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Janet Yellen Is Testifying This Week. Here Are Four Questions Congress Should Ask Her.

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On Tuesday and Wednesday this week, Janet Yellen, the chair of the Federal Reserve, will testify before Congress, one of two times she’ll do so this year. Often times, legislators use these hearings to grandstand and collect a good video clip, instead of actually posing difficult questions to the Fed chair. But they shouldn’t do that this week.

As the economy recovers, the Fed is moving closer and closer to raising interest rates above zero for the first time since 2009. It’s an important moment, one that could decide whether or not the burgeoning recovery actually delivers wage hikes for millions of Americans. Given those stakes, here are four questions that I would ask Yellen:

1. Why is the Fed considering raising rates any time soon?

Yes, the economy has improved substantially over the past year. Job growth has picked up and we even saw a bit of real wage growth in 2014. But that real wage growth was largely the result of plummeting oil prices, which pushed inflation downwards over the latter half of the year. The Personal Consumption Expenditures (PCE) index, which is a commonly used measure of inflation, rose just 0.7 percent year-over-year in December.

Yellen will undoubtedly say that the low PCE is just a temporary result of falling oil prices. The Federal Open Markets Committee (FOMC) rightly doesn’t set monetary policy based on transitory price changes. But Core PCE, which excludes food and energy prices because of their volatility, rose just 1.3 percent year-over-year in December. Even if the FOMC believes that falling oil prices also influenced that index, that is far below the Fed’s 2 percent target.

With Wal-Mart raising its workers’ wages last week, it’s clear that the labor market is tightening up. Workers should finally feel some optimism that they will receive a raise in 2015. But the FOMC has to make sure that actually happens. With inflation so low and workers on the precipice of earning larger paychecks, Ms. Chairwoman, why is the Fed so eager to raise rates?

2. Why don’t markets believe your rate hike schedule?

For months now, Yellen and the FOMC have hinted that they will raise interest rates in the middle of the year, most likely in the June meeting. They haven’t actually said that outright. But economists have generally considered that to be the most likely timetable.

But markets have long considered a June rate hike unlikely. According to CME Group’s FedWatch, which uses Fed fund futures to calculate the implied probability of a rate hike, investors see just a 17 percent chance of the Fed raising rates in June and just a 37 percent chance of a rate hike in July. The minutes of the FOMC’s January meeting, which were released last Wednesday, revealed a strong disagreement among Fed board members over what language to use in its FOMC statements and when to raise rates. Do you agree, Ms. Chairwoman, that the market and FOMC members have different expectations for the timetable of the first rate hike? And if so, how concerned are you about it?

3. Is the Fed's 2 percent target actually a target or a ceiling?

To fulfill the price stability component of its dual mandate, the Fed aims for an inflation target of 2 percent. In aiming for that target, the Fed should be overshooting as much as undershooting. If it's doing one more than the other, then its aim is off. And recently, that seems to be the case—inflation has consistently come in below that 2 percent target.

In fact, with core inflation at just 1.3 percent, the Fed is already talking about raising rates. That indicates that the Fed is very fearful of inflation rising above that 2 percent target. Given all of this, is the Fed really using 2 percent as a target or is it actually a ceiling?

4. How dangerous would it be to return to the gold standard?

Senator Rand Paul has made news recently as he has barnstormed around the country promoting his “Audit the Fed” bill. A number of Fed officials have vehemently criticized Paul’s bill. But the Kentucky senator and presidential hopeful wants to do more than that. Just a few weeks ago, he said it would be “great” if we got rid of the Fed. Paul has also spoken approvingly of the gold standard.

But it’s not just Paul who wants to upend the Fed. The Republican Party’s 2012 platform even implicitly called for returning to the gold standard. What would happen to the U.S. economy if Paul and his colleagues got their way?