[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
                        MONETARY POLICY AND THE

                          STATE OF THE ECONOMY
=======================================================================


                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 11, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-64
                           
   
   
   
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York           PATRICK MURPHY, Florida
STEVE STIVERS, Ohio                  JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana          JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                    
                    
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 11, 2014............................................     1
Appendix:
    February 11, 2014............................................   103

                               WITNESSES
                       Tuesday, February 11, 2014

Calabria, Mark A., Director, Financial Regulation Studies, the 
  Cato Institute.................................................    81
Kohn, Donald, Senior Fellow, Economic Studies, the Brookings 
  Institution....................................................    85
McCloskey, Abby, Program Director, Economic Policy, the American 
  Enterprise Institute...........................................    83
Taylor, John B., Mary and Robert Raymond Professor of Economics, 
  Stanford University............................................    80
Yellen, Hon. Janet L., Chair, Board of Governors of the Federal 
  Reserve System.................................................     7

                                APPENDIX

Prepared statements:
    Calabria, Mark A.............................................   104
    Kohn, Donald.................................................   124
    McCloskey, Abby..............................................   130
    Taylor, John B...............................................   141
    Yellen, Hon. Janet L.........................................   147

              Additional Material Submitted for the Record

Yellen, Hon. Janet L:
    Monetary Policy Report to the Congress, dated February 11, 
      2014.......................................................   154
    Written responses to questions submitted by Chairman 
      Hensarling.................................................   208
    Written responses to questions submitted by Representative 
      Garrett....................................................   217
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   227
    Written responses to questions submitted by Representative 
      Mulvaney...................................................   231
    Written responses to questions submitted by Representative 
      Royce......................................................   280
    Written responses to questions submitted by Representative 
      Sinema.....................................................   282


                        MONETARY POLICY AND THE


                          STATE OF THE ECONOMY

                              ----------                              


                       Tuesday, February 11, 2014

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Bachus, Royce, 
Lucas, Miller, Capito, Garrett, Neugebauer, McHenry, Bachmann, 
Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, 
Huizenga, Duffy, Hurt, Grimm, Stivers, Fincher, Stutzman, 
Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, 
Rothfus; Waters, Maloney, Velazquez, Sherman, Meeks, Capuano, 
Hinojosa, Clay, McCarthy of New York, Lynch, Scott, Green, 
Cleaver, Moore, Ellison, Perlmutter, Himes, Peters, Carney, 
Sewell, Foster, Kildee, Murphy, Sinema, Beatty, and Heck.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    This hearing is for the purpose of receiving the semi-
annual testimony of the Chair of the Board of Governors of the 
Federal Reserve System on monetary policy and the state of the 
economy.
    Before we get started--I am not sure I would call this a 
point of personal privilege--I would like to point out to the 
committee that we are blessed again with the appearance of the 
gentlelady from New York, Carolyn McCarthy, and what a blessing 
it is to have her back with us.
    [applause]
    Chairman Hensarling. The Chair will now recognize himself 
for 6 minutes to give an opening statement.
    We welcome Chair Yellen for her first of many semi-annual 
Humphrey-Hawkins appearances before our committee.
    Chair Yellen, you may recall that just 2 months after Alan 
Greenspan became Fed Chairman in 1987, the stock market 
crashed. And at that time, Paul Volcker sent him a short note 
that read, ``Congratulations. You are now a central banker.''
    Chair Yellen, you face the daunting prospect of unwinding a 
Fed balance sheet, the size and composition of which we have 
never seen before. All of this in the face of an economy that 
is underperforming at best. So allow me to paraphrase: 
Congratulations. You are now the Chair of a central bank.
    Chair Yellen, we look forward to working with you to ensure 
that the Federal Reserve has the tools it needs to operate 
effectively into the next century. We also look forward to 
working with you closely as this committee embarks upon its 
year-long Federal Reserve Centennial Oversight project.
    Any agency or bureau of government that is 100 years old 
probably needs a good checkup, especially one as powerful as 
yours.
    And I remind everyone that independence and accountability 
are not mutually exclusive concepts.
    Perhaps the most critical issue we must examine is the 
limitations of monetary policy to actually promote a healthy 
economy. We have now witnessed both the greatest fiscal and the 
greatest monetary stimulus programs in our Nation's history, 
and the results could not be more disappointing.
    Despite being almost 5 years into the so-called Obama 
recovery, we still see millions of our fellow citizens 
unemployed or underemployed, shrinking middle-income paychecks, 
and trillions of dollars of new unsustainable debt.
    Why is the non-recovery recovery producing only one-third 
of the growth of previous recoveries? By one estimate, the 
Obama Administration has imposed $494 billion in new regulatory 
cost upon our economy.
    From the 2.5 million net jobs the CBO has now announced 
Obamacare will cost us, to the incomprehensible Volcker Rule, 
business enterprises are simply drowning in regulatory red tape 
as they attempt to expand and create more jobs. Monetary policy 
cannot remedy this.
    What else is different from previous recoveries? The single 
largest tax increase in American history: More than $1.5 
trillion in higher taxes from both the fiscal cliff agreement 
and Obamacare. And these taxes principally fall upon small 
businesses, entrepreneurs, and investors, again, as they try to 
bring about a healthier economy and create jobs.
    Monetary policy cannot remedy this either.
    What else is different? Fear, doubt, uncertainty, and 
pessimism that has arisen from the erosion of the rule of law. 
Never before in my lifetime has more unchecked, unbridled 
discretionary authority been given to relatively unaccountable 
government agencies.
    We are slipping from the rule of law to the rule of rulers. 
To punctuate this point, the President recently reminded us 
that he has a pen and a phone to essentially enact whatever 
policy he alone sees fit.
    Regrettably, he does not seem to have handy a copy of the 
Constitution. I suppose the Fed could send him one, and perhaps 
throw in a copy of Milton Friedman's ``Capitalism and 
Freedom,'' although I doubt it would do much good.
    There are clearly limits to what monetary policy can 
achieve, but much it can risk. Thus, the roughly $3.5 trillion 
question remains whether QE3 will continue to taper slowly, 
whether it will end abruptly, or whether it will simply morph 
into QE-infinity.
    We look forward to hearing the Chair's thoughts and 
intentions on the matter.
    As part of our Centennial Oversight project, QE will also 
cause our committee to thoroughly examine the Federal Reserve's 
unprecedented role in credit allocation, a focus distinct from 
its traditional role in monetary policy. Should the Fed pick 
distinct credit markets to support while ignoring others? This 
clearly creates winners and losers, and under the Fed's current 
policies, seniors on fixed incomes are clearly losers as we 
continue to witness the blurring of lines between fiscal and 
monetary policy.
    This committee will also examine the Federal Reserve's role 
as a financier and facilitator of our President's unprecedented 
deficit spending. Since the Monetary Accord of 1951 between the 
Federal Reserve and the Treasury, it has been clear that the 
Federal Reserve should be independent of the President's fiscal 
policy. But, is it?
    We will also consider how the Federal Reserve has 
undertaken the expansive new banking regulatory powers it 
obtained under the Dodd-Frank Act and why it fails to conduct 
formal cost-benefit analysis. We will also consider whether 
Dodd-Frank has constrained the Fed's Section 13(3) exigent 
powers properly, and precisely what its role of lender of last 
resort should be.
    We will closely examine an old debate in monetary policy 
between rules and discretion. During successful periods in the 
Federal Reserve's history, like the great moderation of 1987 to 
2003, the central bank appeared to follow a clear rule.
    Today, it seems to favor more amorphous forward guidance, 
shifting from calendar-based to tight thresholds to loose 
thresholds, which arguably leaves investors and consumers lost 
in a hazy mist as they attempt to plan their economic futures 
and create a healthier economy.
    Chair Yellen, I look forward to working with you as we 
examine these issues, and to ensuring that in the 21st Century, 
the Federal Reserve has a well-defined, specific mission that 
it has both the expertise and resources to effectively 
accomplish.
    The Chair now recognizes the ranking member of the 
committee, Ms. Waters, for 5 minutes for an opening statement.
    Ms. Waters. Thank you, Mr. Chairman.
    I would like to take a moment of personal privilege to just 
say how proud, pleased, and honored I am to have our colleague, 
Mrs. McCarthy from New York, back with us today.
    [applause]
    Ms. Waters. Thank you, Mr. Chairman.
    It is with great pleasure that I welcome you, Chair Yellen, 
to deliver your first ever Humphrey-Hawkins Act report and 
testimony. Chair Yellen, your presence here today is both 
historic and well-deserved. Your record of distinguished 
service in government, academia, and at the Federal Reserve 
make you uniquely qualified to navigate the considerable 
economic challenges that lie ahead.
    Your career in public service has been marked by high 
praise from economists and policymakers across the political 
spectrum. And in the face of an increasingly complex and 
interconnected global economy, your sound judgment on the risks 
to economic growth and stability has been validated time and 
time again.
    In the run-up to the 2008 financial crisis, you accurately 
identified the looming risks to the economy and spoke up, 
telling colleagues, ``The possibilities of a credit crunch 
developing and of the economy slipping into recession seem all 
too real.'' When the crisis hit as you predicted, you pushed to 
challenge conventional thinking about the limits of monetary 
policy and appropriately encouraged the Fed to act forcefully 
to stabilize the economy.
    Today, as mixed economic data seems to suggest that the 
recovery is still fragile and millions of Americans continue to 
be unemployed, your willingness to think outside the box is 
more important than ever.
    Like many of my colleagues, I remain concerned that more 
needs to be done to address the long-term unemployment crisis. 
As you know, 3.6 million Americans have been out of work for 27 
weeks or more. And I fear that any further delay in addressing 
the problem could permanently damage the labor force and slow 
the economy's ability to grow over the long term.
    As you weigh the costs, benefits, and risk of further 
large-scale asset purchases, I hope you will press your 
colleagues on the Federal Open Market Committee (FOMC) to take 
into account the ongoing impact that this long-term 
unemployment crisis is having on millions of American families.
    Of course, the Republicans' ideologically driven austerity 
agenda, protracted political debt ceiling brinksmanship, and 
failure to extend basic unemployment insurance benefits has 
only made this situation more dire. Ironically, Republican 
unwillingness to provide the short-term fiscal assistance that 
the economy needs has put more pressure on the Federal Reserve 
to continue the same stimulative policies that many in their 
party oppose.
    Although monetary policy is indeed a powerful tool, the 
responsibility for putting the economy on more stable footing 
cannot and should not fall exclusively on the Federal Reserve. 
Congress, too, must do its part.
    One issue on this front, which I hope the Congress can work 
on in concert with the Federal Reserve to address, is a growing 
issue of income inequality. As you know, the gains accrued 
during the economic recovery have disproportionately benefited 
the wealthiest in our society, leaving the middle class and 
most vulnerable behind.
    I believe that the income gap is one of the most pressing 
threats to our economic potential. I look forward to your views 
on how we can work together to close it.
    Finally, there are a number of pending issues related to 
the Fed's role in implementing the Dodd-Frank Act. And although 
we won't be able to discuss all of them today, I hope to learn 
more about the Fed's role in identifying and reducing systemic 
risk across the financial system.
    This includes your proposed rules to enhance prudential 
standards for large U.S. and foreign banking firms, and your 
views on risks that continue to exist in the repo markets.
    As the 2008 financial crisis made all too clear, growth and 
prosperity are inextricably linked to financial stability. And 
therefore, your diligence on these matters is critically 
important.
    So I thank you, Chair Yellen. Thank you again for being 
with us today.
    And I will yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Michigan, Mr. Huizenga, the vice chairman of our Monetary 
Policy Subcommittee, for 2 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And Chair Yellen, congratulations on being confirmed as the 
first woman Chair of the Board of Governors of the Federal 
Reserve. And I think, as you see with this group of cameras 
ahead of you, buckle up and hang on. This is going to be an 
interesting ride, I am sure.
    As we were preparing for this, I sent out a Facebook and 
Twitter tweet about what I should ask you. A number of things 
came back: our U.S. competitiveness; auditing the Fed; and a 
number of other things. But I have a couple of other ideas, as 
well.
    Today, I am particularly eager to hear your insights on 
monetary policy and the state of the economy, specifically your 
views of the new, highly touted Volcker Rule. I am not the 
first to note that since the creation of the Fed in 1913, the 
Fed's power has significantly expanded over the last 100 years.
    Ranking Member Waters just thanked you for ``thinking 
outside the box.'' Some of us are trying to determine what 
exactly the box is these days. And I think we all have a 
responsibility to explain that to the American people.
    While originally created to supervise and monitor the 
banking systems in the United States, the Fed's role has 
continued to grow, seemingly unchecked, some of that through 
acts like the Dodd-Frank Act, and for other reasons. But 
certainly, its current position of being a lender of last 
resort to banking institutions that require additional credit 
to stay afloat is something that we need to continue to 
explore.
    Given the interconnectedness of the global financial 
system, there is no doubt that the Federal Reserve's monetary 
policies have also significantly impacted the international 
markets and foreign economies, as was explored right at that 
table last week, when there was discussion of the fragile five 
countries out there, as well as our own country. And I look 
forward to hearing your comments on these topics. So thank you 
very much.
    And with that I yield back, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Missouri, Mr. Clay, the ranking member of our Monetary 
Policy and Trade Subcommittee, for 3 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    And welcome, Chair Yellen. As you report to this committee 
for the first time in your new position--and, Chair Yellen, I 
want you to know that like you, I believe that the actions of 
the Federal Reserve should always consider the impact and well-
being of Main Street as well as Wall Street.
    That means actively pursuing the twin goals of full 
employment and controlling inflation, and it also means 
advancing the vital work of closing the income inequality gap, 
which is hurting so many working families and threatening 
America's economic future.
    Like you, I believe in fundamental financial reform and 
real transparency to protect American consumers. That includes 
maintaining a Consumer Financial Protection Bureau (CFPB) with 
real teeth and the authority to act swiftly against financial 
abuses.
    I strongly oppose the Majority's efforts to cripple the 
Consumer Financial Protection Bureau, and it shocks and saddens 
me that the Majority is more concerned about bringing comfort 
and relief not to struggling consumers but to some of the same 
financial predators who caused the Great Recession.
    In 1977, Congress amended the Federal Reserve Act to 
promote price stability and full employment. The Consumer Price 
Index (CPI) rose 1.5 percent in 2013 after a 1.7 percent 
increase in 2012. And that is actually lower than the 2.4 
percent average annual increase in CPI over the last 10 years.
    As a response to the financial emergency in 2008, the 
Federal Reserve Bank purchased commercial paper, made loans, 
and provided dollar funding through liquidity swaps with 
foreign central banks. This action significantly expanded the 
Federal Reserve's balance sheet.
    The Fed has gradually tapered its asset purchases from an 
initial $85 billion per month to this month's $65 billion 
purchase in Treasury and mortgage-backed securities. In terms 
of supporting full employment, let's look at the data.
    And because of the positive leadership under former 
Chairman Bernanke, the unemployment rate in the United States 
is 6.6 percent, but the number of long-term unemployed is 3.7 
million people. And that is even more compelling evidence why 
this Congress should extend emergency unemployment benefits 
without delay.
    My time has run out, Mr. Chairman, but I look forward to 
the Chair's testimony.
    Chairman Hensarling. The time of the gentleman has expired.
    Today, we welcome the testimony of the Honorable Janet 
Yellen, the Chair of the Board of Governors of the United 
States Federal Reserve, a position she was confirmed to by the 
Senate on January 6th of this year. She took office on February 
3rd, just last week.
    We congratulate Ms. Yellen for her confirmation--her 
historic confirmation--as the first female Chair of the Board 
of Governors. Prior to her accession to the Chair, Ms. Yellen 
served as the Vice Chair of the Board of Governors for 4 years, 
and from 2004 to 2010, Ms. Yellen was the President and CEO of 
the Federal Reserve Bank of San Francisco.
    During the Clinton Administration, Ms. Yellen served as 
Chair of the President's Council of Economic Advisers. She has 
taught at Harvard and the London School of Economics. She holds 
a Ph.D. in economics from Yale.
    Chair Yellen, I want to personally thank you for 
cooperating with us to ensure that every member of the 
committee has an opportunity to ask you questions as part of 
this hearing today.
    I hope the Members are paying careful attention. I would 
also say to the Members that the Chair, unsolicited, offered to 
stay all day.
    Madam Chair, you are in luck. We are not staying all day. 
This committee has a bill on the Floor later this afternoon. 
You will be spared that.
    I peeked at your testimony to where you pledged to be 
accountable. You are off to a very good start by agreeing to do 
this.
    Because of the anticipated length of the hearing, I wish to 
alert Members that the Chair does expect to call a couple of 
recesses during Chair Yellen's testimony. And indeed, the Chair 
will also wield a very strict gavel.
    Without objection, Chair Yellen's written statement will be 
made a part of the record.
    Again, Madam Chair, welcome. You are now recognized for 
your oral presentation.

