[Joint House and Senate Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 114-551
THE ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 17, 2016
__________
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Daniel Coats, Indiana, Chairman Patrick J. Tiberi, Ohio, Vice
Mike Lee, Utah Chairman
Tom Cotton, Arkansas Justin Amash, Michigan
Ben Sasse, Nebraska Erik Paulsen, Minnesota
Ted Cruz, Texas Richard L. Hanna, New York
Bill Cassidy, M.D., Louisiana David Schweikert, Arizona
Amy Klobuchar, Minnesota Glenn Grothman, Wisconsin
Robert P. Casey, Jr., Pennsylvania Carolyn B. Maloney, New York,
Martin Heinrich, New Mexico Ranking
Gary C. Peters, Michigan John Delaney, Maryland
Alma S. Adams, Ph.D., North
Carolina
Donald S. Beyer, Jr., Virginia
Brian Neale, Executive Director
Harry Gural, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana......... 1
Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative
from New York.................................................. 2
Witnesses
Hon. Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System, Washington, DC................................. 4
Submissions for the Record
Prepared statement of Hon. Daniel Coats, Chairman, a U.S. Senator
from Indiana................................................... 30
Prepared statement of Hon. Carolyn B. Maloney, Ranking Member, a
U.S. Representative from New York.............................. 30
Prepared statement of Hon. Janet L. Yellen, Chair, Board of
Governors of the Federal Reserve System, Washington, DC........ 31
Questions for the Record and Responses of Chair Yellen Submitted
by Senator Amy Klobuchar....................................... 34
Questions for the Record and Responses of Chair Yellen Submitted
by Senator Ted Cruz............................................ 41
Chart titled ``YOY Growth in Gross Share Buybacks, Dividends, and
Capital Expenditures--TTM Basis'' submitted by Senator Cassidy. 44
Chart titled ``Has the Fed's QE Stifled Productivity Growth?''
submitted by Senator Cassidy................................... 45
THE ECONOMIC OUTLOOK
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THURSDAY, NOVEMBER 17, 2016
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to call, at 10:01 a.m. in Room
216 of the Hart Senate Office Building, the Honorable Dan
Coats, Chairman, presiding.
Representatives present: Tiberi, Paulsen, Hanna, Grothman,
Maloney, Adams, and Beyer.
Senators present: Coats, Lee, Sasse, Cassidy, Klobuchar,
Casey, Heinrich, and Peters.
Staff present: Breann Almos, Ted Boll, Doug Branch, Whitney
Daffner, Connie Foster, Harry Gural, Colleen Healy, Karin Hope,
Matt Kaido, Brooks Keefer, Christina King, Yana Mayayeva, Brian
Neale, Brian Phillips, and Phoebe Wong.
OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A U.S.
SENATOR FROM INDIANA
Chairman Coats. The Committee will come to order. We are
welcoming this morning Chair Yellen, the Federal Reserve
Chairman.
I would just like to announce to my colleagues, and many of
them will be filing in shortly, we have a hard stop at noon,
both for the Chair's sake and we have a Senate vote at noon. So
I will do everything I can as Chairman to give everybody the
opportunity to ask questions of the Chair, but to my colleagues
it's a hard stop so we're not going to be able to go beyond
that time frame.
The Joint Economic Committee has a long tradition of
receiving regular updates from the Chair of the Federal
Reserve, and we are pleased to hear the Chair's insights once
again before the Congress adjourns for this cycle in 2016.
While we have seen some encouraging metrics of economic
performance over the past year, the next Congress and the next
Administration will still face a number of challenges.
Eight years after a deep recession, we are still looking
for a higher rate of GDP growth, stronger productivity growth,
and increased work opportunities, especially for prime-age
workers.
Low interest rates have historically been the prescribed
treatment for a weak economy. However, the past seven years
have clearly taught us that low interest rates alone cannot
cure an ailing economy.
In response to this continuing challenge of stimulating
growth to a more desired level, there seems to be a growing
consensus forming that tax and regulatory reforms, plus fiscal
stimulus measures such as targeted infrastructure initiatives,
may be necessary ingredients, or perhaps are necessary
ingredients, to incentivize capital investment and GDP growth.
But as we pursue these policy changes, we also have to be
mindful of the nearly $20 trillion national debt that looms
ominously over the U.S. economy.
Where debt-to-GDP stood at 39.3 percent in 2008, it will
total 76.6 percent by the end of this year, according to the
CBO analysis, and will climb to 85.5 over the next 10 years.
We look forward to hearing the Chair's thoughts on this
economic outlook, as well as the types of policies that
Congress perhaps should be looking at considering during this
time of change.
I now recognize Ranking Member Maloney for her opening
statement.
[The prepared statement of Chairman Coats appears in the
Submissions for the Record on page 30.]
OPENING STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER, A
U.S. REPRESENTATIVE FROM NEW YORK
Representative Maloney. Thank you. Thank you so much, Mr.
Chairman, for your leadership.
This is likely the last hearing of the Joint Economic
Committee in the 114th Congress, and I would like to sincerely
thank Chairman Coats for his stewardship of the JEC, and for
holding a number of very interesting hearings that have
generated excellent discussion.
I would also like to thank my colleagues on both sides of
the aisle, and to welcome Martin Heinrich as the Ranking Member
on the Democratic side, and to express my appreciation to Ms.
Klobuchar who is going to be, I understand, Ranking on Rules.
I am particularly pleased that we are ending on a very high
note with Federal Reserve Chair Janet Yellen.
Chairman Yellen, I think it is fair to say that all my
colleagues warmly welcome you to this hearing, and look forward
to hearing your thoughts at this critical time.
I would like to begin by thanking you for your
extraordinary and careful leadership of the Federal Reserve
that has played a critical role in helping our country recover
from the worst recession since the Great Depression.
Your steady hand has built on the work of your predecessor
and has guided the economy forward, and we thank you.
Much has changed since you appeared before the Committee
about a year ago. The economy has continued to strengthen. The
labor market has continued to improve. Wage growth has been the
strongest since the Recession. Household income has had the
largest annual increase since Census began tracking this data.
Inflation has edged up, though it remains below the Fed's 2
percent target.
These are among the tea leaves of the economy, and everyone
here is eager to find out how you read them. Up until very
recently, it was widely assumed that the Federal Open Market
Committee would raise interest rates at its next meeting less
than a month from today.
Some of your past statements have indicated that this is a
possibility, or even a goal. But then came a thunderbolt on
November 8th. Many critical things about our country changed
literally overnight, and our world has been turned upside down.
The question everyone would like to know is how the Federal
Reserve will steer through the days ahead. One particular
challenge is that the President-elect has called for policies
that may have countervailing effects.
History has shown us that the type of tax cuts Candidate
Trump has proposed disproportionately benefit those who do not
need them, and dramatically increases our national debt.
I am also curious to see how President-elect Trump's
infrastructure plan will be reconciled with the Republican
Congress' past opposition to fiscal stimulus.
There is a great deal of uncertainty about fiscal policy,
and that leads to uncertainty for markets, businesses, and the
economy overall. One constant that I hope we can count on is
monetary policy that remains insulated from political attack,
and attempts to meddle in any way with the Federal Reserve's
independence.
The election could also have a direct effect on the Fed
itself. The President-elect's comments on this subject have
been somewhat contradictory. He thinks both that the low
interest rates are good for the economy and that the Fed is
being political in keeping them at these levels.
In Congress some have called for revolutionary changes for
the Federal Reserve, change that would affect the very nature
of the institution, changes that in my opinion would lead to
disaster.
For those who would like to restrict the independence of
the Federal Reserve, I think it is important to briefly review
the immense benefit of an independent Federal Reserve.
We have only to look back a few years. When President Obama
took office, he inherited what former Fed Chairman Ben Bernanke
called, and I quote, ``the worst financial crisis in global
history, including the Great Depression.'' End quote.
The Federal Reserve quickly acted to lower rates to almost
zero, and has held them there for about eight years. It
instituted several rounds of quantitative easing to further
stimulate the economy. This action by the independent Federal
Reserve was critical to our recovery.
Economists Alan Blinder and Mark Zandi found that efforts
by the Federal Reserve and the Obama Administration, with
support from Democrats in Congress, dramatically reduced the
severity and length of the Great Recession, and prevented a
depression.
With control of the Legislative and Executive Branches,
past Republican efforts to limit the Fed's independence may
gain momentum. Last year, Republicans in the House passed
legislation, the FORM Act, that would fundamentally hamper the
Fed's ability to conduct monetary policy. It would limit the
Fed's independence by forcing it to determine target interest
rates using a mathematical formula, while ignoring a broad
range of important economic indicators.
Chair Yellen, as you noted before, if the Fed had been
forced to follow such a rule in recent years, and I quote,
``millions of Americans would have suffered unnecessary spells
of joblessness over this period.'' End quote.
Another proposal is to jettison the Fed's mandate to try to
maximize employment, and instead focus solely on inflation. I'm
not sure that people in Michigan and Pennsylvania and other
states would respond well to that suggestion.
But if that is the conversation my colleagues want to have,
then we will be ready to have it.
The past nine years have been an extraordinary period in
U.S. economic history. We should continue to study and learn
from it. We are not out of the woods by any stretch. When the
next recession hits, as it surely will, what will the monetary
response look like? Will the Fed have the tools to restore
growth? Will it return to quantitative easing? What other
effective policy tools will the Federal Reserve have at its
disposal?
I want to make one final point. The Federal Reserve has
been at the center of the U.S. and global economic recovery.
Efforts to hamstring the Fed are misguided, just as efforts to
politicize it are wrongheaded.
Chair Yellen, thank you for appearing before the Joint
Economic Committee today. We look forward to your testimony.
Thank you.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 30.]
Chairman Coats. It is now my privilege to introduce to you
our Chair of the Board of Governors, Janet Yellen, who has long
experience at the Federal Reserve, including four years as Vice
Chair of the Board of Governors, and six years as president and
chief executive officer of the Federal Reserve Bank of San
Francisco.
She previously served as Chair of the Council of Economic
Advisers under President Clinton, and as Chair of the Economic
Policy Committee of the Organization for Economic Cooperation
and Development.
Chair Yellen earned her Ph.D. in Economics from Yale
University, and is also a Professor Emeritus at the University
of California at Berkeley.
It is my pleasure, Chair, to introduce you as our witness
today, and to thank you for your always accessible presence
before this Committee. You have been someone who has been a
delight to work with and to get your guidance in terms of the
direction we think the Fed needs to take in order to assure our
public that there's a steady hand at the helm.
So we thank you for coming this morning and look forward to
your testimony, and then we will have questions from our
Committee.
STATEMENT OF HON. JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC
Chair Yellen. Thank you for those kind comments. It is my
pleasure to be here.
Chairman Coats, Ranking Member Maloney, and members of the
Committee, I appreciate the opportunity to testify before you
today. I will discuss the current economic outlook and monetary
policy.
The U.S. economy has made further progress this year toward
the Federal Reserve's dual-mandate objectives of maximum
employment and price stability. Job gains averaged 180,000 per
month from January through October, a somewhat slower pace than
last year but still well above estimates of the pace necessary
to absorb new entrants to the labor force.
The unemployment rate, which stood at 4.9 percent in
October, has held relatively steady since the beginning of the
year. The stability of the unemployment rate, combined with
above-trend job growth, suggests that the U.S. economy has had
a bit more ``room to run'' than anticipated earlier.
This favorable outcome has been reflected in the labor
force participation rate, which has held steady this year
despite an underlying downward trend stemming from the aging of
the U.S. population.
While above-trend growth of the labor force and employment
cannot continue indefinitely, there nonetheless appears to be
scope for some further improvement in the labor market. The
unemployment rate is still a little above the median of Federal
Open Market Committee participants' estimates of its longer run
level, and involuntary part-time employment remains elevated
relative to historical norms.
Further employment gains may well help support labor force
participation as well as wage gains; indeed, there are some
signs that the pace of wage growth has stepped up recently.
