[Senate Hearing 114-397]
[From the U.S. Government Publishing Office]










                                                        S. Hrg. 114-397


        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2016

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                                   ON

      OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- 
       ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978

                               __________

                             JUNE 21, 2016

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho                    SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                    Dana Wade, Deputy Staff Director

                    Jelena McWilliams, Chief Counsel

                     Thomas Hogan, Chief Economist

                Shelby Begany, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                Graham Steele, Democratic Chief Counsel

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)














                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 21, 2016

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                                WITNESS

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve 
  System.........................................................     4
    Prepared statement...........................................    41
    Responses to written questions of:
        Chairman Shelby..........................................    44
        Senator Crapo............................................    47
        Senator Toomey...........................................    49
        Senator Kirk.............................................    51
        Senator Heller...........................................    53
        Senator Sasse............................................    57
        Senator Rounds...........................................    63
        Senator Menendez.........................................    64
        Senator Merkley..........................................    71
        Senator Heitkamp.........................................    74

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated June 21, 2016.......    79

                                 (iii)
 
        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2016

                              ----------                              


                         TUESDAY, JUNE 21, 2016

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard C. Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The Committee will come to order.
    Today we will receive testimony from Federal Reserve Chair 
Janet Yellen regarding the Fed's semiannual report on monetary 
policy. And while Humphrey-Hawkins testimony is a key part of 
Congress' oversight of our Nation's central bank, it is not 
sufficient to provide Congress and the American public with a 
full picture of Fed policymaking.
    I have often remarked during these hearings about the 
importance of striking the right balance between transparency 
and independence. One of the Fed's stated reasons for 
maintaining its independence is to avoid politicizing its 
decisions.
    I agree that politics have no place at the Federal Reserve. 
And while the line between politics and policy can be quite 
fine, it should, nonetheless, be clear and unambiguous.
    The Fed should act, I believe, in a manner consistent with 
its statutory mandate in the interest of the stability of the 
U.S. economy whether or not such policies align with the goals 
of Congress or the Administration.
    Our central bank is independent and should remain so. The 
desire to preserve the Fed's independence should not preclude 
consideration of additional measures to increase the 
transparency of the Board's actions. In fact, some have argued 
that better disclosure of monetary policy strategy could 
actually bolster independence.
    Earlier this year, a prominent group of economists, 
including three Nobel Prize winners, agreed in a statement 
that, and I will quote, `` . . . publicly reporting a strategy 
helps prevent policymakers from bending under pressure and 
sacrificing independence.''
    The Fed continues to resist calls by Congress to disclose 
monetary rules, even though it claims to use such rules 
regularly. In its public communications, the Fed has veered 
further away from data-driven analysis toward the exercise of 
even more discretion.
    For example, rather than adhering precisely to its stated 
goals for inflation and employment, the Federal Open Market 
Committee appears to base certain decisions on factors such as 
``financial and international developments'' that cannot be 
derived from quantitative analysis.
    Similarly, the Fed's regulatory conduct has become 
increasingly opaque and complicated. This is demonstrated by 
the inherent complexity and overlap in its capital and 
liquidity rules, stress testing, and resolution and recovery 
planning.
    Two weeks ago, a panel of experts testified before this 
Committee that complex regulations might actually increase 
rather than decrease risk in the banking system. They also 
criticized the lack of analysis and transparency in the 
rulemaking process. This is especially true of Basel rules 
established by an international committee and imposed by 
domestic regulators on our institutions, without adequate 
tailoring.
    The Fed did not even do its own quantitative study for 
Basel III, as it did, Madam Chair, for Basel I and II. It 
instead relied on the Basel Committee's analysis, which 
included data from only 13--only 13--U.S. banks out of the 249 
banks that were studied.
    Such an approach is concerning. The Fed should perform, I 
believe, rigorous analysis, not only for each rule but also on 
the cumulative impact of capital and liquidity regulations. If 
our banking regulators are unable or unwilling to conduct such 
analysis, then we should consider mandating it.
    Even the European Commission analyzes these factors in its 
regulatory framework. In a recent Call for Evidence, it 
solicited feedback from the public to `` . . . evaluate the 
interaction between financial regulations and assess their 
cumulative impact.'' We should expect no less from our own 
regulators.
    Chair Yellen, I look forward to your testimony today and 
your thoughts on these important issues. I think it is a very 
important hearing.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. And, Madam Chair, 
welcome back to the Committee. We are so glad you are here.
    Since your last appearance, the economy has made only 
modest gains. Inflation remains low. Job creation seems to have 
slowed. The economies of our trading partners struggle. 
Uncertainty, most notably with the possibility of Britain's 
exit from the European, remains high.
    In the face of these headwinds, you would think that 
politicians here at home would do everything we could to 
promote our economy. Instead, many of them seem intent on doing 
just the opposite.
    My colleagues on the other side of the aisle are failing to 
invest in infrastructure, in public works, in research and 
development, in education, in training--the very building 
blocks of our economic success. If that were not enough, they 
are trying their level best to undermine the safeguards that 
dampened the economic crisis and were erected to prevent the 
next one. They would like to repeal Dodd-Frank and return our 
country to the casino capitalism that caused so much ruin for 
families and communities across our country. And they are 
trying to politicize and undermine the Federal Reserve, despite 
the key actions that it has taken to help the recovery.
    Congress rated its reserves and reduced dividend payments 
in order to pay for a transportation bill. Many of my 
colleagues are trying to insert Congress into monetary policy 
decisions. This Committee has yet to even hold a hearing on the 
two nominees to the Board of Governors of the Federal Reserve, 
and bad legislative ideas continue to multiply.
    The presumptive nominee of the Republican Party is a 
factory of bad ideas. Moody's Analytics recently released a 
report that states that, if adopted, his economic proposals 
would leave our economy ``significantly weaker.'' He suggests 
that he would replace the current Fed Chair based on imagined 
partisan political considerations. That is a bad idea. You 
might argue that someone is failing to pursue the right course 
on monetary and regulatory policy, but partisan labels should 
never be part of that discourse.
    The presumptive nominee has suggested he would simply 
renegotiate or renege on our debt, comfortable in the belief 
that the United States can never default ``because you print 
the money.'' In his opinion, he understands debt ``better than 
probably anybody.'' His words. He also thinks, along with the 
runner-up for the Republican nomination, that this country 
should return to the gold standard.
    When Ron Paul was promoting this idea a few years ago, the 
Wall Street Journal reported on a poll of a panel of economists 
and whether a return to the gold standard would improve price 
stability and unemployment. The response was split between 
those who disagreed and those who strongly disagreed. Not one 
person thought it would help. So we do not know if it is just a 
bad idea or a really, really bad idea.
    But as one University of Chicago professor put it, ``Love 
of the gold standard implies macroeconomic illiteracy.'' If 
your own very good brain is your top consultant, I suppose the 
unanimous opinion of a diverse group of economists does not 
count for much.
    But for those of us in the evidence-based world, the 
prospect of this nominee trading imagined for real authority 
gives added significance to what we do in the Banking Committee 
and what we do in Congress. That is true in general. It is 
particularly true with maintaining the independence of the 
Federal Reserve and the other regulators of the financial 
services industry.
    Madam Chair, I think you have shown your commitment to an 
independent, data-driven Federal Reserve. I commend you for 
that. We are grateful for that. I hope we can work together to 
maintain it.
    Thank you.
    Chairman Shelby. Madam Chair, your written testimony in its 
entirety will be made part of the hearing record. We welcome 
you here today again. You are no stranger to this Committee, 
and you proceed as you wish.

