[Senate Hearing 114-4]
[From the U.S. Government Publishing Office]


                                                          S. Hrg. 114-4


        FEDERAL RESERVE'S FIRST MONETARY POLICY REPORT FOR 2015

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

                                HEARING

                               BEFORE THE

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

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

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

                               __________

                           FEBRUARY 24, 2015

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                


                 Available at: http: //www.fdsys.gov /
                 
                               ____________
                               
                       U.S. GOVERNMENT PUBLISHING OFFICE
93-836 PDF                 WASHINGTON : 2016                       

________________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].  






            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MICHAEL 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

                    Jelena McWilliams, Chief Counsel

                    Dana Wade, Deputy Staff Director

                Jack Dunn III, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                Graham Steele, Democratic Chief Counsel

              Phil Rudd, Democratic Legislative Assistant

                       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, FEBRUARY 24, 2015

                                                                   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.........................................................     3
    Prepared statement...........................................    36
    Responses to written questions of:
        Chairman Shelby..........................................    39
        Senator Crapo............................................    44
        Senator Vitter...........................................    45
        Senator Kirk.............................................    46
        Senator Heller...........................................    49
        Senator Menendez.........................................    50

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated February 24, 2015...    59

                                 (iii)

 
        FEDERAL RESERVE'S FIRST MONETARY POLICY REPORT FOR 2015

                              ----------                              


                       TUESDAY, FEBRUARY 24, 2015

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 a.m., in room SD-106, Dirksen 
Senate Office Building, Hon. Richard C. Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. Today the Committee will receive testimony 
from Federal Reserve Chair Yellen, as has been required by 
statute since 1978. And although the Federal Reserve Chair has 
been using this venue for decades to communicate directly to 
Congress and the American people, I and many of my colleagues 
have been calling for greater accountability and more effective 
disclosure for years.
    In response, we have heard a chorus of current and former 
Federal Reserve officials who have lined up to defend the 
structure and the degree of transparency of the Fed. Further 
accountability to Congress, some have argued, is not needed. I 
am interested to hear whether the current Chair shares this 
view and whether she believes that the Fed should be immune 
from any reforms.
    As far as monetary policy is concerned, many question 
whether the Fed can rein in inflation and avoid destabilizing 
asset prices when the time comes to unwind its massive $4.5 
trillion balance sheet. The minutes posted online do little to 
answer the questions of when and how this will be done, and the 
most recent FOMC transcript available to the public is from 
2008, over 7 years ago.
    Even though the Fed has several monetary policy tools at 
its disposal, an action of this magnitude has never before been 
taken, to my knowledge. The Federal Open Market Committee 
continues to report that it can be patient in keeping the 
Federal funds rate near zero. Too much delay could lead to a 
more painful correction down the road.
    What the FOMC is thinking and how they are analyzing this 
very difficult problem set remains a mystery, however; and yet 
some continue to dismiss calls for change or more transparency 
at the Fed.
    I would argue, however, that there is an even greater need 
for additional oversight by Congress and further reforms. Our 
central bank has expanded its influence over households, 
businesses, and markets in recent years. Not only has it pushed 
the boundaries of traditional monetary policy, but it has also 
consolidated unmatched authority as a financial regulator.
    As the Fed grows larger and more powerful, much of this 
authority has become more concentrated in Washington, DC, and 
in New York. The Fed emerged from the financial crisis as a 
super regulator, with unprecedented power over entities that it 
