[Senate Hearing 113-329]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 113-329


         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

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

                                HEARING

                               before the

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

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 THE FEDERAL RESERVE SYSTEM'S SEMIANNUAL MONETARY POLICY REPORT TO THE 
                                CONGRESS

                               __________

                           FEBRUARY 27, 2014

                               __________

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


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

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

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                   Glen Sears, Deputy Policy Director

         Brett Hewitt, Policy Analyst and Legislative Assistant

                  Greg Dean, Republican Chief Counsel

             Mike Lee, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                       Taylor Reed, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
















                            C O N T E N T S

                              ----------                              

                      THURSDAY, FEBRUARY 27, 2014

                                                                   Page

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

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

                                WITNESS

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve 
  System.........................................................     3
    Prepared statement...........................................    37
    Responses to written questions of:
        Senator Hagan............................................    41
        Senator Vitter...........................................    42
        Senator Toomey...........................................    43
        Senator Coburn...........................................    46

              Additional Material Supplied for the Record

Monetary Policy Report to Congress dated February 11, 2014.......    49

                                 (iii)

 
         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

                              ----------                              


                      THURSDAY, FEBRUARY 27, 2014

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:04 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order. We welcome 
Dr. Janet Yellen as Chair to deliver the Federal Reserve's 
semiannual Monetary Policy Report. Chair Yellen, I would like 
to congratulate you on your nomination and confirmation. In 
fact, this month's hearings are historic--the first time that a 
woman is delivering the Fed's semiannual Report to Congress.
    Chair Yellen, you have a lot of important issues to focus 
on as Chair, including continued implementation of Wall Street 
Reform, establishing policies to improve financial stability 
and reduce systemic risk, and providing appropriate monetary 
policy to support our economy. Overall, I am encouraged by the 
recent improvements in the economy. It appears that economic 
growth is picking up, and many mainstream economists expect 
stronger growth this year. This is good news.
    However, I am concerned that the economic recovery is not 
being felt by every American. Too many cities and towns across 
America have not fully recovered from the Great Recession and 
continue to struggle. Long-term unemployment remains 
historically high, and we see recent college graduates, many of 
whom are burdened by high student loan debt, have a tough time 
finding work. Income inequality is becoming more severe, and 
more families are being squeezed out of the middle class. As 
such, and while inflation remains weak, I caution the Fed not 
to move too quickly to exit from its current policies until we 
are on solid footing and the recovery is more widespread.
    While the Fed's policies have helped the recovery, the Fed 
can only do so much. Congress needs to act to ensure that the 
recovery is more widespread and that generations of Americans 
are not shut out of economic opportunity. We cannot solve our 
fiscal problems by imposing immediate and arbitrary cuts, and 
we need to invest in the economy today to ensure future 
prosperity. It is important we implement policies that work 
alongside monetary policy to help get more Americans back to 
work.
    Chair Yellen, I look forward to hearing your thoughts on 
the decision to taper asset purchases, how recent Fed actions 
are affecting the economy, and where the economy is heading.
    I now turn to Ranking Member Crapo for his opening 
statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman, and welcome also, 
Chair Yellen, on your first appearance before this Committee as 
the Chair of the Federal Reserve Board of Governors.
    Today's hearing is an important opportunity to examine the 
current state of monetary policy. Since your confirmation 
hearing in November, the Fed has begun the process of tapering 
its quantitative easing purchases. The pace of quantitative 
easing purchases has come down by $20 billion. This is a 
welcome development for those of us who disagree with the 
Federal Reserve's quantitative easing policy and prefer to see 
QE purchases end entirely later this year.
    By the time the Fed stops expanding its balance sheet, it 
will hold well over $4 trillion in Treasury and mortgage-backed 
securities. Former Chairman Bernanke and others have suggested 
that the Fed might maintain the expanded size of the balance 
sheet for some time rather than promptly reducing it. This 
would mean that the reserves created on the Bank's balance 
sheets to purchase those assets would remain in the financial 
system. Richmond Fed President Jeffrey Lacker has called these 
high excess reserves ``tinder on the books of the banking 
system.'' The Fed will have to be vigilant to ensure that the 
tools they have identified to manage the wind-down are 
sufficient to prevent market disruptions.
    These unconventional monetary policy tools have, in my 
opinion, failed to produce the promised benefits as noted 
economists recently observed that over the last 4 years the 
share of adults who are working has not increased and GDP has 
fallen further behind potential as we would have defined it in 
the fall of 2009. All that is to say that, despite 
unprecedented amounts of monetary intervention and record low 
interest rates, businesses have not responded by hiring new 
workers.
    Dr. Yellen, in your confirmation hearing, you commented on 
the need to monitor the costs and risks to financial stability 
that current monetary policy creates. You also stated that you 
believe monetary policy is most effective when the public 
understands what the Fed is trying to do and how it plans to do 
it.
    I appreciate your commitment to openness and transparency. 
I look forward to your thoughts as to how the Fed will manage a 
return to normalized monetary policy and how you will 
communicate that transition to the public.
    I also look forward to learning more about your perspective 
on the implementation of the Dodd-Frank Act and how different 
rules interact with each other and their impact on the economy 
at large. Because of the size and complexity of these rules, it 
is paramount that the regulators strike the right balance 
without unduly harming the economy. This was evident most 
recently in December with the final Volcker rule and its 
unintended and disproportionate effect on community banks with 
respect to their holdings of trust preferred collateral debt 
obligations.
    The economic impact of the recently finalized Fed rule that 
imposed heightened capital requirements on foreign banks doing 
business in the United States is yet to be seen. Earlier 
reports indicate that some foreign banks are moving their 
assets outside the United States, taking their market 
activities to friendlier jurisdictions.
    As you continue with the rulemaking process, I encourage 
you to do so without placing the U.S. markets at a competitive 
disadvantage or putting out of business smaller firms that are 
no threat to our financial security. I certainly hope that you 
will work with Congress to identify statutory ambiguities in 
Dodd-Frank that prevent the Fed from doing the right thing.
    And, lastly, we still have the Government conservatorship 
of Fannie Mae and Freddie Mac, which will create a long-term 
market distortion in this crucial segment of the U.S. economy. 
I look forward to hearing your thoughts on the need for this 
reform and bringing this 5-year ordeal to a close.
    Again, welcome, Chair Yellen, and I look forward to your 
testimony.
    Chairman Johnson. Thank you, Senator Crapo.
    To preserve time for questions, opening statements will be 
limited to the Chair and Ranking Member.
    I would like to remind my colleagues that the record will 
be open for the next 7 days for additional statements and other 
materials.
    I would like to welcome Chair Yellen. Dr. Yellen is serving 
her first term as Chair of the Board of Governors of the 
Federal Reserve System. She was sworn into office earlier this 
month. Before that, Dr. Yellen served as Vice Chair and Member 
of the Board of Governors of the Federal Reserve System. She 
was also previously Chair of the Council of Economic Advisers.
    Chair Yellen, please begin your testimony.

