[Senate Hearing 113-125]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 113-125


                     NOMINATION OF JANET L. YELLEN

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

                                HEARING

                               before the

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

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  NOMINATION OF JANET L. YELLEN, OF CALIFORNIA, TO BE CHAIRMAN OF THE 
            BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

                               __________

                           NOVEMBER 14, 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

                      Krishna Patel, FDIC Detailee

              Brian Filipowich, Professional Staff Member

                  Greg Dean, Republican Chief Counsel

             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, NOVEMBER 14, 2013

                                                                   Page

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

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

                                NOMINEE

Janet L. Yellen, of California, to be Chairman of the Board of 
  Governors of the Federal Reserve System........................     4
    Prepared statement...........................................    37
    Biographical sketch of nominee...............................    39
    Responses to written questions of:
        Senator Crapo............................................    52
        Senator Brown............................................    57
        Senator Hagan............................................    58
        Senator Warren...........................................    60
        Senator Vitter...........................................    63
        Senator Johanns..........................................    67
        Senator Kirk.............................................    71
        Senator Moran............................................    81
        Senator Coburn...........................................    84

 
                     NOMINATION OF JANET L. YELLEN,
OF CALIFORNIA, TO BE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL 
                             RESERVE SYSTEM

                              ----------                              


                      THURSDAY, NOVEMBER 14, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., in room SD-106, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    Today we consider the nomination of the Honorable Janet 
Yellen to be Chair of the Board of Governors of the Federal 
Reserve System for a term of 4 years.
    Dr. Yellen is an extraordinary candidate to lead the 
Federal Reserve. She currently serves as a Member and Vice 
Chair of the Board of Governors; she previously served as a 
Member of the Board of Governors in the 1990s; she was the 
Chair of President Clinton's Council of Economic Advisers; and 
she served 6 years as the President of the San Francisco Fed.
    In addition, Dr. Yellen has an impressive academic record. 
She is a professor at Berkeley's Haas School of Business and 
was previously a professor at Harvard University, as well as a 
faculty member at the London School of Economics. Dr. Yellen 
graduated summa cum laude from Brown University and received 
her Ph.D. in economics from Yale.
    Dr. Yellen's nomination is especially timely as our Nation 
struggles with high unemployment in the wake of the Great 
Recession. She has devoted a large portion of her professional 
and academic career to studying the labor market, unemployment, 
monetary policy, and the economy.
    Dr. Yellen also has a strong track record in evaluating 
trends in the economy; her economic analysis has been spot-on. 
The New York Times recently noted that she was ``the first Fed 
official, in 2005, to describe the rise in housing prices as a 
bubble that might damage the economy. She was also the first, 
in 2008, to say that the economy had fallen into a recession.''
    These forecasts were not an anomaly. The Wall Street 
Journal recently analyzed 700 predictions made between 2009 and 
2012 in speeches and congressional testimony by 14 Federal 
Reserve policy makers and found Dr. Yellen was the most 
accurate. Such accurate economic judgment would be a tremendous 
quality of a Fed Chair.
    Dr. Yellen has proven through her extensive and impressive 
record in public service and academia that she is most 
qualified to be the next Chair of the Federal Reserve. We need 
her expertise at the helm of the Fed as our Nation continues to 
recover from the Great Recession, completes Wall Street reform 
rulemakings, and continues to enhance the stability of our 
financial sector.
    I am excited to cast my vote to confirm her as the first 
woman to serve as Chair of the Federal Reserve, and when we 
vote on the nomination, I urge my colleagues to do the same.
    I now turn to Ranking Member Crapo for his opening 
statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman, for holding today's 
hearing on the nomination of Dr. Yellen to be the next Chair of 
the Federal Reserve Board. Today's hearing is an opportunity 
not only to examine Governor Yellen's qualifications but also 
her views on the role and direction of the Federal Reserve.
    In recent years the Fed has engaged in unprecedented 
policies, including purchasing trillions of dollars in 
Treasuries and mortgage-backed securities. Current Fed 
purchases total up to $85 billion a month. As a result, the 
next Fed Chair will inherit a balance sheet that currently 
stands at approximately $3.8 trillion, four times higher than 
before the financial crisis.
    As I think everyone knows, I have been a long-time critic 
of the Fed's quantitative easing purchases. Now that a 
reduction in asset purchases finally seems to be on the 
horizon, I am concerned that markets have become overly reliant 
on them. That is why it is essential to know how Dr. Yellen, if 
confirmed, would manage the process of normalizing our monetary 
policy. The Fed has indicated that it will hold short-term 
interest rates low for an extended period. In a speech in 
April, Governor Yellen stated, ``The policy rate should, under 
present conditions, be held lower for longer.'' But how long is 
too long?
    The extended period of low rates is hurting individuals 
living on fixed-income investments and defined benefit pension 
funds. The International Monetary Fund cautioned that the 
actions taken by central banks are associated with financial 
risks that are likely to increase the longer the policies are 
maintained.
    How would the Fed ensure that these risks are avoided under 
Dr. Yellen's chairmanship? In addition to unprecedented 
monetary policy, the next Fed Chair will finalize several key 
financial regulatory reform rules. These rules must balance the 
financial stability with the inherent need for markets to take 
on and accurately price risk. They must be done without putting 
the U.S. markets at an undue competitive disadvantage or 
harming consumers with unintended consequences.
    The Chair of the Federal Reserve must understand how 
different rules interact with each other, what impact they have 
on the affected entities and the economy at large. Just as some 
worried that we did not have another regulations on the books 
to prevent the economic crisis, some of us worry now that the 
post-crisis response will result in a regulatory regime that 
stifles growth and job creation.
    The Chair of the Federal Reserve must know and understand 
the need for that balance and how to carefully manage competing 
demands without harming the economy. The U.S. banking system 
and capital markets must remain the preferred destination for 
investors throughout the world.
    During previous hearings, I have asked Chairman Bernanke 
what parts of Dodd-Frank could be revisited on a bipartisan 
basis. The Chairman identified the end user and swaps push-out 
provisions as well as the need for regulatory relief on small 
banks. Chairman Bernanke also commented in July that 
legislation is needed to allow the Fed flexibility to deal with 
the Collins amendment and tailor appropriate capital 
requirements for insurance companies.
    I look forward to hearing Dr. Yellen's views on what Dodd-
Frank fixes Congress ought to consider and how she intends to 
achieve an appropriate balance between the prudential 
regulation and economic growth, if confirmed.
    In addition to the previously mentioned issues, the makeup 
of the Board itself will change in the near future. Governor 
Sarah Bloom Raskin has been nominated to a position at 
Treasury, and Governor Elizabeth Duke resigned in August. If 
Governor Yellen is confirmed as Chair, the Fed will need a new 
Vice Chair. Moreover, Dodd-Frank created a Vice Chair of 
Supervision, which has not yet been officially filled. These 
appointments will shape the direction of the Federal Reserve 
policymaking for years to come.
    I look forward to working with the Chairman to see these 
positions are filled in a way that provides the proper balance 
and expertise at the Fed.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    Senator Crapo and I have agreed that, to allow for 
sufficient time for questions, we are limiting opening 
statements to the Chair and Ranking Member. All Senators are 
welcome to submit an opening statement for the record.
    We will now swear in Dr. Yellen. Please rise and raise your 
right hand. Do you swear or affirm that the testimony that you 
are about to give is the truth, the whole truth, and nothing 
but the truth, so help you God?
    Ms. Yellen. I do.
    Chairman Johnson. Do you agree to appear and testify before 
any duly constituted committee of the Senate?
    Ms. Yellen. I do.
    Chairman Johnson. Please be seated.
    Please be assured that your written statement will be part 
of the record. I invite you to introduce your family and 
friends in attendance before beginning your statement.
    Dr. Yellen, please proceed with your testimony.

