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

                            MONETARY POLICY AND THE
                              STATE OF THE ECONOMY

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION
                                   __________

                                 JULY 15, 2015
                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-42

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

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

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 15, 2015................................................     1
    Appendix:
        July 15, 2015................................................    55

                                   WITNESSES
                            Wednesday, July 15, 2015

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

                                    APPENDIX

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

                  Additional Material Submitted for the Record

    Rothfus, Hon. Keith:
        Two charts: ``Progress Made Since Wall Street Reform;'' and
          ``Quarter-to-Quarter Growth in Real GDP''..................    64
    Waters, Hon. Maxine:
        Letter from the Office of Inspector General, Board of
          Governors of the Federal Reserve System and the Consumer
          Financial Protection Bureau, dated May 29, 2015............    66
    Yellen, Hon. Janet L.:
        Monetary Policy Report of the Board of Governors of the
          Federal Reserve System to the Congress, dated July 15, 2015    69
        Written responses to questions for the record submitted by
          Representative Heck........................................   124
        Written responses to questions for the record submitted by
          Representative Hinojosa....................................   126
        Written responses to questions for the record submitted by
          Representative Hultgren....................................   132
        Written responses to questions for the record submitted by
          Representative McHenry.....................................   135
        Written responses to questions for the record submitted by
          Representative Mulvaney....................................   137
        Written responses to questions for the record submitted by
          Representative Pearce......................................   148
        Written responses to questions for the record submitted by
          Representative Rothfus.....................................   152
        Written responses to questions for the record submitted by
          Representative Schweikert..................................   154
        Written responses to questions for the record submitted by
          Representative Westmoreland................................   155

                            MONETARY POLICY AND THE
                              STATE OF THE ECONOMY

                                  ----------

                            Wednesday, July 15, 2015

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:03 a.m., in
    room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
    [chairman of the committee] presiding.
        Members present: Representatives Hensarling, Royce, Lucas,
    Garrett, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer,
    Huizenga, Duffy, Hurt, Stivers, Fincher, Mulvaney, Hultgren,
    Ross, Pittenger, Wagner, Barr, Rothfus, Schweikert, Guinta,
    Tipton, Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney,
    Sherman, Capuano, Hinojosa, Clay, Green, Cleaver, Moore,
    Ellison, Perlmutter, Himes, Carney, Sewell, Foster, Kildee,
    Murphy, Delaney, Sinema, Beatty, Heck, and Vargas.
        Chairman Hensarling. The Financial Services Committee will
    come to order. Without objection, the Chair is authorized to
    declare a recess of the committee at any time.
        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.
        I now recognize myself for 3 minutes to give an opening
    statement.
        Last week, this committee began a series of hearings
    examining the Dodd-Frank Act on its 5th anniversary, an Act
    which vastly expanded the powers and reach of the Federal
    Reserve beyond its traditional monetary policy role in
    historically unprecedented ways. The evidence continues to
    mount that since the passage of Dodd-Frank, our Nation is less
    stable, less prosperous, and less free. We continue to be mired
    in lackluster, halting economic growth.
        Middle-income paychecks are nearly $12,000 less compared to
    the average post-war recovery, and as Ranking Member Waters
    told us just a few months ago, ``The brutal truth is that
    millions continue to teeter on the brink of poverty and
    collapse.''
        One way that our economy could be healthier is for our
    Federal Reserve to be more predictable in the conduct of
    monetary policy. During periods of expanded economic growth,
    like the great moderation of 1987 to 2003, the Fed followed a
    more clearly communicated, understandable, and predictable
    conventional rule, and America prospered.
        Today, we are left with so-called forward guidance, which
    unfortunately remains somewhat amorphous, opaque, and
    improvisational. Too often, this leads to investors and
    consumers being lost in a rather hazy mist as they attempt to
    plan their economic futures and create a healthier economy for
    themselves and for us all. As one former Fed President has
    written, ``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 they are data dependent, but will not tell us what data
    and how.''
        Following a monetary policy convention or rule of the Fed's
    own choosing, with the power to amend it or deviate from it at
    the Fed's own choosing, in no way interferes with the Fed's
    monetary policy independence. Accountability and independence
    are not mutually exclusive concepts.
        We in Congress would be grossly negligent if we did not
    engage in greater oversight of the Federal Reserve System.
        Again, Dodd-Frank confers sweeping new powers on the Fed to
    regulate and control virtually every corner of the financial
    services sector of our economy, completely separate and apart
    from its traditional monetary policy role. Yet too often, the
    Fed appears to shield these activities from public view,
    improperly cloaking them behind monetary policy independence.
        Second, the Fed has now employed historically unprecedented
    methods, from intervening to prop up select credit markets, to
    paying interest on excess reserves, to keeping interest rates
    near zero for almost 7 years. By doing so, the Fed has
    certainly blurred the lines between fiscal and monetary policy.
        Finally, the Fed has recently crossed the line by willfully
    ignoring a lawful congressional subpoena for documents. This is
    inexcusable and unsupported by legal precedent. It cannot be
    allowed to stand.
        The Fed's refusal to cooperate in a congressional
    investigation threatens both its reputation and its
    credibility. The Fed is not above the law. It is a very serious
    matter and must be resolved.
        The Chair now yields to the ranking member for 3 minutes
    for an opening statement.
        Ms. Waters. Thank you, Mr. Chairman, and welcome back,
    Chair Yellen. I am pleased you are here this month as we
    commemorate the 5-year anniversary of the enactment of the
    Dodd-Frank Wall Street Reform Act.
        Dodd-Frank was signed into law just as we had emerged from
    the worst economic collapse in a generation, one which
    destroyed nearly $16 trillion in household wealth and 9 million
    jobs, displaced 11 million Americans from their homes, and
    doubled the unemployment rate.
        But since those dark days, we have seen improvement. Dodd-
    Frank made significant progress correcting the practices that
    helped lead us to the crisis. It has delivered billions to
    victimized consumers, brought greater transparency to the once-
    opaque banking practices that have caused the crisis, and put
    in place clear rules of the road that foster stability in our
    financial system.
        That stability, along with the help of extraordinary
    monetary policy accommodation, has led to growth, including the
    creation of nearly 13 million private sector jobs, unemployment
    falling to its lowest rate since September 2008, a recovering
    housing market, and significant increases in 401(k) balances
    and the S&P 500.
        But these improvements do not paint a picture of an economy
    that has fully recovered. The gap between communities of color
    and women versus their white male counterparts remains
    dramatic. A lackluster first quarter and a strong dollar,
    coupled with economic instability and slowing growth abroad,
    have sapped momentum for job creation and economic expansion
    here at home.
        As such, I hope the Board of Governors will consider its
    slow and cautious approach to raising interest rates. Chair
    Yellen, as you know, raising interest rates does not in itself
    create a strong economy; it is a strong economy that must be
    the impetus for raising rates.
        With inflation continuing to hover near zero and numerous
    indicators of slack in the labor market, it is my hope that the
    Federal Reserve will fully consider the impact of any potential
    interest rate increase on the middle class and those
    communities that have yet to benefit from the economic
    recovery.
        So I thank you again, Chair Yellen, and I look forward to
    your testimony here today. I yield back the balance of my time.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, chairman of our Monetary Policy and Trade
    Subcommittee, for 2 minutes.
        Mr. Huizenga. Chair Yellen, up here. Sorry. It feels like
    you are kind of down closer to the Botanic Garden than you are
    here in Rayburn, with our new hearing room configuration.
        But welcome. It is good to see you again, and thank you for
    honoring my request to meet last month.
        Today's hearing provides us with another opportunity to
    examine how the Federal Reserve conducts monetary policy and
    why the development of these policies are in desperate need of
    transparency, I believe.
        Needless to say, the Fed's recent high degree of discretion
    and its lack of transparency in how it conducts policy suggests
    that reforms are needed.
        I have continued to encourage the Federal Reserve, as you
    well know from that conversation, to adopt a rules-based
    approach to monetary policy and to communicate that rule to the
    public. The Fed must be accountable to the people's
    representatives as well as, more importantly, to the
    hardworking taxpayers themselves.
        Last Congress, Professor Allan Meltzer of Carnegie Mellon
    University testified that over the first 100 years of the
    Federal Reserve's history, monetary policies operated more
    effectively if they followed simple and clearly understood
    rules.
        And I quote from him, ``There are only two periods in
    Federal Reserve history where they came close to operating
    under a rule. That happened to be the best two periods in Fed
    history in 1923-1928 and in 1985-2003.
        ``In the first case, they operated under some form of the
    gold standard; in the second, under the Taylor Rule, more or
    less; not slavishly, but more or less. And those were the two
    and the only two periods in Federal history that have low
    inflation, relatively stable growth, small recessions, and
    quick recoveries.''
        That was Allan Meltzer.
        Well, Chair Yellen, I ask that you work with me and this
    committee to develop a foundation for a rules-based monetary
    policy that will properly, not slavishly--to borrow a phrase--
    constrain the Fed's discretion without sacrificing the proper
    independence that the Fed has while also allowing the Fed to be
    more transparent in formulating and communicating monetary
    policy to not only market participants but also to the American
    people.
        So thank you, Mr. Chairman, and I yield back the balance of
    my time.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentlelady from Wisconsin, Ms.
    Moore, the ranking member of our Monetary Policy and Trade
    Subcommittee, for 2 minutes.
        Ms. Moore. Thank you so much, Mr. Chairman.
        Madam Chair, I am so happy to welcome you back, and I look
    forward to your testimony, to the Q&A period, and I think this
    committee will benefit from your strong background in
    economics.
        We are, of course, in the midst of a strong 2-year job
    growth of 15 years adding 5.6 million jobs, but I have some
    concerns. You talk about slack in the labor market. And it
    seems to me that slack is disproportionately borne by African-
    Americans and Latinos.
        This brings me to the critical importance of the full
    employment part of your dual mandate. And so while we are
    plodding upwards, there are still many storm clouds. I want to
    see growth which will create jobs and decrease the national
    debt.
        Now I cringe at the austerity policies of this Republican
    Congress because I think it works at cross-purposes with your
    pro-growth policies. And I want to hear you talk about that.
        Your predecessor, Ben Bernanke, came to Congress and told
    us that the sequester and the shutdown were examples of
    counterproductivity. We want to get this slack, as you call it,
    out of the labor market, but Congress needs to embrace growth
    policies that will help working people. Wall Street is doing
    just fine. But we need to invest in education and
    infrastructure, increase the minimum wage so that we can get
    more consumers spending money.
        And I read in your testimony here that U.S. exports are
    slumping, but yet this committee has refused to reauthorize the
    Export-Import Bank. These are unforced errors and I thank you
    and I look forward to hearing your testimony.
        I yield back the balance of my time.
        Chairman Hensarling. The gentlelady yields back.
        Today, we welcome the testimony of the Honorable Janet
    Yellen. Chair Yellen has previously testified before our
    committee, so I believe she needs no further introduction.
        At the request of Chair Yellen, I wish to inform all
    Members that I intend to adjourn the hearing at 1:00 p.m. this
    afternoon.
        Chair Yellen, without objection, your complete written
    statement will be made a part of the record, and you are now
    recognized for 5 minutes to give an oral presentation of your
    testimony. Thank you for being here.