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

    Ms. Yellen. Chairman Johnson, Senator Crapo, and other 
members of the Committee, I am pleased to present the Federal 
Reserve's semiannual Monetary Policy Report to the Congress. In 
my remarks today, I will discuss the current economic situation 
and outlook before turning to monetary policy. I will conclude 
with an update on our continuing work on regulatory reform.
    First, let me acknowledge the important contributions of 
Chairman Bernanke. His leadership helped make our economy and 
financial system stronger and ensured that the Federal Reserve 
is transparent and accountable. I pledge to continue that work.
    The economic recovery gained greater traction in the second 
half of last year. Real gross domestic product is currently 
estimated to have risen at an average annual rate of more than 
3 \1/2\ percent in the third and fourth quarters, up from a 1 
\3/4\ percent pace in the first half. The pickup in economic 
activity has fueled further progress in the labor market. About 
1-\1/4\ million jobs have been added to payrolls since the 
previous Monetary Policy Report last July, and 3 \1/4\ million 
have been added since August 2012, the month before the Federal 
Reserve began a new round of asset purchases to add momentum to 
the recovery. The unemployment rate has fallen nearly a 
percentage point since the middle of last year and 1 \1/2\ 
percentage points since the beginning of the current asset 
purchase program. Nevertheless, the recovery in the labor 
market is far from complete. The unemployment rate is still 
well above levels that the Federal Open Market Committee 
participants estimate is consistent with maximum sustainable 
employment. Those out of a job for more than 6 months continue 
to make up an unusually large fraction of the unemployed, and 
the number of people who are working part-time but would prefer 
a full-time job remains very high. These observations 
underscore the importance of considering more than the 
unemployment rate when evaluating the condition of the U.S. 
labor market.
    Among major components of GDP, household and business 
spending growth stepped up during the second half of last year. 
Early in 2013, growth in consumer spending was restrained by 
changes in fiscal policy. As this restraint abated during the 
second half of the year, household spending accelerated, 
supported by job gains and by rising home values and equity 
prices. Similarly, growth in business investment started off 
slowly last year, but then picked up during the second half, 
reflecting improved sales prospects, greater confidence, and 
still favorable financing conditions. In contrast, the recovery 
in the housing sector slowed in the wake of last year's 
increase in mortgage rates.
    Inflation remained low as the economy picked up strength, 
with both the headline and core personal consumption 
expenditures, or PCE, price indexes rising only about 1 percent 
last year, well below the Federal Open Market Committee's 2-
percent objective for inflation over the longer run. Some of 
the recent softness reflects factors that seem likely to prove 
transitory, including falling prices for crude oil and declines 
in non-oil import prices.
    My colleagues on the FOMC and I anticipate that economic 
activity and employment will expand at a moderate pace this 
year and next, the unemployment rate will continue to decline 
toward its longer-run sustainable level, and inflation will 
move back toward 2 percent over coming years. We have been 
watching closely the recent volatility in global financial 
markets. Our sense is that at this stage these developments do 
not pose a substantial risk to the U.S. economic outlook. We 
will, of course, continue to monitor the situation.
    Mr. Chairman, let me add as an aside that, since my 
appearance before the House Committee, a number of data 
releases have pointed to softer spending than many analysts had 
expected. Part of that softness may reflect adverse weather 
conditions, but at this point, it is difficult to discern 
exactly how much. In the weeks and months ahead, my colleagues 
and I will be attentive to signals that indicate whether the 
recovery is progressing in line with our earlier expectations.
    Turning to monetary policy, let me emphasize that I expect 
a great deal of continuity in the FOMC's approach to monetary 
policy. I served on the Committee as we formulated our current 
policy strategy, and I strongly support that strategy, which is 
designed to fulfill the Federal Reserve's statutory mandate of 
maximum employment and price stability.
    Prior to the financial crisis, the FOMC carried out 
monetary policy by adjusting its target for the Federal funds 
rate. With that rate near zero since late 2008, we have relied 
on two less traditional tools--asset purchases and forward 
guidance--to help the economy move toward maximum employment 
and price stability. Both tools put downward pressure on 
longer-term interest rates and support asset prices. In turn, 
these more accommodative financial conditions support consumer 
spending, business investment, and housing construction, adding 
impetus to the recovery.
    Our current program of asset purchases began in September 
2012 amid signs that the recovery was weakening and progress in 
the labor market had slowed. The Committee said that it would 
continue the program until there was a substantial improvement 
in the outlook for the labor market in a context of price 
stability. In mid-2013, the Committee indicated that if 
progress toward its objectives continued as expected, a 
moderation in the monthly pace of purchases would likely become 
appropriate later in the year. In December, the Committee 
judged that the cumulative progress toward maximum employment 
and the improvement in the outlook for labor market conditions 
warranted a modest reduction in the pace of purchases, from $45 
billion to $40 billion per month of longer-term Treasury 
securities and from $40 billion to $35 billion per month of 
agency mortgage-backed securities. At its January meeting, the 
Committee decided to make additional reductions of the same 
magnitude. If incoming information broadly supports the 
Committee's expectation of ongoing improvement in labor market 
conditions and inflation moving back toward its longer-run 
objective, the Committee will likely reduce the pace of asset 
purchases in further measured steps at future meetings. That 
said, purchases are not on a preset course, and the Committee's 
decisions about their pace will remain contingent on its 
outlook for the labor market and inflation as well as its 
assessment of the likely efficacy and costs of these purchases.
    The Committee has emphasized that a highly accommodative 
policy will remain appropriate for a considerable time after 
asset purchases end. In addition, the Committee has said since 
December 2012 that it expects the current low target range for 
the Federal funds rate to be appropriate at least as long as 
the unemployment rate remains above 6 \1/2\ percent, inflation 
is projected to be no more than a half percentage point above 
our 2-percent longer-run goal, and longer-term inflation 
expectations remain well anchored. Crossing one of these 
thresholds will not automatically prompt an increase in the 
Federal funds rate, but will instead indicate only that it had 
become appropriate for the Committee to consider whether the 
broader economic outlook would justify such an increase. In 
December of last year and again this January, the Committee 
said that its current expectations--based on its assessment of 
a broad range of measures of labor market conditions, 
indicators of inflation pressures and inflation expectations, 
and readings on financial developments--is that it likely will 
be appropriate to maintain the current target range for the 
Federal funds rate well past the time that the unemployment 
rate declines below 6 \1/2\ percent, especially if projected 
inflation continues to run below the 2-percent goal. I am 
committed to achieving both parts of our dual mandate: helping 
the economy return to full employment and returning inflation 
to 2 percent while ensuring that it does not run persistently 
above or below that level.
    I will finish with an update on progress on regulatory 
reforms and supervisory actions to strengthen the financial 
system. In October, the Federal Reserve Board proposed a rule 
to strengthen the liquidity positions of large and 
internationally active financial institutions. Together with 
other Federal agencies, the Board also issued a final rule 
implementing the Volcker rule, which prohibits banking firms 
from engaging in short-term proprietary trading of certain 
financial instruments. In addition, we recently finalized the 
rules implementing enhanced prudential standards, mandated by 
Section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. On the supervisory front, the next round of 
annual capital stress tests of the largest 30 bank holding 
companies is underway, and we expect to report results in 
March.
    Regulatory and supervisory actions, including those that 
are leading to substantial increases in capital and liquidity 
in the banking sector, are making our financial system more 
resilient. Still, important tasks lie ahead. We are working to 
finalize the proposed rule, strengthening the leverage ratio 
standards for U.S.-based, systemically important global banks. 
We expect to issue proposals for a risk-based capital surcharge 
for those banks as well as for a long-term debt requirement to 
help ensure that these organizations can be resolved. In 
addition, we are working to advance proposals on margins for 
noncleared derivatives, consistent with a new global framework, 
and are evaluating possible measures to address financial 
stability risks associated with short-term wholesale funding. 
We will continue to monitor for emerging risks, including 
watching carefully to see if the regulatory reforms work as 
intended.
    Since the financial crisis and the depths of the recession, 
substantial progress has been made in restoring the economy to 
health and in strengthening the financial system. Still, there 
is more to do. Too many Americans remain unemployed, inflation 
remains below our longer-term objective, and the work of making 
the financial system more robust has not yet been completed. I 
look forward to working with my colleagues and many others to 
carry out the important mission you have given the Federal 
Reserve.
    Thank you. I would be pleased to take your questions.
    Chairman Johnson. Thank you, Chair Yellen.
    As we begin questions, I will ask the clerk to put 5 
minutes on the clock for each member.
    Chair Yellen, with inflation low and unemployment so high, 
does that give the Fed some room to continue promoting full 
employment?
    Ms. Yellen. Chairman Johnson, yes, it certainly does give 
us room to continue promoting full employment, and we have 
committed to do so and have made clear that we see an 
accommodative monetary policy as remaining appropriate for 
quite some time. There is no conflict at all at the moment 
between the two goals that Congress has assigned to us of 
promoting maximum employment and price stability. Inflation is 
running well below our 2-percent target, and as you indicated, 
that gives us ample scope to continue to try to promote a 
return to full employment, and we are committed to doing that.
    Chairman Johnson. Chair Yellen, what approach is the Fed 
taking with respect to insurance companies under the new rules 
implementing Section 165 of Dodd-Frank? How would this interact 
with rules on capital requirements for insurance companies 
under the Collins amendment?
    Ms. Yellen. Senator, we are looking very carefully to 
design an appropriate set of rules for companies with important 
involvement in insurance. We recognize that there are very 
significant differences between the business models of 
insurance companies and the banks that we supervise, and we are 
taking the time that is necessary to understand those 
differences and to attempt to craft a set of capital and 
liquidity requirements that will be appropriate to the business 
model of insurance companies.
    I would say, however, that the Collins amendment does 
restrict what is possible for the Federal Reserve in designing 
an appropriate set of rules. So it does pose some constraints 
on what we can do, and we will do our very best to craft an 
appropriate set of rules subject to that constraint.
    Chairman Johnson. In what ways could the FSOC make the SIFI 
designation process more transparent?
    Ms. Yellen. So on this one, Senator, I would say that I 
think FSOC really has provided the public with a good deal of 
information about the criteria that it is using, the general 
criteria that it has established for attempting to determine 
whether or not an institution and organization should be 
designated as a SIFI. And in the cases of those organizations 
where it has made a designation, it has really provided a 
wealth of information about those organizations.
    There are also opportunities for companies that want to 
contest designation to have an appeals process, so there is 
really a well-worked-out process.
    Now, as the FSOC goes on to consider other possible firms 
for designation, if it decides to use a different set of 
criteria, I think it is completely appropriate that the FSOC 
should also make clear if new criteria are being used to govern 
designations.
    Chairman Johnson. How has the recovery impacted wages and 
income inequality? And if so, what can Congress do to address 
this major problem?
    Ms. Yellen. Well, Senator, I think the issues of income 
inequality, of rising income inequality in this country really 
date back many decades, probably to the mid-1980s, when we 
began to see a very substantial widening of wage gaps between 
more skilled and less skilled workers, and this is a trend 
that, unfortunately, has continued almost unabated for the last 
30 years. Economists have debated exactly what the causes are, 
but technological change and globalization play a role.
    However, I think it is clear that the recession has placed 
an extremely high toll particularly and special burdens on 
lower-income workers. Those workers and less educated workers 
have seen their unemployment rates rise disproportionately 
during the downturn, and so households and segments of our 
population that had already been suffering stagnant or 
declining incomes for many years have seen the recession take a 
large toll.
    So there really has been a very large burden, and it is our 
objective to try to get the economy back to full employment to 
alleviate that portion of the burden. Things like education and 
training I think are on every economist's list of actions that 
Congress could take. Early childhood education, training more 
generally, those things certainly, and others Congress could 
consider to address these important issues.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman. And, Chair Yellen, 
again, welcome to the Committee.
    Ms. Yellen. Thank you.
    Senator Crapo. I appreciated your comments a couple weeks 
ago to the House Financial Services Committee when you 
discussed GSE reform. At that point you said that we still have 
a system that has systemic risk. Reforming Fannie and Freddie 
is a priority for this Committee, and I would like to ask you 
to just take a couple of brief moments to discuss the need to 
bring private capital back into the market.
    Ms. Yellen. Well, Senator, I strongly support and would 
urge the Congress to address the issue of GSE reform. We have 
gotten a mortgage system that in a de facto sense remains very 
highly dependent on Government backing, and it fails to meet 
the very important objective of successful securitization 
without systemic risk.
    There are a number of different ways in which Congress 
could proceed with GSE reform, depending on your assessment of 
appropriate priorities, but in my personal view, it is simply 
very important for Congress to decide explicitly what the role 
of the Government should be in housing finance, and there are a 
lot of possible choices available.
    I think in terms of bringing private capital back into the 
market, we now have a system where almost all mortgages that 
are being granted in this country have Government backing 
associated with it, and I think to see private capital return 
in meaningful amounts to the mortgage industry, clarifying the 
rules of the road, is important. So I would certainly urge 
Congress to proceed in this area.
    Senator Crapo. Thank you. I agree with you and appreciate 
your observations at this point.
    As I stated in my opening statement, I am very concerned 
about Dodd-Frank implementation, and I certainly hope that you 
will clearly communicate with Congress if there are statutory 
ambiguities or obstacles that prevent the Fed from doing the 
right thing when promulgating regulations. And in that context, 
I would just like to ask if you agree. When Chairman Bernanke 
was before us last year, I think it was, I asked him this same 
question. But I would like to know if you agree with him that 
the areas of the end users, swaps pushouts, and reducing the 
regulatory burden on community banks are areas in which we need 
additional statutory attention to getting it right.
    Ms. Yellen. So the three areas that you mentioned are ones 
that are high on our list of concerns, areas that we are 
looking at ourselves. And as we design the Dodd-Frank 
regulations, in all of these areas we are doing our very best 
to address in these areas you have mentioned issues that have 
been raised and that we consider quite appropriate. It makes 
sense to me that Congress should consider these areas as well. 
I want to assure you that we will do our best in writing 
regulations in these areas, however, to address the concerns 
that have been raised.
    Senator Crapo. Well, thank you, and I appreciate your 
attention to it. I also believe that you need additional 
clarification and strength in the statute to do it right, and I 
hope that we will be able to provide that from Congress.
    Next, in numerous hearings last year, it was revealed that 
we need better international coordination on cross-border 
issues to ensure that there are no undue interruptions in the 
financial system. Immediately after the Fed finalized its 
Section 165 proposal for foreign banking organizations last 
week, European Commissioner Michel Barnier's office issued a 
statement that the Fed's rule conflicts with the international 
standards on cross-border cooperation in bank resolution.
    What concrete steps are you taking to ensure effective 
coordination with your foreign counterparts to create a 
complementary regulatory regime?
    Ms. Yellen. Well, cooperation with our counterparts 
globally has been a core part of our approach to strengthening 
the financial system and putting in place regulations under 
Dodd-Frank. So we are very actively engaged through the 
Financial Stability Board, through the Basel Committee, through 
the relations we have with insurance regulators, attempting to 
craft regulations in all areas that are consistent globally and 
that mesh together as a successful system.
    In the area of foreign banking organizations in our rule 
writing which we finalized, I guess the week before last, on 
Section 165, we faced important tradeoffs. The role of large 
foreign banking organizations in our capital markets has 
changed dramatically over the last 20 years. These 
organizations are among the largest and most systemically 
important organizations in the U.S. financial system, and we 
tried to write a set of rules that provide a level playing 
field for both U.S. organizations and foreign banking 
organizations doing business in the United States. And the 
rules that we put in place I believe are really quite similar 
to what our own banking organizations face when they do 
business abroad.
    So we have tried to construct a set of rules that preserve 
the opportunity for cross-border international global capital 
flows. Branches and agencies of foreign banking organizations 
can continue to operate without separate capital requirements 
in the United States. But it was important to put in place a 
set of rules directed to financial stability of our own 
markets.
    Senator Crapo. Thank you very much.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
welcome, Madam Chair.
    The Open Market Committee has several times made the point 
that we seem to be operating a cross purposes. As the Federal 
Reserve is pursuing an expansive monetary policy, we are 
pursuing a very restricted fiscal policy. It would seem to me 
that if we were in harmony or complementary, it would be better 
for the overall economy. There are several examples. Our 
current debate about unemployment compensation, most objective 
observers would suggest that could add anywhere from 180,000 to 
200,000 jobs to our economy, and at the same time helping 
people who need help.
    We are in the throes of trying to figure out if we are 
going to actually fund our highway system after next September, 
which is, again, another example of how fiscal policy could aid 
your efforts.
    Can you comment on this apparent cross-purpose activity?
    Ms. Yellen. So fiscal policy really has been quite tight 
and has imposed a substantial drag on spending in the U.S. 
economy over the last several years. The CBO estimated that 
last year the fiscal policy drag probably subtracted a 
percentage point and a half from growth. The drag is likely to 
lessen substantially during the current year, but nevertheless, 
there remains some drag.
    And, of course, it is true that because there has been 
fiscal policy drag, the burden on monetary policy has been 
larger. This is true not only in the United States but in a 
number of advanced countries in Europe and in Japan as well.
    My predecessor has always urged Congress recognizing that 
there are substantial long-term budget deficit issues and need 
for a sustainable fiscal path for the country to focus to the 
maximum extent possible on fiscal changes that would address 
the longer-run issues that will be associated with a rising 
debt-to-GDP ratio over decades and to try to avoid doing harm 
to the recovery. And I would take the same general position.
    Senator Reed. But in the short run, there is a value of 
additional fiscal stimulation in the economy that will 
complement what you are already doing and also make it easier 
for you to begin to withdraw the quantitative easing. Is that a 
fair comment?
    Ms. Yellen. Well, I do think the economy is beginning to 
recover, and we have made progress. And, you know, at a minimum 
I would hope that fiscal policy would do no harm.
    Senator Reed. Just one other quick question. You have and 
your predecessors have looked at an unemployment rate of 6.5 
percent as sort of a point of inflection, if you will. But one 
of the aspects of the current employment situation is that 
labor force participation is falling, and so that 6.5 percent 
might not actually capture sort of the reality of the current 
economy and be an adequate sort of measure when you should 
