On Wednesday, Janet Yellen will become the second Federal Reserve chair in history to take questions from the press.
She's not exactly an unfamiliar face; Yellen has been in the spotlight for months now. She was nominated to replace Ben Bernanke as the Federal Reserve chair in October, appeared before Congress in November, and took the reins of the central bank on Feb. 1. Her life has been thoroughly picked over and publicized; The New York Times even dug up a copy of an interview she conducted with herself when she was a senior in high school in 1963 and graduating as both head of the school paper and class valedictorian. (" 'Just a minute,' said Janet abruptly, 'I'm thinking.''")
But this week marks the first time since her nomination that Yellen will have to answer questions, in real time and on live television broadcast up and down Wall Street, from a group of reporters. She has given one interview since becoming President Obama's pick to run the Fed, with Time magazine in January. If the 12 past press conferences hosted by Bernanke are any indication, she'll be asked approximately 40 questions in an hour-long press conference scheduled for Wednesday afternoon.
The biggest news of the day might come before Yellen even delivers her opening statement. Shortly before the press conference begins, the Fed will release its policy statement. Economists widely expect the central bank to cut its $65 billion-a-month asset-purchase program, intended to bring down long-term interest rates, by an additional $10 billion as part of a gradual process to unwind the stimulus bond-buying program.
More significantly, the central bank could also adjust its "forward guidance," which is the way it communicates its plans for raising interest rates. The Fed has one key interest rate, the federal funds rate, whose movement up and down ripples through interest rates across the economy. The goal of "forward guidance" is to bring down long-term interest rates by pledging to keep this short-term rate low for a long time. The Fed said in its January policy statement that it would likely keep this rate near zero, where it has been since December 2008, "well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."
The unemployment rate is now 6.7 percent, and Fed officials have been describing the 6.5 percent target as passe. The Fed might drop its threshold to 6 percent to make it clear it thinks the current economic conditions don't merit higher interest rates. Deutsche Bank economists think the Fed is likely to abandon numerical targets in favor of a focus on a "broader array" of labor market indicators, such as payroll growth, and how many people are quitting their jobs, on Wednesday. "When two FOMC members who have historically been on opposite ends of the monetary spectrum are in agreement just days ahead of the FOMC meeting, it is extremely noteworthy," the Deutsche Bank economists wrote in a client note last week, pointing to recent remarks from Philadelphia Fed President Charles Plosser, a monetary-policy hawk, and New York Fed President William Dudley, a dove, indicating that the Fed's current guidance was no longer a useful signal to markets and others.
Goldman Sachs economists see the Fed changing its guidance in one of two ways: Policymakers could keep the 6.5 percent threshold but make clearer — in qualitative terms — how the Fed will proceed after it has been crossed, or they can switch entirely to qualitative guidance, saying something like, "The Committee intends to maintain the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent as long as employment or inflation remain well below their longer-run goals." (The latter example was given in a Goldman client note.)
The press conference will provide a forum for Yellen to explain the Fed's decision on forward guidance, even if policymakers stick with the current language. Here are a couple of additional places where Yellen could be asked to fill in the blanks:
Old Man Winter. This winter has been brutal, as storm after storm has brought snow and subzero temperatures to broad swaths of the country. The tough conditions have kept people from work, and are seen contributing to a much weaker-than-expected economic start to 2014. Last month, Yellen told members of the Senate Banking Committee, "I think it's clear that ... unseasonably cold weather has played some role in much of [the recent soft data]. There are many ways in which weather would have affected these series. What we need to do and will be doing in the weeks ahead is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to a softer outlook." The Fed's latest economic projections, which will also be released before the news conference, will provide a big-picture overview of how the central bank is reading the latest economic reports. Yellen may be asked to get into the weeds about how the Fed has interpreted the past few months of data, and whether it's expecting it to bounce back once warm weather sweeps in this spring.
Is "too big to fail" alive and well? The policy statement released after the Federal Open Market Committee meets covers only monetary policy and the economic outlook; it doesn't tackle the Fed's other major role as a bank regulator. So expect some questions about the continuing implementation of the 2010 Dodd-Frank financial reform law (whose rules, according to law firm Davis Polk & Wardwell, are just over halfway finalized). A particularly key issue is that of "too big to fail," the notion that some banks are so systemically important that the government would be assured to step in and help them out, rather than let them go under, if they got in trouble, as it did during the financial crisis. "Addressing 'too big to fail' has to be among the most important goals of the post-crisis period," Yellen said at her Senate Banking Committee nomination hearing in November. " 'Too big to fail' is damaging. It creates moral hazard. It corrodes market discipline. It creates a threat to financial stability and it does unfairly, in my view, advantage large banking firms over small ones."
In February, though, she told the same committee, "I'm not positive that we can declare with confidence that 'too big to fail' has ended until it's tested in some way." She may be asked to elaborate again on how she's assessing the Fed's efforts to address that issue, as well as the other Dodd-Frank rules that still need to be finalized.