Fed has limited view on Trump economic policies as Yellen heads to Congress

WASHINGTON: Federal Reserve Chair Janet Yellen goes to Congress on Tuesday for the first time since Republicans took control of the White House and both houses of the legislature with less clarity on the direction of US economic policy than at any time of her three-year tenure.

The details of President Donald Trump’s economic policies remain largely unknown.

He has announced a rollback of financial regulation with few details and there is no clarity on the size, scope and timing of the tax cuts he has promised.

Possible new taxes on imports and increased infrastructure spending could boost inflation and send the dollar soaring, uncertainties that make it unusually difficult for the Fed to chart a course for interest rate policy.

“There is quite significant uncertainty about what’s actually going to happen, I don’t think anyone quite knows,” Fed Vice Chair Stanley Fischer said on Saturday.

Even at the best of times, the Fed’s ability to see shifts in the economy is limited.

In 2012 it said that interest rates would start to rise in 2014 but policymakers waited until December 2015 for their first rate hike. A forecast of four interest rate rises in 2016 turned out to be one.

Yellen is due to give semi-annual testimony before the Senate Banking Committee on Tuesday at 10 am EST. She will address the House Financial Services Committee on Wednesday.

The American economy is now, by many estimates, around what the Fed considers to be ‘full employment,’ inflation has ticked up to 1.6 per cent and the economy grew 1.6 per cent last year.

Based on the Fed’s economic projections for this year, it could raise interest rates three times in 25 basis-point steps.

Little was changed in the central bank’s Feb. 1 policy statement, a reflection of how little insight Fed officials have into Trump’s policies.

“There are just a lot of ways this could go wrong, like spinning off toward a trade war,” said Jon Faust, a Johns Hopkins University economics professor and former special adviser to the Fed’s Board of Governors. — Reuters