While the improvements in the labor market over the past
year have been widespread across racial and ethnic groups, it
is troubling that unemployment rates for African Americans and
Hispanics remain higher than for the Nation overall, and that
the annual income of the median African American household is
still well below the median income of other U.S. households.
Meanwhile, U.S. economic growth appears to have picked up
from its subdued pace earlier this year. After rising at an
annual rate of just 1 percent in the first half of this year,
inflation-adjusted gross domestic product is estimated to have
increased nearly 3 percent in the third quarter. In part, the
pickup reflected some rebuilding of inventories and a surge in
soybean exports.
In addition, consumer spending has continued to post
moderate gains, supported by solid growth in real disposable
income, upbeat consumer confidence, low borrowing rates, and
the ongoing effects of earlier increases in household wealth.
By contrast, business investment has remained relatively
soft, in part because of the drag on outlays for drilling and
mining structures that resulted from earlier declines in oil
prices. Manufacturing output continues to be restrained by the
weakness in economic growth abroad and by the appreciation in
the U.S. dollar over the past two years.
And while new housing construction has been subdued in
recent quarters despite rising prices, the underlying
fundamentals--including a lean stock of homes for sale, an
improving labor market, and the low level of mortgage rates--
are favorable for a pickup.
Turning to inflation, overall consumer prices, as measured
by the price index for personal consumption expenditures,
increased 1\1/4\ percent over the 12 months ending in
September, a somewhat higher pace than earlier this year but
still below the FOMC's 2 percent objective.
Much of this shortfall continues to reflect earlier
declines in energy prices and in prices of non-energy imports.
Core inflation, which excludes the more volatile energy and
food prices and tends to be a better indicator of future
overall inflation, has been running closer to 1\3/4\ percent.
With regard to the outlook, I expect economic growth to
continue at a moderate pace sufficient to generate some further
strengthening in labor market conditions and a return of
inflation to the Committee's 2 percent objective over the next
couple of years.
This judgment reflects my view that monetary policy remains
moderately accommodative and that ongoing job gains, along with
low oil prices, should continue to support household purchasing
power and therefore consumer spending.
In addition, global economic growth should firm, supported
by accommodative monetary policies abroad. As the labor market
strengthens further and the transitory influences holding down
inflation fade, I expect inflation to rise to 2 percent.
I will turn now to the implications of recent economic
developments and the economic outlook for monetary policy. The
stance of monetary policy has supported improvement in the
labor market this year, along with a return to inflation toward
the FOMC's 2 percent objective.
In September, the Committee decided to maintain the target
range for the federal funds rate at \1/4\ to \1/2\ percent and
stated that, while the case for an increase in the target range
had strengthened, it would, for the time being, wait for
further evidence of continued progress toward its objectives.
At our meeting earlier this month, the Committee judged
that the case for an increase in the target range had continued
to strengthen and that such an increase could well become
appropriate relatively soon if incoming data provide some
further evidence of continued progress toward the Committee's
objectives.
This judgment recognized that progress in the labor market
has continued and that economic activity has picked up from the
modest pace seen in the first half of this year. And inflation,
while still below the Committee's 2 percent objective, has
increased somewhat since earlier this year. Furthermore, the
Committee judged that near-term risks to the outlook were
roughly balanced.
Waiting for further evidence does not reflect a lack of
confidence in the economy. Rather, with the unemployment rate
remaining steady this year despite above-trend job gains, and
with inflation continuing to run below its target, the
Committee judged that there was somewhat more room for the
labor market to improve on a sustainable basis than the
Committee had anticipated at the beginning of the year.
Nonetheless, the Committee must remain forward looking in
setting monetary policy. Were the FOMC to delay increases in
the federal funds rate for too long, it could end up having to
tighten policy relatively abruptly to keep the economy from
significantly overshooting both the Committee's longer run
policy goals. Moreover, holding the federal funds rate at its
current level for too long could also encourage excessive risk-
taking and ultimately undermine financial stability.
The FOMC continues to expect that the evolution of the
economy will warrant only gradual increases in the federal
funds rate over time to achieve and maintain maximum employment
and price stability.
This assessment is based on the view that the neutral
federal funds rate--meaning the rate that is neither
expansionary nor contractionary and keeps the economy operating
on an even keel--appears to be currently quite low by
historical standards.
Consistent with this view, growth in aggregate spending has
been moderate in recent years despite support from the low
level of the federal funds rate and the Federal Reserve's large
holdings of longer-term securities.
With the federal funds rate currently only somewhat below
estimates of the neutral rate, the stance of monetary policy is
likely moderately accommodative, which is appropriate to foster
further progress toward the FOMC's objectives. But because
monetary policy is only moderately accommodative, the risk of
falling behind the curve in the near future appears limited,
and gradual increases in the federal funds rate will likely be
sufficient to get to a neutral policy stance over the next few
years.
Of course the economic outlook is inherently uncertain and,
as always, the appropriate path for the federal funds rate will
change in response to changes to the outlook and associated
risks.
Thank you. I would be pleased to answer your question.
[The prepared statement of Chair Yellen appears in the
Submissions for the Record on page 31.]
Chairman Coats. Chair Yellen, thank you for your opening
statement. Something that caught my attention during that
statement that I had not, in reading your statement earlier had
not caught my attention, you stated that the case for an
increase in the prime rate relatively soon, unless--it was the
word ``unless'' that perked me up a bit--further evidence
indicated to the contrary.
My question to you is: Are the results of the election,
does it fall in the category of ``unless''? And how is the FOMC
looking at that in terms of the decision that the case for an
increase is still relatively soon?
Chair Yellen. Well my own judgment is, looking at incoming
economic data and developments thus far affecting the outlook,
that the evidence we've seen since we met in November is
consistent with our expectation of strengthening growth and
improving labor market, inflation moving up. So we indicated
that the case had strengthened for an increase in the federal
funds rate, and to my mind the evidence we've seen since that
time remains consistent with the judgment the Committee reached
in November.
Now obviously there are many economic policies that
Congress and the Administration will be considering in the
months and years to come, and when there is greater clarity
about the economic policies that might be put into effect the
Committee will have to factor those assessments of their
impacts on employment and inflation and perhaps adjust our
outlook depending on what happens.
So many factors over time affect the economic outlook and
the appropriate stance of policy that's needed to achieve our
dual mandate of employment and inflation objectives. But at
this stage, I do think that the economy is making very good
progress toward our goals, and that the judgment the Committee
reached in November still pertains.
Chairman Coats. Thank you. You suggested publicly that
fiscal policy should play a role in stimulating economic
growth. As I mentioned in my opening statement, any new
economic growth initiatives envisioned by the next Congress and
the next Administration should include a full accounting of its
potential effects on the economy.
And from your perspective, how would you balance the need
to promote economic growth with the realities associated with
deficit spending and high and rising debt? I assume we are
looking at some type of a balance there. How can that be
achieved?
Chair Yellen. Well it's clearly up to Congress and the
Administration to weigh the costs and benefits of fiscal
policies that you will be considering.
My advice would be that several principles should be taken
into account as you make these judgments. First of all, the
economy is operating relatively close to full employment at
this point, so in contrast to where the economy was after the
financial crisis when a large demand boost was needed to lower
unemployment, we are no longer in that state.
You mentioned the longer term fiscal outlook. The CBO's
assessment, as you know, is that there are longer term fiscal
challenges, that the debt-to-GDP ratio at this point looks
likely to rise as the Baby Boomers retire and population aging
occurs. And that longer run deficit problem needs to be kept in
mind.
In addition, with the debt-to-GDP ratio at around 77
percent, there is not a lot of fiscal space should a shock to
the economy occur, an adverse shock that did require fiscal
stimulus.
I think what has been very disappointing about the
economy's performance since the financial crisis, or maybe
going back before that, is that the pace of productivity growth
has been exceptionally slow.
The last five years, a half percent per year. The last
decade, one-and-a-quarter percent per year. The previous two
decades before that were about a percentage point higher. And
that is what ultimately determines the pace of improvement in
living standards.
So my advice would be, as you consider fiscal policies, to
keep in mind and look carefully at the impact those policies
are likely to have on the economy's productive capacity, on
productivity growth, and to the maximum extent possible choose
policies that would improve that long-run growth in
productivity outlook.
Chairman Coats. Thank you. My time has expired, so I will
turn to Congresswoman Maloney for her questions.
Representative Maloney. Thank you, Mr. Chairman. Thank you
for your service. We will miss you. Thank you.
Can you envision any circumstances where you would not
serve out your term as Chair of the Federal Reserve?
Chair Yellen. No, I cannot. I was confirmed by the Senate
to a four-year term which ends at the end of January of 2018,
and it is fully my intention to serve out that term.
Representative Maloney. Thank you. The election outcome
introduced new uncertainties that the markets and the private
sector had not expected and priced in. And how do you--how do
these uncertainties affect the Fed's decision in the next
meeting?
Chair Yellen. Well the markets tried to anticipate what
policies Congress and the Administration will put into effect,
and we have seen some significant market moves since the
election. In particular, longer term Treasury yields are up
about 40 basis points, and the dollar has strengthened about
3\1/2\ percent of broad index.
My interpretation would be that markets are anticipating
that you will ultimately choose a fiscal package that involves
a net expansionary stance of policy, and that in a context of
an economy that's operating reasonably close to maximum
employment, with inflation hitting back toward 2 percent, that
such a package could have inflationary consequences that the
Fed would have to take into account in devising policy; and
that the market response is consistent with that view.
So, from our point of view we don't know what's going to
happen. There's a great deal of uncertainty. Right now I've
tried to offer you my assessment of where the economy is, and
what policy response is appropriate in the months ahead.
Given my current assessment, we will be watching the
decisions that Congress makes, and updating our economic
outlook as the policy landscape becomes clearer, and taking
into account those shifts in the economic outlook for the
appropriate stance of policy. But I think that is how I would
interpret the market response, but things could turn out very
differently, we understand, and we will simply watch what
decisions are made and factor them into our thinking going
forward.
Representative Maloney. Does the lack of information
warrant a delay in raising the interest rate say until the
January meeting when you'll have more information?
Chair Yellen. Well my guess is that uncertainty about these
matters will last for some considerable time. And we have had
an accommodative monetary policy, I do think, and, the
Committee has said for a long time that gradual increases in
the federal funds rate are likely to be appropriate to promote
our objectives.
And my assessment of where the economy is and how it has
been operating and the fact that near-term risks do seem
reasonably balanced, I would think that the judgment that the
Committee reached in November remains the appropriate one.
Representative Maloney. And, Chair Yellen, one of the most
significant responses to the financial crisis was passage of
the Dodd-Frank law. Today, as a result of this law, the
financial system is stronger, safer, and more stable.
How do you feel about repealing Dodd-Frank?
Chair Yellen. Well I agree with your assessment. We lived
through a devastating financial crisis. And a high priority I
think for all Americans should be that we want to see put in
place safeguards through supervision and regulation that result
in a safer and sounder financial system.
And I think we have been doing that, and our financial
system as a consequence is safer and sounder. And many of the
appropriate reforms are embodied in Dodd-Frank.
We now have much higher capital than before the crisis,
much more stringent liquidity requirements. Derivatives,
standardized derivatives are now subject to central clearing,
and derivatives both cleared and uncleared are subject to
margin requirements that increase their safety.
We have a new orderly liquidation authority. We're focusing
on resolution through, and ending too-big-to-fail through the
Living Wills process, which I think is really changing the
mindset of large financial firms about how they need to run
their businesses, and making them safer and sounder.
And Dodd-Frank placed considerable emphasis on financial
stability. We now have a group, the FSOC, that meets, all the
regulators, to consider threats to financial stability.
So I think Dodd-Frank was very important in fostering those
changes, and we should feel glad that our financial system is
now operating on a safer and sounder footing.
Representative Maloney. Thank you, and my time has expired,
but I just have to ask you very quickly, do you have concerns
that the repeal would make another financial crisis more
likely?
Chair Yellen. I certainly would not want to see the clock
turned back on all the improvements we have put in place
because I do think they are important in diminishing the odds
of another financial crisis.
Representative Maloney. Thank you for your service.
Chair Yellen. Thank you.