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

    Ms. Yellen. Thank you. Chairman Shelby, Ranking Member 
Brown, and other Members of the Committee, I am pleased to 
present the Federal Reserve's semiannual Monetary Policy Report 
to the Congress. In my remarks today, I will briefly discuss 
the current economic situation and outlook before turning to 
monetary policy.
    Since my last appearance before this Committee in February, 
the economy has made further progress toward the Federal 
Reserve's objective of maximum employment. And while inflation 
has continued to run below our 2-percent objective, the Federal 
Open Market Committee expects inflation to rise to that level 
over the medium term. However, the pace of improvement in the 
labor market appears to have slowed more recently, suggesting 
that our cautious approach to adjusting monetary policy remains 
appropriate.
    In the labor market, the cumulative increase in jobs since 
its trough in early 2010 has now topped 14 million, while the 
unemployment rate has fallen more than 5 percentage points from 
its peak. In addition, as we detail in the Monetary Policy 
Report, jobless rates have declined for all major demographic 
groups, including for African Americans and Hispanics. Despite 
these declines, however, it is troubling that unemployment 
rates for these minority groups 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.
    During the first quarter of this year, job gains averaged 
200,000 per month, just a bit slower than last year's pace. And 
while the unemployment rate held steady at 5 percent over this 
period, the labor force participation rate moved up noticeably. 
In April and May, however, the average pace of job gains slowed 
to only 80,000 per month or about 100,000 per month after 
adjustment for the effects of a strike. The unemployment rate 
fell to 4.7 percent in May, but that decline mainly occurred 
because fewer people reported that they were actively seeking 
work. A broader measure of labor market slack that includes 
workers marginally attached to the workforce and those working 
part-time who would prefer full-time work was unchanged in May 
and remains above its level prior to the recession.
    Of course, it is important not to overreact to one or two 
reports, and several other timely indicators of labor market 
conditions still look favorable. One notable development is 
that there are some tentative signs that wage growth may 
finally be picking up. That said, we will be watching the job 
market carefully to see whether the recent slowing in 
employment growth is transitory, as we believe it is.
    Economic growth has been uneven over recent quarters. U.S. 
inflation-adjusted gross domestic product is currently 
estimated to have increased at an annual rate of only \3/4\ 
percent in the first quarter of this year. Subdued foreign 
growth and the appreciation of the dollar weighed on exports, 
while the energy sector was hard hit by the steep drop in oil 
prices since mid-2014; in addition, business investment outside 
of the energy sector was surprisingly weak. However, the 
available indicators point to a noticeable step-up in GDP 
growth in the second quarter. In particular, consumer spending 
has picked up smartly in recent months, supported by solid 
growth in real disposable income and the ongoing effects of the 
increases in household wealth. And housing has continued to 
recover gradually, aided by income gains and the very low level 
of mortgage rates.
    The recent pickup in household spending, together with 
underlying conditions that are favorable for growth, lead me to 
be optimistic that we will see further improvements in the 
labor market and the economy more broadly over the next few 
years. Monetary policy remains accommodative; low oil prices 
and ongoing job gains should continue to support the growth of 
incomes and, therefore, consumer spending; fiscal policy is now 
a small positive for growth; and global economic growth should 
pick up over time, supported by accommodative monetary policies 
abroad. As a result, the FOMC expects that with gradual 
increases in the Federal funds rate, economic activity will 
continue to expand at a moderate pace and labor market 
indicators will strengthen further.
    Turning to inflation, overall consumer prices, as measured 
by the price index for personal consumption expenditures, 
increased just 1 percent over the 12 months ending in April, up 
noticeably from its pace through much of last year but still 
well short of the Committee's 2-percent objective. Much of this 
shortfall continues to reflect earlier declines in energy 
prices and lower prices for imports. Core inflation, which 
excludes energy and food prices, has been running close to 1\1/
2\ percent. As the transitory influences holding down inflation 
fade and the labor market strengthens further, the Committee 
expects inflation to rise to 2 percent over the medium term. 
Nonetheless, in considering future policy decisions, we will 
continue to carefully monitor actual and expected progress 
toward our inflation goal.
    Of course, considerable uncertainty about the economic 
outlook remains. The latest readings on the labor market and 
the weak pace of investment illustrate one downside risk--that 
domestic demand might falter. In addition, although I am 
optimistic about the longer-run prospects for the U.S. economy, 
we cannot rule out the possibility expressed by some prominent 
economists that the slow productivity growth seen in recent 
years will continue into the future. Vulnerabilities in the 
global economy also remain. Although concerns about slowing 
growth in China and falling commodity prices appear to have 
eased from earlier this year, China continues to face 
considerable challenges as it rebalances its economy toward 
domestic demand and consumption and away from export-led 
growth. More generally, in the current environment of sluggish 
growth, low inflation, and already very accommodative monetary 
policy in many advanced economies, investor perceptions of and 
appetite for risk can change abruptly. One development that 
could shift investor sentiment is the upcoming referendum in 
the United Kingdom. A U.K. vote to exit the European Union 
could have significant economic repercussions. For all of these 
reasons, the Committee is closely monitoring global economic 
and financial developments and their implications for domestic 
economic activity, labor markets, and inflation.
    I will turn next to monetary policy. The FOMC seeks to 
promote maximum employment and price stability, as mandated by 
Congress. Given the economic situation I just described, 
monetary policy has remained accommodative over the first half 
of this year to support further improvements in the labor 
market and a return of inflation to our 2-percent objective. 
Specifically, the FOMC has maintained the target range for the 
Federal funds rate at \1/4\ to \1/2\ percent and has kept the 
Federal Reserve's holdings of longer-term securities at an 
elevated level.
    The Committee's actions reflect a careful assessment of the 
appropriate setting for monetary policy, taking into account 
continuing below-target inflation and the mixed readings on the 
labor market and economic growth seen this year. Proceeding 
cautiously in raising the Federal funds rate will allow us to 
keep the monetary support to economic growth in place while we 
assess whether growth is returning to a moderate pace, whether 
the labor market will strengthen further, and whether inflation 
will continue to make progress toward our 2-percent objective.
    Another factor that supports taking a cautious approach in 
raising the Federal funds rate is that the Federal funds rate 
is still near its effective lower bound. If inflation were to 
remain persistently low or the labor market were to weaken, the 
Committee would have only limited room to reduce the target 
range for the Federal funds rate. However, if the economy were 
to overheat and inflation seemed likely to move significantly 
or persistently above 2 percent, the FOMC could readily 
increase the target range for the Federal funds rate.
    The FOMC continues to anticipate that economic conditions 
will improve further and that the economy will evolve in a 
manner that will warrant only gradual increases in the Federal 
funds rate. In addition, the Committee expects that the Federal 
funds rate is likely to remain, for some time, below the levels 
that are expected to prevail in the longer run because 
headwinds--which include restraint on U.S. economic activity 
from economic and financial developments abroad, subdued 
household formation, and meager productivity growth--mean that 
the interest rate needed to keep the economy operating near its 
potential is low by historical standards. If these headwinds 
slowly fade over time, as the Committee expects, then gradual 
increases in the Federal funds rate are likely to be needed. In 
line with that view, most FOMC participants, based on their 
projections prepared for the June meeting, anticipate that 
values for the Federal funds rate of less than 1 percent at the 
end of this year and less than 2 percent at the end of next 
year will be consistent with their assessment of appropriate 
monetary policy.
    Of course, the economic outlook is uncertain, so monetary 
policy is by no means on a preset course and FOMC participants' 
projections for the Federal funds rate are not a predetermined 
plan for future policy. The actual path of the Federal funds 
rate will depend on economic and financial developments and 
their implications for the outlook and associated risks. 
Stronger growth or a more rapid increase in inflation than the 
Committee currently anticipates would likely make it 
appropriate to raise the Federal funds rate more quickly. 
Conversely, if the economy were to disappoint, a lower path of 
the Federal funds rate would be appropriate. We are committed 
to our dual objectives, and we will adjust policy as 
appropriate to foster financial conditions consistent with 
their attainment over time.
    The Committee is continuing its policy of reinvesting 
proceeds from maturing Treasury securities and principal 
payments from agency debt and mortgage-backed securities. As 
highlighted in the statement released after the June FOMC 
meeting, we anticipate continuing this policy until 
normalization of the level of the Federal funds rate is well 
under way. Maintaining our sizable holdings of longer-term 
securities should help maintain accommodative financial 
conditions and should reduce the risk that we might have to 
lower the Federal funds rate to the effective lower bound in 
the event of a future large adverse shock.
    Thank you. I would be pleased to take your questions.
    Chairman Shelby. Madam Chair, in recent years the Fed has 
increasingly used forward guidance to shape market 
expectations. However, the Fed's frequently incorrect 
predictions of interest rate increases have caused it to lose 
some credibility among some quarters.
    How would you rate the utility of your forward guidance 
over the past several months?
    Ms. Yellen. So in the past several months, we have used 
forward guidance less than we did in the aftermath of the 
financial crisis when we named calendar dates or gave explicit 
economic conditions that we would not need to see prevailing in 
the economy before considering an increase in the Federal funds 
rate. We used that forward guidance in the aftermath of the 
crisis in order to help market participants understand how 
serious the crisis was and how long we thought we would need to 
maintain the Federal funds rate as its----
    Chairman Shelby. Are you saying you are not using forward 
guidance now or are you not relying on it as much as you were?
    Ms. Yellen. We are not relying very much on forward 
guidance. We do publish every 3 months participants' 
projections for the paths of the Federal funds rate that they 
believe will be appropriate in light of their expectations 
about the performance of the economy. And sometimes those paths 
which participants discuss in their remarks are thought to 
constitute forward guidance about policy. I do believe those 
projections are helpful to the public in understanding the path 
of the economy that participants think is likely and how, if 
those conditions prevail, they would see monetary policy as 
evolving.
    But as I always emphasize on every occasion, including in 
my prepared remarks, those paths, while I think they are 
helpful, are not a preset plan and not in any way a commitment. 
We are constantly trying to evaluate in light of incoming 
information the outlook and risks, and you see those paths 
change over time as we update our evaluation of the economic 
outlook. And I think that is a critical part of monetary 
policy.
    Chairman Shelby. Has the slowing of the economy in certain 
areas caused you to kind of hold back a little bit at times 
information that you see there?
    Ms. Yellen. So for quite some time now, we have seen mixed 
developments in the economy--some sectors slowing because of 
the decline in energy prices, strong dollar foreign growth; 
others providing an offset. Throughout, until the last couple 
of months progress in the labor market has held up extremely 
well.
    Now, for the last few months, as I mentioned, job gains 
averaged 100,000 on a strike-adjusted basis, which is a 
substantial slowdown from the first quarter and from last year. 
And it is important for us to see ongoing progress in the labor 
market, so that is something we want to carefully evaluate and 
is a focus of our attention. But economic growth has picked up 
from a weak pace, and if that slowdown is a reflection of weak 
growth earlier in the year, I am hopeful that we will see 
stronger job gains going forward. And while it is an important 
report, I would also emphasize that it is important never to 
overblow the significance of a single report or a small amount 
of data. Other information about the labor market suggests it 
continues to perform well.
    Chairman Shelby. Do you see a clear path ahead as far as 
your trajectory going forward on the economy picking up? Or are 
you not sure yet?
    Ms. Yellen. That is what you see in all of the projections 
that were provided in connection last week with our June FOMC 
meeting. But, of course, there is uncertainty about that, and 
given that inflation remains low, we have the ability to watch 
economic developments and try to make sure the economy is on a 
favorable path before raising rates.
    Chairman Shelby. Madam Chair, the FOMC's target for the Fed 
funds rate has been at one-half percent or lower since December 
2008. A report last year from the Bank of International 
Settlements found that the prolonged period of low interest 
rates may be damaging the U.S. economy, resulting in, and I 
will quote, ``too much debt and too little growth.'' In 
addition, the report states that low rates may in part have 
contributed to costly financial booms and busts.
    Do you agree that persistently low interest rates can have 
negative long-term effects on the U.S. economy? And could you 
explain?
    Ms. Yellen. Well, I believe that the persistent low 
interest rates we have had have been essential to----
    Chairman Shelby. Can have----
    Ms. Yellen. ----achieving the progress. But, of course, low 
rates can induce households or banks or firms to reach for 
yield and can stoke financial instability. And we are very 
attentive to that possibility, and I would not at this time say 
that the threats from low rates to financial stability are 
elevated. I do not think they are elevated at this time. But it 
is, of course, something that we need to watch because it can 
have that impact. You mentioned debt. I do not think that we 
are seeing an undue buildup of debt throughout the economy. 
Leverage remains at moderate levels, well below where it was 
prior to the crisis. We are looking at credit growth which has 
picked up but is not at worrisome levels. So we are monitoring 
for potential impacts of low rates on financial stability, 
which I think is appropriate.
    Chairman Shelby. Madam Chair, in an interview earlier this 
month, Governor Tarullo stated that the Fed is reviewing the 
application of stress tests to regional banks, and he uses the 
word ``probably'' will exempt regional banks from the 
qualitative portion of CCAR.
    Last December, the Fed announced it was tailoring CCAR, but 
the tailoring turned out to be just a restatement of existing 
policy.
    What assurances can you give that this current review is a 
meaningful effort to tailor CCAR in a way that recognizes the 
different risk profiles of banks? And if so, when do you expect 
to publish such changes for comment?
    Ms. Yellen. So we are engaging in a 5-year very serious 
review that has been informed by consultation with both 
financial sector participants and outside economists, and I do 
think that you will see meaningful changes. The suggestion that 
Governor Tarullo made that banks between $50 and $250 billion 
that are subject to the stress test and CCAR might be left out 
of the qualitative portions of CCAR, still the stress test 
would be applied, but the whole qualitative part of CCAR that 
relates to capital planning, that they might be exempted from 
that, I think that is very likely. We will look at other 
changes as well that, as you said, are designed to 
appropriately tailor it so that its impact is most significant 
for the largest and most systemic firms. It will be a very 
meaningful review, and I believe we will be proceeding on it 
shortly.
    Chairman Shelby. Well, my last observation has to do with 
you alluded to the fact that, come Thursday, there is a big 
referendum in the United Kingdom as to whether to stay in the 
European Union or start leaving. What is the real implication, 
or can you tell at this point, if the British were to leave the 
Common Market on us? There could be implications for the Common 
Market and for Britain.
    Ms. Yellen. Well, it is a very important relationship. It 
would be significant for the United Kingdom and for Europe as a 
whole. I think it would usher in a period of uncertainty, and 
it is very hard to predict, but there could be a period of 
financial market volatility that would negatively affect 
financial conditions and the U.S. economic outlook that is by 
no means certain. But it is something that we will be carefully 
monitoring.
    Chairman Shelby. Thank you.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Madam Chair, first, thank you for your work on the recent 
insurance rules. I am pleased that the Fed has put out an 
Advance Notice of Proposed Rulemaking to implement capital 
standards for the two large insurance companies, the two SIFIs, 
and the 12 insurance companies that are savings and loan 
holding companies. I appreciate how quickly you have moved on 
this and your constructive dialog with stakeholders. I think 
that your response to our efforts here made a huge difference 
in doing this right.
    This week, the Banking Committee will have a second hearing 
on capital and liquidity rules. Please discuss for us the Fed's 
approach to capital and liquidity rules for the Nation's 
largest banks. Specifically, have these new rules made our 
financial system stronger?
    Ms. Yellen. So I do believe that the enhancements that we 
have put in place to capital and liquidity requirements that 
are tailored by firms' size and systemic importance have made 
an enormous difference to the safety and soundness of the U.S. 
financial system. The quantity of capital at the largest 
banking organizations has essentially doubled from before the 
crisis, and the quality of that capital is very much higher.
    In addition to imposing higher static risk-based capital 
and leverage requirements, our stress testing and capital 
planning exercises are very detailed, forward-looking exercises 
that are working to ensure that the largest firms in extremely 
stressful conditions would be able to go on supporting the 
credit needs of the U.S. economy, of households and businesses. 
And I think this has been a very significant exercise and has 
resulted in a far superior understanding by the firms 
themselves of the risks they face and improved management of 
those risks.
    Capital is not sufficient to assure financial stability. 
Often liquidity is what disappears in a financial crisis, and 
we have put in place, especially for the largest banking 
organizations, enhancements to liquidity through the liquidity 
coverage ratio and our proposed net stable funding ratio. And 
so I think this also works to enhance financial stability. So I 
think we have a much safer and sounder, less crisis prone 
system because of the enhancements that we have put in place.
    Senator Brown. Thank you. We have talked in the past about 
how the current labor market data do not reflect what has 
happened to minorities whose rates of unemployment are still 
much higher than the average. In your testimony today, for the 
first time--and thank you for that--you talked about minority 
unemployment rates and have included a new section in the 
semiannual Monetary Policy Report with this data and a 
discussion of whether the gains of the economic expansion have 
been widely enough shared.
    Discuss why the Fed made this addition to the report.
    Ms. Yellen. Well, the Federal Reserve's job is to try to 
achieve maximum employment and broad gains in the labor market 
that are as widely distributed as possible. And I believe it is 
very important for us to monitor how different groups in the 
labor market are doing to see if what we perceive as broad-
based labor market improvement is being widely shared. And 
there are very significant differences in success in the labor 
market across demographic groups, and I think it is important 
for us to be aware of those differences and to focus on them as 
we think about monetary policy and the broader work that the 
Federal Reserve does in the area of community development and 
trying to make sure that financial services are widely 
available to those that need it, including low- and moderate-
income----
    Senator Brown. Well, that brings to mind a meeting I had 
just a few minutes ago with three people from my home town of 
Cleveland, three community leaders, about the lack of diversity 
in terms of gender and ethnicity and race and the lack of 
diversity in terms of ideas that are the Class C Directors in 
many of your Federal Reserves, your 12 Federal Reserves around 
the country, including in Cleveland.
    I would like to see and I think many of us on this panel 
would like to see a more diverse Federal Reserve System, 
including the Governors, the reserve bank Presidents in the 12 
regions, the Boards of Directors, the advisory committees, and 
employees.
    Discuss what you have done as Chair of the Fed, what more 
you can do to better address the financial needs of all 
Americans as you reach into the community better. And I know 
you have had a goal of doing that. You said that at maybe our 
first hearing, certainly one of our first meetings, 
particularly serving those unserved and underserved by the 
financial system.
    Ms. Yellen. So I am personally committed and the Federal 
Reserve as an organization is committed to achieving diversity 
within our workforce and within our leadership at absolutely 
all levels. I believe we have made progress. I am committed to 
seeing us make further progress, and in order to make sure that 
we are taking all of the steps that we possibly can to promote 
a diversity in economic inclusion, I have launched an 
interdisciplinary effort within the Federal Reserve to focus on 
all of our diversity initiatives, both in terms of our own 
hiring, hiring throughout the Federal Reserve System, our work 
in community development to promote access to credit, our work 
in the payment system to foster better and faster payments that 
can promote financial inclusion.
    I do believe we are making some progress, but I want us to 
make greater progress. At the Board, minorities currently 
represent 18 percent and women represent 37 percent of senior 
leadership. That is relatively common. Throughout the Federal 
Reserve System you would see similar numbers. And we have 
worked very hard to increase diversity among the reserve bank 
Directors, and Directors on the branch Boards have made quite a 
lot of progress. At this point minority representation stands 
at about 24 percent of reserve bank and branch Board Directors. 
About 30 percent are women. It is a matter that the Board 
focuses on annually in its oversight of the reserve banks that 
we regularly track our progress in increasing diversity in the 
Boards of Directors, and it is something we will continue to 
focus on. Diversity is an extremely important goal, and I will 
do everything I can to further advance it.
    Senator Brown. Thank you. And I want to--my last question, 
but I want you to share with us in a continual way the progress 
you are making there, especially in the Class C Directors that 
they more represent the community, not just in diversity of 
look and background but diversity of ideas and all that.
    Last question. There currently are a record number of job 
openings, almost 6 million, but the May jobs data show that 
workers are not being hired for these jobs. What do we do to 
get Americans who want to work into these available jobs? What 
do we need to do better?
    Ms. Yellen. So there are an enormous number of job 
openings, and there is a certain degree of mismatch of workers 
who are looking for work with the job openings that are 
available within the Federal Reserve, and I personally have 
been looking at workforce development programs, job training 
programs, some of which I think are doing a very good job of 
trying to build the skills and that are needed to fill 
available jobs and work to match workers with jobs.
    I was recently in Philadelphia and visited a very 
impressive program that is placing workers who have had trouble 
in the job market into real jobs that can lead to upward 
mobility and a career in some of the Philadelphia hospitals. I 
have seen such programs around the country that I think have 
been effective, but obviously, our job at the Fed is to make 
sure we have a strong job market, that there are enough jobs 
that are being created. But helping that matching process, 
looking at training programs and educational opportunities, I 
think that is a piece of the puzzle as well.
    Senator Brown. As you have from time to time mentioned--
``exhorted'' is maybe too strong a word--that Congress needs to 
do a better job in terms of investment in public works and 
infrastructure, also you have made comments from time to time 
about job training. Can you give us more instruction--in my 
last minute or so, could you give us more instruction on what 
we should do here?
    Ms. Yellen. Well, I am not going to give you detailed 
instruction. I think this is up to Congress to decide. But when 
one looks at either inclusion or inequality or more broadly the 
fact we are suffering as a country from very low productivity 
growth, disappointingly low productivity growth, and we think 
about what the factors are that over time influence 
productivity growth, the things that have long been identified 
as important are investments, both private and public, private 
investment really since the financial crisis has been very 
weak, but private and public investments, education and 
workforce development, and the pace of technological progress, 
which is influenced by the environment that contributes to 
innovation, the startup of new firms, and research and 
development and other basic support. So I think all of those 
areas should be on Congress' list to focus on.
    Senator Brown. Thank you.
    Chairman Shelby. Senator Corker.
    Senator Corker. Madam Chairman, we thank you for being 
here. Thank you for your service. I had numbers of 
conversations in this setting and others with your predecessor 
about QE2 and QE3, and I know the Fed announced in 2014 the 
normalization process. And both your predecessor and this 
normalization process that was announced in 2014 stated that 
the securities that we had built up on the balance sheet would 
be held to maturity, and then they would run off the balance 
sheet.
    You have basically announced today that we are embarking on 
QE4 by reinvesting the proceeds, have you not, in new 
securities, which is a major policy change, is it not, from 
where the Fed has been in allowing these securities to run off 
and allowing--maybe I am misunderstanding what you are saying, 
but I thought I heard you say that the Fed is now, when we 
reach maturity on these securities, going to reinvest them, 
which is a pretty big policy change, is it not?
    Ms. Yellen. It is not a policy change. That has long been 
our policy ever since when QE3 ended, we made clear that we 
would continue to reinvest maturing proceeds. We have been 
doing that ever since. We did say that as the economy recovers 
and the Fed funds rate rises to a somewhat higher level than it 
is at present, that a day would come when, based on economic 
and financial conditions, the Committee would begin the process 
you just described of gradually allowing securities to run off 
our balance sheet so that we reduce our holdings to a more 
normal level. And we fully intend to do that, but I cannot give 
you a precise timetable for when that policy will begin. It is 
going to depend on how the economy evolves. But a long time 
ago, we put out a set of normalization principles where we made 
clear that that was how we would proceed, namely, continue 
reinvestment until after we had begun the process of raising 
the Federal funds rate and achieved sufficient progress there. 
That remains our intention.
    Senator Corker. Well, thank you for clearing that up. I 
appreciate that. I know last time you were here, you alluded, 
we alluded to negative rates, and I know that is what has 
happened in Japan and the EU. And you were looking into the 
legality of whether--your staff was looking into whether you 
felt that you had the legal basis to pursue negative rates. 
Have you come to a conclusion relative to that?
    Ms. Yellen. I believe we do have the legal basis to pursue 
negative rates, but I want to emphasize it is not something 
that we are considering. This is not a matter that we are 
actively looking at, considering. When we have looked at it or 
looked at that in the past, we have identified significant 
shortcomings of that type of approach. I do not think we are 
going to have to provide accommodation, and if we do, that is 
not something that is on our list. But I do think we have the 
legal authority.
    Senator Corker. Very good, and I really appreciate you 
clearing that up. Obviously, Japan and the EU have not had good 
benefit from that, or at least it is not benefit that we can 
see has been good for them. So I appreciate you clearing that 
up. That is very good.
    We look at the Taylor rule from time to time, and I know 
that the Fed has not adopted the Taylor rule. But if you look 
at it, Bloomberg has a chart that tracks it, and basically, you 
know, Fed rates and the Taylor rule have been within a range.
    Recently, there is the biggest dichotomy that we have seen 
in years and years between the Fed funds rate and what they 
would be if the Taylor rule was being employed. Today it is at 
25 to 50 basis points. Under the Taylor rule, we would be at 
3.7 percent. That would be a target Fed rate today. A big range 
difference. Is that because of the headwinds that you have been 
alluding to and just what you are generally seeing in the 
market?
    Ms. Yellen. Yes, I believe it is because of the headwinds. 
One of the numbers in the Taylor rule reflects Professor 
Taylor's estimate of what we sometimes refer to as the neutral 
level of the Fed funds rate. It is a level of the Fed funds 
rate that is consistent with the economy operating at full 
employment. And that is something that by our estimate has been 
very depressed in the aftermath of the financial crisis. And 
discussions about secular stagnation are very much about what 
is the level of interest rates that is consistent with the 
economy operating at full employment.
    I am hopeful that rate will rise over time, although I am 
uncertain, but at the moment most of the divergence between our 
settings and what would be the higher levels that would be 
called for really reflect the headwinds that have been facing 
the economy since the financial crisis.
    Senator Corker. The labor--I have only got a little bit of 
time, but the employment rate really is misleading, is it not, 
relative to where we are in the labor market today, meaning 
that there is still a lot of excess capacity, and I know 
Ranking Member Brown was alluding to that anew. So that 
equation is a little bit off. Just because you are not really 
feeling the employment levels, even though the rates that we 
show are there, the involvement by the labor market is not what 
we would like for it to be.
    Let me just ask one last thing briefly on living wills. I 
know that under Section 165 of Dodd-Frank the larger 
institutions are supposed to present living wills, and you all 
are supposed to ensure that they can be resolved in bankruptcy. 
And I know we are going through hopefully the final iteration 
in the next several months. But I was confused in that Governor 
Powell recently mentioned that if the Fed just keeps raising 
capital levels, these institutions will on their own downsize 
or become less complex. And I am just confused by that.
    Is the Federal Reserve, if these institutions cannot be 
resolved in bankruptcy, going to do what Section 165 of Dodd-
Frank tells them to do? Or are you going to rely on raising 
capital to cause the banks to do it themselves?
    Ms. Yellen. Well, we are insisting that the firms address 
in some cases deficiencies and in other cases shortcomings that 
we have found enumerated in the living wills in the last 
submission, and there is a timetable for doing that. If the 
firms fail to address the deficiencies or if later on by the 
summer of 2017 they fail to address the shortcomings we have 
identified and then we find them deficient, Dodd-Frank does say 
that the FDIC and the Fed can impose higher capital 
requirements, liquidity requirements, or ultimately structural 
changes. Do not expect to have to go there, but we are 
insisting that the firms address the deficiencies and 
shortcomings that we have carefully identified.
    Senator Corker. Thank you, Madam Chairman and Mr. Chairman.
    Chairman Shelby. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman. And 
thank you, Madam Chair.
    It strikes me that over the last several years you have had 
a very difficult challenge, we all have, but we have been 
operating in some respects with one hand tied behind our back, 
which is that you have been pursuing a very expansionary policy 
to stimulate the economy, cutting rates and reluctant to raise 
rates, while we have not had a complementary fiscal policy that 
invests in infrastructure and other things and allows you the 
room to raise rates if necessary or to complement your activity 
with what we are doing. And the point you just made in response 
to Senator Brown is that this productivity gap, which is very 
troubling, some of that is just related to decrepit 
infrastructure. If it takes 2 hours to get someplace, that is 2 
lost hours for someone delivering a package. If it takes 10 
minutes on a superhighway, that is a productivity increase.
    So you are in a position, I think, that you are doing all 
you can, but it is not enough, and we have to step up. Is that 
something that you tend to sympathize with?
    Ms. Yellen. Well, I think in the United States and in many 
other advanced Nations where interest rates are at very low 
levels, it is common to say that it is monetary policy, central 
banks that have been carrying the load. In many parts of the 
world, fiscal policy has, because of concern about large debt 
or deficits, not played a supportive role.
    I think we have achieved a lot in the United States. We 
have created over 14 million jobs. The unemployment rate has 
come down to 4.7 percent. Inflation is still under 2 percent, 
but I believe moving up. So I think we are making good 
progress, but if there were to be a negative shock to the 
economy--and I mentioned this in my testimony--starting with 
very low levels of interest rates, we do not have a lot of room 
using our traditional tried and true method to respond. If 
fiscal policy were more expansionary, this neutral level of 
interest rates that is one of the factors, the stance of 
policy, that affects what level of interest rates is neutral 
for the economy, keeps it on an even keel, and the level would 
be higher with a different stance of fiscal policy.
    Senator Reed. We have made progress, I agree, but I think 
the sense is that not only could we have made more progress, 
but we are at a point now where you have exhausted most of your 
leverage in a nonfinancial sense, and if there was a shock, 
then you have very little to respond with.
    Ms. Yellen. Well, we have the same tools that we used 
earlier, namely, asset purchases, forward guidance, the 
maturity distribution, duration of our portfolios, and those 
are the tools we would rely on.
    Senator Reed. And just very quickly, the other part of this 
dilemma is the sense in some places that because interest rates 
have been so low, there is the possibility of creating a 
bubble, for example, driving people into equities because there 
is no return, and the price is driven up not because of the 
underlying quality of the equity but simply because that is 
where they can get some money fast. Are you concerned about 
that?
    Ms. Yellen. Well, yes, as I said earlier, I do not see 
signs of extreme threats to financial stability at this time. 
This is something we monitor very closely. But it is something 
that can happen in a low interest rate environment, so I do not 
think that I see any broad-based evidence of those financial 
stability concerns, but it is something that is possible.
    Senator Reed. And I have less than a minute, but let me 
just add--with respect to cybersecurity--that we had a 
discussion last time you were here. It is an increasing 
problem--in fact, at the Federal Reserve. Public reports say 
you have been breached in some respects. But just getting to 
the point, do you have the authority to require your regulated 
companies to put people on their boards that have cybersecurity 
expertise, and also to publicly disclose what their 
cybersecurity general parameters are, or something to indicate 
to the public that they are taking this seriously?
    Ms. Yellen. Well, it is a focus of our supervision. We do 
have standards that we expect financial institutions to meet, 
and just what is expected depends on the complexity and 
importance of the firm. So we do regard this as a very 
significant threat.
    On your question about Boards of Directors, I do not know 
that we have looked at that. I would need to get back to you on 
that.
    Senator Reed. Thank you.
    Ms. Yellen. But we are certainly supervising financial 
institutions' ability to address cyberthreats.
    Senator Reed. Thank you, Madam Chair.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Vitter.
    Senator Vitter. Thank you, Madam Chair, for being here and 
for your service.
    Ms. Yellen. Thank you.
    Senator Vitter. Madam Chair, in April, the Fed finally 
released the results of the 2015 resolution plans of eight 
systemically important domestic banking institutions, and five 
of the Nation's largest banks failed that exercise, including 
JPMorgan Chase and Bank of America. I have three questions 
related to that.
    First, the New York Times in April described this Fed 
release as stating, ``That suggests that if there were another 
crisis today, the Government would need to prop up the largest 
banks if it wanted to avoid financial chaos.'' So Question 1 
is: Do you agree with that?
    Question 2 is: What do these five banks need to do by 
October 1st to fully remediate their deficiencies?
    And Question 3 is: If they do not by October 1st, will the 
Fed take more systemic action like raising capital levels?
    Ms. Yellen. So those banks have, over the span of the last 
several years in which they have been preparing living wills, 
greatly increased their ability to be resolved in the event of 
trouble by bankruptcy or, alternatively, Title II is available. 
I could not guarantee at this point. It depends just what the 
circumstances are in which a bank fails that bankruptcy would 
work at this point as a means to resolve one of these firms. We 
have identified for five of the firms deficiencies. We have 
been extremely careful in spelling out in detail what those 
deficiencies are that we want to see remedied by October 1st. 
And, in addition, we have listed, jointly with the FDIC, a 
large number of specific shortcomings that the firms have until 
the summer of 2017 to remedy. And we will be monitoring very 
carefully and evaluating whether that is done. And as I said, 
if the deficiencies are not remedied or, later, if the 
shortcomings are not remedied, they could turn into 
deficiencies that would lead us to impose higher capital 
standards or other remedies on these firms if that is not done.
    But I think we have learned a lot in the course of the 
years we have been evaluating these living wills about what it 
takes to actually resolve a firm in bankruptcy. The firms have 
learned in this process, and I do think we have made 
substantial advances in terms of being able to do----
    Senator Vitter. Let me go back to my question--three 
questions. First, in terms of the New York Times quote, needing 
to prop up the largest banks, you would not categorically 
refute that possibility?
    Ms. Yellen. Well, I would not say at this point that all of 
them are prepared for resolution under bankruptcy.
    Senator Vitter. And, again, if they do not get there for 
October 1st, would you very soon thereafter consider something 
