[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

                               __________

          Printed for the use of the Joint Economic Committee
          
          
          
          
          
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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

                              ----------                              

                     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

                              ----------                              


                      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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \2\ 82 FR 2444 (January 9, 2017).
---------------------------------------------------------------------------
      Issuing an interagency advisory clarifying when a real 
estate evaluation can be conducted in lieu of an appraisal;\3\
---------------------------------------------------------------------------
    \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;
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
      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
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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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