Chairman Coats. Thank you, Congresswoman. Our Vice
Chairman, Mr. Tiberi.
Vice Chairman Tiberi. Thank you, Chairman. I am bookended
by two individuals who are going to retire at the end of this
session, and it has been an honor and a privilege to serve on
this Committee with both of you. Mr. Hanna has brought so much
business expertise, and Chairman, if there were a picture in
the dictionary of Indiana Nice, you would be that picture. It
has been an honor and a privilege to serve with you. You will
be missed. I am comforted only by knowing that your
replacement, my colleague Representative Todd Young, is as nice
and as smart as you. So, a great successor.
Chairman Coats. He's actually smarter.
[Laughter.]
Thank you for the compliment.
Vice Chairman Tiberi. Thank you. It's been an honor to
serve with you here.
Chair Yellen, it is an honor to have you here. Thanks for
your time. In a story this month in The Wall Street Journal,
they reported that for the first time in more than 30 years
banks, credit unions, and other depository institution's share
of the mortgage market fell below 50 percent because of banks'
aversion to risk and fear of legal and regulatory issues.
And while some lending has increased, banks have shifted
clearly to jumbo mortgages and borrowers who have the best
credit. Loans to small businesses have lagged, and new rules
for credit cards may be hindering lending, as well.
President-elect Trump has said that Dodd-Frank is, and I
quote, ``a tremendous burden to the banks.'' He's expressed the
same concerns that banks are unable to lend to people who
actually need it, and people who want to start a new business
or expand a current business, which has made us less
competitive and has slowed growth.
His view is shared by many community bankers, by small and
medium-sized business owners, and by many economists across our
country.
Further, the GAO just released a study of the Federal
Reserve Bank's stress test procedures and had 15, as you know,
recommendations for making improvements that go beyond what
Governor Tarullo recently outlined as next steps.
Chair, what are your responses with respect to the
following issues:
The current state of bank lending?
The constraining effects of regulation generally, and
stress test in particular?
And finally, the impact on the economy's ability to grow
and create jobs?
And one last thing, do you plan on adopting the GAO stress
test recommendations on improving transparency, model design,
and management, and cost/benefit analysis? And any of that I
asked, if you can't respond to today, I certainly understand,
if you could reply in writing I would certainly appreciate it.
Chair Yellen. Let me take a shot at it, and if there is
something I do not cover I would be glad to respond.
Let me just start by saying something about the burdens on
community banks. Community banks play a very important role in
our economy in lending, understanding the conditions in their
communities, and providing lending that supports economic
growth. And it is really critical that they be able to function
and to thrive.
We recognize--we talk to community bankers regularly and
recognize that the burdens that they are operating under are
significant, and want to do everything that we can to reduce
those burdens and to simplify the compliance regime for those
banks.
We have taken many steps on our own to reduce the burdens
of our supervision, and we are contemplating ourselves, the
regulators, working on possible proposals for a simplified
capital regime that would apply to smaller community banks.
So I completely agree those banks play a critical role and
we need to focus on reducing burden.
Now to the Dodd-Frank rules, many of them apply
particularly to the largest financial institutions. And the
most significant increases in capital requirements, including
surcharges for the largest capital surcharges for the largest
firms that create the greatest systemic risk, the burdens of
stress tests and other regulatory requirements fall on those
firms that I do think pose potential threats to financial
stability. And it is important that those institutions maintain
higher standards of safety and soundness.
You mentioned the stress tests and GAO's finding. Stress
tests have been central to the Federal Reserve's efforts to
increase capital and ensure the capital planning in large
systemic financial institutions. The capital planning takes
into account an accurate assessment of the risks that could
strike banks.
And the GAO in their review found generally that our CCAR
and DFAST stress tests are effective, are useful. They
suggested some changes, many of which we had already considered
or had underway, and their suggestions are useful and we intend
to take them up, or look carefully at it. So it was a very
useful report.
But bottom line, it concluded that our stress testing
regime has resulted in a very substantial improvement to safety
and soundness.
I should say that we recently put out in the regulation
that will reduce the burden of the stress testing regime on
institutions between $10 billion and $250 billion in size--I
guess $50 billion and $250 billion, that those institutions
will no longer be subject to the qualitative part of our so-
called CCAR capital review process, that we will no longer
object to capital distributions based on qualitative evaluation
of their capital planning process; that we will look at their
capital planning process through normal supervisory methods.
And I think that that will serve to reduce burden on a number
of large, but smaller institutions subject to the stress test.
And finally you asked me about bank lending and mortgages.
I think certainly mortgage credit standards have tightened up,
and there are borrowers who are finding it difficult with lower
credit ratings to obtain mortgage credit.
I think it is a consequence of the financial crisis
regulations and greater caution on the part of lenders. I think
we wouldn't want to go back to the mortgage lending standards
that we had in the first decade of this century that led to the
financial crisis, but they certainly have increased.
On small business lending, I think my assessment there
would be that it remains largely available, and that banks
find--and this is something you also see in surveys--that the
demand for lending for borrowing by small businesses has not
been very robust in recent years. In part, I think they see
their sales are not growing sufficiently rapidly to justify
much borrowing.
Certainly the community banks and other banks that we talk
to and monitor suggest that they stand ready and have adequate
resources to support additional lending to smaller businesses,
but there is a question there as to whether that is a demand or
supply issue.
Chairman Coats. Thank you, Congressman. I have just been
alerted that the House has been called for a vote, which may
scramble, but we would love for you to vote and come back and
we will keep your place in line.
And my Senators, as I look down the line, are smiling
because that means they move up on the list.
[Laughter.]
Senator Klobuchar, you are next on the list.
Vote and come back, and we'd love to have you back, and we
will keep you on the list.
Senator Klobuchar. Okay, thank you. Thank you very much,
Madam Chair.
Just to follow up on Representative Tiberi's questions
about community banks, I appreciated that. Madam Chair and I
have discussed that many times, and I think I will just put
some additional questions on the record.
As you know, I am concerned about the status of community
banks and what has been happening the last few years.
I wanted to start out with a question about the importance
of independence for the Central Bank. I know you can't comment
on political goings on, but you may have noticed there was some
campaigning going on in the last year, and the Federal Reserve
was discussed a few times.
Could you comment on the importance of preserving the
independence of the Federal Reserve Bank from interference by
either the Executive Branch or the Legislative Branch and what
that would mean for monetary policy effectiveness if there
wasn't a sense of independence of the bank?
Chair Yellen. Thank you for that question. I think
independence by a central bank to make tactical decisions about
implementation of monetary policy, subject to a Congressional
mandate which we have--obviously we are accountable to
Congress. We are a creature of Congress. Congress established
goals for us of maximum employment and price stability.
But it is critically important that a central bank have the
ability to make judgments about how best to pursue those goals
while being accountable for explaining its decisions and
transparent in its decision making.
Central banks around the world in recent decades have
gained this independence, and the economic outcomes that have
resulted from this trend towards central bank independence we
have seen much better macro economic performance.
Senator Klobuchar. Are there actually studies showing that
banks that have independence, that there have been improvements
in those countries?
Chair Yellen. Yes. There is clear evidence of better
outcomes in countries where central banks can take the long
view, are not subject to short-term political pressures, and
sometimes central banks need to do things that are not
immediately popular for the health of the economy.
And we have really seen terrible economic outcomes in
countries where central banks have been subject to political
pressure. Often it's the case when a country is not able to
balance its budget and is running large deficits and is finding
it hard to finance those deficits--how can you finance it? You
realize you can go to the central bank and force it to buy the
debt that is being issued. And the story in every country that
has experienced very high, or even hyper inflation, is one
where a central bank has been forced to follow the dictates of
the government that has compromised its independence.
So markets come to expect low and stable inflation from a
central bank that has political independence and good economic
performance. And I believe we have seen that both in the United
States and globally.
Senator Klobuchar. Thank you.
You know, the Fed has the dual goal of maximum employment
and price stability. There has been some talk out there of
eliminating one of the goals and focusing on price stability.
And there's also been comments to have the Fed target a certain
growth rate for the economy.
What do you think would be the effect of that, to either
limit the Fed's focus to stabilizing prices, get rid of the
other part of the dual mandate, or targeting a certain growth
rate?
Chair Yellen. So I am a strong believer in the Fed's dual
mandate. It was Congress' decision, and of course it is up to
Congress what our mandate should be. But I believe that both of
these--both price stability, the rate of inflation, having that
low and stable, and employment matter greatly to the American
people.
They both impact the welfare of households and individuals
in this economy to a great extent, and I think they are both
appropriate goals.
Price stability is a goal of every central bank. Most
central banks also take employment, or real side performance
into account in achieving it.
Now I would say really there is rarely any conflict between
pursuing these two objectives. So it is not commonly the case
that--they could be in conflict, but most of the time they are
not. And if you think about what we have faced, the Federal
Reserve, in the aftermath of the crisis, we have had very high
unemployment that we wanted to bring down as rapidly as
possible. And inflation that has been almost consistently below
our 2 percent objective. And so our efforts to put in place a
highly accommodative policy were directed toward achieving both
of those goals, and they have not been in conflict.
With respect to a growth rate objective, we can't
independently, if we are to achieve our inflation objective,
simply choose some arbitrarily chosen growth rate objective and
try to achieve it. If we tried to do that, and it's one that's
not consistent with the underlying productive potential of the
economy, and the economy's ability to grow based on changes in
technology and capital and labor overtime, we would end up with
an economy that either has inflation that's above acceptable
levels, or conceivably deflation if the target were chosen too
low.
Senator Klobuchar. Thank you very much. I will submit my
questions on infrastructure funding and its effect on the
economy, something the President-elect has discussed for the
record. And the positives of doing that. And questions on
income inequality and some of your views on that.
Thank you very much.
Chair Yellen. Thank you, Senator.
Senator Klobuchar. Thank you.
Chairman Coats. Senator, thank you. I know the members of
the Committee will miss your presence in the future as you are
moving on to greater responsibilities.
Senator Klobuchar. Well I may still be on the Committee,
but, yes. Thank you.
Chairman Coats. Congressman Hanna.
Representative Hanna. Thank you.
We talked about Dodd-Frank. Prior to Dodd-Frank, the
Federal Reserve examiners took responsibility for the safety
and soundness of money as well as consumer protection
oversight.
Dodd-Frank moved that over to the CFPD. And yet, in 2015
the LA Times reported that Wells Fargo with cross-selling
pressures on consumers, consumer bankers, was encouraged, and
encouraging fraud. Wells Fargo paid $185 million in fines.
And I know this is somewhat hypothetical, but I am curious.
So Dodd-Frank in this instance, with whoever is doing this,
missed this. And it is a profound miss. Do you think it would
have been any different had it been left with the Federal
Reserve?
Chair Yellen. Well we have cooperated historically with
other regulatory agencies to engage in examinations. And in
this case, the Consumer Financial Protection Bureau was
involved, the Comptroller of the Currency. Most of the abuses
that occurred were in the national bank where the Comptroller
of the Currency also has responsibilities. That's been
historically true.
So, you know, they did find these problems. They have
levied significant fines and put in place enforcement actions
to correct them.
We in 2011 looked at a subsidiary we were then responsible
for, which was the independent mortgage company, and found
abuses which we fined Wells Fargo for and put in place
enforcement actions.
I think we have all worked together pretty constructively
to try to address abuses. I mean, I would say that we, going
forward in the institutions that we supervise, state member
banks, are looking to see if there are similar practices that
could cause problems. And with the holding companies we
supervise with the largest institutions, we have undertaken a
thorough horizontal review of compliance practices.
But we do work constructively and collaboratively with the
other agencies.
Representative Hanna. So there is no real disconnect
because of the Dodd-Frank?
Chair Yellen. There are many agencies in the United States
involved in supervision, and we do try to work constructively
together. And I think we have had a good working relationship
with those other agencies. So I wouldn't want to levy a
criticism there.
Representative Hanna. Sure. I understand. In previous
hearings we've discussed student debt, the massive amount of
student debt, and how that impacts starting a family, having a
home, doing all those things that people used to do at a much
younger age. How do you take that into account? How does the
Fed take that into account when they consider all the things
that they look at?
