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For years Republicans have grumbled about the Federal Reserve vastly expanding its influence on the U.S. economy. Now theyll press Fed Chairwoman Janet Yellen on when the central bank plans to sound the retreat.

For years Republicans have grumbled about the Federal Reserve vastly expanding its influence on the U.S. economy. Now theyll press Fed Chairwoman Janet Yellen on when the central bank plans to sound the retreat.

Yellen will testify Wednesday before the House of Representatives and then give a repeat performance in the Senate a day later as part of the banks twice-a-year update on the economy.

Republicans in control of the House are expected to try to pin her down on when the Fed will start to wind down its massive $4.5 trillion balance sheet. So far the Fed has only said that the process will begin this year.

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Many conservatives believe the Fed overstepped its bounds. Starting in 2008 the Fed bought trillions of dollars in government Treasurys and bonds tied to home mortgages in a bid to drive interest rates lower and help the economy recover from the Great Recession. Before the crisis, the Fed had less than $900 billion on its balance sheet.

How the Fed goes about reducing its bond holdings will be another big deal. Jamie Dimon, the influential chief executive and chairman of J.P. Morgan Chase & Co. JPM, -0.39% , said on Tuesday hes worried about the potential fallout for the U.S. economy.

It could be a little more disruptive than people think, Dimon said at a conference in Paris. We act like we know exactly how its going to happen and we dont.

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To reign in the Fed, Republicans have backed regular audits and some even want to force the central bank to follow a more transparent formula a rulebook of sorts for when to raise and lower interest rates.

Yellen and other senior Fed officials have balked at the idea of adopting a formula. The banks already released report to Congress ahead of her testimony explicitly lays out reasons why it is a bad idea. Yellen is likely to press home the point, saying it would limit the Feds flexibility to respond to economic crises.

Democrats, for their part, have generally been pleased with the performance of the Fed. Yet some liberal lawmakers are likely to push Yellen to keep interest rates lower for longer to help low-income and other Americans at the margins of society.

The central bank has raised a key short-term rate twice this year and at least one more increase is on tap for 2017. The Feds benchmark rate now is now set between 1% and 1.25%.

Although the cost of borrowing is still quite cheap, most Democrats see no reason to raise rates unless inflation starts to accelerate. Instead, the rate of inflation has actually slowed since the spring.

Some Fed officials appear to agree with a less aggressive posture.

Federal Reserve Governor Lael Brainard on Tuesday suggested the central bank may not have to raise rates again anytime soon, especially if the Fed winds down its balance sheet. The withdrawal process could raise interest rates on its own.

She also pointed to softening price pressures. I will want to monitor inflation developments carefully, she said.

Yellen has argued the slowdown in inflation is temporary, the result of unusual factors that will fade soon. If shes right, dont look for a big change in the Feds interest-rate approach.

The Feds wind-down of its balance sheet could be the last big shift in strategy under Yellen, whos led the central bank since 2014. Her term as chairwoman ends early next year and its likely President Trump will choose another successor.

Excerpt from:
Republicans to press Yellen on Fed plans to reduce its outsized role on US economy - MarketWatch