[Senate Hearing 113-77]
[From the U.S. Government Publishing Office]






                                                         S. Hrg. 113-77


        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2013

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

      OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- 
       ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978

                               __________

                             JULY 18, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                   Glen Sears, Deputy Policy Director

                      Krishna Patel, FDIC Detailee

                 Riker Vermilye, Legislative Assistant

                  Greg Dean, Republican Chief Counsel

            Chad Davis, Republican Professional Staff Member

             Mike Lee, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)













                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 18, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2

                                WITNESS

Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     3
    Prepared statement...........................................    28
    Responses to written questions of:
        Chairman Johnson.........................................    32
        Senator Crapo............................................    35
        Senator Reed.............................................    37
        Senator Hagan............................................    38
        SenatorWarren............................................    39
        Senator Heitkamp.........................................    41

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated July 18, 2013.......    43

                                 (iii)

 
        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2013

                              ----------                              


                        THURSDAY, JULY 18, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:45 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order. Today we welcome Chairman Bernanke back to the Committee 
to deliver the Federal Reserve's semiannual Monetary Policy 
Report.
    Nearly 5 years after the worst financial crisis since the 
Great Depression, the U.S. economy continues to show signs of 
improvement. Recently, we have seen the housing market 
strengthen and payroll employment firm up. Private sector job 
growth strengthened this year to around 200,000 jobs per month. 
The economy has shown signs of resilience despite fiscal 
tightening.
    On housing, I am pleased to see that the recovery is 
gaining momentum, with solid home price gains nationwide. New 
home construction has seen double-digit growth, and single-
family home sales have also picked up. Many homeowners remain 
underwater, but overall numbers continue to decline. Going 
forward, I would encourage the Fed to be thoughtful in its 
actions to make sure these positive trends in housing continue.
    Congress has a role to play, too. To address FHA's short-
term challenges, Ranking Member Crapo and I released details 
this week of bipartisan legislation to get FHA back on stable 
footing and strengthen a program important to many Americans. 
Following this effort, we will turn to comprehensive housing 
finance reform legislation.
    Much progress has been made, but the labor market has not 
fully recovered from the Great Recession. Labor force 
participation remains low even when accounting for retiring 
baby boomers, and long-term unemployment remains near historic 
levels. Moreover, youth unemployment remains high, and even 
many young college graduates struggle to find gainful 
employment. These trends have lasting effects on the economy. 
Over the longer term, skill erosion from prolonged unemployment 
would reduce our economy's potential. It is important that we 
help, not hurt, young Americans' prospects and why it is so 
important that Congress finds a reasonable solution to the 
recent increase in student loan rates.
    To fulfill its dual mandate, the Fed should not prematurely 
step on the brakes. With consumer price inflation low and the 
unemployment rate unacceptably high, the Fed must continue to 
take action to support employment. When the time comes, it is 
important that monetary policy adjustments are gradual and do 
not disrupt financial stability and economic growth.
    Chairman Bernanke, I thank you for your years of service 
and leadership at the Federal Reserve during a challenging 
period in our Nation's history, and I look forward to hearing 
your testimony.
    I now turn to Ranking Member Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. And 
Chairman Bernanke, welcome.
    I welcome our Federal Reserve Chairman Ben Bernanke back to 
the Banking Committee to testify at the semiannual Humphrey-
Hawkins hearing regarding the Federal Reserve's monetary policy 
and the state of the economy.
    In recent weeks, the prudential banking regulators have 
been very active on a number of regulatory fronts, including 
releasing final regulations to implement the Basel III capital 
rules and proposed regulations on capital leverage ratios. I 
thank Chairman Bernanke personally for addressing the concerns 
that Chairman Johnson and I raised in our February letter about 
the unique characteristics of community banks and insurance 
companies. A one-size-fits-all approach regarding capital rules 
does not work for these types of entities.
    With regard to monetary policy, we have experienced a 
period where the Fed has pushed the short-term interest rate 
down to zero more than 4 years ago. The Fed pursued 
quantitative easing, or what has become known as ``QE'', in 
order to suppress long-term interest rates. As a result, the 
Fed's balance sheet now stands at nearly $3.5 trillion, with an 
additional $85 billion every month in long-term assets being 
added.
    Recently released FOMC minutes from the June meeting 
indicate that several members of the Board felt that a 
reduction in asset purchases would likely soon be warranted. 
Several noted economists have called into question whether the 
benefits of these purchases outweigh the risks. The negative 
reaction by equity markets to the June FOMC statement on 
tapering indicates that some of the increase in the prices of 
equities and other assets recently is attributable to the Fed's 
balance sheet expansion and not to purely economic 
fundamentals. In fact, June marked the worst month on record 
for bond fund outflows.
    The reaction indicates that markets are still heavily 
reliant on Government intervention, which is not good for the 
long-term health of the economy. I am interested to hear from 
Chairman Bernanke to what extent the Fed anticipates the 
inevitable tapering process will cause in terms of additional 
periods of market volatility.
    Because the official stance of the Fed is that the decision 
to taper remains data dependent, I am interested in hearing if 
the Chairman believes laying out specific data would improve 
both the Fed's commitment to the policy and the market's 
reaction to it.
    Beyond tapering, which is simply slowing the rate of growth 
of the Fed's balance sheet, is the more important issue of 
winding down the Fed's massive balance sheet. The Fed has 
indicated that it may continue to roll over its holdings of 
long-term assets, which means that its balance sheet may not 
shrink for some time.
    A key element of the exit strategy adopted by the FOMC in 
June of 2011 is a 3- to 5-year period over which the Fed 
expected that it could completely eliminate its holdings of 
agency securities. This was done for the purpose of minimizing 
the extent to which the agency securities portfolio might 
affect the allocation of credit across sectors of the economy. 
Since then, the balance sheet has increased in size by more 
than 20 percent to, as I said, almost $3.5 trillion, and the 
Fed's holding of agency securities has increased by more than 
30 percent to about $1.2 trillion.
    Why does the Fed see the need for such accommodative policy 
to continue into the future?
    In light of the Fed's large portfolio increases, the 
dominant role that the GSEs play in today's mortgage market and 
the recent increases in the level and volatility of mortgage 
rates, will the Fed revise its balance sheet exit strategy 
principles? In particular, will the Fed be revising the time 
period over which it expects to eliminate its holdings of 
agency securities?
    It is my hope that this hearing gives us additional insight 
into the Fed's plans for the future reduction of asset 
purchases and a road map for a return to normalized, rules-
based monetary policy.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    To preserve time for questions, opening statements will be 
limited to the Chair and Ranking Member. I would like to remind 
my colleagues that the record will be open for the next 7 days 
for additional statements and any other materials.
    I would like to welcome Chairman Bernanke. Dr. Bernanke is 
currently serving a second term as Chairman of the Board of 
Governors of the Federal Reserve System. His first term began 
under President Bush in 2006. Before that, Dr. Bernanke was 
Chairman of the Council of Economic Advisers and served as a 
member of the Board of Governors of the Federal Reserve System.
    Chairman Bernanke, please being your testimony.

 STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you, Mr. Chairman, Ranking Member 
Crapo, and other Members of the Committee. I am pleased to 
present the Federal Reserve's semiannual Monetary Policy Report 
to the Congress. In my brief remarks I will discuss current 
economic conditions and the outlook and then turn to monetary 
policy, and I will finish with a short summary of our ongoing 
work on regulatory reform.
    With respect to the outlook, the economic recovery has 
continued at a moderate pace in recent quarters despite the 
strong headwinds created by Federal fiscal policy.
    Housing has contributed significantly to recent gains in 
economic activity. Home sales, house prices, and residential 
construction have moved up over the past year, supported by low 
mortgage rates and improved confidence in both the housing 
market and the economy. Rising housing construction and home 
sales are adding to job growth, and substantial increases in 
home prices are bolstering household finances and consumer 
spending while reducing the number of homeowners with 
underwater mortgages. Housing activity and prices seem likely 
to continue to recover, notwithstanding the recent increases in 
mortgage rates, but it will be important to monitor 
developments in this sector carefully.
    Conditions in the labor market are improving gradually. The 
unemployment rate stood at 7.6 percent in June, about a half 
percentage point lower than in the months before the Federal 
Open Market Committee initiated its current asset purchase 
program in September. Nonfarm payroll employment has increased 
by an average of about 200,000 jobs per month so far this year. 
Despite these gains, the jobs situation is far from 
satisfactory, as the unemployment rate remains well above its 
longer-run normal level, and rates of underemployment and long-
term unemployment are still much too high.
    Meanwhile, consumer price inflation has been running below 
the Committee's longer-run objective of 2 percent. The price 
index for personal consumption expenditures rose only 1 percent 
over the year ending in May. This softness reflects in part 
some factors that are likely to be transitory. Moreover, 
measures of longer-term inflation expectations have generally 
remained stable, which should help move inflation back up 
toward 2 percent. However, the Committee is certainly aware 
that very low inflation poses risks to economic performance--
for example, by raising the real cost of capital investment--
and increases the risk of outright deflation. Consequently, we 
will monitor this situation closely as well, and we will act as 
needed to ensure that inflation moves back toward our 2-percent 
objective over time.
    At the June FOMC meeting, my colleagues and I projected 
that economic growth would pick up in coming quarters, 
resulting in gradual progress toward the levels of unemployment 
and inflation consistent with the Federal Reserve's statutory 
mandate to foster maximum employment and price stability. 
Specifically, most participants saw real GDP growth beginning 
to step up during the second half of this year, eventually 
reaching a pace between 2.9 and 3.6 percent in 2015. They 
projected the unemployment rate to decline to between 5.8 and 
6.2 percent by the final quarter of 2015. And they saw 
inflation gradually increasing toward the Committee's 2-percent 
objective.
    The pickup in economic growth projected by most Committee 
participants partly reflects their view that Federal fiscal 
policy will exert somewhat less drag over time, as the effects 
of the tax increases and the spending sequestration diminish. 
The Committee also believes that risks to the economy have 
diminished since the fall, reflecting some easing of financial 
stresses in Europe, the gains in housing and labor markets that 
I mentioned earlier, the better budgetary positions of State 
and local governments, and stronger household and business 
balance sheets. That said, the risks remain that tight Federal 
fiscal policy will restrain economic growth over the next few 
quarters by more than we currently expect, or that the debate 
concerning other fiscal policy issues, such as the status of 
the debt ceiling, will evolve in a way that could hamper 
recovery. More generally, with the recovery still proceeding at 
only a moderate pace, the economy remains vulnerable to 
unanticipated shocks, including the possibility that global 
economic growth may be slower than currently anticipated.
    With unemployment still high and declining only gradually, 
and with inflation running below the Committee's longer-run 
objective, a highly accommodative monetary policy will remain 
appropriate for the foreseeable future.
    In normal circumstances, the Committee's basic tool for 
providing monetary accommodation is its target for the Federal 
funds rate. However, the target range for the Federal funds 
rate has been close to zero since late 2008 and cannot be 
reduced meaningfully further. Instead, we are providing 
additional policy accommodation through two distinct yet 
complementary policy tools. The first tool is expanding the 
Federal Reserve's portfolio of longer-term Treasury securities 
and agency mortgage-backed securities; we are currently 
purchasing $40 billion per month in agency MBS and $45 billion 
per month in Treasuries. The second tool is ``forward 
guidance'' about the Committee's plans for setting the Federal 
funds rate target over the medium term.
    Within our overall policy framework, we think of these two 
tools as having somewhat different roles. We are using asset 
purchases and the resulting expansion of the Federal Reserve's 
balance sheet primarily to increase the near-term momentum of 
the economy, with the specific goal of achieving a substantial 
improvement in the outlook for the labor market in a context of 
price stability. We have made some progress toward this goal, 
and with inflation subdued, we intend to continue our purchases 
until a substantial improvement in the labor market outlook has 
been realized. In addition, even after purchases end, the 
Federal Reserve will be holding its stock of Treasury and 
agency securities off the market and reinvesting the proceeds 
from maturing securities, which will continue to put downward 
pressure on longer-term interest rates, support mortgage 
markets, and help to make broader financial conditions more 
accommodative.
    We are relying on near-zero short-term interest rates, 
together with our forward guidance that rates will continue to 
be exceptionally low--this is our second tool--to help maintain 
a high degree of monetary accommodation for an extended period 
after asset purchases end, even as the economic recovery 
strengthens and unemployment declines toward more normal 
levels. In appropriate combination, these two tools can provide 
the high level of policy accommodation needed to promote a 
stronger economic recovery with price stability.
    In the interest of transparency, Committee participants 
agreed in June that it would be helpful to lay out more details 
about our thinking regarding the asset purchase program--
specifically, to provide additional information on our 
assessment of progress to date, as well as of the likely 
trajectory of the program if the economy evolves as projected. 
This agreement to provide additional information did not 
reflect a change in policy.
    The Committee's decisions regarding the asset purchase 
program (and the overall stance of monetary policy) depend on 
our assessment of the economic outlook and of the cumulative 
progress toward our objectives. Of course, economic forecasts 
must be revised when new information arrives and thus are 
necessarily provisional. As I noted, the economic outcomes that 
Committee participants saw as most likely in their June 
projections involved continuing gains in labor markets, 
supported by moderate growth that picks up over the next 
several quarters as the restraint from fiscal policy 
diminishes. Committee participants also saw inflation moving 
back toward our 2-percent objective over time. If the incoming 
data were to be broadly consistent with these projections, we 
anticipated that it would be appropriate to begin to moderate 
the monthly pace of purchases later this year. And if the 
subsequent data continued to confirm this pattern of ongoing 
economic improvement and normalizing inflation, we expected to 
continue to reduce the pace of purchases in measured steps 
through the first half of next year, ending them around 
midyear. At that point, if the economy had evolved along the 
lines we anticipated, the recovery would have gained further 
momentum, unemployment would be in the vicinity of 7 percent, 
and inflation would be moving toward our 2-percent objective. 
Such outcomes would be fully consistent with the goals of the 
asset purchase program that we established in September.
    I emphasize that, because our asset purchases depend on 
economic and financial developments, they are by no means on a 
preset course. On the one hand, if economic conditions were to 
improve faster than expected and inflation appeared to be 
rising decisively back toward our objective, the pace of asset 
purchases could be reduced somewhat more quickly. On the other 
hand, if the outlook for employment were to become relatively 
less favorable, if inflation did not appear to be moving back 
toward 2 percent, or if financial conditions--which have 
tightened recently--were judged to be insufficiently 
accommodative to allow us to attain our mandated objectives, 
the current pace of purchases could be maintained for longer. 
Indeed, if needed, the Committee would be prepared to employ 
all of its tools, including an increase the pace of purchases 
for a time, to promote a return to maximum employment in a 
context of price stability.
    As I noted, the second tool the Committee is using to 
support the recovery is forward guidance regarding the path of 
the Federal funds rate. The Committee has said it intends to 
maintain a high degree of monetary accommodation for a 
considerable time after the asset purchase program ends and the 
economic recovery strengthens. In particular, the Committee 
anticipates that its current exceptionally low target range for 
the Federal funds rate will be appropriate at least as long as 
the unemployment rate remains above 6\1/2\ percent and 
inflation and inflation expectations remain well behaved in the 
sense described in the FOMC's statement.
    As I have observed on several occasions, the phrase ``at 
least as long as'' is a key component of the policy rate 
guidance. These words indicate that the specific numbers for 
unemployment and inflation in the guidance are thresholds, not 
triggers. Reaching one of the thresholds would not 
automatically result in an increase in the Federal funds rate 
target; rather, it would lead the Committee to consider whether 
the outlook for the labor market, inflation, and the broader 
economy justified such an increase. For example, if a 
substantial part of the reductions in measured unemployment 
were judged to reflect cyclical declines in labor force 
participation rather than gains in employment, the Committee 
would be unlikely to view a decline in unemployment to 6\1/2\ 
percent as a sufficient reason to raise its target for the 
Federal funds rate. Likewise, the Committee would be unlikely 
to raise the funds rate if inflation remained persistently 
below our longer-run objective. Moreover, so long as the 
economy remains short of maximum employment, inflation remains 
near our longer-run objective, and inflation expectations 
remain well anchored, increases in the target for the Federal 
funds rate, once they begin, are likely to be gradual.
    Let me finish by providing you with a brief update on 
progress on reforms to reduce the systemic risk at our largest 
financial firms. As Governor Tarullo discussed in his testimony 
last week before this Committee, the Federal Reserve, with the 
other Federal banking agencies, adopted a final rule earlier 
this month to implement the Basel III capital reforms. The 
final rule increases the quantity and quality of required 
regulatory capital by establishing a new minimum common equity 
tier 1 capital ratio and implementing a capital conservation 
buffer. The rule also contains a supplementary leverage ratio 
and a countercyclical capital buffer that apply only to large 
and internationally active banking organizations, consistent 
with their systemic importance. In addition, the Federal 
Reserve will propose capital surcharges on firms that pose the 
greatest systemic risk and will issue a proposal to implement 
the Basel III quantitative liquidity requirements as they are 
phased in over the next few years. The Federal Reserve is 
considering further measures to strengthen the capital 
positions of large, internationally active banks, including the 
proposed rule issued last week that would increase the required 
leverage ratios for such firms.
    The Fed also is working to finalize the enhanced prudential 
standards set out in sections 165 and 166 of the Dodd-Frank 
Act. Among these standards, rules relating to stress testing 
and resolution planning already are in place, and we have been 
actively engaged in stress tests and reviewing the ``first-
wave'' resolution plans. In coordination with other agencies, 
we have made significant progress on the key substantive issues 
relating to the Volcker rule and are hoping to complete it by 
year-end.
    Finally, the Federal Reserve is preparing to regulate and 
supervise systemically important nonbank financial firms. Last 
week, the Financial Stability Oversight Council designated two 
nonbank financial firms; it has proposed the designation of a 
third firm, which has requested a hearing before the Council. 
We are developing a supervisory and regulatory framework that 
can be tailored to each firm's business mix, risk profile, and 
systemic footprint, consistent with the Collins amendment and 
other legal requirements under the Dodd-Frank Act.
    Thank you. I would be pleased to take your questions.
    Chairman Johnson. Thank you, Chairman Bernanke.
    As we begin questions, I will ask the clerk to put 5 
minutes on the clock for each Member.
    Chairman Bernanke, with inflation low and unemployment 
still high, what trends in the data would you need to see 
before deciding to begin unwinding monetary policy measures? 
Would unwinding too early threaten the economy and the 
financial system?
    Mr. Bernanke. Well, certainly we face the same issues that 
are always faced when monetary policy begins to normalize after 
a period of recession and expansion, which is if we tighten too 
soon, we risk not letting the economy getting back to full 
employment; if we tighten too late, we risk having some 
inflation. So, as always, there are going to be issues of 
judgment there that are unavoidable in any monetary policy 
normalization.
    That being said, we have laid out essentially a three-stage 
process for our normalization. The first, which is dependent on 
the economy strengthening, the labor market continuing to 
normalize, and inflation beginning to move back toward 2 
percent, is a process of moderating the pace of our asset 
purchases and eventually bringing those to zero, additional 
purchases, at the point that we can say that we have made 
substantial improvement in the outlook for the labor market. 
And we have given some guidelines about how that process would 
go forward.
    The second stage would be a potentially lengthy period in 
which we are watching the economy for continued improvement, 
continued reduction in unemployment, normalization of 
inflation; and as I described in my testimony, when 
unemployment gets to 6.5 percent, and not before, and when 
inflation is looking closer to target, at that point we would 
consider whether tightening in the form of raising short-term 
interest rates is appropriate. So that would be the second 
stage.
    The final stage would be the ultimate normalization of 
policy, the raising of short-term interest rates, and 
eventually the normalization of our balance sheet. As I noted 
in my testimony, assuming that the economy remains in a slow-
growth mode, as we have been seeing, that process will be a 
very gradual process.
    Chairman Johnson. What explains the recent rise in long-
term interest rates? And how much more of an increase in rates 
could cause the recovery to falter? And what would the Federal 
Reserve do to respond if interest rates spike?
    Mr. Bernanke. Well, there are essentially three reasons why 
we have seen some increase in longer-term rates, although I 
would emphasize they remain relatively low.
    The first is that there has been some better economic news. 
As investors see brighter prospects ahead, interest rates tend 
to rise. For example, we saw a relatively good labor market 
report, which was accompanied by a pretty sharp increase in 
interest rates on that day.
    The second reason for the increase in rates is probably the 
unwinding of leveraged and perhaps excessively risky positions 
in the market. It is probably a good thing to have that happen, 
although the tightening that is associated with that is 
unwelcome. But at least the benefit of it is that some concerns 
about building financial risks are mitigated in that way and 
probably make some FOMC participants more comfortable with 
using this tool going forward.
    The third reason for the increase in rates has to do with 
Federal Reserve communications and market interpretations of 
Fed policy. We have tried to be very clear from the beginning 
and I have reiterated again today that we have not changed 
policy. We are not talking about tightening monetary policy. 
Merely we have been trying to lay out the same sequence which I 
just described to you about how we are going to move going 
forward and how that will be tied to the economy. But I want to 
emphasize that none of that implies that monetary policy will 
be tighter at any time within the foreseeable future.
    Chairman Johnson. What do you currently see as the biggest 
threat to the housing market recovery as we continue housing 
finance reform?
    Mr. Bernanke. Well, certainly we have to keep our eyes open 
to pay attention to mortgage rates and affordability. That is 
our job at the Fed. But I think it is very important for us to 
get our housing institutions, our regulatory structure cleared 
up and in working order. I am glad to see that the Congress is 
now looking at reforms of Fannie and Freddie, the mortgage 
securitization system. We still have rules to do about skin in 
the game and other aspects of the mortgage market.
    I think as there is greater clarity about the rules of the 
game for mortgage making and mortgage securitization that we 
will see less tightness in the market for mortgages for first-
time home buyers and people with less than perfect credit 
scores. And I think one of the risks that we face now is that 
there is still a pretty significant part of the population that 
is having considerable difficulty accessing mortgage credit 
even though they may have the financial wherewithal to be 
worthy of that credit.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    Chairman Bernanke, you have previously indicated that the 
Fed wants to see substantial improvement in the labor market 
before cutting off QE. And in your June press conference, you 
noted that ``substantial'' is in the eye of the beholder. If I 
understood you today, you indicated that if all goes as 
expected, we could expect to see this wound down completely by 
midyear next year. Is that correct?
    Mr. Bernanke. If all goes as expected, yes.
    Senator Crapo. And I guess the flip side of that is you 
said if all does not go as expected, we could see QE continue 
for the indefinite future?
    Mr. Bernanke. I suspect that at some point the economy will 
reach that substantial improvement in the outlook given the way 
we have seen progress to this point. Exactly whether it is a 
little bit later or a little bit earlier, that remains to be 
seen.
    Senator Crapo. I guess my question is I assume you would 
agree that there is a risk in continuing QE indefinitely. Would 
you agree with that?
    Mr. Bernanke. Yes, there are costs and risks to QE, and we 
are watching those carefully. We have said in our statement 
that one of the considerations that we are looking at at every 
meeting is the efficiency and costs of this program. And we do 
a benefit/cost analysis as we discuss the benefits of 
additional purchases.
    Senator Crapo. Well, given the notion that ``substantial'' 
is really in the eye of the beholder, I do not think it is very 
easy for the markets to understand exactly how and when we are 
going to see the winding down occur. And to me, it appears that 
possibly communicating more specific targets rather than 
thresholds would help to reduce that risk. Do you agree, or do 
you think it is just not possible to get more specific?
    Mr. Bernanke. Well, this is an issue that the Committee 
will continue to discuss. I would say first that we have given 
some fairly specific qualitative guidance about what we are 
looking for, and I did say that unemployment in the general 
vicinity of 7 percent with inflation moving back toward the 2-
percent objective was indicative of the kind of progress that 
we were trying to achieve.
    The thresholds are tied to rate increases, and there, while 
reaching that threshold does not necessarily mean that we will 
raise rates, we are quite confident that we will not raise 
rates before we get to those points. In that sense we are 
providing a reassurance to the public and to the markets.
    Senator Crapo. Thank you. And with regard to winding down 
the Fed's balance sheet, you and others have indicated a 
willingness to keep the Fed's QE securities on the balance 
sheet, rolling over maturing securities and keeping them out of 
the market. Governor Tarullo said on Monday that, ``No one is 
talking about unwinding or selling the securities we have been 
buying,'' which would mean then that the Fed's balance sheet 
could be over $3 trillion for some time. Correct?
    Mr. Bernanke. Well, not necessarily, because, of course, 
ultimately we will stop rolling over and reinvesting the 
securities, and then they will begin to run off. Then the 
balance sheet will start to come down.
    We have done a lot of scenario analysis, of course, and 
allowing the securities to run off at a certain point when the 
economy is strong enough does not delay normalization by very 
much.
    Senator Crapo. But you are not expecting the winding down 
of the balance sheet at any time soon. Is that correct?
    Mr. Bernanke. Certainly not until we get to the rate 
increase part of the three-part sequence that I described to 
you, and there, again, we are not planning at this point to 
sell any MBS. At some point we would be allowing the maturing 