begin or how you should begin to undertake fiscal easing--
quantitative easing, excuse me.
    So are you looking at other ways or looking beyond just the 
simple unemployment rate to gauge your actions?
    Ms. Yellen. So, Senator, let me first say that 6.5 percent 
unemployment is not the Committee's definition of what 
constitutes full employment. The range of views on that among 
Committee members is substantially lower. The central tendency 
is, you know, under 6 percent. So 6.5 was simply meant to be 
the Committee saying, look, if the unemployment rate is above 
that, we see absolutely no need to consider any possibility of 
raising rates. Below that, we begin to look more carefully. And 
as we do so, of course, the unemployment rate is not a 
sufficient statistic to measure the health of the labor market. 
An additional 5 percent, an unusually high fraction of our 
labor force, is working part-time for economic reasons, which 
means they are unable to get full-time work but want it. That 
is an additional 7 million-plus Americans who were 
involuntarily employed part-time, and we have an unusually high 
fraction of Americans who were unemployed and have been for 
substantial amounts of time.
    So, you know, as we go to a fuller consideration of how is 
the labor market performing, we need to take all of those 
things into account.
    Senator Reed. Thank you, Madam Chair.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you. Thank you, Chairman Yellen, for 
being here with us, and congratulations.
    I want to talk to you a little about the portfolio of the 
Fed that has been mentioned. I understand it is about $4 
trillion at the moment. You have tapered off some, the Fed 
Board of Governors. You are still buying at the current rate, 
about 65 billion a month. So at that rate, if you do not taper 
substantially or stop, you will be getting up toward $5 
trillion at the end of the year, or less. Is that correct?
    Ms. Yellen. Well, we are as you say, we are around $4 
trillion and continuing to buy----
    Senator Shelby. Now, but you are getting up to $5 trillion 
at the rate you are buying.
    Ms. Yellen. If we do not continue to taper.
    Senator Shelby. But even if you taper and you continue to 
buy, like if you taper down from 65 to 50, that is still 
substantial buying in the market, is it not?
    Ms. Yellen. It is. I mean, we have indicated that if the 
economy progresses as we anticipate, we expect to continue 
reducing the pace of purchases in measured steps, which would 
mean ending completely the purchases winding down and ending 
some time next fall.
    Senator Shelby. In your portfolio, are there mainly 
Treasurys and mortgage-backed securities? Is that what the 
portfolio consists of?
    Ms. Yellen. Yes.
    Senator Shelby. What is the relative ratio of that, one to 
the other? Relatively, just an educated guess.
    Ms. Yellen. I believe we have a larger quantity of 
Treasurys than mortgage-backed securities.
    Senator Shelby. Can you furnish that? Do you want to look 
at it or do you want to furnish that for the record.
    Ms. Yellen. I will be happy to furnish the exact numbers to 
you for the record.
    Senator Shelby. To unwind a portfolio of that size, which 
is unprecedented, Chairman Bernanke has told us before that it 
would be a big challenge. Do you agree with that?
    Ms. Yellen. We do not need to and have no intention of 
quickly winding down that portfolio.
    Senator Shelby. Will you--is it your plan to keep some of 
the mortgage-backed securities and Treasurys to maturity?
    Ms. Yellen. So we have indicated that we have no intention 
of selling mortgage-backed securities. They will--I think when 
we begin the process of normalizing monetary policy, of wanting 
to tighten monetary policy, we will have a look at permitting 
runoff out of our portfolio as these securities mature. And 
allowing runoff, we would bring down our portfolio over time.
    Senator Shelby. Slowly.
    Ms. Yellen. Slowly, even without sales. And I think my 
predecessor has emphasized, and I agree, there is no need to 
bring down the size of our portfolio in order to tighten 
monetary policy. We have a range of tools that we can use to 
raise the level of short-term interest rates at the time that 
the Committee deems it appropriate to begin to tighten monetary 
policy conditions. Now, that is a way off, but we continue to 
develop tools to make sure that we have an arsenal of tools to 
be able to, as appropriate, tighten conditions and not have to 
do asset sales or manage our portfolio in any way that would be 
disruptive to financial markets.
    Senator Shelby. If I can shift now to the regulatory side 
of your duties here as Chair of the Fed Board of Governors, 
Basel III is supposed to be in effect, is it not, in 2015? It 
is 2015?
    Ms. Yellen. I believe----
    Senator Shelby. A lot of them have got to make those 
adjustments for capital, the flexibility of capital liquidity, 
so to speak. Is that correct?
    Ms. Yellen. I believe so.
    Senator Shelby. Now, Senator Crapo mentioned the foreign 
banks and so forth. Will you as a regulator make sure that the 
foreign banks comply with their capital standards just like our 
banks have to do if they are doing business in the United 
States of America?
    Ms. Yellen. Yes, we have said that foreign banking 
organizations that have over $50 billion in size will have to 
form intermediate holding companies and to organize their 
activities other than branch and agency activities in an 
intermediate holding company that will be subject to the same 
regulations as U.S.-based banking organizations. That is the 
essence of the proposal that we finalized 2 weeks ago.
    Senator Shelby. Thank you. My time is up.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you. And thank you, Chair Yellen. 
You are off to a great start as far as I am concerned.
    I just want to make one brief comment. I know that some of 
my colleagues on the other side of the aisle express amazement 
that the Fed would take extraordinary measures to boost growth. 
But if Congress had done more on the fiscal side to deal with 
the damage the economy suffered, the Fed would not have to do 
this, and yet some of the very same Senators and Congress 
Members who block all further needed investments in 
infrastructure and other things that used to have broad 
bipartisan support complain that the Fed is doing too much to 
help the economy, and it is sort of incredulous to me. You do 
not have to comment on that. But what do they expect you to do? 
Do they expect you to just stand here and let the economy get 
even worse, let job growth continue to slow? Fiscal is 
preferred, but it is not available because people have blocked 
it.
    My question, the first one, relates to tapering on the 
economy. I know you testified you were surprised--those were 
your words--by the data in the jobs reports in December and 
January, but indicated at the time the Fed had no intention of 
altering its tapering program, despite the fact that the 
economy may not be showing the growth you originally 
anticipated. In your analysis of the data since then, have you 
seen any trends or additional information that has led you to 
reconsider slowing or pausing the tapering of the Fed's bond 
buying?
    Ms. Yellen. Well, Senator as I mentioned in my opening 
remarks, we have seen quite a bit of soft data over the last 
month or 6 weeks. It was, you know, the employment report, 
relatively low, below expectation growth in payrolls, and some 
of the housing numbers and retail sales and industrial 
production. So it is really quite a range of data----
    Senator Schumer. Right.
    Ms. Yellen.----that has been soft recently.
    Now, I think it is clear that unseasonably cold weather has 
played some role in much of that. There are many ways in which 
weather would have affected these areas. What we need to do and 
will be doing in the weeks ahead is to try to get a firmer 
handle on exactly how much of that set of soft data can be 
explained by weather and what portion, if any, is due to a 
softer outlook than we would have----
    Senator Schumer. And if it is not mostly weather, would you 
consider pausing or changing the rate of tapering?
    Ms. Yellen. So as we have said in our statement--and I 
would agree--asset purchases are not on a preset course. So if 
there is a significant change in the outlook, certainly we 
would be open to reconsidering. But I would not want to jump to 
conclusions here.
    Senator Schumer. Understood. My next question talks about 
some of the qualitative versus quantitative guidance. Fed 
Reserve President Lockhart said recently, ``For the next couple 
of years, forward guidance may be the lead policy tool, 
arguably the most potent method we have for influencing 
financial conditions and economic results.''
    I appreciate the Fed's use of forward guidance as another 
tool to influence market conditions, but I would like to get 
your thoughts on how it can be most effective.
    Based on the minutes of the last meeting, it seems the FOMC 
had significant discussion about revising down the Fed's 
forward guidance which originally stated it would consider 
raising interest rates once employment fell below the threshold 
of 6.5. In your testimony before the House, you indicated 
earlier this month that the 6.5 threshold would not be the only 
factor that is taken into account. Policymakers would be 
looking at what you called a ``broad range of data'' on labor 
market, job creation, and other indications. So it seems you 
are inclined to offer a more qualitative approach rather than 
the numerical threshold of 6.5.
    Given the stated importance of forward guidance, which it 
is these days more than ever, and the reality that, to be 
effective, the guidance must be trusted by the market, would 
you agree with President Bullard who said he would favor 
discarding numeral thresholds and much more work toward a more 
qualitative approach which would give you more flexibility and 
yet still give the markets guidance?
    Ms. Yellen. So there are many different views on our 
Committee about what the right way is to cast forward guidance, 
and this is something that we have been debating for a long 
time and will undoubtedly continue to discuss as the 
unemployment rate gets closer to this 6.5-percent threshold.
    I think we have already clearly indicated--and I emphasized 
in my testimony--that the unemployment rate is not a sufficient 
statistic for the state of the labor market. There is no hard 
and fast rule about what unemployment rate constitutes full 
employment, and we need to consider a broad range of 
indicators. Many members of the Committee have emphasized this 
point, and it is one I agree with. It moves in the direction of 
qualitative guidance.
    On the other hand, we do want to give markets as much of an 
indication of how we expect to conduct policy as we can. We did 
provide some additional information in December which we 
reiterated in January. What we said was that the Committee, 
based on its full assessment of all of the data on the labor 
market and inflation pressures and inflation expectations, 
financial developments, taking all of that into account, we 
believed that we could only begin to raise our target interest 
rate well past the time that the unemployment rate has declined 
below 6.5 percent, and we said that that was true especially if 
inflation remained low, because an important factor is that 
inflation is running well below our 2 percent target. So I 
guess this is qualitative guidance, but I feel that what we 
provided then was additional information.
    Senator Schumer. In a sense you moved away from a purely 
quantitative measure and are moving more toward the 
qualitative, which I think is a good thing.
    Thank you.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. I was a little 
surprised at my friend from New York's partisan comments. I can 
only assume he had too much coffee this morning. But it is good 
to see you.
    Senator Schumer. It is a statement of fact about the 
economy. It is not supposed to be partisan.
    Senator Corker. So, Madam Chairman, since it is a the 
first, how would you like to be addressed?
    Ms. Yellen. ``Madam Chair'' is fine or ``Chairman'' will--
--
    Senator Corker. OK, Madam Chair. Very good to have you 
here.
    Ms. Yellen. Thank you.
    Senator Corker. I have met some of the nominees for the Fed 
Board. You and I talked about that a little bit in the back 
room, and I want to say that I am impressed, especially I want 
to make reference to Stanley Fischer. I think you may have had 
something to do with him being nominated. I think the former 
Chairman may have had something to do with that. But very 
impressive person, and I think he is a very good complement to 
your background. So I am glad that he is being put forth and 
look forward to him being confirmed.
    You and I, when we were having the confirmation hearing, 
talked a little bit about financial instability in the hearing, 
and I know there has been a lot of discussion about inflation 
and concerns, and I know Senator Shelby asked you some 
questions about quantitative easing.
    But we addressed in your confirmation process the concern 
about markets overheating and long-term zero interest rate 
policy. Maybe the threat on the front end is not inflation. 
Maybe it is instability in our financial markets, and I am 
wondering if you have seen any signs of that, if you have 
refined any thinking about how you might address that should 
that occur.
    Ms. Yellen. Senator, I agree that an environment of low 
rates, low interest rates, especially when it prevails for a 
long time--and we have had a long period of low interest 
rates--can give rise to behavior that poses threats to 
financial stability. And, therefore, we need to be looking at 
that very carefully, and we are doing so in a very thorough 
way, I believe.
    There are a number of things that we are monitoring: 
measures of asset prices and whether or not they appear to be 
diverging from historical norms, namely, it is hard, but trying 
to spot any asset bubbles, price bubbles that might be 
emerging.
    We are looking at leverage, which buildup in leverage can 
be very dangerous to the financial system and pose stability 
risks. We are looking at trends in leverage. We are looking at 
credit growth to see whether or not that has potentially 
worrisome trends.
    In addition to that, we are looking, particularly through 
our stress tests, at financial institutions. In a low interest 
rate environment, we have to worry about whether or not they 
are appropriately dealing with interest rate risk. We have been 
looking at that, and, in fact, our current stress test includes 
a special portion related to interest rate risk.
    Senator Corker. And as you are looking--I am going to run 
out of time, and our Chairman is very punctual--have you found 
anything yet that gives you concern? And do you have a tool 
with a zero interest rate policy to address that, if you do?
    Ms. Yellen. I would say at this stage broadly I do not see 
concerns, but there are pockets, a few things that we have 
identified that do concern us. For example, underwriting 
standards and leveraged lending clearly appear to be 
deteriorating. We have addressed that with supervisory guidance 
and special exams, and we will continue to be very vigilant in 
that area. That is worrisome to us.
    There are a few areas within asset price valuations. 
Broadly speaking, I would not worry, but there are a few areas 
where I would be concerned. Many people have emphasized 
farmland is a concern, farmland prices.
    So there are a few areas. We have regulatory and 
supervisory tools. To me, they should be the first line of 
defense. But I do not rule out monetary policy.
    Senator Corker. And just if I could--thank you very much 
for that detailed response. We were just in London meeting with 
regulators there, and I know there is a large concern about 
Balkanization of our markets, and I know there was some 
discussion about trying to address that with the EU-U.S. trade 
agreement. I think now that the Administration is not 
interested in that, but I just want to raise that as an issue 
that I think does need to be addressed, and I realize the Fed 
will take, with Tarullo, a major lead in that.
    And let just--the final point. The orderly liquidation 
title in Title II that was put together, and I think a lot of 
us worked on it together, and I am proud of that Title II. It 
is not exactly the way any of us would like for it to be, but 
one of the things, even though it was orderly liquidation, I 
think the FDIC realized when they went through the process, 
these entities are so intertwined, there is really not a way to 
orderly liquidate. And so instead, they are coming in through 
single entry to the holding company.
    Ms. Yellen. Yes.
    Senator Corker. One of the things that I think all of us 
have concern about is making sure, if we are going to use that 
process--and I think it is sound, personally--that we ensure 
there is enough debt at the holding company level; otherwise, 
there will be other kinds of distortions. Where is that right 
now? And when are we going to come up with a ruling that gives 
clarity so that we know absolutely we have things in place 
should a large institution fail?
    Ms. Yellen. So I agree with you that this is extremely 
important. It is high on our list. We have been working 
globally with other regulators and looking ourselves at a 
requirement that holding companies have a minimum amount of 
long-term debt that would be loss absorbing, that would permit 
an orderly liquidation. We would need enough long-term debt 
both to absorb losses and also recapitalize a company in a 
Title II liquidation. And we are looking to come out with a 
rule that would require that. We are working with the FDIC on 
this.
    Senator Corker. Thank you, Mr. Chairman. I hope it is a 
very large amount of debt held at the holding company level. 
OK. Thank you.
    Ms. Yellen. I agree with you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Madam Chairman, let me ask you, the number of long-term 
unemployed Americans has continued to go down, but it is still 
exceptionally high by historical standards, over 3.6 million. 
As you know, long-term unemployment could have serious 
consequences for individuals and their families and can 
permanently impair the growth prospects for our economy if 
workers are stuck on the sidelines for too long and their 
skills and networks become out of date.
    Do you feel that the Fed's policies have been successful in 
helping to reduce the number of long-term unemployed Americans? 
Is there anything more that the Fed can do, or is there 
congressional action that you might believe is necessary in 
order to meet that challenge? And is boosting demand the best 
way to reduce long-term unemployment right now based on our 
current economic conditions?
    Ms. Yellen. Well, Senator, we are very focused on and 
concerned about the high level of long-term unemployment. It is 
really unprecedented to see something like 37 percent of 
unemployed in long spells.
    What can we do? We can try to foster a stronger labor 
market generally. We do not have tools that are targeted at 
long-term unemployment. But in taking account of how much slack 
there is in the labor market and attempting to stimulate demand 
so that there is more spending, there is more production, and 
more jobs in the economy, we have seen long-term unemployment 
edge down very slowly. It is taking a long time for those 
people to be reabsorbed into the labor force, but our approach 
is to foster a stronger recovery and try to get the economy 
back to full employment, and I think they will see gains.
    Senator Menendez. So if increasing demand is part of it, is 
there anything else that you think that the Congress--maybe not 
the Fed--should do in order to achieve getting those numbers, 
historically high numbers down even quicker?
    Ms. Yellen. Well, I think it is also appropriate for 
Congress to look at what some of the special needs of long-term 
unemployed are. These are spelled that are very damaging to 
families, put great burdens on families both in terms of income 
and even health burdens that--burdens on children and 
marriages, and so I think it certainly is something that 
Congress could look at along with us.
    Senator Menendez. Is skill sets, helping individuals with 
their skills sets, something that we should be considering?
    Ms. Yellen. Yes, sometimes the long-term unemployed do need 
to acquire different skills in order to be reabsorbed into the 
job market.
    Senator Menendez. Now, I know Chairman Johnson asked you a 
question on income and wealth inequality, and I want to follow 
that up in terms of monetary policy decisions. Over the last 20 
years, the top 1 percent of earners has grown by more than 86 
percent while incomes for the remaining 99 percent have grown 
by less than 7 percent. And even during our current recovery 
from the financial crisis, the top 1 percent have received 95 
percent of the income gains over the last 3 years while real 
median income remains 9 percent below 1999 levels.
    So, of course, we all applaud those who achieve financial 
success, and we are thankful for that. But we are concerned 
that the vast majority of people in our country feel they are 
not sharing in the economic growth, and when widening income 
and wealth disparity make it harder for ordinary working 
families to move up the economic ladder, as studies have shown 
to be the case, it creates, I think, a greater challenge to our 
overall economic well-being.
    So my question is: How does the Fed account for income and 
wealth inequality in its monetary policy decisions? For 
example, the Fed is looking at broad statistics like GDP, but 
economic growth is only accruing to a small share of the 
population while the rest feel they are still in a recession. 
Is that something that the Fed would wait longer to tighten 
until broader-based growth takes place? Or is there a broader 
range of statistics, including measures of income and wealth, 
that the Fed should be considering?
    Ms. Yellen. Well, I think that the trends that you have 
described in detail are extremely disturbing trends with very 
significant implications for our country, and I am personally 
and the Fed is very worried about these trends. The major thing 
that we can do is, as we try to assess the state of the labor 
market and appropriate policy, to look at a very broad range of 
statistics and metrics concerning the labor market, not just 
the unemployment rate but, in particular, other measures that 
suggest that the labor market is not functioning properly. The 
fact that we have seen very slow growth in wages, for example, 
I take as one of many pieces of information suggesting that the 
labor market has not returned to normal and has quite a ways to 
go. And it is something that is appropriate for us to look at 
as we consider appropriate monetary policy.
    Senator Menendez. So you are looking at a broad--you will 
look at a broad range of factors as you are making your 
decisions?
    Ms. Yellen. Absolutely.