STATEMENT OF JANET L. YELLEN, OF CALIFORNIA, TO BE CHAIRMAN OF 
      THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Yellen. Thank you. I would like to introduce my 
husband, George Akerlof; and my sister-in-law, Allison Brooks; 
and my friend and a former San Francisco Fed Director, Karla 
Chambers, who are here with me today.
    Chairman Johnson, Senator Crapo, and Members of the 
Committee, thank you for this opportunity to appear before you 
today. It has been a privilege for me to serve the Federal 
Reserve at different times and in different roles over the past 
36 years and an honor to be nominated by the President to lead 
the Fed as Chair of the Board of Governors.
    I approach this task with a clear understanding that the 
Congress has entrusted the Federal Reserve with great 
responsibilities. Its decisions affect the well-being of every 
American and the strength and prosperity of our Nation. That 
prosperity depends most, of course, on the productiveness and 
enterprise of the American people, but the Federal Reserve 
plays a role too, promoting conditions that foster maximum 
employment, low and stable inflation, and a safe and sound 
financial system.
    The past 6 years have been challenging for our Nation and 
difficult for many Americans. We endured the worst financial 
crisis and deepest recession since the Great Depression. The 
effects were severe, but they could have been far worse. 
Working together, Government leaders confronted these 
challenges and successfully contained the crisis. Under the 
wise and skilled leadership of Chairman Bernanke, the Fed 
helped stabilize the financial system, arrest the steep fall in 
the economy, and restart growth.
    Today the economy is significantly stronger and continues 
to improve. The private sector has created 7.8 million jobs 
since the post-crisis low for employment in 2010. Housing, 
which was at the center of the crisis, seems to have turned a 
corner. Construction, home prices, and sales are up 
significantly. The auto industry has made an impressive 
comeback, with domestic production and sales back to near their 
pre-crisis levels.
    We have made good progress, but we have further to go to 
regain the ground lost in the crisis and the recession. 
Unemployment is down from a peak of 10 percent, but at 7.3 
percent in October, it is still too high, reflecting a labor 
market and economy performing far short of their potential. At 
the same time, inflation is running below the Federal Reserve's 
goal of 2 percent and is expected to continue to do so for some 
time.
    For these reasons, the Federal Reserve is using its 
monetary policy tools to promote a more robust recovery. A 
strong recovery will ultimately enable the Fed to reduce its 
monetary accommodation and its reliance on unconventional 
policy tools such as asset purchases. I believe that supporting 
the recovery today is the surest path to returning to a more 
normal approach to monetary policy.
    In the past two decades, and especially under Chairman 
Bernanke, the Federal Reserve has provided more and clearer 
information about its goals. Like the Chairman, I strongly 
believe that monetary policy is most effective when the public 
understands what the Fed is trying to do and how it plans to do 
it. At the request of Chairman Bernanke, I led the effort to 
adopt a statement of the Federal Open Market Committee's 
longer-run objectives, including a 2-percent goal for 
inflation. I believe this statement has sent a clear and 
powerful message about the FOMC's commitment to its goals and 
has helped anchor the public's expectations that inflation will 
remain low and stable in the future. In this and many other 
ways, the Federal Reserve has become a more open and 
transparent institution. I have strongly supported this 
commitment to openness and transparency, and I will continue to 
do so if I am confirmed and serve as Chair.
    The crisis revealed weaknesses in our financial system. I 
believe that financial institutions, the Federal Reserve, and 
our fellow regulators have made considerable progress in 
addressing those weaknesses. Banks are stronger today, 
regulatory gaps are being closed, and the financial system is 
more stable and more resilient. Safeguarding the United States 
in a global financial system requires higher standards both 
here and abroad, so the Federal Reserve and other regulators 
have worked with our counterparts around the globe to secure 
improved capital requirements and other reforms 
internationally. Today, banks hold more and higher-quality 
capital and liquid assets that leave them much better prepared 
to withstand financial turmoil. Large banks are now subject to 
annual ``stress tests'' designed to ensure that they will have 
enough capital to continue the vital role they play in the 
economy, even under highly adverse circumstances.
    We have made progress in promoting a strong and stable 
financial system, but here, too, important work lies ahead. I 
am committed to using the Fed's supervisory and regulatory role 
to reduce the threat of another financial crisis. I believe 
that capital and liquidity rules and strong supervision are 
important tools for addressing the problem of financial 
institutions that are regarded as ``too big to fail.'' In 
writing new rules, however, the Fed should continue to limit 
the regulatory burden for community banks and smaller 
institutions, taking into account their distinct role and 
contributions. Overall, the Federal Reserve has sharpened its 
focus on financial stability and is taking that goal into 
consideration when carrying out its responsibilities for 
monetary policy. I support these developments and pledge, if 
confirmed, to continue them.
    Our country has come a long way since the dark days of the 
financial crisis, but we have farther to go. I believe the 
Federal Reserve has made significant progress toward its goals 
but has more work to do.
    Thank you for the opportunity to appear before you today. I 
would be happy to respond to your questions.
    Chairman Johnson. Thank you for your testimony.
    Will the clerk please put 5 minutes on the clock for each 
Member?
    Dr. Yellen, you know, as I do, that unemployment is not 
just numbers but real men and women who are ready to work if 
given the chance. As Chair, how will you lead the Fed to 
continue reducing unemployment aggressively and improve the 
prospects of young Americans and others who are unemployed?
    Ms. Yellen. Thank you, Senator. I would be strongly 
committed to working with the FOMC to continue promoting a 
robust economic recovery. As you noted, unemployment remains 
high. A disproportionate share of that unemployment takes the 
form of long spells of unemployment. Around 36 percent of all 
those unemployed have been unemployed for more than 6 months. 
This is a virtually unprecedented situation, and we know that 
those long spells of unemployment are particularly painful for 
households, impose great hardship and costs on those without 
work, on the marriages of those who suffer these long 
unemployment spells, on their families. So I consider it 
imperative that we do what we can to promote a very strong 
recovery.
    We are doing that by continuing our asset purchase program 
which we put in place with the goal of assuring a substantial 
improvement in the outlook for the labor market. We are taking 
account of the costs and efficacy of that program as we go 
along. At this point I believe the benefits exceed the costs. 
As that program gradually winds down, we have indicated that we 
expect to maintain a highly accommodative monetary policy for 
some time to come thereafter, and the message that we want to 
send is that we will do what is in our power to assure a robust 
recovery in the context of price stability.
    Chairman Johnson. What are the dangers of tapering asset 
purchases too early? If confirmed, how should the FOMC move 
forward on an exit strategy?
    Ms. Yellen. Senator, I think there are dangers, frankly, on 
both sides of ending the program or ending accommodation too 
early. There are also dangers that we have to keep in mind with 
continuing the program too long or more generally keeping 
monetary policy accommodation in place too long. So the 
objective here is to assure a strong and robust recovery so 
that we get back to full employment and that we do so while 
keeping inflation under control. It is important not to remove 
support, especially when the recovery is fragile and the tools 
available to monetary policy should the economy falter are 
limited, given that short-term interest rates are at zero. I 
believe it could be costly to withdraw accommodation or to fail 
to provide adequate accommodation.
    On the other hand, it will be important for us also, as the 
recovery proceeds, to make sure that we do withdraw 
accommodation when the time is appointed. My colleagues and I 
are committed to our longer-run inflation goal of 2 percent, 
and we will need to ensure that, as the recovery takes hold and 
progresses, we also exit or bring monetary policy back to 
normal in a timely fashion.
    I believe we have the tools necessary to do so. We have 
been very careful to make sure that we have the tools available 
at our disposal and we also have the will and commitment, and I 
look forward to leading, when the time is appropriate, the 
normalization of monetary policy.
    Chairman Johnson. Thank you.
    Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman, and I would like to 
follow up on the Chairman's question with you, Ms. Yellen, with 
regard to quantitative easing. You have indicated that you feel 
that as long as the economy remains--well, I do not want to put 
words in your mouth. But as the economy remains fragile, that 
we need to continue the accommodation from the Federal Reserve.
    According to the July quarterly survey of the primary 
dealers by the New York Fed, the Fed's balance sheet will reach 
almost 24 percent of GDP in the first quarter of 2014. And I am 
concerned about the size of the Fed's balance sheet and its 
impact on the economy and the unintended consequences of these 
accommodations.
    It seems to me that there is a disconnect between what the 
Fed intended to accomplish and the results. A PIMCO executive 
recently stated that the $4 trillion in quantitative easing may 
have contributed as little as one-quarter of 1 percent to GDP 
growth. And even the Fed's own economists estimates that the 
QE2 added only about 0.13 percent to real GDP growth in 2010. 
And another expert has indicated that Fed policies contribute 
to bubble-like markets.
    How do you respond to the concerns that quantitative easing 
has limited impact on economic growth and is, in fact, creating 
very serious risks in our financial markets?
    Ms. Yellen. A number of different studies have been done 
attempting to assess what the contribution of our asset 
purchases have been, and, of course, this is something we can 
only estimate and cannot know with certainty. But my personal 
assessment would be, based on all of that work, that these 
purchases have made a meaningful contribution to economic 
growth and to improving the outlook.
    Certainly long-term interest rates. The purpose of these 
purchases was to push down longer-term interest rates. We have 
seen interest rates fall very substantially. Lower interest 
rates, lower mortgage rates particularly, I think have been a 
positive factor in generating the recovery of the housing 
sector. House prices, after having fallen very substantially, 
are moving up, and that is helping substantially many 
households, including the large fraction of American households 
who found themselves underwater on their mortgages. It is 
improving their household finances.
    We have seen a very meaningful recovery in automobile 
sales, spurred in part by low interest rates.
    Senator Crapo. But how long can we artificially hold or 
operate monetary policy in what I consider to be such extreme 
levels of the quantitative easing?
    Ms. Yellen. Senator, when we initiated this program, the 
unemployment rate was 8.1 percent, and the committee was 
somewhat pessimistic about its expectations for what we would 
see in the labor market over the ensuing year. In fact, the 
committee expected little or no meaningful progress in bringing 
down unemployment. And when we began this program, we indicated 
that our goal was to see a substantial improvement in the 
outlook for the labor market.
    So the progress of this program, it is not on a set course. 
It is data dependent, but we have seen improvement in the labor 
market.
    Senator Crapo. But can it just continue indefinitely? I 
mean, if the labor market does not improve to the point that 
you reach your target, how long can this continue? Do you agree 
that there has to be some point at which we return to normal 
monetary policy?
    Ms. Yellen. I would agree that this program cannot continue 
forever, that there are costs and risks associated with the 
program. We are monitoring those very carefully. You noted 
potential risks to financial stability, and those are risks 
that we take very seriously.
    The committee is focused on a variety of risks and 
recognizes that the longer this program continues, the more we 
will need to worry about those risks. So I do not see the 
program as continuing indefinitely.
    Senator Crapo. Do you have any estimate right now as to 
when there may be a beginning of the tapering?
    Ms. Yellen. Well, we at each meeting are attempting to 
assess whether we have seen meaningful progress in the labor 
market, and what the committee is looking for is signs that we 
will have growth that is strong enough to promote continued 
progress. As the FOMC indicated in its most recent statement, 
we do see strength in the private sector of the economy, and we 
are expecting continued progress going forward. So while there 
is no set time that we will decide to reduce the pace of our 
purchases, at each meeting we are attempting to assess whether 
or not the outlook is meeting the criterion that we have set 
out to begin to reduce the pace of purchases.
    Senator Crapo. My time has expired. Thank you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Well, thank you, Mr. Chairman. Thank you, 
Dr. Yellen. I appreciated our visit together.
    Let me ask you, as the Federal Reserve has engaged in 
measures to strengthen our economy, some critics have argued 
that any growth that results might somehow be artificial--I 
know we have heard that here--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, my question is: Isn't 
weak demand the greater concern? I look at consumers pulling 
back on their spending because of high debt burdens, underwater 
mortgages from the financial crisis, businesses holding off on 
investing because of weak consumer demand. Doesn't that change 
the relative costs, benefits, and risks of different monetary 
policy actions?
    Ms. Yellen. Well, Senator, I completely agree that weak 
demand for the goods and services that this economy is capable 
of producing is a major drag holding back the economy. And, of 
course, the purpose of our policies, all of them, is to bring 
down interest rates in order to spur spending in interest-
sensitive sectors, and if we are capable of doing that, that 
will help to stimulate a favorable dynamic in which jobs are 
created, incomes rise, and more spending takes place, which 
will create more jobs throughout the economy. So I agree with 
your diagnosis, and our programs are intended to remedy the 
situation of weak demand.
    On the other hand, it is very important for us to monitor 
financial risks that could be developing as a consequence of 
the program or of low interest rates more generally or even 
more broadly of developing financial risks in the economy. No 
one wants to live through another financial crisis, and the 
Federal Reserve is devoting substantial resources and time and 
effort at monitoring those risks.
    At this stage I do not see risks of financial stability. 
Although there is limited evidence of reach for yield, we do 
not see a broad buildup in leverage or the development of risks 
that I think at this stage poses a risk to financial stability.
    Senator Menendez. Well, let me ask you--I appreciate that. 
Some commentators have suggested that, in addition to managing 
inflation and promoting full employment, the Fed should also 
monitor an attempt to fight asset bubbles. Do you think it is a 
feasible job and something that the Fed should be doing? And if 
so, how would you go about it?
    Ms. Yellen. Well, Senator, I think it is important for the 
Fed, hard as it is, to attempt to detect asset bubbles when 
they are forming. We devote a good deal of time and attention 
to monitoring asset prices in different sectors, whether it is 
house prices or equity prices or farmland prices, to try to see 
if there is evidence of price misalignments that are 
developing.
    By and large, I would say that I do not see evidence at 
this point in major sectors of asset price misalignments, at 
least of the level that would threaten financial stability. But 
if we were to detect such misalignments or other threats to 
financial stability, as a first line of defense, we have a 
variety of supervisory tools, micro and macro prudential, that 
we can use to attempt to limit the behavior that is giving rise 
to those asset price misalignments.
    I would not rule out using monetary policy as a tool to 
address asset price misalignments, but because it is a blunt 
tool and because Congress has asked us to use those tools to 
achieve the goals of maximum employment and price stability, 
which are very important goals in their own right, I would like 
to see monetary policy first and foremost directed toward 
achieving those goals Congress has given us and to use other 
tools in the first instance to try to address potential 
financial stability threats. But an environment of low interest 
rates can induce risky behavior, and I would not rule out 
monetary policy conceivably having to play a role.
    Senator Menendez. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you. Welcome, Governor.
    Would you describe the portfolio of the Federal Reserve as 
unprecedented, the size of it today?
    Ms. Yellen. Yes, Senator.
    Senator Shelby. You are an economist, and you have been on 
the Fed, and you were also the Chairman of the Economic 
Advisers of President Clinton. Looking back in history, recent 
history, the last 30, 40, 50 years, have you noticed any 
portfolio of the Fed approaching what it is today?
    Ms. Yellen. Not of the Federal Reserve, but----
    Senator Shelby. That is what I mean.
    Ms. Yellen. But other central banks----
    Senator Shelby. I am asking about the Federal Reserve of 
the United States of America.
    Ms. Yellen. No, I have not, Senator.
    Senator Shelby. OK. Would you describe what you are doing 
here by--you call it ``quantitative easing,'' a term that has 
been made up, I guess. We all make up terms. But is that a 
stimulus toward the economy, a tool--you used the word, the 
term ``monetary tool.'' Is that what you would call it?--to 
help augment, to stimulate the economy?
    Ms. Yellen. It is a tool that is intended to push down 
longer-term interest rates----
    Senator Shelby. Yes, ma'am. I understand that.
    Ms. Yellen. ----and to stimulate demand and spending in the 
economy, yes.
    Senator Shelby. Is this, in the area of economics, 
something that Keynes and Tobin and others have espoused over 
the years at times when you have got high unemployment, to use 
a monetary tool to stimulate the economy?
    Ms. Yellen. Well, Tobin and Friedman and others have----
    Senator Shelby. What about Keynes, too?
    Ms. Yellen. I do not know that Keynes actually thought 
about this.
    Senator Shelby. OK.
    Ms. Yellen. But a number of economists have written about 
something called the portfolio balance effect that is basically 
about supply and demand, that by buying up a class of assets, 
it may be possible to push up their prices and push down their 
yields and thereby affect financial conditions in the economy.
    Senator Shelby. You know, it was said several years ago 
that China was buying our bonds--in other words, we were 
totally dependent on China to buy our paper, finance our 
deficits, and so forth. But isn't it true that the Federal 
Reserve in the last--since you had quantitative easing, is 
basically the buyer of our bonds, our paper?
    Ms. Yellen. Well, Senator, we are purchasing----
    Senator Shelby. For the most part.
    Ms. Yellen. We are purchasing a substantial, at this point, 
quantity of both Treasury and mortgage-backed, agency mortgage-
backed securities. But we are certainly not doing so for the 
sake of helping the Government finance the deficit. We are 
doing so to achieve the goals that Congress has assigned to the 
Federal Reserve in circumstances where we have run out of scope 
for conducting additional normal monetary policy. Once our 
overnight interest rate target has hit zero, we really have to 
rely on alternative techniques, and we are certainly not the 
only central bank that has recognized this and undertaken 
similar programs.
    Senator Shelby. Now, you have alluded to other central 
banks, but, of course, you look around the world, and I do not 
know of any central bank that I think we should follow myself, 
and a lot of economists do not. We should set the example here 
in the United States, and the Fed has historically.
    I will run out of time in a minute. Unemployment, you 
mentioned unemployment, stated unemployment is, what, 7.2 or 
7.3 percent?
    Ms. Yellen. 7.3 percent.
    Senator Shelby. What is the real unemployment, that is, 
people that have given up looking for a job, working part-time, 
frustrated by the whole system? Is it around 13, 14 percent?
    Ms. Yellen. Well, Senator, you are absolutely right that 
broader measures of unemployment are much higher. Part-time 
employment among people who would prefer full-time jobs or more 
work are at unprecedented levels, and we have seen a 
significant decline in labor force participation. Part of it 
reflects an aging workforce. But some of it may be a reflection 
of very weak labor market conditions where people who have been 
unemployed for a long time feel frustrated about their job 
prospects.
    Senator Shelby. Could you quickly mention your views on 
Basel III, how important Basel III is, how important it is for 
our banks to make the standards of capital and liquidity, and 
also the other banks in Europe? How important is that?
    Ms. Yellen. Senator, it is extremely important for our 
banks to have more capital, higher-quality capital. Basel III 
putting those rules into effect has been an important step, and 
there are further steps that we will be taking with other 
regulators down the line to make sure that the most 
systemically important institutions, those whose failure could 
create financial distress, will be asked to hold more capital 
and meet higher standards of liquidity and prudential 
supervision to make sure that they are more resilient.
    Senator Shelby. What have you learned since you were 
President of the San Francisco Bank? You were there during the 
housing bubble and the debacle. As a regulator, I hope that you 
and others have learned a lot, not just the Federal Reserve but 
others, that you cannot let a bubble continue to grow.
    Ms. Yellen. Senator, I think that in the aftermath of the 
crisis, all of us have spent a great deal of time attempting to 
draw the appropriate lessons. There have been many of them. The 
Federal Reserve is very focused on a broad financial stability 
mandate, both in terms of our monitoring of the economy, 
attempting to understand the threats that exist broadly in the 
financial system, and to improve our supervision especially of 
the largest institutions to make sure that we are identifying 
those threats that can be risks to the economy.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman. Welcome, Ms. 
Yellen.
    When Chairman Bernanke came before this Committee 3\1/2\ 
years ago, he noted that the two sectors that typically pull us 
out of recession are housing and manufacturing--the Fed's 
monetary policy through large-scale purchases of mortgage-
backed securities clearly aimed at stimulating and promoting 
housing. You have spoken compellingly about the real economy. I 
hope that that means a real emphasis on manufacturing, 
particularly because of its impact rippling through the entire 
economy.
    But one of my concerns is that the Fed's monetary policy 
does not do enough to serve all Americans. Last year, a 
journalist described the execution of monetary policy as a sort 
of trickle-down economics; it boosts the price of assets like 
stocks and bonds and homes and can enrich the wealthy and Wall 
Street. But it is not clear to me and, more importantly, it is 
not clear to the many Americans who have not seen a raise in a 
number of years that this policy increases wages and incomes 
for workers on Main Street.
    During your time as Chair, tell us how you will ensure that 
the Fed's monetary policy directly benefits families on Main 
Street in places like Cleveland and Mansfield, Ohio?
    Ms. Yellen. Well, Senator, the objective of our policy is 
to broadly benefit all Americans, especially those who were 
seeing harm come to them and their families from high 
unemployment in a recovery that has taken a long time and been, 
frankly, disappointing.
    It is true that in the first instance the policies that the 
Fed conducts when we implement monetary policy drive down 
interest rates, affect asset prices, and you used the term 
``trickle down.'' We tend to affect interest-sensitive 
spending--automobiles, housing--but the ripple effects go 
through the economy and bring benefits to, I would say, all 
Americans, both those who are unemployed and find it easier to 
get jobs as the recovery is stronger, and also to those who 
have jobs. You mentioned that wage growth has been weak or 
nonexistent in real terms over the last several years. As the 
economy recovers, my hope and expectation is that would change, 
and if we can generate a more robust recovery in the context of 
price stability, that all Americans will see more meaningful 
increases in their well-being.
    Senator Brown. Thank you. I in my role on this committee 
spend a lot of time talking to bankers, to community bankers, 
to the regionals like bankers at Key and Huntington and PNC and 
Fifth Third and some of the largest six or seven or eight 
banks, which--and I hear a concern from so many of these 
bankers across the board that too big to fail still has not 
been solved. In March, Chairman Bernanke said too big to fail 
is not solved and gone, it is still here. Last Friday, you, I 
am sure, saw the comments of the President of the New York Fed, 
Bill Dudley, not exactly a populist firebrand. He said that 
there are deep-seated cultural and ethical failures at many 
large financial institutions. ``They have an apparent lack of 
respect for law, regulation, and the public trust.'' He said 
our current regulatory efforts may not solve these problems. 
His view is reinforced by the fact that DOJ currently has eight 
separate investigations open against the largest U.S. banks 
alone.
    Do you agree with what I assume you are hearing from 
bankers, too, and from others and do you agree with Chairman 
Bernanke and Mr. Dudley that a system where too-big-to-fail 
institutions have, in Dudley's words, ``an apparent lack of 
respect for law, regulation, or the public trust,'' do you 
agree we have not solved the problem? And what do you do as Fed 
Chair to address too big to fail?
    Ms. Yellen. Senator, I would agree that addressing too big 
to fail has to be among the most important goals of the post-
crisis period. That must be the goal that we try to achieve. 
Too big to fail is damaging. It creates moral hazard. It 
corrodes market discipline. It creates a threat to financial 
stability, and it does unfairly, in my view, advantage large 
banking firms over small ones.
    My assessment would be that we are making progress, that 
Dodd-Frank put into place an agenda that, as we complete it, 
should make a very meaningful difference in terms of too big to 
fail. We have raised capital standards. We will raise capital 
standards further for the largest institutions that pose the 
greatest risk by proposing so-called SIFI capital surcharges. 
We have on the drawing boards the possibility of requiring that 
the largest banking organizations hold additional unsecured 
debt at the holding company level to make sure that they are 
capable of resolution.
    Right now the FDIC has the capacity and the legal authority 
to resolve, possibly using orderly liquidation authority, a 
systemically important firm that finds itself in trouble, and 
they have designed an architecture that I think is very 
promising in terms of being able to accomplish that.
    So we are working with foreign regulators to improve the 
odds of a successful resolution and continuing to put in place 
higher prudential standards, capital and liquidity 
requirements. We have put out a proposal for a supplementary 
leverage requirement for the largest banks. So I think that 
this agenda will make a meaningful difference, and we are 
hoping to complete this in the months ahead.
    Senator Brown. You said you look for something 
potentially--something maybe to do further. How will you assess 
the regs put out, the higher capital standards by the Fed, the 
OCC, and FDIC? How will you assess as they go into effect if 
you need higher capital requirements, not just--I mean, 
certainly the surcharges, but how will you assess the 
effectiveness of those?
    Ms. Yellen. There are, as you know, studies that attempt to 
estimate what the too-big-to-fail subsidy is in the market, and 
while there are a lot of question marks around those studies, 
we can look to see what is happening there.
    Senator Brown. Do you believe there is a subsidy, as----
    Chairman Johnson. Would the Senator wrap it up?
    Senator Brown. I apologize. OK. That was the last question. 
Do you believe there is a subsidy, as Bloomberg and so many 
others have pointed out, of tens of billions of dollars a year 
for the largest banks?
    Ms. Yellen. I think there are different methodologies that 
are used in different studies, and it is hard to be definitive. 
But, yes, I would say most studies point to some subsidy that 
may reflect too big to fail, although other factors also may 
account for part of the reason that larger firms tend to face 
lower borrowing costs.
    Senator Brown. Thank you. I am sorry, Mr. Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman. Thank you, Dr. 
Yellen.
    I want to pick up where my colleague left off because, as 
you know, I share his and many others' concerns about too big 
to fail being alive and well.
    As both of you noted, there are many studies that document, 
even try to measure too big to fail and the market subsidy or 
advantage that the megabanks have. Another is coming out today. 
GAO is releasing its first study that Senator Brown and I asked 
for and again confirms this in general. It focuses on the huge 
discount that the Federal Reserve offered the megabanks during 
the financial crisis and the huge market advantage that they 
got. And, specifically, this GAO report coming out today said--
it recommended ``the Federal Reserve Board finalize policies 
and procedures related to its emergency lending authority and 
establish internal timelines for developing those procedures to 
ensure timely compliance with Dodd-Frank Act requirements.''
    What that means, really, is Dodd-Frank gives you the 
ability to wind down that emergency lending authority. The 
Board has not acted on that or even established, as far as I 
know, internal timelines to do that.
    So one obvious question related to this study coming out 
today: Will you do that as Chairman? And when will you do it?
    Ms. Yellen. Senator, I think that that guidance is in the 
works, and we will try to get it out soon.
    Senator Vitter. Do you have a general timeframe in mind?
    Ms. Yellen. I am not certain just what the timeframe is, 
but I will try to make sure that that happens.
    Senator Vitter. OK. If I could just ask you to supplement 
the record following the hearing with more specifics about the 
Fed's plan to act on Dodd-Frank with regard to that.
    Ms. Yellen. Yes.
    Senator Vitter. Thank you.
    You also mentioned increased leverage ratios for the 
biggest banks. I agree that the action you supported in July in 
terms of supplementary leverage ratio for larger banks was very 
positive. I do not agree that it is enough, and I think even 
when you consider the SIFI surcharge and other things, more 
needs to be done.
    Would you support going further in terms of leverage ratios 
for the largest banks or not?
    Ms. Yellen. I think we will have a very meaningful 
improvement in capital standards by going the approach that 
Dodd-Frank has recommended, which is higher risk-based capital 
standards. There will be a SIFI surcharge. We are contemplating 
a countercyclical capital surcharge that would add to that. We 
are contemplating additional ways of dealing with problems of 
reliance on short-term wholesale funding that could take the 
form of a capital charge that is related to reliance on that 
kind of funding, or it could take the role of margin 
requirements.
    I think a belt-and-suspenders kind of approach in which we 
have a leverage requirement that serves as a backup because 
there are potential issues with risk-based capital 
requirements. Remember that we also have stress tests which are 
yet another approach to assessing whether or not the largest 
systemically important institutions have the wherewithal to be 
able to lend, and----
    Senator Vitter. I do not mean to cut you off, but if I can 
follow up before my time is up, I understand those other 
categories, including the SIFI surcharge. But considering all 
those, including the SIFI surcharge, I personally, and others, 
think you should go further with the supplementary leverage 
ratio. Would you support that as we speak today or not?
    Ms. Yellen. I would want to see where we are when we have 
implemented all of the Dodd-Frank requirements that we need to 
put in place.
    Senator Vitter. OK. A final question. You have said in the 
past, ``Like Chairman Bernanke, I strongly believe that 
monetary policy is most effective when the public understands 
what the Fed is trying to do and how it plans to do it.''
    A lot of us would agree with that, and many of us think the 
best way to get there is through true openness and transparency 
at the Fed, not just a better sort of managed PR campaign but 
real openness and transparency.
    Would you publicly support S.209? I am sure you are 
familiar with that. And if not, what specific changes to that 
would be required to earn your public support?
    Ms. Yellen. I strongly, as I have indicated, support 
transparency and openness on the part of the Fed, and I think 
with respect to monetary policy, in terms of the range of 
information and the timeliness of that information, we are one 
of the most transparent central banks in the world. What I 
would not support is a requirement that would diminish the 
independence of the Federal Reserve in implementing and 
deciding on implementing in monetary policy.
    For 50 years Congress has recognized that there should be 
an exception to GAO ability to audit the Fed to avoid any 
political interference in monetary policy. I believe it is 
critically important to the economic performance of this 
country--and we have seen this around the world--that allowing 
a central bank to be independent in formulating monetary policy 
is critical to assuring markets and the public that we will 
achieve price stability. And I would be very concerned about 
legislation that would subject the Federal Reserve to short-
term political pressures that could interfere with that 
independence.
    Senator Vitter. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman. I want to 
thank you for being here, Vice Chair Yellen.
    At the end of October, the Federal Reserve formally applied 
for application in the--International Association of Insurance 
Supervisors for membership. The United States already has 
membership on that through the Federal Insurance Office created 
by Dodd-Frank. Can you tell me why the Fed should have its own 
membership on that board and, furthermore, why there should be 
a focus on that when domestic oversight challenges seem to be a 
much higher priority?
    Ms. Yellen. Well, my understanding, Senator, is that now 
that the Federal Reserve has been charged with supervising some 
of the largest insurance companies that have been designated by 
FSOC as systemic, that we want to be in a position to work with 
regulators in other countries, as we have in the case of 
banking rules, to make sure that we have internationally 
compatible----
    Senator Tester. And the FIO----
    Ms. Yellen. ----appropriate standards.
    Senator Tester. Excuse me, but the FIO cannot fill that 
need for you?
    Ms. Yellen. I am not certain. I think we felt it would be 
beneficial to participate in that group.
    Senator Tester. OK. In our conversations about ensuring 
capital standards are appropriately tailored to insurers, I 
raised concern in this same vein with the FSOC, who I have 
encouraged to develop industry-specific guidance and metrics 
for systemically important financial institutions.
    Do you agree that the FSOC has and should exercise its 
authority to develop industry-specific guidance and metrics 
rather than forcing insurers or asset managing firms, for 
example, into a bank-centric regulatory model?
    Ms. Yellen. Senator, I do believe that one size fits all 
should not be the model for regulation and that we need to 
develop appropriate models for regulation and supervision of 
different kinds of institutions. Insurance certainly has some 
very unique features that make them very different from banks, 
and we are taking the time to try to study what the best way is 
to craft regulations that would be appropriate for those 
organizations.
    Senator Tester. So what I am hearing you saying is that a 
bank-centric regulatory model would not work for insurance 
companies in this country?
    Ms. Yellen. Well, there certainly are critical differences 
in terms of their business models that we want to understand 
and respond to.
    Senator Tester. OK. I want to express a serious 
disappointment with a recent decision by FSOC not to release 
for public comment a study produced by the Office of Financial 
Research regarding the asset management industry. While the 
Council has publicly indicated that it would release any 
metrics or guidance on this industry for public comment, it has 
declined to release this study, which will presumably provide 
formal basis for future consideration.
    If you are confirmed as Chairman of the Fed and a member of 
the FSOC, will you ensure that the Council lives up to its 
commitment of transparency? And will the Fed support efforts to 
make any potential evaluation metrics and studies on which they 
may based available for public comment?
    Ms. Yellen. Senator, I have not participated in FSOC, but 
if I do so, I will try to take those concerns seriously.
    Senator Tester. If you are confirmed, you will be 
participating in FSOC.
    Ms. Yellen. I will.
    Senator Tester. And the question is about transparency, and 
it is the transparency of metrics that are going to be used 
that people need to have the ability to comment on before they 
are applied. And I guess my question to you is: Will you be 
willing to make that commitment to transparency as it applies 
to the FSOC?
    Ms. Yellen. I will need to study this issue more closely in 
terms of what FSOC's procedures are, but I feel it should be 
clear why a particular firm has been designated if that occurs.
    Senator Tester. And the metrics that they are using for 
that designation. OK.
    In closing, I just want to say thank you for your 
willingness to work on the end user issue that we discussed 
last week. I very much appreciate it.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Kirk.
    Senator Kirk. Dr. Yellen, I would like to ask you a 
technical question on behalf of large insurance employers in 
Illinois, to extract a commitment from you to do a cost-benefit 
analysis if we are to require them to switch from SAP to GAAP 
accounting, which they have warned me could cost a couple 
hundred million dollars.
    Ms. Yellen. Senator, I am aware that there is an issue 
around different accounting standards in insurance companies. I 
have not had a chance to study that myself, but I would 
certainly agree that this is something that we need to look 
into and to consider very carefully, and pledge to do so.
    Senator Kirk. Thank you, Dr. Yellen.
    Mr. Chairman, thank you.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and thank you, Dr. 
Yellen, for being here. I have a series of quick questions.
    One, I guess I would like to make a comment. I understand 
some of our colleagues' concerns about, you know, some of the 
extraordinary measures the Fed has had to take on quantitative 
easing. I guess I would simply make a comment and ask for a 
short response on this. Part of our political dysfunction in 
this town in terms of the ability to actually grapple with 
getting our country's balance sheet right in terms of a so-
called grand bargain or even an actual budget in place, if we 
were able to actually perform our functions, wouldn't that 
allow you to move out of these extraordinary measures in a 
quicker manner?
    Ms. Yellen. Well, Senator, it is certainly the case that 
the economy has suffered over the last year a substantial drag 
from fiscal policy. The CBO estimates that the drag amounts to 
something like 1.5 percent on growth, and as we commented in 
our FOMC statement most recently, taking account of that large 
amount of fiscal drag, the economy, even though it has only 
been growing around 2 percent, is showing greater momentum. So 
I think it is fair to say and I would expect that if there were 
less fiscal drag--and I hope there will be less going forward--
that the economy's growth rate is going to pick up.
    So certainly that has been a headwind on the economy and 
something that we have tried to offset, but obviously our tools 
to do so--it is not perfect, not----
    Senator Warner. Right. And, obviously, Government 
shutdowns, which cost, the latest estimate, $24 billion or 
potential default threats, which result in spikes of interest 
rates, sure as heck do not provide that predictability.
    I want to actually follow up as well where Senator Tester 
left off. I have to say, as someone, along with my friend 
Senator Corker, we are very involved in Title I and Title II, I 
have been personally disappointed in the FSOC's ability to kind 
of be that interagency arbiter around regulatory conflicts. I 
have also been somewhat disappointed with the actions so far of 
the OFR, and I simply would say I think it is a--I hope as you 
move into this role on the FSOC there will be financial 
institutions, nonbank financial institutions that will be 
SIFIs. Senator Tester mentioned asset management firms. It did 
seem to me as well that the OFR's report did not have a lot of 
collaboration, did not have a lot of clarity, and I would hope 
that in your role on the FSOC--and, again, I think one of the 
reasons why I wish we ended up with an independent chair on the 
FSOC, but you will clearly have an outsized role as the Fed 
representative--that we try to give some clarity that we do not 
think we are going to view everything through a bank-centric 
regulatory prism, that we realize as we look at nonbank 
institutions that maybe require that SIFI designation, that we 
give some clarity about how we are going to evaluate those 
nonbank institutions.
    Ms. Yellen. I think that is completely fair and a very 
reasonable and logical objective for FSOC to have. Our staff 
have been working very closely with FSOC and the OFR, trying to 
participate constructively and facilitate the works of those 
groups.
    Senator Warner. Well, I would just add my voice to Senator 
Tester's that we would like to see that transparency as we 
start to evaluate nonbank institutions for SIFI designation so 
we kind of all know the rules going forward. I think that would 
be helpful.
    One of the things--as we think about balance sheets and 
stimulation or getting more private capital lent, one of the 
things I know that the Fed pays interest on excess reserves of 
the banks, but I believe now you are holding about $2.4 
trillion of those banking excess reserves, and I think we pay 
25 basis points. We have seen other central banks, I think 
Denmark and others, start to lower those payments. Would you 
consider that possibility of, in effect, incenting the banks to 
get this capital not on your balance sheet but back out into 
the marketplace to stimulate more loans and more private 
capital into the market?
    Ms. Yellen. Senator, that is something that the FOMC has 
discussed and the Board has considered on past occasions, and 
it is something we could consider going forward.
    We have worried that if we were to lower that rate too 
close to zero, we would begin to impair money market function, 
and that has been a consideration on the other side. But it 
certainly is a possibility, Senator.
    Senator Warner. I would just say that I would ask you to 
look at this as well because it is one of the ways, without 
necessarily growing your balance sheet, that some of my 
colleagues have expressed a concern with.
    Thank you.
    Ms. Yellen. Thank you, Senator.
    Chairman Johnson. Senator Heller.
    Senator Heller. Thank you, Mr. Chairman, and, Dr. Yellen, 
thank you very much for being here today. And I also want to 
thank your family for taking time and showing their support. I 
think that makes a real difference.
    Question: Do you follow gold prices?
    Ms. Yellen. To some extent.
    Senator Heller. Do you believe there is any economic 
indicator behind the rise and fall of gold prices?
    Ms. Yellen. Well, I do not think anybody has a very good 
model of what makes gold prices go up or down, but certainly it 
is an asset that people want to hold when they are very fearful 
about potential financial market catastrophe or economic 
troubles entail risks. And when there is financial market 
turbulence, often we see gold prices rise as people flee into 
them.
    Senator Heller. Well, that was a better than I got from 
Chairman Bernanke last July. I asked him the same question, and 
he said that nobody really understands gold prices, and he went 
on to say, ``And I do not pretend to really understand them 
either.'' Do you share that view, clearly with the few extra 
tidbits that you just shared with us?
    Ms. Yellen. Beyond what I shared, I do not have strong 
views on what drives them. I have not seen a lot of models that 
have been successful in predicting them.
    Senator Heller. Thank you. You talked in your general 
statement at the beginning about the role of the Federal 
Reserve: promoting conditions that foster maximum employment, 
low and stable inflation, safe and sound financial system. Do 
you believe we have a safe and sound financial system today?
    Ms. Yellen. I think we have a much safer and sounder 
financial system than we had pre-crisis, but as I indicated, we 
need to do more. We are not at the end of the road in terms of 
putting in place regulations and enhanced supervision that will 
make the system as safe and sound as it needs to be to contain 
systemic risk.
    Senator Heller. The reason I raise the question is we had 
this discussion when you were in my office about community 
banks, and sitting as Chairwoman of the San Francisco Federal 
Board, you have a pretty good understanding of what is going on 
out West--California, Nevada. And as you are aware, and as I 
shared with you, we have lost half of the community banks and 
credit unions in our communities, making it very, very 
difficult for choices, making it very difficult for housing 
recovery, getting loans for small businesses. I guess the 
question is: What steps will you take to avert a culture of 
consolidation of these major banks and the loss of the small 
community banks?
    Ms. Yellen. Well, Senator, in the first place, to the 
extent that the large banks have an advantage because they 
benefit from a too-big-to-fail subsidy, I think our objective 
in regulation should be to put in place tough enough 
regulations and capital and liquidity standards that would 
level the playing field. Since those firms do pose systemic 
risk to the financial system, we should be making it tougher 
for them to compete and encouraging them to be smaller and less 
systemic.
    And with respect to the community banks, we need a model 
for supervision of them that is different and much less onerous 
and has much less regulatory burden and is appropriate to their 
business model. We are obviously imposing on the largest 
systemic institutions much higher and more onerous prudential 
standards.
    Senator Heller. And I appreciate your comments, because I 
do believe the one size fits all is what is really at a 
disadvantage for the community banks and these smaller banks.
    A quick question about quantitative easing. Do you see it 
causing an equity bubble in today's stock market?
    Ms. Yellen. Stock prices have risen pretty robustly, but I 
think that if you look at traditional valuation measures, the 
kind of things that we monitor akin to price equity ratios, you 
would not see stock prices in territory that suggests bubble-
like conditions. When we look at a measure of what is called 
the ``equity risk premium,'' which is the differential between 
the expected return on stocks and safe assets like bonds, that 
premium is somewhat elevated historically, which again suggests 
valuations that are not in bubble territory.
    Senator Heller. Do you believe there is a Federal role to 
support the stock market?
    Ms. Yellen. A Federal role to support the stock market?
    Senator Heller. A Federal role.
    Ms. Yellen. No.
    Senator Heller. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Well, thank you, Mr. Chair, and thank you, 
Dr. Yellen. And I do not believe any nominee for this position 
has come with such an extensive set of qualifications, and it 
is fascinating to read the diversity of your writings over the 
last four decades.
    I wanted to give a special welcome to Karla Chambers, who 
represented Oregon very well on the Board of Directors of the 
Federal Reserve Bank of San Francisco.
    A number of issues have arisen in the international banking 
community just since the meltdown in 2008, including LIBOR rate 
manipulation, energy market manipulation, the London Whale, 
massive issues related to money laundering, robo-signing fraud 
on foreclosure documents. The Fed plays an important role in 
regulation and supervision. Can the Fed under your leadership 
help restore public faith in our regulatory system?
    Ms. Yellen. Senator, I feel that that is an exceptionally 
important goal and one that I am happy to espouse and work 
toward. I absolutely feel that that is essential and 
appropriate, yes.
    Senator Merkley. Thank you very much. And, second, I wanted 
to ask you to address the rules that are being completed on the 
Volcker Rule or firewall, which creates a wall between hedge 
funds that make risky bets with funds from private investors 
and commercial banks that have insured deposits and access to 
the discount window and play an essential role in providing 
loans to individuals and businesses.
    There has been a lot of concern that this firewall will be 
compromised with loopholes related to liquidity management, 
portfolio hedging, and market making. Can we count on the Fed 
under your leadership to work with the other regulators to 
produce a strong Volcker Rule? And perhaps it will be completed 
before you are there because they are in the final stages. But 
if so, to implement it in a fashion that keeps faith with this 
goal of reducing systemic risk by keeping the commercial 
banking world in the commercial banking sphere?
    Ms. Yellen. Yes, Senator, we are working very closely and I 
believe constructively on this rulemaking with the other 
agencies. We are certainly trying to be faithful to the intent 
of this rule, which is to eliminate short-term financial 
speculation in institutions that enjoy the protection of the 
safety net. The devil here is in the details. The rule does 
permit appropriate hedging in market-making activities, and we 
are trying to devise a rule that will permit those activities 
but absolutely be faithful to the intent that Congress had 
here.
    Senator Merkley. Thank you. And, third, I wanted to ask you 
to ponder an issue that received considerable attention 
regarding commodities and the concern that under a certain 
situation, large banks will be able to put their thumb on the 
scale through their ownership of electric power generation 
facilities, pipelines, oil tankers, warehouses for key metals. 
And there is certainly a history in terms of Gramm-Leach-
Bliley, in terms of grandfathered commodity investments, and in 
terms of related activities.
    But there is concern that the ability to influence supply 
and demand and affect price while at the same time as having 
the ability to make bets on the price creates a conflict of 
interest that provides essentially a hidden tax on the American 
economy. And the Fed does have regulatory powers related to 
this, and can you maybe chew on this a little bit in terms of 
your perspectives?
    Ms. Yellen. Senator, we are involved in a very 
comprehensive review of commodities activities in financial 
holding companies. As you indicated, we allowed some activities 
that we deemed to be complementary to financial activities, and 
we are reviewing what is appropriate there. In addition, 
Congress, as you noted, grandfathered certain activities in 
firms that later become financial holding companies. We want to 