    STATEMENT OF HONORABLE JANET L. YELLEN, CHAIR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mrs. Yellen. Chairman Hensarling, Ranking Member Waters, 
and other members of the committee, I am pleased to present the 
Federal Reserve's semiannual monetary policy report to the 
Congress.
    In my remarks today, I will discuss the current economic 
situation and outlook before turning to monetary policy. I will 
conclude with an update on our continuing work on regulatory 
reform.
    First, let me acknowledge the important contributions of 
Chairman Bernanke. His leadership helped make our economy and 
financial system stronger and ensured that the Federal Reserve 
is transparent and accountable. I pledge to continue that work.
    The economic recovery gained greater traction in the second 
half of last year. Real gross domestic product is currently 
estimated to have risen at an average annual rate of more than 
3.5 percent in the third and fourth quarters, up from a 1.75 
percent pace in the first half.
    The pickup in economic activity has fueled further progress 
in the labor market. About 1.25 million jobs have been added to 
payrolls since the previous monetary policy report last July, 
and 3.25 million have been added since August 2012, the month 
before the Federal Reserve began a new round of asset purchases 
to add momentum to the recovery.
    The unemployment rate has fallen nearly a percentage point 
since the middle of last year and 1.5 percentage points since 
the beginning of the current asset purchase program.
    Nevertheless, the recovery in the labor market is far from 
complete. The unemployment rate is still well above levels that 
Federal Open Market Committee participants estimate is 
consistent with maximum sustainable employment. Those out of a 
job for more than 6 months continue to make up an unusually 
large fraction of the unemployed. And the number of people who 
are working part-time but would prefer a full-time job remains 
very high.
    These observations underscore the importance of considering 
more than the unemployment rate when evaluating the condition 
of the U.S. labor market.
    Among the major components of GDP, household and business 
spending growth stepped up during the second half of the year. 
Early in 2013, growth in consumer spending was restrained by 
changes in fiscal policy. As this restraint abated during the 
second half of the year, household spending accelerated, 
supported by job gains and by rising home values and equity 
prices.
    Similarly, growth in business investment started off slowly 
last year but then picked up during the second half, reflecting 
improving sales prospects, greater confidence, and still 
favorable financing conditions.
    In contrast, the recovery in the housing sector slowed in 
the wake of last year's increase in mortgage rates. Inflation 
remained low as the economy picked up strength, with both the 
headline and core personal consumption expenditures, or PCE 
price indexes, rising only about 1 percent last year, well 
below the FOMC's 2 percent objective for inflation over the 
longer run.
    Some of the recent softness reflects factors that seem 
likely to prove transitory, including falling prices for crude 
oil and declines in non-oil import prices. My colleagues on the 
FOMC and I anticipate that economic activity and employment 
will expand at a moderate pace this year and next; the 
unemployment rate will continue to decline toward its longer-
run sustainable level; and inflation will move back toward 2 
percent over coming years.
    We have been watching closely the recent volatility in 
global financial markets. Our sense is that at this stage, 
these developments do not pose a substantial risk to the U.S. 
economic outlook. We will, of course, continue to monitor the 
situation.
    Turning to monetary policy, let me emphasize that I expect 
a great deal of continuity in the FOMC's approach to monetary 
policy. I served on the committee as we formulated our current 
policy strategy and I strongly support that strategy, which is 
designed to fulfill the Federal Reserve's statutory mandate of 
maximum employment and price stability.
    Prior to the financial crisis, the FOMC carried out 
monetary policy by adjusting its target for the Federal funds 
rate. With that rate near zero since late 2008, we have relied 
on two less traditional tools--asset purchases, and forward 
guidance--to help the economy move toward maximum employment 
and price stability. Both tools put downward pressure on 
longer-term interest rates and support asset prices. In turn, 
these more accommodative financial conditions support consumer 
spending, business investment, and housing construction, adding 
impetus to the recovery.
    Our current program of asset purchases began in September 
2012 amid signs that the recovery was weakening and progress in 
the labor market had slowed. The committee said that it would 
continue the program until there was a substantial improvement 
in the outlook for the labor market in the context of price 
stability.
    In mid-2013, the committee indicated that if progress 
towards its objectives continued as expected, a moderation in 
the monthly pace of purchases would likely become appropriate 
later in the year.
    In December, the committee judged that the cumulative 
process toward maximum employment and the improvement in the 
outlook for labor market conditions warranted a modest 
reduction in the pace of purchases, from $45 billion to $40 
billion per month of longer-term Treasury securities, and from 
$40 billion to $35 billion per month of agency mortgage-backed 
securities. At its January meeting, the committee decided to 
make additional reductions of the same magnitude.
    If incoming information broadly supports the committee's 
expectation of ongoing improvement in labor market conditions 
and inflation moving back towards its longer-run objective, the 
committee will likely reduce the pace of asset purchases in 
further measured steps at future meetings.
    That said, purchases are not on a preset course and the 
committee's decisions about their pace will remain contingent 
on its outlook for the labor market and inflation as well as 
its assessment of the likely efficacy and costs of such 
purchases.
    The committee has emphasized that a highly accommodative 
policy will remain appropriate for a considerable time after 
asset purchases end. In addition, the committee has said since 
December 2012 that it expects the current low-target range for 
the Federal funds rate to be appropriate at least as long as 
the unemployment rate remains above 6.5 percent, inflation is 
projected to be no more than a half percentage point above our 
2 percent longer-run goal, and longer-term inflation 
expectations remain well-anchored.
    Crossing one of these thresholds will not automatically 
prompt an increase in the Federal funds rate, but will instead 
indicate only that it had become appropriate for the committee 
to consider whether the broader economic outlook would justify 
such an increase.
    In December of last year, and again this past January, the 
committee said that its current expectation, based on its 
assessment of a broad range of measures of labor market 
conditions, indicators of inflation pressures and inflation 
expectations, and readings on financial developments, is that 
it likely will be appropriate to maintain the current target 
range for the Federal funds rate well past the time that the 
unemployment rate declines below 6.5 percent, especially if 
projected inflation continues to run below the 2 percent goal.
    I am committed to achieving both parts of our dual mandate: 
helping the economy return to full employment; and returning 
inflation to 2 percent while ensuring that it does not run 
persistently above or below that level.
    I will finish with an update on progress on regulatory 
reforms and supervisory actions to strengthen the financial 
system.
    In October, the Federal Reserve Board proposed a rule to 
strengthen the liquidity positions of large and internationally 
active financial institutions. Together with other Federal 
agencies, the Board also issued a final rule implementing the 
Volcker Rule, which prohibits banking firms from engaging in 
short-term proprietary trading of certain financial 
instruments.
    On the supervisory front, the next round of annual capital 
stress tests of the largest 30 bank holding companies is under 
way, and we expect to report results in March.
    Regulatory and supervisory actions, including those that 
are leading to substantial increases in capital and liquidity 
in the banking sector, are making our financial system more 
resilient. Still, important tasks lie ahead.
    In the near term, we expect to finalize the rules 
implementing enhanced prudential standards mandated by Section 
165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
    We also are working to finalize the proposed rule 
strengthening the leverage ratio standards for U.S.-based, 
systemically important global banks. We expect to issue 
proposals for risk-based capital surcharge for those banks as 
well as for a long-term debt requirement to help ensure that 
these organizations can be resolved.
    In addition, we are working to advance proposals on margins 
for non-cleared derivatives consistent with the new global 
framework and are evaluating possible measures to address 
financial stability risks associated with short-term wholesale 
funding. We will continue to monitor for emerging risks, 
including watching carefully to see if regulatory reforms work 
as intended.
    Since the financial crisis and the depths of the recession, 
substantial progress has been made in restoring the economy to 
health and in strengthening the financial system. Still, there 
is more to do. Too many Americans remain unemployed, inflation 
remains below our longer-term objective, and the work of making 
the financial system more robust has not yet been completed.
    I look forward to working with my colleagues and many 
others to carry out the important mission you have given the 
Federal Reserve.
    Thank you. I would be pleased to take your questions.
    [The prepared statement of Chair Yellen can be found on 
page 147 of the appendix.]
    Chairman Hensarling. The Chair will now recognize himself 
for 5 minutes for questions.
    Chair Yellen, you just testified that, ``I expect a great 
deal of continuity on the FOMC's approach to monetary policy.'' 
So I will ask the obvious question: In forward guidance, which 
has been somewhat anchored in the Evans Rule, it seemingly said 
monetary policy will not tighten until unemployment drops below 
6.5 percent.
    Now Chairman Bernanke announced that--or he described this 
as a Taylor-like rule, although Professor Taylor, whom we will 
hear from later, may not agree.
    Be that as it may, we stand on that threshold. And so I 
also see in your testimony where you said, ``Crossing one of 
these thresholds will not automatically prompt an increase in 
the Federal funds rate.''
    I guess to some extent the editorial writers in the Wall 
Street Journal anticipated this and opined 2 days ago, in 
respect to the Evans Rule, ``Perhaps the Open Market Committee 
should have called it the Evans Suggestion.'' ``The mistake was 
telling markets there was a fixed rule when the only sure thing 
at the Fed is more improvisation.''
    So, who is right here? Is The Wall Street Journal correct 
that these thresholds are illusory, and we are seeing more 
improvisation, or do we have something that is rule-like?
    Mrs. Yellen. After the Federal funds rate hit its effective 
lower bound--
    Chairman Hensarling. I'm sorry, Chair Yellen, could you 
pull the microphone a little closer to you, please? Thank you.
    Mrs. Yellen. After the Federal funds rate reached its 
effective lower bound, close to zero, at the end of 2008, the 
Federal Reserve was forced to provide additional accommodation 
through tools that were new and novel. And an important tool 
that had been used to some extent in the past but we have 
relied on quite heavily since that time is our forward guidance 
concerning the likely path of monetary policy.
    Chairman Hensarling. But, Madam Chair, if you reach a 
threshold and then you ignore that threshold, what good is the 
forward guidance?
    Mrs. Yellen. What the Fed indicated in December of 2012 is 
that we did not think it would be appropriate to consider 
raising the Federal funds rate as long as unemployment was over 
6.5 percent and inflation was projected to run under 2.5 
percent, as long as inflation expectations were also well-
anchored.
    So, we have followed that guidance. It has been very--
    Chairman Hensarling. I would say this, if I could--
    Mrs. Yellen. --useful to markets.
    Chairman Hensarling. Madam Chair, the Fed may say one 
thing, but markets may hear another.
    My time is running out. I want to cover a little other 
ground as well, dealing with a rules-based monetary policy.
    I think if I have read some of your statements properly--
and I don't want to put words in your mouth--you consider times 
5 years after the financial crisis still extraordinary, and it 
is not necessarily an appropriate time for a rules-based 
approach? Is that a fair assessment of your views?
    Mrs. Yellen. I have always been in favor of a predictable 
monetary policy that responds in a systematic way to shifts in 
economic variables--
    Chairman Hensarling. In fact, earlier in your career, in 
reference to the Taylor Rule, you said it is, ``what sensible 
central banks do.''
    So that begs the question today, using your words, are you 
a sensible central banker? And if not, when will you become 
one?
    Mrs. Yellen. Congressman, I believe that I am a sensible 
central banker, and these are very unusual times in which 
monetary policy for quite a long time has not even been able to 
do what a rule like the Taylor Rule would have prescribed. For 
several years that rule would have prescribed that the Federal 
funds rate should be in negative territory, which is 
impossible.
    So, the conditions facing the economy are extremely 
unusual.
    I have tried to argue and believe strongly that while a 
Taylor Rule--or something like it--provides a sensible approach 
in more normal times, like the great moderation, under current 
conditions, when this economy has severe headwinds from the 
financial crisis and has not been able to move the funds rate 
into the negative territory that rule would have prescribed, we 
need to follow a different approach. And we are attempting 
through our forward guidance to be as systematic and 
predictable as we can possibly be.
    Chairman Hensarling. Madam Chair, my time has expired, and 
I am going to attempt to set a good example for the rest of the 
committee.
    The Chair now recognizes the ranking member of the 
committee for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Ms. Yellen, you alluded to continuing the policies that 
were initiated by the committee that you served on with Mr. 
Bernanke.
    Mrs. Yellen. I can't hear you.
    Ms. Waters. I am a supporter of quantitative easing, and I 
would like to hear from you what you think quantitative easing 
did to stabilize this economy. Can you tell us not only what 
you think happened with quantitative easing, but how, again, 
you intend to continue the policy on tapering as it is today?
    Mrs. Yellen. Thank you, Congresswoman Waters.
    We have been buying longer-term Treasury securities and 
agency mortgage-backed securities. The objective has been to 
push down longer-term interest rates. And I believe we have 
succeeded in doing that. And also, to more broadly make 
financial conditions accommodative.
    The purpose is to spur spending in the economy and to 
achieve more rapid economic growth. And I believe we have been 
successful. Some examples would be that as mortgage rates fell 
to historically low levels, we certainly saw a pickup--a very 
meaningful pickup--in housing activity off the very low levels 
it had fallen to.
    We also have seen a very meaningful increase in house 
prices, and I think that has improved the security of a very 
large number of households. Many households have been 
underwater in their mortgages, and that fraction has diminished 
substantially, which means that those households are in a 
better position to spend and to borrow.
    In addition, low interest rates have also stimulated 
spending in other intrasensitive sectors like automobiles. We 
have seen a decided pickup in that sector as well. When 
spending and employment increase in those sectors, the 
availability of jobs increases, unemployment tends to come 
down, and growth picks up.
    And as I mentioned, since the beginning of this program we 
have seen the unemployment rate decline 1.5 percent, and I 
think this program has contributed to that.
    When the committee began this policy it did so at a time 
when it looked like the recovery and progress in the labor 
market was stalling. We began these asset purchases as a 
secondary tool, a supplementary tool to our forward guidance to 
add some momentum to the recovery, and we said we would 
continue those purchases until we had seen a substantial 
improvement in the outlook for the labor market in the context 
of price stability.
    As I noted, there have been a substantial number of jobs 
created and unemployment has come down, and in December the 
committee judged that enough progress had been made in the 
labor market to begin a measured pace of reductions in the pace 
of our asset purchases.
    We purposely decided to act in a measured and deliberate 
way to take measured steps so that we could watch to see what 
was happening in the economy, and we have indicated that if the 
outlook continues to be one in which we expect and are seeing 
continued improvement in the labor market that implies growth 
strong enough going forward to anticipate such improvement, and 
inflation, which is running below our objective, if we see 
evidence that will come back toward our objective over time, we 
are likely to continue reducing the pace of our purchases in 
measured steps.
    But we have also indicated that this program is not on a 
preset course, which means that if the committee judges there 
to be a change in the outlook, that it would reconsider what is 
appropriate with respect to the program.
    Ms. Waters. Thank you very much.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Michigan, Mr. Huizenga, the vice chairman of our Monetary 
Policy and Trade Subcommittee.
    Mr. Huizenga. Thank you.
    Chair Yellen, did short-term proprietary trading cause the 
financial crisis?
    Mrs. Yellen. I wouldn't say that short-term proprietary 
trading was the main cause of the crisis.
    Mr. Huizenga. I'm sorry, it was not?
    Mrs. Yellen. I would not see that as the main cause of the 
crisis.
    Mr. Huizenga. Okay. I think we would be in agreement on 
that.
    You have noted, I think on December 10th--just this past 
year--at the open meeting board, you had some concerns about 
the Volcker Rule, as well, and to quote you, you specifically 
asked for an ``assessment of what impact do you--and I am 
assuming that is your own internal economists--think this will 
have on U.S. banks in terms of: Do they face potential 
competitive disadvantages vis-a-vis foreign banks in various 
global capital market activities?''
    I have some of those same concerns, and I am not sure, as 
we had the five regulators--the Fed, the SEC, the OCC, the FDIC 
and the CFTC--for those of you watching out there, that is the 
alphabet soup of regulators that look at all of this, the 
discussion of the Volcker Rule and the impact, Governor Tarullo 
seemed to indicate that the Fed was very concerned about that, 
that we were not going to somehow be at a disadvantage. And I 
am not sure we have made ourselves any safer.
    Do you mind chatting a little bit about that, please?
    Mrs. Yellen. I think the impact of the rule is something 
that we will monitor over time as it goes into effect. The 
agencies have worked hard jointly to write a balanced rule that 
will permit banking organizations to continue to engage in 
critical market-making and hedging activities.
    And we will be very careful in how they supervise 
institutions to make sure--
    Mr. Huizenga. I am sure you are aware that we are the only 
sort of major economy, major government that has put anything 
like this into effect. You are comfortable saying--I think the 
quote was--``monitor over time to see its effect.''
    How long are you comfortable waiting to see what will 
happen? Is that 3 months? Six months? A year?
    How long will we see liquidity leave the United States and 
us lose that market share?
    Mrs. Yellen. I think that banks will be able to go on as we 
implement this rule to engage in those activities, particularly 
market-making and hedging, that are really vital to a well-
functioning financial system.
    Mr. Huizenga. But is there a length of time? That is what I 
am looking for.
    How long are you interested in waiting to see its 
effectiveness? It is 932 pages, 297,000 words. There is a lot 
to wade through and a lot of interpretation.
    Mrs. Yellen. We will be involved with the OCC and the SEC 
and other agencies in using supervision to make sure that firms 
do comply with the rule.
    Mr. Huizenga. So, but an undetermined amount of time to see 
its effectiveness?
    Mrs. Yellen. It will certainly take time to see the effects 
of the rule.
    Mr. Huizenga. Okay. I will follow up with a letter because 
I would like you to put a little thought into exactly how much 
time. How long are we going to be at a competitive 
disadvantage, is what I am concerned about.
    All right. We are going to have to move along, because I 
have just over a minute left.
    In response to quantitative easing, foreign governments 
have adopted measures that have closed foreign markets to U.S. 
investors and companies in many ways. And it is what was talked 
about at that very table, the fragile five. Indonesia, India, 
South Africa, Turkey, as well as Brazil have been affected by 
our monetary policy, and now it is just sort of the reversing 
of our easing, I guess, as you would say, as we are not 
purchasing as many.
    Do you have any concerns that poorly managed tapering that 
we are trying to do, or exit of QE, might cause capital flight 
in some of these other economies as well? And what would that 
mean for investors and firms here in the United States?
    I am concerned that it--not to mention our diplomatic and 
trade relations, we are in an interconnected world economy, 
so--
    Mrs. Yellen. Certainly, capital markets are global, and the 
monetary policies of any country affect other countries in such 
a world.
    But we have been very clear at the outset that we initiated 
our program of asset purchases and an accommodative monetary 
policy more generally to pursue the goals that Congress has 
assigned to the Federal Reserve, namely supporting economic 
growth and employment in the context of price stability.
    We have tried to be as clear as we possibly can about how 
we would conduct this policy. And it has been quite clear at 
the outset that as our recovery advanced, we would wind down or 
reduce the pace of our asset purchases, and as growth picks up 
and inflation comes back toward our objective over time, 
eventually we will normalize our policy stance.
    Chairman Hensarling. The time of the gentleman has long 
since expired and the--
    Mr. Huizenga. Thank you, Mr. Chairman.
    Chairman Hensarling. --Chair would advise all Members 
perhaps to ask that last question with at least 30 seconds to 
go on the clock.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Clay, the ranking member of our Monetary Policy and Trade 
Subcommittee.
    Mr. Clay. Thank you, Mr. Chairman. I will be cognizant of 
time.
    Madam Chair, the U.S. unemployment rate is 6.6 percent. For 
African-Americans, it stands at 12.1 percent; for Hispanics, it 
is 8 percent; and for Asians, it is a little over 4 percent. 
And for young adults, it is 20 percent.
    What can this Congress do, working in conjunction with the 
Federal Reserve, to lower unemployment rates for African-
Americans, for young people, for the Latino community? Any 
suggestions?
    Mrs. Yellen. For our part, we are trying to do what we can 
with monetary policy to stimulate a faster economic recovery to 
bring unemployment down nationally. And because high 
unemployment disproportionately affects many of the groups that 
you mentioned, if we are successful it will have a great 
benefit to the groups that you mentioned.
    Of course, monetary policy is not a panacea, and I think it 
is absolutely appropriate for Congress to consider other 
measures that you might take in order to foster the same goals.
    Some of those groups have been adversely affected as well 
by longer-term trends in the economy that have led to very 
stagnant wage growth for those at the middle and bottom of the 
income spectrum; we have seen rising inequality.
    Certainly, all economists that I know of think that 
improving the skills of the workforce is one important step 
that we should be taking to address those issues.
    Mr. Clay. So Congress could also assist by taking a look 
at, say, infrastructure and starting a jobs program in that 
area where we rebuild our roads, bridges, and other 
infrastructure and put Americans back to work?
    Mrs. Yellen. These are certainly programs that Congress 
could consider and debate.
    Mr. Clay. Thank you for that response.
    In a speech you gave to the AFL-CIO last year, you stated 
that the evidence you had seen showed that the increase in 
unemployment since the onset of the Great Recession has been 
largely cyclical and not structural. You cited the fact that 
job losses were widespread across industry and occupation 
groups and went on to say construction, manufacturing, and 
other cyclically sensitive industries were hard hit as well.
    Do you continue to believe that a significant component of 
our unemployment situation continues to be the result of 
cyclical factors?
    Mrs. Yellen. I do continue to hold that view. I think most 
of the increase we have seen and the decline we have seen--
while a small portion of it may be related to structural issues 
and there may be some reduction in structural mismatch, better 
matching as the recovery has proceeded--mainly we have seen a 
decline in cyclical unemployment.
    Every 3 months, members of the committee offer their 
personal views as to what a longer-run normal unemployment rate 
end is, and the range of opinion in the FOMC in December ranged 
from 5 percent to 6 percent. So at 6.6 percent, we remain well 
above that.
    And I guess I would point out, too, some broader measures 
of the labor market--we shouldn't only focus on the 
unemployment rate. The degree of involuntary part-time 
employment remains exceptionally high, at 5 percent of the 
labor force. So broader measures of unemployment are even more 
elevated relative to normal than our standard unemployment 
rate.
    In addition, there is an unusually high incidence of long-
duration spells of unemployment.
    So by a number of measures, our economy is not back. The 
labor market is not back to normal in terms of our maximum 
employment goals.
    Mr. Clay. Thank you for your responses.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Alabama, our 
chairman emeritus, Mr. Bachus, for 5 minutes.
    Mr. Bachus. Thank you. Chair Yellen, last week Governor 
Tarullo appeared before the committee and he said that the CLO 
ownership issue was at the top of the agenda for the 
interagency working group, which is the Fed and four other 
members, I believe.
    What additional information do you need to resolve the CLO 
issue and clarify how legacy securities will be treated under 
the Volcker Rule?
    Mrs. Yellen. This is something that a number of banking 
organizations have asked the regulators to look at. The 
regulators recently issued a ruling concerning TruPS, and this 
is something they are jointly engaged in looking at, and I will 
hopefully have something on that reasonably soon.
    Mr. Bachus. Okay. I was going to ask you how soon do you 
think we can expect you to issue some guidance, but--
    Mrs. Yellen. I don't have a definite--
    Mr. Bachus. But you are saying maybe soon?
    Mrs. Yellen. Hopefully.
    Mr. Bachus. Okay.
    Do you know what remedy the group is suggesting?
    Mrs. Yellen. I don't. This is something they are going to 
have to look at.
    Mr. Bachus. Do you agree with me that this is something 
that needs to be addressed with some sense of urgency?
    Mrs. Yellen. It is certainly something that the regulators 
will look at and should look at.
    Mr. Bachus. All right.
    The Fed has long suggested--and I know Mr. Clay and your 
response to him mentioned this--and has held the view that a 
large portion of the recent decline in the labor force 
participation rate has been attributable to cyclical factors, 
which would become structural if unaddressed, and therefore, 
because you considered it cyclical, part of the reason for 
aggressive quantitative easing.
    And let me put this up: That is the Philadelphia Fed's 
recent employment study. If you look at that you can see, 
number one, there is evidence that there may be a smaller gap 
between full employment and current employment than we 
previously expected.
    And let me just read two of the--they said almost 80 
percent of the decline in participation since the first quarter 
of 2012 is accounted for by an increase in nonparticipation due 
to retirement. This implies that the decline in the 
unemployment rate since 2012 is not due to more discouraged 
workers dropping out of the labor force.
    And the likelihood of those who have left the labor force 
due to retirement and disability rejoining the labor force is 
small and has been largely insensitive to business cycle 
conditions in the past, suggesting, at least to me, that the 
decision to leave the labor force for those two reasons is more 
or less permanent.
    If you look at that line, participation has really been 
coming down for 10 years--10 or 12 years. And let me put a 
second chart up, which is very consistent with that. That is 
the Bureau of Labor Statistics, and you can see that--I think 
since maybe 1998, yes, 1998 on the Fed and 2001, we have a 
consistent dropping of participation.
    Does that maybe modify or amend your view on the structural 
versus cyclical debate that we have been having?
    Mrs. Yellen. I would like to make clear that I think a 
significant part of the decline in labor force participation, 
as you have mentioned, is structural and not cyclical. The baby 
boomers are moving into older ages where there is a dramatic 
drop-off in labor force participation, and in aging 
populations, we should expect to see a decline in labor force 
participation. And as you noted, that has been going on for 
some time.
    So there is no doubt in my mind that an important portion 
of this labor force participation decline is structural.
    That said, there may also be--and I am inclined to believe 
this myself, based on the evidence--cyclical factors at work. 
So that decline has a structural component and also a cyclical 
component.
    There is no surefire way to separate that decline into 
those two components, but it is important to realize that we 
are seeing declining participation also among prime-age workers 
and among younger people. And it seems to me, based on the 
evidence that I have seen, that some portion of that does 
reflect discouragement about job opportunities. But there is no 
clear scientific way, at this point, to say exactly what 
fraction of that decline is cyclical.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. Thank you. Thank you, Mr. Chairman.
    I would like to begin by congratulating you, Chair Yellen. 
In the 100-year history of the Federal Reserve--it has existed 
for 100 years--there have been only 15 Fed Chairs. You are the 
first woman to lead the Fed or any major central bank. We are 
so proud of you.
    Mrs. Yellen. Thank you.
    Mrs. Maloney. And in your long and distinguished career, 
you have excelled at every single point of your career. And I 
just want to note that your appointment is a tremendously 
important historic achievement in the women's movement. 
Congratulations.
    Mrs. Yellen. Thank you. Thank you, Congresswoman.
    Mrs. Maloney. I would like to ask you about your reaction 
to the unexpectedly weak job report last week, which showed 
that the economy only created 113,000 jobs in January. Some in 
the markets are now calling for a pause in the Fed's tapering 
strategy.
    Has the weak jobs report caused you to consider slowing the 
pace of the Fed's tapering?
    Mrs. Yellen. I was surprised that in the jobs reports in 
December and January, the pace of job creation was running 
under what I had anticipated. But we have to be very careful 
not to jump to conclusions in interpreting what those reports 
mean.
    We have had unseasonably cold temperatures that may be 
affecting economic activity in the job market and elsewhere.
    The committee will meet in March. We will have a broad 
range of data on the economy to look at, including an 
additional employment report, and I think it is important for 
us to take our time to assess just what the significance of 
this is.
    I think the committee has said--
    Mrs. Maloney. Can you describe what would cause you to 
consider a tapering pause? What would cause it? Many months of 
bad data reporting? What would cause you to consider pausing?
    Mrs. Yellen. I think what would cause the committee to 
consider a pause is a notable change in the outlook. The 
committee, when it decided to begin this process of tapering in 
measured steps, believed that the outlook was one where we 
would see continued improvement in the labor market and 
inflation moving back up toward a 2-percent target.
    And if incoming data were to cause the committee, looking 
broadly at all of the evidence--
    Mrs. Maloney. What kind of data?
    Mrs. Yellen. --question that--
    Mrs. Maloney. Jobs data? What kind of data?
    Mrs. Yellen. We would be looking at a broad range of data 
on the labor market, including unemployment, job creation, and 
many other indicators of labor market performance.
    We would also be looking at indicators of spending and 
growth in the economy because we do need to see growth at an 
above-trend pace in order to project continued improvement in 
the labor market. And we note that inflation is running well 
below our objective, and we want to be sure that is moving back 
toward our objective.
    Mrs. Maloney. What would it take for the Fed to consider 
increasing its asset purchases again instead of just slowing 
down its reductions? What would it take?
    Mrs. Yellen. I think a significant deterioration in the 
outlook, either for the job market or very serious concerns 
that inflation would not be moving back up over time. But the 
committee has emphasized that purchases are not on a preset 
course and we will continue to evaluate the evidence.
    Mrs. Maloney. So far, the Fed has been reducing its total 
bond purchases by $10 billion a month, with reductions split 
evenly between Treasuries and mortgage-backed securities. Why 
did the Fed choose to split it between mortgage-backed 
securities and Treasuries?
    Mrs. Yellen. Both kinds of purchases have similar effects 
on longer-term interest rates.
    Mrs. Maloney. Now, if the housing market starts to slow 
down, would the Fed consider maintaining the purchases of 
mortgage-backed securities and only tapering Treasury 
purchases?
    Mrs. Yellen. I think that both kinds of purchases affect 
interest rates broadly. Our purchases of Treasuries tend to 
push down mortgage rates as well. Some evidence suggests a 
differential impact, but it is very hard to think of these 
being discreet.
    Mrs. Maloney. My time has expired.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentlelady from West Virginia, 
Mrs. Capito, the Chair of our Financial Institutions 
Subcommittee.
    Mrs. Capito. Thank you, Mr. Chairman.
    I would like to add my voice to the chorus of 
congratulations to the Chair on her appointment.
    I would also like to tell you that I have been on the 
committee for many, many years, and I have understood more of 
what you said today than I have probably from the last two 
folks who were in front of us, so thank you for that.
    Mrs. Yellen. Thank you.
    Mrs. Capito. I represent West Virginia, an energy State. In 
your report, you note the growth in the oil and gas development 
businesses, which I think has great promise for the country 
economically. But it is also noted in notes from the Richmond 
Fed that the coal industry is suffering low coal prices, 
regulation, and a decrease in employment.
    Energy has a great promise to bring jobs to this country 
and keep them here. What do you think about an all-of-the-above 
energy policy? And what effect would that have on our economic 
growth?
    Mrs. Yellen. I think energy has been a great contributor to 
growth. And we have seen a huge shift in the U.S. position in 
terms of our net imports of oil and natural gas. And, energy 
policy certainly plays an important role there.
    Mrs. Capito. Okay, thank you.
    Another question: Again, coming from a State that has a 
large senior population, one of the concerns I have had is low 
interest rates and what impact this has on savers, particularly 
older savers who are trying to retire when they are relying on 
fixed-income assets like bonds or CDs and savings account. This 
has been difficult for them to plan for their senior years 
post-retirement.
    What kind of thinking do you have as you are weighing the 
interest rate structure on the savings that is occurring in the 
country, particularly for the older saver?
    Mrs. Yellen. Certainly, a low-interest rate environment is 
a tough one for retirees who are looking to earn income in safe 
investments like CDs or bank deposits. But I think it is 
important to recognize that interest rates are low for a 
fundamental reason, and that is because in the United States 
and in the global economy as a whole, there is an excess of 
saving relative to the demand for those savings for investment 
purposes.
    So the rates of return that savers can expect really depend 
on the health of the economy, and with a weak economy where 
there is a lot of saving and less demand for those savings, 
that is a fundamental drag on growth and on what savers can 
expect.
    Our objective in keeping interest rates low is to promote a 
stronger recovery. And in a stronger economy, savers will be 
able to earn a higher return because the economy will be able 
to generate it.
    So I recognize that this is difficult for savers. It is 
also important to recognize that any household, even if it is 
retired, in addition to saving, people care about their work 
opportunities; they care about the opportunities of their kids. 
And lots of people have exposure to the stock market as well, 
even if it is through a 401(k) or the health of a retirement 
plan. And so, this shouldn't be a one-dimensional assessment.
    Mrs. Capito. Right. Thank you.
    Folks are working longer, too, and I think that is a 
concern for those who thought they had planned well and they 
are finding it is not quite turning out for them.
    Another question: You already mentioned that 5 percent of 
the labor force is exceptionally high for the part-time--an 
exceptionally large portion for the part-time. We have learned 
with the President's Affordable Care Act that anybody who is 
working over 29 hours is considered full-time.
    Is that consistent with your assessments of what a full-
time job is when you are looking at your calculations? And when 
you say an exceptionally large portion is part-time, is that 
anybody working under 29 hours? Is that how you define that?
    Mrs. Yellen. I am talking about part-time for economic 
reasons. People who were working--
    Mrs. Capito. What is the definition of a part-time job? How 
many hours a week?
    How many hours a week would you consider a part-time job? 
When most people consider a full-time job 40 hours a week, is a 
part-time job--the President has defined it as 29 hours and 
above. How do you define a part-time job?
    Mrs. Yellen. This is a definition that is used by the 
Bureau of Labor Statistics, not ours.
    Mrs. Capito. Do you happen to know what it is? Or can you 
get back to me on that?
    Mrs. Yellen. Under 35 hours.
    Mrs. Capito. Thirty-five. All right, thank you.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Ms. Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chair Yellen, as you know, the median U.S. wage has failed 
to keep pace with a booming stock market, and record corporate 
profits. Is it possible that stagnant wage growth for American 
workers and not overly accommodative monetary policy, as some 
have suggested, is causing a slower recovery and decreased job 
creation?
    Mrs. Yellen. Certainly, for much of the workforce, real 
wages have been stagnant in recent years, but also, 
unfortunately, going back many years as far as the mid-to late 
1980s.
    I am not sure we know for sure, but there has been some 
speculation that trend for so many households of weak labor 
market income growth did contribute to the troubles in the 
economy. The idea there would be that wealthier families--
higher-income families spent less of their additional income 
than lower-income families, and so that shift in the 
distribution of income may have created a drag on growth.
    I don't know that we have any hard evidence on that, but 
that is certainly a hypothesis that has received some 
attention.
    Ms. Velazquez. The housing sector has continued to see 
improvement with robust construction activity and higher home 
prices. How will continued reductions in QE affect the housing 
market?
    Mrs. Yellen. I think that quantitative easing, or purchases 
of securities, did serve to push down mortgage rates and other 
longer-term interest rates quite substantially and was a factor 
underlying the strength of the housing market, and also 
promoted a recovery in house prices that has been good for so 
many families.
    We did see a backup in interest rates in the spring and 
into the summer. In part, I think that was associated with a 
reevaluation of the strength of economic growth and the likely 
cause of monetary policy. Although mortgage rates are still 
very low, we certainly have seen a slowing in the housing 
sector since mortgage rates have backed up.
    I am hopeful housing will continue to support the recovery. 
There are good fundamentals there, but that provided clear 
evidence of the impact that mortgage rates do have on the 
strength of housing.
    Ms. Velazquez. Thank you.
    According to the ADP National Employment Report, small 
businesses created four of five new jobs in January. In your 
opinion, why are small businesses adding more jobs than their 
larger counterparts?
    Mrs. Yellen. I think we have seen over a longer time, not 
just the month, increases in jobs in most sectors of the 
economy. I think both small and large businesses have by and 
large contributed to that. So of course there is a good deal of 
month-to-month variation. But there has been, I think, broad 
improvement in the labor market.
    Ms. Velazquez. Is it possible that the Volcker Rule could 
further boost small business lending as banks seek out revenue 
in traditional financial products due to the general 
prohibition on risky and lucrative proprietary trading?
    What we saw during the financial crisis was a fact. We saw 
anecdotal stories about small businesses having problems 
accessing capital.
    Yet, it is changing. Do you think that the Volcker Rule has 
anything to do with that?
    Mrs. Yellen. I suppose I wouldn't tie trends in credit 
availability for small businesses so much to the Volcker Rule, 
but certainly during the downturn, during the Great Recession, 
lots of small businesses have had difficulty in accessing 
credit. Business conditions haven't been very good for many 
small businesses during that period.
    In fact, the demand for credit by many small businesses, 
given their prospects, hasn't been that high. And of course, 
equity in one's home for small businesses is an important 
source of financing and the decline in home prices, I think, 
has also taken a toll there.
    Ms. Velazquez. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Housing and Insurance Subcommittee.
    Mr. Neugebauer. Chair Yellen, again, congratulations to you 
and thank you for being here today. Would you say that the 
deficit that we have been experiencing over the last few years 
has had a negative impact on the future growth of our economy?
    Mrs. Yellen. I would say that long-run deficits that are 
projected to rise in an unsustainable way is a trend that has a 
negative effect on the economy. The larger deficits that we 
have had in recent years in part reflect the weakness of the 
economy.
    Mr. Neugebauer. But you would agree that long-term--these 
kind of deficits, in the pathway we are on, is not a positive 
thing for the economy?
    Mrs. Yellen. I think if we look at long-term projections, 
for example, of the Congressional Budget Office, we see as we 
go out 20, 30 years that the debt-to-GDP ratio will be rising 
over time in a way that looks unsustainable--
    Mr. Neugebauer. I am going to take that as a yes, you think 
it is--
    Mrs. Yellen. --and that is a negative for the economy.
    Mr. Neugebauer. Yes.
    So here is a question: It looks like last year in 2013, the 
Fed bought what would be the equivalent of about 62 percent of 
the Treasuries issued in 2013, and that you currently hold 
about 18 percent of the outstanding Treasuries. And what a lot 
of people don't realize is that you kind of bought down the 
yield curve for the Treasury.
    And I am sure Mr. Lew will put you on his turkey list come 
Christmas time because you are doing him a huge favor by buying 
down that yield curve, and so have transferred $77 billion from 
the Fed to the Treasury, obviously reducing the interest 
borrowing cost.
    So in my view, if these deficits are negative, the Fed has 
almost become a deficit enabler in that you are making it very 
easy to really mask the real cost of these deficits. Speaking 
of the CBO, they said in a recent release that 74 percent of 
the budget deficit for the next 10 years will be on interest 
alone.
    And so is this QE, quantitative easing, and this huge 
position that the Fed has taken, I question--I think it has 
almost become a deficit enabler. I would be interested to hear 
your response on that.
    Mrs. Yellen. We are very focused on achieving the 
objectives that Congress has assigned to the Federal Reserve, 
and that is maximum sustainable employment and price stability.
    We have had an economy with unemployment that is well above 
normal levels and inflation is running well below our 2 percent 
objective, and the Federal Reserve is focused on putting in 
place a monetary policy that is designed to achieve those very 
important objectives that Congress has assigned to us.
    Because we have a weak economy with, in some sense, 
plentiful savings relative to investment, the fundamentals call 
for interest rates to be low and we are allowing them to be low 
and fostering a low-interest rate environment to achieve those 
important goals that Congress has assigned to us.
    I don't think it would be helpful, either in terms of 
achieving the objectives that Congress assigned to us or in 
terms of Congress' deficit reduction efforts, for us to 
purposely raise interest rates in order to weaken the economy. 
The likely impact of that in a weaker economy would be larger 
deficits.
    Mr. Neugebauer. I hear what you are saying about the things 
that Congress has challenged you with and the employment and 
mandatory--and monetary policy. But Congress didn't pass a bill 
for quantitative easing; that was a choice that the Fed made.
    And that very choice has really impacted the markets, but 
more importantly, I think it really, I believe, is enabling 
these deficits to continue and for the real cost to be masked 
in the fact that you are make making huge transfers, and that 
as we go out and as you talk about interest rates going up, as 
those interest rates are going up, the deficit, as a percentage 
of what interest applies to that, is going to be much, much 
larger.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Chair Yellen, you have a very busy job and a 
lot of things you can't do, and I am sure one of your great 
regrets is you don't get enough time to hang out with 
accountants.
    That being the case, you probably haven't focused on the 
FASB proposal to basically force the capitalization of all 
leases. This would add $2 trillion to the balance sheets of 
America's businesses, adding $2 trillion of assets, $2 trillion 
of liabilities.
    You would think that would balance out, but in fact it 
destroys the debt ratios, violates their borrowing covenants. 
It is estimated that this will cost anywhere from 190,000 jobs 
up to millions of jobs as corporations try to cut back and 
regain their debt-to-equity ratio. And as less of us refuse to 
sign long-term leases, and then as those wanting to do real 
estate development without an anchored tenant with a long-term 
lease, you can't build a project.
    So I won't ask a question here except to ask you to take a 
look at this, and perhaps even it will affect your economic 
projections on the downside, and then, in your role as bank 
regulator, realize that there are going to be hundreds of 
thousands of companies who, through no fault of their own, are 
in violation of the covenants they have signed with their banks 
and the pressure will be from your bureaucrats to call the 
loans because they are in violation.
    Perhaps you could, both looking at the macroeconomic side 
and bank regulatory side, focus on that.
    You say that savings exceeds demand for investments--
capital. And I disagree with you a little bit on that. It 
exceeds effective demand.
    We here all deal with small businesses. They can't 
necessarily knock on your door. They are going to knock on our 
door whether we want them to or not.
    And American small businesses can't get bank loans. Part of 
the problem is bank executives, because no one ever got a huge 
bonus for making a bunch of quarter million dollar loans. They 
all want to invest in the Whale--or like the Whale, until the 
Whale ate all the money in London.
    But another part of the problem is the bank regulators. I 
hear from bankers, ``If we invest in sovereign debt--Turkey--
heck, if we invest in Zimbabwe sovereign debt we are not going 
to get dinged by the bank regulators near as much as if we make 
loans to people whose character we know, who have been with our 
bank for years, who are part of the community.''
    And these loans shouldn't necessarily be made at prime. One 
out of 100 of these businesses going under. Not every new 
restaurant is a good restaurant.
    What can you do so that banks are making prime-plus-five, 
prime-plus-seven loans and having only modest increases in the 
demand for capital, and that the pressure is on them to stop 
investing in high-flying securities and instead make local 
loans? We need Jimmy Stewart banking back again.
    Mrs. Yellen. I think it is very important for banks to make 
loans in their communities. And in our role as bank 
supervisors, we have tried to be very cognizant of the 
possibility that overzealous supervision could diminish the 
willingness of banks to make loans to creditworthy borrowers, 
so for--
    Mr. Sherman. That may be your policy at the top, but down 
at the field level, that is not what is happening.
    Mrs. Yellen. This has been an important issue that we have 
been aware of now for a number of years, and we have worked 
carefully with our supervisors to make sure that they are not 
taking on policies that would discourage lending to small 
businesses.
    Mr. Sherman. You are going to have to work much harder to 
get your bureaucrats online on that, and the proof of it is 
that banks don't make prime-plus-five loans.
    One last thing: Dodd-Frank gave you and the other systemic 
regulators the authority to break up those who were too-big-to-
fail. Any chance you are going to use that authority?
    Mrs. Yellen. We have a broad program that is designed to 
deal with too-big-to-fail. It is the Dodd-Frank program, and we 
are actively completing our work there. And I am very hopeful 
that is going to effectively deal with it. We will monitor as 
we go forward if more needs to be done.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now declares a 5-minute recess.
    [recess]
    Chairman Hensarling. The committee will come to order.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Westmoreland, for 5 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    And thank you, Madam Chair, for being here.
    We have heard from the other side of the aisle that the 
President's policies are not having any ill effect on the 
economy. Yet, Chair Yellen, we have just recently all seen the 
report from the CBO that the Obamacare Affordable Care Act is 
estimated to cost 2.5 million jobs over the next decade.
    Do you believe that regulation or overregulation has an 
impact on our economic growth and job creation?
    Chairman Hensarling. Chair Yellen, I don't think your 
microphone is on. Can you see if it is on? And if it is, please 
pull it closer to you.
    Mrs. Yellen. I apologize.
    I think certainly regulation has an impact on the economy, 
on economic growth. And there are many economic studies that 
have tried to document what it is. I think in the case of the 
Affordable Care Act, CBO has done an important analysis and 
probably will continue to look at it.
    I think they have recognized the impact of the Act is 
likely to be complex. I think they are still attempting to 
figure out what all of the different channels are by which it 
will affect the economy. And we will look at that and try to 
look at their assessments going forward.
    Mr. Westmoreland. We had to pass that to find out what was 
in it, and so now that is all coming together.
    Has the Fed done any estimates on how many jobs the 
implementation of Dodd-Frank and the culmanative effect of the 
Obama Administration's regulatory policies are expected to cost 
the economy? Or is it that the Fed is not interested in that 