securities just to run off and not replacing them.
    Senator Crapo. But as long as you continue to hold and not 
wind down the balance sheet, doesn't this lead to credit 
mispricing and increased investor risk undertaking?
    Mr. Bernanke. I do not think so, particularly when we are 
winding down. I do not see that there is any real difference 
between, for example, our holding mortgage-backed securities, 
which is intended to strengthen the housing market, and usual 
monetary policy, which lowers long-term interest rates through 
short-term rate cuts, which is also intended to strengthen the 
housing market. The housing market is always an important 
channel of monetary policy, and so I do not really see that 
there is any significant misallocation going on there.
    Senator Crapo. All right. Thank you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Bernanke, I understand this may be your final 
Monetary Policy Report hearing before the Committee before the 
end of your term as Chairman of the Federal Reserve, and I am 
sure you will miss us. But I want to thank you for your hard 
work and dedication and your service to our country, especially 
during a time of crisis, and I appreciate your service.
    We seem to be experiencing a trend right now where our 
economy and employment are growing and recovering, but we still 
have, from my perspective, a ways to dig ourselves out from the 
deep hole caused by the financial crisis. Unemployment is 
coming down, but it is still 7.6 percent. More than a third of 
the people who are unemployed are long-term unemployed, which 
is a true crisis for those more than 4 million individuals and 
families caught in this situation. And as you have discussed 
with this Committee in the past, long-term unemployment can 
have serious consequences, make it harder for people to 
maintain skills and networks to reenter the workforce.
    So my question is: While the economy is recovering, we 
still have a lot of work to do to get full employment and 
strong broad-based growth. With core inflation well below the 
Fed's target and weak demand suggesting that inflation is 
unlikely to be a problem anytime soon, isn't it still way too 
soon to consider any kind of policy tightening?
    Mr. Bernanke. Well, again, I have distinguished between 
changing the mix of our two tools and the overall thrust of 
monetary policy. And I agree with you that with inflation below 
target and with unemployment still quite high, and by some 
measures with unemployment in some ways being even too 
optimistic a measure of the state of the labor market, given 
some of the other statistics that you have cited, that both 
sides of our statutory mandate are suggesting that we need to 
maintain a highly accommodative monetary policy for the 
foreseeable future, and that is what we intend to do.
    But I think that we will be able to maintain that high 
level of accommodation ultimately through rate policy and by 
holding a very large balance sheet. But in making that 
transition to a different stage of this process, we again are 
intending to keep policy highly accommodative.
    Senator Menendez. Let me just follow up on that. As the 
Reserve has engaged in measures to strengthen our economy, some 
critics have argued that any growth that results might somehow 
be artificial or that low interest rates and cheaper credit 
might lead to financial instability or asset bubbles if 
investors make riskier investments in order to ``reach for the 
yield.''
    In the current environment, though, isn't weak demand the 
greater concern? If consumers are pulling back on their 
spending because of high debt burdens and underwater mortgages 
from the financial crisis, and businesses are holding off on 
investing because of the weaker consumer demand, doesn't that 
change the relative cost, benefits, and risks of different 
monetary policy actions?
    Mr. Bernanke. Yes, it can. On the first point about 
artificial growth, during the 1930s there was this view called 
a ``liquidationist view'' which held that recessions and 
depressions were healthy, they purged the evils out of the 
system. I do not think we accept that point of view anymore. We 
think our economy is producing below its potential, and what 
monetary policy is trying to do is help the economy return to 
its potential, and that would be real and sustainable growth 
that we could achieve.
    On financial stability, obviously given recent experience, 
we want to be very careful that we understand what is going on 
and pay close attention to these issues. The relationship 
between monetary policy and financial stability is a 
complicated one. On the one hand, very low rates for a 
sustained period can lead to reach for yield and other risky 
behavior. We are trying to address that primarily through 
regulation, through oversight, through monitoring, and that is 
our first line of defense certainly for dealing with those 
sorts of issues. But you correctly point out that it is not a 
simple relationship because, of course, a weak economy also is 
bad for financial stability because it means weaker credit 
quality, less lending opportunities, more defaults and 
delinquencies. So, again, our strategy is to try to focus on 
inflation and unemployment using monetary policy, but to pay 
close attention to any developments in the financial stability 
sphere and use the regulatory and supervisory tools we have as 
the first line of defense in that case.
    Senator Menendez. I appreciate that. The reason I asked 
those specific questions is because there has been a great deal 
written and said about expansionary austerity. And as I look at 
what is happening in Europe, I am not sure that all the 
measures taken under that guise produce either the economic 
results that we would like to see and certainly the 
consequential human results that we have seen in Europe. And I 
do not want us making those mistakes here.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. And, Mr. Chairman, 
thank you for being here. We were just talking. This second day 
of this Humphrey-Hawkins meeting is about like drinking day-old 
coffee, and maybe even worse, accompanied by a stale doughnut. 
But certainly I am here today--and I do not really have any 
questions; I read your testimony yesterday--but really to thank 
you for your service. I know we have had our differences on 
some issues, but I really do especially appreciate the way you 
handled the crisis. I think that our country was under extreme 
duress. I do not know how many people could have handled that 
crisis and the complexities that came with it in the way that 
you did. So I want to thank you for that.
    Mr. Bernanke. Thank you.
    Senator Corker. Obviously we have had discussions, both 
publicly and privately, about some of the quantitative easing, 
and I know we had differences. But I would wonder--I know that, 
you know, there is a whole industry of folks out there who 
watch every word that you say and people right now are doing 
calculations as to whether to buy this instrument or that, and 
I know that you have to be very cautious in what you say 
sometimes. But this is a little bit of a step back.
    I guess, you know, some of the concerns that I have had, 
and I think Members on this side of the dais, have just been 
the hyperactivity of the Fed and the Fed almost acting as an 
enabler for Congress, which had very bad behavior for a long 
time, our inability to do the things fiscally and in other ways 
that would stimulate our economy. And I think you are well 
aware of those. You do a pretty decent job of staying away from 
that, although sometimes I wish you weigh in more.
    But I do wonder if you have any possibly parting comments--
I do not know what your future is and none of us do at this 
moment. But I wonder if you have any comments about that, about 
any concerns about over time because of the hyperactivity that 
the Fed has been engaged in, and in some ways because Congress 
has been so feckless in living up to its responsibilities and 
dealing with the issues that we have to deal with, if that is 
of any concern to you. And is there any similarities, if you 
will, to a person who knows that they need to do certain 
things, to eat right and exercise, and instead relying on the 
Fed for amphetamines and other kinds of activities to get in a 
place that the economy needs to be in our Nation and, candidly, 
the world.
    But, again, as you potentially contemplate those, I do want 
to again thank you for your service, thank you for friendship, 
and whatever happens I wish you well.
    Mr. Bernanke. Thank you very much for those comments, 
Senator.
    On hyperactivity, I think what we learned during the crisis 
was that we did not have the right tools. We did not have a way 
to address a failing investment bank that would not create a 
huge amount of bad effects in financial markets. We did not 
have appropriate oversight of the shadow banking system.
    There were a lot of weaknesses in our oversight, our 
regulatory system, and our response tools to the crisis, and 
that is why it sometimes seemed frenetic, because the Fed was 
trying to improvise in many cases. And I think we have made 
some progress in setting up a more orderly framework for both 
strengthening our financial system, monitoring the system, and 
responding in case of another emergency. So I hope that that is 
the case.
    It is true that monetary policy I think has carried an 
awful lot of the burden for this recovery, and we would be more 
than happy to share that burden more equally with fiscal policy 
and other policy makers. But I recognize it has been a 
difficult time politically for people to come to agreement on 
some very important issues, and I do not think--you mentioned 
the enabler idea. I do not think it is my place or the Federal 
Reserve's place to try to force Congress to come to any 
particular outcome. I mean, it is Congress ultimately who is 
responsible, and our role is to take what Congress does as 
given and to try to figure out how best to meet our mandate 
given Congress' actions. I do not think we should be in a 
position of trying to threaten Congress with higher interest 
rates or something like that.
    Senator Corker. Yes, and I know that is not your place, and 
I know that you operate under our mandates. I would think, 
though, that most people would ration that, you know, the fact 
that the Fed is there and does have to do what it does in some 
ways acts as a cover for us in our inability to act 
responsibly. I mean, I think that goes without saying, doesn't 
it?
    Mr. Bernanke. Well, I think as you can see, our acting 
alone is not producing the kind of results we all would like. 
Growth is going in the right direction, unemployment is going 
in the right direction, but it still is a very slow process. 
And as I have said many times, monetary policy is not a 
panacea, so there is still plenty of room for Congress to 
address some of these problems that Senator Menendez and others 
referred to.
    Senator Corker. Thank you.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman. And 
let me join Senator Corker, Mr. Chairman, and commend you and 
thank you for your service to the Nation. I witnessed your 
innovative, improvisational, and very thoughtful approach to 
problems that were potentially devastating to the economy. I 
think through your service we avoided a much worse situation, 
and I thank you for that.
    One of the things reflecting back, though, you know, the 
20/20 hindsight, there were a few Governors of the Fed who were 
talking about a housing bubble as the next sort of great 
crisis, but it did not get the traction. Perhaps not 
identically, but in a similar vein, you have got some of your 
colleagues are now talking about the huge growing student debt 
that could have macroeconomic effects, slowing down home 
purchases, slowing down sort of what we assume was the normal 
course, that by your late 20s you buy the home, you settle 
down, et cetera. Also, I think, in a way, underscoring another 
huge problem in the economy, which is the inequality, growing 
inequality of income. Our sort of American solution to 
inequality is education. That is the engine.
    We have reports, for example, from Georgetown University 
that there is already a 5 million projected gap between jobs 
available that will be there and skills available to fill them. 
And yet as we increase the cost of borrowing--and all the 
proposals that we are talking about currently do increase the 
cost--that I think will cut down on opportunities for a lot of 
people.
    So can you comment, one, on this potential sort of crisis 
in student debt, its macroeconomic effects, and whether if we 
do not provide some type of support both directly and also 
refinancing support, that this could be the next big problem we 
face?
    Mr. Bernanke. Well, first, it should be acknowledged that 
the ability to borrow to build your own human capital, to get 
an education, is extremely important and a good thing. You 
know, there was a time when a poor student, no matter how 
qualified, was unable to finance an education, and the fact 
that we now can do that is very good for our economy as well as 
for individuals.
    The amount of student debt is large. It is over $1 trillion 
at this point. I think that it is not particularly likely to 
cause any sharp instability of the sort we saw in the last few 
years. It has a couple of consequences. One, of course, is it 
represents a potential fiscal risk for the U.S. Government to 
the extent that some of it is not repaid. Second, to the extent 
that there are people who have taken out a lot of debt and the 
economy is not serving them well, they are not finding 
opportunities, then obviously over time--this is not something 
that is a big issue at any given moment, but over a number of 
years they will not be able to buy the home and do other things 
that they otherwise would be able to because they are paying 
off the debt.
    So I think the answer to it is, first, of course, to have a 
strong economy that provides job opportunities, and that is 
something we are trying to do, and I am sure you are trying to 
do as well. But the other is I think we need to make sure that 
students are better informed about the market, the labor 
market, and their opportunities and what different options they 
have.
    We know of cases of certain--you know, some of the private 
sector universities, online universities and so on, which do 
not have very good graduation or placement rates. People are 
still borrowing to take those courses. I think if there was 
better counseling, better information, that would certainly be 
an important step. But I do not want us to step back from doing 
everything we can to give young people a chance to get whatever 
skills are appropriate.
    Senator Reed. Let me just ask a broader question, which is, 
your comment, this growing documented inequality in income in 
the United States, does it pose both economic and social risks 
to the country? And how do we deal with it other than through 
education and many different ways?
    Mr. Bernanke. It is a very, very tough problem. It is not 
restricted to the United States. It is a global phenomenon. It 
has been going on for a very long time. There are a number of 
factors behind it. I think, though, that one of the most 
important is that the new technologies we are seeing are what 
is called ``skill bias'', they favor the most skilled workers, 
and they reduce opportunities for people of medium or low 
skills, particularly in competition with the global labor 
force.
    So I do not have an easy answer. I do think that related to 
your question about student debt, I think that focused skill 
enhancement, not everybody should necessarily be doing a 4-year 
B.A. Some people would be better off working specifically 
toward a job in industry where there is an understanding in 
advance that this is what is needed, this is the opening. 
Community college prepares those kinds of courses, so more 
focused job-oriented training for some students who are 
interested in that might be helpful.
    But this is a long-term trend, and I do not have an easy 
solution for it.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and I, too, want 
to thank Chairman Bernanke not just for being with us today but 
also for his years of service. And we have had our 
disagreements over the years, but not without, on my part, a 
great deal of respect for the way you have approached this work 
and the work that you have done.
    I have a few questions that I hope we would be able to mow 
through. One has to do with the efficacy of the quantitative 
easing, and more specifically there are a number of very 
thoughtful folks who have done analyses that suggest that the 
benefit of the quantitative easing we have had might be quite 
modest. And specifically I think the suggestion has been that 
conventional understanding of the transmission mechanism of the 
increase in household net worth to consumer spending would 
suggest a very modest increase to GDP that has resulted from 
the pretty significant increase recently in household net 
worth, even if you attributed all of that increase to the Fed, 
which is itself a questionable premise. And then your own 
previous testimony--I think it was at Joint Economic--to a 
question that I asked, if I understood you correctly, you 
acknowledged that the nature of the impact that monetary policy 
tends to have on economic growth might be more a matter of 
timing rather than a net increase. So accommodative policy can 
accelerate, can move forward economic activity, might not 
increase economic activity in total.
    So I guess what I am saying is if the magnitude of the 
benefit has been very modest and, at that, it might be just a 
shift in timing anyway, that would suggest pretty modest 
benefits, and yet the costs and the risks keep mounting, in my 
view, the risks of asset bubbles, mispricing assets, the risks 
of whether or not we will have an orderly exit.
    So I guess my question would be, number one, how do you 
quantify the benefits that have been occurring, especially 
near-term marginal benefits going forward? And can you and do 
you systematically attempt to quantify the risks of what you 
have done?
    Mr. Bernanke. Yes, that is a very good question. There is a 
very large literature, academic and within central banks, 
trying to figure out how big the effects are of quantitative 
easing, and it is quite difficult to know for sure. But the 
preponderance of the evidence is that while this is not as 
powerful a tool as ordinary monetary policy, rate policy, that 
it does have meaningful impact on jobs and on the economy. And 
in particular, since 2008, where we have had no ability to move 
short-term rates and we have had some periods where became 
somewhat more concerned about deflation, we think that QE has 
provided an important boost at critical times to help the 
economy continue to move forward.
    So I do not want to overstate it, and, again, there is a 
lot of uncertainty, but there is a lot of work on this, and the 
preponderance of the work suggests that the effects, while not 
huge, are quite meaningful.
    Also, in terms of timing, it is true that no monetary 
policy can do very much about the long-term growth potential of 
the economy. But in a situation where we are well below that 
potential, if we can get back to that potential more quickly, 
that is a net gain that is enjoyed by the economy.
    In terms of costs and risks, I have identified in speeches 
and other places some of these risks, and as I said, it is in 
our statement that we look at this carefully. I think the one 
that we have paid the most attention to is financial stability, 
and we have tried to greatly increase our vigilance, our 
monitoring, our use of supervisory tools and the like. And as 
Senator Menendez actually pointed out, though, there are also 
risks on both sides because, of course, as the economy does 
very poorly, then that also creates risks to financial 
stability because of the effect on default, delinquency, and so 
on.
    So let me just acknowledge that this is an issue that is an 
important one. We believe the first line of defense should be 
monitoring, supervision, regulation, and other similar tools, 
but we do take into account these costs and risks when we 
debate our monetary policy.
    Senator Toomey. Do you attempt to quantify it? Or is it all 
subjective?
    Mr. Bernanke. We try to quantify it. It is very difficult, 
of course, to know exactly what the size of the risk is. But 
what we do is we do a lot of work, both qualitative and 
quantitative, trying to measure--for example, we might be 
looking at covenants on loans and whether or not those 
covenants are becoming less restrictive, which is suggestive of 
poor underwriting, for example. So we monitor those kinds of 
things, and we report those to the FOMC at essentially every 
meeting so that they can understand where there may be sectors 
where financial risks are building and try to gauge those 
risks.
    Senator Toomey. Thank you. I have other questions, but I 
see my time has expired.
    Thanks, Mr. Chairman.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. I want to thank 
you as well, Chairman Bernanke, as you endure your second 
marathon on 2 days and echo the views of many of my colleagues 
in the House and Senate who have thanked you for your service 
during such a critical period. Your quiet but strong leadership 
has been instrumental in keeping our economy from falling into 
an abyss and repeating the devastation of a Great Depression, 
and we are now, because of your leadership, on the path toward 
turning that economy around. My view is that 2014 and 2015 will 
be stronger economically than our present time, and that will 
be in large part because of the building blocks that you put 
into place, even if you are no longer Chairman of the Fed. I am 
not prejudging anything, of course. So here are my questions.
    You have been as clear as I think you can be that the 
timing and pace of any tapering--these are monetary--timing and 
tapering of your asset purchases will be dependent on economic 
and financial conditions. That is logical.
    In June, the Committee projected that economic growth would 
pick up in coming quarters, but since then economic data has 
been mixed. We have had decent job numbers, but many signs of 
weakening growth. We found out that the baseline for your June 
outlook was worse than we first thought. First quarter GDP 
numbers were revised downward.
    So the economy is worse than you thought in June, but the 
markets appear to think that you are still set to begin 
tapering in September. So if the economy did not change, were 
exactly as it is today on September 18th, would the Fed be 
announcing a moderation in the pace of its assets? And just one 
subsidiary question, you have often said that asset purchases 
will continue until the Fed sees ``substantial improvement in 