make sure that these are conducted in a safe and sound manner, 
and we may be involved in additional rulemaking as we complete 
this review.
    With respect to market manipulation, I would just note, 
though, that it is the role and responsibility of market 
regulators, particularly the CFTC here, to be looking into 
possibilities of market manipulation and we would certainly 
cooperate in any look there. Our main role is prudential and 
safety and soundness.
    Senator Merkley. Well, thank you so much for being willing 
to consider taking on this role at the Fed and bringing your 
expertise to bear and your past public service, and I certainly 
wish you well. Thank you.
    Ms. Yellen. Thank you, Senator.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. And, Dr. Yellen, 
thank you for being here, and I appreciate the time in our 
office and your transparency here today.
    Just for the Committee's record, if you would, share with 
all of us how many rate increases you have voted for during 
your term on the Federal Reserve.
    Ms. Yellen. I served as a Governor from 1994 to 1997, and 
we had a cycle of rate increases during that time.
    Senator Corker. If you could just give me the number so I 
can----
    Ms. Yellen. I believe 20 or more.
    Senator Corker. Twenty or more. I think it was maybe 27 or 
so.
    Ms. Yellen. It could be.
    Senator Corker. And how many have you voted against?
    Ms. Yellen. None.
    Senator Corker. OK. I thought that was just good to get 
into the record, and I appreciate----
    Ms. Yellen. I appreciate that.
    Senator Corker. ----you very much for being here. We talked 
a little bit about monetary policy, maybe more than a little 
bit in the office, and I think one of the things that we 
discussed was my concern--and I think yours, too--that in many 
ways easy money is an elitist policy. It is the ultimate 
trickle-down, and that, you know, it is based on the premise 
that you are going to have this wealth creation. And what we 
have seen, obviously, is the largest Wall Street institutions 
have done the best and that fund managers have made a lot of 
money, but it generally has not trickled down to the economy. 
And as you were mentioning earlier, it is a blunt object.
    Would you agree that while it has been an attempt to 
stimulate the economy, the more well off have benefited much 
better than those at the lower end of the spectrum?
    Ms. Yellen. Well, to the extent that low interest rates do 
have an impact on asset prices, these policies have probably to 
some extent boosted the stock market, which may be an example 
of what you are talking about. But it has also played an 
important role, I think, in helping the housing sector and 
boosting housing prices. And I think this is something that has 
been broadly beneficial to all those Americans who own homes 
and has improved their sense of financial well-being, and that 
is broad based.
    Senator Corker. We talked a little bit about the Fed in the 
early summer began to talk about moderating the pace at which 
it was going to be making purchases. And the market had a 
pretty stringent reaction, and the Federal Reserve appeared as 
if it had touched a hot stove and that this policy was going to 
greatly affect, if you will, the wealth effect that you were 
trying to create the policy of moderating. And so the Fed 
jumped back, and it seemed to me--and I think you discussed 
this a little bit in the office--that the Fed had become a 
prisoner to its own policy, that to really try to step away 
from QE3 was really going to shatter possibly the markets and, 
therefore, take away from the wealth effect.
    I wonder if you could talk a little bit about some of the 
discussions that were taking place during that time.
    Ms. Yellen. Well, Senator, I do not think that the Fed ever 
can be or should be a prisoner of the markets. Our job----
    Senator Corker. But to a degree in this case, it did affect 
the Fed, did it not?
    Ms. Yellen. Well, we do have to take account of what is 
happening in the markets, what impact market conditions are 
likely to have on spending and the economic outlook.
    So it is the case--and we highlighted this in our 
statement--when we saw a big jump in rates, a jump that was 
greater than we would have anticipated from the statements that 
we made in May and June, and particularly saw mortgage interest 
rates rise in the space of a few months by over 100 basis 
points, we had to ask ourselves whether or not that tightening 
of conditions in a sector where we were seeing a recovery, and 
a recovery in housing that could drive a broader recovery in 
the economy, we did have to ask ourselves whether or not that 
could potentially threaten what we were trying to achieve.
    But overall we are not a prisoner of the markets. I 
continue to feel that we are seeing an improvement in the labor 
market, which was the goal of the program, and we will continue 
to evaluate incoming data and to make decisions on the program 
in that light going forward.
    Senator Corker. Thank you. I am just a little bit of a 
prisoner, maybe not fully. I understand. I would just--my last 
question is: You talked a little bit about monitoring sort of 
the financial markets, and I know that it is--again, monetary 
policy is a blunt instrument. I know that you have been 
credited with, back in 2005, signaling that the housing market 
was bubbling, if you will, in that part of the country.
    I guess my question is: Do you believe that under your 
leadership the Fed would have the courage to, when it saw asset 
bubbles, even though you only have blunt instruments--and I 
realize that--would it have the courage to actually prick those 
bubbles and ensure that we did not create another crisis?
    Ms. Yellen. Senator, no one who lived through that 
financial crisis would ever want to risk another one that could 
subject the economy to what we are painfully going through and 
recovering from. And we have a variety of different tools that 
we could use if we saw something like that occur. They include 
tools of supervision and monetary policy is a possibility----
    Senator Corker. And you would have the courage to do that?
    Ms. Yellen. I believe that I would, and I believe that this 
is the most important lessons learned from the financial 
crisis, Senator.
    Senator Corker. Mr. Chairman, thank you for having this 
hearing, and, Dr. Yellen, I do want to tell you I very much 
appreciate your candor and transparency. I really do. I 
appreciate the conversation both in the office--and I want to 
thank you for giving the same answers to questioners here today 
that you gave in the office, so thank you very much.
    Ms. Yellen. Thank you very much, Senator. I appreciate 
that.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman. Thank you, Ranking 
Member Crapo. I want to echo what I am sure everybody has 
stated. I have been impressed by the depth of your background, 
your experience, and your expertise. We are very honored to 
have you here and thank you for your testimony.
    I wanted to talk about Section 716 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act. Section 716 requires 
that banks with access to deposit insurance or the Federal 
Reserve discount window to push out certain derivatives such as 
equity and commodity-based swaps in to separately capitalized 
affiliates.
    This move would raise cost to the end users without 
significantly reducing risk to the financial system. Chairman 
Bernanke has consistently stated that the Federal Reserve had 
concerns about the swaps push-out rule prior to the enactment 
of Dodd-Frank and that they still have concerns about it today.
    Are your views on this issue consistent with Chairman 
Bernanke's? Would you share the view that it is a good idea to 
repeal parts of the swaps push-out rule?
    Ms. Yellen. Senator, as you indicated, the Federal Reserve 
and other agencies did have concerns about this rule and they 
expressed them when Dodd-Frank was being considered. We are 
working very hard to address some of the concerns around this 
rule, and we think that we are likely to be able to do so. I 
certainly hope that in the final rule we will be able to 
effectively address some of the concerns that people had. That 
is my hope. We are certainly trying to do that.
    Senator Hagan. What is your timeframe on that?
    Ms. Yellen. I believe this is something we hope to get out, 
hopefully, later this year.
    Senator Hagan. You could address some concerns, but not 
all, without changing Section 716?
    Ms. Yellen. I believe that that is the case. We are hopeful 
that we will be able to find ways to address the concerns.
    Senator Hagan. OK.
    Ms. Yellen. We understand the concerns and we are trying 
very hard to----
    Senator Hagan. Do you share Chairman Bernanke's viewpoint?
    Ms. Yellen. I believe so. About the concerns that are there 
and the need to address them, I am hopeful that we will be able 
to do so in the rule.
    Senator Hagan. OK. Thank you. Since the start of QE the 
financial markets have responded to pronouncements by the 
Federal Open Markets Committee. Are you at all concerned that 
markets are too driven by speeches and official pronouncements 
from central banks around the world? If the suggestion of 
tapering can contribute to volatility in asset prices, can we 
expect more volatility in the future?
    Ms. Yellen. Well, at the Federal Reserve, and I think this 
is true of other central banks, we are trying as hard as we can 
to communicate clearly about monetary policy, both our goals 
and our intentions in terms of how we carry out programs. Now, 
this is challenging. We are in unprecedented circumstances. We 
are using policies that have never really been tried before, 
and multiple policies, and we are trying to explain to the 
public how we intend to conduct these policies.
    So it is a work in progress, and sometimes miscommunication 
is possible. But I think my own view would be we certainly want 
to diminish any unnecessary volatility. Sometimes there is 
volatility because we all learn news about the economy that 
changes our views about the course of the economy and the 
course of policy, and there it is natural to see a response.
    But to diminish unnecessary volatility, I think we have to 
redouble our efforts to communicate as clearly as we possibly 
can, and that will be my emphasis.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and Dr. Yellen, 
thank you for being here. Thanks for our chat earlier this 
week. I appreciate that.
    I want to get back to where--some of the issues Senator 
Corker was raising regarding monetary policy. But first, I just 
think it is important to stress, and I know you are very well 
aware of these, but the adverse consequences that we are 
already experiencing directly as a result of the extraordinary 
monetary policy is really problematic, I think.
    We continue to have this artificially suppressed cost of 
funding these excessively large deficits that we run. It 
contributes to, I would argue, fiscal imbalances. We are 
punishing middle class savers for years now, people who spent 
an entire working lifetime choosing to forego consumption 
because they decided they would save and they would have a 
little sum, a little bit of income in their retirement and now 
they have no income because they earn nothing on their savings, 
but they do watch as it gradually gets eroded, even by a low 
level of inflation, when they have no income from it.
    We have exacerbated the problems of under-funded pension 
plans and we have got distortions in financial markets. So 
these are all the things that have been occurring, I would 
argue, and continue to occur. And yet, what worries me perhaps 
even more is the point that Senator Corker was getting to, I 
think, which is, what happens when this morphine drip starts to 
end?
    At some point, some time, this is going to be--we are going 
to move away from this, I assume. I think everybody believes 
that. And the assumption seems to be that the markets will 
behave very benignly when that occurs. And yet, we have seen, I 
think, some worry, some glimpses that maybe that is not a safe 
assumption.
    Back in June, the mere suggestion that some of the members 
of the Fed might be contemplating stepping back a little 
earlier, and 10-year Treasury backs up 100 basis points. 
Yesterday, the release of your testimony and the equity markets 
rally.
    Does this not feel like there is something a little 
artificial here, and is it not possible that while you have 
many tools available to begin and unwind, to retreat from this, 
that the markets may not respond very well and that we could 
end up creating a real problem as we try to exit from this?
    Ms. Yellen. Senator, you made a number of different points 
and I think the first point you mentioned is that low rates, in 
a way, give rise to fiscal irresponsibility, that it takes the 
pressure off Congress.
    Senator Toomey. Make it easy.
    Ms. Yellen. You know, we have established low rates in 
order to get the economy moving, which is Congress's mandate to 
us. I think it is important for Congress to recognize that as 
the economy recovers and both short- and long-term rates move 
up, a situation in which the Government's funding costs remain 
as low as they are, if we are successful in achieving our goal 
of getting the economy back on track, this is a very temporary 
situation.
    And so, I believe Members of Congress should be looking out 
a few years to a time when rates are going to be higher. Low 
interest rates harm savers; it is absolutely true. And this is 
a burden on people who were trying to survive on the income 
from a CD. There is not much they can get.
    But if you think about, how can we get rates back up to 
normal, I would argue that we cannot have normal rates unless 
the economy is normal. At the moment, we have a lot of saving 
and not very much investment, and there are fundamental reasons 
here why rates are low.
    So pursuing a policy of low rates to get the economy moving 
will be enable us to normalize policy and to get rates back to 
normal levels over time.
    In terms of jumps in rates, we will, as the economy 
recovers, need to withdraw the monetary accommodation we have 
put in place, and we will make every effort to do so at a pace 
that is appropriate to continue the recovery and to maintain 
price stability, and to communicate that plan to markets.
    But as we have seen, and as you indicated, it is possible 
for rates to jump. It is not just true now, but in previous 
tightening cycles like the one we had from 1994 to 1995, where 
long rates moved up over the span of 6 months over 100 basis 
points. We have tried to make sure the financial system is more 
resilient.
    In our stress tests, we have tested and continue to do so 
in this round to make sure that banks are appropriately 
managing interest rate risk. And that is a risk that we will 
try to mitigate. But it is inherent in any tightening cycle.
    Senator Toomey. Mr. Chairman, I know I am running out of 
time. Just two quick points I would like to make. One is, I 
would like to express my concern, which is the exact opposite 
of the concern that was raised by Senator Merkley, which is, I 
think, the danger of the implementation of the Volcker rule is 
actually--it could be too restrictive and increase the cost of 
especially corporate bond issuers.
    I think the decision by Congress to exempt U.S. Treasuries 
was an implicit acknowledgment that when you ban proprietary 
trading in those instruments, you make them less liquid and 
more expensive for issuers. I am told that the next rule might 
very well also exempt other sovereign issuers, which is another 
implicit acknowledgment of this problem.
    This is a problem for corporate issuers in America and I am 
very concerned that we not unnecessarily raise their cost of 
borrowing.
    And the last point I would make is, I am deeply concerned 
about the consolidation that is happening in small banks, the 
lack of new small banks. As you know, we used to routinely 
launch sometimes hundreds of new community banks. I am told by 
the FDIC there is not a single new community bank that has been 
launched since 2010.
    The regulatory compliance for institutions that have no 
systemic risk to the economy is way overboard, and I hope you 
will make an effort to diminish that burden.
    Ms. Yellen. I promise to do so, Senator.
    Senator Toomey. All right. Thank you.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. Thank you, Dr. 
Yellen.
    There has been a lot of talk today about the Fed's use of 
quantitative easing to try to help the economy get back on its 
feet. But the truth is, if the regulators had done their jobs 
and reigned in the banks, we would not need to be talking about 
quantitative easing because we could have avoided the 2008 
crisis altogether.
    So I want to focus on the Fed's regulatory and supervisory 
responsibilities to keep the big banks in check. Now, I am 
concerned that those responsibilities just are not a top 
priority for the Board of Governors. Earlier this year, the Fed 
and the OCC reached a settlement with 13 mortgage servicers 
that engaged in a long list of illegal foreclosure activities, 
and the settlement was for over $9 billion. It directly 
affected more than four million families. But the Fed's Board 
of Governors never voted on whether to accept the settlement.
    Instead, this decision was just left to the staff. Now, the 
Fed has smart, hardworking staff, but the Board of Governors 
would never delegate critical monetary policy to them. And yet, 
even now, after the biggest financial crisis in generations, 
the Board seems all too willing to delegate critical regulatory 
and supervisory decisions.
    So I think we need to make reigning in the banks a top 
priority for the Board. So I know the Board meets regularly to 
discuss monetary policy. Do you think the Board should have 
regular meetings on supervisory and regulatory issues as well, 
making it clear that both of those are important to the Fed?
    Ms. Yellen. Well, Senator, I absolutely believe that our 
supervisory responsibilities are critical and they are just as 
important as monetary policy, and we need to take them just as 
seriously and devote just as much time and attention to them as 
we do to monetary policy.
    The Board operates under a variety of restrictions. You may 
know about the Government in the Sunshine Rule, and so when you 
suggest that the Board meet to discuss regulatory matters, our 
ability to do so outside of open meetings is very limited.
    And so, we tend to handle those by meeting individually 
with staff or meeting in small groups. We have a committee 
system where committees are put in charge of managing 
particular areas and making recommendations to the Board.
    I remember in the 1990s that the Board did regularly meet 
to discuss supervisory issues because there is confidential 
supervisory information and it is easier for us to have a 
meeting. I did consider those very valuable. And so, I think 
that is a very worthwhile idea.
    I should just say, when there are delegations to staff and 
the Board of Governors does not vote, that does not mean that 
Board members are not consulted, and maybe those with expertise 
may have played a critical role and had very important input, 
even when there is no formal vote by the Board of Governors.
    Senator Warren. Fair enough. But I think it is an important 
signal here and I am glad to hear that you are thinking about 
this and thinking about the question of the appropriate 
delegation to staff and when it is appropriate to delegate to 
staff.
    Could I ask you just to say something briefly about that, 
about when it is appropriate to staff and when you have to 
retain for the Board itself? Just very briefly, if you could, 
because I want to get on to one other question.
    Ms. Yellen. I believe there are certain matters that, under 
law, the Board must vote on, supervisory findings, mergers, and 
so forth, or rule changes. Typically, we delegate enforcement 
matters to the staff in the area of supervision.
    Senator Warren. And I am glad to hear, though, that you 
want to continue to think about that, particularly when we are 
talking about something this important.
    Ms. Yellen. Yes.
    Senator Warren. I want to ask you one other fundamental 
question here, and that is, do you think that the Fed's lack of 
attention to regulatory and supervisory responsibilities helped 
lead to the crash of 2008?
    Ms. Yellen. In the aftermath of the crisis, we have gone 
back and tried to look carefully at what we should have done 
differently, and there have been important lessons learned. We 
have massively revamped our supervision, particularly of the 
largest institutions, where we are simultaneously reviewing all 
of the largest institutions, and the Federal Reserve system 
works jointly on these reviews. We no longer delegate to 
individual Reserve banks the supervision of, say, one or two of 
these large institutions.
    It has also become an interdisciplinary matter that the 
economists and lawyers and others are involved in. So we have 
learned a lot there about supervision. I would say, one of our 
top priorities now is ramping up our monitoring of the 
financial system as a whole to detect financial stability 
risks. I think that is something that we were not doing in an 
adequate basis before the crisis.
    And so, we missed some of the important linkages whereby 
problems in mortgages would rebound through the financial 
system.
    Senator Warren. Thank you very much. Thank you, Mr. 
Chairman. I just want to say, Dr. Yellen, when you are 
confirmed, and I very much hope you are confirmed, that I am 
glad to hear you will make it a top priority for the Federal 
Reserve to engage in the supervisory and regulatory 
responsibilities that help keep our financial system safe, and 
that cannot be something that is merely an afterthought, but 
has to be a primary effort on your part.
    Ms. Yellen. Thank you, Senator. I completely agree with 
that.
    Senator Warren. Good. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
Governor, you demonstrated your wisdom early by going to Brown 
University in Providence, Rhode Island.
    Ms. Yellen. Thank you, Senator.
    Senator Reed. Everything else after that is, I know, 
anticlimactic, but when you are confirmed as the Chairman of 
the Federal Reserve, it will be consistent with your record of 
wise selections and wise choices.
    Chairman Bernanke has indicated that many times our fiscal 
policy and our monetary policy have been working at cross 
purposes. The Federal Reserve has been quantitative easing. 
They have been trying to get an expansive policy in place and 
we have been contracting, shutting the Government down. We 
anticipate--I hope we can avoid this--but we are going to end 
unemployment--mercy unemployment insurance abruptly at December 
31st.
    How would your job and, obviously, the size and scope of 
your portfolio and everything else, maybe the question has been 
asked today, be affected if our fiscal policy was complementary 
to your monetary policy?
    Ms. Yellen. Well, Senator, I agree that fiscal policy has 
been working at cross purposes to monetary policy. I certainly 
recognize the importance of the objective of putting the U.S. 
deficit and debt on a sustainable path. Congress has worried 
about that and I think it is important to do so.
    But some of the near-term reductions in spending that we 
have seen have certainly detracted from the momentum of the 
economy and from demand, making it harder for the Fed to get 
the economy moving, making our task more difficult. And it 
certainly would be helpful, going forward, if it were possible 
for deficit reduction efforts to focus on achieving gains in 
the medium term horizon and addressing those aspects of fiscal 
policy that give rise to concerns about debt sustainability 
over the medium term while not subtracting from the impetus 
that we need to keep a fragile recovery moving forward.
    Senator Reed. And such a policy, a fiscal policy, would 
help you in terms of what we all anticipate is the point at 
which you have to begin your tapering, because basically this 
balance would allow you more flexibility and more confidence 
that when you start to taper it, it would not lead to a reverse 
to a poor economy. Is that fair?
    Ms. Yellen. I think that is fair, Senator, because we are 
worried about a fragile recovery and a more supportive fiscal 
policy or one that, at least, had less drag that did no harm 
would make life easier.
    Senator Reed. Let me switch gears slightly, and that is 
that we were a few weeks ago discussing the possibility of 
default on our debt and the markets were beginning to react. 
And given the central role that Treasury securities play, not 
just in funding the Government, but also the tri-party 
repurchase markets, the collateral markets across the globe. 
Were you beginning to see at the Fed sort of ominous signs of a 
potential catastrophic impact of the default?
    Ms. Yellen. Well, Senator, I do believe that a default on 
the U.S. debt would be catastrophic, and we did see some signs 
in the run-up to the debt ceiling that suggested that financial 
markets were taking notice and that there were preemptive 
protective actions that market participants were beginning to 
do to protect themselves from what could have been catastrophic 
consequences.
    More generally, I think we did see an impact on consumer 
and business confidence that is not helpful to a general 
willingness to make investments in the economy.
    Senator Reed. And just a final point. We have been talking 
a lot about the size of your portfolio, but essentially--and I 
do not want to over-simplify it--the benchmarks that typically 
you are looking at is inflation and deflation and unemployment.
    Ms. Yellen. Correct.
    Senator Reed. And I think for a while under Chairman 
Bernanke there was a real fear, particularly in 2009 and 2010, 
of deflation, which would have had adverse consequences. We 
have avoided that. We have avoided inflation pressures.
    Ms. Yellen. We have.
    Senator Reed. And what we have not yet done is got the 
employment numbers at a suitable level. So I think the focus, 
the traditional and appropriate focus is on those measures, 
rather than just the absolute size of your portfolio. Is that 
sensible?
    Ms. Yellen. I think that is sensible, Senator. We are very 
focused on achieving our dual mandate, which is, we absolutely 
want to avoid deflation. We have a 2 percent price stability 
objective. We are trying to get the economy back to full 
employment. I do think we have made progress, but we are not 
there yet.
    On the other hand, as we recognized from the outset of the 
asset purchase program, there are costs and risks associated 
with a large balance sheet.
    Senator Reed. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Johanns.
    Senator Johanns. Mr. Chairman, thank you. It is good to see 
you again and thanks so much for stopping by the office the 
other day.
    Ms. Yellen. It is my pleasure.
    Senator Johanns. I felt like we had a good conversation and 
I would like to continue, if I could, with a few questions 
along the lines of what we talked about in my office.
    I found your testimony about asset bubbles to be 
interesting. Just before the Chairman turned to me, I looked at 
where the dollar is at. It is about 15,850, an economy that, 
quite honestly, most everybody would recognize as too much 
unemployment, an economy where people continue to struggle, an 
economy where it is kind of hard to see where the growth is 
going to be.
    We are now starting to see real estate bidding wars, just 
like the old days. Now, that is confined to cities in certain 
areas of the country. We are now starting to see private equity 
firms, who I think are very good at looking where the economy 
is headed, and lo and behold, they are buying single family 
houses.
    That was a shocker to me, having owned a few rentals in the 
past. I was kind of amazed that they would do that. But 
obviously, they see something there. And so, Dr. Yellen, I kind 
of look at these factors and I think I could go on and on with 
some other items, and I must admit, what am I missing here?
    I see asset bubbles. And I think if you were to announce 
today that over the next 24 months you are going to bring that 
balance sheet down from $4 trillion to zero, or $1 trillion, I 
think if you even said over the next 4 years we are going to 
bring it down from $4 trillion to zero, I think we would see 
how big those asset bubbles are. Would you not agree with me on 
that?
    Ms. Yellen. With respect to real estate, we certainly are 
seeing, as you mentioned, private investors come in to invest 
and often use all cash in certain markets in the country. Is 
that evidence of an asset bubble?
    If you look at the markets where that is occurring, it is 
in some of the hardest hit, the markets where prices went up 
the most like Las Vegas or Phoenix. In my part of the country 
that had the biggest crashes where you have the largest number 
of foreclosures with houses being put on the market and many of 
these housing markets where these investments are taking place 
are ones where you have a substantial fraction of underwater 
borrowers and individuals who have lost houses, whose credit is 
impaired, who are not in a position to be buying houses, and 
these investors are purchasing these houses often at very low 
prices for cash and appear to be in the business of renting 
them out over a reasonably long period of time.
    I would say, we have to watch this very carefully, but I do 
not see that as an asset bubble. I see that as a very logical 
response of the market to generate a recovery in very hard-hit 
areas.
    Senator Johanns. Dr. Yellen, I do not want to be rude and 
interrupt you, but I am also running out of time. Here is what 
I would offer, and I think you would agree with me, although 
you probably will not want to agree with me in a public hearing 
setting.
    But I think if I were to say to you, Why do you not 
announce today that you are going to draw this down over the 
next 24 months from $4 trillion to zero? I think you would see 
the impact of your policies on the value of real estate all 
across the United States, not just in the hardest hit areas. I 
think the real estate that I own and others own would go down 
in value.
    I also think that the stock market would have the same sort 
of reaction that it has had when Chairman Bernanke just 
suggested that there might be a phase-down here. Here is what I 
am saying, because now I am out of time. I think the economy 
has gotten used to the sugar you have put out there and I just 
worry that we are on a sugar high.
    That is a very dangerous thing for the little person out 
there who is just trying to pay the bills and maybe put a buck 
away for retirement. The last thing I will say, the flip side 
of your policies that you are advocating for are very, very 
hard on certain segments of our society.
    You know, explain to the senior citizen who is just hoping 
that CD will earn some money so they do not have to dig into 
the principal, what impact you are having on a policy that says 
we are going to, for as far as the eye can see or foreseeable 
future, keep interest rates low. They are hurt by that policy.
    Ms. Yellen. Senator, I agree and I understand that savers 
are hurt by this policy, but, if we want to get back to 
business as usual and a normal monetary policy and normal 
interest rates, I would say we need to do that by getting the 
economy back to normal. And that is what this policy, I hope, 
will succeed in doing.
    The other thing I think is important is to recognize that 
savers wear a lot of different hats. They play many different 
roles in the economy. They may be retirees who were hoping to 
get part-time work in order to supplement their income. They 
may be people who have children who were out of work and who 
were suffering because of that, or grandchildren who were going 
to college and coming out of college and hoped to be able to 
put their skills to work, finding good jobs and entering the 
job market when it is strong.
    I think when those people who worry about our policy, 
thinking about themselves as savers, take into account the 
broader array of interest they have in a strong economy, they 
would see that these policies, even though they may harm them 
in one respect, are broadly beneficial to them as I believe 
they are to all Americans.
    Senator Johanns. My time has expired. Thank you, Mr. 
Chairman.
    Chairman Johnson. Thank you. Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman. And thank you, 
Dr. Yellen, for hanging in there with us. Those of us at the 
end of the desk will love an opportunity to ask you some 
questions, as well.
    I want to get back to the Fed goal of full employment, and 
I want to ask you just some quick questions. Give me a number 
on what you consider full employment?
    Ms. Yellen. We do not have a precise estimate, but every 3 
months all of the participants in the FOMC indicate what they 
think the normal, longer-run level of unemployment is. And in 
our most recent survey, in September, the range of opinion was 
5 to 6 percent.
    Senator Heitkamp. OK. And tell me, what do you believe the 
real unemployment rate is today?
    Ms. Yellen. Well, the measured unemployment rate is 7.3 
percent----
    Senator Heitkamp. I know what the measured unemployment 
rate is. That was not the question.
    Ms. Yellen. ----but as we have discussed previously, we 
have very high incidents of involuntary part-time employment. 
We have all too many people who appear to have dropped out of 
the labor force because they are discouraged----
    Senator Heitkamp. I do not want to belabor this Committee 
hearing any longer than what I have to but would you agree that 
it is at least close to or probably over 10 percent?
    Ms. Yellen. Well, certainly by broader measures, it is that 
high.
    Senator Heitkamp. And would you also agree that right now 
in America we have the greatest income disparity that we have 
had since the Great Depression, right before the Great 
Depression?
    Ms. Yellen. We have had widening wage inequality and income 
inequality in this country going back to the mid- to late-
1980s, and that continues.
    Senator Heitkamp. So I just want to take a moment to speak 
for maybe those folks who are on the lower end who look at the 
Fed policy and look at the stock market, do not have a stake as 
they see it--as you just explained to Senator Johanns. We all 
have a stake in this economy, but they are day-to-day. They do 
not see a stake. They do not see their economic condition 
getting any better. And certainly, they do not see their 
employment opportunities getting any better, especially for 
those with low job skills. I will not say low education but low 
job skills.
    So what can you do or what you done to address income 
disparity, unemployment disparity in this country? And what 
would you suggest that the Fed pursue to avoid the consequences 
long-term of that income disparity?
    Ms. Yellen. Senator, I think that you are asking about 
something that is a very deep problem that has afflicted the 
U.S. economy and other advanced economies. Economists have 
spent a lot of time trying to understand what is responsible 
for widening inequality.
    Many of the underlying factors are things that are outside 
of the Federal Reserve's ability to address.
    Senator Heitkamp. Do you believe your policies have added 
to the problem?
    Ms. Yellen. I believe that the policies we have undertaken 
have been meant to generate a robust recovery. I would like to 
see the U.S. economy and the job market recovering more rapidly 
than they are, but I believe our policies have helped.
    I think, as we saw during the 1990s, when we still had 
trends toward widening inequality, we did have real wage gains 
and we did have a reduction in inequality when we had an 
exceptionally strong and getting ever stronger job market.
    So faster growth in the United States is going to help, a 
stronger job market. And you know, when the economy recovers, 
we are going to see firms be more willing to undertake training 
when they cannot find workers. They are going to be willing 
more to invest in people, to hire, to make capital investments 
that will make workers more productive when they are on the 
job, and we will see greater wage gains.
    Senator Heitkamp. Just a final comment. I would suggest 
that those at the bottom are not feeling the effects of these 
policies. The trickle down has not happened for them. And so 
they struggle every day and they may not see their wealth grow 
because they do not hold a lot of assets.
    And so anything that you can do, taking a look at this 
broader issue--because this is an issue that will affect the 
American economy for years to come and affect our 
competitiveness in years to come. They are the consuming class. 
When you look at why consumers are not consuming, because we 
are not getting resources to those who do consume.
    And so I thank you for your willingness to serve and look 
forward to a long relationship with you.
    Ms. Yellen. Thank you, Senator.
    Chairman Johnson. Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman. And thank you, 
Ms. Yellen. I enjoyed our visit and you have done a great job 
today.
    Let me just say this, that I look at you and think if there 
is a person who involved the last time we had a balanced 
budget, the last time that we would have been on track to be 
debt free, if you go back to those days I am sure there was 
naysayers then said we could not do it, it will never happen. 
But you all did it.
    And then we went off the tracks. What I am asking is how we 
get back on the tracks.
    I know quantitative easing, you and I have a little 
difference of opinion on this, or concern. I have a concern but 
you have a concern. You have a little, I think, broader view of 
what has worked or not worked around the world. I think we 
spoke about Japan and why you believe that what we are doing 
needs to be done.
    I would only say this, if $85 billion a month in 
quantitative easing has not really given us the results that we 
desired, why would you not recommend doing $200 billion a 
month? Why just $85 billion? We know that has not worked.
    Of course, I have concerns with continuing it because I do 
not think--as I think that Senator Johanns had said--we are on 
a sugar high. The bottom line is you all have done your job. 
You have done everything possible to prop up this economy. We 
have failed miserably, as Congress, to do our job.
    And to me, to get even a budget--we do not even have a 
budget--and then to say that we could have a balanced budget 
where people think we are crazy, it cannot happen, it will be 
too harmful, a balanced budget.
    Those of us who were Governors and come from the executive 
branch, that is all we understand. We had to, by law.
    And then to even thing that we could be debt free in the 
next generation or beyond. Do you think those are impossible or 
unreachable goals?
    Ms. Yellen. Well, Senator, I feel achieving debt 
sustainability over the medium term for this country is an 
exceptionally important goal.
    Senator Manchin. Could we balance a budget again?
    Ms. Yellen. It requires very tough decisions, as you know--
--
    Senator Manchin. Well, you all made decisions back in the 
1990s. I remember the dialog, it could not be done.
    Ms. Yellen. Well, we did make tough decisions. Congress and 
the Administration made very tough decisions in the 1990s. They 
did it in a way that I would think would set a model, in a 
sense, for this Congress. When President Clinton was elected, 
the economy had high unemployment. It was just beginning to 
recover. The Administration and Congress wanted to achieve 
deficit reduction but to do so in a way that would not harm the 
economic recovery.
    And so they agreed on a set of tax increases and spending 
cuts, not all of which came into effect immediately but were 
phased in over time.
    There has been, at that time, a lot of uncertainty among 
businesses and in the markets, among households, about whether 
or not the Government would ever balance its budget. And the 
response was very positive. Long-term interest rates came down. 
Now the Fed had scope to use monetary policy to offset any 
adverse impact on the economy. But we really did not see a lot 
of adverse impact because of the fiscal tightness was phased in 
over a period of years and the economy enjoyed a long and 
robust boom.
    Senator Manchin. Let me just say this, that you having that 
experience and lived through it, worked through it, and was 
successful with it. And we have the utmost respect for the 
Reserve, yourself, and I am sure that you see the Committee has 
that much respect for you.
    We just need you to speak out and help us a little bit more 
and challenge us to do our job. If people like yourself, who 
are in the know, are unwilling to challenge us I will guarantee 
you we do not have the political will, it seems like, to do 
what needs to be done.
    We have got to get our financial house in order. Every 
citizen in America has to face a budget. Every one of them has 
to live within that budget. And we are unwilling to make that 
difficult decision. We are on not only a sugar high, we are 
going to go into sugar shock pretty soon. That is what I have 
been talking--but unless we hear the unbridled truth from 
people in the know, people who have been there. They said you 
could not do it and you did it.
    So it is not like it is the impossible dream. We have had 
budgets--we have not had one for five, going on 6 years. We 
have balanced budgets. And we have had surpluses. I would like 
to get back to that again, and I think people like yourself can 
help us be steered in that direction.
    So be bold.
    Ms. Yellen. Thank you, Senator.
    Senator Manchin. Be bold.
    Ms. Yellen. Thanks, I appreciate that.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Hi, thank you, Madame Chair, and thank 
everybody.
    I just want to follow up first on a question that Heidi 
Heitkamp talked about. And I agree with Senator Manchin that 
the deficit is a serious problem. It is less of a problem than 
it was a year or two ago, and I know you acknowledge that. But 
it is not our greatest problem.
    Our greatest problem is that middle class incomes are 
declining in America for the first time in American history, in 
my judgment, in terms of our political economy. And the amazing 
thing is they declined not just because of the recession but 
they actually declined between 2001 and 2007. And 
serendipitously, if that is a word, the person who alerted me 
to this tension was a professor at Harvard Law School named 
Elizabeth Warren, who wrote articles about this long before 
being a Senator was a gleam in her eye.
    But it is our most serious problem. And if middle class 
incomes continue to decline, they declined close to 10 percent 
between 2001 and today, this is going to be a different 
America. I tell this particularly to business executives I 
meet. I get in New York, ``what is all of this populism 
about?''
    Well, I say you know, the American people are a generous 
people. And they do not mind if the people at the top income 
goes up 20 percent if theirs goes up 3 or 4 percent. When 
theirs starts going down, it is a different story. We have 
never had that in America.
    So my question to you is how concerned are you about this? 
What impact will it have on growth and our economic potential? 
And does the Fed have tools to do this? I understand this 
relates to some of my Republican colleagues' skittishness about 
continuing some policies that maintain growth, but I do think--
given the seriousness, at least, which I regard this problem--
that the Fed has really a dual mandate which I know you 
observe, which is not simply keeping inflation down and not 
simply monitoring the budget deficit and its effects on our 
economy, but in trying to get jobs and middle class incomes 
back up again.
    It is so serious, and frankly no one gives it the attention 
that it needs.
    Ms. Yellen. Well, Senator, I want to echo my agreement with 
you that this is a very serious problem. It is not a new 
problem. It is a problem that really goes back to the 1980s, in 
which we have seen a huge rise in income inequality with, as 
you said, for many, many years the middle and those below the 
middle actually losing absolutely. And frankly, a 
disproportionate share of the gains. It is not that we have not 
had pretty strong productivity growth for much of this time in 
the country. But a disproportionate share of those gains have 
gone to the top 10 percent, and even to the top 1 percent. So 
this is an extremely difficult and, to my mind, very worrisome 
problem.
    There is a lot of research, a lot of debate about exactly 
what the causes of this problem are, perhaps having to do in 
part with the nature of technological change with 
globalization, with institutional changes in the United States 
including the decline of unions. But there are many things that 
are involved in this problem.
    What can the Fed do? We cannot change all of those trends. 
The solutions involve a multitude of things, including 
education, maybe early childhood education, job training, other 
things.
    But what we can do is try to achieve, as we are, a robust 
recovery so that we create jobs, we have a stronger job market. 
And in a stronger job market people who are having a lot of 
trouble getting jobs will be drawn into jobs. They will get 
better jobs. There will be more training. People will move up 
job ladders and opportunities will increase.
    It is not going to put an end to the problems, these long-
term structural problems that are driving this. But it will be 
helpful. And I think it is the contribution the Federal Reserve 
can try to make.
    Senator Schumer. Just related to that, but in a specific, 
some of my colleagues have criticized for keeping rates 
``artificially low.'' But is not the zero lower bound on the 
short-term interest rates in some way also artificial? So let 
us say rates were 5 percent today but we had high unemployment, 
very low inflation. Would you not lower rates? And is not QE2 
just another way to influence interest rates when you get close 
to the zero mark?
    So if you did not do QE, would not real interest rates be 
artificially high, so to speak?
    Ms. Yellen. I think that is fair, if you judge what is high 
or low by the needs of the economy. People sometimes talk about 
a concept called the equilibrium real rate, it is what is 
natural given the levels of saving and investment in the 
economy. When there is a lot of saving and not very much 
investment, which is where we are now in a weak economy, the 
natural forces of the economy are pushing interest rates down. 
And it is these forces that we are trying to go with to--if we 
were to try to push rates up when the economy has that much 
saving and such weak investment, we would truly harm the 
recovery.
    And of course, having pushed rates to zero, according to 
many estimates we would ideally have negative short-term 
interest rates. Of course, we cannot achieve that. And as you 
indicate, that is why we are trying to push down longer term 
interest rates.
    Senator Schumer. I think you will--I think you will make a 
great Chair and your Brooklyn wisdom shines through.
    [Laughter.]
    Ms. Yellen. Thank you, very much. I never forget my roots 
and I appreciate that.
    Chairman Johnson. Thank you, Dr. Yellen, for your excellent 
testimony.
    I ask the Members of this Committee to submit any written 
questions for the record for Dr. Yellen by close of business 
tomorrow. Dr. Yellen, please respond promptly so that the 
Committee may proceed to a markup as soon as possible.
    This hearing is adjourned.
    [Whereupon, at 12:16 p.m., the hearing was adjourned.]
    [Prepared statement, biographical sketch of nominee, and 
responses to written questions supplied for the record follow:]
                 PREPARED STATEMENT OF JANET L. YELLEN
 To be Chairman of the Board of Governors of the Federal Reserve System
                           November 14, 2013
    Chairman Johnson, Senator Crapo, and Members of the Committee, 
thank you for this opportunity to appear before you today. It has been 
a privilege for me to serve the Federal Reserve at different times and 
in different roles over the past 36 years, and an honor to be nominated 
by the President to lead the Fed as Chair of the Board of Governors.
    I approach this task with a clear understanding that the Congress 
has entrusted the Federal Reserve with great responsibilities. Its 
decisions affect the well-being of every American and the strength and 
prosperity of our Nation. That prosperity depends most, of course, on 
the productiveness and enterprise of the American people, but the 
Federal Reserve plays a role too, promoting conditions that foster 
maximum employment, low and stable inflation, and a safe and sound 
financial system.
    The past 6 years have been challenging for our Nation and difficult 
for many Americans. We endured the worst financial crisis and deepest 
recession since the Great Depression. The effects were severe, but they 
could have been far worse. Working together, Government leaders 
confronted these challenges and successfully contained the crisis. 
Under the wise and skillful leadership of Chairman Bernanke, the Fed 
helped stabilize the financial system, arrest the steep fall in the 
economy, and restart growth.
    Today the economy is significantly stronger and continues to 
improve. The private sector has created 7.8 million jobs since the 
post-crisis low for employment in 2010. Housing, which was at the 
center of the crisis, seems to have turned a corner--construction, home 
prices, and sales are up significantly. The auto industry has made an 
impressive comeback, with domestic production and sales back to near 
their pre-crisis levels.
    We have made good progress, but we have farther to go to regain the 
ground lost in the crisis and the recession. Unemployment is down from 
a peak of 10 percent, but at 7.3 percent in October, it is still too 
high, reflecting a labor market and economy performing far short of 
their potential. At the same time, inflation has been running below the 
Federal Reserve's goal of 2 percent and is expected to continue to do 
so for some time.
    For these reasons, the Federal Reserve is using its monetary policy 
tools to promote a more robust recovery. A strong recovery will 
ultimately enable the Fed to reduce its monetary accommodation and 
reliance on unconventional policy tools such as asset purchases. I 
believe that supporting the recovery today is the surest path to 
returning to a more normal approach to monetary policy.
    In the past two decades, and especially under Chairman Bernanke, 
the Federal Reserve has provided more and clearer information about its 
goals. Like the Chairman, I strongly believe that monetary policy is 
most effective when the public understands what the Fed is trying to do 
and how it plans to do it. At the request of Chairman Bernanke, I led 
the effort to adopt a statement of the Federal Open Market Committee's 
(FOMC) longer-run objectives, including a 2 percent goal for inflation. 
I believe this statement has sent a clear and powerful message about 
the FOMC's commitment to its goals and has helped anchor the public's 
expectations that inflation will remain low and stable in the future. 
In this and many other ways, the Federal Reserve has become a more open 
and transparent institution. I have strongly supported this commitment 
to openness and transparency, and will continue to do so if I am 
confirmed and serve as Chair.
    The crisis revealed weaknesses in our financial system. I believe 
that financial institutions, the Federal Reserve, and our fellow 
regulators have made considerable progress in addressing those 
weaknesses. Banks are stronger today, regulatory gaps are being closed, 
and the financial system is more stable and more resilient. 
Safeguarding the United States in a global financial system requires 
higher standards both here and abroad, so the Federal Reserve and other 
regulators have worked with our counterparts around the globe to secure 
improved capital requirements and other reforms internationally. Today, 
banks hold more and higher-quality capital and liquid assets that leave 
them much better prepared to withstand financial turmoil. Large banks 
are now subject to annual ``stress tests'' designed to ensure that they 
will have enough capital to continue the vital role they play in the 
economy, even under highly adverse circumstances.
    We have made progress in promoting a strong and stable financial 
system, but here, too, important work lies ahead. I am committed to 
using the Fed's supervisory and regulatory role to reduce the threat of 
another financial crisis. I believe that capital and liquidity rules 
and strong supervision are important tools for addressing the problem 
of financial institutions that are regarded as ``too big to fail.'' In 
writing new rules, however, the Fed should continue to limit the 
regulatory burden for community banks and smaller institutions, taking 
into account their distinct role and contributions. Overall, the 
Federal Reserve has sharpened its focus on financial stability and is 
taking that goal into consideration when carrying out its 
responsibilities for monetary policy. I support these developments and 
pledge, if confirmed, to continue them.
    Our country has come a long way since the dark days of the 
financial crisis, but we have farther to go. Likewise, I believe the 
Federal Reserve has made significant progress toward its goals but has 
more work to do.
    Thank you for the opportunity to appear before you today. I would 
be happy to respond to your questions.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM JANET L. YELLEN