question? Because we feel that Dodd-Frank is going to have just 
as much impact on the jobs market as what the Affordable Care 
Act did.
    Mrs. Yellen. We lived through a significant financial 
crisis that has taken a huge toll on the economy, including 
creating a period with very high unemployment. And most of the 
studies that have been done, for example, the Basel Committee, 
and the United States participated in assessments, which is 
only one piece of Dodd-Frank, but in deciding to raise capital 
standards on financial institutions, and tried to assess what 
would be the net effect on the economy.
    And while there may be some impact in terms of raising the 
cost of capital, the overall impact that these studies found is 
that reducing the odds of a financial crisis would be the most 
important benefit. And when we see what a negative effect that 
has on jobs for such a prolonged period of time, to my mind, 
the regulatory agenda of trying to strengthen the financial 
system, which we are trying to put into place to make it more 
resilient and reduce systemic risk, will bring important long-
term benefits to the economy.
    Mr. Westmoreland. When you say long-term, what are we 
talking about? Because we always hear long-term. What is long-
term?
    And when does long-term start? Because we have been 
supposedly in a recovery now for a period of time, and we keep 
hearing that Dodd-Frank and some of these other things that 
have gone in will have long-term pluses.
    When does long-term start? Is 4 years not long-term? When 
are we planning on this kicking in? Five years, 10 years, 20 
years?
    Mrs. Yellen. I think it is kicking in, in the sense that we 
are building a more resilient financial system and 
substantially mitigating the odds of another financial crisis 
that will take this kind of toll on households in the economy.
    Mr. Westmoreland. Okay.
    And one other question, just quickly: Do you feel like 
there is enough separation between the Federal Reserve and this 
Administration in the fact that I know you meet with the 
Secretary of the Treasury, what, once a week, once a month?
    Mrs. Yellen. It has been the tradition, I think, to meet 
almost once a week. There are many overlapping areas of 
interest between the Federal Reserve and the Treasury that I 
think makes it desirable to have ongoing communication. But--
    Chairman Hensarling. The time of the gentleman has expired.
    Mrs. Yellen. --the Federal Reserve is completely 
independent in conducting monetary policy.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New York, Mr. 
Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    It is with great pleasure that I welcome you this morning, 
Madam Chair. Your historic ascension to the position speaks 
volume, I believe, for our Nation and the continued progress 
our Nation is making in the inclusion of women and minorities 
to positions of leadership and will be another source of 
inspiration for young women, like my three daughters, and 
especially those who are looking for careers in the finance and 
banking industry.
    And let me just say that I am pleased you have the job not 
because you are a woman, because you are the right person for 
the job and you have done it the old-fashioned way--you have 
earned it.
    Mrs. Yellen. Thank you, Congressman. I appreciate that.
    Mr. Meeks. Let me ask--and I think the ranking member 
touched on this, and I know Mr. Clay touched on this--about the 
wealth gap. And when you look at what the--that 95 percent of 
the income gains since the recovery have gone to the top 1 
percent, there has always been a big question about the 
relationship between Main Street and Wall Street. And for me it 
has been difficult, especially sitting on this committee, to 
try to explain Wall Street to Main Street when you have this 
kind of inequality.
    Today, for example, on average there is--the African-
American household is 20 times less than the White household. 
The median net income of White households stands at about 
$110,000 versus $6,000 for blacks and $7,000 for Hispanics, 
largely because most people's wealth was in their homes. And 
when you have the crises, most--because people were steered, in 
minority communities, they lost a large part of that wealth 
when it was closing. Now, it has gone to a tremendous level.
    So, given that we know that there were no-doc loans and 
there was steering into these communities and it has caused 
this kind of disparity in wealth, is there anything that the 
Fed can do, and/or is doing, that will help the middle class in 
general, but even more specifically, these individuals who were 
impacted to a great extent because of the inequality of what 
was going on in the system?
    Is there something that we can do to help them get back on 
their feet?
    Mrs. Yellen. I think, Congressman, the most important thing 
to do, which has been absolutely our focus, is to promote a 
stronger recovery. These same households that were hit so hard 
by what happened in the housing sector and by the subprime 
debacle, we want to see those households get jobs so that they 
can rebuild wealth and have the income that they need to 
support their families.
    Mr. Meeks. The problem, though, that we are having is that 
many have referred to this recovery as a jobless recovery.
    And when you look at technology today and you see that 
technology is--a lot of business folks are using it and saying 
it is for efficiency, et cetera, and thereby a lot of jobs that 
would have gone to people--are losing some of the common 
person.
    I look at New York City. If you were a teller in a bank, 
ATMs have replaced you; bridge tolls, you have EZ-Pass. All of 
these jobs that used to be manual labor now are replaced 
because of technology.
    Now, I am a big believer in international trade because 
that should create jobs. My question to you is, though, can we 
identify the jobs that will be created so that we can then 
pinpoint where we should be training individuals so that they 
can get the jobs that are going to be created and not just 
randomly creating jobs, but creating jobs and then we can go 
back into the communities and train people specifically for the 
jobs that we feel will be created as a result of the current 
economy?
    Mrs. Yellen. A stronger economy is going to create jobs in 
virtually every sector of the economy. But a longer-term trend 
that ties in with the concerns that you have expressed is a 
growing skills gap, a growing wage inequality between more- and 
less-educated workers, technological trends that have reduced 
what used to be an important class of good, high-paying jobs. 
Those jobs are being competed away because of technological 
change and, to some extent, shifts in global competition.
    I think every economist that I know believes that we need 
to address that skill gap in order to make sure that we reduce 
inequality.
    Mr. Meeks. But is there anything the Fed can do 
specifically to help in that regard?
    Mrs. Yellen. What we can do is to try to promote stronger 
demand, a stronger job market generally. We have seen that 
lower-income individuals have been disproportionately harmed by 
the downturn, and as the economy recovers--I am by no means 
saying that this is a panacea, not by any stretch of the 
imagination for inequality--but I think we will see gains 
broadly shared throughout the economy.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, the Chair of our Oversight and Investigations 
Subcommittee.
    Mr. McHenry. Chair Yellen, congratulations on your 
appointment and being an important mark in the history books, 
as well.
    Mrs. Yellen. Thank you.
    Mr. McHenry. I have a question: In 2010, you said that 
banks may be required in their debt stack, in their capital, to 
use a convertible instrument that in good times has a debt 
nature and in bad times converts to equity. You said that they 
may be required to do this. Is it your intention to use this 
instrument?
    Mrs. Yellen. I think when I gave the speech at that time, I 
was broadly considering possible regulations or shifts in the 
focus of supervision that might be helpful. I think there still 
is focus on something like that.
    I think to improve the resolvability of a large banking 
organization, something that the Federal Reserve and other 
regulators are contemplating is a requirement that bank holding 
companies hold a sufficient amount of long-term debt. It would 
play a role similar to the contingent capital instruments you 
have described.
    Mr. McHenry. You mentioned that in your opening statement, 
about this requirement on long-term debt. Would it be your 
intention to have this contingent convertible capital as a part 
of that long-term debt requirement?
    Mrs. Yellen. I think this type of debt would bear some 
similarities. It is not exactly the same but it bears some 
similarities to contingent debt in that it is a source of gone 
concern of value that would be there if an organization got in 
trouble that would serve to recapitalize it. And the existence 
of such a class of debt, I think, would give proper incentives 
to monitor risk-taking in these organizations.
    Mr. McHenry. So are you still broadly favorable towards 
these contingent convertibles?
    Mrs. Yellen. There are a number of issues associated with 
that kind of debt, what would trigger it, and so forth, but I 
think it remains an interesting possibility in this proposal--
    Mr. McHenry. An interesting possibility. That is a fair 
admission from a Chair of the Federal Reserve. So, I will take 
that as somewhat favorable, if I may.
    I was reading yesterday in the Financial Times--we have 
this discussion about the Volcker Rule and the exception the 
Volcker Rule provides for sovereign debt, vis-a-vis, corporate 
debt in the United States. And I read in the Financial Times 
yesterday that Daniele Nouy, who is the head of the Bank 
Supervisory Agency in the European Union, she said that they 
are really going in a different direction in the E.U.
    And in light of their recent crises with sovereign debt, 
she said one of the biggest lessons of the current crisis is 
that there are no risk-free assets. So, sovereigns are not 
risk-free assets. That has been demonstrated, so we now have to 
react.
    In essence, the E.U. is going in a different direction when 
it comes to sovereign debt than we are in the United States. 
How would you react to that?
    Mrs. Yellen. I believe the exemption for U.S. debt markets 
was built into Dodd-Frank. That was explicit in Dodd-Frank.
    Mr. McHenry. Okay. But what is your reaction to that? We 
are policymakers. We could remedy that if you think that is a 
flaw.
    Mrs. Yellen. We have tried to write a rule that is 
consistent with Dodd-Frank as it was legislated.
    Mr. McHenry. Would you look favorably upon us saying that 
sovereign debt should not be exempt or should comparable to 
corporate debt?
    Mrs. Yellen. That is something that I would have to look at 
more carefully.
    Mr. McHenry. But did you not look more carefully at this 
subject matter when you wrote the Volcker Rule?
    Mrs. Yellen. We put into effect the allowance that Congress 
included in Dodd-Frank to exempt Treasury securities.
    Mr. McHenry. Yes. Well no, that is Treasury securities. I 
am asking about sovereign debt, which was excluded from the 
Volcker Rule.
    Written into the language of Dodd-Frank is exclusion of 
U.S. sovereign debt, not the exclusion of other sovereign debt. 
I would call this a lack of enthusiasm from you, I would 
surmise.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Thank you, Madam Chair, for being with us today. Madam 
Chair, I have a couple of different areas I would like to 
pursue. I don't know how far we will be able to get.
    But in your confirmation hearing, you made a comment--at 
least it is reported that you made a comment: ``Addressing too-
big-to-fail has become among the most important goals of the 
post-crisis period,'' which on some levels I would agree with, 
although I happen to think we did address a fair amount of it. 
I also accept what Chairman Bernanke once said, which is, 
``Reality is in perception, and the perception is we haven't 
done enough. So therefore, we have to do more.''
    And I am just wondering if you have any thoughts on how to 
do that, particularly with relation to either reinstituting 
some form of Glass-Steagall or instituting some sort of a 
market-driven attempt to reduce the size of some of these too-
big-to-fail programs.
    Mrs. Yellen. I think we have a broad agenda that is 
intended to address too-big-to-fail and we are putting it into 
effect and I think have made meaningful progress. We have--
    Mr. Capuano. Do you think it would be worth us considering 
reinstituting some form of Glass-Steagall?
    Mrs. Yellen. I think that if we continue on the path that 
we are on of completing the Dodd-Frank rulemakings, beyond that 
of putting in place a rule that would enable a resolution 
through orderly liquidation by requiring--
    Mr. Capuano. So you think we won't need it when you are all 
done?
    Mrs. Yellen. I think we have to keep watching whether or 
not we have succeeded in addressing this, but I believe we 
have--
    Mr. Capuano. Fair enough. I would ask you to also take a 
look at H.R. 2266, which is a market-driven attempt to reduce 
the size of some of these institutions.
    I also want to talk about an editorial that I read in the 
American Banker last week that basically, in my opinion, coined 
a new phrase, but one that is accurate, ``too-big-to-jail.'' 
And it was about the concern that not enough of these people 
who have foisted their inappropriate activities on us in 2008 
have paid a penalty on a personal basis. Some of the biggest 
corporations simply wrote a check to stay out of jail free 
because it is not even their money; it is corporate money.
    And when I read it in the American Banker, it kind of puts 
a big underscore to me, and I am just wondering, do you have 
any concerns about the lack of personal accountability in some 
of the largest institutions in this world when it comes to some 
of the activities they participated in, not just before 2008 
but after 2008 as well?
    Mrs. Yellen. I do have concerns about those activities, and 
the Federal Reserve cooperates with the Department of Justice 
as appropriate when they take actions that are criminal in 
nature. The Federal Reserve's focus is on safety and soundness. 
We are supervisors of these organizations--
    Mr. Capuano. But isn't the safety and soundness of the 
entire economy based on trust and good activity?
    Mrs. Yellen. It certainly is.
    Mr. Capuano. And my concern, to be perfectly honest, is if 
people are not held personally accountable when they are 
allowed to write corporate checks--not personal checks--to just 
push away their ill-gotten gains, and they get to keep that 
money and continue on and actually get raises and bonuses from 
those institutions, that the moral hazard says to the next guy 
coming down the street, the people that you have to regulate, 
``It is okay. Don't worry about it. Do anything you want, and 
all we have to do is, the corporation--not you--will pay a few 
hundred million dollars of shareholder money, by the way, not 
your money.''
    You don't have a concern with that with the Federal 
Reserve, by not having--not you, but by not having other 
entities hold them to personal account that it will make your 
job tougher going forward?
    Mrs. Yellen. I agree with you that there certainly should 
be accountability within these organizations.
    Mr. Capuano. Thank you. I appreciate that.
    And the last point, since we only have a minute, is I want 
to talk about Fannie Mae and Freddie Mac. I personally have 
always wanted to amend and reform them. However, I have also 
thought it is wrong. Fannie and Freddie have now pretty much 
paid back the money that they have borrowed from the taxpayer. 
I don't know if they are exactly there, but they are close to 
it and on their way.
    And yet, at the moment, they have not been allowed by our 
own laws to pay one penny towards the payment of that 
principal. There are lawsuits going on, as I am sure you are 
aware, and I am just curious, do you think that it is fair or 
wise or equitable to keep any entity in a de facto bankruptcy 
state once they have paid back their debt?
    Mrs. Yellen. I think with respect to the GSEs, it is really 
very important for Congress to put in place a new system to 
address GSE reform. I think we still have a system that has 
systemic risk, that government funding remains critical to the 
mortgage sector.
    And I think to really get housing back on its feet, it is 
important for Congress to put in place a new system and to 
explicitly decide what the role of the government should be in 
helping the housing sector.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, the chairman of our Capital Markets Subcommittee.
    Mr. Garrett. I thank the Chair.
    And I thank Chair Yellen. Congratulations on your position, 
and welcome to the committee.
    Thank you also--I understand the rules here that you are 
waiving a little bit and you are staying a little longer since 
there is a whole host of Members of Congress on both sides who 
would really like to dig in to some of these questions. So, we 
do very much appreciate that.
    I am going to step aside from some of the monetary, some 
discussions some people have made and otherwise get into, to 
start off with your prudential supervision role, which of 
course, under Dodd-Frank and others, has been expanded greatly. 
And I am not going to run through the list of all the 
expansions; you know very well what they are.
    But let me just begin to go back. I will reference a letter 
you may or may not--from a report back in November 2011. The 
GAO came up with a report on Dodd-Frank regulation and 
implementation of cost-benefit and analysis.
    And in that report, just to brief you, the Fed Reserve 
General Counsel responded to it with a letter. That was Scott 
Alvarez and Senior Adviser James Lyon responding to that. And 
what they said, what the Fed response was, that the Federal 
Reserve will consider appropriate ways to incorporate these 
recommendations into the rulemaking procedure.
    And I have the letter. I will put it in the record later.
    They even go in further to--where is it--seek to follow the 
spirit of cost-benefit analysis.
    So my first question to you is, what progress is the Fed 
making--and this is 2 years ago since that letter was written--
on actually completing and complying with this cost-benefit 
analysis and rulemaking?
    Mrs. Yellen. The Federal Reserve strongly supports 
analyzing the costs and benefits of rules that it puts into 
effect, and we have done a great deal of that. An example I 
could give you is in connection with our Basel re-capital 
rulemaking, where we participated in extensive cost-benefit 
analysis--
    Mr. Garrett. Would you--
    Mrs. Yellen. --hopefully with other regulators.
    Mr. Garrett. Would you say you are satisfied with how it 
came out with Volcker? Because we had no indication that a 
cost-benefit analysis was done, and I asked Governor Tarullo, 
when he was here, where it is, because we have not seen it. So 
2 years later, it seems like on something that is important as 
that, it was not done.
    Do you believe it was done in that situation?
    Mrs. Yellen. I think what is important in the case of 
Volcker is what Dodd-Frank required of the Federal Reserve. In 
essence, the decision about the costs and benefits of putting 
those restrictions in place were decided by Congress, taking 
account of what the likely cost and benefit would be.
    And our job has been to implement it. We have certainly 
taken into account--issued a proposed rule, received a wide 
range--
    Mr. Garrett. Right.
    Mrs. Yellen. --thousands and thousands of comments.
    Mr. Garrett. I appreciate that. My time is very limited, 
and so I would encourage that a true cost-benefit analysis be 
submitted to Congress, which, I think in anyone's estimation, 
was not done fully in Volcker.
    Speaking of Governor Tarullo, the President has not 
appointed anyone to fill the position of Supervisory Division 
Vice Chair.
    Mrs. Yellen. Vice Chair.
    Mr. Garrett. Would you say that Governor Tarullo is 
effectively holding that position until that is completed, 
until the appointment is made?
    Mrs. Yellen. We operate at the Board through a committee 
system.
    Mr. Garrett. Yes.
    Mrs. Yellen. I usually have three Governors and a Chair.
    Mr. Garrett. Right.
    Mrs. Yellen. And Governor Tarullo heads the Board's banking 
supervision committee. So in that sense, he certainly takes the 
lead.
    Mr. Garrett. So would you--
    Mrs. Yellen. But all of us are involved and all of us are 
responsible.
    Mr. Garrett. But in light of your comment, would you 
commit, then, to have Governor Tarullo come and testify on 
Federal rulemaking before this committee, since he seems to be 
filling that role until the President makes the--
    Mrs. Yellen. He has done a great deal of testifying on 
these topics.
    Mr. Garrett. Just on that topic, can we ask him?
    Mrs. Yellen. On all topics, he has done--
    Mr. Garrett. I understand. I guess I am asking for a 
commitment that we can have him come back in that role and 
testify before the committee on rulemaking.
    Mrs. Yellen. I don't want to commit as to what he is going 
to do, but he has certainly--
    Mr. Garrett. I guess that is what I was hoping for--
    Mrs. Yellen. --taken the lead role in testifying on these 
topics.
    Mr. Garrett. Sure.
    With regard to international agreements that you negotiate, 
you have probably seen some ideas that are floating out there 
that market participants should have a better ability to chime 
in or comment on them prior to in the process of making those 
agreements. Would you commit today to allow market participants 
to engage in that process while you are making those 
international agreements?
    Mrs. Yellen. When we turn to putting rules into effect for 
the United States, which is what affects those firms, we always 
have consultation and take comments in a rigorous process of 
evaluating comments.
    Mr. Garrett. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa, for 5 minutes.
    Mr. Hinojosa. Thank you.
    Thank you, Chair Yellen, for sharing your testimony and for 
your time with us today.
    Since the height of the 2008 financial crisis and the deep 
recession that followed it, the U.S. economy has made 
significant progress, as you and I know. The unemployment rate 
declined from a high of 10 percent in 2009 to the current rate 
of 6.6 percent.
    In the most recent quarter, GDP grew at an annual rate of 
3.2 percent. And furthermore, despite some recent volatility, 
equity markets have seen substantial gains with the S&P index 
increasing by 30 percent last year, 2013.
    Many economists and policymakers fear that the nature of 
the recent recovery may indicate that the U.S. economy could be 
a major inflection point where the ability of the private 
sector to create wealth is now outstripping its ability to 
create jobs. I have seen that in the region that I represent in 
deep South Texas.
    For most of the postwar period, U.S. policymakers assumed 
that growth and employment went hand in hand, and the U.S. 
economy's performance had largely confirmed that assumption. 
But the structural evolution of the global economy and its 
effects on the U.S. economy today could mean that growth and 
employment in the United States are starting to diverge.
    Chair Yellen, can you discuss with us why we appear to be 
undergoing what many have referred to as a jobless recovery? 
What explains the disparity between fairly weak employment 
growth in recent months and the fact that equities and 
corporate earnings are at an all-time high?
    Mrs. Yellen. Congressman, it certainly has been a slow 
recovery, by the standards of U.S. history, from downturns, but 
7.8 million jobs have been created since the drop in 
employment, I believe, in the beginning of 2010. And while we 
still have a ways to go, and the job market is not by any means 
back to full strength, we are not back to maximum employment, 
there has been substantial job creation. So, I think we have 
made progress.
    Clearly, we have further to go. We are trying to promote a 
faster recovery and a fuller recovery, but I do see--and not 
only in terms of the number of jobs, but across a broad range 
of labor market indicators, I do think there is progress even 
though certainly there is a significant way to go.
    Mr. Hinojosa. In past speeches, you have indicated a 
concern about rising inequality. Many members on this committee 
are concerned due to moral beliefs. Additionally, many 
economists have expressed worry that it will impact the 
recovery.
    Do you believe that rising inequality might affect the 
stability of the economy?
    Mrs. Yellen. I am very concerned. I share your concern 
about rising inequality. I think it is one of the most 
important issues and one of the most disturbing trends facing 
the Nation at the present time.
    There has been some discussion about the possibility that 
inequality is holding back the recovery because the gains have 
been so unequally distributed. I think we don't have certainty 
about that. But certainly, rising inequality is partly a matter 
of a weak job market that we are trying to address.
    But there are deep and disturbing longer-term, structural 
trends rising--a rising disparity between the wages earned by 
more- and less-skilled workers, shifts in global competition 
that have diminished jobs for less-educated people.
    Mr. Hinojosa. I am very concerned about the percentages of 
unemployment in our 18- to 29-year-olds, not only in our 
country but in other countries in Europe, as examples.
    What can we do so that we can bring those rates down to a 
single digit?
    Mrs. Yellen. We are working hard. The purpose of our 
monetary policy is to promote a stronger recovery that will see 
young people who are in school come out into a stronger job 
market that can affect their entire future career. It is a key 
goal of the Federal Reserve, and I think Congress could also 
consider ways of helping as well.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Miller, for 5 minutes.
    Mr. Miller. Thank you, Mr. Chairman.
    Chair Yellen, it is good to have you here today.
    Mrs. Yellen. Thank you.
    Mr. Miller. Congratulations on your confirmation.
    Mrs. Yellen. Thank you.
    Mr. Miller. I enjoyed your testimony. There has been a 
considerable amount of discussion regarding the problems that 
were a result of bankcentric standards which were applied to 
insurance companies.
    And I was pleased that at your confirmation hearing, you 
indicated your agreement that insurance has unique features 
that make it different from banks, and that a tailored 
regulatory approach for insurances would be inappropriate.
    And I think it would be devastating to apply the same 
standards to an insurance company that we did to a bank. So 
what are you going to do to make certain that insurance 
companies are not subject to inappropriate bankcentric rules?
    Mrs. Yellen. We explicitly decided, when we put in effect 
our capital rules, to defer their application to savings and 
loan holding companies with substantial insurance activities 
and to the other nonbank SIFIs that were designated. We wanted 
to have a chance to study what an appropriate regime would be, 
recognizing that there are important differences between the 
insurance business and banking.
    We understand that the risk profiles of insurance companies 
really are materially different and we are trying our best to 
craft a set of capital and liquidity standards that will be 
tailored to an appropriate--to the risk profiles of insurance 
companies.
    I would say that we do face constraints in our ability to 
do that because the Collins Amendment requires us to establish 
consolidated minimum risk-based leveraging capital requirements 
for these entities that are no lower than those that apply to 
depository institutions. Within that constraint, we are working 
as best we can to tailor an appropriate regime.
    Mr. Miller. I am concerned about the asset designation and 
how the Fed looks at assets of banks versus assets of insurance 
companies.
    Governor Tarullo said, ``The liability structure of a 
financial institution affects the amount of capital it needs. 
It doesn't affect how risky a particular asset is. It doesn't 
matter who holds it; an asset is an asset.''
    I guess my concern I would like you to take into 
consideration is, banks hold assets different than insurance 
companies do. Insurance companies generally buy assets for the 
long-term. Banks will buy assets for the short-term.
    So to me, there is a difference in the way institutions 
hold assets and the difference in the reasons institutions buy 
assets. So I hope at some point in time you will take that into 
consideration when you are reviewing the asset held by a bank 
versus an insurance company.
    But last fall, the Treasury Office of Financial Research 
(OFR) published a report on asset management, and financial 
stability, at the direction of the Financial Stability 
Oversight Council (FSOC). The report recognized that asset 
managers, as opposed to other financial institutions, act as an 
agent on behalf of their clients, whereas investment gains and 
losses are solely the client's, and do not flow through to the 
asset manager.
    And I am concerned that the asset management firms might be 
designated as SIFIs and put under bankcentric regulations. I 
think it would be harmful to the financial sector if that 
happened.
    Do you agree with the study that asset management and banks 
are different?
    Mrs. Yellen. I think, of course, they are different. 
Designation is something that is very important to any company 
and deserves a very thorough review. If FSOC considers these 
entities, I think it will be appropriate to do very careful 
analysis of whether they do pose systemic risk.
    Mr. Miller. And as it applies to the regulations imposed on 
asset managers, should it be tailored to take into account the 
fundamental difference between the business of the asset and 
the management and banking? Do you agree with that also?
    Mrs. Yellen. I definitely believe that our supervision and 
regulation should be tailored to the unique features of any 
entity that we regulate.
    Mr. Miller. Okay. I would hope that the Fed, in the future, 
can try to make it--to create more of a comfortable environment 
for insurance companies. Because there has been considerable 
unease in the industry, as you know, in the past year, over 
what their future might be. Some have sold off assets, such as 
they might have held a small bank for courtesy to their 
clients, because they thought they were going to be dragged 
into the regulation of the banks.
    I hope that we can be more clear. I know in your position 
it is very difficult to be clear sometimes because the market 
misreads that clarity, but there needs to be some clarity, I 
believe, for insurance companies, so they are not concerned in 
the future with what their future might be as far as it applies 
to assets.
    I yield back. Thank you, Mr. Chairman.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    And, Madam Chair, I want to just start off by welcoming you 
and congratulating you. And I wish you every success in your--
for us--new position.
    I do have a couple of questions. Recently, a fair amount of 
attention has been paid to the commodities activities of some 
of our bank holding companies. For many years, American law and 
regulatory framework have recognized that there should be a 
healthy separation between banking and commerce to ensure that 
we have the safety and soundness of banks, to ensure fair and 
equitable credit flows to economically beneficial activity, and 
also to prevent excessive concentration of power and wealth in 
the financial sector.
    However, over the last 15 years this wall between banking 
and commerce has begun to crumble with serious negative 
consequences.
    In July of last year, the global risk manager for 
MillerCoors testified before the Senate Banking Committee that 
the commodity activities of banks cost that company tens of 
millions of dollars and more than $10 billion for all aluminum 
buyers globally in 2012.
    Similarly, JPMorgan Chase, Deutsche Bank, and Barclays 
recently paid fines to the Federal Energy Regulatory Commission 
(FERC), which has won more than $800 million in civil penalties 
from banks since 2005, for manipulating electricity and natural 
gas markets.
    And then recently, the New York Times documented aluminum 
warehouses owned by Goldman Sachs that used obscure exchange 
rules to drum up hefty fees while contributing very little 
tangible benefit to the economy.
    What all of this shows is that there is a move away from 
the traditional business of banking by banks and into more 
risky and potentially more lucrative, but certainly more 
dangerous, activities that seem to produce very little economic 
benefit while these banks are chasing profits and exposing 
themselves to steep fines and swings in commodity prices.
    So the bottom line for me is, do you support pulling back 
and getting the banks back into traditional banking business? 
Do you support restricting or prohibiting altogether these 
expanded commodities activities by banks? And what does the 
Federal Reserve plan to do to curb these abuses?
    Mrs. Yellen. We are thoroughly reviewing our supervision in 
these areas. We have recently put out an advanced notice of 
proposed rulemaking in this area highlighting a number of 
different issues that we want to consider.
    We will carefully look at the comments and I expect that we 
will be reviewing and likely making changes in these areas to 
address some of these concerns.
    I would say, though, that the Federal Reserve's main focus 
in our supervision of these areas is to make sure that banks 
operate in the commodities activities in a safe and sound 
manner. You referred in your remarks to allegations of market 
manipulation, and I would point out that it is the 
responsibility of market regulators--the CFTC, the SEC, and, in 
some cases, the FERC--to pursue actions with respect to market 
manipulation.
    We would, of course, cooperate in any investigation, but 
they do have primary responsibility. But yes, we are thoroughly 
reviewing our policies in this area.
    Mr. Lynch. All right. That is great to hear.
    One other quick question: Section 956 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act requires that 
the Federal financial regulators issue a rule requiring big 
banks to disclose the incentive-based compensation agreements 
for employees who can expose the banks to excessive losses. In 
other words, an article, I believe, by Gretchen Morgenson in 
the Times a couple of weeks ago.
    Where are we on that? I know you are in the rulemaking 
process. Do you agree with that approach? And where are we on 
the rulemaking process?
    Mrs. Yellen. We did put into effect supervisory guidance 
with respect to compensation in the banking organizations that 
we supervise. We have engaged in horizontal reviews and I 
believe there have been improvements in the incentive 
compensation practices of the organizations that we supervise, 
and we intend to be active in that area.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, chairman of the House Foreign Affairs Committee.
    Mr. Royce. Chair Yellen, it is good to have you here. 
Congratulations--
    Mrs. Yellen. Thank you.
    Mr. Royce. --on your appointment.
    I was going to ask you about a speech you gave as President 
of the San Francisco Fed some years ago. As Chairman of the 
Federal Reserve there, you made some observations as sort of a 
warning, a wakeup call to the situation as it relates to the 
Federal budget deficits not being sustainable.
    And your words were, ``We began to look at numbers that are 
truly staggering, frightening.'' And you were talking about 
entitlements. You said, ``I am concerned that the people take 
it as a given that they have Social Security and Medicare and 
support from Medicaid to pay for nursing home care.''
    And you explained, ``Then it was 8 percent of GDP.'' I 
think it was in about 2006 that you gave that speech--maybe 
2005. You said that looking forward, the numbers showed that it 
would double that. It would be 16 percent of our entire GDP 
that would go to pay for entitlements. Now, I guess we are at 
12 today, they tell me.
    And I was going to ask you about this, because it is a very 
similar thing that we have heard after former Federal Reserve 
Chairman Ben Bernanke retired. He made some comments about 
this. And also, former Fed Chairman Alan Greenspan. Your 
thoughts today on this?
    Mrs. Yellen. I agree with my predecessors that when you 
look at these long-run trends--at that time we were looking, I 
think, over the next 30 to 40 years at, with unchanged 
programs, an aging population, and at that time health care 
costs that were rising more rapidly than the general price 
level.
    You would see a very, very substantial--I believe I said 
roughly a doubling of the share of GDP that would go to those 
three programs without revenues rising in tandem. And of 
course, that is the key dynamic that underlies CBO's long-term 
budget projections that show the United States to be on an 
unsustainable budget path. And this is something we have known 
about for decades and--
    Mr. Royce. But this is a question I have, because I am not 
sure everybody has gotten the message. I heard the leader in 
the Senate say we have a generation before we have to deal with 
this.
    And I guess my question to you is, if we don't deal with it 
now in order to bend this curve, what will be the result for 
young Americans coming into the workforce a generation from 
now? What will they face?
    Mrs. Yellen. We will face a situation in which rising 
budget deficits begin to crowd out private investment and begin 
to lead to an environment of higher interest rates and slower 
growth, and crowd out productive private investment. And so--
    Mr. Royce. Economists agree with this. Regardless of 
whether economists are left or right or center, they are all 
warning us of the same consequence.
    So the question I have is, is there a way for you basically 
to sell the American public--because I don't believe that the 
public really understands the magnitude of it--in order to 
bring the pressure to bear to get an agreement that will 
address entitlement reform?
    How could you do that? How could you take your job as Chair 
of the Federal Reserve and go out and explain the consequences 
of inaction in order to get Washington moving and doing the 
right thing?
    Mrs. Yellen. My predecessors, Chairman Greenspan and 
Chairman Bernanke, have consistently testified that these long-
run budget trends--
    Mr. Royce. But I am sharing with you--
    Mrs. Yellen. --are highly problematic.
    Mr. Royce. I know. We have heard the testimony here.
    What I am sharing with you is that it is not doing the 
trick. Somehow, we have to figure out a way to get you, as 
Chair, out among the public to build support, and maybe with 
the support of former Fed Chairmen who are saying today what 
you are saying today, in order to galvanize the political 
action necessary, because describing the consequences of 
inaction here isn't doing it.
    Mrs. Yellen. I believe that this is something that is 
essential for Congress to address, and I anticipate 
consistently sending this message that this is a critical issue 
facing--
    Mr. Royce. Anything you can do to figure out a way to turn 
up the heat and get the facts out to the public on the 
consequences--people used to live to be 65. It is going to be 
85 and they are having two children instead of four. This has 
to be addressed in terms of reforms.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Scott. Chair Yellen, welcome. I am over here.
    Let me just ask you, because I need to ask you if you will 
be bold. We need bold leadership here.
    You have a dual mission: fighting price stability, 
inflation, but employment. That part of the dual mission has 
always been like a stepchild for the Fed. It has been like a 
second-class citizen.
    And we have a national crisis on unemployment. This is 
riveting. The 6.6 percent figure is misleading.
    College graduates right now getting out of college is 22 
percent. Young veterans is 24 percent, not to count young males 
at 30 percent. One-third of all the working-age women have 
already slid into poverty.
    We need you to be bold. We need you to take us not around 
the docks with the little boats. We need to you to us out where 
the big ships go on this issue.
    And I want to ask you, will you do that? Will you lift this 
up and make the employment part of your mandate on an equal 
plateau with fighting inflation?
    Mrs. Yellen. Congressman, I strongly support both parts of 
the Federal Reserve's dual mandate: price stability; and 
maximum employment. I have led the committee to produce a 
statement concerning its longer-term policy strategies and 
goals that puts both of these on an equal footing. And in terms 
of bold policy, with the economy seemingly stuck looking--
    Mr. Scott. Ms. Yellen, my time is short. I want a yes-or-no 
answer.
    Mrs. Yellen. Yes, I will.
    Mr. Scott. Will you lift employment up? This Nation is in 
trouble. We have 50-year-old men who are being laid off in 
desperate situations. We have jobs being shipped overseas.
    In other words, what I am saying is we need more than just 
zero rate interest rates. Your agency is the only one that has 
the mandate of dealing with unemployment. That is a dual 
mandate and it has never been dealt with, with the level of 
importance that it should be.
    And let me ask you this just to give you an idea: Right 
now, did you know that legislation has been introduced in this 
Congress to eliminate your employment mandate away from that? 
Are you aware of that?
    Mrs. Yellen. Yes, I am. I strongly support the Federal 
Reserve's dual mandate. Both parts of it, both price stability 
and--
    Mr. Scott. But why--
    Mrs. Yellen. --the employment mandate matter enormously to 
American households.
    I think it serves this country well. And there is no 
conflict--most of the time and especially now--between pursuing 
both pieces of this. We have acted boldly in order to promote a 
stronger recovery.
    Mr. Scott. What do you say to Congress? Why would Congress, 
at this most critical time, when the future of this country is 
at stake--this is a national crisis--the depth of unemployment 
when you look at it structurally. And here in this Congress 
they are trying to take away a part of your dual mandate, to 
eliminate your employment mandate at this critical time.
    What do you have to say to Congress about that?
    Mrs. Yellen. I feel very strongly that the Fed's dual 
mandate to focus on both employment and price stability has 
served this country well. We are committed to pursuing both 
parts of that mandate and we are doing so.
    Mr. Scott. Chair Yellen, would you make it a part of the 
Fed's policy and objectives to fight this legislation, to speak 
out against this legislation?
    All I am saying here is that you have a great opportunity 
here. This country needs leadership on fighting this 
unemployment--this structured unemployment and every factor. It 
is a shame that our young people have this rate of 
unemployment.
    Many are giving up. They don't even calculate that into the 
workforce where they have given up.
    And Ms. Yellen, I am so proud of you but I am going to be 
even more proud if you become that Chair of the Fed to right 
the wrong and take us--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Minnesota, 
Mrs. Bachmann, for 5 minutes.
    Mrs. Bachmann. Thank you, Mr. Chairman.
    I also want to thank and welcome to this committee the new 
Chair of the Federal Reserve. We are extremely grateful for you 
being here and also good luck on your service--
    Mrs. Yellen. Thank you very much.
    Mrs. Bachmann. --as the head of the Federal Reserve. We 
want you to be successful.
    Mrs. Yellen. Thank you.
    Mrs. Bachmann. We asked our constituents what their number 
one question would be today. This is an historic opportunity to 
have a new Federal Reserve Chair and we had a plethora of 
responses from constituents with questions.
    But it was interesting that there was a commonality of the 
questions that came forth. One was really from our financial 
institutions and businesses, and the first was from individual 
constituents.
    And so I would like to give you, first of all, the question 
that we received most from our individual constituents, and it 
was this: It was you and other opponents of the Audit the Fed 
legislation who said that it threatens the independence of the 
Federal Reserve. Could you please point to a specific section 
of the bill that allows Congress to interfere with the ability 
of the Federal Reserve to determine monetary policy?
    My constituents absolutely can't understand why the Federal 
Reserve would push back against having the Federal Reserve 
audited.
    Mrs. Yellen. I strongly believe that the Federal Reserve 
should be audited; it should be open; it should be transparent. 
We are audited. We are audited by the GAO in almost every 
aspect of our financial affairs and the programs that we run.
    We have outside independent accounting firms that audit the 
Fed. We publish our balance sheet weekly. All of this is 
completely appropriate.
    What I don't agree with and would strongly oppose is 
interfering with the independence of monetary policy by 
bringing political pressures to bear on the committee's 
judgment about what is the appropriate way to implement 
monetary policy.
    We are given objectives by Congress. That is completely 
appropriate. We report to Congress. You should hold us 
accountable and ask us to explain how our policies advance the 
goals that you have assigned to us.
    But if you pass a bill that would have the GAO come and 
take documents, second-guess every decision that we make, or 
permit them to do that within a short time of our making those 
decisions and bring political pressures to bear--Congress 
wisely made the Fed independent in the implementation of policy 
because it was understood that we sometimes have to make 
difficult decisions that would be hard for the Congress to make 
in the best long-run interests of the country, and enabling us 
to make those decisions free of short-term political pressure 
is critical to maintaining our independence.
    Mrs. Bachmann. Thank you. And I hear what your response is. 
Our former colleague, Ron Paul, who had introduced the 
legislation to audit the Fed, contained within the language of 
that bill there is no section that deals with giving Congress 
the right to determine monetary policy.
    If the House and the Senate were to pass the Audit the Fed 
legislation, if the President of the United States would pass 
that legislation--this is very strong bipartisan legislation--
if that happened, would we hear from all of you at the Federal 
Reserve opposition to that bill that enjoys very strong support 
from the American public?
    Mrs. Yellen. You would hear opposition to that bill because 
Congress has for many, many years--for decades--exempted from 
GAO audits our monetary policy decisions, and it is really 
critical that our monetary policy decision-makings, not other 
aspects of Federal Reserve operations, remain free of GAO 
audits.
    Mrs. Bachmann. And I think that is part of the reason why 
we are here in this hearing today, because the American people 
are feeling less and less empowered to be able to hold the 
Federal Reserve responsible and accountable, because they are 
seeing the Federal Reserve's balance sheet escalate to a level 
never before seen in American history. And the people know that 
eventually they will be the ones called upon to meet the bills 
and payments that are accumulated by the Federal Reserve.
    What means do the American people have to hold the Federal 
Reserve accountable?
    Mrs. Yellen. In hearings like this, it is entirely 
appropriate for you to demand accountability from me and from 
my colleagues, and that is--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the ranking member as well.
    Ms. Yellen, if you will look over this way--yes, here I 
am--we are over here. Thank you. And welcome to the committee.
    Mrs. Yellen. Thank you.
    Mr. Green. You have acquitted yourself well today. I am 
sure this will be one of many visits that you will have with us 
and I look forward to continuing this relationship. We are in 
our genesis today, but there is much we can do together.
    I want to ask just two--go into two areas. The first has to 
do with how much of the 2008 crisis was cyclical as opposed to 
structural. Because if you apply cyclical remedies to a 
structural problem, you don't get the desired results.
    So have you been able to quantify the amount of it that was 
cyclical as opposed to structural?
    Mrs. Yellen. When you say that, we had serious problems in 
the financial sector of the economy. We are certainly trying to 
put in place changes that will make the financial system 
structurally sounder.
    But the crisis that resulted from those weaknesses produced 
a marked downturn in spending in the economy and raised 
unemployment, lowered employment. And much of that shortfall is 
cyclical in the sense that it represents a shortfall of our 
economy producing well below what it is capable of.
    And we have been trying, through our own policies, to boost 
spending in the economy to create jobs and get the economy back 
to operating closer at its potential, at its capacity.
    Mr. Green. The theory of expansionary fiscal contraction is 
one that many of my colleagues have bought into, and it is the 
notion that if you cut government spending that will stimulate 
the private sector and create more jobs, more businesses will 
come into being. Where do you stand on this theory of 
expansionary fiscal contraction?
    Mrs. Yellen. I think the stance of government in the 
economy and its role in the economy in the long term influences 
growth. It influences capital formation. Dealing with budget 
deficits can have a favorable effect on economic growth in the 
long run.
    But in the short run, particularly in a weak economy, when 
government cuts spending or raises taxes, it almost invariably 
has the impact of lowering growth and raising unemployment, and 
I believe that is what has been going on.
    Mr. Green. Do you think we have reached a point where 
cutting a loan is not going to give us the desired results?
    Mrs. Yellen. My predecessor, Chairman Bernanke, routinely 
advised Congress to address long-term budget deficit issues, 
thought it was critical, as I do, to the long-run well-being 
and functioning of this economy, but to avoid cuts in spending 
or increases in taxation that would diminish the ability of the 
economy to recover. So, there are ways of addressing long-term 
budget deficits that wouldn't weaken the recovery, and I share 
his view.
    Mr. Green. Thank you very much, Mr. Chairman. I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being here, and 
congratulations not only on your nomination but the 
confirmation, so--
    Mrs. Yellen. Thank you.
    Mr. Pearce. One of the articles refers to you as the 
champion of Main Street, and I think it is Senator Brown of 
Ohio who says, ``She will be a Fed Chair who gets out and sees 
the real economy more and talks to people.''
    I had submitted a request for Mr. Bernanke to come to the 
district and we would host a town hall together and I am still 
waiting on pins and needles for him to answer. And maybe I am 
giving up that eternal hope now, but I would reissue that 
invitation to you.
    Mrs. Yellen. Thank you. It is much appreciated. I will try 
to do that.
    [laughter]
    Mr. Pearce. I will start waiting on pins and needles for 
you. Thank you.
    Okay. And the reason that I would make that offer is that 
in this hearing room there have been references by people 
sitting at that desk as the seniors as being collateral damage, 
that the low interest rate is acceptable collateral damage. And 
I would like someone who sits on that side of the table to come 
out and explain that to the seniors who show up at my town hall 
meetings who say that, ``We lived our life correctly. We saved. 
We paid for our homes. And now we are caught in policies that 
reduce our ability to live on our savings,'' and they are 
eating up their principal just trying to get by.
    And that does not seem acceptable, because many of them 
don't have the capability to go back to work.
    In a previous testimony somewhere, you have said that there 
are other instruments available. But those instruments bring a 
higher risk, and the last thing an 85-year-old wants is more 
risk. They are just looking for that 2 percent or 3 percent 
coupon that does not exist anymore, and that explanation to 
them of why, that they should understand that this is for the 
greater good, sort of runs a little bit thin as they try to pay 
for increasing costs of food and gasoline, which don't show up 
in our inflation rates because we don't include them anymore, 
but the price of both are squeezing the poor and the seniors 
more than anything else, giving us a de facto war on the poor 
coming from Washington right now. And that is probably the 
recurring theme that I see there.
    Now, I would like to discuss just a little bit of the 
logic. You said at one point that interest rates are lower 
because of too much savings. And yet, you have a policy--the 
Fed has a policy of paying interest on excess reserves, which 
would be a de facto way of encouraging more savings. So has any 
discussion ever come up in the Fed about why are we doing this, 
why are we paying this if we think there is too much savings?
    Mrs. Yellen. The Fed is paying an extremely low rate on 
interest on reserves--
    Mr. Pearce. It is higher than zero, though, because zero is 
what--one quarter of 1 percent is what seniors are getting 
right now, and so banks can make more than seniors. So again, 
they see the advantage going to the rich, not to the poor. And 
again, I just repeat that there is sometimes the appearance of 
a war on the poor.