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

        Mrs. Yellen. Thank you.
        Chairman Hensarling, Ranking Member Waters, and members of
    the committee, I am pleased to present the Federal Reserve's
    semiannual monetary policy report to the Congress. In my
    remarks today I will discuss the current economic situation and
    outlook before turning to monetary policy.
        Since my appearance before this committee in February, the
    economy has made further progress toward the Federal Reserve's
    objective of maximum employment. While inflation has continued
    to run below the level that the Federal Open Market Committee
    (FOMC) judges to be most consistent over the longer run with
    the Federal Reserve's statutory mandate to promote maximum
    employment and price stability.
        In the labor market, the unemployment rate now stands at
    5.3 percent, slightly below its level at the end of last year
    and down more than 4.5 percentage points from its 10 percent
    peak in late 2009.
        Meanwhile, monthly gains in nonfarm payroll employment
    averaged about 210,000 over the first half of this year,
    somewhat less than the robust 260,000 average seen in 2014. It
    is still sufficient to bring the total increase in employment
    since its trough to more than 12 million jobs.
        Other measures of job market health are also trending in
    the right direction with noticeable declines over the past year
    in the number of people suffering long-term unemployment and in
    the numbers working part-time who would prefer full-time
    employment.
        However, these measures as well as the unemployment rate
    continue to indicate that there is still some slack in labor
    markets. For example, too many people are not searching for a
    job but would likely do so if the labor market was stronger.
        And although there are tentative signs that wage growth has
    picked up, it continues to be relatively subdued, consistent
    with other indicators of slack. Thus while labor market
    conditions have improved substantially, they are, in the FOMC's
    judgment, not yet consistent with maximum employment.
        Even as the labor market was improving, domestic spending
    and production softened notably during the first half of this
    year. Real GDP is now estimated to have been little changed in
    the first quarter after having risen at an average annual rate
    of 3.5 percent over the second half of last year. And
    industrial production has declined a bit on balance since the
    turn of the year.
        While these developments bear watching, some of this
    sluggishness seems to be the result of transitory factors,
    including unusually severe winter weather, labor disruptions at
    West Coast ports, and statistical noise.
        The available data suggest a moderate pace of GDP growth in
    the second quarter as these influences dissipate. Notably,
    consumer spending has picked up, and sales of motor vehicles in
    May and June were strong, suggesting that many households have
    both the wherewithal and the confidence to purchase big ticket
    items.
        In addition, homebuilding has picked up somewhat lately,
    although the demand for housing is still being restrained by
    limited availability of mortgage loans to many potential home
    buyers.
        Business investment has been soft this year, partly
    reflecting the plunge in oil drilling and the fact that exports
    are being held down by weak economic growth in several of our
    major trading partners and the appreciation of the dollar.
        Looking forward, prospects are favorable for further
    improvement in the U.S. labor market and the economy more
    broadly. Low oil prices and ongoing employment gains should
    continue to bolster consumer spending. Financial conditions
    generally remain supportive of growth.
        And the highly accommodative monetary policies abroad
    should work to strengthen global growth. In addition, some of
    the headwinds restraining economic growth, including the
    effects of dollar appreciation on net exports and the effective
    lower oil prices on capital spending, should diminish over
    time.
        As a result, the FOMC expects U.S. GDP growth to strengthen
    over the remainder of this year and the unemployment rate to
    decline gradually.
        As always, however, there are some uncertainties in the
    economic outlook. Foreign developments in particular pose some
    risks to U.S. growth, most notably, although the recovery in
    the euro area appears to have gained a firmer footing, the
    situation in Greece remains difficult.
        And China continues to grapple with the challenges posed by
    high debt, weak property markets, and volatile financial
    conditions. But economic growth abroad could also pick up more
    quickly than observers generally anticipate, providing
    additional support for U.S. economic activity.
        The U.S. economy also might snap back more quickly as the
    transitory influences holding down first half growth fade and
    the boost to consumer spending from oil prices shows through
    more definitively.
        As I noted earlier, inflation continues to run below the
    committee's 2 percent objective, with the personal consumption
    expenditures or PCE price index up only a quarter of a percent
    over the 12 months ending in May. And the quarter index which
    excludes the volatile food and energy components, up only one
    and a quarter percent over the same period.
        To a significant extent, the recent low readings on total
    PCE inflation reflect influences that are likely to be
    transitory, particularly if the early or steep declines in oil
    prices, and in the prices of non-energy imported goods. Indeed,
    energy prices appeared to have stabilized recently.
        Although monthly inflation readings have firmed lately, the
    12 month change in the PCE price index is likely to remain near
    it's recent low level in the near-term. My colleagues and I
    continue to expect that as the effects of these transitory
    factories dissipate, and as the labor market improves further,
    inflation will move gradually back toward our 2 percent
    objective over the medium-term.
        Market-based measures of inflation compensation remain low
    although they have risen some from levels earlier this year,
    and survey-based measures of longer-term inflation expectations
    have remained stable. The Committee continues to monitor
    inflation developments carefully.
        Regarding monetary policy, the FOMC conducts policy to
    promote maximum employment and price stability as required by
    our statutory mandate from the Congress. Given the economic
    situation that I just described, the committee is judged at a
    high degree of monetary policy accommodation remains
    appropriate.
        Consistent with that assessment, we have continued to
    maintain the target range for the Federal funds rate at zero to
    a quarter of a percent, and have kept the Federal Reserve's
    holdings of longer-term securities at their current elevated
    level to help maintain accommodative financial conditions. In
    its most recent statement, the FOMC again noted that it judged
    it would be appropriate to raise the target range for the
    Federal funds rate when it has seen further improvement in the
    labor market, and is reasonably confident that inflation will
    move pack to its 2 percent objective to the medium-term.
        The Committee will determine the timing of the initial
    increase in the Federal funds rate on a meeting by meeting
    basis, depending on its assessment of realized and expected
    progress toward its objectives of maximum employment and 2
    percent inflation. If the economy evolves as we expect,
    economic conditions likely would make it appropriate at some
    point this year to raise the Federal funds rate target, thereby
    beginning to normalize the stance of monetary policy.
        Indeed, most participants in June projected that an
    increase in the Federal funds target range would likely become
    appropriate before year end. But let me emphasize again that
    these are projections based on the anticipated path of the
    economy, not statements of intent to raise rates at any
    particular time.
        The decision by the Committee to raise its target range for
    the Federal funds rate will signal how much progress the
    economy has made in healing from the trauma of the financial
    crisis. That said, the importance of the initial step to raise
    the funds rate target should not be overemphasized. What
    matters for financial conditions in the broader economy is the
    entire expected path of interest rates, not any particular
    move, including the initial increase in the Federal funds rate.
        Indeed, the stance of monetary policy will likely remain
    highly accommodative for quite some time after the first
    increase in the Federal funds rate, in order to support
    continued progress toward our objectives of maximum employment
    and 2 percent inflation. In the projections prepared for our
    June meeting, most FOMC participants anticipated that economic
    conditions would evolve over time in a way that will warrant
    gradual increases in the Federal funds rate, as the headwinds
    that still restrain real activity continue to diminish and
    inflation rises.
        Of course, if the expansion proves to be more vigorous than
    currently anticipated, and inflation moves higher than
    expected, then the appropriate path would likely follow a
    higher and steeper trajectory. Conversely, if conditions were
    to prove weaker, then the appropriate trajectory would be lower
    and less steep than currently projected.
        As always, we will regularly reassess what level of the
    Federal funds rate is consistent with achieving and maintaining
    the committee's dual mandate.
        I would also would like to note that the Federal Reserve
    has continued to refine its operational plans pertaining to the
    deployment of our various policy tools when the committee
    judges it appropriate to begin normalizing the stance of
    policy.
        Last fall, the Committee issued a detailed statement
    concerning its plans for policy normalization, and over the
    past few months we have announced a number of additional
    details regarding the approach that the committee intends to
    use when it decides to raise the target for the Federal funds
    rate. These statements pertaining to policy normalization
    constitute recent examples of the many steps the Federal
    Reserve has taken over the years to improve our public
    communications concerning monetary policy.
        As this committee well knows, the Board has for many years
    delivered an extensive report on monetary policy and economic
    developments at semiannual hearings like this one. And the FOMC
    has long announced its monetary policy decisions by issuing
    statements shortly after its meetings, followed by minutes with
    a full account of policy decisions, and, with an appropriate
    lag, complete meeting transcripts.
        Innovations in recent years have included quarterly press
    conferences and the quarterly release of FOMC participants'
    projections for economic growth on employment, inflation, and
    the appropriate path for the Committee's interest rate target.
        In addition, the Committee adopted a statement in 2012
    concerning its longer-run goals and monetary policy strategy
    that included a specific 2 percent longer-run objective for
    inflation, and a commitment to follow a balanced approach in
    pursuing our mandated goals.
        Transparency concerning the Federal Reserve's conduct of
    monetary policy is desirable, because better public
    understanding enhances the effectiveness of policy. More
    important, however, is that transparent communications reflect
    the Federal Reserve's commitment to accountability within our
    Democratic system of government.
        Our various communications tools are important means of
    implementing monetary policy and have many technical elements.
    Each step forward in our communications practices has been
    taken with the goal of enhancing the effectiveness of monetary
    policy and avoiding unintended consequences.
        Effective communication is also crucial to ensuring that
    the Federal Reserve remains accountable, but measures that
    affect the ability of policymakers to make decisions about
    monetary policy, free of short-term political pressure in the
    name of transparency, should be avoided.
        The Federal Reserve ranks among the most transparent of
    central banks. We publish a summary of our balance sheet every
    week, and our financial statements are audited annually by an
    outside auditor and made public. Every security we hold is
    listed on the website of the Federal Reserve Bank of New York,
    and in conformance with the Dodd-Frank Act, transactions level
    data on all of our lending, including the identity of borrowers
    and the amounts borrowed, are published with a 2-year lag.
        Efforts to further increase transparency, no matter how
    well-intentioned, must avoid unintended consequences that could
    undermine the Federal Reserve's ability to make monetary policy
    in the long-run best interest of American families and
    businesses.
        In sum, since the February 2015 Monetary Policy report, we
    have seen, despite the soft patch of economic activity in the
    first quarter, that the labor market has continued to show
    progress toward our objective of maximum employment.
        Inflation has continued to run below our longer-run
    objective, but we believe transitory factors have played a
    major role. We continue to anticipate that it will be
    appropriate to raise the target range for the Federal funds
    rate when the committee has seen further improvement in the
    labor market and is reasonably confident that inflation will
    move back to its 2-percent objective over the medium term.
        As always, the Federal Reserve remains committed to
    employing its tools to best promote the attainment of its dual
    mandate.
        Thank you. I would be pleased to take your questions.
        [The prepared statement of Chair Yellen can be found on
    page 56 of the appendix.]
        Chairman Hensarling. Thank you, Chair Yellen. I now
    recognize myself for 5 minutes for questions.
        Chair Yellen, I hate to take up time to ask this, but it is
    an important matter. As we well know, Dodd-Frank vastly
    expanded the non-monetary policy role of the Fed. Through no
    fault of your own, there has not been a Vice Chair for
    Supervision appointed.
        My counterpart, Chairman Shelby, in the Senate has
    requested that you come on a semiannual basis until such a time
    as the President deigns to fill that position and testify on
    the macroprudential regulatory role of the Fed.
        Your written response to our request, to put it politely,
    was not responsive. So will you voluntarily honor our request?
    And if the answer is ``yes,'' I will take ``yes'' for an
    answer, and if the answer is ``no,'' I will give you a brief
    moment to explain.
        Mrs. Yellen. I certainly stand ready to respond to requests
    of this committee for me to testify--
        Chairman Hensarling. Thank you. I will take ``yes'' for an
    answer, and we will certainly issue those invitations.
        I want to discuss with you, Chair Yellen, the exigent
    powers Section 13(3) clause. There seems to be a growing
    consensus on both sides of the aisle among the right and the
    left that Dodd-Frank, notwithstanding its intentions to
    constrain 13(3), did not hit the mark.
        And in fact, Senator Elizabeth Warren has been rather
    outspoken on the matter and has actually introduced bipartisan
    legislation on the Senate side in this regard.
        Setting aside the arguments of whether or not the AIG
    bailout, specifically, was a good thing or a bad thing, post-
    Dodd-Frank, is it your interpretation that the Fed retains the
    power to do a similar bailout of AIG where counterparties and
    creditors could receive 100 cents on the dollar, including
    foreign entities?
        Mrs. Yellen. Let me start by saying that the role of lender
    of last resort is a critical responsibility that central banks
    fulfill around the world, and it is why the Federal Reserve was
    created.
        I do believe this is a very important power. We need to
    address liquidity and credit pressures in times when there is
    unusual financial stress.
        However, Congress did amend Section 13(3) in Dodd-Frank to
    allow the Federal Reserve to extend emergency credit to the
    financial system only through facilities that have broad-based
    eligibility.
        Chairman Hensarling. Chair Yellen, you know that--
        Mrs. Yellen. So the answer is no, that we could not use
    those powers to address the needs of a single firm, like the
    AIG situation.
        Chairman Hensarling. But several other firms--if an AIG-
    like bailout was made available to a specific firm, as long as
    it was made to multiple firms, there is still nothing
    preventing the Fed from ensuring counterparties and creditors
    get 100 cents on the dollar. Is that correct, or do you
    disagree with that statement?
        Mrs. Yellen. Section 13(3) was amended to state
    specifically that it broadens--
        Chairman Hensarling. No, I am familiar with the statute. I
    am just trying to figure out if you believe it constrains
    creditors getting 100 cents on the dollar.
        Mrs. Yellen. If we have failing financial firms, we would
    not be able to put in place a broad-based facility that was
    intended to rescue those firms.
        Chairman Hensarling. If I could, Chair Yellen, let me ask
    you this--
        Mrs. Yellen. But it is not allowed by Dodd-Frank.
        Chairman Hensarling. Let me ask you this question. There
    obviously is a difference of opinion there.
        Federal Reserve Bank President Jeffrey Lacker recently gave
    a speech dealing with 13(3) and dealing with moral hazard. And
    I agree with you, the lender-of-last-resort function is
    important. But so is moral hazard in creating greater systemic
    risk.
        President Lacker said, ``A final step may be required
    before financial stability can be assured. This would mean
    repealing the Federal Reserve's remaining emergency lending
    powers and further restraining the Fed's ability to lend to
    failing institutions.''
        Are you aware of President Lacker's views on this topic?
        Mrs. Yellen. I am aware of his views, but I disagree with
    him.
        Chairman Hensarling. When do you expect--
        Mrs. Yellen. Dodd-Frank has been amended to limit our
    powers, as I mentioned, to bail out a single firm or a failing
    firm or an insolvent borrower.
        Chairman Hensarling. Chair Yellen, when do you expect that
    we will have the final rule on 13(3)? Because we know there
    were 800 pages devoted to helping define ``proprietary
    trading'' in the Volcker Rule, but we see no such effort in
    defining the concepts of ``insolvent'' and ``broad-based'' and
    presently are seeing no real constraint to your 13(3)
    abilities.
        So, when should we expect to see that final rule?
        Mrs. Yellen. We put out a draft rule--
        Chairman Hensarling. I am aware of that.
        Mrs. Yellen. --and we received a number of comments, and we
    are working hard to come out with a revision, and I expect that
    it will certainly be out in the fall.
        Chairman Hensarling. Okay. Thank you.
        The Chair's time has expired. The Chair now recognizes the
    ranking member for 5 minutes.
        Ms. Waters. Thank you very much, Mr. Chairman.
        Chair Yellen, this morning, I woke up to yet another story
    about discrimination against minorities. It seems Honda has
    been caught charging higher interest rates, I guess, on their
    loans to African-Americans and Latinos.
        When I hear those kinds of stories, I am reminded about the
    predatory lending practices that took place in this country in
    2008, et cetera, and how these predatory practices were
    targeted to minority communities and minorities were charged
    higher interest rates.
        And when they compared the income and the credit that
    Blacks and minorities--their credit records to the credit
    records of Whites, they could be the same, but they were paying
    higher interest rates on many of these predatory products.
        And when I look at the loss of wealth in these communities,
    based on the subprime lending, I cannot help but wonder, when
    is this going to stop? When is it going to stop?
        While we have you here today and we are talking about
    monetary policy and we are talking about interest rates,
    qualitative easing, et cetera, et cetera--I don't know how much
    you can do to deal with this inequality. I don't know if there
    is anything that perhaps you can do that deals with
    discrimination, that deals with racism, that deals with income
    inequality, that deals with the problems that cause this great
    wealth gap that is so big now that it will never be closed.
        We hear a lot of talk about income inequality and the
    wealth gap, et cetera, and we look at the high unemployment
    rates in the African-American and Latino communities, and
    sometimes you just think, despite the struggle, despite all of
    the work, despite the challenges, some of this stuff just will
    never go away in this country.
        So I guess I am asking you, because you have the
    responsibility for some of what goes on in this economy
    relative to some of these issues, what can you do about Honda?
    What can you do about the banks and the predatory practices
    that continue to gouge Latinos and African-Americans and target
    these products to our communities?
        What do you say about all of this?