Q.1. The Federal Reserve is currently developing the regulatory 
framework for the first nonbank financial institutions 
designated by the Financial Stability Oversight Council. 
Chairman Bernanke and Governor Tarullo have stated that the 
Collins Amendment limits the Fed's ability to regulate 
insurance companies differently than bank holding companies. Do 
you agree that the Fed is constrained by the Collins Amendment? 
If the Fed is required to apply bank-like capital requirements 
to insurers, would you support bipartisan legislation to 
address that?

A.1. Section 171 of the Dodd-Frank Act, by its terms, requires 
the appropriate Federal banking agencies to establish minimum 
risk-based and leverage capital requirements for bank holding 
companies (BHCs), savings and loan holding companies (SLHCs), 
and nonbank financial companies supervised by the Board 
(supervised nonbank companies) on a consolidated basis. This 
statutory provision further provides that these minimum capital 
requirements ``shall not be less than'' the generally 
applicable capital requirements for insured depository 
institutions. In addition, the minimum capital requirements 
cannot be ``quantitatively lower than'' the generally 
applicable capital requirements for insured depository 
institutions that were in effect in July 2010. Section 171 does 
not contain an exception from these requirements for an 
insurance company (or any other type of company) that is a BHC, 
SLHC, or supervised nonbank company (Board-regulated company), 
or for a Board-regulated company that has an insurance company 
subsidiary. This requirement constrains the scope of the 
Board's discretion in establishing minimum capital requirements 
for Board-regulated companies.
    The final capital rule approved by the Board earlier this 
year, \1\ did, however, take into consideration differences 
between the banking and insurance business within these 
constraints. The final capital rule included specific capital 
treatment for policy loans and separate accounts, which are 
assets typically held by insurance companies but not by banks. 
Additionally, the Board determined to defer application of the 
final capital rule to SLHCs with significant insurance 
activities (i.e., those with more than 25 percent of their 
assets derived from insurance underwriting activities other 
than credit insurance) and to SLHCs that are themselves State 
regulated insurance companies.
---------------------------------------------------------------------------
     \1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
    To the extent permitted by law, the Board continues to 
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have 
subsidiaries engaged in insurance underwriting in determining 
how to design an appropriate capital framework for these 
companies.

Q.2. The Dodd-Frank Act created an expanded regulatory 
structure in which the Fed plays a significant role. Dodd-Frank 
significantly expanded the Board's regulatory authority over 
banking institutions, financial firms, and their subsidiaries, 
and new authority over several types of other institutions, as 
well as to monitor financial system risk. How will you balance 
these expanded responsibilities with the Fed's traditional 
mandate and political independence?