I mean, it is somewhat like consumer debt out there, this
trillion dollar number that is haunting and hanging over
everyone's head, but how does the Fed think about it going
forward?
Chair Yellen. So we have been very attentive to trends in
student debt. And as you say, it really has escalated to an
extraordinary degree. There is a good deal of research that is
trying to determine whether or not student debt burdens might
be impeding household formation.
Household formation has been very low. The number of young
people who are purchasing new single-family homes has been
quite depressed. And we have seen less of a recovery in the
housing sector, and pickup in housing starts than we would have
expected. Multi-family has been quite strong, but single-family
construction has been depressed.
There are a number of factors I think that are contributing
to that. And there is some research that suggests student debt
is a factor that is leading to the decision to reduce
willingness of Millenials to buy single-family homes. They are
marrying later, getting more education, living more in cities,
have more student debt. It is difficult to sort out exactly
what the most important drivers are, but that could be one of
them.
Representative Hanna. Thank you. Thank you. It is
interesting how we study things. Bob Dylan said--I think it was
him-- said ``You don't need a weatherman to know which way the
wind blows,'' and we spend a lot of time figuring out things
that are kind of patently obvious.
But thank you for your time today.
Chair Yellen. Thank you.
Chairman Coats. Thank you, Congressman.
Senator Peters.
Senator Peters. Well thank you, Chairman Coats. And before
I begin my questioning, I just want to thank you. It has been a
real pleasure and an honor to be on this committee with you,
and wish you well in your future endeavors.
Chair Yellen, it is wonderful to be with you here today,
and thank you for taking the time. And I certainly know that
you understand that politics shapes America and democracy in
sometimes very unpredictable ways, and we have to be prepared
for that unpredictability.
And in times of uncertainty and change, one thing that
always seems clear but always stands out is that Americans care
about the economy, usually first and foremost. And they are
concerned about their pocketbooks, their futures, they want
good jobs, they want growth, a better chance for their
children. And while politics that shape our democracy do not
always follow any kind of predictable pattern, all of us need
some measure of stability and certainty--be it markets,
consumers, savers, spenders, retirees, young professionals, the
list goes on.
Thankfully, to paraphrase President Obama, the Federal
Government remains an ocean liner, not a speedboat. But there
still remains, without question, a level of uncertainty about
the near term of fiscal policies in this Nation. So I just
wanted to say how much I appreciated your comments on the
independence of the Fed, and the necessity for that. Monetary
policy has been, and I certainly think must continue, to be a
balance and a complement to fiscal policies of the Federal
Government.
And I also think that unfounded accusations that the
Federal Reserve monetary policies are somehow political in
nature can be one of the most damaging claims that can happen
in a modern democracy.
Certainly as policymakers I believe we have a role to
express our views on individual monetary decisions, whether in
criticism or in praise, but to undermine the independence and
the credibility of the Federal Reserve is a very dangerous
action that may be very difficult to undo once it is out there.
And I do not believe these are just abstract discussions.
The potential for undermining the credibility of a central bank
will have a direct impact on the economy, and ultimately on our
constituents back home.
And I believe that Members of Congress have the added
responsibility as elected officials to uphold these important
norms that have guided our country for decades.
With that, I would urge my fellow policymakers here in both
the Legislative and Executive Branches to exercise caution and
prudence when it comes to these types of criticisms.
But turning to a question, Chairman Yellen, I believe that
perhaps one of the greatest challenges that we face in our
banking system today is cyber security. And from a consumer
level to a commercial level, to a level of global banking
system, we face tremendous threats every single day, as I know
you are well aware.
The warning signs are very evident. One example was in
February 2016 hackers successfully stole $81 million from
Bangladesh Central Bank by sending false payment requests to
the New York Federal Reserve.
Since this hack was first reported, additional breeches
have been uncovered, including attacks in Vietnam, Equador, and
more. These hacks have all been through the SWIFTS, the Society
for Worldwide Interbank Financial Telecommunications Banking
Network, used worldwide by more than 11,000 financial
institutions. And I use this example not to speak ill of SWIFT,
who has pledged to take steps to strengthen the security and
that of their partners, but rather to just illustrate on a
global level that we are only as strong as our weakest link
when it comes to cyber security.
In August of this year, I wrote President Obama to put the
topic of international cyber security on the G-20 agenda, and
in the months following I am pleased that the Group of Seven
introduced eight suggested principles for private firms and
government agencies to follow. And I continue to believe this
is an issue that we must do in a collaborative and
international manner.
So my question to you, Chair Yellen, is: What steps has the
Federal Reserve taken to ensure both internal cyber security,
as well as cyber security of financial institutions overseas?
You currently play a central role and will continue to play a
central role. What assurances can you give us, please?
Chair Yellen. So let me start by saying that I agree very
much with your assessment. This is one of the most significant
risks our country faces, and we are cooperating with the
regulators, as you indicated, internationally, working with the
G-7, cooperating with the financial institutions to make sure
that we have a system that is prepared to deal with cyber
security risks.
We are very focused on this in our own operations, and I
can provide you more details if you're interested in the
various things that we are doing to make sure that our own
systems are safe and meet the highest standards.
We are also working closely with financial institutions to
make sure that the controls that they have in place are
appropriate. It is a key part of our supervision. We recently
put out an advanced notice of proposed rulemaking that suggests
higher standards of cyber security protections for institutions
that are systemically important.
And for those that are really interconnected where a
problem could spill over to the entire financial system, we are
proposing the very highest standards that those firms should
meet, given the fact that they could be a source of
vulnerability to the larger financial system.
But I would say that, while we are focused on this in our
own supervision and we are working closely with other financial
regulators. The U.S. Treasury has taken the lead here. This is
something the Congress needs to look at very carefully.
It is not just a matter of the Fed and financial
institutions. Risks involve merchants and others involved in
the economy. And it is a very broad threat that we alone are
not able to deal with adequately. I hope you will stay
involved.
Senator Peters. Well I will, and I look forward to taking
you up on your offer to sit down and have a more detailed
discussion as to what is happening at the Federal Reserve. I
serve on Commerce, as well as Homeland Security Committees. All
of this merges together in addition to what we are doing here.
And again, this is, as you stated yourself, the most
significant threat that we face now in cyber security.
So I look forward to working closely with you. Thank you
for your testimony today.
Chair Yellen. Thank you.
Chairman Coats. Okay. Well, I've got Members coming back
and forth. We have this Byzantine process of going back and
forward here. I think you are between votes? Is that what you
said? We are going to give you your five minutes, and then
Senator Lee will be next.
Representative Grothman. Thank you. One of the
controversial things with the Federal Reserve--and I want to
ask you about this--is last time we were in a crisis, you
bought a lot of mortgage-backed securities. Correct?
Chair Yellen. We did.
Representative Grothman. And do you feel you paid above-
market value for those securities? Or did you pay above-market
value for those securities?
Chair Yellen. No. We always purchase securities in the open
market at market prices.
Representative Grothman. Okay, could you give me a
description of other private bonds that you have purchased over
the last few years?
Chair Yellen. We have not purchased private bonds. We are
only allowed to purchase Treasury and Agency securities.
Representative Grothman. Okay, how would you describe
mortgage-backed securities?
Chair Yellen. Those are Agency securities. They are issued
by Fannie and Freddie----
Representative Grothman. Okay, so you consider that the
equivalent of a government bond?
Chair Yellen. Well it is an Agency bond, and those are
permissible investments for us. We buy securities in the open
market in a bidding process, an auction process that we
purchase at market prices.
Representative Grothman. And do those market-backed
securities, do they have a face value, so to speak, or they--I
guess I'll describe it that way. They have a face value? In
other words, their value where their value is if say all the
mortgages would be paid in full?
Chair Yellen. They do have a face value. And then of course
they trade in the market, and prices can deviate from those
face values.
Representative Grothman. And when you were purchasing them,
what were you paying compared to the face value?
Chair Yellen. I honestly don't have--I don't have--we've
published that information. I don't have that information at my
fingertips.
Representative Grothman. Do you have just a wild guess? I
know maybe it is an unfair question. Ninety percent? Eighty
percent? Seventy percent? Just wildly?
Chair Yellen. We would have been paying market prices for
securities at that time.
Representative Grothman. Yeah, I know, but you don't know
about--was that 70 percent of face? 80? I'm not going to, you
know, I realize you don't know exactly, but you must know
about?
Chair Yellen. I don't think the discounts were nearly that
deep, but I may be wrong.
Representative Grothman. Okay. Okay, that's my final
question.
Chairman Coats. Congressman, thank you.
Senator Lee.
Senator Lee. Thank you very much, Mr. Chairman, and thank
you, Chair Yellen, for being with us today.
In 2013 there were 12 banks, as I understand it, that
controlled 69 percent of the industry assets. And I think we
have been seeing a market increase in the share of revenues
concentrated in a relatively small handful of firms. I see you
are nodding. I assume that means you would not disagree with
that?
Chair Yellen. I believe that is true.
Senator Lee. Then there was the economic census of 2012,
and we learned from that study that there were some 33,000
fewer business establishments in the finance and insurance
industry than there were in 2007.
So over that five-year period we saw 33,000 business
entities that left the market or were consolidated into
something else. I think it is worth evaluating the potential
problems that an increasingly concentrated and potentially less
competitive banking sector might pose, especially in light of
some of the concerns surrounding the too-big-to-fail concern.
So let me ask you this, Chair Yellen. What risks do you see
that might come from the concentration of power, the
concentration of market share within the financial industry?
What risk do you think that might pose to our overall financial
stability?
Chair Yellen. So large interconnected, complex firms. It's
not just a question of size, but size is part of it, but other
characteristics matter, too. Their distress or failure could
pose significant risks to financial stability.
And a great deal of our regulatory and supervisory response
since the financial crisis has been directed at those firms
that do pose such systemic risks. And we have imposed much
higher capital standards, and capital standards for individual
firms that reflect our assessment of the individual risks that
each of those systemic firms poses to our financial system.
Because of the risks they pose, they need to have a lower
probability of distress to be better managed, have more
liquidity, to have resolution plans; that we need to make sure
these entities are resolvable, and diminish their risk of
failing. And through our stress tests and capital requirements,
resolution plans, living wills, and other things, we have
improved the safety and soundness especially of those
institutions.
Senator Lee. Let's talk about those efforts for a minute.
You mentioned stress tests in particular. Since the enactment
of Dodd-Frank, and over the last few years, the Fed has
undertaken various measures, some of which you referred to, of
regulatory enforcement.
I wonder whether some of those efforts might undermine the
due process interests of those who own the banks--not just the
banks themselves, not just the wealthy people who are invested
in them, but also the many people, including retirees, who
invest in them.
A long-standing concern of due process involves certainty
in the law. James Madison described this in Federalist 62 when
he said that the people--it will be of little avail to the
people that the laws may be written by individuals of their own
choosing if those laws be so voluminous, complex, and ever
changing that they cannot be understood. Or if they undergo
such incessant changes that no person who knows what the law is
today can be sure what it will be tomorrow.
My understanding of the stress test is that the standards
are constantly changing. And there is kind of a black box. And
so they do not know what the law is today, and they know even
less about what the law will be tomorrow--if by ``the law'' we
mean the standards, enforceable by the Fed, that carry the
force of law will be.
How is that consistent with due process? And how can the
lack of transparency be consistent with our time-honored
standards of due process?
Chair Yellen. So I would disagree that there is a lack of
transparency. While we do not publish the precise mathematical
formulas that are used to evaluate bank portfolios, we have
published and shared with the industry a great deal of
information about the models that we use.
We have----
Senator Lee. A great deal of information ``about'' them.
But that does not mean that they know what the models are. And
the models themselves are the basis for legal standards to
which they are subject, are they not?
Chair Yellen. We want these banking organizations to have
sound risk management. And that means developing their own
capacity to evaluate the risks in their portfolios, rather than
using a model that we hand them.
And the GAO review of our stress testing looked at this
very carefully and they did not recommend that we share with
the industry the exact details of the model.