        Mrs. Yellen. Let me start by saying that the practices you
    described and the trend toward rising inequality, the impact
    that it has on African-Americans and disadvantaged groups is
    something that greatly concerns me, and I think is of
    tremendous concern to all Americans.
        In terms of what we can do, when it comes to lending we are
    responsible for supervision of financial institutions to make
    sure that they adhere to fair lending practices, and we test
    regularly in our consumer compliance exams to make sure that
    the firms that we supervise are abiding by Congress' rules
    pertaining to the Equal Credit Opportunity Act to make sure
    there are not unfair credit practices being directed toward
    minorities or toward any Americans.
        So that is an important goal. We, of course, work to make
    sure that the banks we supervise meet their CRA
    responsibilities which I think has been of benefit to low- and
    moderate-income communities. And more broadly, in terms of our
    monetary policy responsibilities, maximum employment along with
    price stability are the two major goals that Congress has
    assigned to us.
        The downturn that we experienced after the financial
    crisis, where unemployment rose to over 10 percent, was
    particularly punishing to African-Americans and to lower
    skilled workers, more broadly.
        And a strong economy, getting the economy recovering,
    trying to get it back to maximum employment, lowering the
    unemployment rate. Traditionally African-Americans and other
    minorities have had higher unemployment rates. We don't have
    the tools to be able to address the structure of unemployment
    across groups, but a strong economy generally, I think, really
    does tend to be beneficial to all Americans.
        So that is what we are working toward, and there are other
    policies that I think Congress could consider that would
    address these issues.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, chairman of our Monetary Policy and Trade
    Subcommittee.
        Mr. Huizenga. Thank you, Mr. Chairman.
        Chair Yellen, I think we share a respect for rules-based
    monetary policy--as you put it when you served on the Fed Board
    in the mid-1990s, the Taylor Rule was ``what sensible central
    banks do.''
        It looks like we are in good company. Dr. Charles Plosser,
    the immediate past president of the Federal Reserve Bank of
    Philadelphia, expressed support for a rules-based framework by
    setting monetary policy: ``One of the most important ways to
    support credibility, and thus the effectiveness of forward
    guidance is to practice it as part of a systematic policy
    framework. I believe that indicating the evolution of key
    economic variables systematically shapes future and current
    economic policy decisions is critical to such a policy
    framework.''
        In testimony before this committee in December of 2013, Dr.
    Douglas Holtz-Eakin, former Director of the Congressional
    Budget Office, also endorsed a rules-based monetary policy,
    saying, ``Certainly I would like to see a more rules-based
    approach by the Federal Reserve that does not rule out
    discretion, because they can pick the rule they want to
    operate. But if they provide it to Congress and the American
    people, the American people will know what they are up to. They
    themselves have said forward guidance is critical. We need to
    know what they are going to do. Rules provide that.''
        So, I am curious when you and your colleagues at the Fed
    will adopt a rules-based policy?
        Mrs. Yellen. You used the term systematic policy. And I
    want to say that I strongly endorse, and the FOMC strongly
    endorses following a systematic policy. And during my term as
    Vice Chair and as Chair, I have tried to promote a systematic
    monetary policy. And I believe that we do follow a systematic
    monetary policy.
        Mr. Huizenga. But not with a rule that you are willing to
    share, correct?
        Mrs. Yellen. Not a simple rule based on two variables, but
    let me point you first to the monetary policy report: On the
    second page of the report, we have a clear statement of our
    longer-run goals and monetary policy strategy. Any systematic
    policy has to begin by articulating what the goals are very
    clearly, and the strategy that will be followed. And that is
    what we do there--
        Mr. Huizenga. But you agree that a rules-based policy is a
    better way to go?
        Mrs. Yellen. I don't agree that a rules-based policy is a
    better way to go. There is not a single central bank in the
    world that follows a rule that would rely on only two
    variables.
        Mr. Huizenga. So, as you well know--
        Mrs. Yellen. What we do is take into account a wealth of
    information, informing our judgments about the economic
    outlook.
        Mr. Huizenga. Sure.
        Mrs. Yellen. And the way that we make policies systematic
    is we provide and you can see this in section three, in part
    three of the monetary policy report, each individual, each
    participant, writes down their own forecast for the economy and
    the appropriate policy that goes along with that, and from
    that, you can get a clear sense of how we expect to conduct
    policy, if the economy evolves in line with our forecast.
        Mr. Huizenga. I am not convinced that is clear, because
    others in the market don't believe that is clear. Other
    economists don't believe that is clear. We are not trying to
    handcuff you, but we are asking that you write a rule within
    descriptive parameters to use as a reference point, purely use
    it as a reference point. I know you expressed that if we had a
    rule, we may find ourselves in negative interest rates.
        Simply solve that by writing a rule that says, once we do
    that, we are going to zero and no lower, or maybe .25, as you
    have indication--we won't call it the ``Taylor Rule,'' we will
    call it the ``Yellen Rule.''
        We can have some of those things that are going to give us
    predictability. So I think that whether it is Douglas Holtz-
    Eakin or others who have been within the Federal Bank Reserve
    who have said so, predictability and transparency is the way to
    go. So I know you know that we have a discussion draft floating
    around that has some of that information in there. And just so
    I am clear, you don't believe that there is a time it will be
    right to, again, go towards a rules-based policy?
        Mrs. Yellen. I think we need a systematic policy, but I
    would strongly resist agreeing to follow any rule where the
    stance of monetary policy depends on only the current readings
    of two economic variables, which is what your reference rule
    relies on.
        Mr. Huizenga. Okay. That is what the reference rule does,
    but it doesn't say that is the rule you have to follow. And we
    have a lot of confusion out there; the IMF is saying you
    shouldn't be raising interest rates for international
    settlements, which is the central bank--of central banks, as
    you well know. Claudie Arborio had said lower rates beget lower
    rates, and we have a lot of confusion out there as to the
    direction we are going, and that is what we are asking for as
    clarity.
        Thank you, Mr. Chairman.
        Mrs. Yellen. I strongly believe in the systematic policy.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Wisconsin, Ms.
    Moore, ranking member of our Monetary Policy and Trade
    Subcommittee.
        Ms. Moore. Thank you so much, Madam Chair. My colleague,
    the chairman of our Monetary Policy and Trade Subcommittee, has
    been discussing with you the Taylor Rule, so I would like to
    pursue that a little bit more.
        The IMF is warning that if Greece leaves the Eurozone, it
    might slow growth internationally, and impact the United States
    much harder than expected.
        I guess I would like you to just sort of speculate about,
    if you were handcuffed about the terms used here earlier, the
    Taylor Rule, how would that impede your response to such a
    crisis?
        Mrs. Yellen. The Taylor Rule would tell us that the current
    setting of monetary policy should depend on only two variables.
    The current level of real GDP or the output gap, and the
    current level of inflation. So it obviously wouldn't take into
    account in any way our judgments about the likely growth in the
    global economy, how we expected that the European economy would
    be affected or global financial markets by these--by such
    developments.
        So in that sense, it really restricts any simple rule,
    restricts the setting of monetary policy to a very short list
    of variables and typically their current values. That is one of
    the reasons--we spend a great deal of time and--the forecasts
    that we include in our monetary policy report that the
    participants write down, we present to the public every 3
    months, incorporate all of that kind of information. What we
    think is going to happen in the global economy and other
    economic developments, those factor into our economic forecasts
    and our view as to the appropriate role of policy.
        We are providing a great deal of information to the public
    by providing these participants forecasts, because participants
    are telling the public how, in light of their economic
    forecast, concretely with numbers, they think monetary policy
    should be set.
        So that is information about the so-called reaction
    function, namely the relationship between the economy and
    monetary policy that is incorporated in something like the
    Taylor Rule.
        Ms. Moore. Thank you so much.
        Can you provide us with a quick update of the Fed's
    implementation of the so-called Collins fix governing insurance
    capital standards?
        Mrs. Yellen. We appreciate Congress passing the Collins
    fix, and in light of that, we have a great deal of flexibility
    now to design capital standards that we think will be
    appropriate for the firms that we supervise, including the
    insurance-based savings and loan-holding companies and the
    insurance SIFIs, and we are working hard. We will put in the
    public domain either orders or a proposed rule--
        Ms. Moore. Thank you.
        Mrs. Yellen. --when we have figured that out.
        Ms. Moore. Thank you so much.
        We are at the 5-year lookback of Dodd-Frank. Our colleagues
    again say that we have enshrined too-big-to-fail. I wonder if
    you could just set the record straight about whether or not
    Dodd-Frank enshrined too-big-to-fail.
        Mrs. Yellen. I don't believe that Dodd-Frank enshrined too-
    big-to-fail.
        First of all, it directed us to increase the safety and
    soundness of financial institutions and particularly those that
    are most systemic.
        So it gave us tools to raise capital and liquidity, to
    impose capital surcharges on those firms that we deem most
    systemic, to use stress testing as a methodology, to make these
    firms much less likely to fail, and the amount of capital and
    liquidity has increased massively since the crisis.
        In addition, Dodd-Frank gave us Title II orderly
    liquidation authority, which would be a new tool to resolve the
    systemic firm in Title I.
        Ms. Moore. I have 10 seconds left, so I think you have
    covered that.
        Back to my idea about the labor market, do you think ending
    the sequester and raising the minimum wage would be good
    strategies for getting our labor markets together?
        Mrs. Yellen. These, I think, are matters for Congress to
    debate.
        Ms. Moore. I knew you would say that, so I saved it for
    last.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from New Jersey, Mr.
    Garrett, chairman of our Capital Markets Subcommittee.
        Mr. Garrett. Good morning. Thanks, Mr. Chairman.
        Last night, I read through what is called the ``Joint Staff
    Report: The U.S. Treasury Market,'' dated October 15, 2014. It
    is the staff report that looked at what happened in the markets
    back in mid-October.
        Are you familiar with that report? And do you adopt that
    report, even though I see the name of it is the ``Joint Staff
    Report?'' Just as a technical matter, does that mean that this
    is just the staffs' opinion, or is this also your opinion? Just
    so I understand that.
        Mrs. Yellen. I am certainly aware of the intensive work
    done by staff and a number of agencies--
        Mr. Garrett. But do you adopt--
        Mrs. Yellen. --and I think it is a good report. I certainly
    support the report.
        Mr. Garrett. Okay, great. I assumed so.
        I thought there was one seminal question, but I guess maybe
    there are two seminal questions, and I read that. And I also
    read your testimony and the addendums to your testimony this
    morning, since it only came in this morning.
        First of all, is there a problem, and second, what was the
    cause? I thought that we would all have to conclude that there
    was a problem, but that is not clear from looking at the
    addendum to your report that came out--as far as your
    testimony, where it says at the bottom, ``Despite the increased
    market discussions in talking about the disruptions, a variety
    in metric liquidity in the nominal Treasury markets do not
    indicate notable deteriorations.''
        And then you go on to say elsewhere that there really
    weren't many problems in the liquidity of the market. And you
    talk about that.
        I think there is a problem. Other people think there is a
    problem. We had hearings on this, and Rick Ketchum, the CEO and
    chairman of FINRA, told this committee that there have been
    dramatic changes with respect to the fixed-income market in
    recent years.
        So the question is, is Rick Ketchum right, that there have
    been dramatic changes to it, and there is a problem in the
    marketplace, or is your staff, and you are right that there is
    not a problem in the liquidity and the deterioration in that
    marketplace?
        Let's find out whether there is a problem, first of all.
        Mrs. Yellen. I think it is not clear what is happening in
    these markets and what is causing what.
        Mr. Garrett. True, but is there a problem, before we get
    to--
        Mrs. Yellen. The report that you mentioned that was just
    released looked carefully at a 12-minute window, in which--
        Mr. Garrett. But overall, Mr. Ketchum is saying that there
    has been a deterioration and that there is a problem overall.
        He is saying there is a problem. Other panelists have said
    there is a problem overall on the market. You are saying, and
    your staff is saying that there isn't any problem?
        Mrs. Yellen. It is not clear whether there is or there is
    not a problem here.
        Mr. Garrett. Okay.
        Mrs. Yellen. By some metrics, liquidity looks adequate by
    bid-ask spread and--
        Mr. Garrett. But I think that is--
        Mrs. Yellen. --trading volumes. We don't see a problem--
        Mr. Garrett. Let me just interrupt, because we only have--
        Mrs. Yellen. --but there are metrics that suggest there is
    a problem. So this is something we need to study further.
        Mr. Garrett. So you studied it so far, you have an 80-page
    report that looked at it, and I find it troubling that it
    really doesn't come to much of a conclusion.
        What I was looking for was the second seminal question that
    the chairman and I have asked Secretary Lew and others: What
    was the cause of this? And this report still fails to come up
    with any particular explanation. It runs through about half a
    dozen explanations saying, these are not the problem.
        Some of them that it does refer to is it says, ``the growth
    in electronic trading, competitive pressures, other factors,
    and regulation.'' That word ``regulation'' only appears twice,
    but your staff actually says regulation is an indicator to the
    changes in the volatility and the liquidity out in the
    marketplace.
        So it says that regulation is part of the problem. Right?
        Mrs. Yellen. We just don't have a conclusion about what
    happened in the Treasury market at this point.
        Mr. Garrett. No, but you don't have--
        Mrs. Yellen. Regulation could have contributed in some way
    to that, but there are many other things going on as well.
        Mr. Garrett. But it doesn't say that in your addendum at
    all. It says that in the staff report. Nowhere did I see that
    it looks to regulation as being the factor.
        It looks at all of the other factors that are talked about
    here, whether it is the size, order trade size, whether it is
    the electronic trades, whether it is competitive pressures. It
    doesn't say that in here. We never heard that from--we can
    never get that answer from Secretary Lew or anyone else from
    the Administration.
        So are you saying today that, yes, regulations such as the
    Volcker Rule, Basel, and capital requirements are potential
    problems in this area?
        Mrs. Yellen. They are things to look at. We have no
    evidence that those things that you mentioned are problems.
        During this window--
        Mr. Garrett. Let me ask you this.
        Mrs. Yellen. --broker dealers continued to--
        Mr. Garrett. May I ask you a question?
        Did you direct your staff to look to see whether that was a
    potentiality? Because they don't say it once in their report
    that they looked into regulation as a causation. They looked at
    all the metric datas on these other areas.
        Did you direct them to look at that as a factor, and will
    you in the future?
        Mrs. Yellen. We asked them to take a look at what caused
    this very unusual movement in Treasury yields--
        Mr. Garrett. They didn't.
        Mrs. Yellen. --and to study what possible causes of it
    were, and they were unable to find any single cause.
        And they pointed to a number of factors that could have
    been at play, and it needs further study, and it is right for
    regulation to be on that list of things that we look at. But
    there is no evidence at this point--
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from New York, Mrs.
    Maloney, ranking member of our Capital Markets Subcommittee.
        Mrs. Maloney. Welcome, Chair Yellen. I know that some of my
    colleagues have been critical of your performance, but I, for
    one, think you have done a tremendous job, and I want to
    publicly thank you.
        You have been very responsive to Congress, and you have
    also managed to wind down the quantitative easing program very
    smoothly and right on schedule without causing any major
    disruptions in the financial markets, so thank you.
        And I would like to ask you some questions about monetary
    policy.
        In your testimony today, you said that foreign
    developments, including the turmoil in Greece and China, in
    your words, ``pose some risk to United States growth.''
        Has the turmoil in China and Greece changed your view about
    the appropriate timing for the first interest rate hike?
        Mrs. Yellen. We look at international developments very
    carefully in developing our forecast. We have been closely
    tracking developments in Greece and China and other parts of
    the world.
        The issues that exist are not new. For example, in June the
    committee was aware of these developments, and in June when the
    participants wrote down their views of the economy and
    appropriate policy, taking into account these developments and
    the risks they pose, they still thought that the overall risk
    to the U.S. economic outlook were balanced and they judged that
    it would be appropriate sometime this year to begin raising our
    target range for the Federal funds rate.
        Of course, we continue to watch these developments, these
    global developments unfold, and we will in the coming months.
    Were we to judge that these developments did create substantial
    risks, or were changing the outlook in some notable way, then a
    change in the outlook is something that would affect monetary
    policy. As we have said all along, we have no judgment about--
    at this point about the appropriate date to raise the Federal
    funds rate. Our judgment about that will depend on unfolding
    economic developments and how they affect our forecasts.
        Mrs. Maloney. You stressed in your testimony that the pace
    of rate increases is more important than the timing of the
    first rate hike, and many economists, including the IMF, have
    argued that the Fed should wait longer to start raising rates,
    possibly waiting until next year, but should then follow a
    slightly steeper path of subsequent rate increases.
        So my question is, if the Fed waits longer than current
    forecasts to start raising rates, will that mean a steeper path
    of rate increases?
        Mrs. Yellen. If we wait longer, it certainly could mean
    that when we begin to raise rates, we might have to do so more
    rapidly, so an advantage to beginning a little bit earlier is
    that we might have a more gradual path of rate increases.
        As I indicated, the entire path of rate increases does
    matter. There are many reasons why the committee judges, in
    effect, that an appropriate path of rate increases is likely to
    be gradual, but given that we have been at zero for over 6
    years, it has been a long time since we have raised rates.
    Doing so when we finally begin in a deliberate and gradual way,
    looking at what the impact of those decisions are on the
    economy, strikes me as a prudent approach to take.
        Mrs. Maloney. Okay. And as you know, the markets have been
    anticipating a rate increase for quite some time, and that it
    will follow one of the FOMC meetings that has a press
    conference afterwards. Currently, there is a press conference
