[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 10, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-71


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

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

                              ----------                              
                                                                   Page
Hearing held on:
    February 10, 2016............................................     1
Appendix:
    February 10, 2016............................................    55

                               WITNESSES
                      Wednesday, February 10, 2016

Yellen, Hon. Janet L., Chair, Board of Governors of the Federal 
  Reserve System.................................................     5

                                APPENDIX

Prepared statements:
    Yellen, Hon. Janet L.........................................    56

              Additional Material Submitted for the Record

Yellen, Hon. Janet L.:
    Monetary Policy Report of the Board of Governors of the 
      Federal Reserve System, dated February 10, 2016............    64
    Written responses to questions for the record submitted by 
      Representative Fincher.....................................   116
    Written responses to questions for the record submitted by 
      Representative Hill........................................   118
    Written responses to questions for the record submitted by 
      Representative Hultgren....................................   120
    Written responses to questions for the record submitted by 
      Representative Luetkemeyer.................................   124
    Written responses to questions for the record submitted by 
      Representative Lynch.......................................   128
    Written responses to questions for the record submitted by 
      Representative Messer......................................   130
    Written responses to questions for the record submitted by 
      Representative Mulvaney....................................   131
    Written responses to questions for the record submitted by 
      Representative Murphy......................................   134
    Written responses to questions for the record submitted by 
      Representative Sherman.....................................   135
    Written responses to questions for the record submitted by 
      Representative Tipton......................................   137
    Written responses to questions for the record submitted by 
      Representative Waters......................................   139

 
                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

                              ----------                              


                      Wednesday, February 10, 2016

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Royce, Lucas, 
Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick, 
Luetkemeyer, Duffy, Hurt, Stivers, Stutzman, Mulvaney, 
Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Messer, 
Schweikert, Guinta, Tipton, Williams, Poliquin, Love, Hill, 
Emmer; Waters, Maloney, Velazquez, Sherman, Meeks, Hinojosa, 
Clay, Lynch, Scott, Green, Cleaver, Moore, Ellison, Perlmutter, 
Himes, Carney, Sewell, Foster, Murphy, Delaney, Sinema, Beatty, 
Heck, and Vargas.
    Chairman Hensarling. The Financial Services Committee will 
come to order. Without objection, the Chair is authorized to 
declare a recess of the committee at any time.
    This hearing is for the purpose of receiving the semiannual 
testimony of the Chair of the Board of Governors of the Federal 
Reserve System on the conduct of monetary policy and the state 
of the economy. I now recognize myself for 3 minutes for an 
opening statement.
    Last month, we all heard President Obama attempt to take an 
economic victory lap in his State of the Union speech, but the 
American people are having none of it. They are tired of 
hearing from the out-of-touch ruling class in Washington just 
how good things are when their realities are vastly different.
    So, Chair Yellen, notwithstanding the fact that you are a 
Presidential appointee, I hope you do not follow suit this 
morning.
    The reality is, since the President was elected and the Fed 
embarked upon its unprecedented quantitative easing in zero 
real interest rate policies, working families' paychecks have 
declined. Their net worth has declined.
    The real unemployment rate continues to hover around 10 
percent. Approximately one in six is on food stamps and almost 
15 percent live in poverty. There hasn't been a single year 
when economic growth has reached 3 percent.
    As one published report on this failure noted, ``There is 
no parallel for this since the end of World War II, maybe not 
since the beginning of the Republic.'' Last year's less than 1 
percent GDP growth just punctuates the matter for struggling 
working families.
    I will not use this hearing to either praise or condemn the 
Fed's decision to raise by 25 basis points interest rates in 
December, nor do I think it appropriate to advise the FOMC on 
how to vote during its next meeting. But, given that Article I, 
Section 8 of the Constitution gives Congress the power to coin 
money and regulate the value thereof, I do feel compelled to 
demand that the Fed adopt a monetary policy course that is 
predictable, transparent, sustainable, and, barring terribly 
exigent circumstances, to stick with it.
    This is part of the rationale underlying the House-passed 
Fed Oversight Reform and Modernization Act, known as the FORM 
Act. To use Austrian economist Friedrich Hayek's phrase: ``It 
is fatal conceit to believe that the Fed is capable of 
micromanaging our economy to some state of economic nirvana.'' 
We now have at least 8 years of recent history to prove 
otherwise.
    Most importantly, no amount of monetary policy can 
substitute for sound fiscal policy. Unless and until the 
crushing regulatory onslaught of Obamacare, the Dodd-Frank Act, 
and the EPA is replaced with greater opportunity, competition, 
and innovation, the Fed cannot substantially help our economy; 
it can only hurt it.
    It can hurt it by continuing to serve as the financier and 
facilitator or our unsustainable Federal debt. Just last month, 
the Congressional Budget Office yet again warned of our 
unsustainable debt in its latest baseline release, which 
references the debt 199 times.
    The Fed can hurt our economy by continuing to force 
investors to chase yield, thus inflating dangerous asset 
bubbles, the deflating of which we are likely seeing in our 
turbulent equity markets today.
    The Fed can continue to hurt our economy by failing to 
unwind its unprecedented balance sheet. By growing at almost 
500 percent, the Fed itself has become one of our largest 
sources of systemic risk.
    Finally, separate and apart from monetary policy, 
alarmingly, the Fed, under Dodd-Frank, can now functionally 
control virtually every major corner of the financial services 
sector of our economy. It does so with almost no accountability 
or transparency. Not only does this harm economic growth, it is 
an affront to due process, checks and balances, and the rule of 
law.
    The American people should again be duly alarmed that they 
may wake up one day to discover that our central bankers have 
become our central planners.
    The Chair recognizes the ranking member of the committee, 
Ms. Waters, for 3 minutes for an opening statement.
    Ms. Waters. Thank you, Mr. Chairman, for this meeting here 
today.
    But I would really like to thank Chair Yellen for being 
here with us today to discuss the state of the economy and your 
role in ensuring that a full recovery is achieved for all. As a 
result of your Herculean efforts, the efforts of Democrats in 
Congress, and the Obama Administration, we have truly made 
tremendous progress since the darkest days of the financial 
crisis.
    Over the past 71 consecutive months, our economy has added 
more than 14 million private sector jobs, and the unemployment 
rate has fallen by more than half. But despite this commendable 
progress, significant work remains.
    Wages have yet to see real gains: 7.8 million workers 
remain jobless; 6 million workers are involuntarily working 
part-time jobs; and another 2 million Americans indicate they 
would join the workforce if only the economy was strong enough 
to support them.
    With inflation consistently running below target, I wonder 
whether the expected path for further raising rates over the 
course of 2016 may overemphasize concerns about inflation and 
underestimate the weakness in our labor market.
    I look forward to your comments on this issue.
    Absent a full recovery, I fear that further raising rates 
may be a step that takes us further away from what is needed to 
ensure that the needs of vulnerable populations are met. At 
today's hearing, I also hope we can explore the ramifications 
of an exit strategy that relies heavily on paying private 
sector banks not to lend the funds they hold in reserve and to 
discuss reasonable alternatives that may exist that do not 
involve a massive transfer of wealth from the Federal Reserve 
to private sector banks.
    I just wonder if it is possible for these funds to be used 
for workers who are really worried about whether or not they 
are going to have a pension, or if there can be some social 
responsibility investment with these funds to help workers in 
vulnerable populations?
    Finally, many of us have been very patient about the 
implementation of the living wills. As you know, this is a 
requirement in the Dodd-Frank Act, and it is designed to end 
too-big-to-fail.
    And I know that you have to give careful consideration to 
all of this, but after not one, not two, but five submissions, 
the Federal Reserve has yet to impose consequences for living 
wills that are not credible. What can we do about this? It is 
time we understand that we have given a lot of opportunities to 
the banks to get it right and they haven't done that.
    Chair Yellen, I look forward to hearing your views on the 
economy and I welcome the opportunity to discuss how we can 
more effectively elevate the needs of the most vulnerable 
populations and promote a safe and sound financial system. And 
I want you to know that our audience today is made up of 
workers who really want to hear you talk about this, so I would 
welcome opportunities to address some of their concerns.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from South Carolina, Mr. Mulvaney, the vice chairman of our 
Monetary Policy and Trade Subcommittee, for 2 minutes.
    Mr. Mulvaney. Chair Yellen, when I sat down last night to 
get ready for this hearing, it occurred to me that I could ask 
you about a bunch of things today.
    I could ask you about your plans on interest rates and how 
you arrived at the decisions that you are going to make, what 
you used to arrive at those decisions. I could ask about your 
role at the Fed in regulating financial institutions. Dodd-
Frank, for example, has now given you regulatory powers over 
banks, nonbanks, clearinghouses, and thrift holding companies.
    It also struck me I could even ask you about the role of 
the Fed, and more specifically the New York branch, in the 
possibly misleading statements that I believe Secretary Lew 
made to two congressional committees regarding the Fed and the 
Treasury's role in intentionally withholding information from 
Congress about plans to prioritize debt payments during the 
last government shutdown.
    And then, I realized that is too much. That is too much not 
just to ask you in the few minutes that we are going to have 
today; it is just too much for you to be doing. The Fed has, 
like so many other parts of our government, grown way beyond 
its original intended scope.
    When Congress chartered the Bank in 1913, we asked it to do 
one thing: keep the financial system, and primarily currency, 
stable. Today, the Fed is involved in everything from how much 
purchasing power these people have, to where they can bank, how 
they can invest and save, and, to believe some, whether or not 
they even have a job.
    Maybe you shouldn't be involved in trying to get us to full 
employment, something that your own economics orthodoxy teaches 
us you don't have the ability to do, but only fiscal policy can 
do. Maybe you shouldn't be involved with regulating mortgages 
and credit cards. And you certainly shouldn't be involved in 
political decisions to intentionally keep Congress in the dark 
about how this country is going to pay back its principal and 
its interest on the debt.
    So I hope today we get a chance to talk about a lot of 
things--sound money, the dual mandate, full employment, 
regulations, the debt ceiling, community banks, the impact of 
zero rates on retirees, asset bubbles--in the hopes that at the 
end we discover that perhaps the time has come to get back to 
basics, and one and one thing only, which is long-term price 
stability.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, the ranking member of our Monetary Policy and Trade 
Subcommittee, for 2 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman, and welcome 
back, Chair Yellen.
    As you can tell from the opening statements, there is 
plenty to discuss since your last appearance before this 
committee. I supported your rate increase in December. I still 
do. And I think you are providing a lot of credibility to 
markets with your leadership.
    However, these seem to be economic times that are destined 
to be interesting. Since December we have witnessed a lot of 
global economic turmoil, and now it is turning up in the United 
States, as reflected in our stock market.
    Foreign central banks are moving to ease rates even as we 
are moving to try to tighten them. And I am not saying that we 
need to harmonize our monetary policy, but I am very interested 
in hearing how you and the Fed are working with foreign central 
banks to get in front of these ominous trends.
    As you have stated so many times before, monetary policy is 
a limited tool. But if we are going to grow our economy and 
keep on track, and as I look at the folk in green in the 
audience, it causes me to realize that Members of Congress have 
to do their part, too, and not just throw it in all in the lap 
of the Fed. We have to embrace proven growth strategies like 
tackling poverty, especially among women, by providing 
vocational training so that they can qualify and compete for 
sustainable jobs with living wages.
    And with that, I yield back the balance of my time.
    Chairman Hensarling. The gentlelady yields back.
    Today, we welcome the testimony of the Honorable Janet 
Yellen, Chair of the Federal Reserve. Chair Yellen has 
previously testified before this committee so I believe she 
needs no further introduction.
    Without objection, Chair Yellen, your written statement 
will be made a part of the record. You are now recognized for 5 
minutes to give an oral presentation of your testimony.
    Thank you.