We have put out for public comment policies about how we
design stress test scenarios. The industry understands how we
go about devising those scenarios, although they change from
time to time, and they have a great deal of information about
the models that we use and what is contained in them. But we
want to make sure that they have appropriate incentives to
analyze their own unique risks of those organizations that may
not be captured in our stress test, and that they build models
that are appropriate for each individual firm.
Senator Lee. My time has expired. I have to respect the
clock and the Chairman and my fellow committee members. I do
want to point out, the GAO did in fact recommend updating and
revising the guidance. And I also want to be clear that I
understand you have got a difficult job to do, and I understand
these are very important things, but I do not think we can
overlook the fact that simply because something is important
does not mean that we can subject the American people to laws
that are constantly subject to change. Laws that are not even
written by individuals of their own choosing. Laws written by
people who are unelected and therefore unaccountable to the
people.
It does not mean they have bad intentions. It just means
that there can be no due process in that environment. And I
think we have got to take that into account and we need to be
very mindful of that and look for ways to reform it.
Thank you.
Chairman Coats. Thank you, Senator.
Senator Casey.
Senator Casey. Mr. Chairman, thank you very much. And I
want to thank you, Senator Coats, for your service and the work
you did in working with Representative Maloney and others on
this Committee. So we are grateful for that, and wish you luck
as you transition.
Chairman Coats. Thank you.
Senator Casey. Madam Chair, we are grateful to be with you
again, and thank you for your testimony. When you provide this
testimony, we always learn from it.
Chair Yellen. Thank you.
Senator Casey. And my copy of your remarks is highlighted
in yellow, the parts that were most interesting to me, and I
will quote from them in a moment.
But I want to focus on maybe one word, but unfortunately a
vexing problem, and that is wages, or lack of wage growth. We
have had I think a basic disconnect lately where, with a good
recovery corporate profits are healthier, thank goodness, but
the wage picture over time--not the most recent numbers, but
over time--has been a different story.
So we do have a disconnect where folks see corporate
profits going up, and Wall Street having good results, and
their own wages not growing over time. And I think it is a
problem for both parties to come together and tackle it.
I believe we need to focus on short-term strategies to deal
with that, as well as a set of long-term priorities that I will
just quickly mention. But we have seen not just in the context
of the election but even prior to that, but maybe most
especially, people leading lives of real struggle. And a lot of
it is connected of course I think to the wages.
You are familiar with, and I think most people are, one of
the studies at the Economic Policy Institute, which basically
said wages grew more than 90 percent, maybe as high as 91
percent, for 25 years after World War II, along with an
alignment of productivity growth. But then after that, roughly
around 1973, even with productivity still increasing more than
70 percent, wages kind of flat-lined, by one estimate 11
percent over 40 years.
If that data and that analysis is in any way accurate, and
I believe it is, we are looking at wage growth of 11 percent
over 40 years. What we cannot endure is another 20 or 30 or 40
years of that kind of wage growth.
So what do we do about it? Well, one thing we need to do I
think is to focus on ways to help communities when they are
dramatically affected by substantial job loss in the short
term. I am thinking of a place like Erie County, Pennsylvania,
the City of Erie and the County of Erie. They have suffered a
lot of job losses when GE moved jobs down to Texas.
One of the things I hope we can do, and something I have
been advocating for, is having measures that will provide
immediate and targeted assistance to communities that have that
seismic impact that leads to a lot of job loss.
Over time, though, I think we need to focus on more
strategic actions--quality affordable child care, a real
commitment to early learning which we don't really have as a
Nation. And then some of the things we have heard a lot about
lately and I hope we can get agreement on in both parties,
investments in infrastructure, not only the more traditional
roads and bridges, but also broadband deployment. It is pretty
hard to grow a business or run a family farm if you are in a
smaller community that does not have access to broadband,
especially in rural America where the problem is really
alarming. There are huge percentages of rural America, rural
Pennsylvania, that do not have broadband.
So that is a lot to chew into, but I want to get your sense
of what you--not what you hope we would do, but maybe from the
vantage point of what you think works, short-term strategies to
raise wages, as well as long-term investments that might result
in that. If you have any ideas about that, or opinions about
that?
Chair Yellen. So you pointed to the fact in your comments
that the behavior of wages, the disappointing growth in wages,
is not just a recent phenomenon. It is not just something that
is associated with the Great Recession following the financial
crisis, although that took a huge toll. It is a longer term
trend.
Many economists feel it reflects both technological change
that has persistently favored skilled workers and diminished
the job opportunities of those who do more routine or less-
skilled work, and globalization I think also played a
significant role.
And even though many economists believe that these forces
are good for in some sense the economy as a whole, there are
many individuals who were very badly and very negatively
affected by these trends.
And I agree with your focus, that it is important to think
about how to help individuals who are not winners because of
trends of technology and globalization, and how to put in place
inclusive policies that will help those individuals and make
sure that the gains are broadly shared in our society.
I do not have a foolproof method to do this, but you gave a
very good list of things that are certainly worth for the
Congress and the Administration to consider.
Certainly when you see a rising gap between the wages of
most skilled and less-skilled workers, and that has occurred
since the mid-1980s, that is in a way a signal that is saying
investing in people, investing in education, investing in
workforce development training.
We see now there are high levels of job openings, and yet
there is a certain degree of mismatch of skills with openings,
investing to make sure that individuals have the skills they
need to fill the jobs that are becoming available.
And there is a good deal of research on early childhood
education. That is important. So there are a wealth of
investment possibilities that could help to mitigate this trend
and other interventions, and I definitely think it is
appropriate for Congress and the Administration to consider a
broad range here.
Senator Casey. Well I appreciate that. Let me just say, in
conclusion, and I do appreciate the feedback on that, that the
part of your testimony, one part that I did highlight, which is
good news on wages. You say, in part, quote, ``some signs that
the pace of wage growth has stepped up recently,'' unquote.
That is reflected in the 2015 wage increase.
Chair Yellen. Yes. So we are seeing some evidence, and I
think that is good. But over the longer run, we do have a trend
here. And it is important to do more than that.
Senator Casey. Thank you very much.
Thank you, Mr. Chairman.
Chairman Coats. Thank you. Senator Heinrich, you are on.
Let me just state that in the shuffling that goes on between
various Congresses, it appears that you are going to move up
significantly into this chair. And so I welcome you to that.
My understanding is the Chairmanship now reverts back to
the House, and it could be Mr. Tiberi, but we are not sure
about that, but we are looking forward to your leadership here.
So I'd love to give you the chance here to talk to Chair Yellen
who I would assume will be one of your key witnesses.
Senator Heinrich. And, Senator Coats, I just want to say
how much of a pleasure it has been to work with you both on
this Committee, and also on the Intelligence Committee.
Chair Yellen, I am just going to jump into some questions,
because actually Senator Casey went really exactly where I want
to go as well. The economy has come a long way in the last few
years. It is certainly growing.
But I think historically we have had this approach of if we
can just make the economy grow, then a rising tide lifts all
boats. And I at home hear from people, and we certainly saw I
think the same sentiment in the recent election, that some of
those boats just have not been keeping up with the rest of us.
And that is a fundamental problem with the quality of our
economy. So things like wage growth, and particularly the
seemingly broken link between productivity in wage growth. Some
of the lack of which growth you can ascribe to skilled versus
unskilled.
But we have also seen this very divergent path where
historically we are able to keep wages sort of tied to the same
trajectory as productivity. And we have seen those split apart.
Do you have thoughts for why that is? And how we can seek
through vocational training, or other policies to relink those
things together for a broad swath of America that is simply not
feeling the benefits of a growing economy, or a rising stock
market?
Chair Yellen. So productivity growth is important over the
long haul to real wage growth. And it has been extremely
disappointing over the last decade. But I also agree with the
point that you just made, that we have had periods in which
real wage growth has not kept up with productivity growth. That
is also true.
One way of--data that shows that if you look at the share
of the pie, and here by ``pie'' I mean our gross domestic
product, our output bundle of the economy, it's division
between rewards to labor and rewards to capital. That share was
essentially constant for 100 years.
And more recently we have seen an increase in the share of
the pie going to capital. And that is consistent with real
wages not keeping up with productivity.
There is some research on that. The United States is not
the only country that has seen that happen. I am not certain
what the cause of it is, but I would agree with you that that
is something that has happened.
I think we are seeing a little bit of reversal of it now
that the labor market is very tight and wages are increasing
more rapidly. But even if wages were increasing in line with
productivity, we do have the fact that we are seeing rising
income inequality. We have been seeing that for a long time. A
loss of middle income jobs in the face of technological change
and globalization. That was probably accelerated in the
aftermath of the financial crisis.
So we have people who lost good jobs where they were
earning good incomes. And even if they can find work, because
after all the unemployment rate is low and there are a lot of
job openings----
Senator Heinrich. But the nature of those jobs has really
changed.
Chair Yellen. The nature of the jobs have changed, and the
incomes, so they're taking large wage hits. And we are seeing
the frustration that comes with that, and we just go back to
the points I made in response to Senator Casey's comments. I
believe there are lots of things that could be considered that
is not in the domain of monetary policy, but they are
structural policies of training, education, and safety net.
Senator Heinrich. Okay. Well you answered some questions
earlier that were really focused on mortgages and the
tightening mortgage requirements. I wanted to sort of cut
quickly to the chase there and just ask you:
Fundamentally, do you think--I mean we all agree that
things were not--we were not getting the balance right when the
mortgage crisis occurred. And certainly we have seen stricter
requirements, and in large part we have seen some benefits from
that. But do you think we have gotten that right?
Have we gone too far in tightening mortgage requirements?
Or have we gotten the balance right, coming out of the mortgage
crisis of 2007?
Chair Yellen. So that is a hard question, and I do not
think I can give you a simple answer to that. I think it is
appropriate that standards are tighter, but I think there are
some groups for a variety of reasons that may be having an
unduly difficult time in the aftermath.
Senator Heinrich. Thank you, Chair.
Chairman Coats. Thank you. And, Senator Cassidy.
Senator Cassidy. And I also, Mr. Chair, thank you for your
chairmanship this past Congress, and thank you for your service
to our country in a variety of ways.
Chairman Coats. Thank you.
Senator Cassidy. As an Ambassador, as this, as many other
things. So thank you.
Madam Chair, thank you for being here. Thank you for all
you do.
Chair Yellen. Thank you.
Senator Cassidy. I am very aware that your knowledge on all
of this greatly exceeds mine, so I ask with trepidation, but I
ask with sincerity. I was privileged to have a conversation
with one of your predecessors a few months ago, Alan Greenspan.
I asked him, listen, this is the first time over eight years
we've never had GDP growth over 3 percent. Is this the new
norm?
He said, it might be; that long-term capital investment
continues to decline.
Now I have a graph. I'm sorry, I wish I could blow it up
but you think in numbers so it probably is clear to you. It
looks like since 2011 the year-over-year growth in capital
expenditures by Fortune 500 companies have declined pretty
significantly.
[The chart titled ``YOY Growth in Gross Share Buybacks,
Dividends, and Capital Expenditures--TTM Basis'' appears in the
Submissions for the Record on page 44.]
And it occasionally levels, but then it begins to decline
again. On the other hand, every time there's a QE, there is a
spike in buy-backs.
So there are those who say the easy money has made it
easier for big corporations to arbitrage, as opposed to make
money by long-term capital investment.
Going back to my conversation with former Chair Greenspan,
he said that if you go to a board of directors and you say we
need a 30-year spending plan for capital investments, they are
going to say where's the certainty?
On the other hand, if you say we can invest in whatever we
invest in in terms of the credit markets or the bond market, we
can have a return, they will. So your comments has perversely
the QE hurt long-term capital investment, that is what I am
told is key to productivity growth and rising wages and a
rising GDP.
Chair Yellen. So there are a number of factors that have
been depressing GDP growth. A number of my colleagues now
estimate that long-term growth rate is likely to settle under 2
percent without some change in policy.
We have a more slowly growing labor force. And educational
attainment of the workforce which had been increasing at a more
rapid rate is now leveling off. And so there is less
contribution there.
