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Federal Reserve Chairwoman Janet Yellen repeated Thursday that she sees several risks to the U.S. economy from recent global market turmoil and weak growth abroad.
Ms. Yellen's initial remarks to the Senate Banking Committee were identical to the testimony she delivered Wednesday to the House Financial Services Committee. Again, she kept open the Fed's options to raise short-term interest rates in the months ahead, but flagged several concerns that could make officials more cautious about moving.
"Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar," she said.
"Foreign economic developments, in particular, pose risks to U.S. economic growth," she said. "Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange-rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth."
She said Wednesday that Fed rate rises are "not on a preset course," and that global developments "bear close watching."
Ms. Yellen likely will face sharp questions from senators about the Fed's plans on rates and its regulatory efforts to prevent another financial crisis.
If asked, she could expand on her comments Wednesday about whether the Fed might someday push rates into negative territory, if it needed to take new steps to stimulate stronger economic growth. She said that in the interest of prudent planning, the Fed needs to more thoroughly investigate the idea, which central banks in Europe and Japan have begun to embrace. "I'm not aware of anything that would prevent us from doing it," she said.
The Senate committee also could press Ms. Yellen on one of the tools the Fed relied on in December to raise short-term interest rates by a quarter percentage point. Officials voted to raise to 0.5% the interest rate it pays to banks on the money, called reserves, they park at the Fed. The rate is the upper limit of the Fed's 0.25%-0.5% target for its benchmark federal-funds rate.
On Wednesday, House members from both parties decried the move as a gift to big banks. Ms. Yellen countered that the interest payments enabled the Fed to adjust rates without having to shrink its $4.5 trillion portfolio of bonds and other assets, which "could prove very disruptive to the expansion," she said.
On the regulatory side, Senate Banking Committee Chairman Richard Shelby (R., Ala.) is likely to bring up the issue of the Fed's vacant vice chairman for supervision position. Mr. Shelby in the past has criticized the Obama administration for not offering a nominee for the job, which was mandated in the 2010 Dodd-Frank law. For now, Fed governor Daniel Tarullo takes the lead on supervisory matters but hasn't been nominated to the post.
Mr. Shelby has suggested he would tie the confirmation process for two Fed governor nominees to the appointment of a supervision vice chairman. Mr. Obama has nominated Kathryn Dominguez, a University of Michigan economist, and Allan Landon, former Bank of Hawaii chief executive, for the positions, but neither has had a confirmation hearing.
Ms. Yellen also could face questions about proposals to overhaul the Fed's accountability to Congress.
A bill introduced by Mr. Shelby and passed by the committee on a party-line vote last year would create a commission to study restructuring the Fed and make recommendations to Congress, although Congress wouldn't have to act on them. The bill also would require Senate confirmation for the president of the New York Fed and would mandate that transcripts of Fed policy meetings be released after three years rather than after five.
In the past, Ms. Yellen has questioned the need for such legislation.
"What exactly is the problem?" she asked in June. "To my mind, the Fed is accountable and we work well as an institution. I'm not certain what the problem is that needs to be addressed."
A separate bill, introduced by banking committee members David Vitter (R., La.) and Elizabeth Warren (D., Mass.) would restrict the Fed's ability to lend to banks in a crisis, as it did in 2008. Both senators said they were encouraged last year when the Fed implemented a rule restricting its emergency lending abilities.
Still, House members on Wednesday said the new Fed rules left too many loopholes in place. It is possible Ms. Yellen could have to defend the Fed's new emergency-lending rule on Thursday as well.