A.2. The Dodd-Frank Act instituted substantial changes to 
financial sector supervision and regulation. For instance, the 
Act established the multiagency Financial Stability Oversight 
Council (Council), of which the Chairman of the Board is a 
member, in order to promote a more comprehensive approach to 
monitoring and mitigating systemic risk. In addition to the 
Board's role as a member of the Council, the Dodd-Frank Act 
gives the Board other new important responsibilities. These 
responsibilities include supervising nonbank financial firms 
that are designated as systemically important by the Council, 
supervising thrift holding companies, and developing enhanced 
prudential standards--including those for capital, liquidity, 
stress tests, single-counterparty credit limits, and living 
will requirements--for large bank holding companies and 
systemically important nonbank financial firms designated by 
the Council. In addition, the Dodd-Frank Act expanded the 
supervisory responsibilities of the Board and the other Federal 
banking agencies to include consideration of the effects on 
financial stability in the United States of the operations of 
banking organizations that we each supervise.
    The Board's duty to supervise financial institutions for 
safety and soundness and financial stability is complementary 
to the Board's monetary policy mandate to pursue maximum 
employment, stable prices, and moderate long-term interest 
rates. While the Dodd-Frank Act expanded the Board's 
supervisory and financial stability duties, the Federal 
Reserve's role as a supervisor of banking organizations is 
longstanding and dates from the founding of the Federal Reserve 
System a century ago. The Federal Reserve has long operated in 
the role of a banking supervisor as an independent agency.
    The Board has made a number of internal changes to better 
carry out its responsibilities. Prior to the enactment of the 
Dodd-Frank Act, we had begun to reorient our supervisory 
structure to strengthen supervision of the largest, most 
complex financial firms, through the creation of the Large 
Institution Supervision Coordinating Committee, a centralized, 
multidisciplinary body. Relative to previous practices, this 
body makes greater use of horizontal, or cross-firm, 
evaluations of the practices and portfolios of firms. It relies 
more on additional and improved quantitative methods for 
evaluating the performance of firms, and it employs the broad 
range of skills of the Federal Reserve staff more efficiently.
    In addition, we have reorganized to more effectively 
coordinate and integrate policy development for and supervision 
of systemically important financial market utilities. As the 
Dodd-Frank Act recognizes, supervision should take into account 
the overall financial stability of the United States, in 
addition to the safety and soundness of each individual firm. 
Our revised internal organizational structure facilitates our 
implementation of this macroprudential approach to oversight.

Q.3. In December of 2012, the GAO issued a report on Dodd-Frank 
implementation and found deficiencies with most agencies' cost 
benefit analyses. One concern is that agencies are not 
considering the cumulative burden of the new rules. The Board 
does not have an express mandate to conduct economic analysis 
in connection with its rulemakings. However, economic analysis 
is a useful tool for tracking the impacts of all of these new 
rules. Are you willing to perform economic and regulatory 
analysis for new Fed rules?

A.3. I agree that economic analysis is a useful tool for 
evaluating the potential impacts of rulemakings and support the 
Federal Reserve's continued use of this tool.
    The Federal Reserve takes quite seriously the importance of 
evaluating the burdens imposed by our rulemaking efforts. To 
become informed about these benefits and costs, before we 
develop a regulatory proposal we often collect information 
directly from parties that we expect will be affected by the 
rulemaking through surveys of affected parties and meetings 
with interested parties and their representatives. This helps 
us craft a proposal that is both effective and minimizes 
regulatory burden. In the rulemaking process, we also generally 
seek comment from the public on the costs and benefits of our 
proposed approach as well as on a variety of alternative 
approaches to the proposal. In adopting the final rule, we 
consider a variety of alternatives and seek to adopt a 
regulatory alternative that faithfully reflects the statutory 
provisions and the intent of Congress while minimizing 
regulatory burden. We also provide an analysis of the costs to 
small depository organizations of our rulemaking consistent 
with the Regulatory Flexibility Act and compute the anticipated 
cost of paperwork consistent with the Paperwork Reduction Act.

Q.4. With several rulemakings affecting foreign banking 
organizations, including under Section 165 of Dodd-Frank and 
the Volcker rule, some have argued that these proposals could 
risk a protectionist backlash from foreign Governments that 
could make it more difficult and costly for U.S. banks to 
operate abroad. What would you do differently to encourage and 
foster international cooperation?

A.4. Since the financial crisis, the Federal Reserve has 
consistently worked with its international counterparts to 
increase the stability of the global financial system and to 
promote economic growth. U.S. and global financial stability 
and the preservation of competitive equity among U.S. and 
foreign banks can be best achieved by reaching global 
agreements on the core financial sector reforms. In the core 
reform areas, our efforts have led to a number of 
internationally agreed regulatory approaches, such as the Basel 
III capital and liquidity frameworks for global banks. In some 
instances, however, it has been appropriate for countries to 
develop different solutions that are tailored to their unique 
risks, institutional situations, and industry structures.
    The Board's foreign bank proposal under section 165 of the 
Dodd-Frank Act was designed to provide a consistent platform 
for the supervision and regulation of the U.S. operations of 
foreign banks and to help ensure that the U.S. operations of 
foreign banks have sufficient capital and liquidity. The 
proposal was responsive to the evolution of the foreign banking 
sector in the United States over the past couple decades and to 
lessons learned in the financial crisis. Although the impact of 
potential reciprocal actions in other markets on U.S. banking 
firms is difficult to forecast with precision, we do not expect 
the impact of such potential actions on U.S. banking firms to 
be significant--principally because most of the material 
foreign subsidiaries of U.S. banking firms are already subject 
to local, bank-like risk-based capital and other prudential 
requirements.

Q.5. In late 2011 the regulators issued a highly complex and 
lengthy proposal to implement the Volcker rule. Because of the 
size and complexity, it is essential that the regulators get 
this right. Otherwise, there will be significant unintended 
consequences for our financial system and economy. Some 
regulators are in favor or reproposing the rule if it differs 
significantly from the initial proposal. Are you in favor of 
reproposing the Volcker rule? How would you distinguish hedging 
from proprietary trading? Would you allow portfolio-wide 
hedging limit risks? How would you propose that financial firms 
comply by 2014?

A.5. The Federal Reserve is committed to getting the rules 
implementing section 619 of the Dodd-Frank Act right and has 
been working for some time with the FDIC, OCC, SEC, and CFTC to 
develop a final rule that effectively implements that section 
in a manner faithful to the words and purpose of the statute. 
We are striving to consider this rule before year-end in order 
to provide clarity and certainty to the affected members of the 
industry and to the public more broadly about the requirements 
of section 619. In developing the rule, the Federal Reserve has 
met with numerous members of the public about a wide variety of 
issues raised by the statute and the original agency proposal 
and has considered more than 18,000 comments on the proposal.
    As you note, section 619 of the DFA provides an exception 
from the prohibition on proprietary trading for ``risk-
mitigating hedging activities in connection with and related to 
individual or aggregated positions, contracts, or other 
holdings of the banking entity that are designed to reduce the 
specific risks to the banking entity in connection with and 
related to such positions, contracts and other holdings.'' 12 
U.S.C. 1851(d)(1)(C). By its terms, the statute permits risk-
mitigating hedging of individual positions or aggregated 
positions of the banking entity. Risk-mitigating hedging 
focuses on reducing risk associated with individual or 
aggregated positions of the banking entity as distinguished 
from proprietary trading, which focuses on attempting to 
achieve short-term profits or gains. The agencies are working 
hard to ensure this exception is implemented as written.
    By its terms, section 619 became effective on July 21, 
2012. Section 619 provides banking entities an additional 2 
year period following the statute's effective date to conform 
activities and investments to the prohibitions and restrictions 
of that section and any final implementing regulation. \2\ 
Under the statute, the Board may, by rule or order, extend the 
2-year conformance period for up to three, 1-year periods, if 
in the judgment of the Board, an extension is consistent with 
the purposes of section 619 and would not be detrimental to the 
public interest. The statute provides that the Board may grant 
these extensions for not more than 1 year at a time. As it 
considers the merits of adopting a final rule, the Board will 
also consider the public interest in granting an extension of 
the conformance period.
---------------------------------------------------------------------------
     \2\ See, 12 U.S.C. 1851(c).

Q.6. With a number of Fed rulemakings affecting capital in a 
proposed or final stage, much emphasis has been placed on 
increasing the quantity of capital. Is it possible that we can 
end up with a higher capital ratio but lower quality of 
capital? If so, what would be the implication of that scenario 
on financial stability? Liquidity and capital rules work in 
concert but also serve overlapping ends. How do you view the 
trade-offs between higher capital and liquidity rules and, in 
that light, how do you view progress in both of these areas to 
---------------------------------------------------------------------------
date?

A.6. Higher capital and liquidity standards work in concert to 
bolster the stability of individual institutions and the 
financial system, and the Federal Reserve has made significant 
progress in both of these areas. We believe that it is 
important that large banking firms have both sufficient capital 
to absorb losses and a sufficiently strong liquidity risk 
profile to prevent creditor and counterparty runs. The 
financial crisis demonstrated that preventing the insolvency or 
material financial distress of large banking firms requires 
regulating both their capital adequacy and liquidity risk.
    Our final Basel III capital rule strengthens the quantity 
and quality of banking organizations' capital, thus enhancing 
their ability to continue functioning as financial 
intermediaries, particularly during stressful periods. 
Accordingly, the Basel III capital rule should reduce risks to 
the deposit insurance fund and the chances of taxpayer bailouts 
and improve the overall resilience of the U.S. financial 
system. The capital requirements in the final Basel III rule 
would serve as the foundation for other key initiatives 
designed to strengthen financial stability, including the 
capital plan rule, Dodd-Frank Act stress testing, and capital 
surcharges for systemically important financial institutions. 
The Basel III capital reforms are a very important part of the 
global regulatory community's effort to improve financial 
stability.
    Our recent Basel III liquidity coverage ratio (LCR) 
proposal is also a core element in our effort to strengthen the 
resiliency of large banking firms. The LCR would impose 
standardized minimum liquidity requirements on large banking 
firms for the first time. The LCR would require large banking 
firms to hold an amount of high-quality liquid assets that is 
sufficient to meet expected net cash outflows over a 30-day 
time horizon in a standardized supervisory stress scenario.
    There is more to be done on both the capital and liquidity 
fronts, however. In particular, the Board intends to supplement 
the new Basel III capital rules with a proposal to implement a 
risk-based capital surcharge for the largest global 
systemically important banking institutions, and is working 
with the Basel Committee to develop a longer-term structural 
liquidity requirement.

Q.7. In the recent Basel III rule the Fed adhered to the 
standard set by the Basel Committee for banks. With regard to 
the capital standards for insurers, the Fed said that it is 
limited by the Collins amendment in Dodd-Frank. In the recently 
proposed liquidity coverage ratio rule, the Fed went beyond the 
criteria set forth by the Basel Committee. Can you explain when 
is it appropriate for the Fed to adhere to the Basel Committee, 
Dodd-Frank or go beyond the requirements set by either the 
Basel Committee or Dodd-Frank?

A.7. The Federal Reserve is bound by the applicable statutes in 
all cases; accordingly, our Basel III capital rules for bank 
holding companies and savings and loan holding companies 
reflect the requirements of section 171 of the Dodd-Frank Act 
(the Collins amendment) and section 939A of the Dodd-Frank Act, 
which prohibits references to credit ratings in Federal 
regulations. Future capital rules for such companies and 
nonbank SIFIs with substantial insurance activities will also 
reflect the requirements of the Collins amendment and section 
939A.
    We work with our international colleagues on the Basel 
Committee on Banking Supervision to develop global regulatory 
and supervisory standards for internationally active banks. 
However, the baseline standards developed by the Basel 
Committee do not always reflect the unique legal, supervisory, 
and market conditions present in the United States and do not 
always provide sufficient protection for the safety and 
soundness of U.S. banking firms or U.S. financial stability. 
Therefore, when drafting U.S. banking rules, we analyze the 
provisions of the relevant Basel standards and in cases where 
it is warranted, we decide to apply different requirements in 
the United States. When analyzing whether to go beyond the 
requirements of the Basel Committee in a particular regulatory 
regime, we weigh the safety and soundness and financial 
stability benefits of implementing stricter provisions against 
the competitive equity and other potential adverse effects of 
the stricter provisions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                      FROM JANET L. YELLEN

Q.1. On October 9th, the IAIS announced its plan to develop a 
``risk based global insurance capital standard'' by 2016. These 
bank-like capital standards would be imposed on U.S. insurers 
that have not been designated nonbank systemically important 
financial institutions (SIFIs) under U.S. law and were not 
among the insurance groups designated as Global Systemically 
Important Insurers (G-SIIs) in July by the FSB. The IAIS stated 
in its announcement that the development and testing in 2014 of 
new capital requirements for the G-SIIs will be used to inform 
the development of the insurance capital standard for other 
internationally active insurers.
    Does the Fed support this development? If not, did it voice 
its concerns? If so, why are we allowing the imposition of 
European-based, bank-centric capital standards on U.S. 
insurance companies that (a) were not responsible for the 
financial crisis, and (b) have not been designated as nonbank 
SIFIs under Dodd-Frank or among the insurance groups designated 
as G-SIIs in July by the FSB?

A.1. The Federal Reserve participated in, and supported, the 
FSB's July decision to endorse the enhanced policy measures 
promulgated by the IAIS for G-SIIs, including the plan to 
develop capital requirements for G-SIIs. As a new member of the 
IAIS, we plan to work in a coordinated manner with the other 
U.S. members on current IAIS initiatives, including development 
of international capital standards for G-SIIs and other 
internationally active insurance groups. The IAIS is comprised 
of insurance regulators, supervisors and central banks from 
more than 130 countries around the world, including the United 
States. The Federal Reserve recently became a member of the 
IAIS. The Federal Insurance Office, the National Association of 
Insurance Commissioners and the State insurance departments are 
also members of the IAIS. The IAIS works in a collaborative way 
to develop supervisory and regulatory standards to address the 
solvency and financial stability risks inherent in global 
insurance firms. Participation by the Federal Reserve and other 
U.S. members in the IAIS helps us to better understand the 
global insurance industry and to influence the development of 
global insurance supervisory and regulatory standards.
    The IAIS is undertaking work to develop international 
capital requirements for G-SIIs and other internationally 
active insurance groups. The work of the IAIS is conducted 
principally by insurance supervisors--supervisory agencies with 
substantial insurance expertise and responsibility for the 
supervision of insurance firms. It is my understanding the 
capital requirements under development by the IAIS will be 
insurance-based and will address the types of assets held and 
liabilities incurred by insurance firms.

Q.2. What will the Federal Reserve's process be for developing 
capital standards for insurance savings and loan holding 
companies and insurance SIFIs? Will the Federal Reserve propose 
rules that are specific to insurance companies, and will there 
be a notice and comment period and opportunity for public 
input? How will the Fed ensure that these companies have a 
sufficient transition period to adjust to a new capital regime?

A.2. The Board is taking additional time to evaluate the 
appropriate capital framework for insurance nonbank SIFIs and 
savings and loan holding companies (SLHCs) that are 
significantly engaged in insurance activities. We have been 
carefully evaluating public comments (including industry 
feedback) on how to design such a capital framework. The 
business model and associated risk profile of insurance 
companies can differ materially from those of banking 
organizations, and the Board is taking these differences into 
account. The Board is committed to taking the necessary amount 
of time to develop workable capital requirements for insurance-
related firms. To the extent permitted by law, the Board 
continues to carefully consider how to design capital rules for 
Board-regulated companies that are insurance companies or that 
have subsidiaries engaged in insurance underwriting in 
determining how to design an appropriate capital framework for 
these companies.
    We do not have a specific deadline for issuing a proposal, 
but once we have developed a proposal, we will issue it for 
public notice and comment.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN
                      FROM JANET L. YELLEN

Q.1. In today's hearing you indicated that the Federal Reserve 
Board was taking steps to address certain concerns about 
Section 716 of the Dodd-Frank Act through rulemaking and that a 
final rule could be completed as early as this year.
    As a clarification of your comments, were you referring to 
the Federal Reserve Board's interim final rule issued on June 
5, 2013, regarding the treatment of uninsured U.S. branches and 
agencies of foreign banks under Section 716, or were you 
referring to some other regulatory effort to interpret or 
address concerns about Section 716?

A.1. I was referring in my testimony to the interim final rule 
issued by the Federal Reserve to address the problem created by 
section 716 for U.S. branches and agencies of foreign banks. As 
you know, U.S. branches and agencies of foreign banks, by 
statute, have access to the Federal Reserve discount window in 
the same manner as insured depository institutions. It is this 
treatment of U.S. branches and agencies of foreign banks that 
causes them to become subject to section 716. Consequently, the 
Federal Reserve proposed to treat these branches and agencies 
as insured depository institutions for all purposes under 
section 716. We have received a few comments on this interim 
rule and, as I mentioned at the hearing, we expect to consider 
final action on it by year-end.

Q.2. In today's hearing you discussed the Financial Stability 
Oversight Council's process for the consideration and 
designation of nonbank systemically important financial 
institutions with Senator Tester.

        Senator Tester: If you're confirmed, you will be 
        participating in FSOC. And the question is about 
        transparency and it's the transparency of metrics that 
        will be used that people need to have the ability to 
        comment on before they are applied. And I guess my 
        question to you is will you be willing to make that 
        commitment to transparency as it applied to FSOC?

        Governor Yellen: I will need to study this issue more 
        closely in terms of what FSOC's procedures are, but I 
        feel it should be clear why a particular firm has been 
        designated if that occurs.

    As a clarification, if you are confirmed, will you support 
a transparent process for the consideration and designation of 
nonbank systemically important financial institutions that 
includes the release of any determination metrics for asset 
managers before those metrics are applied--as Senator Tester 
stated and regulators have indicated--and not after the 
designation has occurred, as your answer suggests.

A.2. Designation has significant implications for a company, so 
it is important that the designation framework and process is 
careful and deliberative. To implement this authority, the FSOC 
developed a framework and criteria and sought public comments 
twice on the designation framework. After publishing guidance, 
FSOC began the process of assessing individual companies from a 
list of companies that met the quantitative criteria set out in 
the guidance. The guidance is available at: http://
www.treasury.gov/initiatives/fsoc/documents/
nonbank%20designations%20-%20final%20rule%
20and%20guidance.pdf.
    The OFR study on Asset Management and Financial Stability 
did not propose any metrics for the FSOC to use to consider 
asset management firms for designation. If the FSOC develops 
metrics for asset manager firms beyond the metrics in the 
current guidance, if confirmed, I would support that it provide 
the public an opportunity to review and comment on any proposed 
metrics.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                      FROM JANET L. YELLEN

Q.1. As you know, Congress has mandated that the Federal 
Reserve use monetary policy to achieve maximum employment while 
maintaining price stability and moderate long-term interest 
rates. At its December 2012 meeting, the Federal Reserve stated 
that it would continue to keep interest rates low until the 
unemployment rate reached 6.5 percent. Yet a 6.5 percent 
unemployment rate does not reflect maximum employment. As you 
testified, members of the Federal Open Market Committee stated 
in response to a September 2013 survey that an unemployment 
rate of between 5 percent and 6 percent would more accurately 
represent maximum employment.
    The difference between a 6.5 percent unemployment rate and 
an unemployment rate between 5 percent and 6 percent is 
hundreds of thousands of jobs. Do you think the Federal Reserve 
must lower its unemployment rate target to fulfill its 
statutory mandate of pursuing maximum employment?

A.1. In December of 2012, the FOMC established economic 
thresholds to provide greater clarity to the public about the 
period over which short-term interest rates could be expected 
to remain at current exceptionally low levels. In particular, 
the committee indicated that an exceptionally low range for the 
Federal funds rate would remain appropriate at least as long as 
the unemployment rate remained above 6.5 percent and projected 
inflation between 1 and 2 years ahead remains below 2.5 
percent. It is important to note that these economic thresholds 
for the Federal funds rate are not our long-run goals for 
monetary policy. Rather, they are intended as useful benchmarks 
for the public in understanding how the level of the Federal 
funds rate may evolve over time.
    Indeed, in its September economic projections, FOMC 
participants' estimates of the longer-run normal rate of 
unemployment had a central tendency of 5.2 percent to 5.8 
percent. In essence, this is the unemployment range that the 
committee believes that the economy can achieve over the longer 
run.
    It is also important to note that the thresholds are not 
triggers--that is, once a threshold has been crossed, the 
committee will not necessarily raise the Federal funds rate 
target immediately. Instead, crossing a threshold will lead the 
committee to consider whether an increase in rates would be 
appropriate, with the FOMC determining the appropriate stance 
of monetary policy based on its assessment of the economic 
outlook. We will, as always, follow a balanced approach in 
fostering our objectives of maximum employment and stable 
prices. Under that approach, as Chairman Bernanke has said, 
monetary policy is likely to remain highly accommodative long 
after one of the economic thresholds for the Federal funds rate 
has been crossed. For example, in their economic and policy 
projections prepared for the September FOMC meeting, many FOMC 
participants anticipated that the Federal funds rate at the end 
of 2016 would be at or below a level of about 2 percent, well 
below the anticipated long-run level of the Federal funds rate 
of about 4 percent. These FOMC participants judged that 
continued highly accommodative policy over an extended period 
would likely be appropriate to achieve and maintain our 
congressionally mandated objectives of maximum employment and 
stable prices.

Q.2. I am interested in your views on the following question, 
which I asked Governor Tarullo on July 11, 2013. Under 12 
U.S.C. 1818(e), Federal banking agencies may remove 
``institution-affiliated parties'' from participation in the 
affairs of an insured depository when they directly or 
indirectly violate banking laws or regulations. Were officers 
or directors of any bank that was party to the mortgage 
servicer settlements removed because they directly or 
indirectly participated in the violations that led to the 
settlements? If no officer or director was removed, can you 
explain why?

A.2. I fully support the use of the full range of the Federal 
Reserve's enforcement tools, including actions to bar insiders 
of banking organizations from the banking business, where 
appropriate. The statutory requirements to bring a removal or 
prohibition action are rigorous. Under 12 U.S.C. 1818(e), the 
Board must initially find that the insider engaged in a 
violation of law, unsafe or unsound practice, or a breach of 
fiduciary duty that resulted in a benefit to the insider, a 
loss to the institution, or prejudice to the bank's depositors. 
In addition, the Board must determine that the conduct involved 
personal dishonesty or willful or continuing disregard for the 
safety and soundness of the institution. This standard does not 
permit an action against an insider whose conduct only involved 
poor, or even negligent, business decisions that resulted in 
losses to an institution. There must be additional evidence 
showing heightened culpability, such as personal dishonesty or 
reckless or willful disregard for safety and soundness.
    Applying these standards, the Federal Reserve has not, to 
date, taken any actions removing or prohibiting insiders of the 
mortgage servicing organizations that were subject to the 2011 
and 2012 mortgage servicing enforcement actions for their 
conduct in connection with servicing or foreclosure activities. 
We are, however, continuing to investigate whether such removal 
or prohibition actions are appropriate.
    In the past 5 years, the Federal Reserve has issued 68 
prohibition orders, including several orders that also assessed 
a civil money penalty. Also in the past 5 years, the Federal 
Reserve has notified more than 200 individuals that they are 
banned by statute from banking under section 19 of the Federal 
Deposit Insurance Act (12 U.S.C. 1829). Section 19 prohibits a 
person convicted of a criminal offense involving dishonesty or 
a breach of trust from directly or indirectly owning, 
controlling, or participating in the affairs of any insured 
depository institution, or a bank or savings and loan holding 
company without the consent of the FDIC in the case of an 
insured depository institution, or of the Federal Reserve in 
the case of a holding company. The Federal Reserve has worked 
with the Department of Justice as it determines whether to 
bring criminal actions against individuals, including in 
connection with mortgage servicing and foreclosure activities.

Q.3. You testified that the Federal Reserve's supervisory 
responsibilities should be just as important as its monetary 
policy responsibilities. If that is to be the case, the Federal 
Reserve needs to dedicate enough staff to supervision--
particularly for the largest, most complex financial 
institutions. Otherwise, significant problems will likely 
remain undetected until it is too late.
    According to the Federal Reserve System's 2013 Budget, 
there are 412 staff budgeted for Bank Supervision and 
Regulation at the Board of Governors, and another 3,904 staff 
budgeted for Supervision and Regulation at the Federal Reserve 
Banks. How many of these staff are assigned full-time to 
supervision of the six largest bank holding companies (JPMorgan 
Chase & Co., Bank of America Corporation, Citigroup, Inc., 
Wells Fargo & Company, The Goldman Sachs Group, and Morgan 
Stanley), which collectively hold far more than half of the 
total banking assets in the country? Given that a bank holding 
company like Citigroup dedicates several thousand of its 
employees to risk management and internal auditing, do you 
think the Federal Reserve needs to significantly increase the 
number of staff dedicated to supervising the largest financial 
institutions in order to carry out its supervisory 
responsibilities?