more systemic like higher capital requirements or not?
    Ms. Yellen. Yes.
    Senator Vitter. OK. And, Madam Chair, my second and last 
question is about the Puerto Rican crisis. You have said you do 
not think the Fed should be involved, and I appreciate that and 
agree with that. However, my concern is the Fed has authority 
to be involved. Do you think the Fed has authority to issue as 
a last resort emergency loans to Puerto Rican institutions or 
not?
    Ms. Yellen. I think our authority is extremely limited, and 
it would not be appropriate for us to give loans to Puerto 
Rico. We have very limited authority to buy municipal debt, and 
the authority we have, if we were to buy eligible debt, I do 
not think it would be helpful to Puerto Rico. And beyond that, 
we have no ability to make emergency loans. We could not use 
13(3) or emergency powers of that type to extend a loan to 
Puerto Rico. This is inherently a matter for Congress and is 
not something that is appropriate for the Federal Reserve.
    Senator Vitter. OK. Thank you, Madam Chair.
    Chairman Shelby. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you, Madam 
Chair, for your service and your insights. I always appreciate 
it.
    Recently, in the national public discourse, there are those 
who propose reducing the national debt by persuading creditors 
to take a haircut on their investments. And in my opinion, 
policies like that would drive our economy off a cliff and 
endanger working families in our country. And I really do not 
know of anyone more qualified to answer this question than you. 
In your opinion, what would be the consequences if the 
President of the United States were to propose that holders of 
U.S. Treasury bonds accept less than the face value of their 
investments?
    Ms. Yellen. So this is a topic that I have spoken on many 
times when Congress says we have faced debt ceiling-type 
situations. I feel the consequences for the United States and 
the global economy of defaulting on Treasury debt would be very 
severe. U.S. Treasury securities are the safest and most liquid 
benchmark security in the global financial system. They play a 
critical role in financial markets, and the consequences of 
such a default, while they are uncertain, I think there can be 
no doubt that it would be long-run harmful to U.S. interests 
and at a minimum result in much higher borrowing costs for 
American households and businesses.
    Senator Menendez. And saying that you should take a 
haircut, does it actually mean--it means a default because you 
are not paying the full amount that you are obligated to on the 
security. And just for clarification purposes, am I right, my 
understanding that U.S. citizens and American entities, such as 
State and local governments, pension funds, mutual funds, and 
the Federal Reserve, own the vast majority of U.S. debt 
estimated at approximately 67.5 percent?
    Ms. Yellen. U.S. entities and foreign entities.
    Senator Menendez. U.S. entities and foreign entities. OK. 
My understanding is--and I would like to get it for the record. 
My understanding is that just U.S. citizens and American 
entities, State and local governments, pension funds, mutual 
funds, 401(k)s, Federal Reserve, own the majority of U.S. debt, 
and that would be about 67.5 percent. But for the record, if 
you could submit that, I would appreciate it.
    Ms. Yellen. Certainly.
    Senator Menendez. Which means the overwhelming majority 
would be taking a haircut that, as proposed by Mr. Trump, would 
ultimately mean U.S. citizens, State and local governments, and 
that is pretty outrageous.
    Let me ask you this: In the nearly 8 years since the start 
of the financial crisis, our economy has indeed shown signs of 
growth and progress, yet many data points indicate that we are 
far from a full recovery in the labor market. In the past, you 
have advocated for the Federal Reserve's use of a metric called 
the ``Labor Market Conditions Index.'' That index, which pulls 
data from 19 different labor market sources, including labor 
force participation, workers that are classified as part-time 
for economic reasons, hires, quits, and so forth, has fallen 
nearly 15 points over the last 5 months. In fact, the index has 
fallen to its lowest level since 2010.
    My understanding is that every other time the index has 
turned negative for 5 months or longer over the last 25 years, 
the Fed has moved to ease monetary policy, not tighten it. So I 
am concerned that given the path the Fed has laid out for 
potential rate increases later this year and next, the Fed will 
neither have the ability nor the will to temper the impacts of 
this slowdown in the labor market. Shouldn't the Fed wait to 
consider additional rate hikes until we see indications of 
growth in the labor market?
    Ms. Yellen. So the numbers that are released on the Labor 
Market Conditions Index do not refer to the level of the index 
but, rather, the change. And the move that you have mentioned 
in that index suggests not that the labor market is not 
operating--the labor market is operating at a good level 
according to the level of that index, which we do not publish, 
but there is a loss of momentum. That is what those negative 
numbers show, and we see the same thing in recent job reports 
that I referred to in my testimony.
    So without a doubt, for the last several months, a number 
of different metrics suggest a loss of momentum, not a 
deterioration in the labor market but a loss of momentum in 
terms of the pace of improvement. And that is an important 
consideration, as I mentioned. We believe that will turn 
around, expect it to turn around, but we are taking a cautious 
approach and watching very carefully to make sure that that 
expectation is borne out before we proceed to raise interest 
rates further.
    Senator Menendez. Madam Chair, one final point, not even a 
question. I want to echo what Senator Brown has said, and in 
the letter that I, Senator Warner, Senator Merkley, and 124 
Members of Congress sent to you with reference to improving the 
representation at regional banks, 83 percent of Federal Reserve 
Board members are white; 92 percent of regional bank Presidents 
are white. There is not a single President who is either 
African American or someone like me, Latino. That is 
fundamentally wrong, and I would hope that you would chair some 
diversity effort, because leadership on this issue always comes 
from the top, regardless of the institution. And with your own 
experiences as a woman--and in that regard, we seem to be doing 
a lot better in the system, but we are not doing that much 
better with people of color. And I hope that you will seriously 
consider such an effort.
    Ms. Yellen. I agree with you that it is extremely 
important, and I will do everything I can to see that our 
performance improves on that dimension.
    Chairman Shelby. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. And thank you, 
Chair Yellen.
    Chair Yellen, your predecessor, Chairman Bernanke, both 
before this Committee and in columns that he has written, 
discussed some of the limits of monetary policy, what monetary 
policy is capable of and what it is not capable of. And one of 
the things that he said--I am paraphrasing, but I think he has 
said this on numerous occasions--that accommodative monetary 
policy has the limit of being only stimulative in the sense 
that it brings economic activity forward in time. It does not 
create new wealth, goods, or services, but it shifts the timing 
of economic activity.
    Do you agree with Chairman Bernanke in that respect?
    Ms. Yellen. Well, it sometimes does shift the timing of 
economic activity, brings forward a decision that might have 
been made later. But I think the stance of policy also has 
repercussions that have a more longer lasting impact on the 
state of demand. It is not only a matter of shifting purchases 
early by having more accommodative financial conditions. There 
are repercussions that can be longer lasting than that.
    Senator Toomey. You may disagree. My sense of the academic 
consensus is that the main effect of accommodative monetary 
policy is to induce economic activity that was going to occur 
later at an earlier time, and that that is the principal 
activity, or the principal--but you are acknowledging there is 
some of that phenomenon.
    Ms. Yellen. There is some of that phenomenon. It is not the 
only thing.
    Senator Toomey. So to what extent is this unprecedented 
accommodative monetary policy for these many years now part of 
the reason that we have had relatively anemic growth today? 
Isn't it very likely the case that some of the economic 
activity that would be occurring today was dragged forward in 
years gone by and it has already occurred in the past?
    Ms. Yellen. So it is very hard to know how large that 
effect is, but I continue to think that our accommodative 
stance of policy--for example, low mortgage rates--is 
continuing to boost activity in the housing sector. It has not 
only pulled activity forward to suppress it now. I believe it 
has----
    Senator Toomey. The housing sector has still not recovered 
its previous highs.
    Ms. Yellen. Well, it has undergone very substantial shocks.
    Senator Toomey. Have you attempted to quantify how much of 
the economic growth that would be occurring in 2017 and 2018 
and 2019 is happening now because of this ongoing activity of 
having these extremely low, unnaturally low interest rates?
    Ms. Yellen. We have not tried to determine that. We have in 
the past looked at whether or not low rates have had less 
impact on spurring economic activity than in the past, namely, 
whether or not there might be some attenuation in the impact of 
policy. But in the past, our analysis suggested that it is not 
only a matter of shifting the timing of economic activity, but 
also stimulating investment and spending decisions on a longer 
lasting basis.
    Senator Toomey. Even if that is so, my guess is that the 
principal effect is shifting the timing, and you may disagree 
with that. I got the impression from your predecessor that his 
view was that the principal effect was shifting the timing. It 
is certainly an effect, and I would think it is something that 
the Fed ought to be looking at, because to the extent that that 
is a significant effect, what you are doing today is damaging 
economic growth going forward, to some extent.
    Let me touch on another concern. It seems from what you and 
others have said there has been a great focus on the demand 
side of the effect of monetary policy and not so much on the 
supply side. One of the concerns that I have is the danger 
that, first of all, you have been missing the estimates on the 
supply side as well as economic growth overall, right? I mean, 
we are now, I think, 12 consecutive years in which the Fed has 
systematically overestimated economic growth. It has been 
overly optimistic about the supply side phenomena, such as 
workers returning to the workforce, improving productivity 
level, that have not been happening to the extent that the Fed 
has hoped.
    One of my concerns is that the inducement to expand 
capacity, the unnatural excess capacity that comes from 
unnaturally low interest rates, could get the Fed into a kind 
of vicious cycle where all that excess capacity creates excess 
commodities, downward pressure on prices, makes it that much 
harder to hit your 2-percent inflation goal, and creates this 
dilemma that is hard to get out of. Is there a danger that the 
ultra-low interest rates are contributing to that?
    Ms. Yellen. Well, I think investment has been running at a 
very slow pace. We have really not had the creation of a lot of 
excess capacity. One of the reasons----
    Senator Toomey. Globally, we have.
    Ms. Yellen. ----that productivity growth has been so slow, 
and it has been disappointingly slow, is that we have had very 
weak investment in the aftermath of the crisis, and more 
recently in recent months, it has turned negative and is 
extremely low even outside of energy where we have a 
substantial cutback in drilling activity. So I do not think an 
impact of low interest rates has been to stimulate an 
investment boom or a boom in capacity----
    Senator Toomey. No, there is--I think that is largely true 
in the United States, but globally, where this experiment has 
been going on since everybody is in this business of ultra-low 
interest rates, it seems, certainly if you talk to people in 
the steel industry, they would suggest that there is massive 
overcapacity in not just steel but in other commodities as 
well. And I do worry that we have encouraged companies to take 
on massive amounts of debt to create this overcapacity, and it 
is just one of the many distortions. But I thank you for your 
time.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman.
    Chair Yellen, thank you for being here. I have got a couple 
questions that I have asked before and, quite frankly, will do 
it again. Senator Crapo and myself sent a letter on the EGRPRA 
process and how that is moving forward. I am continually 
concerned about community banks and the level regulation to 
match the risk that they pose to the economy and to their 
depositors and borrowers.
    We are seeing consolidation in Montana. We are probably 
seeing consolidation across the country with small banks. And 
that is not good for capitalism, and I do not think it is good 
for rural America as we see small banks combining with bigger 
banks combining with bigger banks.
    So my question is: Do you see any problem with the process 
right now of regulation on our small banks? And if so, what are 
we doing about it?
    Ms. Yellen. We are very heavily focused on trying to find 
ways to relieve community banks of undue burden, and tailoring 
our regulatory system and supervision system to suit the risks 
that an entity entails is a core principle for us of proper 
supervision. So we have made very meaningful efforts to reduce 
the burdens of our examinations on community banks, to reduce 
the complexity of the capital requirements that they face. The 
EGRPRA process we are taking very seriously, and I believe we 
will come out with meaningful proposals for relief. And we are 
looking at something that might be a significant simplification 
of the capital regime for those community banks.
    Senator Tester. I think simplification is important. Are 
you happy where the Fed is right now as it regards the 
community banks?
    Ms. Yellen. I think we have made progress, but we will 
continue to focus on it.
    Senator Tester. OK. Do you believe that consolidation in 
the banking industry, in particular as it applies to--well, 
across the board, does not matter--is not a good thing? And do 
you think that the regulatory issues have contributed to the 
consolidation?
    Ms. Yellen. I think there have been a number of factors 
that have contributed to it. This is a challenging environment 
for banks, a low interest rate environment, and profitability 
has been important.
    Senator Tester. Right. And in some cases, some of these 
small banks are putting out literally millions--and these are 
small banks--millions of dollars to meet the regulatory issues 
that are brought up. I just want to get your commitment you are 
going to continue to work----
    Ms. Yellen. Absolutely.
    Senator Tester. The consolidation piece is something that 
really bothers me big time, especially as it applies to States 
like Montana, because that forces us to the big buys, and I do 
not necessarily think that is good for the consumer coming down 
the line. I think it should be their choice if they want to go 
that direction.
    On international insurance rules, the Fed has proposed 
rules for two nonbank SIFIs, AIG and Prudential, and I am 
pleased the Fed is moving forward with the international 
insurance rules. Could you give me an idea when you think these 
might be complete?
    Ms. Yellen. Well, I think there are some ways to go in 
terms of the international work that is ongoing. We put out a 
few weeks ago an Advance Notice of Proposed Rulemaking for the 
framework that we intend to take here in the United States. You 
know, we are in discussions internationally in advancing these 
ideas, but I think we are ahead of that process here in the 
United States.
    Senator Tester. OK. So I will take one more run at it 
because I may not have worded it correctly. Do you have any 
idea when they will be done?
    Ms. Yellen. No.
    Senator Tester. Will it be done in this Administration?
    Ms. Yellen. I will have to get back to you. I do not know 
what the timetable is. You are talking about the international 
efforts?
    Senator Tester. Yes, right, and how those are going to 
impact, for instance, GE, for example, who is a nonbank SIFI. I 
am just curious to figure out how that is going to come down 
the pipe.
    Ms. Yellen. Well, so GE, we already published----
    Senator Tester. It is a SIFI, right?
    Ms. Yellen. ----a rule.
    Senator Tester. Right.
    Ms. Yellen. It is not insurance.
    Senator Tester. It is not an insurance company. What 
happens to those guys? Does this insurance rule have no impact 
on them? What happens to those guys moving forward?
    Ms. Yellen. Well, they are not an insurance company.
    Senator Tester. No, I know, but they are SIFI, and they 
have divested their financial--their banking part of their 
business. So what happens to them moving forward?
    Ms. Yellen. That will be something that the FSOC----
    Senator Tester. Will take up.
    Ms. Yellen. Will take up.
    Senator Tester. All right. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Kirk.
    Senator Kirk. Madam Chair, I want to take you what you were 
just talking about, the Advance Notice of Proposed Rulemaking 
for the insurance industry. I am speaking on behalf of large 
Illinois employers like State Farm and Allstate. I would say 
that Senator Collins and I have been working very hard to make 
sure the Fed recognizes the great difference between the 
business of banking and insurance, and I would say the ANPRM, 
the Advance Notice of Proposed Rulemaking, heads in the right 
direction there. I would ask you that, as we look forward to 
this, as I look at the essence of the ANPRM, it seemed like the 
key stress test was a 90-day window of liquidity that, if I 
look at the details, I would say a 90-day--if you look at 
someone like State Farm that affects 80 million American 
families, you would say the stress would be given the 2008 drop 
in various sales of various products, do you have enough money 
over 90 days to sustain the enterprise? I wanted to explore 
this with you, a commonsense way of letting people know, 
because this is the way we should go. I would urge you to 
follow in the direction of Senator Collins and me, making sure 
the normal Fed culture of bank regulation does not impinge on 
the insurance industry.
    Ms. Yellen. Well, we have tried to do that very much in 
developing this proposal. We have put forward some conceptual 
frameworks and are going to be looking very carefully at 
comments before we proceed with more detailed rules, and the 
Collins fix was very helpful to us in having the flexibility to 
design something that is appropriate for insurance and not bank 
centric.
    Senator Kirk. Thank you, because I think we have got 60 
days to comment now coming up.
    Ms. Yellen. Yes.
    Senator Kirk. And I will be approaching Members of this 
Committee to also provide their comments on that. I want to 
make sure that we have a robust and strong insurance sector.
    Ms. Yellen. Yes, and we will look at those very carefully. 
We are trying to proceed in a very thoughtful and careful way 
based on a great deal of consultation with other regulators, 
State regulators, the NAIC, the industry. We have taken a lot 
of comment and look forward to more.
    Senator Kirk. From what we have heard, the ANPRM has been 
pretty well received, reflecting the Collins fix nicely.
    Ms. Yellen. Great.
    Senator Kirk. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. And, Chair Yellen, 
it is great to see you. I am going to try to get three 
questions in and respect the 5-minute rule, which has not been 
respected this morning, to make sure that all our colleagues 
get a chance to ask questions.
    I want to go back to Senator Reed's point about cyber. 
Senator Gardner and I have started the Cyber Caucus. I think 
this is increasingly going to be a challenge for every 
institution. Senator Reed raised the question about whether 
under prudential regulations we can make sure that bank boards 
and others have cyberexpertise. I would hope you would move 
forward with that.
    I want to move slightly on my question to the issue around 
what happened at the New York Fed with the Bangladeshi 
incursion that was through the SWIFT system. Obviously, the 
SWIFT system, as evidenced by this cyberattack, has some 
challenges, enormously important to international banking 
regimes. Does the New York Fed or the overall Fed, do you feel 
like you have enough ability to work with SWIFT to increase 
their cyberprotections?
    Ms. Yellen. We are part of an oversight group for SWIFT. It 
is led by the National Bank of Belgium, and many supervisors 
from different countries participate in that group. And we also 
participated in that group. SWIFT and the New York Fed are 
working with the Bank of Bangladesh to try to understand what 
happened.
    Senator Warner. I would just urge you that this is going to 
be an area that is going to exponentially grow in importance, 
both in terms of the Fed's internal expertise and ensuring that 
we are working more closely with the overall banking industry 
to up their game, I think is critically important.
    Ms. Yellen. We certainly agree with that.
    Senator Warner. Let me make sure I get to the others. A 
number of us have talked about how we can generate additional 
job growth. One of the concerns that I have is that, 
particularly inside the public markets, we have seen an 
enormous rush over the last decade plus starting in the 1990s, 
but really over the last decade and the last few years even 
more particularly, toward short-termism in terms of views 
versus long-term value creation, and that in many ways this is 
undermining basic tenets of American capitalism as more and 
more people choose and more and more institutions, financial 
institutions, choose to invest in financial instruments rather 
than investing in lending to business institutions. As a matter 
of fact, I have seen some data that says as low as 15 percent 
of financial institutions' activities are actually geared 
toward supporting businesses making investments in communities.
    We have clearly seen amongst public companies a shift from 
80 percent in the 1980s, where 50 percent of profits were 
reinvested back into plant and equipment and employees and R&D 
now we are seeing 95 percent of corporate profits used for 
stock buybacks and dividends. We have seen some of America's 
largest iconic tech firms with huge balance sheets still go 
into the markets, borrow billions of dollars to use not for R&D 
but to use share buybacks.
    I think there is an increasing consensus among CEOs and I 
think even some more sophisticated investors that this is long-
term destructive to real value creation in business and, 
consequently, to job growth. Has the Fed and do you 
individually have any views on this challenge about short-
termism? Is it a challenge? And some of this movement, 
particularly amongst public companies, away from investing back 
in their businesses, back toward stock buyback and dividends 
prognosis here?
    Ms. Yellen. Well, we have looked very closely at investment 
spending and tried to understand why it has been so very 
depressed in the aftermath of the crisis. You know, I think one 
reason for it is simply that the economy has been growing 
slowly. Sales growth has been slow, and many firms have found 
they actually do not need to invest very much in order to 
satisfy the demand growth that they are seeing.
    The workforce has been expanding less quickly than it had 
been. When you have a rapidly expanding workforce, firms need--
they are hiring those people, and they need to invest to equip 
new entrants with the tools to be productive that others 
already in the workforce have. A slowing workforce has also 
played a role. But beyond that, I would agree with you that 
there has been----
    Senator Warner. I would simply add that there has been some 
level of activist investors who come in and say the first thing 
you shut down are your worker training programs, your 
investment in infrastructure, and I believe that is a negative 
long term. I will adhere to my----
    Ms. Yellen. I would agree with----
    Senator Warner. ----5-minute request, although I would ask 
for the public record that you come back--I am concerned on 
Section 165 and the living wills. We have got to move this 
process along. I am concerned about the level of disagreement 
between the Fed and the FDIC, but I will take that for the 
record so that other members can get their questions in.
    Chairman Shelby. Thank you, Senator Warner.
    Senator Heller.
    Senator Heller. Mr. Chairman, thank you. And, Madam 
Chairwoman, thank you for being here today, and thanks for 
taking time out. I find this to be very informative.
    I want to go back to Brexit for just a minute. The Chairman 
brought Brexit up, and you also mentioned it in your opening 
comments. You said that a U.K. vote to exit the European would 
have significant economic repercussions. Can you go more into 
detail of what that means and perhaps what the plan of attack 
by the Feds are if, in fact, it were to pass 2 days from now?
    Ms. Yellen. So I said it could. I do not know that it 
would, but I think it could have significant economic 
consequences by launching a period of uncertainty, both for the 
United Kingdom and possibly the future of European economic 
integration. Most analyses suggest it would have negative 
economic consequences for the U.K. and spillovers to Europe 
more broadly speaking.
    I think the financial market reaction to the uncertainties 
that would be unleashed by that decision could result in a kind 
of risk/risk off sentiment that we would see impacts on 
financial markets that we might see flight to safety flows that 
could push up the dollar or other so-called safe haven 
currencies. And I do not want to overblow the likely impacts, 
but we are aware of them. We will watch them and consider those 
impacts as we make future decisions on monetary policy.
    Senator Heller. Is there any reason to believe that if 
Brexit were to pass, it would have an effect on the U.S. 
economy to the point that we would go back into a recession?
    Ms. Yellen. I do not think that is the most likely case, 
but we just do not really know what will happen, and we will 
have to watch very carefully.
    Senator Heller. What is the chance of the U.S. economy 
being in a recession by the end of the year?
    Ms. Yellen. I think it is quite low. I think the U.S. 
economy is doing well, and although I have indicated that we 
are watching this recent slowdown in the job market carefully, 
my expectation is that the U.S. economy will continue to grow. 
We have seen a pickup, a strong pickup in consumer spending and 
growth in the economy. If the weakness in the labor market for 
the last couple of months was a reaction to an earlier slowdown 
in growth, that looks to be reversing. I remain quite 
optimistic in the kinds of conditions that have been associated 
in the past with U.S. recession. Often that occurs when 
inflation is--when an economy is overheated, inflation has been 
quite high, the Fed has had to tighten monetary policy. We do 
not have any such conditions in play now. Households are in 
much improved shape, and while there are negative influences in 
the economy, particularly on manufacturing, stemming from slow 
growth abroad, the strong dollar, lower commodity prices, very 
seriously depressing hiring, causing job loss in the energy 
sector, and slowing investment in drilling and mining. Still, 
overall the U.S. economy has been progressing even with those 
negatives, and I think the odds of a recession are low. It is 
certainly not what I expect.
    Senator Heller. Chairman, thanks for your answer.
    A week ago Friday, I think the 10-year yield on Japanese 
bonds and also German bonds were negative. What impact does 
that have on our Treasury yields with these investors obviously 
looking for any kind of return coming in, buying up our 
Treasury bonds, what kind of impact is that going to have on 
our yields?
    Ms. Yellen. So it does tend to induce capital inflows into 
the United States, which pushed down our Treasury yields, so 
ours are considerably higher. But in absolute terms, they are 
really quite low. And differentials in the stance of monetary 
policy also put impacts on the value of the dollar. The dollar 
has gone up around 20 percent against a broad basket of 
currencies since mid-2014, and that has had a negative effect 
on our trade with the rest of the world and put downward 
pressure on corporate profits and hiring in manufacturing.
    Senator Heller. Are you concerned that if Feds raise rates, 
bond traders will ignore that, in fact, reversing exactly what 
you are trying to achieve by raising rates?
    Ms. Yellen. Well, I think one of the factors that does 
influence bond pricing, if this is what you are referring to, 
is the anticipated path of rates. And there are some further 
increases built into market expectations, and often the 
response of bond markets to what we do depends on how our 
actual actions compare with those expectations.
    Senator Heller. Chairwoman, thank you.
    Chairman Shelby. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. It is good to see 
you again, Chair Yellen.
    I want to follow up on questions raised by Senator Corker 
and Senator Vitter. As you know, Dodd-Frank requires giant 
financial institutions to submit living wills, documents that 
describe how these giants could be liquidated in an orderly and 
rapid way in bankruptcy without either bringing down the 
economy or requiring a taxpayer bailout.
    Now, a few months ago, the Fed and the FDIC jointly 
determined that the living wills submitted by five of the 
biggest banks in the country were not credible, and those banks 
must resolve the problems identified in their living wills by 
October 1st. That is 14 weeks from now. If the banks fail to do 
that, the Fed and the FDIC have the power to reduce the risks 
posed by these giant banks by, for example, raising higher 
capital standards or stricter leverage ratios.
    These changes are critically important to avoiding another 
2008 crisis, but the banks are unlikely to make them unless 
they believe that the Fed and the FDIC are serious about 
enforcing Dodd-Frank.
    Now, I know by law you must consider increasing capital and 
higher leverage ratios. What I want today is to ask: Can you 
commit that if any of these giant banks fail to resolve the 
problems in their living wills by October 1st that the Fed will 
use the tools that Congress gave you to reduce the risks posed 
by these too-big-to-fail banks?
    Ms. Yellen. We have been very serious in this review of the 
living wills, and we have clearly stated a set of well-
identified changes that we want to see----
    Senator Warren. I appreciate that.
    Ms. Yellen. ----by October 1st.
    Now, the decision about what we do if those deadlines are 
not met, those are decisions that my colleagues and I will need 
to look at very carefully, what is the appropriate sanction for 
doing that. But, clearly, we are very serious about wanting to 
see these deficiencies remedied and well aware that we have at 
our disposal the tools that you listed.
    So I cannot precommit today to tell you precisely what our 
response will be, and we will work closely with the FDIC, as we 
have been all along. But we are extremely serious about wanting 
to see progress and certainly will consider using those tools.
    Senator Warren. Well, like I said, you are required by law 
to consider them. What I am asking for is a commitment here, 
and I have to say I do not fully understand why you would not 
make that commitment. These banks have known this is coming 
since Dodd-Frank was passed in 2010. That is 6 years ago. And 
they have been submitting living wills since 2013. There is no 
provision in the law for all of the extensions that you have 
given them so far. If any of these banks fail the credibility 
test on their fifth try, they need to face some real 
consequences. Otherwise, why would they ever make changes if 
there are no consequences?
    Ms. Yellen. Well, there will be consequences.
    Senator Warren. Well, I very much hope so.
    You know, when you found that these five banks had 
submitted living wills that were not credible, you were saying 
quite explicitly that each of these banks remains too big to 
fail, and that if any one of them crashed, they would risk 
taking down the whole economy unless they got a Government 
bailout. The entire goal of the living wills process is to push 
the biggest banks to fix this fundamental problem, and I am 
glad that the Fed finally--finally--determined that some of 
these living wills were not credible. But it is not going to 
mean anything if you are not willing to use the tools that 
Congress gave you to force these banks to reduce the risks that 
they are pushing off onto the taxpayers.
    I have a second issue that I just want to cover here if I 
can briefly, and that is, I want to follow up on Senator 
Brown's and Senator Menendez's questions about diversity. I 
think diversity is very important. There is a growing body of 
research showing, for example, that gender diversity and 
leadership makes for stronger institutions. Perhaps it is not a 
coincidence, then, that there is a stunning lack of diversity 
at our biggest financial institutions. Not a single one is led 
by a woman. And while the Fed's leadership is somewhat more 
diverse, it is not a whole lot better. Of the 12 regional Fed 
Presidents, 10 are men.
    Now, as you know, Congressman Conyers and I, along with 120 
of our colleagues, sent you a letter a few weeks ago about the 
lack of diversity among the Fed's leadership, and I appreciate 
the response that you sent us last week in which you 
acknowledged that greater diversity can help improve the Fed's 
decision making and that there is still work to be done to 
improve diversity among the Fed's leadership.
    So let me just start by asking, does the lack of diversity 
among the regional Fed Presidents concern you?
    Ms. Yellen. Yes. I believe it is important to have a 
diverse group of policymakers who can bring different 
perspectives to bear. I think, as you know, it is the 
responsibility of the regional banks' Class B and C Directors 
to conduct a search and to identify candidates. The Board 
reviews those candidates, and we insist that this search be 
national and that every attempt be made to identify a diverse 
pool of candidates. And we monitor those searches while they 
are ongoing to make sure that has been done. It is 
unfortunate----
    Senator Warren. But then let me just ask you about the 
outcome here, because just as you say, under the law, when a 
new regional Fed President is selected by the regional Fed 
Board, that person must be approved by you and the others on 
the Board of Governors before taking office. The Fed Board 
recently reappointed each and every one of these Presidents 
without any public debate or any public discussion about it.
    So the question I have is: If you are concerned about this 
diversity issue, why didn't you use either of these 
opportunities to say, ``Enough is enough. Let us go back and 
see if we can find qualified regional Presidents who also 
contribute to the overall diversity of the Fed's leadership''?
    Ms. Yellen. Well, we did undertake a thorough review of the 
reappointments of the performance of the Presidents. The Board 
of Governors has oversight of the reserve banks. There are 
annual meetings between the Board's Bank Affairs Committee and 
the leadership of those banks to review the performance of the 
Presidents. And there were thorough reviews of the 
performance----
    Senator Warren. But you are telling me diversity is 
important, and yet you just signed off on all these folks 
without any public discussion about it.
    You know, I appreciate your commitment to diversity, and I 
have no doubt about it. I do not question it. It just shows me 
that the selection process for regional Fed Presidents is 
broken, because the current process has not allowed you and the 
rest of the Board to address the persistent lack of diversity 
among the regional Fed Presidents.
    I think that Congress should take a hard look at reforming 
the regional Fed selection process so that we can all benefit 
from a Fed leadership that reflects a broader array of both 
backgrounds and interests.
    Thank you, Madam Chair.
    Chairman Shelby. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Chair Yellen, thank 
you for being here today, and I thank you for your hard work on 
behalf of all of America.
    Ms. Yellen. Thank you.
    Senator Scott. Frankly, you have a difficult task and one 
that will not get any easier before the year is out, from my 
perspective. I did find it quite interesting, the opening 
comments of my good friend, the Ranking Member, Senator Brown 
from Ohio, as he seemed to suggest that perhaps the failure of 
the economy somehow rests on the shoulders of my party. I 
thought to myself that the American people are not really 
looking to assign blame for why the economy is so anemic and 
the so-called recovery has not truly reached into those folks 
living paycheck to paycheck. But it would be easy for them to 
remember that at the beginning of the so-called recovery, the 
Democrats, my good friends to the left, controlled the White 
House, the Senate, and the House until early January 2011. And 
what did they do with that trifecta? Actually, they created the 
most onerous regulatory State in the history of our country, 
and it continued until even last year when the Administration 
proposed 80,000-plus pages of new regulations, according to the 
Competitive Enterprise Institute, with an economic impact or 
cost to the economy of $1.85 trillion. Said differently, that 
this anemic recovery perhaps is anemic because of the 
regulatory burden created during those first couple of years.
    And I would suggest to you that people in my home State of 
South Carolina who are working paycheck to paycheck do not 
believe that we are actually having a strong recovery, and the 
numbers seem to bear that out. First-time home buyers, down for 
the third consecutive year, and that disproportionately impacts 
African Americans who have homeownership of around 45 percent. 
So the challenge seems to continue.
    Our economy grew the first quarter by 1.1 percent. We saw 
real incomes since 2007 decline by 6.5 percent. Americans 
eligible for food stamps is up 40 percent. Americans using food 
stamps are up over 20 percent.
    Last month, we saw 38,000 jobs created, and our labor force 
participation rate: in 2007, 66.4 percent; 2010--bless you--
64.8 percent. I have got to stop and bless a woman for 
sneezing.
    [Laughter.]
    Senator Scott. Is that OK with you, sir? Thank you, sir. 
And in 2014--we are having fun up here because this is not a 
fun topic. In 2014, it was 62.9 percent. In May of this year, 
62.6 percent.
    I would suggest that the numbers themselves bear out the 
fact that perhaps the anemic recovery is not a recovery for 
those folks working paycheck to paycheck. I do not know who is 
to blame, but I can tell you that the American people want 
solutions more than blame.
    My question to you is: As you look for the rest of this 
year, do you anticipate more months where the job creation 
number is 38,000 and in the same months where we see job 
creation at 38,000, we celebrate a 4.7-percent unemployment 
rate only because 458,000 people stopped looking for work? So 
when you take a real unemployment number, based on the 2007 
labor force participation rate, would it be at 9 percent?
    Ms. Yellen. So we do expect further improvement in the 
coming year. The unemployment rate fell substantially over the 
last year, and there were jobs created in 2015 at about 225,000 
or 230,000 a month. Perhaps we will not see job creation now 
that the economy is getting closer to estimates of normal 
longer-run rate of unemployment. But I expect continued 
improvement bringing down broader measures of unemployment, 
which, as you noted, are much higher. Some include involuntary 
part-time employment. I expect further improvement if the labor 
market continues to strengthen.
    Now, the last jobs report and the last couple of months of 
labor market performance were quite disappointing. My hope and 
expectation is that that is something that is temporary, and we 
will see that turn around in the coming months. Clearly, it is 
something we will be watching very carefully. My expectation is 
that we will see improvement, but we will watch it very 
carefully.
    Senator Scott. My last question, as my time is running out, 
has to do with full employment and how to reach that wonderful 
goal of full employment. When I look at the numbers that are 
coming out of the need for skilled workers as well as STEM 
workers, it appears that by 2020 we could have a shortfall of 3 
million or 4 million folks in the skilled labor force and about 
5 million in the STEM labor force. My solution has a lot to do 
with the German model of apprenticeship programs. I would love 
to hear if you have any solutions that you are going to be 
recommending as we look at the labor force participation rate, 
the number of skilled jobs that will be available, and the need 
to get our workforce trained in that direction.
    Ms. Yellen. So going back probably to the mid-1980s, we 
have seen a persistent shift in employment patterns from 
unskilled and people with middle skills but doing jobs that can 
be offshored, outsourced, to demand for skilled labor.
