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

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                           FEBRUARY 25, 2015


       Printed for the use of the Committee on Financial Services

                            Serial No. 114-4



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                    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
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
FRANK GUINTA, New Hampshire

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

Hearing held on:
    February 25, 2015............................................     1
    February 25, 2015............................................    55

                      Wednesday, February 25, 2015

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


Prepared statements:
    Moore, Hon. Gwen.............................................    56
    Yellen, Hon. Janet L.........................................    57

              Additional Material Submitted for the Record

Yellen, Hon. Janet L.:
    Monetary Policy Report of the Board of Governors of the 
      Federal Reserve System to the Congress, dated February 24, 
      2015.......................................................    68
    Written responses to questions for the record submitted by 
      Representative Duffy.......................................   124
    Written responses to questions for the record submitted by 
      Representative Hurt........................................   129
    Written responses to questions for the record submitted by 
      Representative Luetkemeyer.................................   132
    Written responses to questions for the record submitted by 
      Representative Moore.......................................   136
    Written responses to questions for the record submitted by 
      Representative Mulvaney....................................   138
    Written responses to questions for the record submitted by 
      Representative Sinema......................................   146
    Written responses to questions for the record submitted by 
      Representative Waters......................................   149
    Written responses to questions for the record submitted by 
      Representative Huizenga....................................   158

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY


                      Wednesday, February 25, 2015

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:01 a.m., in 
room HVC-210, Capitol Visitor Center, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Lucas, 
Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick, 
Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, Fincher, Stutzman, 
Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, 
Messer, Schweikert, Dold, Guinta, Tipton, Williams, Poliquin, 
Love, Hill; Waters, Maloney, Velazquez, Sherman, Meeks, 
Capuano, Lynch, Green, Cleaver, Moore, Ellison, Perlmutter, 
Himes, Carney, Foster, Kildee, Delaney, Sinema, Beatty, Heck, 
and Vargas.
    Chairman Hensarling. The Financial Services Committee will 
come to order. Without objection, the Chair is authorized to 
declare a recess of the committee at any time.
    Today's hearing is for the purpose of receiving the 
semiannual testimony of the Chair of the Board of Governors of 
the Federal Reserve System on monetary policy and the state of 
the economy.
    We should advise all Members that today's hearing will end 
at 1 p.m., in order to accommodate the Chair's schedule. I now 
recognize myself for 3 minutes to give an opening statement.
    As Chair Yellen delivers her semiannual report today, we 
have an opportunity to examine the state of the Fed's balance 
sheet, but it is the precarious state of family balance sheets 
that must be foremost on our minds. That coincidentally is the 
title of a recent report by the Pew Charitable Trust, which 
rightly concludes that, ``Many American families are walking a 
financial tightrope.'' Since the President embarked on his 
economic program, middle-income families have found themselves 
with smaller paychecks, smaller bank accounts, and further from 
financial independence. Millions have become so discouraged 
trying to find a job that they have simply given up and left 
the workforce. Although we have happily seen some recent 
improvement in our economy, Americans are still mired in the 
slowest, weakest recovery of the post-war era, this in spite of 
the single largest monetary stimulus in America's history.
    Why is this recovery so anemic? No doubt, it is hampered by 
Obamacare, the Dodd-Frank Act, and the other roughly $617 
billion in new regulatory costs imposed by the Administration. 
This is something monetary policy cannot remedy. On top of this 
is the burden of $1.7 trillion in new taxes that fall 
principally upon our engines of economic growth: small 
businesses; entrepreneurs; and investors. Monetary policy 
cannot remedy this either.
    Then there is the doubt, uncertainty, and regulatory burden 
that grows as more and more unbridled discretionary authority 
is given to unaccountable government agencies. Although 
monetary policy cannot remedy this, it can help.
    During the most successful periods of our Fed's history, 
the central bank appeared to follow a clear rule, methodology, 
or monetary policy convention. Today, however, it favors a more 
unpredictable and somewhat amorphous ``forward guidance,'' 
which creates uncertainty.
    For example, just moments after the Federal Open Market 
Committee (FOMC) released its policy statement on December 
17th, the Dow surged over 300 points, seemingly based upon 
nothing more than the substitution of the word ``patient'' for 
the phrase ``considerable time.'' And when Chair Yellen's 
predecessor once publicly mused about the mere possibility of 
tapering Quantitative Easing, markets took a deep dive.
    Thus, there does not appear to be all that much 
``guidance'' in the Fed's ``forward guidance.'' As one former 
Fed President recently wrote, ``Monetary policy uncertainty 
creates inefficiency in the capital market. The FOMC gives lip 
service to policy predictability, but its statements are vague. 
The FOMC preaches that policy is data-dependent, but will not 
tell us what data and how.''
    Many prominent economists believe that the American people 
will enjoy a healthier economy when the Fed begins to adopt a 
more predictable method of rules-based monetary policy, one of 
its choosing.
    Opponents argue any reforms threaten the Fed's monetary 
policy independence, but the greatest threat to the 
independence of the Fed comes from the Executive Branch, not 
the Legislative Branch. While the Federal Reserve Chair 
testifies publicly before this committee twice a year, she 
meets weekly with the Treasury Secretary in private. And for 
decades, there has been a revolving door between Treasury 
officials and Fed officials, which continues even today.
    With respect to reform, accountability, and transparency on 
the one hand, and independence in the conduct of monetary 
policy on the other, these are not mutually exclusive concepts. 
After Dodd-Frank, a quadruple balance sheet, massive bailouts, 
unprecedented credit market interventions, and the financing 
and facilitation of trillions of dollars of new national debt, 
this is clearly a very different Fed.
    Chair Yellen, I will listen very carefully to constructive 
suggestions that improve Fed reform ideas, but I for one 
believe Fed reforms are needed, and I for one believe Fed 
reforms are coming.
    I now recognize the ranking member for 3 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    And welcome back, Chair Yellen.
    Since you last joined us in July, the economy has enjoyed a 
string of positive developments. In the past 3 months alone, we 
have seen the best stretch of hiring in 17 years, GDP growth is 
up, and the outlook for inflation continues to remain low. 
There is no doubt now that the post-crisis policy of 
quantitative easing, which you have extraordinarily championed 
in the face of countless Republican attacks, has played a major 
role in turning the economy around.
    But while I could talk all day about the macroeconomic 
gains we have made, the brutal truth is that millions continue 
to teeter on the brink of severe poverty and financial 
collapse. People in my district are still struggling to recover 
from the crisis. Systemic inequities distort progress and 
opportunity for tens of millions of Americans, most especially 
low- and middle-income Americans, and communities of color.
    A look at the data presents a staggering picture of the 
racial wealth gap, which continues to widen. While some home 
values have increased, Black communities have failed to bounce 
back. In 2013, the number of White families with underwater 
mortgages was 5.45 percent compared to 14.2 percent for 
African-Americans. One-in-nine White Americans have less than 
$1,000 in assets. But for Latino-Americans, that ratio is one-
in-four; for African-Americans, it is one-in-three. The Federal 
Reserve Bank of St. Louis reports that the average wealth level 
for Whites is $134,000 as compared to an astonishing $14,000 
for Latinos and $11,000 for African-Americans. And in 
retirement, there is a dramatic disparity. In 2013, White 
families had over $100,000 more in average liquid retirement 
savings than African-Americans.
    Meanwhile, the rich get richer and Republicans push 
policies that would only exacerbate this inequity, not stem it.
    Chair Yellen, as you discuss the state of our economy, I am 
particularly interested in hearing how the least fortunate 
among us are faring in this time of unprecedented growth for 
big banks, Wall Street, and the wealthiest among us. And I 
would like to hear your view on how we can provide more 
opportunity to this often overlooked segment of our population.
    So, in light of this sobering wealth gap, I am basically 
astounded that Republicans continue politically to be motivated 
in the ways that they are.
    I welcome you, Chair Yellen, and I look forward to your 
views on these important issues.
    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.
    And I will point out to our ranking member that what 
motivates me--and I think my fellow Members--is making sure 
that the Federal Reserve is doing its job properly. Last 
Congress, when we did a Federal Reserve Centennial Oversight 
Project looking at the last hundred years of the actions of the 
Fed, it became clear that the Federal Reserve has gone above 
and beyond its original mandate mission of maximum employment, 
stable prices, and moderate long-term interest rates. In fact, 
since the enactment of Dodd-Frank, the Federal Reserve has 
gained unprecedented power, influence, and control over the 
financial system, which was already quite strong, while 
remaining shrouded in mystery for the American people.
    Additionally, given the interconnectedness of the global 
financial system, there is no doubt that the Federal Reserve's 
monetary policies have significantly impacted the international 
markets and foreign economies as well. I am concerned how the 
Fed's decisions are influencing other central banks and 
interested how it will shake out as we are seeing our friends 
and economic partners seemingly going in the opposite direction 
from where we are going.
    Needless to say, the Fed's recent high degree of discretion 
and its lack of transparency in how it conducts monetary policy 
suggests, as the Chair had said, that reforms are needed. 
Likewise, I am also concerned that the Fed's regulatory 
policies and development of these policies are sort of layered 
in one uncoordinated mandate on top of another without 
examining the impact on hardworking American families and small 
businesses on Main Street. The Federal Reserve has proven time 
and time again that its government-knows-best approach doesn't 
hold the cure for what ails the economy. I know you were not 
here for the passage of Dodd-Frank. Much like me, you are just 
living with the echo effects of it. But not only are 
innovators, entrepreneurs, and job creators uneasy to invest 
because of the environment that has been created by this failed 
framework, hardworking middle-income families are paying the 
price, I believe.
    It is time we restore certainty as well as fiscal 
responsibility, and we must lift the veil of secrecy to ensure 
that the Fed is accountable to the people's Representatives, 
the same people who created the Federal Reserve in the first 
place. It is time to bring the Federal Reserve out of the 
shadows and provide hardworking taxpayers with a more open and 
transparent government.
    I am excited for today's hearing. And, frankly, I hope we 
do more of it. Thanks.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Green, the ranking member of our Oversight and 
Investigations Subcommittee, for 2 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the ranking member.
    And I thank the Chair for appearing today. Thank you very 
    I am very much concerned about many things. Obviously, with 
the Fed, we have to balance the transparency of the Fed with 
the independence of the Fed, and in so doing, there are some 
rhetorical questions that I think are appropriate. Do we want 
Congress to gain control of the Fed? The independence is an 
important aspect of the Fed's existence since 1913, and the Fed 
has served us well. Do we want the same Congress--that cannot 
fund Homeland Security--to have control of Fed funding? Do we 
want the same Congress--that cannot draw conclusions as to how 
we should reform immigration in this country--to have control 
of the Fed? I think it is important for us to have 
opportunities to have transparency but not at the expense of 
the independence of the Fed.
    We understand the mandates, and the low interest rates have 
made a difference. I compliment not only you but also Chair 
Bernanke because he stood fast in some difficult circumstances. 
And I think the Fed has made a significant difference in the 
recovery that we find ourselves experiencing.
    We have not come far enough. I join the ranking member with 
her comments with reference to certain segments of society that 
have been left behind. We have to do more, but I don't want to 
sacrifice the independence of the Fed for transparency.
    I yield back.
    Chairman Hensarling. Today, we welcome the testimony of the 
Honorable Janet Yellen, Chair of the Board of Governors of the 
Federal Reserve System. Chair Yellen has previously testified 
before this committee, so I feel confident that she needs no 
further introduction.
    Without objection, Chair Yellen's written statement will be 
made a part of the record.
    Chair Yellen, you are now recognized for your oral 
testimony. Thank you.