A.3. As a result of lessons learned from the financial crisis, 
the Federal Reserve has taken a number of steps to strengthen 
its ongoing supervision of the largest, most complex banking 
firms. Most importantly, we established the Large Institution 
Supervision Coordinating Committee (LISCC) to ensure that 
oversight and supervision of the largest firms incorporates a 
broader range of internal perspectives and expertise; involves 
regular, simultaneous, horizontal (cross-firm) supervisory 
exercises; and is overseen through a centralized process to 
facilitate consistent supervision and the resolution of issues 
that may be present at more than one firm.
    The LISCC is chaired by the Director of the Board's 
Division of Banking Supervision and Regulation and includes 
senior bank supervisors from the Board and relevant Reserve 
Banks as well as senior Federal Reserve staff from the 
financial stability, research and legal divisions, as well as 
from each of the other divisions at the Board and from the 
Markets and payment systems groups at the Federal Reserve Bank 
of New York. The LISCC provides strategic and policy direction 
for supervisory activities at the largest bank holding 
companies (BHCs) across the Federal Reserve System and, to 
date, has developed and administered important new supervisory 
exercises focused on the largest firms, most notably including 
the Federal Reserve's annual supervisory stress tests and the 
related annual reviews of capital adequacy and internal capital 
planning practices at the Nation's largest BHCs.
    At the largest BHCs, the Federal Reserve has on-site teams 
in place full time. At the six firms mentioned in your 
question, there are approximately 215 Federal Reserve staff 
members on the on-site teams. The work of these teams, however, 
is just one piece of the supervision program for these firms. 
The work of the on-site teams is supported and complemented by 
System-wide teams of specialists, including those focused on 
credit, market and operational risk management, compliance, 
capital adequacy and capital planning assessments, liquidity 
and funding, and stress testing practices. All of these System-
wide teams participate in the supervision of the firms in the 
LISCC portfolio.
    In addition to the on-site teams, we have approximately 200 
experts from across the Federal Reserve involved in the annual 
comprehensive capital analysis and review (CCAR) that focus on 
assessments of the risk measurement, stress testing and 
internal capital planning practices supporting the 8 largest 
firms' capital planning processes. Also, there are 
approximately 100 economists, supervisors, and other 
specialists that carry out the annual supervisory stress 
testing, which is applied to the 30 largest domestic BHCs, 
including those mentioned in your question. Furthermore, the 
Office of the Comptroller of the Currency also has supervisory 
staff that supervise large national banks, including Wells 
Fargo, JPMorgan Chase, Citigroup, Inc., and Bank of America 
Corporation. We coordinate with the OCC in supervisory planning 
and the execution of supervisory activities of these firms.
    We are still adding more personnel that will be devoted to 
supervision of systemically important firms. Staffing needs are 
being driven by further focus on and enhancements to the 
supervision program for the largest U.S. banking firms, FSOC-
designated nonbank SIFIs, and the U.S. operations of large 
foreign banking organizations.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM JANET L. YELLEN

Q.1. The GAO reports that ``Although the Dodd-Frank Act 
requires the Federal Reserve Board to promulgate regulations 
that establish policies and procedures governing any future 
lending under section 13(3) authority, Federal Reserve Board 
officials told us that they have not yet drafted these policies 
and procedures and have not set timeframes for doing so.'' At 
the hearing, I asked you to submit for the record the Federal 
Reserve's detailed plans for how the it will implement the 
Dodd-Frank requirements to limit the Federal Reserve's bailout 
including a time line for drafting and implementing these rules 
along with how the Fed proposes to implement these rules. 
Please submit those details here for the record.

A.1. The Dodd-Frank Act made several major changes to the 
statutory text of section 13(3). The Federal Reserve 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. The Federal Reserve has 
undertaken substantial work both internally and with other 
agencies 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.2. I have heard from many, including Senator Collins and a 
number of lawyers, that the minimum capital requirements of 
Section 171 of Dodd-Frank, commonly referred to as the Collins 
amendment, that the Federal Reserve Board of Governors has 
sufficient flexibility as to how it will apply the minimum 
capital standards to nonbank financial companies primarily 
engaged in the insurance business that are designated as SIFIs 
by FSOC. It seems that the Federal Reserve lawyers are the only 
ones who believe the Fed needs additional legislation passed to 
give them flexibility in how to apply this capital requirement 
to insurance companies. Are you aware of the issue?

    Do you believe that insurance companies should have 
        bank-like capital standards or is that a different 
        industry, holding different assets and needing a 
        different set of requirements?

    Some attorneys of insurance companies have argued 
        that the Board could determine the application of bank-
        centric capital requirements under the Collins 
        amendment would be duplicative of the Risk-Based 
        Capital framework and that the Board could take 
        appropriate action to avoid that duplication. Or, since 
        section 171 does not provide proscriptive capital 
        standards the Board has the ability to tailor standards 
        for insurance companies differently. Have you looked at 
        that issue and do you think that argument has merit?

    Has the Federal Reserve fully taken into 
        consideration the clear congressional intent embodied 
        in Section 165 of the Dodd-Frank Act that requires the 
        Board to ``tailor'' prudential rules, including capital 
        requirements, that are applied to nonbank SIFIs? Why 
        exactly do you believe the Collins Amendment overrides 
        the clear statutory language in Section 165?

    In addition to the clear directive to the Board in 
        Section 165 to ``tailor'' the rules for insurer nonbank 
        SIFIs, Section 616 of Dodd-Frank includes a general 
        directive that gives the Board sufficient discretion to 
        ensure that capital standards for insurers--both 
        nonbank SIFI and thrift insurers--are appropriately 
        aligned with insurance risk, rather than bank risk. It 
        is clear that Congress did not intend for bank-centric 
        capital rules to be applied to insurers. And no one 
        seems to be arguing that a bank capital regime is 
        appropriate for insurers. So what is the Board's plan 
        for addressing this issue? Will you issue a proposed 
        rule specifically for insurance capital requirements, 
        and if so, when?

A.2. Section 171 of the Dodd-Frank Act, by its terms, requires 
the appropriate Federal banking agencies to establish minimum 
risk-based and leverage capital requirements for bank holding 
companies (BHCs), savings and loan holding companies (SLHCs), 
and nonbank financial companies supervised by the Board 
(supervised nonbank companies) on a consolidated basis. This 
statutory provision further provides that these minimum capital 
requirements ``shall not be less than'' the generally 
applicable capital requirements for insured depository 
institutions. In addition, the minimum capital requirements 
cannot be ``quantitatively lower than'' the generally 
applicable capital requirements for insured depository 
institutions that were in effect in July 2010. Section 171 does 
not contain an exception from these requirements for an 
insurance company (or any other type of company) that is a BHC, 
SLHC, or supervised nonbank company (Board-regulated company), 
or for a Board-regulated company that has an insurance company 
subsidiary. This requirement constrains the scope of the 
Board's discretion in establishing minimum capital requirements 
for Board-regulated companies.
    The final capital rule approved by the Board earlier this 
year, \1\ did, however, take into consideration differences 
between the banking and insurance business within these 
constraints. The final capital rule included specific capital 
treatment for policy loans and separate accounts, which are 
assets typically held by insurance companies but not by banks. 
Additionally, the Board determined to defer application of the 
final capital rule to SLHCs with significant insurance 
activities (i.e., those with more than 25 percent of their 
assets derived from insurance underwriting activities other 
than credit insurance) and to SLHCs that are themselves State 
regulated insurance companies.
---------------------------------------------------------------------------
     \1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
    To the extent permitted by law, the Board continues to 
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have 
subsidiaries engaged in insurance underwriting in determining 
how to design an appropriate capital framework for these 
companies.

Q.3. On Tuesday, Andrew Huszar published a piece in the Wall 
Street Journal entitled ``Confessions of a Quantitative 
Easer''. It is a significant piece because of the job that Mr. 
Huszar used to hold. In 2009-10, he managed the Federal 
Reserve's $1.25 trillion agency mortgage-backed security 
purchase program. As the person responsible for executing the 
Fed's experimental and risky monetary policy known as 
``quantitative easing'' he had a simple message, ``I'm sorry, 
America.'' And, that the Fed ``has allowed QE to become Wall 
Street's new `too big to fail' policy.''
    Mr. Huszar described the primary goal in rolling the dice 
with QE was to ``to drive down the cost of credit so that more 
Americans hurting from the tanking economy could use it to 
weather the downturn.'' And he laments that when the trading 
for the first round of QE ended on March 31, 2010, ``[t]he 
final results confirmed that, while there had been only trivial 
relief for Main Street, the U.S. central bank's bond purchases 
had been an absolute coup for Wall Street. The banks hadn't 
just benefited from the lower cost of making loans. They'd also 
enjoyed huge capital gains on the rising values of their 
securities holdings and fat commissions from brokering most of 
the Fed's QE transactions. Wall Street had experienced its most 
profitable year ever in 2009, and 2010 was starting off in much 
the same way.'' However, more than 3\1/2\ years later the Fed 
continues to purchase about $85 billion in bonds each month and 
delaying any reduction in its purchases. Do you disagree with 
Mr. Hauser's assertion that QE is Wall Street's new ``Too Big 
to Fail'' policy, if so, why?

A.3. The FOMC's asset purchases are aimed at promoting the 
Federal Reserve's statutory objectives of maximum employment 
and stable prices. By putting downward pressure on longer-term 
interest rates and helping to make financial conditions more 
accommodative, the Federal Reserve's asset purchases have 
supported a stronger economic recovery, improved labor market 
conditions, and helped keep inflation closer to its 2 percent 
objective. In particular, lower interest rates have allowed 
many homeowners to refinance their mortgages at lower rates and 
thus supported growth in consumer spending. Lower mortgage 
rates also have helped to strengthen home sales and housing 
construction. In addition, lower interest rates have boosted 
auto sales. Through these channels, our asset purchases have 
helped strengthen growth and employment. Moreover, the Federal 
Reserve's asset purchases have helped to guard against 
disinflationary pressures that could otherwise have exacerbated 
the debt burdens faced by some households and businesses. In 
all of these ways, our asset purchases have benefited American 
families and Main Street businesses.
    It is important to emphasize our asset purchases have been 
conducted in the open market and have followed a competitive 
process. The changes in overall financial conditions spurred by 
our asset purchases have not been directed toward benefiting 
any particular institution or class of institutions. Rather, by 
strengthening the economic recovery, fostering improved labor 
market conditions, and maintaining stable inflation and 
inflation expectations, the Federal Reserve's asset purchase 
programs have benefited all Americans.

Q.4. At Jackson Hole speech Chairman Bernanke talked about the 
tradeoffs associated with this experimental monetary policy--
namely higher liquidity premiums on Treasury securities, lack 
of confidence in the Fed's ability to exit smoothly from its 
extremely accommodative policies, and risk to financial 
stability by driving longer-term yields lower incentivizing 
risky behavior in the markets. It seems to me that Mr. Huszer 
and Mohammed El Erian at the PIMCO investment firm are right 
when they point out--``that the Fed may have created and spent 
over $4 trillion for a total return as little as 0.25 percent 
of GDP, that QE really isn't working.'' As someone who is 
viewed as very dovish, in favor of continuing or being more 
aggressive with these accommodative monetary policies, why 
haven't we reached the tipping point where the costs and risks 
associated with this experiment outweigh the benefits?

A.4. A growing body of research by economists at central banks 
and academic institutions has found that asset purchases by 
central banks help to lower longer-term interest rates and ease 
financial conditions. These developments, in turn, help to 
foster a stronger economic recovery, improved labor market 
conditions, and stable inflation and inflation expectations. 
While monetary policy is not a panacea for all of the Nation's 
economic difficulties, our economic situation would almost 
certainly be far worse had the Federal Reserve not acted 
aggressively to address the severe economic shock stemming from 
the financial crisis and the continuing headwinds that have 
slowed the economic recovery. The historical precedents of the 
United States in the 1930s and Japan since the 1990s provide 
sobering examples of the potential costs when central banks 
fail to adequately address severe economic and financial 
shocks.
    While a strong majority of the FOMC judges that asset 
purchases have been effective in fostering its macroeconomic 
objectives, the committee is aware of the potential costs and 
risks associated with asset purchases. As noted in the minutes 
of recent FOMC meetings, policy makers have noted various 
potential risks of asset purchases, including possible 
challenges in removing policy accommodation at the appropriate 
time and the possibility of encouraging imprudent risk-taking 
in the financial sector. Regarding challenges associated with 
exit, the Federal Reserve has developed, and is continuing to 
refine, a range of tools that will allow the Federal Reserve to 
remove policy accommodation at the appropriate time. Regarding 
excessive risk-taking in financial markets, there are few signs 
to date of the types of financial imbalances and excessive 
reliance on leverage that were evident in the runup to the 
financial crisis. That said, the Federal Reserve is monitoring 
financial markets very carefully for signs of excessive risk-
taking and is prepared to take supervisory and other policy 
actions as appropriate to address developments that could pose 
a threat to financial stability.
    On balance, the FOMC has judged that the economic benefits 
of continued asset purchases outweigh the potential costs. 
However, asset purchases are not on a preset course and the 
pace of asset purchase will remain contingent on the economic 
outlook and the FOMC's ongoing assessment of their likely 
efficacy and costs.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS
                      FROM JANET L. YELLEN

Q.1. How active is the Federal Reserve with the Financial 
Stability Board (FSB) on insurance issues? How does the Fed 
coordinate its insurance-related work within the FSB with 
Treasury and State regulators?

A.1. As a member of the FSB, the Federal Reserve participates 
actively in discussions and decisions with respect to 
insurance-related issues. The Federal Reserve recently joined 
the International Association of Insurance Supervisors (IAIS), 
the international standard setting body for insurance. The 
Federal Reserve is working with the other U.S. members of the 
IAIS to provide a coordinated U.S. perspective in the 
development of standards by the IAIS.
    The FSB was established to coordinate at the international 
level the work of national financial authorities and 
international standard setting bodies and to develop and 
promote the implementation of effective regulatory, supervisory 
and other financial sector policies to promote financial 
stability. The U.S. Treasury, the Federal Reserve, and the SEC 
are the U.S. members of the FSB. Governor Daniel Tarullo serves 
as the Federal Reserve's representative to the FSB Plenary and 
is the chairman of the FSB's standing committee on Supervisory 
and Regulatory Cooperation (SRC).
    As the international standard-setting body for insurance, 
the IAIS reports to the FSB through the SRC with respect to 
supervisory and regulatory matters. The IAIS includes insurance 
regulators, supervisors, and central banks from around the 
world, including the United States. The U.S. members of the 
IAIS include the Federal Insurance Office, the Federal Reserve, 
the National Association of Insurance Commissioners, and the 
State insurance departments.

Q.2. The bank-centric Basel 3 framework was developed by 
banking regulators for banks, not for insurers. Do you think it 
is appropriate for insurers to be subject to bank-centric Basel 
3 capital rules that were never intended for them, or does it 
make more sense to have an insurance-based framework for 
insurers?

A.2. The Board's final revised capital framework for bank 
holding companies and savings and loan holding companies from 
summer 2013 does not apply to savings and loan holding 
companies that are engaged substantially in insurance 
activities. The Board decided to take more time to develop 
appropriate capital requirements for insurance holding 
companies, including insurance nonbank SIFIs. We want to get 
this right--it is important that we have strong consistent 
capital requirements for all depository institution holding 
companies and that we have a treatment for insurance risks that 
is economically sensible.

Q.3. Will you work with Congress to ensure that an insurance-
based framework is applied to the insurance companies under Fed 
supervision? If you are confirmed, will you revisit the Fed's 
interpretation of the statute to determine if the Fed has the 
authority, as many in the Senate believe that it does, to avoid 
the negative impact of bank rules applied to insurance 
companies, and instead apply a more appropriate insurance 
framework? Do you support bipartisan legislation that my 
colleague Senator Brown and I drafted that clarifies that the 
Fed does have the flexibility to distinguish capital standards 
between banks and insurance companies?

A.3. The Board recognizes that insurance companies that are 
savings and loan holding companies (SLHCs) or are designated by 
the Council as nonbank financial companies may present 
different business models and risks than bank holding 
companies. Section 171 of the Dodd-Frank Act, by its terms, 
requires the appropriate Federal banking agencies to establish 
minimum risk-based and leverage capital requirements for bank 
holding companies (BHCs), savings and loan holding companies, 
and nonbank financial companies supervised by the Board on a 
consolidated basis. This statutory provision further provides 
that these minimum capital requirements ``shall not be less 
than'' the generally applicable capital requirements for 
insured depository institutions. In addition, the minimum--
capital requirements cannot be ``quantitatively lower than'' 
the generally applicable capital requirements for insured 
depository institutions that were in effect in July 2010. 
Section 171 does not contain an exception from these 
requirements for an insurance company (or any other type of 
company) that is a BHC, SLHC, or supervised nonbank financial 
company (Board-regulated company), or for a Board-regulated 
company that has an insurance company subsidiary. This 
requirement therefore constrains the scope of the Board's 
discretion in establishing minimum capital requirements for 
Board-regulated companies.
    The final capital rule approved by the Board earlier this 
year \1\ took into consideration differences between the 
banking and insurance business within these constraints. The 
final capital rule included specific capital treatment for 
policy loans and separate accounts, which are assets typically 
held by insurance companies but not by banks. Additionally, the 
Board determined to defer application of the final capital rule 
to SLHCs with significant insurance activities (i.e., those 
with more than 25 percent of their assets derived from 
insurance underwriting activities other than credit insurance) 
and to SLHCs that are themselves State regulated insurance 
companies.
---------------------------------------------------------------------------
     \1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
    To the extent permitted by law, the Board continues to 
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have 
subsidiaries engaged in insurance underwriting in determining 
how to design an appropriate capital framework for these 
companies. The Board remains willing to work with Congress on 
this important matter.

Q.4. The Federal Reserve has oversight for nonbank financial 
institutions that are designated as systemically important by 
the Financial Stability Oversight Council (FSOC). How will you 
ensure that the Fed does not apply a one-size-fits-all approach 
to regulating these entities? Is the Fed limited in its ability 
to tailor requirements by the Collins Amendment or any other 
provision of Dodd-Frank?

A.4. The Dodd-Frank Act directs the Board to apply prudential 
standards to nonbank financial companies that have been 
designated by the FSOC for supervision by the Board that are 
more stringent than the standards applied to banking 
organizations that do not pose such significant risks to 
financial stability. The prudential standards must include 
enhanced risk-based capital, leverage, liquidity, stress test, 
resolution planning, and risk management requirements as well 
as single-counterparty credit limits, and a debt-to-equity 
limit for companies that pose a grave threat to the financial 
stability of the United States.
    In establishing enhanced prudential standards for BHCs and 
nonbank financial companies under section 165 of the Dodd-Frank 
Act, section 165(a)(2) provides that the Board may tailor 
application of the standards imposed under that section on an 
individual basis or by category. The Board intends, in 
prescribing prudential standards for a particular nonbank 
financial company under section 165, to thoroughly assess the 
business model, capital structure, and risk profile of the 
designated company to determine how the proposed enhanced 
prudential standards should apply, and if appropriate, would 
tailor application of the standards by order or regulation to 
that nonbank financial company or a category of nonbank 
financial companies.
    The Board recognizes that insurance companies that are 
SLHCs or are designated by the Council as nonbank financial 
companies may present different business models and risks than 
bank holding companies. The final capital rule the Board issued 
this summer implementing the Basel III capital standards 
included specific capital treatment for policy loans and 
separate accounts held by insurance companies, which are assets 
not held by banks. Additionally, the Board determined to defer 
application of the final capital rule to SLHCs with significant 
insurance activities (i.e., those with more than 25 percent of 
their assets derived from insurance underwriting activities 
other than credit insurance) and to SLHCs that are themselves 
State regulated insurance companies.
    To the extent permitted by law, the Board continues to 
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have 
subsidiaries engaged in insurance underwriting in determining 
how to design an appropriate capital framework for these 
companies.

Q.5. The U.S. Department of the Treasury's Office of Financial 
Research (OFR) recently delivered a report to the FSOC on ways 
that activities in the asset management industry may create, 
amplify, or transmit systemic risk. While the OFR report stops 
short of calling for SIFI designations for asset managers, it 
does lay out potential factors that could be used to determine 
if an asset manager poses systemic risk. Many have commented 
publicly that the process for the OFR study and FSOC's review 
of asset managers is flawed and lacks transparency.
    As a voting member of FSOC, if the FSOC undertakes to 
designate asset managers as systemically important, would you 
support the metrics for designation being put out for public 
comment?
    If the FSOC ultimately designates asset managers as 
systemically important, do you agree that asset managers should 
be regulated differently than bank holding companies and that a 
one-size-fits-all approach is not appropriate?

A.5. The study on Asset Management and Financial Stability was 
written by the OFR in response to a request by the FSOC to 
identify data gaps and provide analysis to better inform the 
FSOC's analysis of how to consider asset management firms for 
enhanced prudential standards and supervision under Section 113 
of the Dodd-Frank Act. The study is not an FSOC publication. 
The OFR study did not propose any metrics for the FSOC to use 
to consider asset management firms for designation. If the FSOC 
develops metrics for asset manager firms beyond the metrics in 
the current guidance (available at: http://www.treasury.gov/
initiatives/fsoc/documents/nonbank%20designations%20-
%20final%20rule%
20and%20guidance.pdf), if confirmed, I would support that it 
provide the public an opportunity to review and comment on any 
proposed metrics.
    Section 165 of the Dodd-Frank Act requires the Federal 
Reserve to establish enhanced prudential standards both for 
bank holding companies with total consolidated assets of $50 
billion of more and for nonbank financial companies designated 
by the Council. In the Federal Reserve's proposed rule, we may 
tailor the application of the enhanced standards to different 
companies on an individual basis or by category, taking into 
consideration each company's capital structure, riskiness, 
complexity, financial activities, size, and any other risk-
related factors that the Federal Reserve deems are appropriate. 
This commitment to tailoring is reflected in the recently 
finalized capital rules in which the Federal Reserve excluded 
savings and loan holding companies that are predominantly 
engaged in insurance activities in order to allow for the 
development of more appropriate capital standards. Still, our 
ability to tailor the enhanced standards may be limited by the 
Collins Amendment and other provisions of the Dodd-Frank Act.

Q.6. As chairman of the Fed, what specifically will you do to 
increase the transparency of the Fed with regard to insurance 
regulators and the insurance industry? How will you consult 
with State insurance regulators before taking a position on 
insurance regulatory matters and will that position be 
consistent with the advice you receive from State insurance 
regulators?

A.6. The Federal Reserve has a long history of cooperation, 
consultation, and engagement with Federal and State regulators, 
key stakeholders, and other interested parties.
    To raise transparency with respect to the development of 
our supervisory programs and regulations for the insurers under 
Federal Reserve supervision, Federal Reserve staff regularly 
meets with the Federal Insurance Office, insurance industry 
groups and company representatives, the National Association of 
Insurance Commissioners, State insurance regulators, and others 
regarding issues related to insurance capital requirements, 
supervision, risk management, and other insurance matters.
    The Federal Reserve considers and assesses the views of 
industry groups and State regulators and has made adjustments 
in our approach to supervising and regulating insurers to 
reflect such input. The Federal Reserve recognizes the 
differences between banking and insurance, and is committed to 
tailoring its supervisory and regulatory regime for insurance 
holding companies to reflect the unique business lines and 
risks of insurance--to the extent permitted by law. We will 
continue to engage the industry and State regulators to further 
expand the Board's expertise and gain additional perspectives 
regarding the regulation and supervision of insurance 
companies, with the goal of continuing to promote a financially 
safe and sound financial system.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                      FROM JANET L. YELLEN

Capital Rules for Insurance Companies

Q.1. While many of us believe that the Dodd-Frank Act already 
gives the Federal Reserve the authority to distinguish between 
insurance companies and banks when promulgating capital 
standards under the Collins Amendment, the Federal Reserve has 
made statements publicly that it does not believe it has the 
statutory authority to do so. Therefore, a number of Senators 
on this Committee introduced legislation, S.1369 to codify and 
clarify that the Federal Reserve can and should make 
distinctions between insurance companies and banks when setting 
capital standards. Is it your interpretation that this 
authority currently exists?

