Five Things to Watch: Janet Yellen's Testimony on Regulation

Federal Reserve Chairwoman Janet Yellen testifies before the House Financial Services Committee on Wednesday about financial regulation, once again playing the role of a pinch-hitter because the White House hasn't nominated anyone to the position of Fed vice chairman for supervision. Most of the lawmakers' questions are likely to relate to the Fed's oversight of banks, but look for them to raise other questions as well, from monetary policy to the November election. Here are the main things to watch for:

1. Big Bank Stress Tests

The Fed announced major changes to its stress testing regime on Monday, detailed in a new rule proposal and a 29-page speech from Fed governor Daniel Tarullo. Expect Ms. Yellen to get quizzed about the changes, which generally make the tests easier to pass for regional banks and tougher on global megabanks. Several lawmakers, especially Republicans, have their own ideas about how the Fed should make further changes to the tests, including by revamping the way it measures banks' riskiness.

2. Banks in the Commodities Business

Last week, the Fed took another regulatory action that is sure to generate attention from members of Congress: It proposed new rules targeting some of banks' commodity-market businesses, citing the risk of outsize liabilities in the event of an environmental disaster. Lawmakers might take the view that the rules are an end-run around Congress, which explicitly allowed banks to engage in those activities in 1999. Big banks have also lobbied extensively against the rules, with help from local officials who say they rely on banks to help finance purchases of natural gas and other commodities for their municipalities.

3. Wells Fargo and Executive Compensation

Back in April, U.S. regulators including the Fed proposed incentive compensation rules required by the 2010 Dodd Frank law. Supporters of the rules have been pushing regulators to complete them before President Barack Obama leaves office -- and that was before Wells Fargo & Co.'s scandal over phony customer accounts and the ensuing furor over the bank's pay for senior executives. Republicans are likely to ask Ms. Yellen why the Fed and other regulators didn't do more to stem misconduct at Wells Fargo, while Democrats will push for her to commit to finishing the incentive pay rules soon -- a promise Comptroller of the Currency Thomas Curry made last week.

4. Monetary Policy

Fed policy makers' decision last week to hold interest rates steady while hinting at an increase in the near future could easily come up Wednesday. The Fed chief made clear she was ready for a bump up in borrowing costs, saying the case for a rate increase "has strengthened." Democrats could press Ms. Yellen on the effect that higher interest rates would have on the labor market, particularly among low-income and minority workers, who have been slow to recover from the recession. Republicans on the other hand could push for higher rates.

5. The Election

The Fed is finding itself in an unusual position this election cycle. While central bank officials try very hard to maintain their impartiality and skirt all talk of politics, they have had to parry charges from Donald Trump, the Republican presidential nominee, that they are artificially holding rates down to make President Barack Obama look good and to help Democrat Hillary Clinton get elected. Ms. Yellen spent much of her news conference last week defending the Fed's impartiality. Mr. Trump accused the Fed again during Monday night's debate of " doing political things." Ms. Yellen could face questions related to the election from both sides of the aisle Wednesday. Don't look for her to say more than she did during last week's news conference, however.

Write to Ryan Tracy at ryan.tracy@wsj.com and David Harrison at david.harrison@wsj.com