    Senator Menendez. All right. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, and thank you, 
Madam Chair, for being here and for your work.
    As you know, many of us, certainly including Senator Brown 
and I, are concerned about capital requirements at the biggest 
banks. Can you confirm that U.S. regulators are close to 
finalizing the supplementary leverage ratio that would impact 
that? And if so, when do you expect that final action to be 
taken?
    Ms. Yellen. So this is high on our regulatory agenda for 
this coming year. We have out an initial proposal on this, and 
while I cannot give you an exact time, we will certainly be 
working with the other agencies to finalize this.
    Senator Vitter. Can you give us an exact timeframe, a 
general timeframe, when you would expect the Fed to act?
    Ms. Yellen. In the not too distant future, I would say.
    Senator Vitter. OK. According to the Wall Street Journal, 
Vice Chairman Hoenig said that regulators are unlikely to 
change the draft proposal with regard to a 5-percent capital 
buffer against all large bank assets and a similar 6-percent 
buffer at their insured deposit-taking subsidiaries. In 
contrast to that, there has been concern that you might follow 
Europe's lead in watering down some other provisions from the 
initial draft concerning things like a weaker treatment of 
derivatives and valuation of repurchase agreements.
    Can you give us any insight into where those things stand 
in your discussions?
    Ms. Yellen. So, I mean, let me see if I understand what you 
mean here. When we came out with the proposal for the 5- and 6-
percent the holding companies----
    Senator Vitter. Correct. Do you think there is any chance 
that will change in the final action?
    Ms. Yellen. I mean, this is something we have been quite 
supportive of, and I am not envisioning----
    Senator Vitter. OK. And then deeper in the weeds, if you 
will, there has been some suggestion that you could back off 
some other elements of the draft, for instance, on issues like 
the treatment of derivatives and valuation of repurchase 
agreements. Do you think that is any possibility? I would hope 
not. I think there are others on the panel who would hope not. 
I would encourage you to not weaken any elements of your draft. 
But is that under discussion?
    Ms. Yellen. So I am not aware if it is under discussion. I 
would have to look into that. But my objective would be to come 
out with a strong proposal. We have increased greatly risk-
based capital requirements. In light of that increase, I see 
leverage in risk-based capital is sort of belt and suspenders. 
It is definitely, in my view, appropriate to increase leverage 
requirements more or less in line with risk-based capital 
requirements. And----
    Senator Vitter. Well, I would just encourage a strong final 
set of proposed--or set of rules as strong or stronger than the 
draft. So I would just encourage that.
    Let me move to one other topic I wanted to hit, and this is 
actually related to this too-big-to-fail issue which capital 
requirements are also about. A lot of us have a concern about 
the squeeze that community banks are getting in the financial 
sector. That has been a historic long-term trend. It has gotten 
even a lot worse since the 2007-08 crisis and since--and I 
would argue in some cases because of Dodd-Frank. So it is going 
from bad to worse in terms of a trend.
    If you look at Federal Reserve Board membership, there is 
also a trend, and it is away from representation of any 
community banking or community bank supervision experience.
    Let me just put a chart up. A chart is up, and this shows--
it is a little busy. It is color-coded. This shows sort of the 
makeup of Federal Reserve Board members over time, and any 
community bank and community bank supervision experience, which 
is the yellow, is limited, and there has been a huge growth 
over time in terms of folks with a pure economics and academic 
background.
    In particular, right now there is one person with that sort 
of community bank or community bank supervision experience, and 
she is leaving. So soon there will be none.
    What would your thoughts be about a requirement to have at 
least one person in the future with that type of community bank 
or community bank supervision experience?
    Ms. Yellen. So I have had the privilege of working with 
Governor Raskin and previously Governor Duke, and I can 
certainly say that they made huge contributions in the 
community banking area, and the background that they were able 
to bring was extremely helpful to us in crafting regulations 
and approaching our supervision responsibilities with 
sensitivity to the special issues that community banks face. I 
hope the Administration would consider an appointment of 
someone with that kind of experience, and I can certainly 
attest that it is very helpful to us in doing our work.
    Senator Vitter. Great. Thank you. Thank you, Madam Chair. 
Thank you, Mr. Chairman.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Madam Chair, welcome.
    Ms. Yellen. Thank you.
    Senator Brown. We are thrilled that you are here, and thank 
you for your public service up to this moment----
    Ms. Yellen. Thank you.
    Senator Brown.----and your continued service. Thank you 
for--I thank Senator Vitter for his comments and questions 
about capital standards and urge you--I appreciated your answer 
and urge you as quickly as possible, with OCC and FDIC, to move 
as quickly as possible.
    Thank you for your response to me about the real economy in 
your confirmation hearing. Last Friday, as the Board released 
transcripts of the 2008 FOMC meetings, the reading was 
interesting for those of us that find this stuff interesting. 
As you know, the Fed has a dual mission: fighting inflation, 
maximizing employment. But according to the New York Times, the 
September--the crucial, probably most important of those, the 
September meeting on the eve of the Lehman bankruptcy, FOMC 
members mentioned, according to the minutes, inflation 129 
times and recession 5 times. You speak forcefully, and have for 
some time, about the potential threats to the broader economy. 
This statistic implies that the institution overlooked what was 
happening on Main Street during this critical time. Now that 
you are Chair, convince us that we will not see meetings like 
that where the emphasis is so much more on inflation than full 
employment because--and that the focus will be more on ordinary 
Americans that bear the brunt of this economy.
    Ms. Yellen. Well, I think as you know, I take the Fed's 
dual mandate very seriously and believe we should be focused 
both on inflation and on unemployment. But to just try myself 
to put the 2008 situation in context, if you think about what 
happened within months of that September meeting, where perhaps 
people did not realize just how serious the deterioration in 
both the financial markets and the economy was about to get, 
you know, within days or months of that meeting, the most 
incredible array of programs had been rolled out by the Federal 
Reserve to address deteriorating economic conditions, an 
alphabet soup of programs to support credit, the availability 
and extension of credit throughout the economy, to provide 
liquidity not only to banking organizations but to markets that 
were really finding themselves deprived of it. And by December 
of 2008, even with all the mentions of inflation that you 
noted, the FOMC had certainly changed its focus and in December 
lowered the Federal funds rate to zero.
    So I think I was one of those who was urging more, faster, 
we need to get on this, but within 3 months, a great deal had 
been done, and since then we have been trying to do it. So in 
some sense, I think the Fed has responded.
    Senator Brown. And to your credit, you looked better in 
those minutes than some of your colleagues did, but that is the 
past, and you look to the future.
    I want to follow up on some of the too-big-to-fail 
questions. In November, you said address too big to fail is 
among the most important goals of the post-crisis period. You 
mentioned capital requirements. You mentioned SIFI capital 
surcharges, resolution authority, long-term debt requirements, 
supplemental leverage ratio. You also have living wills and the 
authority to break up institutions if they pose a grave threat 
to the financial system. Despite all that, the Nation's 
foremost expert on banking regulation, your once fellow 
Governor, Dan Tarullo, said on Tuesday that we are ``not even 
close'' to ending too-big-to-fail. It has been 5 years since 
the crisis. When are we going to be--you have the tools as the 
new Fed Chair. Why is it taking so long? And when is this going 
to be resolved? When can the financial--when will America's 
financial community and the American people know that too-big-
to-fail has actually ended?
    Ms. Yellen. Well, I am slightly surprised that he said we 
are nowhere close, because I personally think we have made 
quite a lot of progress in putting in place regulations that 
will make a huge difference to this. Even in orderly 
resolution, I think it is important--we were just discussing 
the long-term debt requirement. There are thorny obstacles to 
resolving a failing firm having to do, for example, with cross-
border resolution issues, how to deal with the fact that laws 
in foreign countries could make it impossible--you know, could 
precipitate the ending of contracts that would cause a 
disorderly failure of a firm. But we are working very closely 
with our foreign counterparts to try to resolve these issues, 
and you gave a list of all the things--or some of the things 
that we have on the drawing board that we are hoping to 
finalize within months or during this year. Beyond that, we are 
working on shadow banking, our stress test capital in the 
banking system, the highest quality capital has doubled since 
the crisis. And I personally think we are making strides, and I 
am continuing--I am completely committed to seeing this agenda 
to fruition, and I am more encouraged about the progress that 
we are making. And I am committed to completing this.
    Senator Brown. Thank you. One last comment, Mr. Chair. I 
apologize. I think that a quick--accelerating the rules that 
you and FDIC and OCC, without diluting those rules, is a really 
important not just substantive thing to do, but really 
important message to the financial community and to the public 
that you really do mean it and you mean business on this and 
you really do want to end too-big-to-fail. So thank you.
    Ms. Yellen. Absolutely. I agree with you.
    Chairman Johnson. Senator Heller.
    Senator Heller. Thank you very much, Mr. Chairman. Dr. 
Yellen, thank you for being here. Thanks for listening, being 
patient, and taking our questions.
    I know that as a former Chair of the San Francisco Federal 
Reserve, you have a pretty good understanding of the State of 
Nevada and its current economic conditions. It has been over 5 
years now since we have had this economic collapse, and I want 
to take a quote from the president of the St. Louis Federal 
Reserve who recently said that we are a lot closer to a normal 
economy than we have been in a long time. And I would stress 
that I can tell you right now Nevada is nowhere close to a 
normal economy. While maybe some parts of this country are 
experiencing some recovery, Nevada is still at 8.8 
unemployment, second highest in the Nation, and many homeowners 
are still underwater.
    So I guess the question is: Do you feel that the struggle 
that Nevadans are currently experiencing, is this a new normal, 
according to the president of the St. Louis Federal Reserve, or 
a new economic reality?
    Ms. Yellen. Well, I mean, as you know, Senator, Nevada was 
one of the hardest hit. It had one of the biggest booms in 
housing, and about----
    Senator Heller. In 20 years, yes.
    Ms. Yellen.----the biggest bust of any market in this 
country, and I am well aware that an unusually large share of 
homeowners is underwater. You know, their prices have come up, 
and they are coming up in a way most rapidly in some of the 
areas like Las Vegas where they fell the most. But it is still 
going to be a long slog before things are back to normal in the 
housing market in Nevada and some of those hard-hit areas. 
Prices are moving back up. We see investors coming in and, you 
know, buying homes and converting them to rental housing. But 
credit is really hard for many families to get, the ability to 
have home equity loans when it has been wiped out, and, 
unfortunately, Nevada is one of the States that has been most 
badly affected.
    Senator Heller. Right. Any timeframe for a new normal or a 
normal economy?
    Ms. Yellen. Some years, I think.
    Senator Heller. Several years? Can you give me what your 
definition of ``full employment'' is?
    Ms. Yellen. To me, it is a state of the job market in which 
people are able to find in a reasonable period of time jobs for 
which they are qualified, and there is no single metric, I 
would say, that would enable me to tell you when we have 
reached that. I would look at a broad range of indicators of 
the labor market. If I had to choose one metric, the 
unemployment rate is probably the best, and members of our 
Committee are not certain exactly what constitutes full 
employment but generally see a range of 5 to 6 percent or a 
little bit--in that area to be a state of full employment in 
the economy, but also looking at part-time employment, job 
flows, what is happening with wages, and a broader set of 
metrics I think is necessary.
    Senator Heller. What is real unemployment today?
    Ms. Yellen. Well, I am not sure exactly--some of the 
broadest measures of unemployment, like U6, which includes 
marginally attached workers and those who are part-time for 
economic reasons, namely, they cannot find full-time work, are 
around 13 percent.
    Senator Heller. Around 13 percent. The Congressional Budget 
Office recently reported that President Obama's proposal to 
raise the minimum wage would eliminate a half a million jobs. 
Some believe they are low-balling this figure. And I know that 
it is your job at the Fed to maximize employment. I would like 
to hear your thoughts on this soft economy and the impact of 
raising the minimum wage.
    Ms. Yellen. Well, I think almost all economists think that 
the minimum wage has two main effects: one is to give higher 
wages to those who continue to have jobs and were earning the 
minimum wage; and then, second, that there would be some amount 
of negative impact on employment as a consequence. And there is 
considerable debates about just what the employment impact of 
it would be. CBO is as qualified as anyone to evaluate that 
literature, and I would not argue with their assessment. I 
mean, there are a range of studies, and they cited them, but, 
you know, I would not want to argue. They are good at this kind 
of evaluation and have opined on this. I think they also--I 
cannot remember the numbers involved, but indicated that a 
large number of individuals would see their incomes raised as a 
consequence. I think that is the tradeoff.
    Senator Heller. Doctor, thank you. My time has run out.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. I want to welcome 
Chair Yellen. Thank you for putting yourself forward for this 
job, and congratulations on a historic confirmation.
    Ms. Yellen. Thank you.
    Senator Tester. We were able to visit about a number of 
issues, and we are going to visit about them again. End users 
are one of those issues that we discussed, clarifying the end-
user exemption from the margin that was included in Dodd-Frank, 
given the minimal risks that they pose to the system.
    As you know--we have visited--Chairman Bernanke, your 
predecessor, and Governor Tarullo have both indicated comfort 
with the intent of the exemption given the lack of systemic 
risk posed by nonfinancial entity end users, but concern about 
the ability of the Fed to achieve that intent. Since the 
proposed rule issued back in 2011, there has been a number of 
additional developments, including most notably the 
finalization of the IOSCO framework in September setting forth 
globally agreed to margin standards.
    Can you share with us where the Fed's thinking stands on 
this issue in light of those developments?
    Ms. Yellen. So the Fed continues to think that end users do 
not pose systemic risks, and we will come back and will be 
crafting a rule in light of the international negotiations, and 
I believe that we will do our very best to make sure that there 
are no undue burdens imposed on end users who do not pose 
systemic risk.
    Senator Tester. I thank you for that. And I know your plate 
is full and there are many issues that you are dealing with 
every day, and people are always asking you when is it going to 
come out, so I will do it. When is the timing on that front?
    Ms. Yellen. I cannot give you a date certain, but----
    Senator Tester. Before the end of the year?
    Ms. Yellen. I believe so.
    Senator Tester. OK. The Chairman talked about banks and 
insurers' regulatory policies. In the final rule released last 
week, Section 165 of Dodd-Frank, the Fed declined to apply the 
rule to nonbank financial companies at this time and indicated 
a desire to basically tailor this rule for insured SIFIs. Can 
you tell me more about what the Fed has in mind with respect to 
the tailoring?
    Ms. Yellen. So we understand that the business models of 
insurance companies are quite different than those of banks. 
There are a number of ways, the asset liability matching 
separate accounts and so forth, that require tailored design of 
capital and liquidity requirements so they are appropriate to 
those business models. And we are trying to take the time that 
is necessary to understand in detail the businesses of these 
companies and what is appropriate.
    I would say again, though, that we do have some constraints 
in what we are able to do because of the Collins amendment.
    Senator Tester. OK. So could you give me some insight into 
what extent might the tailoring with respect to this rule 
provide a road map for how the Fed might seek to tailor other 
rulemakings?
    Ms. Yellen. I mean, I believe we in general tried to tailor 
our rulemakings; I am not sure what area in particular you have 
in mind.
    Senator Tester. Well, with insurers particularly, but 
others, too, if you might.
    Ms. Yellen. Well, I mean, generally we try to tailor our 
rules so that they do not pose undue burdens on companies that 
do not pose risks to the system. I would say, for example, in 
the case of community banks, while I know community banks are 
under many burdens and it is not easy to run a community bank, 
for our part we are trying to avoid burdening community banks 
with the same level of regulatory complexity that we would 
impose on a systemically important institution. And the same is 
true in other areas where we have the ability to tailor rules 
to make them appropriate.
    Senator Tester. OK. Thank you. And in regard to 
international insurance regulation, I just want to say how much 
I appreciate the Fed moving in the direction that you spoke of 
earlier, and I very much look forward to working with you to 
ensure that we do not force insurers into a bank-centric 
regulatory model.
    I also want to note how critically important that this 
sentiment and the direction that the Fed is heading in terms of 
tailoring regulations for insurers is fully reflected in any 
international negotiations regarding capital standards that you 
may be a part of in your capacity as a member of the Financial 
Stability Board. I just want to thank you for your good work. 
I, as many others on this Committee have already expressed, am 
very impressed with your work and look forward to working with 
you as we go down into the future.
    Ms. Yellen. Thank you very much, Senator. I appreciate 
that.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and Madam 
Chairman, thank you very much for being here. Welcome on your 
first visit in your new role.
    Ms. Yellen. Thank you.
    Senator Toomey. You know, I have been very concerned about 
this monetary policy for some time, and I wonder if you could 
for the Committee give us a sense of how you would quantify the 
benefits that the economy has enjoyed, assuming you believe 
there are benefits, from this unprecedented experiment that we 
have been engaged in. A lot of very reputable economists look 
at traditionally understood transmission mechanisms to be asset 
price reflation translate into more spending, and the 
quantification of that gives some very, very modest numbers, 
but I wonder how you quantify the benefits from the 
quantitative easing we have had.
    Ms. Yellen. So I do not have a quantitative estimate that I 
can present to you today. There are a range of estimates in the 
literature. You know, we hit the so-called zero bound in 
December of 2008. We lowered the Fed's overnight interest rate 
target to zero. Standard rules like the Taylor rule would have 
called for substantially more accommodation. Rules like that 
would have said that we should go to minus 400 or 500 basis 
points if we could, and we could not. And so we looked for 
other ways to provide the accommodation that the economy seemed 
to need. So asset purchases and forward guidance, I think they 
have served to push down longer-term interest rates.
    We have seen some significant recovery in housing. The 
backup in rates we have seen last spring and summer clearly 
seems to have had a negative impact on housing. And so I think 
it is fair to say that we were successful in pushing down 
longer-term rates through these policies. We did see a positive 
response in housing. I think in the area of vehicle sales, 
interest-sensitive spending has responded.
    Senator Toomey. I do not mean to--I have just got such 
limited time. I have got a few--so I am aware of the changing 
in economic statistics. But the point is you do not have a 
quantification for how much of that is attributable to the 
quantitative easing.
    I guess the second question I have----
    Ms. Yellen. Well, there are estimates that----
    Senator Toomey. But there is not one that is----
    Ms. Yellen.----a number of people have had.
    Senator Toomey. That you have endorsed or that you 
subscribe to.
    Ms. Yellen. I have cited some, and I will----
    Senator Toomey. OK.
    Ms. Yellen.----provide you details on some that I have 
cited.
    Senator Toomey. On the risk side of this equation, I know 
you did mention some of the things you are looking for. Many 
people believe that last decade the unusual monetary policy, 
including maintaining negative real interest rates for an 
extended period of time, at the short end of the curve anyway, 
contributed significantly to the housing bubble that later 
burst, of course. Do you agree that that was a contributing 
factor? And, second, among the risks that you look at, as we 
hopefully move to normalcy, which ones concern you the most? 
And then I have got one last really short question.
    Ms. Yellen. So I think it will take awhile for scholars to 
decide exactly what role easing monetary policy had in 