    Senator Scott. Yes, ma'am.
    Ms. Yellen. And the consequence of that has been rising 
inequality, a high return to education, and downward pressure 
on the wages of those who are less skilled and middle income. 
And I completely agree with you that education and training, 
perhaps apprenticeships of the type that are used in some 
European and other countries, these are ideas that really have 
to be considered if we are going to address what comes out of 
that, which is that even when you have enough jobs, you have 
downward pressure on the wages and incomes of people in the 
middle and the bottom of the skill distribution.
    Senator Scott. Thank you, Chair Yellen.
    Mr. Chairman, I would just suggest that at some point we 
are going to have to have a national conversation about the 
quality of education in our country and the necessity of a dual 
track. Back in my days, we had shop, which was an important 
part of our education apparatus, and perhaps we need to have 
that conversation again.
    Thank you, Chair Yellen.
    Ms. Yellen. I agree with you.
    Chairman Shelby. Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. And thank you, 
Chair Yellen.
    When you were here in February, we talked about corporate 
offshoring and the devastating impact it has had on families in 
my home State of Indiana and the manufacturing towns across the 
country. The frustration remains.
    The decline in manufacturing employment is one of the 
factors that has led to a shrinking middle class. We have two 
economies in this country. The overall economy might be doing 
well enough, and the wealthier are richer than ever. But 
middle- and working-class families are not feeling the 
recovery. Wages have been stagnant for years. A recent Pew 
report said that since 1971, each decade has ended with a 
smaller share of adults living in middle-income households than 
at the beginning of the decade.
    What is the state of the economy for working families?
    Ms. Yellen. Well, I would agree with you that for decades 
now, as we were just discussing there has been downward 
pressure on the incomes of less skilled individuals, and the 
kinds of jobs that once upon a time were pretty readily 
available, say, for a high school-educated man in manufacturing 
have gradually diminished. There has been a long-term trend. 
Part of it is due to just the technological change that has 
consistently raised the demands for skilled workers and reduced 
the demands for less skilled workers. And I think globalization 
has also played some role.
    More recently, slow growth in foreign economies, the 
strength of the dollar, which really is reflective of the U.S. 
doing better on balance than other countries, and----
    Senator Donnelly. I understand all these reasons, but, I 
mean, these are real people, as you well know.
    Ms. Yellen. I know.
    Senator Donnelly. There was an article not too long ago in 
the paper here about a fellow who was making about $17 an hour 
at the plant. He got fired because they shipped his job to 
Mexico for $3 an hour. But the ongoing ripple of that was that 
his daughter, who had applied to Indiana University, IU, got 
accepted. She found out that her dad was going to lose his job, 
and she said, ``I do not think the family can afford for me to 
go to college like this.''
    That is devastating. That is the future of America. That is 
what the real impact of all of this stuff is, just in the past 
few months, and these are not because the companies are not 
doing well. They are doing really well. But, you know, in the 
town next to my home town, Elkhart, 200 jobs, shipped overseas; 
700 jobs, Huntington, Indiana, not the biggest county in the, 
shipped to Mexico for $3-an-hour wages; 1,400 out of 
Indianapolis. Very profitable companies. And these folks are 
making, you know, $13, $14, $17 an hour.
    So as long as we have the mousetrap like this, how do we 
ever try to get the middle class up if even $13 an hour is too 
much in these companies' minds?
    Ms. Yellen. So these are very sad situations for workers--
--
    Senator Donnelly. They are wrong situations, is what they 
are.
    Ms. Yellen. The kind of thing you are describing imposes 
terrible burdens on all too many American families.
    Senator Donnelly. So how do we make America work for them?
    Ms. Yellen. Part of it is trying to make jobs. We cannot 
stop all shifts occurring across sectors of the economy. I 
think we have to make sure that there are opportunities----
    Senator Donnelly. But let me ask you this: Do you consider 
that a shift when a company is doing really well and somebody 
is making 13 bucks an hour, not much above minimum wage, but 
lose their job because our laws allow them to ship them to 
Mexico for $3 an hour? Is that a shift? That is not really a 
shift in technology or anything. That is just a cold-blooded 
decision that Americans do not count as much as their profits.
    Ms. Yellen. Well, those forces have been in play for quite 
some time, and, for our part at the Fed, we are trying to 
create a job market where there are enough vacancies and 
opportunities that people who lose jobs in one sector are able 
to find them in the sectors of our economy that are expanding. 
And sometimes to make that transition is difficult and may 
require retraining or other forms of help to connect with 
available job opportunities. And sometimes we know that kind of 
job loss does cost long-lasting impact on wages.
    Senator Donnelly. I will just leave it with this: It seems 
like gaming the system to want to make your product somewhere 
else in the hope that you can sell them back to here, to the 
United States, because you are hoping that other people will be 
happy to pay the $13-an-hour, $14-an-hour wages so you will 
have enough customers, you are just going to game it so that 
you can pay the 3 bucks and then get your products back in 
here. And it is like you get it on one end, and you get it on 
the other end. And that just seems incredibly responsible to 
me.
    Thank you, Madam Chair.
    Chairman Shelby. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    Madam Chair, welcome. As I listened to your Monetary Policy 
Report, it strikes me that the--as the Ranking Member had 
indicated earlier, we talk about productivity growth and the 
need for both public and private investment. That requires that 
the dollars come from some place. And I would like your 
thoughts on this just in terms of--on the basis of what the 
Joint Economic Committee had reported earlier this year. And 
they laid it out in some pretty stark terms.
    They indicated that 99--well, let me put it this way: Ten 
years from now, in the year 2026--which, by the way, is the 
250th birthday of our country--we can look forward to, under 
current conditions, 99 percent of all the revenue coming into 
the Federal Government--highway taxes, corporate taxes, 
personal taxes, personal income taxes--99 percent of it is 
going to go back out in two categories: interest on the Federal 
debt and mandatory payments on entitlements. That does not 
leave a lot for public investment and clearly it does not drive 
private investment.
    You are working on short-term activity right now and you 
are monitoring very closely--you are actually, on a day-to-day 
basis, following an economy right now, which, as you have 
suggested, is doing very well. And yet I think a lot of us 
would disagree, that three-quarters of 1 percent growth in a 
quarter hardly seems appropriate. And I know that you are 
optimistic about the second being better, but even if it is 
double or even triple, we are not going to grow our way out of 
this crisis which is coming upon us.
    I would like your thoughts, because right now we are 
looking at areas in which, if we want those jobs to come back 
and if we want individuals or wages to rise, we are going to 
have to be in a position to where we actually grow this economy 
once again--tax policy, regulatory reform, actually managing 
our entitlements, all of which seem critical and yet today we 
have not talked about that at all. We do not seem to really 
have a place where we can.
    Can you, as an impartial individual in this process who 
watches our economy grow or falter on a daily basis, can you 
talk to us about the need to do something now to avoid the 
crisis in 10 years?
    Ms. Yellen. Well, I think we all know, and we have known 
for a long time, that with an aging population and with health 
care costs that have, by and large, risen more rapidly than 
inflation, that we faced a situation where we would have an 
unsustainable debt path and that this would require reforms. As 
you say, Medicare, Medicaid, Social Security, those three 
programs will, under the current rules----
    Senator Rounds. So you are talking--just to begin with, you 
are saying the Affordable Care Act needs to be reformed----
    Ms. Yellen. Well, I did not----
    Senator Rounds. ----as part one.
    Ms. Yellen. Well, I did not say anything about the 
Affordable Care Act.
    Senator Rounds. OK.
    Ms. Yellen. I am saying that the entitlement programs need 
to be considered how to put those on a sustainable basis.
    Senator Rounds. Would it be fair to say they need to be 
managed?
    Ms. Yellen. Well, they need to have Congress look at both 
revenues and the structure of expenditures to ensure that those 
programs remain sustainable in the overall Federal budget and 
debt associated with that remain on a sustainable course, 
because as you go out further with an aging population, as you 
said, the debt-to-GDP ratio is rising simply unsustainably, and 
that does require changes.
    Senator Rounds. Is it fair to say that right now, if--over 
the long-term basis, every time the interest rate that we have 
to pay at the Federal level goes up by a quarter point, it is 
estimated that approximately a $50 billion a year additional 
increase in our costs being paid out. It looks to me like 
simply addressing and beginning the process of slowing down the 
increasing Federal debt and recognizing that we cannot just 
simply say, over a 1-day period of time or a 2-day period of 
time, that we have got all the answers, but most certainly we 
are going to have to grow our way out of this as well as 
reducing some of the ongoing expenditures. Fair to say?
    Ms. Yellen. It certainly would be desirable if the U.S. 
economy were growing at a faster rate. You cited a very 
depressed number for first-quarter growth. Over the last four 
quarters the average growth has been about 2 percent, and over 
eight quarters it has been about 2.5 percent. So sort of 
smoothing through the ups and downs, we have been experiencing 
growth of 2 or 2.5 percent.
    Senator Rounds. And we are not going to grow our way out 
based upon that number, are we?
    Ms. Yellen. We would certainly have to do better than that, 
and that is a matter of productivity growth essentially being 
quite depressed relative, for example, to the levels that we 
enjoyed in the second half of the '90s.
    So it is not certain what is responsible for that but, you 
know, many factors come into play. We have had depressed levels 
of investment. We seem to have a depressed rate of business 
formation. Technological change, as it shows up in output 
gains, seems to have fallen relative to those better times. And 
there were a range of policies we could consider to address it, 
but----
    Senator Rounds. Madam Chair, my time is up, but it looks to 
me like what you are giving us is a wake up call about a crisis 
that is not 10 years from now; it is right now.
    Ms. Yellen. Well, it is a very serious matter that 
productivity growth is so slow, yes. I want to highlight that.
    Senator Rounds. Thank you, Madam Chair.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Merkley.
    Senator Merkley. Chair Yellen, thank you.
    Senator Donnelly was raising concern about manufacturing 
jobs in America. And indeed, our trade policy has given full 
access to our market to goods manufactured by companies in 
countries that do not have to abide by the same labor laws, the 
same wage rules, the same environmental rules, or the same 
enforcement.
    This is a very unlevel playing field for American 
manufacturers and has a devastating impact. The loss is 
extensive. And is that really fair to the American worker to 
have American companies having to compete against companies 
that are allowed a completely different set of standards that 
lower their costs dramatically?
    Ms. Yellen. Well, I guess I would just say that, in the 
view of most economists, more open trade creates net benefits, 
but that does not mean benefits for everyone. And there are 
gainers but there are also losers, and that is certainly part 
of it----
    Senator Merkley. The losers are the manufacturing workers. 
Again, is that fair to the manufacturing workers?
    Ms. Yellen. Well, it is important to have policies that 
address the losses.
    Senator Merkley. Since the mid-1970s, 1975 through now, we 
have had four decades in which virtually zero--well, let me put 
it different--virtually 100 percent of the new income has gone 
to the top 10 percent of Americans, leaving basically 9 out of 
10 Americans in our economy out in the cold. This is 
substantially a reflection of the shift to manufacturing 
overseas.
    We have had a series of geostrategic decisions. We wanted 
to nurture the recovery of Japan. We wanted to pull China out 
of the Sino-Soviet bloc. Now we want to pull the rest of Asia 
away from China. Is there an understanding within the Fed how--
the costs of these geostrategic decisions upon the welfare of 
American families and through living-wage jobs--the loss of 
living-wage jobs?
    Ms. Yellen. Well, we have certainly looked at this question 
of wage inequality, income inequality. We collect data. Our 
Survey of Consumer Finances is one of the key datasets that 
gives us insight into what is happening.
    Academic work on this topic, while it has focused to some 
extent on trade more broadly, also looks at the importance of a 
phenomenon called skill-biased technical change, that the 
nature of technological change in recent decades has 
continually shifted demand away----
    Senator Merkley. So let's take----
    Ms. Yellen. ----from less-skilled workers toward more 
skilled----
    Senator Merkley. So let's take that as an additional 
factor. Technological change has occurred. However, a lot of 
the shift overseas has been due to lower wages, not to 
technological change. In fact, they have been rooting up our 
factory machines and shipping them overseas. So it is the same 
factories producing the same goods in a place that pays less. 
That is not technological change. That is an issue of trade 
policy.
    Technological change does have an impact. So in a situation 
where, as you point out, there is more higher-skilled demand, 
demand for higher-skilled jobs, education becomes very 
important.
    Ms. Yellen. That is right.
    Senator Merkley. But as compared to other developed 
economies, higher education--be it higher skill training or 
college--is far more expensive. It is the single factor, more 
than health care, that has gone up faster than inflation in our 
economy, and such that not only is it daunting to our students 
who, in blue-collar communities like the one I live in, are 
getting the message that there is not an affordable path to 
fulfill their goals in life--and statistically we see our 
students who do pursue that education burdened with debt that 
is having a profound impact both on delaying marriage and on 
delaying home ownership, which is the major--has been a major 
engine of wealth for the middle class.
    So we see this high cost of college, and that seems to me 
like the type of structural concern in our economy that the Fed 
should be using its economic expertise to highlight the long-
term devastating impacts of failing to provide the opportunity 
for the skills needed for the economy of the future, but I do 
not hear the Fed talking about that.
    Ms. Yellen. Well, we are looking at trends in student debt, 
and I believe we will be hosting a conference this fall on 
student debt and looking particularly at what it means for low- 
and moderate-income households.
    Senator Merkley. You know, I cannot--over these last few 
years I have asked so many questions in which the response is 
always: That is something we are looking at. It would be nice 
to have a muscular representation of the big challenges to our 
economy because the Fed has the expertise to put its hands 
around that and be able to project that into the policy debate.
    And I will just close, since my time is expiring, by saying 
one of those issues that I have raised multiple times is the 
Fed's power of the conflict of interest in commodities, the 
ability of large financial institutions to own pipelines, to 
own ships full of oil, to own energy-generation stations, to 
own warehouses of aluminum. And each time I hear ``we are 
looking at that,'' are we still looking at that or are we 
actually going to do something about that?
    Ms. Yellen. We will come out with a proposal on that, but 
some of it reflects decisions that Congress made and not Fed 
policy.
    Senator Merkley. That is true, there are some restrictions, 
but there is still considerable power resting with the Fed.
    Thank you.
    Chairman Shelby. Senator Moran.
    Senator Moran. Mr. Chairman, thank you very much.
    Madam Chairwoman, thank you for joining us this morning. I 
would tell you that, in my conversations with Kansans, very 
few--I do not know if I have had a conversation with a Kansan 
who sees their economic future brighter. They see it--they are 
more disillusioned.
    No one feels more secure in their job. No one feels like 
their children are going to have a brighter future. Parents are 
concerned about their children's opportunities when they 
graduate from school--the ability to pay back student loans--
worried about saving for their own retirement. People are 
worried about having enough income and savings to pay for 
health care emergencies. So the sense of an economic recovery 
is far from being felt universally with Kansans that I visit 
with across our State.
    I wanted to just raise two questions. One, in part that 
circumstance is related to significantly lower agricultural 
commodity prices, significantly lower prices in oil production, 
natural gas production. And part of that is a consequence of, I 
assume, the value of our dollar in comparison to other 
currencies and our ability to promote exports, both of those--
certainly of agriculture commodities, although the law now 
allows for the export of oil as well.
    But where are we in the value of our dollar? What is the 
intermediate expectations for us to be able to jumpstart the 
sale of wheat, cattle, corn and other products, airplanes that 
are manufactured in our State that seemingly are not able to 
access those markets, in part because of the value of our 
currency?
    Ms. Yellen. So the value of the dollar has increased 
significantly since, say, mid-2014. Partly that reflects the 
fact that the U.S. has enjoyed a stronger recovery than many 
other advanced Nations. And that has created an expectation 
that in the U.S., interest rates will rise at a more rapid pace 
than in other parts of the world, and that has induced inflows 
into our assets that have pushed up the dollar.
    But more broadly, the trends you have seen in commodity 
prices I think reflect a larger set of global forces. In some 
cases we have seen significant increases in the supply of 
commodities. In the case of oil, the rapid growth of U.S. 
ability to supply oil markets has been a factor. And then there 
has been a slowdown in global growth, and particularly in 
China, which has been an important consumer of so many 
commodities. China is on a path--and it is understood this will 
continue--a path of slowing growth. And--you have seen for many 
commodity prices plummet just because of basic supply-and-
demand considerations. The dollar makes some difference to that 
as well.
    Senator Moran. We often talk about, when we talk about 
exports, trade agreements. Has the Fed weighed in, or have you 
expressed an opinion previously about other countries and their 
ability to manipulate currencies to our disadvantage of 
exports?
    Ms. Yellen. The responsibility for currency policy rests 
with----
    Senator Moran. With the Treasury Department.
    Ms. Yellen. ----the Secretary of the Treasury, and we do 
not weigh in on that.
    Senator Moran. Madam Chairwoman, let me ask you about 
something in your testimony. You indicate that business 
investment outside the energy sector was surprisingly weak. 
Would you indicate to me--elaborate on the factors that lead 
you to that statement? And when you exclude the energy sector, 
is that just because of definition or is something happening in 
the energy sector that indicates investment?
    Ms. Yellen. Well, drilling activity has been very important 
and it is counted as part of investment activities. So with the 
huge plunge in oil prices, even though there has been some 
recovery, we have seen the number of rigs in operation just 
plummet. And that is part of why aggregate investment spending 
has been so weak. And we understand that and expect it because 
it reflects the decline in oil prices.
    But even when we go outside the energy sector or other 
sectors that are directly related to energy and supplying 
inputs to it, investment spending recently--and this is just a 
report on the data; I do not have a story to offer you on why 
this has happened--it has been surprisingly weak over the last 
several months.
    It has not been very strong investment spending generally--
we talked about this earlier--during the recovery, but it has 
been--and we think we understand some reasons why it has 
generally been weak, namely slow growth and less rapid increase 
in the labor force. But it has been surprisingly weak in recent 
months and it is something we are watching, and I cannot tell 
you just what that is due to.
    Senator Moran. I would not expect you to say this but, in 
my view, in part that lack of investment or that reduction in 
investment is related to a wide array of circumstances. One of 
them would be the debt and deficit, the uncertainty of our 
economy, lack of economic growth generally. The economic 
indicators are down-trending, not up-trending a sufficient 
number of times to instill a sense of confidence. The next 
regulation that may come their way as a businessperson, just 
decisions to make investments, people are deciding it is more 
risky to invest than to not.
    Ms. Yellen. Well, those things are certainly mentioned by 
businesspeople. In recent quarters, corporate earnings have 
also been under downward pressure for a variety of reasons.
    Senator Moran. Well, I would conclude my remarks by 
indicating that one of the places we ought to focus our 
attention is on innovation, startup businesses, new 
entrepreneurs, and the uncertainty that they face is even more 
of a dramatic--has more dramatic consequence than a larger 
business that can better internalize and handle that 
uncertainty.
    Mr. Chairman, thank you very much. Thank you, Chairwoman.
    Chairman Shelby. Senator Cotton.
    Senator Cotton. Thank you.
    And thank you, Chair, for being a force again. I know these 
are always two highlights of every year for you.
    I want to return to some of the earlier discussion of the 
so-called Brexit, the referendum that will occur in the United 
Kingdom on Thursday, on whether Great Britain should remain or 
leave the EU. Your testimony on page 4 says, ``One development 
that could shift investor sentiment is the upcoming referendum 
in the United Kingdom. A U.K. vote to exit the European Union 
could have significant economic repercussions''--``could,'' 
which you stressed to Senator Heller in his comments. That 
sounds to me like the usual prudence and caution you use in all 
of your public statements.
    You also stated to Senator Heller, ``I don't want to 
overblow the likely impacts.'' That reminds me of Yogi Berra's 
old sage advice that predictions are hard, especially about the 
future.
    Ms. Yellen. That is absolutely true. I could not agree with 
that more.
    [Laughter.]
    Senator Cotton. Yet, in the last few minutes, here is how 
the Guardian of London reports your testimony to the Committee: 
``Yellen warns on Brexit.'' Not exactly what you said, is it?
    Ms. Yellen. I said that we were monitoring it and that it 
could have consequences with the United States.
    Senator Cotton. You would not characterize your testimony 
as a warning on the Brexit?
    Ms. Yellen. If that means that I am warning U.K. residents, 
I am not attempting to take a stand. They are going to go to 
the polls. They have had an active debate on the issues and I 
am not providing advice in that sense.
    Senator Cotton. Good. Thank you. I sympathize when 
headlines do not exactly capture the exact meaning of what one 
says. And to be fair to the Guardian, they are not the only 
outlet that has reported your testimony along those lines. The 
BBC, Reuters, CNBC, and Fortune have, as well.
    So to be crystal clear, you take no position on whether 
U.K. citizens should vote to remain or leave the EU, and the 
Federal Reserve takes no position.
    Ms. Yellen. That is correct. It is for them to decide. I am 
simply saying the decision could have economic consequences 
that would be relevant to the U.S. economic outlook that we 
need to monitor carefully.
    Senator Cotton. Thank you for that, because I certainly 
think that we all in America, and particularly in positions of 
leadership in our Government, should respect the British 
people's sovereign right to govern their own affairs.
    One point you made in your earlier comments about Brexit, 
about the potential source of these economic repercussions, is 
``a period of uncertainty.'' That is something I hear 
frequently in commentary about the Brexit. Is there any time 
when the global economy or the U.S. economy does not operate in 
a condition of uncertainty?
    Ms. Yellen. Well, there is uncertainty, but this is a 
unique event that has no close parallel. It is hard to know 
what the consequences would be. Of course there is always 
uncertainty domestically and globally. We operate in an 
uncertain environment.
    Senator Cotton. Many of your counterparts in the Continent, 
many of my elected counterparts in the Continent, have not 
treated the matter so even-handedly. They have opined on what 
British citizens should do. They have also been responsible for 
other things that have caused uncertainties in recent years, 
like the Greek debt crisis or other debt crises in Europe, or 
the suspension of the Schengen zone privileges because of the 
flow of migrants into Europe, and terrorists now infiltrating 
that flow and launching attacks in Paris and just a few blocks 
away from the heart of the European Union.
    Those would also potentially cause periods of uncertainty 
in the European and the global economy, wouldn't they?
    Ms. Yellen. Absolutely.
    Senator Cotton. Is there a risk that some of the dire 
predictions about Brexit could become--or the reaction to the 
Brexit could become a self-fulfilling prophecy in the economy? 
Some British politicians have promised--or perhaps I should say 
threatened--immediate tax increases or budget cuts if the U.K. 
citizens vote to leave. Some continental leaders have 
threatened punitive and retaliatory action if the U.K. votes to 
leave. Our own President has said that the United Kingdom would 
have to go to ``the back of the queue'' for any new trade 
agreement.
    Do these statements have the potential to create a self-
fulfilling prophecy that would lead to increased uncertainty, 
whatever the outcome on Thursday?
    Ms. Yellen. You know, I do not want to comment on what 
various participants in this debate have said or the advice 
they have given the British people. There is an active debate. 
It is not inappropriate, with a decision of this sort, for many 
parties to weigh in about the consequences. As I said, I am not 
trying to offer advice myself to the U.K. residents about to go 
to the polls.
    Senator Cotton. Thank you; nor am I.
    One final point. Your counterpart at the ECB has said that 
the ECB is ``ready for all contingencies following the U.K.'s 
EU referendum.'' Can you say the same thing about the Federal 
Reserve? You are ready for all contingencies following the vote 
on Thursday?
    Ms. Yellen. Well, in the sense that we will closely monitor 
what the economic consequences would be and are prepared to act 
in light of that assessment.
    Senator Cotton. And should the U.K. vote to leave the EU, 
the United States Government as a whole, and the Federal 
Reserve in particular, will handle that contingency in the 
spirit of magnanimity, generosity, and friendship among 
Nations?
    Ms. Yellen. Well, it would certainly be my inclination to 
do so.
    Senator Cotton. Thank you for that.
    Chairman Shelby. Thank you.
    Madam Chair, I want to shift the conversation a little bit 
to custody banks, which are very important. I think that would 
be banks like State Street and New York Mellon and, I am sure, 
others.
    It has been reported that custody banks have turned away 
deposits or are charging fees on deposits because of the 
Enhanced Supplementary Leverage Ratio. You received public 
comments stating that the rule could limit the ability of 
custody banks to accept deposits, particularly during periods 
of stress.
    Is the Fed currently examining how this rule is impacting 
custody banks' ability to accept deposits, one? Two, could this 
rule increase systemic risk during times of stress? And three, 
just for the audience--they probably know--what is a custody 
bank as opposed to the ordinary retail bank, for example?
    Ms. Yellen. So a custody bank is one that handles 
transactions for other customers, like asset managers.
    Chairman Shelby. Very important, isn't it? A custody bank 
is important to the banking system, is it not?
    Ms. Yellen. Yes, they are.
    Chairman Shelby. OK.
    Ms. Yellen. And we certainly are aware that they are 
concerned about the Supplementary Leverage Ratio impacting 
their profitability. Leverage ratios are normally intended to 
be a backup form of capital regulation. They are not oriented 
toward the risk of particular assets in the balance sheet but 
impose a minimum amount of capital that applies to the entire 
balance sheet, all assets. And so, for safe assets in banks 
that hold large quantities of safe assets, it can be a burden. 
And it is something that we will monitor, but this is the way 
leverage ratios have always been imposed against all of the 
assets of the overall size of the organization.
    Chairman Shelby. Thank you.
    Senator Brown, do you have anything else?
    Senator Brown. Nope, that is it. Thank you.
    Chairman Shelby. Madam Chair, thank you for your 
participation. I know it has been long, but I thank you for 
appearing before the Committee again.
    Ms. Yellen. Thank you.
    Chairman Shelby. The Committee is adjourned.
    [Whereupon, at 12:27 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                 PREPARED STATEMENT OF JANET L. YELLEN
        Chair, Board of Governors of the Federal Reserve System
                             June 21, 2016
    Chairman Shelby, Ranking Member Brown, and other Members of the 
Committee, I am pleased to present the Federal Reserve's semiannual 
Monetary Policy Report to the Congress. In my remarks today, I will 
briefly discuss the current economic situation and outlook before 
turning to monetary policy.
Current Economic Situation and Outlook
    Since my last appearance before this Committee in February, the 
economy has made further progress toward the Federal Reserve's 
objective of maximum employment. And while inflation has continued to 
run below our 2-percent objective, the Federal Open Market Committee 
(FOMC) expects inflation to rise to that level over the medium term. 
However, the pace of improvement in the labor market appears to have 
slowed more recently, suggesting that our cautious approach to 
adjusting monetary policy remains appropriate.
    In the labor market, the cumulative increase in jobs since its 
trough in early 2010 has now topped 14 million, while the unemployment 
rate has fallen more than 5 percentage points from its peak. In 
addition, as we detail in the Monetary Policy Report, jobless rates 
have declined for all major demographic groups, including for African 
Americans and Hispanics. Despite these declines, however, it is 
troubling that unemployment rates for these minority groups 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.
    During the first quarter of this year, job gains averaged 200,000 
per month, just a bit slower than last year's pace. And while the 
unemployment rate held steady at 5 percent over this period, the labor 
force participation rate moved up noticeably. In April and May, 
however, the average pace of job gains slowed to only 80,000 per month 
or about 100,000 per month after adjustment for the effects of a 
strike. The unemployment rate fell to 4.7 percent in May, but that 
decline mainly occurred because fewer people reported that they were 
actively seeking work. A broader measure of labor market slack that 
includes workers marginally attached to the workforce and those working 
part-time who would prefer full-time work was unchanged in May and 
remains above its level prior to the recession. Of course, it is 
important not to overreact to one or two reports, and several other 
timely indicators of labor market conditions still look favorable. One 
notable development is that there are some tentative signs that wage 
growth may finally be picking up. That said, we will be watching the 
job market carefully to see whether the recent slowing in employment 
growth is transitory, as we believe it is.
    Economic growth has been uneven over recent quarters. U.S. 
inflation-adjusted gross domestic product (GDP) is currently estimated 
to have increased at an annual rate of only \3/4\ percent in the first 
quarter of this year. Subdued foreign growth and the appreciation of 
the dollar weighed on exports, while the energy sector was hard hit by 
the steep drop in oil prices since mid-2014; in addition, business 
investment outside of the energy sector was surprisingly weak. However, 
the available indicators point to a noticeable step-up in GDP growth in 
the second quarter. In particular, consumer spending has picked up 
smartly in recent months, supported by solid growth in real disposable 
income and the ongoing effects of the increases in household wealth. 
And housing has continued to recover gradually, aided by income gains 
and the very low level of mortgage rates.
    The recent pickup in household spending, together with underlying 
conditions that are favorable for growth, lead me to be optimistic that 
we will see further improvements in the labor market and the economy 
more broadly over the next few years. Monetary policy remains 
accommodative; low oil prices and ongoing job gains should continue to 
support the growth of incomes and therefore consumer spending; fiscal 
policy is now a small positive for growth; and global economic growth 
should pick up over time, supported by accommodative monetary policies 
abroad. As a result, the FOMC expects that with gradual increases in 
the Federal funds rate, economic activity will continue to expand at a 
moderate pace and labor market indicators will strengthen further.
    Turning to inflation, overall consumer prices, as measured by the 
price index for personal consumption expenditures, increased just 1 
percent over the 12 months ending in April, up noticeably from its pace 
through much of last year but still well short of the Committee's 2-
percent objective. Much of this shortfall continues to reflect earlier 
declines in energy prices and lower prices for imports. Core inflation, 
which excludes energy and food prices, has been running close to 1\1/2\ 
percent. As the transitory influences holding down inflation fade and 
the labor market strengthens further, the Committee expects inflation 
to rise to 2 percent over the medium term. Nonetheless, in considering 
future policy decisions, we will continue to carefully monitor actual 
and expected progress toward our inflation goal.
    Of course, considerable uncertainty about the economic outlook 
remains. The latest readings on the labor market and the weak pace of 
investment illustrate one downside risk--that domestic demand might 
falter. In addition, although I am optimistic about the longer-run 
prospects for the U.S. economy, we cannot rule out the possibility 
expressed by some prominent economists that the slow productivity 
growth seen in recent years will continue into the future. 
Vulnerabilities in the global economy also remain. Although concerns 
about slowing growth in China and falling commodity prices appear to 
have eased from earlier this year, China continues to face considerable 
challenges as it rebalances its economy toward domestic demand and 
consumption and away from export-led growth. More generally, in the 
current environment of sluggish growth, low inflation, and already very 
accommodative monetary policy in many advanced economies, investor 
perceptions of and appetite for risk can change abruptly. One 
development that could shift investor sentiment is the upcoming 
referendum in the United Kingdom. A U.K. vote to exit the European 
Union could have significant economic repercussions. For all of these 
reasons, the Committee is closely monitoring global economic and 
financial developments and their implications for domestic economic 
activity, labor markets, and inflation.
Monetary Policy
    I will turn next to monetary policy. The FOMC seeks to promote 
maximum employment and price stability, as mandated by the Congress. 
Given the economic situation I just described, monetary policy has 
remained accommodative over the first half of this year to support 
further improvement in the labor market and a return of inflation to 
our 2-percent objective. Specifically, the FOMC has maintained the 
target range for the Federal funds rate at \1/4\ to \1/2\ percent and 
has kept the Federal Reserve's holdings of longer-term securities at an 
elevated level.
    The Committee's actions reflect a careful assessment of the 
appropriate setting for monetary policy, taking into account continuing 
below-target inflation and the mixed readings on the labor market and 
economic growth seen this year. Proceeding cautiously in raising the 
Federal funds rate will allow us to keep the monetary support to 
economic growth in place while we assess whether growth is returning to 
a moderate pace, whether the labor market will strengthen further, and 
whether inflation will continue to make progress toward our 2-percent 
objective. Another factor that supports taking a cautious approach in 
raising the Federal funds rate is that the Federal funds rate is still 
near its effective lower bound. If inflation were to remain 
persistently low or the labor market were to weaken, the Committee 
would have only limited room to reduce the target range for the Federal 
funds rate. However, if the economy were to overheat and inflation 
seemed likely to move significantly or persistently above 2 percent, 
the FOMC could readily increase the target range for the Federal funds 
rate.
    The FOMC continues to anticipate that economic conditions will 
improve further and that the economy will evolve in a manner that will 
warrant only gradual increases in the Federal funds rate. In addition, 
the Committee expects that the Federal funds rate is likely to remain, 
for some time, below the levels that are expected to prevail in the 
longer run because headwinds--which include restraint on U.S. economic 
activity from economic and financial developments abroad, subdued 
household formation, and meager productivity growth--mean that the 
interest rate needed to keep the economy operating near its potential 
is low by historical standards. If these headwinds slowly fade over 
time, as the Committee expects, then gradual increases in the Federal 
funds rate are likely to be needed. In line with that view, most FOMC 
participants, based on their projections prepared for the June meeting, 
anticipate that values for the Federal funds rate of less than 1 
percent at the end of this year and less than 2 percent at the end of 
next year will be consistent with their assessment of appropriate 
monetary policy.
    Of course, the economic outlook is uncertain, so monetary policy is 
by no means on a preset course and FOMC participants' projections for 
the Federal funds rate are not a predetermined plan for future policy. 
The actual path of the Federal funds rate will depend on economic and 
financial developments and their implications for the outlook and 
associated risks. Stronger growth or a more rapid increase in inflation 
than the Committee currently anticipates would likely make it 
appropriate to raise the Federal funds rate more quickly. Conversely, 
if the economy were to disappoint, a lower path of the Federal funds 
rate would be appropriate. We are committed to our dual objectives, and 
we will adjust policy as appropriate to foster financial conditions 
consistent with their attainment over time.
    The Committee is continuing its policy of reinvesting proceeds from 
maturing Treasury securities and principal payments from agency debt 
and mortgage-backed securities. As highlighted in the statement 
released after the June FOMC meeting, we anticipate continuing this 
policy until normalization of the level of the Federal funds rate is 
well under way. Maintaining our sizable holdings of longer-term 
securities should help maintain accommodative financial conditions and 
should reduce the risk that we might have to lower the Federal funds 
rate to the effective lower bound in the event of a future large 
adverse shock.
    Thank you. I would be pleased to take your questions.
       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
                      FROM JANET L. YELLEN