A.1. Section 171 of the Dodd-Frank Act, by its terms, requires 
the appropriate Federal banking agencies to establish minimum 
risk-based and leverage capital requirements for bank holding 
companies (BHCs), savings and loan holding companies (SLHCs), 
and nonbank financial companies supervised by the Board 
(supervised nonbank companies) on a consolidated basis. This 
statutory provision further provides that these minimum capital 
requirements ``shall not be less than'' the generally 
applicable capital requirements for insured depository 
institutions. In addition, the minimum capital requirements 
cannot be ``quantitatively lower than'' the generally 
applicable capital requirements for insured depository 
institutions that were in effect in July 2010. Section 171 does 
not contain an exception from these requirements for an 
insurance company (or any other type of company) that is a BHC, 
SLHC, or supervised nonbank company (Board-regulated company), 
or for a Board-regulated company that has an insurance company 
subsidiary. This requirement therefore constrains the scope of 
the Board's discretion in establishing minimum capital 
requirements for Board-regulated companies.
    The final capital rule approved by the Board earlier this 
year, \1\ did, however, take into consideration differences 
between the banking and insurance business within these 
constraints. The final capital rule included specific capital 
treatment for policy loans and separate accounts, which are 
assets typically held by insurance companies but not by banks. 
Additionally, the Board determined to defer application of the 
final capital rule to SLHCs with significant insurance 
activities (i.e., those with more than 25 percent of their 
assets derived from insurance underwriting activities other 
than credit insurance) and to SLHCs that are themselves State 
regulated insurance companies.
---------------------------------------------------------------------------
     \1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
    The Board continues to carefully consider how to design 
capital rules for Board-regulated companies that are insurance 
companies or that have subsidiaries engaged in insurance 
underwriting in determining how to design an appropriate 
capital framework for these companies.

Q.2. This ability for distinction should also transfer to the 
Fed's ability to distinguish between insurance companies and 
banks for purposes of accounting practices. I have at least two 
insurance companies in my State that are supervised by the Fed 
as savings and loan holding companies. These companies are not 
publicly traded and do not prepare financial statements in 
accordance with GAAP--but rather, in accordance with GAAP-based 
insurance accounting known as Statutory Accounting Principles 
(SAP). Every person I consult tells me that SAP is the most 
effective and prudential way to supervise the finances of an 
insurance company. It is my understanding that the Federal 
Reserve may want to force these insurance companies that have 
used SAP reporting for many decades to spend hundreds of 
millions of dollars preparing GAAP statements--primarily 
because the Fed is comfortable with GAAP and understands it 
since it's what banks use. Is this is true? If it is true, is 
it simply because the Fed is so accustomed to bank regulation 
and not insurance regulation that it simply wants to make 
things easier for itself? Do you agree with this one-size-fits-
all approach to regulation? Can you provide a cost benefit 
analysis to this as it seems to not add any additional 
supervisory value and only adds astronomic costs to these 
companies?

A.2. The Federal Reserve is still considering regulatory 
capital and financial reporting requirements for companies with 
significant insurance activities in light of the Collins 
amendment requirement that we institute consolidated capital 
requirements for all bank holding companies (BHCs), savings and 
loan holding companies (SLHCs), and nonbank SIFIs. SLHCs with 
significant insurance activities are not covered by the new 
regulatory capital rules published this summer.
    Our willingness to take more time to develop a capital rule 
for insurance holding companies is an acknowledgement that the 
business model and associated risk profile of insurance 
companies can differ materially from those of banking 
organizations and that further evaluation of the appropriate 
capital framework for these entities is warranted.
    Because the calculation of insured depository institution 
capital requirements begins with consolidated GAAP 
measurements, and because statutory accounting has a legal 
entity rather than a consolidated basis, the Collins amendment 
is an impediment to use of statutory accounting as the basis 
for consolidated capital requirements for BHCs, SLHCs, and 
nonbank SIFIs with insurance operations.

Q.3. Each Chairman of the Federal Reserve can appoint other 
Governors to specific posts and issues--such as representation 
to the Financial Stability Oversight Council, representing the 
Federal Reserve to the Financial Stability Board (FSB), etc. Do 
you have a written list of any changes in Fed governors you 
will make to these posts that you can provide in writing?

A.3. No, I do not have a list at this point. If confirmed as 
Chairman, I look forward to working with my fellow governors to 
fulfill the important responsibilities of the Federal Reserve.

FSOC

Q.4. FSOC has been in existence for more than 3 years. Since 
that time, three companies have been deemed systemically 
significant and a second round of companies appear to be under 
consideration. There have been a number of calls, supported by 
a 2012 GAO report, on the FSOC to provide greater transparency 
about the process used for designation and the criteria 
followed. Can you provide greater details on why more 
transparency has not been achieved?

A.4. Although I have not participated in the Financial 
Stability Oversight Council (Council) matters, I understand it 
is firmly committed to promoting transparency and 
accountability in connection with its activities. In November 
2012, the Council and the Office of Financial Research jointly 
provided a response to Congress and the GAO with a description 
of the actions planned and taken in response to each of the 
recommendations in the report. The report made a number of 
recommendations on ways in which the Council could further 
enhance its transparency, including improving the Council's Web 
site.
    Subsequently, the Council's Web site was reintroduced, in 
December 2012, to improve transparency and usability, to 
improve access to Council documents, and to allow users to 
receive email updates when new content is added. The Council is 
firmly committed to holding open meetings and closes its 
meetings only when necessary. However, the Council must 
continue to find the appropriate balance between its 
responsibility to be transparent and its central mission to 
monitor emerging threats to the financial system. Council 
members frequently discuss supervisory and other market-
sensitive data during Council meetings, including information 
about individual firms, transactions, and markets that require 
confidentiality. In many instances, regulators or firms 
themselves provide nonpublic information that is discussed by 
the Council. Continued protection of this information, even 
after a period of time, is often necessary to prevent 
destabilizing market speculation or other adverse consequences 
that could occur if that information were to be disclosed.
    Congress authorized the FSOC to designate nonbank financial 
companies whose material financial distress could threaten U.S. 
financial stability. Congress provided the FSOC with a list of 
10 factors for consideration but left it to FSOC to determine 
how these factors, such as interconnectedness, size, leverage, 
and activities, should be considered in determining whether a 
company posed a threat to financial stability.
    Designation has significant implications for a company, so 
it is important that the designation framework and process is 
careful and deliberative. To implement this authority, FSOC 
developed a framework and criteria and sought public comments 
twice on the framework. After publishing guidance, FSOC began 
the process of assessing individual companies from a list of 
companies that met the quantitative criteria set out in the 
guidance. The guidance is available at: http://
www.treasury.gov/initiatives/fsoc/documents/
nonbank%20designations%20-%20final%?0rule%
20and%20guidance.pdf.
    As described in the guidance, FSOC screens companies 
through a three-stage process which provides a company with 
more due process than set forth in the enabling provisions of 
Dodd-Frank. This authority is focused on individual companies, 
not categories of activities or industries. Because being 
considered for designation is an important event for a firm, 
and the process may involve evaluation of proprietary 
information, there may be some costs to providing too much 
information to the public.

Q.5. The methodology and blanket statements made in the OFR 
Study on Asset Management and Financial Stability have been 
highly criticized as making broad assumptions, blanket 
statements, and for a misuse/misstatement and misunderstanding 
of data to analyze the industry. Can you speak to the reports' 
accuracies and/or if there are errors how best to address these 
since these reports are presumably part of the basis for 
designation?

A.5. The study on Asset Management and Financial Stability was 
written by the OFR in response to a request by the FSOC to 
identify data gaps and provide analysis to better inform the 
FSOC's analysis of how to consider asset management firms for 
enhanced prudential standards and supervision under Section 113 
of the Dodd-Frank Act. The study is not an FSOC publication. In 
addition, because the designation authority is focused on 
individual companies rather than industries, it will be only 
one of many inputs used by the FSOC in its analysis.

Q.6. In terms of Asset Management companies, the Council has 
previously stated that in any additional metrics are developed 
``it intends to provide the public with an opportunity to 
review and comment on any such metrics and thresholds.'' Why 
was it the SEC then and not the FSOC that released these for 
public comment? Can you speak to other reports/studies that the 
OFR may do and if there will be some kind of open/regular 
process that will be followed for the public to review and 
comment? In terms of the OFR's Study on Asset Management and 
Financial Stability, do you know how many comments were 
received and the general nature/issues raised in these 
comments?

A.6. The study on Asset Management and Financial Stability was 
written by the OFR in response to a request by the FSOC to 
provide data and analysis to better inform the FSOC's analysis 
of how to consider asset management firms for enhanced 
prudential standards and supervision under Section 113 of the 
Dodd-Frank Act. The OFR study did not propose any metrics for 
the FSOC to use to consider asset management firms for 
designation. If the FSOC develops metrics for asset manager 
firms beyond the metrics in the current guidance (available at: 
http://www.treasury.gov/initiatives/fsoc/documents/
nonbank%20designations%20-%20final%20rule%
20and%20guidance.pdf, I would support that it provide the 
public an opportunity to review and comment on any proposed 
metrics.

Volcker

Q.7. Can you update me on the timing of the rule and will the 
conformance period be extended for firms to implement it?

A.7. The Federal Reserve is committed to getting the rules 
implementing section 619 of the Dodd-Frank Act right and has 
been working for some time with the FDIC, OCC, SEC, and CFTC to 
develop a final rule that effectively implements that section 
in a manner faithful to the words and purpose of the statute. 
We are striving to consider this rule before year-end in order 
to provide clarity and certainty to the affected members of the 
industry and to the public more broadly about the requirements 
of section 619.
    By its terms, section 619 became effective on July 21, 
2012. Section 619 provides banking entities an additional 2-
year period following the statute's effective date to conform 
activities and investments to the prohibitions and restrictions 
of that section and any final implementing regulation. \2\ 
Under the statute, the Board may, by rule or order, extend the 
2-year conformance period for up to three, 1-year periods, if 
in the judgment of the Board, an extension is consistent with 
the purposes of section 619 and would not be detrimental to the 
public interest. The statute provides that the Board may grant 
these extensions for not more than 1 year at a time. As it 
considers the merits of adopting a final rule, the Board will 
also consider the public interest in granting an extension of 
the conformance period.
---------------------------------------------------------------------------
     \2\ See, 12 U.S.C. 1851(c).

Q.8. Can you assure me that the rule will be structured so it 
---------------------------------------------------------------------------
doesn't negatively impact small issuers?

A.8. Among other things, section 619 of the Dodd-Frank Act 
prohibits banking entities from engaging in proprietary 
trading, which is defined by the statute to be trading in 
financial instruments for the purpose of selling in the near 
term or the intent to resell in order to profit from short-term 
price movements. Section 619 also provides an exception from 
this prohibition for underwriting activities and for market-
making activities that are designed not to exceed the 
reasonably expected near term demands of clients, customers, 
and counterparties. Underwriting activities and market-making 
activities serve a very important role in providing capital to 
businesses and liquidity to markets.
    The Federal Reserve has been working for some time with the 
FDIC, OCC, SEC, and CFTC to develop a final rule that 
effectively implements section 619, including the exceptions 
for underwriting and market-making activities and the other 
activities permitted by the statute, in a manner faithful to 
the words and purpose of the statute. In developing the rule, 
the Federal Reserve has met with numerous members of the public 
about a wide variety of issues raised by the statute and the 
original agency proposal, including the issues you have raised, 
and has considered more than 18,000 comments on the proposal. 
We are striving to consider this rule before year-end in order 
to provide clarity and certainty to the affected members of the 
industry and to the public more broadly about the requirements 
of section 619.

Enhanced Banking System: Ending Too Big to Fail and Protecting Against 
        Future Collapses

Q.9. It is safe to say that in 2008 the U.S. Government did not 
have the tools to wind down a large failing financial 
institution. This inability is one of the primary reasons 
behind the Orderly Liquidation Authority (OLA) enacted in the 
Dodd-Frank Act. Recently, Bank of England's Paul Tucker stated, 
`` . . . the U.S. authorities have the technology--via Title II 
of Dodd-Frank; and just as important, most U.S. bank and dealer 
groups are, through an accident of history, organized in a way 
that lends them to top-down resolution on a group-wide basis. I 
don't mean to it would be completely smooth right now; it would 
be smoother in a year or so as more progress is made, but in 
extremis, it should be done now. That surely is a massive 
signal to bankers and markets.'' Do you agree with Mr. Tucker's 
statement and what does progress on this front mean for those 
arguing large banks benefit from an implicit subsidy?

A.9. The Dodd-Frank Act and Basel III approach to addressing 
systemically important financial institutions (SIFIs) involves 
much stricter regulation of SIFIs and improving the 
resolvability of SIFIs. This is a sensible path that will lower 
the probability of failure of SIFIs, improve market discipline 
of SIFIs, and reduce the damage to the system if a SIFI does 
fail. The Board, the FDIC, and other regulators have made much 
progress on this path. Market participants and some rating 
agency actions for large bank holding companies have recognized 
this progress.
    The FDIC's orderly liquidation authority (OLA) is effective 
today and its core regulatory implementation architecture is in 
place. The FDIC's single-point-of-entry approach to 
implementing Title II of the Dodd-Frank Act is a big step 
forward in this regard. More work remains to be done around the 
world to maximize the prospects for an orderly SIFI resolution, 
but the basic framework has been established in the United 
States.
    Potential impediments to an orderly SIFI resolution 
remain--including the need for other countries to adopt 
workable statutory resolution regimes for SIFIs, the need to 
ensure that SIFIs have sufficient gone concern loss absorption 
capacity and resolution-friendly internal organizational 
structures, the need to provide host regulators of SIFIs with 
credible assurances that local operations will be protected in 
a resolution, and the need to address the potential disorderly 
unwind of cross-border derivative contracts. The Federal 
Reserve is committed to working with the FDIC and our 
supervised firms to remove these impediments.
    The Fed, in consultation with the FDIC, has been developing 
a regulatory proposal that would require the largest, most 
complex U.S. banking firms to maintain a minimum amount of 
outstanding long-term unsecured debt that could be converted to 
equity in resolution. Such a requirement would increase the 
prospects for an orderly resolution under OLA by ensuring that 
shareholders and long-term debt holders of a systemic financial 
firm can bear potential future losses at the firm and 
sufficiently capitalize a bridge holding company in resolution. 
In addition, by increasing the credibility of OLA, a minimum 
long-term debt requirement should help counteract the moral 
hazard arising from taxpayer bailouts and improve market 
discipline of systemic firms.
    U.S. regulators are in active discussions with their 
foreign counterparts with respect to crisis planning around 
potential future SIFI failures. In particular, the U.S. and 
U.K. resolution authorities--the FDIC and the Bank of England--
together with the Federal Reserve Board, the Federal Reserve 
Bank of New York and the U.K. Financial Services Authority, 
have been working closely to develop contingency plans for the 
failure of global SIFIs with significant operations on both 
sides of the Atlantic.

Q.10. There have been some that have expressed concerns that 
winding down a large bank is impossible because of cross border 
problems. One solution offered has been the Single Point of 
Entry (SPOE) approach. Does this approach significantly 
mitigate the challenge posed by winding down a firm that has 
operations in multiple jurisdictions?

A.10. The FDIC's single-point-of-entry approach to resolution 
of a systemic financial firm does mitigate the challenges posed 
by winding down a large, cross-border banking firm. Under the 
single-point-of-entry approach, the FDIC will be appointed 
receiver of only the top-tier parent holding company of the 
failed firm. After the parent holding company is placed into 
receivership, the FDIC will transfer assets of the parent 
company to a bridge holding company. The firm's operating 
subsidiaries (foreign and domestic) will remain open for 
business as usual. To the extent necessary, the FDIC will then 
use available parent holding company assets to recapitalize the 
firm's critical operating subsidiaries. Equity claims of the 
failed parent company's shareholders will effectively be wiped 
out, and claims of its unsecured debt holders will be written 
down as necessary to reflect any losses or other resolution 
costs in the receivership. The FDIC will ultimately exchange 
the remaining claims of unsecured creditors of the parent for 
equity or debt claims of the bridge holding company and return 
the restructured firm back to private sector control.
    This conceptual approach to resolution under Title II of 
the Dodd-Frank Act represents an important step toward 
addressing the market perception that any U.S. financial firm 
is too big or too complex to be allowed to fail. The aim of the 
single-point-of-entry approach is to stabilize the failed firm 
quickly, in order to mitigate the negative impact on the U.S. 
financial system, and to do so without supporting the firm's 
equity holders and other capital liability holders or exposing 
U.S. taxpayers to losses. The single-point-of-entry approach 
offers the best potential for the orderly resolution of a 
systemic financial firm under Title II, in part because of its 
potential to mitigate run risks and credibly impose losses on 
parent holding company creditors and, thereby, to enhance 
market discipline.
    As noted in my previous answer, although use of the single-
point-of-entry resolution approach materially improves the 
prospects for the orderly resolution of a cross-border banking 
firm as compared to alternative implementation paths, 
impediments to such an orderly resolution remain. The Federal 
Reserve is committed to working with the FDIC in the coming 
months and years to mitigate those residual impediments.

Q.11. Liquidity and capital rules work in concert, but also 
serve overlapping ends. How do you view the trade-offs between 
higher capital and liquidity rules and in that light, how do 
you view progress in both of these areas?

A.11. Higher capital and liquidity standards work in concert to 
bolster the stability of individual institutions and the 
financial system, and the Federal Reserve has made significant 
progress in both of these areas. We believe that it is 
important that large banking firms have both sufficient capital 
to absorb losses and a sufficiently strong liquidity risk 
profile to prevent creditor and counterparty runs. The 
financial crisis demonstrated that preventing the insolvency or 
material financial distress of large banking firms requires 
regulating both their capital adequacy and liquidity risk.
    The new capital framework published by the U.S. banking 
agencies this summer will increase the quantity and quality of 
banks' required capital, whereas the proposed liquidity 
coverage ratio will establish for the first time a standardized 
minimum liquidity requirement for large banking organizations. 
Both measures enhance banking organizations' ability to 
continue functioning as financial intermediaries, particularly 
during stressful periods, thereby reducing risks to the deposit 
insurance fund and the chances of taxpayer bailouts and 
improving the overall resilience of the U.S. financial system.
    There is more to be done on both the capital and liquidity 
fronts, however. In particular, the Board intends to supplement 
the new Basel III capital rules with a proposal to implement a 
risk-based capital surcharge for the largest global 
systemically important banking institutions, and is working 
with the Basel Committee to develop a longer-term structural 
liquidity requirement for global banks.

Macro Economic

Q.12. To what extent could potential challenges within the 
Chinese banking and ``shadow'' banking industry transmit credit 
risk into the global financial markets?

A.12. The Chinese economy has experienced very rapid credit 
growth in recent years. Along with bank loans, nonbank (shadow) 
financing has expanded substantially, which includes lending 
via trust companies, corporate bond issuance, and off-balance 
sheet lending undertaken by banks. This rapid and sizable 
credit expansion has raised concerns about asset quality at 
banks and in the shadow banking sector. A future rise in 
problem loans could lead to capital shortfalls in the banking 
sector and potentially large expenses for the Government. That 
said, currently banks report sound capital buffers, and the 
Chinese Government has extensive resources to meet potential 
shortfalls in capital. In addition, Chinese authorities appear 
to recognize the potential risks of excessive credit growth to 
their economy, and have signaled intentions to curb it. 
However, notable risks remain and the situation bears 
monitoring closely. Although China has a relatively closed 
financial system with fewer financial links to other countries 
than many other major economies, a sharp slowdown in the 
Chinese economy would slow growth in other countries as well.

Q.13. How do you view the bond purchase program orchestrated by 
the Bank of Japan? How does it differ from quantitative easing? 
Does it appear that the Japanese are attempting to manipulate 
their currency, or is this a proper response to Japan's more 
than 20 years of economic stagnation and deflation?

A.13. Japan has experienced low growth coupled with mild 
deflation or very low inflation for nearly two decades. It is 
important to address this problem, and the Bank of Japan (BOJ) 
has recognized that aggressive action is necessary. The BOJ has 
taken a couple of steps. In January, the BOJ introduced an 
inflation target of 2 percent, similar to that of other major 
central banks. In April, the Bank of Japan announced it would 
be greatly expanding its existing asset purchase program and 
increasing the maturity of its purchases (a break from prior 
quantitative easing, which was focused on shorter-term maturity 
assets) with the goal of raising inflation to the 2 percent 
goal in 2 years. These asset purchases are mainly concentrated 
in Japanese Government bonds.
    These measures have already contributed to supporting 
economic activity in Japan--with real GDP accelerating in the 
first half of the year--and deflationary pressures have also 
begun to recede. However, ultimately Japan will need to take 
steps to restore fiscal sustainability and implement pro-growth 
structural reforms.

Q.14. Do you believe that the recent increases in mortgage 
interest rates this past summer--that went up nearly 100 basis 
points from May 2012 \3\ were an overreaction to the Fed's June 
statements on ``tapering'' the stimulus? Do you believe that 
these moves are indicative that housing sector is being over-
stimulated by economic policies?
---------------------------------------------------------------------------
     \3\ http://www.bankrate.com/finance/mortgages/mortgage-
analysis.aspx

A.14. The increase in longer-term interest rates over the 
summer reflected a number of factors. First, the incoming 
economic data suggested a somewhat stronger economic outlook, 
which boosted rates. Second, as you note, in June the FOMC 
provided additional information on its expectations regarding 
its current purchase program, offering a conditional outlook 
for reductions in the pace of purchases over coming quarters if 
the incoming economic data continued to be consistent with the 
outlook for ongoing improvement in labor market conditions. The 
committee was clear that the policy outlook was conditional on 
economic and financial developments--our purchases are by no 
means on a preset course. Nonetheless, some investors who had 
taken on leveraged positions in longer-term instruments 
reportedly decided to exit those positions, putting additional 
upward pressure on rates. While the resulting tightening of 
financial conditions was unwelcome, and could slow the recovery 
in the housing sector to some degree, the reduction in 
leveraged positions should reduce the risks to financial 
stability going forward. The committee will continue to adjust 
policy as appropriate to foster our dual objectives of maximum 
---------------------------------------------------------------------------
employment and price stability.

Q.15. After the initial round of the Federal Reserve's monetary 
measures to keep the financial system solvent during the 
financial crisis, the threshold for additional central bank 
easing action has become lower and lower, especially with each 
successive round of QE. We now see loose central bank policies 
in the U.S., Japan, Europe, and elsewhere. Policy makers appear 
to be relying on monetary manipulation as a substitute for 
necessary tough decisions to structurally reform our tax, 
spending, and trade policies that would make for long-term, 
true economic growth. Do you believe that the U.S. Federal 
Reserve can continue to be a shining example of Central Bank 
independence? Do you anticipate that you will have the courage 
to end the stimulus programs and make some of the more 
difficult decisions to get our economy back to a ``true'' 
functioning economy rather than an economy that only functions 
with Government stimulus?

A.15. Americans can be confident that the FOMC has both the 
ability and the will to slow our asset purchases and eventually 
end our asset purchase program, and ultimately to begin to 
remove policy accommodation, when the economy is strong enough 
to make doing so appropriate. We have clearly indicated that 
the purchase program is conditional on economic and financial 
developments. We anticipate ending our purchases once we have 
seen a substantial improvement in the outlook for the labor 
market in a context of price stability. More broadly, we are 
providing a high degree of monetary policy accommodation in 
order to support a stronger economic recovery and move 
inflation back toward its 2 percent longer-run objective--that 
is, to foster our congressionally mandated objectives of 
maximum employment and price stability.
    That said, as economic conditions normalize, it will become 
appropriate to begin removing policy accommodation. In 
considering the timing of such a step, our objective will be to 
assure a strong and robust recovery while keeping inflation 
under control. On the one hand, it is important not to remove 
support too soon, especially when the recovery is fragile. On 
the other hand, it is crucial not to wait too long to withdraw 
accommodation, and so allow an undesirable rise in inflation. 
My colleagues and I are committed to our longer run inflation 
goal of 2 percent, and we will need to ensure that, as the 
recovery takes hold and progresses, we bring monetary policy 
back to normal in a timely fashion.