had not previously overseen. With such a delegation of 
authority comes a heightened responsibility, I believe, for 
Congress to know the impact these new requirements place on our 
economy as a whole.
    The role of Congress is not to serve on the Federal Open 
Market Committee, but it is to provide strong oversight and, 
when times demand it, bring about structural reforms. As part 
of this process, the Committee will be holding another hearing 
next week to discuss options for enhanced oversight and reform 
in the Fed.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. Chair Yellen, 
welcome back. It is good to see you again and good to have you 
in front of our Committee.
    Our economy continued to see strong employment gains and 
economic growth at the end of 2014, but we know the 
improvements in the economy are not being felt by enough 
Americans. The gains we have made over the past 5 years, 11.5 
million net private sector job growth in the last 5 years, come 
on the heels of 9 years when we lost 4.5 million jobs. Some 
pundits and politicians have been predicting runaway inflation 
for years. They clearly do not have a very good grasp of what 
is happening for most Americans. Low wage growth has continued 
for the majority of Americans. The declining participation in 
the workforce is troubling. In fact, as you pointed out, Madam 
Chair, the income inequality gap has actually widened during 
this recovery.
    It is good, Mr. Chairman, that we began our session today 
by commemorating the Selma Foot Soldiers. We must also note, 
though, that the wealth gap between white and black American 
families has widened. Low- and middle-income Americans have not 
benefited much from low interest rates. Workers with stagnant 
wages have trouble saving for a downpayment or their retirement 
or their children's education. These are issues that Congress 
should be addressing, but the everyday struggle of Americans 
needs to be part of the Fed's consideration in making monetary 
policy, too.
    I appreciate, Chair Yellen, your announcement last month of 
plans to create the Community Advisory Council. It will have 15 
members, meet twice a year with the Board in Washington to 
offer perspectives on their economic circumstances and the 
needs of low- and moderate-income communities and consumers. I 
hope the entire Federal Reserve System--the 12 regional banks 
as well as the Board in Washington--will engage community 
leaders way more than they have in the past and will do what 
you have done by setting the tone in Washington and incorporate 
the diverse perspectives into their decision making.
    We too often hear concerns that the Fed is a system that is 
run by and to benefit the very largest banks. Last November, I 
held a Subcommittee hearing on one facet of this: regulatory 
capture. The hearing explores concerns about the culture of the 
banks and the regulators. A regulatory culture that is fair and 
tough, that challenges group think, and that produces rules and 
regulations designed to strengthen the financial stability of 
our economy will protect Americans' financial interests.
    I applaud the Fed for finalizing strong rules for the 
Nation's largest and riskiest financial institutions. I 
encourage you to move forward to finalize outstanding proposals 
so that everyone will benefit from the certainty of having 
appropriate rules in place.
    It has been more than a year since the Fed released an 
Advanced Notice of Proposed Rulemaking on commodities trading 
and physical asset ownership. For example, in today's papers, 
there are reports of a DOJ investigation of 10 banks for 
activities in the precious metals markets, and we have yet to 
see a proposed rule. The job does not end there. You must then 
send the message to your examiners that these rules must be 
implemented and enforced.
    Finally, while some of my colleagues are eager to help you 
and the Fed decide monetary policy, I think that is the wrong 
role for Congress. I am all for transparency. I think more is 
better as a general rule. But every one of us knows there are 
times when you can do better by having a candid discussion in 
private.
    One real goal must be to have a Federal Reserve that works 
for all Americans, to have a strong economy that benefits low-
wage workers and the middle class as much as the wealthiest, 
and to have a stable and diverse financial system that provides 
opportunities for all Americans, not one that threatens their 
savings. That is why your dual mandate to promote price 
stability and employment, and I so appreciate, perhaps more 
than you, perhaps more than any of your predecessors, or at 
least as much understands the dual mandate, including 
employment, how important that is. It remains important today.
    Thank you.
    Chairman Shelby. Madam Chair, welcome to the Committee. We 
look forward to your testimony and our question-and-answer 
period. Your written testimony will be made part of the record 
in its entirety. You may proceed briefly to outline what you 
want to tell us.

