Reuters/Carlos Barria
Federal Reserve Board Chair Janet Yellen testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on the "Semiannual Monetary Policy Report to Congress" in Capitol Hill, Washington February 11, 2016.
On Thursday morning, Yellen is speaking before the Senate Banking, Housing, and Urban Affairs Committee on monetary policy.
The highlight of Yellen's testimony Thursday is the Q&A session, which is happening now following a repeat of her prepared testimony from yesterday.
She said the Fed is evaluating whether negative interest rates would work in the US, now that they've been used in Europe. A prior 2010 study found that they didn't work well, she said.
Yellen said, "We wouldn't take those off the table, but we have work to do to judge whether they would be workable here."
On concern that negative rates would be a tax on depositors, Yellen said she had not seen this happen anywhere in countries that already have rates below zero.
A 2010 memo showed the Fed questioned its legal authority to enact negative rates. "I am not aware of any legal restriction that would mean that we cannot establish negative rates," she said, adding that the constraints have not been carefully analyzed.
Yellen noted, in response to the first question from committee chair Richard Shelby (R-Alabama), that the Fed did not anticipate the surge in the dollar and the plunge in oil prices. Lower oil prices have held inflation away from the Fed's 2% target.
On whether wage growth is spreading across sectors and demographics, Yellen noted that average hourly earnings, which jumped 2.5% year-on-year last month, is a volatile series, and evidence of wage growth remains tentative.
Yellen said she agrees that market liquidity can be thin during market turmoil - when it's most needed, answering a question that referenced the bond-market flash crash in October 2014. The Fed is studying whether regulation and the prevalence of high-frequency trading are worsening liquidity, according to Yellen.
Later, Sen. Elizabeth Warren (D-Mass.) is likely to press Yellen yet again on the extent to which the Fed is prepared to police Wall Street's biggest banks. Yellen got similar questions yesterday, and responded that while it's the Department of Justice's job to prosecute, the Fed ensures that offenders are barred from banking.
Yellen's testimony comes at a tumultuous time for global markets, as US stocks continue to sell-off and the Nasdaq hovers right above bear-market territory.
In her remarks to the financial services committee on Tuesday, Yellen gave an assessment of the economy that was little changed from what we saw in the Fed's December statement: Labor-market gains continue to be strong, and transitory factors are holding down inflation.
However, she noted that financial conditions have become less supportive of growth, as stocks have sold off, the dollar strengthened, and investment grade bond yields spiked. She noted that the Fed could lower the rate-hike path if economic conditions warrant.