I agree with you that capital investment has been weak, and
that is one reason that productivity growth has been as
depressed as it is. Even outside of investment, improvements in
technology that come from other sources also seem to have
diminished.
Now it is not clear to my mind why it is that investment
spending has been as weak as it is. Initially we had an economy
with a lot of excess capacity. Firms were clearly operating
without enough sales to justify a need to invest in additional
capacity. And more recently with the economy moving toward full
employment, you would expect to see investment spending picked
up and it is not obvious exactly why it has not picked up. But
I would not agree that the Fed's monetary policy has actually
hampered business investment, or been a negative factor. And I
am not aware of any evidence that suggests that it is.
Senator Cassidy. If I could, because I am almost out of
time and Mr. Chair's going to wrap up and then I am through, I
have a graph that shows that in about 2008 the productivity
began to decline. So you mentioned the excess capacity related
to the great financial crisis.
And then productivity began to climb. Around 2009, around
the time of QE-1, it modestly began to decline. And then in QE-
2 it plummeted. And then it has kind of been like this, kind of
lackluster, staying about the same on net since the end of QE-
2.
[The chart titled ``Has the Fed's QE Stifled Productivity
Growth?'' appears in the Submissions for the Record on page
45.]
So what you're saying, that the excess capacity associated
with the Recession had to shake itself out, doesn't make sense
to me that between 2007 and 2009 productivity would have grown
so robustly.
Chair Yellen. So I believe what happened is we had a huge
financial crisis. Firms found their sales collapsing, and they
took measures that they thought were necessary for business
survival. And that meant firing every worker that a company
could possibly do without.
And because layoffs were so huge, we saw a surge in
productivity. They cut workforce to the bone and productivity
surged. And those productivity gains continued for awhile. But
eventually the amount of labor that firms had was so low
relative to their output that, as hiring picked up and their
sales picked up, productivity growth then subsided.
There was a huge surge at the beginning as firms did
everything in their power to cut costs, and it's not largely a
reflection of trends having to do with investment.
Senator Cassidy. And then so for the specific question, if
a company has a chance to go, as Mr. Greenspan--it wasn't
related to this, so you may say that's not what he meant and
I'll accept that--but he said, if a CEO could go to his board
and say we need to either make a long, a 30-year investment
with all the uncertainty of interest rates and regulatory
environment, et cetera, versus invest in these financial
instruments, that they are choosing the financial instruments
over the productivity, would you say that's true and relevant?
True and unrelevant? Or not true?
Chair Yellen. I mean I think we do see a short-term focus
in business decision making that is disturbing. And the causes
of that I think are not clear. And I certainly do not think it
is our monetary policy, but it is true that businesses seem
reluctant to commit to projects.
In part, it suggests that they do not see that many
projects that they think will produce returns that justify
those investments. And it is conceivable that, you know, we see
evidence. The pace of technological change has diminished, and
it may be partly a reflection of that.
Senator Cassidy. Thank you. I yield back.
Chairman Coats. Thank you, Senator.
Well, I think we have come to the end of the session here.
I just want to say that it has been a privilege for me to chair
this Committee. There are very few joint committees where House
and Senate Members gather together to address a particular
topic or subject, and this is one of them.
We have had a wealth of experienced and informed witnesses
that have come before us on a variety of topics affecting our
national economy and economic issues.
We have made our records available to all House Members and
Senate Members, and to the general public. I want to personally
thank my colleagues, most of whom have left here.
Thank you, Senator Lee, for staying.
But also the staff. We have just had a marvelous staff,
working together in a bipartisan, bicameral way, and that is
not the norm here in the Congress but it is a pleasure to do
that. And the respect that I have for that staff and their
working together is enormous.
I want to give special thanks to Chair Yellen. She is our
star witness. We have had many wonderful witnesses that have
come before us here, but she is the star because the
coordination between the Congress and the Legislative Branch
and the Fed is extremely important to the economic future of
our country.
Chair Yellen has been more than available to come here and
speak with us, and deal with all the questioning that takes
place, to better explain the role of the Fed in relationship to
the role of the Congress and the Legislative Branch has been
transparent. And as you have listened this morning, very
thorough with her answers to our questions that have been
raised.
And so I just want to thank her for her availability. I
wish you the best of success going forward in the future of our
economy, as much of it falls to obviously both areas here, the
Legislative as well as the Administrative. But the Fed plays a
very important role, and we certainly have learned a lot more
about what the Fed is doing, and your leadership, and we thank
you.
Chair Yellen. Thank you, Senator. I really appreciate your
kind words and want to say how much I appreciate your inviting
me here to testify, and how much I have enjoyed cooperating
with you, and appreciate your leadership and wish you the best
in the future.
Chairman Coats. Thank you. My parting gift to you, knowing
how busy you are, is that we are actually adjourning early.
[Laughter.]
We will at least give you more lunch time.
Chair Yellen. Thank you, Senator.
Chairman Coats. With that, this meeting concludes.
(Whereupon, at 11:42 a.m., Thursday, November 17, 2016, the
hearing was adjourned.)
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Dan Coats, Chairman, Joint Economic
Committee
The committee will come to order. I would like to welcome everyone
to today's hearing, especially Federal Reserve Chair Janet Yellen.
The Joint Economic Committee has a long tradition of receiving
regular updates from the Chair of the Federal Reserve, and we are
pleased to hear your insight once again before this Congress adjourns.
While we have seen some encouraging metrics of economic performance
over the past year, the next Congress and the next Administration will
still face a number of challenges.
Eight years after a deep recession, we are still looking for a
higher rate of GDP growth, stronger productivity growth, and increased
work opportunities for prime-age workers.
Low interest rates have historically been the prescribed treatment
for a weak economy.
However, the past seven years have clearly taught us that low
interest rates alone cannot cure an ailing economy.
In response to this continuing challenge of stimulating growth to a
more desired level, there seems to be a growing consensus forming that
tax and regulatory reforms, plus fiscal stimulus measures such as
targeted infrastructure initiatives, are necessary ingredients to
incentivize capital investment and GDP growth.
But as we pursue these policy changes, we also have to be mindful
of a nearly $20 trillion national debt that looms ominously over the
U.S. economy.
Where debt-to-GDP stood at 39.3 percent in 2008, it will total 76.6
percent by the end of this year, according to CBO, and will climb to
85.5 over the next 10 years.
We look forward to hearing your thoughts on the economic outlook,
as well as the types of policies you feel Congress should be
considering at this time.
__________
Prepared Statement of Representative Carolyn B. Maloney, Ranking
Democrat, Joint Economic Committee
This likely is the last hearing of the Joint Economic Committee in
the 114th Congress. I'd like to thank Chairman Coats for his
stewardship of the JEC, and for holding a number of very interesting
hearings that have generated excellent discussion. I'd also like to
thank my colleagues on both sides of the aisle.
I am particularly pleased that we are ending on a high note with
Federal Reserve Chair Janet Yellen. Chair Yellen, I think it's fair to
say that all my colleagues warmly welcome you to this hearing and look
forward to hearing your thoughts at this critical time.
I'd like to begin by thanking you for your extraordinary and
careful leadership of the Federal Reserve. The Fed has played a
critical role in helping our country recover from the worst recession
since the Great Depression. Your steady hand has built on the work of
your predecessor and has guided the economy forward. Thank you.
Much has changed since you appeared before this Committee about a
year ago:
The economy has continued to strengthen.
The labor market has continued to improve.
Wage growth has been the strongest since the recession.
Household income has had the largest annual increase
since Census began tracking this data.
Inflation has edged up, though it remains below the Fed's
2 percent target.
These are among the ``tea leaves'' of the economy--and everyone
here is eager to find out how you read them.
Up until very recently, it was widely assumed that the Federal Open
Market Committee would raise interest rates at its next meeting, less
than a month from today. Some of your past statements have indicated
that this is a possibility, or even a goal.
But then came a thunderbolt on November 8th. Many critical things
about our country changed literally overnight. Our world has been
turned upside down.
The question everyone would like to know is how the Federal Reserve
will steer through the days ahead.
One particular challenge is that the President-elect has called for
policies that may have countervailing effects.
History has shown us that the type of tax cuts candidate Trump has
proposed disproportionately benefit those who don't need them and
dramatically increase our national debt.
I'm also curious to see how President-elect Trump's infrastructure
plan will be reconciled with the Republican Congress' past--and fierce
opposition--to fiscal stimulus.
There is a great deal of uncertainty about fiscal policy and this
leads to uncertainty for markets, businesses and the economy overall.
One constant that I hope we can count on is monetary policy that
remains insulated from political attacks and attempts to meddle with
Fed independence.
the critical role played by the fed
The election could also have a direct effect on the Fed itself. The
President-elect's comments on this subject have been somewhat
contradictory--he has stated both that the current low interest rates
are good for the economy and that the Fed was being political in
keeping them at these levels.
In Congress, some have called for revolutionary changes for the
Federal Reserve. Changes that would affect the very nature of the
institution. Changes that in my opinion would lead to disaster.
For those who would like to restrict the independence of the
Federal Reserve, I think it's important to briefly review that immense
benefit of an independent Federal Reserve. We only have to look back a
few years.
When President Obama took office, he inherited what former Fed
Chairman Ben Bernanke called ``[ . . . ] the worst financial crisis in
global history, including the Great Depression.''
The Federal Reserve quickly acted to lower rates to almost zero and
has held them there for about eight years. It instituted several rounds
of quantitative easing to further stimulate the economy.
This action by an independent Federal Reserve was critical to our
recovery. Economists Alan Blinder and Mark Zandi found that efforts by
the Federal Reserve and the Obama Administration--with support from
Democrats in Congress--dramatically reduced the severity and length of
the Great Recession.
recent attempts to undermine fed independence
With control of the legislative and executive branches, past
Republican efforts to limit the Fed's independence may gain momentum.
Last year, Republicans in the House passed legislation--the FORM
Act--that would fundamentally hamper the Fed's ability to conduct
monetary policy.
It would limit the Fed's independence by forcing it to determine
target interest rates using a mathematical formula, while ignoring a
broad range of important economic indicators.
Chair Yellen, as you have noted before, if the Fed had been forced
to follow such a rule in recent years, quote ``[ . . . ] millions of
Americans would have suffered unnecessary spells of joblessness over
this period.''
Another proposal is to jettison the Fed's mandate to try to
maximize employment, and instead focus solely on inflation. I'm not
sure that people in Michigan, Pennsylvania and other states would
respond well to that suggestion. But if that's the conversation my
colleagues want to have, let's have it today.
conclusion
The past nine plus years, going back to the start of the recession
in 2007, have been an extraordinary period in U.S. economic history. We
should continue to study and learn from it.
We are not out of the woods by any stretch. When the next recession
hits, as it surely will, what will the monetary response look like?
Will the Fed have the tools to restore growth? Will it turn to
quantitative easing? What other effective policy tools will the Fed
have at its disposal?
I want to make one final point. The Federal Reserve has been at the
center of the U.S. and global economic recovery. Efforts to hamstring
the Fed are misguided. Just as efforts to politicize it are wrong-
headed.
Chair Yellen, thank you for appearing before the Joint Economic
Committee today. I look forward to your testimony.
__________
Prepared Statement of Hon. Janet L. Yellen, Chair, Board of Governors
of the Federal Reserve System
Chairman Coats, Ranking Member Maloney, and members of the
Committee, I appreciate the opportunity to testify before you today. I
will discuss the current economic outlook and monetary policy.
the economic outlook
The U.S. economy has made further progress this year toward the
Federal Reserve's dual-mandate objectives of maximum employment and
price stability. Job gains averaged 180,000 per month from January
through October, a somewhat slower pace than last year but still well
above estimates of the pace necessary to absorb new entrants to the
labor force. The unemployment rate, which stood at 4.9 percent in
October, has held relatively steady since the beginning of the year.
