[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

                               __________

                             JULY 16, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-92
                           
                           
                           
                           
 
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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
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

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

                              ----------                              
                                                                   Page
Hearing held on:
    July 16, 2014................................................     1
Appendix:
    July 16, 2014................................................    53

                               WITNESSES
                        Wednesday, July 16, 2014

Yellen, Hon. Janet L., Chair, Board of Governors of the Federal 
  Reserve System.................................................     7

                                APPENDIX

Prepared statements:
    Yellen, Hon. Janet L.........................................    54

              Additional Material Submitted for the Record

Duffy, Hon. Sean:
    Letter to President Barack Obama, dated June 18, 2014........    60
Lynch, Hon. Stephen:
    Letter from Americans for Financial Reform, dated July 10, 
      2014.......................................................    66
Yellen, Hon. Janet L.:
    Monetary Policy Report of the Board of Governors of the 
      Federal Reserve System to the Congress, dated July 15, 2014    76
    Written responses to questions submitted by Representative 
      McHenry....................................................   134
    Written responses to questions submitted by Representative 
      Neugebauer.................................................   136
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   141
    Written responses to questions submitted by Representative 
      Ross.......................................................   144
    Written responses to questions submitted by Representative 
      Stutzman...................................................   146
    Written responses to questions submitted by Representative 
      Miller.....................................................   149


                        MONETARY POLICY AND THE



                          STATE OF THE ECONOMY

                              ----------                              


                        Wednesday, July 16, 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, 
Garrett, Neugebauer, McHenry, Bachmann, Pearce, Posey, 
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, 
Stivers, Fincher, Stutzman, Mulvaney, Hultgren, Ross, 
Pittenger, Barr, Cotton, Rothfus, Messer; Waters, Maloney, 
Velazquez, Sherman, Meeks, Lynch, Scott, Green, Cleaver, 
Ellison, Perlmutter, Himes, Carney, Sewell, Foster, Kildee, 
Delaney, Sinema, Beatty, Heck, and Horsford.
    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.
    I now recognize myself for 5 minutes to give an opening 
statement.
    We welcome Chair Yellen for another semi-annual Humphrey-
Hawkins appearance before our committee today. Her appearance 
performs a double duty, as today's hearing represents the 11th 
hearing of our committee's Federal Reserve Centennial Oversight 
Project.
    As all Members know, last week we held a legislative 
hearing on the first piece of legislation to arise from the 
Project, namely the Federal Reserve Accountability and 
Transparency Act (FRAT Act), co-authored by Mr. Huizenga and 
Mr. Garrett.
    Not surprisingly, its introduction was met with howling 
protests and apocalyptic visions from my Democratic colleagues. 
Regrettably, such a reaction has become commonplace on our 
committee. With few exceptions, my Democratic colleagues have 
proven they do not wish to legislate, nor do they wish to 
conduct oversight.
    It causes many to wonder why they ran for Congress in the 
first place. And the answer: they apparently wish to be 
defenders and apologists of the status quo.
    But with the real unemployment rate at 12.1 percent, 46 
million Americans dependent on food stamps, and real median 
income having fallen every year of the Obama Administration, 
the status quo is unacceptable.
    Additionally, when the Federal Reserve helps precipitate 
the financial crisis with loose monetary policy, selectively 
intervenes in distinct credit markets, facilitates our 
unsustainable national debt, blurs the lines between fiscal and 
monetary policy, and has its power vastly expanded, the status 
quo is unacceptable.
    A dramatic increase in power calls for a corresponding 
increase in accountability and transparency, and that is 
precisely what the FRAT Act does. The overwhelming weight of 
evidence is that monetary policy is at its best in maintaining 
stable prices and maximum employment when it follows a clear, 
predictable monetary policy rule.
    I believe the period of the great moderation between 1987 
and 2002 attests to this proposition. Had a clear, predictable 
monetary policy rule like the Taylor Rule been in place 
throughout the last decade, it is likely the financial crisis 
would have been avoided in the first place, or at least 
downgraded to a garden variety recession.
    The FRAT Act in no way, shape, or form dictates monetary 
policy. Anybody who maintains otherwise either hasn't read the 
Act, doesn't understand the Act, or regrettably, they are 
trying to mislead others.
    After the passage of the FRAT Act, if the Fed wants to 
conduct monetary policy based upon viewer text messages from 
the ``American Idol'' television show, it will retain the 
unfettered discretion to do so. If the Fed wishes to conduct 
monetary policy based upon a rousing game of rock-paper-
scissors on odd Tuesdays at the Federal Open Market Committee 
(FOMC), it will retain the unfettered discretion to do so.
    The Fed can set any rule it wishes. It can change the rule 
anytime it wishes. It can deviate from the rule any time it 
wishes.
    Under the FRAT Act, it simply has to report and explain 
this to the rest of us. That is what transparency and 
accountability are all about.
    For those who claim this somehow imposes upon the Fed's 
independence, I note that the Fed Chair testifies before our 
committee and our Senate counterpart twice a year. The Fed 
Chair meets with the Treasury Secretary once a week. And dare I 
mention the continuing revolving door between Fed officials and 
Treasury officials.
    The threat to the Fed's independence does not come from the 
Legislative Branch; it comes from the Executive Branch.
    And again, I reiterate, this has nothing to do with the 
FOMC deliberations or micromanagement of daily Federal Reserve 
operations. The Fed just wants to keep the curtains closed and 
keep any outside eyes from reviewing how well or how badly its 
biggest policies are implemented.
    Who knows whether the Fed's engine needs a tune-up if no 
one will let the mechanic look under the hood? Oh, by the way, 
that is not my quote. It is from a former chairman of this 
committee, Henry B. Gonzalez, whose portrait sits to my right, 
and who very well may have been the single most liberal 
Democrat to ever Chair this committee.
    My, how the times have changed.
    As our witness, Dr. Mark Calabria of the Cato Institute, 
testified last week, the reason it is important for the Fed to 
reveal its rule or operating model is, ``so that it can be 
examined and tested by those outside the Fed. Only under such 
examination can we learn how the model captures the real 
world.''
    The Fed has yet to corner the market on Ph.D. economists or 
monetary policy experts. Quite simply, the Fed's work should 
bear the scrutiny and critical examination of others.
    With respect to the other portions of the FRAT Act, it 
remains an open question whether the Fed should serve any role 
as a prudential regulator. But regardless of the answer to that 
question, the Fed should no longer be permitted to hide its 
prudential regulatory actions behind its monetary policy 
independence cloak.
    This is particularly true when we consider the Fed's 
sweeping powers under the Dodd-Frank Act to control an ever-
increasing share of the American economy.
    When it comes to prudential regulations, it is clearly time 
to hold the Fed to the same openness and transparency standards 
that we require of other Federal agencies. This includes 
mandatory cost-benefit analysis, also known as common sense.
    Finally, many have wondered about the Fed's view of the 
FRAT Act. I have not. During my congressional tenure I have yet 
to encounter one Federal agency that has requested less power, 
fewer resources, or more accountability. I doubt the Fed will 
be the first.
    I now yield to the ranking member for an opening statement.
    Ms. Waters. Thank you, Mr. Chairman.
    And welcome back, Chair Yellen.
    Chair Yellen, it has been 5 months since you last appeared 
before this committee, and in that time, much has changed. 
Absent major changes in our economic outlook, the Federal 
Reserve's program of large-scale asset purchases, known as 
quantitative easing, is set to end in October, and many are 
looking to see what the Fed will do once the program subsides.
    The challenges are significant. Although employment levels 
for many sectors have continued to rise, stable and consistent 
growth is uneven and is not a given.
    In a surprise turn, GDP dropped substantially in the first 
quarter. Unemployment remains unacceptably high, particularly 
for minority groups. African Americans face an unemployment 
rate of 10.7 percent; 7.8 percent for Latinos.
    So let's be clear. While we have made much progress, the 
long-term effects of the financial crisis, the worst since the 
Great Depression, can still be felt by working people and 
people still looking for work in every one of our communities 
across the country.
    Of course, the problem of unemployment has only been made 
worse by Republican intransigence on any number of measures, 
from refusing to invest in our country's job-creating 
infrastructure, to cutting investments in education that will 
fuel the next generation of American leaders, to their refusal 
to extend benefits for our friends and neighbors suffering from 
long-term unemployment.
    And other important programs that create jobs and economic 
growth, such as the Export-Import Bank and the Terrorism Risk 
Insurance Act, remain needlessly tied up in a Republican 
ideological war, creating widespread uncertainty for our 
Nation's job creators.
    In the wake of legislative uncertainty and fiscal 
recklessness, some of my colleagues on the other side of the 
aisle are likewise attempting to stop the Fed from taking 
action to jumpstart our economy and preserve economic 
stability. They have recently proposed harmful legislation that 
would take unprecedented steps to virtually eliminate the 
Federal Open Markets Committee's role in shaping monetary 
policy.
    Instead, Republicans prefer to put decisions related to 
inflation and employment on autopilot, determined arbitrarily 
based upon a rigid set of factors. If enacted, this proposal 
would undercut the Fed's ability to respond to emerging threats 
through rules and requirements designed to paralyze Fed 
rulemaking and to curtail monetary policy discretion.
    This would include concerns emanating from areas like 
social media, which the Fed noted just yesterday appears to be 
substantially stretched. Quite simply, the straitjacket 
approach taken in the Republican bill would leave the Fed with 
few options, powerless to deal with an emerging area of concern 
even if it were to pose a danger to our economy.
    Whether emerging threats to financial stability come from 
social media or elsewhere, this shortsighted legislation would 
be a recipe for disaster.
    Chair Yellen, I am eager to hear your views on how our 
economy would have fared during the crisis and would fare in 
the future with such a regime in place.
    Finally, I am very interested to hear about the Fed's 
progress in meeting the heightened regulatory policy mandate 
entrusted to the institution under the Wall Street Reform Act. 
In particular, I want to urge the Fed to expeditiously 
implement the unfinished provisions of the Act and to 
faithfully enforce the provisions of the law--provisions like 
robust living wills and a strong Volcker Rule that provide the 
tools for preventing the next 2008 crisis.
    Thank you, Mr. Chairman, and 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 Subcommittee, and co-author of the Federal Reserve 
Accountability and Transparency Act, for 3 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. And, as predicted, 
the apocalyptic view has emerged already here in regards to my 
particular bill.
    But I do have to say, Chair Yellen, that I give you credit. 
I watched some of your testimony last evening on TV of what you 
did in the Senate, and I give you credit for coming in front of 
this committee and giving us time; you have been very generous 
with that.
    But we both know that over the past several years the 
Federal Reserve has gained unprecedented power, influence, and 
control over the financial system, while remaining shrouded in 
mystery to the American people.
    This standard operating procedure, I believe, can't 
continue. We must lift the veil of secrecy and ensure that the 
Fed is accountable to the people's representatives. This is not 
about your independence or the independence of the Federal 
Reserve, but about accountability and transparency.
    And at this point I won't go on my oversight rant that I 
did back at our hearing on the bill, where I just don't 
understand why many of my colleagues aren't interested in 
embracing the responsibility of their job to go and exercise 
oversight, and have a lack of interest in doing that.
    But last week my colleague, Scott Garrett, and I introduced 
H.R. 5018, and this legislation will start to pull back the 
curtain at the Fed to increase accountability and transparency.
    The Dodd-Frank Act bestowed massive new regulatory 
authority upon the Federal Reserve, yet the Fed is not required 
to conduct cost-benefit analysis when it considers new 
regulations, unlike all the other financial regulators, such as 
the SEC and the CFTC.
    Additionally, this legislation urges the Fed to adopt a 
rules-based approach, as the chairman had talked about, to the 
monetary policy, instead of the continued ad hoc strategy 
currently being employed. Should the Fed fail to adopt a rules-
based approach, it would trigger an audit of the Fed's books, 
and unlike the view that this is going to somehow chill this, I 
can tell you that many people believe this doesn't go far 
enough.
    In fact, I support that as well, and I never thought that I 
would agree with the former chairman, Henry Gonzalez, about 
doing an audit of the Fed, but if it was good enough for him in 
1993, I think it is probably good enough for us here at the 
centennial, as well.
    But additionally, this legislation urges the Fed to--
sorry--economists across the ideological spectrum have called 
upon the Fed to set this kind of monetary policy according to a 
mathematical rule that uses economic data, such as the rates of 
inflation and unemployment and to share that rule with the 
public.
    We cannot have a power entity within the Federal Government 
without--just operating on a whim.
    This legislation codifies the common-sense principle of 
using a rules-based approach when determining monetary policy, 
and I believe it is time to bring the Federal Reserve out of 
the shadows and provide hardworking taxpayers with a more open 
and transparent government.
    My bill last week was labeled the ``Spanish Inquisition,'' 
and all kinds of other things were thrown around. But again, I 
believe it is our job, our constitutional duty, our 
constitutional responsibility, to work with you and to have 
oversight of the operations.
    And with that, Mr. Chairman, I yield back. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New York, Mr. 
Meeks, the ranking member of our Financial Institutions 
Subcommittee, for a minute and a half.
    Mr. Meeks. Thank you, Mr. Chairman.
    And thank you, Madam Chair.
    Chair Yellen, it is with great pleasure that we welcome you 
here again this morning. And I want to extend my deep 
appreciation to you and your staff for the significant amount 
of time you have spent on the Hill and also for welcoming 
congressional staffers at the Federal Reserve. That is 
tremendously important.
    I, too, was listening to some of your testimony yesterday 
before the Senate Banking Committee, and you mentioned that the 
United States labor markets are far from healthy.
    I applaud your remarks, and I think that you are absolutely 
right.
    The latest data from the Bureau of Economic Analysis show 
that Americans' personal income is barely growing at a tepid 
rate of only 0.3 percent. In fact, other reports indicate that 
the American real wages are still lower than before the crisis.
    Members of this chamber are closest to the American people 
that we represent in Congress, and I can assure you that we 
hear loudly and clearly from them that they are not feeling 
this recovery.
    In fact, when preparing for this hearing I took to social 
media, just asking them what questions they would like me to 
ask you, and what were their current conditions. And they 
said--too many said, especially the younger Americans, that 
they are struggling to get jobs, and when they do get jobs, the 
wages are barely sufficient to make ends meet. Too many have 
been unemployed for more than 2 years or 3 years or more, and 
they have exited the job market out of frustration.
    Too many are concerned about their job security and their 
ability to save or invest in their future.
    Thank you, and I wait to hear your testimony, Madam Chair.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Alabama, Ms. 
Sewell, for a minute and a half.
    Ms. Sewell. Mr. Chairman and Ranking Member Waters, I want 
to add to the voice--add my voice to the choir of those 
welcoming Chair Yellen here today. Today's hearing with Chair 
Yellen is critically important as we receive an update on the 
state of the economy and the Federal Reserve's essential role 
in our economic recovery.
    I want to applaud Chair Yellen and the entire Federal 
Reserve for their diligent work towards fulfilling its 
congressional mandate of helping maximize employment, stabilize 
prices, and moderate long-term interest rates. Thanks in part 
to the Federal Reserve's insight and pragmatic monetary 
policies, our economy continues to experience positive and 
steady economy growth.
    I also want to encourage the Federal Reserve to continue to 
work as quickly as possible to enact rules that fulfill the 
promise of strengthening our financial system and protecting 
our consumers.
    As this committee continues to engage in conversation with 
key individuals surrounding the state of our national economy, 
we must be ever vigilant in working to ensure that we avoid any 
and all self-inflicted economic setbacks. It is important that 
we hear from Chair Yellen and work to pass legislation that 
fosters a stronger and more resilient financial system, rather 
than enacting strict policy rules that would impair the Federal 
Reserve's ability to do its job.
    We must develop and promote fair and balanced monetary 
economic policies that ensure the long-term growth and vitality 
of our economy. The American people deserve nothing less.
    Thank you.
    Chairman Hensarling. The gentlelady yields back.
    Before introducing our witness, I wish to make a scheduling 
announcement. Contrary to the Chair's last appearance, where 
she stayed to answer all Member questions, she has requested to 
be excused at 1 p.m. for today's hearing and for future 
hearings, so I wish to alert Members of that. I have neither 
the desire nor the ability to hold the Chair against her will, 
but I am disappointed in the change of heart.
    Notwithstanding my disappointment, Madam Chair, you are 
nonetheless welcome. We welcome your testimony today.
    Chair Yellen has previously testified before our committee, 
so I believe she needs no further introduction. Without 
objection, Chair Yellen's written statement will be made a part 
of the record.
    Chair Yellen, you are now recognized for your oral 
presentation of your testimony.

