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Yellen takes hot seat in middle of first congressional debate on Trump stimulus

Federal Reserve Board Chair Janet Yellen testifies during a hearing before the House Financial Services Committee September 28, 2016 on Capitol Hill in Washington, DC.
Alex Wong | Getty Images

Fed Chair Janet Yellen's appearance before the Joint Economic Committee of Congress is the main event for markets Thursday, and it's very likely the Fed chair will come under some fire from politicians on both sides of the aisle.

"I'd like to hear a clear signal that we're going to get a rate hike in December and the outlook. But things are going to be so politically charged that it's hard to know if we're going to get any useful information out of it. I think Republicans will be galvanized by the win and the fact they are at the helm now," said Tom Simons, chief money market economist at Jefferies.

Yellen was scheduled to testify on the economy at the 10 a.m. hearing, but now she is expected to be asked about President-elect Donald Trump's plans to cut taxes and launch a hefty infrastructure spending program next year. But the Fed itself is also likely to be a topic of discussion.

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"Meanwhile, the Democrats are going to try to be picking apart Trump's economic plan just because this is the forum to do that," he said.

Greg Valliere, chief global analyst at Horizon Investments, said he expects Yellen to speak positively about fiscal spending since Fed officials have long said that monetary policy alone can't rev up the economy. He said the Fed will also be a topic, and Republicans with control of the White House and both houses of Congress next year, could take steps to create new oversight of the Fed.

"I would think given the opportunity, she would try to steer people away from any legislation that would curb the Fed's authority. I think the House is going to move on something next year, at least an audit," said Valliere. The idea of an audit would be to provide a way for Congress to review the Fed's policy decisions.

While some market players expect Yellen to be asked specifics about Fed policy and about whether it would consider winding down its hefty balance sheet, as has been suggested by the Trump camp, Yellen is not likely to go into details on that. Some market players even expect her to be asked if she plans to resign, now that Trump has won.

"She's not going to encourage that kind of speculation. She knows she has 15 months to go," said Valliere.

The committee is expected to spend a lot of time on infrastructure spending "They're going to try to get into the details and make her pick winners and losers," said Dan Clifton, head of policy research at Strategas.

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"You're going to hear a lot about infrastructure spending. You're going to hear a lot about tax reform. This is the first debate we're going to have on public policy for 2017," said Clifton.

He said the Fed chair could also be pressed on aspects of the Trump tax plan including whether it favors the rich.

"I think it's going to be a lot of battling. … Donald Trump wins the election and all of a sudden interest rates start to go higher, and people think the economy is going to get better," Clifton said. "…The market is starting to like this and she's going to be caught up in questions about why this is happening."

Interest rates have been rising since Trump won the election on the view that his program will add a spark to economic growth that has been missing, and also lead to higher interest rates and inflation.

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The market has been heavily focused on Trump's policies, but also who he will pick for his cabinet.

"I think the real concern is whether Trump aligns himself with people who want to curb the Fed's authority. If there's one appointment that would send a chill through the Fed it would be Jeb Hensarling, and I think that would send an alarm through the Federal Reserve and maybe be viewed by concern in the financial markets," said Valliere. The Texas Congressman chairs the House Financial Services Committee and has made it clear he would like to be Treasury secretary.

Besides Yellen, there is important data Thursday. "At 8:30 [a.m.], you get CPI, housing starts, Philly Fed and claims. All of that is 30 minutes after we get the text of Yellen's speech too," said Simons.

The stock market closed mixed Wednesday, with the S&P 500 at 2176, off 3 and the up 18 at 5294. The broke its winning streak with the first loss in eight sessions. The Dow fell 54 to18,868.

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Scott Redler, partner with said the S&P is at a pivotal point, and it traded in its narrowest range in seven days.

"Typically when you hit the tightest range bar, you get some expansion. The question is which way does it break," Redler said. "It still looks like it's going to be higher. If the S&P goes above 2,181 and holds, we should be seeing new highs by the weekend. If it doesn't hold, and we trade back to 2171, new highs might be more toward Santa Claus rather than Thanksgiving."

Two other Fed officials speak Thursday. New York Fed President William Dudley makes welcoming remarks at a forum at the New York Fed at 9:10 a.m. Federal Reserve Governor Lael Brainard speaks at 12:30 p.m. at the forum. President-elect Trump is scheduled to meet with Japanese Prime Minister Shinzo Abe in New York on Thursday.

Earnings are expected Thursday from Wal-Mart, Best Buy, Staples, and JM Smuckers report before the opening bell. Applied Materials, Intuit, Gap,, Ross Stores and Williams-Sonoma report after the closing bell.