contributing to the financial crisis. I would not argue with 
the idea that a long period of low interest rates does 
contribute to the buildup of leverage and may have touched off 
a housing bubble. But I think on the regulatory side and the 
supervision side, there were also failings that contributed 
importantly to the crisis.
    We are watching very carefully for the development of any 
such excesses. We are very focused on not allowing such a thing 
to happen again. And while there might be a few areas where I 
have concerns such as deteriorating underwriting standards and 
leveraged lending, farmland prices, a few things, I do not see 
those excesses having developed at this point.
    With respect to housing prices, they have rebounded 
significantly, but remain not back to their peak levels by any 
means, and price/rent ratios in housing certainly remain in 
normal ranges. So I do not think we have promoted those kinds 
of excesses, certainly not at this stage.
    Senator Toomey. Thank you. My last question. You have 
stressed a couple of times the importance that you attach to 
fulfilling the congressional legislative mandate to maximize 
employment as well as the other portions of the mandate. My 
question is: Would the behavior of the Fed, with the actions 
and the policies of the Fed, be any different at all if the Fed 
had only a single mandate and that were price stability?
    Ms. Yellen. So over these last several years, I think the 
answer is no, because at the moment----
    Senator Toomey. Well, how about today?
    Ms. Yellen. Well, inflation is running well below our 
objective, and the economy has fallen short of full employment. 
So both of these--both pieces of the mandate are giving us the 
identical signal, namely, we need an accommodative policy.
    Now, there can be situations where there could be conflicts 
between the objectives, and in that sense, it would make a 
difference, it might make a difference to have a dual mandate 
rather than a single mandate. At the moment there is no such 
conflict. But my personal view is that this mandate has served 
us quite well, and most central banks, even if they have an 
inflation target, also have a mandate to take account of 
economic growth and stability.
    Senator Toomey. Although the ECB does not, right?
    Ms. Yellen. That is true.
    Senator Toomey. Thank you very much, Mr. Chairman.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman. And, Chairman 
Yellen, welcome to the Committee. I was so pleased at the 
beginning of the hearing to hear Chairman Johnson's 
introduction and welcome to you as the first woman to head up 
the Federal Reserve, so welcome.
    Ms. Yellen. Thank you so much.
    Senator Hagan. My questions--my first one is: During the 
January 2014 Federal Open Market Committee meeting, the 
Committee authorized the Federal Reserve Bank of New York to 
conduct a series of fixed-rate, overnight, reverse repurchase 
operations involving U.S. Government securities and securities 
that are guaranteed by agencies of the United States. The 
authorization runs through January 30th of next year, of 2015, 
and specifies an offering rate of zero to five basis points 
that you have the authority to waive. The program, which has 
been steadily extended and expanded, is being considered for 
use in supporting the implementation of monetary policy. So I 
want to ask you some questions about this.
    Can you begin by describing this program, its scale, and 
then your vision for its expanded use? And also, if you can 
talk about the dollar volume of these operations.
    Ms. Yellen. So this fixed-rate, overnight, reverse 
repurchase facility is one where we are essentially borrowing 
from entities other than banking organizations. We are offering 
to pay a low fixed rate and are offering our counterparties, in 
return for their loans to us, collateral which comes in the 
form either of Treasury or agency mortgage-backed securities. 
And we are engaging in this program--as you mentioned, this is 
something technical, but we want to be able to firmly control 
short-term money market rates. When the time ultimately comes, 
which it is not--it is probably a long way off, but when the 
time comes that we do want to tighten monetary policy and raise 
our target for short-term interest rates, we would like to be 
able to execute that in a very smooth way so that we have good 
control over the level of short-term interest rates. And paying 
interest on reserves, that is something--that is one tool we 
will be using to boost when the time comes the level of short-
term rates, but using this new facility can also help us gain 
better control, I think, than we could through interest on 
reserves alone.
    So at the moment, we have been experimenting with 
developing this facility, making sure we can smoothly execute 
these transactions with a range of potential lenders. We have 
put limits both on the magnitude of loans that we will be 
willing to take on and what we are paying, as you mentioned, 
the limit so far has been five basis points. We are pleased by 
what we are seeing about our ability to carry out these 
exercises, and it is part of prudent planning that the Fed has 
been doing for quite some time.
    Senator Hagan. And what about the dollar volume?
    Ms. Yellen. It varies from day to day, depending on how 
much interest there is in the markets. It is up to the markets 
to decide. We have typically had limits on the amount that any 
one firm can lend to us overnight.
    Senator Hagan. It was 3 billion, now it is up to 5 billion?
    Ms. Yellen. Yeah. I think there were some days at the end 
of the year, given the pressures that existed toward the end of 
the year, when I believe the volume rose to 30 or 40 billion, 
but I can get you some--I can get you exact details on the 
quantities, if you would like further information.
    Senator Hagan. What are the monetary policy effects of 
raising this offer rate beyond the range set in the FOMC's 
resolution?
    Ms. Yellen. Well, these are very, very low rates.
    Senator Hagan. Right.
    Ms. Yellen. And so we are not raising rates by doing this. 
We are only going up to five basis points. We are paying 25 
basis points on interest on reserves, and there is really only 
any takeup at times when there would be, you know, pressure for 
unusual reasons for rates to fall below that. But we are not 
pushing up the general level of short-term rates with this 
facility at this time.
    Senator Hagan. My time has run out. Thank you very much.
    Chairman Johnson. Senator Manchin.
    Senator Manchin. Thank you very much. And congratulations, 
Madam Chairman, and I am so pleased that I was able to vote for 
you on final confirmation.
    Ms. Yellen. Much appreciated.
    Senator Manchin. And that was a lot--and you and I had nice 
conversations concerning the quantitative easing.
    Ms. Yellen. Yes, thank you.
    Senator Manchin. And I appreciate the job you are doing.
    Ms. Yellen. Thank you.
    Senator Manchin. Let me just say that I sent you, along 
with five other regulators, a letter yesterday expressing my 
concerns with Bitcoin, and I fundamentally believe it is being 
used primarily for illegal activities. It allows scam artists 
and hackers to steal money from hard-working Americans, and it 
is a bad form of currency because it has a deflation problem. 
Most recently the major exchange for Bitcoin unexpectedly went 
dark, which led to $400 million in Bitcoins evaporation 
overnight. I am concerned--other countries are ahead of the 
curve by already issuing regulations to protect their citizens, 
which might leave Americans truly holding the bag. And I would 
like to know your view on the Bitcoin. And what actions does 
the Fed have planned on regulating this unstable currency?
    Ms. Yellen. Senator, I think it is important to understand 
that this is payment innovation that is taking place entirely 
outside the banking industry, and to the best of my knowledge, 
there is no intersection at all in any way between Bitcoin and 
banks that the Federal Reserve has the ability to supervise and 
regulate. So the Federal Reserve simply does not have authority 
to supervise or regulate Bitcoin in any way.
    I think my understanding is that FinCEN and the Department 
of Justice have--I mean, one concern here with Bitcoin is the 
potential for money laundering. I think that they have 
indicated that their money-laundering statutes are adequate to 
meet their own enforcement needs. So the Fed does not have 
authority with respect to Bitcoin, but it certainly would be 
appropriate, I think, for Congress to ask questions about what 
the right legal structure would be for, you know, virtual 
currencies that involve nontraditional players that are not 
regulated by----
    Senator Manchin. Let me just say--and I am so sorry, 
because our time--you know how our time runs here.
    Ms. Yellen. Sure.
    Senator Manchin. If there is going to be a new American 
exchange for the Bitcoins, they are going to be using banks. If 
this exchange is using banks, you all will have----
    Ms. Yellen. If they use banks, but my understanding is that 
Bitcoin does not touch banks. It is not settled or cleared 
through----
    Senator Manchin. Why did other governments--why did other 
countries believe they had to get involved?
    Ms. Yellen. Well, you could get involved, if Congress wants 
to get involved and set up a supervisory regime.
    Senator Manchin. OK.
    Ms. Yellen. I think it is not so easy to regulate Bitcoin 
because there is no central issuer or network operator to 
regulate. This is a decentralized----
    Senator Manchin. OK. What we will do--what we will do is I 
think probably, if we can, further explore this and get some 
recommendations and see what our ramifications would be. We 
would really appreciate that.
    Ms. Yellen. Sure. And we would be happy to work with you.
    Senator Manchin. OK.
    Ms. Yellen. We are looking at this.
    Senator Manchin. We will do it.
    Ms. Yellen. And we would be glad to talk to you about it.
    Senator Manchin. OK. My other question is going to be on 
community banks. I know we have spoken about community banks. 
But a new study just released this morning by the Mercatus 
Center showed that Dodd-Frank is having a negative impact on 
community banks. It just came out this morning. Most community 
banks have had to hire at least one additional compliance 
officer, and many have had to hire two. It does not seem like 
much, but former Fed Governor Elizabeth Duke, who I know you 
know very well, has said hiring one additional employee would 
reduce the return on assets by 23 basis points for many small 
banks. In other words, 13 percent of banks with assets of less 
than $50 million would go from profitable to unprofitable, 
which is very concerning. In my great State of West Virginia, 
you know, community banks are our lifeblood, and it has really 
caused a problem here.
    So based on the new study, 13 percent of banks may be 
unprofitable simply because they had to hire a new compliance 
officer to deal with the burdensome Dodd-Frank.
    What can the Feds do to protect these banks other than just 
asking us to do our job?
    Ms. Yellen. So we have tried in all of our rulemakings to 
tailor regulations so that changes that are really meant to 
reduce systemic risk that these banks do not contribute to, 
that we are not burdening them. I mean, we have thought it 
appropriate that even community banks have appropriate capital 
and appropriate quality of capital, and so there have been some 
new standards that have applied to community banks. But what I 
can pledge is that we will in all of our rulemakings do our 
very best to minimize burden on community banks, and we will 
listen very carefully through our contacts with----
    Senator Manchin. You can see the burden that----
    Ms. Yellen.----the community banks to understand what the 
burdens are and to minimize them where we possibly can.
    Senator Manchin. That report just came out, and my time is 
up, but I have more questions that I will submit for the 
record. But one thing I would like to say and hope you would 
consider, just yesterday the Wall Street Journal reported that 
China's central bank engineered--and I repeat, engineered--the 
recent decline of its country's currency, which is yet another 
clear example of currency manipulation. And we are so concerned 
about that, ma'am.
    So I will submit these for you.
    Ms. Yellen. OK.
    Senator Manchin. Thank you.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman, and welcome, Chair 
Yellen. It is good to see you here.
    Ms. Yellen. Thank you.
    Senator Warren. So back at your confirmation hearing, you 
said you thought the Fed's supervisory and regulatory 
responsibilities were as important as the monetary policy 
responsibilities, and I agree. But I think current Fed 
practices do not reflect those values. So while the Fed's Board 
of Governors votes on every important monetary policy decision, 
the Board rarely votes on issues like whether to settle 
enforcement actions.
    Last year, the Fed reached its largest settlement in its 
history--$9.3 billion--with mortgage servicers, affecting more 
than 4 million families. But it was the Fed's staff that worked 
out that arrangement, and the Fed Board did not even vote on 
it.
    So 2 weeks ago, Congressman Cummings and I sent a letter to 
you recommending that the Fed change its rules so that the 
Board would have to vote before any major settlement. Do you 
support such a change?
    Ms. Yellen. Senator, I think that you have raised very 
important questions about this, and I do think it is 
appropriate for us to make changes, and I fully expect that we 
will.
    Senator Warren. And, in principle, support what we have 
asked for in this letter, that is, clear and concrete evidence 
that the Board is involved in supervisory and regulatory 
policy.
    Ms. Yellen. It is completely appropriate for the Board to 
be fully involved in important decisions, and I----
    Senator Warren. And voting is a good way to do that.
    Ms. Yellen. I fully intend to make sure that we are.
    Senator Warren. Thank you. Thank you.
    Now, I want to ask about another aspect of the mortgage 
settlement. When the deal was struck, the Fed had a big press 
release to announce a $9.3 billion settlement. But it turned 
out that of that $9.3 billion, $5.7 billion was in the form of 
credits for what the Fed described in its press release as 
``assistance to borrowers such as loan modifications and 
forgiveness of deficiency judgments.''
    What the press release did not say is how the credits would 
be calculated, and later it came to light that under the 
agreement, mortgage companies could get away with actually 
paying only a fraction of that $5.7 billion. Now, the fine 
print in this settlement could potentially reduce the direct 
relief to borrowers by literally billions of dollars.
    So Senator Coburn and I recently introduced a bill, Truth 
in Settlements Act, which would require every agency to 
publicly disclose the key details of their settlement 
agreements, including the method of calculating those 
agreements, whether it is tax deductible and so on. And the 
disclosure would be required up front at the time the 
settlement is announced.
    Now, the Fed does not have to wait for Congress to do that. 
You could voluntarily adopt that public disclosure now. Will 
you do that?
    Ms. Yellen. So I agree with you it is important for us to 
disclose more and to disclose as much as we can, and we will 
look at that very carefully and try to provide more 
information.
    Senator Warren. So, in principle, we are talking about more 
disclosure here.
    Ms. Yellen. Correct.
    Senator Warren. I think this is really important because 
this is about accountability. We want to be able to hold our 
financial institutions accountable, but it also means 
accountability for our regulatory institutions.
    Ms. Yellen. Agreed. It is a principle I endorse.
    Senator Warren. Good. Thank you. And I want to just follow 
up quickly, if I can, on Senator Brown's question about too-
big-to-fail. You said that we have made significant progress 
but much work remains to be done, and I agree. But I would note 
that since the financial crisis in 2008, the five largest 
financial institutions are 38 percent larger than they were 
back then.
    So my question is: What evidence would you need to see 
before you could declare with confidence that too-big-to-fail 
has ended?
    Ms. Yellen. So I am not positive that we can declare with 
confidence that too-big-to-fail has ended until it is tested in 
some way. I mean, I do believe that there are demonstrable 
improvements in terms of the amount of capital and liquidity 
that we have put in place, both through stress testing and 
Dodd-Frank regulations. There is more to come in the form of 
SIFI surcharges and likely a supplemental leverage ratio. You 
know, there is a whole agenda here of minimum debt 
requirements.
    I think it is important to feel that we have solved too-
big-to-fail that we have the confidence that if an institution 
were to get in trouble, that we could actually resolve that 
institution.
    Senator Warren. And I am over time, so I really will quit, 
Mr. Chairman. He is strict with us, but I just want to draw in 
on this a little bit. So long as the markets believe that too-
big-to-fail has not ended, and they demonstrate that by 
reducing capital costs for the banks that are perceived to be 
those that the Government would rescue, do we still have a too-
big-to-fail problem?
    Ms. Yellen. Well, the markets may think that we will rescue 
such an institution and may not end up believing us until we 
put it through resolution. So we cannot guarantee that they 
have an appropriate view of how we are going to handle such a 
situation, but I do think it is appropriate to look at 
estimates of subsidies and so forth in judging what progress we 
are making. I do not think it is definitive, but it is 
certainly appropriate to keep track of those markets metrics. 
And, I mean, we see that rating agencies are changing their 
methodology, diminishing the amount of their estimates of the 
amount of support that would be forthcoming. And I think as we, 
you know, complete our work on orderly liquidation, putting in 
place minimum debt requirements and working with foreign 
supervisors to feel we really could effect an orderly 
liquidation if it came to it, that that estimate of market 
subsidy should certainly come down.
    Senator Warren. Well, thank you very much, and I will look 
forward to our continuing to track those data.
    Ms. Yellen. Very good.
    Senator Warren. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. Madam Chairman, 
you are on the home stretch.
    Ms. Yellen. Thank you.
    Senator Warner. Since my friend Senator Warren raised the 
point that I know Senator Brown has raised repeatedly, you 
know, I came at this from a different perspective, and I think 
this is a very valid debate. One of the things, as you go 
through the tools that Dodd-Frank gave you, that I think that 
might help make the case is in your, in effect, blessing of the 
resolution plans, as you are, I know, well aware, you have the 
ability if there is an institution that has such a behemoth 
that it has its tentacles everywhere, that through resolution 
could not be orderly put through resolution, you have your 
ability to use that power to disentangle or take away part of 
that institution, which might be a great signal, because I do 
think there are--I do not want to say this with Sherrod not in 
the room, but, you know, he continues to make a point that it 
would be bad for us to have to wait until we have the moment of 
crisis to fully feel whether we have fully got it right. I 
think showing strong evidence along the path, because I do 
think you have--rather than--I have been concerned about 
arbitrary asset caps being the right test, that you have some 
of those tools, and using some of those tools in advance of a 
crisis might be--might make some of more assured. One editorial 
comment.
    Second editorial comment, following up on Senator Manchin's 
comments about community banks and smaller institutions, I 
think there were a number of us who felt very strongly as we 
went through Dodd-Frank that we tried to put--by putting that 
$10 billion cap in terms of some of the regulations that did 
not fall below on those smaller institutions, I think it was 
good in theory. The challenge has been, as best practices get 
kind of built into the regulators' mind-set, even though there 
may not be a legal requirement for these additional regulatory 
obligations, for these smaller institutions, I think it has 
become kind of best practice model.
    So I know earlier on when Sheila Bair was head of the FDIC, 
there were, in effect, jawboning efforts and others. I would 
encourage you and your colleagues at FDIC and other regulators, 
because this is a--you know, when compliance is the fastest 
growing area in the finance industry, that should be of some 
concern. In some institutions, it needs to be, but in some of 
our smaller institutions, it--we are, I think, affecting the 
market in a way, at least from this Senator's standpoint, was 
not what we hoped to do in putting our smaller banks at such a 
disadvantage. There may be ways through guidance or other 
things that you can nudge our regulators. Part of this I think 
is just a mind-set that you could come back to.
    My time is going quickly. Let me just ask two questions 
totally unrelated so I can get them out before the Chairman 
gavels me out.
    One is--and I know you have been hit on almost every 
subject, and these two are going to be completely out of--maybe 
not total left field. One, although an area again that Senator 
Warren has raised a lot, student debt now at $1 trillion north 
of our credit card debt. I feel this may be kind of the next 
looming financial crisis, lots of different ideas on how we get 
about it. Part of that has been, as we all know--at least I 
believe is because of decreasing direct Federal and State 
assistance to higher education. And we have kind of said--made 
this addiction to debt amongst our students. I would like a 
comment on that.
    And then also I would like a comment on an issue that I 
have raised before, and I know you have not--you felt I perhaps 
overstated it, but, you know, with our financial institutions 
now having $2.4 trillion in excess reserves deposited at the 
Fed, and I know that 25-basis-point interest rate you pay you 
feel is not that much, I would simply say that, you know, when 
you have got other central banks like the Bank of Denmark, 
which is actually made negative, that has pushed their 
institutions to get more of that money lent out, which actually 
then might assuage Senator Shelby because you might not have to 
do as many asset purchases if some of these banks were doing 
more to stimulate and get that capital back out into the 
marketplace. So I really do believe the excess reserves--I hope 
you will comment on that as well.
    Thank you, Mr. Chairman. I got that all done at 12 seconds 
left.
    Ms. Yellen. So with respect to student debt, I mean, 
clearly the outstanding volume of Government-supplied student 
