[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
__________
JUNE 22, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-93
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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
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Page
Hearing held on:
June 22, 2016................................................ 1
Appendix:
June 22, 2016................................................ 55
WITNESSES
Wednesday, June 22, 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 June 21, 1016................ 63
Written responses to questions for the record submitted by
Chairman Hensarling........................................ 104
Written responses to questions for the record submitted by
Representative Barr........................................ 112
Written responses to questions for the record submitted by
Representative Beatty...................................... 113
Written responses to questions for the record submitted by
Representative Hinojosa.................................... 118
Written responses to questions for the record submitted by
Representative Luetkemeyer................................. 125
Written responses to questions for the record submitted by
Representative Messer...................................... 129
Written responses to questions for the record submitted by
Representative Murphy...................................... 132
Written responses to questions for the record submitted by
Representative Tipton...................................... 134
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Wednesday, June 22, 2016
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 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, Pearce, Posey, Fitzpatrick, Westmoreland,
Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, Stutzman,
Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus,
Messer, Schweikert, Guinta, Tipton, Williams, Poliquin, Love,
Hill, Emmer; Waters, Maloney, Velazquez, Sherman, Clay, Lynch,
Scott, Cleaver, Moore, Ellison, Perlmutter, Himes, Carney,
Sewell, Foster, Murphy, Delaney, Sinema, and Heck.
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 to give an opening
statement.
I have been struck by some of the headlines I have reviewed
recently. For example, ``Economy barely grew in first 3 months
of the year,'' Associated Press. ``U.S. added on 38,000 jobs in
May, weakest performance since September 2010,'' The Wall
Street Journal. ``Will we ever get higher wages?'', CNN. And,
``Labor force shrinks,'' Reuters.
What is clear and verifiable is that this weak economy
doesn't work for millions of working Americans. The true
unemployment rate stands at almost 10 percent. Paychecks are
stagnant, and the national debt clock spins out of control.
After almost 8 years of the President's economic policies,
he is on track to be the only President in U.S. history not to
deliver a single year of at least 3 percent economic growth.
This will give him the fourth-worst economy record of any
President in U.S. history.
The Fed cannot escape its share of responsibility in being
complicit in ``Obamanomics'' because it has lost much of its
independence from the Administration. To wit, every Member of
the Board of Governors has been appointed by this President.
There is a noticeable revolving door between the White
House, Treasury, and the Fed. The Fed Chair meets almost weekly
with the Secretary of the Treasury to discuss policy.
Furthermore, the Fed has been a facilitator and accommodator of
the Administration's disastrous national debt policy and has
regrettably lent its shrinking credibility to advancing the
Administration's social agenda.
There is a better way forward, which includes renormalizing
monetary policy and reforming key aspects of the Federal
Reserve to better comport with its mandate--as my House
Republicans passed the FORM Act last year and are introducing
the Financial CHOICE Act this year, which offers economic
growth for all and bank bailouts for none.
The Fed's so-called ``data-dependent'' monetary policy
strategy says nothing about which data matter, let alone how
they matter. This severely compromises the kind of policy
transparency and predictability that is necessary for
households and businesses to grow our economy.
The Fed's so-called ``forward guidance'' continues to
provide little or no guidance to the rest of us. The FORM Act,
which has been endorsed by nationally renowned economists,
including three Nobel laureates, would help reestablish the
Fed's independence and promote economic growth by ensuring a
systemic monetary policy framework that is truly data-
dependent, consistent, and predictable.
Another drag on our economy is the blurring of fiscal and
monetary policy by the Fed. By paying interest on excess
reserves at above-market rates, the Fed has swollen its balance
sheet by which it now directs credit to favored markets.
Stanford economics professor John Taylor rightfully calls
this, ``mondustrial policy,'' for the combination of monetary
and industrial policy it represents. By inviting distributional
interests to crowd out the market discipline of credit, this
policy favors a few at the expense of many and weakens economic
growth for working Americans.
Left unabated, the central bank will soon become our
central planner. This cannot be allowed to happen. It is way
past time for the Fed to commit to a credible, verifiable
monetary policy rule, systematically shrink its balance sheet,
and get out of the business of picking winners and losers in
credit markets.
I now yield 3 minutes to the ranking member for an opening
statement.
Ms. Waters. Thank you, Mr. Chairman.
And I thank Chair Yellen for joining us today. Under your
leadership, we have seen a Federal Reserve that cares about
American workers and families and has made tremendous progress
on their behalf.
While the Fed's work may seem abstract to many people, in
fact it does have a profound impact on our day-to-day lives,
from determining the rates we pay on loans to ensuring that
Wall Street never again puts taxpayers at risk.
Thanks to actions taken by the Fed, the Obama
Administration, and Democrats in Congress, we have come a long
way since the financial crisis wiped out trillions of dollars
in household wealth. We can see this in the longest-ever streak
of private sector job growth, rising home prices and overall
gains in household wealth.
Yet, I remain concerned that despite these gains, our
recovery remains incomplete, and our progress has been uneven,
particularly as it affects our middle-class workers, low-income
families, and minority communities.
When you look at wages, broader measures of unemployment
and the most recent jobs numbers, it is clear that too many
Americans have been left behind. That is why I am pleased that
you have taken a cautious approach to raising rates and have
dedicated significant personal energy to increasing economic
inclusion. It shows that you are indeed listening to the needs
of everyone, not just the well-connected. And I would encourage
you to continue down this path.
Of course, Congress must take responsibility for these
disparities as well. Too many years of fiscal austerity have
robbed our economy of its full potential. And now we are seeing
the culmination of Republican efforts to kill the Dodd-Frank
Act, putting our economy back at risk of another crisis. In
addition to the chairman's wrong Choice Act, Republicans have
filed over 30 amendments to the financial services
appropriations bill that would undermine financial reform.
So before closing, I would like to highlight tomorrow's
vote in Britain, which serves as the latest reminder of why we
must preserve the Fed's independence and ability to set
monetary policy on a forward-looking basis. No rule or formula
could adequately account for such unpredictability, which is
why foolish proposals that seek to put monetary policy on
autopilot must be rejected.
I look forward to your testimony.
And I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Michigan, Mr. Huizenga, chairman of our Monetary Policy
and Trade Subcommittee, for 2 minutes.
Mr. Huizenga. Thank you, Mr. Chairman.
I am back here, Chair Yellen.
So in response to the financial crisis, the Emergency
Economic Stabilization Act accelerated its authority that had
been granted to start paying interest on reserves from 2011
back to October 1, 2008. And according to the New York District
Bank, the Fed expected to set interest on reserves well-below
the Fed's target policy rate, that is the Federal funds rate.
Had the Fed created such a ``rate floor'' it would have
complied with the letter of the law.
Section 201 of the Financial Services Regulatory Relief Act
of 2006 explicitly states that interest on reserves ``cannot
exceed the general level of short-term interest rates.''
However, as we learned in last month's Monetary Policy and
Trade Subcommittee hearing, interest on reserves is above the
Fed funds rate.
This above-market rate not only appears to have gone
outside the bounds of the authorizing statute, it may also be
discouraging a more free flow of credit in an economy that can
and should be flourishing. Speeding up the authority to pay
interest on reserves equipped the Fed to expand its balance
sheet to previously unimaginable heights. Due to various rounds
of unconventional monetary policy, such as quantitative easing,
the Fed's balance sheet has grown exponentially, and today it
stands at a staggering $4.5 trillion, with a ``T,'' which is
about 25 percent of the United States' GDP.
At the same time, the average maturity of Treasury
securities held by the Fed increased from about 5 years to over
10 years, which considerably increases the balance sheet's
exposure to interest rate duration risk. It all leads me to
wonder if the Fed has not become the ultimate global
systemically important bank, or G-SIB.
Almost 7 years old, the Fed's colossal and distortionary
balance sheet shows no signs of shrinking anytime soon. To be
sure, the Fed appears to have only started thinking about an
exit, as described in its late 2014 policy normalization
principles and plans, but the word ``principles'' is nowhere
really to be found in this described plan.
Moreover, the ``plan'' simply mimics the same opaque data-
dependent strategy that has been talked about for monetary
policy that has left market participants scratching their heads
for years, unsure of what exact data will inform the Fed's
decision-making and how the FOMC will react to that data.
Unfortunately, monetary policy has clearly stepped outside this
bound and shows little, if any, sign of returning and it
threatens the durability of the monetary policy independence
itself, in my opinion.
With that, I yield back.
Chairman Hensarling. The Chair 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.
I know it must be very frustrating to you every time you
come here, there is some cloud over our economy and people want
to point fingers directly at you. But I want you to know that I
have recognized that in the time immediately following the
financial crisis, I think the Obama Administration and Congress
reacted very forcefully with smart reforms and stimulus to make
sure that the U.S. economy, and with the help of the Fed, that
we became the envy of the world, compared to Europe and China
and Russia.
And in the United States, I would like to see a lot more of
this recovery touch the working class and poor Americans. But
that failure, Madam Chairwoman, is Congress' failure, not your
failure.
The last time you were here, we asked you about the Chinese
economy. And of course, we are all here sitting on the edge of
our seats to hear what you might have to say about the so-
called Brexit.
And I worry that in our worrying and becoming more anxious,
that we are just going to worry ourselves into doing more
counterproductive things, counterproductive policies, like
austerity and like the Brexit.
We have some extreme policies that are floating out here in
our body politic, orderly default on U.S. debt, negotiated
default, and I think we just have to stop derailing ourselves
with nonsense. I think we have a bright future and I know that
we can get through this deep frustration with people like you
at the helm of the Fed. And so, thank you so much for joining
us today.
And with that, Mr. Chairman, 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 Yellen has previously testified before this
committee on a number of occasions, so I believe she needs no
further introduction.
Without objection, Chair Yellen, your written statement
will be made a part of the record, and you are now recognized
for 5 minutes to give an oral presentation of your testimony.
STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mrs. Yellen. Chairman Hensarling, Ranking Member Waters,
and other members of the committee, I am pleased to present the
Federal Reserve's monetary policy report to the Congress. In my
remarks today, I will briefly discuss the current economic
situation and outlook before turning to monetary policy.
Since my last appearance before this committee in February,
the economy has made further progress toward the Federal
Reserve's objective of maximum employment. And while inflation
has continued to run below our 2 percent objective, the FOMC
expects inflation to rise to that level over the medium term.
However, the pace of improvement in the labor market appears to
have slowed more recently, suggesting that our cautious
approach to adjusting monetary policy remains appropriate.
In the labor market, the cumulative increase in jobs since
its trough in early 2010 has now topped 14 million, while the
unemployment rate has fallen more than 5 percentage points from
its peak. In addition, as we detail in the monetary policy
report, jobless rates have declined for all major demographic
groups, including for African Americans and Hispanics.
Despite these declines, however, it is troubling that
unemployment rates for these minority groups remain higher than
for the Nation overall and that the annual income of the median
African-American household is still well below the median
income of other U.S. households.
During the first quarter of this year, job gains averaged
200,000 per month, just a bit slower than last year's pace.
While the unemployment rate held steady at 5 percent over this
period, the labor force participation rate moved up noticeably.
In April and May, however, the average pace of job gains slowed
to only 80,000 per month or about 100,000 per month after
adjustment for the effects of a strike.
The unemployment rate fell to 4.7 percent in May, but that
decline mainly occurred because fewer people reported they were
actively seeking work. A broader measure of labor market slack
that includes workers marginally attached to the workforce and
those working part time who would prefer full-time work was
unchanged in May and remains above its level prior to the
recession.
Of course, it is important not to overreact to one or two
reports, and several other timely indicators of labor market
conditions still look favorable. One notable development is
that there is some tentative signs that wage growth may finally
be picking up. That said, we will be watching the job market
carefully to see whether the recent slowing in employment
growth is transitory, as we believe it is.
Economic growth has been uneven over recent quarters. U.S.
inflation-adjusted GDP is currently estimated to have increased
at an annual rate of only 3/4 percent in the first quarter of
this year. Subdued foreign growth and the appreciation of the
dollar weighed on exports, while the energy sector was hard hit
by the steep drop in oil prices since mid-2014. In addition,
business investment outside of the energy sector was
surprisingly weak.
However, the available indicators point to a noticeable
step-up in GDP growth in this second quarter. In particular,
consumer spending has picked up smartly in recent months,
supported by solid growth in real disposable income and the
ongoing effects of the increases in household wealth.
And housing has continued to recover gradually, aided by
income gains in the very low level of mortgage rates. The
recent pickup in household spending together with underlying
conditions that are favorable for growth lead me to be
optimistic that we will see further improvements in the labor
market and the economy more broadly over the next few years.
Monetary policy remains accommodative. Low oil prices and
ongoing job gains should continue to support the growth of
incomes and, therefore, consumer spending. Fiscal policy is now
a small positive for growth. And global economic growth should
pick up over time, supported by accommodative monetary policies
abroad. As a result, the FOMC expects with gradual increases in
the Federal funds rate, economic activity will continue to
expand at a moderate pace and labor market indicators will
strengthen further.
Turning to inflation, overall, consumer prices as measured
by the price index for personal consumption expenditures
increased just 1 percent over the 12 months ending in April, up
noticeably from its pace through much of last year, but still
well-short of the committee's 2 percent objective. Much of this
shortfall continues to reflect earlier declines in energy
prices and lower prices for imports.
Core inflation, which excludes energy and food prices, has
been running close to 1\1/2\ percent. As the transitory
influences holding down inflation fade and the labor market
strengthens further, the committee expects inflation to rise to
2 percent over the medium term. Nonetheless, in considering
future policy decisions, we will continue to carefully monitor
actual and expected progress toward our inflation goal.
Of course, considerable uncertainty about the economic
outlook remains. The latest readings on the labor market and
the weak pace of investment illustrate one downside risk, that
domestic demand might falter.
In addition, although I am optimistic about the longer-run
prospects for the U.S. economy, we cannot rule out the
possibility expressed by some prominent economists that the
slow productivity growth seen in recent years will continue
into the future. Vulnerabilities in the global economy also
remain. Although concerns about slowing growth in China and
falling commodity prices appear to have eased from earlier this
year, China continues to face considerable challenges as it
rebalances its economy toward domestic demand and consumption
and away from export-led growth.
More generally, in the current environment of sluggish
growth, low inflation, and already very accommodative monetary
policy in many advanced economies, investor perceptions of and
appetite for risk can change abruptly. One development that
could shift investor sentiment is the upcoming referendum in
the United Kingdom. The U.K. vote to exit the European Union
could have significant economic repercussions.
For all of these reasons, the committee is closely
monitoring global economic financial developments and their
implications for domestic activity, labor markets, and
inflation.
I will turn next to monetary policy. The FOMC seeks to
promote maximum employment and price stability as mandated by
the Congress. Given the economic situation I just described,
monetary policy has remained accommodative over the first half
of this year to support further improvement in the labor market
and a return of inflation to our 2 percent objective.
Specifically, the FOMC has maintained the target range for
the Federal funds rate at 1/4 to 1/2 percent, and this kept the
Federal Reserve's holdings of longer-term securities at an
elevated level.
The committee's actions reflect a careful assessment of the
appropriate setting for monetary policy, taking into account
continuing below-target inflation and the mixed readings on the
labor market and the economic growth seen this year. Proceeding
cautiously in raising the Federal funds rate will allow us to
keep the monetary support to economic growth in place while we
assess whether growth is returning to a moderate pace, and
whether the labor market will strengthen further, and whether
inflation will continue to make progress toward our 2 percent
objective.
Another factor that supports taking a cautious approach in
raising Federal funds rate is that the Federal funds rate is
still near its effective lower bound. If inflation were to
remain persistently low or if the labor market were to weaken,
the committee would have only limited room to reduce the target
range for the Federal funds rate. However, if the economy were
to overheat and inflation seemed likely to move significantly
or persistently above 2 percent, the FOMC could readily
increase the target range for the Federal funds rate.