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

    Mrs. Yellen. Chairman Hensarling, Ranking Member Waters, 
and members of the committee, I am pleased to present the 
Federal Reserve's semi-annual 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 a few words about financial stability.
    The economy is continuing to make progress toward the 
Federal Reserve's objectives of maximum employment and price 
stability. In the labor market, gains in total nonfarm payroll 
employment averaged about 230,000 per month over the first half 
of this year, a somewhat stronger pace than in 2013, and enough 
to bring the total increase in jobs during the economic 
recovery thus far to more than 9 million.
    The unemployment rate has fallen nearly 1.5 percentage 
points over the past year, and stood at 6.1 percent in June, 
down about 4 percentage points from its peak. Broader measures 
of labor utilization have also registered notable improvements 
over the past year.
    Real gross domestic product is estimated to have declined 
sharply in the first quarter. The decline appears to have 
resulted mostly from transitory factors, and a number of recent 
indicators of production and spending suggest that growth 
rebounded in the second quarter, but this bears close watching.
    The housing sector, however, has shown little recent 
progress. While this sector has recovered notably from its 
earlier trough, housing activity leveled off in the wake of 
last year's increase in mortgage rates, and readings this year 
have, overall, continued to be disappointing.
    Although the economy continues to improve, the recovery is 
not yet complete. Even with the recent declines, the 
unemployment rate remains above Federal Open Market Committee 
participants' estimates of its longer-run normal level. Labor 
force participation appears weaker than one would expect based 
on the aging of the population and the level of unemployment.
    These and other indications that significant slack remains 
in labor markets are corroborated by the continued slow pace of 
growth in most measures of hourly compensation.
    Inflation has moved up in recent months but remains below 
the FOMC's 2 percent objective for inflation over the longer 
run. The personal consumption expenditures, or PCE price index, 
increased 1.8 percent over the 12 months through May. Pressures 
on food and energy prices account for some of the increase in 
PCE price inflation.
    Core inflation, which excludes food and energy prices, rose 
1.5 percent. Most committee participants project that both 
total and core inflation will be between 1.5 and 1.75 percent 
for this year as a whole.
    Although the decline in GDP in the first quarter led to 
some downgrading of our growth projections for this year, I and 
other FOMC participants continue to anticipate that economic 
activity will expand at a moderate pace over the next several 
years, supported by accommodative monetary policy, a waning 
drag from fiscal policy, the lagged effects of higher home 
prices and equity values, and strengthening foreign growth.
    The committee sees the projected pace of economic growth as 
sufficient to support ongoing improvement in the labor market 
with further job gains. And the unemployment rate is 
anticipated to decline toward its longer-run, sustainable 
level.
    Consistent with the anticipated further recovery in the 
labor market, and given that longer-term inflation expectations 
appear to be well-anchored, we expect inflation to move back 
toward our 2 percent objective over coming years. As always, 
considerable uncertainty surrounds our projections for economic 
growth, unemployment, and inflation. FOMC participants 
currently judge these risks to be nearly balanced, but to 
warrant monitoring in the months ahead.
    I will now turn to monetary policy. The FOMC is committed 
to policies that promote maximum employment and price 
stability, consistent with our dual mandate from Congress. 
Given the economic situation that I just described, we judge 
that a high degree of monetary policy accommodation remains 
appropriate.
    Consistent with that assessment, we have maintained the 
target range for the Federal funds rate at 0 to 1/4 percent and 
have continued to rely on large-scale asset purchases and 
forward guidance about the future path of the Federal funds 
rate to provide the appropriate level of support for the 
economy.
    In light of the cumulative progress toward maximum 
employment that has occurred since the inception of the Federal 
Reserve's asset purchase program in September 2012, and the 
FOMC's assessment that labor market conditions would continue 
to improve, the committee has made measured reductions in the 
monthly pace of our asset purchases at each of our regular 
meetings this year.
    If incoming data continue to support our expectation of 
ongoing improvement in labor market conditions and inflation 
moving back toward 2 percent, the committee likely will make 
further measured reductions in the pace of asset purchases at 
upcoming meetings, with purchases concluding after the October 
meeting. Even after the committee ends these purchases, the 
Federal Reserve's sizable holdings of longer-term securities 
will help maintain accommodative financial conditions, thus 
supporting further progress in returning employment and 
inflation to mandate-consistent levels.
    The committee is also fostering accommodative financial 
conditions through forward guidance that provides greater 
clarity about our policy outlook and expectations for the 
future path of the Federal funds rate. Since March, our post-
meeting statements have included a description of the framework 
that is guiding our monetary policy decisions.
    Specifically, our decisions are and will be based on an 
assessment of the progress, both realized and expected, toward 
our objectives of maximum employment and 2 percent inflation. 
Our evaluation will not hinge on one or two factors, but 
rather, will take into account a wide range of information, 
including measures of labor market conditions, indicators of 
inflation, and long-term inflation expectations, and readings 
on financial developments.
    Based on its assessment of these factors, in June the 
committee reiterated its expectation that the current target 
range for the Federal funds rate likely will be appropriate for 
a considerable period after the asset purchase program ends, 
especially if projected inflation continues to run below the 
committee's 2 percent longer-run goal, and provided that 
inflation expectations remain well-anchored.
    In addition, we currently anticipate that even after 
employment and inflation are near mandate-consistent levels, 
economic conditions may for some time warrant keeping the 
Federal funds rate below levels that the committee views as 
normal in the longer run. Of course, the outlook for the 
economy and financial markets is never certain, and now is no 
exception. Therefore, the committee's decisions about the path 
of the Federal funds rate remain dependent on our assessment of 
incoming information and the implications for the economic 
outlook.
    If the labor market continues to improve more quickly than 
anticipated by the committee, resulting in faster convergence 
toward our dual objectives, then increases in the Federal funds 
rate target likely would occur sooner and be more rapid than 
currently envisioned. Conversely, if economic performance is 
disappointing, then the future path of interest rates likely 
would be more accommodative than currently anticipated.
    The committee remains confident that it has the tools it 
needs to raise short-term interest rates when the time is right 
and to achieve the desired level of short-term interest rates 
thereafter, even with the Federal Reserve's elevated balance 
sheet. At our meetings this spring, we have been constructively 
working through the many issues associated with the eventual 
normalization of the stance and conduct of monetary policy.
    These ongoing discussions are a matter of prudent planning 
and do not imply any imminent change in the stance of monetary 
policy. The committee will continue its discussions in upcoming 
meetings, and we expect to provide additional information later 
this year.
    The committee recognizes that low interest rates may 
provide incentives for some investors to reach for yield, and 
those actions could increase vulnerabilities in the financial 
system to adverse events. While prices of real estate, 
equities, and corporate bonds have risen appreciably and 
valuation metrics have increased, they remain generally in line 
with historical norms.
    In some sectors, such as lower-rated corporate debt, 
valuations appear stretched and issuance has been brisk. 
Accordingly, we are closely monitoring developments in the 
leveraged-loan market and are working to enhance the 
effectiveness of our supervisory guidance.
    More broadly, the financial sector has continued to become 
more resilient as banks have continued to boost their capital 
and liquidity positions and growth in wholesale short-term 
funding in financial markets has been modest.
    In sum, since the February monetary policy report, further 
important progress has been made in restoring the economy to 
health and in strengthening the financial system. Yet too many 
Americans remain unemployed, inflation remains below our 
longer-run objective, and not all of the necessary financial 
reform initiatives have been completed.
    The Federal Reserve remains committed to employing all of 
its resources and tools to achieve its macroeconomic objectives 
and to foster a stronger and more resilient financial system.
    Thank you. I would be pleased to take your questions.
    [The prepared statement of Chair Yellen can be found on 
page 54 of the appendix.]
    Chairman Hensarling. The Chair now recognizes himself for 
questions.
    Chair Yellen, my first question has to do with Mr. 
Huizenga's and Mr. Garrett's legislation. On the one hand, it 
has only been in the public domain for a little over a week; on 
the other hand, it is only 31 pages long. But have you had a 
chance to read and review this legislation?
    Mrs. Yellen. I have had the chance to review the 
legislation, yes.
    Chairman Hensarling. Yesterday, before the Senate Banking 
Committee, you opined that under this legislation the Fed would 
not have had the flexibility it needed to take the actions that 
it took during the financial crisis.
    I would commend for your review Section 2(e), on page 7 of 
the legislation, entitled, ``Changing Market Conditions,'' 
which reads in part, ``Nothing in this Act shall be construed 
to require that the plans with respect to the systematic 
quantitative adjustment of the Policy Instrument Target 
described under Subsection (c)(2) be implemented if the Federal 
Open Market Committee determines that such plans cannot or 
should not be achieved due to changing market conditions.''
    I personally don't believe the language could have been any 
clearer. It is not the intent of the legislation--and I would 
certainly welcome any policy feedback from your experts to 
assure that it achieves that purpose. But I believe the 
language is about as clear as the language could possibly be.
    Chair Yellen, let's talk a little bit about independence. 
Larry Summers, in a famous paper in the Journal on Money, 
Credit & Banking on central bank independence, measures 
independence as, ``The institutional relationship between the 
central bank and the executive, the procedure to nominate and 
dismiss the head of the central bank, the role of government 
officials on the central bank board, and the frequency of 
contacts between the executive and the bank.''
    Do you agree or disagree with his characterization of 
Federal Reserve independence?
    Mrs. Yellen. I see Federal Reserve independence--of course, 
we are a creature of Congress. We have a responsibility to 
report to Congress. And you use the term ``Executive Branch,'' 
I think, in the material--
    Chairman Hensarling. Well, I used the term that Larry 
Summers used in his paper, yes.
    Mrs. Yellen. I see us as needing to report regularly to 
Congress about our conduct of monetary policy in the economy.
    Chairman Hensarling. Let me ask you this question, Chair 
Yellen. I think it is well-established--I am under the 
impression, again, that you are required to appear before our 
committee and the Senate Banking Committee on a semi-annual 
basis. Is it true that there is a weekly meeting between you 
and the Secretary of the Treasury?
    Mrs. Yellen. Many weeks. It is not every single--
    Chairman Hensarling. Most weeks.
    Mrs. Yellen. --week. Many weeks we get together and confer 
about matters of mutual concern. But we are completely 
independent from the Executive Branch in the conduct of--
    Chairman Hensarling. Speaking of matters of mutual concern 
and independence, I am certainly not interested in a transcript 
of a private luncheon, but would you be willing to report to 
this committee on the matters of mutual concern that were 
discussed in any agreements reached between Treasury and the 
Federal Reserve?
    Mrs. Yellen. I am not willing to report on a regular basis 
on private conversations that I have, but any agreements that 
were reached certainly would be in the public domain. But our 
conversations do not result--
    Chairman Hensarling. How would they get into the public 
domain?
    Mrs. Yellen. If there were an agreement--
    Chairman Hensarling. If you don't report them, how do they 
get into the public domain--agreements between the Federal 
Reserve and Treasury?
    Mrs. Yellen. There was, for example, during the financial 
crisis, a question as to what is the appropriate role of the 
Federal Reserve in lending programs and when does the Treasury 
need to be involved? When is there a fiscal component?
    And those discussions led to a formal agreement between the 
Treasury and the Federal Reserve--
    Chairman Hensarling. My time is starting to wind down.
    If I could address another matter, on page three of your 
testimony, it reads, ``Even after the Committee ends these 
purchases,'' so we are speaking of tapering, ``the Federal 
Reserve's sizable holdings of longer-term securities will help 
maintain accommodative financial conditions, thus supporting 
further progress in returning employment and inflation to 
mandate-consistent levels.''
    Is there any current plan or any current commitment to 
reduce the Fed's balance sheets to historic levels? And I am 
not speaking of what you may want to do or what you might do, 
but is there any current commitment or plan to reduce the Fed's 
balance sheet to historic levels?
    Mrs. Yellen. As the FOMC stated in 2012, I believe, we 
issued a set of exit principles in which one of the principles 
was that over time we sought to normalize the size of our 
balance sheet and to bring it down to the smallest level 
consistent with the efficient and effective conduct of monetary 
policy.
    Chairman Hensarling. Chair Yellen, would you characterize 
that, then, as a current plan or current commitment to reduce 
the Fed's balance sheet to historic levels?
    Mrs. Yellen. I would characterize it as a current plan. We 
are discussing our principles for the normalization of policy. 
And as I indicated in my testimony, I expect we will be able to 
give more complete guidance later this year when those 
discussions are complete.
    And I fully expect that we would reiterate an intention 
over time to reduce the size of our balance sheet.
    Chairman Hensarling. Thank you.
    The Chair now recognizes the ranking member.
    Ms. Waters. Thank you very much.
    Legislation that was offered by the Republicans on our 
committee last week would require the Federal Reserve's Federal 
Open Market Committee to issue a rule to dictate the course of 
monetary policy.
    In your view, how feasible would it be to design a rule 
that would act as an appropriate substitute for independent 
judgment and discretion in the determination of monetary 
policy? And do you expect that such a rule could adequately 
respond to the range of economic data that affect the economy 
on any given day?
    Mrs. Yellen. I feel, Congresswoman, that it would be a 
grave mistake for the Fed to commit to conduct monetary policy 
according to a mathematical rule. No central bank does that.
    I believe that although under the legislation we could 
depart from that rule, the level of short-term scrutiny that 
would be brought on the Fed in real-time reviews of our policy 
decisions would essentially undermine central bank independence 
in the conduct of monetary policy.
    And I believe that global experience has shown that we have 
better macroeconomic performance when central banks are removed 
from short-term political pressures and given the independence 
to, within a framework in which their goals are clear--and in 
our case those are specified by Congress--given operational 
independence to decide how to conduct monetary policy.
    The Federal Reserve is the most transparent central bank, 
to my knowledge, in the world. We have made clear how we 
interpret our mandate and our objectives and provide extensive 
commentary and guidance on how we go about making monetary 
policy decisions.
    We do, I should say, routinely consult the recommendations 
of a whole variety of rules in thinking about monetary policy. 
And I have indicated previously in speeches I have made that 
these can be useful starting places or guides to policy. So I 
am not 100 percent negative on using rules in thinking through 
what we should do.
    But I think it is very important to understand that had we 
followed, in the aftermath of the financial crisis, the 
recommendations of any of the simple rules that are widely 
discussed, the outcomes would have been even more disappointing 
than what we experienced. Even with the Federal Reserve's 
conduct of policy departing very substantially from what those 
rules would have recommended, we have had a long, slow grind to 
get this economy recovering.
    We actually could not have followed the recommendations of 
the simple rule. Almost every rule would have called, during, 
for example, 2011 and 2012, for negative interest rates, 
something that is impossible.
    And that is one reason that we began asset purchases. We 
needed a further tool.
    Given the fact that we have had unusual headwinds 
constraining this recovery, I believe it is utterly necessary 
for us to provide more monetary policy accommodation than those 
simple rules would have suggested.
    And I think history would show that following any of those 
simple rules would have given us very much worse performance. 
So I feel it would be a mistake.
    Although those rules sometimes do have merit in normal 
times, during the great moderation when there were relatively 
few shocks, and the Federal Reserve's behavior was very rule-
like; it corresponded to some of those rules. They can work 
well, but not always.
    We can't be mathematically bound to a simple formula.
    Ms. Waters. I would like to thank you for that explanation. 
You could not be clearer.
    And you could not have explained better to this committee 
why you certainly could not operate with some cookie-cutter 