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

    Mrs. Yellen. Thank you. Chairman Hensarling, Ranking Member 
Waters, and 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.
    Since my appearance before this committee last July, the 
economy has made further progress toward the Federal Reserve's 
objective of maximum employment. And while inflation is 
expected to remain low in the near term, in part because of 
further declines in energy prices, the Federal Open Market 
Committee (FOMC) expects that inflation will rise to its 2 
percent objective over the medium term.
    In the labor market, the number of payroll jobs rose 2.7 
million in 2015, and posted a further gain of 150,000 in 
January of this year. The cumulative increase in employment 
since its trough in early 2010 is now more than 13 million 
jobs.
    Meanwhile, the unemployment rate fell to 4.9 percent in 
January, 0.8 of a percentage point below its level a year ago 
and in line with the median of FOMC participants' most recent 
estimates of its longer-run normal level.
    Other measures of labor market conditions have also shown 
solid improvement, with noticeable declines over the past year 
in the number of individuals who want to work, and are 
available to work, but have not actively searched recently, and 
in the number of people who are working part-time but would 
rather work full-time.
    However, these measures remain above the levels seen prior 
to the recession, suggesting that some slack in labor markets 
remains. Thus, while labor market conditions have improved 
substantially, there is still room for further sustainable 
improvement.
    The strong gains in the job market last year were 
accompanied by a continued moderate expansion in economic 
activity. U.S. real gross domestic product is estimated to have 
increased about 1.75 percent in 2015.
    Over the course of the year, subdued foreign growth and the 
appreciation of the dollar restrains net exports. In the fourth 
quarter of last year, growth in the gross domestic product is 
reported to have slowed more sharply, to an annual rate of just 
0.75 percent.
    Again, growth was held back by weak net exports as well as 
by a negative contribution from inventory investment.
    Although private domestic final demand appears to have 
slowed somewhat in the fourth quarter, it has continued to 
advance. Household spending has been supported by steady job 
gains and solid growth in real disposable income, aided in part 
by the declines in oil prices.
    One area of particular strength has been purchases of cars 
and light trucks. Sales of these vehicles in 2015 reached their 
highest level ever.
    In the drilling and mining sector, lower oil prices have 
caused companies to slash jobs and sharply cut capital outlays.
    But in most other sectors, business investment rose over 
the second half of last year, and home-building activity has 
continued to move up on balance, although the level of new 
construction remains well below the longer-run levels implied 
by demographic trends.
    Financial conditions in the United States have recently 
become less supportive of growth, with declines in broad 
measures of equity prices, higher borrowing rates for riskier 
borrowers, and a further appreciation of the dollar. These 
developments, if they prove persistent, could weigh on the 
outlook for economic activity in the labor market, although 
declines in longer-term interest rates and oil prices provide 
some offset.
    Still, ongoing employment gains and faster wage growth 
should support the growth of real incomes and, therefore, 
consumer spending. And global economic growth should pick up 
over time, supported by highly accommodative monetary policies 
abroad.
    Against this backdrop, the Committee expects that with 
gradual adjustments in the stance of monetary policy, economic 
activity will expand at a moderate pace in the coming years, 
and that labor market indicators will continue to strengthen.
    As is always the case, the economic outlook is uncertain. 
Foreign economic developments in particular pose risks to U.S. 
economic growth. Most notably, although recent economic 
indicators do not suggest a sharp slowdown in Chinese growth, 
declines in the foreign exchange value of the renminbi have 
intensified uncertainty about China's exchange rate policy and 
the prospects for its economy.
    This uncertainty led to increased volatility in global 
financial markets and, against the backdrop of persistent 
weakness abroad, exacerbated concerns about the outlook for 
global growth. These growth concerns, along with strong supply 
conditions and high inventories, contributed to the recent fall 
in the prices of oil and other commodities.
    In turn, low commodity prices could trigger financial 
stresses in commodity-exporting economies, particularly in 
vulnerable emerging market economies and for commodity-
producing firms in many countries.
    Should any of these downside risks materialize, foreign 
activity and demand for U.S. exports could weaken, and 
financial market conditions could tighten further. Of course, 
economic growth could also exceed our projections for a number 
of reasons, including the possibility that low oil prices will 
boost U.S. economic growth more than we expect.
    At present, the Committee is closely monitoring global 
economic and financial developments as well as assessing their 
implications for the labor market and inflation and the balance 
of risk to the outlook.
    As I noted earlier, inflation continues to run below the 
Committee's 2-percent objective. Overall, consumer prices, as 
measured by the price index for personal consumption 
expenditures, increased just 0.5 percent over the 12 months of 
2015.
    To a large extent, the low average pace of inflation last 
year can be traced to the earlier steep declines in oil prices 
and the prices of other imported goods. And, given the recent 
further decline from the prices of oil and other commodities as 
well as the further appreciation of the dollar, the Committee 
expects inflation to remain low in the near term.
    However, once oil and import prices stop falling, the 
downward pressure on domestic inflation from those sources 
should wane. And as the labor market strengthens further, 
inflation is expected to rise gradually to 2 percent over the 
median term.
    In light of the current shortfall of inflation from 2 
percent, the Committee is carefully monitoring actual and 
expected progress toward its inflation goal. Of course, 
inflation expectations play an important role in the inflation 
process, and the Committee's confidence in the inflation 
outlook depends importantly on the degree to which longer-run 
inflation expectations remain anchored.
    It is worth noting in this regard that market-based 
measures of inflation compensation have moved down to 
historically low levels. Our analysis suggests that changes in 
risk and liquidity premiums over the past year-and-a-half 
contributed significantly to these declines. Some survey 
measures of longer-run inflation expectations are also at the 
low end of their recent rages. Overall, however, they have been 
reasonably stable.
    Turning to monetary policy, the FOMC conducts policy to 
promote maximum employment and price stability, as required by 
our statutory mandate from the Congress. Last March, the 
Committee stated that it would be appropriate to raise the 
target range for the Federal funds rate when it had seen 
further improvement in the labor market and was reasonably 
confident that inflation would move back to its 2 percent 
objective over the medium term.
    In December, the Committee judged that these two criteria 
had been satisfied and decided to raise the target range for 
the Federal funds rate 0.25 percentage point to between 0.25 
and 0.5 percent. This increase marked the end of the 7-year 
period during which the Federal funds rate was held near zero. 
The Committee did not adjust the target range in January.
    The decision in December to raise the Federal funds rate 
reflected the Committee's assessment that even after a modest 
reduction in policy accommodation, economic activity would 
continue to expand at a moderate pace and labor market 
indicators would continue to strengthen. Although inflation was 
running below the Committee's longer-run objective, the FOMC 
judged that much of the softness in inflation was attributable 
to transitory factors that are likely to abate over time, and 
the diminishing slack in labor and product markets would help 
move inflation toward 2 percent.
    In addition, the Committee recognized that it takes time 
for monetary policy actions to affect economic conditions. If 
the FOMC delayed the start of policy normalization for too long 
it might have to tighten policy relatively abruptly in the 
future to keep the economy from overheating and inflation from 
significantly overshooting its objective. Such an abrupt 
tightening could increase the risk of pushing the economy into 
recession.
    It is important to note that even after this increase, the 
stance of monetary policy remains accommodative. The FOMC 
anticipates that economic conditions will evolve in a manner 
that will warrant only gradual increases in the Federal funds 
rate. In addition, the Committee expects that the Federal funds 
rate is likely to remain for some time below the levels that 
are expected to prevail in the longer run.
    This expectation is consistent with the view that the 
neutral, nominal Federal funds rate, defined as the value of 
the Federal funds rate that would be neither expansionary nor 
contractionary if the economy was operating near potential, is 
currently low by historical standards and is likely to rise 
only gradually over time.
    The low level of the neutral Federal funds rate may be 
partly attributable to a range of persistent economic 
headwinds, such as limited access to credit for some borrowers, 
weak growth abroad, and the significant appreciation of the 
dollar that have weighed on aggregate demand.
    Of course, monetary policy is by no means on a preset 
course. The actual path of the Federal funds rate will depend 
on what incoming data tell us about the economic outlook, and 
we will regularly reassess what level of the Federal funds rate 
is consistent with achieving and maintaining maximum employment 
and 2 percent inflation.
    In doing so, we will take into account a wide range of 
information, including measures of labor market conditions, 
indicators of inflation pressures and inflation expectations, 
and readings on financial and international developments. In 
particular, stronger growth or a more rapid increase in 
inflation than the Committee currently anticipates would 
suggest that the neutral Federal funds rate was rising more 
quickly than expected, making it appropriate to raise the 
Federal funds rate more quickly as well.
    Conversely, if the economy were to disappoint, a lower path 
of the Federal funds rate would be appropriate. We are 
committed to our dual objectives and we will adjust policy as 
appropriate to foster financial conditions consistent with 
their attainment over time.
    Consistent with its previous communications, the Federal 
Reserve used interest on excess reserves and overnight reversed 
repurchase (RRP) operations to move the Federal funds rate into 
the new target range. The adjustment to the interest rate on 
excess reserves (IOER) rate has been particularly important in 
raising the Federal funds rate and short-term interest rates 
more generally in an environment of abundant bank reserves.
    Meanwhile, overnight RRP operations complement the IOER 
rate by establishing a soft floor on money market interest 
rates. The IOER rate and the overnight RRP operations allowed 
the FOMC to control the Federal funds rate effectively without 
having to first shrink its balance sheet by selling a large 
part of its holdings of longer-term securities.
    The Committee judged that removing monetary policy 
accommodation by the traditional approach of raising short-term 
interest rates is preferable to selling longer-term assets 
because such sales could be difficult to calibrate and could 
generate unexpected financial market reactions. The Committee 
is continuing its policy of reinvesting proceeds from maturing 
Treasury securities and principal payments from agency debt and 
mortgage-backed securities. As highlighted in the December 
statement, the FOMC anticipates continuing this policy until 
normalization of the level of the Federal funds rate is well 
under way.
    Maintaining our sizable holdings of longer-term securities 
should help maintain accommodative financial conditions and 
reduce the risk that we might need to return the Federal funds 
rate target to the effective lower bound in response to future 
adverse shocks.
    Thank you. I will be pleased to take your questions.
    [The prepared statement of Chair Yellen can be found on 
page 56 of the appendix.]
    Chairman Hensarling. The Chair now recognizes himself for 5 
minutes for questions.
    Chair Yellen, I know you are familiar with the Fed 
Oversight Reform and Modernization Act, known as the FORM Act, 
which was passed by the House in November. It is designed to 
bring about greater transparency and accountability at the Fed, 
to respect the Fed's independence but also ensure that the Fed 
lets the rest of us know the variables that are used in 
monetary policy and their reaction functions so that working 
families can plan out their family economies.
    I know that you are not a fan of the FORM Act, because I 
have a letter dated November 16th that you sent to the Speaker. 
In that letter, you called the Act ``a grave mistake.'' I have 
another letter that describes it as an important reform.
    Your letter mentions, or complains that monetary policy 
would be forced to be strictly adhered to by the prescriptions 
of a simple rule. My letter says the legislation does not chain 
the Fed to any rule, and certainly not a mechanical rule.
    Your letter says that the Act would undermine the 
independence of the Fed. My letter says in no way would the 
legislation compromise the Fed's independence. On the contrary, 
publicly reporting a strategy helps prevent policymakers from 
bending under pressure and sacrificing independence.
    Your letter states that the FORM Act would ``severely 
damage the U.S. economy were it to become law.'' My letter says 
the new legislation would improve economic performance.
    By definition, your letter is signed by you. My letter is 
signed by Dr. Lars Hansen of the University of Chicago, Nobel 
laureate in economics.
    It is also signed by Robert Lucas, University of Chicago, 
Nobel laureate in economics; Edward Prescott, Arizona State 
University, Nobel laureate in economics; George Shultz, former 
Secretary of the Treasury; Robert Heller, former Federal 
Reserve Governor; Jerry Jordan, former President of the 
Cleveland Federal Reserve Bank; William Poole, former President 
of the St. Louis Federal Reserve Bank, and former member of the 
Council of Economic Advisers; Michael Boskin, Stanford 
University, former Chairman of the President's Council of 
Economic Advisers; Charles Calomiris, Columbia University, 
former consultant, Federal Reserve Board of Governors; Marvin 
Goodfriend, Carnegie Mellon, former Research Director for the 
Federal Reserve Board of Richmond; Allan Meltzer, Carnegie 
Mellon; and John Taylor of Stanford University, former Under 
Secretary of the Treasury, member of the Council of Economic 
Advisers, and author of the Taylor Rule. And there are about 15 
other signatories to the letter.
    So, Chair Yellen, we have three Nobel prizewinners in 
economics, a host of former Federal Reserve officials, and some 
of the most renowned and respected economists in the country 
who pretty much disagree with everything that you asserted in 
your three-page missive against the FORM Act. I know you are 
not a fan, but I would just caution you, Chair Yellen, that 
when you use such apocalyptic and hyperbolic language, you 
might consider whether or not this undercuts your credibility 
as Fed Chair.
    I have one question. In your testimony, Chair Yellen, in 
characterizing the Fed strategy to increase policy rates, you 
testified that, ``removing monetary policy accommodation by the 
traditional approach is preferable to shrinking the Fed's 
balance sheet,'' which now holds almost as much in Treasuries 
as China and Japan do combined.
    I am trying to figure out what precisely is ``traditional'' 
about this current approach where the Fed--and the ranking 
member, I think, brought this up in her opening statement--
subsidizes deposit rates for some of the biggest banks in our 
country, which can distort, as you well know, real asset 
allocation and constrain economic opportunity. And the last 
time I checked, as we speak, the Fed's fund rate is just above 
30 basis points. You are paying banks 50 basis points for 
excess reserves, which would seem to be above the market rate.
    You have previously testified that this does not involve a 
subsidy to the banks. It appears to be a subsidy, and it 
appears to distort real asset allocation. So what is 
traditional about this approach?
    Mrs. Yellen. The tools that we have used to raise our 
target for short-term interest rates, namely our key tool being 
interest on excess reserves, is widely used by central banks as 
a key tool of monetary policy. And it is the critical tool that 
we need to rely on in order to adjust the level of short-term 
rates to what we regard as the appropriate stance to achieve 
congressionally-mandated goals.
    I would point out that although we are paying interest to 
banks on reserves, those reserves are financing our holdings, a 
large portfolio of holdings of longer-term Treasury securities 
and mortgage-backed securities on which we earn substantially 
greater interest. And because of that large balance sheet, this 
past year the Fed transferred back to the Treasury and to the 
American taxpayers $100 billion.
    Chairman Hensarling. But it is true, Chair Yellen, is it 
not, that you are paying 50 basis points when the Fed funds 
rate is 30 basis points?
    Mrs. Yellen. It is necessary for us to raise benchmark 
rates in order for a whole host of short-term interest rates--
    Chairman Hensarling. That would seem to imply a subsidy to 
the largest banks. My time has long since expired.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you, Mr. Chairman.
    Chair Yellen, continuing on the discussion that was just 
initiated by the Chairman, as you continue to embark on the 
path of raising rates I want to explore the alternative 
approaches that may exist for the Federal Reserve to do so in a 
manner that does not rely so heavily on paying massive sums to 
private sector banks to hold onto the reserves they maintain at 
the Fed.
    While the Fed paid close to $7 billion on reserves in 2015, 
as the economy strengthens and rates are further increased, the 
amounts paid could increase dramatically into the tens of 
billions of dollars. Can you expand on why you believe that 
paying interest on excess reserves is particularly important 
for raising rates in the current environment and discuss 
possible alternative approaches that may exist?
    And if you talk about what you believe is the mandate of 
Congress and how you don't have the authority for alternatives, 
I want to hear more about that and what you do have the 
authority to do.
    Mrs. Yellen. Prior to the financial crisis, the Fed 
adjusted the level of short-term interest rates through small 
variations in the supply of reserves to the banking system. 
Following the financial crisis, as our balance sheet expanded, 
reserves became abundant, and the traditional old-fashioned 
approach was no longer feasible.
    Congress had debated the wisdom of giving us the tool of 
paying interest on reserves for many years and decided to do so 
in 2006, and then speeded up implementation in 2008. The 
knowledge that we had that tool and would be able to use it 
when we deemed it appropriate to begin to raise the short-term 
level of interest rates, as we did in December--the knowledge 
that that tool was available, as I just mentioned, the tool 
that is critical to our control of short-term rates and widely 
used globally, that was an important fact when we considered 
all the actions that we took--the unconventional actions that 
we took--to produce the decline in the unemployment rate and 
improvement in the labor market that we have achieved.
    So if we were denied that tool at the present time, we 
would not be able to easily raise the level of short-term 
rates. Until we--
    Ms. Waters. However, if I may interrupt you for a moment, 
are you saying that you are limited only to that action? Or do 
you have the authority to make some other decisions relative to 
what the interest is that you are paying to big banks? Do you 
have some flexibility here?
    Mrs. Yellen. We would likely, to regain effective control 
of short-term interest rates, need to shrink our portfolio from 
its current large level back to the kinds of levels we had 
before the crisis. And we have set out over several years a 