The FOMC continues to anticipate that economic conditions
will improve further and that the economy 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 because headwinds,
which include restraint on U.S. economy activity from economic
and financial developments abroad, subdued household formation
and meager productivity growth, mean that the interest rate
needed to keep the economy operating near its potential is low
by historical standards. If these headwinds slowly fade over
time as the committee expects, then gradual increases in the
Federal funds rate are likely to be need.
In line with that view, most FOMC participants, based on
their projections prepared for the June meeting, anticipate
that values for the Federal funds rate of less than 1 percent
at the end of this year and less than 2 percent at the end of
next year, will be consistent with their assessment of
appropriate monetary policy. Of course, the economic outlook is
uncertain, so monetary policy is by no means on a preset
course, and FOMC participants' projections for the Federal
funds rate are not a predetermined plan for future policy.
The actual path of the Federal funds rate will depend on
economic and financial developments, and their implications for
the outlook and associated risks. Stronger growth or a more
rapid increase in inflation than the committee currently
anticipates would likely make it appropriate to raise the
Federal funds rate more quickly. 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. 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 statement
released after the June FOMC meeting, we anticipate continuing
this policy until normalization of the level of the funds rate
is well underway.
Maintaining our sizable holdings of longer-term securities
should help maintain accommodative financial conditions and
should reduce the risk that we might have to lower the Federal
funds rate to the effective lower bound in the event of a
future large, adverse shock.
Thank you. I would be pleased to take your questions.
[The prepared statement of Chair Yellen can be found on
page 56 of the appendix.]
Chairman Hensarling. Thank you.
The Chair now yields himself for 5 minutes for questions.
Chair Yellen, I wish to spend a little time exploring
interest on reserves. In 2006, you were the President of the
San Francisco Fed. Is that correct?
Mrs. Yellen. Yes.
Chairman Hensarling. Yes, and I was a junior member of this
committee, and I carried the Financial Services Regulatory
Relief Act in the House, which did not contain IOR.
I have since gone back to review the legislative history,
and all the legislative history I can find is that the Fed
wanted IOR in order to have, number one, member bank
retention--they were concerned about that--and number two, to
establish a rate floor for the Fed's fund rate. So I don't know
if you would have had an occasion to review the legislative
history yourself, or do you have any memory of why the Fed
asked for IOR in 2006? Have you reviewed the legislative
history?
Mrs. Yellen. I have some recollection of it, although
perhaps not perfect.
Chairman Hensarling. Did any Fed official at that time, to
the best of your knowledge, say that IOR would supplant open
market operations as the main tool of monetary policy?
Mrs. Yellen. I don't recall exactly what was said, but we
were faced with the problem. I remember former Vice Chair
Donald Kohn testified on this, and I believe there were a
number of testimonies over many years.
Chairman Hensarling. I agree. I just wanted to know if you
had a memory of them.
Mrs. Yellen. I think that the Fed felt that there were
difficulties in managing short-term interest rates using our
standard--
Chairman Hensarling. Yes, but do you have any memory of the
Fed saying anything else besides a rate floor? Because if you
don't, my point is this: I believe Congress granted IOR for one
purpose, and it appears that the Fed is using it for another
purpose.
My 12-year-old son could ask me for a Louisville slugger to
improve his batting practice, but that doesn't mean I approve
it for the use of chasing his sister around the house. I am not
sure that anybody in Congress foresaw the tool being used in
such a way.
And as I think you know, Section 201 of the Financial
Services Regulatory Relief Act says that payments on reserves,
``cannot exceed the general level of short-term interest
rates.'' Today, you are paying 50 basis points on interest on
excess reserves. The Fed funds rate yesterday, I believe, was
38 basis points. Is that correct?
Mrs. Yellen. That's probably correct.
Chairman Hensarling. So, you are paying about, back-of-the-
envelope calculation, a 35 percent premium on excess reserves.
You are paying a premium to some of the largest banks in
America, is that correct?
Mrs. Yellen. I consider a 12 basis point difference to be
really quite small and in line with the general level of
interest rates.
Chairman Hensarling. Okay. So, you believe you have the
legal authority to do this, otherwise you wouldn't do it, is
that correct?
Mrs. Yellen. I do believe we have the legal authority to do
it.
Chairman Hensarling. Madam Chair, would it be legal for you
to pay a 50 percent premium? You are paying a 35 percent
premium today. Would it be legal to pay a 100 percent premium?
Mrs. Yellen. I believe it is a small difference. And
interest on excess reserves did not succeed as expected in
setting a firm floor--
Chairman Hensarling. And would it be legal--
Mrs. Yellen. --on the level short-term interest rates.
Chairman Hensarling. Would it be legal under the statute
for you to pay twice the Fed's fund rate as a premium on
interest on reserves?
Mrs. Yellen. I believe that the way we are setting it is
legal and consistent with the Act.
Chairman Hensarling. No, that is not my question.
Mrs. Yellen. Yes, it is. It is--
Chairman Hensarling. What is the legal limit? What is the
legal limit on which you can pay? What does the phrase ``exceed
the general level of short-term interest'' mean? You are saying
that 12 basis points does not trigger the statute. At what
point is the statute triggered?
Mrs. Yellen. It depends on exactly what short-term interest
rate you are looking at. There are a whole variety of different
rates and--
Chairman Hensarling. Okay. Do you have an opinion on
whether or not it would be legal to pay a 100 percent premium?
Mrs. Yellen. Whatever level we set, the interest on
reserves at--
Chairman Hensarling. Madam Chair, please, it is a simple
question.
Mrs. Yellen. --funds going to trade below that level.
Chairman Hensarling. Madam Chair, please, it is a simple
question. Would it be legal under the statute to pay a 100
percent premium? If you don't know the answer to the question,
you don't know the answer to the question.
Mrs. Yellen. My interpretation is that it is legal.
Chairman Hensarling. It would be legal to pay twice the
market rate? That would not exceed the general level of short-
term interest?
Mrs. Yellen. There is likely to be for quite some time a
small number of basis points gap between interest on reserves
and the Fed funds rate, and that is something that--
Chairman Hensarling. I would simply advise discussing that
with the legal counsel, because I think that frankly offends
common sense.
Last question: You mentioned as part of your policy of
paying interest on reserves, part of the rationale is that you
have sent roughly $600 billion back to Congress, to the
taxpayer, to Treasury. It is only possible because of a larger
stock of reserves.
Are you aware that the GAO has opined, ``While a reserve
bank transfer to Treasury is recorded as a receipt to the
government, such transfers do not produce new resources for the
Federal Government?''
And are you aware that the Congressional Budget Office has
opined that, ``transferring excess earnings from the Federal
Reserve to the Treasury has no import for the fiscal status of
the Federal Government?'' Are you aware of either of those
opinions of the GAO or the CBO?
Mrs. Yellen. I am, but I believe those opinions were
rendered in connection with a highway bill which tapped Federal
Reserve surplus in order to pay for the highway bill and what
the opinion meant was that Congress was not generating
additional revenues in transferring Federal Reserve's surplus
to the Congress, that this was essentially an accounting--
Chairman Hensarling. My time has expired, and I think the
language is plain.
The Chair now recognizes the ranking member for 5 minutes.
Ms. Waters. Thank you very much.
Last month's jobs report included an unusually steep
decline in labor force participation, with 664,000 workers
reporting that they had stopped looking for work altogether.
You said recently that it is too soon to tell whether this drop
was an aberration or the sign of a larger trend and cautioned
in your testimony in the Senate not to place too much emphasis
on a single jobs report.
That said, the drop was quite substantial. So, I would like
to better understand your current thinking on what could have
caused such a deep decline in labor force participation.
Moreover, how are you reconciling the consistently positive job
gains over the past 75 months with the steep labor force
decline? And to what extent has the decline in labor force
participation affected your thinking regarding the timing and
pace of further rate increases?
Mrs. Yellen. Taking a slightly longer time perspective than
just the last 2 months, labor force participation has been
declining and is likely to continue declining in the coming
years because we have an aging population. And as people move
into the retirement years and their fractions in our population
are increasing, they work less, even though more recent cohorts
participate more. But there is a sharp drop-off in
participation in the labor force, so that will continue.
But we have also felt, or at least I have felt, that labor
force participation among other groups has been somewhat
depressed by the fact that we have had a weak labor market. And
a sign of a strengthening labor market is to see people who
were discouraged brought back into the labor force. Now, over
the last year, the labor force participation rate has been
essentially flat. It had increased for a bit, it has come down
somewhat, over the last year it has been flat.
Now, with the declining trend due to an aging population, I
take the flatness in the labor force participation rate over
the last year as an indication that in fact we have seen some
cyclical gains, that people who were discouraged have come back
into the labor force. If we just look at the last labor market
report, the last month, I would caution these numbers are quite
volatile and I don't think we should attach too much
significance to a single month.
But as I indicated in my prepared remarks, when we have a
month in which job gains are very low and we see a decline in
labor force participation, that reflects an increase in the
number of people who had actively been looking for work and in
the previous month had been categorized as unemployed, ceased
looking hard enough so they now move into the category of out
of the labor force because instead of actively searching they
are no longer actively searching. That is not a good sign. So,
we are watching that very closely.
But I think we shouldn't over-blow the significance of a
single report. I continue to believe this is likely to be a
transitory phenomenon. The economy slowed toward the end of
last year and in the first quarter of this year. When GDP
growth slowed, the labor market, nevertheless, continued to
perform well with 200,000 jobs per month in the first quarter.
Now, this more recent decline in job growth may be a
reflection of that earlier weakness in spending. And as I
pointed out, we are seeing, I believe, a pickup in growth.
There has been a sharp increase in consumer spending. I think
if that turns out to be the case, and I see the fundamentals as
remaining essentially strong there, I am very hopeful that we
will see a pickup in job growth, and we will be watching for
that as we assess the economy.
Ms. Waters. Thank you very much.
Let me just say, you noted in your testimony that a U.K.
vote to exit the European Union would have significant economic
repercussions for economic activity, labor markets and
inflation here in the United States, and have previously
indicated that the uncertainty posed by the referendum was a
factor in the Fed's most recent decision to hold off on raising
rates.
My Republican colleagues have called for tying monetary
policy decisions to a strict mathematical formula. And I wanted
to just get your take on whether there is any such preset
formula that you are aware of that takes into account the
uncertainty associated with the chance that a member country
could drop out of the European Union.
Can you quickly comment on that?
Mrs. Yellen. Mechanical rules take none of that into
account. They base changes in the stance of policy on just two
variables: the rate of inflation and GDP or the unemployment
rate. And I do think, especially given how low interest rates
are and how long it has taken the U.S. economy to recover, that
it is important to look at the risks and to bring in risk
management considerations, as we are doing.
I don't know that a Brexit vote would have significant
consequences for us, but it could. And I think it is important
to take that into account.
Ms. Waters. Thank you. I yield back.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, chairman of our Monetary Policy and Trade
Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman.
I have a lot to cover, but really quickly, I do want to
clarify the quote that the chairman had read from the GAO:
``Such transfers do not produce new resources for the Federal
Government as a whole.'' That had nothing to do with the
Highway Trust Fund. That was a quote from the GAO in 2002 on
page 16 of their report. So I wanted to clarify that.
I was hoping to cover two other issues:one, the Fed balance
sheet and risk situation, and whether the Fed has basically
become a G-SIB; and two, the independence of monetary policy
versus the regulatory accountability. Senator Dodd, when this
was originally going through-- I wasn't here--was talking about
breaking those out.
But on page six of your testimony here, ``Maintaining our
sizable holdings of longer-term securities should help maintain
accommodative financial conditions and should reduce the risk
that we might have to lower the Federal funds rate to the
effective lower bound in the event of future large adverse
shock.''
I know yesterday in the Senate, you said that you do have
the ability to go to negative rates. I am assuming that is what
you were talking about in your sentence.
Mrs. Yellen. No, I said that we are not looking--
Mr. Huizenga. I know that. But in your written testimony, I
am just trying to say, is that what you are referring to? I
don't know where else we go other than into negative interest
rates. And I am curious by what authority do you have to go
negative?
Mrs. Yellen. I am not thinking, and I was not referring to
the possibility of going to negative interest rates. What I
meant was that the higher the level of the Federal funds rate
we are able to achieve, as tightening becomes appropriate to
this economy, the more ability we will have to respond to some
future negative shock by cutting the Fed funds rate.
Mr. Huizenga. I am glad you could clarify that. I want to
move on.
A former Federal Reserve officer has highlighted the Fed's
exposure to the very type of carry trade, borrow short, lend
long that had increased financial fragility before the
financial panic of 2008. You have previously expressed your
support for stress testing banks using extreme worst-case
scenarios. You just, in reference to the ranking member's
question about Brexit, talked about risk management that the
Fed is having to go through.
Given your belief in the value of stress testing, would you
agree that it would also be appropriate to stress test the
Fed's balance sheet with a $4.5 trillion portfolio, to make
sure that the risk to the Fed, the Treasury, and the economy as
a whole, if the Fed decides in the future that it is best to
shrink its balance sheet faster than it is currently expected?
Should you stress test?
Mrs. Yellen. It is very important to understand that the
Fed is not like a commercial bank. Our balance sheet is very
different and our liabilities are not runable. So capital plays
a very different role for a central bank.
Mr. Huizenga. You have a huge effect.
Mrs. Yellen. I do not think stress testing our balance
sheet is something that is necessary. But nevertheless, we have
done so and we have reported publicly the outcome of such
stress tests.
Mr. Huizenga. So, if you didn't think you needed to, why
did you?
Mrs. Yellen. Because there is public interest in what would
happen under such a scenario. And it is an exercise worth
undertaking to understand.
Mr. Huizenga. Do you believe that the Fed is exposed with
this $4.5 trillion balance sheet to considerable interest rate
duration risk leading to loss of income as you unwind?
Mrs. Yellen. Our income is very, very much higher, about 5
times higher now because of that large balance sheet, then
around $100 billion a year--
Mr. Huizenga. So, when you start unwinding, you will lose
money. Correct?
Mrs. Yellen. It is very unlikely that the Fed would end up
with negative income. It is conceivable.
Mr. Huizenga. Not everybody believes that. There are a lot
of people who believe that it is inevitable that the Fed is
going to end up with negative income because of the amount of
unwinding that needs to be done.
Mrs. Yellen. It is certainly not inevitable. But there is a
scenario in which the U.S. economy grows very strongly, and in
order to avoid overheating, the Fed needs to raise short-term
interest rates at a much steeper pace than we consider likely
to be appropriate. And in that scenario, it is conceivable that
we would end up paying more for reserves than we earn on our
assets. It is very unlikely.
Mr. Huizenga. I think many people believe that is
inevitable.
Mrs. Yellen. And let me say this would be a very nice
situation for the United States to find itself in because this
would be a scenario with strong growth and large tax--
Mr. Huizenga. Madam Chair, my time has expired.
Mrs. Yellen. --proceeds coming into the U.S. Treasury.
Mr. Huizenga. Ultimately, my question is, is the Fed
solvent? And I am not sure that has solidly been answered.
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, for 5 minutes.
Ms. Moore. Thank you so much, Mr. Chairman. I have some
questions for you, Madam Chairwoman. I want to get to a couple
of questions about the living wills and the orderly
liquidation.
As you know, the chairman of this committee and our speaker
have called for an end to it. So, I definitely want you to
explain how the orderly liquidation authority would work,
confirm for us that it would be paid for with an assessment on
remaining firms and not on taxpayers.
There seems to be some sort of notion that this would be a
revenue raiser for us if we were to end it. But inside of that
answer, I also want you to talk about the firms that had
failed. And of course, Wells Fargo, who had passed the last
time, failed this time.
So, can you just review for us that once a bank passes the
stress tests and the living wills test, do they need to keep
updating their wills? How will they stay fruitful?
Mrs. Yellen. Dodd-Frank contends for the largest banking
organizations to structure themselves and to have in place
processes that would enable them to be resolved if they were to
fail under the bankruptcy code with Title II or the orderly
liquidation authority that would be used by the FDIC being a
backstop that would be available if it were impossible to
resolve these firms under the bankruptcy code.