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

    Ms. Yellen. Chairman Shelby, Ranking Member Brown, and 
Members of the Committee, I am pleased to present the Federal 
Reserve's semiannual Monetary Policy Report to the Congress. In 
my remarks today, I will discuss the current economic situation 
and outlook before turning to monetary policy.
    Since my appearance before the Committee last July, the 
employment situation in the United States has been improving 
along many dimensions. The unemployment rate now stands at 5.7 
percent, down from just over 6 percent last summer and from 10 
percent at its peak in late 2009. The average pace of monthly 
job gains picked up from about 240,000 per month during the 
first half of last year to 280,000 per month during the second 
half, and employment rose 260,000 in January. In addition, 
long-term unemployment has declined substantially, fewer 
workers are reporting that they can find only part-time work 
when they would prefer full-time employment, and the pace of 
quits--often regarded as a barometer of worker confidence in 
labor market opportunities--has recovered nearly to its 
prerecession level. However, the labor force participation rate 
is lower than most estimates of its trend, and wage growth 
remains sluggish, suggesting that some cyclical weakness 
persists. In short, considerable progress has been achieved in 
the recovery of the labor market, though room for further 
improvement remains.
    At the same time that the labor market situation has 
improved, domestic spending and production have been increasing 
at a solid rate. Real gross domestic product is now estimated 
to have increased at a 3\3/4\ percent annual rate during the 
second half of last year. While GDP growth is not anticipated 
to be sustained at that pace, it is expected to be strong 
enough to result in a further gradual decline in the 
unemployment rate. Consumer spending has been lifted by the 
improvement in the labor market as well as by the increase in 
household purchasing power resulting from the sharp drop in oil 
prices. However, housing construction continues to lag; 
activity remains well below levels we judge could be supported 
in the longer run by population growth and the likely rate of 
household formation.
    Despite the overall improvement in the U.S. economy and the 
U.S. economic outlook, longer-term interest rates in the United 
States and other advanced economies have moved down 
significantly since the middle of last year; the declines have 
reflected, at least in part, disappointing foreign growth and 
changes in monetary policy abroad. Another notable development 
has been the plunge in oil prices. The bulk of this decline 
appears to reflect increased global supply rather than weaker 
global demand. While the drop in oil prices will have negative 
effects on energy producers and will probably result in job 
losses in this sector, causing hardship for affected workers 
and their families, it will likely be a significant overall 
plus, on net, for our economy. Primarily, that boost will arise 
from U.S. households having the wherewithal to increase their 
spending on other goods and services as they spend less on 
gasoline.
    Foreign economic developments, however, could pose risks to 
the U.S. economic outlook. Although the pace of growth abroad 
appears to have stepped up slightly in the second half of last 
year, foreign economies are confronting a number of challenges 
that could restrain economic activity. In China, economic 
growth could slow more than anticipated as policymakers address 
financial vulnerabilities and manage the desired transition to 
less reliance on exports and investment as sources of growth. 
In the euro area, recovery remains slow, and inflation has 
fallen to very low levels; although highly accommodative 
monetary policy should help boost economic growth and inflation 
there, downside risks to economic activity in the region 
remain.
    The uncertainty surrounding the foreign outlook, however, 
does not exclusively reflect downside risks. We could see 
economic activity respond to the policy stimulus now being 
provided by foreign central banks more strongly than we 
currently anticipate, and the recent decline in world oil 
prices could boost overall global economic growth more than we 
expect.
    U.S. inflation continues to run below the Committee's 2-
percent objective. In large part, the recent softness in the 
all-items measure of inflation for personal consumption 
expenditures reflects the drop in oil prices. Indeed, the PCE 
price index edged down during the fourth quarter of last year 
and looks to be on track to register a more significant decline 
this quarter because of falling consumer energy prices. But 
core PCE inflation has also slowed since last summer, in part 
reflecting declines in the prices of many imported items and 
perhaps also some passthrough of lower energy costs into core 