rule when in fact, as you explained, the headwinds that you 
were confronted with or that the Feds were confronted with 
required discretion. It absolutely required that you had the 
flexibility to deal with unforeseen circumstances in having to 
make your decisions. And I want to thank you very much.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Michigan, Mr. Huizenga, vice chairman of our Monetary 
Policy Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    I have a quick question, Chair Yellen. Have you read my 
bill--the Garrett-Huizenga bill?
    Mrs. Yellen. I have looked at the bill.
    Mr. Huizenga. You have looked at it? Okay. Well, that is 
good news. I will, then, I guess, just refresh your memory and 
address my colleague from California.
    We anticipated that might be a concern of yours, so on page 
8 of the bill, under subsection 2, the GAO approval of an 
update--and we are not going to get into whether there should 
or shouldn't be the rule or does the rule go far enough, et 
cetera, et cetera.
    However, it does say, ``Upon determining that plans 
described in paragraph (1) cannot or should not be achieved, 
the Federal Open Market Committee shall submit an explanation 
for that determination and an updated version of the Directive 
Policy Rule to the Comptroller General of the United States and 
the appropriate congressional committees not later than 48 
hours after making the determination.''
    It goes on to say that if they determine that you are not 
in compliance with the new rule, then you get audited. It does 
not say that you cannot change the rule. What it says is you 
have to notify us and notify them.
    I am a history buff, so I went back and did a little 
history. We got to where we are today because of the Employment 
Act of 1946, where Congress felt it needed to lay out what Fed 
policy was.
    In the 1970s they felt--Congress, my colleagues, felt it 
was too vague and therefore created a bill that would 
strengthen and clarify the 1946 Act. It actually had three 
goals, not two. It is not a dual mandate, it is actually a tri-
mandate by Congress: stable prices; maximized employment; and 
moderate long-term interest rates.
    So on page three of your testimony you are talking about--
and I am going to quote, it is the second paragraph down--
``Even after the Committee ends these purchases, the Federal 
Reserve's sizable holdings of longer-term securities will help 
maintain accommodative financial conditions, thus supporting 
further progress in returning employment and inflation to 
mandate-consistent levels.''
    Where in the Humphrey-Hawkins Act--which was signed, oh, by 
the way, I'm sorry, my colleagues, by Jimmy Carter in 1978 
after Democrats in the House and the Senate passed the bill--do 
we lay out a 2 percent inflation rate? Do we do that?
    Mrs. Yellen. You do not make specific in the legislation--
    Mr. Huizenga. Do we lay out exactly what employment rates 
or unemployment rates should be?
    Mrs. Yellen. The FOMC has--
    Mr. Huizenga. No, no, I'm sorry, Congress--the bill that 
was passed by Democrats in the House and the Senate and signed 
by Jimmy Carter, does that mandate what the employment rate 
should be?
    Mrs. Yellen. The bill uses the terms, as you said, 
``maximum employment'' and ``price stability.''
    Mr. Huizenga. Okay, so we don't prescriptively say it is 
going to be a 2 percent inflation rate target and 5 or 6 
percent employment rate.
    Mrs. Yellen. It is obviously language of the type that is 
in the legislation. We need to interpret--
    Mr. Huizenga. Do we lay it out?
    Mrs. Yellen. You do not, but we have tried to--
    Mr. Huizenga. Okay. All right. There we go.
    So I am curious how us requesting a rule--a simple step in 
most people's view--a simple rules-based policy, how is that 
different than the mandate--the tri-mandate that was laid out 
in Humphrey-Hawkins and defended every single day by others in 
this committee?
    How, when we are asking for what the rule is--not telling 
you what the rule is, not being prescriptive or even 
descriptive, but just saying, ``Set a rule and then let us know 
so that we can have oversight.'' I here will reference my rant 
on oversight to my colleagues who can go back and watch it on 
YouTube if they weren't in the committee room.
    So if we can get as detailed as the Humphrey-Hawkins Act, 
or lack of detail, why can't we have a rule and have you all at 
the Fed accept that? And if you are not willing to accept it 
because you are concerned about your independence--is that one 
of your reasons? I don't want to put words in your mouth. Is 
that one of your reasons why you don't want to sign on to the 
Garrett-Huizenga bill?
    Mrs. Yellen. I am not aware of any literature which 
establishes that a central bank, whether it makes it public or 
not, adopting a rule is the most desirable way to run monetary 
policy. And I would say that many--
    Mr. Huizenga. You might want to talk to the Europeans about 
that and a lot of other economists, as well.
    Mrs. Yellen. What the Europeans do is the ECB has been 
given a great freedom and they have defined a price stability 
objective, and they certainly do not--
    Mr. Huizenga. Here is my last request: If the Garrett-
Huizenga bill isn't good enough, I would like to know when the 
Fed is going to call for a rescission of the Humphrey-Hawkins 
Act because it impedes your independence.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Thank you.
    And welcome, Madam Chair.
    I would like to ask you about the Fed's exit from its 
monetary stimulus. As you testified, the Fed is currently on 
pace to wind down its QE3 purchases by the end of October. But 
right now the market isn't expecting the Fed to start raising 
interest rates until the third quarter of 2015.
    So between October of this year and the third quarter of 
2015, what are the main tools that the Fed anticipates using to 
exit from its monetary stimulus?
    Mrs. Yellen. Well, thank you.
    As I indicated, if the committee continues to see 
improvement in the labor market and continues to forecast 
ongoing progress in the labor market over time, and inflation 
moving back toward 2 percent, it is our intention to wind down 
our asset purchases, to conclude them after the October 
meeting.
    Beyond that, we would maintain the zero to quarter percent 
range for the Federal funds rate that we have maintained now 
for many years. And eventually, as the economy makes further 
progress, we would begin to raise our target for short-term 
interest rates.
    And while we have not laid out a specific timeline for 
doing that, we have given a general principle, which is we will 
be assessing what is our actual progress and then our expected 
future progress toward obtaining the two objectives of maximum 
employment and price stability. So we will be looking at how 
far we are from our objectives and how rapidly those gaps are 
closing.
    Now that is a matter that we can't be certain about. We 
make forecasts, but incoming data causes us, over time, to 
change those forecasts. So I can't be specific about what the 
timing of an ultimate increase in our target for short-term 
interest rates would be, but we will be assessing incoming 
information.
    Now, we do give participants in the FOMC--these are not 
FOMC policy statements, but we have provided in the monetary 
policy report and we provide every 3 months--information about 
each FOMC participant's assessment of both the economic outlook 
and their views on the likely path of monetary policy. So 
again, this is each individual's view walking in to our June 
meeting.
    As a committee we have to transform that into a single 
policy, but it gives some indication, I think. And given their 
expectations for progress in the labor market and inflation, at 
the beginning of our June meeting, FOMC participants, almost 
all of them, saw it appropriate to begin raising our target for 
the Federal funds rate sometime during 2015. The median 
participant saw the Federal funds rate by the end of that year 
standing around 1 percent.
    So while there is no exact timing, obviously, in 2015, it 
is in some sense roughly consistent with what you said. But 
market expectations are--but again, I want to emphasize that 
the actual progress we see in the labor market and inflation 
and our general assessment of the labor market could change 
that over time, so there is no mechanical formula and no clear 
date.
    Mrs. Maloney. Will the Fed start changing the interest rate 
on excess reserves held at the Fed during this time?
    Mrs. Yellen. When we decide to raise our target for short-
term interest rates a key tool will be to raise the interest 
rate we pay on excess reserves. So we would only raise the 
interest rate on excess reserves when we have determined that 
the time has come to begin raising short-term interest rates 
more generally. That will be a key tool that we will use.
    Mrs. Maloney. Last week Federal Reserve Vice Chairman 
Stanley Fischer gave a speech in which he suggested that adding 
a financial stability mandate to the overall mandates of all 
the U.S. financial regulators could help improve financial 
stability. Can you comment on the effects of adding an explicit 
financial--I guess I will get that response in writing. My time 
has expired. Thank you.
    Thank you--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Alabama, Mr. 
Bachus, the chairman emeritus of our committee.
    Mr. Bachus. Thank you.
    Chair Yellen, let me begin by saying that this will be my 
final Federal monetary policy hearing that I will participate 
in as a Member of Congress because I am retiring at the end of 
this year.
    During my 22 years of service on this committee, including 
my 6-year term as ranking member and then chairman, I have 
heard testimony from Federal Reserve Chairs Alan Greenspan, Ben 
Bernanke, and now, of course, yourself. My observation during 
these times of both prosperity and during times of financial 
crisis is that we have leaders and a professional staff at the 
Fed who have conducted themselves with honor and who have been 
true public servants.
    So let me thank you and your professional staff, as well as 
your predecessors, for serving the people of America in this 
most important and tremendously demanding position.
    Mrs. Yellen. Thank you, Congressman. I appreciate that.
    Mr. Bachus. Thank you.
    We have seen that FSOC, where the Fed is obviously a key 
player, exercise the authority granted by Dodd-Frank to 
designate institutions as systemically important financial 
institutions (SIFIs). This has included asset managers and 
insurance companies, which has been somewhat controversial.
    My experience is that there is often a greater resistance 
to a designation or a ruling when the parties feel they haven't 
been consulted or the process is not transparent enough. So one 
of the approaches that is attracting some interest is to 
require that companies being considered for a SIFI designation 
be provided with specific reasons why and also a description of 
steps they could take so they might not be named as SIFIs. And 
this would be between the particular company and the Fed; it 
wouldn't be a public discussion.
    Do you agree or would you consider that as a reasonable 
approach? It would bring greater transparency to the SIFI 
designation process. And I think laying out a clear methodology 
actually leads to more certainty and confidence in the process, 
and I think would be accepted more readily.
    Mrs. Yellen. This is clearly a very important thing that 
happens to a company when it is designated, and I believe it 
utterly has to be given every opportunity to understand the 
logic of why the FSOC is thinking that it poses systemic risk 
and every opportunity to present its own analysis of the issues 
and to interact with the staff and having a very good and frank 
dialogue and back and forth.
    I believe that is part of the process. And the firms are 
given every opportunity to intensively interact with the 
committee and its staff before any organization is designated 
as a SIFI. That is completely appropriate.
    Now, in that process there is a great deal of confidential 
information, so I don't feel it is appropriate for that to take 
place in the public domain.
    Mr. Bachus. And I would agree with you. I am talking about 
a give and take between the parties.
    Mrs. Yellen. I think that is absolutely appropriate. And to 
the best of my knowledge--I have not served on FSOC when any 
institution has been designated--when the institution gets into 
the latter stages of the process, there is a great deal of back 
and forth.
    Mr. Bachus. Thank you.
    Let me talk about some demographic influences on labor 
force participation, because I know that concerns you; it 
concerns all of us.
    Part of it is the rise in the service sector employment, 
where we have gone to a lot of part-time employment. Some good 
reasons by choice, some not. But also, many analysts think that 
it is being driven in part by an aging U.S. population, 
particularly as retirees exit the workforce.
    Does the Fed take that into consideration when they talk--
if labor force participation doesn't pick up and growth does, 
how does that affect your decision to keep rates low?
    Chairman Hensarling. A very brief answer, please.
    Mrs. Yellen. I fully agree with your point. Demographics 
and an aging population are driving and should be expected to 
drive the labor force participation rate down.
    So the question is, has labor force participation fallen 
more than would be expected based on demographics? And my 
personal judgment is yes, it has fallen somewhat more than 
that, but aging is a very important downward force, and that is 
what I expect going forward.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Madam Chair, with the prospect of 0 percent interest rates 
coming to an end, some have warned that this could unduly 
hamper economic growth. Yet artificially low interest rates 
pose a real threat of creating asset bubbles.
    What has the Fed seen in the market concerning asset 
prices, and does the threat of a bubble outweigh any slowdown 
in economic growth?
    Mrs. Yellen. The Federal Reserve has been increasingly and 
intensely focused on financial stability, and we understand 
that maintaining interest rates at low levels for a long time 
can incent reach for yield or asset bubbles. So we are 
monitoring this very closely, and that is, in part, why I 
referenced some of these trends in my opening testimony.
    My general assessment at this point is that threats to 
financial stability are at a moderate level and not a very high 
level. Some of the things that I would look at in assessing 
threats to financial stability to see if they are broad-based: 
broad measures of asset prices--of equities, of real estate, of 
debt--do they seem to be out of line with historical norms?
    And I think there the answer is no. Some things may be on 
the high side and there may be some pockets where we see 
valuations becoming very stretched, but not generally.
    Ms. Velazquez. Thank you.
    Mrs. Yellen. The use of leverage is not broad-based. It 
hasn't increased, and credit growth is not at alarming levels 
by any means.
    Ms. Velazquez. Thank you.
    Although the economy is recovering at an accelerated pace, 
many experts have warned of the disconnect between stock market 
gains and overall economic growth. What impact are the Fed's 
current monetary policies having on this phenomenon?
    Mrs. Yellen. An environment of low interest rates is one 
factor that affects asset prices generally, including equities. 
And so a low interest rate policy I think partially accounts 
for why housing prices have rebounded and also is an influence 
on equity prices, but it is not the only influence.
    The economy is recovering and earnings have been--
    Ms. Velazquez. But do you find this an issue to be 
concerning to you? Is it concerning to you?
    Mrs. Yellen. The issue being that monetary policy affects 
asset prices?
    Ms. Velazquez. Yes.
    Mrs. Yellen. That is one of the--
    Ms. Velazquez. The disconnect between stock market gains 
and overall economic growth?
    Mrs. Yellen. I don't have a view--the Federal Reserve 
doesn't take a view as to what the right level of equity or 
asset prices should be, but we do try to monitor to see if they 
are rising outside of levels consistent with historic norms.
    And as I indicated, in spite of the fact that equity 
prices' broad indices have risen substantially, price equity 
ratios and other measures are not outside of historical norms. 
And I don't know what the right level of prices is, but in that 
sense I am not seeing--
    Ms. Velazquez. Thank you.
    Mrs. Yellen. --alarming warning signals.
    Ms. Velazquez. As we all know, the economy has been 
creating jobs at an accelerating pace recently, despite fears 
that tapering the Fed's qualitative easing could slow the 
recovery.
    In your opinion, is this strong evidence that the economy 
has turned the corner and now is healthy enough to self-sustain 
the recovery?
    Mrs. Yellen. I am optimistic about the economy, and that is 
reflected in the forecasts that are included in the monetary 
policy report. We had a very surprising negative growth in the 
first quarter, which is a number that in a way doesn't seem 
consistent with the underlying momentum in the economy and many 
indicators of spending and production.
    I do think the economy is recovering and that growth is 
picking up and that we have sufficient growth to support 
continued improvement in the labor market. And we have seen, 
maybe not progress over many years at the pace that would be 
ideal, but real progress that will continue.
    Ms. Velazquez. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, chairman of our Capital Markets Subcommittee.
    Mr. Garrett. Thank you, Mr. Chairman.
    I have a couple of questions, Madam Chair.
    Finally, after many, many months, we got responses to the 
questions that we put to you months ago. One of the questions 
came about because one of the Fed Governors has stated that 
they believe that a failure of a large broker-dealer would be 
destabalizing to the economy.
    So we asked you, do you support expanding the Fed's 
discount window access to broker-dealers and other nonbanks 
during turbulent economic times to expand your regulator. You 
said no. You said, ``I do not favor expanding the Fed's 
discount window to broker-dealers and nonbanks.''
    Instead, you say you support the application of stringent 
capital standards and liquidity requirements, and you also said 
that you support the development of resolution regimes. I get 
that.
    If those regulations and the resolution regimes do not 
work, do you then rule out access to broker-dealers and other 
nonfinancial institutions to the discount window? Is that what 
you are saying, that you rule that out?
    Mrs. Yellen. Under the terms of the Dodd-Frank Act, the 
Federal Reserve is barred from extending discount window 
lending to an individual firm--
    Mr. Garrett. Right.
    Mrs. Yellen. --and we are confined to broad-based 
facilities.
    Mr. Garrett. Right. So would you rule out, then, extending 