So, we are insisting that firms put in place structural
changes, governance mechanisms, make sure that they have
adequate capital, gone concern, loss absorbency, liquidity in
the right places, everything that we think would maximize the
odds of success in resolving such a firm under the bankruptcy
code, and the living wills that have evolved over time as the
banks understand better what is needed, and we do as well, set
out their expectations for how they could be resolved under the
bankruptcy code. In the event they encountered trouble, these
are very helpful documents to have available.
Now, you mentioned that Wells Fargo, the FDIC, and the Fed
did not find their initial living will a year ago to be non-
credible. We did, nevertheless, identify a set of shortcomings
that we wanted to see remedied and in the last submission that
we evaluated and we have put all this information out publicly
in the letters to the firms.
Ms. Moore. My time is running short, so I just really do
want to get to the point. There is a call for ending it. What
would be the consequences of that?
Mrs. Yellen. For ending orderly liquidation?
Ms. Moore. Yes.
Mrs. Yellen. I believe that is a very important backup
authority for the FDIC to have.
Ms. Moore. What will happen if we don't have it?
Mrs. Yellen. If you don't have it and a firm were to fail,
and we don't know what the circumstances would be, they might
be such that it were difficult to resolve under the bankruptcy
code.
Ms. Moore. Would that be a bailout for the taxpayers if
we--
Mrs. Yellen. If the orderly liquidation provided--
Ms. Moore. If we didn't have that?
Mrs. Yellen. The taxpayers would be in a difficult
situation.
Ms. Moore. That is what I would like to know.
On the regulatory capital, there are pros and cons to just
simple leverage, but there is also risk weighting like Basel.
Could you provide your thoughts on what the right amount of
banking capital would be if we went to simple leverages without
other prudential protections?
Mrs. Yellen. I think it would be a very bad idea to only
have a leverage ratio that would encourage banking
organizations to take on risks by loading up their balance
sheets with riskier assets. That happened prior to the
financial crisis. It is why we went to risk weighting. So, I
think it is useful to have such a ratio as a backup measure,
but not sufficient. And I also think for systemic firms that
stress testing, which is a different and forward-looking
capital exercise, is also necessary.
Ms. Moore. Thank you so much, Mr. Chairman.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair recognizes the gentleman from Texas, Mr.
Neugebauer, chairman of our Financial Institutions
Subcommittee, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
Chair Yellen, you and I have had several discussions about
the need for U.S. bank regulators to do a kind of comprehensive
study of post-crisis regulation, similar to what the EU is
currently doing. I really continue to be disappointed that we
are in a mode right now where we implement first and study
later. And to continue that discussion, I wanted to have a
little bit of a dialogue with you.
Now, is it correct that the total loss absorbing capacity
or the TLAC rule was designated to strengthen the ability of
the largest domestic banks to resolve without government
support?
Mrs. Yellen. Yes. That is true. It is to provide gone
concern loss absorbency that could be used in a Title II
resolution, or alternatively, most of the large banking
organizations indicated in their living wills--
Mr. Neugebauer. So, it is designed to reduce the systemic
footprint of the U.S. G-SIBs right?
Mrs. Yellen. It is designed to aid an orderly resolution.
Mr. Neugebauer. And is it correct of the Federal Reserve
proposal to impose single counterparty limits on U.S. banks is
a rule that would reduce the systemic footprint of U.S. G-SIBs?
Mrs. Yellen. It is designed to do that, yes.
Mr. Neugebauer. So, in the G-SIBs surcharge rule then, the
Federal Reserve states that it is designed to reduce G-SIBs,
now I am going to quote, says it is designed to reduce ``GSIBs
probability to default, such as G-SIBs suspected systemic
impact and approximately equal to that of a large non-systemic
holding company.'' So does the G-SIBs' surcharge methodology
and calibration structure take into account these other steps
that you have taken to reduce systemic risk?
Mrs. Yellen. I think it does. The idea here is that a G-
SIBs failure would have systemic repercussions and result in
cost to the economy, even if it could be resolved. And
therefore, it is appropriate and Dodd-Frank was very clear on
this, it is appropriate for those firms to be more resilient
and less likely to fail. And by insisting that they hold more
capital, that is a way of making them more resilient. And the
capital surcharges take account of not only their size, but
measures of interconnectedness with other parts of the
financial system.
Mr. Neugebauer. It just appears to me, Chair Yellen, that
we are pancaking here. We say, well, this is designed to reduce
systemic risk, and then we say, well, but this is designed to
reduce systemic risk, well, maybe we didn't go far enough and
this is designed to, and we are really not looking back. Or
maybe you have. Have you done an analysis of what the impact of
some of these other ones that we discussed earlier are going to
have and what?
Before you said, let us look at a surcharge on top of that,
did you do an analysis of the impact and basically a cost/
benefit analysis? Because I think what I look at is it is kind
of like going through a buffet. I think the Fed is going
through a buffet. I don't know about you, but when I go through
a buffet I have a big problem. I take a little of this, oh,
that looks good, I will take a little of that, then I take a
little of this. And when I get to the end of the checkout, I
have more food than I probably should eat.
I am concerned here, and I think that is what the EU is
saying right now is, before we layer more and more regulations
and prohibitions on the financial sector, maybe we ought to
look and see what the impact is on it. Are you all having those
conversations?
Mrs. Yellen. At various points, we have looked pretty
carefully at what the impact is of these rules on the costs and
benefits to society as a whole. And the overwhelming conclusion
that comes from those studies is that a financial crisis is
immensely costly, takes an immensely costly toll on American
households, workers, and businesses--
Mr. Neugebauer. So is the goal here to make these
institutions fail-proof or just to make sure that the American
taxpayers don't have to bail them out in the event that they do
fail?
Mrs. Yellen. I think we are trying to reduce the odds that
they get into trouble and take a toll on the U.S. economy.
Mr. Neugebauer. The question is, are you trying?
I think the Fed is trying to make these entities fail-
proof. And I think it is kind of spilling over the entire
financial community. So basically, I think what we have now is
we have trying to run banks. I am not sure that when we look at
the anemic growth, you are trying to paint a rosy picture, but
the economic data out there is not all that rosy.
Mrs. Yellen. I guess I would respond by saying that credit
has been growing at a healthy rate.
If you look at surveys, for example, the National
Federation of Independent Business, small and medium-sized
businesses are not reporting that lack of access to credit is
among their most significant problems. We have had great
improvement in the U.S. economy. And most banks, even though it
is a challenging, low-interest-rate environment, remain
profitable and we have a safer financial system.
Chairman Hensarling. The time of the gentleman from Texas
has expired.
The Chair now recognizes the gentleman from Connecticut,
Mr. Himes.
Mr. Himes. Thank you, Mr. Chairman.
And welcome, Chair Yellen.
I want to make a quick statement. As you hear the scrutiny
and criticism of the other side, I want to say that a lot of us
subscribe to a point of view held by much of the economic
profession, which is that this place, the Congress, abdicated
its economic role in 2010 in favor of austerity, giving up an
opportunity to do a massive investment in infrastructure and
any number of other things that I think would have actually
helped the economy in favor of austerity, which while it
reduced the deficit fairly dramatically, has been a drag on our
economic growth, leading the Federal Reserve to stand on its
own with monetary policy, not an ideal situation.
But many of us appreciate the position that the Fed was put
into, and many of us will go to the mat to defend the Fed
against the many ideas that would damage the monetary policy
independence of the Fed.
My question really pertains to something that you just
closed on. There is a narrative developing that while credit
markets as a whole are robust and the facts show that, whether
it is the high-yield market or the IPO market, you name it,
credit markets are strong for corporate America, but that is
not true for small and medium-sized enterprises. The narrative,
as it has developed, is that is true, and that is a question to
you. You seem to believe that it is not.
Number two, the second part of the narrative is that the
reason for that is bank regulation. I will just quote from one
Wall Street research report that says, ``New banking
regulations have made bank credit more expensive and less
available. This affects small firms disproportionately.'' So,
my question is, are we in fact seeing a supply problem in terms
of credit to smaller businesses, and is there any evidence that
this is attributable to new bank regulations?
Mrs. Yellen. Small businesses often find it more difficult
to get access to credit.
We know that frequently small businesses or startup
businesses, the owners will use their credit cards and personal
credit worthiness in order to take out loans. They may have
less access to capital than established businesses, but I
don't--
Mr. Himes. Pardon me, that has always been true. But has
that changed?
Mrs. Yellen. That has always been true. I wouldn't say I
have seen any data suggesting there is a significant change. I
know the decline we had in house prices made it more difficult
for a while for small businesses, for example, to use a home
equity loan to finance a business.
But that is not a small-business loan. I think every
indication I have seen suggests that the supply of credit
remains healthy to small businesses, that it doesn't rank among
the top of their concerns, that the demand, we meet with many
banking organizations to discuss this issue, and they say the
demand for credit by small businesses and medium-sized
businesses remains somewhat depressed.
But I think the supply and availability of credit are
there. We have not seen negative changes that I am aware of.
Mr. Himes. And is this true throughout the Fed's many
regions?
Mrs. Yellen. I believe so. I am not aware of evidence to
the contrary.
Mr. Himes. Okay. So to part two of my question, again, you
have said that is not a reality, or at least not a material
reality. So part two of the question is a little more
challenging, which is, is it attributable to new banking
regulations on small providers of credit?
Are we seeing, are you, is the Fed observing dislocations
in the credit market to small and medium-sized enterprises that
might be attributable to new regulations?
Mrs. Yellen. We know that there are community banks that
are struggling under regulatory burdens, and we are doing
everything that we possibly can to address that.
The fact that we are in a low-interest-rate environment
also tends to put downward pressure on net interest margins
that harms bank profitability. So it is a difficult environment
for community banks.
And as I said, there have always been in rural areas and
for some small businesses difficulties in gaining access to
credit. But I have not seen a change that would be attributable
to the financial regulations we have in place.
Mr. Himes. Thank you. In my last 30 seconds, you said the
Fed is doing everything they can to alleviate the burden on
community banks. Can you just elaborate for 20 or 30 seconds on
what the Fed is doing there?
Mrs. Yellen. We have significantly increased the exemption
under our small bank holding company policy rules so that now
all holding companies under $1 billion are not subject to our
consolidated capital rules.
We have changed our exam processes to do more work off-site
to make our exams more tailored. Through the EGRPRA process we
are looking to reduce our regulatory burden. And we are
contemplating a simplified capital rule for well-capitalized
banks that would--
Chairman Hensarling. The time of the gentleman from
Connecticut 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.
Chair Yellen, at a conference in June 2011, your
predecessor, Chairman Bernanke, was asked a simple question in
reference to the thousands of pages of Dodd-Frank and the tens
of thousands of pages of implementing regulations. He was
asked, ``Has anyone bothered to study the cumulative effect of
these things? Is all this holding back the economy at this
point?''
And Chairman Bernanke responded, ``Has anybody done a
comprehensive analysis of the impact? I can't pretend anybody
really has. It is just too complicated. We don't really have
the quantitative tools to do that.''
So following up on Chairman Neugebauer's line of
questioning here, you were asked, does the Fed study any of
this? So I guess the question is, has an analysis been done of
the cumulative effect of Dodd-Frank regulations as well as
Basel III on broader economic variables such as credit
availability, economy growth, capital formation, and job
creation? Have you done any studies on that?
Mrs. Yellen. Perhaps the kind of comprehensive analysis of
everything that you are looking for hasn't been undertaken, and
I guess I would agree with Chairman Bernanke's remarks. But
Congress set out pretty clearly a road map for the regulators
in terms of ways they wanted to see financial regulations--
Mr. Luetkemeyer. If you don't have the tools, the ability
to study this, how can you make regulations that pinpoint what
you can do to improve the economy or know the effect of those
rules?
Mrs. Yellen. Every time we put out a rule, we do an
internal study of how to minimize burden under that rule. And
we take public comments and ask for alternatives that could
achieve the same goals with reduced burden. And so we are
taking costs into account and trying to minimize those costs,
while achieving--
Mr. Luetkemeyer. Okay. If you are doing it, Madam Chair,
why, in the last 5 years, have there been almost no new bank
charters issued? Why? What is your reasoning for that? Is it
regulation? Or is it low interest rates?
Mrs. Yellen. The work that I have seen suggests that the
challenging economic environment, a low-interest-rate
environment and a sluggish economy--
Mr. Luetkemeyer. So regulation doesn't have anything to do
with this?
Mrs. Yellen. I am not aware of any studies that suggest
that regulations are responsible for that.
Mr. Luetkemeyer. In your testimony you talk about how
housing has continued to recover gradually. And if you look at
the home building market, there are actually fewer home
mortgage loans now than there were a year or two or three ago.
And I go home and I talk to my local community banks, and there
are some that got completely out of the home mortgage lending
business.
And so they go back and they point to rules and regulations
as the reason for not doing this. They can't comply. They can't
hold things in portfolio without being qualified, which infers
there is an extra risk with their loans. They just said, we are
not going to deal with the risk. And so now you have community
banks no longer serving their communities, which is disastrous,
in my mind.
So the question is, these banks are telling me it is rules
and regulations that are keeping this from happening. And the
CFPB is kind of the main culprit here, with the QM rule and
TRID. Do you coordinate at all with other agencies, whether it
is the CFPB, the Treasury, other agencies when these rules are
promulgated to see if there is a cumulative effect that could
be negative out there that everybody should be watching for?
Mrs. Yellen. We coordinate, many of our rules are joint
with the other banking agencies.
Mr. Luetkemeyer. Did you coordinate with the CFPB?
Mrs. Yellen. In the case of the CFPB, they are required to
consult with us and we often offer comments to--
Mr. Luetkemeyer. So, did they accept your comments? Or did
they ignore them?
Mrs. Yellen. There are a number of them. I would agree with
you when it comes to mortgage credit that the new rules that we
have, which are designed to end the abuses we saw in subprime
lending and in the housing crisis--
Mr. Luetkemeyer. This all goes back--
Mrs. Yellen. They have made credit more difficult to obtain
for individuals--
Mr. Luetkemeyer. This all goes back to monetary policy from
the standpoint that rules and regulations are strangling our
economy so that people can't participate in the economy. And
that goes back to, whether you are adjusting interest rates and
trying to play with unemployment, that all goes back to the
fact that you are dealing with lives every day, with the rules
and regulations that you are messing with.
And I think we need to understand the importance of that.
And when you see the impact, fewer mortgage loans, banks not
being formed. And a while ago you talked about the small-
business folks, we had fewer small businesses, fewer businesses
created in the last 5 or 6 years than we lost.
Mrs. Yellen. True.
Mr. Luetkemeyer. That is the wrong direction. Small
businesses are where you generate the jobs. And if we are not
allowing those folks to be created, we are hurting ourselves.
And it goes back to rules and regulations and monetary policy.
Please do the research. Thank you.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Delaware, Mr.
Carney.
Mr. Carney. Thank you, Mr. Chairman.
Thank you, Chair Yellen, for coming in today. You are here
for your twice-a-year report on Humphrey-Hawkins. And I haven't
been able to read all of your monetary policy report or your
opening statement, but I have gotten through some of it. And I
just have really a couple of questions that maybe you could
address.
You say early on that inflation has continued to run below
our 2 percent objective. The Federal Open Market Committee
expects inflation to rise to that level over the medium term.
So you are meeting your target there. However, the pace of
improvement in the labor market appears to have slowed more
recently, suggesting that your cautious approach to adjusting
monetary policy remains appropriate.
What other things in the economy suggest that it may be
slowing down? We are pretty far out in this economic expansion.
Are there other things in your report that you could point to?
Mrs. Yellen. There are mixed developments in the economy.
One thing we do note is that investment spending has been
unusually weak in recent months. And the combination of
particularly weak investment spending and, of course,
investment spending has been very weak because of the decline
in drilling and drilling and mining activity. The rig counts
are way down because of the decline in energy prices. But we
have seen weakness also outside of that. And the combination--
Mr. Carney. Is that an overall plus or minus for the
economy, the lower prices?