    after every other FOMC meeting, and as a result, in the
    market's view, the Fed only has two more chances to raise rates
    this year in September or December, even though there is an
    FMOC meeting later this month and one in October.
        My question is, would the Fed feel comfortable raising
    rates for the first time at an FOMC meeting without a press
    conference scheduled afterwards? In other words, are the July
    and October meetings on the table, so to speak, for rate
    increases?
        Mrs. Yellen. I have tried to emphasize that every meeting
    is a live meeting. We could make decisions at any meeting of
    the FOMC, and we have emphasized that if we were to make such a
    decision, we would likely have a press briefing afterwards. And
    we recently conducted a test to make sure that members of the
    media, of the press, understand how technically they would
    participate in such a press briefing.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Missouri, Mr.
    Luetkemeyer, chairman of our Housing and Insurance
    Subcommittee.
        Mr. Luetkemeyer. Thank you, Mr. Chairman.
        Over here, Madam Chair. Thank you.
        A few weeks ago we met, and we had a long discussion about
    a number of different topics, and one of them was Operation
    Chokepoint. And I asked you at that time or made mention of the
    fact that I was very concerned from the standpoint that the
    Oversight and Government Reform Committee had this report that
    they put out with regard to the internal e-mails and memos,
    which showed that the FDIC was going well beyond their
    statutory authority and duties in trying to limit the ability
    of certain legal businesses to do legal business, and was
    impacting a lot of banks in a very negative way.
        And the fact that you oversee some of the banks as well, I
    felt that you should be pushing back and have a meeting with
    Chairman Gruenberg, and I asked you to do that.
        Have you have done that at this point?
        Mrs. Yellen. Yes, I have done that. I have discussed
    Operation Chokepoint with Chairman Gruenberg, and our views on
    what proper policy is on the part of the banking agencies with
    respect to how our examiners deal with banks and the services
    they offer.
        We both certainly agree on the importance of making sure
    that examiners and our policies don't discourage banks from
    offering services to any business that is operating within
    State and Federal law. He and I agree that is appropriate
    policy and--
        Mr. Luetkemeyer. Did he indicate to you, though, how he is
    going to stop Operation Chokepoint within his own agency?
        Mrs. Yellen. I don't want to speak about his policies--
        Mr. Luetkemeyer. I think it is important that you make the
    point to him that he has to stop. In this report, this report
    of his own e-mails, within his agency, he is implicated as
    being part of the problem. And therefore it is important, I
    believe, that you have a discussion and say that he has to
    cease and desist those kinds of activities, and get assurance
    from him that he will make sure that is done.
        Mrs. Yellen. He explained to me a number of policies that
    he has put in place to be absolutely certain that his examiners
    are abiding by the policy that I indicated, which is the banks
    we supervise--that examiners in examining them do not--
        Mr. Luetkemeyer. If at some point you find that this is
    still continuing, will you confront him about that? If it is
    continuing in the banks you oversee, will you confront him and
    say, we find this operational, and therefore you need to stop
    it. Will you stop him from doing that, if you see it?
        Mrs. Yellen. I will continue to discuss with him this issue
    and to make sure that our policies--
        Mr. Luetkemeyer. Okay. With regard to another issue that we
    discussed, with regard to SIFI designation, one of the concerns
    that I have, especially with insurers and asset managers, is
    that as they are designated, there doesn't seem to be a way for
    them to become de-designated, and there is no path written out,
    there is--obviously, you can say, well, they need to change
    their business model. But I would think it would be helpful
    whenever they are designated to be able to say if you do this,
    this and this, these are the problems that have caused you to
    become designated. If you change these things, do these things
    differently, it would allow us to de-designate you. And I
    really don't see a path to de-designate.
        Can you elaborate on that?
        Mrs. Yellen. Yes, well, FSOC reviews every single year the
    designations of firms and considers whether or not they are
    appropriate or no longer appropriate, and firms that are
    designated are given very detailed--
        Mr. Luetkemeyer. Okay.
        Mrs. Yellen. --material to enable them to understand the
    basis for the designation--
        Mr. Luetkemeyer. I would just encourage you every year to
    be sure you put something like that in there so there is some
    certainty on the part of those folks who are designated. I have
    30 seconds left, so let me get one quick question in here.
        With regard to the Board's charge of adopting capital
    standards for federally-supervised insurers, these capital
    standards are of concern from the standpoint that this is the
    first time the Fed ever got involved in domestic capital
    standards for insurance companies, and I know you--through FIO,
    you are looking at international capital standards.
        My question is, would you commit to us that prioritizing
    domestic capital standards will take priority over
    international capital standards?
        Mrs. Yellen. Any international capital standards would not
    become effective in the United States unless a regulation or
    rule were proposed--
        Mr. Luetkemeyer. That is my concern.
        Mrs. Yellen. --and went through a full debate.
        Mr. Luetkemeyer. That is my concern. We want to make sure
    that domestic insurance industry is protected.
        I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Missouri, Mr.
    Clay, ranking member of our Financial Institutions
    Subcommittee.
        Mr. Clay. Thank you, Mr. Chairman.
        And welcome back, Chair Yellen.
        You were quoted in a June 17th American Banker's article as
    stating that the Federal Reserve was examining ways to improve
    its implementation of the Community Reinvestment Act amid
    concerns that regulators are letting too many poor communities
    go unserved by banks.
        How would the Federal Reserve's effort in seeking to
    improve implementation of the Community Reinvestment Act
    encourage investments in places like the ones that I represent,
    such as Ferguson, Missouri, and other communities throughout
    this country that are mired in poverty?
        Mrs. Yellen. We have been working to improve implementation
    of the CRA regulations with other banking regulators, and we
    have been doing that in part by trying to improve our guidance,
    adding to a set of interagency questions and answers on the
    community reinvestment. We came out with additional Q&A in
    2013, and we are working toward further additions.
        And so what this guidance does is try to clarify the ways
    in which basic banking services can help to meet the credit
    needs of low- and moderate-income people in the context of CRA.
    And by doing that, I hope what we will be doing is encouraging
    banks to consider providing the kinds of banking services that
    people in these communities need to be an important part of
    their CRA program.
        Mr. Clay. Okay. And along those same lines of questioning,
    you stated in your testimony your concerns about the limited
    availability of mortgage loans. As a supporter of Dodd-Frank,
    has the law given us unintended consequences and tamped down
    banks' ability to lend money in order for people to get
    mortgage loans?
        Mrs. Yellen. It is hard to say. Certainly, lending
    standards are much tighter than they were in the run-up to the
    financial crisis, and I think most of us think appropriately
    so; we don't want to go back to lax lending standards. But it
    may be that the steps we have taken are having some unintended
    consequences, and that we need to work on that to make sure
    that credit is available.
        Mr. Clay. So do we need to tweak the law in order to allow
    banks to really get money out into our economy and allow people
    to realize the American dream and purchase homes?
        Mrs. Yellen. There are a number of obstacles that banks see
    to lending. Some have to do with put-back risk, which are
    matters that the FHFA is working on with Fannie Mae and Freddie
    Mac. And, there remains uncertainty about securitization and
    the rules around securitization, so we have not really seen an
    active market come back for private residential mortgage-backed
    securities. And that could be part of what is happening.
        Mr. Clay. Well, okay. The Federal Reserve released a report
    entitled, ``Strategies for Improving the U.S. Payment System,''
    a follow-up to a 2013 consultation paper that signaled its
    intention to expand its presence in electronic payments.
        Why has the Fed embarked on this faster payments
    initiative? What does it hope to achieve? And what is the
    Federal Reserve's plan?
        Mrs. Yellen. Our basic plan is that we want to see a faster
    and safer payment system in the United States. We think that
    many steps can be taken to make that possible, and the main
    role we expect to play is that of a convener, to bring a lot of
    private sector participants to the table to talk through these
    issues. And for them, we have set up task forces on faster
    payments and safer payments.
        Hundreds of private sector participants are discussing what
    they can do in order to bring this about, so we are trying to
    play the role of facilitator, of bringing people to the table.
        Mr. Clay. Thank you. My time--
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr.
    Duffy, chairman of our Oversight and Investigations
    Subcommittee.
        Mr. Duffy. Thank you, Mr. Chairman. Welcome, Chair Yellen.
    As you know, I chair the Oversight Subcommittee of the
    Financial Services Committee, and along with Chairman
    Hensarling, we have been doing an investigation into the 2012
    FOMC leak.
        We kindly asked you to produce documents in regard to the
    leak and you failed to comply. The chairman then issued a
    subpoena for the documents, with which you failed to comply. So
    I would ask, what is your legal authority? Give me case law or
    statute that allows you to not comply with a congressional
    subpoena?
        Mrs. Yellen. First, let me say that we have cooperated with
    the committee, and--
        Mr. Duffy. No, no, no, listen. I have limited time. So I
    want to know--give me the legal authority which says that you
    do not have to comply with a subpoena. We have asked for
    specific documents and you haven't given them to us.
        Mrs. Yellen. We indicated that we fully intend to cooperate
    with you to provide the documents that you have requested--
        Mr. Duffy. Madam Chair--
        Mrs. Yellen. --but that we are not going to provide them
    now because this matter is the subject of an open criminal
    investigation by the Board's Inspector General and by the
    Department of Justice. They have indicated to us that it will
    compromise--it will likely compromise their investigation.
        Mr. Duffy. You are the Chair. Give me the legal authority--
    you can read the statement all day long, but I would like to
    know the legal authority that you have. Basically, what you
    said in a letter to Chairman Hensarling and myself is that the
    OIG in essence requested that you don't give it to us.
        You are not bound by the IG, and you are not bound by the
    DOJ.
        Mrs. Yellen. We have indicated--
        Mr. Duffy. We have asked for the documents, and you have
    said you are not going to give them to us. Is it fair to say
    you don't have any legal authority, because you can't give me
    case law or statute that says you have an exemption--
        Mrs. Yellen. No, we have said that we plan to give them to
    you--
        Mr. Duffy. Just not now.
        Mrs. Yellen. --as soon as we are able to do so and not
    compromise an open criminal investigation.
        Mr. Duffy. Compromising an open--
        Mrs. Yellen. We want to see this investigation succeed.
        Mr. Duffy. You do? Let's talk about that. You want to see
    it succeed. So let's talk about the timeline. This happened in
    October of 2012. You didn't follow your policy. The General
    Counsel did an extensive 6-month investigation. After that
    investigation, the General Counsel was supposed to make a
    referral to the IG. That didn't happen.
        The General Counsel gave a report to the committee, right?
    And when you got that report, because you were so concerned
    about justice, you were so concerned about bringing the leaker
    to the forefront, what did you do? Nothing. You didn't make a
    referral to the IG. You didn't make a referral to the FBI, the
    SEC, the CFTC, or the DOJ. You did absolutely nothing. Zero.
        And so you are trying to say that Congress is going to
    obstruct your investigation? When you had information, you did
    nothing to perpetuate an investigation that would lead us to
    the truth.
        Eventually, the IG did their own investigation and then
    they closed it. And guess what? Congress stood forward and
    said, listen, this is important stuff. We just--as Elizabeth
    Warren would say, we don't want those who are well-connected to
    get information through the leaks; we should know who the
    leaker is.
        And so it was because we pressured the IG--it was a closed
    investigation and we pressured you that all of a sudden, there
    is a second investigation, and they say no, no, we can't give
    you that documentation because it is a pending investigation
    and we are concerned about you jeopardizing it.
        Madam Chair, it appears that you are the one who is
    jeopardizing, or the Fed is the one who is jeopardizing this
    investigation. Am I wrong?
        Mrs. Yellen. The FOMC has in place a clear set of rules
    that are to be followed when there are allegations of a leak.
        Mr. Duffy. You didn't follow them.
        Mrs. Yellen. They called for a review of the incident by
    the General Counsel and the FOMC Secretary. We have described
    to you how that review took place. It took place before the
    review was complete. The Inspector General--
        Mr. Duffy. Did the General Counsel--I am reclaiming my
    time. Did the General Counsel, per your guidelines, talk to the
    FOMC Board or did he make a recommendation to the IG? Because
    the requirement is that they make--that they do an initial
    review and solely determine whether they make a referral to the
    IG They didn't do that, right? Mr. Alvarez didn't do that.
        Mrs. Yellen. Before his review was complete, he was
    informed by the IG that the IG had undertaken his own
    investigation and therefore the IG was already looking at it
    before it was necessary for him to make a decision to refer it
    to the IG.
        The IG was already involved.
        Mr. Duffy. Madam Chair--my time is almost up. I reclaim my
    time. If anyone is trying to sweep this under the rug, it is
    the Fed. It is Congress that is trying to bring light to this.
    I sent you a letter in response to your denial with Chairman
    Hensarling on the 17th of June, and we have almost a full page
    of footnotes where Congress has done oversight during an open
    pending DOJ prosecution.
        We have the right to the documents, and you have the duty
    to provide them to us, and you have cited no legal authority to
    deny that request. We are entitled to do oversight, and you are
    required to give us the documents, and I hope you reconsider
    your denial.
        I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Alabama, Ms.
    Sewell.
        Ms. Sewell. Thank you, Mr. Chairman.
        And thank you, Chair Yellen, for being here today.
        I wanted to bring your attention to the wages and what I
    see is income inequities going on, and really get your take on
    what we can do as far as monetary policies to close that gap.
        Since the height of the financial crisis, the U.S. economy
    has made remarkable progress, particularly compared to other
    parts of the world. Here in the United States, the unemployment
    rate fell from 10 percent to 5.3 percent in June, and the
    President has pointed out in his budget over the past 4 years
    that we put more people back to work here in the United States
    than Europe has, and Japan, and other nations.
        However despite the overall employment gains, there are
    still some districts, mine included, that have folks who want
    to work who haven't been able to find work. The hourly labor
    compensation has been tending to lag behind the growth, in
    particular, and the President's budget projects the share of
    national income going to labor rather than to capital will
    remain at historic lows for years to come.
        What, in your view, can and should be done to reverse this
    trend and ensure that the workers reap more of the rewards and
    gains from our growing economy. I am particularly interested in
    the disparity that exists among minority unemployment. I can
    tell you that in my own district in Alabama, while the overall
    Nation has 5.3 percent unemployment, our median average
    unemployment in a district that is disproportionately African-
    American is right at 9 to 10 percent, which is vastly
    different.
        I would love to know how you think our monetary policies
    can go about changing that trend.
        Mrs. Yellen. Monetary policy has been aimed at trying to
    achieve a strong recovery in the job market, and while we are
    not there yet, I believe we have made substantial progress. As
    the economy improves and the labor market gets stronger, I
    would expect to see the growth of wages pick up over time, and
    at this point I think we are seeing at least some first
    tentative signs that wage growth is increasing. It has been
    running at a very slow pace. There are often lags between
    improvement in the labor market and a pickup in wage growth.
        Ms. Sewell. Do you think unemployment rates--is it more
    because of structural changes or cyclical factors with respect
    to--
        Mrs. Yellen. Both cyclical and structural factors matter.
    So cyclically as the labor market picks up, I think the pace of
    aggregate wage growth will pick up. But structural factors are
    also very important; productivity growth matters over time to
    real wage increases, and productivity growth in recent years
    has frankly been very disappointing. That may be holding wages
    down.
        But across gaps, differences in wage trends across
    different groups in the labor market, I think, reflect a deeper
    set of longer term structural influences and go way back to the
    late 1970s or mid-1970s, where we have seen growing gaps by
    education. We have seen a persistent increase in the returns to
    high-skilled workers, and stagnation at the middle and at the
    bottom.
        Ms. Sewell. Do you think any changes in our tax or spending
    policies could help close that gap quicker? I get that systemic
    problems and persistent poverty cause lots of segments of the
    population to have their unemployment lag behind, sort of
    overall unemployment, but I really want to know if there are
    substantive things we can do as far as our tax policies or our
    spending policies that would hasten the closure of that gap,
    that unemployment gap?
        Mrs. Yellen. Well, there is a large literature on this, and
    many economists have made suggestions about things that
    Congress could consider that would address inequality. I am
    certain with a high return to education and skills being a very
    important factor in determining wage outcomes, policies that
    address education at different levels would be relevant to
    that.
        Ms. Sewell. Are there any policies that--or outreach
    efforts that the Fed has made in order to really understand the
    difference in communities of color with respect to the wage and
    the income inequality?
        Mrs. Yellen. We do have surveys. We are trying to collect
    information. Household surveys enable us to gain better insight
    into this, and we have community development efforts that are
    addressed to low- and moderate-income communities to try to see
    what could be done.
        Ms. Sewell. Thank you for your efforts, and I hope you will
    continue them.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Tennessee, Mr.
    Fincher.
        Mr. Fincher. Thank you, Mr. Chairman. And welcome, Chair
    Yellen.
        I appreciate you being here today, and I am going to get
    right to the point. I am going to talk a little bit--a couple
    of lines of questions, cost-benefit analysis, and then about
    raising interest rates and what kind of impact that will have
    on national debt versus personal debt, and the committee room
    being remodeled, I also have been watching the TVs, which are
    very informative.
        And the charts that I think are being shown by my
    colleagues on the other side of the aisle, if we would just
    change the top to progress since Republicans took the House in
    2011, then I think the charts are great.
        Mr. Perlmutter. Yes!
        [laughter]
        Mr. Fincher. So I appreciate my buddies on the other side
    of the aisle; I get a big kick out of that. Back to costs-
    benefit analysis, the small and medium-sized banks, lending
    institutions all over the country, the impacts of Dodd-Frank