the labor market outlook.'' Does weakening data regarding 
growth change your outlook with respect to the strength of the 
labor market? In other words, can labor markets continue to 
improve in relative growth? So first about September 18th, and 
then about the labor markets.
    Mr. Bernanke. Well, the June FOMC meeting was only a few 
weeks ago. There have been some data points since then, and as 
you say, they have been mixed. So I think it is way too early 
to make any judgment. We will be obviously reviewing the data, 
and what we are looking for is a pickup as the year progresses, 
because our theory of the case, if you will, is that one of the 
reasons that the economy has been so slow in the early part of 
2013 is because of fiscal factors. It is hard to judge how long 
those factors will last, but if the economy begins to move 
beyond that point and fiscal restraint becomes somewhat less 
pronounced, then we should see, as you suggested yourself, a 
pickup in growth. And so that is what we will be looking for. 
It is too early to----
    Senator Schumer. OK. But the September 18th deadline of 
beginning tapering is not immutable. You are going to look at 
the data.
    Mr. Bernanke. We are going to obviously look at the data. 
It is a Committee decision. And it is going to depend on 
whether we see the improvement which I described.
    Senator Schumer. Right. And the second question, does the 
weakening data regarding growth change your outlook with 
respect to the strength of labor markets?
    Mr. Bernanke. Yes. So we specifically set as a goal an 
improvement in the outlook for the labor market as opposed to 
the labor market per se. And what that means is that we want to 
see improvement in labor market indicators, but we also want to 
have a sense that improvement will continue. And, of course, 
for improvement to continue, you need to have a broader-based 
growth.
    And so of the three conditions which I described, one of 
them is a pickup in growth which will be sufficient to provide 
continued improvement----
    Senator Schumer. You think we still could be on the path to 
labor markets improving even with this relatively weak growth 
in terms of outlook.
    Mr. Bernanke. It is possible. Again, it has only been a few 
weeks since the June meeting, and I think we have new data----
    Senator Schumer. OK. My first question was about the 
tapering. My second is when you might end asset purchases 
altogether. The minutes of your last meeting said that, ``About 
half of the participants indicated that it likely would be 
appropriate to end asset purchases late this year.'' Yet you 
yourself said in guidance that was approved by the Committee 
based on current projections, you expect asset purchases to end 
sometime in the middle of next year when you currently 
anticipate unemployment will be down around 7 percent. That is 
the level of unemployment you say represents the amount of 
improvement that would warrant a moderation in Fed policy.
    Do those other members have a different definition of 
``substantial improvement in the labor market''--there seems to 
be some disparity between the other members and you, and if you 
are not there come next year, there is a worry there--or a 
different view of the likely path of the labor market? Do they 
think unemployment will be 7 percent this year? Or do they have 
different assessments about the relative cost and benefit of 
QE?
    Mr. Bernanke. Well, there are diverse views obviously on 
this program, and in particular, people could see an early 
wind-down because they are optimistic about the economy or 
because they do not think that QE is very effective. I mean, 
there are a lot of different reasons why you might have that 
view.
    Let me just assure you that we have a very careful 
discussion at the meeting. We have what is called a ``go-
round'' where every person, including the nonvoters, gets to 
express for several minutes their view on policy, both current 
and prospective, and the general scenario, which I described in 
my press conference, is broadly supported by people on the 
Committee, including both voters and nonvoters.
    Senator Schumer. Good. That is good to hear, and it gives 
me a little belief.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Coburn.
    Senator Coburn. Mr. Bernanke, I appreciate the service that 
you have given our country, and we had nobody to compare you to 
because we have never been in the situation we were in before. 
But I think basically you have done some significant work for 
the average American, and I appreciate it.
    I have a couple of questions in terms of your balance with 
your mandate, both in terms of inflation and employment and 
growth.
    One of the things that concerns me is that, since 1980, we 
have changed the way we measure inflation 20 times. And if you 
use the same measure of inflation that we had in 1980, our 
inflation rate would be over 8 percent right now. And the other 
thing that concerns me is median family income in real dollars 
is the same as it was in 1989.
    So if I had a criticism of anything you have done in the 
last few years, it would really go along and align more with 
Senator Corker's thoughts. We have let you down. The 
kindergarten of Congress has let you down by not doing the 
things to create the confidence, to create the certainty in the 
business community that will allow the significant capital that 
is sitting on the sidelines to be invested, which would create 
some of the growth that you are hoping to do. So for that, I 
apologize.
    But would you care to comment, since in your testimony 
inflation is under control but the average American over the 
last 10 years has seen significant inflation and in the last 
few years has seen significant inflation in the things that 
really matter? And let me talk about it: the cost of an 
education, transportation, electricity, rents, food, plus out 
of what we have done, not intentionally, we have gotten a 
commodity bubble in many areas in terms of raw commodities.
    Would you comment on both the changing metrics that we use 
for inflation as well as maybe what we could have done, looking 
backwards, that might have accentuated and augmented what you 
have done?
    Mr. Bernanke. Well, on inflation, the inflation statistics 
are calculated by the Bureau of Labor Statistics, as you know, 
which is made up of highly qualified professional economists--
there is no partisan influence--and their efforts are always to 
try to make the inflation numbers better, make them more 
accurate. And that is my sense of what has been happening there 
in terms of changes.
    There was a bipartisan commission on inflation measurements 
a few years ago which concluded that the official inflation 
numbers overstated, not understated, inflation. And so some of 
the changes they recommended have been included.
    So there is a distinction between prices being high and 
prices being rising. It is true that gas prices and food 
prices--all these prices relative to people's wages--wages are 
not going up much.
    Senator Coburn. That is right, so the cost of living is 
going up----
    Mr. Bernanke. No, it is not going up. It is high. It is not 
going up. In other words, real wages----
    Senator Coburn. Are going down.
    Mr. Bernanke. Real wages have been going down because even 
though inflation is very low, wages have been growing slower 
than inflation. So----
    Senator Coburn. So discretionary income has decreased, so 
consumer spending is not rising at the rate at which you would 
like to see it.
    Mr. Bernanke. That is true, but that is not an issue of 
inflation. That is an issue of real living standards, and that 
has to do with the productivity of the economy and the 
distribution of income. And the Fed really cannot do a whole 
lot about that.
    So I guess I would just respectfully disagree that 
inflation is badly undermeasured. I think the professionals are 
doing as good a job as they can to measure inflation, and if 
you look at a lot of prices, including rents, food, gasoline, 
and so on, again, while they may be high, they are not much 
different from where they were a year ago, and that is what 
inflation is about. It is the rate of change over time.
    In terms of what Congress could do, I mean, I think, you 
know, I can only go so far in recommending, but I do think that 
an attempt to focus the budget consolidation efforts more on 
the longer term----
    Senator Coburn. I agree.
    Mr. Bernanke. ----would have been a more productive way--
rather than putting so much of the tax increases and spending 
cuts in a front-loaded way, would have been more helpful. That 
would have been one suggestion.
    Senator Coburn. So if, in fact, Congress had behaved 
appropriately and helped create a certainty in the long term, 
especially with our entitlement programs, but also in terms of 
some of the waste, the effectiveness of some of the things you 
have done with monetary policy might have been greater.
    Mr. Bernanke. Certainly.
    Senator Coburn. Thank you.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Chairman Bernanke, I thank you for your service, as others 
have done, and we all mean that. And thank you for the new 
rules on capital standards that you have issued with the OCC 
and FDIC. I urge you to hold fast on them when the megabanks 
fight to weaken those standards, and I hope that you will do 
that.
    Some financial institutions argue, as we have discussed, 
that we should not get out ahead of Europe in our financial 
regulation. On Monday, Governor Tarullo said, and I want to 
quote at some length: ``I think it is very dangerous that some 
have tried to characterize Basel agreements as the ceiling and 
not the floor. So for us in the United States, those of us who 
are charged with financial stability of the United States need 
to make the judgment as to what levels of capital will most 
ensure financial stability in the country without unduly 
affecting the flow of credit. Ever since the publication of our 
proposed reg, I have had calls from my counterparts around the 
world,'' Governor Tarullo says. ``That is really interesting. 
They are saying, `Tell me the reasoning on this, how you are 
thinking about it. Explain to me more why you think 3 percent 
is inadequate.' ''
    What I hear Governor Tarullo saying is that we should do 
what we think is best for our financial stability, and if we 
lead by example, the rest of the world will follow. Do you 
agree with Governor Tarullo?
    Mr. Bernanke. I certainly agree with the first part, which 
is that Basel III is a floor, it is not a ceiling. It is really 
a least common denominator because these agreements are made 
essentially by unanimous consensus. And, therefore, if there 
are a few countries that are very resistant for whatever 
reason, you know, that makes it tougher to get the higher 
standard. So we view them as a floor, and we are prepared to do 
whatever additional steps are needed in order to make our 
financial system safe.
    I do not know whether all countries will follow us, but 
there are other countries--Switzerland comes to mind, U.K.--
that have thought hard about this and have made additional--
taken additional steps to strengthen their banking systems. And 
we do have a leadership position, and I hope that will happen. 
But I do not think it will be universal. I think that you will 
see different responses from different countries.
    Senator Brown. But the most important countries with 
financial systems will follow as Governor Tarullo suggests?
    Mr. Bernanke. I do not know whether they will follow the 
exact same things, but they have all got the same--the key 
financial centers which recognize how important banks are to 
their economy, but also the fact that in some cases the banks 
are bigger than their economy, recognize that it is very 
important to have stability, and they have been particularly 
willing to consider additional steps.
    Senator Brown. So we should not shrink from doing the right 
thing for stability of our country because some megabanks say 
that we will be an outlier and other countries will not follow. 
Do you agree?
    Mr. Bernanke. Well, the other countries may or may not 
follow. Some will. But whether they do or not, I do agree that 
we should do whatever we need to do to make sure that the U.S. 
financial system is safe.
    Senator Brown. Thank you. Let me ask another question. It 
is bank earning season again, as you know, and it is no 
surprise that megabanks are doing quite well. Yet they continue 
to claim that regulations, new regulations and pending 
regulations, are killing them. Tuesday's Financial Times said, 
``Here is the problem: banks have spent a lot of time, energy, 
and money warning of the potential ill effects of ramping up 
regulation. But since the crisis, international regulators have 
kept demanding more capital, including a surcharge for the 
bigger banks''--as you have said. ``Lenders have doubled their 
capital levels as a result, hitting the new Basel III targets 6 
years early in some cases and, yet,'' the Financial Times asks, 
``where are the ill effects? The best of them continue to set 
new profit records . . . with every earnings season, warnings 
of calamity look more and more hollow.''
    The debate about the Fed's new proposed supplementary 
leverage ratio reminds me that when we think about costs, we as 
policy makers, regulators, and elected officials, when we think 
about costs and benefits, industry wants us only to think about 
costs to them. Steel companies dump waste into our rivers, and 
then they argue that it will be costly to clean it up. It has a 
higher human cost to the minors and the children who get sick 
from the pollution. It passes more health care costs on to our 
society, clearly, as they fail to internalize those costs. 
Those who believe in a society with rules understand that auto 
safety might cost car companies a little bit more for air bags 
and seat belts and other safety features, but these protections 
save lives.
    The same with financial rules. They might cost bank 
executives a little bit more in smaller bonuses and maybe even 
in dividends, but they will help prevent a repeat of what we 
had 5 years ago where the costs obviously were shifted to the 
broad public in retirement savings, in lost jobs, in every way 
imaginable, and certainly people's lost homes.
    If these are the costs of a safer financial system, aren't 
they worth it?
    Mr. Bernanke. The crisis was an enormous waste of 
resources, and unsafe practices by large financial institutions 
pose a risk not just to themselves but to the rest of society, 
and in setting policy we should look at the social costs and 
not just the cost to the firms. And that is what we are 
attempting to do.
    Senator Brown. And if it means the bonuses are a little 
smaller and that dividends are a little less and the earnings 
reports of the banks are not quite up to what they were this 
quarter, which was a pretty lucrative quarter for them, that is 
a price we should pay as a society?
    Mr. Bernanke. From a cost point of view, I think what we 
should be looking at is whether there is any effect on credit 
availability, things of that sort that affect our economy more 
broadly. But I certainly agree that, again, given the enormous 
cost of the crisis, strong measures to prevent a repeat are 
obviously well justified on a cost/benefit----
    Senator Brown. Are you concerned that these higher capital 
standards will result in less credit available?
    Mr. Bernanke. I do not think so--no, I am not concerned 
about it. You know, we have done some analysis of that, and 
there is not much evidence that that----
    Senator Brown. So there is not really much downside if you 
said that higher capital--you said that the biggest potential 
problem with rules is does it mean less credit available. If it 
does not mean less credit available, there is no real downside 
for strong capital standards.
    Mr. Bernanke. The only downside I can think of is that if 
banks are finding it very costly to make loans, then credit may 
start flowing through other less regulated channels, and those 
have to be monitored.
    Senator Brown. But you are not implying at all that we are 
there yet, even close to that situation with capital standards.
    Mr. Bernanke. No, we are not there yet, but we have to 
watch the shadow banking system and other parts of the system 
and make sure that risks are not being offloaded into other 
parts of the financial system.
    Senator Brown. OK. Thank you. And, Mr. Chairman, thank you 
for your generosity of time.
    Chairman Johnson. Senator Heller.
    Senator Heller. Thank you, Mr. Chairman, and I certainly 
appreciate the questioning of Senator Brown. And, Chairman 
Bernanke, thank you for being here and taking time, because I 
was pleased to hear that Basel III is the floor. And the 
question--I think you answered the question. I was going to ask 
you to give me some insight why we came to Basel III as opposed 
to a former FDIC Chair who wants that percentage to be closer 
to 8 percent, and we have legislation around here that wants it 
as high as 15 percent. So I was looking for some insight as to 
where we came to those Basel III capital rates, and it appears 
the answer may be risk, unless you have more to add to it.
    Mr. Bernanke. Well, we have a program for building up 
capital, and I described part of it, which was Basel III 
itself, which triples the amount of high-quality capital, then 
the surcharges, then the higher leverage ratio, and, in 
addition, we were looking at things like capital charges for 
wholesale funding if firms rely on less reliable wholesale 
funding. And we have discussed also the possibility of 
requiring large firms to have unsecured senior debt in their 
capital structure which could also provide some buffer in the 
event the firm fails. So we are in a variety of ways trying to 
buildup the buffer that these large firms have, yes.
    Senator Heller. Let me change the topic real quick here to 
housing. The Wall Street Journal recently had an article on the 
city of Las Vegas and the difficulty of moving homes. We have 
had 300,000 people in Las Vegas receive foreclosure notices, 
not be foreclosed on but receive notices. Over 50 percent of 
the homes are underwater. And I know you have played an 
important role in trying to reverse this situation. What are we 
doing wrong? And what can we do, what can we do as a Congress 
to help move and change the situation we have not only in 
Nevada but Arizona, Florida, and some of these other States?
    Mr. Bernanke. Well, as I was saying earlier, I think that 
from Congress' point of view, getting the mortgage finance 
system working better in terms of reforming Fannie and Freddie 
and helping to clarify the rules--some of that is on us as 
regulators to do that--so that there is greater access to 
credit and more people can buy homes, because ultimately the 
solution is to find a demand side for the market so that demand 
for homes will support prices and help us get out of this 
housing problem we have.
    Senator Heller. I was not here earlier in the discussion of 
the reforms for Fannie and Freddie. I have signed on to the 
bill here in the Senate side. I now the House rolled out theirs 
yesterday. Do you have a preference?
    Mr. Bernanke. I think it is very important that the 
Congress move forward on this, and I think it is time to do 
that.
    Senator Heller. Your insight on a secondary market or 
Government involvement in mortgage securities?
    Mr. Bernanke. I think a key issue is going to be not so 
much making mortgages cheaper but, rather, making sure that 
there is some kind of backstop or protection for situations 
where the financial markets are in distress, like they were 
recently. And then the question is, the Government is one way 
to do that. There may be other ways to do that. But if the 
Government is involved, I think it would be very important to 
make sure, first of all, that the Government is appropriately 
compensated for whatever insurance or backing it provides; and, 
second, that firms that are securitizing hold enough capital, 
again, to protect the taxpayer from losses. If that is done, I 
think those would be very helpful if you come to a solution 
that involves a Government role.
    Senator Heller. Let me talk about one other topic because I 
do not have a lot of time. Sorry to jump around so much, but 
gold prices. You know, we had gold prices almost $2,000 an 
ounce. It has dropped about $600 an ounce, trading, I think, 
today around $1,275, somewhere around there.
    Do you have any insight on why this volatility? What 
quantitative easing would have--what long-term impact it will 
have as you ratchet back?
    Mr. Bernanke. Gold is an unusual asset. It is an asset that 
people hold as sort of disaster insurance. You know, they feel 
if things go really badly wrong, at least they will have some 
gold in their portfolio. So----
    Senator Heller. Is that an accurate----
    Mr. Bernanke. Sorry?
    Senator Heller. Is that an accurate feeling?
    Mr. Bernanke. It is not all that accurate. I mean, for 
example, a lot of people hold gold as an inflation hedge, but 
the movements of gold prices do not predict inflation very 
well, actually. But, anyway, the perception is that by holding 
gold you have a hard asset that protects you in case of some 
kind of major problem. And I suppose that one reason that gold 
prices are lower is that people are less concerned about 
extreme outcomes, either, you know, particularly negative 
outcomes, and therefore they feel less need for whatever 
protection gold affords.
    Senator Heller. Do you believe it is an indication, perhaps 
psychologically, the direction of the economy for investors?
    Mr. Bernanke. I think psychologically the gold price going 
down is not necessarily a bad thing from that perspective. It 
suggests people has somewhat more confidence and are less 
concerned about really bad outcomes. But let me just end by 
saying that nobody really understands gold prices, and I do not 
pretend to really understand them either.
    Senator Heller. Thank you.
    Mr. Chairman, thank you very much.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. And, Chairman 
Bernanke, thank you for all your service during very hard 
times.
    I still want to ask about some other risks to the economy. 
The biggest banks in the country have reported huge profits 
over the last couple of years. But just this week they reported 
some staggering numbers. Wells Fargo's profits jumped 19 
percent from last year, JPMorgan Chase's profits jumped 31 
percent, and Citigroup's profits jumped 42 percent.
    Now, some reports have indicated that a big part of those 
profits have come from the banks' trading activity--in other 
words, not from boring banking but from trading on Wall Street 
and elsewhere.
    So are you concerned that these biggest banks are loading 