The stability of the unemployment rate, combined with above-trend job
growth, suggests that the U.S. economy has had a bit more ``room to
run'' than anticipated earlier. This favorable outcome has been
reflected in the labor force participation rate, which has been about
unchanged this year, on net, despite an underlying downward trend
stemming from the aging of the U.S. population. While above-trend
growth of the labor force and employment cannot continue indefinitely,
there nonetheless appears to be scope for some further improvement in
the labor market. The unemployment rate is still a little above the
median of Federal Open Market Committee (FOMC) participants' estimates
of its longer-run level, and involuntary part-time employment remains
elevated relative to historical norms. Further employment gains may
well help support labor force participation as well as wage gains;
indeed, there are some signs that the pace of wage growth has stepped
up recently. While the improvements in the labor market over the past
year have been widespread across racial and ethnic groups, it is
troubling that unemployment rates for African Americans and Hispanics
remain higher than for the nation overall, and that the annual income
of the median African American household and the median Hispanic
household is still well below the median income of other U.S.
households.
Meanwhile, U.S. economic growth appears to have picked up from its
subdued pace earlier this year. After rising at an annual rate of just
1 percent in the first half of this year, inflation-adjusted gross
domestic product is estimated to have increased nearly 3 percent in the
third quarter. In part, the pickup reflected some rebuilding of
inventories and a surge in soybean exports. In addition, consumer
spending has continued to post moderate gains, supported by solid
growth in real disposable income, upbeat consumer confidence, low
borrowing rates, and the ongoing effects of earlier increases in
household wealth. By contrast, business investment has remained
relatively soft, in part because of the drag on outlays for drilling
and mining structures that has resulted from earlier declines in oil
prices. Manufacturing output continues to be restrained by the weakness
in economic growth abroad and by the appreciation in the U.S. dollar
over the past two years. And while new housing construction has been
subdued in recent quarters despite rising prices, the underlying
fundamentals--including a lean stock of homes for sale, an improving
labor market, and the low level of mortgage rates--are favorable for a
pickup.
Turning to inflation, overall consumer prices, as measured by the
price index for personal consumption expenditures, increased 1\1/4\
percent over the 12 months ending in September, a somewhat higher pace
than earlier this year but still below the FOMC's 2 percent objective.
Much of this shortfall continues to reflect earlier declines in energy
prices and in prices of non-energy imports. Core inflation, which
excludes the more volatile energy and food prices and tends to be a
better indicator of future overall inflation, has been running closer
to 1\3/4\ percent.
With regard to the outlook, I expect economic growth to continue at
a moderate pace sufficient to generate some further strengthening in
labor market conditions and a return of inflation to the Committee's 2
percent objective over the next couple of years. This judgment reflects
my view that monetary policy remains moderately accommodative and that
ongoing job gains, along with low oil prices, should continue to
support household purchasing power and therefore consumer spending. In
addition, global economic growth should firm, supported by
accommodative monetary policies abroad. As the labor market strengthens
further and the transitory influences holding down inflation fade, I
expect inflation to rise to 2 percent.
monetary policy
I will turn now to the implications of recent economic developments
and the economic outlook for monetary policy. The stance of monetary
policy has supported improvement in the labor market this year, along
with a return of inflation toward the FOMC's 2 percent objective. In
September, the Committee decided to maintain the target range for the
federal funds rate at \1/4\ to \1/2\ percent and stated that, while the
case for an increase in the target range had strengthened, it would,
for the time being, wait for further evidence of continued progress
toward its objectives.
At our meeting earlier this month, the Committee judged that the
case for an increase in the target range had continued to strengthen
and that such an increase could well become appropriate relatively soon
if incoming data provide some further evidence of continued progress
toward the Committee's objectives. This judgment recognized that
progress in the labor market has continued and that economic activity
has picked up from the modest pace seen in the first half of this year.
And inflation, while still below the Committee's 2 percent objective,
has increased somewhat since earlier this year. Furthermore, the
Committee judged that near-term risks to the outlook were roughly
balanced.
Waiting for further evidence does not reflect a lack of confidence
in the economy. Rather, with the unemployment rate remaining steady
this year despite above-trend job gains, and with inflation continuing
to run below its target, the Committee judged that there was somewhat
more room for the labor market to improve on a sustainable basis than
the Committee had anticipated at the beginning of the year.
Nonetheless, the Committee must remain forward looking in setting
monetary policy. Were the FOMC to delay increases in the federal funds
rate for too long, it could end up having to tighten policy relatively
abruptly to keep the economy from significantly overshooting both of
the Committee's longer-run policy goals. Moreover, holding the federal
funds rate at its current level for too long could also encourage
excessive risk-taking and ultimately undermine financial stability.
The FOMC continues to expect that the evolution of the economy will
warrant only gradual increases in the federal funds rate over time to
achieve and maintain maximum employment and price stability. This
assessment is based on the view that the neutral federal funds rate--
meaning the rate that is neither expansionary nor contractionary and
keeps the economy operating on an even keel--appears to be currently
quite low by historical standards. Consistent with this view, growth in
aggregate spending has been moderate in recent years despite support
from the low level of the federal funds rate and the Federal Reserve's
large holdings of longer-term securities. With the federal funds rate
currently only somewhat below estimates of the neutral rate, the stance
of monetary policy is likely moderately accommodative, which is
appropriate to foster further progress toward the FOMC's objectives.
But because monetary policy is only moderately accommodative, the risk
of falling behind the curve in the near future appears limited, and
gradual increases in the federal funds rate will likely be sufficient
to get to a neutral policy stance over the next few years.
Of course, the economic outlook is inherently uncertain, and, as
always, the appropriate path for the federal funds rate will change in
response to changes to the outlook and associated risks.
Thank you. I would be pleased to answer your questions.
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Questions for the Record and Responses of Chair Janet Yellen Submitted
by Senator Amy Klobuchar
2. Infrastructure Investment
There's an economic imperative to fixing our infrastructure:
businesses rely on our transportation network to move goods to market.
In 2013, the American Society of Civil Engineers estimated that
inefficiencies in infrastructure are expected to drive up the cost of
doing business by an estimated $430 billion over the next decade.
Please discuss how improving U.S. infrastructure including our
broadband network can benefit the U.S. economy and our global
competitiveness.
How would increasing investment in infrastructure help the labor
force participation rate, lower the underemployment level, and address
income inequality?
As noted by the Congressional Budget Office (CBO), productive
investment in public infrastructure can provide benefits for the
economy and society more broadly.\1\ Infrastructure investment can
boost productivity and, in turn, raise economic output, although the
CBO notes that these positive effects tend to occur only gradually. Of
course, greater productivity and a larger U.S. economy would also
improve our competitiveness in the global economy. To the degree that
infrastructure investment leads to an expansion in U.S. economic
activity, one would also expect that domestic labor market conditions
would further improve--all else equal, there would tend to be
incentives for workers to join or remain in the labor force and there
would be downward pressure on the unemployment rate. Greater
productivity and an even stronger economy would also likely show
through to higher wages for many lower- and middle-income workers,
which could help ease income inequality somewhat. However, the CBO's
analysis appears to indicate that plausible increases in federal
infrastructure spending would probably not be a panacea for either the
low rates of productivity growth or the increases in income inequality
seen in recent years. As a result, it would seem likely that fiscal
policymakers would want to consider a number of possible policies to
address the issues of low productivity growth and rising income
inequality.
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\1\ See, for example, Congressional Budget Office, ``The
Macroeconomic and Budgetary Effects of Federal Investment,'' June 2016;
``Approaches to Make Federal Highway Spending More Productive,''
February 2016; and ``Public Spending on Transportation and Water
Infrastructure,'' March 2015.
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3. Income Inequality
In the 113th Congress, the Joint Economic Committee examined the
economic impacts widening income inequality which does not just mean
those Americans at the top or the bottom of the income distribution,
but also includes impacts on those in the middle of income
distribution--the middle class.
While the recovery has been strong with low unemployment rates,
increased earnings, and GDP growth, the benefits of the recovery have
not been equal across income distribution levels or regions.
For example, in your testimony you noted that for Hispanics and
African-Americans the unemployment rate is higher and the median
household incomes are lower than for the nation overall. And we know
that parts of the country are lagging behind in the recovery.
What do you see as the impact of income inequality on those in the
middle of the income distribution and what is the overall effect of
growing income disparity?
What are the possible long-run consequences of continued or
widening income inequality for the economy?
Why have we seen a rise in income inequality over the past decades?
What can be done to reverse this trend?
Please discuss policy options that would benefit those who have not
seen the effects of the recovery in their region.
Rising economic inequality is of great concern to me, and in fact,
I discussed this subject in one of my earliest speeches as Chair of the
Federal Reserve, in October 2014. Widening inequality in recent years
has been associated with ``polarization'' in the labor market, with
many middle class families finding that even when jobs are available,
those jobs do not pay what they are accustomed to earning. There can be
direct macroeconomic effects from this sort of rising income
inequality, if lower- and middle-income earners are not able to spend,
invest in a home, or invest in education as they would have under
better circumstances. Research has also shown that greater income
inequality is associated with diminished intergenerational mobility.
Thus, there may be important harmful long-run economic consequences of
such inequality--for example, if people believe they cannot get ahead,
they may not even want to invest time and money in their education and
training. And beyond the purely economic effects, I worry that greater
inequality can be associated with a loss of social cohesion and I think
it is appropriate to ask whether this trend is compatible with values
rooted in our nation's history, among them the high value that
Americans have traditionally placed on equality of opportunity.
Rising inequality began decades before the recession and is likely
due to a variety of factors. For example, labor earnings--which are the
largest component of most households' incomes--have become increasingly
unequal since the early 1980s, as real wages for higher-wage and more
educated workers have pulled away from those in the middle and at the
lower end of the distribution. The causes of rising earnings inequality
are complex, but available research suggests that shifts in the demand
for workers toward those with higher education and a more versatile
skill-set have been an important contributor, as have changes in the
minimum wage, declining unionization and executive compensation
practices.
Recessions tend to exacerbate earnings inequality, as low- and
middle-income wage earners tend to experience larger increases in
unemployment and larger declines in household income than their higher-
earning counterparts. Recessions also have a very noticeable effect by
race, for example, as the Board noted in the most recent Monetary
Policy Report. Unemployment among Hispanics and African-Americans is
higher than the national average and median incomes are lower in all
years, and those outcomes are more sensitive to overall macroeconomic
conditions. For example, while median incomes for White households fell
about 7 percent between 2007 and 2012, the corresponding decline for
African-American families was more than 15 percent.
In the past several years, the economy has expanded and
unemployment has fallen impressively. For example, unemployment rates
are back near pre-recession levels across all race groups. This gives
me hope that continued stable economic growth, supported by monetary
policy, will continue to benefit Americans across the economic
spectrum. Beyond this important contribution, however, monetary policy
is not well placed to address many of the underlying causes of
inequality, and I encourage the Congress as well as policymakers in
state and local governments to consider other policy approaches. In my
2014 speech, for example, I highlighted some potential ``building
blocks'' for greater economic opportunity; these included strengthening
the educational and other resources available for lower-income
children, making college more affordable, and building wealth and job
creation through strengthening Americans' ability to start and grow
businesses. I view inequality as a central concern for our nation's
economic future, and I believe that these and other policy approaches
deserve close scrutiny.
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Questions for the Record and Responses of Chair Janet Yellen Submitted
by Senator Amy Klobuchar
1. Community Banks and Credit Unions
Minnesota strongly relies on a network of community banks and
credit unions which provide credit for many small businesses and farms.
Yet, the overall number of community banks is declining and
consolidation in the banking sector has played a role.
I support the Dodd-Frank reforms that protect our financial system
against the abuses of the past while preventing a crisis in the future.
But we also must ensure that we have a strong community banking and
credit union sector.
In your testimony before the House Financial Services Committee in
September 2016 you noted that the risks for small community banks and
large, systemically important financial institutions are not the same.
And that the Federal Reserve, ``would be able to address [some of the]
concerns [of community banks] as part of the normal safety-and-
soundness supervisory process.''
What steps can the Federal Reserve take to help ensure a strong
community bank and credit union sector? How can the Federal Reserve
work together with the other community bank prudential regulators,
specifically the Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and the National
Credit Union Association (NCUA) to ensure that community banks and
credit unions are able to continue to serve small businesses and rural
America? What rules or regulations could be reviewed, adjusted or
revised to better tailor the regulation of community banks and credit
unions to the potential risks posed by this sector of the financial
services industry?