    Mrs. Yellen. Thank you. Chairman Hensarling, Ranking Member 
Waters, and members of the committee, I am pleased to present 
the Federal Reserve's semiannual Monetary Policy Report to the 
Congress. In my remarks today, I will discuss the current 
economic situation and outlook before turning to monetary 
    Since my appearance before this committee last July, the 
employment situation in the United States has been improving 
along many dimensions. The unemployment rate now stands at 5.7 
percent, down from just over 6 percent last summer and from 10 
percent at its peak in late 2009. The average pace of monthly 
job gains picked up, from about 240,000 per month during the 
first half of last year to 280,000 per month during the second 
half. And employment rose 260,000 in January.
    In addition, long-term unemployment has declined 
substantially. Fewer workers are reporting that they could find 
only part-time work when they would prefer full-time 
employment. And the pace of quits, often regarded as a 
barometer of worker confidence in labor market opportunities, 
has recovered nearly to its pre-recession level. However, the 
labor force participation rate is lower than most estimates of 
its trend and wage growth remains sluggish, suggesting that 
some cyclical weakness persists.
    In short, considerable progress has been achieved in the 
recovery of the labor market, though room for further 
improvement remains.
    At the same time that the labor market situation has 
improved, domestic spending and production have been increasing 
at a solid rate. Real gross domestic product is now estimated 
to have increased to the 3\3/4\ percent annual rate during the 
second half of last year. While GDP growth is not anticipated 
to be sustained at that pace, it is expected to be strong 
enough to result in a further gradual decline in the 
unemployment rate.
    Consumer spending has been lifted by the improvement in the 
labor market as well as by the increase in household purchasing 
power resulting from the sharp drop in oil prices. However, 
housing construction continues to lag. Activity remains well 
below levels we judge could be supported in the longer run by 
population growth and the likely rate of household formation.
    Despite the overall improvement in the U.S. economy and the 
U.S. economic outlook, longer term interest rates in the United 
States and other advanced economies have moved down 
significantly since the middle of last year. The declines have 
reflected, at least in part, disappointing foreign growth and 
changes in monetary policy abroad. Another notable development 
has been the plunge in oil prices. The bulk of this decline 
appears to reflect increased global supply rather than weaker 
global demand. While the drop in oil prices will have negative 
effects on energy producers and will probably result in job 
losses in this sector, causing hardship for affected workers 
and their families, it will likely be a significant overall 
plus on net for our economy.
    Primarily, that boost will arise from U.S. households 
having the wherewithal to increase their spending on other 
goods and services as they spend less on gasoline.
    Foreign economic developments, however, could pose risks to 
the outlook for U.S. economic growth. Although the pace of 
growth abroad appears to have stepped up slightly in the second 
half of last year, foreign economies are confronting a number 
of challenges that could restrain economic activity. In China, 
economic growth could slow more than anticipated, as 
policymakers address financial vulnerabilities and manage the 
desired transition to less reliance on exports and investment 
as sources of growth. In the Euro area, recovery remains slow, 
and inflation has fallen to very low levels. Although highly 
accommodative monetary policy should help boost economic growth 
and inflation there, downside risks to economic activity in the 
region remain.
    The uncertainty surrounding the foreign outlook, however, 
does not exclusively reflect downside risks. We could see 
economic activity respond to the policy stimulus now being 
provided by foreign central banks more strongly than we 
currently anticipate, and the recent decline in world oil 
prices could boost overall global economic growth more than we 
    U.S. inflation continues to run below the committee's 2 
percent objective. In large part, the recent softness in the 
all-items measure of inflation for personal consumption 
expenditures reflects the drop in oil prices. Indeed, the PCE 
price index edged down during the fourth quarter of last year 
and looks to be on track to register a more significant decline 
this quarter because of falling consumer energy prices, but 
core PCE inflation has also slowed since last summer, in part 
reflecting declines in the prices of many imported items and 
perhaps also some passthrough of lower energy costs into core 
consumer prices.
    Despite the very low recent readings on actual inflation, 
inflation expectations, as measured in a range of surveys of 
households and professional forecasters, have thus far remained 
stable. However, inflation compensation, as calculated from the 
yields of real and nominal Treasury securities, has declined. 
As best we can tell, the fall in inflation compensation mainly 
reflects factors other than the reduction in longer term 
inflation expectations.
    The committee expects inflation to decline further in the 
near term before rising gradually toward 2 percent over the 
medium term as the labor market improves further and the 
transitory effects of lower energy prices and other factors 
dissipate, but we will continue to monitor inflation 
developments closely.
    I will now turn to monetary policy. The Federal Open Market 
Committee is committed to policies that promote maximum 
employment and price stability, consistent with our mandate 
from the Congress. As my description of economic developments 
indicated, our economy has made important progress toward the 
objective of maximum employment, reflecting in part support 
from the highly accommodative stance of monetary policy in 
recent years.
    In light of the cumulative progress toward maximum 
employment and the substantial improvement in the outlook for 
labor market conditions, the stated objective of the 
Committee's recent asset purchase program, the FOMC concluded 
that program at the end of October. Even so, the Committee 
judges that a high degree of policy accommodation remains 
appropriate to foster further improvement in labor market 
conditions and to promote a return of inflation toward 2 
percent over the medium term. Accordingly, the FOMC has 
continued to maintain the target range for the Federal funds 
rate at zero to a quarter percent and to keep the Federal 
Reserve's holdings of longer term securities at their current 
elevated level to help maintain accommodative financial 
    The FOMC is also providing forward guidance that offers 
information about our policy outlook and expectations for the 
future path of the Federal funds rate. In that regard, the 
Committee judged in December and January that it can be patient 
in beginning to raise the Federal funds rate. This judgment 
reflects the fact that inflation continues to run well below 
the Committee's 2 percent objective and that room for 
sustainable improvements in labor market conditions still 
    The FOMC's assessment that it can be patient in beginning 
to normalize policy means that the Committee considers it 
unlikely that economic conditions will warrant an increase in 
the target range for the Federal funds rate for at least the 
next couple of FOMC meetings. If economic conditions continue 
to improve, as the Committee anticipates, the Committee will at 
some point begin considering an increase in the target range 
for the Federal funds rate on a meeting-by-meeting basis. 
Before then, the Committee will change its forward guidance.
    However, it is important to emphasize that a modification 
of the forward guidance should not be read as indicating that 
the Committee will necessarily increase the target range in a 
couple of meetings; instead, the modification should be 
understood as reflecting the Committee's judgment that 
conditions have improved to the point where it will soon be the 
case that a change in the target range could be warranted at 
any meeting.
    Provided that labor market conditions continue to improve 
and further improvement is expected, the Committee anticipates 
that it will be appropriate to raise the target range for the 
Federal funds rate when, on the basis of incoming data, the 
Committee is reasonably confident that inflation will move back 
over the medium term toward our 2 percent objective.
    It continues to be the FOMC's assessment that even after 
employment and inflation are near levels consistent with our 
dual mandate, economic conditions may for some time warrant 
keeping the Federal funds rate below levels the Committee views 
as normal in the longer run. It is possible, for example, that 
it may be necessary for the Federal funds rate to run 
temporarily below its normal longer run level, because the 
residual effects of the financial crisis may continue to weigh 
on economic activity.
    As such factors continue to dissipate, we would expect the 
Federal funds rate to move toward its longer run normal level. 
In response to unforeseen developments, the Committee will 
adjust the target range for the Federal funds rate to best 
promote the achievement of maximum employment and 2 percent 
    Let me now turn to the mechanics of how we intend to 
normalize the stance and conduct of monetary policy when a 
decision is eventually made to raise the target range for the 
Federal funds rate.
    Last September, the FOMC issued its statement on policy 
normalization, principles, and plans. The statement provides 
information about the Committee's likely approach to raising 
short-term interest rates and reducing the Federal Reserve's 
security holdings. As is always the case in setting policy, the 
Committee will determine the timing and pace of policy 
normalization so as to promote its statutory mandate to foster 
maximum employment and price stability.
    The FOMC intends to adjust the stance of monetary policy 
during normalization primarily by changing its target range for 
the Federal funds rate and not by actively managing the Federal 
Reserve's balance sheet. The Committee is confident that it has 
the tools it needs to raise short-term interest rates when it 
becomes appropriate to do so and to maintain reasonable control 
of the level of short-term interest rates as policy continues 
to firm thereafter even though the level of reserves held by 
depository institutions is likely to diminish only gradually.
    The primary means of raising the Federal funds rate will be 
to increase the rate of interest paid on excess reserves. The 
Committee also will use an overnight reverse repurchase 
agreement facility and other supplementary tools as needed to 
help control the Federal funds rate. As economic and financial 
conditions evolve, the Committee will phase out these 
supplementary tools when they are no longer needed. The 
Committee intends to reduce its security holdings in a gradual 
and predictable manner, primarily by ceasing to reinvest 
repayments of principal from securities held by the Federal 
Reserve. It is the committee's intention to hold in the longer 
run no more securities than necessary for the efficient and 
effective implementation of monetary policy and that these 
securities be primarily Treasury securities.
    In sum, since the July 2014 Monetary Policy Report, there 
has been important progress toward the FOMC's objective of 
maximum employment. However, despite this improvement, too many 
Americans remain unemployed or underemployed; wage growth is 
still sluggish; and inflation remains well below our longer run 
    As always, the Federal Reserve remains committed to 
employing its tools to best promote the attainment of its 
objectives of maximum employment and price stability.
    Thank you. I would be pleased to take your questions.
    [The prepared statement of Chair Yellen can be found on 
page 57 of the appendix.]
    Chairman Hensarling. Thank you, Chair Yellen.
    The Chair now recognizes himself for 5 minutes for 
    Chair Yellen, I think I heard you say in your testimony 
that a modification of forward guidance will not necessarily 
lead to a modification of the target Fed funds rate. Is that 
what I just heard you testify?
    Mrs. Yellen. Modification--not--
    Chairman Hensarling. Forward guidance does not necessarily 
lead to a modification of your target Fed funds rate. Is that--
I believe I read--
    Mrs. Yellen. It means--a modification of the guidance would 
mean that we wish to consider whether or not to raise the 
Federal funds rate on a--
    Chairman Hensarling. I am reading from your written 
testimony now: ``It is important to emphasize that a 
modification of the forward guidance should not be read as 
indicating that the Committee will necessarily increase the 
target range.''
    Mrs. Yellen. Yes.
    Chairman Hensarling. Okay.
    Mrs. Yellen. So--
    Chairman Hensarling. I guess I just question, then, how 
much guidance there is in forward guidance. We have had this 
discussion before in private and public concerning a 
predictable rules-based monetary policy. Again, prior to 
becoming Chair, when you previously served as a Member of the 
Board, I believe you indicated that the Taylor Rule, in 
particular, ``is what sensible central banks do.''
    In previous testimony, I believe your last testimony before 
our committee, I thought I heard you say that you still 
believed that but that the timing was not right because we are 
still in extraordinary times. Perhaps I am putting some words 
in your mouth, but that was the essence of what I thought I 
heard in your last testimony. And yesterday, before the Senate, 
you testified that, ``I am not a proponent of chaining the 
Federal Open Market Committee in its decision-making to any 
rule whatsoever.''
    A couple of observations. I think you are familiar with the 
legislation that was furthered by Mr. Huizenga. Perhaps 
``rule'' is an intimidating term, but under his legislation--
call it rule, call it process, call it methodology--the Fed 
would set the rule, the Fed could waive the rule, the Fed could 
change the rule at will as long as it publicly told the rest of 
us what it was doing.
    I am not sure what, with respect to that proposal, the Fed 
would be chaining itself to, so I guess my question is this: Do 
you no longer believe that a rules-based policy like the Taylor 
Rule is what sensible central banks do? Is it a question of 
timing, or have you simply changed your mind?
    Mrs. Yellen. What--the view that I was offering, that is a 
statement I made in 1995. I was comparing the Taylor Rule to 
other rules that were simpler and indicating that that was a 
rule that, up until that time, from the mid-1980s until the 
mid-1990s, had worked well.
    Chairman Hensarling. Chair Yellen, it is just that your 
statement of yesterday doesn't seem to leave a whole lot of 
wiggle room.
    Mrs. Yellen. I don't believe in chaining--that the Fed 
should chain itself to any mechanical rule. I did not believe 
that in 1995; I do not believe it now. And I had the privilege 
to meet with Professor Taylor right after he proposed the 
Taylor Rule in 1993, and I agree with the views that he 
expressed then. If I could quote--
    Chairman Hensarling. If we want the ability to--
    Mrs. Yellen. He said, ``Operating monetary policy by 
mechanically following a policy rule is not practical.''
    Chairman Hensarling. Okay. Well, Chair Yellen, let me ask 
you this question.
    Mrs. Yellen. --benchmarks that a central bank could refer 
to in deciding--
    Chairman Hensarling. Let me ask you this question. It you 
had the ability--
    Mrs. Yellen. And I continue to hold that view.
    Chairman Hensarling. --to waive the rule and change the 
rule, how is one chaining themselves?
    Mrs. Yellen. I don't believe that any mechanical rule that 
links monetary policy to one or two variables, in the case of 
Taylor-Rule-type equations--
    Chairman Hensarling. Okay. I understand--
    Mrs. Yellen. --it is two variables. We take into account a 
wide range of factors that impact the performance over time of 
the economy and--
    Chairman Hensarling. Chair Yellen, I think I understand 
your position.
    Mrs. Yellen. --benchmark--
    Chairman Hensarling. Forgive me, but I am beginning to run 
out of time here.
    The second and last question I will ask: Yesterday, you 
stated in Senate testimony that you are not seeking to alter 
Dodd-Frank, apparently in any way or form. This was in an 
answer to a question by Senator Warren, whom I believe may be 
fairly alone in believing that Dodd-Frank is sacred text. Your 
predecessor said, as a general matter, ``Dodd-Frank is a very 
big, complicated piece of legislation that addresses many 
issues. I am sure there are many aspects of it that could be 
improved in one way or the other.'' Your own General Counsel, 
Scott Alvarez, has indicated problems with the swaps pushout 
provision. Board Member Daniel Tarullo has indicated a concern 
for the SIFI designation level and expressed support for 
explicitly exempting institutions below a certain size from the 
Volcker Rule. Barney Frank himself has indicated a willingness 
and interest in changing nonbank SIFI designations, asset 
thresholds for automatic bank SIFI designations, Volcker Rule 
end-user margin, and QM treatment for loans held in a 
    And so my question is, particularly as the Fed is the 
prudential regulator for thousands of community banks that are 
withering on the vine, is there any context for the answer you 
give, or is it that you believe Dodd-Frank cannot be altered 
and should not be altered in any way?
    Mrs. Yellen. We are not seeking, we are not asking the 
Congress to alter it. The Act provides considerable flexibility 
for the Federal Reserve and other regulators to tailor rules 
that are appropriate to the institutions that we supervise. And 
while if we were starting from scratch, no doubt we would have 
suggestions for different ways of having formulated one thing 
or another, it has been a very useful piece of legislation. It 
has provided a roadmap for us to take strong action to improve 
the safety and soundness of the financial system. And we have 
found ways to use the flexibility that Act affords us--
    Chairman Hensarling. Thank you.
    Mrs. Yellen. --to appropriately tailor our supervision.
    Chairman Hensarling. Okay. Contrary to your predecessor or 
Barney Frank himself, at the moment, you seek no modifications.
    The Chair is way past his time.
    The Chair now recognizes the ranking member.
    Ms. Waters. Thank you very much, Chairman Hensarling.
    Madam Chair, since the chairman took that line of 
questioning, I think, prior to raising a question with you, it 
is important to know that the chairman and I have met on more 
than, I think, one occasion to talk about community banks and 
whether or not there were steps that could be taken that would 
ensure that the community banks are not overly burdened with 
regulations and to separate out the community banks from 
regionals and big banks.
    And so it is not that Mr. Barney Frank, or I, or others 
believe that there never, ever, ever, can be any modifications, 
any changes. We have always said that we are open to technical 
changes and to working in areas where there may be confusion or 
appears to be duplication. So I want you to know that some of 
what is being raised with you is in ongoing discussions. And 
certainly--hopefully--if we can get the cooperation from the 
opposite side of the aisle on some of these issues, then there 
may be some room for some technical changes or modifications.
    Having said that, I am interested in what is happening with 
our living wills. Under Title I of the Dodd-Frank Act--as you 
know, robust living wills under Title I of Dodd-Frank Act are 
crucial in order to ensure that we have truly ended too-big-to-
fail. In the past few years, many members of the public wrote 
to the FDIC and the Federal Reserve expressing frustration that 
the public portions of living wills have been disappointing. 
Specifically, the lack of public information makes it difficult 
for members of the public to assess the progress that firms and 
regulators have made on achieving the goals of Dodd-Frank, 
which is to reduce the complexity of the world's most 
significant financial institutions and allow them to be 
resolved under ordinary bankruptcy proceedings without 
endangering the broader economy.
    In an August 2014 press release, the Fed noted that both 
they and the FDIC will be working with large banks to explore 
ways to enhance public transparency of future plan submissions.
    I want you, if you can, to elaborate on this commitment. 
What additional information does the Fed plan on releasing to 
the public so that we can know whether or not you are doing 
what we intended in Wall Street reform? If each living will is 
thousands of pages long, does the public really have any 
transparency if the Fed is only releasing about 30 or so pages 
of the plans?
    Here is what I am concerned about: First of all, we 
understand that the submissions are certainly not adequate, 
that they are not what they should be in many instances. These 
banks are huge--the big banks we are talking about. They are 
complex, and we believe that the very top--sometimes the CEOs 