Q.16. The Federal Reserve's recent monetary actions have 
created somewhat of an unfair recovery, where investors and 
banks seem to be fairing quite well while the middle and lower 
classes seem to continue to struggle. Do you agree that the 
monetary policies put into place by the Federal Reserve since 
the financial crisis have been a ``top-down'' approach to 
bolstering the economy? Do you think that the Fed's easy money 
policies punish savers? We've seen a growth and love spawned in 
the equities market--Do you think that this artificial ``boom'' 
in equities will falter once the Fed begins tapering?

A.16. It is certainly true that savers and those who rely on 
investments such as certificates of deposit and Government 
bonds are receiving very low returns. However, savers typically 
wear many economic hats. For example, many savers are 
homeowners or would like to be homeowners, and low interest 
rates make it easier to own a home and contribute to rising 
house prices. In addition, many savers own stocks and other 
assets through pension funds and 401(k) accounts; low interest 
rates are supporting the economic recovery and are thus good 
for businesses' sales and earnings, and so for stock investors. 
And a stronger economy will help people who need jobs to find 
them. Without a job, it is difficult to save for retirement or 
to buy a home or to pay for an education, irrespective of the 
current level of interest rates.
    More broadly, we cannot have a more normal configuration of 
interest rates until the economy returns to a more normal 
state. Currently, interest rates are low for fundamental 
economic reasons, not just because the Federal Reserve and 
other central banks are providing accommodative monetary 
policy. Those fundamental reasons include slow growth and low 
inflation in the U.S. and other major economies. Pursuing an 
accommodative monetary policy now will help to get the economy 
moving and so will best enable us to normalize policy and to 
get rates back to normal levels over time. Indeed, an improved 
economic outlook has contributed to the rise in interest rates 
we have seen of late, and most forecasters anticipate that 
rates will rise further as the economy strengthens.

Q.17. When does the Fed plan to begin tapering?

A.17. As we have emphasized, our purchase program is not on a 
pre-set course. Instead, our decisions regarding the purchase 
program are data dependent. Our goal for the purchase program, 
as stated in September 2012 and reiterated since then, is to 
achieve a substantial improvement in the outlook for the labor 
market.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
                      FROM JANET L. YELLEN

Q.1. Community banking is undergoing a change, especially in 
rural America. There are fewer banks in Kansas, but the banks 
that remain are growing due to mergers and acquisitions. One 
consequence of this growth is that the bank holding companies 
absorbing these smaller institutions fall under greater 
regulatory thresholds due to their increasing asset size. These 
small bank holding companies (SBHCs) are increasingly exposed 
to the current $500 million threshold under the Federal 
Reserve's Small Bank Holding Company Policy Statement. For 
example, an SBHC located in Kansas has seven branches. These 
branches are located in rural communities where they are, in 
some instances, one of the only remaining businesses located on 
Main Street. But since an SBHC brought those small banks under 
its purview and kept a branch open for these small communities, 
that SBHC is now very close to exceeding that $500 million 
threshold. As I understand it, the Federal Reserve has the 
discretion to alter the Small Bank Holding Company Policy 
Statement and has exercised that discretion in raising the 
threshold in the past.
    I have introduced legislation along with Sen. Tester and 
Sen. Kirk along with an additional 13 of our Senate colleagues 
as cosponsors. Section 3 of the CLEAR Relief Act, S.1349, would 
require the Federal Reserve to raise that threshold. This seems 
to me a commonsense reform we could make that would ensure that 
small communities across the country will maintain access to 
hometown banking services. This is only one example of a 
regulatory burden the Federal Reserve could lift for the 
betterment of community banking. Would you comment on how you 
will go about reducing the regulatory burden on small banks, 
utilizing the Federal Reserve's discretionary regulatory 
framework, so that communities in Kansas will still have access 
to a hometown bank?

A.1. Community banks play a critical role in the U.S. economy, 
and the Federal Reserve is committed to implementing a 
supervisory and regulatory regime for community banks that is 
appropriate for their business model and economic function. To 
better tailor our oversight framework to the specific 
characteristics of community banks, the Federal Reserve has 
formed a Community Depository Institutions Advisory Council and 
a small bank subcommittee of its Committee on Bank Supervision.
    The Federal Reserve has been very focused on addressing 
too-big-to-fail (TBTF) and protecting financial stability by 
strengthening the regulatory regime for systemically important 
financial institutions (SIFIs). TBTF is a damaging economic 
phenomenon that corrodes market discipline of our largest 
banking firms and contributes to an unlevel playing field 
between large banks and small banks. The much stricter 
regulatory regime that the Federal Reserve and other U.S. and 
global regulators are implementing for SIFIs should help level 
that playing field. Consistent with this principle, our recent 
final Basel III capital rule also created substantial 
differences between the regulatory capital regime that will 
apply to large U.S. banking firms as compared to community 
banks.
    The Federal Reserve periodically reviews the scope of 
application of its Small Bank Holding Company Policy Statement. 
The Federal Reserve raises the asset threshold when appropriate 
in light of changes to U.S. banking markets and the economy.

Q.2. The drafting process of the Volcker Rule has caused some 
confusion among investors and regulators alike. Without delving 
into the specifics of the rule, I would simply mention that I 
have heard concerns as to where market making ends and 
proprietary trading begins. As you well know, market making 
serves a very important role in providing liquidity. I am 
concerned that an overly restrictive Volcker Rule could damage 
a business's ability to operate and expand. I have also heard 
discussions about certain asset classes, namely non-U.S. 
sovereign debt, that may be under consideration for an 
exemption from the Volcker rule. If you believe the Volcker 
Rule is structured in a way to not have an overly negative 
impact on liquidity and the costs of issuing debt, for what 
purpose would certain asset classes require exemptions? Could 
not an asset class exemption of this nature be viewed as 
favoring foreign countries over American companies?

A.2. Among other things, section 619 of the Dodd-Frank Act 
prohibits banking entities from engaging in proprietary 
trading, which is defined by the statute to be trading in 
financial instruments for the purpose of selling in the near 
term or the intent to resell in order to profit from short-term 
price movements. Section 619 also provides an exception from 
this prohibition for market-making activities that are designed 
not to exceed the reasonably expected near term demands of 
clients, customers and counterparties. As you note, market-
making activities serve a very important role in providing 
liquidity to markets.
    The statute also provides exceptions from the proprietary 
trading prohibition for trading in certain asset classes. In 
particular, the statute permits trading by banking entities in 
obligations of the United States, obligations of any agency of 
the United States (including the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, the 
Federal Home Loan Banks, and the Government National Mortgage 
Association) and obligations of any State or political 
subdivision thereof.
    The Federal Reserve has been working for some time with the 
FDIC, OCC, SEC, and CFTC to develop a final rule that 
effectively implements section 619, including the exception for 
market-making activities and the other activities permitted by 
the statute, in a manner faithful to the words and purpose of 
the statute. In developing the rule, the Federal Reserve has 
met with numerous members of the public about a wide variety of 
issues raised by the statute and the original agency proposal, 
including the issues you have raised, and has considered more 
than 18,000 comments on the proposal. We are striving to 
consider this rule before year-end in order to provide clarity 
and certainty to the affected members of the industry and to 
the public more broadly about the requirements of section 619.

Q.3. Among the concerns that have been raised about Basel III, 
the possibility of bank-centric capital standards being applied 
to insurance companies is among the most difficult to justify. 
I realize the Federal Reserve may feel it is obligated to 
regulate certain components of the insurance industry due to 
the Collins Amendment language of the Dodd-Frank Act. However, 
I believe, as do many of my Senate colleagues, that the Federal 
Reserve does have flexibility in the statute to develop 
insurance-based standards. I am concerned that the very 
different capital accounting methods utilized by the insurance 
industry will make bank-centric Basel III standards unworkable 
and disruptive if applied to insurers. Are you able to provide 
any insight as to whether the Federal Reserve intends to saddle 
insurance companies with bank-centric prudential standards, and 
do you believe there is a way to develop strong insurance-based 
standards that would make more sense? Could you elaborate on 
the process moving forward?

A.3. Section 171 of the Dodd-Frank Act, by its terms, requires 
the appropriate Federal banking agencies to establish minimum 
risk-based and leverage capital requirements for bank holding 
companies (BHCs), savings and loan holding companies (SLHCs), 
and nonbank financial companies supervised by the Board 
(supervised nonbank companies) on a consolidated basis. This 
statutory provision further provides that these minimum capital 
requirements ``shall not be less than'' the generally 
applicable capital requirements for insured depository 
institutions. In addition, the minimum capital requirements 
cannot be ``quantitatively lower than'' the generally 
applicable capital requirements for insured depository 
institutions that were in effect in July 2010. Section 171 does 
not contain an exception from these requirements for an 
insurance company (or any other type of company) that is a BHC, 
SLHC, or supervised nonbank company (Board-regulated company), 
or for a Board-regulated company that has an insurance company 
subsidiary. In addition, because the calculation of insured 
depository institution capital requirements begins with GAAP 
measurements, and because statutory accounting is on a legal 
entity rather than a consolidated basis, consideration of 
accounting methods is part of the analysis in determining 
whether capital regulations meet the requirements of section 
171 of the Dodd-Frank Act.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
                      FROM JANET L. YELLEN

Q.1. Was there any task more important for the Fed since the 
1930s than understanding the financial system, understanding 
the financial institutions which were using more and more 
leverage and building massive opaque books of complicated 
derivatives positions, and heading off the next financial 
collapse? Fed minutes from 2006 and 2007 show that the Fed did 
not understand the risks of the modern financial system. Now, 
the Fed contends that its policy of quantitative easing does 
not present a serious inflation risk. However, considering the 
failure of the Federal Reserve to anticipate broad changes in 
the economy--including the 2008 financial crash and the worst 
recession in 50 years--why should Americans have confidence in 
that judgment?

A.1. Americans can be confident that the FOMC has both the 
ability and the will to prevent inflation. Everyone on the 
committee, including myself, is firmly committed to our 2 
percent longer-run goal for inflation. Over the past 5 years 
inflation has averaged near, but a bit below, our goal of 2 
percent. More recently, inflation has generally been running 
more significantly below our 2 percent objective, and falling 
inflation has been a concern.
    At some point as economic conditions normalize, maintaining 
price stability will require removing accommodation. At that 
time, the Federal Reserve will tighten the stance of monetary 
policy by raising its target for the Federal funds rate and the 
interest rate it pays on reserve balances, which will put 
upward pressure on short-term market interest rates to avoid an 
overheated economy and higher-than-target inflation in the 
historically normal and well understood way. The Federal 
Reserve has also developed a number of tools that it can use if 
necessary to help keep market rates near the interest rate on 
reserve balances. Moreover, the FOMC intends to gradually 
reduce its securities holdings once the economy is strong 
enough so that it no longer needs the support provided by the 
committee's large scale asset purchases. We are confident we 
have the tools to normalize the stance of policy when doing so 
becomes appropriate, and that we can do so in a way that will 
avoid inflationary consequences down the road.

Q.2. Fiat money is very difficult to preserve in value, and 
generations of central bankers have tried hard to project an 
image of sobriety and proprietary regarding the purchasing 
power of paper money. Do you think the Fed has put at risk the 
confidence of investors and citizens in paper money by its 
zero-percent-interest-rates and successive rounds of QE?

A.2. Investors and citizens can be confident that the FOMC has 
both the will and the ability to prevent rapid inflation. 
Everyone on the committee, including myself, is firmly 
committed to our 2 percent longer-run goal for inflation. The 
FOMC has employed its nontraditional policy tools in order to 
support a stronger recovery and move inflation back toward its 
longer-run goal--that is, to better foster its Congressionally 
established goals of maximum employment and price stability. 
Investors would only have reason to lose confidence in the 
purchasing power of the dollar if inflation had been excessive 
or was at risk of being excessive in the future. However, as 
described in my answer to the previous question, inflation has 
been low in recent years and remains below our 2 percent 
target, and the committee has the tools necessary to remove 
policy accommodation when doing so becomes appropriate.

Q.3. Are the Fed's statements that it could snuff out inflation 
in 15 minutes by raising rates consistent with past historical 
experience? This past spring the mere mention of slightly 
reducing the Fed's pace of bond-buying sent global fixed income 
markets into a panic, and prices of long-term debt reversed 
almost all of the price elevation caused by QE since the spring 
of 2009. It is impossible to know whether this market reaction 
was the beginning of an anticipation of serious inflation, or 
the beginning of a loss of confidence in long-term claims on 
paper money that are seen as being debased by the Fed's 
policies. What do you think about what happened in the markets 
this past spring, and what is the support for the Fed's 
statement that if inflation arises, the Fed can get rid of it 
in 15 minutes?

A.3. As you note, last spring, the FOMC provided additional 
information on its expectations regarding its purchase program, 
suggesting a conditional outlook for reductions in the pace of 
purchases. That outlook was explicitly conditional on economic 
and financial developments--our purchases are by no means on a 
preset course. Partly in response to the information the 
committee provided about the possible path for policy, but also 
reflecting some strengthening in the economic data at that 
time, interest rates rose. In addition, some investors who had 
taken on leveraged positions in longer-term instruments 
reportedly decided to exit those positions, putting additional 
upward pressure on rates. However, measures of inflation 
expectations, such as the difference between yields on nominal 
Treasury securities and those on Treasury Inflation Protected 
Securities, did not change appreciably and remained close to 2 
percent, indicating that investors did not anticipate high 
inflation.
    As I noted above, the FOMC is firmly committed to its 2 
percent longer-run goal for inflation. The committee has the 
tools it needs to address incipient inflation risks, should 
they develop, and it can take steps to address unwelcome 
increases in inflation very rapidly if required. Such steps 
would include increases in our target for the Federal funds 
rate and in the interest rate paid on reserve balances as well 
as the use of other tools to tighten the relationship between 
short-term market interest rates and the rate paid on reserves.

Q.4. After the first round of the Fed's emergency monetary 
measures to keep the financial system afloat, the threshold for 
additional central bank easing action has become lower and 
lower with successive rounds of QE. As a result, loose central 
bank policies in the U.S., in Japan, and elsewhere, has 
resulted in policy makers relying on monetary policy as a 
substitute for necessary tough decisions to structurally reform 
our tax, spending, and trade policies that would allow for long 
lasting growth. Do you believe it is a critical role of the Fed 
Chair to tell the President and Congress that monetary policy 
can only go so far, and that it is up to the President and 
Congress to do everything they can to remove the impediments to 
strong sustainable growth so that the Fed can discontinue its 
unprecedented monetary accommodations and their associated 
risks?

A.4. Policy makers should understand that monetary 
accommodation is not a panacea, and that other parts of the 
Government need to take the necessary steps to address the 
challenges our economy faces. In particular, I have emphasized 
that it would be helpful to the economy to put in place a 
strategy for fiscal policy that is not as restrictive in the 
near term, but that focuses on the longer-term fiscal issues 
that are at the heart of achieving fiscal sustainability, and 
that over the longer run can boost the capacity of the economy 
through greater national saving, higher investment and, in 
turn, increased productivity and long-run economic growth.

Q.5. The Fed's policies of zero-percent interest rates and QE 
have created a distorted, unfair recovery. Investors in bonds 
and stocks are doing great, with record highs in stock prices 
and very high prices of bonds across the yield curve. At the 
same time, ordinary people are experiencing just about 
recessionary unemployment and underemployment conditions, and 
millions of Americans have become discouraged by long-term 
unemployment and are no longer even looking for work. Moreover, 
QE has boosted the prices of some of the necessities of life 
and has made it impossible for savers to earn a safe fair 
return on their savings, forcing them to take higher risks. 
This set of distortions naturally creates resentment in those 
not experiencing a full economic recovery. Do you count this 
widening of inequality as a cost of QE and zero-percent 
interest rate policy?

A.5. Too many people remain unemployed or have stopped looking 
for work, and the extent of long-term unemployment is still 
very troubling. However, only a stronger economy will allow 
people who need jobs to find them. It is certainly true that 
savers and those who rely on investments such as certificates 
of deposit and Government bonds currently are receiving low 
returns. But savers also participate in the economy in many 
other ways as well. Many are workers or would-be workers, and 
low interest rates boost economic growth and help create jobs 
throughout the economy. Many are borrowers or would-be 
borrowers, and Federal Reserve policy has kept mortgage and 
other interest rates lower than they would have been otherwise, 
helping those who want to buy homes, automobiles, and other 
durable goods. Many are investors in stocks and other financial 
investments, and a stronger economy will naturally generate 
better returns on those other investments. More generally, in 
light of the continued headwinds restraining economic growth, 
the FOMC judges that low interest rates are needed at this time 
to provide support to the ongoing recovery. Unequivocally, the 
goal of our accommodative monetary policy is to foster a more 
rapid return to an economy that works better for everyone, by 
promoting a return to maximum employment in a context of price 
stability.

Q.6. Since 2008, our Nation's largest banks are even larger 
than prior to the crisis, and studies have found they can raise 
money at lower rates due to their TBTF status. A major reason 
these firms retain the perception of TBTF is that even the most 
sophisticated market participants cannot understand the complex 
risks embedded in their derivatives books, which were at the 
heart of the recent crisis and which still contain trillions of 
dollars of potentially volatile positions. In the absence of 
adequate derivatives disclosures, the market will continue to 
lack confidence that these firms are actually safe and sound 
and won't threaten a breakdown of the financial system. Dodd-
Frank gave the Fed vast new powers to end TBTF. A key component 
of ending TBTF is ensuring that the market understands the risk 
exposures of these multi-trillion dollar derivatives books. 
Will you commit to using the Fed's new powers to make sure that 
the market has significantly more robust access to the 
derivatives exposures of financial institutions?

A.6. I agree that TBTF is a damaging economic phenomena, and 
regulators around the world need to work to address TBTF. We 
have made progress in reducing the TBTF problem since the 
financial crisis by reducing the probability of failure of 
systemically important financial institutions (SIFIs), by 
reducing the damage to the system if a SIFI were to fail, and 
by strengthening the broader financial markets and 
infrastructure. For example, we have substantially raised bank 
capital requirements, implemented stress tests for large bank 
holding companies and disclosed results, strengthened our 
approach to large bank supervision, and agreed on new liquidity 
rules for global banking firms. Progress also has been made to 
address the failure of a SIFI, through the resolution planning 
process and through the development of the FDIC's single-point-
of-entry approach to orderly liquidation authority. In 
addition, the Federal Reserve is now required to consider 
financial stability when reviewing merger and acquisition 
applications by bank holding companies. Finally, we have 
strengthened financial markets and infrastructures by, among 
other things, improving the tri-party repo settlement 
infrastructure, strengthening the supervision of financial 
market utilities, moving more over-the-counter derivatives to 
central clearing, and substantially improving transparency in 
the derivatives markets.
    Market participants and some rating agency actions for 
large bank holding companies have recognized this progress. But 
we still have work to do to eliminate residual TBTF subsidies. 
We are committed to that work. If the existing regulatory 
reform efforts in train prove to be insufficient to solve the 
TBTF problem, we are willing to look at the costs and benefits 
of other approaches.
    On the specific issue of disclosure of bank derivatives 
activities, the Federal Reserve has been working in concert 
with other agencies--in particular the CFTC and SEC--to 
implement the broad set of derivatives reforms mandated by the 
Dodd-Frank Act. These reforms should substantially increase 
transparency regarding banking firms' derivatives activities, 
as more derivatives trading takes place through central 
counterparties (CCPs) and data regarding such activity is 
stored and accessible via trade repositories (TRs). This 
information should augment existing data on firms' derivatives 
activities publicly disclosed in regulatory filings (e.g., Y-
9Cs and 10-K/Qs).
    In addition, firms' derivatives exposures are included in 
the Federal Reserve's Dodd-Frank Act Stress Test and 
Comprehensive Capital Analysis and Review (CCAR) exercises, the 
results of which are released publicly each year.
    The Federal Reserve has a long history of supporting 
enhancements in bank disclosure practices.

Q.7. The Bank for International Settlements noted in its annual 
report that ``in the years ahead, exiting from the 
extraordinarily accommodative policy stance will raise 
significant challenges for central banks. They will need to 
strike the right balance between the risks of exiting 
prematurely and the risks associated with delaying exit 
further. While the former are well understood, it is important 
not to be complacent about the latter just because they have 
not yet materialized.'' Do you believe there could be a 
tendency to delay exiting because the risks related to waiting 
too long (asset bubbles, inflation, misallocation of credit) 
are not clear until it is too late?

A.7. There are risks associated with both keeping monetary 
policy accommodative for too long and tightening policy too 
soon. As you note, keeping policy accommodative for too long 
could result in an unwelcome increase in inflation and could 
encourage excessive risk-taking that might eventually lead to 
financial instability. Tightening policy too soon could cut off 
an incipient strengthening of the recovery, preventing a 
beneficial decrease in unemployment, and possibly causing 
inflation to move further below the FOMC's target of 2 percent. 
In order to determine the appropriate setting of monetary 
policy, the Federal Reserve assesses the outlook for economic 
conditions as well as the risks around that outlook on an 
ongoing basis.
    I agree that there are unique risks associated with the 
unconventional monetary policy instruments the FOMC is 
currently employing, including its large-scale asset purchases 
and forward guidance for the Federal funds rate, but I do not 
believe those risks result in a tendency for the FOMC to keep 
policy accommodative for too long. The Federal Reserve is 
carefully monitoring the sources of risk associated with 
accommodative policy. In particular, the Federal Reserve has 
increased considerably the resources it is devoting to 
monitoring risks to financial stability. While there are 
currently some indications of ``reach for yield'' in the low-
rate environment, there does not appear to be a widespread 
increase in excessive risk taking.
    It is important to note that there are also unique risks 
associated with removing policy accommodation too soon because 
of the current policy situation. Indeed, I think the best way 
to bring about an expeditious end to unconventional monetary 
policy is to avoid a premature removal of accommodation.

Q.8. In a speech this spring, Fed Board Governor Jeremy Stein 
indicated that certain sectors of the credit market are showing 
signs of overheating due to the extended period of low interest 
policy. He noted these risks are developing in the corporate 
junk bond markets, the mortgage REIT sector, and commercial 
bank securities, and he concluded that these risks may need to 
be dealt with through rate increases. FSOC also identified the 
extended period of low-interest as potentially causing banks to 
push further out along the risk curve to ``reach for yield,'' 
increasing credit risk for near-term earnings but sacrificing 
long term stability in the event of a sudden large rise in 
rates or widening in credit spreads. Do your views of the 
overheating of certain markets differ from Governor Stein's? Do 
you believe there is a potential that we can experience a boom 
and bust in asset prices without ever experiencing a full 
economic recovery?

A.8. We follow a great many markets and overall, I do not think 
we see very much evidence of troubling excesses. I agree with 
Governor Stein, however, that we saw some issues in some 
markets this spring and that these warrant careful monitoring. 
The rise in interest rates over the summer may have helped 
reign in some behavior that might otherwise have grown even 
more concerning. Still we continue to monitor a number of 
areas. We are mindful of the fact that financial excesses can 
appear even before a full recovery is complete.
    As Governor Stein noted, we have a number of tools for 
dealing with such problems should they reach the point that a 
response is required. My preferred first lines of defense 
involve supervisory and regulatory tools. This is because 
monetary policy is a very blunt tool for addressing excesses in 
particular markets. Raising the price of credit for everyone in 
the economy may help to reign in some troubling behavior, but 
would also impose costs on all those behaving prudently. Thus, 
while it is important to maintain the monetary policy option 
for dealing with financial excesses, I believe it should be a 
backstop used if more directed approaches fail.

Q.9. How much are the Fed's tools to lower interest rates to 
stimulate consumer spending on durable goods and mortgages 
diminished by the fact that the private sector is deleveraging 
from recent overleveraging and massive asset bubbles? To what 
extent is incentivizing consumer debt counterproductive to a 
stable long-run economy? How could fixing our fiscal, tax, and 
regulatory policies impact the economy as compared to 
accommodative monetary policies?

A.9. One key factor shaping the contours of the recovery has 
been the effort of the private sector to reduce its leverage. 
Substantial progress in that direction has been accomplished, 
and that progress helps lay the groundwork for a more secure 
economic expansion going forward. Another important factor 
helping to lay that groundwork is a highly accommodative 
monetary policy. These factors are complementary, in that they 
both help to boost consumer confidence, boost hiring above 
where it would otherwise be, and increase business demand for 
capital. That said, monetary policy is not a panacea, and 
policy makers of all types should be endeavoring to align their 
policies similarly toward bolstering the recovery and ensuring 
a solid foundation for growth and stability going forward.


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