    being burdensome, over-burdensome. Just two or three questions,
    and you can answer and we will move on.
        Does the Fed's independence in setting monetary policy mean
    that financial regulations are above the law, one, and has
    anyone at the Federal Reserve does an analysis of the
    cumulative impact of Dodd-Frank regulation on broader economic
    variables, such as credit availability, economic growth,
    capital formation, and perhaps most importantly, job creation?
        Now, the CFTC and the SEC do this. Why aren't you doing
    this, and can you shed light on why you are not, and would you
    be open to doing it?
        Mrs. Yellen. We do a great deal of analysis to try and
    understand the costs of regulations that we put in place, and
    their benefits. For example, with respect to the Basal III
    capital requirements, we participated along with other
    countries in a very detailed cost-benefit study of the likely
    impact of raising capital standards.
        We came to the conclusion that even though there might be a
    very modest burden on raising spreads and the cost of capital
    to the economy, that the costs of financial crises had been so
    dramatic and so large that the impact that we would have of
    reducing the odds of a financial crisis passed the cost-benefit
    test easily. We regularly make sure we comply with the--
        Mr. Fincher. So, are you--not to interrupt, but my time is
    slipping away. Would you be open to doing a specific cost-
    benefit analysis for every big decision? Because, what you are
    saying there--I get what you are saying and I know it is very
    complicated, but you are saying that in order to make sure that
    we hurt this one over here, we are doing this one here, but we
    are not going to give you the information that you--it is not
    cut and dried, which we need more than you are getting. Would
    you be open to doing a cost-benefit analysis, yes or no?
        Mrs. Yellen. We do follow the analysis required by current
    law, and in some cases I think it would be difficult to do
    that, after all--
        Mr. Fincher. So, no?
        Mrs. Yellen. --Congress has, for example, in Dodd-Frank,
    already made a judgment that they want to see us put certain
    requirements into place based on Congress' judgment that it
    would make the financial system safer and sounder. We put out
    proposed regulations for comment to try to accomplish an
    objective that Congress has already assigned to us, because
    they have determined that it would be beneficial.
        Mr. Fincher. Okay. Reclaiming my time, it just seems like a
    common-sense approach. I know it is very complicated, but
    again, the SEC, the CFTC, and other agencies are doing this--
    that we have a common-sense approach, cost-benefit analysis.
        And you are--I think you are saying that you are in favor
    of doing it this time. Maybe Congress needs to do something
    else--let me move on--but you are not in favor of it.
        Raising interest rates, nationally, the debt that we owe,
    we see the current national debt, personally, the debt that
    every--many Americans owe in this country. When we start down
    this path of raising rates, I am afraid--there is a whole
    generation of people now who think that zero percent is the
    standard interest rate, because they don't know what the
    interest rates--back when I was a kid, when interest rates were
    18 or 20 percent under the Carter Administration.
        But when you start down this path of raising rates, my
    theory is we go into another recession, then you can't raise
    rates again, because rates are already low, because you haven't
    raised them much anyway. And then the only answer is more
    quantitative easing, more dumping money into the economy, and
    that gets very serious very quickly.
        What is your--do you fear that raising rates is going to do
    this? I know my time is--
        Mrs. Yellen. We are not going to raise rates if we think it
    is going to tip the economy into a recession. We will raise
    rates because we believe the economy is strong enough that it
    is appropriate to have higher rates to meet the objectives we
    have been assigned by Congress and--
        Mr. Fincher. This is a concern for you as well?
        Mrs. Yellen. We wouldn't do something that would threaten a
    recession--
        Mr. Fincher. I yield back.
        Mrs. Yellen. --unless inflation were at risk with--
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Illinois, Mr.
    Foster.
        Mr. Foster. Thank you, Mr. Chairman.
        And thank you, Chair Yellen, for appearing today.
        On page 12 of your report, you note that exports, that is
    to say, trade imbalance, has been a substantial drag on GDP
    growth.
        The House and Senate will soon go to conference on a
    customs bill that was part of a trade package that was mostly
    passed into law last month.
        So my concern is and continues to be around the potential
    for our trade partners to undermine the value that free-trade
    agreements can have without strong, enforceable prohibitions on
    currency manipulation.
        During the trade debates, the Administration put forth the
    position--they basically insisted that it was impossible to
    define currency manipulation in any way--for example, with the
    IMF definition of currency manipulation, in any way that would
    not have significantly impinged on your ability to have
    accommodative monetary policy, including quantitative easing,
    in response to the downturn.
        So my question to you is, do you agree with that?
    Specifically, in what ways would, for example, the IMF
    definition of currency manipulation, have prevented you from
    accommodative monetary policy?
        Mrs. Yellen. I do agree with the concerns that were
    expressed about currency manipulation. First, let me make clear
    that I am opposed, and the G-7 and G-20 have weighed in, that
    intervention in currency markets by governments for the sake of
    changing the competitive landscape and purposely trying to--
        Mr. Foster. Agreed.
        Mrs. Yellen. --convert trade to a country is wrong. It is
    inappropriate behavior. Our Treasury Department is deeply
    engaged with other countries--
        Mr. Foster. I understand.
        Mrs. Yellen. --when they think they see that.
        Mr. Foster. The question is, is it possible to make
    actionable objective criteria, defining currency manipulation,
    which would not have impinged on what we had to do in response
    to the crisis?
        Mrs. Yellen. I believe it is difficult because many factors
    influence the value of currencies that are traded in markets.
        Mr. Foster. You are aware the IMF definition does not talk
    about the value of currencies; it talks about action.
        It has three indicia: you have to be running a persistent
    trade surplus; you have to be accumulating additional foreign-
    exchange reserves; and you have to be holding excess foreign
    exchange reserves.
        It is my belief that none of those three would have been
    triggered by our response.
        And the question is, in so that the Administration's
    position was just fundamentally wrong, that IMF definition
    would have prevented us from the accommodative monetary policy
    that was so important to rescuing our economy?
        Mrs. Yellen. My concern with this is that I think it is
    important for countries to be able to conduct monetary policies
    that best pursue domestic objectives. Those policies are not
    intended to impact currencies, but because they do affect
    interest rates, and interest rates affect global capital flows,
    they have impacts on currency values.
        All I have said about this topic is that I would worry
    about any type of legislation that could cripple monetary
    policy from achieving the objectives that Congress has assigned
    to us.
        Mr. Foster. I understand you are worried about it. The
    question, the precise question is, is there anything you did
    that would have triggered the IMF definition of currency--
        Mrs. Yellen. I am not sure. I haven't studied that
    carefully enough.
        Mr. Foster. Would you be able to get back to us? Would it
    be possible to get back with an answer for the record--
        Mrs. Yellen. We will try to look at that.
        Mr. Foster. --of that precise question? Thank you. I really
    appreciate that.
        Let's see. I have a little bit of time left, so I guess--
    are you familiar with--I am a physicist, are you familiar with
    Albert Einstein's quote that any theory of the universe should
    be made as simple as possible but not simpler? And are you ever
    reminded of that quote when you talk about these--things like
    the Taylor Rule, where you imagine that the entire universe can
    be reserved--reduced to a linear relation between a handful of
    variables?
        Mrs. Yellen. I think that is a very good point, and I think
    it is apropos of the Taylor Rule. It would be nice to be able
    to reduce appropriate policy to the current values of two
    simple variables, but I think the world is more complicated
    than that. We can't take everything into account, but there are
    important things that need to be considered, and that is why we
    have an FOMC that has been asked to bring a great deal of
    information to the table.
        Mr. Foster. Right. And the last thing is sort of a
    mathematical corollary of that, which is that if you have
    something that is really a function of many, many variables,
    and it is changing over a period of time in response to a
    single one of those variables, that obviously does not mean
    that the real response function is a single variable--single
    function of the single variable, which is--
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr.
    Royce, chairman of the House Foreign Affairs Committee.
        Mr. Royce. Thank you, Mr. Chairman. Chair Yellen, in your
    first appearance as Fed Chair before this committee, you
    commented on the need to move forward with housing finance
    reform. Do you continue to believe the current state of our
    secondary mortgage market poses a systemic risk, and should
    Congress and the FHFA be taking steps to share that public risk
    backed by taxpayers with the private sector? Secretary Lew
    suggested that such an approach would have his support.
        Mrs. Yellen. I have long said, and my predecessors have as
    well, that we think it would be desirable to see Congress
    address GSE reform to decide explicitly, self-consciously what
    is the appropriate role of the government in the mortgage
    market, and to try to bring private capital back into the
    mortgage market.
        There are a number of different ways, different strategies
    Congress could take to accomplish that, but I do think it is
    important for Congress to try to resolve those issues.
        Mr. Royce. Thank you. Chair Yellen, last year, I, along
    with other members of the House Financial Services Committee,
    wrote to Treasury Secretary Lew and copied you regarding our
    concerns about FSOC's lack of a formalized process for
    reviewing non-bank financial institutions facing designation,
    and we shared concerns about the FSOC's need to conduct a
    thoughtful review of the insurance industry before moving to
    designate individual insurers.
        Since sending that letter, the FSOC has taken additional
    steps to understand the asset management industry which was
    clearly needed after the flawed Office of Financial Research
    report.
        Specifically, Federal Reserve Governor Tarullo has endorsed
    an in-depth marketwide analysis and an activities-based
    systemic risk review, but the FSOC has still not taken steps to
    study and better understand the insurance industry.
        So, do you think it would be appropriate to conduct a
    thorough study and analysis of the insurance industry as well?
    Shouldn't all non-bank financial institutions face a similar
    process for review?
        Mrs. Yellen. The asset management industry is one where
    FSOC thought it appropriate to focus on activities and to look
    at whether or not there are systemic risks associated with some
    asset management activities. Examples would include liquidity
    and redemption risk and use of off-balance-sheet leverage.
        With respect to insurance, this is not a matter of going
    from reviews of individual companies to the activities type of
    approach--it is not something that FSOC, to the best of my
    knowledge, has discussed.
        Mr. Royce. Let me go then to my last question. In February
    of 2014, I asked you about the deepening economic crisis in the
    Commonwealth of Puerto Rico. You said then that the Federal
    Reserve was monitoring developments and would continue to
    analyze the potential consequences for financial stability for
    these events. You also said that it would be best to not have
    the Federal Reserve step in as a creditor of a State or
    municipality. In fact, you said it was more appropriate for
    Congress and not the Federal Reserve to address financial
    issues faced by States and municipalities.
        Do you believe that the best outcome would be that the
    Puerto Rico Electric Power Authority and its creditors would
    come to an agreement without any government intervention with
    respect to this issue?
        Mrs. Yellen. Without what intervention?
        Mr. Royce. Without government intervention, and instead
    work it out between the Power Authority and the creditors?
        Mrs. Yellen. This is not a matter in which I have an
    opinion. It is something the Federal Reserve can't and
    shouldn't be involved in. I think it is important for Congress
    to consider what is best to do in this case. And it is not a
    question on which I have an informed judgment.
        What we have been doing is obviously monitoring
    developments in Puerto Rico, which economically, are very, very
    difficult. We are looking to see if there are risks that are
    being transmitted to the broader municipal debt market, and we
    are not seeing signs of contagion. That is another topic that
    is obviously important, but exactly what should be done in this
    situation, I think, is a matter for Congress to consider.
        Mr. Royce. In the past, you have said it is best not to
    have the Federal Reserve step in as a creditor of a State or
    municipality.
        Mrs. Yellen. And I continue to believe that very strongly.
        Mr. Royce. Thank you very much.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Ohio, Mrs.
    Beatty.
        Mrs. Beatty. Thank you, Mr. Chairman, and thank you,
    Ranking Member Waters.
        Chair Yellen, thank you for being here today, and let me
    just say that we were very proud to have you last week in the
    great State of Ohio.
        Mrs. Yellen. Thank you.
        Mrs. Beatty. Although it was not Columbus, the capital, we
    would look forward to having you come just a few miles south to
    visit us.
        My first question is a follow-up on Congresswoman Waters'
    question, when she asked about discrimination and the loss of
    wealth based on subprime lending, and in part of your answer,
    which I am not sure you got to finish, when you said there were
    other policies that Congress could pursue to address
    discrimination and inequality.
        Can you elaborate on what those policies are?
        Mrs. Yellen. I meant more broadly in terms of inequality
    among households, in terms of wealth and income. There are many
    factors that affect inequality. They tend to be deeper
    structural forces, including technological change that has
    increasingly upped the skill demands for our workforce and
    raised the return to skilled workers relative to those who are
    less skilled.
        Certainly, education and training are matters that are
    within Congress' domain to consider how to make sure that
    individuals have access to a world-class education that is
    going to enable them to earn a higher wage; policies affecting
    infrastructure and capital formation, entrepreneurship, other
    things also affect trends and inequality. And I was referring
    to all of those factors where Congress could potentially play a
    role.
        Mrs. Beatty. Okay, thank you.
        When you testified before this committee in February,
    January's unemployment rate was about 6.6 percent overall.
    About 4 months later, the rate decreased to about 5.3 percent.
    However, in African-American communities, while it declined, it
    went from 12.1 percent to 9.5 percent over that same period.
        And while African-Americans' unemployment rate did
    decrease, the number is still too high. In fact, it is double
    the national unemployment rate, and I think most people--you
    included--would agree that is unacceptably high.
        So my question is, as you assess the health of the labor
    market, to what extent are you taking into account the fact
    that minority communities still face unacceptably high rates of
    unemployment, and is there any outreach or anything that the
    Federal Reserve has engaged in to understand the extent in
    communities such as the one I represent?
        Mrs. Yellen. There really isn't anything directly that the
    Federal Reserve can do to affect the structure of unemployment
    across groups. And unfortunately, it has long been the case
    that African-American unemployment rates tend to be higher than
    those on average among those in the Nation as a whole. It
    reflects a number of different sources of disadvantage that are
    operative there.
        In our national monetary policy, we are trying to achieve a
    situation where jobs are broadly available in the economy to
    those who want to work. But we seek the maximum sustainable
    level of employment or we have to be careful not to try to push
    the economy to a point we have to worry about inflation
    remaining under control. And given our focus on inflation,
    there are certainly limits on what we can do for any particular
    group.
        Mrs. Beatty. Okay. Thank you.
        I have a few seconds left. Let me continue on this theme on
    the other side as I talk about the Office of Minority and Women
    Inclusion (OMWI). Certainly, you know that Section 342 of Dodd-
    Frank created that office. Part of what we have struggled with
    is the whole reporting authority and the standards for
    reporting back what the Federal regulation offices are doing.
        Do you have any insight on that?
        Mrs. Yellen. We make each of the Federal agencies or
    entities that are covered by this make annual reports to the
    Congress. So the Board is reported annually on our efforts, and
    we are very committed to doing what we can to facilitate
    inclusion of minorities and women. And we have many programs
    and have tried to detail them in those reports--
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentlelady from Missouri, Mrs.
    Wagner.
        Mrs. Wagner. Thank you, Mr. Chairman.
        Chair Yellen, thank you for joining us today. I want to
    touch on some issues that some of my colleagues have also
    brought up. But keeping in that vein, and particularly with the
    news coming out of Greece for the past few weeks, I think it is
    important for countries to take a hard look at their own debt.
    It is time for us to look in the mirror and address our own
    problems, including the over $18 trillion in debt that we have
    accumulated.
        Now, the Federal Reserve has employed an, I will say
    exceptionally accommodating, monetary policy since the
    financial crisis to spur economic growth. However we are now
    nearly 7 years, ma'am out with the Federal funds rate still at
    the lower zero bound. The quantitative easing and low interest
    rates have made financing of the Nation's deficits much easier,
    and certainly has relieved pressure through fiscal reforms to
    solve our long-term debt problem.
        Chair Yellen, both you and your predecessor, Chair
    Bernanke, have argued that fiscal reform is important over the
    long term. However, you have also stated that fiscal prudence
    can be ignored in the short term to not hamper the economic
    recovery.
        Chair Yellen, it has now been 7 years. We can no longer say
    we are looking at the short term when we are dealing with our
    country's debt problem, can we?
        Mrs. Yellen. I, like my predecessor, believe the Nation
    faces a very serious debt problem in the years ahead.
        At the moment our deficit, mainly because of congressional
    actions and those by the Administration, have succeeded in
    lowering deficits to the point where for the next several
    years, the debt-to-GDP ratio is stable.
        But over time, under CBO projections, as the population
    ages, and especially if health care costs rise above trends,
    the country will face an unsustainable debt path, in which debt
    to GDP ratio rises and that requires further action.
        That is mainly related to retirement programs, to Social
    Security and even more important, to Medicare and health care
    cost trends. And so, we have known about this for decades, and
    there remains a need for action on this front.
        Mrs. Wagner. There does remain a need for action. And
    citing those latest CBO long-term budget outlook reports on
    some of the consequences of large and growing Federal debt,
    this comes again from the CBO's long-term budget outlook, it
    cites things like less national savings, lower income, pressure
    for larger tax increases or spending cuts, reduced ability to
    respond to domestic and international problems, and a greater
    chance of a fiscal crisis.
        Are these things that you all consider at the Federal
    Reserve with regard to monetary policy?
        Mrs. Yellen. I agree with the set of consequences that you
    just read to me. And ultimately, when we see those things being
    manifest, those consequences. So in the years ahead, if