Section 13(3) as well?
    Mrs. Yellen. If there were general financial disruption and 
we were in the situation of systemic risk, similar to what we 
saw during the financial crisis, where we have a general 
panic--
    Mr. Garrett. Then you would use 13(3) to allow broker-
dealers to have access to either 13(3) potentiality or access 
to the broker-dealer--to the discount window is what you are 
saying, under those circumstances?
    Mrs. Yellen. I believe a broad-based scheme in the 
situation of systemic risk is a possibility, but it is 
something that would have to be very seriously considered.
    Mr. Garrett. Right. So we would be actually extending the 
American public backstop to broker-dealers under your 
Administration, potentially, under the right circumstances, is 
what you just said? That is what I heard.
    Mrs. Yellen. It depends on the circumstances. But, again, I 
want to emphasize--
    Mr. Garrett. That is quite astounding, that broker-dealers 
and other nonbanks are on notice that they may have, under the 
right circumstances, 13(3)--
    Mrs. Yellen. It would have to be unusual and exigent and it 
would have to--
    Mr. Garrett. Understood. But now we know.
    Secondly, Secretary Lew recently testified about the FSB, 
and after much questioning and answering we asked him, ``What 
is the process?'' And he said, ``The FSB does not act--acts in 
a consensus manner.
    And we asked, ``Did you, Secretary Lew, consent to the 
designation of specific globally systemic firms?'' And he said, 
``Yes, I did consent to them.''
    So my question to you is very simply, did you agree with 
Secretary Lew? Did you also consent to those designations of 
globally systemic firms, or did you take a contrary view? Did 
you object?
    Mrs. Yellen. I have to say I was not at the time involved 
in any way with the FSB--
    Mr. Garrett. Okay.
    Mrs. Yellen. --and I am not at this time either.
    Mr. Garrett. Okay. You do not take part in any discussions 
with FSB as far as the determination of globally systemic--
    Mrs. Yellen. I have personally not been involved in those 
discussions. Governor Tarullo is our representative to the FSB, 
and he has been--
    Mr. Garrett. Governor Tarullo is our representative and not 
you. Has he consented, as far as you know?
    Mrs. Yellen. He may well have been involved in those 
discussions and consented. You would have to pose that question 
to him.
    Mr. Garrett. Okay. He doesn't come up to testify. That was 
one of the provisions of our bill, to see whether we could get 
him to start coming up here to testify on that section, but 
okay.
    Do you believe that with regard to FSOC, the head of the 
New York Fed, Mr. Dudley, is an active participant? Is that 
correct, with respect to FSOC?
    Mrs. Yellen. I believe he has the status of observer.
    Mr. Garrett. My understanding is that you have given him 
active participation status. Is that correct, or is he just an 
observer?
    Mrs. Yellen. I am not in a position to make any rules about 
who can or cannot attend FSOC. Those are done by the 
leadership, which is--
    Mr. Garrett. Well, you allow him to attend, and--would you 
allow members of this committee to attend?
    Mrs. Yellen. It was not my decision.
    Mr. Garrett. To allow him to attend?
    Chairman Hensarling. The time of the gentleman has--
    Mr. Garrett. Can I just get an answer whether or not it was 
her decision that he should attend? Who allowed him to attend 
these meetings?
    Chairman Hensarling. Brief answer, please.
    Mrs. Yellen. I believe the Treasury Secretary.
    Mr. Garrett. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Sherman.
    Mr. Sherman. Chair Yellen, we learn a lot from you. Thanks 
for being here.
    Mrs. Yellen. Thank you.
    Mr. Sherman. You also have a chance to learn from us, not 
because we have any great economic theories worthy of your 
consideration, but because we represent 60-plus districts from 
coast to coast. We are intensely aware of what is going on in 
our districts, and we prove that biannually.
    And the reports you get from Members in this room as to 
what is happening in their districts are uniform even though 
our economic theories are disparate and, in many cases, 
unworthy of your attention.
    The economy is worse than your statement indicates. There 
isn't a person in this room who has waxed eloquently about how 
everything is going spectacularly in their district. And many, 
many Members have told me and spoken about how in a very large 
percentage of this country we are still in a recession.
    A second reason for you to push toward more quantitative 
easing and a continuation of low interest rates is that you 
have very few tools left if we slip back into recession, and 
you have all the inflation-fighting tools still available to 
you. I think you understand that.
    There is a second area where I think you can learn from us, 
and that is not in the monetary policy area, but you are a top 
bank regulator. We had an exchange back in February in which 
you described how important it was to loan money in local 
communities.
    And I explained to you, and I have talked to my colleagues 
here, but your regulators haven't gotten the memo. You can send 
them a copy of the remarks you made in response to my question 
in February. Many, many small businesses can't get loans even 
with an appropriate risk premium.
    In fact, if you are trying to borrow money at prime plus 5, 
oh, my God. You are terrible. We can't talk to you.
    Rather than the idea that you are going to make a hundred 
loans and one of them is going to go under default, it is, 
``You are going to buy a hundred government bonds.'' And that 
is not a way that a bank can contribute to the economy.
    You may remember back in February we talked about the 
Financial Accounting Standards Board lease-accounting project, 
which would capitalize all leases and add $2 trillion to the 
liabilities of balance sheets of American business. And at that 
time you indicated that you would have your staff look at this 
both in terms as to whether you would want to comment on 
something that other economists have said will cost $400 
billion to our GDP as companies try to rebalance their balance 
sheets, and because nobody can build a big building without a 
long-term tenant, and if you penalize companies for signing 
long-term leases you are not going to have long-term tenants.
    I wonder if you could at least recommit to having your 
staff look at that, and perhaps be willing to comment on it? 
Because those folks at the Financial Accounting Standards 
Board, the slightest hint from you or your staff would be very 
instructive to them.
    And if they won't listen to you, at least you could price 
into your economic projections economic risk that only an 
accountant would bring to your attention. I wonder if you can 
comment on the lease accounting?
    Mrs. Yellen. We will have a look at that and get back to 
you.
    Mr. Sherman. Okay. As to designating the SIFIs, I hope that 
you would focus not on the size of an entity's assets but the 
size of their liabilities. It was Lehman Brothers' inability to 
pay its liabilities that was the final straw that broke the 
economy.
    If you had some blue-chip name that everybody loved and so 
they were able to issue trillions of dollars of credit-default 
swaps, I would say they would be a SIFI, and they would be 
particularly a SIFI if they didn't have a lot of assets because 
their failure would have a substantial effect on our economy.
    So I hope that you would look at the liabilities and 
contingent liabilities of an entity, not their assets. And that 
would argue for not designating as a SIFI an unleveraged mutual 
fund since they don't have liabilities.
    Mrs. Yellen. FSOC is, in its analysis, just as you said, 
trying to identify whether there are specific and well-defined 
channels by which the failure of a particular organization 
would have spillovers to the rest of the financial system that 
would be severe. And it is not just a question of size and not 
just a question of the assets they hold.
    But for example, if there are liabilities, and if they are 
highly runnable, and they are a highly-interconnected firm, 
that would point in the direction of systemic risk, as you 
indicate.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Housing and Insurance Subcommittee.
    Mr. Neugebauer. Thank you, Chairman Hensarling.
    Chair Yellen, thank you for being here.
    I want to go back to something you said in 1995. You said, 
``This policy, which fits the behavior of this committee, is an 
example of the type of hybrid rule that would be preferable, in 
my view, if we wanted a rule. I think the Greenspan Fed has 
done very well by following such a rule and I think this is 
sensible for central banks to do.''
    But earlier you said, ``I am not aware of any literature 
that establishes that a central bank adopting a rule, whether 
it makes it public or not, is the most desirable way to run 
monetary policy.''
    So were you for it in 1995 and now you are against it in 
2014? I am having trouble reconciling that.
    Mrs. Yellen. As I said also this morning, I think simple 
rules can be a helpful guide and starting point in thinking 
about the appropriate stance of monetary policy. I said that 
then and I continue to think that now. And I will say that 
before every FOMC meeting, I review the recommendations of a 
number of sensible, simple rules. And so as an input, I regard 
this as valuable.
    Now during the time period that I was referencing in that 
1995 statement, that was the so-called great moderation and 
there actually had been quite a lot of literature looking at 
the different ways to run monetary policy that established that 
simple rules, like the Taylor Rule, really could do quite a 
good job--maybe not the best possible, but quite a good job of 
delivering good economic performance.
    And behavior during that time was not bound by a rule, but 
I think it was good policy. It had the characteristic that 
pretty systematically, as the labor market tightened, the 
stance of policy became tighter; and as inflation rose, policy 
became tighter, and tighter enough that real interest rates--
the nominal interest rates, were raised more than inflation.
    These are sensible ways to conduct monetary policy. Policy 
wasn't bound by a formula. It didn't adhere exactly to a 
mathematical formula. There were sometimes other factors that 
were important and factored in. But it was sensible.
    But now in the more recent period--and I remain--I continue 
to think it is useful to look at simple rules and think about 
their recommendations. What I oppose is tying monetary policy 
to a rigid mathematical formula to any rule.
    And we have now lived through a period where those rules 
would have performed just miserably. And if we had followed 
them we would have had even more dreadful macroeconomic 
performance than the disappointing recovery we have enjoyed.
    I think that if the kinds of analysis that had been 
performed earlier that showed that these rules worked well, if 
you rerun this, that type of analysis through the period of the 
last 6 or 7 years, you would find that they would not have 
performed well. Even so, I hope that as the economy becomes 
more normal and as interest rates get back to more normal 
levels, that the world will be less volatile. I continue to 
think that the recommendations of such rules are worthwhile to 
look at.
    I have given a number of speeches in recent years in which 
I have discussed those rules and their recommendations 
explicitly, and it is something I wouldn't do if I thought 
there wasn't some value in it. On the other hand, I have tried 
to explain in a number of speeches why I think they would not 
have worked and would not have been appropriate in the 
circumstances we have been living--
    Mr. Neugebauer. I don't mean to be rude here, but--so what 
I hear you saying is that the rule structure is not totally 
unacceptable in the Fed scheme here, but you have some--
    Mrs. Yellen. Not rigidly tying our hands to something, but 
it is useful input. We have models. We have forecasts. We have 
a number of inputs into the policy process. And a rule is--
rules, a collection of them, do provide useful input and we do 
take it into account. But I just would not go further than 
that.
    Mr. Neugebauer. Thank you.
    And I guess my time has expired, Mr. Chairman.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. Mr. Chairman, I want to 
ask unanimous consent to submit a report for the record from 
Americans for Financial Reform, dated July 10, 2014, which I 
will refer to in my remarks.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Lynch. Thank you, Mr. Chairman.
    Welcome, Madam Chair. Thank you for your willingness to 
participate here, and thank you for your patience.
    Last month Federal Governor Tarullo gave a speech in Boston 
and he described the stress test for the major banks as the 
cornerstone of the regulatory response to the recent financial 
crisis. Do you tend to agree with that?
    Mrs. Yellen. I think they have been very important in 
strengthening supervision.
    Mr. Lynch. Right. The idea of the stress tests, as I 
understand them, is that, well, the value in that annual stress 
test is that we inspect the capital reserves, we inspect the 
risk management policies within the banks, and when they pass--
ideally, when they pass the stress tests, there is actually 
value in passing that stress test because they have a stamp of 
approval. Is that the idea behind this?
    Mrs. Yellen. I think it is really something more than what 
you just said, that we are using our own models and judgments 
to take a very detailed look at all of the asset holdings and 
transactions and exposures of a large financial firm and we are 
attempting to assess, in a well-specified, highly adverse 
stress scenario, an economic scenario that is extremely 
difficult--we are making our own very detailed assessment of 
whether or not that bank would have sufficient capital to 
continue to meet the lending needs of the economy and to 
continue to function.
    And on top of that, we are insisting that the firm 
demonstrate to us that they have the ability to do that kind of 
analysis themselves and in that way--
    Mr. Lynch. Okay.
    Mrs. Yellen. --judging their risk management capabilities.
    Mr. Lynch. You put it much better than I could, but I agree 
with everything you just said.
    So the legislation that was offered, called the Federal 
Reserve Accountability and Transparency Act, would require the 
Fed--in section four, would require the Fed to publish--to give 
the information to the major banks that are being tested, all 
of your methodologies, all of the--I will read it here--the 
hypothetical--excuse me--all of the alternatives that are--and 
public notice and comment rulemaking in advance of any stress 
test that detail the exact models, the methodologies, and 
assumptions to be used in the stress test.
    So you would have to give that under this new bill. You 
would have to give that to the banks.
    You would also have to allow them to comment and to help 
design the test that you are going to give them.
    Now in my mind, if you are going to give the people the 
answers to the test, if you are going to let them design the 
test, won't there be an assumption that they can now game this 
test?
    Mrs. Yellen. Precisely. And that is exactly why we don't 
give them the models. We want them to, in a sense, show us 
their work and show us that they have the capacity in their 
organizations to make well-reasoned judgments about the risks 
that they face.
    We absolutely don't want to give them the answers. And when 
you give the answers then you don't get to see the work that 
demonstrates that the student has learned the material and can 
apply that kind of logic in the unique circumstances that will 
face that firm, as opposed to just the scenarios that we have 
laid out.
    Those firms need to be able to analyze their own unique and 
specific risks that they face. We set out a couple of scenarios 
and we do detailed analysis, but what are the unique stresses 
that could afflict a particular firm with particular 
characteristics?
    We want to make sure they have models that will serve to 
analyze those situations. And they can't just use our models 
for that. They need to show us that they understand what the 
unique stresses are that could hit those firms as well.
    Mr. Lynch. I thank you, and I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Georgia, Mr. Westmoreland, for 5 minutes.
    Mr. Westmoreland. Thank you, Chair Yellen, for being here.
    I want to follow up just on one of the things that Mr. 
Garrett--one of your answers. You said that Mr. Tarullo is the 
Federal Reserve representative to the Financial Stability 
Board. You are his boss and you are the Chair of the Federal 
Reserve. Are we to really believe that the gentleman acts on 
his own without any direction or oversight from you?
    Mrs. Yellen. I think Congressman Garrett referred to 
decisions that were made about naming global systemically 
important banks, and that occurred before I was Chair. I am 
sure that he consulted with Chairman Bernanke.
    Mr. Westmoreland. Okay. So he is not independent?
    Mrs. Yellen. Well, no. The Chairman obviously has 
responsibility.
    Mr. Westmoreland. Okay. And just to go back to the 
independent part of the Federal Reserve from the Executive 
Branch, I am sure you are aware that of the 15 Chairmen in the 
Fed's history, 10 of them have either served at Treasury or the 
White House. And it seems to be a revolving door-type policy 
between the Federal Reserve and the Treasury Department, and 
that it actually continues today.
    And the Fed staff has gone back and forth into the Treasury 
Department, including in the current Administration. So do you 
believe that this revolving door poses any risk whatsoever to 
the Fed's independence?
    Mrs. Yellen. I think the Fed's independence is extremely 
important and I have never in my many years in the Fed seen 
anything occur that led me to believe that it had at any time 
been threatened. And while I understand the point you are 
making, it is essential that the Federal Reserve remain 
independent.
    Mr. Westmoreland. Okay. And that kind of leads me--
    Mrs. Yellen. I perceive that--
    Mr. Westmoreland. And I appreciate it. And that kind of 
leads me to the next question.
    We here in Congress have been having a vigorous political 
debate about infrastructure spending and unemployment benefits 
to continue. And in your Senate testimony, you dived into this 
political debate, expressing your support for more 
infrastructure spending in response to questions from Senator 
Menendez.
    In a recent letter to Representative Sinema, who is a 
member of this committee, you expressed the virtues of 
extending unemployment benefits. We will continue to debate the 
merits of this, but do you have any reservations that carrying 
the water for the Democrats on this fundamentally political 
issue risks the Fed's independence, impartiality, and indeed, 
its credibility?
    Mrs. Yellen. I don't think it is appropriate for me to 
