera on Twitter

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