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Janet Yellen's confirmation hearing: what to expect

Pay close attention to what she says

Janet Yellen, vice chair of the Board of Governors. (Source/AP) Photo/Getty /Eugene Hoshiko)

Janet Yellen, vice chair of the Board of Governors. (Photo/Getty /Eugene Hoshiko)

Federal Reserve chair nominee Janet Yellen will face U.S. lawmakers next week, kicking off the Congressional vetting process that should clear her to take over the U.S. central bank when current Chairman Ben Bernanke steps down on Jan. 31, 2014.

Here’s everything you need to know:

The politics

The House won’t have any say in the matter. Quizzing Fed nominees is the exclusive prerogative of the Senate.

The first formal step of confirmation is a hearing before the Senate Banking Committee, scheduled for Nov. 14 at 10 a.m. Senators will ask questions during the hearing, and then some more “for the record” in written form, which the prospective chairwoman will take some time to answer. The actual vote normally takes place weeks after the hearing. Yellen is expected to sail through thanks to the Democrats holding the majority of the Committee’s 22 seats.

She will then face the full Senate — and here’s where things might get a bit rocky. Confirmation requires 60 affirmative votes and Democrats only have 55 seats, meaning Yellen will have to woo some Republicans as well. Chances that she won’t get the “yays” she needs are extremely low, but the whole affair might drag on for some time.

GOP Senators Lindsey Graham of South Carolina and John McCain of Arizona have warned that they intend to prolong the hearing as leverage against the Obama Administration in an ongoing Congressional investigation into the 2012 attacks on U.S. diplomats in Benghazi, Libya. It’s unlikely that the two, or any other senator joining them, will resort to a filibuster, but there are other procedures they could use to delay the confirmation.

Another controversy that might get tied up with Yellen’s hearing is the confirmation of a couple of President Barack Obama’s picks for a key federal appeals court. The two presidential nominees are expected to spark a fierce Senate fight that could spillover into Yellen’s court.

In general, Senate confirmations have become more contentious. Fed nominees tend to encounter less opposition than other federal appointees, but Bernanke’s confirmation for a second term passed with only 70 votes, a slim margin compared to historical standards.

The policy

Republicans are won’t torpedo the confirmation, but they won’t be pulling any punches either. Expect lots of questions on what the effect on inflation will be if interest rates stay near zero for much longer; how the Fed plans to let the air out of the various bubbles partly created by its easy-money policy; and Yellen’s perceived over-emphasis on the Fed’s mandate to pursue maximum employment vs. the other mandate of maintaining price stability. And then, of course, there will be many variations of the most important question: How and when will the Fed roll up its $85-billion a month bond-buying program?

This is also the trickiest question. The Fed clearly did not expect long-term interest rates to jump as much as they did when it announced plans to gradually unwind its asset purchases. Its strategy on tapering quantitative easing has clearly evolved based on trial and error. The latest communication on the matter has been muddled. Yellen will have to choose her words carefully as lawmakers will demand substantive answers while investors will be looking for any element of novelty that count hint at a change in strategy. Leadership transitions at the Fed are generally associated with higher financial volatility: What Yellen says could move the markets.