debt has escalated. On the one hand, I think it is a good thing 
because there are these huge differentials between what more 
and less educated people earn, and we want people to have 
access to education to be able to improve their skills. But on 
the other hand, it may be that sometimes they do not quite know 
what they are buying and what the education that they may be 
acquiring, you know, it is important for them to understand 
what are the placement rates and job experiences of the schools 
that they are paying to go to. It is not obvious that that is 
always readily available. And then, again, because student debt 
is something that you cannot get rid of in bankruptcy, 
individuals who take it on can really be faced with very 
substantial burdens if they encounter financial difficulties, 
and, you know, that is really of some concern.
    On the interest on reserves, I recognize the argument that 
you are making. I think that lowering that rate would have very 
limited--it goes in the right direction, but would have a very 
limited effect on bank lending.
    We have worried about what impact it would have on money 
markets that we operate in, and not wanting to disrupt, 
completely disrupt money market activities, it is something we 
have considered and could consider going forward. But there are 
conflicting things that are going on there.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair. And thank 
you for your testimony before our Committee.
    I want to focus on a report that was released yesterday by 
Senators Carl Levin and John McCain, a bipartisan report that 
chronicled how Credit Suisse helped thousands of wealthy 
Americans evade U.S. taxes by stashing their money in Swiss 
banks. It highlighted flagrant abuses where employees of the 
bank came to the United States to seek wealthy new recruits at 
golf tournaments and bank-sponsored events, but telling U.S. 
officials they were simply here for tourism. They even set up 
special meeting rooms at airports and destroyed account 
statements that had been reviewed.
    Billions of dollars of U.S. taxes were dodged in the course 
of this with the help of the bank, and it is doing business in 
the United States under the supervision of the Federal Reserve 
Board.
    Now, this report, very thoroughly researched, is critical 
of our own Department of Justice for failing to prosecute or 
use the leverage at its disposal of a bank operating in the 
United States. Senator Levin rightly pointed out if the Swiss 
bank does not want to or cannot comply with U.S. law, maybe it 
should not do business in the United States.
    This case has reminders or echoes of the HSBC case we saw 
just a year ago, flagrant violations through transactions 
carefully structured to keep U.S. officials out of the loop, 
and once discovered, an unwillingness by the Bernanke 
regulators and DOJ to use their authorities to hold anyone 
accountable.
    As Senators Levin and McCain asked the CEO to admit 
yesterday, and he did admit to, not one person was fired for 
flagrant, willful violations of U.S. law from the CEO on down. 
It is the same story for HSBC and, frankly, for any other 
number of other banks that were involved in predatory 
transactions that hurt American citizens.
    So I guess my question is this: We have a situation where 
the Government refused--and this is the Government of 
Switzerland--and blocked the identification of the folks who 
were stashing their money in Switzerland. We are talking about 
22,000 U.S. customers with Swiss accounts, of which less than--
or about 1 percent, the names were shared with the United 
States. If they are not going to share the names for these 
illegal activities, should the Federal Reserve Board be using 
its regulatory power to basically say if you cannot play by the 
rules, you cannot bank in the United States?
    Ms. Yellen. Well, you know, certainly in our work with 
institutions, it is incumbent on us to make sure that they 
comply with the law, and when there are violations of the law, 
we will refer--have referred it and will refer it to the 
Department of Justice if there is criminal behavior that is 
involved. And the Department of Justice should be pursuing 
that, and I think the behavior that Senator Levin uncovered 
with respect to this institution is both illegal and highly 
unacceptable, and it should be pursued.
    Senator Merkley. So certainly a criminal action being 
referred to the Department of Justice is appropriate, but you 
also have powers. You have powers for how banks operate in the 
United States that are separate and independent of the 
Department of Justice. Should the Federal Reserve be using 
these powers in reaction to this type of criminal behavior?
    Ms. Yellen. Well, so our obligation has to do with safety 
and soundness, and to the extent that these practices are 
illegal and we have an institution that is discovered not to be 
complying with the law, we have an obligation to act to make 
sure that it comes into compliance. And if we detect behavior 
that is criminal, it is our obligation to refer that to the 
Justice Department for prosecution.
    Senator Merkley. So one of the powers you have directly is 
to remove executives of banks when they misbehave. Is it your 
intention to pursue this issue in any way to explore whether 
that type of action is appropriate in this situation?
    Ms. Yellen. I will discuss with my colleagues what is 
appropriate. I do not have a definitive answer for you.
    Senator Merkley. Thank you very much for pursuing that. I 
will certainly want to follow up with you, because when we are 
talking over $1 billion of tax evasion and of 22,000 Americans 
engaged, we cannot even get more than 1 percent of the names of 
folks, and yet it is up to our regulatory agencies to decide 
whether and how a bank participates in the U.S. economy. And if 
we are holding U.S. banks to one standard and letting foreign 
banks operates by a completely different standard, that is a 
fundamental unfairness. And it is also an unfairness to 
ordinary Americans. If ordinary Americans are engaged in tax 
evasion, they can serve a lot of years in jail. In this case, 
we are talking massive facilitation of tax evasion by a bank, 
now well documented by McCain and Levin, and it seems like 
there should be some accountability. And I know folks in my 
town halls ask this all the time: Why does there seem to be a 
different standard? With HSBC, their money laundering was well 
documented over a 10-year period. They facilitated terrorist 
networks. They facilitated drug networks. They facilitated the 
evasion of U.S. sanctions, very important to us, for example, 
the sanctions to try to prevent Iran from obtaining a nuclear 
weapon. And yet not one bank official was held accountable.
    So this is another chapter and a new opportunity to change 
this story of fundamental just and fairness, and I would just 
ask that you take a very serious look at it.
    Ms. Yellen. I will. Thank you.
    Senator Merkley. Thank you.
    Chairman Johnson. Senator Shelby has a brief point to make.
    Senator Shelby. Thank you.
    Madam Chair, thank you very much for sticking around with 
us. I would pose this: Is the Fed inconsistent? Let me explain. 
On one hand, the Federal Reserve holds GSE securities on its 
balance sheet at face value. And on the other hand, it is 
asking under Basel's regulation, it is asking financial 
institutions--that is, our banks--that hold the same GSE-backed 
securities that the Fed has basically to take a 15-percent 
haircut when risk weighting such assets for the purpose of 
Basel III calculations. That is my understanding of what is 
going on.
    How is the market to interpret this discrepancy in the 
approach by the Fed to its own portfolio as opposed to the 
portfolio of the banks that it regulates? It looks like on 
monetary policy you have got one thing, your own stuff, and 
then the banks, who hold about 40 percent of GSEs, prudential 
regulations look at it in a different way?
    Ms. Yellen. Well, Senator, you mean they have capital 
requirements----
    Senator Shelby. That is right. That is exactly right. 
Liquidity. Whether they call it ``new liquidity coverage 
ratio'' under the Basel III deal.
    Ms. Yellen. Oh, OK. But why would the Fed have a 
liquidity--I mean, we----
    Senator Shelby. The banks--go ahead.
    Ms. Yellen. You mentioned that we carry these on our 
balance sheet at face value. That is an accounting convention 
that we use in Fed accounting. We also report when there are 
price fluctuations for these securities, we report that in our 
financial accounts, so the market value of these securities 
is----
    Senator Shelby. I understand that. But at the same time, 
aren't you on one hand treating as a regulator your banks, say 
they have to take a 15-percent haircut on GSE holdings, and the 
Fed is different. I know you do different things.
    Ms. Yellen. I mean, we want to----
    Senator Shelby. The approach should be consistent. Or 
should it not?
    Ms. Yellen. We want to make sure in the liquidity coverage 
ratio that banks have adequate liquid assets to be able to meet 
potential withdrawals that they can face over a period of about 
a month.
    Senator Shelby. Sure.
    Ms. Yellen. And while mortgage-backed securities are assets 
that can be sold, they are somewhat less liquid than Treasurys, 
and the most liquid in cash. And so in computing this, we put 
in place a 15-percent haircut. But to say that the same 
requirement should apply to the Fed, I am confused about that 
because we do not have the possibility of having runs on the 
Federal Reserve----
    Senator Shelby. Ma'am, I was raising the inconsistency in 
the approach. Is there an in consistent approach? Or do you say 
one is good for the banks and the Fed does not need that? Is 
that what you are saying?
    Ms. Yellen. I believe that the Fed does not need that, and 
we are not in this area of liquidity in the need to maintain 
liquidity that the Federal Reserve is really quite different 
than an ordinary commercial bank. We are not subject to 
liquidity runs, and to me it is different.
    Senator Shelby. But, the same, you are treating securities 
differently--I mean you are treating the GSE-backed securities 
in a different way. You are basically weighting, weighing the 
haircut of 15 percent discount in a way of the value of those 
securities. Is that correct?
    Ms. Yellen. Well, because we think----
    Senator Shelby. Under Basel III.
    Ms. Yellen. We think they are somewhat less liquid than, 
say, Treasurys, and because they are somewhat less liquid, the 
markets in which they trade, there needs to be some haircut 
that they are not quite as good as cash or Treasurys in terms 
of meeting potential runs on a bank or liquidity drains. And to 
me that is an appropriate recognition of the difference in 
liquidity between mortgage-backed securities and Treasurys or 
cash.
    Senator Shelby. Fifteen percent is a pretty good number, 
though, isn't it?
    Ms. Yellen. It is something.
    Senator Shelby. Does it seem like a high number? Is that an 
arbitrary number that has been brought forth to risk weight 
something at a discount of 15 percent?
    Ms. Yellen. There are judgments that have been made 
throughout about what the appropriate rates of discount----
    Senator Shelby. Well, a lot of the banks--a lot of the 
smaller banks are concerned about this because they have bought 
a lot of GSE securities, and if they are going to be risk 
weighted adversely in their portfolio, it could cause them a 
problem, as you well know.
    Ms. Yellen. So we put this proposal out for comment, and, 
you know, we will certainly look at all the comments that----
    Senator Shelby. Well, look at it closely, is all I----
    Ms. Yellen. We will look at all the comments that come in 
and try to take that into account as we craft a final proposal.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Chair Yellen, I want to thank you for 
your excellent testimony.
    This hearing is adjourned.
    [Whereupon, at 12:17 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow]:
                 PREPARED STATEMENT OF JANET L. YELLEN
        Chair, Board of Governors of the Federal Reserve System
                           February 27, 2014
    Chairman Johnson, Senator Crapo and other Members of the Committee, 
I am pleased to present the Federal Reserve's semiannual Monetary 
Policy Report to the Congress. In my remarks today, I will discuss the 
current economic situation and outlook before turning to monetary 
policy. I will conclude with an update on our continuing work on 
regulatory reform. First, let me acknowledge the important 
contributions of Chairman Bernanke. His leadership helped make our 
economy and financial system stronger and ensured that the Federal 
Reserve is transparent and accountable. I pledge to continue that work.
Current Economic Situation and Outlook
    The economic recovery gained greater traction in the second half of 
last year. Real gross domestic product (GDP) is currently estimated to 
have risen at an average annual rate of more than 3 \1/2\ percent in 
the third and fourth quarters, up from a 1 \3/4\ percent pace in the 
first half. The pickup in economic activity has fueled further progress 
in the labor market. About 1 \1/4\ million jobs have been added to 
payrolls since the previous Monetary Policy Report last July, and 3 \1/
4\ million have been added since August 2012, the month before the 
Federal Reserve began a new round of asset purchases to add momentum to 
the recovery. The unemployment rate has fallen nearly a percentage 
point since the middle of last year and 1 \1/2\ percentage points since 
the beginning of the current asset purchase program. Nevertheless, the 
recovery in the labor market is far from complete. The unemployment 
rate is still well above levels that Federal Open Market Committee 
(FOMC) participants estimate is consistent with maximum sustainable 
employment. Those out of a job for more than 6 months continue to make 
up an unusually large fraction of the unemployed, and the number of 
people who are working part time but would prefer a full-time job 
remains very high. These observations underscore the importance of 
considering more than the unemployment rate when evaluating the 
condition of the U.S. labor market.
    Among the major components of GDP, household and business spending 
growth stepped up during the second half of last year. Early in 2013, 
growth in consumer spending was restrained by changes in fiscal policy. 
As this restraint abated during the second half of the year, household 
spending accelerated, supported by job gains and by rising home values 
and equity prices. Similarly, growth in business investment started off 
slowly last year but then picked up during the second half, reflecting 
improving sales prospects, greater confidence, and still-favorable 
financing conditions. In contrast, the recovery in the housing sector 
slowed in the wake of last year's increase in mortgage rates.
    Inflation remained low as the economy picked up strength, with both 
the headline and core personal consumption expenditures, or PCE, price 
indexes rising only about 1 percent last year, well below the FOMC's 2 
percent objective for inflation over the longer run. Some of the recent 
softness reflects factors that seem likely to prove transitory, 
including falling prices for crude oil and declines in non-oil import 
prices.
    My colleagues on the FOMC and I anticipate that economic activity 
and employment will expand at a moderate pace this year and next, the 
unemployment rate will continue to decline toward its longer-run 
sustainable level, and inflation will move back toward 2 percent over 
coming years. We have been watching closely the recent volatility in 
global financial markets. Our sense is that at this stage these 
developments do not pose a substantial risk to the U.S. economic 
outlook. We will, of course, continue to monitor the situation.
Monetary Policy
    Turning to monetary policy, let me emphasize that I expect a great 
deal of continuity in the FOMC's approach to monetary policy. I served 
on the Committee as we formulated our current policy strategy and I 
strongly support that strategy, which is designed to fulfill the 
Federal Reserve's statutory mandate of maximum employment and price 
stability.
    Prior to the financial crisis, the FOMC carried out monetary policy 
by adjusting its target for the Federal funds rate. With that rate near 
zero since late 2008, we have relied on two less-traditional tools--
asset purchases and forward guidance--to help the economy move toward 
maximum employment and price stability. Both tools put downward 
pressure on longer-term interest rates and support asset prices. In 
turn, these more accommodative financial conditions support consumer 
spending, business investment, and housing construction, adding impetus 
to the recovery.
    Our current program of asset purchases began in September 2012 amid 
signs that the recovery was weakening and progress in the labor market 
had slowed. The Committee said that it would continue the program until 
there was a substantial improvement in the outlook for the labor market 
in a context of price stability. In mid-2013, the Committee indicated 
that if progress toward its objectives continued as expected, a 
moderation in the monthly pace of purchases would likely become 
appropriate later in the year. In December, the Committee judged that 
the cumulative progress toward maximum employment and the improvement 
in the outlook for labor market conditions warranted a modest reduction 
in the pace of purchases, from $45 billion to $40 billion per month of 
longer-term Treasury securities and from $40 billion to $35 billion per 
month of agency mortgage-backed securities. At its January meeting, the 
Committee decided to make additional reductions of the same magnitude. 
If incoming information broadly supports the Committee's expectation of 
ongoing improvement in labor market conditions and inflation moving 
back toward its longer-run objective, the Committee will likely reduce 
the pace of asset purchases in further measured steps at future 
meetings. That said, purchases are not on a preset course, and the 
Committee's decisions about their pace will remain contingent on its 
outlook for the labor market and inflation as well as its assessment of 
the likely efficacy and costs of such purchases.
    The Committee has emphasized that a highly accommodative policy 
will remain appropriate for a considerable time after asset purchases 
end. In addition, the Committee has said since December 2012 that it 
expects the current low target range for the Federal funds rate to be 
appropriate at least as long as the unemployment rate remains above 6 
\1/2\ percent, inflation is projected to be no more than a half 
percentage point above our 2 percent longer-run goal, and longer-term 
inflation expectations remain well anchored. Crossing one of these 
thresholds will not automatically prompt an increase in the Federal 
funds rate, but will instead indicate only that it had become 
appropriate for the Committee to consider whether the broader economic 
outlook would justify such an increase. In December of last year and 
again this January, the Committee said that its current expectation--
based on its assessment of a broad range of measures of labor market 
conditions, indicators of inflation pressures and inflation 
expectations, and readings on financial developments--is that it likely 
will be appropriate to maintain the current target range for the 
Federal funds rate well past the time that the unemployment rate 
declines below 6 \1/2\ percent, especially if projected inflation 
continues to run below the 2 percent goal. I am committed to achieving 
both parts of our dual mandate: helping the economy return to full 
employment and returning inflation to 2 percent while ensuring that it 
does not run persistently above or below that level.
Strengthening the Financial System
    I will finish with an update on progress on regulatory reforms and 
supervisory actions to strengthen the financial system. In October, the 
Federal Reserve Board proposed a rule to strengthen the liquidity 
positions of large and internationally active financial 
institutions.\1\ Together with other Federal agencies, the Board also 
issued a final rule implementing the Volcker rule, which prohibits 
banking firms from engaging in short-term proprietary trading of 
certain financial instruments.\2\ On the supervisory front, the next 
round of annual capital stress tests of the largest 30 bank holding 
companies is under way, and we expect to report results in March.
---------------------------------------------------------------------------
    \1\ See Board of Governors of the Federal Reserve System (2013), 
``Federal Reserve Board Proposes Rule to Strengthen Liquidity Positions 
of Large Financial Institutions,'' press release, October 24, 
www.federalreserve.gov/newsevents/press/bcreg/20131024a.htm.
    \2\ See Board of Governors of the Federal Reserve System, Commodity 
Futures Trading Commission, Federal Deposit Insurance Corporation, 
Office of the Comptroller of the Currency, and Securities and Exchange 
Commission (2013), ``Agencies Issue Final Rules Implementing the 
Volcker Rule,'' joint press release, December 10, 
www.federalreserve.gov/newsevents/press/bcreg/20131210a.htm.
---------------------------------------------------------------------------
    Regulatory and supervisory actions, including those that are 
leading to substantial increases in capital and liquidity in the 
banking sector, are making our financial system more resilient. Still, 
important tasks lie ahead. In the near term, we expect to finalize the 
rules implementing enhanced prudential standards mandated by section 
165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 
We also are working to finalize the proposed rule strengthening the 
leverage ratio standards for U.S.-based, systemically important global 
banks. We expect to issue proposals for a risk-based capital surcharge 
for those banks as well as for a long-term debt requirement to help 
ensure that these organizations can be resolved. In addition, we are 
working to advance proposals on margins for noncleared derivatives, 
consistent with a new global framework, and are evaluating possible 
measures to address financial stability risks associated with short-
term wholesale funding. We will continue to monitor for emerging risks, 
including watching carefully to see if the regulatory reforms work as 
intended.
    Since the financial crisis and the depths of the recession, 
substantial progress has been made in restoring the economy to health 
and in strengthening the financial system. Still, there is more to do. 
Too many Americans remain unemployed, inflation remains below our 
longer-run objective, and the work of making the financial system more 
robust has not yet been completed. I look forward to working with my 
colleagues and many others to carry out the important mission you have 
given the Federal Reserve.
    Thank you. I would be pleased to take your questions.
  RESPONSE TO WRITTEN QUESTION OF SENATOR HAGAN FROM JANET L. 
                             YELLEN

