Janet Yellen is likely to be tugged in all directions in her debut testimony today to Congress as chairwoman of the US Federal Reserve.
Tea Party Republicans will want to know what the Fed will do to stave off the hyperinflation they have been predicting since 2008. Left-leaning Democrats want evidence the Fed will resume its expansionary stance to stoke up the US jobs market. Neither tack is likely to throw Ms Yellen off course. She will doubtless be too polite to point out that Congress, rather than the Fed, is failing to do its job. At a time when the central bank is running low on new policy tools, it is Capitol Hill that ought to be sitting in the hot seat.
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To be sure, the Fed is not completely out of options. Last month’s anaemic US jobs report, which followed a worse one in December, has raised doubts about whether the Fed will continue with tapering at its next meeting in March. The Fed has always said the speed of the taper would depend on conditions. A bad jobs report in February may well lead to a pause.
Ms Yellen will also need to update the Fed’s forward guidance that pledged to keep interest rates zero bound until unemployment fell below 6.5 per cent or inflation exceeded 2.5 per cent. No one believes the fall in US joblessness to 6.6 per cent last month reflects the build-up of inflation pressures. At 1 per cent, it is virtually non-existent. Ms Yellen will have the chance today to give lawmakers a preview of the central bank’s updated forward guidance. Yet even its strongest proponents would stop short of claiming guidance is the solution to America’s economic challenges.
The era of extraordinary US monetary policy is winding down. It is long past due for economic policy makers to step into the breach. Alas, Congress shows no signs of doing so. In a better climate, it should be doing two things. First, fiscal policy is still not an ally of US growth. In December lawmakers removed the worst features of last year’s sequestration, which imposed blind domestic cuts across the board. But US fiscal policy remains the opposite of nimble. For example Congress failed to resume insurance for the long-term unemployed at the start of 2014. That means up to 1.35m US job seekers could drop out of the labour force altogether. Likewise, the US sovereign debt ceiling has just expired. The US Treasury has said it will run out of emergency options to honour its obligations by February 27. Congress must lift the ceiling without conditions.
In an ideal world, Congress would then enact structural reforms to boost US competitiveness. The two biggest are an overhaul of the US immigration system and support for President Barack Obama’s global trade agenda. Both now look in danger of falling by the wayside. On immigration, John Boehner, the Speaker of the House of Representatives, last week said Republicans were not prepared to consider a bill that gave America’s 11.5m illegal immigrants a pathway to citizenship. The more is the pity. The bill passed last year by the US Senate would make it easier for high-skilled immigrants to obtain green cards and foreign students to remain. Both would boost US productivity.
Likewise, strong trade deals with the Pacific and Atlantic blocks would be a shot in the arm for US competitiveness. Neither is realistic unless Mr Obama can win fast track negotiating authority from Congress – a prospect that was effectively killed last month by Harry Reid, the Senate Democratic majority leader.
Five years after the US came out of the Great Recession, Congress’s obstructionism continues to jeopardise the US recovery. Doubts remain about its robustness. As well as grilling Ms Yellen, lawmakers should take a long hard look in the mirror.
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