Mrs. Yellen. It is not a plus for the economy because,
first of all, it is a part of spending that supports growth,
but it is highly relevant to productivity growth.
Mr. Carney. Right.
Mrs. Yellen. And productivity growth has also slowed. So we
are watching that carefully. We have a drag from slow growth in
the rest of the world and a strong dollar that is negatively
impacting trade-exposed sectors including--
Mr. Carney. So, there are some pretty significant
headwinds.
Mrs. Yellen. There are some headwinds. But on the other
hand, we do have strengths. Consumer spending is particularly
strong. And balancing everything out, we have an economy that
is, for the last four quarters, growing about 2 percent.
Growth was quite slow in the first quarter at the end of
last year. It looks to be picking up. So, while we are watching
things, I don't want to send a message of pessimism about the
economy and where we are going.
Mr. Carney. So there is some pessimism underneath the
unemployment numbers, which suggests that certain subgroups,
African Americans and Hispanics, have higher unemployment
rates, and you note that in your report.
Mrs. Yellen. Yes.
Mr. Carney. Is there anything significant there that you
can point to with respect to that issue?
Mrs. Yellen. I think we should be very concerned about the
fact that there are subgroups of the population who experience
lower income and more distress in the labor market. And think
about what we can do to address the problems of those groups.
They have seen improvement.
Mr. Carney. What about the quality of the jobs in that job
group? I was talking to some folks the other day in my State of
Delaware, and one of the guys in the conversation said,``We
need new old jobs.'' And I knew exactly what he was talking
about. We need the old kind of manufacturing jobs that we had
at Chrysler and General Motors in our State, manufacturing jobs
that paid a good income.
Can you comment on that, the quality of the jobs that are
being created?
Mrs. Yellen. So probably the quality of the jobs that are
being created, we have created a lot of high-end jobs. So, it
is not only--
Mr. Carney. High-end jobs?
Mrs. Yellen. High-end jobs for skilled workers.
Mr. Carney. Highly educated, skilled workers.
Mrs. Yellen. Right. And a lot of the kinds of jobs that you
are referring to and middle-income jobs they disappeared. They
declined and were hard hit in the downturn.
But over a longer period of time, probably since the mid
1980s, there have been a combination of pressures that have
made those jobs fewer and far between.
Mr. Carney. So I don't know that you have monetary policy
tools that you can use to address that. But on our side, on
fiscal policy, we should be thinking about those kinds of tools
that we might deploy.
Mrs. Yellen. I think so. We are talking about secular
trends relating to the nature of technical change and how it
has raised the demand for skilled labor, trends relating to
globalization. And then, what are we doing in terms of
education, workforce development investment in your domain?
Mr. Carney. Thank you very much.
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. It is good to see you.
I listened intently to your testimony and your commentary
on the headwinds to our economy that I think all of us follow
very closely, since it has a direct impact on all of our
constituents.
But I didn't hear you comment on a couple of issues that
concern me. Last year, there were 81,000 pages of new
regulation. Between 2009 and 2015, there were 550,000 new pages
of regulation. Would you consider that a headwind for economic
growth?
Mrs. Yellen. You are referring to our regulations?
Mr. Duffy. No, no. I am talking about government
regulations across the spectrum. I hope you don't have 550,000
new pages of regulation at the Fed.
Mrs. Yellen. I don't think we do.
Mr. Duffy. No, I don't think you do, either. You have a
lot.
Mrs. Yellen. We have additional regulations, we certainly
do.
The regulations that have been put in effect generally are
intended to address problems.
Mr. Duffy. That is not my question. Are these headwinds to
the economy or not?
Mrs. Yellen. It is very hard to quantify the extent to
which regulation is a headwind.
Mr. Duffy. But it would be a headwind?
Mrs. Yellen. Businesses certainly cite regulation as a
factor affecting their decision-making.
Mr. Duffy. Then why don't you cite it? If the businesses
that you talk to cite this as a headwind, why don't you cite it
as a headwind?
Mrs. Yellen. I actually don't think it is the most
important headwind. It may be a headwind.
Mr. Duffy. Okay. And the U.S. corporate tax rate, 31.9
percent, the OECD average of corporate tax rate is 24.1
percent. We pay 15 percent more in corporate taxes. That is 15
percent less money that goes into wages and economic
development, research and development. Do you see that as a
headwind?
Mrs. Yellen. I think it is widely agreed that there could
be constructive changes to the corporate tax system.
Mr. Duffy. I have an individual in Wisconsin, that is where
I am from, who has a manufacturing facility. He manufactures in
Wisconsin and has facilities all over the country. And most
manufacturers in his industry have all left America, they have
all gone overseas. He is one of the few that are left.
And he talks about how he spends $15,000 a year per
employee on insurance, and $20,000 per employee on regulatory
compliance. So $35,000 goes out the door per employee before he
pays them one red cent in salary. Do you see that as a
headwind?
Mrs. Yellen. These tax arrangements do have impacts on the
profitability of various business activities.
Mr. Duffy. So, you would agree that would be a headwind? Or
is that a benefit? Does that help him out? Does that help him
grow jobs and salaries in his company, that $20,000 in
regulatory compliance cost?
Mrs. Yellen. Different countries have different systems for
dealing with health care and financing it. And the impacts are
complicated.
Mr. Duffy. I will accept that as a non-answer.
I want to change course a little bit. Looking back at the
2008 crisis--you have been at the fed For a while--were there
any banks that failed that had a leverage ratio of 10 percent
or higher that you are aware of?
Mrs. Yellen. I don't--
Mr. Duffy. If so, give me their names, if you would.
Mrs. Yellen. I don't know. But I can tell you that a lot of
banks that failed were considered to be well-capitalized at the
time that they failed.
Mr. Duffy. That is not my question, though. There are
different definitions of well-capitalized. Do you know of any
one bank that had a leverage ratio of 10 percent or higher
failed?
Mrs. Yellen. I do not know.
Mr. Duffy. Because I have looked and I haven't found one in
the 2008 crisis that failed with a leverage ratio of 10 percent
or higher.
And so I think you are aware that this committee is talking
about a reform to Dodd-Frank, and I know that you are aware
that many banks complain about the cost of compliance and what
that does for them to make loans that would be good loans and
traditional loans that they could usually make, but now they
can't because of new regulation which has an impact on our
economy, economic growth, job creation.
Do you oppose the idea that if you have a high leverage
ratio, you hold good capital, that you can get out of some of
the costly regulations that come from the Fed and other
regulators?
Mrs. Yellen. I do think that for community banks it would
be worthwhile to put in place a simplified capital regime. And
the details, I am not certain of, but we are looking at this as
well.
Mr. Duffy. Do you agree there is a correlation, though,
between more capital and less regulation? Can you buy into that
concept?
Mrs. Yellen. I think for community banks, yes.
Mr. Duffy. Because we are safer, right? We hold more
capital, there is less risk to the economy.
Mrs. Yellen. For community banks, I think a simplified
regime where there is less regulatory burden--
Mr. Duffy. For larger banks, the answer is no?
Mrs. Yellen. I said for community banks.
Mr. Duffy. So, is the answer no for larger banks?
Mrs. Yellen. For systemically important banks, the answer
is no.
Mr. Duffy. My time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Foster.
Mr. Foster. Thank you, Mr. Chairman.
I have a quick two questions for the record. The first, you
had indicated earlier in your questioning that there was a
situation of super strong economic growth where the Fed may
have a period of negative income.
And I was wondering if you could just provide a brief
write-up of what that scenario would look like, in particular
looking at the consolidated balance sheet of the government and
acknowledge the fact that this super strong economic growth
would be accompanied by a very large increase in tax revenues.
And yes, would it be possible for you to make just a brief
write-up? Or if you have a more detailed one, that would be
great, too.
Mrs. Yellen. Yes, I think we could certainly do that.
Mr. Foster. Thank you.
Secondly, earlier this week, Moody's Analytics published a
macroeconomic analysis of the policy proposals of one of the
presidential candidates and they are in the process of doing a
similar analysis for both presidential candidates. It is my
understanding that you have a similar macroeconomic model that
you run. I was wondering, would it be possible for you to run
in your models the assumptions and see if you reproduce their
results? Because they were rather impressive, there was
trillions of dollars of loss to economic activity due to at
least one set of these policy proposals.
Mrs. Yellen. Congressman Foster, we are a nonpartisan
organization and I don't want us, either me as the leader or
our organization, to be involved in analyzing partisan issues.
Mr. Foster. This is simply verifying the math, this is a
mathematical question, a modeling question.
I am not asking you to question or evaluate the
assumptions. I am just saying under these assumptions, do you
reproduce their numbers? Because you know, obviously,
policymakers are at the mercy of the details of these very
complex macro models. It would be reassuring to understand that
there is some agreement between macroeconomics that you are
talking in similar terms. Anyway, if you could--
Mrs. Yellen. I would say that our model, one of our
workhorse models is in the public domain. We publish it on our
website. If someone wanted to do it, they could download our
model and feed in those assumptions.
Mr. Foster. And reproduce those results? Do you find in
general that there are not big differences? You are familiar
with the Moody's modeling and so on? Or do most of these models
produce comparable results?
Mrs. Yellen. I am not deeply familiar with the Moody's
model. My guess is it is similar in many ways to ours. But
again, I am not certain about the details, but our model is
available to perform that kind of analysis.
Mr. Foster. Sounds like a good job for a think tank, I
guess.
Okay, another sort of detailed, technical question. There
have been reports that the European Commission is considering
delaying the going live of margin requirements for unclear
derivative trades. I believe that we are on schedule to have
them go live in September, the beginning of September, and that
there is some foot-dragging, at least reports of it. Is that
something you are willing to engage the EC that they not do
this, not delay these?
Mrs. Yellen. We have worked very hard to put these in
place. It is important that we put it in place here, and my
understanding is that the delay will be very short.
Mr. Foster. Thank you.
Another technical issue. Right now, the supplemental
leverage ratio rule requires custody banks to hold capital
against their deposits on the Federal Reserve. This is
presumably a worry about some future scenario where the Federal
Reserve will not be a reliable counterparty in some sort of
financial panic. I was wondering if you would comment on the
logic of this requirement to hold capital against deposits at
the Fed?
Mrs. Yellen. So, a leverage ratio is typically not in a
capital regime, it is not the binding requirement. It is a
backup, simple measure that assesses capital against an entire
balance sheet based on its size without differentiating the
different riskiness of different assets. And it has always been
imposed in this way.
Mr. Foster. Custody banks are in a sort of unique position,
as they have potentially very large and transient deposits of
the Federal Reserves. I think for very good reasons, that is a
behavior you want to encourage. And I just--it is a concern
that I and other Members have expressed. And I think you should
continue to look at that.
Mrs. Yellen. We will do so.
Mr. Foster. Okay. Let's see, the last thing that I guess is
relevant to those who are wearing the green shirts in the
audience here.
The Federal Reserve recently published an international
finance discussion paper called, ``Doves for the Rich and Hawks
for the Poor,'' which made the point that the real
distributional consequences of whether in response to a
monetary shock you try to maintain constant employment or
constant pricing. And I was wondering, is that sort of thinking
leaking into your consciousness?
Mrs. Yellen. We are certainly very focused on maximum
employment and wanting to promote stronger job markets with
gains to all groups.
Chairman Hensarling. The time of the gentleman from
Illinois has expired.
The Chair now recognizes the gentleman from New Hampshire,
Mr. Guinta.
Mr. Guinta. Thank you, Mr. Chairman.
Good morning, Chair Yellen. Thank you for being here today.
Since the Federal Reserve was created in 1913, we have seen
the Great Depression, the stagflation of the 1970s, the Great
Recession, and currently one of the slowest economic recoveries
in quite some time. When the Federal Reserve makes artificial
decisions, setting interest rates, or fails to properly
communicate on its monetary policy, it creates market
volatility in my opinion, which weakens the effectiveness of
the markets, making it harder for economic opportunities for
all Americans.
As you know, there has been considerable pushback to the
Fed's current approach to stress testing financial institutions
from those who believe that the process has become increasingly
arbitrary and unpredictable. The committee has heard concerns
from regional banks that are subject to the stress tests that
the exercise is not tailored to their size and complexity,
which results in significant costs that outweigh any potential
benefit from a safety and soundness perspective.
To increase the transparency of the stress test process and
ensure that Congress can hold the Fed accountable for its role
in administering the tests, I would like to ask you, would you
support legislation to require the Federal Reserve to issue
regulations subject to public notice and comment spelling out
in detail the scenarios it would rely upon in conducting those
stress tests?
Mrs. Yellen. I wouldn't support such legislation.
I think it is very important that the scenarios be current
and reflect risks that we assess to be important and relevant
at a particular time that we are conducting those stress tests.
And the delay that would be caused by putting out for comment
particular scenarios would result in the test being stale.
We put out a great deal of information about the stress
tests. Our approach has been put out for public comment. We
have model symposia, we have put out a great deal of
information. And I don't think that would result in a stronger
process.
Mr. Guinta. How often do those environments change on an
annual basis?
Mrs. Yellen. We have new scenarios every year that we give
to the firms and it is important that they--
Mr. Guinta. So, annually?
Mrs. Yellen. We put out a different set of scenarios
annually.
Mr. Guinta. Why couldn't that legislation be updated
annually?
Mrs. Yellen. Because the delay in having public comment and
revising things based on public comment would mean that we
would have to start very much earlier, and wouldn't have the
advantage of developments that had taken place
Mr. Guinta. But it is possible to do that--don't you think
we could complete that in a 12-month period?
Mrs. Yellen. I don't think that it would add anything to
the process and I think that it would make the scenario stale.
Mr. Guinta. I think it is important for accountability and
I think it is also important for transparency. I think if we
had this kind of requirement on an annual basis, we would
probably have both.
But I want to move on to a different issue. Dodd-Frank
established the CFPB as a bureau within the Federal Reserve
System. Can you tell me which of Richard Cordray's decisions
must be submitted to you for your approval?
Mrs. Yellen. We don't approve decisions. The CFPB has to
consult with us in the course of drawing up proposals. And I
believe that they have done so when we have tried to provide
feedback and useful input.
Mr. Guinta. How often does Richard Cordray consult with you
personally?
Mrs. Yellen. I have not consulted with him personally.
Mr. Guinta. So who are they consulting with then?
Mrs. Yellen. With our staff.
Mr. Guinta. Do you review and approve the CFPB's budget?
Mrs. Yellen. No, we don't approve their budget.
Mr. Guinta. Can you by law?
Mrs. Yellen. I believe the answer is no.
Mr. Guinta. I am told that the CFPB gets its funding simply
by sending a letter each quarter requesting, in most cases, in
excess of $100 million. Do you know if that is accurate?
Mrs. Yellen. I don't know the details of their budget, but
we follow the law in--
Mr. Guinta. You personally don't review the requests?
Mrs. Yellen. I don't think so. No. No, we do not.
Mr. Guinta. Wouldn't you want to, as the head of the
Federal Reserve, since they are created under your purview?
Mrs. Yellen. Congress set up a system in which we fund
them, but don't decide what their budget should be.
Mr. Guinta. Do you have any idea what their last budget
request was?
Mrs. Yellen. I don't recall.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Washington, Mr.
Heck.
Mr. Heck. Thank you, Mr. Chairman, very much.
Chair Yellen, I think almost unarguably, there is no person
more responsible for the state of the economy than you are.
And in my humble opinion, you have a pretty good track
record in that regard. Car sales are up. Home sales are up. A
constant steady drumbeat of private sector job creation has
accumulated. And yet, I cannot shake the feeling that it is way
too premature to put out the ``mission accomplished'' banner on
the aircraft carrier and I think most Americans agree.
I also think that the reason for that is because of an
absence of wage growth. I think we are ticking upward now at
about 2\1/2\ percent. I know you will cite that, so I will do
it first. Put frankly, Chair Yellen, that is fairly de minimis
compared to the last recovery when it was 4 percent. My
question is very straightforward, when does America get a pay
raise?