    deficits aren't addressed and become very large, they will put
    pressure on the economy that--not right now, but in future
    years, likely will cause us to have higher levels of interest
    rates than we otherwise would have, diminished levels of
    investment and productivity growth in this economy. We would
    have to offset those forces by having a tighter monetary
    policy. But we are not in that situation now.
        Mrs. Wagner. Particularly relating to long-term debt
    leading to a greater chance of fiscal crisis, as they say, is
    this something you discuss as part of FSOC when you are looking
    at systemic risk?
        Mrs. Yellen. I have not been part of an FSOC discussion of
    this, but it obviously is a significant issue for the long
    term.
        Mrs. Wagner. I only have a short amount of time. When do we
    get to the long term, Chair Yellen? When are we there after 7
    years and adding $8 trillion in debt over the last handful of
    years? When do we get to the long term?
        Mrs. Yellen. The economy is recovering. I am pleased by its
    progress. As I indicated, my colleagues and I think if the
    economy progresses as we expect, we probably will begin to
    raise interest rates some time this year, and that takes us
    toward the long term.
        Mrs. Wagner. How does that affect our current debt, Chair
    Yellen?
        Mrs. Yellen. Well, two ways. Higher interest rates will
    raise the cost of servicing the debt, but a stronger economy,
    which is what will cause us to raise interest rates, boosts tax
    receipts and is favorable for the Federal budget.
        Mrs. Wagner. Thank you. I appreciate you being here.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Kildee.
        Mr. Kildee. Thank you, Mr. Chairman. Chair Yellen, thank
    you for being here.
        The work that I did before I came to Congress and a lot of
    the work that I have been focused on since I have been here
    relates to the economic health of America's cities and towns.
    And I know that a lot of the regional banks, most notably
    Boston, Cleveland, Chicago, and in some ways Philadelphia, have
    been focusing some attention on this issue of the fiscal health
    of communities within their supervisory area. And I have raised
    this with your predecessor and again with you.
        I am curious as to whether the Board of Governors might in
    the near future take up this question. What we have, and I have
    talked about this before, I know other Members have heard me go
    on about it, is we have looming a pending institutional failure
    in this country. There is often a tendency to think about
    cities facing significant municipal stress as being anomalies,
    or having that problem as a result of significant
    mismanagement, or an episodic sort of fiscal stress situation.
        But what we are seeing, and what the data shows us, is
    there is a structural problem. Municipal governments of all
    types are facing enormous stress. Hundreds of millions of
    dollars in general fund revenues and expenditures in many, many
    dozens of these municipal institutions that are facing
    potential failure.
        While I know the Fed has involved itself most recently in
    the question of municipal bonds, potentially as a source of
    liquidity for banks, looking at the municipal financial
    situation from the investor side is only one-half of the
    equation.
        And I think it is overdue that the Fed, with its strong
    voice and its dual mandate, particularly its mandate related to
    employment, take a look at the potential employment impacts of
    the failure of dozens, potentially, of American cities that are
    really central to our economy.
        I wonder if you might comment on the problem and offer any
    thoughts as to whether you think the Board of Governors might
    take this question up. I think it would be an important issue
    to take up.
        Mrs. Yellen. That is something I am happy to raise with my
    colleagues. I am well aware of the work that has gone on in a
    number of Reserve banks. Reserve banks all have active
    community development functions, and many of them have been
    very focused on older cities or cities that have suffered
    declines, in some cases because of the decline of
    manufacturing, and trying to help them work toward strategies
    that would lead to their revitalization.
        And a number of them have done some very creative work. So
    I can discuss with my colleagues what we might do in that
    space. I am pleased to see the efforts and the good work that
    many of the Reserve banks have undertaken. I think it has been
    helpful to community leaders as they try to devise strategies
    for revitalization.
        Mr. Kildee. Thank you. I would just encourage you to look
    at this as potentially a part of the work of the Board of
    Governors itself and looking at the role that the banks,
    regional banks have done. It is important.
        But I think often what happens is, when it is looked at
    from a perspective of a region, it is seen as an anomaly. And I
    think if the Fed would be willing to use its research capacity
    to help elucidate to many policymakers that not only does this
    problem have a potential negative impact on employment, but it
    is a structural and pervasive problem that goes beyond what
    normally had been seen as an anomaly, or as an episode based on
    management failure or some unforeseen circumstance. It is a
    structural problem, and I really do think it fits within the
    responsibility of the Fed.
        Mrs. Yellen. I appreciate your suggestion. I know a number
    of years ago the Reserve banks collaborated to initiate work on
    this topic. They chose a number of communities around the
    country, cities that were hard pressed, and tried to work on
    understanding what strategies worked to revitalize these
    different kinds of communities. And it could be collaborative
    work the Reserve banks undertake together.
        Mr. Kildee. Thank you very much. I appreciate it.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Kentucky, Mr.
    Barr.
        Mr. Barr. Chair Yellen, welcome back to the committee. And
    I wanted to talk to you a little bit about the low rate policy,
    effectively, it is almost a zero short-term interest rate
    policy, that the Federal Reserve has pursued now for 6 years.
    One of the original targets the Fed set to begin raising rates
    was when unemployment reached 6.5 percent.
        We are well below that target now; as you testify today, we
    are at about 5.3 percent unemployment. And I appreciate your
    testimony that you expect to raise the target Federal funds
    rate gradually by the end of this year, but what I want to
    explore are the reasons why the Fed has delayed normalizing
    monetary policy beyond the point that you originally targeted
    for increasing rates and what that says about a few issues.
        First of all, what does it say about the unpredictability
    of Fed policy? And I appreciate in your testimony that
    effective communication is critical, that transparency is
    desirable.
        But doesn't the fact that we have been below 6.5 percent
    unemployment now for almost a year-and-a-half, and you still
    haven't raised rates, undermine the commitment to transparency
    and the commitment to communication?
        Mrs. Yellen. I want to make clear that we never said that
    we intended to raise rates when unemployment fell to 6.5
    percent.
        Instead, we said it was a threshold and if unemployment was
    above that level and inflation was well under control, we would
    not raise rates; that once unemployment fell below that level,
    we would then begin to consider whether it was appropriate to
    raise rates.
        And we have followed that policy, and we never said that it
    was a target--
        Mr. Barr. I understand that.
        Mrs. Yellen. --at which we would begin to raise rates.
        Mr. Barr. I understand that, and I appreciate the caveats,
    and I appreciate the fact--
        Mrs. Yellen. Well, it is more than a caveat. It is--
        Mr. Barr. You are very good at caveats. I appreciate that.
        But I think that brings me to my second point, which is
    that a full 6\1/2\ years after the recovery, even though we
    have seen a decline in unemployment, as you acknowledge, there
    is slack in the labor market, and there are significant,
    significant weaknesses in the labor market, in the overall
    economy.
        In fact, a recent ``Investor's Business Daily'' article
    said that the overall growth in the 23 quarters of the Obama
    recovery has been 13.3 percent. That is less than half the
    average growth rate achieved at this point in the previous 10
    recoveries since World War II.
        Looked at another way, had the Obama recovery been merely
    average, GDP would be $1.9 trillion larger than today. That
    translates into $6,000 per household.
        And I think you recognize this in your report, saying that
    the measure of labor under-utilization remains elevated
    relative to the unemployment rate, and that would explain why
    you have invoked that caveat and haven't raised the rates, even
    though you came below that 6.5 percent. So I understand that
    analysis.
        But let's talk about the cause of that underlying weakness.
    It is clearly not monetary policy from your standpoint, because
    you have engaged in these extraordinary measures--6 years of
    zero rates, very accommodative policy, bond buying,
    quantitative easing.
        Shouldn't we start looking at fiscal policy: Obamacare,
    which CBO says is contracting employment by 2.5 million jobs;
    the 30-hour work week, which is forcing people to go part-time;
    the EPA's rationing of energy; 8,000 lost coal miners in my
    State and we are losing employment by the day.
        The American Action Forum says that over the next 10 years,
    Dodd-Frank will reduce GDP output by almost a trillion dollars.
        And just last week, one of your colleagues on the Federal
    Reserve, Board Governor Lael Brainard, acknowledged that
    regulations may be a factor in diminished fixed-income
    liquidity in the capital markets.
        The Federal Reserve has gone to extraordinary lengths to
    produce robust economic growth, and yet we see this lag and
    this slack, as you say.
        Shouldn't we start diagnosing the problem differently, that
    this is a fiscal policy disaster?
        Mrs. Yellen. Of course, it is appropriate to look at why we
    have had such a slow recovery. It really has been painstakingly
    slow getting the economy to the point where unemployment is 5.3
    percent.
        Remember, we had a devastating financial crisis. It took a
    huge toll on households, left many of them struggling with
    debt, with massive losses in wealth, underwater on their
    mortgages. They have been trying to get that debt under
    control.
        Businesses have been very cautious about investing. We
    are--
        Mr. Barr. And I have 15 seconds left.
        Mrs. Yellen. --partly living with the headwinds from that
    crisis. But--
        Mr. Barr. Just one final point. I think you know that low
    rates are not the problem. And in fact, what I am concerned
    about now is that because we have delayed raising rates below
    that 6.5 percent unemployment rate, now we have no tools left.
        And what is your response now? If we go back into recession
    with a $4.5 trillion balance sheet and zero rates, we have no
    tools to address the next recession.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair recognizes the gentleman from Florida, Mr.
    Murphy.
        Mr. Murphy. Thank you, Mr. Chairman, and Ranking Member
    Waters. Chair Yellen, thank you for being here.
        One of the biggest problems we have in our country is the
    disappearing middle class, and one of the factors that isn't
    addressed in that conversation is often housing.
        And in my home State of Florida, in areas like Miami, and
    Coral Gables, there is a lot of growth. In fact, a lot of the
    numbers there for growth are through the roof, way better than
    ever expected.
        But unfortunately, that is for folks who have the 700-plus
    credit scores, while the middle- to lower-middle-income
    families, especially a lot of the minority communities, are
    neither experiencing this bounce-back, nor building the equity
    that I think is important to get into the middle class.
        My question relates to regulatory relief for banks lending
    to these families. When does the Federal Reserve intend to
    finalize its list of domestic systemically important banks so
    that this committee can have an idea, better than just the $50
    billion line, which American banks are vanilla, making 30-year
    fixed-rate mortgages and small business loans important in our
    communities, versus the ones that carry systemic risk.
        Mrs. Yellen. I am not sure exactly what your--
        Mr. Murphy. When do you intend to finalize the list of
    domestic systemically important banks?
        Mrs. Yellen. We have eight domestic banks that have been
    designated globally as global systemically important banks (G-
    SIBs). They are among the banks that are over $50 billion and
    subject to the enhanced prudential standards in Dodd-Frank.
        And those banks we have, for example, subjected to a higher
    leverage requirement than other banks. We supervise them in a
    different process, and we will be proposing enhanced capital
    standards or surcharges for those eight systemically important
    banks.
        But others that are not in that group also are important
    and have systemic significance and are subject to enhanced
    prudential standards and supervision.
        Mr. Murphy. And will you be putting that list out?
        Mrs. Yellen. The list exists.
        Mr. Murphy. Other than the G-SIBs.
        Mrs. Yellen. I am not sure--what list?
        Mr. Murphy. For what I just said. For the domestic
    systemically important banks. And there has been a lot of
    conversation here in the committee as to whether it is just a
    $50 billion, what I would say, arbitrary line that is being
    considered instead of qualitative measures like
    interconnectedness, derivatives, substitutability, et cetera,
    and if that is going to be taken into consideration.
        Mrs. Yellen. We give special attention to all banks that
    are over that threshold. But they differ in terms of their
    characteristics. And we have tried throughout to tailor
    supervision and regulation to the systemic footprint of the
    bank.
        So there is no list of banks that meet this criteria. And
    there are, of course, several that have been designated for
    supervision by FSOC that--or also subject to enhanced
    supervision.
        Mr. Murphy. Switching gears a little bit, and we have
    already had some discussion related to employment, most
    economists say that 5 percent is full employment. Right now, U3
    is at, what, 5.3 percent? So we are pretty close.
        Why do you think we haven't had wage growth yet, and what
    do you think needs to be done to begin to feel that?
        Mrs. Yellen. First of all, I think there is more slack in
    the labor market than you would think by the 5.3 percent
    measure, somewhat more. And I have pointed to the very high
    levels, unusually high, and we detailed this in the Monetary
    Policy Report. The fact that involuntary part-time employment
    is unusually high given the unemployment rate. So that is one
    factor.
        In addition, I think that labor force participation, while
    it has mainly declined for demographic reasons, there remains
    some component of depressed labor force participation that does
    reflect a weak economy, a weak labor market that more people
    would rejoin the labor market if it were stronger.
        So to my mind, the U3, the 5.3, somewhat overstates just
    how strong the labor market is. But there are also lags in the
    time the labor market strengthens and wage growth picks up.
        Mr. Murphy. What rate do you think we as policymakers
    should use as full employment?
        Mrs. Yellen. The--what?
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Pennsylvania,
    Mr. Rothfus.
        Mr. Rothfus. Thank you, Mr. Chairman. Welcome, Chair
    Yellen.
        Last week, the Federal Reserve Board approved the merger of
    a $188 billion bank with an $18 billion bank. This will put the
    new entity above $200 billion. In the Federal Reserve's final
    order approving the merger, it analyzed the financial stability
    implications of the merger. The Federal Reserve noted that the
    merger did not present a meaningful, greater risk to the
    stability of the United States financial sector. In analyzing
    the stability implications, the Federal Reserve used a factor-
    based model.
        Chair Yellen, based on the analysis in the final order,
    should we consider this analysis an endorsement by the Federal
    Reserve of a factor-based approach to measuring systemic
    importance and financial sustainability?
        Mrs. Yellen. The staff looked at the detailed circumstances
    surrounding the characteristics of this particular merger and
    tried to arrive at a reasoned judgment, taking many different
    factors into account of whether or not this would create a
    financial stability threat. And they didn't use just a
    formulaic approach but they looked at the details of
    situation--
        Mr. Rothfus. So the factor-based model worked in this case?
        Mrs. Yellen. They listed a number of factors they took into
    consideration, and that is a useful list, but then they did a
    detailed analysis--
        Mr. Rothfus. Thank you. Chair Yellen, as you know, this
    month marks 5 years since the enactment of the Dodd-Frank Act.
    At the signing ceremony, President Obama proclaimed that the
    law would help lift our economy and lead all of us to a
    stronger, more prosperous future.
        Yet since that time, the law has resulted in some 400 new
    government mandates, which research has shown will reduce gross
    domestic product by $895 billion over the next decade, or
    $3,346 for each working-age person. These costs are a large
    reason why more than 17 million Americans are still unemployed
    or underemployed today. Why the percentage of adults who are
    employed is just 62 percent, the lowest in 37 years. And why
    even Bernie Sanders has admitted that an honest assessment of
    real unemployment in the United States is 10.5 percent.
        In your speech to the City Club in Cleveland last week you
    said, ``Growth in real GDP has averaged only 2.25 percent per
    year since 2009; about 1 percent less than the average rate
    seen over the 25 years preceding the great recession.'' I would
    note that by comparison, the GDP growth rate for a comparable
    period after the Reagan recovery was 4.8 percent. That was a
    recovery marked by less regulation, lower taxes compared to
    higher taxes, and a higher regulation environment than we have
    here.
        Considering that average 2.25 percent per year since 2009,
    that number hides quarters where we actually contracted. For
    example, in both the first quarter in 2014 and in the first
    quarter in 2015, the economy actually shrank. Is that correct?
        Mrs. Yellen. According to the statistics we have, yes.
        Mr. Rothfus. In light of the negative growth in those
    quarters, I would like to draw your attention to the slide that
    has been shown by my colleagues from across the aisle. I don't
    see any negative growth quarters in that.
        Do you think this slide is an accurate reflection of the
    economy's GDP growth?
        Mrs. Yellen. It looks like the numbers you have on this
    chart are year over year numbers rather than quarterly numbers.
        Mr. Rothfus. Counting the bars between 2011 and 2015, I see
    more than 4 bars there; I see quite a few bars. It is hard to
    see what is represented here. What I don't see are the negative
    quarters we have had in there.
        Mrs. Yellen. I don't know, this isn't my chart, but--
        Mr. Rothfus. Would you agree the chart does not show the
    negative quarters?
        Mrs. Yellen. I don't see the negative quarters. I see your
    label says year over year.
        Mr. Rothfus. But you do see more than 4 or 5 years there
    between 2010 and 2015--more bars that would represent--
        Mrs. Yellen. Year over year often means the fourth quarter
    of one year over the fourth quarter of the previous year, or
    the third quarter over the third quarter of the previous year.
    And because negative quarters are infrequent, typically in a
    four quarter year over year--
        Mr. Rothfus. Negative quarters and near zero quarters,
    which we also missed in that chart. I would be interested in
    your perspective given these anemic GDP numbers when you
    compare a 2.25 percent growth since 2009, and your own
    acknowledgment that is a percentage less than the 25 years
    proceeding the great--this is the more accurate slide, by the
    way, which does show the negative or near zero growth in some
    of the quarters.
        Mrs. Yellen. Okay.
        Mr. Rothfus. Given that anemic growth, 2.25 percent, and
    you compare the deregulatory, lower tax environment in the
    1980s where we had 4.8 percent growth, do you think Dodd-Frank
    has lifted the economy?
        Mrs. Yellen. I think Dodd-Frank has led to a stronger and
    more resilient financial system, and the years that you showed
    on your previous graph that were negative and year over year
    negatives, that was what we suffered in the financial crisis--a
    huge loss in output and in jobs. And to have a stronger, more
    resilient financial system means the odds of such a devastating
    episode is dramatically reduced.
        Mr. Rothfus. I yield back my time.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Washington, Mr.
    Heck.