Community banks \1\ play a critical role in the U.S. and regional
economies, and the Federal Reserve is mindful of the impact of
regulatory burden on community banks. In particular, community bankers
have indicated that as costs associated with regulatory compliance
increase, these increased costs can contribute, along with other
factors, to industry consolidation.
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\1\ Generally, the Federal Reserve defines the community banking
organizations that it supervises as those state member banks, bank
holding companies, and savings and loan holding companies with
consolidated assets totaling less than $10 billion. In conducting its
supervision of these organizations, the Federal Reserve coordinates
closely with the Federal Deposit Insurance Corporation (FDIC) and
Office of the Comptroller of the Currency (OCC). The Federal Reserve is
not involved in the supervision of state and federal credit unions,
which are regulated and insured by the National Credit Union
Administration (NCUA).
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The Federal Reserve is guided by the principle that regulations
should promote the safety and soundness of individual financial
institutions but also be tailored to their risks. With respect to its
supervisory responsibilities for community banks, the Federal Reserve
considers ways to tailor the rules and supervisory program for these
banks based on their risk profile, size, and complexity. Tailoring the
supervisory program allows the Federal Reserve to achieve its goal of
promoting a strong banking system and preventing or mitigating against
the risks of bank failures while minimizing regulatory burden to
community banks.
In carrying out its responsibilities, the Federal Reserve has
collaborated, and continues to collaborate with, other banking agencies
on major aspects of bank supervision such as the development of policy
guidance and on-site examinations. For example, a large portion of the
guidance that impacts community banks is developed on an interagency
basis through the Federal Financial Institutions Examination Council
(FFIEC) to promote consistency in the supervision of community banks.
Further, to reduce the burden of on-site examinations, the Federal
Reserve coordinates with state agencies on the majority of on-site
examination work. For example, since 1981, the Federal Reserve and
state regulators have examined healthy community banks on an
alternating schedule, with the Federal Reserve examining one year and
the state the next. The Federal Reserve Board and state regulators also
regularly conduct joint examinations and participate in each other's
examinations in an effort to reduce burden on their regulated financial
institutions.
Along with the other members of the FFIEC, the Federal Reserve has
considered and is considering the comments received as part of the
regulatory review started in 2014 conducted pursuant to the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). This
decennial review, which is a joint effort between the Federal Reserve,
OCC, and FDIC (collectively, the Agencies), has generated over 230
public comments submitted in response to four Federal Register notices.
Additional comments were received from bankers, consumer and community
groups, and the public through six outreach meetings held in 2014 and
2015 in Los Angeles, Dallas, Boston, Kansas City, Chicago, and the
Washington, D.C., area. While the Federal Reserve continues to evaluate
these comments and work with the other agencies, the Federal Reserve
has taken action on certain issues raised in public comments, such as:
Proposing burden reductions to the Call Report such as a
streamlined report for noncomplex institutions with total assets of
less than $1 billion;\2\
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\2\ 82 FR 2444 (January 9, 2017).
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Issuing an interagency advisory clarifying when a real
estate evaluation can be conducted in lieu of an appraisal;\3\
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\3\ See: http://www.federalreserve.gov/newsevents/press/bcreg/20 l
60304a.htm.
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Clarifying through supervisory guidance that community
and regional banking organizations \4\ are not expected to have stress
testing models and processes that are as sophisticated as those at the
CCAR firms,\5\ tailoring the stress testing rule requirements by
allowing them more time to conduct stress tests each year, and
requiring less detailed reporting and public disclosure than larger
firms;
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\4\ Regional banking organizations are generally defined as
companies with total consolidated assets between $10 billion and $50
billion.
\5\ Those firms that are a part of the Comprehensive Capital and
Analysis Review (CCAR) program.
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Communicating supervisory statements that make clear that
community banks will not be required to build costly or complex models,
or to engage third-party service providers, to comply with the new
accounting standard for credit losses issued by the Financial
Accounting Standards Board;\6\ and
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\6\ SR Letter 16-12.
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Tailoring the Volcker rule to reduce burden on community
banks by adjusting the compliance program and reporting requirements
based on the size and level of covered activity of a banking entity.
In addition, the Federal Reserve has taken steps to ease the burden
associated with community bank examinations, including improving
examination efficiency by:
Using existing bank financial data to identify banking
organizations with high-risk activities, which allows the Federal
Reserve to focus our supervisory efforts and reduce regulatory burden
on banking organizations with less risk;
Leveraging technology to conduct more examination work
off-site;\7\
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\7\ SR Letter 16-8.
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Simplifying and tailoring pre-examination requests for
documentation;
Helping community bankers more easily identify new
regulations or proposals that are applicable to their organizations;
and
Providing implementation guidance and extensive training
for examiners, and performing internal reviews and studies, to ensure
that rules and guidance are properly interpreted and applied
consistently to all community banks.
Under the Basel III agreement, banks will have to increase their
capital reserve holdings. I am concerned that these requirements will
weaken the ability of community banks to make loans to the small
businesses and farms they serve. What can the Federal Reserve do to
recognize the different risks posed to the financial system by
community banks as the Basel III regulatory framework is implemented?
In general, the Board's Basel III rulemaking increased capital
requirements for Board-regulated institutions, improving the resiliency
of individual firms and thus enhancing overall financial stability. The
revised regulatory capital rules did not increase the general risk-
based factor applicable to corporate exposures or loans to individuals,
which includes those that are exposures to small businesses and farms.
The Board considered the many comments received during the Basel III
rulemaking process, and took action to ensure that application of the
rule would be tailored. In addition, many of the rule's stricter and
more complex elements, such as the countercyclical capital buffer, the
supplementary leverage ratio, full recognition of accumulated other
comprehensive income, the market risk requirements, and certain public
disclosure requirements, only apply to larger and more complex banking
organizations. Community banking organizations also are not subject to
the enhanced standards that larger bank holding companies face related
to capital planning, stress testing, liquidity and risk management
requirements, and capital surcharges. The Federal Reserve, therefore,
holds community banking organizations to different overall standards
than larger and more complex firms.
More recently, comments received through the EGRPRA process have
argued in favor of additional revisions to the regulatory capital
requirements. Commenters have argued that simpler capital rules are
needed to reduce the compliance burden on smaller institutions because
the burden is disproportionate to the benefits of the framework's
increased risk sensitivity. Commenters have further asserted that the
greater detail of the revised regulatory capital rule can require a
degree of categorization, recordkeeping, and reporting that can be
particularly costly for community banks. The Federal Reserve is working
together with the other Federal banking agencies to identify potential
simplifications to the capital requirements that would be consistent
both with the safety and soundness aims of prudential regulation and
with statutory requirements, such as section 171 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
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Questions for the Record for Chair Janet Yellen Submitted by Senator
Ted Cruz
1. Commodity prices, in general, are in their second year of
relative decline from record highs achieved in the 2014 period. In
fact, just in the last week newspapers from my home state of Texas are
reporting that cattle prices have reached an all-time low. Prices are
also low for other agricultural commodities, such as corn and cotton.
Likewise, Texas' energy industry has seen prices fall more than in half
since 2014, hitting the entire regional economy.
The story of commodity prices is the story of the fluctuating
dollar. Prices for primary goods traded on global spot markets, ranging
from energy to metals to farm products, tend to move broadly in tandem,
opposite the dollar. When the dollar is low, commodities tend to be
high; when the dollar is up--as it is today with it up at least 20%
since 2014--commodity prices tend to be down.
Now, to be fair, there are a number of factors that affect the cost
of a product. However, if U.S. monetary authorities had kept the dollar
more stable, then capital flows, commodity prices, and asset valuations
would have been more stable. Instead:
Consumers have been hit by the unstable dollar coming and going:
they have lower median household incomes and wealth due to the bubble
and crash, have not recovered due to the record-slow recovery, and yet
are paying higher prices for many essential goods.
Meanwhile, energy and agriculture businesses, investors, and
workers have been whipsawed multiple times from high to lower prices.
This arrangement is dysfunctional and is the major issue preventing
the economy from recovering.
The solution isn't to deflate commodities back to their earlier
levels which would cause a painful recession.
The right solution is to stabilize the dollar at a healthy level to
keep commodities prices stable over the long run--and provided a much
needed level of certainty to both consumers and producers.
Do you not agree that if U.S. monetary authorities had kept the
dollar more stable since the late 1990s, then capital flows, commodity
prices, and asset valuations would have been more stable and the
economy would likely be in much better shape? As part of the Fed's dual
mandate--to maximize employment and stabilize prices--shouldn't a
stable dollar be a concern for the Fed?
Agricultural and oil prices have declined considerably over the
past couple of years. However, it is likely only some of that decline
should be attributed to the rise in the dollar over that period. The
dollar is only weakly correlated with commodity prices, and that
correlation is often driven by other factors that influence both the
dollar and commodity prices; for instance, economic weakness abroad can
drive down global commodity prices while also driving up the value of
the dollar. In addition to weak global demand, the commodity price
decline since 2014 has been a response to strong growth in the global
supply of commodities, including in the United States. Although U.S.
oil production has declined over the past year, it has recently moved
up and remains well above its level of early 2014. New technologies
such as hydraulic fracturing have greatly increased U.S. oil production
in recent years. Both beneficial weather and productivity improvements
have contributed to record U.S. crops of corn and other agricultural
commodities, which have put downward pressure on prices of those
commodities.
As the dollar has not been the main driver of commodity price
movements, it is not clear that a more stable dollar would have
prevented fluctuations in commodity prices in recent years. It is also
unclear whether a more stable dollar would have led to greater
stability in capital flows and asset valuations. Looking around the
globe and across time, fixed exchange rate regimes have not been
associated with more stable capital flows and asset prices. In the long
run, allowing exchange rates to be freely determined by market forces
permits them to respond to changing economic conditions and to act as a
stabilizing force in the economy.
Consumers generally have benefited from low and stable inflation in
recent years, even as the dollar's foreign exchange value has
fluctuated. The dollar's rise since 2014 has put downward pressure on
import prices, contributing to low consumer price inflation that has
helped to boost real incomes. More broadly, consumers and firms have
benefited from the economic rebound and falling unemployment.
A more stable dollar likely would not stabilize commodity prices
and provide certainty to consumers and producers, as commodity prices
are driven by global supply and demand. Moreover, a more useful
certainty for consumers and producers is to know that there will be low
and stable inflation and an economy that operates near its potential.
Those objectives are most likely to be achieved when Federal Reserve
monetary policy remains focused on its dual mandate of price stability
and maximum employment.
2. Since the end of QE3 two years ago, the dollar has risen about
20% relative to other major currencies. Your colleague at the Fed, Lael
Brainard, suggests this had already had a significant tightening effect
on the economy. The higher dollar has hit U.S. multi-nationals and
exporters, domestic manufacturers, and commodity industries like oil
and agriculture. Some believe the high dollar is creating great
pressures to devalue on nations with dollar pegs such as China and
Saudi Arabia.
So now the Fed is talking about hiking in December. If the Fed does
tighten, do you worry about the dollar soaring another 10 or 20%. What
impact do you think that will have on U.S. markets?
Factored into the dollar's current value is the market's
expectation that the U.S. economy will expand in a manner that will
make it appropriate for the Federal Reserve to raise rates in a
cautious and gradual way over time. The appreciation of the dollar
since mid-2014 partly reflects the strength of the U.S. economy
compared with many of our trading partners, which has led to
considerable divergence in expectations for monetary policy. A further
divergence in economic conditions and policy expectations could cause
the dollar to rise further.
All else equal, dollar appreciation tends to restrain U.S. exports
and boost imports. This results in a more negative contribution of net
exports to U.S. GDP growth. Dollar appreciation also restrains U.S.
import price inflation and, consequently, overall inflation in the
economy. That said, the underlying strength of demand in the United
States, supported by healthy consumption growth, seems to be
sufficiently robust to overcome the drag emanating from the higher
dollar.
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