Mrs. Yellen. I think we are beginning to see slightly
faster wage growth based on average hourly earnings. Wage
growth is, over the last 12 months now, about 2\1/2\ percent
and that is up from the very low level it was. Readings on
compensation, hourly compensation are very noisy, so it is hard
to know, but it looks like we are seeing somewhat faster wage
growth. I hope that it will be permanent.
And other measures, other wage indicators, like the Atlanta
Fed's Wage Tracker, do show an improvement in wage growth. And
I do believe that as the labor market continues to improve, and
I certainly expect, and it will be our policy to continue to
see further improvement, that will move up. But I would say one
factor that is a negative with respect to wage growth that we
didn't have, for example, in the second half of the 1990s, is
that productivity growth has been very slow.
So, if you ask what is a sustainable level of wage growth,
given our 2 percent inflation target, kind of a rough measure,
and of course this applies over long periods, not a quarter or
even a year, that wages can grow at the rate of productivity
growth plus the rate of inflation. So, with a 2 percent
inflation target, you would expect wage growth of 2 percent
plus productivity growth, trend productivity growth. Now, I
believe since 2010 productivity growth has been running at a
meager 1/2 percent per year.
Mr. Heck. May I interrupt and ask if you think we are still
accurately measuring productivity growth? Because I note a
growing body of literature and scholarship around that
question, that we may not be accurately measuring it anymore,
do you believe that we are accurately measuring it?
Mrs. Yellen. I think there is mismeasurement and the work
has shown that there is--
Mr. Heck. Can I ask you a question?
Mrs. Yellen. And definitely declines due to an increase in
mismeasurement.
Mr. Heck. I would like to ask you a question, however,
about the relationship between employment and wage growth.
We are at the Fed's historic definition of full employment
at 4.7 percent, but we are still significantly above, that is
U-3, we are still significantly above on U-6. If they could put
that slide up, I would appreciate it.
I think the latest number was 9.7 percent. The gap between
U-6 and U-3 is greater than it was pre-recession.
So, Chair Yellen, what does U-6 have to be at to constitute
what you would deem to be full employment? And what would be
the relationship of that measure of full employment? Because we
still have 10 percent of the employment base which either isn't
employed and wants to be, is discouraged, or working part time
and wants to work full time. What is the relationship? What is
the point at which U-6 is ``full employment,'' and then what
would be the effect on wage increases? Because I think at the
end of the day, most Americans and even everybody on this
panel, these and ours, would like to see America get a pay
raise.
Mrs. Yellen. I agree with what you just said, that U-6 is
not back to pre-recession levels to, say 2007 levels, U-3 is.
Involuntary part-time employment which is in U-6 is very high
relative to pre-recession levels.
Mr. Heck. I have 4 seconds, can you give me a number, Chair
Yellen? What is full employment under U-6?
Mrs. Yellen. I am not sure of the number but it does show a
margin of slack.
Mr. Heck. A range?
Mrs. Yellen. Adding part-time employment to an unemployed
person is a difficult thing to do.
Mr. Heck. Thank you. Just let me conclude by saying I am
not sure why you take your foot off the pedal before we--
Chairman Hensarling. The time of the gentleman from
Washington has expired.
The Chair now recognizes the gentleman from Oklahoma, Mr.
Lucas.
Mr. Lucas. Thank you Mr. Chairman.
Chair Yellen, as you know, I also sit on the House
Agriculture Committee, and I have a particular interest in the
creation and implementation of rules governing our derivatives
market and ensuring that a level playing field exists for U.S.
companies. I would first like to commend the Fed's efforts in
working to set global standards within these markets. I think
can all agree that it is certainly in the best interest of U.S.
competitiveness that as global standards are developed there is
consistency in the rules and their effective dates throughout
various jurisdictions.
I would therefore like to discuss the European Commission's
recent announcement that it will delay implementation of the
margin rules for uncleared over-the-counter derivatives until
mid-2017. The United States currently plans to move forward
with an agreed-upon implementation date of September 1, 2016.
And while the United States is ready to move forward, I am very
concerned about the impact that this variation in effective
dates will have on U.S. companies.
Given this likely variation date on the implementation
dates, what can be done to mitigate fragmentation and to ensure
that a level playing field exists for U.S. firms?
Mrs. Yellen. We have worked very hard to get ready to
implement these rules. The firms are ready to put them into
effect. And my understanding is that the delay from the EU is
going to be short. And we will continue to monitor that. These
are markets where it is important to have a level playing
field, I agree with that.
Mr. Lucas. But even in the briefest of times, assuming that
it is a year or less, September of 2016 to sometime in mid-
2017, should we be concerned that market participants will
limit their trading with U.S. counterparties during this period
of time? Will we change their habits and patterns while they
look for standards or opportunities that might be slightly more
advantageous assuming the new rules will be more restrictive
than the existing system? Should we be concerned that people
will do business outside of the United States during this
period?
Mrs. Yellen. Hopefully, it will be a very short period.
Mr. Lucas. I guess ultimately where I am going, Chair
Yellen, is I represent constituencies in Oklahoma in
agriculture and energy that use these products, both in the
production of, the processing of, and the ultimate retail sales
of. They are products that I am told that their bankers insist
upon using, that both banking regulators at state and Federal
level insist that they be used.
My concern is that if we move forward ahead of the
Europeans, we will create a situation for months or a year that
will disadvantage not only the consumers of these derivative
products, but the market makers, too. And once patterns are
established, will we be able to overcome that sometime in 2017
or later? So ultimately, I am asking you, suggesting to you
that it might well be in the Fed's and the economy's best
interest to continue to try to coordinate our effective dates
with the Europeans. And if they are not going in 2016, maybe we
shouldn't go either. Do you see where I am coming from on this
point?
Mrs. Yellen. I do. It is an issue we need to watch
carefully. If there is a delay in Europe, we need to consider
what impact it will have and to work closely with the Europeans
to make sure this is a--
Mr. Lucas. As you know, and as our colleagues on this
committee know, we are talking about a tremendous amount of
dollars in business. We are talking about establishing
patterns, relationships. I just worry that this will create an
undue burden on my constituents and on the market makers in
this country, and that we won't be able to recover. Whether it
is an accident that the Europeans are delaying or it is a good
business tactic, I don't know. We need to be coordinated in
whatever we do, there is too much at stake.
Thank you for acknowledging that, Chair Yellen.
With that, on the behalf of my farmers and ranchers, I
yield back, Mr. Chairman.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Thank you.
The gentleman from Wisconsin talked to you about the number
of pages of regulations. I practiced tax law, and advised a lot
of small businesses. And this idea of number of pages of
regulations is a great sound bite, but has nothing to do with
actually making it easier for businesses to transact business.
If you look at tax law, thank God we have long pages of
regulations so we can find out what the answer is.
In the area of antitrust law, the regulations are basically
nonexistent. And so, you go to a law library and you read
hundreds of pages of court decisions and you still don't know
what the answer is. So, the idea that more pages of business
regulations means more problems for business is a great
political sound bite, but it is actually government agencies
clarifying what the law means.
As to the tax rate, I would point out that we don't have a
value-added tax in this country, which all those comparative
countries do. There is no one who has put forth the plan to
replace the revenue from the decline in the corporate income
tax. And the one thing the majority party has suggested is
eliminating the earned income tax credit to really sock it to
families trying to make it on $20,000 and $25,000 a year.
There is, of course, a loss of manufacturing jobs. That is
not because we have regulations that clarify what congressional
statutes mean, that is because we got really bad trade deals
that Congress has ratified or approved. And I will point out
that Congress is now geared up to use the chicanery of a lame-
duck session to approve a TPP deal that is terrible for
America, so terrible that you can't find a presidential
candidate who is willing to support it.
Chair Yellen, you are going to be told, you have been told
in this room by many that your rates are too low, your balance
sheet is too big. People who say that are wrong. America is
under-performing. Our inflation rate is lower than your target.
And our labor participation rate is lower than everyone's
target.
As to the size of your balance sheet, I know that you focus
on the effect it has on the economy as a whole. But there is
also the tens of billions of dollars that you turn over to the
Treasury. Do you and your fellow FMOC members ever spend any
time wondering whether Congress is going to have the money to
provide a school lunch program, a school breakfast program?
When you factor in how big your balance sheet should be, do you
envision hungry kids here in America and how the money you turn
over to this Congress could be used to feed them?
Mrs. Yellen. We are very focused on the dual mandate that
Congress has given us, namely full employment and price
stability. And the size of our balance sheet and the stance of
monetary policy is all designed to promote those objectives
rather than trying to make a profit.
Mr. Sherman. I would just say that earning--
Mrs. Yellen. But we are pleased to be able to turn over
$100 billion checks, but that is not what draws policy. But
we're glad to be able--
Mr. Sherman. Speaking on behalf of the Congress that would
otherwise have to cut cancer research or cut school lunches,
thank you for the $100 billion checks and please do factor that
in.
Mrs. Yellen. You are welcome.
Mr. Sherman. The world is focused on Brexit. And it may be
good or bad long term for the world. We don't know. That is a
decision for Britain to make.
There are some at the extreme who are painting this as some
immediate world calamity. I just want to ask a question about
your schedule. Have you scheduled some sort of emergency
meeting on Friday because you envision some great calamity
happening to the world on Thursday, or is the British vote just
one of the many things that you will consider at the next
regularly scheduled meeting?
Mrs. Yellen. It is a risk that we are monitoring. I have
said that, we will be watching closely to see what the vote is
and what possible repercussions it might have.
Mr. Sherman. But you haven't blocked off Friday and
Saturday on your personal schedule for emergency meetings as if
the hurricane is coming to envelope the entire world?
Mrs. Yellen. No, I haven't.
Mr. Sherman. Thank you.
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. Chair Yellen, welcome.
I am worried that the Federal Reserve has created a third
pillar of monetary policy, that of a stable and rising stock
market. And I say that because then-Chairman Bernanke, when he
appeared here, stated repeatedly that the goal of QE was to
increase asset prices like the stock market to create a wealth
effect. So it seemed as though that was the goal.
It would stand to reason then that in deciding to raise
rates and reduce the Fed's QE balance sheet standing at a
still-record $4\1/2\ trillion, one would have to be prepared to
accept the opposite result, a declining stock market and a
slight deflation of the asset bubble that QE created.
Yet, every time in the past 3 years when there has been a
hint of raising rates and the stock market has declined
accordingly, the Fed has cited stock market volatility as one
of the reasons to stay the course and hold rates at zero. So
indeed, the Fed has backed away so many times from rate
normalization that, and I think this is a conceptual problem
here, that the market now expects stock market volatility to
diminish the odds of a rate increase.
So, Madam Chair, is having a stable and rising stock market
a third pillar of the Federal Reserve's monetary policy, if I
go back to what I originally heard Ben Bernanke articulate?
Mrs. Yellen. It is not a third pillar of monetary policy.
Mr. Royce. Right.
Mrs. Yellen. We do not target the level of stock prices.
That is not an appropriate thing for us to do.
Mr. Royce. I thought you would say that. So, the question I
have as a follow up is, does that mean that you are prepared to
accept stock market volatility or a slight deflating of the
asset bubbles as the Fed proceeds toward normalization?
Mrs. Yellen. We are going to look at what the trajectory is
for the economy, for the goals Congress has assigned us, namely
inflation and maximum employment, and take policies we think
are appropriate to foster them.
Now, as the economy recovers, we have said we anticipate
raising rates. What implications that may have for stock
prices, one shouldn't assume that it will necessarily be a
negative scenario for stock prices.
Mr. Royce. Right.
Mrs. Yellen. Higher rates to some extent are already built
into longer-term interest rates. Longer-term interest rates are
anticipating a path of rising short-term rates. They do matter
to stock market valuations, but so do earnings in a strong
growth economy. We are not targeting equity prices, we are
trying to achieve outcomes for the economy.
Mr. Royce. And then there is another aspect of this that I
wanted to ask you. This is my last question.
In September of 2015, you were asked whether you were
worried that given the global interconnectedness, the low
inflation globally--
Mrs. Yellen. The low inflation what?
Mr. Royce. --globally that we were seeing, were you worried
that you may never escape from this zero lower bound situation?
And you answered at the time that while you couldn't completely
rule it out, that is not the way that you see the outlook or
the way the committee sees the outlook.
Since that time, in February, Governor Brenner suggested
that financial tightening associated with cross-border
spillovers may be limiting the extent to which U.S. policy
diverges from major economies.
New York Fed President Bill Dudley has said that global
consequences can impact the monetary policy transmission
mechanism in the United States and influence the effectiveness
of our monetary policy in achieving our objectives.
So my question then is restating the question from last
year, not will we never escape, but will we escape any time
soon? And maybe to put it more clearly, does the Fed have the
capacity to defy the global pattern of zero or negative rates,
if it that is the global reality?
Mrs. Yellen. We do have the capacity to have different
rates than the rest of the world, but we have to recognize that
differentials in our stance of policy impact, for example, the
value of the dollar and that is a linkage back to the U.S.
economy.
So, those linkages, as my colleague said, are important,
but the bottom line is what happens in the rest of the world
and their stance of policy it does matter, but it doesn't mean
we can never--
Chairman Hensarling. The time of the gentleman from
California has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Madam Chair, the current wealth gap between upper-income
households and the rest of the country is the widest it has
been in the last 30 years. The Great Recession exacerbated this
troubling gap and had profound effects along racial lines.
On average, African Americans lost 52 percent of their
wealth. Latinos lost 66 percent, but Whites only lost 16
percent. What type of ramifications will this type of racial
wealth gap have on our country's long-term economic growth?
Mrs. Yellen. I think the trends that you discussed, and we
discussed some related data in this monetary policy report, are
extremely disturbing. There has been some research that has
tried to look at the links between inequality and growth and
they are frankly complex and I don't think we fully understand
them. But one linkage is that higher-income individuals may
spend less of their income than lower-income individuals.
So, rising inequality may suppress the growth rate of
consumer spending and harm our growth in that way. There may be
linkages in terms of ability and desire and opportunity for
education and training that can have a long-run negative impact
on growth.
I think we are just beginning to understand these
complicated linkages, but it is certainly a very disturbing
phenomenon.
Ms. Velazquez. So there is a correlation in terms of the
type of public policy that we enact to address those
disparities. It will have long-term consequences.
Mrs. Yellen. I believe they can have, yes, can have long-
term consequences.
Ms. Velazquez. So as the economy continues to gain strength
and we move back to normalized monetary policy, Fed decisions
will have an impact on credit markets. And this has a number of
businesses concerned about the availability and cost of
capital.
Is there any indication that the last rate increase had an
impact on credit availability for small businesses?
Mrs. Yellen. We raised rates by 25 basis points. That is a
very small amount. And I am not aware of any significant
repercussions that has had for the cost of consumer credit. We
have said that we expect the path of rate increases to be
gradual and that we will be very cautious about raising rates.
We will only do so in the context of an economy that is
performing well with the strong job market that is growing at a
good pace where people's incomes are rising. And we would do
that to make sure that we achieve price stability, which is our
congressional objective.
Ms. Velazquez. Okay. So we discussed the current wealth gap
between Whites, Blacks, and Latinos. I would like to rise
another issue and that is the cost of student loans.
Student loan debt now stands at more than $1.35 trillion, a
figure that has nearly tripled over the past decade. Some
experts have reported that the average student loan debt for
the class of 2016 is $37,000 per borrower.
What type of consequences for lifetime wealth creation do
these levels of debt present for young people?
Mrs. Yellen. First of all, the importance of gaining an
education and the advantages that come with that and the higher
income make it critically important that funds be available to
students to gain that education. So let me start there.
But if a student takes on that debt and then, as happens
all too often, doesn't end up completing a degree or goes to an
institution that doesn't provide training that enabled them to
get that higher-wage job, that can be a very, very serious
burden and I think for many minorities, this is a huge burden.
And so we actually plan to hold a conference at the Fed on
this topic next November. We are going to look at this issue
and focus particularly on minority communities and the impact.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce.