don't even know and understand the complexity of their 
institutions. And these living wills are extremely important if 
we are to have a plan by which we can resolve them in the event 
we determine that they are putting us all at risk. What can you 
tell us to update us about these living wills?
    Mrs. Yellen. Let me say that we are taking the living wills 
process very seriously. We have worked closely with the FDIC, 
and last summer we issued a set of joint letters to the largest 
firms, establishing a clear set of criteria of things that we 
want to see in their next submissions. They are very 
significant steps that will improve the odds of resolvability 
under the Bankruptcy Code. We have told them, for example, that 
they need to establish a rational and less complex legal 
structure that would improve resolvability; that they need to 
develop a holding company structure to support resolvability; 
that they need to change the way in their--some of their 
derivatives contracts, stay provisions, include stay provisions 
that would aid resolvability. We have told them that they need 
to make sure that shared services that support critical 
operations in core business lines will be maintained throughout 
resolution. And we are working with the firms to make sure that 
by July of this year, when they make their next submissions, we 
see very meaningful improvements.
    And I will say that in some of the largest firms, we have 
seen very meaningful steps toward reducing the number of legal 
entities along the lines that we have suggested.
    If we do not see the kind of progress that we expect, we 
have told these firms that we expect to find their submissions 
not credible. So, we are taking this process very seriously.
    Now, these living wills, as you said, they are often tens 
of thousands of pages. They contain a great deal of 
confidential information that doesn't really belong, I think, 
in the public domain. But we have insisted that they provide 
information to the public in the public portion of their 
submission. And we are working with them to try to increase the 
amount of information, the amount of detail that is in the 
public portion so that you would be able to get a better 
understanding of how they are proceeding on this.
    Ms. Waters. Thank you very much. Let me just move to 
another subject area quickly, market manipulation. Paul 
Volcker, the architect of the Volcker Rule, has said that one 
key loophole that remains in his namesake rule is the merchant 
banking exemption, which allows our banks to engage in activity 
in the real economy. This includes activities like owning or 
controlling shopping centers, power plants, coal mines, even 
oil tankers. Traditionally, we have wanted to separate the 
business of banking from activities in the real economy because 
blurring these distinctions runs the risk of banks engaging in 
anticompetitive behavior, manipulating markets, driving up 
costs for consumers, or just accruing too much political power 
over our economy. Any thoughts about that?
    Mrs. Yellen. With respect to physical commodities, the Fed 
is engaged in a very careful review of the activities that we 
have permitted along these lines. And with respect to the 
concerns they raise about safety and soundness, we are likely 
to propose new rules during this year.
    With respect to market manipulation, where there have been 
allegations of banks in the commodity areas manipulating 
markets, market manipulation is something that the CFTC and the 
SEC are charged with overseeing.
    Ms. Waters. I see. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Michigan, Mr. Huizenga, chairman of our Monetary Policy 
and Trade Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And, Chair Yellen, I appreciate you being here again.
    Before I go into an issue of joint concern regarding 
political influence on the Fed, I do want to just briefly touch 
on where the chairman had gone regarding my Federal reform bill 
from last term with Congressman Garrett. And just to be clear, 
we don't dictate a rule, we don't say you can't change a rule. 
What we are looking for are some clearer forward explanations 
about where you are going. And I do want to do this 4 times a 
year rather than twice a year.
    My friend from Texas had said that he was concerned about 
gaining control by Congress and that he was concerned that we 
might not be all that functional. I will note that the 
Humphrey-Hawkins Act, which was also viewed as draconian, 
having the Fed dragged up here twice a year, happened in that 
special Kumbaya era of Watergate, not exactly a time of great 
cooperation here on the Hill. But it was because of precisely 
making sure that the House and the Senate had proper oversight 
of an entity that they created, the Federal Reserve.
    And I am curious, shouldn't we be equally or even more 
concerned about the threats posed by Executive Branch 
influence? And I think we have just hit on a perfect example of 
this: Sort of this absolutely no changes to Dodd-Frank sounds 
like a 1600 Pennsylvania Avenue policy rather than the policy 
that has been talked about by the ranking member or the former 
Chair, Barney Frank, or has been voted on by this committee. My 
friends across the aisle joined me in voting unanimously for 
two of my bills last term that changed Dodd-Frank: one dealing 
with points and fees; another dealing with derivatives reform. 
That was a nine-bill package that the Executive Branch 
officially opposed because it changed Dodd-Frank. And it sailed 
through this committee.
    You join us twice a year, but it is my understanding that 
you hold weekly lunches or near weekly lunches with Treasury 
Secretary Lew. In fact, last year, according to your public 
schedule in research done by The Wall Street Journal, from 
February through December alone you held 51 meetings with the 
White House and 23 meetings with lawmakers. I don't know 
exactly who those lawmakers were; I was Vice Chair of this 
particular committee. We did not--a meeting with me was not one 
of those 23 meetings. But that was 42 hours versus 18 hours of 
your time meeting with that. That is three-to-one that you were 
dealing with the Executive Branch versus the Legislative 
Branch, and again, that is bicameral. And I would be curious if 
you were willing to share any of the written summary of the 
items discussed with Secretary Lew--that would help with 
transparency--and any of the agreements that were made during 
these meetings. And if not, I guess I just really want to 
discuss the Fed's independence. Is it being unduly influenced 
by the Executive Branch?
    Mrs. Yellen. The Federal Reserve is independent. I do not 
discuss monetary policy or actions that we are going to take 
with the Secretary or with the Executive Branch. We confer 
about the economy and the financial system on a regular basis. 
We participate jointly in many international meetings, 
including those of the G7 and G20, and we confer on matters 
that are coming before those groups.
    Mr. Huizenga. I would love to have a summary of that, of 
those conversations. That would be wonderful. We do this in the 
open public.
    Mrs. Yellen. Yes.
    Mr. Huizenga. You see our television cameras over here. 
This hearing is on C-SPAN and a number of other places right 
now. And I think my goal with that particular bill is to do 
more of this. I think this is healthy for us, and by ``us,'' I 
don't mean us as a legislature; I mean us as a system.
    And as I said, I don't want to see 1600 Pennsylvania Avenue 
policies getting pushed through the Fed because many of the Fed 
officials that the chairman talked about believe that we need 
to have changes to Dodd-Frank, Members across the aisle believe 
that we need to have changes to Dodd-Frank. And it is 
bothersome to me that it appears that you are taking the 
position of the White House.
    Mrs. Yellen. We have come and made suggestions about 
changes to Dodd-Frank in situations where we felt it really 
hampered our ability to appropriately supervise an entity. A 
case in point would be the application of the Collins Amendment 
to our ability to design appropriate capital rules for 
insurance companies.
    Mr. Huizenga. I look forward to more of those conversations 
    Mrs. Yellen. I do also want to say that it is obviously 
critically important that the Federal Reserve be accountable to 
Congress. We are accountable to Congress, and I personally and 
the Federal Reserve as an institution seek to provide all of 
the input that Congress needs for appropriate oversight. My 
colleagues and I have testified 16 times during the last--over 
the past year. And staff have provided countless briefings, but 
it is clearly important for us to--
    Mr. Huizenga. Actually 23--
    Mrs. Yellen. --it is clearly important for us to provide 
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, the ranking member of our Monetary Policy and Trade 
    Ms. Moore. Thank you so much, Mr. Chairman.
    And, Madam Chair, it is such a delight to see you here 
    I just wanted to start by pursuing an answer that you 
provided to the ranking member about the orderly liquidation 
facility implementation, and I just want to know about your--
the cross-border mechanism for resolution.
    Mrs. Yellen. The orderly liquidation in Title II is a 
procedure set up in Dodd-Frank for liquidating a firm. We were 
discussing something different, which is Title I, which is the 
provisions that firms need to make in their living wills to be 
    Ms. Moore. And right. So that is why I am saying--
    Mrs. Yellen. --bankruptcy--
    Ms. Moore. You just mentioned what is being done. Update us 
on what is happening with cross-border.
    Mrs. Yellen. With respect to cross-border issues and 
derivatives contracts, one of the things that could make it 
difficult either in orderly liquidation or bankruptcy to 
resolve a firm or a contract provision that goes into effect, 
immediately requiring a firm to make payments to holders of 
derivative contracts, to be able to resolve a firm. It is 
important that there be at least a short time, a day or so, 
during which a stay is put in effect on those provisions. And 
we have asked the firms--it is one of the provisions of the 
living wills--the large firms, to change those contracts to 
provide for such a stay. And they have had discussions and we 
have with--the International Swaps and Derivatives Association 
is a private sector entity that has a master contract that 
governs this.
    Ms. Moore. Thank you so much, Madam Chair.
    Mrs. Yellen. We are making progress.
    Ms. Moore. My time is eroding, and I am satisfied with that 
    Listen, let me congratulate you or thank you for your 
excellent speech on perspectives on inequality and opportunity 
from the Survey on Consumer Finances. The Dow Jones has hit 
18,000, and we have had 59 months of private-sector growth, a 
record for the last 18, 19 years. And then, when I try to give 
this kind of speech in front of my constituents, they just kind 
of scratch their head because they are not feeling it.
    So when you talked in your testimony about your mission at 
the Fed to reduce unemployment and--I guess I just wanted you 
to comment on inequality and what you think that does to our 
    Mrs. Yellen. There are many factors that are responsible, I 
think, for rising inequality. And many of the factors are 
structural; they have to do with the nature of technological 
change in globalization.
    Ms. Moore. What can the Fed do?
    Mrs. Yellen. What we can do is try to assure a generally 
strong labor market where it is possible for those who want to 
work to find jobs in a reasonable amount of time. We can't 
determine the wages associated with those jobs or what sectors 
those jobs will appear in, but the policies that we follow and 
the general state of the economy have an important influence on 
the overall strength of the job market. And we are trying to 
achieve a job market where individuals who seek to work and 
want to work are able to find work.
    Ms. Moore. Thank you.
    Representative Sewell and I wrote you a letter expressing 
our concern that all municipal bonds were excluded from being 
highly qualified liquid asset rules under Basel III, but you 
said you were considering including certain municipal bonds at 
a later time. Can you tell me where you are at on that?
    Mrs. Yellen. Yes. We are working very expeditiously on that 
and hope to be able to identify some of those bonds that would 
qualify for different LCR treatment. We are in discussions with 
the other banking agencies on that.
    Ms. Moore. Thank you so much.
    I see my colleague, Mr. Ellison, has arrived, and I am 
running out of time, so he might want to ask some questions 
about this too. I know you are taking an aggressive stance to 
deter and punish banks and bank employees that are involved 
with tax avoidance and money-laundering schemes to fight 
terrorism, which we are all for, but that does seem to impede 
on the ability to provide remittances and even the tithes that 
people are--and we are wondering why you can't surgically--what 
efforts are you making to surgically cut off these illegitimate 
activities and to try to continue the remittances because 
people are starving.
    Mrs. Yellen. This is an extremely important problem, and we 
are trying to work with other agencies and talk with interested 
members of this committee to see if we can't devise some way to 
assure that remittances get, for example, to Somalia or to 
other places. This is a very difficult problem because the laws 
that Congress has passed on--the Bank Secrecy Act--have 
significant sanctions for violations, and banking organizations 
are very reluctant to engage in relationships where they think 
they are putting themselves at risk.
    The Federal Reserve, in our supervision, we want to make 
sure they have appropriate procedures in place. We can't force 
them to take risks in this regard that they are unwilling to 
take. And so, this is a difficult problem.
    Chairman Hensarling. The time of the gentlelady has 
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, vice chairman of the committee.
    Mr. McHenry. Thank you, Chair Yellen. Thank you for being 
    I just want to go back to the chairman's original question. 
The Fed is currently not seeking any changes to Dodd-Frank. Is 
that correct?
    Mrs. Yellen. Yes.
    Mr. McHenry. Okay. You previously did seek changes to Dodd-
Frank, though, did you not?
    Mrs. Yellen. We indicated that it would be very helpful to 
see a change in the Collins Amendment that would help us with--
    Mr. McHenry. So you no longer need any help with Dodd-
Frank? Is that the case now?
    Mrs. Yellen. We are certainly finding it possible to use 
flexibility that we have to implement regulations in a way we 
think is appropriate.
    Mr. McHenry. You weren't currently in your seat that you 
are holding now when Dodd-Frank was implemented, but--
    Mrs. Yellen. I was not.
    Mr. McHenry. --the Federal Reserve is the largest regulator 
in Washington, the largest regulator in the financial 
marketplace broadly, and perhaps the largest regulator in the 
world. So when we have these discussions about Fed oversight, a 
significant function of the Federal Reserve is on this 
regulatory aspect that was greatly enhanced through Dodd-Frank. 
Is that right? A significant amount of your time is on the 
regulatory front, not simply the monetary policy front?
    Mrs. Yellen. Yes.
    Mr. McHenry. Okay.
    Mrs. Yellen. Correct.
    Mr. McHenry. So, with these enhanced regulations and 
enhanced regulatory powers that we have been given, the Federal 
Reserve has been given through Dodd-Frank, do you have any 
concerns that that erodes your independence largely because 
your role is so much greater now in terms of financial 
regulation than it was prior to Dodd-Frank? Does that erode in 
any respect, or does it concern you that it would erode your 
independence going forward?
    Mrs. Yellen. I think where independence is very important 
is in the day-to-day conduct of monetary policy. We operate 
supervision and regulation jointly with other regulators under 
the oversight of Congress.
    Mr. McHenry. But you are not concerned about the 
independence of the Fed when it comes to the regulatory piece? 
We have regulators in here regularly, many of them are on 
budget, and we have to appropriate money. The Fed is very 
different in that respect.
    So do you have any concerns about these enhanced powers you 
have been given and congressional oversight of those powers?
    Mrs. Yellen. Oh, I think congressional oversight is 
appropriate in all those areas.
    Mr. McHenry. So no--
    Mrs. Yellen. It certainly is.
    Mr. McHenry. Okay. So you are very fine with the Congress 
having intense oversight of your regulatory agenda and powers.
    Mrs. Yellen. We testify regularly on our conduct of 
supervision and regulation. We put all regulations out for 
public comment and--
    Mr. McHenry. Does that in any way run counter to your 
independence on setting monetary policy?
    Mrs. Yellen. I think monetary policy is different.
    Mr. McHenry. No, but I am asking a different question than 
you are answering actually. Does that run counter to the Fed's 
independence broadly when we have intense oversight of the 
majority of the day-to-day operations of the Federal Reserve?
    Mrs. Yellen. I don't think it runs counter toward 
    Mr. McHenry. Thank you. I appreciate it. Along those lines, 
the Fed has not processed additional regulations when it comes 
to capital and liquidity requirements for community banks and 
large banks. Are you done with the rulemaking when it comes to 
capital and liquidity?
    Mrs. Yellen. I think we are largely done. However, we have 
recently proposed a rule for so-called SIFI surcharges which 
would be additional capital requirements for the most systemic 
banks that we think should operate in the safer and sounder 
fashion given the likely spillover of distress at those 
    Mr. McHenry. But in the short- and medium-term, are the 
Fed's proposals, when it comes to capital and liquidity, sort 
of through?
    Mrs. Yellen. Largely through, but there is a net stable 
funding ratio that we will propose probably later this year as 
a rule which could be thought of as a liquidity requirement as 
well and to--
    Mr. McHenry. And is that--
    Mrs. Yellen. --supplement the liquidity coverage ratio.
    Mr. McHenry. Okay. So along those lines, this capital 
buffer that you proposed, the Dodd-Frank requirements that have 
been imposed on lending and community banks, in particular, and 
the cumulative effect of Basel, Dodd-Frank, and these capital 
surcharges, has the Fed undertaken a cost-benefit analysis on 
these regulations and the cumulative effect on lending, 
economic growth, job growth?
    Mrs. Yellen. At the outset of this regulatory process, 
there was a detailed cost-benefit analysis that was done by 
global regulators working through the Basel Committee, and the 
finding was that the benefits exceed the cost.
    Mr. McHenry. Sure, sure, but--
    Mrs. Yellen. Because the cost--
    Mr. McHenry. --has the Fed--
    Mrs. Yellen. --is so much greater but--
    Mr. McHenry. Has the Fed undertaken that analysis?
    Mrs. Yellen. --we were part of that project, undertaking 
that analysis.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentlelady from New York, Ms. 
    Ms. Velazquez. Thank you, Mr. Chairman.
    Madam Chair, welcome. In a very positive sign for our 
economy, new jobs are being created at a rate not seen since 
the 1990s, averaging nearly 250,000 new jobs every month in 
2014. To what extent has monetary policy been responsible for 
this improvement in our economy--
    Mrs. Yellen. Well--
    Ms. Velazquez. --in the labor market?
    Mrs. Yellen. Thank you. I think monetary policy has made a 
significant contribution. We found that the headwinds resulting 
from that financial crisis were really impeding the recovery of 
the economy, and we found that we needed to take extraordinary 
steps to get the economy moving. That is why, for example, we 
didn't follow the dictates of the Taylor Rule or a rule like 
that. We put in place a great--well, in fact, a Taylor Rule 
would have called for negative levels of short-term rates which 
we couldn't put in place.
    So we have used tools like forward guidance and our asset 
purchase programs to try to restore economic growth and job 
creation in this economy. And of course, it is many years after 
the financial crisis and households and businesses have gone 
through their own difficult adjustments, and to a great extent, 
restored their health and are now better positioned, but I 
think monetary policy played a critical role.
    Ms. Velazquez. On the other hand, Chair Yellen, the 
financial industry continues to complain that the new capital 
standards will negatively impact access to credit, especially 
for small businesses. However, banks are continuing to ease 
lending and expect robust growth in 2015. Is there any truth to 
that claim?
    Mrs. Yellen. We look very carefully at small business 
lending to try to determine what is causing it to grow so 
slowly. We hear both from the business side and from the 
banking side that, in fact, the demand for small business loans 
is not very high, and I think that the banking industry, at 
this point, is looking to give additional small business loans 
but is not faced with much demand. But I think the 
uncertainties caused by the crisis, also the fact that home 
values fell so much, often the value in a person's home is an 
important source of funding for a new small business, so small 