plan for how we would normalize policy that relies not on 
selling long-term assets but on adjusting short-term interest 
rates.
    I believe that if we were to follow the plan of selling off 
long-term assets, it could prove very disruptive to the 
expansion. It is a strategy that I think could harm the 
economic recovery, and it certainly is not what we have set out 
to the public. We said we would shrink our balance sheet in a 
gradual and predictable way so as to not be disruptive.
    Ms. Waters. So if I may interrupt you again, you are saying 
it was Congress, starting in 2006, who would have to design 
this approach, and Congress could, if it decided to, take it 
away as an approach that you would use even though you do not 
think it would be helpful?
    Mrs. Yellen. I think it would be very disruptive to the 
economy and I really--I want to point out several things about 
this. First of all, although the banks are earning this 
interest on the excess--on the reserves that they hold, as the 
level of short-term rates rises, first of all, on their 
wholesale funding that many of the banks rely on, they are also 
paying more to gain that funding. Eventually this will be the 
mechanism that would lead, as well, to higher deposit rates to 
reward savers.
    And finally, I really want to emphasize that from the 
taxpayers' point of view, the Federal Reserve has transferred, 
since 2008 through 2015, roughly $600 billion back to Congress, 
to the taxpayers, to the Treasury, funds that have contributed 
importantly to financing the government, and that has only been 
possible because we have a larger stock of reserves in the 
banking system and, correspondingly, hold a far larger stock of 
interest-bearing assets that pay in larger amounts.
    Prior to the crisis, a typical level of transfers from the 
Fed to the Treasury was in the order of $20 billion. For the 
past 2 years, we have transferred $100 billion a year.
    Ms. Waters. Thank you very much. We need to talk about this 
some more.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from South Carolina, Mr. Mulvaney, the vice chairman of our 
Monetary Policy and Trade Subcommittee.
    Mr. Mulvaney. I thank the Chairman.
    A quick follow up, Chair Yellen, on the Chairman's 
question: You mentioned that using the IOER or the RRP were 
traditional tools, and then you mentioned that other central 
banks used them before. Have you ever used them?
    Mrs. Yellen. No.
    Mr. Mulvaney. Has the Federal funds rate, which I 
understand now is trading on the market at about 30 basis 
points, ever been--ever--below the IOER, which is now set at 50 
basis points?
    Mrs. Yellen. Has it ever been below?
    Mr. Mulvaney. Yes, ma'am.
    It is since we set the--when we were first given the power 
to pay interest on reserves, we set it at 25 basis points, and 
the Fed funds rate traded below it. And when we raised it to 
50, the Fed funds rate moved up by 25 basis points, the amount 
of the increase in IOER that continues to trade below it.
    Mr. Mulvaney. All right. So your testimony is that those 
are traditional tools. So let's move then to a different 
discussion with that as a background.
    You have in the past been a proponent, though a reserved 
proponent, of a rules-based system. Back in 2012, you gave a 
speech where you said, ``Why shouldn't the FOMC adopt such a 
rule as a guidepost?''
    The answer is that times are by no means normal now and 
that simple rules that perform well under ordinary 
circumstances just won't perform well.
    Two years ago, you said something similar to this 
committee. In response to a question about rules you said, 
``The conditions facing the economy are extremely unusual. I 
have tried to argue and believe strongly that while a Taylor 
Rule, or something like it, provides a sensible approach in 
normal times, like the Great Moderation, under current 
situations it is not appropriate.''
    So, that was your testimony in 2014. You gave a speech in 
2012.
    Here we are in 2016. You, by your own testimony, are using 
traditional tools of monetary policy. Your written testimony 
begins by saying that the economy has made further progress 
towards the Federal Reserve's objective of maximum employment. 
You go on to say that inflation is low in the near-term but it 
will rise to its 2 percent objective over the median term.
    Are we in normal times?
    Mrs. Yellen. The economy is in many ways close to normal in 
the sense that the unemployment rate has declined to levels 
that most of my colleagues believe are consistent with full 
employment in the longer run. And inflation, while it is below 
2 percent, I do think there is a good reason to think it will 
move up over time. And in that sense things are normal.
    But what is not normal is that the so-called neutral level 
of the Federal funds rate that I referred to in my testimony 
and we discuss in the report is by no means normal. In other 
words, we have needed for 7 years to hold the Federal funds 
rate and--both in nominal and inflation in real terms--
inflation adjusted or real terms--at exceptionally low levels 
to achieve growth averaging 2 percent or a little bit above.
    Mr. Mulvaney. I am sorry to interrupt, but I do want to 
get--
    Mrs. Yellen. And in that sense, it is not normal. The 
economy is being held back by headwinds.
    I would point out that a tenet of the Taylor Rule is that 
it takes--it assumes and embodies in it an assumption that the 
equilibrium level of the Fed funds rate with the 2 percent 
objective is 4 percent, or that the real equilibrium Fed funds 
rate is 2 percent. And that simply isn't the case.
    Mr. Mulvaney. Madam Chair, I am not actually, surprisingly, 
not pushing the Taylor Rule. I am simply asking about a general 
rule-based system because you have shown some support for it in 
the past. And I guess my question is this: What does the world 
have to look like? Because I think admittedly, employment is 
better. Inflation, it seems to be under control. Yes, you say 
that the Fed funds rate is extraordinarily low, which it is, 
but that is something under your control.
    What does the world have to look like in order for the 
Federal Reserve to start considering transitioning to a rule-
based system?
    Mrs. Yellen. I think the benefit of a rule-based system is 
it is systematic and understandable. And the Federal Reserve 
has attempted to engage in the systematic policy. It takes a 
different form.
    Mr. Mulvaney. I get that, but what does the world have to 
look like? When you come back next year, what should the world 
look like for you to be saying, you know what, we are 
considering a rules-based system? What has to change?
    Mrs. Yellen. The Committee looks at guidelines from rules 
as useful benchmarks as it considers the appropriate stance of 
policy, but I believe, and I think most of my colleagues would 
agree, that we shouldn't mechanically follow that rule or any 
other rule, but that we need to take into account a large set 
of indicators of how the economy is performing.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, ranking member of our Monetary Policy and Trade 
Subcommittee.
    Ms. Moore. Thank you so much, Mr. Chairman.
    And again, welcome, Chair Yellen.
    I want to take us in a little different direction. Many of 
us here on both sides of the aisle are really concerned about 
what is happening with our smaller banks. And we understand 
that because of Basel III and we had a lot of concerns when we 
debated Dodd-Frank, including provisions like Volcker and FSOC.
    They were driven by the concerns of the large banks in 
active capital markets. And I know that the Fed is not the only 
regulator overseeing implementation of Dodd-Frank, but I would 
like your thoughts on how the rules may have been tailored, or 
should have been tailored, for small and community banks?
    The stress tests and the capital standards are killing our 
small banks, compliance officers that--where they don't have 
the additional staff. Just your thoughts on what should have 
been done or how has it been tailored?
    Mrs. Yellen. Let me say that I think community banks and 
their vitality is exceptionally important. They provide 
enormous benefits to the country and to the economy. I 
recognize that the regulatory burden on community banks is 
intense.
    Ms. Moore. They are shutting down.
    Mrs. Yellen. For our part, we are focused on doing 
everything that we conceivably can to minimize and reduce the 
burden on these banking organizations.
    We have been conducting an EGRPRA review to identify 
potential burdens that our regulations impose on these banks, 
and we will do everything that we can to respond to the 
concerns that are identified there to reduce burden.
    We are looking for many ways. First of all, we have tried 
to tailor our regulations to the size and complexity of 
institutions. The smaller community banks are not subject to 
stress-testing requirements. Many aspects of Basel III capital 
requirements and liquidity rules do not apply to those banking 
organizations. We have tried to simplify those requirements.
    We are, in addition to that, trying to reduce the duration 
of the time that we spend reviewing banks during exams; we are 
trying to simplify and be more targeted in our requests for 
documentation.
    We try to identify for community bankers what is relevant 
to them and what they can safely ignore. And we are looking for 
ways to conduct exams that are more focused on the actual risks 
that are relevant to a particular organization.
    So I recognize that the burdens on those banks have been 
very intense and I pledge that we are doing and will continue 
to do all we can to reduce burdens on them.
    Ms. Moore. Thank you, Madam Chair.
    On this committee, we spend a lot of time talking about 
moral hazard, and so I guess I would like your view on whether 
or not you think there is any moral hazard on not a single 
person involved in the 2008 crash having gone to jail. They get 
fines, they get sort of compliance letters where they can clean 
up their act and avoid prosecution, and I am wondering if you 
think that it is important for us to seek--so what? You pay a 
fine. That doesn't stop anyone from doing the next crime, 
unlike other of our criminal laws.
    Mrs. Yellen. I agree with you. I do not think that 
individuals who are guilty of wrongdoing should escape paying 
appropriate penalties.
    For our own part, we are not allowed, obviously, to put in 
place criminal penalties. That is a matter for the Department 
of Justice. For our part, we can, when we find individuals to 
be responsible for wrongdoing, make sure that they are not 
allowed to work at the banking organizations where they 
committed misdeeds. And in many cases, we can make sure that 
they are banned from the business of banking.
    And when we have been able to identify individuals who are 
responsible, we have put in place those sanctions and will 
continue to do so. And we always cooperate with the Department 
of Justice in their investigations.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, vice chairman of the committee.
    Mr. McHenry. Thank you, Chair Yellen.
    So, does the Federal Reserve have the legal authority to 
implement negative rates?
    Mrs. Yellen. I'm sorry, do we have the legal authority to--
    Mr. McHenry. Implement negative rates.
    Mrs. Yellen. This is a matter that the Federal Open Market 
Committee considered around 2010, and we didn't fully--as we 
were exploring our options to provide accommodation we decided 
not to lower interest rates, either IOER to zero or into 
negative territory, and we didn't fully look at the legal 
issues around that.
    I would say that remains a question that we still would 
need to investigate more thoroughly.
    Mr. McHenry. And one of our document requests, that 2010 
memo that I assume is connected to that policy discussion--
    Mrs. Yellen. That is right.
    Mr. McHenry. --raised significant doubts about the Fed's 
authority that they currently have to charge--to pay interest 
on excessive--on excess reserves and whether or not that same 
authority would allow you to demand payment for that.
    Mrs. Yellen. Congressman, I don't know of any restriction 
that would prevent us from doing that. That memo indicated--was 
intended to indicate that the legal issues had not been 
seriously considered in the time that went to the FOMC.
    Mr. McHenry. Have they been seriously considered since 
2010?
    Mrs. Yellen. In the spirit of prudent planning, we always 
try to look at what options we would have available to us, 
either if we need to tighten policy more rapidly than we expect 
or the opposite, to loosen policy.
    Mr. McHenry. Do you--
    Mrs. Yellen. So, we would take a look at it. But the legal 
issues I am not prepared to tell you have been thoroughly 
examined at this point.
    Mr. McHenry. So at this point it is unclear whether or not 
the Fed does have the legal authority to implement negative 
rates?
    Mrs. Yellen. I am not aware of anything that would prevent 
us from doing it, but I am saying that we have not fully 
investigated the legal issues. That still needs to be done.
    Mr. McHenry. So let's move to regulation. You run the 
largest regulatory organization in the United States of 
America, perhaps on the globe--likely on the globe.
    And as such, I believe in the independence of the Fed to 
make monetary policy, but as a regulator, Congress should have 
significant oversight of your regulatory action, should they 
not?
    Mrs. Yellen. Yes.
    Mr. McHenry. Okay. And as such, as a matter of regulation--
the Chairman raised this question with you the last time you 
were here about Federal Reserve regulators, bank examiners 
demanding to be a part of board of director meetings at member 
banks.
    And you have exchanged multiple letters on this matter. We 
still hear that this is, in fact, taking place.
    Would you pledge to this committee that you would direct 
your bank examiners and regional bank examiners to stop this 
practice?
    Mrs. Yellen. I will look into--
    Mr. McHenry. You have already looked into it, and you have 
exchanged letters and you gave the Chairman the assurance last 
time that you are not aware of it. I assume you are now aware 
of whether or not this is taking place, are you not?
    Mrs. Yellen. I think there are occasional situations in 
which that occurs.
    Mr. McHenry. Do you believe that is appropriate?
    Mrs. Yellen. I am not certain that it is inappropriate. I 
want to get back to you on that.
    Mr. McHenry. This was raised about 6 months ago by the 
Chairman; you have exchanged multiple letters. I would like to 
have some greater assurance. This is not meant to be a 
``gotcha;'' this is a well-worn question.
    And we are hearing--and in fact, there is a press report 
that the Fed directed one of your member banks to incorporate 
two additional members of the board of directors. And the Fed 
directing a private enterprise to change their board of 
directors seems somewhat perplexing.
    Do you believe that is appropriate authority for the Fed?
    Mrs. Yellen. I think it is appropriate as a matter of 
supervision to--
    Mr. McHenry. To direct?
    Mrs. Yellen. --ensure that a board of directors of a 
financial company that we supervise is appropriately 
constituted in fulfilling its corporate governance functions. 
That is a part of supervision.
    Mr. McHenry. My time has expired.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Chair Yellen, you raised interest rates in 
December and said that any future interest rate increases, if 
they happened, would be gradual. I would like to ask you about 
the recent turmoil in global markets.
    As you know, equity markets around the world, led by China, 
have plunged since the beginning of the year as global economic 
growth has weakened. And the United States has not been immune. 
U.S. stock markets have fallen over 9 percent since the 
beginning of the year and Treasury yields have plunged 23 
percent.
    So my question is, has the turmoil in global markets 
changed your view about the appropriate pace of interest rate 
increases and hikes, or will you wait to see how global market 
turmoil affects the U.S. economy before raising rates again?
    Mrs. Yellen. We are watching very carefully what is 
happening in global financial markets. It would appear that 
stresses that we have seen since the turn of the year relate to 
uncertainties regarding Chinese exchange rate policy. There are 
uncertainties around the price of oil. We have not seen shifts 
in--that seem significant enough to have driven the sharp moves 
we have seen in markets.
    There would seem to be increased fears of recession risk 
that is resulting in rises in risk premium. We have not yet 
seen a sharp drop-off in growth, either globally or in the 
United States, but we certainly recognize that global market 
developments bear close watching. As I mentioned, the financial 
conditions have become less supportive to growth and we 
recognize that these developments may have implications for the 
outlook, which we are in the process of assessing.
    And I want to make clear that monetary policy is not on a 
preset course and so our evaluation of the likely impact of 
those developments on the economic outlook and our ability to 
meet both our employment and inflation objectives, those are 
the factors that will govern the future stance of monetary 
policy. It is not on a preset course.
    Mrs. Maloney. And given the turmoil in global markets and 
the slowing U.S. economy, some analysts are now talking about 
the United States possibly falling into a recession this year. 
What would it take for you to consider cutting interest rates 
again? A severe downturn in the economy or just stubbornly low 
inflation?
    Mrs. Yellen. Our commitment is to achieve our 
congressionally mandated goals of maximum employment and price 
stability. I do not expect that the FOMC is going to be soon in 
this situation where it is necessary to cut rates. Let's 
remember that the labor market is continuing to perform well, 
to improve. I continue to think that many of the factors 
holding down inflation are transitory.
    While there is always some risk of recession, and I 
recognize and have just stated that global financial 
developments could produce a slowing in the economy, I think we 
want to be careful not to jump to a premature conclusion about 
what is in store for the U.S. economy.
    So I don't think it is going to be necessary to cut rates, 
but that said, monetary policy, as I said, is not on a preset 
course. And if it turned out that would be necessary, obviously 
the FOMC would do what is needed to achieve our--the goals that 
Congress has assigned to us.
    Mrs. Maloney. You said in December that you were surprised 
by how far oil prices had fallen and that you expected 
inflation to increase once oil prices stabilized. Since the 
Fed's December meeting, oil prices have fallen even further. 
They are down about 25 percent since the December meeting and 
they have fallen 7 percent since Friday.
    At the same time, we have also seen inflation expectations 
fall since the December meeting to the lowest levels in quite 
some time. Has this caused you to rethink your inflation 
projections at all?
    Mrs. Yellen. We indicated in our statement in January that 
these developments led us to conclude that inflation will stay 
low for a while longer as these developments work through. 
Clearly, we are watching inflation expectations and, as I 
mentioned, market-based measures of inflation compensation have 
moved down now to historically low levels. And that is 
something we are evaluating carefully.
    In December when we raised rates, we indicated that with 
inflation so far below our objective, we would carefully watch 
incoming data and revise our expectations. So I don't want to 
jump to a premature conclusion.
    My colleagues and I will issue in March updated projections 
for inflation taking all the evidence we have at hand into 
account, but--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair recognizes the gentleman from New Jersey, Mr. 
Garrett, chairman of our Capital Markets Subcommittee.
    Mr. Garrett. I thank the Chair.
    Chair Yellen, thank you for being here.
    I would like to talk a little bit--begin on emergency 
lending under Section 13(3). It was about a year-and-a-half ago 
that Senator Elizabeth Warren and myself and Mr. Capuano joined 
together, and Senator Vitter as well, and sent you a letter 
expressing our deep concern with what you were doing with 
regard to implementing the limiting language in Dodd-Frank at 
that time.
    And of course, you have come out now with a rule, despite 
our admonition and questions in that letter, a rule that would 
basically allow the Fed to drive a Mack truck through the 
various loopholes in it, and also, once again, as is typical 
with the Fed, lacking in clarity and transparency.
    That being said, the Fed is not always not clear in what 
they want to do, and the regulators are not always clear in 
what they want to do. For example, they came up with the 
Volcker Rule, and in the Volcker Rule the Fed was not shy about 