Mr. Pearce. Thank you, Mr. Chairman.
Chair Yellen, thanks for being here today.
Let me wrap up some of the old business here. So, my good
friend from Washington asked, when does America get a pay rise?
And you sort of in your answer hinted that if the global market
continues to improve--is that what I heard you say? If the
global market continues to improve, then we can expect better
wage growth?
Mrs. Yellen. I think if the labor market continues to
improve, we will see some pickup in wage growth. But I did want
to indicate that we have at the moment low productivity growth,
very low, that wage growth will be greater over time if
productivity growth picks up. If it doesn't--
Mr. Pearce. Right. I guess my main point is that there are
many who see the global market as not improving at all. So,
kind of the inference that it is moving in the right direction,
or if it would just do a little bit more of it, it is going to
okay, is one there are differing opinions on.
For instance, just in very recent days, a significant
article came out talking about how business spending is down,
exports are down, consumers are very cautious, and many of the
foreign countries are having difficulty.
That is a little bit in contrast to your report. You talk
about the 14 million jobs created. That is one of your
objectives. And you also referred to the unemployment rate
being below 5 percent.
So those all would indicate a fairly good opinion from the
Federal Reserve about the condition of the economy. Am I
interpreting that right?
Mrs. Yellen. Yes. I think the labor market is in a pretty
healthy condition.
Mr. Pearce. Okay, but, yes, my question is the recovery.
Mrs. Yellen. There are a lot of jobs available.
Mr. Pearce. The recovery is pretty well in place that it is
moving along.
Mrs. Yellen. We have achieved a lot. We have gotten to a
much better place.
Mr. Pearce. Okay. But my question really is that in
February of 2014, you stated that, I know this is difficult for
seniors, in other words, a zero interest rate because they
typically do very liquid things and they don't like risk. When
we have accomplished recovery, rates of return will come back.
And so I wonder when the seniors are going to see those rates
come back? When are they going to see that? Because the seniors
are the ones who have paid the bill through this entire thing.
When we drive the rates of interest down, that penalizes
their savings. And they tell me, I lived my life correctly, I
paid for my house, and you all messed up the housing market,
and I saved money and you all make it where my money is worth
nothing in the bank.
So, when can they expect to see an increase in their rate
of return?
Mrs. Yellen. I can't give any guarantee on that, but if the
economy progresses along the lines I expect, I think it will be
appropriate to gradually increase rates further.
Mr. Pearce. Okay. But you have previously answered my
question that you felt like we have made a lot of progress.
Yet, seniors haven't seen any progress. So, I think that is one
of the continuing problems that we have.
I also want to ask, now, you mentioned and it is well known
that the Federal Reserve's objective is maximum employment. Do
you have kind of a handbook that you have put out on how to
achieve maximum employment? Something that political
candidates, like maybe a candidate for President, might say
that she is going to get rid of all the coal mining jobs? Do
you have a handbook that says, if you do that, you are going to
put pressure on the economy over here? Do you put out anything
at all? I know you don't want to be very political, but do you
put out anything at all?
Because when I look at the things that the government does,
I draw a different conclusion than what my friend Mr. Sherman
draws. I see regulations that say, the haze regulation for
instance, that is being implemented in the West, you can't see
the difference in the haze in the air, you actually have to
have a computer to measure it. But using that regulation, coal
miners being sent to the house in New Mexico make $60,000 a
year, and they are going to then be on subsistence-level of
government support checks. And that is an actual regulation
that is penalizing the job markets.
So I see those penalties, but do you put out a fact sheet
that says, look, if you increase minimum wage, Burger King is
going to go and announce they are going to put kiosks in. And
so, the poor people are never going to get into the labor
market, and so the gap between the rich and the poor is going
to increase because we have outsourced, we have sent those jobs
out of America that are on the low end of the scale that allow
people to get into the workforce.
And so I wonder if you all do that, because if you are in
charge of a trillions-of-dollars economy, it seems like you
would put out some sort of a fact sheet so people sitting on
this side of the desk could actually have some idea of what
effect their policies would have.
And I guess the answer is no, you don't put out a fact
sheet.
Mrs. Yellen. I think not one of the type that you were
describing.
Mr. Pearce. It is funny that we have trillions of dollars
at risk, but we don't have the best practices.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentlelady from Alabama, Ms.
Sewell.
Ms. Sewell. Thank you.
Chair Yellen, I apologize if you have answered this
question. But as you know, 127 Members of Congress, both
Senators and House Members, and I was one of them, sent a
letter last month highlighting the fact that the Federal
Reserve Act mandates that the presidents and the board of
directors at the 12 regional Federal Reserve banks ``represent
the public.''
Despite this mandate, there is only one non-White regional
bank president and he is also the only non-White member of the
FOMC; 83 percent of Federal Reserve board members are White and
men make up nearly three-fourths of those directorships. One-
third of the 12 regional Federal Reserve presidents are either
former executives or trustees at Goldman Sachs.
In response to the letter, you said that, ``45 percent of
the directors are either women or minorities, meaning 55
percent are White males.'' Does your response indicate that you
believe the leadership at the Federal Reserve bank is
fulfilling its mandate to ``present the public with due
consideration,''given the enormous economic interests of our
diverse Nation?
Mrs. Yellen. Let me start by saying that I believe that
diversity is extremely important in all parts of the Federal
Reserve, but I do want to distinguish two different things.
There are, if we were at full strength, 19 members of the
FOMC, that is 12 presidents, and we are now at 5 board members,
there are supposed to be seven. And then a completely separate
category of leadership are the directors of the Federal Reserve
banks, there are nine at each bank and then there are branch
boards that also have their own boards of directors.
I do believe we have made substantial progress in achieving
diversity and improving our performance among directors at the
reserve banks in the branch boards. I believe the figure that
you cited, the 45 percent, refers to those directors. At this
point, 24 percent of those directors are minorities, an
additional 30 percent are women, and in total women and
minorities come to the number that you cited.
Now, among the reserve bank presidents, we are looking at
12 presidents, as you said, one is a minority and then there
are two women reserve bank presidents. I would very much like
to see greater diversity at that level, too. And it is a goal
that I hope we will make progress on in the coming years.
The procedures for appointing those presidents are set out
in the Federal Reserve Act. The board has to approve the
appointments of presidents that are recommended by the Class B
and C directors of the reserve banks. We insist and make sure
that the searches for those presidencies are national, that the
candidate pool is diverse, and that due consideration is given
to diversity as an important goal. We welcome and have been
recently taking public suggestions from the public about
possible candidates and when these searches are launched, we
will make sure that candidates who are suggested gain full
consideration.
Ms. Sewell. Now, I know it has been considered or suggested
that the Board of Governors fill the Class C directors on each
regional bank's board with at least one individual from an
academic background, one from a consumer or community-based
organization, and one representative from a labor organization.
What does the Fed think about this recommendation, and does the
Board of Governors have a strategy for increasing the diversity
of its leadership so that candidates are considered who have a
variety of backgrounds, not just solely that of Wall Street?
Mrs. Yellen. We track diversity, not only in terms of
gender and race, but also in terms of experience.
And I believe we have made considerable progress in
achieving the kind of diversity you are discussing. I believe
in every reserve bank branch there is an individual, might be
an academic or someone who represents communities and
nonprofits, and we are constantly trying to add to our ranks of
people who represent labor.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair recognizes the gentleman from Georgia, Mr.
Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
Chair Yellen, first of all, I want to thank you for the
inspector general going through your cybersecurity policies. I
want to encourage you to listen to what he has to say because
you are on the frontline really of our affairs when it comes to
cybersecurity. So, I just wanted to thank you for that.
The other thing I wanted to do is make some comments
between the tit and tat kind of thing, between the gentleman
from Wisconsin and the gentleman from California, as far as the
new regulations. There were approximately 3,000 new regulations
last year with 81,000 pages of it.
The gentleman from California said this was to explain,
these pages, he was thankful for them because they were there
to explain the regulation. Ma'am, where I am from, if it takes
you 27 pages to explain something you are trying to tell
somebody, something is way too complicated.
And that is the point of some of the other questions that
have been here before, is the complex regulations are requiring
all types of compliance officers. Banks are being taken down
with this.
Sometimes they have more compliance officers than they do
loan officers. So I guess my question to you regarding these
overly burdensome regulations that are on our small banks is,
is it a priority of the Federal Reserve and for other members
really of the Federal financial institutions, examination
councils, is it your priority to get these regulations off?
Mrs. Yellen. It is our priority to do everything that we
possibly can to reduce regulatory burden.
I think we have already taken some significant steps. We
are completing the EGRPRA review. I believe we will take more
steps in light of that review. And we are looking carefully at
a very simplified capital regime that could apply to these
community banks if they are well-capitalized and managed.
Mr. Westmoreland. I feel like I have been asking this same
question now since 2008. My district probably had more
community bank failures than any other district in the United
States.
And we keep hearing this over and over about, we are
looking at regulations and so forth. So, is there any way that
you could give me some type of timeline as to when something
may come out about this?
Mrs. Yellen. We have already put quite a few things in
place. So, it is not that everything is in the future. We have
raised our thresholds to a billion dollars for capital
requirements to apply to small holding companies. We have
changed our examination process so that our examiners spend
much less time in bank premises.
We have made our examinations more risk-based so that we
focus on those risks that really are relevant to banks. We have
taken a number of steps. We meet regularly, twice a year with a
group called CDAC which is community banks to hear their
perspectives and take their suggestions when we can. We have a
special committee of the board that focuses on community banks
and assesses different ways to reduce burden.
Mr. Westmoreland. I thank you and I hope that you have been
communicating with the community banks, too, about what you can
do to actually help them.
One other thing just to follow up, as I mentioned, in my
district in Georgia, we know what it is like to lose a bank.
While the Federal Government is focusing on economic policies
for large banks, designating banks and non-banks as SIFIs,
conducting stress tests, all the while these policies are still
creating that notion that large banks are too-big-to-fail.
And so I guess my point is that somehow there has to be a
more distinct classification between banks and the size of
banks.
Mrs. Yellen. I agree with that. We want to tailor our
regulations so that they are appropriate to the risks. And we
are likely to make changes to the stress testing regime that
would reduce burden on some of the smaller banking
organizations that are subject to that process.
Mr. Westmoreland. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Thank you, Mr. Chairman.
Chair Yellen, when you visited here the last time, I raised
the issue about the high rate of unemployment among African
Americans. It is absolutely staggering. In some of our
communities, particularly with African-American males between
the ages of 18 and 37, it is over 22 percent, and in some
communities it is as high as 50 percent, which leads to all
kinds of problems, the crime problem, but more importantly the
breakdown in the African-American family, because these young
men who are age 18 to 37, that is the childbearing age.
So, we have to look at this as a national crisis. And I ask
you to do that. And you told me, you said that, Mr. Scott, I
don't have the tools to do what you are asking.
But I say to you, Mrs. Yellen, you do have the tools. You
have your voice. You have your position. You have a dual
mandate to curb inflation, but also to deal with unemployment.
And we need you to use that voice to holler loud and clear that
this is a national crisis. It is the number-one domestic
problem that we have in this country because of the devastation
and the impact in the African-American community.
But here is what really concerns me. Since you say you
don't have the tools, why are you so eager to change course on
monetary policy and raise interest rates yourself when the
unemployment level in the African-American community is so
high?
Now, you said it yourself, you said here that your future
rate increases depending on the data you have. Well, to me,
Chair Yellen, the data is telling a pretty clear story: one, we
are well-below the 2 percent inflation target; and two, growth
abroad in places like China is anemic. And most importantly,
the dollar remains strong.
So tell me, Chair Yellen, what harm do you see in holding
the interest rate at its current level until we can get our
hands around this problem and get some improvement in the
African-American unemployment rate?
Mrs. Yellen. Congressman, I do want to call attention to
the material that we included in this monetary policy report
and intend to continue including that discusses the situation,
the labor market situation of African Americans and other
minority groups. And it does document, as you said, the high
unemployment rates of African Americans.
Mr. Scott. Yes, I know it, but--
Mrs. Yellen. But there has been improvement.
Mr. Scott. What is so frustrating to me is that you are in
the position to say something, to do something. This is
intolerable. You are the only agency with this dual mandate.
Mrs. Yellen. Congressman, we are doing something.
Mr. Scott. What is that?
Mrs. Yellen. We are doing something extremely important,
which is putting in place a monetary policy that has brought
down unemployment rates and improved the labor market for all
groups in American society and trying to do that in the context
of our price stability mandate.
And as serious as the suffering is in the African-American
community, and it is, there has been improvement and there will
continue to be improvement and our policies are designed to
make sure that we continue to have improvements in the labor
market that will benefit the African-American community and
others as well.
And I have used my voice and I will continue to do so. And
in the work that we do in community development, we will
continue to use the tools at our disposal to try to identify
interventions--
Mr. Scott. Let me try to identify something right here. We
are in the midst, legislatively, of doing things like building
the Keystone Pipeline. Why can't we target that so these young
people can get jobs or they can learn the basic skills as they
work? Earn as you learn, get them involved with labor unions
that have skill programs.
We just passed a bill to be able to lift the embargo on
crude oil. That is going to spread out 200,000 jobs. We have to
look at our economy and point out areas where we can get
African-American young men into the wheel to learn these
skills.
Mrs. Yellen. This is for Congress to consider.
Mr. Scott. We have done that. And we have done our job--
Chairman Hensarling. The time of the gentleman has expired.
Mr. Scott. We need some leadership from you and this
Administration.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from New Jersey, Mr.
Garrett, chairman of our Capital Markets Subcommittee.
Mr. Garrett. Thank you. And let me follow up on the
question that the gentleman was just talking about, about the
negative, disastrous impact that the Fed has had on the
African-American community and the poor in this country.
Last year you gave a speech on income inequality and you
said that the income gap between the rich and the poor has long
been of interest to you and the Federal Reserve, and you
expressed concern about that and basically your comments were
eerily similar to what the Administration has been saying.
You lamented the problem, but failed to admit to
acknowledge in your comments that it is your actions and the
Fed and the government policies that can have a dramatic impact
on expansion of the gap between rich and the poor.
In fact, we are often reminded by the Federal Reserve and
our President how low-income families have fallen behind during
this Administration's last 8 years. We have seen the greatest
monetary expansion and regulatory assault in history, and I
think there is no coincidence.
So let us look at your predecessor, what he said. Chair
Bernanke acknowledged on more than one occasion that monetary
policy has the effect of raising asset prices, in particular
the stock market, I am sure you agree with him. The question
then we have is, who does that really benefit? Who does your
policy benefit?
Let me give you a number. According to Gallup, the survey,
90 percent of households with incomes over $75,000 own stock;
only 21 percent of households under $30,000 own stock. So, if
your policies, as Ben Bernanke indicated it does and you are
nodding your head as well, benefits the stock market, raises
asset prices, who are you benefiting? The rich. Who are you
hurting? The poor.
So, the stock market has boomed. The biggest beneficiaries
have been households with income well above the national median
and particularly those at the very top where the wealth in the
stock market is concentrated. So, that is what the gentleman is
pointing out, your policies. He is looking for leadership, but
leadership to lead in the other direction, not always helping
the rich, but hurting the poor.
And another area that we see where you take the pattern of
helping the rich and not the poor is, where does the average
poor person making under $30,000 put their money? In the stock
market? No, they put it into savings accounts. Now, according
to the FDIC, the average rate of return in America is 6 basis
points.
At the same time, you are paying Wall Street banks 50 basis
points to park their money over there. So the question is, why
do you see the need to benefit the Goldman Sachs CEOs of the
world and pay them more than the small, local banks on Main
Street where my constituents have to invest their money? Do you
see a need to benefit the rich continuously to the disadvantage
of the poor? Why is that?
Mrs. Yellen. I'm sorry, we are not trying to benefit the
rich at the expense of the poor.