consumer prices.
    Despite the very low recent readings on actual inflation, 
inflation expectations as measured in a range of surveys of 
households and professional forecasters have thus far remained 
stable. However, inflation compensation, as calculated from the 
yields of real and nominal Treasury securities, has declined. 
As best we can tell, the fall in inflation compensation mainly 
reflects factors other than a reduction in longer-term 
inflation expectations. The Committee expects inflation to 
decline further in the near term before rising gradually toward 
2 percent over the medium term as the labor market improves 
further and the transitory effects of lower energy prices and 
other factors dissipate, but we will continue to monitor 
inflation developments closely.
    I will now turn to monetary policy. The Federal Open Market 
Committee is committed to policies that promote maximum 
employment and price stability, consistent with our mandate 
from the Congress. As my description of economic developments 
indicated, our economy has made important progress toward the 
objective of maximum employment, reflecting in part support 
from the highly accommodative stance of monetary policy in 
recent years. In light of the cumulative progress toward 
maximum employment and the substantial improvement in the 
outlook for labor market conditions--the stated objective of 
the Committee's recent asset purchase program--the FOMC 
concluded that program at the end of October.
    Even so, the Committee judges that a high degree of policy 
accommodation remains appropriate to foster further improvement 
in labor market conditions and to promote a return of inflation 
toward 2 percent over the medium term. Accordingly, the FOMC 
has continued to maintain the target range for the Federal 
funds rate at 0 to \1/4\ percent and to keep the Federal 
Reserve's holdings of longer-term securities at their current 
elevated level to help maintain accommodative financial 
conditions. The FOMC is also providing forward guidance that 
offers information about our policy outlook and expectations 
for the future path of the Federal funds rate. In that regard, 
the Committee judged, in December and January, that it can be 
patient in beginning to raise the Federal funds rate. This 
judgment reflects the fact that inflation continues to run well 
below the Committee's 2-percent objective and that room for 
sustainable improvements in labor market conditions still 
remains.
    The FOMC's assessment that it can be patient in beginning 
to normalize policy means that the Committee considers it 
unlikely that economic conditions will warrant an increase in 
the target range for the Federal funds rate for at least the 
next couple of FOMC meetings. If economic conditions continue 
to improve, as the Committee anticipates, the Committee will at 
some point begin considering an increase in the target range 
for the Federal funds rate on a meeting-by-meeting basis. 
Before then, the Committee will change its forward guidance. 
However, it is important to emphasize that a modification of 
the forward guidance should not be read as indicating that the 
Committee will necessarily increase the target range in a 
couple of meetings. Instead the modification should be 
understood as reflecting the Committee's judgment that 
conditions have improved to the point where it will soon be the 
case that a change in the target range could be warranted at 
any meeting. Provided that labor market conditions continue to 
improve and further improvement is expected, the Committee 
anticipates that it will be appropriate to raise the target 
range for the Federal funds rate when, on the basis of incoming 
data, the Committee is reasonably confident that inflation will 
move back over the medium term toward our 2-percent objective.
    It continues to be the FOMC's assessment that even after 
employment and inflation are near levels consistent with our 
dual mandate, economic conditions may, for some time, warrant 
keeping the Federal funds rate below levels the Committee views 
as normal in the longer run. It is possible, for example, that 
it may be necessary for the Federal funds rate to run 
temporarily below its normal longer-run level because the 
residual effects of the financial crisis may continue to weigh 
on economic activity. As such factors continue to dissipate, we 
would expect the Federal funds rate to move toward its longer-
run normal level. In response to unforeseen developments, the 
Committee will adjust the target range for the Federal funds 
rate to best promote the achievement of maximum employment and 
2-percent inflation.
    Let me now turn to the mechanics of how we intend to 
normalize the stance and conduct of monetary policy when a 
decision is eventually made to raise the target range for the 
Federal funds rate. Last September, the FOMC issued its 