elaborating on concepts in that statute. In fact, it went so 
far as to adopt prohibitions in trading assets that were 
clearly never intended by the statute.
    So the Fed and other regulators came up with this part of 
the Volcker Rule dealing with defining just what the words 
``proprietary trading'' mean. Over 800 pages to make some 
definitional clarity in the area of Volcker and proprietary 
trading. Compare that to what you did with--under the 
limitations that should be in place under Dodd-Frank of 13(3)--
47 pages of definition and a lack of clarity throughout it.
    So the first question is why in one area can you be exact 
and precise in precision when you are trying to limit what the 
private market is doing, but when Congress tells you to put 
limitations on yourself, you lack that clarity and give it a 
broad brush?
    Mrs. Yellen. I think we tried in the rule to be as clear as 
we possibly could. We--
    Mr. Garrett. Let's take a look at that then.
    Mrs. Yellen. --took a--we, for example--
    Mr. Garrett. Now, let me give you an example.
    The Fed claims that it establishes a penalty rate under 
13(3), but then you failed to provide any specifics whatsoever 
of what that rate would be.
    Compare that to what Congress did. This committee passed a 
bill that would establish a penalty rate that would be 
commensurate with ``a distressed borrower.''
    So why wouldn't the Fed be clear on this? What are the 
rates going to be?
    Mrs. Yellen. Because what a penalty rate is depends on the 
specifics of a particular situation.
    Mr. Garrett. But can't--
    Mrs. Yellen. A penalty rate is a rate that when conditions 
normalize--
    Mr. Garrett. But we know what a distressed borrower is and 
what the markets are. That is clear. Why didn't you define it 
that way, compare it to the regular markets so that a 
distressed borrower in the markets would be charged the same if 
they are borrowing from the Fed--
    Mrs. Yellen. Well, in the--
    Mr. Garrett. --or related to it?
    Mrs. Yellen. In the type of situation that we found 
ourselves in--
    Mr. Garrett. Yes.
    Mrs. Yellen. --during the financial crisis, market rates 
had shot up to extraordinary levels because liquidity had dried 
up in the financial--
    Mr. Garrett. I understand what the history of the market 
was at that time, but you could have provided clarity in here.
    So basically what you are telling us is once again, the Fed 
is going to be in the position of picking winners and losers. 
By your prior answer, it seems like you are saying that you 
could charge borrower A one rate and borrower B another rate 
under similarly situated circumstances. Is that not correct?
    Mrs. Yellen. I think what is an appropriate rate does 
depend on the circumstances. Financial crises, which is when we 
would be using this authority--
    Mr. Garrett. But that is--
    Mrs. Yellen. --to set up a broad-based program, are always 
very unique. And--
    Mr. Garrett. Right. And I think that basically what you are 
telling us is that nothing really has changed despite the 
admonition and the law in Dodd-Frank to put a limitation.
    And it is not just me saying that, by the way. It is 
interesting that while you are here testifying today, Governor 
Fisher is also making public statements as you speak.
    We just got part of his statement, and he seems to be 
saying exactly what you are, that you have not limited 13(3). 
He said, ``But in simple language, strengthening fire 
prevention regulation does not imply that the fire brigade 
should be disbanded.''
    He goes on basically to say in his comments today that we 
are not seeing the limitations, that you are going to be able 
to do similar things to what you did back in, or that--before 
you were here, that the Fed did the last time around.
    Mrs. Yellen. I want to make clear that I think our 13(3) 
powers and ability to lend to keep credit flowing in the 
economy during a financial crisis is a critical power. It 
played a critical role during the financial crisis.
    Mr. Garrett. So is he wrong when he says that nothing--my 
interpretation--has really changed? Your powers are the same as 
they were before?
    Mrs. Yellen. No, a lot has changed. Congress put in place a 
series of restrictions that they intended--
    Mr. Garrett. But your rule does not implement those, does 
it?
    Mrs. Yellen. Yes, it does. Our rule does implement those 
restrictions.
    We cannot lend to an insolvent borrower; we cannot lend to 
help one or more failing firms. We can only put in place broad-
based programs, and we have defined pretty clearly in that rule 
what constitutes a broad-based program. So Congress clearly 
changed what the Fed can do.
    Mr. Garrett. But it does not--
    Mrs. Yellen. It also gave--provided--
    Mr. Garrett. Governor Fisher is saying we have likely 
reduced the probability that lender of last resort will be 
needed, but we have not reduced that probability to zero. So it 
appears that, in his opinion at least, some of those problems 
remain.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chair Yellen, the unemployment rate is down to under 5 
percent for the first time in 8 years. However, I remain 
concerned that unemployment rates remain elevated in the 
Hispanic and African-American communities.
    Does the Fed specifically take unemployment within these 
groups into consideration when making policy decisions 
surrounding the Fed fund rate?
    Mrs. Yellen. We track very carefully the unemployment rates 
and experiences of different demographic groups, and we make a 
very careful assessment about whether or not the economy is 
meeting the objective of maximum sustainable employment, which 
involves taking account of factors like, are particular groups 
being discouraged from even participating in the labor force 
because of conditions?
    But it is important to recognize that our powers, which 
involve setting interest rates, affecting financial conditions, 
are not targeted and can't be targeted at the experience of 
particular groups. I think it always has been true and 
continues to be true that when the labor market improves, the 
experience of all groups does improve.
    Roughly now, the unemployment rate in the United States is 
close to where it was in the fourth quarter of 2007. Now, 
African-Americans and Hispanics at that time back in 2007 had 
higher unemployment rates than the population as a whole. 
Regrettably, because of the disadvantages that these groups 
face in the labor market, they have historically tended to have 
higher unemployment rates.
    But as the economy has improved and unemployment has come 
down, the unemployment rates for those groups, for Hispanics 
and African-Americans, has come down. They have fallen to 
roughly the same levels that they were in at the end of 2007 
while, again, remaining higher.
    Ms. Velazquez. So you--
    Mrs. Yellen. We do look at that, but we don't have tools to 
target particular groups--
    Ms. Velazquez. I understand that.
    Mrs. Yellen. --rather than others.
    Ms. Velazquez. Do you consider an 8.8 percent unemployment 
rate among African-Americans today too high?
    Mrs. Yellen. I do consider it too high, and I think there 
are any number of reasons for that. And I think that the 
reasons for it are ones that Congress should be considering 
broadly in designing a wide range of policies.
    It is something that we want to see a strong labor market, 
we want to see continued progress, and we will put in place 
policies that achieve that. But we cannot target the 
unemployment rate for a particular group.
    Ms. Velazquez. I heard you.
    As you know, Chair Yellen, U.S. employers have created 14 
million jobs during President Obama's tenure. However, the 
labor force participation rate remains low and discouraged 
people who want to work have stopped looking. How much of the 
decline in the rate can be explained by the trend of flat or 
declining wages for many American workers?
    Mrs. Yellen. For the country as a whole, an important 
reason that labor force participation has fallen and will 
continue to fall is because of the aging of the population. So 
that is not going to change and the trend is downward.
    But it is also true that for certain subgroups in the 
population--for example, prime age but less educated men--the 
trend downward has been particularly steep. And there is a lot 
of economic research that tries to understand why men have--
their labor force participation has declined, and it wouldn't 
surprise me if wage trends are part of the reason for that.
    Ms. Velazquez. Right.
    Mrs. Yellen. So my guess is that they have played a role in 
discouraging labor force participation.
    Ms. Velazquez. As wages begin to increase, do you 
anticipate the participation rate to increase as well?
    Mrs. Yellen. Yes, I anticipate that wage growth will move 
up somewhat. And I do think that labor force participation is 
somewhat depressed relative to where it will be in a really 
full employment economy.
    That is why I say I think there does remain some slack in 
the labor market even though the aggregate unemployment rate is 
at 4.9 percent. So I do hope that--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Financial Institutions 
Subcommittee.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being here as well. Part 
of your remarks were about the state of the economy, and I 
think you are trying to paint a little bit rosier picture, and 
maybe there is a little bit of a rosier picture, but it is not 
a good picture.
    I am looking at some stats here that we still have 16 
million American citizens who are unemployed. In fact, the 
number of long-term unemployed Americans is 761,000 higher than 
it was at the start of the recession.
    We have 94 million Americans over the age of 17 who have 
abandoned the job market. Real disposable income is a paltry 
annual rate at 1.2 percent.
    The real GDP is growing just under 2.2 percent. We have 
more Americans living in poverty than ever before--46.7 million 
people. And we have 45 million people on SNAP. I could read 
more and more.
    I think the issue that I have been thinking about this week 
is that when you look at the original purpose the Fed was 
formed for, and what the Fed looks like today, and I think my 
good friend Mr. Mulvaney pointed this out, is that basically we 
have a Fed that is in charge of monetary policy, some other 
things have been added to that, and then we have a Fed that is 
the biggest and largest regulator and regulates more assets 
than any other financial institution in the world.
    And it kind of reminds me that while you all are working on 
one side of the Fed to stabilize employment, keep inflation in 
check, then on the other side of the Fed you have this huge 
regulatory structure that has grown substantially and continues 
to issue very complicated, and some people think that you have 
become a micromanager of these financial institutions with the 
regulations.
    So it reminds me of that statement, ``We have met the enemy 
and it is us.'' Is it counterproductive that you have the--a 
Fed working on one side to create jobs, and you have a Fed on 
the other side of the building that is doing things that a lot 
of people think are killing jobs: micromanaging the financial 
markets; increasing the cost of capital; and reducing the 
availability of capital, which has stymied the ability of this 
economy to grow? Isn't that self-defeating?
    Mrs. Yellen. I think we have to remember that financial 
crises are immensely costly to well-being. And it is important 
to make sure that we do everything--almost everything we can to 
reduce the odds of another devastating financial crisis.
    So we are working hard. We have worked hard in the 
aftermath of the crisis to make sure that we have a financial 
system that is safer, sounder, has more capital, higher quality 
capital, more liquidity, and is less crisis-prone than the 
financial system that we had that caused this financial crisis.
    Mr. Neugebauer. The time is short. You mentioned the word 
``liquidity,'' and I think a lot of people think some of the 
things that the Fed has done and some of the regulations have 
actually reduced liquidity in a number of markets. And in fact, 
you and I have had a conversation about the fact that you all 
have shown some concern about liquidity.
    I wanted to see if you knew that the European Commission 
has initiated a review process. They said after 5 years of 
instituting all of these regulations and additional capital 
requirements, and kind of just piling on of regulation and 
capital, more capital and regulation--and I am not against 
having adequate capital, but the problem is that we seem to 
have an add-on game here and the additional capital also comes 
with additional regulations.
    And so the European Commission has initiated a review 
process that said, ``You know what? Time out here; let's go 
back and look. We know what we have asked these entities to do; 
we know what we have impounded them with.''
    But the question is, how are the markets responding to this 
and how have--basically, it is a cost-benefit analysis of all 
of the policies that have been in place.
    Has the Fed thought about, hey, maybe we should stop and 
analyze what we have done here and see if it is positive?
    Mrs. Yellen. We have a few things we still need to finalize 
to put in place the Dodd-Frank regulations that were called 
for, and we hope to complete that work soon. And it certainly 
is appropriate to evaluate how the system is working. And we do 
that on an ongoing basis, and I think it is, of course, 
appropriate to see whether or not there are ways in which we 
can improve or simplify regulations. And we are in the process 
of doing that in some very important areas.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Mr. Chairman, I feel like I am at a ballroom 
dance on the deck of the Titanic. The faith of the American 
people in our government and institutions is at an all-time 
low. I have been sitting in this room for 20 years and the room 
has the feel that it had 20 years ago, except we don't have 
Alan Greenspan in front of us.
    Government institutions work better if they listen to the 
American people, first, because the American people will then 
accept the decisions, and second, because we get better 
decisions.
    Yesterday, in a small State that is doing better than most 
of the country, two-thirds of the people went out in a very, I 
think, record-setting turnout with inclement weather to say 
that they are mad as hell, particularly at the financial 
institutions that this committee deals with. And two-thirds of 
them voted for the most angry candidate they could find.
    Too-big-to-fail should be too-big-to-exist. Madam Chair, in 
response to the gentlelady from Wisconsin, you said it was 
basically the Department of Justice's failure to have a single 
criminal prosecution of those who had robbed the banks and, 
more importantly, robbed the American people. And I wonder 
whether you can really just put that at the feet of the 
Department of Justice?
    Because we have learned institutions can get so big that 
they are too-big-to-fail. Your predecessor was in this room 
demanding that we bail them out. And, God forbid, you will be 
again if you allow these too-big-to-fail institutions to 
continue to exist.
    They are too-big-to-jail. And as you point out, you may bar 
somebody from the banking world, but, gee whiz, in a country 
with more people incarcerated than any other country in the 
world, is it really adequate to those who steal hundreds of 
millions and billions to say, ``Well, you can't go back into 
the banking world?''
    So I will ask you as a member of FSOC, we need moral hazard 
to make sure that major economic decisions made by the giant 
banks are made correctly. They don't have a moral hazard in the 
sense of not being able to get capital. People are flooding 
them with capital at rates that are said to be up to 80 basis 
points less than they would pay if there wasn't a belief that 
we would bail them out. So the too-big-to-fail won't be allowed 
to fail. As you point out, DOJ won't put anybody in jail.
    The solution is, use your power under FSOC to break them 
up. Are you going to break up the too-big-to-fail institutions?
    I have asked you that before, and I will ask you it again. 
I think I know the answer.
    Mrs. Yellen. The answer I will give you is that we are 
using our powers to make sure that a systemically important 
institution could fail and it would have systemic consequences 
for the country.
    We are doing that in a whole variety of ways. First of all, 
we have done many things to diminish the odds that they would 
fail. We are trying to make them, and I think I can enumerate 
all the things we have done--
    Mr. Sherman. Are you willing to call the attorney general 
and say, ``We have this thing handled so well that you can 
start criminal prosecutions because they are not too-big-to-
jail anymore?''
    Mrs. Yellen. I said that I am in favor of going after 
individuals who are guilty of wrongdoing.
    Mr. Sherman. With such penalties as barring them from the 
banking system.
    Mrs. Yellen. Well, --
    Mr. Sherman. I want to move on--
    Mrs. Yellen. --what I said is those are the sanctions that 
the Federal Reserve can impose.
    Mr. Sherman. I need to move on to another question.
    You are a governmental entity, but it is--in some parts of 
the entity it is one bank, one vote. It is the only part of our 
constitutional system that puts governmental power in the hands 
of one bank, one vote.
    Are you going to use your considerable power to oppose 
legislative efforts to try to make the regional bank governors 
appointed exclusively by the President and to try to make the 
regional banks subject to the Freedom of Information Act?
    Mrs. Yellen. Congressman, I think the current structure of 
the Fed is something that Congress decided after a long debate 
and weighing of a whole variety of considerations. I would say 
I think it has worked pretty well, but it is certainly 
something--
    Mr. Sherman. Wait, excuse me, Madam Chair. Are you saying 
that the Fed, having just lived through 2008, with people not 
getting raises, that this whole system has worked well?
    Mrs. Yellen. I'm sorry. I thought you were asking about our 
governance.
    Mr. Sherman. Your governance has led to the decisions that 
have nearly brought this country to its knees.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, chairman of our Housing and Insurance 
Subcommittee.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    And welcome, Madam Chair.
    It is kind of interesting, as you discuss all the questions 
that have been asked you here with regards to your ability to 
micromanage the economy, and as you make the decisions at the 
Federal Reserve to try and do something about unemployment and 
try and do something about the inflation rate, I look at some 
of these things and I am just kind of stunned.
    Let's start off first with what happens if we have a 
downturn and you already have $4 trillion on your balance 
sheet? What levers are still allowed or are available to you to 
do something?
    Mrs. Yellen. The Fed has an array of tools.
    Mr. Luetkemeyer. Which are?
    Mrs. Yellen. Most importantly, the path of the short-term 
interest rates.
    Mr. Luetkemeyer. Madam Chair, they are already down to 
almost nothing. How is lowering the rates going to help when 
they are almost nothing right now?
    Mrs. Yellen. One of the ways in which markets work is that 
they form expectations about what the likely path of the Fed 
funds rate will be over time. Those expectations influence 
longer-term rates in the market.
    And when the economy weakens, market participants naturally 
expect the Fed, in pursuing our mandate, to follow a shallower 
path of interest rate increases, and that shift in expectations 
moves longer-term rates.
    I think you can see that just over the last several weeks, 
as I mentioned, longer-term Treasury yields have come down as 
market participants have become more fearful about a recession. 
And their--
    Mr. Luetkemeyer. Forgive me for intruding, but I have more 
questions here. So are you saying that this is a good time, 
then, to start to reduce your balance sheet?
    Mrs. Yellen. We--
    Mr. Luetkemeyer. Lower interest rates, it would be a nice 
time to short-shift that, wouldn't it? Are you intending to do 
that?
    Mrs. Yellen. We have indicated that we want to make sure 
that normalization is well under way before we begin to shrink 
our balance sheet.
    And our decision to do that reflects the fact that we feel 
that moving short-term rates is a more reliable and 
understandable and predictable way to manage the economy.
    Mr. Luetkemeyer. Okay.
    Mrs. Yellen. And so we are going to wait to shrink our 
balance sheet until a point when short-term interest rates are 
somewhat higher.
    Mr. Luetkemeyer. So we may never get there, is what you are 
saying? Because there is not much room to go down. So, let's--
    Mrs. Yellen. We will have to see.
    Mr. Luetkemeyer. But let me also go into your decision-
making process, here.
    We have a labor market that continues to--the labor force 