Q.1. In connection with the release of the proposed rule on 
single-counterparty credit limits, the Board released a white 
paper with a quantitative credit risk model and calibrated that 
model to determine the appropriate credit limits. Will you 
commit to using similar quantitative analyses on all future 
capital and liquidity rulemakings, and will you make such 
analyses public?

A.1. The Federal Reserve Board (Board) carefully considers the 
cost and benefits of all regulations that it proposes. The 
nature and scope of the analysis depends in large part on the 
nature of the rule, the underlying statutory framework for the 
rule, and the extent to which the potential costs and benefits 
of the rule lend themselves to rigorous quantification.
    The Board typically publishes its assessment of the costs, 
benefits, and impact of a rule as part of the rule itself, but 
has occasionally issued such an assessment in a separate white 
paper. In each case, the Board chooses a publication format for 
its assessment that is best suited for the public communication 
of the particular analysis and results. The Board has chosen to 
publish white papers on occasions where the level of detail 
needed to communicate its assessment has been greater than what 
would typically appear in the preamble to a proposed or final 
rule.
    It is important to point out that the calibration of a rule 
can rarely be fully reduced to the output of a single 
mathematical formula with a set of parameters that are known 
with certainty. Therefore, the Board is careful not to ascribe 
a false level of precision to its analyses. Typically, the 
Board's goal in publishing an analysis such as the Calibrating 
the Single-Counterparty Credit Limit between Systemically 
Important Financial Institutions white paper is not to derive 
an exact calibration for a regulatory threshold, but rather to 
demonstrate that under a range of plausible assumptions and 
parameter values, the calibration of the regulatory threshold 
in question is defensible. In the case of proposed rulemakings, 
the publication of the analysis may also point out where 
further data from the industry could be helpful, and may 
encourage the industry to provide such data during the comment 
period.
    In the future, the Board will continue to perform 
appropriate quantitative analyses for proposed and final rules, 
and will strive to publish such analyses in the most suitable 
form to solicit public input on, and enhance public 
understanding of, our rules.

Q.2. Is it possible that the [Enhanced Supplementary Leverage 
Ratio] rule could increase systemic risk due to its impact on 
the ability of custody banks to accept deposits during times of 
stress? What type of analysis has the Board performed to 
examine this issue?

A.2. The Federal Reserve Board (Board) and the other Federal 
banking agencies (the Office of the Comptroller of the Currency 
and the Federal Deposit Insurance Corporation) adopted enhanced 
supplementary leverage ratio (SLR) standards for the largest, 
global systemically important bank holding companies and their 
insured depository subsidiaries, effective January 1, 2018 (5 
percent and 6 percent SLR, respectively). \1\ The enhanced SLR 
is one part of the enhanced prudential standards adopted by the 
Board that, taken together, improve the resiliency of 
individual companies and strengthen financial stability. For 
example, companies subject to the enhanced SLR standards are 
also subject to risk-based capital surcharges that are scaled 
to their systemic risk profiles, liquidity risk management and 
risk measurement requirements, supervisory- and company-run 
stress testing and capital planning requirements, and 
resolution planning standards.
---------------------------------------------------------------------------
     \1\ See 79 FR 24528 (May 1, 2014).
---------------------------------------------------------------------------
    Depending on a banking organization's business structure 
and mix of assets, banking organizations will be affected by 
the SLR differently. Custody banks, which engage in a variety 
of activities may experience increases in assets based on 
economic events, particularly during periods of financial 
market stress. The SLR does not impose any specific 
restrictions on any particular asset profile, including the 
asset profile of custody banks. Rather, the SLR requires that 
banking organizations hold a certain amount of capital to 
support their total assets. In this regard, the SLR final rule 
requires banks to use daily average balance-sheet assets to 
calculate the amount of their assets each quarter. This 
approach helps to mitigate the impact of spikes in deposits 
that banking organizations, such as custody banks, may 
experience. The agencies also have reserved authority under 
their respective capital rules to require a banking 
organization to use a different asset amount for an exposure 
included in the SLR to address extraordinary situations. \2\
---------------------------------------------------------------------------
     \2\ See 12 CFR 3.1(d)(4) (OCC); 12 CFR 217.1(d)(4) (Federal 
Reserve); 12 CFR 324.1(d)(4) (FDIC).
---------------------------------------------------------------------------
    As part of several rulemakings that are applicable to 
global systemically important banking organizations, which 
includes the largest U.S. custodial banking organizations, the 
Board estimated the impact that such rulemakings would have on 
these firms' regulatory capital ratios, including on the 
leverage ratio. Prior to finalizing the enhanced SLR standards, 
the staff of the Federal banking agencies, including Board, 
analyzed regulatory and confidential supervisory data to 
determine the quantitative impact of these rules on subject 
firms. According to their public disclosures, global 
systemically important bank holding companies and their insured 
depository institutions have made significant progress in 
complying with the enhanced SLR standards that take effect 
January 1, 2018. Board staff continuously evaluates the capital 
planning processes and capital adequacy of the largest U.S.-
based bank holding companies through its Comprehensive Capital 
Analysis and Review (CCAR), which will incorporate the SLR 
requirements under stressed conditions beginning with the 2017 
exercise.

Q.3. One of the stated goals of the Federal Reserve's 
Quantitative Easing (QE) programs was to put downward pressure 
on long-term interest rates and thereby ``reduce the cost and 
increase the availability of credit for the purchase of houses, 
which in turn should support housing markets and foster 
improved conditions in financial markets more generally.'' \3\ 
Nonetheless, studies by Soebel and Taylor (2012) \4\ and Belke, 
Gros, and Osowski (2016), \5\ among others, have found that QE 
was not effective at reducing long-term rates. To what degree 
can currently low long-term interest rates be attributed to a 
decades-long trend of decline versus the effects of QE?
---------------------------------------------------------------------------
     \3\ See: http://www.federalreserve.gov/newsevents/press/monetary/
20081125b.htm.
     \4\ Stroebel, Johannes, and John B. Taylor (2012), ``Estimated 
Impact of the Federal Reserve's Mortgage-Backed Securities Purchase 
Program'', International Journal of Central Banking 8(2):1-42.
     \5\ Belke, Ansgar, Daniel Gros, and Thomas Osowski (2016), ``Did 
Quantitative Easing Affect Interest Rates Outside the U.S.? New 
Evidence Based on Interest Rate Differentials'', CEPS Working Paper No. 
416.

A.3. The Federal Reserve and many other central banks have used 
purchases of longer-term assets as a tool to provide additional 
policy accommodation once the level of short-term interest 
rates reached the effective lower bound. The effectiveness of 
large-scale asset purchases (LSAPs) as a tool for providing 
additional policy accommodation--at both conceptual and 
empirical levels--has been a topic of active discussion and 
research among economists and others. On balance, the results 
of recent research support the view that LSAPs are an important 
and effective tool that central banks can use to put downward 
pressure on longer-term rates and make overall financial 
conditions more accommodative. These changes in financial 
conditions, in turn, help to support the level of economic 
activity and guard against disinflationary pressures.
    Regarding the conceptual framework for the effects of 
LSAPs, many authors have pointed to a range of channels through 
which large scale asset purchases may affect financial markets 
and the economy. A particularly important channel for the 
influence of LSAPs operates through basic supply and demand 
factors. By purchasing large volumes of longer-term Treasury 
and agency securities in its large scale asset purchase 
programs, the Federal Reserve reduced the quantity of those 
assets held by private investors. Given strong private sector 
demand for those longer-term Treasury and agency securities, 
the reduction in the available private supply of those assets 
tended to push up their prices and push down their yields. 
Investors holding lower-yielding Treasury and agency securities 
then tend to bid up the prices and push down the yields on 
other assets that are reasonably close substitutes such as 
corporate bonds and many other fixed-income investments. Lower 
levels of private yields generally boost the prices for a range 
of assets including equities, home values, and many other types 
of investments. These changes in financial conditions, on net, 
contribute to lower borrowing costs for households and 
businesses and generally more accommodative financial 
conditions.
    Regarding the empirical basis for the effectiveness of 
LSAPs, while the studies that you cite conclude that LSAPs have 
not been effective, many other studies to date find that these 
programs have been successful in providing additional policy 
accommodation. Indeed, some studies suggest that yields on 
longer-term Treasury securities could be 50 to 100 basis points 
lower at present than would otherwise be the case in the 
absence of the Federal Reserve's asset purchases. Moreover, 
these estimates typically focus on only the direct effects of 
LSAPs on yields operating through basic supply effects and thus 
may understate the effects of asset purchases that can stem 
from other channels. For example, large scale asset purchase 
programs may help to reinforce central bank communications 
about the future path of the Federal funds rate--the so-called 
signaling channel. In addition, large scale asset purchases may 
have significant effects in financial markets at times when 
markets are under severe stress by enhancing market liquidity 
and bolstering market confidence. By boosting asset prices and 
lowering borrowing costs, these changes in asset prices provide 
support for spending and guard against downward pressures on 
inflation.
    See Vayanos and Vila (2009) \6\ and Li and Wei (2013 ) \7\ 
for a discussion of the effects of LSAPs on interest rates in a 
modern models of the term structure of interest rates. See Li 
and Wei (2013), Hamilton and Wu (2011) \8\, and D'Amico, 
English, Lopez-Salido, and Nelson (2012) \9\ for a discussion 
of empirical estimates of the effects of LSAPs; see Chung, 
Laforte, Reifschneider, and Williams (2012) \10\ and Engen, 
Laubach, and Reifschneider (2015) \11\ for a discussion of the 
effects of LSAPs in providing macroeconomic stimulus.
---------------------------------------------------------------------------
     \6\ Vayanos, Dmitri, and Jean-Luc Vila (2009), ``A Preferred 
Habitat Model of the Term Structure of Interest Rates'', NBER Working 
Paper, 15487.
     \7\ Li, Canlin, and Min Wei (2013), ``Term Structure Modelling 
With Supply Factors and the Federal Reserve's Large Scale Asset 
Purchase Programs'', International Journal of Central Banking, 9(1), 
pp.3-39.
     \8\ Hamilton, James, and Cynthia Wu (2011), ``The Effectiveness of 
Alternative Monetary Policy Tools in a Zero Lower Bound Environment'', 
NBER Working Paper 16956.
     \9\ D'Amico, Stefania, William English, David Lopez-Salido, and 
Edward Nelson (2012), ``The Federal Reserve's Large-Scale Asset 
Purchase Programs: Rationale and Effects'', FEDS Working Paper series, 
2012-85.
     \10\ Chung, Hess, Jean-Philippe Laforte, David Reifschneider, and 
John Williams (2012), ``Have We Underestimated the Likelihood and 
Severity of Zero Lower Bound Events?'' Journal of Money, Credit and 
Banking, vol. 44(S1), 47-82.
     \11\ Engen, Eric M., Thomas Laubach, and David Reifschnieder 
(2015), ``The Macroeconomic Effects of the Federal Reserve's 
Unconventional Policies'', FEDS Working Paper, 2015-005.
---------------------------------------------------------------------------
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM JANET L. YELLEN

Q.1. In previous hearings I have encouraged our banking 
regulators to make the 10-year regulatory review meaningful and 
provide specific ways to reduce the regulatory burden on 
financial institutions while at the same time ensuring the 
safety and soundness of the financial system. Last week Senator 
Tester and I sent you a letter highlighting feedback from the 
EGRPRA outreach meetings questioning the need for four capital 
minimum requirements, a capital conservation buffer, and the 
complexity in the definition of tier 1 capital for community 
banks.
    Do you agree that our banking regulators should simplify 
and tailor the capital framework for community banks?

A.1. Federal Reserve Board (Board) staff are currently 
exploring ways to simplify and tailor the regulatory capital 
requirements for community banking organizations in a manner 
that will be consistent with the safety and soundness aims of 
prudential regulation and with statutory requirements. As part 
of these efforts, Board staff are considering simplifications 
to certain aspects of the current capital framework, including 
those suggested in your letter, and associated reporting forms 
and instructions.

Q.2. On June 9th, the European Commission announced that it 
would delay its start date from September 1 to mid-2017 on the 
implementation of the margin requirements. I assume this 
announcement surprised you and your fellow regulators since for 
the last 3 years all the international regulators have been 
working to ensure global consistency in application of margin 
requirements in various jurisdictions around the world and 
established a phased-in schedule.
    What steps can the U.S. regulators take to address this 
timing issue and avoid fragmentation and competitive 
disadvantages and achieve global consistency?

A.2. On June 9, 2016, U.S. regulators were informed by staff of 
the European Commission that the Basel Committee on Banking 
Supervision-International Organization of Securities 
Commissions' (BCBS-IOSCO) margin framework for over-the-counter 
derivatives would not be enacted in the European Union in time 
for the upcoming September 2016 implementation deadline.
    Under the BCBS-IOSCO framework, large swap market 
participants with over $3 trillion in noncleared swaps 
exposures are to begin complying with margin requirements on 
September 1, 2016, for their noncleared swaps with other large 
market participants. This agreed-upon implementation schedule 
is reflected in the final swap margin rules adopted in October 
2015 and November 2015 by the U.S. prudential regulators and 
the Commodity Futures Trading Commission (CFTC), respectively.
    Minimum margin requirements for noncleared swaps are among 
the most important postfinancial crisis reforms to reduce 
uncertainty around possible exposures arising from noncleared 
swaps by requiring firms to have financial resources 
commensurate with the risks of the swaps into which they have 
entered. Sections 731 and 764 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act) mandate 
that the U.S. regulators write rules for initial margin and 
variation margin for noncleared swaps.
    We intend to move forward with implementation of the 
prudential regulator final swap margin rule on September 1, 
2016, as agreed to under the BCBS-IOSCO framework and as 
required by the Dodd-Frank Act. We have consulted with 
colleagues at the CFTC, and we understand they also plan to 
move forward with implementation on September 1, 2016.
    We are in close communication with our European Union 
counterparts and are urging them to move forward with 
implementation as soon as possible to avoid fragmentation and 
competitive disadvantages and achieve global consistency.

Q.3. I have heard concerns from clearinghouses and end users of 
the derivatives markets related to the treatment of customer 
margin under the Basel leverage ratio. The posting of margin is 
required for end user customers who use the futures market to 
manage their business risks. As was widely espoused during 
development of the Dodd-Frank Act, margin posted to a clearing 
member bank both protects the customer from counterparty risk 
and offsets the clearing member bank's exposure to the 
clearinghouse.
    Why then does the leverage ratio not recognize this offset 
rather than penalize bank affiliated clearing members who 
accept customer margin?

A.3. The Board and the other Federal banking agencies (the 
Office of the Comptroller of the Currency and the Federal 
Deposit Insurance Corporation) adopted a supplementary leverage 
ratio (SLR) rule that applies to internationally active banking 
organizations. \1\ As designed, the SLR rule requires a banking 
organization to hold a minimum amount of capital against on-
balance sheet assets and off-balance exposures, regardless of 
the riskiness of the individual exposure. This leverage ratio 
requirement is designed to recognize that the risk a banking 
organization poses to the financial system is a factor of its 
size as well as the composition of its assets. The denominator 
of the SLR, total leverage exposure, generally includes all on-
balance sheet assets as determined by United States generally 
accepted accounting principles, as well as certain off balance 
sheet items. If a banking organization records clients' cash 
initial margin on its balance sheet, such margin is included in 
the banking organization's total leverage exposure. Whether 
cash initial margin is recorded on the balance sheet depends on 
the details of each specific margin agreement.
---------------------------------------------------------------------------
     \1\ 79 FR 57725, 57728, and 57735, September 26, 2014.
---------------------------------------------------------------------------
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                      FROM JANET L. YELLEN

Q.1. The Financial Stability Board (FSB), of which the Federal 
Reserve is a member, has designated several American companies 
as global systemically important insurers (G-SIIs). The U.S., 
however, has its own designation process for nonbank 
systemically important financial institution (SIFI) managed by 
the Financial Stability Oversight Council (FSOC). Though the 
FSB and FSOC share some members, not all American G-SIIs are 
currently SIFIs. This disparity in designations appears to 
undermine the credibility of both regulatory bodies. Should the 
U.S. representatives to the FSB support the rescission of the 
G-SII designation for American companies that are not U.S. 
designated SIFIs?

