Fed's dovish Janet Yellen prepares to meet Congress

When Janet Yellen, the Federal Reserve chair, faces off with members of Congress on Tuesday, the surprise factor might be lacking. Then again, maybe not.

Yellen’s semi-annual testimony could be a snoozer. Why? Yellen had a wide-ranging question-and-answer session last week with reporters after the Fed’s two-day meeting broke up.

That give-and-take made clear that not only was the Fed holding off on raising interest rates in June, but it also was dialing back the number of rate hikes in 2017 and 2018 amid a recognition that the U.S. economy is likely to maintain its slow 2% growth rate through 2018.

With that kind of surprisingly dovish lead-in, it will be tougher for Yellen to shock anew Tuesday at 10 a.m. ET, when her prepared testimony is released and Q&A with Senate members gets underway, argues Steven Ricchiuto, chief economist at MSUSA.

“The close proximity of (last week’s) policy meeting and (Tuesday’s) testimony further reduces the chances of anything unexpected or undisclosed,” Ricchiuto said in a report.

But there is a way Yellen can roil markets: if her testimony diverges from comments last week, when she suggested the Fed's approach to raising rates might be even more gradual than initially believed. "Even a modest bit of back-pedaling," Ricchiuto wrote, "will result in an outsized market response."

Congress will also press Yellen on how a vote by Britain to leave the European Union might impact Fed policy and the economy.