participation rate continues to go down, and yet, according to 
your report here, the hourly rate of employees went up. There 
should be more incentive for people to work, yet they are 
becoming less. And you use the demographics of our country to 
indicate that.
    So I am concerned that if you look at those numbers, that 
there is minimal ability of your--the way you explained the 
answer to Ms. Velazquez a while ago, of you guys to be able to 
manipulate this.
    The second thing is, I am concerned--what other factors do 
you take into consideration when you look at your rates? For 
instance, do you look at what the Congress is proposing? Do you 
look at the court decisions?
    Because we had--and there has been a big discussion about 
trying to stop the inversion, the ability of our companies to 
go overseas and be able to take advantage of those tax rates. 
So the discussion is to try and cut corporate tax rates to 
bring those dollars home.
    Do you ever think about those sorts of implications about 
whenever you make decisions on your rates?
    Yesterday, we had a dramatic historic decision by the 
courts with regards to an EPA ruling that would have 
dramatically changed the way that we--the cost of energy in 
this country.
    Do you take those things into consideration when you make 
your rates? Because those are dramatic--they will have dramatic 
increases or significant impact on our economy.
    Mrs. Yellen. We try to take into account in making our 
decisions any factor that we regard is important in--
    Mr. Luetkemeyer. But do you have in place right now some 
modeling with regards to the EPA rule?
    Mrs. Yellen. Not that I know of.
    Mr. Luetkemeyer. Do you have in place any modeling with 
regards to potential tax cut for bringing dollars home? Or for 
corporations?
    Mrs. Yellen. We routinely look at the stance of fiscal 
policy--
    Mr. Luetkemeyer. Do you have a model in place right now, if 
we cut corporate tax rates, that would allow you to make a 
decision on that issue?
    Mrs. Yellen. If you were to decide that, our staff would 
attempt to evaluate--
    Mr. Luetkemeyer. But you don't have one in place right now, 
is what you just said?
    Mrs. Yellen. Not to the best of my knowledge.
    Mr. Luetkemeyer. Okay. Thank you very much.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair recognizes the gentleman from New York, Mr. 
Meeks.
    Mr. Meeks. Thank you, Mr. Chairman
    And welcome, Chair Yellen.
    Some of my colleagues may not have been here 9 years ago, 8 
years ago, but I have to tell you, I feel better today than 
when I sat here 8 or 9 years ago. I feel much better today than 
I did then.
    I can remember some of what was taking place then, and the 
panic that was going on, and the pressure that this government 
was under. And though we have not completely done what we need 
to do, because we do need to let wages grow, we do need to make 
sure we create more jobs, the position that we are in today, 
would you agree, is much stronger than the position we were in 
2007 and 2008?
    Mrs. Yellen. I believe it is. I believe we have made a lot 
of progress, while recognizing at the same time that there are 
many households that are suffering and that there are a lot of 
challenges that people face and structural--
    Mr. Meeks. Which, and I think it is important to 
acknowledge that, that--how far we have come. And then, I would 
hope that we would also focus then on what else needs to be 
done, because we do need to make sure that--especially those 
individuals who were victimized by the financial crises.
    For example, if you look at areas in--and I think Ms. 
Velazquez talked about it particularly in African-American and 
Latino communities, they lost a great amount of wealth. Many of 
them lost their homes; they lost their jobs. And so, they need 
something so that they can get back, and that is why you see 
this disparity that is very high right now.
    My focus then is we had, and I guess because of what took 
place in the past, in 1977 we passed the Community Reinvestment 
Act (CRA). Now, the Fed is in charge of CRA and can enforce it. 
And today, one of the--what we find still is that individuals 
in communities that were deeply affected, there is no 
investment going in, there is no job creation there, there is 
no access to credit. They don't have credit because of, 
primarily, the crisis.
    So I was wondering, since the Fed oversees and can enforce 
CRA, what is the Fed doing in helping to implement CRA, 
compelling some of the large banks to make these investments in 
these communities as well as into CDFIs, who are focused on 
trying to make sure that the kind of investments are there to 
create jobs, to grow wages in communities that were devastated 
by the recession?
    Mrs. Yellen. I think CRA is extremely important in making 
sure that financial institutions, depository institutions serve 
the needs of their communities, and particularly underserved 
communities.
    We take our enforcement and evaluation of banks' CRA 
performance very seriously. We have a whole variety of 
community development activities and programs that are focused 
on working, using our convening power and their CRA obligations 
to try to understand and identify what the needs are in 
particular communities and to try to tell banks what works, 
what kind of programs are worth supporting that really seem to 
make a difference in terms of alleviating distress in low- and 
moderate-income communities.
    Mr. Meeks. One of the things I think is important, because 
I want to know, and maybe you have the answers, is to show 
where the banks are making these investments in compliance with 
CRA. Because I have found that those numbers have surely sunk, 
and then when I look at access to capital in these communities, 
you have about 70 million people now who are underbanked or 
unbanked in these communities, and so CRA could definitely help 
there.
    I would love to follow up with you to find out exactly 
where the enforcement--who is, in fact, complying and giving 
and who is not, because there has to be some accountability 
therein.
    Lastly, let me just, in the few seconds I have, because the 
other thing that I think that is important to look at in some 
of these communities, because--and today as well, access to 
credit is absolutely key and essential. And sometimes, in the 
way credit is looked at, are there alternative systems?
    For example, you find some people who pay their rent every 
month on time, and that is not to be considered when referenced 
to credit scoring models. So are there other models that you 
are looking at with reference to how credit scores are 
considered that the Fed could advocate?
    Mrs. Yellen. I am not sure about credit scores. We would be 
glad to get back to you on that.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, chairman of our Oversight and Investigations 
Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    And welcome, Chair Yellen.
    I want to take a trip down memory lane, because I think 
there is some rewriting of what happened in the crisis.
    There are a lot of people who bought homes, and for lower-
income folks, that is their investment. And a lot of them lost 
their investment walking into the crisis, devastating families.
    I know we want to look to Wall Street and there is blame 
there. But I think there is a little bit of revisionist history 
when we say, you know what, Fannie Mae and Freddie Mac didn't 
have anything to do with the crisis. Fannie and Freddie allowed 
no-doc loans, no income verification, allowing folks to buy 
homes they couldn't afford.
    And in Dodd-Frank, that was passed by my friends across the 
aisle, Fannie and Freddie weren't touched at all. Fannie and 
Freddie were the ones that were allowing folks in this room to 
get homes they couldn't afford and they were hurt. It didn't 
touch them.
    The regulators had wild authority and power. They failed. 
And instead of taking a look at the regulation and the 
regulators, we have re-empowered regulators.
    And it's no wonder that big banks after Dodd-Frank haven't 
gotten smaller. Big banks have gotten bigger. And the small 
community banks that I am sure service a lot of the folks in 
this room, and service folks in my community, are going away. 
That's a big problem.
    I just had to get it off my chest.
    So there are a lot of exciting things to chat about with 
you, Chair Yellen. But as the chairman of the Oversight 
Subcommittee, I do have some concerns about your willingness to 
comply with our requests.
    We sent a letter in the Medley investigation in our 
oversight of the Fed asking you for information regarding 
communication. No compliance. Then, we sent you a subpoena in 
May. You did not comply with that.
    We had partial compliance in October.
    We are now a year after my initial letter. I have asked you 
for excerpts of the FOMC transcripts in regard to the 
discussion--in regard to the internal investigation on Medley. 
You have not provided those to me.
    Is it your intent today to promise that I will have those 
if not this afternoon, then tomorrow?
    Mrs. Yellen. Congressman, I discussed this matter with 
Chairman Hensarling and indicated we have some concern about 
providing these transcripts.
    Mr. Duffy. Finding the transcripts?
    Mrs. Yellen. I said with providing transcripts, given their 
importance in monetary policy.
    Mr. Duffy. So let me just--
    Mrs. Yellen. And I received a note back from Chairman 
Hensarling last night quite late indicating your response to 
that. And we will consider it and get back to you as soon as we 
can.
    Mr. Duffy. Oh no, no. I don't want you to consider it. And 
I think the Chairman would agree with me that this is a 
conversation not about monetary policy; this is not market-
moving stuff. This is about the investigation and the 
conversation of a leak inside of your organization.
    This institution is entitled to those documents. Would you 
agree?
    Mrs. Yellen. I will get back to you with the formal answer.
    Mr. Duffy. No, no, listen.
    Mrs. Yellen. I believe that we have provided you with all 
the relevant information.
    Mr. Duffy. That is not my question for you, Chair Yellen. 
If I am not entitled to it, can you give me the privilege that 
you are going to exert that is going to let me know why I am 
not entitled to those documents?
    Mrs. Yellen. I said we received well after the close of 
business yesterday a letter explaining your reasoning, and I 
will need some time to discuss this matter with my staff--
    Mr. Duffy. No, I don't want--
    Mrs. Yellen. --before I give you a final answer.
    Mr. Duffy. I don't want--listen. I sent you a letter a year 
ago, on February 5th. I had to send you a subpoena.
    You knew that I was looking for these documents; you knew I 
was going to ask you about this today. So if you are not going 
to give me the documents, exert your privilege. Tell me your 
legal authority why you are not going to provide this to us.
    If this is market-moving, I would be sensitive to that. 
This is not monetary policy conversations; this is about the 
internal workings of the Fed.
    And I am not asking for all the transcripts; I am just 
asking for the excerpts specific to our investigation and 
oversight of the Fed.
    Let me ask you this: You get to oversee banks. If you made 
a request to a bank for information a year ago and they said, 
``Let me review with my board. Let me talk about it,'' but they 
never comply with your request for documents or information, 
what would the Fed do?
    Mrs. Yellen. I think we have complied very fully with the 
requests that you have made.
    Mr. Duffy. I am asking, what would you do if you made that 
kind of a request to a bank that you oversee? What would you 
do?
    Mrs. Yellen. We work with banks to make sure we have access 
to the information.
    Mr. Duffy. If they didn't, I can't imagine what the Fed 
would do if someone didn't comply with your request. And guess 
what, we are entitled to the documents. We expect to get them 
unless you exert a privilege, and there is no privilege that 
you have. So I expect they will come over.
    I yield back.
    Ms. Waters. Mr. Chairman?
    Chairman Hensarling. The time of the gentleman has--for 
what purpose is the ranking member seeking recognition?
    Ms. Waters. Is it appropriate to ask for unanimous consent 
for clarification on a point of information that was just given 
by the gentleman?
    Chairman Hensarling. Does the lady have a parliamentary 
inquiry?
    Ms. Waters. The inquiry could be considered parliamentary. 
I understand the gentleman to say that they subpoenaed the Fed 
and it was ignored. Is that what he meant?
    Chairman Hensarling. The gentlelady is not stating a 
parliamentary inquiry, and as I think the ranking member knows, 
the time of the Chair is limited. If other members wish to 
pursue that in their questioning, they may pursue it in their 
questioning.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa.
    Mr. Hinojosa. Thank you, Chairman Hensarling and Ranking 
Member Waters, for holding this hearing today.
    Chair Yellen, I thank you for meeting with our committee 
today and for your steadfast leadership at the Federal Reserve. 
America has made great progress since the financial crisis of 
2008.
    Our recovery includes 70 consecutive months of job growth, 
the longest streak in our Nation's history, resulting in an 
astounding 14 million private-sector jobs created. And an 
unemployment rate now standing below 5 percent.
    However, we continue to feel the hangover from the 
financial crisis started during President George W. Bush's 
second term. Today, the slower-than-average economic growth 
rate is fueling anxiety and weakening confidence in our 
Nation's economic growth prospects.
    Additionally, our economy appears to be sailing into strong 
headwinds caused by slowing growth in the developing world, 
stagnant growth in Europe, the dual effects of plunging oil 
prices and a strong dollar negatively affecting our 
manufacturing and export industries.
    Addressing those challenges also requires us to answer 
questions regarding the sustainability of our national debt and 
of the ability of Congress and the Federal Reserve to act 
effectively to stimulate the economy.
    Despite that market turmoil and economic uncertainty, 
however, I will note that our Nation's confidence in the safety 
and soundness of our financial system has not been shaken. 
Indeed, we can attribute a much stronger and more resilient 
financial system in large part to the protections and 
improvements of the market oversight under the Dodd-Frank Act.
    My first question, Chair Yellen: What else should our 
Nation be doing to help us return to normal growth rates?
    Mrs. Yellen. One of the distressing aspects of the recovery 
we have seen--I agree with you that we have made progress in 
the labor market, created a lot of jobs and the unemployment 
rate is low. But the growth in the economy that has been 
consistent with that has been quite disappointing.
    So another way of saying what that implies is when output 
is growing at a very weak pace and you have a lot of job 
growth, that means that productivity growth has been very 
disappointing since the financial crisis, and ultimately that 
determines living standards.
    Mr. Hinojosa. Chair Yellen, do you think we are dragging 
down the potential growth rate of our economy and doing a 
disservice to our young men and women by saddling them with 
debt just as they are setting out to become full contributing 
members of our workforce and economic engine?
    Mrs. Yellen. I think the debt situation that faces this 
country over the longer term is something that Congress 
certainly needs to address. While at this point the debt-to-GDP 
ratio looks like it should be sustainable at present levels for 
a number of years, as the population ages, it will--this is 
evident from CBO projections--be on an unsustainable upward 
course, and this is something Congress has known about for 
decades and it is important to address.
    Mr. Hinojosa. It seems to me that while Congress must do 
its part to raise the minimum wage, expand the Social Security 
safety net, and provide a more progressive tax code, what steps 
are you taking at the Federal Reserve to address the historic 
level of inequality in the United States?
    Mrs. Yellen. Congressman, the main contribution that the 
Fed can make to inequality, given that we don't have policies 
that target particular groups in the labor force, is to make 
sure that the labor market is performing well, that we attain 
Congress' maximum employment objective.
    I am pleased with the progress we have made, but there is 
further to go, and we are committed to making sure that we stay 
on that course of further improvement in the labor market.
    And it won't right every disadvantage that workers face, 
but it has resulted and will continue to result in broad-based 
gains for all groups in the workforce.
    Mr. Hinojosa. My time has run out, and I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, Chairman of the House Foreign Affairs Committee.
    Mr. Royce. Thank you, Mr. Chairman.
    Chair Yellen, it's good to see you. Thank you for being 
here.
    The latest stress-test scenario that was published by the 
Fed includes this scenario where the rate on 3-month U.S. 
Treasuries drops below zero from the second quarter of 2016 
through 2019.
    And I recognize that this in no way predicts any future 
action here. As a matter of fact, CCAR announced specifically 
in the document there that this scenario does not represent a 
forecast for the Federal Reserve.
    Nonetheless, this timing is interesting because it comes at 
a time when the European Central Bank and the Bank of Japan 
have both instituted these negative interest rate policies.
    So the question I was going to ask you--and let me make one 
other point. It may suggest that the Federal Reserve is not 
opposed to reducing its target rate below zero, should economic 
conditions warrant, and may be employing the stress-test 
process as a tool to consider its possible impacts. That 
strikes me as maybe the reason you deployed it in the scenario.
    You told the committee in November that if the economy were 
to deteriorate in a significant way, potentially anything, 
including negative interest rates, would be on the table.
    And I remember those remarks were echoed in January by New 
York Fed President Bill Dudley.
    So assuming for a minute that the Fed figures out this 
question about the legal authority, do you still believe that 
negative rates are a tool in the toolbox? And can we assume 
that the Federal Reserve would not include this scenario in a 
stress test if, in fact, it were not a potential future action?
    Mrs. Yellen. Let me say that was not what motivated the 
inclusion of this scenario in the stress test. We are in an 
environment where, as you pointed out, a number of the ECB, 
other European central banks, and the Bank of Japan, have gone 
to negative rates.
    Through much of Europe, and in Japan, interest rates are 
negative way at the yield curve. And we have had periods of 
market stress, where we see a flight into U.S. Treasuries as a 
safe haven, and the scenario that we ask banks to look at is 
one in which Treasury bill yields go negative.
    This is something that could potentially happen without the 
Fed actually setting negative interest rates. It is something 
that could happen, and we have seen it happen for limited 
periods of time in stressful situations.
    Mr. Royce. Let me ask a clarifying point--
    Mrs. Yellen. But--
    Mr. Royce. --because it has been kicked around since 2010, 
the possibility of the Fed maybe setting negative interest 
rates. Right?
    Mrs. Yellen. Well, yes.
    Mr. Royce. Quick question on looking at the Fed authority, 
you haven't taken a serious look at the Fed authority until 
now, while it was kicked around then and you do the scenario in 
the interim?
    Mrs. Yellen. Back in 2010 when we were looking for ways to 
consider--to add accommodation, to have a toolkit available, it 
is something we looked at. We got only to the point of thinking 
that it wasn't a preferred tool.
    Mr. Royce. Right.
    Mrs. Yellen. We were concerned about the impacts it would 
have on money markets. We were worried that it wouldn't work in 
our institutional environment. And we thought that zero was 
really the effective or very--
    Mr. Royce. I got it.
    Mrs. Yellen. --just very little was--could be gained.
    Mr. Royce. Let me ask you, then, really quickly--
    Mrs. Yellen. We would--in the spirit of prudent planning--
    Mr. Royce. --right. Yes.
    Mrs. Yellen. --it is something that, in light of European 
experience, we will look at, we should look at, not because we 
think there is any reason to use it but to know what could 
potentially be available.
    And it isn't just a question of legal authority. It is also 
a question of, could the plumbing of the payment system in the 
United States handle it? Is our institutional structure of our 
money markets compatible with it? We have not determined that.
    Mr. Royce. Let me just say that I think that the central 