weigh in on these issues and I don't--
    Mr. Westmoreland. Why did you?
    Mrs. Yellen. --interpret--I do not interpret what I said 
about infrastructure to have been telling Congress what I think 
it should do. I commented, as I recall, to Senator Menendez on 
the stance of fiscal policy and the way it had been affecting 
the economy.
    Mr. Westmoreland. So you don't think we need to spend on 
infrastructure?
    Mrs. Yellen. I--
    Mr. Westmoreland. And that wasn't what you meant by your 
comment?
    Mrs. Yellen. I believe it is entirely appropriate for 
Congress to debate and decide that.
    Mr. Westmoreland. Okay. Was it appropriate just to even 
talk about it? Didn't you answer Senator Menendez that, ``it is 
up to you all, it is not up to me?''
    Mrs. Yellen. I believe that was the spirit, although I did 
comment on the fact that fiscal policy had posed a significant 
drag to economic growth over the last several years.
    Mr. Westmoreland. Okay, quickly, the chairman's staff and 
the committee staff discussed the Federal Reserve's role in 
operating a payment system for the Treasury Department with the 
New York Fed staff.
    Mrs. Yellen. I'm sorry, what system? What type of system?
    Mr. Westmoreland. The role in operating a payment system 
for the Treasury Department.
    Mrs. Yellen. A payment--okay.
    Mr. Westmoreland. And they discussed it with the New York 
Fed staff who operate that system, and the staff of the New 
York Fed described the Fed's role there as Treasury's agent and 
described the Treasury Department as the Fed's client.
    Is that a good characterization--just a yes or no--of your 
relationship?
    Mrs. Yellen. The Federal Reserve is the fiscal agent of the 
government, and in that sense, it is correct.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    I am over here in the corner, Mrs. Yellen.
    I would like to just take us briefly in another direction, 
because we don't operate in a vacuum in the United States. To 
what extent are the developments in various parts of the world 
that are taking place now, in Ukraine, in Iraq, possible 
caliphate there, the Israeli-Palestinian situation, Syria. The 
world is aflame, and I am wondering what effect this would have 
on our global economic growth and especially the United States 
economic outlook.
    But something that is going a little bit unnoticed is 
another situation, and that situation is Iran.
    By Sunday, as the deadline, and their decision and 
agreement is supposed to come out. And in collaboration with 
all of these other hot spots that are happening around the 
world, what would be the global impact in terms of economic 
growth, and where would the United States be? I know you and 
Treasury talk in concert on this, and particularly Treasury, 
which is basically enforcer of our sanctions, which is based 
largely on, quite honestly, the well-being of the United States 
economy.
    What would happen Sunday if they don't come up with an 
agreement and ask for an expansion, or they do come up with an 
agreement that has nothing to do with dismantling and Israel 
will not accept it?
    So Sunday presents a very timely issue and I thought we 
might benefit from your thoughts on that, including the other 
things that are happening in Iraq, Syria, Israel and so forth.
    Mrs. Yellen. Certainly, the developments that you are 
talking about present risk to the United States through any 
number of different channels. In trying to focus simply on the 
potential economic impact of these developments on the United 
States, I would be thinking particularly about energy markets, 
that we have seen some disruptions in energy supplies, and 
obviously there could be much larger disruptions in energy 
supplies. Such developments clearly would have an impact on the 
United States and on the global economy more broadly.
    We also look at whether or not there are significant direct 
financial exposures, for example, of our banking system to 
particular regions that are troubled. In the case of the set of 
countries you mentioned, my assessment would be that the direct 
financial implications for our banking system would not be 
large, but in times of global unrest it is very normal to see 
disruptions in risk aversion rise in financial markets 
generally, and that would certainly, were that to occur, have 
spillovers to the United States and to our outlook.
    Mr. Scott. Okay. Thank you.
    Now let me ask a question on your asset purchase program, 
which I think has done a good job in two important areas. I 
think it has made a very major contribution to lowering the 
unemployment, creating jobs, and very significantly in the 
housing market in terms of reducing mortgage rates.
    Is that true? Is that pretty much--
    Mrs. Yellen. I believe it has made a positive 
contribution--
    Mr. Scott. Okay.
    Mrs. Yellen. --in the ways that you have mentioned, yes.
    Mr. Scott. Okay. I understand that you are going to end 
that program within a couple of months. So the issue is, would 
that have a downturn impact on the progress we have made in 
both unemployment and housing with this program?
    Mrs. Yellen. We are continuing to purchase assets, so in 
that sense we are continuing to add stimulus. And even if we 
stop our purchases, our large holdings will be supporting lower 
long-term interest rates and, I think, keeping mortgage rates 
lower, and will continue to provide a positive for the housing 
market.
    If we lacked confidence that the labor market and the 
economy will continue to improve, we probably would not have 
been comfortable winding down the asset purchase program, but I 
do think the economy is improving, the labor market has 
improved, and will continue to do so.
    Mr. Neugebauer [presiding]. The time of the gentleman has 
expired.
    Mr. Scott. Thank you very much, Chair Yellen.
    Mr. Neugebauer. I now yield to the chairman of our 
Oversight and Investigations Subcommittee, Mr. McHenry.
    Mr. McHenry. I thank the chairman.
    Chair Yellen, thank you for being here.
    Mrs. Yellen. Thank you.
    Mr. McHenry. I know these days are long, but I wanted to 
ask you about something that I care about, which is Section 113 
part D of Dodd-Frank. And what this in essence says is that you 
will have an annual review of the SIFI designation, right, that 
there is a mandate under Dodd-Frank that no less than annually 
there will be an undertaking by FSOC to review those SIFI 
designations for non-bank financial institutions. You, as well 
as Secretary Lew, have both pledged that you are committed to 
that process, and I assume that remains the case.
    The question I have is what metrics are you going to use 
for that annual review?
    Mrs. Yellen. I have not been involved in that. It hasn't 
come to FSOC yet and I am not certain of exactly what they will 
look at. I would assume that they would look at some of the 
same metrics and whether or not those have changed, that they 
used in deciding to designate those firms--
    Mr. McHenry. I would appreciate it if you would follow up 
with me on this to give us an understanding of what that is.
    The 4-year anniversary of Dodd-Frank is next week, and for 
us to not have an annual review process set up on the SIFI 
designation is concerning.
    Related to that, you also have, under Section 165, the 
opportunity for remedies under the--after the CCAR process and 
the living will process, to seek remedies from firms. Both 
Governor Tarullo and former Governor Stein have told us that 
the CCAR process is moving from a wartime setting to more of a 
peacetime setting and there is a bit of tension between 
customization and standardization under the CCAR metrics.
    So once you go through the CCAR process, once you get the 
review of this stuff, at the end I am sure you and your staff 
pore over the way to improve it for the next time. Are there 
some key takeaways that we can understand from the CCAR 
process?
    Mrs. Yellen. I'm sorry, you are talking about CCAR? You 
mentioned living wills as well.
    Mr. McHenry. I'm sorry. My next question is about living 
wills, so I--yes, I put those two together.
    Mrs. Yellen. You are talking about the CCAR process?
    Mr. McHenry. My question is about the CCAR process. My next 
question, to give you a heads up, is on living wills.
    Mrs. Yellen. Okay.
    I think we have learned a lot from the CCAR process and we 
have refined our own modeling techniques and I think worked 
with the firms to clarify over time what our expectations are 
for their risk management modeling capabilities, and I think we 
have had good back and forth that is leading to improvements in 
how we conduct this.
    Mr. McHenry. Okay.
    About living wills, you said yesterday in front of the 
Senate--I know one Senator asked you this question rather 
directly and apparently wasn't satisfied with your answer about 
living wills--that you continue to work to improve living 
wills. Can you give us greater clarity on that? Because you 
judge whether or not living wills are credible, right? And if 
you are continuing to work with firms on their living wills, 
does that mean that they are currently not credible?
    Mrs. Yellen. Well, we do not make some annual determination 
as to whether or not they are credible. We may make a 
determination. We are not required by the statute, but the FDIC 
and the Fed can make a determination at some point that the 
living will is not credible, of a particular firm, or that it 
would not facilitate resolution.
    My own understanding of the process is that this is a 
difficult and new responsibility for the banking organizations 
and for us, and that we would have iterations back and forth 
with the firms in trying to set out a set of expectations, look 
at what they are provided, give feedback, and set out a set of 
expectations we want to see.
    Mr. McHenry. So if the living wills are accepted, then 
therefore they are credible.
    Mrs. Yellen. Accepted does not necessarily mean they are 
credible. We can determine under Dodd-Frank--
    Mr. McHenry. That is disconcerting because if living wills 
are intended for that purpose, to help unwind these firms and 
be a road map for unwinding these firms in the advent of a 
cataclysmic event, then they should be credible.
    Mrs. Yellen. We will work with the FDIC to give these firms 
feedback on what we want to see them do to facilitate 
resolution. And of course, that is the objective. But although 
we are close, we have not even finalized feedback to the firms 
on their second round submissions.
    Chairman Hensarling. The time of the gentlemen has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, ranking member of our Oversight and Investigations 
Subcommittee.
    Mr. Green. Thank you, Mr. Chairman.
    Good morning, Madam Chair, and welcome again to the 
committee. I have three questions, each of which could easily 
consume 5 minutes of your time. And I do not believe that I 
will get through all three but I will ask, if possible, that 
you give a laconic answer to each.
    The first, you have used the term ``unusual headwinds,'' 
and I have noted that the term ``fiscal policies'' has been 
associated with this. Would you, as tersely as possible, 
explain some of the unusual headwinds that we have faced or are 
facing?
    Mrs. Yellen. Tight fiscal policy is one of them. Although 
there was a stimulus for a number of years, in more recent 
years fiscal policy, in addressing deficits and attempting to 
reduce deficits, has created drag on economic growth. And that 
is unusual in times like these.
    In addition, the system of housing finance and the 
willingness of residential mortgage lenders to provide credit, 
the standards should have escalated, they have escalated, but 
it has now become the case that any borrower without a pretty 
pristine credit rating finds it awfully hard to get a mortgage. 
And I think that there are a number of reasons for it coming 
out of the crisis, but I think that is a headwind.
    So credit availability for some purposes, I think is 
diminished relative to historical norms.
    Coming out of this crisis, we also see that households have 
unusually depressed expectations about their own future income 
gains, and I think that weighs on their feelings about their 
own household finances and is holding back consumer spending.
    So those are some of the things that I would see as 
headwinds from the crisis. In addition, productivity growth has 
really been quite slow for a number of years.
    Mr. Green. I am going to abandon my other two questions 
because I now have a follow-up to this one.
    Mrs. Yellen. Okay.
    Mr. Green. You indicated that these fiscal policies are 
unusual for times such as these. What would you expect usual 
fiscal policies to be for times such as these?
    Mrs. Yellen. I think historically, when the economy has 
been weak, fiscal policy has, at least on average, provided 
greater stimulus than it has over the last several years.
    And I understand there are reasons that Congress has chosen 
this course. But simply what I would see as a factual matter, 
the degree of drag from fiscal policy in a high unemployment 
situation has been unusual.
    Mr. Green. And could you kindly give an example or two of 
the kinds of fiscal policies that historically have been 
employed in times such as these?
    Mrs. Yellen. Typically, there would be tax cuts and 
increases in spending that would allow automatic stabilizers to 
go into effect in circumstances where unemployment was high.
    It has been very rare--we haven't, in the post-war period, 
had really a recession that has been as long and as deep as 
this one, so it has been an unusual period.
    Mr. Green. Thank you.
    I will take one more question and just ask you about 
indicators. We have leading indicators, lagging indicators, 
and, of course, we have coincidental indicators.
    I try to follow these, but what I would like from you is 
just as you look at them in general, could you give me just an 
assessment of where these indicators seem to indicate we are 
going?
    Mrs. Yellen. I see most indicators that I look at in the 
economy as suggesting improvement. I look at things like 
industrial production, the labor market, auto sales. What is 
happening in the housing sector, that may be an exception that 
we don't see a lot of improvement there.
    But most measures of spending in the economy, consumer and 
business attitudes, through all of those I think we see 
positive signs.
    Mr. Green. Thank you very much.
    Thank you, Mr. Chairman, I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Wisconsin, Mr. Duffy, vice chairman of our Financial 
Institutions Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    And, Madam Chair, thank you for being here. I want to 
commend you for the last time you were here, staying for as 
much time as we would need to have everyone on the committee 
ask you questions. I thought that was fantastic. I was hoping 
that was going to be a continual policy, but maybe it was not 
as pleasurable for you as it was for us.
    But I appreciate you being here today.
    On June 18th Representative Perlmutter and I, along with 84 
of our colleagues, wrote a letter to the President asking that 
he appoint someone to the Federal Reserve with banking 
experience. I would ask that that letter be included in the 
record.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Duffy. And I know yesterday Senator Vitter asked you 
about this very issue, and I think you indicated your support 
that we--you would support having someone with banking 
experience, community banking experience, on the Fed Board. Is 
that correct?
    Mrs. Yellen. Yes, I would.
    Mr. Duffy. And it is fair to say that your role has 
expanded. Traditionally you were dealing with monetary policy, 
but through Dodd-Frank and the Fed's own action you have had an 
increased role on the regulatory side, correct?
    Mrs. Yellen. Yes.
    Mr. Duffy. And, we are familiar with your dual mandate of 
maximum employment and price stability. Is it almost fair to 
say there is an unwritten third mandate that would bring us to 
protecting the country from systemic risk?
    Mrs. Yellen. I think that is fair to say for the Federal 
Reserve, although it is not something that applies specifically 
to monetary policy, but we have a number of different tools, 
and I interpret that as an unwritten third mandate for the 
Federal Reserve.
    Mr. Duffy. Right. And kind of talking about that, right, 
there is--you have the monetary policy side and you also have 
the regulatory side. And just on the good government side for 
us, we get concerned, not about your blackout period during the 
FOMC meetings; we agree that you should have the blackout 
period.
    We do get concerned in Congress when you take the blackout 
period that applies to monetary policy and when we ask you to 
come in and talk about the regulatory side, you use the 
argument on monetary policy and the blackout and use if for--
    Mrs. Yellen. We have no blackout period that applies to 
anything other than monetary policy in the economy. There is no 
blackout period with respect to supervision and regulation. 
And, it is conceivable that you asked someone to testify and 
they had a problem--I don't know what specifically you have in 
mind here, but a--
    Mr. Duffy. Yes. I--
    Mrs. Yellen. --blackout period does not apply to 
supervision and regulation.
    Mr. Duffy. Thank you, and I would agree with you. It does 
not apply.
    But I would just reference, we had a December 2012 
meeting--and there are a number of examples, but in December 
2012 we wanted to have a hearing on Volcker and we didn't get a 
witness because the blackout period was cited.
    So just if you would take a look at that, we want to make 
sure that there is a blackout period that does not apply to the 
regulatory side.
    Mrs. Yellen. It does not apply.
    Mr. Duffy. Okay.
    If you haven't noticed, this side of the aisle gets very 
concerned about the debt. I think that is why the chairman at 
our hearings will put up the fact that we have an almost $17.6 
trillion debt. And by way of your accommodative policy, 
quantitative easing, we have had historically low interest 
rates, you would agree.
    Today I think to the Budget Committee we will pay $227 
billion a year to service our debt. And you would agree we pay 
historic low interest rates on that debt, correct?
    Mrs. Yellen. Yes.
    Mr. Duffy. Have you taken a look at what it would cost to 
service the debt if interest rates go to historic norms?
    Mrs. Yellen. I don't have those calculations in front of 
me, but certainly the Congress should be thinking about the 
fact that over time, as the economy recovers, interest rates 
will move back up to more normal levels.
    Mr. Duffy. And the cost to service that debt does not stay 
at $230 billion. Even if we were able to stop that clock from 
turning and we were able to hold it at $17.6 trillion, the cost 
to service that debt is going to increase dramatically when 
interest rates go up, correct?
    Mrs. Yellen. It will certainly increase.
    Mr. Duffy. So, there is not a correlation--
    Mrs. Yellen. Yes. Higher interest rates will increase the 
cost of servicing that debt.
    Mr. Duffy. Right.
