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

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION

                             JULY 15, 2015

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-42


                         U.S. GOVERNMENT PUBLISHING OFFICE 

07-154 PDF                     WASHINGTON : 2016 
  For sale by the Superintendent of Documents, U.S. Government Publishing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001


                    JEB HENSARLING, Texas, Chairman

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

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

Hearing held on:
    July 15, 2015................................................     1
    July 15, 2015................................................    55

                        Wednesday, July 15, 2015

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


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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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) 
    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 
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, chairman of our Monetary Policy and Trade 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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-
    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 
    Ms. Moore. I knew you would say that, so I saved it for 
    Chairman Hensarling. The time of the gentlelady has 
    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 
    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 
    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 
    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 
    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 
    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 
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, chairman of our Housing and Insurance 
    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 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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 
    The Chair now recognizes the gentleman from Tennessee, Mr. 
    Mr. Fincher. Thank you, Mr. Chairman. And welcome, Chair 
    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!
    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 
    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. 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    The Chair now recognizes the gentlelady from Missouri, Mrs. 
    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 
    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 
    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 
    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 
    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 
    The Chair now recognizes the gentleman from Michigan, Mr. 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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 
    Businesses have been very cautious about investing. We 
    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. 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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. 
    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 
    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 
    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. 
    Mr. Tipton. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for taking the time to be here 
    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 
    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. 
    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-
    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 
    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 
    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. 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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