Joseph Davis, chief economist at Vanguard Group Inc., the world’s biggest mutual fund manager, said he expects Yellen will be quizzed by lawmakers on how the U.S. economy may be held back by slowing global growth, especially in China.
“What, exactly, about weakening international conditions concerns them most,” Davis said. “What are their economic expectations, their forecast for growth outside the U.S.?”
U.S. exports represent 13 percent of gross domestic product, up from 9.6 percent the last time the Fed began a tightening cycle in June 2004, making the domestic economy more dependent on global conditions.
“International developments are going to be of out-sized importance compared to past cycles,” Levenson said.
Connected to that, Yellen may address how the Fed will manage the impact of moving in the opposite direction to the world’s other major central banks. The European Central Bank, Bank of Japan and People’s Bank of China are all still easing policy.
That will spur capital to flow to higher-yielding, dollar- denominated assets, causing the dollar to strengthen, which hurts U.S. exports and suppresses inflation. The dollar has already gained 9.2 percent this year against a basket of 10 leading global currencies.
“To date the dollar’s strength is a reflection of relative strength, but there’s a clear point, maybe another 10 percent, that there’s a self-limiting rise,” Davis said, referring to the drag from greenback appreciation.
For now, Yellen can still put a positive spin on the picture, said Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.
“She’s going to get a chance to say the U.S. is embarking on a course different from other central banks because the U.S. is the first to come out of the downturn,” he said. “She’ll couch in a somewhat upbeat message, that divergence is part of the natural order of things.”
Other Fed speakers this week include Vice Chairman Stanley Fischer, who will address a conference on financial stability in Washington on Thursday. Fed Board Governor Lael Brainard is set to speak Tuesday evening at Stanford University’s Institute for Economic Policy Research.