up on big risks again? Or is there another explanation for this 
spike in profits?
    Mr. Bernanke. Well, let me just say that we are quite aware 
of these portfolios, and we are addressing them in at least two 
ways--or more than two, really, but one of them is that we have 
just finalized new capital requirements that banks have to hold 
against these assets for sale, these securities, which should 
provide protection. We have done stress tests where we assume 
that a December 2008 type of financial shock hits and so there 
is a huge drop in asset values. And we have stress-tested the 
banks again to see if they have enough capital to protect 
themselves against big losses in their securities books.
    The other thing, as of course you know, is that we are 
working hard with our colleagues to put the Volcker rule into 
place, and that will restrict proprietary trading.
    Senator Warren. Let me just say, though, Mr. Chairman, that 
the question I am trying to ask about is whether this indicates 
they are loading up on risk. And I very much appreciate that 
what you are telling me about are the ways we are trying to 
regulate the risk when the banks take it on.
    Maybe I could ask this slightly differently, and that is, 
yesterday Secretary of Treasury Jack Lew said, and I want to 
get the quote right: ``If we get to the end of this year and we 
cannot with an honest, straight face say that we have ended too 
big to fail, we are going to have to look at other options.''
    Do you agree with the Secretary of the Treasury?
    Mr. Bernanke. I do not know about the timing. Maybe I would 
take another year from now. But I have said to you in an 
earlier hearing that there is a strategy. Dodd-Frank lays out a 
strategy. Basel III provides additional support through 
capital, et cetera. But if those things do not make us 
comfortable about the status of these largest firms, yes, I do 
think additional steps would be appropriate.
    Senator Warren. Then we need to look at other steps. As you 
know, I have introduced, along with Senator McCain, Senator 
Cantwell, and Senator King, a Glass-Steagall bill, another tool 
in the toolbox to deal with too big to fail. But I think at 
least now we have got some time on this. The Secretary of the 
Treasury says by the end of the year; you say maybe a year 
longer. But we have got to keep this one under examination. 
Fair enough?
    Mr. Bernanke. Yes, I think we obviously want to look at all 
tools. I think that there is probably more scope for capital if 
we are not comfortable with the status of these firms.
    Senator Warren. Good, and fair enough on that.
    I want to ask you, as you know, the Federal Reserve and the 
OCC announced last January that they were stopping their 
investigation into the system foreclosure fraud and that you 
had reached a settlement with the largest mortgage servicers in 
the country. And just last week, the OCC announced that 52,048 
people just in Massachusetts received checks so far under this 
settlement, and it was an aggregate total of $41 million in 
compensation, or about $800 a family.
    Now, that is $800 a family in a State, Massachusetts, where 
the median home income is $324,500. I will do the math for you. 
That is about \2/10\ of 1 percent of the purchase price of the 
average home in the Commonwealth of Massachusetts.
    Now, it is my job to look out for families in 
Massachusetts, including helping them get basic information 
about whether settlements made on their behalf by the 
Government are fair. And to do that, 6 months ago I started 
asking for basic documents about the investigation and to see 
what the foreclosure fraud investigation had uncovered, how 
many people had lost their chance to save their home, just 
really how bad the damage was. So far, the Fed and the OCC have 
disclosed very little of what I have asked for.
    So the question I have is how the people I represent in 
Massachusetts who believe they were cheated or the 4 million 
people who received checks around the country, how they know 
that the payments they are receiving are fair if the Fed and 
the OCC will not disclose details about what they uncovered in 
the investigation.
    Mr. Bernanke. Well, as you know, we stopped the 
investigation well before all 4.2 million borrowers were 
analyzed, so we do not have that information for everybody, but 
we do have it for some folks, and we are looking to see if we 
can find a way to get that information to the individuals whose 
files were evaluated by the independent consultants.
    Senator Warren. Good. So we are talking about getting that 
information to them and releasing more information about what 
you did find in the aggregate?
    Mr. Bernanke. Yes. We hope to have a report on this whole 
thing within the next couple of months that will lay out 
basically all the information we have. Some of the things that 
you have requested frankly we just did not collect. But we will 
try to provide as much transparency as we can.
    Senator Warren. I would be very grateful for that, Mr. 
Chairman. You know my concerns in this area generally that if 
the regulators are not aggressive enough, if they do not 
require admission of guilt, if they never take large financial 
institutions to trial, then the resulting settlements are too 
weak. And so I know you appreciate that a slap on the wrist is 
not enough, and if the OCC and the Fed are confident that these 
are good settlements, I think it helps everyone if the 
information is out there. So thank you, Mr. Chairman. I 
appreciate it.
    Mr. Bernanke. I would like to add that, of course, the 
people who received checks have not yielded their legal rights, 
and they could pursue this further if they wish.
    Senator Warren. Yes, and I hope that by revealing this 
information they will be able to better evaluate whether or not 
that is appropriate for them. Thank you.
    Chairman Johnson. Senator Crapo has a brief statement to 
make.
    Senator Crapo. Yes, thank you, Mr. Chairman. I have a 
number of additional questions, but we are coming up against a 
vote right away. So, Chairman Bernanke, if it is OK with you 
and with the Chairman, I will submit these questions to you and 
ask you to respond later. The questions that I have, among 
others, are some further inquiries about the short-term 
interest rate policy, the actions right now at the FSOC, the 
Financial stability Oversight Council, in particular in 
relationship to nonbank, systemically important financial 
institutions. And as you might guess, on GSE reform, I would 
love to get some further information from your perspective on 
that.
    But I will submit those questions, Mr. Chairman, in light 
of the fact that we do have a vote pending. Thank you.
    Chairman Johnson. Chairman Bernanke, I want to thank you 
for your extraordinary service to our Nation.
    Mr. Bernanke. Thank you.
    Chairman Johnson. And I want to thank you for your 
testimony.
    This hearing is adjourned.
    [Whereupon, at 12:12 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                 PREPARED STATEMENT OF BEN S. BERNANKE
       Chairman, Board of Governors of the Federal Reserve System
                             July 18, 2013
    Chairman Johnson, Ranking Member Crapo, and other Members of the 
Committee, I am pleased to present the Federal Reserve's Semiannual 
Monetary Policy Report to the Congress. I will discuss current economic 
conditions and the outlook and then turn to monetary policy. I'll 
finish with a short summary of our ongoing work on regulatory reform.
The Economic Outlook
    The economic recovery has continued at a moderate pace in recent 
quarters despite the strong headwinds created by Federal fiscal policy.
    Housing has contributed significantly to recent gains in economic 
activity. Home sales, house prices, and residential construction have 
moved up over the past year, supported by low mortgage rates and 
improved confidence in both the housing market and the economy. Rising 
housing construction and home sales are adding to job growth, and 
substantial increases in home prices are bolstering household finances 
and consumer spending while reducing the number of homeowners with 
underwater mortgages. Housing activity and prices seem likely to 
continue to recover, notwithstanding the recent increases in mortgage 
rates, but it will be important to monitor developments in this sector 
carefully.
    Conditions in the labor market are improving gradually. The 
unemployment rate stood at 7.6 percent in June, about a half percentage 
point lower than in the months before the Federal Open Market Committee 
(FOMC) initiated its current asset purchase program in September. 
Nonfarm payroll employment has increased by an average of about 200,000 
jobs per month so far this year. Despite these gains, the jobs 
situation is far from satisfactory, as the unemployment rate remains 
well above its longer-run normal level, and rates of underemployment 
and long-term unemployment are still much too high.
    Meanwhile, consumer price inflation has been running below the 
Committee's longer-run objective of 2 percent. The price index for 
personal consumption expenditures rose only 1 percent over the year 
ending in May. This softness reflects in part some factors that are 
likely to be transitory. Moreover, measures of longer-term inflation 
expectations have generally remained stable, which should help move 
inflation back up toward 2 percent. However, the Committee is certainly 
aware that very low inflation poses risks to economic performance--for 
example, by raising the real cost of capital investment--and increases 
the risk of outright deflation. Consequently, we will monitor this 
situation closely as well, and we will act as needed to ensure that 
inflation moves back toward our 2 percent objective over time.
    At the June FOMC meeting, my colleagues and I projected that 
economic growth would pick up in coming quarters, resulting in gradual 
progress toward the levels of unemployment and inflation consistent 
with the Federal Reserve's statutory mandate to foster maximum 
employment and price stability. Specifically, most participants saw 
real GDP growth beginning to step up during the second half of this 
year, eventually reaching a pace between 2.9 and 3.6 percent in 2015. 
They projected the unemployment rate to decline to between 5.8 and 6.2 
percent by the final quarter of 2015. And they saw inflation gradually 
increasing toward the Committee's 2 percent objective. \1\
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     \1\ These projections reflect FOMC participants' assessments based 
on their individual judgments regarding appropriate monetary policy.
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    The pickup in economic growth projected by most Committee 
participants partly reflects their view that Federal fiscal policy will 
exert somewhat less drag over time, as the effects of the tax increases 
and the spending sequestration diminish. The Committee also believes 
that risks to the economy have diminished since the fall, reflecting 
some easing of financial stresses in Europe, the gains in housing and 
labor markets that I mentioned earlier, the better budgetary positions 
of State and local governments, and stronger household and business 
balance sheets. That said, the risks remain that tight Federal fiscal 
policy will restrain economic growth over the next few quarters by more 
than we currently expect, or that the debate concerning other fiscal 
policy issues, such as the status of the debt ceiling, will evolve in a 
way that could hamper the recovery. More generally, with the recovery 
still proceeding at only a moderate pace, the economy remains 
vulnerable to unanticipated shocks, including the possibility that 
global economic growth may be slower than currently anticipated.
Monetary Policy
    With unemployment still high and declining only gradually, and with 
inflation running below the Committee's longer-run objective, a highly 
accommodative monetary policy will remain appropriate for the 
foreseeable future.
    In normal circumstances, the Committee's basic tool for providing 
monetary accommodation is its target for the Federal funds rate. 
However, the target range for the Federal funds rate has been close to 
zero since late 2008 and cannot be reduced meaningfully further. 
Instead, we are providing additional policy accommodation through two 
distinct yet complementary policy tools. The first tool is expanding 
the Federal Reserve's portfolio of longer-term Treasury securities and 
agency mortgage-backed securities (MBS); we are currently purchasing 
$40 billion per month in agency MBS and $45 billion per month in 
Treasuries. The second tool is ``forward guidance'' about the 
Committee's plans for setting the Federal funds rate target over the 
medium term.
    Within our overall policy framework, we think of these two tools as 
having somewhat different roles. We are using asset purchases and the 
resulting expansion of the Federal Reserve's balance sheet primarily to 
increase the near-term momentum of the economy, with the specific goal 
of achieving a substantial improvement in the outlook for the labor 
market in a context of price stability. We have made some progress 
toward this goal, and, with inflation subdued, we intend to continue 
our purchases until a substantial improvement in the labor market 
outlook has been realized. In addition, even after purchases end, the 
Federal Reserve will be holding its stock of Treasury and agency 
securities off the market and reinvesting the proceeds from maturing 
securities, which will continue to put downward pressure on longer-term 
interest rates, support mortgage markets, and help to make broader 
financial conditions more accommodative.
    We are relying on near-zero short-term interest rates, together 
with our forward guidance that rates will continue to be exceptionally 
low--our second tool--to help maintain a high degree of monetary 
accommodation for an extended period after asset purchases end, even as 
the economic recovery strengthens and unemployment declines toward 
more-normal levels. In appropriate combination, these two tools can 
provide the high level of policy accommodation needed to promote a 
stronger economic recovery with price stability.
    In the interest of transparency, Committee participants agreed in 
June that it would be helpful to lay out more details about our 
thinking regarding the asset purchase program--specifically, to provide 
additional information on our assessment of progress to date, as well 
as of the likely trajectory of the program if the economy evolves as 
projected. This agreement to provide additional information did not 
reflect a change in policy.
    The Committee's decisions regarding the asset purchase program (and 
the overall stance of monetary policy) depend on our assessment of the 
economic outlook and of the cumulative progress toward our objectives. 
Of course, economic forecasts must be revised when new information 
arrives and are thus necessarily provisional. As I noted, the economic 
outcomes that Committee participants saw as most likely in their June 
projections involved continuing gains in labor markets, supported by 
moderate growth that picks up over the next several quarters as the 
restraint from fiscal policy diminishes. Committee participants also 
saw inflation moving back toward our 2 percent objective over time. If 
the incoming data were to be broadly consistent with these projections, 
we anticipated that it would be appropriate to begin to moderate the 
monthly pace of purchases later this year. And if the subsequent data 
continued to confirm this pattern of ongoing economic improvement and 
normalizing inflation, we expected to continue to reduce the pace of 
purchases in measured steps through the first half of next year, ending 
them around midyear. At that point, if the economy had evolved along 
the lines we anticipated, the recovery would have gained further 
momentum, unemployment would be in the vicinity of 7 percent, and 
inflation would be moving toward our 2 percent objective. Such outcomes 
would be fully consistent with the goals of the asset purchase program 
that we established in September.
    I emphasize that, because our asset purchases depend on economic 
and financial developments, they are by no means on a preset course. On 
the one hand, if economic conditions were to improve faster than 
expected, and inflation appeared to be rising decisively back toward 
our objective, the pace of asset purchases could be reduced somewhat 
more quickly. On the other hand, if the outlook for employment were to 
become relatively less favorable, if inflation did not appear to be 
moving back toward 2 percent, or if financial conditions--which have 
tightened recently--were judged to be insufficiently accommodative to 
allow us to attain our mandated objectives, the current pace of 
purchases could be maintained for longer. Indeed, if needed, the 
Committee would be prepared to employ all of its tools, including an 
increase the pace of purchases for a time, to promote a return to 
maximum employment in a context of price stability.
    As I noted, the second tool the Committee is using to support the 
recovery is forward guidance regarding the path of the Federal funds 
rate. The Committee has said it intends to maintain a high degree of 
monetary accommodation for a considerable time after the asset purchase 
program ends and the economic recovery strengthens. In particular, the 
Committee anticipates that its current exceptionally low target range 
for the Federal funds rate will be appropriate at least as long as the 
unemployment rate remains above 6\1/2\ percent and inflation and 
inflation expectations remain well behaved in the sense described in 
the FOMC's statement.
    As I have observed on several occasions, the phrase ``at least as 
long as'' is a key component of the policy rate guidance. These words 
indicate that the specific numbers for unemployment and inflation in 
the guidance are thresholds, not triggers. Reaching one of the 
thresholds would not automatically result in an increase in the Federal 
funds rate target; rather, it would lead the Committee to consider 
whether the outlook for the labor market, inflation, and the broader 
economy justified such an increase. For example, if a substantial part 
of the reductions in measured unemployment were judged to reflect 
cyclical declines in labor force participation rather than gains in 
employment, the Committee would be unlikely to view a decline in 
unemployment to 6\1/2\ percent as a sufficient reason to raise its 
target for the Federal funds rate. Likewise, the Committee would be 
unlikely to raise the funds rate if inflation remained persistently 
below our longer-run objective. Moreover, so long as the economy 
remains short of maximum employment, inflation remains near our longer-
run objective, and inflation expectations remain well anchored, 
increases in the target for the Federal funds rate, once they begin, 
are likely to be gradual.
Regulatory Reform
    I will finish by providing you with a brief update on progress on 
reforms to reduce the systemic risk of the largest financial firms. As 
Governor Tarullo discussed in his testimony last week before this 
Committee, the Federal Reserve, with the other Federal banking 
agencies, adopted a final rule earlier this month to implement the 
Basel III capital reforms. \2\ The final rule increases the quantity 
and quality of required regulatory capital by establishing a new 
minimum common equity tier 1 capital ratio and implementing a capital 
conservation buffer. The rule also contains a supplementary leverage 
ratio and a countercyclical capital buffer that apply only to large and 
internationally active banking organizations, consistent with their 
systemic importance. In addition, the Federal Reserve will propose 
capital surcharges on firms that pose the greatest systemic risk and 
will issue a proposal to implement the Basel III quantitative liquidity 
requirements as they are phased in over the next few years. The Federal 
Reserve is considering further measures to strengthen the capital 
positions of large, internationally active banks, including the 
proposed rule issued last week that would increase the required 
leverage ratios for such firms. \3\
---------------------------------------------------------------------------
     \2\ See, Daniel K. Tarullo (2013), ``Dodd-Frank Implementation'', 
statement before the Committee on Banking, Housing, and Urban Affairs, 
U.S. Senate, July 11, www.federalreserve.gov/newsevents/testimony/
tarullo20130711a.htm; and Board of Governors of the Federal Reserve 
System (2013), ``Federal Reserve Board Approves Final Rule To Help 
Ensure Banks Maintain Strong Capital Positions'', press release, July 
2, www.federalreserve.gov/newsevents/press/bcreg/20130702a.htm.
     \3\ See, Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and Office of the Comptroller of the 
Currency (2013), ``Agencies Adopt Supplementary Leverage Ratio Notice 
of Proposed Rulemaking'', joint press release, July 9, 
www.federalreserve.gov/newsevents/press/bcreg/20130709a.htm.
---------------------------------------------------------------------------
    The Fed also is working to finalize the enhanced prudential 
standards set out in sections 165 and 166 of the Dodd-Frank Act. Among 
these standards, rules relating to stress testing and resolution 
planning already are in place, and we have been actively engaged in 
stress tests and reviewing the ``first-wave'' resolution plans. In 
coordination with other agencies, we have made significant progress on 
the key substantive issues relating to the Volcker rule and are hoping 
to complete it by year-end.
    Finally, the Federal Reserve is preparing to regulate and supervise 
systemically important nonbank financial firms. Last week, the 
Financial Stability Oversight Council designated two nonbank financial 
firms; it has proposed the designation of a third firm, which has 
requested a hearing before the council. \4\ We are developing a 
supervisory and regulatory framework that can be tailored to each 
firm's business mix, risk profile, and systemic footprint, consistent 
with the Collins amendment and other legal requirements under the Dodd-
Frank Act.
---------------------------------------------------------------------------
     \4\ U.S. Department of the Treasury (2013), ``Financial Stability 
Oversight Council Makes First Nonbank Financial Company Designations to 
Address Potential Threats to Financial Stability'', press release, July 
9, www.treasury.gov/press-center/press-releases/Pages/jl2004.aspx.
---------------------------------------------------------------------------
    Thank you. I would be pleased to take your questions.
               RESPONSES TO WRITTEN QUESTIONS OF
             CHAIRMAN JOHNSON FROM BEN S. BERNANKE