business formation has been very weak, and I think individuals, 
in thinking about starting small businesses, given the 
uncertainty in the economic environment, have been risk-averse 
in their behavior, but we are trying to take the steps we can 
to make sure that funding is available.
    Ms. Velazquez. And that leads to my next question. You 
commented recently that rebounding housing prices have restored 
much of the housing wealth we lost during the recession with 
working families experiencing some of the largest gains. With 
the prospect of economically stimulating low interest rates 
coming to an end, does the Fed have other tools to help lower a 
middle-income family's built wealth for the long term?
    Mrs. Yellen. I think our main tool to help low- and 
moderate-income families build wealth, aside from making sure 
that banks satisfy their CRA obligations in making sure that 
they serve the needs of low- and moderate-income communities is 
that we need a strong job market and a strong economy where 
jobs are readily available for those who want to work. And we 
have provided a great deal of accommodation, even when the time 
comes to begin to raise our target for short-term interest 
rates, and we will continue to provide a great deal of support 
for the economy and make sure that we will continue to see a 
good job market that continues to improve over time. That is an 
important objective.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Hensarling. The gentlelady yields back. The Chair 
now recognizes the gentleman from New Jersey, Mr. Garrett, 
chairman of our Capital Markets Subcommittee.
    Mr. Garrett. Thank you, Mr. Chairman. And thank you, Chair 
Yellen. I am just going to follow up on Chairman Huizenga's 
issues for the so-called independence of the Fed. There has 
been a lot of press focus on this issue recently, probably 
because of the likelihood of the Audit the Fed legislation 
moving now in the Congress. The main criticism by you and folks 
over at the Fed has been that this legislation will somehow 
subject the Fed to inappropriate political pressure and force 
you to make decisions on political grounds instead of sound 
fundamental market fundamentals.
    As a matter of fact, you just said over at the Senate 
yesterday that Audit the Fed is a bill that would politicize 
monetary policy, and would bring short-term political pressure 
to bear on the Fed. In theory, having a technocrat like the Fed 
simply implement monetary changes based on basic facts sounds 
appealing, but in practice, that is not anywhere close to what 
happens at the Fed.
    Now, the Chair just gave one example of this. Let me run 
through seven examples or more by you and the Fed which clearly 
indicate that the Fed is already acting and making decisions 
clearly on a partisan political basis.
    He mentioned, one, about the fact you have weekly meetings 
with the political and partisan head of the Department of 
Treasury. Another one is a very clear revolving door between 
political appointees at the Treasury and over at the Board of 
Governors. Third, former Chair Bernanke made an unprecedented 
decision to formally endorse the President's failed and 
wasteful fiscal stimulus plan, the reason some gave was because 
he was trying to seek political favor for his reappointment as 
Chair. Fourth, and also by Chair Bernanke, his decision to 
announce QE3 just weeks before the President was to face the 
election back in 2012.
    Fifth, your meetings at the White House the day before the 
President's--this year's election, and sixth, your speech on 
income inequality, a major political theme in this past 
election, just weeks before the election. And finally, your 
meeting in an open door policy with liberal advocacy groups.
    Taken separately, it is one thing. Taken collectively, it 
is unbelievable that each one of these things could just have 
been coincidental. It paints a pretty damning picture. I think 
the Fed has already been completely immersed and guided by 
partisan politics. Now, if the press reports are accurate, in 
addition to this, you are lobbying the other side of the aisle 
extremely hard, and do not agree to requiring agencies to be 
more accountable and transparent. You are lobbying hard against 
having more confines around your ability to use your bailout 
authority. You are lobbying hard against being required to do 
more economic analysis of your rulemaking, and you are also 
lobbying hard against additional public scrutiny and 
congressional oversight.
    When one thinks about it, I am not sure who is lobbying 
more, you or the banks that you oversee. As far as who you are 
seeing in Congress, it is a 2-1 ratio whom you are lobbying 
hard with, Democrats to Republicans. And on your monetary 
decisions, which are being praised by the Democrats and being 
criticized by Republicans, it would seem you have already made 
monetary policy a partisan political exercise. And so, having 
Congress oversee your agency more thoroughly will not make it 
more political than it already is.
    You see, the whole original idea here about having 
political monetary decisions was that the political push would 
be to juice the economy with low rates in the short term by 
Congress to win reelection, but the exact opposite is happening 
right now, Chair Yellen. The people pushing back on your 
decisions are those arguing for a tougher monetary policy, not 
a looser one. This flies in the face of the original stated 
rationale for political independence in monetary policy.
    So on that last point, as far as meeting with outside 
liberal organizations, I wonder whether you can agree today 
that you will meet with folks from the other side of this 
specter, and meet with some of them who have a different view 
on this.
    Mrs. Yellen. We are meeting with such a group on Friday.
    Mr. Garrett. Who is that?
    Mrs. Yellen. What is it called? The Americans for 
Principles in Action.
    Mr. Garrett. I appreciate your willingness to do that, 
    Mrs. Yellen. I'm sorry. We meet with a wide range of 
groups. I think it is a complete mischaracterization of our 
meeting schedules, and my meetings are entirely public. My 
schedule is completely in the public domain. I think if you 
actually look--
    Mr. Garrett. That is where I am actually taking this from, 
this was just--
    Mrs. Yellen. Yes, but I--
    Mr. Garrett. --handed to me, so I am sure--
    Mrs. Yellen. I'm sorry, but I think if you--
    Mr. Garrett. It is good that this much of it is in the 
public domain because all we are trying to do is make it a 
little bit more in the public domain with regard to the 
regulatory section as far as--which you admitted to right here, 
that you are willing to have a robust oversight as far as 
Congress, but you didn't answer one question, and I will just 
close on this. I only have 10 seconds left.
    The chairman of the subcommittee asked if you would make 
available the transcripts or summaries of those meetings that 
you have. You didn't answer that question. Would you make those 
summaries available?
    Mrs. Yellen. These are private one-on-one meetings, and I 
don't think it is appropriate. If I had breakfast with you, I 
would not make a transcript of what we discussed over breakfast 
    Mr. Garrett. When you are discussing monetary and 
regulatory policy with the Secretary of the Treasury, a 
political appointee, it is a private matter? Okay.
    Mrs. Yellen. We have a common interest and responsibility 
for the economy, and I think it is entirely appropriate that we 
confer on--
    Mr. Garrett. Thank you.
    Mrs. Yellen. --what we see happening in the--
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Massachusetts, Mr. 
    Mr. Capuano. Thank you, Mr. Chairman, and thank you, Madam 
Chair, for being here. I tell you, I am shocked, shocked, I 
tell you, that you were actually meeting with the President or 
the Secretary of the Treasury or anyone else. You should be 
sitting in a closet making these decisions on your own. I am 
personally shocked that you or anyone else would care about 
growing income inequality. What a terrible, terrible thing to 
care about.
    By the way, my schedule is private. What I say in meetings 
is private, with my constituents, with people I don't agree 
with, with people I agree with. If you open that door, I 
challenge all my colleagues, Democrat and Republican, to do the 
same, open every meeting you have with everyone, including 
    By the way, Madam Chair, have you donated any money to a 
Member of Congress?
    Mrs. Yellen. No.
    Mr. Capuano. Have the banks donated any money to a Member 
of Congress to your knowledge?
    Mrs. Yellen. I am assuming they have.
    Mr. Capuano. I think they have. By the way, Madam Chair, I 
hope I am on your Christmas card list because I would be very 
offended if I don't get a Christmas card. With all of that 
nonsense aside, all of that hypocrisy aside, that doesn't mean 
I agree with you on everything. I can't tell you how strongly I 
disagree with the Fed's recent decision to take municipal bonds 
and declare them not high quality liquid assets. They are still 
the safest investment in this country, and to tell banks they 
can't hold them as capital needs, other than the risky ones--of 
course there are some risky munis, but most of them are safe. 
To tell them not to--you may as well tell those banks they 
should take their cash and stuff it in a mattress. That is the 
only safer place for investment.
    Mrs. Yellen. But it is not a question of safe. It is a 
question of liquid and how rapidly these assets can be 
converted into cash.
    Mr. Capuano. They have never been a problem. And what this 
does is simply drive up costs to taxpayers and simultaneously 
reduce investment in economic enhancements. That is what munis 
are used for. It is a shortsighted, wrong policy, in my 
opinion, even though I am not on your dance card for many 
different things.
    I also want to talk a minute about too-big-to-fail. The 
FDIC, and you both basically said the last--the second, not the 
first, the second submission of these living wills were 
inadequate. Yet, the FDIC was pretty clear about it. I want to 
read--as a matter of fact, I would like to submit a copy of the 
comments from Vice Chairman Hoenig for the record.
    But in his comments, he said the plans provide no credible 
or clear path through bankruptcy that doesn't require 
unrealistic assumptions in direct or indirect public support, 
and on and on and on. My time is running out.
    I want to get to one simple question. You said earlier you 
are going to give them a third try. We won't know the results 
of that third try until a year or so from now, maybe longer. If 
they don't meet your requirements at the third try, what you 
said is--I wrote it down here somewhere, something along the 
lines of you would be upset. You would say, oh, my goodness, 
you failed.
    Honestly, if my mother or my teacher or my priest told me, 
if you do those terrible things, I will be very disappointed, I 
don't need to tell you, but when I was irresponsible, it didn't 
much matter.
    Mrs. Yellen. Congressman--
    Mr. Capuano. What are you going to do with--
    Mrs. Yellen. I said we would find the plan--
    Mr. Capuano. What does that mean?
    Mrs. Yellen. We would find them to be not credible if we do 
not see progress--
    Mr. Capuano. What does that mean?
    Mrs. Yellen. --that we have asked.
    Mr. Capuano. What is the practical result of finding them 
not credible?
    Mrs. Yellen. If we find them not credible, we then, along 
with the FDIC, would be in the position to impose additional 
capital and liquidity and other requirements--
    Mr. Capuano. You would increase capital requirements?
    Mrs. Yellen. --from these firms. They would then--
    Mr. Capuano. Would you break them up?
    Mrs. Yellen. They would then have 2 years to--I believe it 
is 2 years to show us that they had made changes that we would 
then have to find--
    Mr. Capuano. So 5 years after Dodd-Frank, they still have 
potentially 3 years before there are any serious consequences 
to prove to you that they no longer operate a threat to the 
entire U.S. economic system?
    Mrs. Yellen. We have put in place much higher capital 
standards and liquidity standards.
    Mr. Capuano. But they have been found insufficient by 
virtually everybody who studies these, except the Fed.
    Mrs. Yellen. We issued a rule about how we would conduct 
the living will process.
    Mr. Capuano. The last line of Mr. Hoenig's letter says, 
``In theory, Title I solves too-big-to-fail. However, in 
practice, it is not the passage of the law. Rather, it is 
implementation that determines whether the issue is resolved.''
    Madam Chair, I will tell you that it is insufficient at the 
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Financial Institutions 
    Mr. Neugebauer. Thank you, Mr. Chairman, and Chair Yellen, 
thank you for being here today. Over the last few years, there 
has been a lot of discussion about a financial institution 
being systemically important, and Section 165 of the Dodd-Frank 
sets an arbitrary threshold of $50 billion. That designation 
then triggers an enhanced prudential standards.
    Of course, as you and I have discussed, I am not a big fan 
of the SIFI designation because I believe it is an implicit 
designation of an institution being too-big-to-fail. And with 
that said, the $50 billion threshold that is currently in place 
isn't, I don't think, in my estimation, and I think a lot of 
other people's, really working because it places an undue 
burden on the mid-sized banks that aren't systemic to meet 
additional enhanced standards. And so, I want to applaud 
Congressmen Luetkemeyer and Stivers for their leadership in 
this issue.
    As you know, this month the Office of Financial Research 
(OFR) released a study examining, I think it is called systemic 
important indicators. It looked at five factors: size; 
interconnectedness; substitutability; complexity; and cross-
jurisdictional activity. This came out of the Basel Committee, 
as you are aware.
    So does the Federal Reserve agree that these five factors 
that were used by the Basel Committee are the primary 
indicators of a financial institution's systemic importance?
    Mrs. Yellen. We would certainly look at factors like that 
and take those into account in deciding on an institution's 
systemic importance. I completely agree that a $50 billion 
banking organization is very different in a systemic footprint 
than a $2 trillion organization, and Section 165 does allow the 
Board to differentiate among companies based on their capital 
structure, their riskiness, and their complexity, and we have 
done so in writing rules pertaining to the Section 165 
    So there is flexibility, not total, but a good deal of 
flexibility to tailor our supervision and requirements to the 
systemic footprint of the firms, and the requirements on the 
$50 billion firms are not the same as the requirements on the 
more systemic institutions.
    Mr. Neugebauer. But basically the parameters that you have 
only let you determine what happens to people in the box. It 
does not let you determine who is and who isn't in the box, and 
when you look at that study, what you realize is one of the 
least of the companies that has been determined to be 
systemic--there is a huge range between the firms that are 
larger and not systemic.
    I think if you look at that chart--and I am sure you have 
seen--we have a big gap there, and that big gap is problematic, 
and I think a lot of people think that we need to do better in 
that area. So if you think these standards are acceptable, then 
would you be receptive to accepting a different arrangement 
where you use standards that have been adopted by Basel, and if 
you--if the Fed has additional standards that you would like to 
include in that, so that everybody would know whether they were 
in the box or out of the box.
    Mrs. Yellen. I think trying to draw any line and having 
some firms just below and some firms just above creates an 
element of arbitrariness, and wherever that line is, one 
retains that problem. So it is important that the statutes 
enable us to differentiate and try to tailor rules to different 
firms of different complexities that are important. There are 
some things that we must apply to every firm over $50 billion, 
and the same would be true if that were to change.
    Mr. Neugebauer. The statute doesn't allow you now to draw 
that line. The line is drawn for you, and so--
    Mrs. Yellen. That is right.
    Mr. Neugebauer. --do I hear you saying that you think that 
is a flawed process?
    Mrs. Yellen. I am saying wherever you draw the line, there 
will be a kind of arbitrariness that is associated with it. If 
you drew it at $200 billion, I would still say that it shows 
most $200 billion firms are different than the very largest 
financial institutions, and we would still want the flexibility 
to be able to impose different requirements on those firms.
    Mr. Neugebauer. So, requirements is what you should be 
drawing upon; is that what you are saying?
    Mrs. Yellen. I am saying it--
    Mr. Neugebauer. No, you said it was arbitrary, so should we 
not draw the line?
    Mrs. Yellen. Congress chose to draw a line and to apply 
enhanced standards to a certain class of firms, and what I am 
saying is we absolutely recognize that within that large class 
of firms, they do differ in terms of their complexity and 
systemic footprint, and we need to tailor regulations that are 
appropriate and not identical for the largest and the ones that 
come closest to wherever that dividing line is.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Massachusetts, Mr. 
    Mr. Lynch. Thank you, Mr. Chairman. And thank you, Madam 
Chair. It is good to see you again. I was reading something 
recently in The Financial Times, Desmond Lachman of the 
American Enterprise Institute, and he talked about the 
appreciation of the dollar, we have a strong dollar, coupled 
with the substantial decline in international oil prices, and 
he said, ``Those factors could very well reduce U.S. inflation 
to about zero by the end of the 2015.'' He went on to write 
that it would seem reckless--this is his opinion--for the 
Federal Reserve to disregard such a prospect, especially at a 
time that recent political events in Greece and elsewhere are 
reminding us that the euro crisis is far from over.
    Can you speak to the concerns about the possibility that 
inflation could dip well below your 2 percent target over the 
next year?
    Mrs. Yellen. Inflation is running below our 2 percent 
target even now. Total inflation over the last 12 months was 
seven-tenths of a percent, and we think that inflation is going 
to move lower before it moves higher for exactly the reasons 
you cited. Import prices have been falling in part because of 
the dollar, and declining oil prices have had a very major 
    And the committee has indicated that it expects that in its 
most recent statements. Now, we do think that the effects of 
these factors will be transitory, especially with an improving 
labor market that we expect inflation over the medium term, the 
next 2 or 3 years, to move up to our 2 percent target.
    We have said we are monitoring these inflation developments 
very carefully, and it is one of the key factors that will be 
driving our decisions about appropriate monetary policy, but we 
do think that these factors are transitory, and if we gain 
confidence that is the case on the basis of incoming data and 
continue to see the labor market improve, we would consider 
still raising rates, but we are very focused on the 
developments you cite.
    Mr. Lynch. ``Transitory'' is the key term there, though.
    Mrs. Yellen. Correct.
    Mr. Lynch. And you think medium term, 2 to 3 years, is 
    Mrs. Yellen. Every 3 months, participants in the FOMC 
submit their own individual projections for the economy and in 
the December projections, which are included in your monetary 
policy report, participants indicated that they thought that 
inflation would be running in the 1.7 to 2 range at the end of 
    Mr. Lynch. Thank you.
    Mrs. Yellen. And move up.
    Mr. Lynch. You have been very thorough. I appreciate that. 
The next question I have is, under Dodd-Frank--this is 
something I supported, so I am to blame here--we were concerned 
about proprietary trading, so we put a provision where banks 
and covered funds would have to disassociate, and we actually 
require that they change their name so that there would be no 
confusion by the consumer that banks and funds are affiliated.
    And so we are requiring a lot of these funds to change 
their names, which is visiting a significant cost on some of 
these funds. There is a reputational cost for the funds that 
have done well and now they have to change their names. Is 
there any less costly way, less damaging way to accomplish our 
goal which was to bifurcate these two entities?
    Mrs. Yellen. Let me--I need to confer, look into that a 
little bit more carefully.
    Mr. Lynch. Okay.
    Mrs. Yellen. We have tried to use the ability we have to 
minimize some of, diminish some of the burden associated with 
these investments in these funds but--
    Mr. Lynch. Yes.
    Mrs. Yellen. --let me get back to you on what possibility 
we have.
    Mr. Lynch. I can certainly understand where if you have a 
bank and then the fund is the same name with something added, 
the confusion would be palpable, but in some cases you have a 
bank and the fund is named--I won't use any examples, but there 