banks in Japan and Europe are trying to overcompensate for 
irresponsible fiscal policy. I think that is what put them in 
this position.
    Can we avoid the same mistake here in the United States if 
we get our fiscal house in order? In other words, do you agree 
that if we address the long-term structural problems with 
soaring mandatory spending, we would decrease the potential 
need for monetary policy actions that reverse course on 
interest rates?
    Mrs. Yellen. I think it is certainly desirable and 
important for the long-run stability and growth of this country 
to take the measures that you have suggested and evaluating the 
stance of fiscal policy. It is something that affects our 
monetary policy options.
    Mr. Royce. Thank you, Chair Yellen. Thank you very much.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Chair Yellen, thank you for being here. Chair 
Yellen, you know I have a lot of respect for you.
    Mrs. Yellen. Thank you.
    Mr. Scott. But I very vehemently disagree with you when you 
say that you can't target unemployment.
    Let me just say this: It is very important for everyone to 
know that you have an equal mission. Part of that mission, one 
half of it, is to curb inflation. But the other half is 
unemployment.
    And so just as surely as you go and you target inflation 
with movement of your interest rates, surely you have to 
understand that you have the same authority to deal with the 
unemployment.
    Now, let me tell you why this is important, Mrs. Yellen: 
Nobody is suffering from unemployment like the African-American 
community. And they are suffering from that because of the very 
laissez-faire attitude that the Fed historically has dealt with 
just employment or unemployment altogether.
    When you look--yes, we can crow about a 4.5 unemployment 
rate. Do you know what the unemployment rate is for African-
American men between the ages of 18 and 37? It is 36.5 percent 
unemployment. And in some communities like Chicago, Baltimore, 
Atlanta, Houston, any of these big cities, it is hovering at 50 
percent.
    When you have this devastating situation, there is nobody 
else--there is no other agency that has the mandate to deal 
with it as the Fed. Now, in order to deal with it, you have to 
look at the economy like it is a wheel. The economy is a wheel.
    And why is it that we have this high unemployment rate 
among African-American young men? And African-American women in 
that same age group is 26 percent. So why is it that we can't? 
And a part of that reason is because the Fed has historically 
downplayed unemployment.
    Never in the history of the Fed have you even seen fit to 
have an African-American president of a regional Federal bank 
for the Federal Reserve. That is a part of the reason. We are 
not even a part of the conversation.
    So my whole point is that I want the Fed--nobody is better 
equipped to handle this rigid unemployment facing the African-
American community in that most pliable age group. That is the 
child-producing age group, 18 to 37.
    Can you imagine if that was the employment rate of 37.6 
percent of white young men in that age group? All hell would be 
breaking loose right now to do something about it.
    We need that same compassion from you. When you look at the 
sectors of the economy that are growing--transportation, 
energy, agriculture business, health care, construction, 
rebuilding the infrastructure, manufacturing--we need an 
advocacy from you to say automatically, there must be on-the-
job training programs for African-Americans in this hard group 
to go into these areas and earn as they learn.
    In agro-business, we have 1890s colleges, 19 of them, whose 
authority and mandate through the Farm Bill is to take the 
money that we give them through the Farm Bill and spend in 
teaching, research, and extension. Why not create the other 
spending category for scholarships and loan forgiveness, 
students who will go in and take advantage of these job 
openings in agriculture and business?
    All I am saying is that, please, we have to get the Fed to 
get off the dime and put the issue of African-American 
unemployment on the front burner. That is the core of all of 
the domestic issues that we are facing. And that is the child-
bearing group. What are these fathers to do? What is there for 
them?
    That is why we have so many of the situations in Baltimore, 
in Chicago, and in other places, and it leads to a straight 
pipeline to why we have 1.2 million of them sitting in the 
prisons. Would you help us with that?
    Mrs. Yellen. Congressman, I--
    Mr. Scott. I would love to work with you on it.
    Mrs. Yellen. --want to assure you that we recognize how 
serious the problems are that you have discussed, and we take 
our employment mandate extremely seriously and have been doing 
everything that we can to promote a stronger labor market that 
will benefit African-Americans.
    Mr. Scott. Would you really consider getting an African-
American, for the first time in history, to be a regional 
president of a Federal Reserve bank for the first time in 
history?
    Mrs. Yellen. Absolutely. It is our job to make sure that 
every search for those jobs assembles a broad and diverse group 
of candidates, and I regret that there hasn't been an 
appointment of an--
    Mr. Scott. Thank you, Mrs. Yellen.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Florida, Mr. Posey.
    Mr. Posey. Thank you, Mr. Chairman.
    Madam Chair, the number one thing I hear from my local 
community banks and credit unions is the need for regulatory 
release. That is not news to you, obviously, either. And these 
financial institutions provide critical services to our 
communities, and they are worried that the overregulation is 
hurting not only their ability to provide those services, but 
eventually is clearly leading to increased industry 
consolidation.
    What do you consider to be the negative consequences, if 
any, that result from consolidation, and the effects on the 
local and national economy?
    Mrs. Yellen. I think community banks play a vital role in 
supplying credit to groups of borrowers whom larger banks often 
would not be able to serve. And that is a vital role in all 
communities throughout the country, so we want to see those 
banks thrive, and are very focused on ways that we can reduce 
the burden on those banks.
    I mentioned earlier some of the things that we have tried 
to do to reduce the burden, and we will continue looking 
through the EGRPRA process, and by the regular meetings and 
contact that we have with community bankers, to address the 
burdens that they face and look for ways to simplify regulation 
and reduce burden.
    Mr. Posey. Madam Chair, do you think that relationship 
lending is important?
    Mrs. Yellen. It has been very important often for community 
banks in the kind of business that they do, so yes.
    Mr. Posey. Just a quick follow up: Can you identify some 
areas of priority at the Fed for reducing regulatory burdens on 
community banks?
    Mrs. Yellen. Yes. We have been focusing, for example, on 
the duration of our on-site reviews and looking for ways to 
have our examiners spend less time on bank premises. We have 
been looking at ways and have simplified and tried to tailor 
our pre-examination requests for documentation.
    We have been conducting extensive training for examiners to 
make sure that our guidance is properly interpreted and applied 
in ways that are consistent. We have a number of fora in which 
we try to help community bankers understand what new 
regulations or proposals are relevant to them and which ones 
are not intended at all for their organizations.
    As I mentioned, the EGRPRA process is ongoing, and we have 
been holding fora around the country to hear the concerns of 
banks with regulatory burden and will take all of the steps 
that we possibly can to address the concerns that surface.
    We meet regularly with community bankers through an 
organization called CDIAC, which is composed of representatives 
from each of the 12 Federal Reserve districts. They come to the 
Board and we meet with them twice a year, the full Board of 
Governors, to discuss their concerns, and we follow up on what 
we hear.
    Mr. Posey. Thank you.
    Finally, this week the House is considering legislation 
that would require the Administration to put forth a detailed 
plan to reduce the national debt whenever the debt limit is 
increased--a commonsense concept, I believe. We also just 
received the President's budget request, which would, in the 
face of a $19 trillion--we just passed the $19 trillion mark in 
the debt clock--increase spending by $2.5 trillion.
    When the President took office, the national debt was 
roughly $10 trillion. When he leaves office, the debt is 
expected to have doubled to about $20 trillion. You have also 
voiced your concerns about the impact of failing to raise the 
debt limit, failing to pay our bills, citing the impact it 
would have on the economy.
    I don't disagree, but I am curious, do you have similar 
concerns about the impact on the economy of failing to address 
our national debt? How much debt do you think is too much?
    Mrs. Yellen. I think if you look at the path that the U.S. 
Fed is on under current policies, it will rise from the present 
level to levels well above 100 percent of GDP and continue 
rising more or less indefinitely. And wherever you draw the 
line, you have to conclude that is an unsustainable economic 
situation. So I think it is essential that Congress address 
this longer-run budget deficit issue.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, the ranking member of our Oversight and Investigations 
Subcommittee.
    Mr. Green. Thank you, Mr. Chairman.
    I thank Chair Yellen for appearing today, as well.
    Mr. Chairman, Chair Yellen and, of course, Ranking Member 
Waters, I want you to know that there has not been some sort of 
conspiracy among Congressional Black Caucus members to bring up 
this issue of black unemployment, although I think we do talk 
about it among ourselves quite regularly.
    But I do believe that a basic premise that may be of help 
to us is the notion that, ``In the beginning was the Word.'' 
And not enough talk takes place among those who have the power 
to influence public policy with reference to African-American 
unemployment. To this end, I am concerned, and would ask if you 
have, in your statement, given a specific reference to African-
American unemployment in the statement that you made today?
    I apologize if I missed it, but was there a specific 
reference to African-American unemployment?
    Mrs. Yellen. I referenced in the answer to a previous 
question the very high rates of unemployment of African-
Americans that persist even with the current aggregate 
unemployment rate.
    Mr. Green. If I may, let me share this thought with you: If 
it is--and I believe you are in agreement that it is a serious 
problem--not just a problem, a serious problem.
    Mrs. Yellen. I certainly agree with that.
    Mr. Green. If it is a serious problem, I would ask that you 
make it a part of your actual statement that you present, and 
that you publish it, and that you continue to say to those of 
us who can make a difference--and we should be able to make the 
difference here in Congress; we have responsibilities here to 
focus as well--but if you would make it a part of your 
statement, and if you would publish this, I think it can have a 
meaningful impact on policymakers up and down the line.
    So just a small request, but I think it can make a really 
big difference, so I am going to ask that you do this.
    Mrs. Yellen. I am certainly open to doing so. I will 
certainly--
    Mr. Green. Thank you.
    Now, let's move to the Taylor Rule for just a moment. You 
have indicated that the Taylor Rule would be a grave mistake 
and that it would be detrimental to the economy and the 
American people. Could you, in about 1 minute, give some 
examples or an example of how it would be detrimental to the 
economy? That is a sort of a nebulous term and I think you 
should provide some clarity.
    Mrs. Yellen. Sometimes, it provides recommendations for 
what monetary policy should be that clearly overlook important 
circumstances, and--
    Mr. Green. If I may, Madam Chair, would you kindly explain 
the impact that it will have on the economy? What would the 
impact be if it causes us to do something inappropriate? And I 
will let you decide what is inappropriate.
    Mrs. Yellen. Either it would have us set a monetary policy 
that would result in much higher unemployment than would be 
desirable or, alternatively, there could be circumstances in 
which it would recommend an accommodative policy that would 
result in extremely high inflation.
    Now, I would say right now, as an example, the Taylor Rule 
would recommend an overnight short-term interest rate that 
would be close to 2.5 percent, and I think in light of the slow 
growth in the U.S. economy and the fact that we have needed to 
hold the Federal funds rate for almost 7 years--for 7 years at 
zero to achieve the progress that we have made, that setting it 
at the level that it would now recommend would be highly 
damaging to the economic situation.
    And we tried to provide some analysis in the monetary 
policy report we submitted about what--why that is, and in 
particular this idea that the neutral Fed funds rate, because 
of the damage from the financial crisis--
    Mr. Green. I regret that I must reclaim my time because I 
have one additional thing that I must say. I appreciate your 
commentary and I think that a good many people have the point.
    But I want to say this: We have some people who are 
visiting today. I don't want any response from them, but I want 
to acknowledge their presence because they are concerned about 
these wages. Now, they are concerned about wages across-the-
board, especially as they impact working people, people who are 
on salaries, people who make minimum wage.
    And it is our desire to see policies that will have greater 
employment, greater opportunities, but also policies that will 
target those who are hurt the most.
    I thank you, Mr. Chairman. I yield back.
    Mr. Messer [presiding]. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Welcome, Chair Yellen.
    I want to talk briefly about custody banks, which you know 
follow a different business model from other financial 
institutions. Custodians do not make consumer loans or engage 
in investment banking, and for these reasons pose relatively 
little credit risk. I understand that custody banks, whose 
customers would include, for example, pension funds with 
millions of beneficiaries, are finding it increasingly 
difficult to provide their core custody services, especially 
accepting large cash deposits. And this could worsen under a 
period of stress.
    One of the main reasons for this appears to be recent 
regulatory reform, such as the supplementary leverage ratio 
known as SLR. Custody banks typically place cash received on 
deposit with the Federal Reserve. This is cash that comes from 
pension funds, endowments, municipalities, and other clients.
    However, the Federal Reserve's supplementary leverage ratio 
does not recognize the essentially riskless nature of Fed 
deposits or the necessity of these placements by custodians. 
This may cause the leading custody banks to reject a customer 
cash deposit.
    My question is: Is the Federal Reserve aware of the impact 
that this may be having on custody banks? And if so, what do 
you propose to do about it?
    Mrs. Yellen. This is something that was considered, what is 
the appropriate treatment of central bank deposits, when the 
supplementary leverage ratio was adopted. And the decision was 
made at the time that the leverage ratio is not our main 
capital tool, but a backup capital tool that is intended to, in 
a crude kind of way, base capital requirements on the overall 
size of a firm's balance sheet, and that for that reason it 
should be included.
    We have more recently put in place capital surcharges that 
apply to the eight largest U.S. banking organizations, 
including two custody banks. And it is likely that once those 
are in place, they will become the binding capital requirement. 
But--
    Mr. Rothfus. I would encourage you to take a look at it 
because it is an issue for the banks.
    Mrs. Yellen. We have heard of the problem, and I will 
address it.
    Mr. Rothfus. As you know, Chair Yellen, the Bank of Japan 
recently announced that it would implement a negative interest 
rate policy in an effort to increase spending and investment 
and spur growth. The decision follows close on the heels of the 
European Central Bank's announcement that it would also launch 
additional monetary stimulus in March, and economists have 
predicted that Sweden, Denmark, Norway, Canada, Australia, and 
China may follow suit.
    In a recent editorial in The Wall Street Journal, William 
Poole, the former president of the Federal Reserve Bank of St. 
Louis, argued that these sorts of monetary policy gimmicks will 
not create their intended effects and instead they will only 
serve to divert attention from the actual structural problems 
that have plagued growth in the United States and around the 
world over the last decades, namely regulatory burdens and tax 
policies that serve to constrain business investment and long-
term growth.
    What do you say in response to Mr. Poole?
    Mrs. Yellen. I agree that there are structural factors that 
have restrained U.S. growth and also been responsible for 
rising inequality in the labor market. And it is important to 
take steps to address those problems. They are steps that are 
in the domain of Congress.
    But it is important for the Fed to try to achieve its 
mandate of ensuring a state of the labor market where people 
who want to work are able to find jobs, where there are a 
sufficient number of them.
    And, given the stressed situations that exist in Europe 
where there remains very high unemployment, and in Japan where 
inflation has for well over a decade undershot their inflation 
objective, it is a tool that has proven useful to them.
    Mr. Rothfus. I want to talk a little bit--you testified 
earlier that over the past number of years, the Fed kept the 
Federal funds rate at exceptionally low levels. You testified 
that even with this ``exceptional'' strategy, the economy 
achieved only 2 percent growth. And you added that ``The 
economy is being held back by headwinds.''
    I am wondering if any of these headwinds are manmade, or, 
to borrow a phrase, anthropogenic here in the United States? 
And I could identify some: the Affordable Care Act; a Wall 
Street reform bill that missed the mark, frankly; EPA 
regulations.
    And these headwinds have hit folks in my district, like a 
mom who now has to pay $400 for allergy medicine for her kid 
when she used to pay $10; or the coal miner I talked to last 
week who is taking care of a 5-year-old, a 3-year-old, and a 1-
year-old and won't be able to pay for his mortgage.
    And I just wonder, when the economic history of this decade 
is written, are they going to say that the Fed tried to do with 
monetary policy what should have been done with fiscal policy?
    I yield back.
    Mrs. Yellen. I think it is also important for Congress to 
address structural factors that are holding down growth.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, ranking member of our Housing and Insurance 
Subcommittee.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Thank you for being here, Madam Chair.
    Following through on some things that were said earlier, I 
have a bad knee and I have had it operated on 11 times, but the 
weird thing is that whenever I go to the hospital for another 
surgery, they never operate on my shoulder or my fingers. For 
some strange reason, they always operate on the same knee that 
has been hurt. And I know that is weird.
    The issue is we can't address unemployment in a certain 
sector by saying we are going to operate on the whole body and 
it gets better. That has never been true.
    Now, I differ a little from my colleagues in that I don't 
think it is your responsibility. I don't think the Fed has the 
responsibility even with the dual mandate. I think it is to be 
handled legislatively, and I don't think we are going to get 
that done.
    The other thing I have to say is that--and it is been said, 
and every time you come I have to say it because I have to just 
get it off my chest, because I do think that we are declaring 
minority unemployment to be too-big-to-curtail, and that is 
somewhat troublesome.
    But Wall Street and the big six banks are too-big-to-jail. 
If you rob a convenience store, you go to jail. If you rob 300 
million Americans, you get a cocktail. And I think that is what 
is creating all this anger around the country.
    I know you don't run the Justice Department, and I know you 
don't vote on legislation that could address some of these 
other issues. But I think we have to say it as much as we can 
because I don't think the world is hearing us.
    Now, I would like to yield the remainder of my time to the 