    My district is also very low income. Manufactured housing 
is a big deal; 50 percent of the homes in my district are 
manufactured housing. And yet, the QM policy has really made it 
very difficult for banks to lend on that.
    I suspect that your staff has made known to you that these 
pressures exist. Have you all discussed that in any greater 
detail that we would need to look out for the people on the low 
end of the income spectrum?
    Mrs. Yellen. Well, QM was a policy adopted by the Consumer 
Financial Protection Bureau. I think they are trying to address 
a set of practices that resulted in unsafe and unsound--
    Mr. Pearce. Okay. Thank you.
    Mrs. Yellen. --lending. But it is very important to monitor 
their impact on credit availability.
    Mr. Pearce. One of the reasons that we have been able to 
get by with the QE is that we are the world's reserve currency. 
Has the Fed thought at all about what is going to happen when 
more nations are expressing discontent that we are printing 
money and that we are devaluing what they are holding, and so 
we have seen countries trade with other currencies this past 
year? Any thoughts about what happens if the world says, ``You 
are not the world's reserve currency anymore?''
    Mrs. Yellen. The dollar plays a critical role in the global 
economy and it is the Federal Reserve's job to make sure that 
inflation remains under control so that the dollar remains a 
safe and sound currency and can continue to play that role.
    Mr. Pearce. Thank you. I have--
    Chairman Hensarling. The time of the gentleman--
    Mr. Pearce. --the other countries.
    And I yield back, Mr. Chairman. Thank you.
    Chairman Hensarling. Okay. The time of the gentleman has 
expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, for 5 minutes.
    Mr. Cleaver. Madam Chair, thank you for being here. I want 
to talk consumer spending and jobs.
    Five percent of our population is doing about 35 percent of 
the consumer spending. And if you exclude food and energy, 
consumer spending would rise 1 percent, 2 percent, 3 percent, 
something in that area?
    Mrs. Yellen. The distribution of spending across households 
is very unequal.
    Mr. Cleaver. Yes. So my concern is, so how do we increase 
consumer spending, raise GDP, unless we are able to get a 
larger share of the population spending?
    And for them to spend, they need to have some form of 
income. So what is the impact, or what would be the predictable 
impact if we had unemployment benefits and a number of other 
programs that we are--we have backed away from in Congress?
    Mrs. Yellen. With respect to unemployment benefits, they 
certainly were serving to support the spending of individuals 
who had long unemployment spells and ending those will have 
some negative effect on spending in the economy and on growth.
    Mr. Cleaver. Because they will spend everything they 
receive?
    Mrs. Yellen. More or less--
    Mr. Cleaver. Yes.
    Mrs. Yellen. --that is true. That is right.
    Mr. Cleaver. Yes.
    Several people have talked about the structural 
unemployment situation here in the country, but what do you 
think--6.6 percent, I guess, is unemployment and that is not 
necessarily good but it is better than what it has been, but I 
am interested in real unemployment, the U6 rate.
    What do you think it is? Do you have a good estimate?
    Mrs. Yellen. The U6 rate includes discouraged--
    Mr. Cleaver. Yes.
    Mrs. Yellen. --workers and those on part-time. It is 
substantially higher.
    Mr. Cleaver. More than double the--
    Mrs. Yellen. It is close to 13 percent, and that is a much 
broader measure of shortfall in our economy from what we would 
like to see.
    Certainly, there are discouraged workers, those who are 
marginally attached. We have 5 percent of the workforce that is 
part-time. For economic reasons, they are not able to find 
full-time work and so that is a measure that is 
disproportionately elevated in comparison with the 6.6 percent 
or U3 unemployment rate.
    Mr. Cleaver. So are there jobs available and people just 
won't take the jobs?
    Mrs. Yellen. I think there is a shortfall of jobs and 
hiring in the economy. The rate of hiring remains well below 
normal levels and there is a shortage of demand in the economy 
that propels businesses to see that their sales are rising 
sufficiently to want to take on enough additional workers in 
order to lower unemployment back to normal levels. And that is 
what we are trying to address.
    Mr. Cleaver. I drove down to the Bootheel of Missouri--I am 
from Missouri--to speak at an event, and on the way back I 
stopped at a Chili's restaurant and there were no waiters or 
waitresses coming over to the table. They had a little box on 
the table and you speak in the box to order your food and then 
somebody will bring it out, and they give you a certain number 
of minutes before it is brought out.
    The point I am making is, we are taking jobs away, and then 
we are criticizing people for not taking the jobs that don't 
exist.
    Thank you.
    Chairman Hensarling. The Chair wishes to alert all Members 
that I intend to recognize two more Members, after which the 
Chair intends to call a 30-minute recess.
    The Chair now recognizes the gentleman from Florida, Mr. 
Posey, for 5 minutes.
    Mr. Posey. Thank you, Mr. Chairman.
    I originally--and I do want to ask about the volatile three 
pigs, but the questions by Mrs. Bachmann, I think, deserve a 
little bit more response.
    As you well know, Dr. Paul's legislation to audit the Fed 
was the most cosponsored bill in the 112th Congress, very 
bipartisan, passed by an overwhelmingly bipartisan vote, and it 
did not talk about interfering with the day-to-day management 
and decision-making of the Fed. It was post-decision-making 
audits.
    And seeing where all government and official agencies under 
our dominion are subject to audit, it just seems very strange 
that the Fed would object to having the logic behind their 
decisions and the many other of the litany of items you are 
exempted from being audited for deemed to be reasonable.
    Mrs. Yellen. I think if Members of Congress can ask the GAO 
to come into the Federal Reserve shortly after a meeting where 
we have made a difficult decision and to perhaps review 
transcripts and look at the debate that took place around a 
particular decision, we release transcripts. We release minutes 
of our meetings.
    But to come in, review materials and say, ``No, we don't 
agree with a decision that was made at the last meeting,'' will 
stifle debate in meetings and bring to bear short-term 
political pressures in the decision-making in the Federal Open 
Market Committee, and I do believe that independence of the 
Federal Reserve in making monetary policy means that we need 
some scope for deliberation and exercising our best judgment 
and then explaining to Congress and the public what the logic 
of that was.
    And the purpose, as I have understood it, of my appearing 
at a hearing like this, is to give Members of Congress exactly 
that opportunity.
    Mr. Posey. I understand that. Some of us believe in the old 
adage, ``trust but verify,'' and that is what an audit would 
do. And so, would it be reasonable to assume you would not 
object to an audit if it was post-30-days or 60-days? Is there 
a time limit when you would be totally unafraid to be audited 
in retrospect?
    Mrs. Yellen. An audit is different than second-guessing 
policy judgments that were made by--
    Mr. Posey. I am not talking about guessing--we do that as 
it is now. We don't agree with all of the decisions you make 
now. I think that is clear from at least one side of this 
aisle.
    But I would just like to think that at some point, the Fed 
could be audited, like all official Federal agencies, much less 
one that is not a government agency but has the run of our 
entire economy.
    Mrs. Yellen. This is an exemption that has been granted the 
Federal Reserve that is central to our independence for decades 
by Congress and I think--
    Mr. Posey. We have changed a lot of policies trying to make 
it more transparent and accountable. I like to think that 
government gets less corrupt every day, not more corrupt, and--
    Mrs. Yellen. I don't believe that the Federal Reserve is in 
any way corrupt, and I believe that the confidence of markets 
in the Federal Reserve and in our monetary policymaking would 
not be enhanced by that type of audit.
    Mr. Posey. By historically being able to audit things that 
every other agency is subject to review for but you should not 
be--let me get over to Basel III.
    Starting in 2015, Basel III's liquidity coverage ratio will 
require enough banks to hold enough high-quality liquid assets 
to cover net cash outflows for 30 days. The problem is that 
Basel III's definition of high-quality liquid assets includes 
the sovereign debt of vulnerable countries like Portugal, 
Ireland, Italy, Greece, and Spain.
    Don't you think that is a little bit like leading sheep to 
slaughter?
    Mrs. Yellen. We have designed a rule in the United States 
that would have stricter definitions. It is a minimum.
    Mr. Posey. So you think that is not the same as rating 
agencies with high-risk mortgages as AAAs, which triggered the 
2008 crisis?
    Mrs. Yellen. What we want is for our banking 
organizations--we have proposed this in our rule--to hold 
assets that can be quickly converted into cash.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Colorado, sans 
his Broncos cap, Mr. Perlmutter, for 5 minutes.
    Mr. Perlmutter. Thank you, Mr. Chairman. And I will wear my 
Broncos cap next week.
    Madam Chair, thank you for your testimony today. I had the 
pleasure to hear Mr. Bernanke testify a number of times at 
these very same hearings, and I really appreciated three things 
about him: one, he is very smart; two, he is very steady; and 
three, he is not very exciting. And I want to say, you are 
following in his footsteps.
    Mrs. Yellen. Thank you. I appreciate that.
    Mr. Perlmutter. What I would like to talk to you about a 
little bit is the FSOC and what is happening just in terms of 
numbers of meetings. Generally, are you concerned about 
bubbles? Have you seen anything that would cause you some 
concern?
    We hear that student loans are awfully high and that may be 
a difficult issue coming up. And so, can you tell us a little 
bit about what you see as the role of the FSOC, and how often 
you all meet?
    Mrs. Yellen. I have to say that I am new to FSOC. I have 
only been in office for 11 days, and I have not attended FSOC 
meetings previously, but there will be one this week and FSOC 
does meet regularly. There are deputies and staff who meet very 
frequently.
    Clearly, a major focus is to address potential threats to 
financial stability, to identify those threats, and to assess 
them.
    This is something the Federal Reserve is very focused on. 
We have built very substantially our capacity to assess threats 
to the financial system. We bring that expertise to FSOC. We 
also use it in thinking about monetary policy and in 
supervising the largest institutions.
    We recognize that in an environment of low interest rates, 
like we have had in the United States now for quite some time, 
there may be an incentive to reach for yield, and that we do 
have the potential to develop asset bubbles or a buildup in 
leverage or rapid credit growth or other threats to financial 
stability.
    So, especially given that our monetary policy is so 
accommodative, we are highly focused on trying to identify 
those threats. We could potentially take them into account in 
monetary policy, but certainly in our supervision and 
regulation, we would try to address those threats.
    Broadly speaking, we haven't seen leverage credit growth 
asset prices build to the point where generally I would say 
that they were at worrisome levels.
    The stock market broadly has increased in value very 
substantially over the last year. And our ability to detect 
bubbles is not perfect, but looking at a range of traditional 
valuation measures doesn't suggest that asset prices, broadly 
speaking, are in bubble territory or outside of normal 
historical ranges. There are a few areas where we do have 
concerns, but nothing broadly speaking.
    So student loans, again, you mentioned the growth there has 
been very, very large. That is mainly government-backed student 
loans rather than private. And I would say the concern there is 
this is debt that will be with students for a very long time. 
If they get into financial difficulties, that debt stays with 
them.
    It is important that they be getting a good return for the 
borrowing that they are doing, and it is important that they 
understand what the burdens will be on them when they take out 
those loans.
    Of course, it is very important. Education is critically 
important. We want to see that.
    But the burdens are very high, and it is important that the 
education that students are getting pay a return and that they 
understand what it is they are getting for the debt that they 
are taking on.
    Mr. Perlmutter. Thank you.
    And then, I will just finish where I started. So Mr. 
Bernanke--very smart, very steady, not very exciting. The 
markets must agree because the markets are up today.
    We appreciate your testimony. Thank you for taking on this 
job. It is still a difficult economy out there even though it 
is getting better, and we thank you for being at the helm.
    Mrs. Yellen. Thank you, Congressman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now declares the committee to be in recess for 
half an hour.
    [recess]
    Chairman Hensarling. The committee will come to order.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Hurt, for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    And, Chair Yellen, thank you very much for appearing before 
our committee. Welcome, and I look forward to your tenure.
    Obviously, we recognize in Virginia's 5th District how 
important your task is, and we appreciate your commitment to 
that task.
    To tell you a little bit about our district, it is a very 
rural district in central south side Virginia. It is a district 
that historically was dependent upon textiles, furniture, and 
tobacco. It still is a very large agricultural producer in our 
State and in our Nation.
    But we have seen hard times with the changes in--especially 
in manufacturing. And I know as an economist you are well aware 
of the terrible effects that has had in many parts of our 
country, and south side Virginia is no exception.
    We have had over the years--in the last 10 years, we have 
had unemployment in parts of our district as high as 25 
percent, so you can imagine what we really want are jobs, and 
what we want is a booming economy.
    And so I guess one thing that strikes me as--and I think we 
hear it on the other side--we have heard it a few times this 
morning, and in fact, I think you have even used this word of--
the word of inequality, talking about, I think, income 
inequality, and is that something that we need to focus on? Is 
that something the Federal Reserve needs to specifically focus 
on?
    I would suggest to you that obviously my view is that we 
need to focus on economic opportunity for all people, for 
everybody. We want to see that prosperity.
    And I would suggest that at least what contributes in part 
to that inequality are one-size-fits-all, top-down policies 
that come out of Washington that make it more difficult for 
people in rural and south side Virginia to make it, whether it 
be an energy policy--on Keystone, for instance, one that is--
has--the Keystone policy that has come out of this 
Administration has been one that has been an obstacle to jobs, 
not promoted jobs.
    If you look at the President's health care law, again, we 
see more people in our district who are losing full-time jobs, 
going to part-time work. Obviously, it is very, very, very 
difficult for my constituents as a consequence.
    And I guess what I would ask is, as you take on this new, 
very important responsibility, can you talk a little bit about 
your view of the rulemaking that comes from the Federal 
Reserve? If you look at the Volcker Rule, for instance, and you 
see that is--was a rule that certainly in the beginning was 
designed to get at the biggest banks, but because of the TruPS 
issue, inadvertently perhaps, it ended up affecting a lot of 
smaller banks.
    Can you talk about this--the one-size-fits-all mentality 
that I feel pervades Washington and how that affects our 
community banks all across Main Streets in Virginia's 5th 
district and leads to the inequality, let's say, of the access 
to credit from our community banks?
    Mrs. Yellen. As a general philosophy, I don't agree with 
one-size-fits-all. I think we ought to be designing regulation 
that is appropriate for each institution we regulate, and 
community banks clearly do not pose the kind of systemic risks 
to financial stability that the larger banking organizations 
do. And the kind of supervision and regulation that is 
appropriate for those systemically important banking 
institutions, I think we really want to do our very best to 
make sure that community banks aren't burdened with all that 
regulation.
    And I know we meet regularly with community bankers, and we 
have felt it particularly important to do so coming out of the 
financial crisis. We supervise them. We know they are 
different. We want to listen to their concerns and understand 
them, and we are doing our very best to listen and try to 
tailor an appropriate set of capital requirements and other 
regulations.
    Mr. Hurt. And from the standpoint of the supervisory role 
that you play, likewise, we hear from our community banks from 
time to time that sometimes it feels like there isn't the 
responsiveness that is needed; there is micromanagement that 
prevents them from being able to find a meeting of the minds 
with them and the customer, and that is caused by the 
supervisory relationship.
    And so I hope, as my time expires here, that you all will 
continue to make that a top priority--
    Mrs. Yellen. I pledge to do so.
    Mr. Hurt. --at the Federal Reserve. Thank you.
    Mrs. Yellen. I pledge to do so. Absolutely.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    And welcome, Madam Chair. It is so wonderful to be able to 
say ``Madam Chair.''
    And thank you for your indulgence in really sitting through 
a lot of questions. I don't remember the former Chair indulging 
us this way. Maybe things will change after you are here for a 
time or two.
    I have some questions. Let me start out with a 
macroeconomic question. There is a lot of criticism about 
quantitative easing and the positions that the Fed has taken 
with that policy, and on the other end of the street here, 
Congress has been engaging in more and more and more fiscal 
austerity.
    Is it fair to say that we are kind of working at cross 
purposes here? On one end, we are forcing really austere cuts, 
the economy is slowing while you are doing quantitative easing. 
My friend here coming in the door, it is my thought that we 
might be able to slow down on quantitative easing if we weren't 
forcing such austerity on the economy. Your thoughts?
    Mrs. Yellen. I agree. I basically agree with your point.
    Chairman Hensarling. Madam Chair, I don't think your 
microphone is on or you need to pull it closer, please.
    Mrs. Yellen. Is that better?
    Chairman Hensarling. Yes.
    Mrs. Yellen. As an example, over the last year--I'm sorry, 
during 2013--the CBO estimated that fiscal drag depressed 
growth by about a percentage point and a half, which is really 
a pretty significant drag on growth. And our policies have been 
trying to offset that to boost the recovery. So yes, in that 
sense we have been working at cross purposes.
    Ms. Moore. Thank you, Madam Chair.
    One of the things is that we would like to think that the 
current high unemployment is just cyclical. Can you tell us, 
have we reached the tipping point? Are we getting to a tipping 
point where this could be structural?
    Mrs. Yellen. I'm sorry, where it could be structural?
    Ms. Moore. Yes.
    Mrs. Yellen. We are very much worried about the possibility 
that it could become structural. Something on the order of 36 
percent of all unemployment is in long-term spells of 26 weeks 
or greater, and we know when people are unemployed for that 
long, they surely must get discouraged. They begin to lose 
their networks that enable them to find jobs, they may decide 
to drop out of the labor force permanently, they may begin to 
lose the skills that are necessary to find new jobs or, as we 
can see, employers tend not to want to hire people who are 
long-term unemployed.
    And so the notion that something that should be temporary 
can become a source of permanent job loss is a huge problem for 
the economy and, of course, for the households.
    Ms. Moore. Thank you, Madam Chair.
    Just quickly, inequality, another thing that is very 
controversial--people think that inequality is just something 
that should be left to market forces, but would you--is it fair 
to say that inequality is really very harmful to our future 
economic growth and job creation, and what tools in the toolkit 
does the Fed have to address this threat?
    Mrs. Yellen. Our toolkit, I am afraid, is more limited than 
I think what is necessary to deal with these trends.
    The major contribution that we can make is to try to 
promote a strong recovery. Many of the unemployed, particularly 
those with the most serious spells, are lower-income people, 
and if we can get a good, strong recovery going, not only will 
they get jobs, firms will probably promote people faster and be 
more willing to engage in training--
    Ms. Moore. Thank you, Madam Chair.
    Just very quickly, I am very concerned about the Fed 
continuing to work with the cross-border solutions on the 
orderly liquidation facilities, and I am--we have worked on 
this on my subcommittee and I hope that is a priority of the 
Fed.
    Mrs. Yellen. We are working very closely with foreign 
supervisors to try to be able to affect a cross-border 
resolution--those are if, God forbid, it should come to that, 
but these are challenging issues, but we are very focused on 
them.
    Ms. Moore. Thank you so much.
    My time--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Oklahoma, Mr. 
Lucas, chairman of the House Agriculture Committee.
    Mr. Lucas. Thank you, Mr. Chairman.
    And, Chair Yellen, it is a pleasure to be with you today to 
visit a little bit about the pressing issues out there.
    Sitting on the Agriculture Committee and having worked on 
what were the 2012 and 2013 and 2014 farm bills, now signed 
into law, there are several things that we look at in the 
committee, and some of them are directly or indirectly related 
to the activities of the Fed.
    For instance--and not so much an Agriculture-related 
issue--but the observation from some of my constituents that 
after the financial problems in 2008, the dramatic downturn in 
the stock market, and now over the course of the last 5 years, 
going from losing half its value, basically, back to where it 
was and a little bit on the positive side--not just that but, 
for instance, in farmland prices we watched over the course of 
the last 5 years a rather dramatic appreciation in the value of 
farmland.
    Now, some might say that part of the rebound in the stock 
market reflected the simple fact that the equities should not 
have collapsed that far in value 5 years ago, but--and some 
would also say that a big part of the takeoff in farmland 
values reflected the renewable fuel standard, a new government 
mandate consuming 40 percent of the crop, driving a demand in 
price responses that hadn't been there before.
    But in both cases it would seem, as an observer--and your 
opinion of course on this, Madam Chair--that once these effects 
occurred, it would seem that both land prices and maybe stock 
market values have continued on in a trend that would reflect 
more than the initial effect of either a rebounding stock 
market or the effect of the renewable fuel standard.
    In your opinion, how much effect has quantitative easing, 
the effort, of course, to try and address the housing market 
and the Federal financial obligations--how much of that extra 
money, that liquidity, has bled over into these other areas? Is 
part of the rise in land price values attributable to things 
like the quantitative easing?
    Mrs. Yellen. I will not profess to be an expert on land 
prices, but--
    Mr. Lucas. And nobody is, but you are exactly right.
    Mrs. Yellen. --I think land prices have been going up at a 
remarkable rate even before the stock market began to recover, 
and certainly have caught our attention as an area where we 
would be concerned about valuations. We have been watching that 
very closely.
    Mr. Lucas. But if resources becoming so plentiful spread 
out into the other parts of the economy away from housing, if 
it distorts the decision-making process--in the farm bill this 
time we did away with the old direct payment program, basically 
taking $4 billion a year out of the farm economy in an effort 
part of which to address that issue, but if all of this money 
is churning and once these rates of return that appear to be so 
dramatically greater than anything else you can invest in--
whether it is farmland or the appreciation of stock--I guess 
what I am asking you is: one, of course, as you noted, the Fed 
watches all of these things, but when we undo quantitative 
easing, what is the effect going to be on things like farmland 
prices or stock market prices, for that matter--equities?
    Mrs. Yellen. I would agree that one of the channels by 
which monetary policy works is asset prices, and we have been 
trying to push down interest rates, particularly longer-term 
interest rates. Those rates do matter to the valuation of all 
assets--stocks, houses, and land prices--and so I think it is 
fair to say that our monetary policy has had an effect of 
boosting asset prices.
    We have tried to look carefully at whether or not broad 
classes of asset prices suggest bubble-like activity. I have 
not seen that in stocks, generally speaking. Land prices, I 
would say, suggest a greater degree of overvaluation.
    Mr. Lucas. Because from the perspective of a number of us, 
Madam Chair, the concern about the old analogy about the--put 
your finger in the balloon and it pops out somewhere else are 
concerns that we would potentially, unintentionally of course, 
create a bubble similar to what we went through in housing a 
decade ago, either in farmland prices or somewhere else, and 
then the consequences of that would just be most unnerving.
    Your predecessor once, in response to a question from me 
when I asked, ``When will you know to undo the quantitative 
easing,'' his response was, ``We will know.''
    And my question then was, ``Well, if you didn't know when 
the problem was coming, how are you going to know when the 
problem is fixed, to undo?''
    So, I appreciate the challenges you face. I certainly 
wouldn't want your job. But then it took us 2\1/2\ years to do 
a farm bill too.
    Mrs. Yellen. We will watch asset prices very closely and 
recognize they can be a sign of excesses that are developing.
    Mr. Lucas. Thank you, Madam Chair.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Connecticut, 
Mr. Himes, for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman.
    And welcome, Madam Chair.
    Mrs. Yellen. Thank you.
    Mr. Himes. It is a pleasure to say that. As a guy who grew 
up with a mom and two sisters, and now lives with a wife and 
two daughters, it is a real privilege for me to see it here 
when, after 100 years, the Federal Reserve is chaired by a 
woman. It is a--
    Mrs. Yellen. Thank you very much. It is much appreciated.
    Mr. Himes. I want to follow up on a line of questioning by 
my friend from Wisconsin and just read you a portion of this--
of your report here, which reads, ``Fiscal policy was a notable 
headwind in 2013 relative to prior recoveries. Fiscal policy in 
recent years has been unusually restrictive and the drag on GDP 
growth in 2013 was particularly large.''
    I think you quantified that at 1.5 percent. So my questions 
are--and I--maybe keep it to a minute or so--unusually 
restrictive. I wonder what you mean by that.
    And number two, 1.5 percent of GDP growth given up to 
unusually restrictive fiscal policy. Can you quantify that for 
me in terms of number of jobs?
    Mrs. Yellen. I guess it is--we are a little reluctant to 
try to quantify it, but a percentage and a half less GDP growth 
would, probably over the course of a year, raise the 
unemployment by several tenths of a percent. So it is 
significant.
    The economy succeeded in growing in 2013 at a reasonable 
rate, nevertheless, in creating jobs. But presumably, it would 
have grown faster without that drag.
    And when you say it is unusually restrictive, I think if 
you look back historically in periods like this, where we are 
recovering from a deep downturn and unemployment as as high as 
it is, the typical stance for a contribution of fiscal policy 
to growth would be substantially larger, and that is what it 
means to say it is an unusual drag. It is not only absolutely a 
large negative number, but it is unusual, given the economic 
conditions.
    Mr. Himes. Thank you. So you did say that several tenths of 
a percentage point added to the unemployment rate. It is not 
unreasonable, I think, if I am doing the math right, to assume 
that would equate to something on the order of magnitude of 
hundreds of thousands of jobs. Is that unreasonable to assume, 
based on several--
    Mrs. Yellen. I haven't done the math, but it is probably--
    Mr. Himes. Okay, so several hundred thousands worth of jobs 
that are attributed by the Federal Reserve to the unusually 
restrictive fiscal policies, which, of course, are generated in 
this institution. I appreciate you clarifying that. I have been 
through--not carefully, but I have been through all 51 pages of 
this report, and I don't see mention of something that our 
chairman identified as a huge drag on the economy--I think he 
said, ``regulatory costs and regulatory red tape.''
    Am I misreading this, or is there a reason why regulatory 
costs and regulatory red tape are not identified as a drag on 
the economy?
    Mrs. Yellen. That probably is a drag on the economy. There 
are certainly studies that suggest that regulation sometimes 
does depress economic growth, and it is hard to quantify but it 
depends on exactly what we are talking about.
    Mr. Himes. But in excluding that from this report, did the 
Federal Reserve make a judgment of materiality perhaps? Or why 
was the judgment made to, if in fact it does depress 
employment, not include it in the report?
    Mrs. Yellen. We are mainly focusing on macroeconomic 
factors.
    Mr. Himes. Okay. Thank you.
    I just had the opportunity to spend a little bit of time 
with Mark Zandi of Moody's Analytics, and he suggested or said 
that he thought you might estimate the employment effects of 
the monetary policy carried out by your predecessor at roughly 
a million jobs that exist in the face of that monetary policy. 
Is that a number with which you would agree?
    Mrs. Yellen. There are a number of different studies and it 
is hard to quantify exactly what the effects are, but that is a 
significant study.
    Mr. Himes. Okay. Thank you.
    Just in my remaining time, we had the opportunity to speak 
with the regulators on the topic of the Volcker Rule, which is 
a rule that I think is a very good idea. It is obviously a very 
complex rule and I asked, and I will forward my question to 
you, that I think the success of the implementation of the 
Volcker Rule will reside largely in the ability of the 
regulators to give timely interpretive guidance on what you 
know is a very complicated internal adjustment they will have 
to make.
    So I am hopeful that this interagency group that has been 
formed will put in place a system to provide rapid interpretive 
guidance to financial institutions around that very complicated 
rule, and I will say, again, thank you. It is a privilege to 
have you here.
    And I yield back the balance of my time.
    Mrs. Yellen. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney, for 5 minutes.
    Apparently, the Chair doesn't. The Chair recognizes the 
gentleman from Wisconsin, Mr. Duffy, for 5 minutes.
    Mr. Duffy. You were throwing us for a loop here. Thank you, 
Mr. Chairman.
    And, Madam Chair, thank you for your testimony today and I 
appreciate your generosity with your time. All of us are 
grateful for that, especially those of us who are low on the 
dais.
    During his last testimony before our hearing--it was in 
July of 2013--Chairman Bernanke testified that in about 5 years 
we can expect a spike in our debt-to-GDP ratio, arising mostly 
from long-term entitlement programs and a bunch of other 
things, including interest payments on our debt. President 
Obama has also acknowledged that the major driver of our long-
term liabilities--and he said everybody knows this--is Medicare 
and Medicaid and our health spending, and ``nothing else comes 
close,'' I think was his quote.
    So I guess to you, Chair Yellen, do you agree that there 
are serious economic consequences and risks associated with the 
failure to address our Nation's fiscal imbalances? And do you 
agree with the President and your predecessor that the 
principal driver of our unsustainable national debt is our 
long-term entitlements? Do you agree with that?
    Mrs. Yellen. I do.
    Mr. Duffy. Great. We are on the same page. It is wonderful.
    And we also agree that we are not here to address this 5 
years from now, or 1 year from now. The real time to address 
these entitlement issues really starts today, doesn't it?
    Mrs. Yellen. It is often difficult to make adjustments in 
these programs and retirement programs that people count on and 
require if their adjustments require planning over their lives, 
and so, yes, it is important to address them earlier.
    Mr. Duffy. Right. And address them fairly for those who are 
in their retirement or near retirement.
    Mrs. Yellen. Of course.
    Mr. Duffy. But we should, as a body, start to address them. 
And you would also agree that it is pretty hard, from your 
position, to address these imbalances through monetary policy. 
We really have to do them through the legislative process, 
right?
    Mrs. Yellen. Yes.
    Mr. Duffy. Now, if you look at long-term entitlement 
spending, and the CBO's report that just came out saying that 
the Affordable Care Act, or Obamacare, is going to cost another 
trillion dollars over the next 10 years, you have to agree, 
then, that the Affordable Care Act isn't bringing us closer to 
balances in regard to our entitlement system; it is actually 
taking us further away from balance, right?
    Mrs. Yellen. CBO was really the agency that has done the 
greatest, most careful assessment of the fiscal consequences, 
and I don't have anything to add to what they have said about 
the likely fiscal--
    Mr. Duffy. So you don't dispute it but you are not 
necessarily agreeing with it either. Is that your position?
    Mrs. Yellen. That is really their domain of expertise and 
not ours.
    Mr. Duffy. And if we are going to spend an extra trillion 
dollars on the Affordable Care Act, I would have to imagine 
that entitlement is going to take us further away from balance, 
but let me move on.
    One of the concerns I have is the high rate of 
unemployment, and oftentimes after a downturn we will see 
pretty aggressive growth and recovery, and we haven't really 
seen that in this recovery. I think all of us on both sides of 
the aisle can agree that we wish the economy would grow faster 
and more jobs would be created.
    Our concern also goes to labor participation. It is at a 
pretty low rate. We wish more people were participating in the 
labor market.
    I know we will disagree on this across the aisle, but we 
are concerned that the President's Affordable Care Act has 
full-time work defined as 30 hours, and the CBO came out and 
said it is going to cost 2.3 million jobs--all a concern for 
us.
    But specifically, my concern goes to the young in America, 
the youth, ages 16 to 24. They have an unemployment rate--I 
think the number is 24 percent, which is really high.
    And it is this time in a young person's life when they 
learn skills to show up on time, how to follow directives of 
your boss--all life skills that we use to probably move up the 
economic ladder. I don't know. I had to bag groceries at the 
IGA. I don't know if you had a minimum wage job. I did.
    My question is, if we increase the minimum wage for these 
young workers maybe from $7.25, if we got them up to $12, $13, 
$15 an hour, would that help create jobs for them in your 
opinion?
    Mrs. Yellen. I think standard economic theory suggests that 
changing the minimum wage has two effects. It raises the 
incomes of those people who get the higher wage and have jobs, 
and it may to some extent discourage job creation. And there 
are a variety of different studies on how large that effect is, 
some of them suggesting that it is small, but others taking a 
different view.
    Mr. Duffy. So those who keep the jobs get a little better 
wage, but it is not creating jobs; it may cost jobs. Is that 
right?
    Mrs. Yellen. That is what a range of studies suggest, but 
differ on the magnitude.
    Mr. Duffy. Thank you, Madam Chair. I appreciate it.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Peters, for 5 minutes.
    Mr. Peters. Thank you, Mr. Chairman.
    And, Chair Yellen, first I would like to congratulate you 
on your historic nomination and your confirmation as the Fed 
Chair and thank you for appearing with us here today and being 
so generous with your time. It is not easy to be in the so-
called hot seat for as long as you are, so thank you for doing 
that. We appreciate it.
    Mrs. Yellen. Thank you.
    Mr. Peters. Just last week, as you know, new data came out 
showing that 2 years after the Korea-U.S. Free Trade Agreement 
was passed, we now have a record trade deficit with Korea. In 
fact, our trade deficit with Korea has increased 56 percent 
since 2011, which was the year before the trade agreement took 
effect. And without question, this certainly hurts American 
manufacturers and American workers.
    Congress, I believe, can't ignore the impact of trade pacts 
on our middle class. I voted against the Korea Free Trade 
Agreement and I now oppose fast track authority for the Trans 
Pacific Partnership (TPP) unless that agreement includes some 
very strong, enforceable mechanisms to address currency 
manipulation.
    I have serious concerns that Japan has been included in the 
TPP, while maintaining the world's most closed auto market and 
having a history of currency manipulation. The yen recently had 
a 5-year low against the dollar, and today's monetary policy 
report notes that the dollar has appreciated sharply against 
the Japanese yen since October.
    It is estimated that the recent fall in the yen puts 
roughly a $2,000 per export vehicle into the pockets of Japan's 
automakers, a significant disadvantage for our local companies.
    Now, I don't need to tell you that every country certainly 
has a right to conduct sound monetary policy, but in this 
increasingly interconnected global economy, monetary policy 
facilitating the direct manipulation of currency, I believe, 
simply cannot be tolerated. And while it can be argued that 
Japan's Abenomics policies are not direct intervention, I 
believe it is unsustainable. When Japan can no longer continue 
the policies, I think that they will--you will see, inevitably, 
a revision to direct currency interventions, a policy that they 
have used as late as 2011.
    So, Madam Chair, it certainly--I think it can be argued 
that the Fed's quantitative easing program helped American 
manufacturers, it has helped boost exports and our ability to 
compete abroad. However, I am curious to know if you believe 
that Japanese monetary policy has potentially weakened the 
beneficial effects of the Fed's quantitative easing program for 
the American manufacturing sector and for middle-class 
families?
    Mrs. Yellen. I would say that this is a topic that the G-7 
has considered and generally come to the conclusion--one that I 
agree with--that countries should be allowed to use monetary 
policy to pursue domestic aims--certainly not to target the 
value of a currency or to attempt some improvement in their 
competitive situation, but to address broad macroeconomic 
concerns.
    Japan has had almost 20 years of deflation--mild, but 
chronic and debilitating deflation. And I think it is natural 
and logical that after such a long period of deflation, the 
government and the Bank of Japan should want to put in place a 
set of policies to end that.
    As you said, in a global economy, economies are 
interconnected. Monetary policy does have exchange rate 
impacts. I see the Bank of Japan's policy is intended, and at 
least it looks favorable for now--seems to be moving inflation 
out of deflation territory and toward their 2 percent 
objective.
    To the extent that the policy is designed to stimulate 
domestic demand--and it looks like it has raised growth in the 
Japanese economy--of course, they have continuing problems and 
the need to put in place policies to address their high debt 
and budget deficits--but to the extent that they are successful 
and Japan grows more quickly, I think that will be something 
that will re-down to the benefit of Japan's neighbors.
    If Japan has stronger domestic spending growth, there will 
be benefits throughout the global economy. But there are 
exchange rate implications of those policies, as well.
    Mr. Peters. Certainly, if they have closed markets, even if 
you have stronger domestic markets but you are not allowing 
American autos, for example, to be sold in Japan, it really has 
a detrimental impact. So my question was on the detrimental 
impact to the United States. It may be good for Japan, but it 
is bad for the United States.
    Mr. Duffy [presiding]. The gentleman's time has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Chair Yellen, it appears that the FOMC has had at least two 
special hearings over the course of the last several years 
regarding the debt ceiling. We have the minutes of the October 
16th meeting, and I will read part of them to you.
    It says, ``The staff provided an update on legislative 
developments bearing on the debt ceiling and the funding of the 
Federal Government, recent conditions in financial markets, and 
technical aspects of the processing of Federal payments.''
    That falls on a similar meeting in August of 2011 where the 
notes reflect the following: ``The staff provided an update on 
the debt limit status, conditions in financial markets, and 
plans that the Federal Reserve and the Treasury had developed 
regarding the processing of Federal payments.''
    Both of the minutes that we have from those meetings 
contain similar language then on the conclusions that the 
committee received from the staff and amongst themselves 
regarding the debt ceiling status at this time, and I will read 
you the minutes from 2013: ``Meeting participants saw no legal 
or operational need to make changes to the conduct or 
procedures employed in currently authorized desk operations 
such as open market operations, large-scale asset purchases, or 
securities lending, or the operation of the discount window. 
They also generally agreed that the Federal Reserve would 
continue to employ prevailing market values of securities in 
all of its transactions and operations under the usual terms.''
    So in light of the fact there have been at least two 
hearings where the technical aspects or the plans regarding the 
processing of Federal payments have been raised, and the 
conclusions in both of those that it would not materially 
impact the conduct or procedures of the Fed, I will ask you a 
simple question: Is there a contingency plan in place regarding 
the making of Federal payments in the event the debt ceiling is 
not raised?
    Mrs. Yellen. Not to the best of my knowledge.
    Mr. Mulvaney. Then I will ask you, Ms. Yellen--thank you 
for that--in the 2011 minutes, which read, ``The staff provided 
an update on the debt limit status, conditions in the financial 
markets, and, most importantly, plans that the Federal Reserve 
and the Treasury had developed regarding the process of Federal 
payments.'' What were those plans that had already been 
developed as of at least August 2011?
    Mrs. Yellen. We were discussing very technical issues 
connected with the payment system. For example, would the 
Treasury put through in the morning ACH payments that they 
might not have sufficient balances in their account to pay?
    Mr. Mulvaney. And what would happen in such a circumstance?
    Mrs. Yellen. In such circumstances, if they did that banks 
would receive instructions in the morning to pay customers 
amounts that the Treasury wouldn't have in their checking 
account to make good on, and so their checks would bounce, 
leaving those institutions in a very difficult situation--
    Mr. Mulvaney. Are the plans that are referenced in the 2011 
hearing in writing?
    Mrs. Yellen. There are briefings that staff made to the 
Federal Open Market Committee when we met about what our plans 
would be in terms of the responsibilities we have in dealing 
with financial--
    Mr. Mulvaney. I understand that, but are the briefings 
based upon a written document? Are they based on some verbal 
history at the Fed or the Treasury? Or is there a written plan 
on these payments?
    Mrs. Yellen. To the best of my knowledge, there is no 
written plan on--
    Mr. Mulvaney. Given the fact that coming up with a 
contingency plan would have a great deal of impact on calming 
the markets in the face of a debt ceiling difficulty, do you 
think it is a good idea to develop a contingency plan for 
prioritization of Federal payments in the event the debt 
ceiling is not raised?
    Mrs. Yellen. That is a matter that is entirely up to the 
Treasury. That is not the domain of the Federal Reserve.
    Mr. Mulvaney. But you perform the functions for the 
Treasury through the New York Fed, don't you?
    Mrs. Yellen. We are the Treasury's fiscal agent.
    Mr. Mulvaney. If they asked you to do it, could you?
    Mrs. Yellen. It is not up to us to develop a plan 
concerning what bills would be paid.
    Mr. Mulvaney. If the Treasury asked you to create a 
prioritization program to put into place through the New York 
Fed, could you do it?
    Mrs. Yellen. I don't know that we could do that.
    Mr. Mulvaney. Do you think it would be a good idea to do 
that?
    Mrs. Yellen. Treasury submits to us every day a set of 
payments to make, and we can either make them or not make them.
    Mr. Mulvaney. I understand.
    Let me finish with this, Ms. Yellen. I appreciate that.
    We have asked for the records from the Fed, from specifics 
related--identified in the meeting from the New York Fed. The 
New York Fed has told us we cannot have them until they get 
permission to give them to us from the Treasury. In light of 
your earlier comments to Mrs. Bachmann and Mr. Posey regarding 
Fed independence, are you concerned about having to ask the 
Treasury for permission to give information to Congress?
    Mrs. Yellen. The Federal Reserve acts as the Treasury's 
fiscal agent, and in that case we take instructions from the 
Treasury and are merely acting as their agent. That is one of 
our roles, to serve as the fiscal agent of the Treasury.
    Mr. Duffy. The gentleman's time--
    Mrs. Yellen. It is not a monetary policy role.
    Mr. Mulvaney. Thank you, ma'am.
    Mr. Duffy. The gentleman's time has expired.
    The Chair recognizes the gentleman from Delaware, Mr. 
Carney, for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman. Thank you for the 
opportunity to ask some questions of the new Chair of the Fed.
    Welcome, Chair Yellen. Thank you for coming. I know it has 
been a very long day.
    We do appreciate your coming twice a year as part of the 
Humphrey-Hawkins Act testimony, and we appreciate your report. 
I have found these meetings very useful with your predecessor, 
Chairman Bernanke, and I have asked him each time this 
question, which I will ask you, which is, what is the most 
important thing we can do--we talk a lot here as Members of 
Congress about our focus on creating an environment where 
businesses can be successful and create jobs. What is the most 
important thing we can do within our purview to help there?
    We have this debt ceiling clock that--well, it is not 
running right now, but it has been looming over us. Are there a 
couple of things in your mind that Congress should be doing or 
could be doing?
    Mrs. Yellen. It is Congress' job to put in place 
legislation that best advances the economic development of the 
country. There are a broad array of--
    Mr. Carney. So what are those kinds of things? One of the 
things that frustrates me is the fact that we have been unable 
to reach agreement across the aisle on a meaningful fiscal plan 
that gets our longer-term liabilities under control and makes 
the kind of investments in the short term that are important 
for future economic growth. Do you have any comments there?
    Mrs. Yellen. I would agree with that. I think that is one 
of Congress' most important responsibilities, and my 
predecessors and I have all emphasized the importance of 
putting in place budgets that are responsible, not only from a 
short-term but particularly from a long-term perspective. When 
we look at the CBO's 75-year projections and see an 
unsustainable debt path, that is a great concern.
    Mr. Carney. That is the one thing your predecessor used 
to--he was kind of unwilling to give us policy advice, which I 
think is probably appropriate, but he would always say that the 
focus maybe ought to be on doing the things, frankly, that are 
a little bit harder, in terms of getting particularly health 
care liabilities over the long term, given the demographics and 
aging of our population. Your thoughts on that?
    Mrs. Yellen. I completely agree with that. I think the 
combination of demographics are aging and a health care trend 
and cost trend that has been outstripping other prices in the 
economy is what leads to long-term deficits and debt that is 
unsustainable, and so wouldn't want to give advice on how to 
deal with that, but this is something--
    Mr. Carney. Deal with it, right?
    Mrs. Yellen. --you have known about for decades, and I 
think it is important to do so--to deal with that.
    Mr. Carney. One of the Fed Governors, Mr. Tarullo, was in 
here last week, and talked about systemic risk. And one of the 
pieces of unfinished business from the near financial collapse 
is what we have or haven't done with respect to Fannie Mae and 
Freddie Mac and housing mortgage finance reform. You are buying 
$85 billion a month of MBS.
    Do you have any advice to us as to what we should do there 
with respect to housing finance reform? Obviously, it is a very 
important part of the economy and--
    Mrs. Yellen. I think the time has come. I hope that you 
will deal with reform of the GSEs. And there are a variety of 
different ways to do it, but I think the government should make 
its role and intended role explicit--
    Mr. Carney. More explicit.
    Mrs. Yellen. --and make sure that whatever entities are set 
up to deal with housing finance don't create systemic risk to 
the financial system.
    Mr. Carney. Right.
    Mrs. Yellen. The mortgage market is highly dependent on 
Fannie and Freddie at this point to provide credit, and there 
are uncertainties about what will happen with them. I think 
some resolution of that is necessary to get private capital 
back in the sector and--
    Mr. Carney. So is it your view that a more explicit Federal 
guarantee is important for liquidity and for the mortgage 
markets?
    Mrs. Yellen. I think there are a variety of possible 
approaches that you can take depending on what you think the 
role of the Federal Government will be in hard times in the 
housing market, and it is simply important for Congress to 
decide what you want to do here and to do it in a way that 
doesn't create systemic risk.
    Mr. Carney. My time is running out. Again, I want to 
congratulate you for your new position. I wish you well, and 
thank you for coming, again.
    Mrs. Yellen. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross, for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, not only for being here but 
also for your endurance and for agreeing to be here to take 
questions from all of us.
    I don't envy your job because it is quite a balance. Your 
monetary policy has to make sure that we not only allow for 
enough liquidity in the markets at an affordable rate, but we 
also have to make sure that there are those who are reliant 
upon investment income, seniors predominantly, whose savings 
accounts can survive in this environment.
    And when your predecessor was here before, Chairman 
Bernanke, he talked about the effect on the seniors who have 
fixed incomes and aren't concerned about home appreciation; 
they are more concerned about CD rates, savings accounts, 
because that is their livelihood, that is their income.
    Can you comment at all as to any hope or suggestion for 
those seniors of mine back home who are on a fixed income, who 
are dependent upon not a zero interest rate but at least some 
return on their investment as being able to allow them to live 
an affordable life?
    Mrs. Yellen. I know that this is a difficult situation for 
seniors in that position, and I would simply say that our 
objective is to get the economy moving and into a state of full 
recovery as rapidly as we can. And when we have accomplished 
that, rates of return will come back to more normal levels--
    Mr. Ross. Do you feel that--
    Mrs. Yellen. --and they will see higher returns.
    Mr. Ross. --the reduction in the asset buying, do you think 
that may have a positive impact on some of these fixed-income 
accounts?
    Mrs. Yellen. I would say the reduction in our asset 
purchases in part reflect--importantly, reflect a stronger 
economy. We see an economy that is now meaningfully recovering, 
the labor market improving, and as that process plays itself 
out, I think seniors can look forward to higher interest rates; 