    And some of the projections I have seen, if the debt stays 
the same it brings us to around $500 billion, $550 billion a 
year, an additional $300 billion that doesn't go to whether we 
are building our defense, whether we are using that money for 
food stamps, the social good of the country.
    And I think it is important that the country understand 
that there is a consequence for the spending binge that this 
town has gone on and that we will pay it as rates go up and it 
will have a significant impact on our budget in our out years, 
which might start, as you have indicated, next year.
    Thank you for your testimony. Thank you for your honesty in 
actually answering our questions. I appreciate that. It is very 
nice and refreshing.
    With that, I yield back.
    Mrs. Yellen. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Madam Chair, thank you for being here.
    I want to talk about unemployment because that continues to 
be a major concern of mine and, frankly, a major concern in the 
district that I represent. Obviously, the macroeconomic 
situation is thriving, but when it comes to unemployment, 
particularly for minorities, it is still almost in recession 
levels.
    And I am wondering if you think that is some kind of a 
structural unemployment issue, or do you believe in the, as it 
is called, Luddite, is that how you--
    Mrs. Yellen. Luddite?
    Mr. Cleaver. Yes.
    Mrs. Yellen. I think the labor market is afflicted both by 
weakness in the overall economy, and so things should broadly 
improve as the economy strengthens and the unemployment rate 
and other broader indicators come down. But on top of that, 
there are also structural factors that are currently, and have 
for a long time been, creating problems for many, many American 
families.
    Luddite tends to refer to technology, and we have seen a 
widening of the income distribution, the wage distribution in 
the United States, going back to the mid-1980s. Economists have 
been debating the causes, and they do see technological changes 
that have favored skilled workers as being one of the causes of 
a widening income distribution. To some extent, globalization 
probably also plays a role and there may be other factors.
    But I think when we think about all of the pressures that 
middle- and lower-income families in the United States are 
facing, some of them come from the generally weak economy, and 
I think that is the part the Federal Reserve can contribute to. 
But there are deeper adverse trends at work on top of that, and 
perhaps they have even been exacerbated during this downturn.
    Mr. Cleaver. Some economists seem to believe that as 
technology expands, it will create more jobs than it will 
destroy. Do you embrace that economic theory?
    Mrs. Yellen. I think the total number of jobs in the 
economy is not just determined by technology; it is determined 
by macroeconomic policy. I wouldn't believe people have for 
centuries worried that advancing technology, for example, would 
destroy jobs and people would become unemployed just because 
technology enables more to be produced with fewer workers.
    Time and time again, we have seen that is not the case, 
that even with productivity growth and improving technology we 
can have jobs with appropriate policy for people who want to 
work. So I don't endorse that.
    But patterns of technological change can favor some groups 
in the labor market and disfavor other groups in the labor 
market. And many economists have been writing about the fact 
that so-called skill-biased technical change--in part, the use 
of computers and new information technologies--has raised the 
productivity in the income-earning capacity of more-skilled 
workers and has worked to the disadvantage of less-skilled 
workers.
    So technological changes can produce winners and losers, at 
least in a relative sense.
    Mr. Cleaver. Yes. The latter--in restaurants, for example, 
I have seen that. I have said here in the committee before, I 
went to a restaurant in Cape Girardeau, Missouri--I am from 
Missouri--where you order your meal from the table through a 
computer, which means that there is no waitress or waiter with 
that job now.
    That still doesn't answer, for me at least, the question 
about a cure for the unemployment levels that are so high in 
urban centers, even if you are a college graduate. If you are 
an African-American or a Latino college graduate you are still 
going to have a difficult time getting a job.
    Now, there may be some sociological--thank you, Mr. 
Chairman.
    Mrs. Yellen. I hope that will improve in a stronger 
economy.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Indiana, Mr. 
Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being here today and for 
your testimony. I would like to talk a little bit about the 
dual mandate. And your comments and your testimony are that you 
are making progress towards the Federal Reserve's objectives of 
maximum employment and price stability.
    One of the things that we are starting to see in northeast 
Indiana is there is demand for labor, and even some wage 
increase. One of the concerns that I have is in the long term, 
how do you--I believe that the dual mandate is conflicting and 
would like to hear some of your thoughts on how do you decide 
when is the right time to increase interest rates? How do we 
grow the economy but keep inflation in check?
    One of the things that I do believe is that the dollar is a 
unit of measure. It is something that we use to measure a 
current value. Shouldn't it be stable just like any other 
measurement, whether it is a foot, hour, pound? Shouldn't it be 
stable like those measurements?
    Mrs. Yellen. Almost every central bank that has an explicit 
inflation target has chosen a low positive number as their 
objective for inflation rather than zero, and there are a 
number of reasons for that.
    One reason is that if zero is the target, one is bound to 
have episodes of deflation, which can be associated with very 
highly adverse outcomes, which almost every country wants to 
avoid.
    Mr. Stutzman. So let me get to inflation. The Fed's 
favorite measurement of inflation is the PCE deflator. Is that 
right?
    Mrs. Yellen. Yes.
    Mr. Stutzman. Okay. Is that a leading coincident or is it a 
lagging indicator?
    Mrs. Yellen. I am not sure I quite understand what that 
means.
    Mr. Stutzman. How do you gather information? What 
information are you gathering to then declare that we are 
seeing inflationary pressures?
    Mrs. Yellen. The PCE price index is issued. Data on it 
comes out every single month that is produced by the Bureau of 
Economic Analysis. So we have monthly data on it.
    We are measuring, and the Bureau of Labor statistics is 
going out and collecting data on a wide range of goods and 
services that they incorporate into the consumer price index. 
So we have pretty good real-time data on prices in the economy.
    Mr. Stutzman. Is wage growth that part of the calculation?
    Mrs. Yellen. It is not explicitly part of inflation, but in 
trying to forecast inflationary pressures, one question is, 
what is the price level or inflation now? Another question is, 
what is its likely trajectory over time?
    And in trying to understand and forecast where is inflation 
going--
    Mr. Stutzman. How much are wage increases calculated into 
inflation?
    Mrs. Yellen. It doesn't directly enter into inflation, but 
the prices of some goods, and particularly services, depend 
very heavily on the cost of labor. So it is an important--
    Mr. Stutzman. So would the cost of--
    Mrs. Yellen. --influence on the rate of inflation.
    Mr. Stutzman. So we are trying to get wage increases. Is 
that correct?
    Mrs. Yellen. We are trying to hold stable, or to have 2 
percent growth in an index of consumer--
    Mr. Stutzman. But why wouldn't we want unlimited wage 
increases? Why wouldn't we let the market drive wage increases?
    Mrs. Yellen. We are letting the market drive wage 
increases.
    Mr. Stutzman. But if we--
    Mrs. Yellen. We don't have a target for wage increases. We 
have to target for increases in the prices--
    Mr. Stutzman. Am I not understanding that wage increases 
would then factor into inflationary pressure, and then you 
would take that into calculation for interest rates?
    Mrs. Yellen. We have an objective for a price index that is 
a broad measure of the cost of a basket of consumer goods to 
the typical American consumer, and we are trying to achieve a 
longer-term objective of 2 percent for that. Looking at wage 
behavior, we don't have a target for wage increases, but wage 
increases can be a determinant of inflation of goods and 
services and have predictive power for inflation in the future.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. I thank the chairman and the ranking member.
    Good morning, ma'am. It is good to see you again.
    Just with regard to this issue of wage increases and the 
implication that they could be a driver of inflation, could you 
speak on the relationship between increases in wages and 
productivity? And if you have an increase in work productivity, 
you could also have increases in wages that are not 
inflationary. Could you comment on that?
    Mrs. Yellen. That is certainly true. And often, instead of 
looking at just wages, we would look at a different measure 
called ``unit labor costs,'' which compounds together both 
productivity or output per hour and wage or compensation costs.
    And that is a broader measure--taking account of 
productivity of what does it cost or how is the cost changing 
over time, of what firms need to pay basically to produce a 
certain amount of output. So certainly productivity is a key 
factor and not only wages.
    Over the last several years, what we have seen is that real 
wages, or wages in real terms, are not growing as fast as 
productivity.
    Mr. Ellison. Thank you for making that point. I was going 
to ask you, but you anticipated my question, which is that we 
have room for wage increases, given our rate of productivity in 
this economy. And I would argue that wages are depressed and 
sometimes you need government to intervene in labor markets 
through--in minimum wage in order to catch up because there is 
no equality of bargaining power, given the decline of union 
representation in our country.
    Anyway, I have to ask you a question on behalf of my 
constituents. I represent a very large percentage of people 
whose roots are in Somalia, and I am very proud to represent 
that community.
    One of the problems we have been having is that because of 
certain regulations like the PATRIOT Act, the Bank Secrecy Act, 
and others, that the regulatory--I hate to use the term 
``regulatory burden'' because that sounds so Republican, but 
the regulatory burden, okay--it is my move on bipartisanship 
today--is such that a lot of the banks that facilitate these 
money-wiring transfers are opting out of that market.
    Usually we are not talking about them remitting a lot of 
money, and the banks tell me they do it but it is just 
expensive and the liability associated with making a mistake is 
pretty high when it comes to having to do all the documentation 
of knowing your customer.
    What can be done? Because we have hardworking people who 
are trying to send money back home to their families, and our 
government correctly is trying to stop terrorism financing, 
which I completely support. But in so doing, a lot of folks are 
very hard-pressed to get money back home. Can you speak to this 
issue?
    Mrs. Yellen. This is an issue that the Federal Reserve has 
been aware of and it has been discussed, I know, on an 
interagency basis for a number of years. It is certainly a 
legitimate need to make remittances to Somalia, and I think 
part of the issue is with the need to also manage money-
laundering and terrorist-financing risks.
    This is a hard issue. I would say the Federal Reserve--I 
think it is important to understand, the Federal Reserve 
absolutely does not prohibit businesses from providing 
remittances to Somalia. To the extent that the banks we 
supervise are involved with customers who are in this business, 
we would supervise to make sure that they are abiding with BSA/
AML requirements. But we are not prohibiting banks from serving 
the needs of these customers.
    Now, it is a decision that they make whether or not they 
want to take these risks. And, I know--and this is not the only 
area where this comes up--some firms may be reluctant to 
undertake those risks.
    Mr. Ellison. Forgive me, Madam Chair, because my time is 
running short, but I think that one of the ways to solve this 
problem is for some developed governments like ours to engage 
with the Somali government, which seems to be getting its feet 
on the ground, and help them stand up their central banking 
system so that it can meet international standards. I think 
this would be money well spent to help them get their processes 
in order because every penny that Somali Americans send to 
their families is a penny we don't have to send in foreign aid. 
But we are not going to stand by and let people starve, so we 
will step in when we need to, and remittances take a lot of 
pressure off.
    Thank you very much. I yield back.
    Chairman Hensarling. The time of the gentleman has expired. 
And the Chair would note for the record that I am aware of many 
accusations against my friend from Minnesota, but sounding like 
a Republican is not one of them.
    The Chair now recognizes the gentlelady from Minnesota, 
Mrs. Bachmann, for 5 minutes.
    Mrs. Bachmann. Thank you, Mr. Chairman.
    Continuing on with the Minnesota line of questioning here 
in the Financial Services Committee, my questions for you--and 
thank you again for coming before this committee, Chair Yellen, 
today--as of July 9, 2014, my understanding is that the bank 
reserves at the Federal Reserve are something close to $2.8 
trillion, and I am wondering if you could explain to the 
committee why is this number so high, the amount of reserves 
that are on hand at the Federal Reserve?
    Does this show that businesses are leery of investing in 
the U.S. economy? And if these reserves enter the economy too 
quickly, what is your assessment on the impact of inflation if 
this $2.8 trillion adds to our money supply too quickly? And 
what, if anything, would the Federal Reserve do to stop this 
inflation?
    Mrs. Yellen. The reason that bank reserves are so high is 
because we are creating those reserves when we purchased 
longer-term assets. So we have been involved in a program of 
purchasing longer-term treasury and mortgage agency mortgage-
backed securities in order to provide financial conditions that 
are appropriate to stimulate the recovery, and when we 
purchased those assets we create those reserves. Any individual 
bank can decide what they want their deposits to be with the 
Federal Reserve, but in the aggregate that total is determined 
by the Federal Reserve and not the banking system.
    Now, as the economy recovers and we come closer to our 
goals of maximum employment and our 2 percent longer-run 
objective, it will be appropriate for the Fed to tighten 
monetary policy to avoid inflation picking up to undesirable 
levels. And we can do that with a balance sheet that is as 
large as we have with reserves at these high levels, and we 
have been discussing the exact procedures we will use when the 
time comes to normalize policy.
    We have had a number of discussions in recent meetings, and 
the minutes of our last meeting, as I referred to in my 
testimony, give some details of our thinking. We hope to set it 
out in detail before the end of the year.
    But we will move to raise short-term interest rates when 
the time is appropriate. We will use tools like our ability to 
pay interest on excess reserves and a host of subsidiary tools 
that we can use to move up the general level of short-term 
interest rates, and that is how we will tighten monetary 
policy.
    Eventually the committee sees it as appropriate to operate 
with a much smaller balance sheet and smaller reserves than we 
have now. Looking into the distant future, I think it is quite 
reasonable to predict that our balance sheet will eventually 
shrink in size, but only much later in the process of 
normalizing policy.
    Mrs. Bachmann. You had touched on the issue of recovery. We 
have been in recovery for approximately 6 years. That seems 
like historically a very long period of time, an unusually long 
period of time for the United States economy to be in a so-
called period of recovery.
    Normally, when we have a recession or if we have a 
backtracking in our economy, usually we see almost like a 
bungee cord effect. We see the economy grow at a rapid pace. We 
haven't seen that for the last 6 years.
    Can you tell this committee why haven't we seen the--what--
historically we would see robust recoveries, but we do not see 
them now. Why, in your opinion, has that happened?
    Mrs. Yellen. I think because this downturn was caused by a 
financial crisis, and the study of financial crises around the 
world suggests that when they occur, the downturns that follow 
them and the recoveries take a very long time and they have a 
pronounced effect on the economy. The typical post-war 
recession--
    Mrs. Bachmann. But so much of the recoveries--isn't it true 
that so many of the recoveries, usually the further down you go 
you see a quicker move up in recovery? Why aren't we seeing 
that?
    Mrs. Yellen. I think that is when it is not caused by a 
financial crisis. For example--
    Mrs. Bachmann. What makes it different?
    Mrs. Yellen. For example in 1981 we had a tightening of 
monetary policy because inflation had risen to unacceptably 
high levels. When inflation came down, there was the ability to 
then step on the gas with respect to monetary policy, and 
intra-sensitive sectors like housing that had been suppressed, 
immediately began to grow and bring the economy back. And of 
course, this is a very different episode.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Washington, Mr. 
Heck.
    Mr. Heck. Thank you, Mr. Chairman.
    Chair Yellen, thanks very much for your presence today. I 
want to follow up on a question that Congresswoman Velazquez 
asked you about what you highlighted in your own testimony, 
your increasing concern about reach for yield activity. I 
effectively have concluded you placed it kind of on your watch 
list and your amber light is on.
    The follow up question is this: Can you, without speaking 
to broad policy, nonetheless give an example of what it would 
look like in order for you to take that from your amber light 
to your red light? And secondly, an example--again, not the 
broad policy--about what kind of an action step you might take 
to deal with it. Is that clear?
    Mrs. Yellen. Yes.
    I would look at broad measures of leverage and the extent 
of maturity transformation and credit growth and asset prices 
generally--broad measures--if I saw a leverage growing rapidly 
in the economy, asset prices rising to levels that were--
    Mr. Heck. Got it.
    Mrs. Yellen. --outside of historic valuations.
    Mr. Heck. And what is an example of what you might then do?
    Mrs. Yellen. An important thing that we have done is to 