is no confusion between the bank and the fund, and yet there is 
still, because they were previously owned by the fund, excuse 
me, owned by the bank, they are being required to change their 
name, and there just has to be a better way about this, I 
    Mrs. Yellen. Let me look into that, and I promise to get 
back to you on that.
    Mr. Lynch. I appreciate that. My time has expired. Thank 
you very much.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Missouri, Mr. Luetkemeyer, the chairman of our Housing and 
Insurance Subcommittee.
    Mr. Luetkemeyer. Madam Chair, it is good to be with you 
this morning. Thanks for coming. As the chairman of the Housing 
and Insurance Committee, I want to follow up sort on the lines 
of Congressman Neugebauer with regards to SIFIs, and my 
specific question would be with regards to insurance SIFIs.
    It is kind of interesting that the Fed is involved with 
FSOC, and as a result, agreed that three of our big insurance 
companies need to be designated as SIFIs. I would like to know 
where do you believe that you get this authority from to be 
able to designate an insurance company a SIFI?
    Mrs. Yellen. I believe it is directly contained in Dodd-
    Mr. Luetkemeyer. That is interesting because the former 
Financial Services Committee chairman, the name of the coauthor 
of the bill, Dodd-Frank, made this statement. He says, ``As a 
general principle, I don't think that asset managers at 
insurance companies that just sell insurance as it is 
traditionally defined are systemically important. They don't 
have leverage. Their failure isn't going to have a systemic 
reverberatory effect.'' The coauthor of the bill did not intend 
for anybody to designate an insurance company as a SIFI, and I 
am curious as to whether you believe that the bill went further 
than he intended or how do you come up with the authority--
    Mrs. Yellen. The question that the FSOC has had to address 
in each case where it has designated a company a SIFI is would 
its failure or material distress, pose systemic consequences to 
the U.S. financial system, and that involves a case-by-case 
analysis of the specific activities that those firms engage in. 
And some of the largest firms that have been designated SIFIs 
engage in capital markets activities--
    Mr. Luetkemeyer. Well, Madam Chair--
    Mrs. Yellen. --that go well beyond traditional insurance.
    Mr. Luetkemeyer. I am curious, though, there is no bank in 
the country, according to the records that I have been told in 
testimony in some other committees, that has more than 2 
percent of their assets involved in an insurance company. Tell 
me how that makes an insurance company systemically important?
    Mrs. Yellen. We have--the FSOC has put out on its Web site 
detailed discussions of the specific findings for the companies 
that it has designated and--
    Mr. Luetkemeyer. Is there written criteria somewhere on 
    Mrs. Yellen. There are criteria.
    Mr. Luetkemeyer. Is there a written criteria on how to get 
yourself de-designated as a SIFI?
    Mrs. Yellen. There is no--
    Mr. Luetkemeyer. What is the procedure for doing that?
    Mrs. Yellen. The FSOC, I believe, is required to revisit 
every year the designation, and if there were a significant 
change in the business structure activities of a firm, the FSOC 
certainly could and would consider de-designating that firm.
    Mr. Luetkemeyer. Okay. There is nothing in writing then, 
there are no rules out there. It is all arbitrary with regards 
to FSOC, whether--
    Mrs. Yellen. It is not arbitrary. It involves detailed 
case-by-case analysis of individual firms.
    Mr. Luetkemeyer. You just said in a comment to Mr. 
Neugebauer a minute ago that Dodd-Frank creates elements of 
arbitrariness with regards to--
    Mrs. Yellen. No, I said cut off.
    Mr. Luetkemeyer. --the designation of a cutoff. So there is 
arbitrariness, obviously, within the designation of these 
SIFIs, is there not?
    Mrs. Yellen. I'm sorry, that is a very different thing. I 
said any dollar cutoff, to say anything above a specific dollar 
    Mr. Luetkemeyer. Okay. So if you are saying certain--
    Mrs. Yellen. --is a SIFI and should all be treated alike, 
that is arbitrary. And there are differences. There will be 
differences among the firms that are over a given size 
    Mr. Luetkemeyer. Okay. This size then?
    Mrs. Yellen. No, it is not just size. In the case of SIFIs, 
the FSOC has put out it is the criteria that it looks at in 
doing detailed investigations of individual firms, and it has 
published the detailed reasons why it chose these firms for 
    Mr. Luetkemeyer. One of the firms was designated a GSIF, in 
other words, the international folks designated as a SIFI. Was 
that the reason that it was designated a SIFI here in this 
    Mrs. Yellen. No, because international designations have no 
    Mr. Luetkemeyer. They have absolutely nothing to do with us 
designating here in this country as a SIFI.
    Mrs. Yellen. Correct. There is a detailed procedure that 
the FSOC goes through in analyzing a firm. The firm has every 
opportunity to provide information about its activities and to 
understand the analysis that has led to a decision--
    Mr. Luetkemeyer. I just have a few seconds.
    Mrs. Yellen. --to designate it.
    Mr. Luetkemeyer. I just have a few seconds left here. But 
there is no way that an insurance company can know how to get 
itself undesignated as a SIFI because there is no written 
criteria out there. You just have to come to the Fed and kind 
of by--
    Mrs. Yellen. The FSOC.
    Mr. Luetkemeyer. --trial and error decide to deleverage 
part of your portfolio--
    Mrs. Yellen. The FSOC.
    Mr. Luetkemeyer. --and change your business model. Do they 
come to you first and say, if this happens, can we get de-
designated, or how does that work?
    Mrs. Yellen. To the best of my knowledge, there are no 
formal criteria, but the firms understand--
    Mr. Luetkemeyer. There is formal criteria with which to 
designate them. There needs to be some formal criteria to de-
designate them; do you not believe that?
    Mrs. Yellen. The firms certainly could be de-designated if 
they change their business structure, and the FSOC would 
certainly consider that.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from California, Mr. 
    Mr. Sherman. Thank you. Picking up on the gentleman from 
Missouri, I hope that in designating SIFIs, you would focus on 
the size of the liabilities, not the size of the assets. Lehman 
Brothers didn't have a problem with too many assets. The 
problem was too many liabilities.
    When you focus that on an unleveraged mutual fund, they 
don't have any liabilities unless you fear that their 
depository safeguards are inadequate and somebody has absconded 
with the securities. If I pick a particular fund and they 
invest, the ups and downs are mine, not theirs. And as to 
insurance companies, we saw in the greatest stress test ever, 
2008, that every entity that was directly regulated by State 
insurance regulators came out fine. You compare that to all the 
other regulators, and it is quite a record.
    I have a parochial question for you here. The New York Fed 
represents under 20 million people. The San Francisco Fed 
represents 65 million people, 3 times as many. One approach, 
and we have discussed this before, is breaking up the San 
Francisco Fed. We would like to have an L.A. Fed, but I want to 
bring up something else, and that is, could you go back to your 
Board and at least say that if you have more than 60 million 
people in your region, you get a permanent seat on the FOMC, 
not just New York? They are not more than 3 times more 
important than we are.
    Mrs. Yellen. The structure at the Federal Reserve System 
was carefully debated by Congress when it established the 
Federal Reserve.
    Mr. Sherman. We were mining for gold back then.
    Mrs. Yellen. I agree with you that there have been many 
changes in the economic landscape of our country since the 
Federal Reserve was established.
    Mr. Sherman. But you could establish a practice that any 
bank that represents over 60 million people always has a seat.
    Mrs. Yellen. This would be something Congress would need to 
do and--
    Mr. Sherman. It would be great if you could do it, but I am 
going to go to something else.
    Mrs. Yellen. It is not something that we could do. I 
    Mr. Sherman. We will. We will do a legal analysis on that. 
At least your heart is in the right place, and history will 
show you whether you can do it.
    Mrs. Yellen. San Francisco is well-represented, and--
    Mr. Sherman. Let me move on to another issue.
    Mrs. Yellen. Okay.
    Mr. Sherman. You have a bunch of economists who are telling 
you that maybe it is time to take away the punchbowl, maybe a 
couple of meetings from now. We are not economists here, but we 
all have districts that we are in touch with in a way your 
people can never--and let me tell you, it ain't good out there. 
It is not ready. It is not a punchbowl. It is a lifeline. And 
whatever you are being told as to when to ``take away the 
punchbowl,'' add another 6 months or spend some time in my 
district, one or the other.
    Your statutory mandate asked you to have maximum 
employment, but there are those who are saying that, oh, 
maximum employment, that is an unemployment rate of 5.2, 5.5 
percent. There are two possible definitions of maximum 
employment. One is what Congress intended, because we speak our 
own language: Maximum employment means everybody who wants a 
job gets a job. Then there is the economist's view that maximum 
employment is as low as you can get the unemployment rate 
without wage inflation. America needs a raise. Are you for 
maximum employment even if that means there is some wage 
    Mrs. Yellen. Certainly, faster growth in wages would be 
merited just on the basis of productivity growth, and I fully 
expect that as the labor market continues to strengthen, as I 
hope it will, that wage growth will move up and Americans will 
find that they are getting a raise that would be a symptom of a 
healthier job market, and it is certainly something that we 
would like to see occur. It is hard to define maximum 
employment. Beyond some point, we are likely to see 
    Mr. Sherman. I am out of time.
    Mrs. Yellen. --developments increase, and that--
    Mr. Sherman. One more question
    Mrs. Yellen. --is part of our mandate, too.
    Mr. Sherman. And finally, would you support legislation 
that says that money of insurance affiliates that are 
affiliated with a failing depository institution cannot be 
transferred to save the depository institution without the 
consent of the State insurance regulators?
    Mrs. Yellen. I'm sorry, I haven't had a chance to consider 
    Mr. Sherman. Okay. I will ask you to respond for the 
    Mrs. Yellen. Okay.
    Chairman Hensarling. The gentleman yields back. The Chair 
now recognizes the gentleman from Wisconsin, Mr. Duffy, 
chairman of our Oversight and Investigations Subcommittee.
    Mr. Duffy. Chair Yellen, you have testified today that you 
believe that there should be a level of transparency and 
oversight that comes from the Federal Reserve. And with Dodd-
Frank, you have moved from monetary policy, and the last time 
you testified, it was almost a third mandate, the regulatory 
role now with the Fed.
    Today, do you have a hard stop?
    Mrs. Yellen. At 1 o'clock.
    Mr. Duffy. 1 o'clock. I would agree it is 1 o'clock. You 
started testifying at 10:30, so you are going to testify for--
started--questions began at 10:30, I would say. So we are going 
to hear from you and you are going to answer questions for 2\1/
2\ hours twice a year probably, but now that you have a much 
larger role, don't you think that we should spend more time 
actually engaging in a conversation with you, not just on the 
monetary side, but also the regulatory side? It is going back 
to Mr. Huizenga's question saying maybe you should come in 4 
times a year, or we should have a hearing where everyone in the 
committee gets to ask you questions, but because of the 
increased role that the Fed now plays, shouldn't we have 
increased oversight, which means longer hearings or more 
    Mrs. Yellen. I am always open to testifying and want to 
make sure that I provide the information that you need to 
conduct oversight of the Fed. My colleagues also have specific 
expertise and have testified before congressional committees, 
    Mr. Duffy. But you are more fun.
    Mrs. Yellen. --this one.
    Mr. Duffy. So would you testify for--
    Mrs. Yellen. I'm not sure.
    Mr. Duffy. --longer periods of time or increased hearings, 
would you object to that or would you be okay with that?
    Mrs. Yellen. We will try to work with you to do something 
that is reasonable.
    Mr. Duffy. I will characterize that as a non-answer, but 
let's move on.
    I know that the Fed has been concerned about the concern 
that we have had about it getting politicized, and Mr. Garrett 
asked you some questions on it, and I know you would be 
concerned because you are opposed to our efforts to audit the 
Fed, and you have been very resistant to that effort.
    Mr. Garrett asked you about a speech that you gave 2 weeks 
before the election. Do you remember what that speech was 
about? Income inequality, right?
    Mrs. Yellen. Yes. I think that is the--
    Mr. Duffy. Let me ask my question. I know you don't live in 
a closet. You are out there and amongst the people. Was there 
one party that was pushing the idea of income inequality over 
the other party in the last election? Was there?
    Mrs. Yellen. I think, I believe that it is a problem that--
    Mr. Duffy. No, no, no, no, answer my question--
    Mrs. Yellen. --everyone in this room--
    Mr. Duffy. --Chair Yellen.
    Mrs. Yellen. --should be concerned about.
    Mr. Duffy. I agree, but was one party pushing that idea 
over the other party?
    Mrs. Yellen. I have heard politicians on both sides of the 
aisle lament rising income inequality in the--
    Mr. Duffy. That is not my question, Chair Yellen--
    Mrs. Yellen. --plight of middle-class Americans.
    Mr. Duffy. You are a smart, smart Chair. Was one party 
pushing income inequality in the last election over the other 
party? Simple answer.
    Mrs. Yellen. I don't know.
    Mr. Duffy. You don't know
    Mrs. Yellen. I have heard both raise concern about this.
    Mr. Duffy. Chair Yellen, I would--
    Mrs. Yellen. I don't believe that it has--
    Mr. Duffy. I would venture to guess, if I asked--
    Mrs. Yellen. --concern for this--
    Mr. Duffy. Reclaiming my time, I would venture to guess, if 
I asked all of your staff behind you and everyone on either 
side of this aisle what party made income inequality a 
political issue, I think we would all get it right. But today 
you are not willing to tell us the answer to that very simple 
question, and you want to tell us that you are not getting 
involved in politics. But then again, 2 weeks before an 
election you are making political statements that are 
consistent with--
    Mrs. Yellen. I am not making political statements.
    Mr. Duffy. --the Democratic Party.
    Mrs. Yellen. I am discussing a significant problem that 
faces America and--
    Mr. Duffy. I would welcome that if you are talking about 
quantitative easing and how that has increased revenue at the 
top, or if you are talking about rules and regulations that 
keep the little guy from competing with the big guy. In 
Wisconsin, my biggest employers will tell me that if they were 
going to start their business that employs thousands of people 
today, they could never do it because there are too many rules 
and regulations. That they might not even get a bank to take a 
risk on them because of the pressure that they get from the 
regulators. This is tough stuff.
    And so I hear you taking a Democrat line as opposed to, 
look what has happened in the last 6 years. It has gotten worse 
with liberal progressive policies. It hasn't gotten better, and 
maybe it is the liberal progressive policy that is the problem, 
not the answer. Maybe free markets and free enterprise are the 
answer to the problems of income equality.
    Mrs. Yellen. I didn't offer any policy recommendations 
whatsoever in that speech.
    Mr. Duffy. But you offered a political backup.
    Mrs. Yellen. I pointed to trends and--
    Mr. Duffy. I only have 20 seconds
    Mrs. Yellen. --discussed work that we do at the Fed.
    Mr. Duffy. Have you heard of a program called Operation 
Choke Point?
    Mrs. Yellen. Excuse me?
    Mr. Duffy. Have you heard of a program called Operation 
Choke Point?
    Mrs. Yellen. Yes.
    Mr. Duffy. Do you know what it is?
    Mrs. Yellen. Yes
    Mr. Duffy. Has the Fed been involved in Operation Choke 
    Mrs. Yellen. No. The Department of Justice.
    Mr. Duffy. Oh, I know, but--and also the FDIC, but are you 
telling me that the Fed has not been involved, whether it is 
called a different name, the program?
    Mrs. Yellen. Not to the best of my knowledge.
    Mr. Duffy. Not to the best of your knowledge. Okay. Do you 
guys look at encouraging banks to de-risk or use reputational 
risk as you analyze banks and how they do business with their 
    Mrs. Yellen. We supervise them and look at how they manage 
their risks, including--
    Mr. Duffy. Are you looking to de-risk?
    Me. Yellen. --reputational risk--we tell them that they 
need to manage their risks. We never tell them--
    Mr. Duffy. So you use up--
    Chairman Hensarling. The time of the gentleman--
    Mrs. Yellen. We never tell them not to do business with a 
client as long as they are--
    Mr. Duffy. I yield back.
    Mrs. Yellen. --controlling the risk of those relationships.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from New York, Mr. 
    Mr. Meeks. Thank you, Mr. Chairman.
    Madam Chair, thank you for being here today. I have a few 
questions that I want to ask about a few concerns that I have. 
The first is something that we work with very--and I was 
concerned about very much during the 2008 recession, and that 
is dealing with the problem of too-big-to-fail institutions. I 
understand today there are still 11 banks in our country that 
are perceived to be too-big-to-fail. Some are even bigger today 
than they were 5 years ago.
    Now, I also hear that many banks have seriously reduced 
their risky trading activities, but that either other risks 
remain, or there are new risks that have arisen. So can you 
please give us an update on the too-big-to-fail problem and the 
issues so that we--because I don't ever want to go down that 
road again.
    Mrs. Yellen. We don't want to go down that road either. 
Dodd-Frank gave us numerous tools to deal with too-big-to-fail, 
and we have used them. To start with our supervision program, 
our supervision program for the largest institutions has been 
completely revamped, and we do take into account the systemic 
risks that affect these banking organizations.
    We now engage in extremely rigorous stress testing in which 
we make sure that these large institutions could survive an 
extremely severe set of shocks and have enough capital to go on 
serving the needs of the country in terms of providing credit. 
We have ramped up capital standards and liquidity standards for 
these firms and have a range of enhanced prudential standards. 
We have tools and orderly liquidation that we could use that we 
did not have during the financial crisis such that if a firm 
were to encounter distress, we have a way to wind that firm 
down. And this morning we discussed the living wills process 
and the fact that we are going to insist on changes that would 
make these firms also resolvable under bankruptcy.
    For the largest of the systemically important firms, we 
have put out a proposal that they be forced to hold additional 
capital based on the size of their systemic footprint over and 
above what any other institutions hold because of the impact 
that their failure could potentially have on the economy, and 
we are beginning to see discussions on--that these capital 
charges are sufficiently large that is causing those firms to 
think seriously about whether or not they should spin off some 
of their enterprises to reduce their systemic footprint, and 
frankly, that is exactly what we want to see happen. That is 
the purpose of them.
    Mr. Meeks. So I should feel, at least be comfortable, even 
though we have 11 banks, some who have gotten bigger, that you 
are--that the work and/or the principles within Dodd-Frank are 
being adhered to and they are working, that we are not on the 
verge of having another risky situation where there is 
contagion in the market, that we should--it is working and--
    Mrs. Yellen. I believe the financial system is much safer. 
There is twice as much high quality capital among the largest 
firms now than there was before the crisis, and I believe this 
list of steps I just gave are very significant. I am not going 
to say that the last step has been taken in the process of 
dealing with this. There is more on the drawing board. We are 
going to put out a requirement later this year that they hold 
enough long-term debt to facilitate the resolution.
    Mr. Meeks. I see I am almost out of time. Let me just ask 
one other question, and this is on the wage increases recently. 
Some of the biggest, largest American businesses have announced 
increases in minimum wage, and some of the States have gone up. 
Is this a--or can it be a reflection of a larger economic trend 
with increases, and will this have a positive impact on the 
overall U.S. economy?
    Mrs. Yellen. We have seen announcements of wage increases, 