ranking member of the Financial Services Committee.
    Ms. Waters. Thank you very much, Mr. Cleaver.
    As you know, originally I was thinking about dealing with 
the question of the subpoena, et cetera. Except if you don't 
mind, I am so focused on all of this money that goes to these 
too-big-to-fail banks and trying to understand, number one, not 
only the fact that Goldman Sachs got $121 million, JPMorgan 
$910 million, and that with the rise in interest rates from 
0.25 percent to 0.5 percent, this will double.
    And this money keeps--it is going to the big banks. It is a 
subsidy to keep them from lending money, and we have this big 
need that has been discussed by my colleagues about this high 
unemployment rate and the lack of creativity and thinking about 
how we can deal with this. And these banks, too-big-to-fail, 
who we are finding every day because of the predatory lending, 
et cetera, are getting support from the Feds.
    Please, please explain that.
    Mrs. Yellen. It is an essential tool that we need to adjust 
the level of short-term interest rates. And from the standpoint 
of the taxpayer, our payment of those interest on reserves--we 
have very large reserve balances. We have $2.5 trillion, 
roughly, of reserves in the banking system, as compared with 
$20 billion or $30 billion prior to the crisis.
    The counterpart of that on our balance sheet is that we 
hold a very large stock of assets on which we are earning a 
substantially higher rate of return than we are paying to the 
banks. And that differential between what we earn on our 
holdings of long-term Treasuries and mortgage-backed securities 
and the 25 or 50 basis points we pay to the banks, that 
differential all shows up in the taxpayers' pocket. It is money 
that Congress can use to address all of the problems that you 
have discussed. Over the last year, we transferred $100 billion 
because of that.
    Now, if we don't pay interest on reserves and must use 
another technique to adjust short-term interest rates, likely 
we will be forced to greatly shrink our balance sheet in a 
rapid fashion, and the total amount of money going from the 
Federal Reserve to Congress will be significantly diminished. 
In addition to that, it would have very adverse effects on the 
economy.
    Ms. Waters. I want you to know that not only am I 
concerned, it looks like we are about to have some bipartisan 
concern on this issue.
    Mrs. Yellen. I hear that.
    Ms. Waters. And while I understand the argument that you 
are making about the big banks, we cannot feel sorry for them 
in terms of the amount of interest rates that they are getting 
or not getting, et cetera. We really do have to deal with this 
issue.
    I understand what you are trying to explain by short-term 
interest rates, but if I may, Madam Chair, let me just say 
this, that we have an opportunity with the discount window to 
allow for loans from some of these small community banks that 
they are not getting. And if that money went into the small 
community banks, they would be able to do job creation and to 
support small businesses, et cetera.
    And we just don't get why they are precluded from doing 
this, and increasing the job opportunities in the community, 
while we have given the subsidy to the big banks. We just don't 
get it.
    Chairman Hensarling. Although I agree with much of what the 
ranking member has said, she has long since spent her time.
    The Chair now recognizes the gentlelady from Utah, Mrs. 
Love.
    Mrs. Love. Thank you, Mr. Chairman.
    Thank you, Chair Yellen, for being here today. Chair 
Yellen, I am increasingly concerned about the impact of Dodd-
Frank regulations on real economy, economic growth, and 
especially job creation, which I wouldd like to just ask you a 
few questions about.
    If you look beyond the headlines, the headline numbers from 
last Friday's job numbers, and include discouraged workers and 
the underemployment, real unemployment remains high, nearly 10 
percent. In addition, millions of people have stopped looking 
for jobs. They have dropped out of the workforce, and it is a 
dynamic that is driving the Nation's workforce participation 
rate to an all-time low at 62.7 percent.
    And I want you to know that I agree with my colleague on 
the other side of the aisle, Representative Scott, when he 
talks about the large number of unemployment with our young 
Black Americans. Meanwhile, economic growth slowed to just 0.7 
percent in the fourth quarter.
    I am concerned the Fed and other financial regulators may 
not have a firm grip on the cumulative impact on the real 
economy of thousands of pages of the new Dodd-Frank 
regulations, especially new capital and liquidity rules. I am 
wondering if you share some of those concerns?
    Mrs. Yellen. I recognize that some of the new concerns are 
burdensome and do raise banks' cost of financial 
intermediation. In designing those regulations, we are always 
trying to achieve a balance between the benefits of creating a 
sounder and more resilient financial system that is less likely 
to be subject to the kind of devastating financial crisis that 
we had.
    We are balancing that against burdens that can raise the 
cost of capital or diminish financial intermediation. And we 
have tried to strike a reasonable balance, remembering that 
nothing resulted in more harm for a longer period of time than 
the financial crisis that we lived through, and I think we now 
have a much safer and sounder financial system.
    Mrs. Love. Okay, so another study by the American Action 
Forum found that consumer credit availability deteriorated 12 
percent to 14 percent since the passage of Dodd-Frank. I am 
also concerned about the growing number of borrowers unable to 
access affordable banking--including a lot of borrowers from 
low-income areas in my district, which is Sigurd, West Valley. 
These are hardworking Americans who are turning to high cost 
and unregulated online lenders to be able to get the access to 
the credit that they need, whether it is for purchasing a car 
or even starting a small business. They are finding that their 
ability to access this type of credit is unavailable to them.
    And so I am wondering if you also share some of my concerns 
about credit availability and the higher-cost alternatives?
    Mrs. Yellen. I do share your concerns about credit 
availability. And I think it is clear that credit availability 
has, in particular segments, been diminished. Home loans, 
mortgages, for example, for individuals without pristine credit 
ratings is really difficult, remains difficult to obtain.
    In part, we have regulations that are meant to address 
harms. I think lending standards were too easy prior to the 
financial crisis. We don't want to go back to lending standards 
that are so loose that they lead to the kinds of predatory 
lending and harms that we had that took a toll on the economy 
and on low-income households in communities. We need to achieve 
a reasonable balance, and we are searching for that.
    Mrs. Love. Being on the Subcommittee on Monetary Policy, I 
wanted to ask you just a quick question on monetary policy and 
what is happening in Europe and what are the implications. I 
may have stepped out of the room; I don't know if you have 
addressed this. But very quickly, what are the implications of 
the Federal Reserve and the ECB pursuing divergent monetary 
policy?
    Mrs. Yellen. The ECB has been addressing high unemployment 
and inflation that has slipped very meaningfully below their 2-
percent goal by putting in place negative interest rates and 
large-scale asset purchase programs.
    The United States has done better. We are, among advanced 
economies, about the strongest, so we have divergent monetary 
policies.
    It has put upward pressure on the dollar over a long period 
of time, which has harmed manufacturing and net exports. And 
so, it has resulted in negative influences on the part of our 
economy.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Clay, ranking member of our Financial Institutions 
Subcommittee.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you for being here, Chair Yellen.
    The Federal Reserve has a congressional dual mandate to 
seek maximum employment while limiting inflation. To limit 
inflation, the Federal Reserve raises interest rates, which 
slows the economy by discouraging people from borrowing to buy 
homes and cars, and discouraging businesses from investing.
    With this reduced demand, businesses will hire fewer 
workers. And as a result, workers will have less bargaining 
power, meaning they will be less likely to get pay increases. 
The decision to raise interest rates is based on the assessment 
of the Federal Open Market Committee of the Federal Reserve 
about whether inflation or unemployment poses a greater threat 
to the American economy.
    Unfortunately, the members of the FOMC largely come from 
the financial industry and, as a result, tend to be more 
concerned about inflation than the population as a whole, and 
less concerned about unemployment. So how do we square that, 
Madam Chair?
    Mrs. Yellen. First of all, I want to say that the committee 
is deeply focused on unemployment. We have two objectives, not 
one: maximum employment; and price stability, which we have 
interpreted as a 2 percent inflation objective.
    And I would really take issue with the idea that we are not 
focused on achieving our maximum employment objective. We are.
    Monetary policy has been highly accommodative. The Fed 
funds rate was at zero for 7 years. And we also have a large 
balance sheet that has provided a lot of additional 
accommodation.
    So we are not talking about tightening monetary policy, or 
a tight monetary policy. We have an economy that now has made 
substantial progress, creating 13 million jobs with the 
unemployment rate down to 4.9 percent.
    We took one small step to raise short-term interest rates 
but continue to have an accommodative monetary policy, which we 
see as consistent with further progress in the labor market. So 
it is not that we are trying to reverse progress. We continue 
to see, even with modest increases and interest rates, further 
progress, and we want to achieve it precisely because we think 
that although the unemployment rate is at levels that are 
probably normal in the longer run, there remains slack in the 
labor market. We want to see more progress.
    Mr. Clay. Although--not to cut you off--we could get to 4 
percent unemployment. But, look, while we are pleased to see 
that new jobs are continuing to be created in our economy and 
to learn that the unemployment rate last month fell below 5 
percent broadly, these positive signs may lead some to ignore 
the persistent economic challenges faced by African-Americans 
in this country.
    The current unemployment rate for African-Americans, for 
example, remains at nearly 9 percent. It is a commonly accepted 
view that access to gainful employment is one of the most 
important factors in supporting economic mobility and improving 
health outcomes. It is also widely known that in areas with 
higher rates of unemployment, there is a lack of consumption, 
increased crime rates, reduced school funding, and reduced 
political influence.
    Please discuss with us any specific actions that you have 
personally taken or directed your staff to take to identify 
solutions to help remedy the historical and continued racial 
disparity between employment opportunity for African-Americans 
and Whites.
    Mrs. Yellen. Our staff produces statistics that are among 
the most important in documenting and highlighting disparities 
in the economic situations in terms of assets and income by 
demographic groups. And I have personally given speeches 
highlighting those statistics. So our staff certainly looks at 
and does work to document those disparities.
    And in our community-development programs and work we 
discussed earlier that relates to the CRA, that is an area in 
which we have the capacity to try to identify particular 
programs that will be helpful in low- and moderate-income 
communities that suffer from special disadvantage in the labor 
market, and to try to identify programs that work that we 
encourage to be adopted on a broader scale--
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Clay. I would like to work more with you in that area.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from North Carolina, Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    I would like to just welcome those who have come today with 
your T-shirts on: ``What recovery?'' ``Let our wages grow.'' 
``Whose recovery?'' These are very pointed and clear 
statements, and I really commend you for being here and seeing 
this process.
    Yes, the reality is that this recovery is the most dismal, 
slow, tepid recovery we have ever had from a recession in 
recorded history. And we look at the realities of this 
recovery. This last report of new jobs was only 150,000 new 
jobs. We have a 2 percent dismal economic growth.
    Frankly, the demographic group that is the lowest recovery 
is the low-income, minority people in this country. That 
demographic group has moved up the ladder less than any other 
group, albeit an intense effort, well-intended, I am sure, by 
the Obama Administration, by Chair Yellen.
    But through it, what we have seen is very accommodative 
monetary policy; we have seen a high regulatory environment; we 
have seen Obamacare; we have seen the highest corporate tax 
rates in the industrialized world. All of this has achieved 
this dismal recovery.
    And I would say to you that the contrast is back in the 
1970s, we had the same type of dismal economic outlook--high 
inflation, high unemployment. And yet, what happened? We 
reduced the regulatory environment, we reduced the tax burden, 
and the economy took off.
    We were creating 300,000, 400,000, 500,000 jobs a month. 
One month, a million jobs. We were growing up to 6 percent.
    It seems to me that--logic may come in--perhaps well-
intended policies have had an adverse outcome of what was ever 
intended.
    And, Chair Yellen, I commend you for your work and what you 
have sought to do. But it seems to me that these accommodative 
policies have contributed to where we are today.
    I would say, Chair Yellen, I would like to thank you in 
your remarks that you made reference to the fact that there are 
those who are available to work but not actively searching for 
work. You have also made reference to those who are working 
part-time and can't get full-time jobs.
    Now, these numbers are not included in the current 
unemployment rate of 4.9 percent. So in reality, we are really 
talking around 10, 11, 12 percent are the stats that I have 
seen of real unemployment.
    Would that not be correct, Chair Yellen?
    Mrs. Yellen. Broader measures of unemployment are 
significantly higher. For example, a definition that the BLS 
refers to as U-6 that includes both of the groups you 
mentioned--involuntary part-time--
    Mr. Pittenger. The point I want to make is--
    Mrs. Yellen. --and discouraged--
    Mr. Pittenger. --the real numbers are much higher than 4.9 
percent. So it is really disingenuous to say to the American 
people that these policies have contributed toward 4.9 percent 
unemployment.
    In the real world, where people are living--and we have 
some of them here today--it is far less. And I think that 
should be understood and absorbed by these wonderful people who 
have come, that the types of policies that have been enacted, 
been enforced this last 7 years, have worked against your 
interests.
    What grew the American economy were small businesses who 
could go get loans. That entrepreneur who has been the 
lifeblood of our economy can't go to a bank today to get that 
new loan because of compliance requirements. They are the 
people who create those new jobs.
    And on top of that, you have the burden of the obligations 
of Obamacare. In small business, what are they doing? They are 
cutting jobs so they don't have to comply.
    What will grow your economy, what will create the jobs that 
you earnestly want, is an open market where companies can grow 
and not have this intense regulatory environment, whether it is 
through monetary accommodative policy or through onerous 
regulatory environments placed upon them. So I want to 
encourage you with that reality, that we can find that type of 
opportunity economy.
    I would say to you, Chair Yellen, that the regulatory 
rulebook--it has been in a constant state of revision for the 
last 6 years. Can you see the benefit, then, as a result of 
what we discussed, in pausing this process in order to assess 
the cumulative impact that these regulations are having on the 
economy before we proceed further?
    Mrs. Yellen. We have several regulations that we intend to 
put out during this coming year. And in terms of the list of 
what was mandated by Dodd-Frank, we have made substantial 
progress.
    Mr. Pittenger. Consider that outcome. We are saying that we 
think it needs to be done.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair wishes to remind Members that we expect to excuse 
the witness as close to 1:00 p.m. as possible. The Chair 
anticipates getting through perhaps four more Members.
    The Chair now recognizes the gentleman from the Super Bowl 
champion Denver Broncos, Mr. Perlmutter.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    And, Chair Yellen, thank you, as always, for being here 
today. I was going to go a little off topic with my first 
question, to say, how about those Broncos, but--
    Mrs. Yellen. Way to go.
    Mr. Perlmutter. --the Chair already beat me to the punch.
    But I do want to talk about the overall conversation today, 
and I want to thank you and I want to thank the Federal 
Reserve. I want to start with the chart that we have on the 
board, which shows what happened at the end of the Bush 
Administration, when we went to 10 percent unemployment, and 
under Obama, we are down to less than half of that.
    Okay? So that is your chart number two in your monetary 
report. And all the Republicans don't want to let the facts get 
in the way of their rhetoric because then chart number four 
shows that after some time--and that is on page five, Chair--
wages are beginning to move up after we started getting people 
back into the job market.
    Chart six, oil prices way down. Chart seven, inflation 
even. Chart 13, wealth-to-income--disposable income up ``a 
robust 3.5 percent.'' Chart 15, household debt service, way 
down. Chart 20, mortgage rates, down. Figure one on page 37, 
unemployment down looking at the long-term, and core price 
inflation, even.
    Those are your charts. Those are the facts.
    Now, have wages gone up as much as we would like to see? 
No. But we had to get a lot of people back working. Now, we are 
starting to see them move.
    So the Chair went through a whole list of economists, 
because obviously he didn't have a lot of questions; he wanted 
to list a lot of names. And there were a couple of guys there 
with the Hoover Institute.
    So Herbert Hoover, grand old Republican President who led 
us into the Great Depression. Not the kind of economy I would 
like to see, all right?
    George Bush, we go from 5 percent unemployment to 10 
percent unemployment. We lose millions of jobs.
    Under Barack Obama, back down to 4.9 percent. In Colorado, 
we are at 3.5 percent.
    So I just want to thank you, and I want to thank the 
Administration for getting this economy back on track.
    Now, can we do better? You bet.
    So how would you suggest that we do better? How can this 
economy get moving so that the folks here can see some real 
growth in wages, which I think are beginning to appear, but 
what would you suggest?
    Mrs. Yellen. Our objective in terms of what we can do is to 
try to make sure that the picture that you have put up here 
shows continuing improvement in the labor market.
    I agree with you, I would say the signs of wage growth 
increasing--they are tentative at this point. There are some 
hopeful signs, but I think if the labor market continues to 
progress we are very hopeful we will see faster progress on 
wages.
    And we will try to keep that progress going. That is our 
objective. Inflation is running under our 2-percent objective. 
I expect that will move up over time, as well, with appropriate 
policy.
    But I appreciate your saying that some of the burden should 
also be on Congress and others, because there are so many 
problems in the labor market and particular groups--we have 
talked a lot about African-Americans and the problems they 
face.
    The Fed, of course, has a role to play, but job training, 
educational programs, programs that address other barriers in 
the labor market, I think this is Congress' job to address.
    Productivity growth is very low. I think Congress has 
always had a role in supporting basic research, making sure 
that the infrastructure of our country is adequate and putting 
in place programs that make sure that training and education 
are widely available.
    Mr. Perlmutter. All right. Let me move to a soft spot that 
I think exists in the economy, and you and I have talked about 