take steps to make the financial system stronger. All the steps 
coming out of Dodd-Frank to increase the quantity and quality 
of capital, to put in place tougher leverage standards--all the 
different things--liquidity rules--I won't go through the full 
list of them, but let me just say these do two things.
    First of all, if we were to have an unwinding of imbalances 
that occurred, it means that financial institutions and the 
financial sector would be in a much stronger position to 
withstand the shocks and to go on meeting the credit needs of 
the economy than they were in the run-up to this crisis.
    But second of all, all of those--the collection of rules we 
have put into effect and are now completing, we have to work 
our way through them, will work to restrain the build-up of 
these imbalances. For example, we will expect to put in place, 
are likely to put in place, measures that will require extra 
capital holdings against short-term wholesale financing. That 
discourages the build-up of leverage and overnight borrow that 
creates these risks.
    Mr. Heck. I got it. Thank you. Financial institutions 
should be put on notice as of now.
    I want to ask a question about the output gap, the 
difference between actual economic activity and that which 
would be sustaining at maximum employment and peak industrial 
output.
    The IMF puts America's output gap at $720 billion a year. 
The CBO puts it at a trillion. What is your personal opinion of 
about what it is?
    Mrs. Yellen. We don't have any official--
    Mr. Heck. I know. I asked your personal opinion, Madam 
Chair.
    Mrs. Yellen. Okay. So can I put it in a slightly different 
metric?
    Mr. Heck. You will anyway, so please go ahead.
    Mrs. Yellen. The unemployment rate is 6.1 percent. Members 
of our participants in the FOMC would see a normal, longer-term 
unemployment rate in the range of 5.2 to 5.5 percent. So, 
taking the lower end of that range is say a .9 percent gap in 
terms of the unemployment rate.
    A simple historical relationship that has fit pretty well--
this is just back of the envelope; it is not precise--called 
Okun's Law, would say that--
    Mr. Heck. Okun's?
    Mrs. Yellen. Okun's law, after Arthur Okun, would say that 
the output gap tends to be on the order of two or 2\1/2\ times 
that in terms of a percentage of GDP, so I think that gets us 
in the range of something like 2 or a little bit over 2 percent 
in terms of an output gap. But I want to emphasize, that is a 
back of the envelope calculation I am trying at your request 
rather than any official. But that is probably in line with 
what you said, but I am not sure.
    Mr. Heck. Thank you, Madam Chair.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney.
    Mr. Mulvaney. Thank you.
    Madam Chair, last time you were here you and I talked 
briefly about some discussions between Treasury and the Fed in 
the fall of 2013 regarding the debt ceiling, the possible 
prioritization of payments. I sent you several questions for 
the record in follow up to that and I received a response last 
week, which I appreciate.
    And I have to ask, just for the record, ma'am, do you 
actually read those or are they done by staff and you just sign 
them?
    Mrs. Yellen. I absolutely read them.
    Mr. Mulvaney. Thank you. You didn't answer a lot of my 
questions. I had asked for names of specific folks who were 
involved in those discussions.
    I asked--for example, you had invoked a certain privilege. 
You said you couldn't tell Congress what you had talked about 
because you have an agency relationship with the New York Fed 
and you couldn't tell us what you talked to them about.
    And I asked you for a specific legal justification for that 
privilege and you didn't answer that. So without wasting a lot 
of the time to actually get the answers, which I will do in a 
follow-up QFR today, do you think it is appropriate not to 
answer congressional inquiries on QFRs?
    Mrs. Yellen. I think we have answered to the best of our 
ability the questions you posed.
    Mr. Mulvaney. Good. And I will give you a chance in the 
follow-up to point out, in the answers you gave, where you are 
actually answering those questions.
    Let's get to the substance of the answers, because you gave 
me a very interesting answer, one that I have heard from 
members of the Administration several times, where you 
distinguish between a default on debt and a default on 
obligations. It is a term that has changed over the course of 
the discussion regarding the debt ceiling.
    It used to be that not raising the debt ceiling would 
supposedly lead to a default on the debt and the members of the 
Administration changed that language to use the term default on 
our obligations.
    And you continued that verbiage in your response where you 
said, ``A failure to pay Social Security benefits, contractors, 
or Armed Forces, et cetera, and other obligations as they come 
due will, in fact, be and will be viewed publicly as a default 
by the United States on its obligations.''
    And I won't go in now to Social Security benefits, 
contractors, Armed Forces. I will ask you this: We spent $1.9 
million last year on lifestyle training for Senate staffers. 
Would not doing that be deemed a default by the United States 
on its obligations?
    Mrs. Yellen. I really can't comment on a specific like 
that. I would simply say that the government has a wide range 
of obligations to contractors, to Social Security recipients--
    Mr. Mulvaney. They do. Would you agree with me that some 
are more important than others?
    Mrs. Yellen. That is not my judgment to make. That is up to 
Treasury and to the Congress to decide, not me.
    Mr. Mulvaney. But I guess if you are taking the position 
that not paying any of the obligations is a default, then not 
paying the $300,000 we spent to encourage Americans to eat 
caviar last year would be a default?
    Mrs. Yellen. When the government has purchased goods and 
services and is presented with a bill that has come due for 
those goods and services and it fails to pay bills when they 
come due--
    Mr. Mulvaney. Fair enough. But not paying things that 
haven't yet incurred and become due would not be a default, 
then, in your definition. So if we have an expense that we are 
going to incur next month but we do not, and therefore it does 
not come due, it is not a default, using your definition.
    Mrs. Yellen. The Treasury is making payments--
    Mr. Mulvaney. Treasury.
    Let's move on to the other topic I want to talk about, 
because we received a letter last week or late last month from 
Sheila Bair, former head of the FDIC, regarding the new reverse 
repo facility at the Fed. She had raised some concerns about 
it. I know I think the President of the New York Fed and also 
the Boston Fed raised some questions about it in a recent Wall 
Street Journal blog.
    Two questions, as quickly as I can. Number one, why did you 
not come to Congress to seek authority to create that facility?
    Mrs. Yellen. This is a repurchase agreement, which is a 
standard tool that we use in open market operations. It has 
long been--we have long had--
    Mr. Mulvaney. True, but this is a dramatic expansion, which 
is why you are doing it, I think correctly, on a test basis, 
correct? This is a new facility for you. It may be a 
reinvention of something that you have used or a re-
characterization, but it is a new facility.
    So I guess the answer is you didn't think you needed 
authority to come to Congress?
    Mrs. Yellen. We do have authority under the Federal Reserve 
Act to purchase and sell securities in the open market and in 
conduct of monetary policy, and I believe it falls under 
standing authority that the Federal Reserve has and we will use 
this facility only for the purpose of implementing monetary 
policy.
    Mr. Mulvaney. Fair enough. And let me ask you this: Do you 
share Ms. Bair's concern and that expressed by the Presidents 
of the New York and Boston Fed that perhaps this facility needs 
to be limited in its size and application?
    Mrs. Yellen. We have discussed and are aware of the 
potential--if it is available on very large scale and can be 
expanded and contracted very quickly--to create financial 
stability risks. And we absolutely intend to make sure that we 
address those risks.
    Mr. Mulvaney. Thank you, ma'am.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Nevada, Mr. 
Horsford.
    Mr. Horsford. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    And thank you, Chair Yellen, for being here today. It has 
been a very informative session on the state of the U.S. 
economy.
    An area that I wanted to explore from the monetary policy 
report is the issue of the slow recovery of housing and the 
housing market. I am from Nevada. We have the most unstable 
housing market in the country. About a third of our homeowners 
are upside-down, negative equity, some of them as high as 50 
percent or more.
    And so in the report, it indicates that while there was a 
slight increase in values and an uptick in the housing market, 
we are beginning to see a decline or a slowdown in that. And so 
I wanted to ask, what forces are contributing to this 
lackluster housing recovery?
    Mrs. Yellen. Housing did seem to be recovering throughout 
most of the recovery, and it looked like it was on a reasonably 
solid course, recovering from a very low level. And then we saw 
essentially a cessation of progress when mortgage rates rose 
significantly last year.
    I think my expectation was that would be a temporary 
setback for housing, and with mortgage rates higher but still 
at very low levels, and with a period of very weak household 
formation, I expected that we would see a rebound by now, a 
pickup in the housing sector.
    And frankly, it continues to be sluggish. I can't give you 
a precise reason why that has occurred. We are certainly aware 
of the fact that mortgage credit remains very, very tight, as I 
have said several times this morning, for a wide range of 
borrowers. And that may be part of it.
    We also hear about some supply constraints that builders 
face. Perhaps that is contributing. But I have to say that I am 
somewhat surprised.
    Mr. Horsford. So what more do you think the Fed can do to 
help stimulate recovery in the housing sector, both for those 
homeowners who are upside-down in the values, as well as to 
help new entrants be able to qualify for homes?
    Mrs. Yellen. Housing prices are continuing to increase, and 
they have increased substantially, and I think particularly in 
the markets that saw the worst booms and busts.
    I know particularly in Nevada, there is a very large 
fraction of homeowners who are underwater, but I think if you 
look at the aggregate numbers, just the increase in house 
prices we have seen--and I think that is in part reflecting our 
accommodative monetary policy--many fewer borrowers are 
underwater. The numbers have diminished substantially.
    And, I know the Las Vegas area particularly is one of the 
most hard-hit and still has about the highest numbers on this. 
But I really think that our policy is helping, and I think 
eventually we will see greater progress in the housing market.
    But, there are many impediments that servicers face in the 
aftermath of the problems and the foreclosure problems we have 
had during the crisis and things have not yet settled out 
there.
    Mr. Horsford. Definitely.
    At yesterday's Senate Banking Committee hearing, you stated 
that, ``Too many Americans remain unemployed, inflation remains 
below our longer-run objective, and not all of the necessary 
financial reform initiatives have been completed.''
    What benchmarks are you looking at when determining if a 
full recovery has taken place? And what does a full recovery 
look like, from your perspective?
    Mrs. Yellen. We have emphasized that at this stage we are 
not looking at just one or two statistics and assessing the 
labor market. We are taking into account many different 
measures of performance.
    Probably the unemployment rate is the single best 
indicator, and it has come down to 6.1 percent, which is really 
notable progress, and broader indicators that include 
marginally attached workers, discouraged workers, and those 
with involuntary unemployment, part-time employment, those have 
come down as well. But that is not at levels that most members 
of our committee would consider full employment.
    We are looking at the extent of long-term unemployment. We 
are looking to see if there are groups that have dropped out of 
the labor force that may indicate why labor force participation 
has declined so much. I am hopeful that some of that will 
reverse as the economy strengthens.
    We are looking at measures of hiring and quits that remain 
below normal and suggest not a normal labor market at this 
point.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    Chair Yellen, thank you very much for being here. In your 
role, you are balancing the metaphorical gold standard of our 
currency, and I know that can be very difficult.
    In your opening statement, with regard to the monetary 
policy, it says that the committee seeks to explain its 
monetary policy decisions to the public as clearly as possible. 
In trying to keep it as clear as possible for my constituency 
back home, especially those who are on fixed incomes, what hope 
or what prognosis can you give, as clearly as possible, to 
those on fixed incomes?
    Is this a positive? Is there an opportunity that they are 
going to see greater returns on their investments, or are they 
going to have to see eating into principal? Fixed-income people 
in central Florida--there are a lot of them.
    Mrs. Yellen. I know it has been a really hard time for 
savers who are trying to exist on the returns you would earn on 
a safe investment, like a savings account. And that has been a 
heavy toll for those households.
    Mr. Ross. It has led to abbreviated retirements and return 
to the workforce. That might be one of the reasons why 
unemployment has gone down.
    Mrs. Yellen. But they can be hopeful that as the economy 
recovers, and interest rates in a sense, they are not just set 
arbitrarily; they reflect fundamental economic forces. And the 
fundamental--
    Mr. Ross. That you control, fortunately--or unfortunately, 
depending on who you are talking to. But yes, you are right.
    Mrs. Yellen. It is a lot to save, and there is not much 
demand for those savings in the form of investment. And that 
means that--
    Mr. Ross. As you discontinue the buyback, I think that 
should hopefully put some more pressure on upward rates for 
savings. Wouldn't you agree?
    Mrs. Yellen. As the economy recovers and we begin to 
normalize policy, eventually interest rates will go up. So if 
the recovery continues, I would envision rising interest rates 
over time. And we have tried to spell out what we envision.
    Mr. Ross. Thank you.
    Let's talk briefly about SIFIs, because the last time you 
were here we discussed this. And specifically, I think you 
would agree that the fewer systemically important financial 
institutions that we have, the better off we are.
    And in fact, we have now have some insurance companies that 
are being designated SIFIs. My big concern is that they should 
be designated as a SIFI as a last resort, when nothing else is 
out there to help them. I think you would agree with that.
    Mrs. Yellen. Well, sure. I think there has to be clear 
evidence that--
    Mr. Ross. But when they are at that level, shouldn't we 
allow for some opportunity for self-correction, or an 
opportunity so that they can keep from being designated as a 
SIFI? In other words, these entities don't know they are a SIFI 
until it is too late.
    Wouldn't you agree that there should be more transparency, 
more involvement, whether it be some role for the Fed to come 
in there and keep them from being a SIFI? And wouldn't that 
send a message to keep others from also ever being designated 
as that, taking appropriate action?
    Mrs. Yellen. I think the FSOC has tried to make clear what 
the criteria are,--
    Mr. Ross. I would differ with you on that--
    Mrs. Yellen. --that they will take into account, and I 
don't really think it was any surprise to these institutions 
that they are on the list. And of course, after they are 
designated, if they wanted to change their structure 
substantially enough, that situation could potentially change.
    Mr. Ross. Quickly, I see that you have just commissioned 
Tom Sullivan to assist in capital standards, and I think that 
is a very good move. I want to make sure that we are adequately 
representing this industry, this insurance industry, especially 
with regard to international capital standards.
    And that has me concerned because I think you have 
testified yesterday that maybe if--even if there are 
international standards, that we may not abide by them. And 
that--
    Mrs. Yellen. What I said was that if international 
standards are agreed to, nothing becomes--
    Mr. Ross. We are not compelled to do it.
    Mrs. Yellen. --nothing happens in the United States unless 
we go through a full range of--
    Mr. Ross. We are still going to be at the table, though, 
with regard to the negotiation of those standards, correct?
    Mrs. Yellen. We are sitting at the table, and state 
insurance commissioners are there with us. We--
    Mr. Ross. Good.
    Mrs. Yellen. --consult with the Federal Insurance Office. 
And as you noted, we are adding--
    Mr. Ross. I just have one little quick question, one last 
question. Just recently this month the President was speaking 
and he said, ``Right now, if you are one of the big banks, 
profit center is the trading desk, and you can generate a huge 
amount of bonuses by making some big bets. You will be rewarded 
on the upside. That is going to require some further reforms,'' 
the President said. ``That is going to require us taking 
additional--looking at additional steps that we can take.''
    Have you talked to the President about further reforms?
    Mrs. Yellen. No.
    Mr. Ross. Okay. Do you think that Dodd-Frank is appropriate 
in terms of its reforms that have been imposed on the market so 
far?
    Mrs. Yellen. I am not certain what he is referring to 
there.
    Mr. Ross. Okay. Thank you.
    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, how are you?
    Mrs. Yellen. Good, thank you.
    Mr. Royce. I am glad you are with us again. I want to 
encourage you on a theme that you spoke to recently, and that 
is this question of the unsustainable path, as you mentioned, 
of entitlement spending that we have known about for decades.
    There is a new Congressional Budget Office report that just 
came out and it releases new numbers. It says that the long-
term debt will equal 100 percent of the overall economy within 
25 years.
    I think this goes to your point that, in your words, this 
is a critical issue facing the country. I talked to Ben 
Bernanke about this and his predecessor, Alan Greenspan. Isn't 
there a way to ring that bell a little louder so that people 
understand what this means for the next generation? And I will 
ask you that and give you the floor here to amplify that 
message if you would like.