and in specific cases, I can't say what was behind it, but in 
the stronger job market where firms find it more difficult to 
hire the kind of workers that they want, you should expect to 
see more upward pressure on wages, and in that sense, hopefully 
it is a good sign that the economy and the labor market are 
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Oklahoma, Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman.
    Chair Yellen, I would like to address the Basel III 
leverage ratio rule as it relates to the treatment of 
segregated margin. As you know, Congress requires that the 
margin received from customers for clear derivatives belongs to 
the customers and is to remain segregated from the bank 
affiliated shared members' accounts. As a prudential regulator 
charged with implementing the new capital requirements for 
these institutions, why then does the rule treat this customer 
margin as something the bank can leverage when clearly they 
    Mrs. Yellen. Leverage requirements were intended to be a 
measure to constrain the overall size, or sort of a backup to 
risk-based capital charges that would be based on the overall 
size of a firm's activities, and the activities you describe do 
add to the size of the balance sheet, so the leverage ratio 
does apply. But we are involved in discussions with our 
counterparts in the Basel Committee about this feature.
    Mr. Lucas. I would just ask you to note that from the 
customer's perspective, if his or her money is already 
segregated, if the bank cannot use it in one of their 
affiliated institutions, yet they are required to have more 
capital on top of their existing capital to take into 
consideration these accounts they cannot use, it just would 
seem to raise the overall cost of doing business, and therefore 
discourage participation in the market and reduce the number of 
ways that customers out there in the real world could address 
their risk.
    Mrs. Yellen. I understand the problem, and there are 
complicated issues here that pertain to different accounting 
standards, but we are working to understand and address this 
    Mr. Lucas. Clearly, I appreciate your understanding, and 
note that it is something that should be addressed because the 
impact on these products from customers who are not using them 
to speculate but generally to try to protect themselves from 
being detrimental would be unfortunate.
    One other question, Chair Yellen, that I have to ask, and 
being the first lay member of the committee now to get to ask a 
question, we have had a lot of discussion about the impact of 
policies and quantitative easing and a variety of issues over 
the last 6 years. Would it be possible, or maybe such a number 
exists, but you and I both know in the most simple definition 
of economics, economics is about taking finite resources and 
most efficiently allocating them among implement demands, the 
most elementary description of economics.
    Over the course of the last 6 years where the policy 
decisions have been made to, some would say, artificially 
restrain interest rates, in effect, dramatically causing 
interest rates to be less than they would normally have been, 
and at the same time, have an aggressive buying program on 
certain assets that would, in effect, hold up their value above 
and beyond what they normally would be worth, that there is a 
cost there.
    I occasionally have constituents, especially in the older 
part of my constituency, who have money either in bonds or in 
bank deposits because they want absolute safety, absolute 
security, who question me about the cost to them of this 
program. Would it be possible for someone on your staff to 
quantitatively produce a number about what the transfer of 
value or wealth or whatever you want to describe it over the 
last 6 years has been from one class to another of asset 
holders? I think it would be a fascinating number because there 
is a price that has been paid for this technique to try and 
keep the economy alive.
    Mrs. Yellen. It has been a tough period for savers, and I 
have certainly heard from and interacted with many groups of 
retirees especially who were looking to supplement their 
retirement income with interest from safe assets, and it hasn't 
been possible for them.
    Mr. Lucas. It reminds me of my period as a college student 
in the late 1970s and early 1980s when we went through what 
some would define as a superinflationary period where there was 
a dramatic shift from dollar-denominated assets over to 
anything that was real estate or stocks and bonds, that kind of 
a thing, and there was a price paid by that part of our society 
who was most thrifty, most careful, most cautious, most 
concerned about their old age, and I see that scenario again, 
and I would like to have, if it is possible, a number.
    Mrs. Yellen. I agree with the fact that it has been hard 
for savers, but I don't think it is right to think about this 
as some arbitrary policy the Federal Reserve put into effect. 
There is an underlying economic reality that we have to 
address, and that underlying reality is that there are many 
people who were looking to save and they would like to save in 
a way that is safe, but the rates of return they can earn 
depend on the strength of demand for those funds to borrow and 
spend and--
    Mr. Lucas. But Chair Yellen, somebody has paid for--
    Mrs. Yellen. --that just hasn't been there.
    Mr. Lucas. --the economic methadone that we have been 
existing on for 6 years.
    Mrs. Yellen. I don't think it is methadone. I think it is a 
reflection of an economy where the demand to borrow has been 
weak, and we are living in a market system, and the rates of 
return that savers get have to depend on the strength of demand 
for the funds they want to supply. Think about--
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I thank you again, 
Madam Chair. Madam Chair, it is my belief that prior to 2008, 
AIG was an insurance company. Is that a fair statement?
    Mrs. Yellen. Yes.
    Mr. Green. And as an insurance company, who knew that AIG 
was a part of the glue that was holding the world together? 
AIG, an insurance company by definition, under some standards, 
might not be declared a SIFI, but by virtue of what AIG was 
doing, AIG was clearly a SIFI in 2008. Would you please 
elaborate for just a moment on why you look to see what 
businesses are doing so as to determine whether or not they are 
    Mrs. Yellen. I think you have pinpointed it. You just 
answered the question, which is that firms may engage in 
activities that--capital market activities, whether it is 
derivatives activities or involvement in securities lending or 
wholesale financing that would create a situation where their 
material distress would create systemic consequences for the 
U.S. economy, and AIG is a case in point, and that is precisely 
the analysis that the FSOC is doing of individual companies 
when it decides whether or not to designate them.
    Mr. Green. Let's talk about income inequality. Why is it 
important for us to pay some attention to the chasm that is 
developing between the very, very rich and those who have been 
not so fortunate in life? Why is this important, Madam Chair?
    Mrs. Yellen. I think all of us treasure living in an 
economy where we feel that people who work hard and play by the 
rules can get ahead and can see themselves succeed and advance, 
and we have been accustomed to that in this country generation 
after generation. And when we, over the last 25 or 30 years, 
realize that income inequality is increasing and it has been an 
inexorable rise, that is really, I think, a concern to--about 
the quality of life and the ability to get ahead and to see 
    Mr. Green. And for the edification of people in general, 
would you give a working definition or a simple definition, as 
simple as you can, of income inequality?
    Mrs. Yellen. There are many different measures of income 
inequality, but we can look at--one common ratio would be to 
look at the ratio of income earned at the 90th percentile of 
the income distribution to that at the 10th, or there are 
measures called Gini coefficients, other measures of income 
inequality. Regardless of what measure you look at, I believe 
what you see is rising inequality since the late 1980s.
    Mr. Green. Let's simplify what you have said to a certain 
extent. I greatly appreciate it, but would we look at, for 
example, what a CEO, the average CEO was making compared to the 
worker, say in 1950, and then compare that to what the CEO is 
making today, maybe in 1950, let's just use an arbitrary 
number, say about 50 times what the worker was making, and now 
the CEO makes 500 times what the worker is making? That kind of 
comparison, is that done?
    Mrs. Yellen. That is another kind of comparison that one 
can look at. And I don't know the numbers there--
    Mr. Green. No, no. The numbers--
    Mrs. Yellen. --exactly, but they are pretty dramatic.
    Mr. Green. Yes, they are dramatic. And I use those numbers 
to illustrate just how dramatic things can be, not to contend 
that they are the exact numbers. But that is some of what we 
are experiencing, this unusual expansion of the chasm between 
workers and the CEOs. That is just one aspect of it.
    Let's move now to meetings. How many meetings have you and 
your staff persons attended over the last year?
    Mrs. Yellen. I'm sorry. How many meetings?
    Mr. Green. Yes, ma'am.
    Mrs. Yellen. Have I attended?
    Mr. Green. Yes, ma'am, and your staff people. We were 
talking about meetings.
    Mrs. Yellen. With Members of Congress?
    Mr. Green. Yes, ma'am.
    Mrs. Yellen. I am not--
    Mr. Green. No way to know.
    Mrs. Yellen. I am not sure. I have been to--
    Mr. Green. No way to know.
    Mrs. Yellen. --many, many meetings.
    Mr. Green. How many meetings have you attended regarding 
Congress and congressional business, leaving your staff out of 
    Mrs. Yellen. I have had many individual meetings with 
Members of Congress. I don't have an exact count, but--
    Mr. Green. Do you decline meetings with--
    Mrs. Yellen. --beyond testimony, I--
    Mr. Green. Do you decline meetings with Members of 
Congress? When Members ask for meetings, do you decline them?
    Mrs. Yellen. No, I have not declined a meeting with a 
Member of Congress.
    Mr. Green. Finally, I would like to get a written response 
from you on how the President of a Federal Reserve Bank is 
appointed and how the public can have access to that process 
and input into that process.
    Mrs. Yellen. Federal Reserve Bank Presidents are appointed 
by their boards of directors. The banking members, the so-
called Class A directors, cannot participate in that process. 
So it is the directors who represent the public interest and 
not banks that run that process, and they make recommendations 
after thorough national searches, and the Board of Governors 
must approve those appointments.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Green. Thank you.
    Chairman Hensarling. And--bless somebody.
    The Chair wishes to advise all Members also as a reminder 
that once the Chair and the ranking member complete their 
questioning, the Chair's eyesight becomes far more acute on the 
clock, and Members are requested to leave the witness 
sufficient time to answer their questions in the 5-minute 
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Fitzpatrick.
    Mr. Fitzpatrick. Madam Chair, first off, thanks for your 
participation in today's hearing. Last Friday, I joined 
business owners and community leaders back in my district in 
Pennsylvania to discuss the state of the Nation, and joining me 
at that meeting was a research analyst from the Philadelphia 
Federal Reserve, and she gave a detailed and very informative 
presentation about the status of our local economy, 
southeastern Pennsylvania, and the national economy. And while 
her presentation was great, I would say riveting even, from 
looking at the business leaders who were there, the takeaways 
from it were not always so.
    Here is how my hometown newspaper, the Bucks County Courier 
Times, put it in the lead sentence of their Sunday story, 
``Welcome to the new normal of slow but steady economic growth 
and higher `natural' unemployment across the Philadelphia 
    Later in the same article, and this was a quote from the 
analyst, ``We are in a new normal of lower growth in the long 
run, and we just need to get used to that.''
    This trend of lower levels of growth, slower growth, and 
higher levels of unemployment in the future is one that 
troubles me, and it is one that I hope Members of Congress and 
the Federal Reserve have not resigned themselves to.
    So my question to you is this: Do you think that this new 
normal that was discussed in Philadelphia this past week of 
slower growth that is being predicted, is that acceptable?
    Mrs. Yellen. The recovery from the financial crisis has 
been very slow and painstaking, and only now are we getting 
close to what I would call full employment or operating at 
potential. And there are a number of reasons for that, 
including serious headwinds from the crisis.
    Over the longer run, the pace of growth of an economy is 
determined by essentially three factors: the growth rate of the 
labor force; the growth rate of the capital stock; and the pace 
of productivity growth. So I think we don't yet know what the 
new normal is in terms of what will be the levels of GDP growth 
over long periods of time.
    We do see, because of demographics, the population, the 
labor force is likely to grow more slowly going forward. And 
already we are seeing labor force participation rates drop for 
that reason. Productivity growth has also been very slow. And 
that would be a very depressing aspect if that turns out to be 
the new normal.
    Mr. Fitzpatrick. The question is, Chair--
    Mrs. Yellen. We don't yet know if that is the new normal.
    Mr. Fitzpatrick. Should we, on either side of the aisle, 
settle for that, what is being predicted by the Federal Reserve 
as slower growth and a higher normal rate of unemployment?
    Mrs. Yellen. We are not predicting a higher normal rate of 
unemployment. The current range of estimates among FOMC 
participants about the longer run normal rate of unemployment 
is in the 5.2 to 5.5 range, and that is pretty similar, not 
much higher, than it was prior to the crisis, so--
    Mr. Fitzpatrick. But a much, a much lower participation 
rate, correct?
    Mrs. Yellen. I think that mainly will be because of 
demographics. Labor force participation is probably depressed 
somewhat because of weakness in the economy, but in the long 
run, that is a trend reflecting demographics and aging 
    Mr. Fitzpatrick. Madam Chair, many of us are concerned 
about the growth of entitlement spending and its effect on 
spending here in Washington and the debt. Entitlement spending 
is rising faster than the economy is being predicted to grow. 
Would you agree?
    Mrs. Yellen. The long-run trends in entitlement spending 
are that they will grow substantially really as a share of GDP.
    Mr. Fitzpatrick. The demographics are not on our side.
    Mrs. Yellen. Correct. It is partly because of an aging 
    Mr. Fitzpatrick. The deficit is coming down, but the truth 
is the bubble of retirees has not hit us yet. Is that correct?
    Mrs. Yellen. That is right.
    Mr. Fitzpatrick. What are you prepared to recommend?
    Mrs. Yellen. My predecessor and I have consistently urged 
Congress to try to look at the long-run fiscal situation in a 
timely fashion to be able to deal with it. This is something we 
have known about for--there are no surprises here. We have 
known about this for the last 20 years at least, and the 
problem remains with us and I would urge Congress to address 
    Mr. Fitzpatrick. I thank the Chair.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, for 5 minutes.
    Mr. Cleaver. Madam Chair, thank you for being here.
    Mr. Chairman, I thank you and the ranking member.
    Let me first of all, before I get into questions, I am 
convinced that there will always be those who exploit the 
paranoia of the public with regard to the Federal Reserve. So I 
think it is important that from time to time we erase the 
mystification around the Fed with the sterilization of exposure 
to the public. I am from--I represent Kansas City, Missouri. We 
have, of course, two Feds in our State because we are better 
than the other States. But what I think is very important, 
about 45 days ago, Esther George from the Kansas City Fed 
agreed to a meeting with a variety of people, including the 
head of the AFL-CIO, the mayor, the county executive, and me. 
We had activists in the community, economists, chamber of 
commerce. It was a fabulous meeting and an opportunity for a 
very good exchange--although we centered primarily on interest 
rates. But I just wanted to share with you that I think that is 
a way in which we can at least attempt to push aside some of 
the tension that is, I think, created by those who just don't 
like the fact that we have a central bank.
    Mrs. Yellen. I appreciate that. And I think that is 
something that is absolutely appropriate for all the Federal 
Reserve Banks to be doing. And those of us at the Board also 
meet routinely with a very wide range of groups representing 
all segments of American society: banks; business interests; 
consumer groups; representatives of low- and moderate-income 
groups; and unions. We have met with unemployed workers, and we 
really need to hear from all those who have a stake in the 
American economy and understand their perceptions and concerns.
    Mr. Cleaver. I appreciate that. They also bring a large 
group of high school students here in the fall of the year.
    Mrs. Yellen. Yes. I believe I met with that group of 
students when they came to Washington.
    Mr. Cleaver. Now, I am a former mayor of Kansas City. Mike 
Capuano is a reserved person, who also served as mayor, and so 
I associate myself with the comments he made earlier, because I 
think munis are the mother's milk for municipal development, 
and they are the safest of all bonds. And I think when the Fed 
and FDIC approved the liquidity coverage ratio rule, I am not 
sure--I would hope that the Fed and the FDIC would look at this 
issue that--municipal bonds may appear to be less liquid, and I 
think it is because liquidity should be measured on the insurer 
basis as opposed to the security basis. And I think if you 
factor this new look, munis are still the best thing going. 
And, I think every city in the country trembled at the approval 
of the liquidity ratio coverage that you and FDIC did.
    Mrs. Yellen. We are working with the FDIC and the banking 
agencies to have a look at this.
    Mr. Cleaver. Now, let me go to a question. Oh, my goodness. 
The chairman is probably going to give me another 2 or 3 
minutes, but I won't even get started.
    Thank you, Madam Chair.
    I yield back my 13 seconds.
    Chairman Hensarling. The gentleman can submit his questions 
in writing.
    And as tempting as it was to give the gentleman an extra 2 
minutes, the Chair will decline.
    The Chair now recognizes the gentleman from Virginia, Mr. 
    Mr. Hurt. Thank you, Mr. Chairman.
    And Chair Yellen, thank you for appearing before us this 
    The last time that you were here, I talked to you a little 
bit about our district. I represent Virginia's Fifth District, 
a very rural district. Agriculture is the primary part of our 
economy, which helps make up the primary part of the Virginia 
economy, which is agriculture and forestry together. At that 
time, I asked you about my concerns relating to the community 
banks and what is being done specifically to help them. You 
said when we talked last that, ``We want to listen to their 
concerns and understand them, and we are doing our very best to 
listen and try to tailor an appropriate set of capital 
requirements and other regulations.''
    You went on to say that, ``We want to do our very best to 
make sure that community banks aren't burdened with all that 
    And I am sure you are familiar with the recent Harvard 
study that came out that tells us now what those of us back in 
the Fifth District already knew, which is that the community 
banks are hurting. For the last 20 years, we have seen their 
share of lending drop from 41 percent to 22 percent, I think. 
Since Dodd-Frank was enacted, we have seen their share drop 12 
percent alone.
    I guess what I would like to hear from you today, because 
you didn't get into the specifics at our last meeting, 
specifically what are we doing to stop this and what are we 
doing to reverse this trend so that we can have capital access 
for working families in places and districts like mine, capital 
access for small businesses and for our farmers?
    Mrs. Yellen. I completely agree about the importance of 
community banks and the critical role that they play in 
providing credit to businesses and households in their 
communities. And, of course, they do suffer from significant 
regulatory burdens. In the EGRPRA reviews that we are doing, we 
are looking at the set of regulations that we have in place. We 
will be taking public comments and trying to identify ways in 
which we can reduce burden on those and other depository 
institutions. We have taken--
    Mr. Hurt. Can you talk specifically about proposals that 
you think that will help stop this trend and in fact reverse 
    Mrs. Yellen. We have just begun that process and we are 
having public meetings and we will be taking comments and we 
will look to identify such initiatives.