A.1. Since the financial crisis, U.S. authorities and foreign 
regulators have been working to identify institutions whose 
failure or distress may pose a threat to financial stability, 
including nonbank financial companies like insurance firms. The 
leaders of the Group of 20 Nations, including the United 
States, charged the Financial Stability Board (FSB) with 
identifying firms whose distress would threaten the global 
economy. The Financial Stability Oversight Council (FSOC) 
undertakes a process for designating nonbank firms as 
systemically important that assesses the potential harm that a 
firm's distress or failure could cause to the economy of the 
United States. The fact that both groups have examined the same 
firms, at times in close proximity, is to be expected given the 
limited number of firms that would reasonably be large and 
interconnected enough to be considered systemically important.
    However, the specific designation frameworks and standards 
at the FSB and FSOC are distinctive. The FSB's process for 
identifying global systemically important insurers (G-SIIs) is 
completely independent from the FSOCs designation process. 
Indeed, a designation by the FSB that an insurer is 
systemically important would not logically require a similar 
finding by the FSOC, even if the FSB and the FSOC agreed on the 
underlying facts. The methodology for identifying G-SIIs is 
developed by the International Association of Insurance 
Supervisors (IAIS) and has been updated this year. The FSOC's 
analysis is based on a broad range of quantitative and 
qualitative information available to the FSOC through existing 
public and regulatory sources and as submitted to the FSOC by 
the firms under consideration. The analysis is tailored, as 
appropriate, to address company-specific risk factors, 
including, but not limited to, the nature, scope, size, scale, 
concentration, interconnectedness, and mix of the activities of 
the firms. In addition, any standards adopted by the FSB, 
including any designation of an entity as a G-SII, are not 
binding on the Federal Reserve, the FSOC, or any other agency 
of the U.S. Government, or any U.S. companies. Thus, FSB 
designation of an entity as a G-SII does not result in the 
Federal Reserve becoming the entity' s prudential regulator. 
Under the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act), the FSOC is responsible for deciding 
whether a nonbank financial company should be regulated and 
supervised by the Federal Reserve Board, based on the FSOC's 
assessment of the extent to which the failure, material 
distress, or ongoing activities of that entity could pose a 
risk to the U.S. financial system.
    As a member of the FSB, the Federal Reserve, together with 
other U.S. agencies, participates in the FSB's work, including 
G-SII designations, and provides input that considers 
implications for U.S. domiciled firms that the Federal Reserve 
supervises as well as global financial stability. A decision to 
rescind the designation of any G-SII requires a careful 
evaluation of the firm and its global systemic footprint in 
accordance with the methodology developed by the IAIS. The 
Federal Reserve, the U.S. Securities and Exchange Commission, 
and the U.S. Department of Treasury are all members of the FSB 
and engage in the FSB's global financial stability work. 
Moreover, the Federal Reserve is participating as a member of 
the IAIS alongside the Federal Insurance Office (FIO), the 
National Association of Insurance Commissioners (NAIC), and 
State insurance regulators in the development of international 
insurance standards that best meet the needs of the U.S. 
insurance market and consumers. The Federal Reserve, along with 
other members of the U.S. delegation at the FIO and NAIC, 
actively engage U.S. interested parties on issues being 
considered by the IAIS.

Q.2. Will the FSB review its list of G-SIIs in 2016, and will 
that review include the possibility for the rescission of 
current G-SII designations? What analysis will the Fed review 
or develop to support its positions on 2016 G-SII designations?

A.2. As noted by the FSB in its 2015 update of the list of G-
SIIs, ``the group of G-SIIs would be updated annually based on 
new data published by the FSB each November,'' where changes to 
the list may ``reflect changes in the level and/or type of 
activity undertaken by the relevant institutions, combined with 
supervisory judgment.'' \1\ The 2016 review will cover the 
presently identified G-SIIs, which may result in changes to the 
institutions included in the list, and will use the G-SII 
assessment methodology as updated by the IAIS on June 16, 2016, 
among other things. Federal Reserve staff will review documents 
associated with the development of the methodology and will 
continue to confer with other U.S. members of the FSB and IAIS.
---------------------------------------------------------------------------
     \1\ FSB, 2015 Update of List of Global Systemically Important 
Insurers (G-SIIs) dated Nov. 3, 2015, available at http://www.fsb.org/
wp-content/uploads/FSB-communication-G-SIIs-Final-version.pdf.

Q.3. The systemically important designation, by both 
international and American regulators, has proven to have a 
profound impact on designated American companies, their 
employees, and their customers. Nevertheless, transparency in 
these designation processes remains lacking. As a participant 
at the FSB, what steps will you take to increase transparency 
---------------------------------------------------------------------------
into activities at the FSB?

A.3. The Federal Reserve strongly supports transparency in the 
methods and processes that the IAIS and FSB use to identify G-
SIIs. On November 25, 2015, the IAIS issued a public 
consultation document on the methodology used to identify and 
analyze potential G-SIIs. The Federal Reserve participated in 
the review of comments received from stakeholders in the U.S. 
and around the world. The revised methodology was released as a 
public paper on June 16, 2016, and has been implemented. The 
revisions to the G-SII identification process increased the 
involvement of the insurance companies and their relevant 
supervisors in the process through its five phases: (1) the 
collection of data, (2) quality control on the data, initial 
scoring of the company, and grouping relative to a quantitative 
threshold for the score, (3) additional information collection 
and methodical assessment of companies that cross the 
quantitative threshold, (4) information exchange between the 
company, relevant authorities, and the IAIS, and (5) 
recommendation by the IAIS to the FSB, which then deliberates 
on a confidential basis to protect the confidentiality of 
company data. The updated assessment methodology contemplates 
transparency that was not part of the prior assessment 
methodology, including transparency with companies that are 
subject to phases 1 through 4 and other transparent engagement 
with companies subject to only phases 1 and 2, as well as 
certain public disclosure of aggregate and methodology 
information after the G-SII identification process is complete. 
Moreover, the JAIS has committed to further developing public 
disclosure.
    It is important to note that neither the FSB, nor the IAIS, 
has the ability to impose requirements in any national 
jurisdiction. The FSOC makes its own independent decisions on 
designating nonbank financial companies, using the statutory 
standards set forth in the Dodd-Frank Act.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                      FROM JANET L. YELLEN

Q.1. As you know, the financial regulators, including the 
Federal Reserve Board, recently put forward a joint proposed 
rule on executive compensation pursuant to section 956 of the 
Dodd-Frank Act. The rules, which are intended to reduce 
systemic risk, would represent a sweeping change to executive 
compensation arrangements for many financial institutions, and 
would apply to a subset of insurance companies--those that own 
thrifts. There is concern that the rules are very bank-centric 
and not in any way tailored to insurance companies subject to 
the rule. As the Fed noted in its release of proposed capital 
rules for insurers, thrift insurers do not pose systemic risk, 
and generally have a very distinct business model from the 
banks that are the central target of the Fed's proposed 
executive compensation rule. The one-size-fits-all approach by 
the Fed in the executive compensation rule is counter to the 
agency's own statements on thrift insurers, and counter to the 
Fed's insurance-specific approach for capital rules for thrift 
insurers. Furthermore, the Federal Reserve's analysis 
underlying the rule, including the horizontal review, was 
focused solely on banks.
    Are you willing to conduct an analysis of insurance 
executive compensation practices and insurance risks before 
finalizing the rule for thrift insurers, and will you treat 
insurers distinctly from banks in the final rule, consistent 
with the treatment of thrift insurers for capital purposes?

A.1. Pursuant to section 956 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act), the 
Agencies \1\ joint notice of proposed rulemaking \2\ covers all 
depository institution holding companies, including all savings 
and loan holding companies. \3\ As described in the preamble, 
the proposed rule does not establish a rigid, one-size-fits-all 
approach. Rather, the Agencies have tailored the requirements 
of the proposed rule to the size and complexity of covered 
institutions. In addition, the proposed rule would allow firms 
to tailor the incentive based compensation arrangements to the 
nature of a particular institution's business and the risks, as 
long as those incentive-based compensation arrangements 
appropriately balance risk and reward. The methods by which 
such balance is achieved would be permitted to differ by 
institution and across business lines and operating units. The 
preamble invited comment on the impact of the proposed rule on 
all covered institutions. The Agencies have included numerous 
questions, touching all aspects of the proposed rule, including 
the tailoring of institutions by asset size and the definitions 
of significant risk takers. We will consider your comments and 
all comments we receive in the final rulemaking process.
---------------------------------------------------------------------------
     \1\ Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board); Federal Deposit 
Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); 
National Credit Union Administration (NCUA); and U.S. Securities and 
Exchange Commission (SEC).
     \2\ 81 FR 37670 (July 10, 2016).
     \3\ Section 956 of the Dodd-Frank Act defines ``covered financial 
institution'' to include any of the following types of institutions 
that have $1 billion or more in assets: (A) a depository institution or 
depository institution holding company, as such terms are defined in 
section 3 of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1813); 
(B) a broker-dealer registered under section 15 of the Securities 
Exchange Act of 1934 (15 U.S.C. 780); (C) a credit union, as described 
in section 19(b)(1)(A)(iv) of the Federal Reserve Act; (D) an 
investment adviser, as such term is defined in section 202(a)(11) of 
the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); (E) the 
Federal National Mortgage Association (Fannie Mae); (F) the Federal 
Home Loan Mortgage Corporation (Freddie Mac); and (G) any other 
financial institution that the appropriate Federal regulators, jointly, 
by rule, determine should be treated as a covered financial institution 
for these purposes.
---------------------------------------------------------------------------
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                      FROM JANET L. YELLEN

Q.1. What are the precise criteria and metrics that Financial 
Stability Oversight Council (FSOC) uses to determine whether to 
designate an intuition as a Systemically Important Financial 
Institution?

A.1. The Financial Stability Oversight Council (Council) may 
determine that a nonbank financial company should be supervised 
by the Federal Reserve Board (Board) and be subject to 
prudential standards ``if the Council determines that material 
financial distress at the U.S. nonbank financial company, or 
the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the U.S. 
nonbank financial company, could pose a threat to the financial 
stability of the United States.'' \1\
---------------------------------------------------------------------------
     \1\ Dodd-Frank Act section 113(a)(1), 12 U.S.C.  5323(a)(1).
---------------------------------------------------------------------------
    In considering whether a nonbank financial company should 
be supervised by the Board and subject to prudential standards, 
the Council considers the following statutory factors: \2\
---------------------------------------------------------------------------
     \2\ The Council may also consider any other risk-related factors 
that it deems appropriate. Dodd-Frank Act section 113(a)(2), 12 U.S.C. 
5323(a)(2).

---------------------------------------------------------------------------
  1.  The extent of the leverage of the company;

  2.  the extent and nature of the off-balance-sheet exposures 
        of the company;

  3.  the extent and nature of the transactions and 
        relationships of the company with other significant 
        nonbank financial companies and significant bank 
        holding companies;

  4.  the importance of the company as a source of credit for 
        households, businesses, and State and local governments 
        and as a source of liquidity for the United States 
        financial system;

  5.  the importance of the company as a source of credit for 
        low-income, minority, or underserved communities, and 
        the impact that the failure of such company would have 
        on the availability of credit in such communities;

  6.  the extent to which assets are managed rather than owned 
        by the company, and the extent to which ownership of 
        assets under management is diffuse;

  7.  the nature, scope, size, scale, concentration, 
        interconnectedness, and mix of the activities of the 
        company;

  8.  the degree to which the company is already regulated by 
        one or more primary financial regulatory agencies;

  9.  the amount and nature of the financial assets of the 
        company; and

  10.  the amount and types of the liabilities of the company, 
        including the degree of reliance on short-term funding.

    In 2012, the Council adopted a rule and interpretive 
guidance that describe the manner in which the Council applies 
the statutory standards and considerations, and the processes 
and procedures that the Council follows, in making 
determinations under section 113 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act). \3\ In 
2015, the Council revised certain of its practices related to 
evaluation of nonbank financial companies and adopted 
supplemental procedures to bolster engagement with companies 
during evaluations for potential determinations and annual 
reevaluations, as well as transparency to the public. \4\
---------------------------------------------------------------------------
     \3\ 12 CFR part 1310, app. A.
     \4\ See ``Supplemental Procedures Relating to Nonbank Financial 
Company Determinations'', Feb. 4, 2015.
---------------------------------------------------------------------------
    The Council's assessment of whether a nonbank financial 
company meets the statutory standard is based on an evaluation 
of each of the statutory factors, taking into account facts and 
circumstances relevant to the company. Quantitative metrics, 
together with qualitative analysis, informs the judgment of the 
Council when it is evaluating whether a nonbank financial 
company should be supervised by the Board and be subject to 
prudential standards. Because the impact of a firm's material 
distress or activities on financial stability is firm-specific, 
the Council conducts its analysis on a company-by-company basis 
in order to take into account the potential risks and 
mitigating factors that are unique to each company.

Q.2. Do you think there is room for improvement in the FSOC's 
annual review and derisking process, and what would you 
suggest?

A.2. At the time the Council determines that a nonbank 
financial company should be supervised by the Board and subject 
to prudential standards, the nonbank financial company is given 
a detailed basis for the determination. A company can use that 
information, as well as the factors the Council is required to 
consider under the Dodd-Frank Act, to guide its effort to 
reduce its systemic footprint. The Dodd-Frank Act requires the 
Council to reevaluate the determinations at least annually. The 
Council's reevaluation process considers whether the nonbank 
financial company continues to meet the standards under the 
Dodd-Frank Act. As explained in its final rule and interpretive 
guidance, the Council may also consider a request from a 
nonbank financial company for a reevaluation before the next 
required annual reevaluation in the case of an extraordinary 
change that materially decreases the threat a nonbank financial 
company could pose to U.S. financial stability.
    As part of the annual reevaluation process, each company is 
provided an opportunity to meet with Council staff to discuss 
the scope and process for the review and to present information 
regarding any change that may be relevant to the threat the 
company could pose to U.S. financial stability, including a 
company restructuring, regulatory developments, market changes, 
or other factors. lf a company requests that the Council 
rescind the determination, the Council has noted that it 
intends to vote on whether to rescind the determination and 
provide the company, its primary financial regulatory agency, 
and the primary financial regulatory agency of its significant 
subsidiaries with a notice explaining the primary basis for any 
decision not to rescind the designation. The notice will 
address the material factors raised by the company during the 
annual reevaluation. In addition, the FSOC will provide each 
designated nonbank financial company an opportunity for an oral 
hearing before the Council once every 5 years.
    As discussed below, using the foregoing process, the 
Council has recently voted to rescind its determination 
concerning GE Capital.

Q.3. Would you consider making a clear exit or off-ramp for 
designated firms?

A.3. Because the impact of a firm's material distress or 
activities on financial stability is firm specific, the Council 
conducts its analysis on a company-by-company basis in order to 
take into account the potential risks and mitigating factors 
that are unique to each company. At the time the Council 
determines that a nonbank financial company should be 
supervised by the Board and subject to prudential standards, 
the nonbank financial company is given a detailed basis for the 
determination. A company can use that information, as well as 
other information relating to the factors the Council is 
required to consider under the Dodd-Frank Act, to guide its 
efforts to reduce its systemic footprint.
    As you may be aware, on June 28, 2016, the Council voted to 
rescind the determination that GE Capital should be subject to 
supervision by the Board and prudential standards. The Council 
determined that GE Capital had fundamentally changed its 
business and become a much less significant participant in 
financial markets and the U.S. economy through a series of 
divestitures, a transformation of its funding model, and a 
corporate reorganization. GE Capital had decreased its total 
assets by over 50 percent, shifted away from short-term 
funding, and reduced its interconnectedness with large 
financial institutions. The Council's decision to rescind its 
final determination was based on extensive quantitative and 
qualitative analyses regarding GE Capital. Upon review of the 
statutory factors and all the facts of record, the Council 
determined that GE Capital no longer met the standards for 
determination under section 113 of the Dodd-Frank Act and 
rescinded its determination that GE Capital should be 
supervised by the Board and subject to prudential standards.

Q.4. The Federal Reserve plays a major role on the Financial 
Stability Board and chairs the supervisory and regulatory 
cooperation committee. The Federal Reserve is uniquely involved 
in setting international regulatory and supervisory policies 
that ultimately must be implemented by U.S. regulators.
    Would you support having transcripts made at international 
groups the Federal Reserve is a member of so the American 
public knows what is being advocated for and discussed?

A.4. The Federal Reserve is committed to transparency in the 
international groups of which it is a part. The Financial 
Stability Board (FSB) monitors and assesses vulnerabilities 
affecting the global financial system and recommends actions 
needed to address them. In addition, it monitors and advises on 
market and systemic developments, and their implications for 
regulatory policy. Before the FSB recommends a particular 
policy action, the FSB typically goes through a public notice-
and-comment process similar to that which would accompany 
rulemaking in the United States. In addition, it is important 
to note that none of the policy actions recommended by the FSB 
would take effect in the U.S. without being adopted by U.S. 
authorities through a notice and comment process.
    With respect to the possibility of public transcripts of 
meetings of international groups, there are competing factors 
that must be considered. The benefits of increased transparency 
must be weighed against concerns about exposing confidential or 
sensitive information about firms and markets and concerns 
about the impact on discussion within the international group, 
which could make the group less effective at achieving its 
stated goals.

Q.5. Would you be willing to brief Members of the Senate 
Banking, Housing, and Urban Affairs Committee on what is 
happening in international discussions prior to any new 
international rules being proposed?

A.5. My staff and I are always available to brief Members of 
the Committee on the status of international regulatory policy 
discussions.

Q.6. Does the Financial Stability Board influence the decisions 
that the Federal Stability Oversight Council makes regarding 
Systemically Important Financial Institution designations?

A.6. The U.S. Financial Stability Oversight Council (FSOC) 
determines whether to designate nonbank financial firms as 
systemically important based on the factors identified in the 
Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), as interpreted by the FSOC through 
rulemaking. Whether an entity has been designated by the FSB is 
not a consideration.

Q.7. Recently the living wills submitted by several banks were 
rejected by the Federal Reserve and the Federal Deposit 
Insurance Corporation (FDIC). The Federal Reserve and the FDIC 
came to different conclusions regarding two firms.
    How is the criteria used by the Federal Reserve when 
evaluating living wills different than the FDIC's criteria 
which is creating these split decisions?
    Do you believe providing more clear criteria of what you 
expect to see or fix in living wills would help prevent split 
decisions between the Federal Reserve and FDIC?

A.7. In April 2016, the Federal Reserve and the Federal Deposit 
Insurance Corporation (together, the Agencies) published a 
joint assessment framework and an explanation of the 
determinations they had made on the firms' 2015 resolution 
plans. \5\ Specifically, the Agencies evaluated the preferred 
strategy presented by each firm, the executability of the 
firm's resolution plan, and whether the firm had made 
demonstrable progress to improve its resolvability. In 
assessing each of the 2015 resolution plans, the Agencies 
focused on seven key elements: capital, liquidity, governance 
mechanisms, operational capabilities, legal entity 
rationalization, derivatives and trading activities, and 
responsiveness. The Agencies also issued joint guidance for the 
next full resolution plans that are due in July 2017. \6\
---------------------------------------------------------------------------
     \5\ See http://www.federalreserve.gov/newsevents/press/bcreg/
bcreg20160413a2.pdf.
     \6\ See http://www.federalreserve.gov/newsevents/press/bcreg/
bcreg20160413a1.pdf.
---------------------------------------------------------------------------
    Under Section 165(d) of the Dodd-Frank Act, the Agencies 
are required to make independent findings. Nonetheless, the 
Agencies closely coordinate to ensure consistency of treatment 
in the review process and reconcile factual findings and 
identified issues. The Agencies reached consensus and agreement 
repeatedly throughout the process, including on the weaknesses 
identified at particular firms and guidance being issued for 
the next resolution plans. In the instances where the agencies 
differed, they have found agreement on facts and remediations.

Q.8. Do you believe that the Federal Reserve should study the 
costs and benefits of existing and recent financial regulations 
before layering on new regulations?
    Do you have concerns about the cumulative impact that all 
these regulations are having on average Americans access to 
credit or main street businesses?

A.8. The Federal Reserve conducts a variety of economic 
analyses and assessments to support the rulemaking process, and 
regularly publishes these analyses either as part of the 
proposed or final rule itself or as a separate white paper 
accompanying the rule. In such cases, the impact analyses 
naturally focus on the impact of the specific regulation in 
question, but the Federal Reserve also gives careful 
consideration to the potential positive and negative 
interactions among rules.
    More broadly, the Federal Reserve engages in a regular 
quantitative impact assessment and monitoring program that is 
coordinated with other global regulators through the Basel 
Committee on Banking Supervision (BCBS). This program, the 
results of which are made public, is designed to assess the 
overall impact of the new postcrisis bank capital and liquidity 
requirements on the global banking system. The Federal Reserve 
has been participating in this impact assessment program since 
2012, and it continues to inform the Federal Reserve's 
understanding of the cost and benefits of bank capital and 
liquidity regulation.
    The Federal Reserve has also participated in several other 
global efforts to assess the costs and benefits of postcrisis 
financial regulatory reforms through its participation in the 
FSB and the BCBS. The BCBS published a study in 2010 that 
demonstrated the substantial net economic benefits of stronger 
bank capital and liquidity requirements. The FSB published an 
updated study in 2015 that demonstrated the substantial 
additional net economic benefits of imposing total loss 
absorbing capacity requirements on the most systemic global 
banks.
    The Federal Reserve carefully considers the overall costs 
and benefits of all of the regulations it promulgates. The 
overarching goal of the Federal Reserve's regulatory program is 
to enhance bank safety and soundness and financial stability at 
the least cost to economic growth and credit availability. The 
Federal Reserve is committed to conducting an ongoing review to 
understand how postcrisis reform is influencing financial 
stability and the economy.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                      FROM JANET L. YELLEN

Q.1. I'd like to continue our discussion of the concentration 
of job creation and economic growth in higher-skilled fields. 
You said in recent correspondence that unemployment rates for 
``lower skilled workers and workers in goods producing 
industries'' are around twice as high as those for highly 
skilled workers such as managers and professions.
    As I said in our correspondence, this disparity is 
important because our economy faces a crisis in the nature of 
work. If we think about the history of economics, we had the 
``old economy,'' which evolved from hunter gatherers, to 
settled farmers and big tool manufacturing economies. Now we're 
entering into a ``new economy,'' which exists within a global 
economy and a fast, technology-based, information age.
    Could you elaborate on the causes of this uneven growth? In 
our correspondence, you briefly mentioned the ``business cycle 
and transitory-specific factors,'' including the housing market 
collapse and the decline in oil prices.

A.1. In addition to the cyclical and transitory factors, it is 
the case that these disparities in unemployment rates and the 
shift in employment shares that I cited in my letter of May 25, 
2016, are related to longer term developments transforming our 
economy such as globalization and technical change, which I 
mentioned in my February 11, 2016, testimony and which you 
describe as being related to our economy's transition from an 
``old economy'' based on manufacturing to a new economy.

Q.2. As I understand it, we have moved from having the average 
duration at a firm for a worker being 26 years in the late 70s, 
to being around 3.8 years now, and dropping. How is this 
turnover affecting our economy? For example, how many workers 
must now change fields altogether in order to find a new job?

A.2. Based on data from U.S. Census Bureau and work by Farber, 
it appears that firm tenure has actually not changed much 
because an increase in the age of the population (older people 
have longer tenure) and greater attachment to the labor market 
among women has offset a decline in tenure among men. But 
tenure has gone down for men, especially those over 50. \1\ I 
have not seen statistics on how many workers must change fields 
in order to find a new job and whether that has changed over 
time. The U.S. labor market is very fluid, and a regular 
feature is that individuals change occupations and industries 
fairly frequently--some studies have estimated that about 20 
percent of workers change industry or occupation each year. \2\ 
However, it seems likely that many of these transitions are 
voluntary.
---------------------------------------------------------------------------
     \1\ Farber, Henry S. ``Employment Security: The Decline in Worker-
Firm Attachment in the United States'', CEPS Working Paper No. 172, 
January 2008.
     \2\ Whether this share has been rising is not clear. See, for 
example, Moscarini, Giuseppe, and Kaj Thomsson, ``Occupational and Job 
Mobility in the U.S.'', Scandinavian Journal of Economics 109(4), 807-
836, 2007; and Kambourov, Gueorgui, and Iourii Manovskii, ``Rising 
Occupational and Industry Mobility in the United States: 1968-1997'', 
International Economic Review 49(1), 41-79, 2008.

Q.3. Is this increasing job turnover behind some of the 
disparity in job creation between highly skilled workers and 
---------------------------------------------------------------------------
lower skilled workers?

A.3. It is the case that lower skilled workers experience 
higher turnover and have higher unemployment rates than highly 
skilled workers. In part this may reflect the fact that lower 
skilled workers gain fewer firm-specific skills on the job, or 
the skills they gain are easily taught, and thus it is less 
costly for firms to replace them.

Q.4. What portion of currently unemployed, underemployed, and 
discouraged workers will have to retool their skillset to enter 
a new sector of the economy to become fully employed?

