[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
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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
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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.
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\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).
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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\
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\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.
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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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