    In terms of things we can do on our own, we are trying to 
improve the efficiency of our exams. We are conducting much 
more work offsite so that examinations are less burdensome to 
firms. We are simplifying and trying to tailor our pre-exam 
requests for documentation from these institutions. We are 
trying to help community bankers figure out what regulations 
they do have to pay attention to because they apply to 
community banks and which regulations just have nothing to do 
with them and they can ignore them. Several years ago, we 
formed a group called CDIAC, which is representatives of 
community banks from around the country from each of the 12 
Reserve districts.
    Mr. Hurt. Has that been useful?
    Mrs. Yellen. It has been useful.
    Mr. Hurt. Has it resulted in any--
    Mrs. Yellen. We have had very--
    Mr. Hurt. --concrete proposals?
    Mrs. Yellen. --detailed discussions to try to understand 
what their concerns are, and we have followed up on them when 
issues have arisen about the way in which our examiners conduct 
exams or practices that they may have that they see as impeding 
lending. We try to follow up, both internally and also with 
other banking agencies, to make sure that we are not imposing 
undue burden and are addressing the specific questions they 
    At the Board, we have formed a new committee that focuses 
explicitly and exclusively on supervision of community banks to 
try to look for ways to speed up application processes and to 
reduce burden.
    So I know many of these banks are suffering with low 
interest rates. They also have compressed net interest margins. 
And that has hurt their profitability. That is a--
    Mr. Hurt. Right.
    Mrs. Yellen. --a part of the environment.
    Mr. Hurt. My time is about to expire, but I would ask that 
you do everything that you can to continue to make this a 
front-burner issue because it is deeply affecting working 
families, small businesses, and family farmers all across my 
district. Thank you.
    Mrs. Yellen. I hear you, and I promise to do so.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
    Mr. Ellison. Welcome, Chair Yellen. And I also want to 
thank the chairman and ranking member of our committee.
    The last time we were together in this committee hearing, I 
think I raised the issue of Somali remittances, and at that 
time, I think I pointed out that as banks drop out of this 
business space, it is going to create a whole lot more 
pressure. I think, on February 6th or right around there, the 
last big bank that facilitates these remittances dropped out, 
and then an Illinois bank dropped out. At this point, I am told 
that there are no money service businesses providing 
remittances to Somalia.
    This is important for a lot of reasons. One is that people 
in my district rely on that, and they send their hard-earned 
moneys to their loved ones. And I believe this helps to 
stabilize Somalia as a country. They send way more remittances 
than we do foreign aid over there, and it is already a fragile 
state. It does have a government. It is not a failed state 
anymore, but it is a fragile one, and if we pull that rug out, 
I fear for national security issues. We just heard threats by 
Al Shabaab to our homeland, which is something that I am very 
much concerned about. And as we destabilize that country, I 
think it is bigger than just the humanitarian needs of 
individuals. We are now dealing with a really serious problem. 
So what can be done?
    Mrs. Yellen. Congressman, I agree with you, it is a very 
serious problem. And it is causing a great deal of hardship. 
And we are meeting with interested Congressmen, including 
yourself, and with other banking agencies, the Comptroller of 
the Currency, and the Treasury, to see what we can do to try to 
address this problem. It is a difficult problem to deal with, 
because BSA/AML rules impose heavy sanctions. And banks have 
been penalized for violating those rules, so many of them are 
really very reluctant to want to take risks in their dealings 
when it may bring them in violation of those rules. As banking 
supervisors, we can't insist or force them to do that. So I 
think this is--we need to have broad-based discussions, and 
conceivably it is something that Congress needs to look at also 
the way in which BSA/AML is--
    Mr. Ellison. Forgive me for interrupting, Chair Yellen, but 
I would just like to point out that last time this Congress, 
which has been kind of known for its polarization, actually 
came together and passed legislation to try to reduce the 
regulatory burden and expense associated with compliance. I 
think we can do it again, but it would be nice if we could get 
some indication where exactly legislating would make a 
    As I understand it, there are some banks--or some 
regulators who believe that in Somalia, you not only have to 
know your customer; you have to know your customer's customer. 
That is not the law. And I think clear guidance on this point 
would be important, and I think the Fed would be able to offer 
some good guidance to help banks understand what really is 
their obligation to know your customer; how far does it go? Is 
that something you think could happen?
    Mrs. Yellen. I think we can certainly sit down and go over 
all of this with you and other interested Members and try to 
see where there is some scope to do something constructive to 
address this problem.
    Mr. Ellison. Now, what about the Federal Reserve Federal--
Fedwire? Could that be used to provide wire transfers to Dubai?
    Mrs. Yellen. Well--
    Mr. Ellison. I don't want to put you on the spot now, but I 
just want to introduce the idea. Maybe you and your staff could 
go back--
    Mrs. Yellen. It--
    Mr. Ellison. Yes.
    Mrs. Yellen. It is something that is only open to 
depository institutions, that individuals don't deal with those 
    Mr. Ellison. Right, but my point is we have a state where 
we have an active terrorist organization that is threatening 
us; we have a state that is fragile and has come out of 2 
decades of civil war; and we have a humanitarian crisis. It 
seems to me if there is an occasion to try to get creative, 
this would be it. I am just coming up with some ideas here.
    What about third-party verification? There are some 
nongovernmental organizations on the ground in Somalia who 
might be able to verify the identity of the recipient of the 
remittances? Could a group like that be utilized?
    Mrs. Yellen. I can't give you definitive answers to these, 
but we certainly can sit down and talk about each of your 
suggestions in detail and try to work through them with you, 
and I believe the State Department will be involved in these 
discussions as well.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Ellison. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Ohio, Mr. Stivers.
    Mr. Stivers. Thank you, Mr. Chairman.
    Chair Yellen, thank you for being here. I really appreciate 
the time you are spending with us today. I have a quick 
question on monetary policy, and then I will spend most of my 
time on regulatory policy.
    To follow up with the gentleman from Oklahoma's line of 
questioning, do you believe the Fed's permanent or long-term 
low interest rates along with quantitative easing have 
encouraged both retirees and institutional investors in some 
cases to chase more risk in their investments? And if you could 
give me a yes-or-no answer, it would be great.
    Mrs. Yellen. Yes. There--
    Mr. Stivers. Thank you.
    Mrs. Yellen. There has been some search for yield.
    Mr. Stivers. And I would just hope you would take that 
concern and problem seriously when you look at your policies 
going forward.
    With regard to your regulatory role, the first thing is you 
have sensed some frustration maybe over the transparency issue 
with you coming here a couple of times a year and spending 5 
hours. You probably know that, under Section 1108, the Federal 
Reserve Vice Chair for Supervision is also supposed to be 
appointed, confirmed by the Senate, and then come to us twice a 
year. I know that job has apparently been deemed unimportant by 
the Administration and they have not filled it for 6 years, 
but, given that Governor Tarullo is filling that role 
temporarily, would you commit to us today that you would let 
him come here twice a year in his acting role to share with us 
what the Fed is doing on regulation?
    Mrs. Yellen. I would certainly discuss with him--
    Mr. Stivers. I would ask you to look at that. We would 
appreciate it. I know it might take away some of the sense of 
frustration that you are feeling today, and I appreciate if you 
would take that under advisement and figure out if you can do 
    I want to talk about your role in regulation with regard to 
small firms and then big firms. You talked about community 
banks. You had a robust dialogue with the gentleman from 
Virginia a minute ago. Are you familiar with the term that many 
community bankers have now coined called ``trickle-down 
    Mrs. Yellen. I have heard that term, but--
    Mr. Stivers. Okay. Do you want me to define it for you, or 
would you like to define it in a very few words?
    Mrs. Yellen. You can define that.
    Mr. Stivers. Essentially, it is inappropriate regulation 
for the size or complexity of the bank. So what happens is, at 
every level, the regulator or supervisor in that area adds a 
little bit to what the law was or what to the person above them 
added, and by the time you get done--I will give you a couple 
of quick stories. In one case, and the former Governor of 
Oklahoma, Governor Keating, tells this story, but a bank that 
is about a billion dollars was told by its regulator that they 
need to do the same stress test that a $10 billion bank should 
do, because, at every level, they added more stuff. So it leads 
to extra cost and it really causes problems where these small 
banks have to merge, and it really creates problems for them. 
In one case, the banks did merge. A $2 billion bank merged with 
another bank of about the same size. They had one guy who dealt 
with money transfers and things like that, and the regulator 
came in and said, ``Well, at your size, you had one; now that 
you have doubled, you should have two people.'' And they were 
doing it to try to get economies of scale.
    So I would ask you to take that trickle-down regulation 
seriously, and what the gentleman from Virginia already talked 
about. Please listen to these guys. They provide a lot of 
liquidity, a lot of money in our local communities for people 
to live their American Dream.
    You probably read The Wall Street Journal, but I gave you 
the article. I think my staff member just handed it to you. Did 
you happen to see The Wall Street Journal on February 11th, 
where the chairman of Goldman Sachs said that regulation is 
good for Goldman Sachs? And I will summarize it really quickly 
because I don't want to read the whole thing. Essentially, he 
said that this heavy overregulation and heavy regulation will 
result in large global giants like Goldman Sachs gobbling up 
even more market share, making our too-big-to-fail problem 
greater--which he doesn't say, but it is implied--and make it 
harder for new people to gain entry to the system. I would hope 
you would look at things like that as well. And now I will 
transition to a question, but I wanted to raise that as a 
    The gentleman from Texas and the gentleman from Missouri 
talked to you about the SIFI thing. So I gave you the OFR study 
that the gentleman from Texas referred to, and I understand 
there is a line-drawing problem, but it is pretty clear when 
you look at the complexity you have as a total risks, or at the 
highest, is 5 percent of overall risk in the system, which is 
the biggest one, but when you move below banks of about $250 
billion, that risk goes--in fact, below $500 billion, that risk 
goes below 1 percent for all those folks. It seems to me we are 
wasting a lot of regulatory resources on smaller firms. I have 
a bill that would take the tailored living will approach and 
allow you to do some things with it, but--I am getting gavelled 
down here, but the one thing I would ask you is you said you 
already had the authority, but the CCAR stress test and the 
DFAST stress test, today you don't have the authority to get 
rid of one of those. And, for a $50 billion institution, it 
creates a lot of burden. And so I would allow you to allow us 
to help you in this battle to have appropriate regulation.
    I am sorry for going over my time, Mr. Chairman.
    Chairman Hensarling. The gentleman is right. His time has 
    The Chair now recognizes the gentleman from Colorado, Mr. 
    Mr. Perlmutter. Madam Chair, it is great to have you in 
front of our committee again. Thank you very much. And I just 
came in, I am sort of bouncing between two committee hearings. 
We had Secretary Ernest Moniz testifying over in the Science 
Committee. So I am going to ask you some questions about oil 
and gas in just a second, but what I would like to do is start 
with your report. I always enjoy taking a look at the graphs 
that the Federal Reserve prepares. And I would like to start 
with page 3, your first graph basically, and to talk about the 
increase in employment that we have seen pretty much on a 
monthly basis. The report says that about 280,000 people per 
month additional employment. Is that right?
    Mrs. Yellen. For the last 6 months, it has been 280,000 a 
month; for the last 12 months, 267,000.
    Mr. Perlmutter. Okay. So just to put things back in 
perspective, at the end of the Bush Administration, the 
beginning of the Obama Administration, we were losing in the 
neighborhood of 700,000 to 800,000 jobs a month, were we not?
    Mrs. Yellen. Yes.
    Mr. Perlmutter. So we basically have a swing of almost a 
million jobs a month?
    Mrs. Yellen. We do.
    Mr. Perlmutter. Okay. I would say that is pretty 
successful, given where we were and where we are today.
    And looking at your chart No. 4, which is found on page 5, 
that is what is reflected in that chart, is it not?
    Mrs. Yellen. Yes. Chart 4 is an index that our staff 
produced of labor market conditions. It takes many different 
aspects of the job market into account. And the size of the bar 
shows essentially the extent of improvement, and you see, it 
varies from month to month but a pattern of improvement.
    Mr. Perlmutter. The reason I am asking this is just some of 
the questions and some of the sort of approaches that have been 
taken would lead you to believe that we have struggled gaining 
jobs, but, at this point, we are on average almost 300,000 jobs 
a month.
    Mrs. Yellen. Yes. For the last 3 months, we have actually 
had 336,000 jobs a month.
    Mr. Perlmutter. Some of my colleagues' areas may be 
suffering--and I am sorry for that--but I can say, in Colorado, 
we are at a very good employment rate of in the neighborhood of 
3.5 percent, which is better than we have been in many, many 
years. So we are feeling pretty good, which brings me, though, 
to a concern that I have and you discussed early in your 
testimony. And that is the effect of the recent decline in oil 
prices on economic activity. In Colorado, we have a pretty 
diverse economy, but we certainly are an energy-producing 
State. Texas is. A number of the States are. And so my concern 
is, given the dramatic drop in price--and this is what I talked 
to Secretary Moniz about--of oil, what effect do you think that 
is going to have? You said you thought the net effect would be 
positive on the U.S. economy. I guess my fear is back when I 
first started practicing law, the Saudis were--oil prices were 
at 30 bucks a barrel. They dropped to 10. It hurt Texas badly, 
it hurt Colorado, it hurt oil-producing and energy-producing 
States pretty substantially. And so my fear, looking out for my 
State, is I don't want to see that happen again. And if it is 
coupled with a fragile Europe, which you talked about, I would 
be worried about the overall effect on the economy. And I would 
just like you to comment on that.
    Mrs. Yellen. I indicated in my testimony this huge decline 
in oil prices is going to result in job loss, I think, in the 
energy industry. And if you wanted to turn to page 9 of our 
testimony of the Monetary Policy Report, you would see a graph 
of what has happened to domestic oil drilling rigs in 
operation, and you see that just plummeting over the last 3 to 
6 months. So there is going to be reduced drilling, reduced 
capital expenditures in the energy sector, and it will have a 
negative impact on several States where that is important.
    Mr. Perlmutter. And I would just ask the Federal Reserve to 
continue to keep an eye on this sphere of the economy for the 
effects it might have overall.
    Mrs. Yellen. Yes. We will.
    Mr. Perlmutter. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Madam Chair, I am going to do something I don't usually do, 
which is talk for most of my 5 minutes today, to try and take 
advantage of the opportunity to try and explain why many of us 
here on both sides of this building are interested in more 
oversight of the Federal Reserve and why we are interested in 
the Audit the Fed Bill and similar types of measures.
    Earlier today you gave us your testimony, and you said 
something I thought was interesting, that one of the ways you 
plan on ending accommodation or at least tapering off of 
accommodation was to raise the rates that you pay on excess 
reserves. That surprised me. You weren't going to choose to 
shrink your balance sheet. We could probably and should 
probably have an entire hearing on that, but by articulating 
that policy, that is a huge wealth transfer. I think that one 
of your Fed economists said it could be as much as $20 billion 
to $60 billion in money that will flow to the large banks that 
have the excess reserves. The President of the St. Louis Fed 
just said it could be about $50 billion, so in the same range, 
which I think would be more money in that single transfer than 
those banks made last year collectively. This includes foreign 
    So you come in and you talk very publicly about your 
feelings on wealth inequality and income inequality, yet at the 
same time, in the same moment, you articulate a policy that is 
actually going to transfer money from the taxpayers, which 
would go to them in remittances if you didn't give it to the 
banks, and transfer it to large financial institutions, 
including foreign banks, and you add to that policy the policy 
which we have had for the last several years of this ultimate--
this extremely low interest rate policy, which we know hurts 
savers. We have talked about that today with Mr. Lucas. We know 
that it devalues the dollar. So it hampers an ordinary family's 
ability to run itself. And it discourages savings by 
discouraging--which hurts small business. So, at every turn so 
far, the policy you have articulated about how you are going to 
unwind and the policy that got us here in the first place, the 
policies that the Fed has adopted are actually making income 
and wealth inequality worse.
    Yesterday, you had a chance to talk a little bit about this 
with, I think it was Senator Brown. He asked you what you 
thought was causing wealth inequality and income inequality in 
this country. And you listed a couple of things. You talked 
about the global production chain depressing wages. You talked 
about the fact that the lack of organization of labor, which I 
assume means unions, was also depressing wages. And previously 
I know that you have commented on the structural role of 
education and technology in expanding the inequality of wealth 
and income distribution in the country.
    And my simple point to you on those points is that monetary 
policy has nothing to do with any of that. Monetary policy has 
nothing to do with the global supply chain, nor should it. It 
has nothing to do with the organization of labor, goodness 
gracious, nor should it. And it certainly has nothing to do 
with the role of technology in education. In fact, I had a 
chance to have a very similar conversation with your 
predecessor about 2 years ago on something similar to this when 
I asked him about the role of monetary policy when it comes to 
the labor markets and the ability of the Fed and the labor--and 
monetary policy to drive labor markets, and this is what he 
said, ``With respect to employment, monetary policy as a 
general rule cannot influence the long-run level of employment 
nor unemployment.'' And that is certainly correct. I know that 
happens to be economic orthodoxy. In the long run, you all 
can't have an impact on the labor markets. I know--
    Mrs. Yellen. I--
    Mr. Mulvaney. I'm sorry, but let me finish. And if I do 
have time, I will let you comment at the end.
    So that, Madam Chair, is why we are interested in being 
more involved because you are sticking your nose in places that 
you have no business being. You have no business in the long-
term labor markets. And to the extent you claim to want to help 
fix income inequality and wealth distribution in this Nation, 
in the view of many of us, you are actually making it worse. 
You are making it--
    Mrs. Yellen. I--
    Mr. Mulvaney. You are--and, again, I will give you the 
opportunity at the end and the chairman may as well.
    You are favoring capital over labor and you are favoring 
Wall Street over the folks back home, and that, Madam Chair, is 
why we want to know more about how you operate, and that is why 
many of us support the policies contained in the Audit the Fed 
    Now, with that--and, again, I apologize for taking too much 