Q.1. I am concerned about the long-term impact of youth 
unemployment. What more can the Federal Reserve do to help 
promote youth employment?

A.1. Your concerns about the long-term impact of youth 
unemployment are well-founded. The unemployment rate for 16-24 
year olds was 15.1 percent in October 2013, down from its peak 
of 19 percent in late 2009, but still 5 percentage points above 
its level prior to the recession. A persistent lack of job 
opportunities for young people inhibits many of them from 
gaining valuable work experience and may cause lasting damage 
to their future employment and earnings prospects. The Federal 
Reserve can best help to promote youth employment--and indeed 
to enhance the economic well-being of all Americans--through 
our efforts to promote a stronger economy and a further 
improvement in labor market conditions. To this end, the 
Federal Reserve--consistent with its congressional mandate--
will continue to provide the policy accommodation that is 
needed to foster maximum employment and price stability.

Q.2. As we approach the 5 year anniversary of the financial 
crisis, what lessons should we never forget regarding 
appropriate regulation and supervision?

A.2. The primary lesson for financial regulation and 
supervision of the financial crisis and the ensuing Great 
Recession is that financial instability can do grave damage to 
the broader economy. This is a lesson that was also learned 
following other severe crises, such as the Great Depression. To 
a certain extent, policy makers forgot this lesson in the 
decades of prosperity that followed the end of World War II.
    Thus, it is important that financial institutions are well-
capitalized, have sufficient liquidity on hand to meet a range 
of contingencies, and that counterparties, regulators and 
others are prepared for the failure of any given firm. The 
Federal Reserve, working with other regulatory agencies, has 
made great progress putting in place enhanced standards for 
capital, liquidity, risk management, and resolution for the 
largest financial institutions.
    However, while financial crises share many features, they 
happen infrequently enough that each has its own unique 
aspects. Thus, regulators must be flexible in their 
consideration of the key risks facing the financial system. To 
this end, the Federal Reserve's annual stress testing exercise 
uses scenarios designed to stress the most salient risks. In 
addition, the Federal Reserve has devoted increased resources 
to monitoring the evolution of the financial system and 
emerging threats to better ensure that policy makers have the 
information necessary to preserve financial stability. Such 
efforts and increased interagency focus on systemic issues 
through the FSOC represent an important shift toward a 
macroprudential approach to regulation and supervision of the 
financial system.