    Mrs. Yellen. I believe this is a critical problem that 
Congress should really try very hard to address in the 
Administration. It is one we have known about for decades. 
There is nothing fundamentally new here. We have just come 
closer to the problem without taking the necessary steps.
    I think it relates to trends in health care costs, combined 
with an aging population. That is certainly not news. There are 
many organizations that have been trying to explain, I believe, 
to the American people how serious this problem is.
    Mr. Royce. I want to encourage you to continue to do what 
you are doing on that front. If I might recommend opening every 
speech with trying to get people's attention, both in Congress 
and around the country, about this problem and what it will 
mean for future generations.
    I also have a fiscal policy question for you, and it is on 
an issue on which I find myself in agreement with our current 
Treasury Secretary. We must do more to discourage these 
inversion transactions, and that is the use of mergers and a 
change of the P.O. box to avoid paying higher taxes here in the 
United States.
    And in 1997 in your confirmation hearing, you said that the 
tax structure impacts decisions about work and investment. 
Other things being equal, lower taxes are better than higher 
taxes.
    I am wondering, on the corporate tax part of this, if you 
have looked at this issue of inversion or if you have been 
involved in any conversations about the impact of our current 
tax system and relatively high marginal corporate tax rates, on 
job loss? And is this something you have discussed with 
Secretary Lew?
    And on comprehensive tax reform, including a reduction of 
U.S. corporate tax rates, that is one possible solution to this 
problem. I wish we had--as you say, I wish we had more than a 
letter from the Treasury Secretary calling for--the words here 
that he used were, ``a new sense of economic patriotism.''
    We are going to need more than that new sense of economic 
patriotism. We need real leadership. And we need leadership out 
of the White House and we need leadership all around to pass a 
comprehensive tax reform.
    Only President Reagan made it possible in 1986, in my view, 
and he did that in engagement with Tip O'Neill, right? And only 
an engaged President will make it possible today.
    But could you speak to this inversion issue on what we 
might be able to do?
    Mrs. Yellen. I am sorry to say this is an issue that, while 
I am aware of it, I am not an expert on it. And it is a complex 
set of issues, and I think it is entirely appropriate for the 
Congress and the Administration to frame policy to deal with 
it.
    But I don't think it is appropriate for me to give specific 
advice about how--
    Mr. Royce. I understand that. But we are going to continue 
to lose ground in terms of economic productivity that you have 
spoken to in the country. If companies continue to change their 
domicile, we are going to lose receipts, we are going to lose 
jobs.
    All of that is going to compound that problem that we spoke 
to earlier, which is now the long-term debt equals 100 percent 
of the overall economy 25 years from now under current 
trajectory. So if we want to change the trajectory, we have to 
do something, in my view, about this problem as well.
    Mrs. Yellen. I think it is entirely appropriate to try to 
frame appropriate policies to deal with this issue.
    Mr. Royce. Thank you, Chair Yellen.
    And thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair wishes to announce that we have three Members 
left in the queue. It is the Chair's intention to clear these 
three Members and excuse our witness, so if there are Members 
monitoring the hearing in their offices wanting to hasten over 
here to ask questions, do not bother.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being with us again today.
    Mrs. Yellen. Thank you.
    Mr. Pittenger. Chair Yellen, Alice Rivlin, who was 
President Clinton's appointee to be Vice Chair of the Fed, 
endorsed the cost-benefit analysis requirement of the FRAT Act. 
Do you agree with her?
    Mrs. Yellen. I'm sorry, what did she endorse?
    Mr. Pittenger. She endorsed the cost-benefit analysis of 
the FRAT Act, the bill that we have been discussing today with 
Mr. Huizenga. Do you agree with her?
    Mrs. Yellen. I believe the Federal Reserve does do cost-
benefit analysis where it is appropriate. When we--
    Mr. Pittenger. Do you believe it is appropriate in this 
case?
    Mrs. Yellen. I don't endorse the version of what is 
required in the FRAT Act. But I think we do appropriate and 
detailed and careful analysis of alternative ways to implement 
a regulation that implements a law that is passed by Congress. 
Rules--
    Mr. Pittenger. I appreciate what you are saying, Chair 
Yellen, but--so the bottom line is that you would not agree 
with Ms. Rivlin on this?
    Mrs. Yellen. I didn't have a chance to review her remarks, 
but I wouldn't endorse what is in the FRAT Act.
    Mr. Pittenger. Chair Yellen, we saw a recent report from 
the CBO that Obamacare is estimated to cost 2.5 million jobs 
over the next decade. Has the Fed done any estimates of how 
many jobs the implementation of Dodd-Frank is expected to cost 
the economy? Or is the Fed even interested in that?
    Mrs. Yellen. In evaluating a number of different 
regulations, we have attempted to do cost-benefit analysis. The 
overall conclusion we came to, for example, when we looked at 
our capital rules, was that the reduced probability of a 
financial crisis, which takes an enormous toll on jobs--and we 
have just lived through that so we can see how large that can 
be--that the reduction in the odds we would live through a 
period like this again resulted in benefits that exceeded the 
cost of implementing higher capital standards.
    Mr. Pittenger. We sure are seeing it in North Carolina. In 
my district alone, the building permits aren't even up to 50 
percent of what they were in 2008. That is a lot of lost jobs.
    The same is true with community banks, the consolidations. 
There has been a lot of impact. And I would think that a 
measurable effect of Dodd-Frank would certainly be warranted.
    Chair Yellen, with the lackluster growth we have had, 
though, there have been some bright spots. One in particular is 
in the energy sector. The Dakotas, Texas, Oklahoma, and other 
energy-producing States have presented--have had great job 
growth, particularly as it relates to the energy revolution 
that has come from the fracturing and other production of 
fossil fuels.
    Chair Yellen, what effect would opening up other resources, 
the OCS, expanded drilling areas on land, ANWR, across the 
United States, have on the GDP, and what type of impact would 
that have on job growth?
    Mrs. Yellen. I would agree that we have seen a remarkable 
growth in the energy industry and a transformation of energy, 
our dependence on the rest of the world for energy.
    We don't do calculations in the Federal Reserve of the type 
that you have asked about, what impact it would have on GDP--
    Mr. Pittenger. But it is common sense. You would agree that 
if we opened it up to the OCS and the other lands and ANWR that 
it could make an even greater, measurable difference?
    Mrs. Yellen. As you know, there are complicated policy 
issues and a number of different factors that come into play. 
And I think that is not in the domain of the Federal Reserve to 
opine on what is the right public policy in this area.
    Mr. Pittenger. Given the right political atmosphere, it 
would create jobs.
    Chair Yellen, the Federal Reserve is now in the business of 
regulating insurance companies and currently supervises two 
insurance companies which have been designated as SIFIs, AIG 
and Prudential, and nearly a dozen insurance companies that 
have owned depository institutions, the likes of Nationwide 
Insurance, State Farm, and TIAA-CREF, to name a few.
    Chair Yellen, other than one appointee who is now on that 
Board, a recently hired senior adviser with extensive 
background in insurance, how many full-time employees has the 
Fed hired with insurance expertise in the last year? And did 
the hires possess a particular insurance expertise?
    Mrs. Yellen. I can't give you a number, but I can tell you 
that we have worked hard both at the Board and in the Reserve 
Banks to increase our expertise. We are working closely with 
the Federal Insurance Office, with State regulators, and are 
trying to tailor supervision--
    Mr. Pittenger. Thank you. We are out of time. It does make 
sense, though, doesn't it?
    Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being with us today.
    I would like to talk a little bit about the Federal Reserve 
Accountability and Transparency Act, which has been the topic 
of some discussion today. And what I am hearing from across the 
aisle with our colleagues, I have heard talk of a straitjacket. 
And then I think I heard you testifying about a ``rigid rule'' 
that you described in the proposed legislation.
    Is it your testimony that this bill requires the Fed to 
follow a rigid rule for monetary policy?
    Mrs. Yellen. It requires us, as I understand it, to specify 
a rule, and when we don't follow it, to explain exactly what 
the logic is or how we have changed the rule, and then calls 
for very rapid GAO involvement in overseeing the conduct of 
monetary policy if for any reason we were to deviate from the 
rule and--
    Mr. Rothfus. I look at the Act and I see two rules 
described: a directive policy rule; and a reference policy 
rule. Now, the reference policy rule does set forth parameters 
for calculating a Fed funds rate. But there is no requirement 
in this Act that would require the FOMC to follow the reference 
policy rule, correct?
    Mrs. Yellen. That is what I see in the legislation, but--
    Mr. Rothfus. So then we have a directive policy rule that 
simply requires the Fed to identify an interest rate. That is 
what the Fed is already doing when it announces a policy. It 
identifies an interest rate--and an explanation of what the 
FOMC doing.
    If we were to boil down the directive policy rule, that is 
essentially saying it is--we are going to say there is going to 
be an interest rate and an explanation of what the Fed--FOMC is 
doing. Is that right?
    Mrs. Yellen. I think we regard it as incumbent upon 
ourselves to explain why we have adopted the policy we have, 
and--
    Mr. Rothfus. And so that is what--basically that is what we 
are talking about here--
    Mrs. Yellen. Well, no--
    Mr. Rothfus. --and the added requirement that you would 
explain or educate the Members of Congress and the American 
people on why you would deviate from a standard that was in 
place, similar to what was happening during the great 
moderation.
    Mrs. Yellen. It requires the specification of a 
mathematical rule and models and forecasts, which goes much, 
much, much further in straitjacketing how we would set monetary 
policy than setting an interest rate and providing Congress and 
the public with a explanation of the rationale for our policy 
decision, and then would bring to bear on Federal Reserve 
decision-making very quickly, in real time, oversight from the 
GAO and from Congress, and I believe fully bring into the 
process of Federal Reserve decision-making essentially short-
term political influences.
    I don't believe it is--
    Mr. Rothfus. I would like to talk a little bit about the 
independence of the Fed--again, another focus of our hearing 
today. Does this apply to the Fed's regulatory responsibilities 
as well as its monetary policy?
    Mrs. Yellen. It is an exception that Congress made for 
monetary policy.
    Mr. Rothfus. Okay. When we talk about writing a cost-
benefit analysis requirement into law to ensure that the 
benefits of the Fed's regulations are greater than their costs, 
the same requirement that currently applies to the SEC and 
CFTC, we hear that judicial review under such a statute would 
compromise the Fed's independence.
    Does the Fed's independence require that the Fed be exempt 
from review of its rules by the courts?
    Mrs. Yellen. The term, to me, ``Fed independence,'' applies 
to monetary policy. I feel the cost-benefit analysis that we do 
is adequate, but that is a separate matter.
    Mr. Rothfus. Okay. I want to follow up on Congressman 
Pittenger's line of questioning about the designation of 
insurance companies as SIFIs.
    Other than hiring Thomas Sullivan as a senior adviser, what 
steps have you taken to ensure that the Federal Reserve has the 
requisite expertise to regulate insurance companies?
    Mrs. Yellen. We have hired individuals with that expertise, 
especially when we have taken on the oversight and supervision 
of savings and loan holding companies, some of which have heavy 
insurance involvement, including the ones that the Congressman 
mentioned. We have really greatly built our expertise and 
understanding of the insurance industry and its unique 
characteristics.
    We have explicitly, when we came out with our 165 rules, 
refrained from putting in effect capital rules that would apply 
to heavily insurance-based companies in order to make sure that 
we thoroughly understand their unique characteristics.
    Mr. Rothfus. I thank the chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    Last but not least, another gentleman from Pennsylvania, 
Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you, Chairman Hensarling.
    I also want to thank Chair Yellen for the investment of 
time you have made here. I think you have been very generous 
with your time, which I know we all appreciate.
    The number one issue in my district back in Bucks County, 
Pennsylvania, is jobs and the economy. And there has been much 
said about what appears to be a government rate of improving 
unemployment rate and what that says about our economy. And you 
have talked about that both in your policy report and your 
written statement here today.
    In your oral statement, Chair Yellen, you said the 
unemployment rate has fallen nearly 1.5 percentage points over 
the past year. It stood at 6.1 percent in June, which is down 4 
points--
    Chairman Hensarling. The gentleman will suspend. The clerk 
is having a little trouble hearing the gentleman. If you could 
speak a little closer to the microphone?
    Mr. Fitzpatrick. Much has been said about the unemployment 
rate falling 4 points from the height. My concern is that these 
government numbers don't seem to distinguish between full-time 
employment and part-time employment--
    Chairman Hensarling. I'm sorry. If the gentleman would 
suspend one more time. For whatever reason, the clerk still 
can't hear the gentleman. Would you mind using the microphone 
adjacent to you and let's see if that corrects the problem?
    Mr. Fitzpatrick. Is that better?
    Chairman Hensarling. Perhaps the microphone for Mr. 
Westmoreland might work?
    I apologize. Let's try this.
    Mr. Fitzpatrick. Okay.
    Chair Yellen, in March you gave a speech about what the Fed 
is going to tackle the unemployment rate, and you made this 
observation--this is a quote: ``The existence of such a large 
pool of partly unemployed workers is a sign that labor 
conditions are worse than indicated by the unemployment rate.'' 
That was the National Interagency Community Reinvestment 
Conference in Chicago. That was back in March.
    Do you believe that the unemployment rate, as currently 
reported by the Bureau of Labor Statistics, is an accurate 
snapshot of the labor market?
    Mrs. Yellen. It is one particular measure but it is 
obviously not complete. The Bureau of Labor Statistics reports 
on the number of individuals who are part-time employed and 
involuntarily so would like more work, and that figure has been 
running about 5 percent of the labor force, which is an 
unusually high level.
    The Labor Department computes some broader statistics 
pertaining to unemployment. One of them is called U-6, and it 
is the standard civilian unemployment rate with those 
involuntary part-time employees added in, and also those who 
were discouraged or marginally attached to the labor force, and 
that is a number that is much higher. It is running around 12 
percent; it has come down significantly, along with the 
narrower measure of unemployment. But clearly what is called 
the U-3, or the 6.1 percent unemployment rate, is not a 
complete measure of what is happening in the labor market.
    That is why we have said, the Federal Reserve, the FOMC has 
said, we are looking at a broad measure of indicators, 
including many indicators of the labor market, to assess where 
it stands.
    Mr. Fitzpatrick. Because many here on the legislative side 
look at the unemployment rate, I guess it is the U-3, which is 
6.1 percent, and looking at that to drive policy decisions on 
spending, on programs, and the like.
    So which do you think is the better reflection of the true 
employment picture of our Nation? Because my constituents are 
not buying the 6.1 percent. It doesn't feel right. They know it 
is not right. It is not an accurate reflection of what is 
really going on in the economy in real towns across America.
    Mrs. Yellen. That is why I believe you have to look at many 
measures of the labor market, and there obviously is more 
distress than is captured in that 6.1 percent number, and the 
12 percent, for example, or roughly the U-6 measure is 
capturing a broader range of distress.
    But there are many metrics. We can't judge something as 
complicated as the labor market by one number--
    Mr. Fitzpatrick. Is there anything in particular that the 
Bureau of Labor Statistics can do to create a more accurate 
picture of the economy?
    Mrs. Yellen. I think we shouldn't try to look for one 
single number to assess what is a complicated phenomenon. If I 
had to choose one and only one number to look at, I would 
choose the 6.1 percent U-3 number. But I don't think that is 
adequate and I think we should want a broad range of 
measurements of different aspects of the labor market and to 
keep them all in mind.
    Mr. Fitzpatrick. I remain concerned by these monthly 
reports that say the unemployment rate is coming down not 
counting individuals who are--distinguishing between those who 
work part-time and those who work full-time, not counting 
individuals who are not actively engaged in a search, who have 
given up on the search. People are desperately looking for 
work. They are not reflected in the numbers of the government 
that is supposed to care about that.
    Mrs. Yellen. I agree, and I mentioned my own concern with 
some who are simply measured as out of the labor force who 
might rejoin and want work if it were available.
    Mr. Fitzpatrick. Madam Chair, thanks for your service. I 
appreciate it.
    Mrs. Yellen. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    I would like to thank Chair Yellen for her testimony today.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this witness and to place her 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 1:03 p.m., the hearing was adjourned.]
                            A P P E N D I X



                             July 16, 2014



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