that is our objective.
    Mr. Ross. Let me quote you something. There is a commentary 
that was in The Wall Street Journal just recently by Mr. E.S. 
Browning, an investment adviser, and he states that, ``If you 
don't invest in U.S. stocks, the thinking goes, where else are 
you going to invest? Developing country markets have turned 
unstable. Europe is struggling. Cash and high-grade bonds offer 
the tiniest of yields. Many experts consider junk bonds 
overpriced. Hedge funds are struggling. The Fed is determined 
to get people investing again by keeping rates down and forcing 
them to take risks. Anyone who refuses to buy stocks, in other 
words, is fighting the Fed.''
    So I guess my question is, it seems that the Fed policy is 
not only affecting my seniors but all investors, and I guess, 
should we be concerned about families trying to save for 
college education, because now they are going to be risking--or 
investing in more risky options? Is that what we see to come?
    Mrs. Yellen. Interest rates are low, and they are low not 
just because the Fed arbitrarily decided to set them at a low 
rate but because the fundamentals of the economy are generating 
low interest rates that--normally we think of interest rates as 
reflecting the balance--a balance between savings and 
investment, the strength of those forces in the economy.
    And in the aftermath of the downturn, the desire to borrow 
money for private investment is weak and a reflection of that 
is low rates.
    If we were to try to keep interest rates above the levels 
called for by fundamentals we would have a yet weaker economy, 
it would be harder to get a job, and the children and 
grandchildren--
    Mr. Ross. But aren't we already limiting--
    Mrs. Yellen. --of those retirees would be coming home even 
more than they already are to live with their parents and 
grandparents because they would find it even more difficult to 
get jobs--
    Mr. Ross. But haven't we already limited the investment 
opportunities?
    Mrs. Yellen. --and that wouldn't be good for those seniors.
    Mr. Ross. Hasn't Fed policy already limited investment 
opportunities for many out there, other than leaving for high-
risk investments?
    Mrs. Yellen. In an environment of low interest rates, there 
is an incentive to move to higher-yielding investments, and it 
is important for the recovery of the economy that people be 
willing to take some moderate risks.
    Mr. Ross. Let me ask you really quickly about the SIFIs, 
because you have talked about this in your opening and on other 
questions. There seems to be confusion regarding the process 
involved and what constitutes or designates an SIFI, but there 
must be some methodology involved. So if a firm is, 
hypothetically speaking, designated an SIFI, is there some 
action that they can take to be removed to that designation?
    Mrs. Yellen. They have absolutely. It is an important--
important for them, and they have the opportunity to have very 
serious consideration or--before the FSOC and to protest the 
status and have it reconsidered.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Foster, for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman.
    And congratulations, again--
    Mrs. Yellen. Thank you.
    Mr. Foster. --Chair Yellen.
    I would like to speak for a moment and ask you a couple of 
questions about the crosstalk between wealth distribution and 
offshore capital flows. This is something that is not usually 
captured in the macroeconomic models that you get a lot of your 
guidance from, but I believe it is a very important and 
overlooked effect.
    It is well-known and appreciated that the middle class has 
a much lower propensity to consume than high-net-worth 
individuals, so policies that exacerbate the concentration of 
wealth at the top reduce consumption. And since we are in a 
demand-limited point in our economy, that is a very relevant 
fact.
    But less appreciated is what I believe is the increased 
propensity of high-net-worth individuals to move their money 
offshore. You can see this is, for example, hurting China, 
where the top 1 percent who owns a big fraction of that country 
is frantically moving their money to safer locations, but I 
believe it is also true, from what I have been able to dig up, 
that high-net-worth individuals in North America move their 
money offshore with a--roughly a third of their investments 
actually go offshore.
    This, for example, may be an important explanation for why, 
for example, the Bush tax cuts created no jobs, that they 
affected the wealth distribution, but instead of reinvesting 
that money onshore, it was reinvested offshore.
    And so I was just wondering, first, do you, when you look 
at macro models for guidance, look at the wealth distribution 
and its effects both on consumption and on offshore capital 
flows?
    Mrs. Yellen. Consumption is very important in terms of our 
forecasting, and so we are constantly trying to understand what 
the forces are that determine consumption and its growth over 
time.
    We have looked to see--research has been done in the Fed 
and outside the Fed to try to see if we can identify 
differences--systematic differences--in marginal propensities 
to consume across different income groups, and I would say the 
evidence on that--I am certainly aware of the hypothesis that 
you put forward. I would say the evidence is not crystal clear, 
but certainly--
    Mr. Foster. In the case of consumption--
    Mrs. Yellen. --some prominent people have made the argument 
that you expressed, that shifting distribution of income has 
reduced consumption and made it harder for the economy to grow.
    Mr. Foster. I would like to have you look--in addition to 
continuing to look into that, which I believe is fairly widely 
accepted, maybe not universally--look at the effect of offshore 
capital flows, because I think this is also a large effect. And 
I think both parties tend to have a one-country model in their 
minds when they talk about changes in things like tax policy, 
and it is more complicated than that.
    Second, you had mentioned earlier in your testimony a 
secular shift in the labor market. And I was wondering if you 
think or have been considering what we may be seeing as a 
secular shift in the housing market.
    And I would also like to congratulate you on your 
increasing attention paid to the housing market in your report, 
which is--I think we all learned that the housing market was a 
very big dog in this fight.
    But what I hear from REALTORS more and more is that 
younger kids--or, well, what I think of as kids now--are less 
interested in--they grew up looking at TV screens; they no 
longer want a riding lawn mower and a big house in the suburbs. 
And so, the fraction of our investments that will be made in 
housing may be going down over time, and when you see the big--
what looks to me like a secular shift--I guess it is on page 
16, plot 27, the big shift in the housing starts--that it--we 
may be actually seeing a secular shift in that.
    And I was wondering if that is a sort of thing you track, 
because it has big implications if that is the way things are 
evolving in the country.
    Mrs. Yellen. We are looking at that. Household formation 
has been very low in part because of the weak economy, but to 
the extent that this shift that you have described exists, we 
are certainly seeing robust activity in the multifamily sector 
that if people want to live more in apartments, what may not be 
single family housing so much, but if they don't want to own 
homes and there is a shift in that direction, it may give rise 
to a greater growth in rental properties than in single family 
housing. And we are certainly seeing that pattern in the 
recovery.
    Mr. Foster. I would just like to encourage you, despite 
your history in the banking business, to pay a lot of attention 
to the real estate markets and their health.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair advises all Members that there are votes 
currently taking place on the Floor. The Chair will recognize 
two more Members, and then recess the hearing.
    The Chair recognizes the gentleman from North Carolina, Mr. 
Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And, Chair Yellen, congratulations to you. I have three 
daughters and I am encouraged by your success, as I am by 
theirs.
    Chair Yellen, I would make reference to your testimony 
where you stated that the growth in consumer spending was 
restrained by changes in fiscal policy. Given that a broad tax 
increase was part of that change in fiscal policy, it seems 
that reversing some of those tax increases would spur growth 
and consumer spending. Would you agree with that?
    Mrs. Yellen. The payroll tax--
    Mr. Pittenger. Yes.
    Mrs. Yellen. --cut was ended at the beginning of the year 
and taxes went up on higher-income households.
    Mr. Pittenger. That is right.
    Mrs. Yellen. And so, that cut into the growth of consumer 
spending. That is what we were trying to say there.
    Mr. Pittenger. Exactly right. So then, do you believe that 
if we were to reverse some of those tax increases, that would 
spur the growth in consumer spending?
    Mrs. Yellen. That if you were to reverse them, that would 
spur growth?
    Mr. Pittenger. Yes, reverse the tax increases.
    Mrs. Yellen. Certainly.
    Mr. Pittenger. Thank you.
    Madam Chair, the Fed proposed a rule for comment in 
December to implement the Dodd-Frank Act limitations and the 
Fed's 13(b) emergency lending authority. Chairman Hensarling 
wrote to Chairman Bernanke last month to express this concern, 
and I just want to ask today for your commitment to give this 
letter your personal attention and to provide a substantive 
response to that letter before the rulemaking comment period 
closes out, and to also provide an opportunity for the other 
Members of the Board to similarly provide their individual 
views of this letter. Would you do that on our behalf?
    Mrs. Yellen. We have put out a proposed--I want to make 
sure I understand what you are saying. We have put out a 
proposed rule to implement what is in Dodd-Frank on 13(3)--
    Mr. Pittenger. 13(3) the--
    Mrs. Yellen. --and we very much welcome comments on that 
and we will take them into account when we come out with a 
revised proposal--hopefully, a final proposal.
    Mr. Pittenger. Chairman Hensarling wrote a letter to 
Chairman Bernanke, and in the letter he wanted to give a 
commitment in that for--just a substantive response to that 
letter. Would you take a look at that letter of Chairman 
Hensarling's and kind of respond to that?
    Mrs. Yellen. We certainly will, but as I understand it, it 
is a letter that was submitted as part of the set of comments 
on and during the comment period on 13(3), and we will collect 
all of the comments and then consider--
    Chairman Hensarling. Would the gentleman yield to the 
chairman--
    Mr. Pittenger. Yes.
    Chairman Hensarling. --since the chairman's name is being 
used here?
    Madam Chair, I sent a letter to your predecessor. We have 
concerns about the 13(3) rulemaking. We have waited for 3 years 
and what we see now is a rule that largely parrots the language 
of the statute illuminating essentially very little.
    And so, the letter goes into much greater detail about our 
concerns. Given that I sent it to your predecessor, I would be 
happy to send it to you, as well. If not, if you could give it 
your personal attention, I would be most appreciative.
    I thank the gentleman for North Carolina for yielding to 
the Chair.
    Mrs. Yellen. I will do so.
    Mr. Pittenger. Madam Chair, in just the minute or so we 
have left, regarding the Volcker Rule, there are five agencies 
involved. We have talked some about this already. But in this 
rule there are different positions taken by these agencies that 
provide for a different perspective, and right now the rule 
that they have adopted, that they have a consistent point of 
view. What formal or public coordination can you commit to in 
the future where they would not agree?
    Mrs. Yellen. We tend to coordinate, and plan to do so very 
closely with the other financial regulatory agencies. We are 
accustomed to working very closely with them, and I think more 
broadly, we will try to cooperate and ensure that there is a 
similar approach to implementing this rule with the SEC and the 
CFTC as well.
    Mr. Pittenger. It is a burdensome challenge, I am sure.
    We did see a recent report from CBO that we have lost 2.5 
million jobs through Obamacare. Has the Fed done any estimates 
of job loss as a result of Dodd-Frank in our economy? And could 
you give us a response if you would anticipate that--looking 
into that?
    Mrs. Yellen. I think it is very difficult to estimate in 
total what the implementation of Dodd-Frank will mean. On 
balance, I feel that Dodd-Frank was passed to make the 
financial system safer and sounder and to avoid--
    Mr. Pittenger. Do you think it would be worth that review 
to see what job losses occurred?
    Mrs. Yellen. Well--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Kildee, for 5 minutes.
    Mr. Kildee. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being here, and I know 
others have said this, but having a daughter and a 
granddaughter who will now grow up in world where the president 
of General Motors is a woman, and the Chair of the Fed is a 
woman, it is something to celebrate. And I just want--
    Mrs. Yellen. Thank you very much.
    Mr. Kildee. --to thank you.
    Mrs. Yellen. I appreciate that.
    Mr. Kildee. I wonder if you would comment briefly--later 
today, presumably, the House will vote to extend for another 
year the Nation's debt limit to ensure that we meet the 
obligations that we have already made, and I wonder if you 
might comment on what effect, if any, you think positive action 
by Congress on the debt limit might be? And I know your staff 
loves it when you speculate, but if you might speculate on what 
the effect of the failure of Congress to take that action 
before the February 27th deadline or date set by the Treasury 
Secretary might have on domestic and global markets, if you 
could just comment on that subject?
    Mrs. Yellen. I think fiscal policymakers should never put 
our Nation in this situation where there is a risk of 
defaulting on the Federal debt. It would be an extremely 
destructive thing to do from the point of view of our economy, 
of our financial markets, of global financial markets, and even 
in the run-up to the last debt ceiling crisis we could see the 
beginnings of market participants beginning to worry and 
protect themselves and to take steps even in advance of that 
limit coming into place that could cause us problems in the 
financial system.
    So I believe, frankly, it would be catastrophic to not 
raise the debt limit.
    Mr. Kildee. Thank you for that. That is good guidance and I 
hope that Members of Congress on both sides of the aisle will 
listen closely to your thoughts on that.
    I wonder if I might take a different tack for a moment and 
ask you, in the report that you supplied you do make reference 
to labor markets, particularly in the context of the dual 
mandate of the Federal Reserve, and I wonder if you would 
comment on two points: one, you make reference in the document 
to the length of time that those who have been out of work--
basically the long-term unemployed--have had on the economy; 
and two, you make reference also to the fact that while 
productivity over the long period has increased, recent gains 
in wages--in real wages--have not kept up with productivity, 
despite the fact that we may have not seen productivity gains 
recently, but over the long term we have certainly seen 
productivity gains far in excess of what we have seen in real 
wages.
    Why are those two factors important in terms of the mandate 
of the Federal Reserve?
    Mrs. Yellen. The fact that we have very long spells of 
unemployment--that almost 36 percent of those unemployed who 
are in very long spells of 26 weeks or more--really suggests 
that the job market is not strong enough to be able to provide 
people with jobs who want to work, which is roughly another way 
of stating what our employment goal is, and so it is a mark 
that there is a great deal of slack in the labor markets still 
that we need to work to eliminate.
    The fact that wages have not kept up with productivity, for 
the last number of years we have seen a shift in the 
distribution of income more away from what is called labor 
share and more towards capital share. And I think it is not 
fully understood what accounts for that trend, but it is a 
disturbing trend because it suggests that workers aren't--even 
though they are being more productive, their wages in real 
terms aren't keeping up with that. And so, it is a very 
worrisome trend from the point of view of living standards.
    Mr. Kildee. I think both are important, and I am glad you 
included them. Certainly what Congress and what other 
policymakers have to consider is the effect of long-term 
unemployment, especially on those who are unemployed and are 
losing unemployment benefits and the effect on wages not 
keeping up with productivity and having a minimum wage in this 
country that puts a family below the poverty wage is something 
that is not sustainable.
    And I wonder, just before I close, if I could follow up 
with you at some point in time--I pursued this line of 
questioning with your predecessor. The effect of fiscal 
insolvency in America's municipalities, I think, is a 
significant issue and I think that it is one that poses a real 
threat to our overall economy, and I would certainly like to 
engage the Fed in the question. I think it is something that we 
are going to have to take on.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair will now declare a recess pending the conclusion 
of Floor votes. The committee stands in recess.
    [recess]
    Chairman Hensarling. The committee will come to order.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    And let me echo the congratulations to you, Chair Yellen, 
and thank you for coming today and spending your day with us.
    Chair Yellen, we have seen the Fed take a leadership role 
at the FSOC in exercise of its authority to designate 
systemically significant financial firms. What we have 
unfortunately not seen is any transparency on how the SIFI 
designation process works.
    During your confirmation hearing, you committed to Senators 
Tester and Warner that you would provide more transparency in 
this area. What have you done to make that process more 
transparent? And will you commit to demanding that the FSOC 
provide guidance to firms being considered for SIFI designation 
with a clear indication of what they could do to ensure that 
they will not be so designated?
    Mrs. Yellen. Let me first say that my first FSOC meeting is 
on Thursday, so I haven't been very involved to this point. But 
the FSOC, as I understand it, has come out with this set of 
criteria--metrics that they are using when they consider 
designation. When they have designated firms I think they have 
provided--their Web site is full of information on those firms 
and the analysis that was done in connection with designation.
    Certainly, if FSOC decides on additional criteria or uses 
other criteria or develops other metrics I think it is 
completely appropriate that they should be made public so that 
the public understands what the criteria are that are being 
used. And in that sense, I certainly will support having FSOC 
provide the public with adequate analysis both of the criteria 
that they are using for designation and the analysis that they 
have done that supports the decision to designate particular 
firms.
    And I should say that those firms have many opportunities 
to have hearings before FSOC. It is obviously very important to 
them--designation--and they are given extensive opportunities 
to appear before FSOC groups and question analysis and--
    Mr. Rothfus. Thank you.
    I want to talk a little bit about stress testing. You have 
previously expressed your support for stress testing banks 
using extreme worst-case scenarios, such as those seen in 
recessions occurring decades ago which are highly unlikely to 
recur.
    Wouldn't it also be appropriate to stress test the Fed's 
exit strategy for QE to estimate the exit strategy's effect on 
the Fed's ability to fulfill its mandate as well as the Fed's 
balance sheet, the upper ranges of interest on excess reserves 
the Fed might be required to pay, and how increases in the 
Federal funds rate might impact the relationship between the 
government's interest payments on Treasury obligations and the 
deficit? So again, I am looking for a commitment to stress 
testing what is going on with the Fed and the withdrawal from a 
QE
    Mrs. Yellen. We of course do extensive analysis of our 
balance sheet under alternative scenarios, both about what exit 
would look like and under alternative interest rates scenarios. 
And an update of a paper by a Fed staffer by the name of Seth 
Carpenter and his colleagues, which came out in September, 
provides a great deal of that analysis.
    It shows, for example, what would happen if there were an 
increase in interest rates of a couple hundred basis points 
higher than what markets are assuming to be most likely. And 
that, of course, is important analysis and we have purposely 
put it in the public domain.
    But I must say that our ability--you refer to our ability 
to achieve our dual mandate. I see no reason why our ability to 
achieve our dual mandate or to conduct monetary policy--
    Mr. Rothfus. One of my concerns is, I consider it a 
distorting effect that QE has had, for example, on the bond 
market. Have you considered the value of the securities held by 
the Fed, what would happen in the event of an interest rate 
spike, for example, what if the securities held by the Fed 
dropped by 2 percent--the value of them dropped because of 
interest rates going up?
    Mrs. Yellen. That is exactly what we have looked at, and I 
would urge you to have a look at the Carpenter paper, where we 
analyze what the impact would be on our balance sheet and our 
remittances.
    Mr. Rothfus. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    Chair Yellen, thank you for being here. Congratulations on 
your sort of record-breaking appointment to be the Chair of the 
Fed.
    I want to thank you very much for your time today. You have 
given us an extended amount of time.
    I also want to thank you for your candor. I think your 
answers have been very honest and you haven't tried to pull any 
political punches. You have just told it like it was, and I 
appreciate that.
    Mrs. Yellen. Thank you.
    Mr. Stivers. I want to ask you a couple of questions, one 
about sort of the business of insurance. As you know, since the 
McCarran-Ferguson Act in the 1940s, the States have really 
regulated the business of insurance and the Federal Government 
has had a very, very limited role in insurance.
    And now that we have Dodd-Frank and some big insurance 
companies are--could be and are being demonstrated as 
systemically important financial institutions, they come under 
the Fed's purview. And because of the limited amount of 
insurance expertise at the Fed, it gives me some cause for 
concern.
    And I guess I am curious, I want to make sure you don't 
impose sort of bankcentric capital standards on insurance 
company SIFIs, because frankly, they have a different role. 
Their investments are for a purpose. They focus on the 
maturities based on their needs.
    So, I am really worried about the capital standards you 
might impose, and I am curious, first, what your timetable for 
making any ruling on insurance company capital standards might 
be; and second, if you will work with industry experts and the 
State-based regulators to get their input, because they know 
the industry better than folks at the Fed? I have lots of 
respect for folks at the Fed and your experience in the 
financial markets, but because of the limited exposure on 
insurance, I am curious if you will work with those State 
regulators and some insurance experts and try to defer to some 
of their opinions, including Mr. McRaith, with the Federal 
Office of Insurance?
    Mrs. Yellen. We have consulted with others with greater 
insurance expertise. And of course, we are building our own 
expertise as is appropriate.
    But we absolutely recognize that it is important to tailor 
rules to the specific and different business model of insurance 
companies. They are not the same as banking organizations. We 
recognize a number of special issues, including the long-term 
nature of most insurance company liabilities, the fact that 
they have asset liability matching practices, risks associated 
with separate accounts, and so forth.
    Mr. Stivers. Can you update me on what you think your 
timeline will be there? Or do you know yet?
    Mrs. Yellen. I am not certain exactly. I--
    Mr. Stivers. Okay. Maybe you can get back to me when you 
know or--
    Mrs. Yellen. --can get back to you on what our timeline is.
    Mr. Stivers. That would be great.
    Mrs. Yellen. But I do want to say, though, that in spite of 
the fact that we understand they are special, and we want to 
tailor an appropriate regime, there are some limits to what we 
can do. The Collins Amendment requires us to establish a 
consolidated minimum risk-based capital and leverage 
requirements for these holding companies that are no lower than 
those that apply to insured depository institutions, and--
    Mr. Stivers. Sure, and I understand that. And if we can 
move on, because I have limited amount of time.
    Mrs. Yellen. Sure.
    Mr. Stivers. You referred earlier to employment and your 
concern that there are changes in employment going on--some 
people are moving more to part-time. There have been a lot of 
people who have given up. Unemployment stayed steady at 6.6 
percent.
    But I am worried you are using the wrong look at 
unemployment, the traditional view. Because of all the changes 
going on, shouldn't you look at U6 for your view of what full 
employment is, because it takes into account the underemployed 
and people who have given up?
    Mrs. Yellen. We are absolutely looking at U6. We see that, 
for example, the extent of part-time employment for economic 
reasons is unusually elevated. You see that--
    Mr. Stivers. And it is going to increase, so I hope you 
will take a look at what is appropriate and--
    Mrs. Yellen. Absolutely.
    Mr. Stivers. --consider that.
    And I am running out of time, but the last thing I want to 
ask you about is--and you may not be able to say this because I 
don't--you may not want anybody to think you are trying to grab 
power, but if we were going to redo our regulatory framework--
we had another chance to re-look at it--wouldn't it make sense, 
whether it is the Fed or somebody else, to have one systemic 
regulator and then functional regulation regardless of who you 
are, regulate you based on what you do, and then one systemic 
regulator that sort of de-conflicts things?
    We had six regulators in here last week about the Volcker 
Rule and it is very confusing where there could be 
contradictory things that different enforcers of the same rule 
say. Don't you think that would be a better way to regulate?
    Mrs. Yellen. There are pros and cons and Congress has 
considered this. We certainly have a complex system and I would 
agree that sometimes coordination is quite challenging.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Murphy, for 5 minutes.
    Mr. Murphy. Thank you, Mr. Chairman.
    And, Chair Yellen, thank you for your time. It has been a 
long day for you. Thank you for sticking it out for us.
    The collapse of the housing bubble and resulting financial 
crisis devastated the global economy and cost Americans $17 
trillion worth of wealth. Many have assigned responsibility for 
low interest rates and lax capital and leverage standards to 
the Federal Reserve and then Chairman Greenspan. While I do not 
believe the Fed caused the crisis, its policies certainly 
helped fuel the bubble.
    In June 2009, you said that higher short-term interest 
rates might have slowed the unsustainable increase in housing 
prices. With the benefit of hindsight, would measures to slow 
the housing bubble have been appropriate?
    Mrs. Yellen. Certainly, the collapse of housing in the 
bubble was devastating and at the heart of the financial 
crisis, so of course, yes, with the benefit of hindsight, 
policies to have addressed the factors that led to that bubble 
would certainly have been desirable. I think a major failure 
there was in regulation and in supervision, and not just in 
monetary policy.
    So I would say going forward, while I certainly recognize, 
as do my colleagues, that an environment of low interest rates 
can incent the development of bubbles and we can't take 
monetary policy off table as a tool to use to address it, it is 
a blunt tool. And macro-prudential policies--many countries do 
things like impose limits on loan-to-value ratios, not because 
of safety and soundness of individual institutions but because 
they see a housing bubble form and they want to protect the 
economy from it.
    We can consider tools like that, and certainly supervision 
and regulation should play a role and their more targeted 
policies.
    Mr. Murphy. The reason I ask is, would you be willing and 
open to pushing for policies to prevent another catastrophe if 
it means slowing or deflating an asset bubble? And as a sort of 
follow-up to that, are you seeing any bubbles out there now or 
anything you are concerned about?
    Mrs. Yellen. Nothing is more important than avoiding 
another financial crisis like the one that we just lived 
through, so it is immensely high priority for the Federal 
Reserve to do what we can to identify threats to financial 
stability.
    One approach that we are putting in place, in part through 
our Dodd-Frank rulemakings, is simply to build a financial 
system that is much more resilient to shocks. The amount of 
capital in the largest banking organizations has doubled. We do 
have a safer and sounder system, and that is important.
    But detecting threats to financial stability--we are 
looking for those threats. I would say my general assessment at 
this point is that I can't see threats to financial stability 
that have built to the point of flashing orange or red.
    Mr. Murphy. Okay.
    Mrs. Yellen. We don't see a broad-based buildup, for 
example, in leverage or very rapid credit growth. Asset prices 
generally do not appear to be out of line with traditional 
metrics. But this is something we are looking at very, very 
carefully.
    Mr. Murphy. Okay. I have about a minute left.
    Wall Street reform designated bank holding companies with 
combined assets above $50 billion as SIFIs and therefore 
enhanced supervision. Is asset size alone the best way to 
measure a bank's systematic importance?
    Mrs. Yellen. No. We have a whole variety of different 
metrics. And we strive to differentiate within that category of 
$50 billion and above and the largest banking organizations.
    For example, we have singled out the eight largest bank 
holding companies for higher capital requirements, 
supplementary leverage ratios. Those things do not apply to the 
$50 billion banking organization. We are trying to tailor our 
regulations even within that $50 billion and above category and 
certainly below it.
    Mr. Murphy. Could you just touch briefly on some of your 
efforts regarding examination processes that you are doing with 
some of the smaller community banks to ensure that you get the 
right information, but that you are not burdening some of the 
community banks--some of your efforts?
    Mrs. Yellen. First of all, we have formed a new 
organization called the Council of Community Banks (CDIAC), 
that we meet with 4 times a year to understand their concerns, 
and we have a special new committee of the Board to focus on 
issues with community bank supervision. So we are listening and 
we are trying to be very sensitive and attentive to those 
concerns.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    And thank you, Madam Chair. Congratulations on your 
appointment. And again, thank you for your generosity with your 
time, particularly for us who are at the end of the line of 
questioners.
    Madam Chair, you have stressed in your written and in your 
verbal testimony here today the Fed's statutory mandate of 
maximum employment. Should the objective of U.S. fiscal policy 
also be to maximize employment?
    Mrs. Yellen. Fiscal policy has many different objectives. 
It affects the economy in a whole variety of different ways. 
And so, I wouldn't have stated that is the main goal of fiscal 
policy, but it is a goal that fiscal policy should take into 
account.
    Mr. Barr. Last week, as you know, the Congressional Budget 
Office issued this report, and that report projected that the 
President's health care law--Obamacare--will reduce the size of 
the U.S. labor force by 2.5 million full-time equivalent 
workers over the next decade. That is about triple what the CBO 
originally projected after the Congress passed Obamacare 3 
years ago or 4 years ago.
    In commenting on that report, CBO Director Elmendorf 
testified that the Act creates a disincentive for people to 
work, and it does this against a backdrop where the labor force 
participation rate is already the lowest it has been in 35 
years.
    The White House responded to this bad news by claiming that 
2.5 million Americans leaving the workforce was actually a good 
thing, saying that these people would no longer be ``trapped in 
a job.''
    My question to you is, I think, a pretty straightforward 
one: Is a shrinking workforce a positive or a negative 
development for the economy?
    Mrs. Yellen. It has different effects. I don't think there 
is a simple answer to that question. In the CBO analysis, they 
focused on this not being a matter of creating unemployment, 
but of people withdrawing from the labor force. And there are 
some good and bad aspects to that.
    Mr. Barr. Let me ask you the question this way: It is the 
statutory mandate of the Fed to maximize employment, so why 
would it be a complex question? Why shouldn't the goal of U.S. 
fiscal policy be equally dedicated to maximizing employment, 
and shouldn't this concern all of us?
    Mrs. Yellen. I think the CBO recognized when they produced 
this analysis that the effects of this Act are extremely 
complex, and while it has effects on labor supply, the Act also 
may have an effect, for example, on the growth of health care 
costs, and a number of different impacts on the growth of 
economy over time that go in different directions.
    Mr. Barr. And, Madam Chair, will a declining labor force--
how would that impact deficits?
    Mrs. Yellen. I am not sure. It is not--
    Mr. Barr. Okay.
    Let me move on to a different subject. Just as an economist 
and also as Fed Chair, as you assess the fiscal health of the 
Nation, which is a more meaningful statistic for you, the total 
debt figure or the ratio of debt-to-gross domestic product? And 
why would you choose one or the other?
    Mrs. Yellen. I would look at the debt-to-GDP ratio both 
currently and its projected path over time under assumptions 
that current policies continue. I think you can't assess the 
debt of an economy in how if you were looking at the debt of a 
household you would need to assess it to know what the 
household's income is, what is a bearable or serviceable level 
of debt, given the income of the household or the economy.
    What is important here is that according to any projection, 
particularly the CBO's over a longer horizon, the U.S. debt is 
unsustainable relative to GDP.
    Mr. Barr. I appreciate your comment and your testimony 
there.
    I have introduced legislation that would replace the 
existing debt ceiling law with a new debt ceiling that ties the 
new ceiling to a declining debt-to-GDP ratio, so I appreciate 
the testimony.
    One final question: I often hear the argument that 
quantitative easing effectively enables our fiscal deficits by 
lowering the cost of borrowing for the government and by 
artificially fueling the market for U.S. Treasuries. Is there a 
reason to be concerned that QE crosses the line from monetary 
to fiscal policy because it implicitly finances government?
    Mrs. Yellen. Not in my opinion. I believe the Fed is 
focused on its mandate that was given to it by Congress, namely 
maximum sustainable employment and price stability, and I think 
you should hold us accountable to meeting those goals.
    Mr. Barr. Thank you. I yield back the balance of my time.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty, for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    First, let me say to Chair Yellen that I certainly join my 
colleagues in congratulating you, and to also say it is quite 
an honor on this historic day for me to have the opportunity to 
pose questions to you.
    My first question is somewhat similar to Congressmen Meeks 
and Clay as they talked about diversity and minority 
participation.
    Certainly, as you and your staff will know, in the 2013 GAO 
report it talked about the decline of diversity representation. 
But on a very good note, when you look at what Dodd-Frank did 
to create the Office of Minority and Women Inclusion (OMWI), 
which is an avenue that will allow women and minorities to be 
more included not only in supplier development, but also in 
policy making.
    Thanks to Congresswoman Waters, she has allowed me the 
opportunity to meet with the OMWI directors throughout your 
area. So my question as it relates to that is, how will you 
help to promote and to elevate OMWI within all of the 
divisions?
    Mrs. Yellen. The divisions at the Federal Reserve?
    Mrs. Beatty. Yes.
    Mrs. Yellen. So we have a very active program intended to 
promote diversity and bring in minority-owned businesses and 
women-owned businesses as suppliers. We have incorporated 
supplier diversity language into all of our contracts. We are 
now requiring that contractors confirm their commitment to 
equal opportunity in employment and contracting, fair inclusion 
of minorities and women in the workforce.
    We are engaged, both at the Board and in the Federal 
Reserve Banks, in a number of different programs to attract an 
increase in employment of minorities and women, and we are 
tracking our success.
    In the Board, at the officer level, we have increased our 
staff. I believe the last year for which we have full data in 
2012, there are seven new officer positions and six of them 
were minorities. And female representation in the manager and 
officer ranks has also increased.
    We are taking many of the steps, including affiliations 
with recruiting organizations that are heavily minority-based, 
in order to improve our networks from which we can hire. And we 
are trying to understand what best practices are in this area 
and to move forward vigorously.
    Mrs. Beatty. Okay, thank you.
    Let me try to quickly shift gears. In your confirmation 
hearing, you indicated your agreement that the insurance 
industry has unique features that make it different from 
banking, and you agreed that a tailored regulatory approach for 
insurers would be appropriate.
    One of the things that my constituents are asking is, how 
could the Federal Reserve develop a timetable for rulemaking 
for insurance companies subject to Federal Reserve supervision, 
and how would you ensure that the Federal Reserve works with 
the industry and other insurance experts to develop an 
insurance-based capital framework?
    Mrs. Yellen. We have been working very hard to understand 
the special characteristics of insurance. We are personally 
taking our time to develop standards so they can be tailored to 
the needs of the industry.
    We are consulting with experts in the insurance industry 
and building our own expertise. And we are committed to 
devising an appropriate regime that is different than that we 
apply to banks and that recognizes their special features.
    I will say again, though, that the Collins Amendment is 
constraining in terms of what we can do in terms of capital and 
liquidity requirements.
    Mrs. Beatty. Thank you very much.
    And let me just end by again thanking you for being so 
generous with your time today and for having such stellar 
answers. I am a big fan of when women succeed, America 
succeeds, and you are certainly setting the light for women 
across this Nation.
    Mrs. Yellen. Thank you, Congresswoman Beatty.
    Mrs. Beatty. Thank you.
    Chairman Hensarling. The time of the gentlelady hasn't--
    Mrs. Beatty. I yield back.
    Chairman Hensarling. --quite expired, but it has now.
    The Chair now recognizes the gentleman from Arkansas, Mr. 
Cotton.
    Mr. Cotton. Ms. Yellen, thank you very much for staying all 
day with us today, and congratulations on your recent 
confirmation.
    Mrs. Yellen. Thank you.
    Mr. Cotton. At a hearing with your predecessor, Mr. 
Bernanke, my mother sent me an e-mail in the middle of the 
hearing. My mother is a retired school teacher and my dad is a 
Vietnam veteran and a farmer. And my mom said, ``Tell Mr. 
Bernanke that we would like some more interest on our 
savings.''
    And this is something I hear from my constituents a lot in 
my rural Arkansas district in places like Hot Springs Village, 
on one of the biggest plan retirement communities in the 
country of largely middle-income retirees who are prudently 
investing in things like CDs and money market accounts and 
other fixed-income interests and falling behind because of the 
low interest rates of the last 5 or 6 years, and feel that it 
would be unwise to invest in riskier assets that are more 
suitable for younger people.
    So I had some questions about that but I think maybe the 
best way to raise them is through this video that retired Navy 
Commander Joe Fahmy has made expressing some of the same 
concerns, so if we could roll the video?
    [Begin video clip.]
    ``Mr. Fahmy. My name is Joe Fahmy. I served in the Navy 
from 1960 to 1983, with 3 combat tours to Vietnam in 1968, 
1969, and 1972, and the Arab-Israeli War in 1973. Then in 
civilian work, I developed defense electronic systems for 25 
years.
    Now, semiretired, I use my experience to help other 
companies grow and to supplement my retirement income. We have 
three children, plus a foster daughter from Vietnam, and nine 
grandchildren.
    In retirement, our financial obligations include ourselves 
as well as our son, age 52, with Downs Syndrome, living with us 
in Arlington, and our daughter and our high-school-aged 
granddaughter in another State, as our daughter lost her job 
and her apartment in 2007.
    I am still working at age 76 because our family savings 
were ravaged in the stock market collapses of 2000 and 2006. 
Now, having recovered much of our losses from the previous two 
downturns, there is talk of another successive bear market, as 
many big money investors have recently taken their profits.
    At age 76, it is very stressful to endure the Fed's easy 
money policies. On the Fed's current course, our retirement 
savings will not be restored until I am age 83, assuming I can 
continue contributing to our retirement accounts. Perhaps then, 
I can retire.
    Chair Yellen, many seniors who are living on fixed incomes 
from CDs and money market funds are suffering. When Chairman 
Bernanke was asked about these concerns, he always changed the 
subject to talk about younger workers or home prices.
    What will you do to address our concerns? And will you 
commit today to attend a town hall meeting of retired seniors 
later this year to hear from folks who share these concerns?''
    [End video clip.]
    Mr. Cotton. I can't ask it any better.
    Mrs. Yellen. The concerns are very well-expressed, and of 
course they are very valid concerns, and I would like to see 
retirees earn more on their safe investments.
    I believe that if we get the economy back on track--after 
all, interest comes from earning returns on investments even in 
a bank. The bank tends to pay more for deposits and pay higher 
interest when its investments are faring better, and in a 
stronger economy that will be more possible. So I would very 
much like to see interest rates go up.
    He did note, however, that he has a daughter who lost her 
job, and I think it is also important to remember that an 
individual who is a retiree also has children and 
grandchildren. His daughter lost her job. We are trying to make 
it possible for his daughter to regain employment and for the 
grandchildren, when they graduate from school, to enter a 
healthy job market
    He also noticed--
    Mr. Cotton. Can I reclaim my time, which is running out?
    In the meantime, though, focusing specifically on these 
seniors who do depend on these fixed-income instruments, is the 
harm caused to them just a necessary byproduct of the Federal 
Reserve's current monetary policy?
    Mrs. Yellen. Congress has assigned to us the objectives of 
maximum employment and price stability. We are not at maximum 
employment. Inflation is running below our 2 percent longer-run 
objective. So I would say that those conditions dictate an 
accommodative policy.
    Mr. Cotton. Thank you. And to follow up on the town hall 
invitation, they would love to have you in Hot Springs Village 
in Arkansas and I would love to host you.
    Mrs. Yellen. Thanks for the invitation.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Washington, Mr. 
Heck.
    Mr. Heck. Thank you, Mr. Chairman.
    Chair Yellen, thank you so much for being here.
    Mrs. Yellen. My pleasure.
    Mr. Heck. I have heard several adjectives attached to you 
today: intelligent; articulate; plain-speaking; and, not very 
flatteringly, unexciting--
    Mrs. Yellen. That is good.
    Mr. Heck. --to which I would like to add, possessing an 
extraordinary amount of stamina.
    Mrs. Yellen. Thank you.
    Mr. Heck. No, the gratitude is all ours.
    Mrs. Yellen. Thank you.
    Mr. Heck. As has been noted, your current policy is to 
purchase both Treasuries and mortgage-backed securities. And 
that has been going on for a while. In your report I note that 
you even call out the fact that mortgage rates are probably 
lower than they would have otherwise been as a result of this 
policy.
    Mrs. Yellen. Yes, I think so.
    Mr. Heck. So are you considering targeting other sectors of 
our economy?
    Mrs. Yellen. I wouldn't say that we are targeting housing 
as a sector of the economy. It is an important sector. In the 
past it has contributed a good deal to recoveries, and it would 
be nice to see housing get back on its feet. It would 
contribute to the recovery.
    But generally I would say our policies are designed to 
lower longer-term interest rates on a broad range of private 
assets. Mortgages, yes--
    Mr. Heck. So, Chair--
    Mrs. Yellen. --corporate borrowing--
    Mr. Heck. --that begs a couple of observations and 
questions. First, why would you call it out in your report if 
you weren't targeting it? Second, are you saying that it would 
not have been possible to lower overall interest rates by just 
lowering the--or just by purchasing Treasuries?
    Mrs. Yellen. I would say that by purchasing Treasuries, we 
would bring down interest rates throughout the economy, not 
only on Treasuries, on mortgages as well.
    Mr. Heck. Okay, then--
    Mrs. Yellen. Probably we have a slightly bigger impact on 
mortgage rates by buying mortgage-backed securities.
    Mr. Heck. Then, with all due respect, if it walks like a 
duck and quacks like a duck, it seems to me that there is some 
targeting going on.
    Here is where I am going.
    Mrs. Yellen. Okay.
    Mr. Heck. I have long wondered why it is the Fed couldn't 
target another sector of our economy that cries out for it, and 
that is investment in infrastructure. In fact, in the 1970s, as 
has been noted in this committee, the Fed purchased the bonds 
that helped build the DC Metro, so I know that there is a 
precedent for that having occurred. And I know, looking around 
for help--true statement, Madam Chair.
    And the fact of the matter is the evidence about our 
infrastructure deficit, the evidence about what kinds of 
increase in both short-term and long-term jobs would be 
created, it seems to me is at least as strong a case as it is 
for targeting mortgage-backed securities and the resultant 
salutary effect on housing industry. What would you need in 
order for the Fed to positively consider doing this again, as 
occurred in the 1970s?
    Mrs. Yellen. Our desire is to stimulate interest-sensitive 
sectors of the economy; pushing down interest rates does that. 
Our authority that the best of my knowledge for the Federal 
Reserve is to buy government- and agency-backed debt and 
nothing else.
    Mr. Heck. So if we have--
    Mrs. Yellen. I am not aware of any authority that we would 
have to buy--for example, I am not sure what kind of bonds you 
are talking about, but we buy government and agency debt in the 
open market and we are not allowed to buy a broader range of 
assets, to the best of my knowledge.
    Mr. Heck. But if your dual mandate, which I support 
wholeheartedly--in fact, I am not going to have time to ask the 
question what the world would look like if they took away the 
keep unemployment down mandate, which I find, frankly, 
unfathomable--but if your mandate is to reduce unemployment and 
the evidence is so empirically overwhelmingly strong in favor 
of the rule of improved infrastructure, both short-term and 
long-term, why wouldn't you put some of these large numbers of 
people to work at--what would we have to do in order to be able 
to purchase bonds?
    Would it require a national infrastructure bank? Could you 
just work with banks in some kind of direct way, where you 
backed their purchase of infrastructure bonds?
    Mrs. Yellen. I am not aware of any authority that we would 
have under existing law have to pursue that avenue, but if 
Congress is interested in doing that, that is something you 
could certainly think about. But I am not aware of any 
authority that we have.
    Mr. Heck. Thank you.
    Chairman Hensarling. The time of the gentlemen has expired.
    If there are any Members who are not presently in the 
hearing room who are listening, notwithstanding the Chair's 
generous offer to stay, it has been quite some time after votes 
on the Floor. It is my intention to excuse the Chair of the Fed 
at 4 o'clock.
    The gentleman from Minnesota got in under the wire, and 
perhaps one other.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison, for 5 minutes.
    Mr. Ellison. Chair Yellen, thank you so much, and 
congratulations.
    Mrs. Yellen. Thank you.
    Mr. Ellison. I only have one question for you, and the 
question is this: You have made the point that there are 
limitations to what monetary policy can do to help put 
Americans back to work and improve the economy, but if you had 
a magic wand and you could prescribe what we should do to lower 
the unemployment rate, to put our economy on a healthy 
trajectory, what would it be?
    Mrs. Yellen. You are asking me what more broadly could be 
done?
    Mr. Ellison. Yes.
    Mrs. Yellen. I think Congress can certainly consider any 
number of measures that--
    Mr. Ellison. Like what?
    Mrs. Yellen. Training measures, job creation measures, a 
number of measures to deal with the skills gap and other 
factors that are related to stagnant real wages, especially in 
the lower part of the income distribution.
    Mr. Ellison. What about public investment?
    Mrs. Yellen. It is a possibility Congress could consider as 
well.
    Mr. Ellison. Yes. Would that help stimulate the economy in 
a way that maybe monetary policy can't reach?
    Mrs. Yellen. Certainly, we have a set of tools. They are 
limited, and there is much more that Congress can do depending 
on what Congress' priorities are.
    Mr. Ellison. Thank you.
    Chairman Hensarling. The gentlemen yields back his time.
    I want to thank Chair Yellen for her cooperation--her 
generous cooperation with this committee today.
    And we also thank you for your stamina. You may have to use 
it on Thursday as well, as I understand that you will be 
appearing before the other body.
    Again, we thank you for your testimony. We will excuse you 
at this time.
    The Chair will declare a 5-minute recess pending the 
seating of the next panel.
    The committee stands in recess.
    [recess]
    Chairman Hensarling. The committee will now come to order, 
and we will turn to our second panel of witnessess.
    Dr. John Taylor is the Mary and Robert Raymond Professor of 
Economics at Stanford University. In a 1993 paper, Dr. Taylor 
proposed what is now commonly referred to as the ``Taylor 
Rule,'' a rules-based approach to determining nominal interest 
rates. Dr. Taylor holds a Ph.D. from Stanford in economics.
    Dr. Mark Calabria is the director of financial regulation 
studies at the Cato Institute. Prior to his tenure at CATO, Dr. 
Calabria spent 6 years as professional staff on the Senate 
Banking Committee, which is, regrettably, not as prestigious as 
the House Financial Services Committee. Dr. Calabria holds a 
Ph.D. in economics from George Mason.
    Abby McCloskey is the program director of economic policy 
at the American Enterprise Institute (AEI). Before joining AEI, 
Ms. McCloskey was the director of research for the Financial 
Services Roundtable. She, too, did a tour of duty on the Hill, 
regrettably, yet again, on the other side of the Capitol. She 
received her bachelor's degree from Wheaton College.
    Last but not least, Dr. Donald Kohn is a senior fellow in 
economic studies at the Brookings Institution. Dr. Kohn also 
serves on the advisory committee of the Office of Financial 
Research. He previously served as the Vice Chair of the Fed's 
Board of Governors from 2006 to 2010. And we are beginning to 
wonder if all former Chairmen and Vice Chairmen of the Fed end 
up at Brookings. Dr. Kohn holds a Ph.D. in economics from the 
University of Michigan.
    Without objection, each of your written statements will be 
made a part of the record. Each of you, I believe, has 
testified before, so you are familiar with our system. Please 
bring your microphone close to you. And you know about the 
green, yellow, and red lighting system. I would ask each of you 
to observe the 5-minute rule.
    Dr. Taylor, you are now recognized.