        Mr. Heck. Thank you, Mr. Chairman. And Madam Chair, thank
    you so much for being here.
        I am aware that there is an accumulating amount of research
    and scholarship, as a matter of fact, kind of tracking the
    decline of entrepreneurship and business formation. Fewer
    businesses are being started and fewer are surviving past the
    first year. And as we all know, there is a declining number of
    community banks in this country.
        So my question to you is, what can you do, and what can we
    do to help community banks serve their local economies?
        Mrs. Yellen. Community banks are really vital to local
    economies. I saw this firsthand when I was in San Francisco as
    President of the Reserve bank there. It is something we are
    very focused on at the Federal Reserve. We want to see
    community banks thrive, and we know that for many different
    reasons, this is a very difficult environment for community
    banks: the slow pace of economic growth and recovery that we
    have had; the low interest environment is squeezing their
    margins; and the regulatory burdens that they face have been
    really quite high and they are struggling with it.
        For our part, we are looking at the way that we supervise
    community banks to do everything within our power to reduce the
    regulatory burden. And I could give you a list of things that
    we are trying to do to minimize the burden: more off-site
    exams; more special tailoring of our exams to the risk profile
    of the bank.
        Mr. Heck. If I could reclaim my time, thank you.
        Mrs. Yellen. Yes, sure.
        Mr. Heck. Kind of in the spirit of this, Congresswoman
    Beatty asked you about what you could do specifically to help
    communities of color who have disproportionately high
    unemployment rates. And you indicated that you don't have
    specialized tools. I am going to respectfully disagree.
        And I would encourage you and others at the Fed to take
    note of some recent research done by a graduate student at MIT
    named Mr. Nguyen, who indicates that when community banks
    branches leave census tracks where there is a concentration of
    either low-income or communities of color, that local business
    lending declines precipitously, even when there are other
    national or international bank branches retained in that
    community.
        He tracks that it is not true with mortgage lending, but it
    is true with small business lending. And with all due respect,
    Madam Chair, you have merger approval authority oftentimes when
    community banks are purchased, and you could make conditional
    the continuing presence of branches in those census tracks or
    in those neighborhoods where we have begun to document a
    decline.
        So with the little amount of time I have left, I am always
    interested in your opinion about what you see as the threats to
    our continuing recovery. And I will use this opportunity to
    suggest that I don't think it is as robust as it can be. You
    and I have had the conversation about the output gap and the
    dire need for the Fed to begin to think of itself differently
    as it relates to investment and infrastructure. But I am not
    going to go there today with you.
        What do you see as the threats that could induce--or the
    factors that could contribute to another downturn in the
    economy? What are you worried about? What keeps you up at
    night?
        Mrs. Yellen. Let me first start by saying that I do think
    the economy has improved a great deal. And in a way, I am
    focused on the economy's strength and its good performance,
    rather than mainly lying awake at night and worrying about a
    further downturn. I think we are doing pretty well.
        Mr. Heck. The Fed has reduced the projected growth rate of
    the GDP by 20 percent in just the last few years, from 2.5 to
    2.8 to 2.3 percent. That is a material downward projection.
        Mrs. Yellen. It is--
        Mr. Heck. But the question still is, what is out there that
    worries you?
        Mrs. Yellen. Okay, let me just say that the writing down
    for our projections on growth in part reflects the fact that
    productivity growth has consistently disappointed now for a
    number of years.
        So our unemployment projections have proven more accurate
    than our output projections. In essence, we have had decent job
    growth and better job growth than you would have anticipated,
    or we would have anticipated with weaker growth. In part, it is
    a reflection of quite disappointing productivity growth.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair recognizes the gentleman from Arizona, Mr.
    Schweikert.
        Mr. Schweikert. Thank you, Chairman Hensarling.
        Madam Chair, first, on a personal basis, you have always
    been very kind to me, particularly on some of the more abstract
    questions I have thrown at you. But in a couple of the
    conversations here, there has been the discussion of interest
    rate policy, ultimately what it does to us and our fiscal
    policy. In an FOMC meeting, does it ever reach the level of
    conversation of, as interest rates go back to some level of
    normalization, what it actually means to our debt and deficit
    and the projection of our financing costs?
        Mrs. Yellen. That is something our staff looks at and I
    have looked at. Congress should expect, and this is embodied in
    CBO projections that as the economy recovers, short-term
    interest rates will rise. Long-term interest rates already
    reflect that, and as the years go by, if short-term interest
    rates do indeed rise with the recovering economy, long rates
    will move up further and this will affect the interest burden
    of the debt, and other things equal will add to deficit.
        So that is clear. But it is also true that a strengthening
    economy means stronger tax receipts. So this will have an
    effect.
        Mr. Schweikert. You and I see that as somewhat obvious. But
    I see many discussions around here when we are looking at an
    environment where reports are telling us that just in a few
    years, interest is going to equal our entire defense budget.
    And that is actually the new normal--we will call it the new
    normal interest rate models we are heading towards.
        My great fear is current monetary policy ultimately
    emboldens us to engage in bad fiscal policy. And we are going
    to pay a price for that. I think that in the future,
    particularly if we keep seeing the revisions on our GDP growth,
    we may have to deal with this much sooner than later.
        Mrs. Yellen. You should be aware that interest rates are
    likely to rise and that will raise the interest cost of the
    debt. That should be part of the calculation that you are
    making.
        Mr. Schweikert. I have sort of a one-off type question, and
    you and I touched on this earlier; you were very kind to engage
    in conversation with me. I have an interest in the distortion
    of the price of money. And more than just what the Fed does in
    its liquidity and claim on bank reserves and the purchase. It
    is what we do tax policy-wise on what interest is deductible
    and what isn't, and what is guaranteed.
        We sat down with some Richmond Fed folks a while back, and
    they told us that the majority, the vast majority of total
    debt, not including student loans in this country, has full
    faith or implied credit. Are we in the time of an absolute
    distortion of the price of money, and does that make your job
    much more difficult to use money as a communication of activity
    in the markets?
        Mrs. Yellen. It is absolutely true that when--whether it is
    a student or a business or a household, considers what the
    relevant cost of borrowing or debt is to them, they look not
    only at the interest rate they have to pay, but what the other
    terms are of that borrowing. And if, for example, it is tax
    advantage, that has an impact on what the relevant cost of
    money is to them. So, of course, it is true that many things
    other than just the headline interest rate matters in the
    incentives facing borrowers.
        Mr. Schweikert. Well, my thesis on that is that ultimately
    hits to your concern of our savings rates. We have created so
    much distortion over here on the price of money that we have
    disincentivized proper savings and frugality, you now,
    particularly in our part of Congress.
        You have been asked a couple of questions, and you have
    always been very good at bringing up entrepreneurship. One of
    the things that seems to be working in the economy is some of
    the alternate access to capital platforms, whether they be
    crowd-sourced lending or crowd-sourced equity.
        Much of the regulatory environment is about the systemic
    risk and a cascade effect to the banking financial systems. But
    these, when they are crowd-sourced, actually have almost no
    cascade effect.
        Do you believe the Fed will take a light regulatory touch
    to sort of the alternative financing models out there that are
    much more egalitarian, reaching into some of our smaller
    communities, but actually in many ways are much safer?
        Mrs. Yellen. I am so happy to see innovation in the
    financial sector that makes new forms of financing available. I
    am not aware of regulatory issues at this point that affects
    those vehicles. But I can get back to you if we do have
    concerns.
        Mr. Schweikert. Thank you, Madam Chair.
        And thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr.
    Sherman.
        Mr. Sherman. Thank you, Mr. Chairman.
        Madam Chair, I have 5 minutes to try to convince you not to
    raise interest rates until the spring. Spring is when things
    naturally are risen. It is when plants come out of the ground.
    It is a better time than winter to do so.
        And there are some reasons that I think you are already
    aware of. The IMF study, for example, argues that things should
    be delayed until early next year.
        You have more economic experience than all of us in this
    room, of course. But on the political side, you should not
    underestimate the ability of politicians in Europe to screw
    things up.
        You should not underestimate the ability of politicians in
    Washington to screw things up. You need to price in the
    prospect that we do not pass all the appropriations bills, that
    we do not raise the debt limit.
        I am sure you factored in China, but it is not just Beijing
    and Washington that you need to worry about. You need to worry
    about Norwalk, Connecticut.
        I mentioned this to you when you were here a few months
    ago. And I am hoping that you can get your staff to do a study
    on this for two purposes: one, to let the country know how
    important this is and what its economic effect will be; and
    two, to inform your own decision so that if this prospective
    terrible decision does occur, you factor in the fact that it is
    going to shave half a point away from our economic growth at
    least.
        I am referring, of course, as you know, to the argument
    that we are going to capitalize all leases. This would add $2
    trillion to the corporate balance sheets liabilities of
    America--a $2 trillion increase in liabilities.
        Not because anything has happened in the economy, but just
    because as a matter of theological esoteric accounting thinking
    that I have to confess I actually understand and no one should.
    But for no benefit to our economy, we may add $2 trillion.
        When you do that, you throw all the balance sheet ratios
    out of whack. You force companies to try to retrench and make
    their balance sheets look better. And you strongly
    disincentivize entering into long-term leases.
        Companies will say well gee, yes, you could open that
    shopping center. Why don't we sign a 1-year lease for the
    anchor store? And oh, we will renew it later, but we can't sign
    more than a 1-year lease because our balance sheet will look
    terrible.
        So, if you factor all those reasons in, maybe that will
    push you in the right direction. But there are more.
        The reason to raise interest rates, well the one other that
    you are already aware of is that our unemployment rate doesn't
    capture all those who have dropped out of the labor market. We
    have an all-time low labor participation rate. When you adjust
    for that, the unemployment rate does not just define increase.
        The reason given to raise interest rates is to deal with
    the prospect of inflation. Inflation is already very low. You
    have a 2 percent target and you are not hitting it. You have to
    keep interest rates low to hit that target.
        But by the way, that is too low a target. Laurence Ball,
    another economist, has argued for even a 4 percent rate.
        And it is in real business where things stick, where you
    may have an employee who gets fired who might not get fired if
    there was an easy way to reduce their costs by 2 or 3 percent.
        And then finally, you have all the Baby Boomer retirees.
    And I will point--it is not in your mandate, but it is in the
    Declaration of Independence, a desire for happiness.
        There are economists and CPAs for whom a 1 percent real
    interest rate is always a 1 percent real interest rate. That is
    way less than 1 percent of the people.
        For everyone else, they live in a nominal world. And if you
    are a retiree in a zero inflation rate, 1 percent real interest
    rate world, you are living on 1 percent because you
    psychologically cannot invade principal.
        If instead you are in a 3 percent inflation, 4 percent
    interest rate, 1 percent real rate of return world, you are
    deliriously happy. You are earning 4 percent, and nominally you
    are not invading principal. And this works for everybody except
    economists and CPAs, which means just about everybody.
        So please, wait until spring.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Colorado, Mr.
    Tipton.
        Mr. Tipton. Thank you, Mr. Chairman.
        And thank you, Chair Yellen, for taking the time to be here
    today.
        We have heard comments from our colleagues across the aisle
    in terms of the disparate impact that we are seeing in the
    failed economy for minority communities. And I would like to be
    able to expand that actually for what we are seeing in rural
    America as well, where the economy simply isn't moving. And one
    of the key components for that is obviously access to capital
    for our community banks.
        You just stated a few moments ago that it has been a
    difficult period for community banks. Regulatory burdens have
    been high.
        And I guess what my question is, as follows up on comments
    that you made earlier in the year, which were then supplemented
    by FDIC Chairman Sheila Bair as well, that we have an
    overzealous regulatory burden which is impacting some of the
    community banks that are going. And what assurances, what
    policies are you going to be putting forward?
        Because it seems to be that through Dodd-Frank, it is a
    matter of shoot, then aim. And now we are trying to be
    reactive. But at home our people are feeling the pain of bad
    policy that has come out of Dodd-Frank. And what we are
    feeling--and what are you going to be doing at the Fed to be
    able to alleviate this?
        Mrs. Yellen. We are very focused on community banks. We
    want to--
        Mr. Tipton. That is what they are worried about, by the
    way.
        [laughter]
        Mrs. Yellen. We formed a council called the Community
    Depository Institutions Advisory Council (CDIAC), that consists
    of community bankers. And they come to see us twice a year. The
    entire Board meets with them.
        There are also in each of the 12 Federal Reserve districts,
    versions of, on a regional scale, a council to advise the
    Reserve banks on factors affecting community banks.
        So we are listening. We are taking seriously the complaints
    that we hear, and the specifics about our supervision, and
    trying to be responsive--
        Mr. Tipton. I appreciate that, but if I can put a little
    exclamation point on this. I sat down with community banks in
    my district. They feel that they are no longer working as a
    banker, but they are working for the Federal Government. They
    are working just for--to be able to comply with regulations
    that are currently in place.
        And while we may have hearings, they don't feel that anyone
    is actually listening, because this is stagnating that growth
    in those community banks.
        Mrs. Yellen. We are listening and we are taking a series of
    steps that I believe are meaningful to reduce burden, including
    reducing the amount of time we spend in these banks, disrupting
    other activities that they want to be doing, by reducing our
    demands for documentation, taking a more risk-focused approach
    to reduce the burdens of exams.
        We are trying to make clear to the community banks what is
    relevant to them. And so many of the regulations under Dodd-
    Frank we have put in effect only affect larger banks, and
    particularly the most systemically important banks--
        Mr. Tipton. But you do recognize that a lot of our
    community banks de facto feel they still have to be able to
    comply with those Dodd-Frank regulations. Even though you are
    saying, ``We are going to look the other way, it doesn't really
    apply to you,'' they are still feeling the impacts that are
    coming out of Dodd-Frank.
        Mrs. Yellen. There are some things that Dodd-Frank imposed
    on all firms. For example, the Volcker Rule could envision
    their community banks being exempt from Volcker. Now, we are
    trying to tailor our implementation of Volcker to utterly
    minimize the burden on community banks, but they are subject to
    it. There may be some steps that could be taken.
        Mr. Tipton. We just introduced legislation for tailoring
    bank regulations. We have 55 banking organizations that have
    endorsed the legislation, and we hope you will, too, because we
    have to be able to get the economies moving in rural America
    and our minority communities.
        Because when we are looking at that 5.3 percent, and we are
    talking about, as Mr. Rothfus had pointed out, a real
    unemployment level that is 10.5 percent, part of the problem is
    that when you aren't raising interest rates right now, what you
    are really saying is, our economy stinks right now. We are just
    not seeing real movement and what tools do you have left in the
    toolbox to be able to stimulate this?
        Mrs. Yellen. I would say our economy is in a much better
    state. Low interest rates have facilitated it, and a decision
    on our part to raise rates won't say, no, the economy doesn't
    stink. We are close to where we want to be, and we now think
    the economy cannot only tolerate, but needs higher rates. So,
    there have been head winds and we have tried to use monetary
    policy to overcome them.
        But I want you to know that we share the goal of minimizing
    burden on community banks and will remain very focused on it.
    We have the Agrippa process that is in play at the moment, and
    it is focusing particularly on burdens in community banks.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr.
    Ellison.
        Mr. Ellison. Thank you, Mr. Chairman, and I also thank you,
    Chair Yellen, for being here.
        Is it regulation from Dodd-Frank that is keeping our
    economy--for the people who haven't been able to benefit from
    the economy in the recovery, is it regulation that is causing
    the problem?
        Mrs. Yellen. To my mind, there has been an increase in
    regulatory burden on banks. What we are doing is trying to
    create a healthier, safer, sounder financial system that will
    keep credit flowing to the economy and particularly, if we ever
    experience a stress situation where in this financial crisis,
    we saw banks just withdraw credit for the economy, which took a
    huge toll on economic activity by having more capital and
    liquidity and a safer and sounder financial system.
        We hope we are preventing future episodes like the
    devastating one we just lived in. And if there is some burden
    that is associated with that and some cost, the benefit is a
    far reduced chance of a financial crisis that will take the
    kind of toll you have just described.
        Mr. Ellison. Thank you. So it has been pointed out that we
    have a low labor participation rate. Is it because of Dodd-
    Frank?
        Mrs. Yellen. No. And also there are very--we are going to
    have over time a declining labor force participation rate,
    first and foremost because we have an aging population, more
    individuals in the retirement years. This is going to continue.
        Now, I have said, and my colleagues have said, that over
    and above that, we think there is something holding labor force
    participation back that reflects weakness in the economy and
    that as things strengthen, we would expect some people who have
    been too discouraged to look for work to move back into
    employment.
        But the major reason that we are seeing a trend downward in
    labor force participation is because of demographics, and it
    will continue.
        Mr. Ellison. Has the Consumer Financial Protection Bureau
    (CFPB) been harmful to the U.S. economy in the recovery?
        Mrs. Yellen. Congress created the CFPB to enhance consumer
    protection, and they have been very focused on doing that.
        Mr. Ellison. I just ask because some of my good friends
    complain about it a lot, and I am just trying to get an expert
    opinion on whether it is a good thing or a bad thing for our
    economy.
        Mrs. Yellen. It is addressing potential consumer abuses and
    trying to enhance consumer protection.