it before, and that is on oil and gas and the fact that the 
Saudi Arabians are pumping like crazy into what appears to be 
an oversupplied market, causing the price to drop a lot, which 
in some ways is very good for all of us because saves us $10, 
$15, $20 a week or a month in our price at the pump.
    But it also is causing some job losses in the manufacturing 
sectors, the oil and gas, obviously, transportation. Can you 
comment on what the Fed is doing or reviewing when it comes to 
oil and gas production?
    Mrs. Yellen. We are taking account, as you said, of the 
fact that the energy sector is very hard-hit. We are losing 
jobs there. But with respect to employment, it is--although 
there really are very severe losses, it is a pretty small 
sector of the workforce overall.
    We are seeing massive cutbacks in drilling activity, and 
that is rippling through to manufacturing generally, where 
output is depressed. So, it is having negative consequences.
    On the other hand, if you look at the difference in oil 
prices now relative to 2014, for the average American 
household, we are looking at a savings of $1,000 a year.
    And that is boosting consumer spending. And we have these 
two: a negative force, positive forces. We are trying to factor 
all of that in as--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Thank you, Chair Yellen, so much, for being with us today.
    As you may know, the Financial Crimes Enforcement Network, 
or FinCEN, is in the process of finalizing some new 
requirements to prevent terrorism financing and money 
laundering under its beneficial ownership rules.
    While I fully support efforts to curb terrorism financing, 
it seems the application of FinCEN's rule to certain non-bank 
subsidiaries, such as premium finance companies, may not be 
appropriate.
    I understand that my staff is already talking with the Fed 
about this issue, but wondered if I could get a commitment from 
you today about trying to find clarification for if these rules 
apply to premium finance companies that are subsidiaries of 
banks?
    Mrs. Yellen. We would be happy to work with you on that.
    Mr. Hultgren. Thank you so much.
    When you testified before the committee back on November 
4th of 2015, we discussed the impact of the supplementary 
leverage ratio on custody banks. At that time, you described it 
as a kind of backup ratio that works as a backup to risk-based 
capital standards.
    When responding to questions from Congressman Rothfus 
earlier today, you stated that, ``When the supplementary 
leverage ratio becomes effective, that it will likely become 
the binding capital requirement for some custody banks.''
    I understand some of these custody banks already feel they 
must discourage customer cash deposits. As you know, these 
institutions have highly liquid, low-risk balance sheets that 
support client needs. In light of this concern, will the Fed 
consider adjusting the capital requirements for excess cash 
deposits held with the Federal Reserve?
    Mrs. Yellen. I am not sure if they will become the--if the 
supplementary leverage ratio will become the binding constraint 
or not. I didn't intend to say that it is the binding 
constraint. There will also be so-called SIFI capital 
surcharges that will come into effect that may make those 
binding constraint.
    This is a matter that I understand what the issue is. We 
can look at it and discuss it. It was debated at the time. 
There were considerations on both sides and a decision was made 
to include Fed deposits.
    It is something we can look at, but it was considered.
    Mr. Hultgren. I hope we are able to discuss that and also 
look and see if it is necessary for us to have congressional 
intervention, as far as legislation, to change the rule.
    Let me move on. I am pleased by the news that the Federal 
Reserve has been engaged with the insurance industry on capital 
roles appropriate for the business of insurance.
    What are your thoughts on how that process is proceeding, 
and when might we suspect to see proposed rules from the 
Federal Reserve released for public comment?
    Mrs. Yellen. We are working very hard on that. I don't have 
an exact timetable but we are expecting to go out with, for 
each of the firms, a notice of proposed rulemaking, so the 
public can react to these rules. The staff is fairly far along 
in developing these, so my hope is that it won't be too much 
longer.
    We have worked hard to have the appropriate interactions 
with the firms and other regulators to do this right.
    Mr. Hultgren. I appreciate your work on that. From 
Illinois, insurance is important. We have some wonderful 
companies there, but I know they have questions, and I 
appreciate the iteration and hopefully the resolution 
relatively quickly.
    One last question: Will the Federal Reserve issue one 
proposed capital rule for all insurers it supervises? And if 
you could explain why or why not?
    Mrs. Yellen. I am not positive. I think for the particular 
SIFIs that have been designated--Prudential, AIG, and MetLife--
they are likely to be firm-specific rules, but I am not 
positive. Let me get back to you on that.
    Mr. Hultgren. That would be great. Thank you. Thanks, Chair 
Yellen.
    Mr. Chairman, I have an additional minute. I would yield 
that back to the Chairman, if the Chairman wants it. Otherwise, 
I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    As we start out, I also want to thank some of the folks who 
have joined us for the hearing today. My good friend, Ron 
Harris, is here from Minneapolis.
    It's good to see you, Ron.
    And I just want to let you know that this active 
citizenship of coming to these hearings, watching things, is 
exactly what is needed in order for this government to function 
properly. In my view, this is what democracy looks like.
    Thank you all for being here.
    Chair Yellen, let me point your attention to the words of 
Mr. Narayana Kocherlakota, who was a former Minneapolis Fed 
chair, outgoing President of the Federal Reserve Bank in 
Minneapolis. On Martin Luther King Day, he wrote a blog and 
here is what he said in part: ``There is one key source of 
economic difference in American life that is likely 
underemphasized in the FOMC deliberations--race.''
    He went on to say that for the year--he went on to say that 
he searched through the transcripts of the FOMC meetings for 
the year 2010, his first year on the committee, and a dire year 
for African-Americans in our labor market, and in that year our 
total unemployment rate exceeded 9.25 percent every quarter, 
but for African-Americans, it exceeded 15.5 percent.
    Today, now, White unemployment in Minnesota is 2.9 percent 
as of December 2015, but Black unemployment is 14.1 percent. 
And in Minneapolis, overall White unemployment is 4 percent, 
but Black unemployment is a shocking 18.9 percent.
    So I say that because this is something that I think needs 
the attention of the Chair. I don't know what constraints you 
believe are out there, but race matters when it comes to how 
people experience our economy.
    And if we don't discuss it, talk about it, then we won't 
ever get to the heart of the matter as to how to fix it to make 
equal justice for all.
    I will quote one Kocherlakota one more time. He said, ``As 
we all know too well, race matters. The average African-
American's experience with the U.S. economy is different from 
that of the average White person's.''
    So, my question is, what do you make of the commentary from 
the previous Minneapolis Fed president? In your view, is there 
adequate discussion, attention of the economic situation of 
African-American workers within FOMC deliberations?
    And if there is not--and I suspect you will say there is 
not--what can we do about it? How can we at least focus the 
committee's attention on this segment of our fellow Americans?
    Mrs. Yellen. It is, of course, important that we look at 
different groups, and particularly those who are suffering the 
most in the labor market. And I am surprised that there was no 
specific mention of race.
    In 2010, the unemployment rate was substantially higher 
than it was. The committee was very focused at the time on what 
we could do to promote a stronger labor market. And I suppose 
because our tools are not ones that can be targeted at 
particular groups in the labor market, it was clear what we 
needed to do, and that was to support a stronger labor market 
more generally.
    Mr. Ellison. But, Chair Yellen, forgive me for the 
interruption. I definitely think that--I get that part. But I 
would rather talk prospectively, because the past is what 
happened and there is no changing it.
    How can the Fed Chair get the FOMC to say, ``Wait a minute, 
not all Americans, particularly African-Americans, are 
experiencing this upsurge in economic activity?''
    For Black Americans, we are still in the midst of a very 
serious depression-recession. What can we do about it, and 
what--and again, I am not here to say--to wag my finger about 
what happened. We know what happened and it wasn't right. But 
in terms of what is happening now and what can happen, what can 
you tell me?
    Mrs. Yellen. I think you are right that we should pay 
adequate attention to how different groups are faring in the 
labor market. We have made clear that we don't focus on any 
single statistic, that the unemployment rate is only one 
measure of what is happening in the labor market, and it is 
appropriate for us to really try to do a much more detailed 
assessment of where things stand and what we should be aiming 
for.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair anticipates calling upon two more Members, Mr. 
Barr and Mr. Delaney, and then excusing the witness.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. Thank you, Mr. Chairman.
    And, Chair Yellen, thanks for being back before us.
    The last time you were here, we talked about a qualified 
CLO concept, and you were kind enough to respond to that 
question in writing. I want to thank you for that, and I want 
to particularly thank you for recognizing that the qualified 
CLO concept could be considered a positive development in the 
market.
    And I would like to continue our discussion about the role 
that regulation could very well play in terms of being a source 
of economic instability, particularly in our capital markets.
    The Basel Committee recently finished a rule in January 
that increases the capital held against securitization 
exposures in a bank trading book by up to 5 times the amount 
already required under Basel III, as well as the final TLAC 
rules.
    One industry study suggests that trading in U.S. asset-
backed securities will become uneconomical if the rule is not 
tailored to fit the U.S. marketplace.
    If it is uneconomical to act as a market-maker for 
commercial mortgage-backed securities or residential mortgage-
backed securities, auto loans, credit cards, collateralized 
loan obligations, then banks will pull out of the ABS market, 
which represents a $1.6 billion source of consumer lending, or 
30 percent of all lending to U.S. consumers.
    So my question to you, Chair Yellen, is how will the Fed 
ensure that the final rule will be tailored to fit the U.S. 
market, which is the most liquid ABS market in the entire 
world?
    Mrs. Yellen. I will have a careful look at that. I am not 
familiar with all of the details of the Basel proposal.
    But anything we implement in the United States--there is 
nothing automatic that is implemented in the United States, and 
we will have a careful look at what the impact would be.
    Mr. Barr. I appreciate you doing that. And I continue to 
urge the Fed, and you in particular, as a member of FSOC, to 
look at government regulation as a source of economic 
instability.
    To that end, we are told by many of the regulated bank 
holding companies that there is no updated organizational chart 
within the Fed. And so my question would be, can you share with 
us--or can your staff share with us--a detailed organizational 
chart with the names and titles of the Bank Supervision and 
Regulation Division's full professional staff?
    Mrs. Yellen. I think so.
    Mr. Barr. I am told that whatever organizational chart you 
have is very dated, and so--
    Mrs. Yellen. Yes--
    Mr. Barr. --we can't even--many of the folks can't even ask 
you questions.
    Mrs. Yellen. --yes. I don't see any reason we can't--
    Mr. Barr. I appreciate you doing that.
    Switching gears really quickly to the Consumer Financial 
Protection Bureau and their funding source, which, as you know, 
according to the budget overview that the Bureau makes public, 
transfers from the Federal Reserve System are capped at $618 
million for Fiscal Year 2015, and the transfer cap is estimated 
to be $631 million for Fiscal Year 2016.
    Given that my time is scarce, if you could just answer the 
following in yes-or-no responses, that would be greatly 
appreciated. Does the Fed approve the Bureau's budget?
    Mrs. Yellen. We fund the Bureau's budget.
    Mr. Barr. You fund it, but do you approve the budget?
    Mrs. Yellen. I think the answer is no, but--
    Mr. Barr. Right. Can you veto specific allocations 
requested? No.
    Mrs. Yellen. I don't think so.
    Mr. Barr. Okay. And does the Fed have protocols if the 
bureau seeks to transfer more than the cap on its transfers 
under the formula? Do you have a protocol in place to prevent 
that?
    Mrs. Yellen. We abide by the law. I need to look at the 
details of what our obligations and limits are. I need to look 
at that more fully.
    Mr. Barr. We would like to know if the--
    Mrs. Yellen. But we certainly have protocols to abide by 
what Congress set out.
    Mr. Barr. This is the problem we have is that we don't have 
appropriations control over the Bureau. And so, they get their 
funding from you. We would hope that they would at least be 
accountable to you as the funding source.
    Is there any direct oversight of the implementation of the 
Bureau's budget by the Fed?
    Mrs. Yellen. No. Our Inspector General has authority both 
for the Fed and the Bureau, but the Fed does not have authority 
over the budget and spending of the--
    Mr. Barr. Thank you. In my last 10 seconds, you have talked 
a little bit about the need for Congress to address our long-
term debt and deficit crisis. This seems to me a five-alarm 
fire.
    Given that mandatory spending is 70 percent of the Federal 
budget, why isn't the Fed more aggressively warning Congress 
that it must reform mandatory entitlement spending?
    Mrs. Yellen. Every Fed Chair that I can remember has come 
and told Congress that this is a looming problem with serious 
economic consequences. I know my predecessor has; I have on 
many occasions; and I certainly remember that Chairman 
Greenspan discussed with Congress the importance of addressing 
this.
    Mr. Barr. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Maryland, Mr. 
Delaney.
    Mr. Delaney. Thank you, Mr. Chairman.
    And I want to thank you, Chair Yellen, for not only your 
leadership in general, but also your participation and patience 
at this hearing.
    I also want to welcome our visitors and guests here today 
and thank you for bringing your important message.
    We do talk about how our unemployment rate has gone down 
substantially, which it has--below 5 percent now. But we all 
know that when you get behind those numbers there are really 
only two types of jobs being created right now in this country: 
high-skilled, high-paid jobs, where you need very, very 
specific skills and advanced educations to get them; and low-
skilled, low-paid jobs.
    And what we are not creating is middle-skilled, middle-
class jobs, the kind of jobs that have been the backbone of 
this country for a long time and allowed wages to grow and 
people to raise their families with one job.
    The Chair touched on something very important, which is 
infrastructure, because there is nothing we can do as a country 
to help address that problem more than rebuilding our country.
    So if I could ever edit your T-shirts I would say, ``Let 
our wages grow, rebuild our country,'' because I do think it 
would really make a difference in raising wages.
    But my question for the Chair is--and again, thank you for 
your patience--in December, when the decision was made to raise 
the Federal fund rates, in your testimony you said that was in 
part based on a view that economic activity would continue to 
expand at a moderate pace and labor market indicators would 
continue to strengthen.
    And certainly, based on the top-line data from 2015 and 
2014, where we saw decent GDP growth, improvement in the 
residential market, business investments at a decent level--not 
where we would like them, but at a decent level--increases in 
R&D investments, et cetera, but even when you take into 
consideration the negatives from the oil and gas sector, the 
outlook for economic growth was reasonably solid, and the labor 
market data that you were looking at, at the time, must have 
been good because the January numbers were actually 
encouraging, not only in terms of unemployment but some of the 
wage data, as you talked about.
    So I guess my question is, a lot has happened since that 
decision in the markets, and that tends to change behavior. 
When you look at the same data you looked at when you made that 
decision in December, if you look at that data now, does it 
change your view as to your perspective on economic activity, 
economic growth, and general labor market trends?
    Mrs. Yellen. I think the answer is ``maybe,'' but the jury 
is out. We have continued to see progress in the labor market. 
Over the last 3 months, there have been 230,000 jobs per month, 
averaging through.
    GDP growth clearly slowed a lot in the fourth quarter. My 
expectation is that it will pick up this quarter.
    But on the other hand, financial conditions have tightened 
considerably, and that can have implications for the outlook.
    And what the Committee said in January--we had previously 
said that we regarded the risks to the outlook for economic 
activity and the labor market as balanced.
    Mr. Delaney. Right.
    Mrs. Yellen. What we said in January is that we are 
evaluating and assessing the impact of these developments on 
the outlook for both the labor market and activity for 
inflation and the balance of risks. And that is what we are 
doing at this point.
    Mr. Delaney. And when you look, Chair Yellen, at recent 
data that you get better than anyone about credit formation and 
borrowing activities in the markets, are you concerned that 
there has been a significant contraction in credit availability 
based on recent market activities? And how much does that 
factor in to your--
    Mrs. Yellen. That is an important factor.
    Mr. Delaney. And have you seen it?
    Mrs. Yellen. Not really at this stage. But what we do see 
is that spreads, especially on lower-graded bonds, have widened 
considerably. Borrowing rates have widened.
    Mr. Delaney. What about bank lending?
    Mrs. Yellen. And it is not just energy. In our most recent 
survey of banks on their lending standards, we have seen a 
tightening that is reported in C&I loans, in CRE loans, and 
that certainly those loans continue to grow but that is 
something that bears watching. It is really those kinds of 
trends that we need to evaluate--
    Mr. Delaney. And very quickly, as you weigh your decisions, 
obviously inflation and labor-market participation are 
critical, overall, the economic activity is critical. This 
subcomponent, in other words, what is happening with credit 
availability--how important is that in your decision-making 
process?
    Mrs. Yellen. What we are trying to do is forecast spending 
in the economy. Investment spending and housing are two 
important forms of spending. And credit availability factors 
into our forecast for both of those portions of the economy. 
They are not the only factors that matter, but they are a 
factor that is important, and so we will be considering those.
    And there are a number of weeks before we meet again in 
March. There is quite a bit of additional data we will want to 
look at. But you have pinpointed exactly the kinds of 
considerations that will bear on our thinking.
    Mr. Delaney. Thank you again.
    Chairman Hensarling. The time of the gentleman has expired.
    The ranking member is recognized for a unanimous consent 
request.
    Ms. Waters. I ask unanimous consent to insert into the 
record the statement from Financial Innovation Now (FIN) that 
highlights the very important work the Federal Reserve Board is 
doing through the Faster Payments Task Force, of which FIN is a 
member.
    Chairman Hensarling. Without objection, it is so ordered.
    Chair Yellen, I thank you for your testimony today.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place her responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
record.
    I ask Chair Yellen to please respond promptly.
    This hearing stands adjourned.
    [Whereupon, at 1:12 p.m., the hearing was adjourned.]

                            A P P E N D I X


                          February 10, 2016

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