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR 
               OF ECONOMICS, STANFORD UNIVERSITY

    Mr. Taylor. Thank you, Mr. Chairman. Thanks for inviting me 
to this hearing.
    I would like to use my opening remarks to refer back to the 
initial set of questions and answers to Chair Yellen with which 
you began. They have to do with the role of policy rules in 
formulating monetary policy.
    It seems to me that the case could be made that monetary 
policy would have been far better in the last few years had it 
been based on a predictable set of policy rules. Moreover, I 
think if policy moved in that direction, we would more quickly 
move to a more sustainable higher growth rate.
    There has been a tremendous amount of research, historical 
work on policy rules. There continues to be interest in what 
you refer to as the Taylor Rule, based on research of many 
people over many years, not just me. This research has 
indicated that when the Fed has followed rules close to that, 
performance has been very good. The historian Allan Meltzer in 
particular notes the period from 1985 to 2003 as one where the 
performance of the U.S. economy was extraordinarily good in 
historical comparison, and that was a period when the Fed 
adhered pretty closely to one of these rules.
    I think if in the last 10 years, policy had been guided 
this way, the performance would have been much better. If 
during 2003, 2004, and 2005, the Fed had followed a rule like 
this, we would not have had the excess risk-taking, we would 
not have had the search for yield, we would not have had as 
much of a housing boom as we had, and therefore, the financial 
crisis and the Great Recession would have been much less 
severe.
    If during the period since the financial crisis, the Fed 
had adhered to this kind of a policy rule, we would not have 
had to have the quantitative easing that has been so 
questionable. We would not have had to have the forward 
guidance that has been so debatable in its effects. And the 
predictability of the economy, I think, would have been much 
better and, therefore, economic growth would have been better 
in those circumstances.
    And I want to emphasize that such a rule would certainly 
not preclude the very important actions the Fed took during the 
panic of 2008, its classic lender of last resort role, which 
helped stabilize the financial markets.
    It is because of the success of policy rules that I 
recommend that legislation be put in place to require the Fed 
to report on its policy rule. It would be a rule of its own 
choosing. That is the responsibility of the Fed. But if it 
deviated in an emergency or for other reasons, the Fed, through 
the Chair, would be required to report to this committee and to 
the Senate Banking Committee about the reasons why.
    We are not close to that right now. Some argue that could 
be done in a procedural way rather than through legislation. 
But I think there are some promising signs that we could be 
going in that direction. Number one, the Fed recently adopted a 
2 percent inflation target. That is exactly what the Taylor 
Rule recommended 20 years ago. Moreover, the European Central 
Bank, the Bank of England, and the Bank of Japan have also 
adopted that target. There is an international congruence which 
adds durability to that.
    Number two, the forecast of the current FOMC, long-term 
forecast for the interest rate is 4 percent. Combine that with 
the 2 percent inflation target, and you have a 2 percent real 
interest rate, which is exactly what that rule recommended 20 
years ago.
    Number three, there is a consensus now that the reaction of 
the central banks, and the Fed in particular, should be greater 
than one when inflation picks up. There is debate about what 
the reaction should be in the case of a recession. Some argue 
it should be larger, some smaller. And that is a difference of 
opinion.
    But the fourth reason why I think we are in a position to 
move in this direction more so in the past is statements of 
Chair Yellen herself. She has indicated that policy rules like 
this are sensible, they are good, and they work well. She 
emphasizes that is in normal times. She would also argue these 
are not yet normal times.
    There is debate about when we will get back to normal or 
whether we are already back to normal. It seems to me, 
therefore, the debate is not over whether we should follow a 
policy rule like this. It is about when.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Taylor can be found on page 
141 of the appendix.]
    Chairman Hensarling. Dr. Calabria, you are now recognized.

 STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL REGULATION 
                  STUDIES, THE CATO INSTITUTE

    Mr. Calabria. Chairman Hensarling, distinguished members of 
the committee, I want to thank you for the invention to appear 
at today's important hearing.
    Before I begin, let me first commend the Chair on the 
establishment of the Federal Reserve Centennial Oversight 
Project. Certainly, the opinion that every government program 
should be reviewed regularly and subject to vigorous 
oversight--the American people deserve nothing less. Quite 
frankly, I can think of no part of the Federal Government more 
deserving of oversight right now than the Federal Reserve.
    Had vigorous oversight of the Federal Reserve been 
conducted in the past, we may very well have been able to avoid 
the creation of a massive housing bubble. I will not repeat 
Chair Yellen's assessment of the economy, as I agree with much 
of it, but will highlight a few issues, touch upon the conduct 
of monetary policy, and wrap up with a few comments on 
regulatory policy.
    The release last week of January's establishment survey 
revealed continued weakness in the job market. The 113,000 job 
estimate was considerably below expectations. For instance, the 
Dow Jones consensus was 189,000. It was also considerably below 
the monthly average for 2003 of 149,000. The unemployment rate, 
however, dipped slightly to 6.6 percent.
    Despite these trends, there are very bright spots in 
January's labor market. The labor force participation rate rose 
to 63 percent. The unemployment population ratio increased to 
58.8 percent. We also witnessed, importantly, a decline in the 
long-term unemployed by 232,000. The marginally attached to the 
labor force, including discouraged workers, remained 
essentially flat. So the point I would emphasize with these 
numbers is, while the improvement in the labor market was 
modest, it was quite real. We did not see these improvements 
driven by people leaving the labor market.
    So I do want to emphasize a broad agreement with the 
emphasis on the job situation. However, where I will depart 
with some of the remarks of Chair Yellen and others is that I 
think our current monetary, fiscal, and regulatory policies 
have not been conducive to job creation. In fact, I would go as 
far to say that those policies have retarded job creation, and 
that the unemployment growth we have seen has been in spite of 
policies coming out of Washington, not because of them.
    For example, the Federal Reserve's low interest rate 
policies have driven up asset prices without adding 
significantly to job creation. They have also transferred from 
savers to borrowers. Perversely enough, extremely low interest 
rates may have increased the incentive for firms to replace 
labor with capital. Low rates also reduced the penalty for 
holding cash balances, which reduces the velocity of money, 
weakening the impact of the Fed's own provision of liquidity.
    In sum, I think the Fed's policies over the last few years 
have delivered little in terms of improving our labor market 
and broader economy. This would be bad enough had not these 
policies also placed the Federal Reserve in a very precarious 
position. In my opinion, its exit strategy lacks credibility. 
Once we start to see an increase in interest rates, I think we 
are going to see a reversal in the inflation and asset prices 
that has distributed.
    I think there were a number of distortions in our financial 
markets we have yet to see that will only become clear once we 
remove these policies. I usually try to go by a good rule of 
thumb, which is that if you have long periods of time where you 
pay people to take money--that is, you have a negative interest 
rate--I think it is fairly certain they are going to do some 
dumb things with it, and that will come back to haunt us at 
some point.
    Turning to regulatory policy, I believe there was probably 
no bigger force pushing the passage of the Dodd-Frank Act than 
the public's anger with the financial bailouts. I believe much 
of the current distrust toward the Federal Reserve among the 
public is driven by the public's surprise that the Federal 
Reserve could essentially rescue anyone almost--on almost any 
terms it deemed.
    Title 11 of the Dodd-Frank Act attempts to address these 
concerns by eliminating the Federal Reserve's ability to engage 
in arbitrary bailouts. While I believe the correct solution is 
an altogether repeal of paragraph 13 through the Federal 
Reserve Act, Dodd-Frank's Title 11 does offer a modest avenue 
for limiting bailouts.
    The Federal Reserve was late in promulgating a rule to 
implement these provisions. As Chair Yellen is aware, a notice 
of proposed rulemaking was released just days before Christmas 
last year.
    Let me briefly mention a couple of issues that I have with 
the rule. Probably the foremost is the determination of 
insolvency. I find that the rule's definition of insolvency is 
exceedingly narrow and actually does nothing to limit the 
Federal Reserve's discretion beyond what is already included in 
Title II of Dodd-Frank. The notion that a firm is only 
insolvent once it is already in bankruptcy resolution or 
receivership contradicts both common sense and historical 
practice.
    I think we also need to be concerned about the Fed's 
ability to provide assistance to insolvent firms by passing 
that assistance via solvent firms, as was the purchase of Bear 
Stearns by JPMorgan.
    The final issue I have with the rule, the final top-level 
issue I have with the rule--there were a number of other minor 
issues, I would say--is also the definition of ``broad-based.'' 
While I am personally against any bailouts, whether they are 
individual firm or broad-based, I believe the intent of Dodd-
Frank is pretty clear that you are only supposed to assist 
classes of firms, not individual firms. I believe the language 
in the Fed's proposal falls short of that.
    I will say, however, it is a notice of proposed rulemaking. 
The Fed has offered to take comment. And so I, at this point, 
will be optimistic that hopefully these issues will be 
addressed in the rulemaking process.
    Thank you.
    [The prepared statement of Dr. Calabria can be found on 
page 104 of the appendix.]
    Chairman Hensarling. Ms. McCloskey, you are now recognized 
for 5 minutes.

STATEMENT OF ABBY MCCLOSKEY, PROGRAM DIRECTOR, ECONOMIC POLICY, 
               THE AMERICAN ENTERPRISE INSTITUTE

    Ms. McCloskey. Chairman Hensarling, members of the 
committee, thank you for the opportunity to testify today.
    I will lead with my conclusion: The Dodd-Frank Act 
substantially increased the regulatory authority of the Federal 
Reserve. As such, it has never been more important for the Fed 
to be transparent and accountable in its rule-writing.
    The Federal Reserve is one of the primary implementers of 
Dodd-Frank. It is involved in over 50 rulemakings, such as the 
Volcker Rule and the Durbin Amendment. The Federal Reserve 
houses and funds the newly created Consumer Financial 
Protection Bureau and has taken a prominent place in the 
Financial Stability Oversight Council.
    Perhaps most significantly, the Fed is charged with 
regulation and supervision of some of the largest banks and 
nonbanks in the country. The new rules promulgated by the 
Federal Reserve will no doubt have an impact on the economy and 
businesses and consumers. Yet the Fed has no requirement to 
disclose cost-benefit analysis on its rules, nor are the Fed's 
rules subject to challenge on the basis of their economic 
impact.
    Former Chairman Bernanke, and today Chair Yellen, have 
promised that the Fed considers the economic cost of its 
regulation, but the GAO and the Board's Inspector General have 
found otherwise. In 2011, they reported that economic analysis 
is not standard or routine at the Federal Reserve. The need for 
such analysis is especially poignant when examining the impact 
of recent rules on low-income Americans. I detailed the 
literature and empirical evidence for this in my written 
testimony, but I will go over it briefly now.
    Since the Dodd-Frank Act was passed, the cost of a basic 
bank account has increased considerably, as banks offset 
decreased revenue and increased costs. Bank fees reached record 
highs in 2012, and the proportion of bank accounts qualifying 
for free checking declined from 76 percent in 2009 to 39 
percent in 2012.
    Credit cards have become more difficult and expensive to 
access. Forty percent of low- and middle-income Americans 
reported tighter credit conditions over the last 3 years. And 
hundreds of community banks, which are often the most 
convenient banking option for low-income rural consumers, have 
closed their doors in part due to growing compliance costs.
    As a result, many low- and middle-income families have been 
shut out of mainstream banking or have turned to alternative 
financial products, such as payday loans or check cashers, 
which can be more expensive.
    Now, these trends are clearly an unintended consequence of 
the Dodd-Frank Act, which set out to protect consumers. So the 
question is, what can we do about it? Some may propose capping 
fees, which is what the CFPB appears to want to do with 
overdraft and payday loans. Others may want to subsidize credit 
for low-income households.
    But history shows us these options may end up doing more 
harm than good by raising fees elsewhere or by saddling 
households with debt they can't repay, as we witnessed during 
the 2008 housing crash. I propose considering the impact on 
consumers during the rulemaking process and adjusting the final 
rule accordingly to maximize consumer choice and opportunity. 
This could be accomplished through a statutory requirement for 
cost-benefit analysis at the Federal Reserve. The analysis, 
among other things, should examine if a rule disproportionately 
impacts a traditionally underserved population such as low-
income consumers. I also propose a retrospective evaluation for 
major rules.
    People may raise any number of concerns with economic 
analysis, that it is rarely done well or it may slow down the 
regulatory process. But cost-benefit analysis is routine in 
most other parts of the Federal Government. Federal agencies 
have been required to disclose cost-benefit analysis for more 
than 30 years under executive orders. And the OMB has developed 
detailed guidance on what good regulatory analysis entails.
    Cost-benefit analysis is also an effective check on 
regulatory overreach. The D.C. Court of Appeals struck down the 
SEC's first rule promulgated under Dodd-Frank because the SEC 
failed to thoroughly consider economic consequences. The risk 
of not requiring a cost-benefit assessment is that the impact 
of the Federal Reserve's new rules on the economy and consumers 
will go unaccounted for. And this is especially troubling for 
low-income households who traditionally have borne the brunt of 
credit regulation and appear to be doing so again.
    To conclude, I am reminded of the saying, ``To whom much is 
given, much will be expected.'' The Federal Reserve's 
regulatory authority grew tremendously under the Dodd-Frank 
Act, and this has increased the need for statutory cost-benefit 
analysis.
    Thank you for your time.
    [The prepared statement of Ms. McCloskey can be found on 
page 130 of the appendix.]
    Chairman Hensarling. Dr. Kohn, you are now recognized for 5 
minutes.