time--I would be happy to have your comments.
    Mrs. Yellen. I strongly disagree that I have taken the 
positions that you have described. I have described trends in 
income inequality in the United States. I have never said that 
the Federal Reserve is the right agency to deal with those. 
When asked what contribution--
    Mr. Mulvaney. Then why are you talking about it?
    Mrs. Yellen. Because I--
    Mr. Mulvaney. You are one of the most powerful 
    Mrs. Yellen. I have also--
    Mr. Mulvaney. --in the world.
    Mrs. Yellen. I'm sorry. I have also talked about long-run 
budget problems and deficit problems--
    Mr. Mulvaney. But you--
    Mrs. Yellen. --in this country, and they are your 
    Mr. Mulvaney. But you went to great lengths--
    Mrs. Yellen. --not mine.
    Mr. Mulvaney. --before, Madam Chair--and I think correctly 
so--to point out that you are not political.
    Mrs. Yellen. I--
    Mr. Mulvaney. And when you start to talk about items that 
are outside of your jurisdiction--
    Mrs. Yellen. Every Federal Reserve Chair--
    Mr. Mulvaney. --outside your portfolio, you are being 
    Mrs. Yellen. --all of my predecessors have talked about 
large important economic trends and problems affecting the 
    Mr. Mulvaney. Well, you--
    Mrs. Yellen. --whether it has to do with trade or 
    Mr. Mulvaney. --agree with your predecessor--
    Mrs. Yellen. --or developments in energy markets.
    Mr. Mulvaney. --that monetary policy--
    Mrs. Yellen. And I feel--
    Mr. Mulvaney. --has an impact--
    Chairman Hensarling. The time--
    Mrs. Yellen. --I am entitled to do the same.
    Mr. Mulvaney. --on labor rights.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Mulvaney. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Connecticut, Mr. Himes.
    Mr. Himes. Thank you, Mr. Chairman.
    And, Madam Chair, thank you so much for being here and for 
your patience over this lengthy period of time. I am actually 
going to pick up on this idea of commenting on large 
macroeconomic themes, which may be slightly outside of your 
purview, but nonetheless, obviously, the Fed and you have a 
    We have had an interesting disconnect over these last many 
years on this committee and particular in this testimony in 
that as we were working through an economic recovery, my 
friends in the Majority have consistently demanded very 
substantial cuts, which would obviously translate into fiscally 
contractionary policy whereas consistently these reports under 
your predecessor identified fiscal policy as a very real risk 
to the recovery. And though your predecessor was careful about 
not overstepping his bounds, the implication was clear that 
being overly contractionary on the fiscal side would actually 
damage the recovery.
    Now we have experienced a pretty robust recovery. I 
actually asked your predecessor probably a year ago whether he 
could point to an industrialized country that had combined a 
recovery in GDP growth with a decline in the deficit in a more 
constructive and salubrious way than the United States, and he 
toyed momentarily with Germany but, at the end, said, no, he 
couldn't point to another industrialized country that had 
gotten it right, by the way, perhaps in spite of us.
    So my question is, that is really pretty impressive 
testimony with respect to the economic recovery. We still see, 
if you check the shrines to the religion of debt on either side 
of the room, we still have this debate. So I guess my question 
is, looking back on fiscal policy, is it your belief that GDP 
would have grown more and employment would be higher if we had, 
in fact, been more expansionary? And, conversely, if we would 
been more contractionary, would this recovery have been weaker?
    Mrs. Yellen. I think in the early years after the financial 
crisis, fiscal policy provided considerable support to the 
    Mr. Himes. By which you mean, among other things, the 
American recovery, the stimulus.
    Mrs. Yellen. Right, the stimulus.
    Mr. Himes. Thank you.
    Mrs. Yellen. And then the successful efforts to bring down 
the deficit by combinations of changes in taxes and spending 
have led to several years in which there has been a 
considerable drag on spending and on growth coming from fiscal 
    At this point this year, I think fiscal policy is 
relatively neutral. In a sense, it has become a plus for 
growth, because when something is a negative and then switches 
to being neutral in growth accounting terms, that is a 
contributor to growth. So, at this point, I think fiscal policy 
is roughly neutral. For a number of years, it was a drag on 
economic growth, and--
    Mr. Himes. Is it fair for me--
    Mrs. Yellen. --the Federal Reserve--
    Mr. Himes. --to extrapolate--is it fair--I am sorry to cut 
you off--
    Mrs. Yellen. Sure.
    Mr. Himes. --but is it fair for me to extrapolate--you say 
it has been a drag on economic growth. Is it fair for me to 
extrapolate that the policies of this Congress have actually 
reduced potential employment? We would have more jobs had we 
been less contractionary fiscally?
    Mrs. Yellen. I think it has been a drag in that sense. The 
Federal Reserve in conducting monetary policy has tried in a 
sense to take fiscal policy as a given and do what we can to 
stimulate job growth. And, I think we have had some success in 
    Mr. Himes. Thank you. One more question.
    I was interested to hear you say that you and your 
predecessor correctly have urged action by Congress to address 
the long-term unfunded liabilities associated with what we call 
the entitlements. You are not in the practice of speaking 
intuitively or qualitatively. I wonder if the Federal Reserve 
or if you have any estimates as to what the cost is of not 
acting to make Social Security and Medicare long-term 
sustainable. Is there a cost, either in terms of dollars or in 
terms of increased risk, to the full faith and credit that you 
can quantify for us?
    Mrs. Yellen. I don't want to say that there is a cost to 
full faith and risk. We look at CBO projections, and you can 
see that, over the next 15 to 30 years, debt-to-GDP ratios will 
rise in an unsustainable fashion without some changes in the 
pattern of spending or taxation that will, over time, in a full 
employment economy put upward pressure on interest rates and 
tend to crowd out private investment that contributes to 
productivity growth. And I think that is something that is a 
serious concern.
    Mr. Himes. Thank you.
    And I do suspect that this institution will act because 
eventually, obviously, the growth in those programs will 
constrict discretionary spending, but I am out of time. If the 
Fed could provide any sort of estimate to costs associated with 
inaction, that would be terrific.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
    Mr. Ross. Thank you.
    Chair Yellen, thank you for being here, and I appreciate 
your service and your patience today.
    I want to address my first part of questioning with regard 
to systemically important financial institutions, specifically 
with nonbank institutions. Recently, FSOC came out with a 
statement with regard to greater transparency, which I think is 
a very important step in the right direction. However--and as a 
voting member, I know you can appreciate this, and we look to 
you for guidance on this--I am very concerned that there are 
not guidelines being issued to mitigate the risk for nonbank 
financial institutions.
    For example, these institutions don't know they are being 
considered and have no method or manner or notice to take 
corrective action. And my question to you first is, don't you 
think that if we are going to start looking at nonbank 
financial institutions as systemically important institutions, 
we should at least not only offer transparency but should also 
offer them notice that they are being considered and offer them 
a path or at least an opportunity to get out?
    Mrs. Yellen. I believe the new guidelines that were 
recently approved will give earlier notification to firms when 
they come under consideration so that they have an earlier 
opportunity to interact with staff and with the FSOC. I believe 
the new guidelines also will more clearly indicate what the 
metrics are, how they are computed, result in--
    Mr. Ross. So you give them essentially due process, if you 
    Mrs. Yellen. Yes.
    Mr. Ross. --to have notification that they are being 
considered, to allow them to take corrective action, and then 
to have the opportunity that if they are so designated, to get 
out of that designation and have it up for review every, say, 5 
    Mrs. Yellen. It is, I believe, reviewed every year after a 
firm is designated. So we are reconsidering, I believe, every 
    Mr. Ross. Would you agree, in addition to the regulations, 
that we ought to just codify that as part of the Dodd-Frank Act 
so that we know that these nonbank financial institutions have 
a clear path of transparency and procedure to avoid and maybe 
even get out of being considered a SIFI.
    Mrs. Yellen. So, we have tried to, through FSOC, create due 
process--I think there is due process--for firms to have input, 
to understand they are being considered, and to interact and 
provide the information. We are trying now to provide that in 
an earlier way so that they can have input earlier in the 
process. But we do reconsider every year firms can interact 
    Mr. Ross. But specifically nonbank financial institutions--
    Mrs. Yellen. Yes.
    Mr. Ross. --because there is a different standard, of 
    Mrs. Yellen. Yes. I am talking about--
    Mr. Ross. For example, let's take asset managers. What risk 
would an asset manager group pose to the financial system that 
would constitute them to be considered a systemically important 
financial institution? It is not their assets that they are 
managing, it is others.
    Mrs. Yellen. So if you are--recently the FSOC has put out a 
notice and asked for comments. It has shifted its focus to 
certain activities of asset management in general, not specific 
firms that could potentially pose risks. For example, there are 
a growing share of assets under management that provide 
liquidity to the investors and yet hold primarily illiquid 
assets. And the notice asks questions about whether or not 
there can be financial stability risks associated with that 
type of structure. So--
    Mr. Ross. With regard to--
    Mrs. Yellen. --the focus is not on individual firms.
    Mr. Ross. Governor Tarullo thinks, I think, that we need to 
have a Collins Amendment fix to this. Would you agree with 
    Mrs. Yellen. I wouldn't--
    Mr. Ross. That there needs to be some clarification as to 
what constitutes a systemically important financial institution 
when it comes to asset managers.
    Mrs. Yellen. There is a definition and a set of criteria 
about what constitutes a systemically important organization, 
and the FSOC is--
    Mr. Ross. But it is not that clear.
    Mrs. Yellen. --supplying that. Of course, it is not clear, 
and that is why--
    Mr. Ross. We should clarify it.
    Mrs. Yellen. --when any--I don't think it can be just 
clarified in a very general mechanical way. It involves 
analyzing the activities of specific firms and asking the 
question, if those firms were to encounter distress, what would 
be the repercussions? And a great deal of analysis goes into 
understanding those issues before designating a firm.
    So, at the moment, on asset managers, the focus is on a 
different place, it is an activity-based analysis and not a 
firm-based analysis.
    Mr. Ross. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair, taking note of the time, and knowing that Chair 
Yellen will be departing at 1 o'clock, that will allow us to 
clear two more Members. Presently, I have Mr. Carney on the 
Democratic side in the queue and Mr. Pittenger on the 
Republican side in the queue.
    The gentleman from Delaware, Mr. Carney, is now recognized.
    Mr. Carney. Thank, Mr. Chairman. Right under the wire here.
    Madam Chair, thank you for coming in today and for sticking 
with us for so long. I would like to talk briefly, if I could, 
about Dodd-Frank, rulemaking and implementation, and 
    I looked through your report, and other than on pages 24 
and 25--of course, this is a report on monetary policy--there 
is not a lot of discussion about it. And I wonder if you could 
direct me to some other document maybe that you have or if you 
could provide something in writing about kind of a scorecard: 
What rules have been implemented and done; what might be 
outstanding; and kind of characterize that work in some kind of 
    Mrs. Yellen. I would be glad to do that. It is also the 
case that Governor Tarullo and others have testified even 
pretty recently about where things stand, but we would be glad 
to provide it for you.
    Mr. Carney. It may just be me that I haven't seen all that 
and been able to compile it, but I would like to see it in one 
place just to kind of get a scorecard. There has been a lot of 
discussion about--today even in some of these things, and--
    Mrs. Yellen. I will be glad to provide that.
    Mr. Carney. Yes. So I would like to go to the thing that 
you were just talking about in terms of SIFI designation. 
Governor Tarullo, you mentioned, he has spoken about it 
publicly, about the $50 billion threshold, that he didn't think 
that is an appropriate threshold. I think in his speech he 
referenced a hundred billion dollars. As a practical matter, 
you can go down the financial institutions and say, yes, no, 
yes, no, that is not the way we do legislation, but there has 
been a lot of conversation about that, although today you seem 
reluctant to suggest a change on the threshold, even mentioning 
that it is--even though you mentioned that it is somewhat 
    Could you just restate that? I know you probably said it a 
number of times. I have been in and out of the hearing; I 
haven't heard all that. So, that is the first part. And the 
second part is, is there a better approach? And I know that 
others have asked that as well.
    Mrs. Yellen. I don't know if there is a better approach. It 
is natural, when designating that a certain set of enhanced 
prudential standards need to be put in place, to try to define 
what institutions they will apply to. And the simplest cutoff, 
there are many ways of defining a cutoff, but the simplest way 
is to choose some asset threshold and say, above this level, it 
applies. And, in a sense, any cutoff is arbitrary. It could 
have been different.
    I think recognizing that within Section 165, the Board is 
given a good deal of flexibility to tailor the actual 
provisions to accord with--obviously a $50 billion institution 
is not as systemically important, or unlikely to be, as a $2 
trillion institution. And Dodd-Frank recognized that by giving 
the Board flexibility to tailor the rules to the specifics of 
the institution, its footprint, and within--there are some 
places where we don't have such discretion, but where we do, we 
have tried to use that.
    Mr. Carney. Great. So moving along to the Volcker Rule and 
its implementation and bank compliance, how would you 
characterize that generally in terms of the rule itself and 
then compliance among particularly the big banks?
    Mrs. Yellen. Volcker does apply to all institutions--
    Mr. Carney. I understand that.
    Mrs. Yellen. --as a--
    Mr. Carney. I understand that.
    Mrs. Yellen. --rule. When you say how will we--the rule has 
been finalized.
    Mr. Carney. Right.
    Mrs. Yellen. The regulators, the banking institutions are 
working together jointly to figure out how to supervise in a 
consistent way across firms to make sure they are in adherence. 
And there is a regular set of meetings among the supervisory 
agencies to respond to questions that arise in connection 
    Mr. Carney. Recently, I think you issued an extension, if 
you will, on CLOs and their compliance. What was the rationale 
behind that?
    Mrs. Yellen. It looked like there would be significant cost 
to a number of institutions and not just large institutions but 
also many smaller institutions.
    Mr. Carney. Losses because they would have to sell and--
    Mrs. Yellen. Have to sell at a loss, that they had legacy 
holdings of these assets, which would be difficult to sell. 
Now, clearly, the rule went into effect that regulates all new 
acquisitions, all new investments. So this was a question of 
legacy investments.
    Mr. Carney. Right. Nothing going forward?
    Mrs. Yellen. Nothing going forward is affected by that 
    Mr. Carney. And no delay with respect to going forward?
    Mrs. Yellen. No. There is no delay in it. The rule affects 
everything going forward.
    Mr. Carney. I see my time is up. Thank you very much.
    Chairman Hensarling. The time of the gentleman has expired.
    The last questioner will be the gentleman from North 
Carolina, Mr. Pittenger. You are now recognized.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Chair Yellen, there has been considerable commentary today 
about the current economic status and climate in the country. 
We heard from the ranking member about the plight of the 
minorities and low-income people and how they were suffering 
and the rich were getting richer. Mr. Sherman's statement was 
that it is really nasty out there, not a pretty sight.
    We are in the highest regulatory environment that we have 
ever been in in modern history, a very high tax burden. And we 
have very strong Fed policies, very accommodating, frankly, to 
our current debt and the interest on the debt and the spending 
levels that are being sustained right now. Unemployment, as you 
stated, was 5.7 percent. That really doesn't include those who 
have given up and includes part-time workers. Many analysts 
believe that is truly about 11 percent unemployment. So it 
isn't a pretty sight by any real measure, and yet the Fed has 
played a part in that.
    Do you look back on that and feel that these policies have 
had outcomes that have been adverse to what was intended, have 
not reached your desired objectives, that perhaps the strong 
hand of the Fed and this high regulatory environment has not 
reached the intended desires that you would like to have seen?
    Mrs. Yellen. I'm sorry. Are you referring to our own 
    Mr. Pittenger. Yes.
    Mrs. Yellen. I think our own regulations are--they are 
certainly mandated by Dodd-Frank, and they are necessary to 
create a sounder and safer financial system. I think--
    Mr. Pittenger. But the outcomes--you would say the desired 
objective, we haven't reached that with these, with the current 
    Mrs. Yellen. I think some of the distress in the country 
results from the fact that we had a financial crisis, and it 
was very severe. And part of the reason we had that financial 
crisis is that we were--our supervision and regulation of the 
financial system wasn't sufficiently rigorous and didn't 
sufficiently take account--
    Mr. Pittenger. On the other hand, you could say--
    Mrs. Yellen. --of systemic risk that was building, and that 
is what we are addressing now.
    Mr. Pittenger. Thank you. I would say to you that many 
could say the opposite, that it is the extended hand of the 
Federal Government that has tried to centralize and control the 
policies without rulemaking, without an open economic 
    I would like to ask you, Dodd-Frank created the Office of 
Women and Minority Inclusion. Are you familiar with that?
    Mrs. Yellen. Yes.
    Mr. Pittenger. In it, it was defined to provide a cost-
benefit analysis on the impact of women and minorities. Has 
there been such a cost-benefit analysis?
    Mrs. Yellen. Cost-benefit analysis?
    Mr. Pittenger. On the regulations that have come out of 
Dodd-Frank and the impact on women and minorities.
    Mrs. Yellen. Has there been a cost-benefit analysis? I'm 
sorry. I am going to have to get back to you on that. I need to 
look at that more carefully.
    Mr. Pittenger. To my knowledge, there hasn't been one to 
date, and I think that is--if that was the intended objective, 
I think it should be reached.
    One thing that was brought up, Madam Chair, was that the 
Fed has some of the brightest minds, economic minds, in the 
country, and I think I would like to just beg the question why 
there hasn't been an effort to--by the use of these 
individuals, considering the very radical regulatory 
environment that we are in and the transition that has taken 
place, the impact of this on the economy and what you believe 
that the variables have created in terms of our economic growth 
and job creation--do you believe that there has been an 
adequate analysis of the impact of these regulations?
    Mrs. Yellen. A careful impact study was done at the outset 
as capital and liquidity standards were being thought through, 
and the economic analysis showed that, given how very costly a 
financial crisis is, that the role of heightening standards in 
diminishing the odds of a financial crisis, that because of 
that, because of the serious costs associated with such crises, 
that the benefits exceeded the costs, at least within the range 
of capital and liquidity standards that we were contemplating.
    Chairman Hensarling. The time of the gentleman has expired.
    I wish to thank our witness for her testimony today. I only 
wish she would stay a little longer.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place her responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
    This hearing stands adjourned.
    [Whereupon, at 1:04 p.m., the hearing was adjourned.]

                            A P P E N D I X

                         February 25, 2015