[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

                              ----------                              
                                                                   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

                              ----------                              


                        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.]














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