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What Congress is likely to hear from Yellen

Newly installed Federal Reserve Chair Janet Yellen makes her first appearance before Congress as head of the central bank on Tuesday. Those expecting Yellen to signal that recent weak economic data could lead the Fed to slow down—or even stop—its tapering of asset purchases are likely to be disappointed.

Yellen, in hear appearance at 10 a.m. EST before the House Financial Services Committee, will likely be pressed by Democrats to say whether she thinks the economy is once again hitting a soft patch warranting a return to more robust monthly asset purchases.

Janet Yellen
Andrew Harrer | Bloomberg | Getty Images
Janet Yellen

Democrats are increasingly nervous that an advantage they hoped to wield against ferocious GOP attacks over Obamacare in the 2014 midterm election—a strengthening economy—will turn into yet another vulnerability in a year where they are at serious risk of losing the Senate. So they will be eager for Yellen to do everything in her power to boost the economy.

The problem is Yellen has signaled she is very much behind former chair Ben Bernanke's decision to begin tapering asset purchases. And she has made it clear that she has mixed feelings about the usefulness of quantitative easing in improving labor market conditions. QE's effectiveness in lifting the stock market and other risk assets is obvious. Its role in boosting the underlying economy and improving hiring is less clear.

There is also the question of how bad the data really are. January's employment report showed a disappointing gain of just 113,000 jobs. But as Ian Shepherdson of Pantheon Macroeconomics wrote in a note to clients, if the same seasonal adjustment used in 2013 had been used this year, the number would have been closer to 250,000.

(Read more: What this jobs report means for Dems and midterm elections)

The JOLTS (Job Openings and Labor Turnover Survey) report, which Yellen has said she follows closely for signals about the labor market, showed a rise in the quit rate last year to its highest point since 2008, indicating workers feel better about their prospects to get a better job.

Unfortunately for the new Fed chair, the latest JOLTS data come out just as she sits down for her congressional grilling. One assumes an aide will hand her an update (or perhaps she will look at it on her smartphone) but it will be hard to fully incorporate the latest data on the fly.

Fed chairs are not known to comment off the cuff about breaking high-frequency economic reports. Yellen will have a better handle on the JOLTS data when she appears before the Senate Banking Committee on Thursday.

(Read more: Democrats promote positive message on Obamacare and work hours)

Whatever the report shows, people close to the Fed say the central bank wants to get out of the asset purchase business and return to using rates and forward guidance as its main monetary policy tools. So it would likely take much worse data than we are currently seeing to change the course set by Bernanke.

On other topics, markets will be watching closely to see if Yellen backs away from the Fed's 6.5 percent unemployment target for keeping the overnight interbank loan rate at close to zero. Joblessness ticked down to 6.6 percent in January but the overall drop in the labor force participation rate during the recovery from the recession shows the measure has lost much of its usefulness as an indicator of economic health.

Meanwhile, core inflation at 1.2 percent remains well below the Fed's 2 percent target. So many observers expect Yellen to guide markets away from the 6.5 percent target as an indicator for when the Fed might start moving on rates.

Republicans, meanwhile, are likely to press Yellen to move faster on the taper, arguing that the central bank is degrading the dollar, usurping congressional authority on economic policy and risking asset bubbles and inflation.

The chair should have little trouble beating back these attacks by noting there are not really any signs of inflation or obvious asset bubbles. The only open question is how gentle Yellen is in rebuffing Republican criticism.

(Read more: Fight over minimum wage illustrates web of industry ties)

If her confirmation hearings were any guide, Yellen is adept at humoring her interlocutors while giving away absolutely no policy ground. Every new interaction with Congress is a risk, but the chances of a major blowup or Yellen gaffe seem quite low.

The higher stakes event for Yellen will come on March 19, when the FOMC releases its latest statement on monetary policy and the new chair meets the press for the first time. If the February jobs report is equally weak, coming in below 150,000, there will be much more pressure on Yellen to announce a pause in the taper.

But until then, expect Yellen to offer low-key testimony and stay the course.

—By Ben White. White is POLITICO's chief economic correspondent and a CNBC contributor. He also authors the daily tip sheet POLITICO Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben.

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