Q.1. One concern I've heard is the uncertainty surrounding 
potential designation as a systemically important financial 
institutions--in particular, how the Federal Reserve will 
regulate nonbank firms that are designated.
    Will the Federal Reserve establish a framework for 
measuring the impact of designation on individual companies, 
their customers and the financial markets before moving forward 
with further designation for nonbank financial firms? Will 
there be opportunities for firms to adjust their business model 
so they can remedy systemic concerns?

A.1. Section 165 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act or the Act) directs the 
Board of Governors of the Federal Reserve System (Board) to 
establish prudential standards for bank holding companies with 
total consolidated assets of $50 billion or more and for 
nonbank financial companies that the Financial Stability 
Oversight Council (Council) has determined will be supervised 
by the Board (nonbank financial companies supervised by the 
Board) in order to prevent or mitigate risks to U.S. financial 
stability that could arise from the material financial distress 
or failure, or ongoing activities of, large, interconnected 
financial institutions.
    The Council considers the potential impact of its actions 
on financial markets, firms, and financial stability. For 
example, in considering whether to subject a nonbank financial 
company to Federal Reserve supervision under section 113 of the 
Dodd-Frank Act, the Council is required to consider 10 factors 
specifically determined by Congress and set forth in the 
statute related to the company's vulnerability to financial 
distress and its potential to transmit financial distress to 
other firms and markets. In this process, the Council engages 
in company-specific evaluations and discussions with the firm. 
The Council also annually reviews whether designated nonbank 
financial companies should continue to be subject to enhanced 
prudential standards. As part of that annual review, the 
Council considers any changes in the business activities of 
designated firms that would reduce the potential impact of 
material financial distress or failure of the firm on U.S. 
financial stability.
    The Board recognizes that the companies designated by the 
Council may have a range of businesses, structures, and 
activities, and that the types of risks to financial stability 
posed by nonbank financial companies will likely vary. 
Following designation of a nonbank financial company for 
supervision by the Board, the Board intends to 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 to a category of nonbank 
financial companies. In applying the standards to a nonbank 
financial company, the Board will take into account differences 
among nonbank financial companies supervised by the Board and 
bank holding companies with total consolidated assets of $50 
billion or more. For those nonbank financial companies that are 
similar in activities and risk profile to bank holding 
companies, the Board expects to apply enhanced prudential 
standards that are similar to those that apply to bank holding 
companies. For those that differ from bank holding companies in 
their activities, balance sheet structure, risk profile, and 
functional regulation, the Board expects to apply more tailored 
standards. The Board's ability to tailor capital requirements 
for companies designated by the Council is, however, limited 
substantially by section 171 of the Dodd-Frank Act, which 
requires the Board to subject such companies to capital 
requirements that are at least as stringent as those applicable 
to banks. The Board will ensure that nonbank financial 
companies receive notice and opportunity to comment prior to 
determination of their enhanced prudential standards.
                                ------                                