A.4. It is very difficult to say what proportion of the 
unemployed are structurally unemployed, in the sense that they 
lack the skills to perform the available jobs, and I have not 
seen the specific estimates you are asking for. One could 
estimate an upper bound limit of about 8 million workers who 
are either unemployed or discouraged. \3\ If we assume that all 
discouraged workers and all long-term unemployed workers 
(unemployed more than 27 weeks) are structurally unemployed, 
then the portion of unemployed and discouraged workers who are 
structurally unemployed and therefore at risk of having to 
retool would be closer to 30 percent. However, this latter 
number is certainly an overstatement. Some discouraged workers 
stop searching due to what they perceive as overall weak demand 
or other factors, not lack of skills, and not all workers who 
are unemployed more than 27 weeks must retool to find jobs. Of 
course this number does not include workers who choose to 
reskill after only a short period of unemployment or who 
improve or change their skillset while working, because they 
see more opportunity in another field.
---------------------------------------------------------------------------
     \3\ Discouraged workers, as defined by the Bureau of Labor 
Statistics, are workers who separated from a job in the past year and 
did some job search but stopped searching because they think there is 
no work available for them.

Q.5. Will this percentage of unemployed, underemployed, and 
discouraged workers that must enter a new sector increase in 
---------------------------------------------------------------------------
the future?

A.5. It is difficult to say with certainty. The answer to this 
question depends on many factors including whether future 
technical change and globalization are more or less disruptive 
to labor markets as have been the changes we have undergone in 
recent decades.

Q.6. What is the average age of an unemployed or underemployed 
worker that decides to leave the workforce altogether instead 
of seeking to retool their skillset and enter a new sector?

A.6. Consider again the data on discouraged workers. In 2015, 
about half of discouraged workers were in the 25 to 54 age 
group, although as noted previously, not all discouraged 
workers leave the labor force because they think they do not 
have the right skills. \4\ Another way to answer this question 
is to look at data from the Bureau of Labor Statistics on 
displaced workers. \5\ Of all workers who were displaced from a 
job in 2014, those who were 65 and older were the most likely 
to leave the labor force--over half did. About one-fifth of 
workers ages 55 to 64 left the labor force as did 12 percent of 
workers ages 25 to 54. However, because most displaced workers 
fall into this latter age category, about half of the workers 
who left the labor force after a displacement were between the 
ages of 24 and 54.
---------------------------------------------------------------------------
     \4\ Bureau of Labor Statistics, Household Data, Annual Averages, 
Table 35. http://www.bls.gov/cps/cpsaat35.pdf.
     \5\ Displaced workers are defined as ``persons 20 years of age and 
older who lost or left jobs because their plant or company closed or 
moved, there was insufficient work for them to do, or their position or 
shift was abolished.'' ``Worker Displacement: 2011-2013'', News 
Release, USDL-14-1605, Bureau of Labor Statistics, Department of Labor, 
August 26, 2014.

Q.7. What risk, if any, does the increasing automation of 
---------------------------------------------------------------------------
routine work tasks pose to the economy over the long-term?

A.7. Typically automation has boosted productivity growth. 
Moreover, history suggests that while automation does reduce 
employment in the affected occupations, demand and workers 
shift to new occupations, some of which may not even exist 
today. However, such processes can take a long time to play 
out, and there is some debate today among economists and others 
who think about the role of automation in the workplace as to 
whether the technical change underway now may upend this 
historical pattern, resulting in greater displacement of 
workers from the labor market than has historically been the 
case. Beyond that, automation could affect the distribution of 
income and wealth in the economy, which could have spillovers 
to other parts of the economy.

Q.8. How long will it take for these risks to come to 
significant fruition?

A.8. It is unclear how automation will evolve and its impact on 
the economy going forward is highly unclear. As such, we cannot 
speculate as to the timing of any particular outcomes.

Q.9. What sectors of the economy will benefit the most from 
automation?

A.9. The jobs that are most susceptible to automation are those 
that involve routine tasks, either physical or cognitive. The 
sectors where automation has proceeded the furthest include 
manufacturing, and where automation substitutes for routine 
physical labor and some services, where automation can 
substitute for routine cognitive skills (such as banking--for 
example, ATMs). To the extent that automation makes it less 
expensive to perform these tasks, end users of those products 
(whether they be businesses that use them as inputs or 
consumers) will benefit.

Q.10. What sectors of the economy will benefit the least from 
automation?

A.10. With our current technology, tasks that require 
nonroutine skills, either physical or cognitive, are the least 
susceptible to automation. This includes a wide range of 
occupations that include both lower skilled work, such as 
laborers and personal care providers, to higher skilled work 
such as software developers and managers. Sectors of the 
economy and consumers that rely on these types of work are less 
likely to see cost savings. However, as technology changes, it 
may be that more and more occupations are susceptible in part 
to automation. Already we have seen that technology has 
improved productivity in these occupations even if the jobs 
themselves are not automated (for instance, improved 
information technology does not completely substitute for 
doctors, but it can provide them access to better information, 
which improves outcomes).

Q.11. I'd like to ask about the recent Brexit.
    What economic and political factors are the Federal Reserve 
consulting in evaluating the national and international 
economic risk associated with the Brexit?
    How would the economically worst-case Brexit scenario 
unfold?
    How would the economically best-case Brexit scenario 
unfold?
    Will the value of the dollar will significantly appreciate 
over the long-term, including as compared to the pound 
sterling, due to the Brexit?
    If so, what will the impact of such appreciation be on U.S. 
exports?
    What are the most economically significant legal questions 
that the U.K. and the EU must resolve, in order to fully 
evaluate the practical economic consequences of the Brexit?

A.11. The United Kingdom (U.K.) vote to leave the European 
Union (EU) has increased uncertainty about the future trading 
relationship between the U.K. and the EU. That increased 
uncertainty appears to be weighing on U.K. investment and 
hiring decisions, and early indicators following the June 23 
referendum point to a slowdown in U.K. economic growth. The 
broader effect on the global economy, however, is likely to be 
limited, as many postvote declines in global asset prices have 
since been reversed. For instance, U.S. stock price indexes are 
now higher than before the referendum.
    The economic impact of the referendum result on the U.K., 
the rest of Europe, and the global economy is likely to depend 
on how uncertainty is resolved over time, which in turn will 
depend on the progress of negotiations between U.K. and EU 
authorities over their future trading relationship. Given the 
importance of London as a global financial center, some of the 
most important legal questions involve the trading of financial 
services between the U.K. and the EU.
    Since the June 23 referendum, the dollar has appreciated 
significantly against the British pound, but the dollar is only 
modestly stronger on net against a broad basket of foreign 
currencies, and thus the impact on the demand for U.S. exports 
is likely to be modest.

Q.12. I'd like to ask about the Federal Reserve Board's joint 
proposed rule on executive compensation under section 956 of 
Dodd-Frank.
    As you know, these rules would apply to those insurance 
companies that own thrifts. Does the Federal Reserve plan on 
treating insurance companies different than banks in the 
application of this rule, as it has with capital standards?
    What has the Federal Reserve done or will do to ensure that 
these rules are not bankcentric and are instead tailored to the 
insurance industry?

A.12. Pursuant to section 956 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act), the 
Agencies' \6\ joint notice of proposed rulemaking \7\ covers 
all depository institution holding companies, including all 
savings and loan holding companies. \8\ As described in the 
preamble, the proposed rule does not establish a rigid, one-
size-fits-all approach. Rather, the Agencies have tailored the 
requirements of the proposed rule to the size and complexity of 
covered institutions. In addition, the proposed rule would 
allow firms to tailor the incentive based compensation 
arrangements to the nature of a particular institution's 
business and the risks, as long as those incentive-based 
compensation arrangements appropriately balance risk and 
reward. The methods by which such balance is achieved would be 
permitted to differ by institution and across business lines 
and operating units. The preamble invited comment on the impact 
of the proposed rule on all covered institutions. The Agencies 
have included numerous questions, touching all aspects of the 
proposed rule, including the tailoring of institutions by asset 
size and the definitions of significant risk-takers. We will 
consider your comments and all comments we receive in the final 
rulemaking process.
---------------------------------------------------------------------------
     \6\ Office of the Comptroller of the Currency (OCC); Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation (FDIC); Federal Housing Finance Agency (FHFA); National 
Credit Union Administration (NCUA); and U.S. Securities and Exchange 
Commission (SEC).
     \7\ 81 FR 37670 (July 10, 2016).
     \8\ Section 956 of the Dodd-Frank Act defines ``covered financial 
institution'' to include any of the following types of institutions 
that have $1 billion or more in assets: (A) a depository institution or 
depository institution holding company, as such terms are defined in 
section 3 of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1813); 
(B) a broker-dealer registered under section 15 of the Securities 
Exchange Act of 1934 (15 U.S.C. 780); (C) a credit union, as described 
in section 19(b)(1)(A)(iv) of the Federal Reserve Act; (D) an 
investment adviser, as such term is defined in section 202(a)(11) of 
the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); (E) the 
Federal National Mortgage Association (Fannie Mae); (F) the Federal 
Home Loan Mortgage Corporation (Freddie Mac); and (G) any other 
financial institution that the appropriate Federal regulators, jointly, 
by rule, determine should be treated as a covered financial institution 
for these purposes.

Q.13. Has or will the Federal Reserve conduct specific analysis 
of insurance executive compensation practices and risks and how 
the rule will impact insurance companies? If so, please provide 
---------------------------------------------------------------------------
a copy of the analysis.

A.13. The Federal Reserve Board has not conducted specific 
analysis of insurance executive compensation practice. However, 
the Agencies have encouraged institutions to provide feedback 
on the potential impact of the proposed rule on covered 
institutions throughout the comment period process, and through 
this notice and comment process help us analyze specifically 
insurance compensation practice. \9\ In addition, the preamble 
solicits input on the impact of the rule on all covered 
financial institutions through a number of questions posed in 
this area. For instance, question 2.8 seeks commenters' views 
on situations where it might be appropriate and why to modify 
the requirements of the proposed rule where there are multiple 
covered institution subsidiaries within a single parent 
organization based upon the relative size, complexity, risk 
profile, or business model, and use of incentive-based 
compensation of the covered institution subsidiaries within the 
consolidated organization. In a similar vein, question 2.12 
asks whether the determination of average total consolidated 
assets should be further tailored for certain types of 
investment advisers, such as charitable advisers, non-U.S.-
domiciled advisers, or insurance companies and, if so, why and 
in what manner.
---------------------------------------------------------------------------
     \9\ See http://www.federalreserve.gov/apps/foia/
ViewComments.aspx?doc_id=R-1536&
doc_ver1.

Q.14. As you know, the rule provides that a firm's 
``significant risk-takers'' are subject to the compensation 
rule. Some have expressed concern that determining whether an 
employee is a ``significant risk-taker''--specifically 
calculating whether an employee is among the top 5 percent of 
compensated employees--could be costly to implement, given 
technical difficulties in accurately discerning salary levels 
across a firm. Could there be merit in implementing a salary 
threshold test instead, which would instead define (in part) 
``significant risk-takers'' as any employee earning more than a 
---------------------------------------------------------------------------
particular salary threshold?

A.14. While drafting the proposal, the Agencies were conscious 
of potential burden on covered institutions and have attempted 
to appropriately reduce burden throughout the proposal. We are 
evaluating the merit of a proposal such as salary thresholds. 
To that end, the Agencies have posed specific questions \10\ on 
the alternative of using a dollar threshold test under which 
the designation of significant risk-takers would be based in 
part on whether a covered person receives annual base salary 
and incentive-based compensation in excess of a specific dollar 
threshold.
---------------------------------------------------------------------------
     \10\ See questions 2.30, 2.31, and 2.32. 81 FR 37670 at 37699.
---------------------------------------------------------------------------
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
                      FROM JANET L. YELLEN

Q.1. The Federal Reserve (along with the Department of the 
Treasury and the Security and Exchange Commission) participates 
at the Financial Stability Board (FSB), but there is little to 
no transparency into the Fed's actions at the FSB. What steps 
can the Fed take to increase transparency into its activities 
at the FSB?

A.1. Like the U.S. Treasury Department and the Securities and 
Exchange Commission, the Federal Reserve is a member of the 
Financial Stability Board (FSB). The FSB monitors and assesses 
vulnerabilities affecting the global financial system and 
recommends actions needed to address them. In addition, it 
monitors and advises on market and systemic developments, and 
their implications for regulatory policy. Before the FSB 
recommends a particular policy action, the FSB typically goes 
through a public notice and comment process similar to that 
which would accompany rulemaking in the United States. In 
addition, it is important to note that none of the policy 
actions recommended by the FSB would take effect in the U.S. 
without being adopted by U.S. authorities through a public 
notice and comment process. Thus, the Federal Reserve would not 
implement any FSB standards in the U.S. without going through 
the same process as we do for our other rulemakings.

Q.2. As you know, the FSB is an international body charged with 
designating global systemically important nonbank financial 
companies. To date, the three American insurers that the FSB 
designated have all been designated by the Financial Stability 
Oversight Council (FSOC).
    Given that the FSB is not subject to the requirements of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
and several members of FSOC serve on the FSB and have been 
involved in the separate designation process for global 
systemically important financial institutions (SIFI), how much 
does FSOC rely on or consider the FSB's designations in 
conducting its own assessment of SIFI prospects?

A.2. The U.S. Financial Stability Oversight Council (FSOC) 
determines whether to designate nonbank financial firms as 
systemically important based on the factors identified in the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, as 
interpreted by the FSOC through rulemaking. Whether an entity 
has been designated by the FSB is not a consideration.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
             SENATOR MENENDEZ FROM JANET L. YELLEN

Q.1. After years of rapid and consistent economic growth due to 
large-scale market reforms beginning in the late 1970s, the 
Chinese economy has slowed significantly in recent years. The 
slowdown has led the Chinese government to fall back on fiscal 
and monetary stimulus measures to buoy its faltering economy. 
And while these efforts have had varying levels of success, 
further intervention has served to raise core concerns about 
the Chinese government's ability and willingness to open up its 
economy to greater competition and its financial system to 
cross-border capital flows--elements most economists agree are 
necessary to facilitate sustained economic health in China.
    Taking into account China's surging debt levels resulting 
from an aggressive lending campaign by financial institutions 
and banks, imbalanced and slowing economic growth, and an 
unpredictable regime, can you speak to what impact China's 
continuing economic decline will have on the U.S. economy?

A.1. Chinese economic growth has been on a general downward 
trend over the past several years, but we would not 
characterize the Chinese economy as being in decline. It is 
still growing at a sizable pace and, to some degree, the 
slowing that has occurred is a result of several structural 
factors--slower labor force growth, reduced investment as the 
economy rebalances toward consumption, and a moderation in 
growth typical of maturing economies. Even with growth 
declining it should be noted that China's contribution to 
global growth remains strong. This contribution depends on both 
China's growth rate and its weight in the world economy--since 
China still grows faster than many other economies, its share 
in the global economy has been rising. Also, if China manages 
to rebalance its economy successfully, its economic growth will 
be more sustainable even if it is lower, and it will 
increasingly import more consumption-type goods, thus becoming 
more of an independent engine of global growth as it draws more 
imports from the rest of the world, including from the United 
States (U.S.).
    But you are right to note that there is a risk that Chinese 
growth could slow more sharply given the run-up in corporate 
debt, adjustments going on in industries with excess capacity, 
and some uncertainty about the economic policies being 
followed. We do not view this to be the most likely scenario, 
as the authorities still have room to provide more policy 
stimulus were the economy to slow sharply and also have ample 
resources to stave off a crisis if necessary. But unexpected 
developments can occur, and, should the Chinese economy slow 
much more abruptly and severely, there would clearly be an 
adverse impact on the global economy, including in the U.S. The 
U.S. economy would be hit from its direct trade links to China 
(China accounted for nearly 8 percent of U.S. goods exports in 
2015), its indirect links to China through trade with other 
countries affected by China's slowing, and possibly by 
reverberations to global financial markets.

Q.2. To what extent has this been a factor in monetary policy 
decisions?

A.2. Our monetary policy is motivated by the dual mandate set 
for us by the U.S. Congress, which calls for achieving stable 
prices and maximum sustainable employment. In this globally 
interconnected world, economic and financial developments in 
the U.S. have a significant impact on the rest of the world 
and, by the same token, developments in the rest of the world 
have significant effects on our own economy. We, therefore, 
closely monitor developments abroad, including importantly 
those in China, for their implications for the outlook and 
risks to the U.S. economy and adjust our policies accordingly 
in order to achieve our dual mandate.

Q.3. From 2010 to 2015, labor productivity rose just 0.6 
percent per year on average, in comparison to an average of 
nearly 2 percent growth in the previous 6 years. And perhaps 
just as concerning, productivity fell at a 0.6 percent annual 
rate in the first quarter of this year. However you slice it, 
all signs point to the fact that U.S. worker productivity is no 
longer on the same trajectory that it had been on in the past.
    In your speech on June 6, you said that productivity growth 
has been ``unusually weak in recent years.'' This has 
undoubtedly hampered wage growth and limited economic 
expansion. As many have acknowledged, business investment, 
research and development, and business creation have all been 
slow to recover from the recession.
    In your opinion, what are the major factors accounting for 
this slowdown?

A.3. Part of the weakness in labor productivity growth seen in 
recent years likely reflects the enduring effects of the Great 
Recession. For example, there is some evidence that the 
recession led to a long-lasting reduction in business 
investment, research, and development spending, and new 
business formation, and that these factors have lowered 
productivity growth. \1\ That said, productivity growth began 
to slow even before the Great Recession, and some research has 
suggested that the earlier deceleration was the result of the 
economic effects of the 1990s IT revolution having largely run 
their course by the mid-2000s.\2\ \3\
---------------------------------------------------------------------------
     \1\ Reifschneider, Dave, William Wascher, and David Wilcox (2015), 
``Aggregate Supply in the United States: Recent Developments and 
Implications for the Conduct of Monetary Policy'', IMF Economic Review, 
vol. 63, no. 1, pp.71-109.
     \2\ Fernald, John G. (2014), ``Productivity and Potential Output 
Before, During, and After the Great Recession'', NBER Macroeconomics 
Annual 29(1), pp.1-51.
     \3\ It has also been argued that mismeasurement of real output 
could have contributed to the weakness in measured productivity growth. 
However, recent research by Byrne, Fernald, and Reinsdorf (2016) casts 
doubt on the ability of this hypothesis to explain the recent slowdown. 
Byrne, David M., J. Fernald, and Marshall Reinsdorf (2016), ``Does the 
United States Have a Productivity Slowdown or a Measurement Problem?'' 
Brookings Papers on Economic Activity, Spring.

Q.4. Earlier this month, you also said that you are cautiously 
optimistic about productivity growth. What indications do you 
---------------------------------------------------------------------------
have that we will begin to see an upswing in productivity?

A.4. Up to this point, we have not yet seen clear indications 
of a pickup in productivity growth in the economic data. 
However, some of the factors that have dragged down 
productivity growth in recent years--especially factors related 
to the last recession--are likely to diminish going forward. 
For example, we expect that continued gains in economic 
activity will lead to a faster pace of investment growth and 
more spending on research and development, contributing to a 
stronger pace of productivity growth in coming years. Moreover, 
we see no obvious slowdown in the pace, or the potential 
benefits, of innovation in America--for example, stunning gains 
continue to be made in computing power, data storage, robotics, 
3D printing, and cloud computing, to name just a few areas of 
technological progress. Such innovations may bear fruit more 
readily in a stronger economy.

Q.5. There is widespread agreement that we face a considerable 
shortfall of public investment in transportation, education, 
broadband, and research and development. With interest rates 
still low, and gains to be made in the labor market, isn't now 
the time to make sustained public investments that would lead 
to job creation, productivity gains, and broad-based economic 
growth?

A.5. I agree with the view that the American people would be 
well served by investments--both public and private--that 
support longer-run growth in productivity. Well-designed 
investments in the areas you mention--transportation, 
education, broadband, and research and development--have the 
potential to lead to stronger productivity gains in the future. 
Furthermore, I would add that any such investments are more 
likely to be effective if they are accompanied by Government 
policies that encourage entrepreneurship and innovation, and 
that foster the flexible allocation of labor and capital to 
their most productive uses.

Q.6. Chair Yellen, in your recent speech on June 6, you laid 
out the grim reality that many African Americans and Latinos 
face in our job market. Although conditions have improved, we 
still see that compared to the overall unemployment rate, 
minorities still face a much tougher job market.
    In January, the unemployment rate for African American's 
with Associate's Degrees finally fell equal to the unemployment 
rate for white adults who did not complete high school.
    If we're nearing full employment, shouldn't we expect the 
unemployment rates of African Americans with Associate's 
Degrees to be much closer to the unemployment rate of whites 
with Associate's Degrees and not those who've dropped out of 
high school?

A.6. Unemployment rates have long been persistently higher for 
both African Americans and Hispanics, on average, than for 
whites. And, those differentials are not purely the result of 
whites having more education. Unemployment rates are lower for 
those with more education, but for any given level of 
educational attainment, African Americans in particular tend to 
experience higher unemployment than whites. One illustration of 
this fact, as you note, is that the unemployment rate for 
African Americans who have an associate degree is comparable to 
the unemployment rate for whites who have not completed high 
school. These patterns have been evident since at least the 
early 1990s.
    Despite overall improvements in the U.S. economy in recent 
years, there are still significant disparities in labor market 
outcomes and a continuation in the trend toward widening wealth 
and income inequality. These trends are troubling. In carrying 
out its mandate, the Federal Reserve pays close attention to 
issues of economic inclusion. We follow unemployment rates by 
race and ethnicity and examine whether particular groups are 
discouraged from participating in the labor force. More 
broadly, through our data collection efforts, such as the 
Survey of Consumer Finances and the Survey of Household 
Economics and Decision Making, the Federal Reserve has gathered 
and disseminated information that is critical for understanding 
the economic situation of disadvantaged groups.

Q.7. Former Minneapolis Fed President Narayana Kocherlakota 
said earlier this year, ``there is one key source of economic 
difference in American life that is likely underemphasized in 
FOMC deliberations: race.'' After a search of transcripts of 
FOMC meetings from 2010, when African American unemployment 
stood at 15.5 percent or higher, to the most recent meetings, 
Kocherlakota found that there was not a single reference in the 
meetings to labor market conditions among African Americans.
    It is absolutely critical that the leadership of the 
Federal Reserve reflect the composition of our diverse Nation. 
Monetary policy is inextricably linked with the experiences of 
hardworking families, white, African American, Latino, and 
Asian, across the Nation, and leadership positions at the 
Federal Reserve should be held by those that reflect the 
interests of all of our communities.
    Recently, I along with Sens. Warren and Merkley, and many 
other members of Congress sent letter urging you to improve 
representation at the regional Banks' boards of directors. The 
Federal Reserve Act requires that the presidents and Boards of 
Directors at the 12 regional Federal Reserve Banks ``represent 
the public.'' Yet 83 percent of Federal Reserve Board members 
are white, and 92 percent of regional Bank presidents are 
white, and not a single president is either African American or 
Latino. When you were here in February, you testified that the 
Board of Governors was constantly attentive to the issue of 
diversity on the boards, and that 45 percent of directors are 
either women or minorities. Do you believe that this is 
sufficient? Does the Board of Governors have a plan for 
increasing the representation of diverse candidates?

A.7. As I have stated previously, I am personally committed and 
the Federal Reserve as an organization is committed to 
achieving diversity within our workforce and within our 
leadership at all levels. We have made progress, but there is 
more work to be done. Diversity is an extremely important goal 
and I will do everything I can to further it.
    It is important to have a diversified group of policy 
makers who can bring different perspectives. The Federal 
Reserve recognizes the value of sustaining a diverse workforce 
at all levels of the organization. An interdisciplinary effort 
that I discussed at my June 21 hearing before the Senate 
Banking, Housing, and Urban Affairs Committee is focusing on 
all of our diversity initiatives, both in terms of our own 
hiring al the Federal Reserve Board (Board) and throughout the 
Federal Reserve System, as well as our efforts to promote 
diversity in economic inclusion.
    Our efforts to achieve our objectives for more diversified 
leadership include both shorter-term and longer-term goals. In 
the short-term, we are committed to broad, open, transparent, 
and proactive search processes. We are actively soliciting and 
then considering input from a wide range of sources in our 
efforts to identify qualified candidates who expand on one or 
more dimensions of the diversity of our senior leadership. We 
have, for example, benefited from input with respect to Reserve 
Bank directors from several community groups. We have also 
incorporated into our search process for our most senior 
executives outreach via social media, intended to both better 
explain the nature of the positions to a broader audience and 
invite suggestions regarding suitable candidates.
    Building on those efforts, we have also initiated a longer-
term program of seeking to identify and foster promising 
candidates from a variety of backgrounds and with a variety of 
experiences for a range of roles while at a stage in their 
careers when they may not yet fully be prepared to assume the 
responsibilities of our most senior leadership. We intend to 
leverage the full range of the System's existing outreach 
programs, including in the areas of economic education, 
community outreach, and academic partnership.

Q.8. Along with other financial agencies, the Federal Reserve 
is mandated to assess and increase its contracting and 
procurement with minority-owned and women-owned businesses. 
This practice, known as supplier diversity, is a powerful form 
of economic development. Contracts create economic ripples 
throughout communities and create quality jobs, something 
desperately needed in communities of color. In 2015, the Board 
of Governors spent $214 million on goods and services, but less 
than 9 percent of that money went to minority-owned businesses. 
That's less than half of what the average financial agency 
spends.
    What are the Fed's plan to rectify this disparity?