STATEMENT OF DONALD KOHN, SENIOR FELLOW, ECONOMIC STUDIES, THE 
                     BROOKINGS INSTITUTION

    Mr. Kohn. Thank you, Mr. Chairman. Although economic growth 
has picked up, Federal fiscal policy will be much less of a 
drag on growth next year. The U.S. economy is still very far 
from where it can and should be. The unemployment rate is a 
little over 6.5 percent. That is still well above the 5.5 
percent level that many economists estimate to be its 
sustainable level. Utilization in U.S. industries is a 
percentage point below its long-term average.
    Unemployed labor and capital are wasted resources that can 
be utilized to raise standards of living, especially, but not 
only for the workers and business owners involved. Slack in 
labor and capital use has resulted in very competitive 
conditions for businesses and workers, and this has been 
reflected in very low inflation rates, well below the 2-percent 
target set by the Federal Reserve. We are in a risky zone for 
inflation. Expectations start to decline, real short-term 
interest rates will rise, hurting growth, and a downward 
surprise in demand could push us into or close to a destructive 
zone of deflation.
    With unemployment of labor and capital too high and 
inflation too low, a highly accommodative stance of monetary 
policy would seem to be called for, for some time to come. The 
Federal Reserve has decided it can dial back its security 
purchases, but it has chosen also to strengthen its 
articulation of its intent to keep short-term rates close to 
zero until the unemployment rate and inflation are closer to 
their objectives. This seems about the right policy mix to me.
    The Fed faces considerable challenges in the execution of 
monetary policy over the coming years. The most important 
challenge will be deciding when to begin raising interest rates 
and at what pace they should rise. Unfortunately, there are no 
reliable formulas for making this decision. We are in uncharted 
waters with respect to economic circumstances and policy 
responses.
    When the economy behaves in unprecedented ways, policy must 
respond in unprecedented ways. And the financial crisis, 
resulting Great Recession, and sluggish recovery were 
unprecedented in postwar U.S. economic history. In these 
circumstances, there is no substitute for judgment and 
flexibility in the conduct of policy.
    The most important way the Federal Reserve can reduce 
uncertainty is by achieving its congressional mandates for 
employment and prices. Households and businesses, in planning 
for the future, care far more about their prospective income 
sales and the rate of inflation than they do about the size of 
the Fed's portfolio or the level of interest rates. The Fed 
should be as predictable as possible, but it and we as outside 
observers should recognize the limits of predictability under 
current circumstances.
    And that brings me to the second challenge, which is 
communication about policy. The short-term rates at the zero 
lower bound influencing expectations about future rates and 
future inflation in economic activity are among the few ways 
the Federal Reserve has to accomplish its objectives, but 
communication must recognize the inherent uncertainty in 
policymaking, and, in my view, it didn't do this last summer. 
It tried to give too much certainty.
    In its interest rate guidance, the Federal Reserve needs to 
explain what it will be looking at to judge when to raise rates 
after the unemployment rate falls through 6.5 percent. Our 
economy is a complex mechanism. State is not readily summarized 
in one or two variables, and policy needs to react to the whole 
array of indicators pointing to the evolution of economic 
activity and prices. This complexity presents challenges for 
communication and guidance about interest rates, but it is a 
reality.
    The third challenge is associated in part with monetary 
policy, maintaining financial stability. Unconventional policy 
by driving down yields on safe assets does encourage people to 
take more risk than they might otherwise have done. The issue 
is, what problems might ensue as security purchases come to an 
end and interest rates were subsequently raised?
    The Fed is clearly monitoring these risks, as we heard this 
morning, and close monitoring--closely using a variety of 
methods and regulation supervision of discovering and dealing 
with this potential source of instability, and I agree with 
this approach to safeguarding financial stability under the 
current circumstances. I think it is superior to one in which 
interest rates are raised, because raising interest rates might 
discourage some kinds of risk-taking, but they would also keep 
unemployment high and elevate the risk of deflation.
    The final challenge, and it is really for this committee, 
as well as the Federal Reserve, is preserving the short-run 
operational independence for monetary policy. Congress has set 
the overall goals, and should hold the Fed accountable for 
achieving these goals, should be required to explain who its 
policy actions will lead to achieving those objectives, and if 
they don't, why they haven't.
    And this committee's intention to revisit whether the 
Congress had set the appropriate goals for the Federal Reserve, 
whether the structure of the Fed is best suited for meeting 
those goals is appropriate and welcome. But we need to be very 
careful to safeguard the arm's-length relationship of the 
Federal Reserve to the political process when it comes to 
setting the instruments of policy.
    Much evidence over time and across countries strongly 
indicates that leaving the setting of policy to technical 
experts with some separation from day-to-day political 
pressures produces much better outcomes than when elected 
officials whose focus is on the next election cycle can 
influence how policy is conducted in the pursuit of the agreed 
goals.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Kohn can be found on page 
124 of the appendix.]
    Chairman Hensarling. Thank you. I thank all the panelists. 
The Chair now recognizes himself for 5 minutes for questions.
    Dr. Taylor, among other things we heard from Chair Yellen 
today was her concern over the unsustainable level of 
entitlement spending. I have heard the President say he was 
concerned. Most economists are concerned. I just can't find 
anybody really to say we should begin to reform it today.
    So I hear her also say, in some respects, she supports the 
Taylor Rule, but these are extraordinary times. So when is the 
right time to employ the Taylor Rule? I am reminded--I think 
there was a C&W song, everybody wants to go to Heaven, just 
nobody wants to go today. So what is the day that we take up 
the Taylor Rule? I believe I saw an exchange with you and 
Chairman Greenspan not long ago where he said that the Taylor 
Rule, I think, would have gone negative after the crisis. I 
think I heard Chair Yellen say something similar.
    So would it have been appropriate then? Is it appropriate 
now? Please elaborate on your views.
    Mr. Taylor. The first part of your question, I think that 
if we had stuck to--the Fed had stuck to--a rule like that, as 
it was following pretty closely for a long period, that we 
would have had a much better performance. And so my view is, we 
should have stuck with this long ago. I indicated that in my 
opening remarks and in my written testimony.
    With respect to going negative, that refers to a situation 
where a policy rule like that would suggest a negative interest 
rate. And it certainly doesn't suggest that now. It would be 
closer to 1.25 percent. And so you can't really rationalize all 
of this extraordinary other activity of the Fed based on that.
    Would it ever have gone negative during this period? 
Perhaps, depending on how you measure it. A little bit in 2009, 
I think by a small amount. But certainly not by enough to 
justify this extraordinary action that went beyond 2009, 2010, 
2011, 2012, 2013, and 2014.
    Moreover, it is not like all this research I referred to on 
policy rules never considered a negative rate. All of the work 
considered that for many, many years. And the main 
recommendation, when that happened, was to keep money growth 
steady. Do the kind of things that economists had recommended 
for a long time, rather than these extraordinary interventions, 
unprecedented, that we have never seen before.
    Chairman Hensarling. I assume all of you listened to Chair 
Yellen's testimony, perhaps the first few hours of it. But I 
asked her to comment in my own question to her concerning the 
current state of forward guidance. I quoted the recent piece 
from The Wall Street Journal, and I would like to quote it to 
you again: ``Perhaps the Open Market Committee should have 
called it the Evans suggestion.'' The mistake was telling 
markets there was a fixed rule, when the only sure thing at the 
Fed is more improvisation.
    Now that you have heard Chair Yellen's response, Dr. 
Taylor, what side do you come down on? Do we have more 
improvisation or, as Chairman Bernanke said, current forward 
guidance is Taylor Rule-like?
    Mr. Taylor. The current forward guidance and the forward 
guidance that has been used thus far has the problem that it 
keeps changing. Originally, it was somewhat vague. In fact, it 
began, really, in 2003, 2004, and 2005, when the Fed talked 
about ``measurable pace'' and ``a prolonged period'' as forward 
guidance. And then in more recent periods, it was a fixed date, 
like 2012. And then there was an unemployment rate, 6.5 
percent, and now kind of--well, a little bit more than 6.5 
percent. We will have to wait a little longer.
    So I think the problem with this has been the changes back-
and-forth. It is hard to do forward guidance. I think anyone 
recognizes that. Even the people who support it recognize that.
    And what you have seen here--and I think it was 
demonstrated again today--is it is a moving concept. It is not 
a rule, in the sense you stick to it as best you can. Of 
course, you are always going to have to change and adapt, but 
this one seems to me particularly erratic, if you like.
    Chairman Hensarling. In the time I have remaining, Dr. 
Calabria, you have advocated jettisoning the Fed's 13(3) 
exigent powers. So how would you define--or if you had our jobs 
and could write the law, what--how should the lender of last 
resort function for the Fed? What would you see as its purpose?
    Mr. Calabria. Let me preface my answer with, I am also 
skeptical of even having a lender-of-last-resort function, but 
if you are going to have one, I would limit it to discount 
window lending to commercial bank members of the Federal 
Reserve System based on good collateral with penalty rate, 
sufficient haircut--
    Chairman Hensarling. Classic Walter Bagehot.
    Mr. Calabria. Absolutely. And the I think deviations from 
that have been the problem.
    Mr. Kohn. May I comment, Mr. Chairman?
    Chairman Hensarling. Yes, Dr. Kohn?
    Mr. Kohn. I think when Bagehot wrote about this in the late 
19th Century, he viewed lending not only to commercial banks, 
but all elements in the money market and financial markets. 
When people thought about commercial banking as far back as the 
19th Century, Bagehot himself said that lending should be to 
this man and that man, not just to commercial banks, but to all 
the key elements in the money market, because at that time in 
the U.K., it wasn't just banks that were key elements to the 
money market. There were many other brokers and things like 
that.
    So I think as the U.S. financial market has developed, and 
these other elements of our market--it is a strength of our 
market that it is not just commercial bank-dependent, the way 
the European banks are. But as these other elements become more 
integral into the market, it is important that a central bank 
be able to support their liquidity in emergency circumstances.
    So I would be very reticent to--I would be opposed to 
suspending 13(3). I think it is right that it needs--the Fed 
needs to think about how it is going to implement it. Maybe 
these rules aren't sufficient. They should work on them. But I 
think they have to be part of preventing a run at liquidity, a 
panic in the financial markets from bringing down the financial 
system.
    Chairman Hensarling. I have long since exhausted my own 
time. The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, the vice chairman of our Monetary Policy 
Subcommittee.
    Mr. Huizenga. Mr. Chairman, I will just point out that it 
is good to have the gavel and give yourself as much time as you 
would like. So--yes.
    And to the witnesses, I appreciate your time and patience, 
as well, today. I know it has been a long day for everybody. 
But, Dr. Taylor--I guess kind of for everybody--we talked about 
the Taylor Rule. I am kind of curious about the $10 million--or 
sorry, $10 billion. Sorry, I forgot I was in Washington, not 
back in Lansing when I was in the state legislature--$10 
billion per month taper that has been proposed. It appears that 
the FOMC is going to be continuing that based, at least as I 
was reading the tea leaves with Chair Yellen today--seems a 
little too neat and tied up with a bow to me.
    It is kind of like betting that the next Powerball winner 
is going to be 1-2-3-4-5-6. Do you know what I mean? To have 
them be able to predict that this is just going to be taken 
down in $10 billion increments as we are moving forward--I 
wonder if anybody wants to comment on that? And then I would 
like to get Ms. McCloskey--I would like to talk a little bit 
about the impact on low- and moderate-income, and, Dr. 
Calabria, if we can get onto a couple of other issues, so 
quickly.
    Mr. Taylor. That is their strategy. And I think it is good 
to have a strategy. You saw what happened last May and June 
when there wasn't really much of a strategy for the tapering. 
You could quarrel whether that is too specific, but I 
congratulate them on moving ahead with some kind of strategy, 
and I--
    Mr. Huizenga. But you would rather have--basically, you 
would rather have a strategy laid out like that than having 
what had happened before? Great.
    Mr. Taylor. Yes, I think it is much better for the 
markets--you have seen a better reaction than last May and 
June, absolutely.
    Mr. Huizenga. Okay. Would anybody else care to comment 
quickly?
    Mr. Calabria. Let me also echo that. I would prefer to see 
tapering at a faster rate, but I think that the fact that they 
have laid out a series and you have expectations of how much 
tapering you are going to get, is very helpful. So the fact 
that this is less ad hoc than it would be otherwise I think is 
the appropriate direction.
    Mr. Kohn. I agree. I think a gradual taper withdraws that 
extra--caps that portfolio very slowly, gives the markets 
something to anticipate, gets already built in, and gives the 
Fed a chance--
    Mr. Huizenga. Well, the markets seemed surprised.
    Mr. Kohn. I think they were a little surprised in December 
when it was announced, but not that surprised. And then in 
January, when the next tranche came, there was no surprise. So, 
I think Dr. Taylor is right.
    Mr. Huizenga. Certainly, people have been trying to tie it 
to that, as we have seen some dips in the market. But I am not 
convinced, either.
    Mr. Kohn. I think the emerging markets--
    Mr. Huizenga. If they are not paying attention, our friends 
in New York, pay attention.
    Mr. Kohn. I think those emerging market economies face lots 
of challenges, and the taper is a small part of their problem.
    Mr. Huizenga. Okay. Ms. McCloskey, let's talk a little bit 
about the impact on low- and moderate-income households. I wish 
there was a single colleague over on the other side of the 
aisle who was here right now. They could participate in this 
conversation, as well. This is something that my side of the 
aisle often gets accused of not caring about, but I can tell 
you, representing one of the 10 poorest counties in the Nation, 
Lake County, Michigan, this is very high on my list. And I am 
very concerned--having a background in real estate and 
developing myself, I am very concerned about what is happening 
to those hard-working, working-class families who feel like 
they are just getting the short end of the stick time and time 
and time again, and here they go.
    Community banks are getting harder and harder to work with. 
The big guys don't, frankly, want to deal with them. Now they 
are turning to their credit unions and, frankly, now other 
alternatives. So if you can talk a little bit about that?
    Ms. McCloskey. Sure. There has been a lot of discussion in 
Washington about income inequality and economic mobility. And 
we know that access to savings and credit opportunities are 
really important for economic advancement for families. And 
what concerns me is that, as an unintended consequence of new 
rules that we have put into place, albeit with perhaps good 
intentions following the financial crisis, is that those 
opportunities are becoming more expensive or more rare for low-
income families. And this could end up exacerbating the 
inequality and the lack of mobility that we are seeing.
    And so I think having some sort of economic analysis at the 
Federal Reserve, some requirement to take these impacts into 
consideration would be a good first step in improving mobility.
    Mr. Huizenga. What would you identify as the most 
egregious?
    Ms. McCloskey. Certainly, the Durbin Amendment, which 
limits debit interchange fees. There is a very clear 
correlation between that and reduced free checking and higher 
bank fees. The University of Chicago has suggested the Durbin 
Amendment alone has resulted in $25 billion in higher fees and 
reduced services for consumers.
    But I think the danger with just pulling out one or two 
rules is that we miss the broader impact of 400 new rules on 
companies and on consumers and we can't overlook the impact 
that is going to have in decreasing credit and savings 
opportunities.
    Mr. Huizenga. Two wrongs don't make a right. Or maybe in 
this case, 400 wrongs don't make a right on trying to get this 
put together.
    Ms. McCloskey. Exactly.
    Mr. Huizenga. I see my time has expired, Mr. Chairman. 
Thank you.
    Chairman Hensarling. At the moment, we have a little bit of 
a supply of time, but at this time, the Chair now recognizes 
the gentleman from Indiana, Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And thank you to the panel for being here. Dr. Taylor, I 
would like to follow up just a little bit. You have mentioned 
the comment that caught my ear today from Chair Yellen, and 
that was, what we are facing today is very unusual. I think 
that the economy goes through changes, and we could all say 
they are unusual. I guess my question is, what are normal 
times? Looking at what we have today, I am not sure that the 
economy is necessarily abnormal as much as Washington is 
abnormal.
    You look at Obamacare, Dodd-Frank, the Durbin Amendment, 
QE, easy monetary policy, regulations upon regulations. Would 
you like to comment on that? Are we overreacting and causing 
more problems than we are fixing problems?
    Mr. Taylor. I very much agree that a major problem in the 
U.S. economy is policy. We have talked about monetary policy 
here, and I have indicated that. I think for fiscal policy, the 
Chair mentioned getting entitlements under control. Regulatory 
policy, a great deal of uncertainty and increase in 
intervention.
    If I look at all those things, it is quite remarkable how 
many there are, and I think they are a significant drag on the 
economy. I think that is really why we have had this weak 
recovery. And in that sense, it doesn't need to be normal. We 
can change it. If the policy is the problem, we can change 
policy. And that is what I believe.
    And so, the idea that the economy itself is not normal 
doesn't add up to me. First of all, the financial crisis is in 
the past quite a bit now. It was a problem, a serious problem. 
But we are going away from that. We can't argue forever that 
the economy is not ready for a good kind of normal policy. So I 
very much think we are ready to go with improved policy, and I 
hope we can do that.
    Mr. Stutzman. Yes, with almost $2 trillion on balance 
sheets in the private sector, people are just waiting. I have 
talked to small businesses in northeast Indiana, and they are 
waiting to know what the rules are, letting the dust settle a 
little bit before they can move forward.
    I would like to talk a little bit about the dual mandate. 
How does the Fed respond to the current conditions that we are 
facing with the dual mandate? We see unemployment numbers 
dropping, but I tell you, when you get outside of the Beltway, 
we are hurting. We are seeing more people out of the workforce. 
What should the Fed do?
    And, Dr. Calabria, maybe you would like to respond and, Ms. 
McCloskey or Dr. Kohn, if any of the three of you would like to 
respond to that.
    Mr. Calabria. Let me first emphasize something asked in the 
earlier question, which I do think policy has been a tremendous 
drag. Chair Yellen mentioned earlier the tax increases, 
whether--and you recall we have seen that in the fiscal cliff.
    Mr. Stutzman. Yes.
    Mr. Calabria. And so I do think it is important to keep in 
mind, all the talk about austerity, almost all of the deficit 
reduction has come from revenue raisers, not spending cuts. It 
has been quite modest, and I think that has been a mistake.
    Certainly on the regulatory side, I also think that has 
been a mistake, as well. So I think we need to fix policy that 
is outside of the realm of the Fed, and we need to recognize 
that you can only do so much. As you alluded to, there is a 
tremendous amount of cash on corporate balance sheets, $2 
trillion. There is almost $2 trillion, about $1.7 trillion in 
cash on bank balance sheets. So it is not a deficit of 
liquidity in the financial system or in the corporate system. 
It is costs facing the labor markets, costs facing the 
regulatory markets.
    I will repeat something that Chair Yellen said earlier, 
which is that monetary policy is not a panacea. And I think 
that is what we need to recognize and believe that it can't fix 
a number of things.
    So to go back to your question of, what would I have the 
Fed do, I would have the Fed follow something like the Taylor 
Rule, where our short-term Federal funds rate was something 
like 1.25 points, somewhere around that. I don't think anybody 
is suggesting that we go to 3 percent or 4 percent or 5 percent 
Federal funds rate. So even at 1.25 percent would still be, in 
my opinion, highly accommodative, certainly would not be tight 
by any stretch of the imagination, and to begin to taper in a 
much quicker way.
    Mr. Stutzman. Ms. McCloskey, I have 30 seconds. Would you 
like to comment?
    Ms. McCloskey. Sure. I do think there is a burden on 
Congress to address the 11 million people who are unemployed, 4 
million of whom who have been unemployed for over 6 months. 
Aside from providing some level of stability, we have seen that 
the Fed is very limited in its ability to encourage businesses 
to hire.
    And so I am in favor of more creative solutions from 
Congress, such as relocation vouchers or cash bonuses for 
people who get a job. I think programs like this are our best 
hope of moving the long-term unemployed back to work.
    Mr. Kohn. I believe this current very accommodative policy 
of the Federal Reserve is appropriate and will be appropriate 
at least for a little while longer. Among the policy issues has 
been not only the increase in taxes, but the decline in Federal 
spending, which took about 1.5 points off of growth last year.
    I ask myself, what would the economy look like or what 
would our financial markets look like if the fed funds rate was 
1.25 points instead of essentially zero right now? And I have 
to think that the stock market would be lower, that housing 
starts would be slower, because interest rates would be higher. 
We saw the results of a modest increase in interest rates, a 
percentage point, from 1.7 percent to 2.7 percent this summer, 
and it slowed the recovery in the housing market. Automobile 
sales would be less, because the ability to borrow very 
inexpensively to buy a car must be encouraging sales.
    So I think higher interest rates would have produced an 
even slower economic recovery. This is a very difficult 
discussion about the counterfactual. The Federal Reserve is 
saying, we are not satisfied. We haven't been satisfied with 
the recovery. We think it would have been worse without it. 
Other people say, no, if you had had higher interest rates, it 
would have been better.
    I am just myself convinced that by and large, higher 
interest rates are associated with less demand, not more 
demand. And that is a pretty robust empirical finding.
    Mr. Calabria. If I could make a point, because, first, I 
want to agree. I think there are a lot of points here that we 
don't know. I think there are a lot of uncertainties. What I 
would say--take the housing market, for instance. Housing 
starts are about a third of what they were at the peak, so it 
seems to me that the data suggests that most of the boom for 
the buck we have gotten in the housing market has been 
refinancing, and it has been higher prices.
    But refinancing--which I have done, and I am glad to have 
taken care of that--doesn't put any construction workers back 
to work. It is great for mortgage lenders, but not necessarily 
really good for the overall economy.
    So we have yet, in my opinion, to see the actual 
construction market turn around in a very big way from that. I 
do think it is important to keep in mind that lending doesn't 
seem to be getting out there. And ultimately, having that move 
is far more important, in my opinion, than just pushing housing 
prices up.
    Mr. Stutzman. Thank you. I guess I would just say, as we 
see families across the country with dollars being taken away 
from--to put towards insurance, health insurance, cost of 
banking, they just have less money to spend to be buying new 
cars and new homes.
    So thank you, Mr. Chairman. I will yield back.
    Chairman Hensarling. The Chair would like to alert the 
Members in the hearing room and those who may be listening in 
their offices that votes are expected on the Floor any time 
within the next 15 minutes. It is the Chair's intention to 
continue this round of questioning until we need to go to the 
Floor to vote. At that time, we would excuse the panel and 
adjourn the hearing.
    Now I would like to recognize the gentleman from South 
Carolina, Mr. Mulvaney.
    Mr. Mulvaney. Thank you. And let's stay right there on a 
couple of different topics. Following up on what Mr. Stutzman 
said, Dr. Kohn, I hear what you are saying about how, if 
interest rates were higher, if we were at 1.25 percent, as the 
Taylor Rule might call for right now, that we would be selling 
fewer cars and selling fewer houses.
    But doesn't that imply, sir, that the recovery that we have 
is, to a certain extent, illusory anyway? Isn't the Fed 
artificially depressing the price of interest--the cost of 
money right now anyway?
    Mr. Kohn. It is certainly keeping it lower than anyone 
thinks it will be over the long run.
    Mr. Mulvaney. It is lower than the equilibrium, right. We 
would--
    Mr. Kohn. Yes, that is the deliberate policy.
    Mr. Mulvaney. The equilibrium rate right now for the cost 
of money is higher than what the market is charging.
    Mr. Kohn. If by equilibrium rate, do you mean what might 
prevail over 15 to 20 years?
    Mr. Mulvaney. No, I am talking about what might prevail 
without the active intervention of quantitative easing.
    Mr. Kohn. The Federal Reserve has to set the short-term 
rate and has to establish in this--
    Mr. Mulvaney. Right, and it has set it at zero, and that 
didn't have the desired impact--
    Mr. Kohn. It set it at zero.
    Mr. Mulvaney. --so it added to that, printing money, what 
we call quantitative easing.
    Mr. Kohn. Right. It could set it at 1, 2, 3, 4, 5, whatever 
it wanted to set it at, so it is not--there isn't a mechanism 
here, given the central bank and the kind of money facility we 
have. We are not on a gold standard. There isn't a natural way 
to establish a natural rate.
    Mr. Mulvaney. Let me ask you this way: If tomorrow Janet 
Yellen says that quantitative easing is going to zero, what 
would the prevailing rate of interest be on the 10-year 
Treasury?
    Mr. Kohn. It would go up, I don't know, 50, 100 basis 
points.
    Mr. Mulvaney. And we have heard in this committee between 
150 and maybe as many 300 basis points. I think it is subject 
obviously to a bunch of different interpretations. But that is 
my point when I say that the equilibrium rate, the natural 
rate--call it organic, I don't care what you call it--if the 
Fed was not actively intervening in the markets, interest rates 
would be higher. And that means to me that the equilibrium rate 
of car sales is being--would be lower than it is today, that 
housing sales is lower than it is today.
    And I am worried, sir, I guess the long way of saying this 
is that we are creating asset bubbles, in housing, in stocks, 
in automobiles. Would you agree with that or not?
    Mr. Kohn. I think it is something to be watchful and 
careful about, but I don't see evidence of it. I think we are 
leaning against some other forces that are holding back the 
economy. Last year, it was increases in taxes and decreases in 
spending and problems in Europe and other places.
    Some of it we don't understand. Mark was absolutely 
correct. Our understanding of the economy is rudimentary. We 
keep trying--things like the Taylor Rule keep pushing back the 
frontier, but it is a long way to go.
    Mr. Mulvaney. Let me go to another line of questioning that 
Mr. Stutzman had asked about--and I apologize for cutting you 
off--which is the dual mandate, because one of the things that 
I heard today, and I was a little bit surprised to hear from 
Chair Yellen was her vociferous support for the dual mandate.
    I think that was different than what we heard out of her 
predecessor. I had a chance to ask him about the dual mandate 3 
or 4 times in the last several years. And while he certainly 
played lip service to it, every single time I asked him about 
it, he asked--he also said, but I acknowledge that in the long 
run, monetary policy cannot influence the long-term 
unemployment rate.
    So I guess my question is, Dr. Kohn, if that is economic 
orthodoxy right now, why are you and Mrs. Yellen paying such--
putting such a dramatic faith in the dual mandate, if it is 
orthodoxy that we cannot influence the labor markets in the 
long run with monetary policy?
    Mr. Kohn. I agree about the long run. That is influenced by 
the structure of labor markets, competitive conditions in labor 
markets, matching skills to jobs, et cetera. But in the short 
to intermediate run, monetary policy can influence the labor 
market. And--
    Mr. Mulvaney. Has it?
    Mr. Kohn. And--
    Mr. Mulvaney. Has it?
    Mr. Kohn. --the Federal Reserve recognizes this. And the 
policy statement they put out in January of every year 
recognizes that they don't have control over the longer run, 
but they do have influence over the short run.
    Mr. Mulvaney. Okay. Now, you talk about counterfactual. Let 
me ask you this. We have been doing this now for 5 years. Has 
the zero interest rate policy, has quantitative easing added 
jobs in the short term?
    Mr. Kohn. Yes.
    Mr. Mulvaney. You wouldn't agree with me that most, if not 
all of the decline in the unemployment rate we have seen is by 
people leaving the job market, not by new jobs being created?
    Mr. Kohn. I think we have had some of both. And it depends 
on which survey you look at, et cetera, but certainly on the 
survey of businesses, they have added many more jobs, 200,000 a 
month--
    Mr. Mulvaney. No, no, no. As far as 200,000 jobs a month, I 
think we have done that maybe 5 or 6 times in the last 4 or 5 
years.
    Mr. Kohn. Over the last year, it has been, what, about 
175,000, something like that.
    Mr. Mulvaney. It was 130,000 last month and 75,000 on 
adjusted basis the month before that.
    Mr. Kohn. Right. So it is the last 2 months. But I--no, I 
think the--we have added to employment, so as she noted, I 
think 7.5 million or 8 million jobs since the bottom of the 
recession. But still--
    Mr. Mulvaney. And in fairness to her--
    Mr. Kohn. --the unemployment is still very high, I agree. 
And the Federal Reserve itself is disappointed. It wouldn't 
have engaged in several rounds of QE and guidance if it had 
been satisfy with the outcome.
    Mr. Mulvaney. No. And in fairness to her and to Dr. 
Bernanke--and he said this several times--that even if he had a 
single mandate, his policies probably would not have been 
demonstrably different over the course of the last several 
years, because you could take the same policies towards 
fighting deflation, so I appreciate that.
    I am sitting there looking at my time, waiting for my 
chairman to bang down on the gavel. I did want to ask one--oh, 
goodness me.
    Chairman Hensarling. You brought that up.
    Mr. Mulvaney. And since several of my colleagues have come 
in, now I won't get a chance to ask any--
    Chairman Hensarling. The gentleman from South Carolina 
asked for it; the gentleman from South Carolina got it.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    And thank you to our panel for being with us this 
afternoon. I would like to go to Dr. Calabria. Chair Yellen 
appeared comfortable with the Fed's staff study in regards to 
stress testing. Do you have an opinion on that staff study and 
whether it was adequate to do a stress test of what the Fed has 
been doing?
    Mr. Calabria. I have not fully looked at it, so I don't 
want to pass judgment on it. I will say I have been skeptical 
of some of the rounds of stress testing, both here and in the 
E.U. I think much of them have not been all that stressful, 
but, again, I will emphasize that I have not read them--
    Mr. Rothfus. What would you look for in a stress test? What 
kind of variables would you--
    Mr. Calabria. For instance, one of the things that I am 
most concerned about is I think we are all in agreement that 
rates are going to go up at some point, and so I do worry that 
as the yield curve steepens, which is necessary to encourage 
lending, but that you are encouraging an amount of maturity 
mismatch within the banking system that I worry about. And so, 
we do need to keep an eye on that when rates go up. After all, 
that is what really drove the savings and loan crisis, so I 
think at that degree of mismatch in assets and liabilities 
needs to be observed quite closely.
    I also think we need to be a bit more stressful about 
sovereign risk. Certainly, it is more of a case in the E.U., 
but the treatment here--I guess it is worth noting that there 
still is no Federal statutory guarantee of Fannie and Freddie. 
And so the treatment of bank regulators of Fannie and Freddie 
debt, in my opinion, has been far too generous, and it 
certainly has embedded that risk in the system. And I think we 
also need to look at the treatment of municipal debt on banks' 
balance sheets, as well. So I think there is some credit risk, 
I think there is interest rate risk across the board that we 
really need to take very seriously.
    Mr. Rothfus. What would your consideration be, for example, 
if interest rates did go up 100 basis points, 150 basis points, 
and what that would do with the value of the securities that 
the Fed is holding right now?
    Mr. Calabria. We certainly know that increases in interest 
rates will lower the value of long-dated assets on both bank 
balance sheets and the Federal Reserve's balance sheet. I think 
that is a very real concern for me in terms of monetary policy.
    The entire exit strategy seems to assume that you will not 
have to conduct open market operations where you would sell the 
long-dated assets off. The Federal Reserve's position so far 
has been we will let those assets mature, and I think that is a 
feasible strategy if we don't see any inflation. The fallback 
to that is, of course, the desire to raise interest on 
reserves, and this is where I am a little more skeptical, not 
in a mechanical sense, because you certainly can raise interest 
on reserves and constrain lending.
    What I am skeptical is that, my back-of-the-envelope is on 
the $2.4 trillion or so in reserves, we are probably paying 
somewhere around $6 billion a year to the banks via the Federal 
Reserve. In an inflationary environment, I could easily see 
that approach $30 billion, $40 billion, and it just strikes me 
as politically unsustainable for the Federal Reserve to cut a 
$30 billion to $40 billion check to the banking industry.
    So I do worry that open market operations might be on the 
table--off the table, because you can't sell the assets at par, 
and I might--and I might be worried that the level of interest 
reserves you have to pay is just simply not politically 
feasible.
    Mr. Rothfus. Would you consider broader impacts, for 
example, interest rate spikes on the stock market? We just had 
this experience about a month ago when we saw a correction in 
the market after--whether it was related at all to pulling back 
on QE. Any thoughts there?
    Mr. Calabria. I certainly think we are going to start to 
see rates go up. The earlier numbers we talked about, 100, 150 
basis points. So certainly, as the tapering continues, we are 
going to start to see long-term rates go up, and I think we 
will also start to see the yield curve steepen, which is an 
important aspect of this, as well.
    I think it is going to moderate the stock market. I think 
it is also going to moderate prices in the real estate market, 
all else being equal. So, of course, we do hope that you start 
to have economic recovery so that the fundamentals start to 
drive those markets, rather than liquidity.
    Mr. Rothfus. Is there any historical precedent for what the 
Fed has done over the last 4 years, the way it has expanded its 
balance sheet, and then to have an environment where you could 
just do a proper stress test?
    Mr. Calabria. I don't want to push the comparison too much, 
because I don't think QE plays into this, but I do worry that 
we are in a sort of 2003-2004-style situation. We saw a 
tremendous amount of refinancing bank fees in 2003. As that 
went away, when interest rates started to go up, and you 
started to see a reduction in credit quality, in--so, again, I 
worry that we are going to start to see that cycle play out 
again.
    And, of course, it is also worth remembering that when you 
look back at the 1980s, we had a boom and bust in the housing 
market at the beginning and at the end of the 1980s. So I do 
think that we are in a situation where the housing market 
represents some risk, again. Certainly, 2 to 3 years out, I 
think that is something that needs to be taken quite seriously.
    Mr. Rothfus. Thank you. If I can just quickly go to Ms. 
McCloskey, we all heard Chair Yellen suggest that there has 
been a cost-benefit analysis done with respect to the Volcker 
Rule. Do you have an opinion with respect to any cost-benefit 
analysis that the Fed may have done with respect to the Volcker 
Rule, the preamble of the Volcker Rule?
    Ms. McCloskey. There is no economic analysis disclosed by 
the Fed on the Volcker Rule, which is grievous, considering the 
impact that the Volcker Rule could have on the economy and on 
businesses. So I think Volcker is actually a great example as 
to why having a requirement of statutory cost-benefit analysis 
would be an important step forward for the Fed.
    Mr. Rothfus. Thank you. Thank you, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from North Carolina, Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Thank you all for being here today. How do you believe the 
Volcker Rule will affect mainstream America? And is there 
anything that the regulators can do to calm the fears that we 
are hearing in the financial industry?
    Mr. Calabria, we can start with you, if you would like.
    Mr. Calabria. Sure. One of the issues that I don't think 
gets discussed enough in the Volcker Rule is the exemptions for 
Treasuries, agencies and municipals. And so I do worry that you 
combine that with the liquidity coverage requirements and the 
new capital rules that we are seeing under Basel, I do worry 
that we are putting our thumb highly on the scale toward 
essentially government debt versus the private sector. I think 
one of the things we need to do is actually quite interesting. 
If you took bank balance sheets and you graphed lending to 
business versus lending to government, they almost kind of 
mirror each other.
    So the fact is, banks haven't stopped lending. They have 
just changed who they are lending to. And in my opinion, they 
are lending to the least productive sectors of society. So I do 
think that we need to keep that in mind in terms of long-term 
growth that we don't want to push the financial system away 
from lending to the private sector. We have not had financial 
crises caused by small-business lending. We have had financial 
crises globally caused by lending to governments.
    Mr. Pittenger. Does anybody else want to comment on that?
    Ms. McCloskey. I haven't seen any studies that specifically 
look at the consumer impact of the Volcker Rule, but theory 
would suggest that banks could seek higher yields elsewhere and 
actually invest in riskier assets, which might make the system 
more unstable, or that they may offset reduced revenue from 
Volcker by raising the cost of credit on consumers.
    So while there was no economic analysis before Volcker was 
passed, this also raises the need for retrospective analysis 2, 
3, 5 years out to consider how it is really impacting the 
economy.
    Mr. Pittenger. With the unemployment rate trending 
downward, do you believe that this is an indication of a strong 
economy? Or do you believe this rate is indicative of people 
just leaving the labor force? Would any of you like to comment 
on that?
    Mr. Calabria. I will note that the January number has 
really been driven not by people leaving the labor force. It is 
a weak number, so I wouldn't use the word strong, but it is a 
real number, and I think it is a modest improvement. You have 
certainly seen in previous months where declines in the 
unemployment rate have been driven by departures from the labor 
market. So the point I would emphasize is, I think we are in a 
recovery. I just don't believe we are in a strong recovery.
    Mr. Pittenger. Yes, sir?
    Mr. Taylor. Yes, I think a significant part of the 
unemployment reduction is labor force participation declining. 
One way to think about that is to look at projections of labor 
force participation before this recession. And they are much 
higher than what has turned out, so the demographics really 
can't explain a lot of the decline, some, of course, but a 
major part of it must be the recession itself and people 
dropping out of the labor force. And if you adjust for that, 
the actual unemployment rate would be higher than what is 
reported.
    Mr. Calabria. One thing I will note, we saw the declines in 
unemployment rate pretty much broad categories, December to 
January, with one glaring exception to me, which is teenagers. 
The unemployment rate significantly increased for African-
American teenagers, to an almost 40 percent unemployment rate 
in January, which to me is quite shocking.
    I think one of the really, really bad policy mistakes we 
made going into this recession, and it is worth certainly 
recognizing that this happened under President Bush, we put in 
place a series of minimum wage increases that I think have hurt 
the teenaged labor market in a very serious manner, and that 
certainly should be considered in the current debates.
    Mr. Pittenger. And they are trying to do that again today.
    Yes?
    Ms. McCloskey. Pardon. I didn't hear your question.
    Mr. Pittenger. No, I said--I just made the comment that 
they have the same proclivity to continue in that venture 
today, to make it more difficult for teenagers to get jobs, by 
raising the minimum wage. Looking at Fed policies over the past 
few years, I would just like to get your opinion on how this 
has affected the current fiscal issues facing our country.
    Mr. Kohn. Current fiscal issues? Yes, so I think the--as 
has been said before on this panel and was discussed by Chair 
Yellen, the country still faces some very, very serious long-
term fiscal issues, in terms of the demographics interacting 
with the promises that past Congresses and Presidents have made 
and enacted into law--
    Mr. Pittenger. But do you think Fed policies have 
exacerbated that problem? Do you think that they have--
    Mr. Kohn. No, I don't think Fed policy has exacerbated that 
problem. I think that problem results from acts of Congress--
    Mr. Pittenger. What is your take? Let's just go down the 
line--
    Mr. Kohn. --and--
    Mr. Pittenger. We have 20 seconds. Just go down the line. 
Do you think Fed policies have been a help or a hindrance?
    Ms. McCloskey. The Federal Reserve policies have made it 
easier for the government to borrow money at a cheaper rate, 
but I do think that politicians have shown a proclivity to pass 
spending bills regardless of the price of borrowing.
    Mr. Pittenger. Thank you. Ten seconds. Keep going.
    Mr. Calabria. While the primary cause is, of course, fiscal 
policy, not the Fed, I do think the Fed has facilitated.
    Mr. Taylor. Yes, I agree.
    Mr. Pittenger. Thank you very much. I yield back the 
balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Kentucky, Mr. Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman. And thanks to the panel. 
I appreciate your testimony.
    Just to follow up on Mr. Pittenger's last question, and 
this was a subject that I was exploring with Chair Yellen a 
little bit, but I would like your thoughts on this.
    Obviously, as the Fed begins to taper or continues to taper 
the asset purchase program, and as interest rates begin to 
normalize and elevate, the cost of borrowing to the government 
is going to rise. What counsel do you have to Congress in terms 
of the urgency and the time sensitivity of getting our fiscal 
house in order, in light of Fed monetary policy and tapering 
and the impact that will have on government costs of borrowing?
    Mr. Kohn. I think this is more a medium- to longer-term 
problem, but it is important to act soon, because this is a 
problem having to do with what people are going to count on, in 
terms of support for their health care, support for their 
income, when they retire. So in order to deal with a problem 
that is coming in 10, 15, 20 years, if you are going to reduce 
the trajectory of that support, you have to do it now. It is 
not fair to do it to people who are going to retire in 5 years.
    Ms. McCloskey. I would add, I think there is a tendency to 
kick the can down the road on the debt, especially because some 
of the most astounding numbers, when GDP is 100 percent of--or 
Federal debt is 100 percent of GDP don't come for 25 years 
based on current projections by the CBO. But there is 
substantial economic literature, including by the IMF, that 
says countries with levels of debt-to-GDP that the United 
States currently has right now experienced slower growth, they 
experienced less job creation, there is a crowding out of 
investment. And so when you look at it through that lens, I 
think it is an urgent requirement for Congress to fix the debt.
    Mr. Calabria. I would emphasize, as well, that I agree 
with--basically with both what Don and Abby had said, and I 
will emphasize, as well, we can address long-term fiscal issues 
now without having any impact--without having any negative 
impact on any short-term stabilization goals.
    And while I am skeptical on our ability to stabilize in the 
short run, dealing with our long-term entitlement problem will 
be a positive in that return, not a negative.
    Mr. Taylor. I think it would be a positive to address it 
sooner rather than later. It is part of the uncertainty about 
the debt and how it is going to get resolved. It is still 
lingering around. CBO's projections of long-term debt are as 
pessimistic as they were 4 or 5 years ago. So the sooner this 
can be addressed--it is mainly looking down the road--I think 
the economy will respond positively.
    Mr. Barr. Ms. McCloskey, I was reading with interest your 
written testimony about the impact that financial regulation 
has on low-income Americans. And there have been some voices in 
Washington that have been pretty vociferous and aggressive 
recently in advocating an increase in the minimum wage.
    I would be interested to hear--and I was--I noted your 
testimony about how the consolidation in banking is forcing 
low-income consumers to be underbanked or unbanked and moving 
into alternative outlets. And while at the same time they are 
being forced into alternative services like payday lenders or 
check-cashers, at the same time, we are anticipating the 
Consumer Financial Protection Bureau clamping down on that 
industry, as well, leaving a lot of these low-income folks with 
no other alternatives to access to credit.
    Can you speak to the negative impact that has relative to a 
$7 minimum wage?
    Ms. McCloskey. Sure. I will take your questions, actually, 
one at a time. First, there is a lot of debate about the 
disemployment effects for the minimum wage, but what we do know 
is that the minimum wage is--even if it worked perfectly--a 
really ineffective way to lift the poor out of poverty. This is 
because most people who are impoverished don't have a job at 
all, and the proportion of people who are low-income, very few 
of them actually are in the minimum wage. Minimum wage is 
predominantly given to part-time workers, younger workers, and 
workers 3 or 4 times above the poverty line. So the minimum 
wage, I don't think, is the best answer we could have for the 
challenges facing low-income people.
    Per new rules on alternative credit products, such as 
payday loans, if the CFPB goes forward with that, I think that 
the goal of the CFPB should be to maximize options for low-
income consumers, not to limit them, and that would be a great 
guiding principle for them going forward.
    Mr. Barr. Thank you.
    Ms. McCloskey. Thank you.
    Chairman Hensarling. I yield back.
    The Chair is going to take the privilege of asking the last 
question. We do have votes on the Floor now. And, Dr. Taylor, I 
am under the impression you have traveled the greatest 
distance, so like it or not, you are getting the last question.
    I think at least one of the things I have heard from Chair 
Yellen and this entire panel, at least there is consensus that 
there are limits to what monetary policy can achieve in our 
economy. And so we know that banks are sitting on $1.6 
trillion, $1.7 trillion of excess reserves. So I am trying to 
figure out what further rounds of quantitative easing can 
achieve for us today? What is $2 trillion in excess reserves 
going to do for us that $1.7 trillion hasn't done?
    And, Dr. Taylor, what there hasn't been is a discussion 
today about what is it going to take to unwind this balance 
sheet? And even if we taper each and every month--I am not 
leaving this hearing today with a clear understanding of where 
Chair Yellen intends to take us. Maybe there will be further 
tapering, and maybe not. But even if there is, we are still 
adding to the balance sheet.
    I know that you and my mentor, Senator Phil Gramm, have 
written about this subject in the past, but what are the risks 
associated if she and the other Members of the FOMC choose not 
to taper, and what are the risks associated with unwinding this 
balance sheet? And if you had the job, how would you go about 
it?
    Mr. Taylor. I have been warning about the unwinding since 
the winding up began. It is one of the big concerns I have had 
about it. So the only thing I can say is, the unwinding has to 
be done as strategically, as predictably as possible.
    I don't think it should be postponed. I don't think the 
purchases are doing much good. Look at QE3 as a program. When 
it began, the 10-year bond rate was 1.7 percent. It is now 2.7 
percent. How can you say that program worked? If you can say, 
oh, it was the problem of unwinding. There was always the 
problem of unwinding.
    I think it would be a mistake never to unwind, because 
ultimately that is going to be inflationary. That is the two-
edged sword we have always worried about. It could be risk on 
the downside, the fear of tapering too much, or just the fear 
of tapering. We have experienced that downside, I think, 
already. That is one of the reasons the economy has grown more 
slowly. But there is always the other side.
    And so, it has to unwind at some point. The strategy is 
probably going to involve, for a while, paying higher interest 
on reserves. Mark is quite right. That is going to be hard for 
the Fed itself. And there is the question of capital losses, 
how that is going to be treated, but ultimately, as I answered 
to Mr. Huizenga, you have to get on with it. And at least, they 
are getting on with it. That is a positive.
    Chairman Hensarling. I want to thank each of our witnesses 
for testifying today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    
    [Whereupon, at 5:09 p.m., the hearing was adjourned.]
    
                            A P P E N D I X


                           February 11, 2014
                           
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