Q.3. It was recently announced that the New York Stock Exchange 
Euronext would administer LIBOR rates. What steps are needed to 
ensure that LIBOR and other benchmarks are appropriately 
structured and regulated going forward?

A.3. While the announcement of Euronext as the administrator is 
an important step, we do not yet know the details of Euronext's 
plan for its system of oversight or how it will link the 
submission of rates to transactions. We look forward to 
learning more. Another important step to ensure that LIBOR and 
other benchmarks are appropriately structured and regulated is 
the work that has been undertaken by the Financial Stability 
Board (FSB) to review existing reference rates and to examine 
possible complements or alternatives to existing rates. The FSB 
commissioned the International Organization of Securities 
Commissions (IOSCO) to undertake the review of existing rates, 
including LIBOR, EURIBOR, and TIBOR; and it is our 
understanding that IOSCO has convened a group of regulators to 
come up with the parameters for that review. The reviews of 
those rates are expected to be completed sometime next year. 
The FSB report on possible alternatives is due to be completed 
in the second quarter of 2014.

Q.4. How is the Federal Reserve preparing the financial 
institutions it regulates for higher interest rates?

A.4. From a policy perspective, the Federal Banking agencies 
have established guidance in place on interest rate risk (IRR) 
since 1996 (Joint Policy Statement on Interest Rate Risk SR 96-
13) with more recent guidance in 2010 (Interagency Advisory on 
Interest Rate Risk SR 10-1) and in 2012 (Questions and Answers 
on Interagency Advisory on Interest Rate Risk Management SR 12-
2). Together these documents outline supervisory expectations 
for effective interest rate risk management. Through on-site 
examinations, ongoing monitoring, and analysis of bank supplied 
information and/or regulatory filings, the Federal Reserve 
assesses and monitors the level of interest rate risk and the 
quality of interest rate risk management. Institutions that are 
found to contain outsized levels of interest rate risk and/or 
poor quality interest rate risk management routines may be 
subject to enforcement actions to reduce interest rate risk, 
improve available capital levels, or improve their interest 
rate risk management process.
    Over the past few years, the FRB has taken additional 
action steps to strengthen the supervisory oversight with 
regard to interest rate risk. As part of this, we have devoted 
more resources to interest rate risk teams that continuously 
monitor cross-institution risk and keep abreast of emerging 
risk issues affecting the largest firms. In addition, we have 
conducted, when necessary, in-depth on-site examinations 
targeting IRR in order to assess firms' preparedness for 
potential interest rate shocks. The Federal Reserve has also 
undertaken a number of outreach efforts to raise awareness of 
interest rate risk. Some recent topics include:

    Essentials of Effective Interest Rate Risk 
        Measurement

    Effective Asset/Liability Management: A View From 
        the Top

    Interest Rate Risk Management at Community Banks

    Managing Interest Rate Risk in a Rising Rate 
        Environment

Q.5. As you know, on July 21 the 3-year moratorium on 
Industrial Loan Company (ILC) charters mandated by Wall Street 
Reform expired. Do you believe there will be any impact on the 
banking system now that the moratorium has expired? Do you 
believe the regulators have sufficient supervisory and 
enforcement authority to appropriately regulate firms that own 
ILCs? If not, what supervisory gaps exist?

A.5. Industrial loan companies (ILCs) are State-chartered banks 
that have virtually all of the powers and privileges of other 
insured commercial banks, including the protections of the 
Federal safety net--deposit insurance and access to the Federal 
Reserve's discount window and payments system. Nonetheless, 
ILCs operate under a special exception to the Federal Bank 
Holding Company Act (BHC Act). This special exception allows 
any type of firm, including a commercial firm or foreign bank, 
to acquire and operate an ILC chartered in one of a handful of 
States--principally Utah and California--without complying with 
the standards that Congress has established for bank holding 
companies to maintain the separation of banking and commerce 
and to protect insured banks, the Federal safety net and, 
ultimately, the taxpayer.
    The Board believes the best way to prevent this exception 
from further undermining the general policies that Congress has 
established and further promoting competitive and regulatory 
imbalances within the banking system is to close the loophole 
in current law to new acquirers of ILCs. This is precisely the 
approach that Congress has taken on previous occasions when 
earlier loopholes began to be used in unintended and 
potentially damaging ways.
    It is important to keep in mind that the exception 
currently is open-ended and subject to very few statutory 
restrictions. Although only a handful of States have the 
ability to charter exempt ILCs, there is no limit on the number 
of exempt ILCs that these States may charter. Moreover, Federal 
law places no limit on how large an ILC may become and only one 
restriction on the types of activities that an ILC may conduct. 
That restriction prevents most ILCs from accepting demand 
deposits that the depositor may withdraw by check or similar 
means for payment to third parties. This Federal restriction 
has lost much of its meaning as ILCs have entered the world of 
retail banking by offering retail customers negotiable order of 
withdrawal (NOW) accounts--transaction accounts that are 
functionally indistinguishable from demand deposit accounts.
    The ILC exception also fosters an unfair and unlevel 
competitive and regulatory playing field by allowing firms that 
acquire an insured ILC in a handful of States to operate 
outside the activity restrictions and consolidated supervisory 
and regulatory framework that apply to other community-based, 
regional, and diversified organizations that own a similarly 
situated bank. Addressing these matters will only become more 
difficult if additional companies are permitted to acquire and 
operate ILCs under this special exception.
    The ILC exception in current law undermines the supervisory 
framework that Congress has established for the corporate 
owners of insured banks. ILCs are regulated and supervised by 
the FDIC and their chartering State in the same manner as other 
types of State-chartered, nonmember insured banks and the Board 
has no concerns about the adequacy of this existing supervisory 
framework for ILCs themselves. However, due to the special 
exception in current law, the parent company of an ILC is not 
considered a bank holding company. This creates special 
supervisory risks because the ILC's parent company and nonbank 
affiliates may not be subject to supervision on a consolidated 
basis by a Federal agency.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM BEN S. BERNANKE

Q.1. You mentioned in your testimony that the Fed is developing 
the regulatory framework for the two nonbank systemically 
important financial institutions designated by the FSOC. These 
companies by definition are not banks. They have different 
assets and liabilities than the entities traditionally 
regulated by the Fed. How will the Fed address the unique 
characteristics of nonbank financial institutions that are 
designated as systemically important? If the idea is to have a 
general framework for nonbank SIFIs, what specific steps is the 
Fed planning to undertake to ensure that the diverse nature of 
these companies is accounted for while also ensuring they 
remain competitive in their industries? How long will that 
process take?

A.1. The Dodd-Frank Act requires the Board to apply enhanced 
prudential standards and early remediation requirements to bank 
holding companies with at least $50 billion in consolidated 
assets and to nonbank financial companies designated by the 
FSOC for supervision by the Board (designated companies). The 
Act authorizes the Board to tailor the application of these 
standards and requirements to different companies on an 
individual basis or by category. In so doing we can consider 
any factor we deem appropriate, including capital structure, 
nature of financial activities, riskiness, size, and 
complexity. In our proposed rulemaking, we noted that this 
tailoring authority would be particularly important in applying 
the standards and requirements to designated companies that are 
organized and operated differently from banking organizations. 
We sought and received comment on how the standards should be 
applied to designated companies. Staff has carefully reviewed 
the comments and met with interested members of the public, 
including the designated companies and other financial firms. 
As we indicated in the proposal, following the recent 
designations by the FSOC of AIG, GECC, and Prudential, we are 
assessing the business model, capital structure, and the risk 
profile of each company to determine how the standards and 
requirements should apply.
    The Federal Reserve currently supervises AIG and GECC as 
savings and loan holding companies and formerly supervised 
Prudential in this capacity. We intend to design a supervisory 
program for these firms as designated companies that is 
consistent with the approach we use for the largest financial 
holding companies but tailored to account for different 
material characteristics of each firm. We intend to utilize 
expertise gained from our prior and current supervisory 
activities and from the designation process, to leverage our 
strong working relationships with State insurance supervisors 
(in the case of AIG and Prudential), and to include a focus on 
threats to financial stability posed by each firm.

Q.2. After completing work on FHA reform, the Banking Committee 
will move to the issue of reforming the GSEs. As we begin this 
process, what are the guiding principles that we ought to 
consider? If there is a Government guarantee, how do we make 
sure that it is priced accordingly?

A.2. The historical experience with mortgage-backed securities 
provides three principles for successful mortgage 
securitization. First, for the ultimate investors to be willing 
to acquire and trade mortgage-backed securities, they must be 
persuaded that the credit quality of the underlying mortgages 
is high and that the origination-to-distribution process is 
managed so that originators, such as mortgage brokers and 
bankers, have an incentive to undertake careful underwriting. 
Second, because the pools of assets underlying mortgage-backed 
securities have highly correlated risks, including interest 
rate, prepayment, and credit risks, the institutions and other 
investors that hold these securities must have the capacity to 
manage their risks carefully. Finally, because mortgage-backed 
securities are complex amalgamations of underlying mortgages 
that may themselves be complex to price, transparency about 
both the underlying assets and the mortgage-backed security 
itself is essential.
    From a public policy perspective, the question arises 
whether fully privatized mortgage securitization would continue 
under highly stressed financial conditions. Government-backed 
insurance for any form of bond or securities financing used to 
provide funding to mortgage markets should be explicitly priced 
and transparent, so that the taxpayers' risks can be fully 
understood. Pricing such insurance is difficult unless the 
Congress provides an objective for the Government insurer. If 
there is a Government guarantee, Congress needs to establish a 
standard for when it should be used and provide sufficient 
authority and clarity so that the Government catastrophic 
insurer knows how to balance concerns about taxpayer risk and 
credit availability.

Q.3. Beyond the discussion of tapering and winding down the 
Fed's balance sheet is the fact that short-term rates are still 
being held close to zero. In fact, it has been more than 4 
years since the Fed Funds Rate was reduced to near zero. Some 
have suggested the Fed should commit to leave the rate low for 
a period of time after the economy begins improving, while 
others are concerned that any delay would provoke inflation. 
Given the limits of the accuracy of real-time economic data and 
economic forecasting, how confident are you that the Fed will 
be able to move from a zero-interest rate policy at the right 
time?

A.3. The Committee is firmly committed to its price stability 
objective, and, as affirmed in its statement of Longer-Run 
Goals and Policy Strategy, its policy decisions will be aimed 
at achieving its longer-run goal of 2 percent inflation (as 
measured by the deflator for personal consumption 
expenditures). The FOMC has stated that it will be appropriate 
to keep its target range for the Federal funds rate at its 
current very low level at least as long as the unemployment 
rate remains above 6\1/2\ percent, inflation between one and 
two years ahead is projected to be no more than a half percent 
about the Committee's 2 percent longer-run goal, and longer-
term inflation expectations continue to be well anchored. In 
any set of circumstances, it is difficult to accurately judge 
the ideal timing of a shift in the direction of monetary policy 
and one cannot rule out the risk that inflation could at some 
point increase unexpectedly. However, policy makers carefully 
and continuously monitor a range of inflation indicators and 
will adjust the stance of policy as appropriate to achieve low 
and stable inflation as well as maximum employment.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                      FROM BEN S. BERNANKE

Q.1. In February you testified before this Committee that 
monetary and fiscal policy were working at ``cross-purposes.'' 
Many more Americans would have jobs and be much better off if 
Congress passed sensible fiscal policy--policies that are good 
investments with high bang for the buck like infrastructure 
projects, tax relief for low and middle-income Americans, and 
incentives to companies to hire and expand their payroll.
    Could you describe how the Fed's policy would be different, 
in size or scope, if there was sensible fiscal support? And how 
many more Americans would have a job? Would a stronger 
recovery, supported by fiscal policy, help the Fed manage its 
monetary policy as employment increases and the economy nears 
the thresholds laid out by the FOMC?