        Mr. Ellison. Does addressing consumer issues like say, the
    problems that the mortgage issues that we saw in the 2008
    period and before that, help the overall economy? Does that
    strengthen--does that help markets operate more accurately?
    Does it help employment?
        Mrs. Yellen. We certainly saw that the subprime crisis
    where there was irresponsible lending had a very harmful effect
    on the economy and on low-income communities, and that burden
    continues to exist. So we are going through a period in which
    we are trying to address all of the issues, including improper
    securitization and mortgage underwriting practices, that led to
    that devastating experience.
        It is difficult to get the balance right and to figure out
    what the best way is to design regulations. There are always
    consequences in terms of unintended effects of regulation. We
    need to be vigilant about trying to address that.
        Mr. Ellison. What about student debt? You know how big it
    is. Is it a drag on the overall functioning of the economy?
        Mrs. Yellen. It has increased enormously. I am worried
    about the high levels of student debt, and it is debt that if
    an individual can't repay, it never goes away. It can't be
    written off in bankruptcy. But on the other hand, education is
    really critical to succeeding in this economy. And it is
    critically important to make sure that students have access to
    quality education so they can get ahead. They need good
    information about programs and their success rates in order to
    avoid mistakes.
        Mr. Ellison. Thank you.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Texas, Mr.
    Williams.
        Mr. Williams. Thank you Mr. Chairman, and Chair Yellen,
    thank you for being here today.
        I am a small business owner from Texas. I am a Main Street
    guy. I am a car dealer, one of your favorites. And I can tell
    you small business is hurting. Main Street America is hurting,
    and it is hurting because regulations, which you have talked
    about today, are literally choking the heart out of small
    business. And I think, too, that we talked earlier about
    inequalities. And I would say that competition is the key.
        Competition in business takes care of inequalities, not the
    Federal Government. And my colleague here just was asking for
    an expert opinion on whether Dodd-Frank and the CFPB are good
    for the economy. I can tell you as an expert opinion that they
    are bad for the economy, the worst.
        With that being said, in 2014, in comments before the Joint
    Economic Committee, and I will be somewhat repetitious here,
    but I think it is important that we remind you where we need to
    head our economy, you stated in questioning from Senator Coats
    that, ``In my own discussions with businesses, I hear exactly
    the same things that you are citing. Concerns with regulations,
    about taxation, about uncertainty about fiscal policy.'' You
    went on to say, ``There is more work to do to put fiscal policy
    on a sustainable course.'' That, ``progress has been made over
    the last several years in bringing down deficits in the short
    term, but that a combination of demographics, the structure of
    entitlement programs and historic trends in health care costs,
    we can see that over the long term, deficits will rise to
    unsustainable levels relative to the economy.''
        Now, my constituents back home in Texas are very concerned
    about the health of our economy, because it is not good. And in
    Texas, we are the--we have great things going but it can still
    be better. In Texas, a State that has somewhat recovered since
    2008, you have 115 fewer community banks and you have 105 fewer
    credit unions. Tons of consolidation and a lot of uncertainty
    about where the economy is headed.
        So, my question, Chair Yellen, is what do you say to those
    community-based institutions that former Fed Chair Bernanke
    characterized as saying, we are being penalized, and you
    touched on this today, by your policies, particularly when
    these policies have at the same time, failed to produce
    meaningful economic growth in the communities those
    institutions serve, which further erodes their profitability?
        Mrs. Yellen. What I have said is we are trying to do
    everything we possibly can to relieve burdens on community
    banks. They have been through very difficult times. First of
    all, a period that has been very rough for the economy, and a
    slow recovery. And that has taken a toll on their profitability
    and that of the businesses, as you noted. And in a low interest
    rate environment, net margins tend to be low.
        I think that the low interest rate environment we have had
    and accommodative monetary policies have served to help our
    economy overall and get it moving and moving back to full
    employment. If you compare the Unites States with any number of
    other economies that also suffered in the aftermath of the
    crisis, we are among the leaders in terms of how we are doing
    economically.
        And other countries are now pursuing the same kinds of
    monetary policies that we put into place earlier, which in a
    way is an endorsement of their effectiveness.
        Mr. Williams. It still is very hard to borrow money for
    small businesses. And I can tell you that banks, and you
    probably heard this too, are having to hire more compliance
    officers than loan officers. That takes money out of the
    system, money which could be loaned to people like me to hire
    people and create jobs.
        We had CFPB Director Cordray here before us and I asked him
    if he would slow down this Dodd-Frank legislation because a lot
    of it is not completed, and because we are losing so many banks
    and credit unions. And he said, no, we are going to go 100
    percent and take a look at it. That is a bad policy.
        You stated that the community banks shouldn't face the same
    scrutiny as the bigger banks. You said that today, and I agree.
    And if the Fed will tailor its supervision to reduce regulatory
    burden. I heard you say in 2014, I heard you say--you said, I
    had community bankers in my office just yesterday, from what
    you said, and I heard today from community bankers asking me,
    ``What do I do?''
        We say the right thing, but what do we do? They are fearful
    of things that can happen of what they may not do. They don't
    know what to do. What would you tell these people? We talk a
    good game but we don't come through.
        Mrs. Yellen. We are trying to make clear our supervisory
    expectations and work carefully with them to let them know what
    rules and regulations apply and how and what don't and to try
    to shield them from many of the things with which larger banks
    have to comply.
        Mr. Williams. It is very vague. I hope you will understand
    that. Mr. Chairman, I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Maine, Mr.
    Poliquin.
        Mr. Poliquin. Thank you, Mr. Chairman. And thank you, Chair
    Yellen, for being here. I appreciate it very much. You know,
    everybody wants the same thing. We want more jobs, we want
    higher-paying jobs. I am a business owner like Mr. Williams and
    other folks in this room. I love talking to other business
    owners because they grow our economy and create opportunities
    for our kids.
        Now if you are in my district, and you are talking to the
    owners of a paper mill or convenience store, they say the same
    thing, that they are spending so much time and so much money to
    comply with government regulations that they can't afford to
    grow their business and hire more workers.
        The Competitive Enterprise Institute calculates that the
    cost of businesses in America in one year to comply with just
    Federal Government regulations is $1.9 trillion--$1.9 trillion.
    Now, these businesses pass on the cost of these regulations in
    the price of their products. So, our families are spending
    about $15,000 a year for businesses to comply with government
    regulation.
        I am sure we can agree, Chair Yellen, that businesses need
    to be fairly regulated, and predictably regulated, but when
    those regulations are killing jobs, it is just not right.
        Several years ago, in a highly partisan vote with very
    little Republican support, the 2,300-page Dodd-Frank bill was
    passed. Since then, there have been mountains and mountains of
    regulations and rules that are starting to smother our
    financial services industry. And one part of Dodd-Frank that is
    a great concern of mine is the too-big-to-fail regulations, the
    SIFI designation.
        When FSOC is trying to determine what banks and other non-
    financial institutions, like asset managers, should be
    designated as too-big-to-fail, it means that if they fail, the
    taxpayers will have to step in and bail them out. We all know
    that there is a huge difference, Chair Yellen, between large
    money center banks with all kinds of tentacles running through
    our economy and asset managers, mutual funds, and pension fund
    managers that handle the retirement savings for millions of
    Americans, with no systemic risk to the economy.
        The former director of a nonpartisan congressional office
    calibrates that if asset managers have to comply with these
    too-big-to-fail regulations, with no systemic risk imposed to
    the market, it will drive up the cost of their operation to the
    extent where the long-term rates return that they can generate
    for millions of Americans in this country while saving for
    their retirements will be dinged by about 25 percent.
        I don't know about you, but where I come from, 25 percent
    is a lot of money. Can't we agree, Chair Yellen, right now,
    that it just doesn't make any sense for non-bank financial
    institutions that pose no systemic risk to the market, like
    asset managers--they should escape this Dodd-Frank regulation
    that penalizes our savers?
        Mrs. Yellen. The FSOC is charged with attempting to
    identify threats to the financial stability of our country. And
    they issued a public notice indicating what they are going to
    do is to look at particular activities--
        Mr. Poliquin. Okay. So they are still looking at it.
        Mrs. Yellen. --not firms but asset management activities
    that could pose risks.
        Mr. Poliquin. I appreciate that.
        Mrs. Yellen. That is the focus.
        Mr. Poliquin. You are still looking at it.
        Okay, I would like to switch gears if I can in my remaining
    minute. You stated on a number of occasions that you are very
    concerned about unstable deficit spending in this country, how
    it might impact economic growth and job creation, and I agree.
        Everybody who is on a family budget or a small business
    budget knows that you can't spend more than you take in for
    long periods of time and borrow to make up the difference
    without getting into trouble. But that is exactly what Congress
    has done. That is why we have an $18 trillion national debt.
        Now, we have some folks who come before our committee, Mrs.
    Yellen, including the Secretary of the Treasury, Mr. Lew, who
    was here a few weeks ago and said, ``You know, a $500 billion
    annual deficit is no big deal. It is only 3 percent of our
    GDP.'' I disagree with that, and I bet you do, too. I was a
    State treasurer in Maine and I can tell you that high levels of
    public debt caused by long periods of deficit spending can do
    great damage to our economy because we need to pay the interest
    on that rising debt, therefore, we are not able to spend it to
    build roads and bridges, and to educate our kids.
        This year, Chair Yellen, we are spending about $230 billion
    in interest payments on that debt. And in 10 years, it is
    projected to be $800 billion, more than we pay to defend our
    country. Can't we agree that it is about time you help us, and
    Congress gets its act together, when it come to our deficit
    spending and our debt?
        Mrs. Yellen. I did indicate my concern with the
    sustainability of the debt path that the Unites States is on.
        Mr. Poliquin. I hope you use your influence in this town,
    Chair Yellen, to make sure you talk with the--
        Chairman Hensarling. Time.
        Mr. Poliquin. --Administration to make sure--
        Chairman Hensarling. The time of the gentleman has expired.
        Mr. Poliquin. Thank you, sir.
        Chairman Hensarling. The Chair wishes to inform the
    remaining Members that the Chair anticipates clearing two more
    Members in the queue, the gentleman from Arkansas, Mr. Hill,
    and the gentleman from Oklahoma, Mr. Lucas. At that point, I
    anticipate adjourning the hearing.
        The gentlemen from Arkansas, Mr. Hill, is recognized.
        Mr. Hill. Thank you, Mr. Chairman. And Chair Yellen, thank
    you very much for being here today.
        There are a couple of items I want to bring up. Mr. Heck
    talked about banking availability and the Harvard Study that
    everyone has read the last few months, you see that one out of
    five counties, particularly rural counties, now no longer have
    a physical presence of a bank. So not a branch of a national
    bank, but not even a presence of a commercial bank. I think
    that is concerning, and speaks to his point.
        There are two things on that item I want to call to your
    attention that relate to merger approval issues at the Fed. One
    is the Herfindahl-Hirschman index. I think the Herfindahl-
    Hirschman index, which was adopted back in the 1960s as bank
    mergers became subject to the anti-trust rule, discriminates
    against rural areas.
        I think the idea of using county designations and using
    deposits as the sole indicia for what business is in trade area
    is incorrect. And I can give you many examples of this. But I
    would invite the Board staff to reconsider how to do bank
    mergers, not base them on deposits only, not base them on the
    Herfindahl-Hirschman index, particularly in the rural counties.
        Second, is the issue of comment letters on mergers. Mergers
    for a bank--between bank holding companies, if there is no
    comment, you have a 56-day approval process. If they get one
    comment letter, that extends to 206 days for approval, which
    reduces efficiency and reduces productivity of that.
        And I would like to see the Board adopt a new approach on
    comment letters and distinguish between real comment letters
    from the geographies connected to the merger and just
    promotional fishing expedition comment letters, and let the
    Reserve banks have more power and not force a Board of
    Governors approval of mergers. I am going to write you about
    this, you don't need to comment on it today.
        I would like you to comment on the labor force
    participation rate, because my reading of the cohorts that you
    referenced a minute ago, actually is that younger people are
    who have dropped out of the labor force. In fact, people over
    55 are working more than ever before, and I really take issue
    with your point that those of us in the Baby Boom generation
    are retiring. I think if you go back and look at those numbers,
    you will find that it is actually young people being forced
    out--or not having the opportunity to participate in the labor
    force.
        Mrs. Yellen. I agree with you, that younger cohorts of
    retirees are working more than their parents and grandparents
    did. That is absolutely true. It is just that there is such a
    substantial drop-off in labor force participation when people
    retire that, when you look at the joint effect of an aging
    population, more people in age brackets where they do retire,
    that the working more is only an offset. It is not the same
    order of magnitude as the demographic effect of the aging. I
    don't disagree with what you have said about that.
        Mr. Hill. Let me change subjects and go back to liquidity.
    Secretary Lew, when he was here, talked in his testimony about
    the factors including technology, regulation, and competition,
    that have reduced liquidity in the market . He said, ``The
    business models and risk appetite of traditional broker-dealers
    have changed, with some broker-dealers reducing their
    securities' inventories, and in certain cases, exiting certain
    markets.'' Notwithstanding the October study, Chairman
    Neugebauer also had a roundtable last week in which a
    participant, JPMorgan, I believe, stated that in the Treasury
    market it used--you could be able to do a $500 million trade
    and not have a bid ask spread move. The market would not move.
        Now her estimate is, it is down to $292 million. There is
    an indication of--even in the Treasury, the most liquid market,
    we have significantly reduced liquidity.
        In the FSOC report, on page 68, the primary securities
    dealings, shows since the crash and since the implementation of
    Dodd-Frank, Treasury holdings have gone up to high levels and
    all other categories, corporates and even agency securities
    have dropped, which implies to me that people are holding
    Treasuries, holding liquidity, and not making a market in that.
        And I really think regulation is being shortchanged in its
    impact. I would like you to comment on Basel, the liquidity
    rules all working together that are causing a lack of
    liquidity.
        Mrs. Yellen. I am not ruling out the possibility that
    regulations could play a role here, it is simply we have not
    been able to understand through a lot of different factors and
    we need to look at it more to sort out just what is going on
    and what the different influences are, but I am not ruling that
    out.
        Chairman Hensarling. The Chair now recognizes the gentleman
    from Oklahoma, Mr. Lucas.
        Mr. Lucas. Thank you, Mr. Chairman, and I appreciate your
    indulgence at the end of the hearing, and Chair Yellen, I will
    try to move in an expeditious sort of a fashion.
        First, an observation. As we discussed before, my part of
    the country is very economically dependent on the oil and gas
    industry. And I am hearing from those involved in energy
    lending about regulatory pressure on the treatment of energy
    loans. Reserve-based loans, crude oil in the ground, proven
    reserves during this current period of low prices.
        I am concerned that if banks have less flexibility in
    dealing with lending to these companies in this sector, that an
    accumulative impact of all the factors as we move towards the
    end of the year could result in loans potentially being
    defaulted on or bankruptcy filings. It would be devastatingly
    destructive to the domestic energy industry.
        So, I just ask that we be understanding of the nature of
    those proven barrels in the ground. Second question, or second
    observation of the question, the last time we were together
    before this committee we discussed the Basel III leverage ratio
    rule as it relates to the treatment of segregated margin.
        And I appreciated your response in addressing the matter of
    on-balance sheet accounting treatment. But I would like to go
    just a little further today and specifically talk about the
    Basel leverage ratio now extending to off-balance-sheet
    exposures that are not driven by accounting rules. And in this
    off-balance-sheet context, why is customer margin collected by
    a bank-affiliated member of a clearinghouse being treated as
    something the bank can leverage, when Congress very explicitly
    required that such margin be segregated away from the bank's
    own resources?
        And for the benefit of my colleagues, I suspect on any
    given day we are probably talking a couple hundred--$200
    million, oh, these big numbers here, $200 billion in resources
    on any given day. Could you enlighten us a little bit on that,
    Chair Yellen, please?
        Mrs. Yellen. The leverage ratio was meant to be a very
    simple non-risk-based measure that pertains to all assets that
    are carried on a bank's balance sheet and that includes
    derivative transactions.
        It is not clear that for many companies the leverage ratio
    is what is binding rather than risk-based capital standards in
    many cases, but this is something we are having a look at. I
    recognize it is a concern. It is something that the Basel
    committee is discussing, and trying to gather additional
    information on what impact it is having. And it is something
    that is very useful to put on the agenda that we will have a
    close look at.
        Mr. Lucas. And that is all I can ask, Chair Yellen, that
    you work with our friends at the CFTC here, and our foreign
    regulator friends to come up with a sensible approach. Two
    hundred billion dollars that can't be touched by the banks, but
    yet they have to have extra resources to cover. It just seems
    like the net effect would be more cost and more strain on those
    trying to use these resources.
        So, I appreciate your comments. With that, Mr. Chairman,
    and out of character, I yield back.
        Chairman Hensarling. The gentleman yields back.
        Chair Yellen, I want to thank you for your testimony today
    before the committee. Pursuant to our earlier discussion, we
    look forward to having you back soon, separate and apart from
    your Humphrey Hawkins appearances.
        The Chair notes that some Members may have additional
    questions for this witness, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to this witness and to place her responses in the record. Also,
    without objection, Members will have 5 legislative days to
    submit extraneous materials to the Chair for inclusion in the
    record.
        This hearing stands adjourned.
        [Whereupon, at 1:03 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 15, 2015

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