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

Q.1. Chairwoman Yellen, since the financial crisis, the 
implantation of Dodd-Frank, and industry consolidation, 
community banks are still facing many challenges that impend 
the continued success of this relationship-based lending model. 
Because independent research is so crucial in helping lawmakers 
and regulators understand and effectively shape laws and 
regulation affecting community banks, the fact that the Federal 
Reserve and Conference of State Bank Supervisors hosted a 
national community banking research and policy conference last 
year is laudable. I am glad that a similar event is planned for 
this year, and hope that, under your leadership the Federal 
Reserve will continue this partnership.
    Do you support this effort encouraging community banking 
research, and do you believe that continued research in this 
area is beneficial and can better inform public policy?

A.1. I strongly support continued research to assist 
policymakers in understanding how successful community banks 
can contribute to the health of the U.S. economy. Better 
research on community banking issues should allow policymakers 
to make more effective supervisory and regulatory decisions 
that are appropriate to the unique characteristics of community 
banks. The inaugural research conference on Community Banking 
in the 21st Century that the Federal Reserve and Conference of 
State Bank Supervisors sponsored at the Federal Reserve Bank of 
St. Louis in October 2013 provided a unique opportunity for 
community bankers, academics, policymakers, and bank 
supervisors to discuss research findings and practical 
experience. I am pleased that planning is well under way for a 
similar conference in 2014, and my hope is that events such as 
these will serve as a catalyst for additional high-quality 
research that can inform effective policymaking with regard to 
community banks.

Q.2. What other ways can the Federal Reserve support and 
encourage independent research on the role community banks play 
in our economy?

A.2. Our newly instituted annual community banking research 
conference, which we co-sponsor with the Conference of State 
Bank Supervisors, is the primary way that the Federal Reserve 
can encourage independent research on the role community banks 
play in our economy. These conferences provide a unique 
opportunity for academics who are interested in community 
banking to present their research to a diverse audience, 
including not only other researchers, but also community 
bankers and bank regulators. The conferences facilitate 
conversations among these three groups that might not otherwise 
take place. These conversations can lead to future 
collaborations that benefit all parties involved. In addition, 
the annual conferences provide a known venue for presenting 
community banking research, and send a strong signal to 
academics that such research is highly valued by bankers and 
bank regulators. Beyond the conferences, the Federal Reserve 
can encourage research on community banking topics by providing 
opportunities for community banking researchers to present 
their work in seminars held at the Board of Governors or at 
Reserve Banks and to interact with Federal Reserve System 
staff.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JANET L. 
                             YELLEN

Q.1. There have been a lot of unintended consequences coming 
out of the Volcker Rule. I am concerned about one that hasn't 
gotten a lot of attention but could force institutions to take 
losses, have a harmful effect on the economy, and drive more 
assets to the shadow banking system. Congress included a 
special extended transition period in the Volcker Rule that was 
intended to allow preexisting ``illiquid'' private equity 
investments to run off naturally, without the need for forced 
fire-sales. I am concerned that the Federal Reserve may have 
defined an illiquid fund in such a way as to make it virtually 
impossible for organizations to take advantage of this 
transition period. I understand the Federal Reserve did not 
``re-finalize'' its conformance period rule (which includes the 
illiquid fund definition) when the rest of the Volcker 
regulations were finalized. What is the Federal Reserve doing 
to take comments on this issue into account and to prevent 
institutions from being forced to sell these investments at a 
loss? Are you worried about these assets moving into the 
unregulated shadow banking system?

A.1. Congress determined that section 13 of the Bank Holding 
Company Act (``BHC Act'') was necessary to promote and enhance 
the safety and soundness of banking entities and the financial 
stability of the United States by prohibiting banking entities 
from engaging in short-term proprietary trading of financial 
instruments and making certain types of investments in private 
equity funds and hedge funds, subject to certain exemptions.
    By statute, the requirements of section 13 are subject to a 
conformance period that ended on July 21, 2014, absent action 
to extend the period by the Federal Reserve. The conformance 
period for section 13 may be extended for up to three 
additional 1-year periods if, in the judgment of the Federal 
Reserve, an extension is consistent with the purposes of 
section 13 and would not be detrimental to the public interest. 
Additionally, the Federal Reserve may, upon application of a 
banking entity, extend for up to an additional 5 years the 
period during which a banking entity, to the extent necessary 
to fulfill a contractual obligation that was in effect on May 
1, 2010, may take or retain its ownership interest in, or 
otherwise provide additional capital to, an illiquid fund.
    On February 9, 2011, the Federal Reserve issued its final 
conformance rule as required under section 13(c)(6) of the BHC 
Act,\1\ and stated that the Federal Reserve expected to review 
the final conformance rule after completion of the final rule 
implementing section 13 of the BHC Act, to determine whether 
modifications or adjustments to the rule are appropriate in 
light of the final rules adopted under that section. In October 
2011, as part of proposing implementing rules for 13, the 
Federal Reserve requested comment on whether any of the 
conformance provisions in that rule should be revised.
---------------------------------------------------------------------------
    \1\ See Conformance Period for Entities Engaged in Prohibited 
Proprietary Trading or Private Equity Fund or Hedge Fund Activities, 76 
FR 8265 (Feb. 14, 2011).
---------------------------------------------------------------------------
    Consistent with the statute and in order to give markets 
and firms an opportunity to adjust to the prohibitions and 
requirements of any implementing rules, the Federal Reserve in 
December 2013, exercised its statutory authority to extend the 
general conformance period under section 13 of the BHC Act 
until July 21, 2015, on the same date that the final 
implementing rules for section 13 were issued.\2\
---------------------------------------------------------------------------
    \2\ See Board Order Approving Extension of the Conformance Period 
(Dec. 10, 2013). On April 7, 2014, the Federal Reserve issued a 
statement that it intends to grant two additional 1-year extensions of 
the conformance period under section 13 of the BHC Act that would allow 
banking entities additional time to conform to the statute ownership 
interests in and sponsorship of collateralized loan obligations 
(``CLOs'') in place as of December 31, 2013, that do not qualify for 
the exclusion in the final rule implementing section 13 of the BHC Act 
for loan securitizations. This would permit banking entities to retain 
ownership interests in and sponsorship of CLOs held as of that date 
until July 21, 2017.
---------------------------------------------------------------------------
    Staff of the Federal Reserve has met with representatives 
of interested parties and is currently reviewing comments 
submitted on the conformance rule and definition of illiquid 
fund. These commenters have requested that the Federal Reserve 
broaden the definition of illiquid assets in the conformance 
rule and the meaning of what is ``necessary to fulfill a 
contractual obligation'' of the banking entity. The Federal 
Reserve is considering these comments in light of the final 
rule implementing section 13 to determine whether to revisit 
the conformance rule. To the extent that the Federal Reserve's 
conformance rule has unintended impacts, the Federal Reserve 
would evaluate and address those impacts within the parameters 
of the statute if possible, and otherwise to inform Congress.

Q.2.a. You may already be in receipt of a bi-partisan letter to 
which I am a signatory that raises concerns about new global 
capital standards being contemplated by the Financial Stability 
Board (FSB) for ``internationally active insurance groups.''
    In the United States, unlike in Europe, policy holders are 
protected by State guaranty funds. Furthermore, U.S. insurance 
companies already comply with the capital standards 
requirements in European countries. The FSB's effort may be a 
solution in search of a problem.

A.2.a. In its July 2013 press release announcing the policy 
measures that would apply to the designated global systemically 
important insurers (GSIIs), the International Association of 
Insurance Supervisors (IAIS) stated that it considered a sound 
capital and supervisory framework for the global insurance 
sector more broadly to be essential for supporting financial 
stability, and that it planned to develop a comprehensive, 
group-wide supervisory and regulatory framework for 
internationally active insurance groups (IAIGs), including an 
international capital standard (ICS). The business of insurance 
has become increasingly global in the past few decades. The 
decision of the IAIS to develop an ICS for IAIGs reflects that 
trend, and has a parallel in the development of capital 
standards for internationally active banks by the Basel 
Committee on Banking Supervision (BCBS). The BCBS has been 
promulgating capital requirements for internationally active 
banks since the 1980s. The U.S. Federal banking agencies, which 
are members of the BCBS, have long contributed to and supported 
the work to develop common baseline prudential standards for 
global banks.
    The Financial Stability Board (FSB) endorsed the proposed 
measures announced by the IAIS. That endorsement was consistent 
with the mission of the FSB to coordinate at the international 
level the work of national financial authorities and 
international standard setting bodies, including the IAIS, and 
to develop and promote the implementation of effective 
regulatory, supervisory and other financial sector policies in 
the interest of financial stability. State insurance 
supervisors, the National Association of Insurance 
Commissioners, the Federal Insurance Office, and more recently, 
the Federal Reserve, are members of the IAIS.

Q.2.b. I am not aware of any legal authority for the FSB to 
pursue the creation and adoption of capital standards for 
``internationally active insurance groups'' in the United 
States. Will you commit to resisting efforts by others on the 
FSB to establish and impose new global capital standards that 
are at odds with the current regulatory and structural 
framework of U.S. insurers or would put U.S. insurers at a 
competitive disadvantage?

A.2.b. The Federal Reserve is fully committed to transparency 
and due process in the development and promulgation of 
regulatory standards. We support the practice of the IAIS to 
release for public comment its proposals for the basic capital 
requirements for globally systemically important insurers and 
expect that the IAIS will follow a similar process in the 
development of the ICS. It is important to note that neither 
the FSB nor the IAIS has the ability to implement requirements 
in any jurisdiction. Implementation in the United States would 
have to be consistent with U.S. law and comply with the 
administrative rulemaking process, including an opportunity for 
public comment.
                                ------                                


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

Q.1.a. During your testimony, you indicated the FOMC will try 
to get a ``firmer handle'' on what is causing the recent soft 
economic reports and that the FOMC is open to reconsidering 
adjusting the pace of asset purchases accordingly.
    In your estimate, how much lag time exists between Fed 
monetary policy adjustments and their impact on the real 
economy?

A.1.a. Estimates from standard econometric models of the U.S. 
economy suggest that monetary policy adjustments begin to 
affect growth of output and employment after a lag of about one 
quarter, and that the effects build for a few quarters 
thereafter. Standard estimates are that inflation responds with 
a longer lag. These estimates are derived from studies of the 
economy's responses to adjustments in the Federal Open Market 
Committee's (``Committee'') target for the Federal funds rate 
in normal times. We have less evidence with which to estimate 
the lags in the effects of changes in asset purchases on the 
economy, but the lags seem unlikely to be shorter.

Q.1.b. Do you believe that the Fed's December announcement to 
begin the slow taper of asset purchases could have impacted 
employment data in January?

A.1.b. No. The reported sluggishness in job growth early this 
year appears to reflect unusually severe weather, at least in 
part. After assessing a wide range of indicators of economic 
activity and labor market conditions, the Committee judged that 
there is sufficient underlying strength in the U.S. economy to 
support a pickup in job growth and ongoing improvement in labor 
market conditions. Moreover, even with the reduction in the 
pace of its asset purchases, the Federal Reserve continues to 
add to its securities holdings, thereby putting downward 
pressure on longer-term interest rates and providing stimulus 
to the economy.

Q.1.c. If the FOMC decided to discontinue or even reverse the 
taper based on weak economic data, how long would you expect it 
to take for the decision to impact employment and economic 
growth?

A.1.c. I would expect such a decision to affect interest rates 
quickly; indeed interest rates likely would begin to decline in 
response to surprisingly weak economic data before the 
Committee even released its decision. Employment and output 
growth, in turn, likely would begin to respond to lower 
interest rates in a quarter or two.

Q.2. In your testimony, you mention that the reduction of 
large-scale asset purchases would depend on inflation and 
employment data along with the likely efficacy and costs of 
such purchases.
    Can you explain what the Board's current view is on the 
efficacy and costs of additional LSAPs?

A.2. Based on research conducted by economists at the Federal 
Reserve and by many outside experts, our judgment is that LSAPs 
have put downward pressure on longer-term interest rates and 
helped to make financial conditions more accommodative. These 
changes in financial conditions, in turn, have had a meaningful 
effect in supporting the economic recovery and have helped keep 
inflation nearer the Committee's 2 percent goal. As we have 
noted many times, LSAPs and monetary policy generally are not a 
panacea for all of the Nation's economic difficulties. But our 
judgment is that our policy actions have helped to foster 
progress toward our statutory mandate of maximum employment and 
price stability.
    The Committee has discussed the potential costs of LSAPs at 
length. Among the possible costs of LSAPs, policymakers have 
pointed to potential risks to financial stability; possible 
complications for the Federal Reserve's strategy for removing 
policy accommodation at the appropriate time, which could 
contribute to inflation pressures; and the possible 
implications of LSAPs for Federal Reserve net income in some 
scenarios. To date, all of these risks appear manageable. We 
are monitoring financial markets very carefully, but there is 
little evidence at this point of excessive risk-taking or 
broad-based reliance on leverage. We are confident that we have 
the tools necessary to remove policy accommodation at the 
appropriate time and inflation has been running below the 
Committee's 2 percent goal for some time and is expected to 
move up only gradually over time. Finally, we have examined the 
likely path of Federal Reserve net income in many alternative 
scenarios. In all but the most extreme cases, Federal Reserve 
income is expected to remain positive in coming years. 
Moreover, cumulative Federal Reserve net income over the entire 
period from 2008-2025 is virtually certain to be very large, 
and much larger than would have been the case in the absence of 
asset purchases. That said, the Federal Reserve takes all these 
possible risks of LSAPs very seriously and, as our statements 
suggest, an increase in our assessment of the likely costs of 
asset purchases would certainly be taken into account in 
judging the appropriate pace of such purchases.

Q.3.a. You have indicated your commitment to using forward 
guidance to inform market observers about Fed intentions in 
order to maintain a stimulative monetary footing. You and your 
predecessor have also repeatedly stated that any adjustments to 
the pace of asset purchases would be wholly dependent on the 
data.
    Do you believe there is a contradiction between the Fed 
adamantly stating that any changes in quantitative easing will 
be data dependent while simultaneously stating that in the 
future the Fed will keep rates lower for longer than economic 
conditions would otherwise necessitate?

A.3.a. Both the Committee's forward guidance and its asset 
purchases have been designed to provide stimulus while being 
data dependent. The Committee has provided three types of 
forward guidance: qualitative guidance (extended period), date-
based guidance, and guidance using economic thresholds. All 
have been designed to provide stimulus by conveying the 
Committee's expectation that the Federal funds rate target 
would be lower for longer than may otherwise have been expected 
without the guidance. However, the guidance has consistently 
been expressed as the Committee's current assessment of the 
policy it expects to be appropriate in the future given future 
economic conditions. Indeed the threshold-based guidance was 
explicitly data-dependent. Thus, the Committee always reserved 
the option to raise interest rates sooner or keep them 
unchanged for longer than indicated in the guidance. Asset 
purchases have been designed to provide economic stimulus by 
putting downward pressure on longer-term interest rates, and 
have also been explicitly data dependent, especially the 
current flow-based asset purchase program, which the Committee 
has indicated will continue until there has been a substantial 
improvement in the outlook for the market, conditional on an 
ongoing review of their efficacy and costs.

Q.3.b. Does the Fed run the risk of losing credibility if you 
do not stick to your forward guidance in the coming years? Or, 
does the Fed run the danger of exercising monetary policy that 
is no longer appropriate for the economic conditions in the 
future in order to maintain the commitments a previous Board 
has already made?

A.3.b. The Committee's forward guidance is intended to provide 
the public with a better understanding of how it will conduct 
monetary policy in the future, but the guidance has 
consistently been expressed in terms of what policy would be 
appropriate in the future given the Committee's current outlook 
for future economic conditions. Indeed, the threshold-based 
forward guidance was explicitly data-contingent. If the 
Committee were to conduct policy in the future in a manner that 
was inconsistent with its past statements, that could harm its 
credibility. But those past statements do not constrain the 
Committee to conduct policy in the future in a fixed manner, 
regardless of the future prevailing economic conditions.

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