Mr. Garrett. Okay. So your statement is your intention is
not to benefit the rich, but the facts of Ben Bernanke and
others, what you are nodding your head, is your actions are
benefiting the rich over the poor because of your monetary
policy. Is that correct?
Mrs. Yellen. It is not correct.
Mr. Garrett. Which part is not? Is it not the fact--is
Gallup wrong when they say the rich are more likely to invest
in the stock markets than the poor? Is that not correct?
Mrs. Yellen. That is true.
Mr. Garrett. That is true. Is it not true that your
quantitative easing according to Ben Bernanke also benefits
asset purchases?
Mrs. Yellen. 14 million jobs--
Mr. Garrett. Is that a fact?
Mrs. Yellen. --is what our policy--
Mr. Garrett. Excuse me. I have the floor. I am trying to
find out which fact is wrong.
The fact of the matter is is that the rich own stock, you
said yes. The fact of the matter is that quantitative easing
increases asset purchases, you said yes, asset prices, you said
yes. The fact of the matter is that you are indicating yes,
that is increasing the valuation of stock, you are indicating
yes. And the fact of the matter is, is that for the average
poor person, they are not in the stock market, they are in
banks. You are saying yes. So all those facts are correct.
Mrs. Yellen. Houses are widely held by most families and
low interest rates have also--
Mr. Garrett. But as far as where most people have their
investments.
Mrs. Yellen. --have also benefited from rising house
prices.
Mr. Garrett. Part of the problem is that although you admit
here today that it is not your intention to help the rich over
the poor, that when you are nodding yes on every point I raise,
is that the monetary policy of the Federal Reserve over the
last several years of your tenure benefits the rich over the
poor and creates a greater expansion of income inequality.
Mrs. Yellen. I am sorry--
Mr. Garrett. Let me go on to the next question. I only have
a minute here.
With regard to your balance sheet, I can't get into the
details as far as the significant increase over time and the
increase in the risk in the market. I understand the question
was already raised on whether you do a stress test on yourself
and the answer was no?
Mrs. Yellen. Yes, we have.
Mr. Garrett. Oh, you do do stress tests like you do on the
banks on yourself?
Mrs. Yellen. We have performed that exercise.
Mr. Garrett. And do you believe then that interest rate
risks and credit risks of your portfolio in this position now
is at greater risk than it was before when it was--
Mrs. Yellen. We have no credit risk in your portfolio. We
only hold government and agency--
Mr. Garrett. You are immune to credit rate risk?
Mrs. Yellen. I think U.S. Treasury bonds are a pretty safe
investment.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison.
Mr. Ellison. Hello, Chair Yellen. I appreciate you being
here, and I appreciate all the work that you do.
I would like to commend the Fed for its decision to keep
interest rates low. I believe keeping interest rates low helps
calm and strengthen our economy. I also wish Congress had
chosen to act as assertively and creatively as the Federal
Reserve did. The truth is that without the Federal Reserve
working, the fact is we have had absolutely no fiscal
assistance around here at all.
And I think if you looked at the historic amount of
obstruction that we have seen, it is really quite remarkable
that anybody in Congress would be shaking a finger at the Fed
given how little we have done to try to stimulate the economy
and to help low-income Americans. If Congress had funded an
infrastructure bank for example and rebuilt schools, bridges,
roads, and transit, we would have lower unemployment and a
stronger economy. Lord knows we need it. Lord knows that our
infrastructure is crumbling all around us.
Interest rates are at historic lows, we could really
rebuild this economy if we would have taken fiscal action. I
would like to ask you this, Chair Yellen, if the Congress
approved money for infrastructure development, would that have
a positive effect on employment? How would it impact wages? How
would it impact our productivity if we had better, more
improved infrastructure?
Mrs. Yellen. I can't give you a detailed assessment, but I
certainly would agree that productivity growth has been very
weak.
We have had a shortage of investment, private investment
has been very weak. That is one reason I think that
productivity growth has been so meager and generally having a
stronger rate of investment.
There are other things as well, education and training make
a difference here and supporting research and development. But
those things would contribute, I believe, to stronger
productivity growth and ultimately faster wage growth.
Mr. Ellison. If you look historically at the amount of
fiscal investment, how does the era that we have been in for
the last, say, 5, 6 years compare with other periods of fiscal
investment in our Nation's history?
Mrs. Yellen. I don't have the numbers at my fingertips.
Mr. Ellison. I am not going to sue you.
Mrs. Yellen. But I think the answer is low.
Mr. Ellison. Okay. And so you are supposed to fix the
economy, but we don't suppose to do anything.
Mrs. Yellen. We can use some help, thank you.
Mr. Ellison. Yes, okay. When you were here in February, you
and I had an exchange on what the Federal Reserve could do to
increase employment for African Americans. And I wonder if you
had any update for me. Has the Federal Reserve been able to
think about a traditional policy toolkit to specifically
consider investments and action that might impact African
Americans, Latinos, Native Americans, and low-income people?
In addition to keeping interest rates low, are there more
targeted tools that the Federal Reserve is considering or might
recommend?
Mrs. Yellen. In terms of our general stance on monetary
policy, we have seen a lot of improvement. And it has benefited
African Americans in spite of the fact that there remains so
much distress among African Americans and in the labor market
that concerns us. Nevertheless, there have been improvements.
We don't have tools in monetary policy to target particular
groups. We want to make sure we have continued general
improvement in the labor market in the context of price
stability. In the community development work that we do inside
the Fed, we are quite focused on what we can do to aid low- and
moderate-income communities and trying to identify and promote
programs that seem to work.
In my travels, I have visited a number of workforce
development programs that I think are helpful in trying to
match unemployed African-American and other minorities with
available jobs. Job openings are at a record level and often
programs that link-up workers and jobs and sometimes there is a
need for workforce training.
We have done work and tried to promote best practices in
this area and credit availability more generally to low- and
moderate- income--
Chairman Hensarling. The time of the gentleman from
Minnesota has expired.
The Chair recognizes the gentleman from Ohio, Mr. Stivers.
Mr. Stivers. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being here today.
I appreciate that you have a hard job, and I wanted to ask
you a couple of questions. You just said to the gentleman from
Minnesota that private investment is lacking. And it is clear
that you have reduced the interest rates in the economy, which
is one factor when people choose to make an investment.
But at the same time it appears that the increasing
regulatory requirements that are passed on to consumers through
banks, including a capital surcharge on bigger financial firms
that is nearly double the international average, it is 4.5
percent versus 2\1/2\ percent, a supplemental leverage ratio
that is double, 6 percent versus 3 percent, a liquidity-
coverage ratio that is more restrictive and punishes certain
asset classes and a total loss-absorbing capital requirement
that doesn't consider things like market making to get capital
in the economy.
It just seems like even though you have reduced interest
rates with your monetary policy, your regulatory policies are
increasing costs and therefore decreasing folks' ability to
make private investment and also doing it at such a level
higher than the rest of the world, it just makes America a less
attractive place to place jobs, financial service jobs and
other jobs. And I know you have commented that you want to try
to take a look at all that and I really appreciate your
willingness to take a look at it.
I know the European Commission just did a call for evidence
to review the ways that their financial regulations are
actually working and recalibrate the rules to support both
liquidity and markets, economic growth and lending. Do you have
any plans to do something similar, given that our regulations
are so far out of whack with rest of the international
community?
Mrs. Yellen. I won't comment on tax policy, but our
regulations with respect to banking organizations are not
really out of line with international standards. We have worked
jointly with other countries to try to maintain a level playing
field and to raise standards in tandem. We have really improved
the safety and soundness of the banking system. We have a
banking system that is extending lots of credit. Credit is
readily available to most corporations. Loans have been growing
and banks are eager to make loans. They are priced at low
interest rates given this environment, so--
Mr. Stivers. But clearly they are not borrowing, so
interest rates aren't doing enough. That is kind of to my
point. I guess you didn't answer my question. Are you going to
be opening up the regulations for comments the way the European
regulators have or not, because you have said you will, but I
have not seen anything on it. Will that happen, or not?
Mrs. Yellen. We are currently going through the EGRPRA
process and looking at our regulations.
Mr. Stivers. Okay. I do want to compliment Governor Tarullo
for his comments in The Wall Street Journal recently that
acknowledged that small and medium-sized banks do not present
the same systemic risk and therefore he is going to try and
reduce their compliance cost.
Those are the kind of things I am talking about and they
are great to see in The Wall Street Journal, I would love to
see them happen. So, I want to compliment him on his
willingness to say he is going to do that and I just want to
encourage you to encourage that to happen.
Because the Office of Financial Research, which is charged
with doing the research on systemic risk, did a study a year
ago that showed the systemic risk of all the institutions. The
six largest institutions have an overwhelming majority of the
risk in the entire financial system, and I think we should
concentrate our previous regulatory capital on those that
generate the biggest risk for our system and relieve the folks
who don't generate risk from things that don't want sense.
And so I was really pleased to see Governor Tarullo's
comments, but I would urge you to actually implement those.
Mrs. Yellen. I am very supportive of the things that he
said. We are focused on it. I agree that we want to do
everything we can to eliminate burden for those community
banks.
Mr. Stivers. Thank you. And my time has almost expired, but
I would urge you, and I know that this is our monetary policy
hearing, and we have a regulatory hearing every 6 months as
well, and I would urge you, and I know that Governor Tarullo is
an acting regulatory supervisor, he has not been confirmed by
the Senate, but I would hope you would bring him with you
during that hearing, which is coming up.
Thank you. I yield back the balance of my time.
Chairman Hensarling. The time of the gentleman has expired,
but to ensure that the gentleman does not engage in an act of
political negligence, by unanimous consent he will be granted
an additional 10 seconds if he wishes to recognize Cleveland's
NBA championship.
[laughter]
Mr. Stivers. Thank you, Mr. Chairman. Go, Cavs! I yield
back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from South Carolina,
Mr. Mulvaney.
Mr. Mulvaney. I thank the chairman.
Chair Yellen, thank you very much for being here.
In your opening testimony, you said the following,
``Another factor that supports taking a cautious approach in
raising the Federal funds is that the Federal funds rate is
still near its effective lower bound.'' What is the effect of
lower bound?
Mrs. Yellen. Well, I meant zero.
Mr. Mulvaney. So no, we can put that to bed, correct? No
negative rates in the Fed's future, correct?
Mrs. Yellen. It is not something we are contemplating.
Mr. Mulvaney. Thank you very much. I have a couple of
questions that deal with, while we are not going negative,
still deal with rates staying at or near zero for a long time.
Other countries have seen their rates go negative, and
obviously that has an impact on the value of the dollar,
driving it up. You have taken a position previously that you
thought that a strong dollar was ``something of a drag or could
be something of a drag on the economy.''
So my question for you is this: As you make your decisions
regarding rates, or even as you make your decisions regarding
your guidance, what weight do you put on the fact that other
countries are going negative, or are approaching zero? How does
that factor into your decision-making?
Mrs. Yellen. The situation of other countries is important
in our decision-making. To the extent their rates decline or
lower than ours, it does tend to put upward pressure on the
dollar, which is a drag.
But to the extent that their policies are successful in
promoting stronger growth in those countries, then that boosts
the demand for exports, so we need to take both aspects of it
into account. And generally, it may differ from situation to
situation, but when countries take steps, including monetary
policy steps to support demand, domestic demands in their own
countries, it has these mixed effects on our outlook.
Mr. Mulvaney. Thank you.
Mrs. Yellen. Nevertheless, we assess it and take it into
account in setting our own policy.
Mr. Mulvaney. Another issue regarding long-term at or near-
zero rates, in 2011 this body estimated that our interest
payments this year, actually next year, would be about $600
billion. The real number next year will about $300 billion,
even though the actual debt today is greater than we thought it
would have been 5 or 6 years ago.
What weight, what consideration, what pressure do you feel,
if any, to maintain low interest rates in order to keep the
government's borrowing costs low? We all know what could happen
if interest rates were to spike, the interest cost to the
Nation would go up dramatically, possibly causing a fiscal
crisis. Do you factor that into your decision-making on setting
your rates or setting your guidance?
Mrs. Yellen. We do not factor that into our decision-
making. That is an important reason why most countries have
chosen to have their central banks have independence in making
monetary policy, because when financing the government becomes
the focus of monetary policy, inflation can rise to highly
undesirable levels. The Congress told us to focus on maximum
employment and price stability and that is what we are doing
and will continue to do.
Mr. Mulvaney. So it is fair to say, and I am sorry to cut
you off, but you know how we deal with time, it is fair to say
that if your dual mandate required you otherwise to raise
rates, you would do that, even if it were to create
difficulties on a fiscal standpoint in terms of paying our
Nation's debt?
Mrs. Yellen. That is correct. That is Congress' to
consider. The CBO does projections for Congress that assume an
outlook with rising short-term interest rates and long-term
interest rates and that factors into the information that you
get in deciding on specifics of politics--
Mr. Mulvaney. Speaking of rising rates, Mr. Huizenga a
while ago asked you a question about a rising interest rate
environment and the impact that might have on your remittances
to the Treasury and you had said that while it was certainly
contemplatable that a rising interest rate environment could
lead to net negative earnings at the Fed, that that, and I
think your exact words were, ``could be a very nice situation
because it would be indicative of strong growth.''
The last time I remember in my lifetime having
extraordinary high interest rates, the problem was it was no
growth, which was in the late 1970s, that is accurate, right?
We have had periods in this country's recent history of
high interest rates and low growth. And that would not be a
very good situation to be in.
Mrs. Yellen. That would be a much less desirable situation.
I did indicate that it is highly unlikely and would require a
very unlikely set of circumstances.
Mr. Mulvaney. But it is possible that a set of
circumstances would arise where your net earnings would go zero
or negative?
Mrs. Yellen. It is possible.
Mr. Mulvaney. Thank you, ma'am.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
Chair Yellen, I would like to make a comment initially, a
reference to my friend Mr. Heck from Washington, he stated that
you played a most important key role in terms of our economy
and the increasing of jobs.
And after that you mentioned that we are allotting 14
million jobs through a very accommodating monetary policy. That
comes out to about 160,000 jobs a month over an average around
90 months during this Administration.
The contrast I would bring to you is that we had, in the
1970s, 20 percent interest rates, high inflation, high
unemployment, and gas lines, as you recall. And the regulatory
burden was significantly reduced, the tax burden was reduced,
and in 2 years we were creating 300,000 and 400,000 and 500,000
jobs a month, 1 month a million jobs.
Don't you see that the clear contrast in terms of the
regulatory burden that has been put on in our economy today and
how that has not achieved the desired impact that these good
folks have come to want? And there was a concern, I see their
green shirts, I see their expressions of hope.
And yet, the fact that the very policies that have been
initiated seems to be counterproductive. That is my comment.
Now, my question is related to, as you know, the
comprehensive capital analysis and review known as CCAR is the
Federal Reserves supervisory stress test for U.S. financial
institutions.
This month, Governor Tarullo announced the Fed will likely
add the G-SIB surcharge as a component of future CCAR
exercises. I am concerned that the Fed has failed to adequately
consider if there is any benefit in adding this as a component.
The CCAR currently contains two components that are unique
to U.S. G-SIBs. First, only U.S. G-SIBs are required to assume
a counterparty failure scenario. Secondly, the U.S. G-SIBs are
required to assume an instantaneous global market shock.
According to a clearinghouse analysis, both of these existing
components already make up a significant portion the G-SIB
surcharge calculation, including on issues of
interconnectedness, complexity and cross-jurisdictional
activity.
Chair Yellen, doesn't inclusion of the G-SIB surcharge on
top of the current G-SIB-only components result in regulatory
redundancy? Do you believe that this is in essence a double tax
on these risks?
Mrs. Yellen. I think Congress intended for systemically
important firms to be more resilient than other firms and
recognize that it is important that even in very adverse
circumstances, those firms can go on serving the credit needs
of the country, continue to lend. And in all the static
requirements, the leverage ratio, static capital requirements,
we have added an extra level, higher requirements for those
firms. And I believe it is appropriate--
Mr. Pittenger. Let me ask you this. What then is the net
added benefit of adding the G-SIB surcharge as part of the CCAR
exercise? Where do you see the benefit to that?