A.8. As reported in the Board's Report to the Congress on the 
Office of Minority and Women Inclusion for calendar-year 2015, 
the Board awarded contracts for goods and services (including 
contracts for the Board's Office of Inspector General as well 
as the Board's currency program) in the amount of $214,867,580, 
of which 11.23 percent went to minority-owned businesses. This 
represents the total obligated amount of the contracts rather 
than the ``spend'' or actual amounts paid to contractors. The 
amount of funds that the Board paid out to contractors for 
goods and services during 2015 was $154,264,257, of which 8.32 
percent went to minority-owned businesses. Both the amounts 
contracted and the amounts paid represented a significant 
increase from the prior year.
    The Board has an active supplier diversity program that 
combines outreach and training for vendors with internal 
programs aimed at educating our staff about the importance of 
diversity and how to increase diverse vendor participation in 
the Board's procurement activities.
    To enhance its supplier diversity program, Board 
Procurement staff plans to review its Acquisition Policies and 
Procedures to identify any unintentional barriers to minority 
participation and to build additional strategies to increase 
contracts awarded to minority vendors. To help these companies 
compete, the Board will consider changes in the design of its 
solicitations that may facilitate or encourage participation by 
these companies. For example, lengthening delivery schedules or 
the time period for the submission of offers or bids or 
dividing proposed acquisitions to permit offers in quantities 
Jess than the total requirement could create greater 
opportunities for minority-owned business to compete.
    In looking for opportunities to further increase its spend 
with small and disadvantaged businesses, the Procurement staff 
is reviewing its approach to setting aside an acquisition or a 
class of acquisitions for covered companies. A ``set-aside'' is 
a preference where the procurement is limited to participation 
by small and disadvantaged businesses only. An award will be 
made only if the proposal is fair and reasonable. We will 
continue to look for additional opportunities to use this 
program.
    In 2017, the Board plans to host a ``vendor outreach 
fair.'' The event is an opportunity for us to share upcoming 
procurement opportunities with a wide range of potential 
suppliers, including minority-owned firms. Because staff from 
across the organization participate, vendors have an 
opportunity to get to know the individuals overseeing 
contractual work, and staff have an opportunity to learn about 
vendors' products and capabilities. The outreach fair will also 
include training sessions designed to better position 
prospective vendors to compete for procurement opportunities. 
Our previous outreach event held in June 2015 attracted over 
400 individuals representing 300 companies.
    The Board will continue to utilize national and local 
organizations advocating for minority companies as a method to 
connect directly with qualified minority-owned companies. 
Memberships in these types of organizations will provide direct 
access to these suppliers who demonstrate the ability to 
provide high-quality goods and services. Among these 
organizations are the National Minority Supplier Development 
Council, U.S. Hispanic Chamber of Commerce, Greater Washington 
Hispanic Chamber of Commerce, and the National Black Chamber of 
Commerce. The outreach events hosted by these organizations 
provide a platform for the Board's staff to discuss the 
procurement process with potential vendors while also providing 
information on future procurement opportunities to potential 
vendors. The Board is aware of the many challenges facing 
minority firms, and continued collaboration with advocacy 
groups representing these firms will help the Board better 
understand the challenges these businesses face and help the 
firms better navigate the Board's acquisition process.
    Lastly, to increase Board staffs awareness and 
understanding of the requirements of section 342 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, the 
Board's Procurement office will continue to host a series of 
training sessions and forums to educate staff--agency wide--on 
the importance of supplier diversity. The Procurement office 
has also established a reporting tool to monitor the success of 
the supplier diversity program. The tool, which is available to 
all Board divisions, provides dashboards, product data, and 
supplier classification information, allowing divisions to 
track and monitor their diversity spend and to make 
improvements to help achieve desired results.

Q.9. Over the years, the Federal Reserve has struggled to 
increase the diversity of its senior leadership. Multiple 
entities, including the Government Accountability Office, have 
repeatedly cited leadership commitment as a driver to change. 
Agency heads and top officials at the CFPB, FDIC, SEC, and NCUA 
actively participate in Diversity Councils.
    With your unique insights as a woman, how are you 
specifically working to drive diversity at the Fed? Will the 
Federal Reserve commit to forming a Diversity Council led by a 
Governor?

A.9. I am personally committed and the Federal Reserve as an 
organization is committed to achieving diversity within our 
workforce and within our leadership. The Federal Reserve 
recognizes the value of sustaining a diverse workforce at all 
levels of the organization. When I joined the Board staff, I 
was one of relatively few women economists. Since then, there 
have been significant gains in diversity at the Board and 
throughout the Federal Reserve System (System). Currently, 
minorities represent 18 percent and women 37 percent of senior 
leadership at the Board. Throughout the System, minorities make 
up 18 percent of officer-level staff, which is an increase of 
22 percent over the past 4 years. Furthermore, among directors 
on Reserve Bank and Branch boards, minority representation 
stands at about 24 percent, and representation of women is 
approximately 30 percent. I recognize there is still work to be 
done and workforce diversity remains a strategic priority for 
the Federal Reserve.
    The selection and reappointment of Federal Reserve Bank 
presidents is a process set forth by the Federal Reserve Act, 
including the specific responsibilities of the Reserve Bank's 
board of directors and the Board of Governors. Within this 
statutory framework, the System has operationalized the process 
to be expansive and proactive in the identification of 
candidates, including persons who may not routinely have 
contact with the Federal Reserve, the economics profession, or 
the financial services sector.
    I am committed to seeing us make further progress and to 
making sure that we are taking all of the steps that we 
possibly can to promote diversity and economic inclusion. To 
further support this commitment, as mentioned previously, I 
recently launched and lead an interdisciplinary effort within 
the Federal Reserve that is focused on all of our diversity 
initiatives, both in terms of hiring at the Board and 
throughout the Federal Reserve System, and our efforts to 
promote diversity and economic inclusion. My colleagues and I 
meet quarterly with this group to discuss initiatives and 
progress.
    The Federal Reserve is committed to achieving further 
progress, and to better understanding the challenges to 
improving diversity, as well as promoting diversity of ideas 
and backgrounds. I believe that diversity makes the Federal 
Reserve more effective in carrying out its mission.

Q.10. I appreciate the Federal Reserve's willingness to engage 
and recognize that this issue doesn't exist at the agency 
alone--it's pervasive throughout the entire financial sector. 
The Federal Reserve should use its leadership to promote this 
same transparency among its regulated entities. Your Office of 
Minority and Women Inclusion made the submission of diversity 
data voluntary.
    How will you use your position to increase diversity in the 
private sector?

A.10. The Federal Reserve, in conjunction with the Federal 
Deposit Insurance Corporation and the Office of the Comptroller 
of the Currency, issued a joint press release on August 2, 
2016, providing information on how regulated institutions may 
begin to submit self-assessments of their diversity policies 
and practices to their primary Federal financial regulator per 
the approval granted by the Office of Management and Budget on 
July 13, 2016, to collect voluntary self-assessment 
information. The notice also strongly encouraged the regulated 
entities to post their diversity policies and practices, as 
well as information related to their self-assessments on their 
public Web sites.
    The Office of Minority and Women Inclusion Directors of the 
banking agencies worked to establish uniform standards 
applicable to all regulated entities and in view of the 
particular statutory language of section 342 of the Dodd-Frank 
Act, the banking agencies determined to make compliance with 
the standards voluntary.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                      FROM JANET L. YELLEN

Q.1. It's been 3 years since the Volcker Rule was finalized and 
a little over a year since it went into effect. As of last 
year, banks can no longer engage in some of the risky trading 
behavior that nearly wrecked on our economy.
    Both the public and Congress need to understand and deserve 
to know how the Volcker Rule is being enforced by regulators 
and if banks are complying with it. If we learned anything from 
2008, it's that Congress must shine a spotlight on how 
regulators are implementing the Nation's laws.
    The final version of the Volcker Rule included a standard 
for regulators to measure whether banks went beyond market-
making and into the now prohibited proprietary trading. But, 
this standard did not include specific metrics for how the 
Volcker Rule should be enforced or how to measure its success.
    There's a lack of clear guidance on what metrics regulators 
are using, the thresholds determining if proprietary trading is 
happening, or even what regulators are supposed to do if a 
financial institution is found to be in violation.
    In the absence of clearer guidance, how can the American 
people and Congress be sure that the regulators are doing their 
job and ensuring that the Volcker Rule is being properly 
implemented by regulators?
    Does the Federal Reserve have a plan to ensure that 
Congress and the public is more informed and understand how the 
Fed is working with other regulators on enforcement and 
compliance of the Volcker Rule?

A.1. I appreciate your desire to understand how the Federal 
Reserve, Office of the Comptroller of the Currency, Federal 
Deposit Insurance Corporation, U.S. Securities and Exchange 
Commission, and U.S. Commodity Futures Trading Commission (the 
Agencies) are implementing and enforcing compliance with 
section 619 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the statutory provision known as the Volcker 
rule). \1\ As you know, the Agencies have jointly issued public 
rules that detail and implement the statutory requirements 
mandated by the Volcker rule. The implementing rules also 
require each firm engaged in activities covered by the Volcker 
rule to have in place a compliance program that is consistent 
in detail and breadth with the size, type, and complexity of 
the banking entity and the activities the entity conducts that 
are subject to the Volcker rule. The implementing rules 
establish minimum requirements for those compliance programs 
with increased requirements and detail for the largest banking 
entities engaged in activities covered by the Volcker rule. 
Among these requirements is a provision requiring the chief 
executive officer of each banking entity engaged in activities 
covered by the Volcker rule, on an annual basis, to attest that 
the entity has in place processes to establish, maintain, 
enforce, review, test, and modify the compliance program in a 
manner reasonably designed to achieve compliance with the 
Volcker rule.
---------------------------------------------------------------------------
     \1\ 12 U.S.C. 1851.
---------------------------------------------------------------------------
    In addition, the Federal Reserve conducts examinations of 
the compliance programs and activities subject to the Volcker 
rule of banking entities for which the Federal Reserve is the 
appropriate supervisor under the Volcker rule. To aid designing 
and conducting these supervisory efforts, the implementing 
rules of the Agencies require banking entities with significant 
trading activities subject to the Volcker rule to report a 
variety of metrics regarding these activities. These metrics 
include risk and position limits and usage, risk factor 
sensitivities, value-at-risk (VaR) and stress VaR, 
comprehensive profit and loss attribution, inventory turnover, 
inventory aging, and customer facing trade ratio.
    As described in the preamble to the final rule, the Federal 
Reserve uses these metrics as a tool to help identify instances 
that may warrant further investigation to determine whether a 
violation has occurred or whether the activity is within a 
permitted exception, such as market making or hedging. This 
additional review typically includes review of other metrics 
and information collected from the firm and information about 
events that have occurred in the market. As indicated in the 
preamble to the final rule, the Federal Reserve and the other 
Agencies are evaluating the data collected through September 
30, 2015, and may revise the metric definitions and collection 
requirement, as appropriate, based on their review of the data.
    Implementation of the Volcker rule is coordinated among the 
Agencies as part of an ongoing effort to facilitate consistent 
application of its requirements. Staffs of the Agencies 
regularly meet to address key implementation and supervisory 
issues as they arise. The Agencies collaborate, for example, to 
jointly issue to the public responses to frequently asked 
questions and other forms of external guidance as appropriate. 
Public responses to frequently asked questions published to 
date have clarified particular provisions of the final rule, 
including the submission of metrics, expectations during the 
conformance period, the application of certain covered funds 
restrictions and clarification regarding the annual chief 
executive officer attestation. \2\ Staffs of the Agencies 
expect to continue to coordinate responding to matters that are 
of common interest in public statements, including through 
public responses to frequently asked questions and in public 
guidance.
---------------------------------------------------------------------------
     \2\ See http://www.federalreserve.gov/bankinforeg/volcker-rule/
faq.htm.

Q.2. Currently, some type of marijuana use is legal in 27 
jurisdictions in the United States, or more than half the 
country. But a conflict between State and Federal law remains.
    This conflict is making it very difficult for marijuana-
related businesses in these States to access to the banking 
system forcing them to operate in all cash. Financial 
institutions that provide banking services to legitimate 
marijuana-related businesses are currently vulnerable to 
criminal prosecution under Federal law.
    As you're probably aware, few banks and credit unions are 
willing to risk providing services to marijuana-related 
businesses, leaving many of these legal businesses cut off by 
financial institutions. That means even marijuana-related 
businesses like landlords and security companies have lost 
their accounts at banks and credit unions. These businesses can 
no longer accept credit cards, or deposit revenues, or write 
checks to meet their payroll or pay their taxes.
    In Oregon alone, it is estimated that the marijuana market 
could bring in close to half a billion dollars during its first 
14 months of legal sales. Just last month, I accompanied an 
Oregon businessman who runs a marijuana dispensary to Salem to 
pay his taxes. He had to stuff $70,000 dollars in cash into a 
backpack in order to pay the State what he owed in taxes and 
drive it over an hour away in his car.
    Businessmen and women, who are operating legally under 
Oregon State law and elsewhere, are forced to shuttle around 
gym bags full of cash and it is just an invitation to crime and 
malfeasance. The Federal Government is effectively forcing 
legal marijuana businesses to carry gym bags full of cash to 
pay their taxes, employees and bills.
    This is an invitation to robberies, money laundering, and 
organized crime. Earlier this month, a 24-year-old U.S. Marine 
who was working as a security guard at a Colorado dispensary 
was shot and killed in an attempted robbery. The death of a 
husband and father of a three children under 4 is tragic. 
Sadly, it is not surprising given the dangers faced by 
businesses operating all-cash.
    What is the Federal Reserve's position on ensuring that 
marijuana-related businesses operating legally at the State 
level have access to banking and other financial services?

A.2. The decision to open, close, or decline a particular 
account or customer relationship is made by a depository 
institution without involvement by its Federal banking 
regulator. This decision may be based on the bank's particular 
business objectives, its evaluation of the risks associated 
with particular products, services, or customers as well as the 
institution's capacity and systems to effectively manage those 
risks. Among the factors a banking firm will typically consider 
in establishing a business relationship with a customer is 
whether the activity of the customer is being conducted in 
accordance with Federal and State law. Federal law and State 
law are in conflict concerning certain types of use and 
distribution of marijuana. Federal law makes it a Federal crime 
to possess, grow, or distribute marijuana and prohibits 
knowingly engaging in monetary transactions with proceeds from 
an unlawful activity. Because of this conflict, marijuana-
related businesses in those States that have legalized certain 
types of marijuana use and distribution under State law have 
had difficulty obtaining financial services.
    The Department of Justice and the Financial Crimes 
Enforcement Network (FinCEN) have both issued guidance that 
recognize that the use and distribution of marijuana in general 
continues to be illegal under Federal law and describe the 
resources and priority those agencies expect to place on 
enforcement of those Federal laws governing marijuana. As a 
Federal agency, the Federal Reserve incorporates guidance 
issued by FinCEN concerning the Bank Secrecy Act into our 
supervisory process, including references to FinCEN's marijuana 
guidance. Nonetheless, the conflict between Federal law and 
State law creates risk and uncertainty for banking 
institutions. Only Congress can determine whether it is 
appropriate to amend Federal law in this area.

Q.3. Do you believe the Federal Reserve has the authority to 
act and give banks the certainty they need to offer services to 
legal marijuana related businesses or does Congress need to 
act?

A.3. The Federal Reserve does not have the authority to change 
laws and regulations regarding the legality of possession, 
sale, or distribution of marijuana. Only Congress has the 
authority to act to determine whether it is appropriate to 
amend Federal law governing marijuana possession, sales, and 
distribution.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
                      FROM JANET L. YELLEN

Q.1. Many American workers face significant economic 
uncertainty as they approach retirement. According to a 2015 
Government Accountability Office (GAO) report, about half of 
households age 55 and older have no retirement savings (such as 
in a 401(k) plan or an IRA). After reviewing several 
independent studies, the GAO also concluded that generally 
about one-third to two-thirds of workers are at risk of falling 
short of maintaining their preretirement standard of living in 
retirement.
    How is the Federal Reserve monitoring this issue?
    What metrics does the Federal Reserve use to quantify 
retirement needs?
    Does it view the lack of retirement savings in the U.S. as 
a systemic risk?
    Are there any steps the Fed has considered taking that 
would help address the retirement savings gap?

A.1. Through its Survey of Consumer Finances, the Federal 
Reserve Board collects some of the key data that provide the 
foundation on which researchers form judgments about retirement 
income adequacy. However, important as it is, retirement income 
adequacy does not directly implicate the stability of the 
financial system. If households enter retirement without 
adequate financial preparation, their spending power will 
suffer, with potentially serious implications for their own 
well being over their remaining lifetime, but the stability of 
the financial system is not likely to be threatened.
    As part of our effort to calibrate the stance of monetary 
policy so as to promote the dual mandate given to us by the 
Congress--price stability and maximum sustainable employment--
we attempt to gauge the strength of aggregate demand over the 
next few years. The issue of retirement income security is of 
greater relevance over a considerably longer time horizon: Are 
today's working generations adequately preparing themselves for 
retirement a decade or more into the future? That question is 
surely important, even it extends well beyond the reach of 
monetary policy.
    The one main contribution that the Federal Reserve can and 
does make to the attainment of a financially secure retirement 
is to pursue our core monetary policy and financial stability 
responsibilities. By pursuing the dual mandate, we aim to 
establish the best possible backdrop for individuals seeking to 
provide for their retirement security by having a better chance 
at steady employment, and knowing that their retirement savings 
will not be eroded by a bout of unanticipated inflation. By 
helping to build a financial system that is robust, households 
will have a greater assurance that their retirement-oriented 
savings will be there, as planned.
    Thus, the Federal Reserve agrees that retirement income 
adequacy is an important issue; we provide key information that 
can be used to form judgments about it; and we recognize that 
the actions we take under our monetary policy and financial 
stability responsibilities have indirect implications for the 
ability of households to attain financial security in 
retirement.

Q.2. In the past, you have remarked that regulators should work 
to help ease unnecessary regulatory burdens on our community 
banks. In North Dakota, and rural America more generally, 
community banks are many times the only access to capital 
families and businesses have. Yet more than ever they are faced 
with layers of regulatory and accounting rules that I worry are 
stifling new bank charters, banking innovation, and customer 
access to important credit and deposit relationships and 
products.
    Given your concerns about the regulatory pressures on 
community banks, what is the Fed actively doing to address this 
issue?

A.2. A major goal of the Federal Reserve is to eliminate 
unnecessary regulatory burden on all banks, especially 
community banks. In that vein, the Federal Reserve has been 
carefully considering the comments received as part of the 2014 
review 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, 
the Office of the Comptroller of the Currency (OCC), and the 
Federal Deposit Insurance Corporation (FDIC) (collectively, the 
Agencies), generated nearly 270 public comments submitted in 
response to four issued Federal Register notices. Additional 
comments were also received from bankers as well as consumer 
and community groups through the six outreach meetings held in 
2014 and 2015 with over 1,030 participants in Los Angeles, 
Dallas, Boston, Kansas City, Chicago, and Washington, DC.
    Although the Federal Reserve is still evaluating these 
comments, we have already taken action on certain issues. For 
example, the Federal Reserve immediately raised the threshold 
from $500 million to $1 billion for banks that qualified for an 
18 month versus a 12 month examination cycle when the Fixing 
America's Surface Transportation Act became effective on 
December 4, 2015. An interim final rule later followed in 
February 2016. \1\ In April 2016, the Federal Reserve published 
a final rule to expand the applicability of its Small Bank 
Holding Company Policy Statement by raising the asset threshold 
of the policy statement from $500 million to $1 billion in 
total consolidated assets. The policy statement was also 
expanded to apply to certain savings and loan holding 
companies. As a result of this action, 89 percent of all bank 
holding companies and 81 percent of all savings and loan 
holding companies are excluded from certain consolidated 
regulatory capital requirements. In addition to reducing 
capital burden, the action significantly reduced the reporting 
burden associated with capital requirements. In addition, 
raising the asset threshold allowed more bank holding companies 
to take advantage of expedited applications processing 
procedures. \2\
---------------------------------------------------------------------------
     \1\ 81 FR 10063 (February 29, 2016).
     \2\ See: http://wwww.gpo.gov/fdsys/pkg/FR-2015-04-15/pdf/2015-
08513.pdf.
---------------------------------------------------------------------------
    Under the auspices of the Federal Financial Institutions 
Examination Council (FFIEC), the Agencies issued a public 
notice on September 8, 2015, to establish a multistep process 
for streamlining Call Report requirements. \3\ The notice 
announced an accelerated start of a required review of the Call 
Report and included proposals to eliminate or revise several 
Call Report data items. It also included a proposed assessment 
of the feasibility of creating a streamlined community bank 
Call Report. The Agencies also reached out to the banking 
industry to better understand significant sources of Call 
Report burden. On March 4, 2016, the Agencies also issued an 
``Interagency Advisory on Use of Evaluations in Real Estate-
Related Financial Transactions.'' \4\ This advisory describes 
existing supervisory expectations, guidance, and industry 
practice for using evaluations instead of appraisals when 
estimating the market value of real property securing real 
estate-related financial transactions, and directly responds to 
issues raised by EGRPRA commenters regarding the use of 
evaluations. \5\ In June of 2016, the Agencies also issued 
supervisory views on the new accounting standard for credit 
losses issued by the Financial Accounting Standards Board 
indicating that the new standard will be scaled to the size of 
the institution, that allowances for credit losses may be 
determined using various methods and that smaller and less 
complex institutions are not expected to implement complex 
modeling techniques. \6\
---------------------------------------------------------------------------
     \3\ 80 FR 56539 (September 18, 2015).
     \4\ See: http://www.federalreserve.gov/newsevents/press/bcreg/
20160304a.htm.
     \5\ OCC Bulletin 2016-8; FRB SR letter 16-5; FDIC FIL-16-2016.
     \6\ SR Letter 16-12.
---------------------------------------------------------------------------
    Outside of the EGRPRA review, the Federal Reserve has also 
taken a number of steps to ease the burden associated with 
community bank examinations, including improving examination 
efficiency by:

    Using existing bank financial data to identify 
        high-risk activities, which would allow us 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.

    simplifying and tailoring preexamination requests 
---------------------------------------------------------------------------
        for documentation;

    helping community bankers easily identify new 
        regulations or proposals that are applicable to their 
        organizations; and

    conducting extensive training for examiners and 
        performing internal reviews and studies to ensure that 
        rules and guidance are properly interpreted and applied 
        appropriately to community banks.

    Further, in order to reduce the burden of on-site 
examinations the Federal Reserve continues to coordinate with 
other regulators on the majority of on-site examination work. 
For example, since 1981, the Federal Reserve and the State 
regulators have examined community banks that are free of 
problems on an alternative schedule, with the Federal Reserve 
examining one year and the State the next. The Federal Reserve 
and the State regulators also conduct joint examinations or 
participate in each other's examinations.

Q.3. How has the Fed coordinated with other regulatory agencies 
to appropriately tailor rules for community banks? Do you see 
areas for improvement in this regard?

A.3. The Federal Reserve collaborates with the other regulatory 
agencies in most major aspects of bank supervision such as the 
development of supervisory rules and guidance and on-site 
examinations. For example, a large portion of the guidance 
issued that impacts community banks are developed on an 
interagency basis through the FFIEC. Through the FFIEC, the 
Federal Reserve has and continues to work with other regulators 
to help ensure that our rules are properly tailored so that 
smaller institutions are not subject to the same set of 
requirements as larger institutions.
    When permitted by law, the Federal Reserve and the other 
regulatory agencies work together to tailor supervisory rules 
and guidance based on the bank's risk, size, and complexity so 
that the most stringent requirements are applicable to the 
largest, most complex banking organizations that pose the 
greatest risk to the U.S. financial system. For example, the 
enhanced prudential standards and expectations implemented 
through the Dodd-Frank Wall Street Reform and Consumer 
Protection Act set forth a number of requirements that do not 
apply to community banks such as capital plans, stress testing, 
and liquidity and risk management requirements. Many of the 
requirements of the capital rule that were issued in 2013 such 
as the countercyclical capital buffer, supplementary leverage 
ratio, and capital requirements for credit valuation also do 
not apply to community banks. Also, to assist community banks 
in understanding how new complex rules could possibly affect 
their business operations, the Federal banking agencies have 
issued supplemental guides that focus on rule requirements that 
are most applicable to community banks. For example, the 
Federal banking agencies issued supplemental guides for the 
2013 capital rule, as well as the Volcker rule issued in 
December 2013.
    As to the identification of areas for improvement, the 
Federal Reserve and the other Federal banking agencies are 
currently in the midst of completing the EGRPRA review. The 
Federal Reserve views this review as a timely opportunity to 
step back and look for ways to reduce regulatory burden, 
particularly for smaller or less complex banks that pose less 
risk to the U.S. financial system. By the end of this year, the 
Federal banking agencies will submit a report to Congress 
summarizing any significant issues raised by the commenters and 
the relative merits of such issues, as well as recommendations 
and actions taken by the Federal banking agencies to reduce 
regulatory burden.
              Additional Material Supplied for the Record
              
              
              
              
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