A.1. As I have suggested to the Congress in the past, a fiscal 
policy that was less focused on near-term consolidation and 
more focused on long-run sustainability would be preferable to 
the current policy. According to the CBO, the near-term 
policies embodied in current law--such as sequestration, tax 
increases and other measures--are cutting an estimated 1.5 
percentage points off GDP growth this year, or approximately 
750,000 jobs. Although Fed policies are working to support the 
labor market and offset some of this drag, monetary policy is 
not a panacea, and we would surely see stronger labor market 
conditions if fiscal policy were not imposing strong headwinds 
on the economy this year. By the same token, it is imperative 
that Congress come to grips in a compelling, credible way with 
the fact that fiscal policy as encoded in current law is not 
sustainable in the long term. These two objectives are not 
contradictory; on the contrary, they could be mutually 
reinforcing. A less restrictive fiscal policy in the near term 
that supported a stronger economic recovery would help improve 
the sustainability of the Federal Government's overall fiscal 
position over the long term. At the same time, a credible and 
growth-oriented long-term plan for sustainability, enacted into 
law, would alleviate widespread concerns and reduce 
uncertainty--both of which could add to the vigor of aggregate 
demand in the near term.
    I am confident that we have the tools to manage monetary 
policy effectively once we get to the point where the economy 
is nearing the thresholds laid out by the Federal Open Market 
Committee.

Q.2. The United States just concluded the first round of 
negotiations with the European Union on the Transatlantic Trade 
and Investment Partnership (T-TIP) agreement. There is some 
concern that these negotiations and the resulting FTA could 
adversely affect financial regulatory reforms made by the Fed 
and other domestic prudential regulators.
    Has the Federal Reserve been consulted by or weighed in 
with the United States Trade Representative on whether this 
trade agreement would affect your rulemaking? Would an FTA with 
significant financial regulatory changes frustrate your ongoing 
rulemaking and multilateral efforts with the G20?

A.2. Federal Reserve staff works closely with the staff of the 
Treasury Department and other agencies to keep abreast of the 
status of trade negotiations to assure that any agreement would 
not interfere with U.S. prudential regulation. We are aware 
that there has been interest on the part of the EU to negotiate 
financial regulations in the context of the T-TIP agreement. 
However, the U.S. agencies working on the T-TIP, including 
USTR, are in agreement that the negotiations will not include 
prudential or financial regulations or attempt to set standards 
for such regulations. The Federal Reserve will continue to 
monitor the negotiations to assure that its ability to 
establish appropriate prudential regulations is not 
compromised.
    The Federal Reserve has long supported including the 
financial services sector itself in trade negotiations in the 
interest of opening markets, reducing trade barriers, and 
encouraging the free flow of trade, but only subject to 
prudential considerations. As the financial crisis 
demonstrated, market discipline alone is not sufficient to 
ensure a healthy and stable economy. Financial institutions 
must be held to rigorous prudential standards. Efforts to 
restore and strengthen the health and stability of the U.S. 
financial sector could be undermined if prudential or financial 
regulations are subject to exemptions or modifications through 
trade agreements. It could also undermine other multilateral 
efforts to agree on international financial standards, already 
underway in such fora as the FSB, Basel Committee, IOSCO, and 
the IAIS.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN
                      FROM BEN S. BERNANKE

Q.1. There has been a significant sell-off in the fixed income 
markets in recent weeks, with substantial outflows from bond 
mutual funds. Are you at all concerned you that markets are too 
driven by the speeches and official pronouncements from central 
banks around the world? If the suggestion of tapering has been 
contributing to volatility in asset prices, can we expect more 
volatility as policy action nears?

A.1. The recent rise in interest rates appears to partly 
reflect shifts in investor expectations about monetary policy, 
but other factors likely played important roles as well. In 
particular, incoming data appears to have led investors to mark 
up their expectations for economic activity relative to earlier 
in the year. Yield movements were also reportedly exacerbated 
by an unwinding of leveraged and risky trading positions that 
had been predicated on highly optimistic investor expectations 
of persistently low and stable interest rates. Notably, an 
unwinding of such positions, while having the unfortunate 
effect of tightening financial conditions, may also have 
removed some of the risks to financial stability posed by those 
overextended positions, putting financial markets on a firmer 
footing.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                      FROM BEN S. BERNANKE

Q.1. The Federal Reserve proposes to end its asset purchases by 
the middle of next year, assuming that the recovery has gained 
momentum, unemployment is near 7 percent, and inflation is 
moving toward 2 percent. However, unemployment of 7 percent 
would be well above the so-called ``natural'' rate of 
unemployment (http://research.stlouisfed.org/fred2/series/
NROUST), suggesting that inflation would not be a concern, and 
many households would still be in considerable distress because 
of the slack labor market. Why does the Federal Reserve plan to 
abandon a tool that you say helps ``to increase the near-term 
momentum of the economy, with the specific goal of achieving 
substantial improvement in the outlook for the labor market in 
the context of price stability'' when macroeconomic conditions 
remain far from normal?

A.1. The FOMC is currently providing monetary stimulus to the 
economy using two tools: large scale asset purchases and 
communications about its expectations for the path of the 
Federal funds rate, or ``forward guidance.'' Asset purchases 
help to lower longer-term interest rates by reducing the stock 
of available longer term securities, thereby helping to raise 
their price in the open market, and reduce their yield. Thus, a 
cessation of asset purchases would not imply a reduction in 
monetary stimulus because the Federal Reserve will continue to 
hold the assets it has purchased in its portfolio and thereby 
maintain downward pressure on long-term interest rates. 
Moreover, as the Committee has indicated in its most recent 
post-meeting statement, it expects that a highly accommodative 
stance of monetary policy will remain appropriate for a 
considerable time after the asset purchase program ends. In 
particular, the Committee sees its asset purchases as providing 
near-term momentum to the economy with the specific goal of 
achieving a substantial improvement in the labor market in a 
context of price stability. However, even after this goal has 
been achieved, the Committee expects that it will be 
appropriate to maintain the current low range for the Federal 
funds rate at least as long as the unemployment rate remains 
above 6\1/2\ percent, inflation between 1 and 2 years is 
projected to be no more than half a percentage point above the 
Committee's 2 percent longer-run goal, and longer-term 
inflation expectations continue to be well anchored.

Q.2. In a recent Notice of Proposed Rulemaking the Federal 
Reserve proposes to treat branches and agencies of foreign 
banking organizations as if they were insured depositories for 
purposes of section 716 of the Dodd-Frank Act (http://
www.gpo.gov/fdsys/pkg/FR-2013-06-10/pdf/2013-13670.pdf). This 
rule would allow branches and agencies to act as a swaps entity 
for certain types of swaps, and to use swaps for hedging, while 
retaining access to the Federal Reserve discount window and 
emergency lending. This change is described in the rule 
proposal being, `` . . . consistent with the purpose and 
legislative history of section 716. Section 716 and Title VII 
of the Dodd-Frank Act generally are intended to reduce systemic 
risks from derivatives activities.'' Can you explain how 
extending the Federal safety net to swaps entities located in 
branches and agencies--which are not subject to the full range 
of U.S. banking regulation--reduces the systemic risks created 
by derivatives activities?

A.2. The Board's interim final rule treats an uninsured U.S. 
branch or agency of a foreign bank as an insured depository 
institution for purposes of section 716 of the Dodd-Frank Act.
    The interim final rule does not extend the Federal safety 
net to these branches and agencies. Under the Federal Reserve 
Act, both uninsured and insured U.S. branches and agencies of 
foreign banks may receive Federal Reserve advances on the same 
terms and conditions that apply to domestic insured State 
member banks. \1\ In section 716, Congress also determined to 
permit insured depository institutions to continue to conduct 
certain limited hedging and bank permissible activities. It 
made this determination to allow insured depository 
institutions to manage the risk from their activities in a safe 
and sound manner. This treatment is consistent with 
congressional intent as reflected in a colloquy between Senator 
Lincoln, the sponsor of section 716 and Senator Dodd, the 
Chairman of the Senate Committee on Banking, Housing, and Urban 
Affairs. During Senate consideration of the Dodd-Frank Act 
Conference Report, Senators Lincoln and Dodd had a colloquy 
during which they expressed the view that uninsured U.S. 
branches and agencies should be treated in the same manner as 
insured depository institutions. \2\ The Board's rule allows 
uninsured branches of foreign banks to engage in the same bank 
permissible activities so that they too can better manage risk.
---------------------------------------------------------------------------
     \1\ Section 13(14) of the Federal Reserve Act; 12 U.S.C. 347d.
     \2\ See, 156 Cong. Rec. S5904 (daily ed. July 15, 2010) (statement 
of Senator Lincoln).

Q.3. During the financial crisis, the unprecedented use of 
emergency lending powers under Section 13(3) of the Federal 
Reserve Act raised important questions about moral hazard in 
the financial sector. In response to these concerns, Section 
1101 of the Dodd-Frank Act placed important new restrictions on 
the Federal Reserve's use of its emergency lending powers. 
Section 1101(a)(6) required the Federal Reserve to write rules 
``as soon as is practicable after the enactment of this 
subparagraph'' establishing policies and procedures for 
emergency lending that implement these restrictions.
    It has been 3 years since Dodd-Frank was enacted but I am 
not aware that any rules have been issued or proposed 
establishing policies and procedures for emergency lending 
under Section 13(3). If any rules implementing the new Dodd-
Frank restrictions on emergency lending been proposed, can you 
please provide them to my office? If such regulations have not 
been proposed, what explains the failure to issue them ``as 
soon as is practicable'' and when do you expect these 
regulations to be issued?

A.3. The Dodd-Frank Act imposed numerous requirements upon the 
Board for rulemakings, both on its own as well as in 
consultation with other agencies, as well as requirements for 
process changes and development, studies, consultations, and 
reports. The Board has taken its obligations under the Dodd-
Frank Act very seriously. As of last month, the Board had 
completed 27 final rulemakings, 12 proposed rulemakings, and 12 
studies and reports (on its own or jointly with other 
agencies). The Board has undertaken substantial work both 
internally and with other agencies where required on other 
Dodd-Frank Act requirements, including on the policies and 
procedures intended to implement the Dodd-Frank Act amendments 
to section 13(3). The Board expects to issue a proposal for 
public comment on the section 13(3) policies and procedures 
shortly.

Q.4. Given the statutory directive to issue detailed policies 
and procedures restricting 13(3) powers, do you believe that 
the Federal Reserve would be legally authorized to use its 
emergency lending powers in the absence of the mandated 
regulation?

A.4. The Dodd-Frank Act made several major changes to the 
statutory text of section 13(3). The Board believes that the 
provisions enacted in the Dodd-Frank Act governing its 
emergency lending authority have governed the use of that 
authority since enactment of that act.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
                      FROM BEN S. BERNANKE

Q.1. How are the unpredictability in taxes and regulation that 
businesses face affecting our economic recovery and future 
growth?

A.1. Economic research suggests that uncertainty about Federal 
Government policies, including those for taxes and regulation, 
can restrain business investment and hiring, although there is 
not a consensus on the magnitude of these effects. Policy 
makers can help alleviate this uncertainty by putting in place 
a stable and sustainable set of policies. It is important that 
taxes are set in order to raise sufficient tax revenue for a 
given amount of Federal Government spending and that Federal 
regulations are set in order to achieve key economic and social 
goals. The decisions made about the size and structure of 
Federal taxes and regulations have important effects on the 
future performance of the economy. These decisions entail 
balancing many factors to implement policies that reflect our 
values and priorities as a Nation.

Q.2. How can we improve the development of our future workforce 
to ensure we have the human capital necessary for the economy 
they will enter?

A.2. The skills and talents of the American workforce are 
important determinants of the long-run growth potential of the 
U.S. economy and of the standard of living of the population. 
Both to promote economic growth and to enhance the well-being 
of future generations, it is important that we provide our 
young people and our future workers more generally with the 
resources and opportunities they need to build their human 
capital and succeed in the modern economy.
    A first step toward achieving this goal is to make our 
education system as strong and accessible as possible. If we 
are to successfully navigate such challenges as the retirement 
of the baby boom generation, technological change, and 
increasing globalization, we must work diligently to maintain 
the quality of our educational system where it is strong and 
strive to improve it where it is not. Our efforts need to focus 
on all levels of education, from preschool on up. And even 
though higher education currently represents the strongest part 
of the U.S. educational system, we must find ways to move more 
of our students, especially minorities and students from 
disadvantaged backgrounds, into educational opportunities after 
high school.
    Of course, not everybody should necessarily be pursuing a 
4-year college degree. Indeed, there are many educational 
opportunities that lie outside the traditional route of a 
kindergarten-through-twelfth-grade education followed by 4 
years of college. For example, some individuals would be better 
off looking specifically towards a job in an industry where 
there is an understanding in advance that workers are needed 
with particular sets of skills. For students interested in that 
career path, support for focused job-oriented training programs 
such as those offered by many community colleges may be 
helpful.
    A third set of policies relates to those who are already in 
the workforce but need to adapt to a changing economic 
environment. In this regard, policies targeted towards 
providing those workers with the resources they need to upgrade 
their skills and find new jobs can be helpful. For example, 
community college and other adult education programs have been 
effective in helping workers advance their careers, as well as 
helping those who have lost their jobs to obtain new skills 
that strengthen their qualifications for available jobs. 
Similarly, innovative workforce development programs can play 
an important role in anticipating future job market demands, 
and by helping workers improve their skills to meet the 
requirements of businesses as they adopt more advanced 
technologies.
    Finally, promoting a strong economy that provides job 
opportunities for our future workforce is, of course, critical 
to the success of future generations. In this regard, the 
Federal Reserve remains firmly committed to fulfilling its 
statutory mandate from the Congress of promoting maximum 
employment, stable prices, and moderate long-term interest 
rates.
              Additional Material Supplied for the Record


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