Mrs. Yellen. It is a forward-looking exercise in which we
look at how these firms would perform and survive in a highly
adverse circumstance--
Mr. Pittenger. You don't see it as an unnecessary added
burden to these firms?
Mrs. Yellen. I think it is important that these firms be
resilient. But let me just say that we are doing a 5-year
review of the stress test in CCAR and will probably make other
changes as well that could be partially offsetting in terms of
capital levels.
Mr. Pittenger. One comment, there has been much said about
community banks, the Federal Reserve Bank Minneapolis President
Neel Kashkari made comments regarding his contact with the
community bank in seeking to get a loan.
And his comment was that he saw through that an
extraordinary painful process. This was his own personal
experience. He went on to say that these community banks suffer
under the new regulatory regime. He added that the notion of
let us solve too big to fail and relax regulations on those who
are not systemically risk, that he supports that philosophy.
I just want to emphasize again and some of this has already
been said today, the real issue of addressing these community
banks--I served on a community bank board for a decade and to
date there are no additional community banks that are being
formed because they don't see that market capability, they
don't see their ability to support the requirements of the
regulatory burden, but I would just emphasize that need to you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, the ranking member of our Capital Markets
Subcommittee.
Mrs. Maloney. Thank you very much, Mr. Chairman.
Chair Yellen, when you were here in February, I asked you
whether the decline in inflation expectations to historically
low levels had caused you to rethink the inflation projections.
And you said that it is something that you are, and I quote,
``evaluating closely.''
Since February, however, inflation expectations have fallen
even further. Why do you think inflation expectations have
continued to decline?
Mrs. Yellen. Some measures have declined and others have
not. Survey measures like the Michigan survey of households
have declined. In professional forecaster surveys, we don't see
a decline.
I'm not sure why, we are focused on that, but the decline
we have seen in energy prices going back some time may be
influencing household's perceptions. We have also seen declines
since I was here last, in what is called inflation
compensation, which is market-based measures of the extra yield
that investors require to hold longer-dated Treasury nominal
securities over tips.
And that is not a pure measure of inflation expectations. I
think perceptions of inflation risk and the value given the
global risks that investors attach to Treasuries as a safe
haven may be playing a role. We watch this carefully because it
can feed into actual price setting, but core inflation is now
running about 1.6 percent over the last 12 months. It has moved
up some. Headline inflation is moving up as oil prices have
come up some and stabilized and as the dollar has stabilized,
and of course, we need to keep track of this. It is a risk. But
inflation is behaving largely as I would have anticipated.
Mrs. Maloney. How long do we have to go without an increase
in inflation expectations for you to reconsider your plan to
gradually increase interest rates?
Mrs. Yellen. We are watching inflation and inflation
expectations. As I said, in spite of some of these measures
declining further, actual inflation is moving up and roughly in
the manner we expected and we are also watching the labor
market as the labor market tightens and we see pressures
develop there.
We certainly are contemplating some further increases in
short-term rates if things continue as we expect. We want to
make sure, we want to get inflation back to 2 percent, that is
our objective, we are committed to that, but we want to make
sure that inflation doesn't rise to the point where we
compromise price stability either.
Mrs. Maloney. Okay. I am very concerned about the recent
cybersecurity breaches involving SWIFT in which hackers
successfully stole foreign banks' SWIFT credentials and then
initiated fraudulent fund transfers from these foreign banks.
And as you know, I sent you, the Fed, and the OCC a letter
last month asking what your agencies are planning to do in
response to these truly unprecedented attacks. Can you give us
an update on the banking regulators' response to these attacks?
Are you concerned that these cyberattacks could undermine
confidence in the international payments system?
And even though the hackers have not successfully stolen
the SWIFT credentials of a U.S. bank, what effect could these
attacks have on the U.S. banking system? It certainly rattled
me that this happened.
And as you know, the Federal Reserve is one of the 10
central banks that collectively oversees SWIFT. What has the
Fed done in its capacity as a regulator of SWIFT to respond to
these attacks? I must tell you, if I go to a foreign country
that I am not expected to be in, my bank stops my transaction
until I tell them it is okay. It is, to me, quite unbelievable
that such a large amount of millions of dollars could be
transferred to sites, including a casino in the Philippines. I
think this is a threat to the U.S. banking system.
Mrs. Yellen. So, let me just say, the New York Fed systems
weren't compromised, but they are looking at their processes,
looking at what is best practices, looking at the possibility
of enhanced monitoring for certain kinds of transactions.
We expect the institutions we supervise to make sure that
they comply with procedures to control access to critical
payment services and to review and ensure that they are meeting
security requirements. We do participate in an oversight
arrangement for SWIFT run by the--
Chairman Hensarling. The time of the gentlelady from New
York has expired.
The Chair wishes to advise Members that in order to
accommodate the witness' schedule, the Chair intends to
recognize three more Members. Currently, the queue would be Mr.
Barr, Mr. Rothfus, and Mr. Williams.
The gentleman from Kentucky, Mr. Barr is recognized.
Mr. Barr. Thank you, Mr. Chairman.
Welcome back to the committee, Chair Yellen.
New York Fed Bank President William Dudley recently
acknowledged a link between post-crisis regulations and
liquidity problems in Treasuries, corporate bonds, and asset-
backed securities. Specifically, he stated that capital
liquidity requirements for the largest securities dealers,
which have been raised significantly since the financial
crisis, have adversely impacted market liquidity.
These regulatory changes have affected the profitability of
dealer intermediation activities and consequently the provision
of market liquidity. Do you agree that market liquidity has
declined since the implementation of these post-crisis
regulations?
Mrs. Yellen. It is really difficult to tell because by many
measures, market liquidity remains quite adequate and hasn't
deteriorated, but we certainly hear and have seen some evidence
that under stress, the liquidity may disappear.
And there are a bunch of different factors that we are
looking at that may be relevant to that. Regulations are on the
list. I am not precluding a role there, but there are changes
in business models. High-frequency trading has become very
dominant in the Treasury market.
Mr. Barr. Let me just interject right there. Do you agree
with your colleague, Mr. Dudley, that Volcker, risk retention,
TLAC, some of the supplemental ratio and some of these other
requirements have decreased trade sizes, have resulted in fewer
active trading participant participants, there is a transfer of
market making activities out of highly regulated banks and into
the less regulated shadow banking sector which has less
capacity to act as a liquidity provider?
Mrs. Yellen. I didn't know that he said that. That's a long
list.
Mr. Barr. I got a little more specific than he did.
Mrs. Yellen. Okay.
Mr. Barr. But that is really what is happening according to
a lot of the market participants.
Mrs. Yellen. You put a lot of things on the list that I am
not aware of any research suggests are in any way relevant to
this phenomenon. I am not aware of research that documents what
the role is of any specific regulation, but it is something we
will look at.
We are looking at--
Mr. Barr. Let me follow up on a question, a specific
question about this issue that I asked you in February.
I asked you how the Fed was reviewing and tailoring the
fundamental review of the trading book for the domestic market.
That is a rule that increases capital held against
securitization exposures in the bank trading book by up to 5
times the amount already required under Basel III. And one
industry study suggests that the trading of U.S. asset-backed
securities would become uneconomical if the rule is not
tailored to the U.S. marketplace.
That is a really big deal, Chair Yellen, because 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, and
if banks pull out of the ABS marketplace, that is a $1.6
billion source of consumer lending. That is 30 percent of all
lending to U.S. consumers. So how is that going? You indicated
to me 4 months ago that you were taking a look at that. How is
that going?
Mrs. Yellen. I need to get back to you with further
details, and I will do that.
Mr. Barr. Thank you for doing that. We need you to take a
look at it. Tailoring is very important.
And kind of to conclude, in your prepared remarks, you
indicated that business investment was surprisingly weak. Maybe
the reason why the Fed is surprised and continued to miss on
forecasts, and the Fed, as The Wall Street Journal pointed out
estimated 2.4 percent growth in December, that had fallen to
2.2 percent by March, this month it was down to 2 percent, and
it follows the Federal Reserve's consistent record of
forecasting error from a standpoint of predicting stronger
growth than is actually occurring.
Maybe the reason why the Fed is missing out on these
forecasts is that you continue to view fiscal policy as a
``small positive'' when it is obvious to everybody in the
private economy that over-regulation is producing illiquidity.
It is drying up access to capital. You are very cognizant of
keeping interest rates low, you are putting off raising rates,
it seems to me contradictory to the lack of attention that the
Fed seems to be giving to over-regulation as an impediment to
economic recovery.
I would like you to comment on that.
Mrs. Yellen. Growth has been disappointing. I am not sure
of the reason. But our forecasts of the unemployment rate and
progress in the labor market have been pretty close. And we
have seen a lot of job creation, firms that are doing
relatively little investing are doing a lot of hiring.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania, Mr.
Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman.
Chair Yellen, my colleague Mr. Foster touched on the issue
with custody banks. I just want to follow up a little bit. I
asked you previously about custody banks and their ability to
accept deposits because of the supplementary leverage ratio
rule. I would like to follow up by asking, is the Fed studying
or analyzing how the supplementary leverage rule is impacting
the custody banks' ability to accept deposits?
Mrs. Yellen. We will look at that. I am aware of concerns
around that.
Mr. Rothfus. There is no current study that you are going
to do, or you are planning on doing, but you are not studying
it today?
Mrs. Yellen. We don't have a study underway, but you are
talking about a handful of banks and the impact this has on
them. And we are aware of the concerns around this, and we will
look at it.
Mr. Rothfus. If a bank is charging for deposits, that is
the equivalent of a negative interest rate, would you agree
with that?
Mrs. Yellen. For that bank for that class.
Mr. Rothfus. If custody banks are unwilling or unable to
take client cash, where would the cash go? Any idea where a
customer might park that cash?
Mrs. Yellen. They might put it in other banks that are less
constrained or in money market funds.
Mr. Rothfus. Purchase Treasuries?
Mrs. Yellen. Or do other things, yes.
Mr. Rothfus. As you know, both the proposed net stable
funding ratio rule and the liquidity coverage ratio rule use
the same thresholds to determine whether and to what extent
those rules apply to financial institutions. Specifically, any
institution with more than $250 billion in assets is subject to
the full version of the rules.
In prior testimony, though, you indicated that the full
version of these rules should apply to only those that are
internationally active. Yet, in defining the term, you
indicated that institution could be considered as such merely
if it has more than $250 billion in total assets, even if it
has no or limited foreign activities. Could you explain why a
bank should be considered internationally active even if it has
no or very limited foreign activities?
Mrs. Yellen. I am not sure exactly what firms you are
referring to. I don't have enough detail on that to be able to
tell you, to answer that. I will get back to you on it.
Mr. Rothfus. Yes, I would appreciate it. We will follow up
with you.
Again, any firm with more than $250 billion being somehow
deemed to be internationally active, that is what we would be
curious to learn.
You talked about headwinds the last time you were here,
headwinds to the economy, headwinds today. The Fed is not
operating in a vacuum. There has been discussion about any
number of issues that are going out there. You would agree that
low interest rates themselves are not a headwind, right?
Mrs. Yellen. No.
Mr. Rothfus. And in fact, with low interest rates, you
would expect much more robust economic growth.
Mrs. Yellen. That is correct.
Mr. Rothfus. You testified you expect the headwinds to
``slowly fade over time.''
I contend those headwinds, like I did last time, are
regulatory and we had a discussion here today about some of the
regulatory impact. A number of Members have raised this issue
because we are hearing it from our constituents back home,
small businesses.
So I contend again it is the regulatory and fiscal policies
that this Administration has pursued, which is not the vacuum,
again, the Fed is not operating in a vacuum. We have higher
taxes, the Affordable Care Act, EPA, Dodd-Frank regulations
that I contend are missing the mark because Dodd-Frank itself
missed the mark. Would you consider any of these regulations or
fiscal policies to be headwinds to the economy?
Mrs. Yellen. I would say that productivity growth and
growth in the economy's capacity to supply goods and services
has been pretty meager. And we are really not sure what the
cause is. I would point out that it is a global phenomenon. We
are seeing this in many parts of the world.
Mr. Rothfus. But you also see other countries imposing
other regulations on their economies as well.
Mrs. Yellen. The reasons may not all be the same in
different countries. I don't think we really have a very good
handle on it.
Mr. Rothfus. I am concerned because you talk about the
headwinds, yet you are not diagnosing the full scope of what
the headwinds are.
And as we look at the performance of this economy, which is
sputtering, and looking at the constituents I talk to have not
seen raises and the small businesses who are not accessing
capital. I think we have to take a comprehensive look at what
those headwinds truly are. I would encourage you to do that.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair is going to recognize now the last Member, the
gentleman from Texas, Mr. Williams, who is recognized for 5
minutes.
Mr. Williams. Thank you, Mr. Chairman.
And Chair Yellen, thank you for being here.
I am from Texas. I am a small-business owner, and I have
been for 44 years. I appreciate your testimony.
Last July, we had a chance to chat about community-based
financial institutions. I further asked you, when I go back
home, what should I tell the community bankers, the credit
unions who feel they are being penalized, even targeted, for
the financial collapse of our economy?
What you said was that you are trying to do everything you
can to relieve burdens on community banks that have been
through very difficult times.
Now, Madam Chair, 1 year later, community-based financial
institutions are still feeling the pain, I can tell you, and
most of them don't see any relief in sight.
Recent research from the Mercatus Center shows that the
Dodd-Frank Act creates more regulatory restrictions than do all
other regulations of the current Administration combined, over
27,000 restrictions for all laws passed through 2014. So
clearly, someone is not getting the message.
So, in your experience, is it more difficult for a small
institution to comply with new regulatory mandates than it is
for a larger institution?
Mrs. Yellen. Well, very small institutions, certainly we
would recognize there are burdens involved. But we have also
tried to tailor our regulations so that there is less burden
and many fewer rules apply to smaller institutions.
There has been an increase in the capital standards that
apply to those institutions, but most of the things we have
discussed today, stress tests, TLAC, other things, liquidity
regulations, don't apply to those institutions at all. And as I
said, we have tried to make many efforts and will continue
looking for ways to simplify the regulatory regime and the
capital regime for those institutions.
Mr. Williams. Has the number of regulatory changes
negatively affected the community financial institutions'
ability, do you think, to offer products and services to
consumers more than it has affected larger institutions?
Mrs. Yellen. I don't know that it has affected smaller
institutions more than larger institutions.
Mr. Williams. I would submit that it has. I wish you would
take a look at it, because to be honest I don't really know how
you start a business--like I said, I am a business person--in
this economic environment. I don't know how people would get
started. I don't know how a new business even secures capital
or is able to remain profitable.
One thing you said earlier was that corporations can secure
credit. They can secure capital. But I am a Main Street person,
and I can tell you I don't see that opportunity being able to
get capital and start a business right now with Main Street.
So let me just close by saying this, Madam Chair. I ask
these questions because the Federal Reserve is responsible for
the regulatory oversight of about 5,000 bank holding companies,
850 depository institutions that are State-chartered members of
the Fed. I personally have heard from banks in my district that
the disproportionate impact of the ever-mounting regulatory
burden is contributing to increased industry consolidation.
So, my question would be, would you please explain the
negative consequences that result from consolidation and the
effects of consolidation on the local and national economy?
Mrs. Yellen. Community banks are very important in
supplying the kinds of services to their communities that may
not be readily available from larger institutions. And I
certainly agree that it is important that they remain healthy
and vibrant and able to thrive and contribute to the growth of
their communities.
Mr. Williams. Reducing regulations would help that. So,
please take a look at it. Main Street America is hurting. There
is a difference between Main Street and Wall Street.
Mr. Chairman, I yield back.
Chairman Hensarling. The gentleman yields back.
I wish to thank Chair Yellen for her 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 witnesses 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.
This hearing stands adjourned.
[Whereupon, at 1:07 p.m., the hearing was adjourned.]
A P P E N D I X
June 22, 2016
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