statement on Policy Normalization Principles and Plans. This 
statement provides information about the Committee's likely 
approach to raising short-term interest rates and reducing the 
Federal Reserve's securities holdings. As is always the case in 
setting policy, the Committee will determine the timing and 
pace of policy normalization so as to promote its statutory 
mandate to foster maximum employment and price stability.
    The FOMC intends to adjust the stance of monetary policy 
during normalization primarily by changing its target range for 
the Federal funds rate and not by actively managing the Federal 
Reserve's balance sheet. The Committee is confident that it has 
the tools it needs to raise short-term interest rates when it 
becomes appropriate to do so and to maintain reasonable control 
of the level of short-term interest rates as policy continues 
to firm thereafter, even though the level of reserves held by 
depository institutions is likely to diminish only gradually. 
The primary means of raising the Federal funds rate will be to 
increase the rate of interest paid on excess reserves. The 
Committee also will use an overnight reverse repurchase 
agreement facility and other supplementary tools as needed to 
help control the Federal funds rate. As economic and financial 
conditions evolve, the Committee will phaseout these 
supplementary tools when they are no longer needed.
    The Committee intends to reduce its securities holdings in 
a gradual and predictable manner primarily by ceasing to 
reinvest repayments of principal from securities held by the 
Federal Reserve. It is the Committee's intention to hold, in 
the longer run, no more securities than necessary for the 
efficient and effective implementation of monetary policy and 
that these securities be primarily Treasury securities.
    In sum, since the July 2014 Monetary Policy Report, there 
has been important progress toward the FOMC's objective of 
maximum employment. However, despite this improvement, too many 
Americans remain unemployed or underemployed, wage growth is 
still sluggish, and inflation remains well below our longer-run 
objective. As always, the Federal Reserve remains committed to 
employing its tools to best promote the attainment of its 
objectives of maximum employment and price stability.
    Thank you. I would be pleased to take your questions.
    Chairman Shelby. Madam Chair, I first would want to get 
into measures of inflation. You touched on that a little. The 
Federal Reserve I understand currently uses an inflation 
measure of core personal consumption expenditures, or PCE, 
which excludes volatile food and energy prices. Several 
alternative measures of inflation exist, including one called 
the ``Trimmed Mean PCE,'' which strips out a larger basket of 
volatile items from the calculation. I know you know all this.
    Do you think that the Federal Open Market Committee should 
incorporate alternative measures of inflation such as Trimmed 
Mean PCE? And could you explain to us the risk of not properly 
gauging inflation expectations?
    Ms. Yellen. Thank you. So let me first say that the Federal 
Open Market Committee's 2-percent objective refers to the 
increase, the annual increase in the total PCE price index that 
includes food and energy. Food and energy are very important 
components of every household's spending basket, and I do not 
think it would make a lot of sense or be acceptable to 
Americans to focus on a measure that strips out these important 
components of the consumer basket. So we focus on total 
consumer prices, including food and energy.
    But at the same time, we recognize that food and energy are 
particularly volatile prices, and in order to get a better 
forecast sometimes of the underlying trend in inflation, we do 
look at so-called core inflation that strips out these 
measures.
    And in trying to understand trends in inflation and the 
factors impacting inflation, we look at a broad variety of 
measures of inflation. Although our formal index is the so-
called PCE price index, we look at the CPI, which is well known 
to most Americans, and also to these Trimmed Mean and other 
measures that you cited.
    Chairman Shelby. You have opined on the use of monetary 
policy rules such as the Taylor rule, which would provide the 
Fed with a systematic way to conduct policy in response to 
changes in economic conditions. I believe that would also give 
the public a greater understanding of and perhaps confidence in 
the Fed's strategy.
    You have stated, and I will quote: ``Rules of the general 
sort proposed by Taylor capture well our statutory mandate to 
promote maximum employment and price stability.''
    You have expressed concerns, however, over the 
effectiveness of such rules in times of economic stress. Would 
you support the use of a monetary policy rule of the Fed's 
choosing if the Fed had discretion to modify it in times of 
economic disruption?
    Ms. Yellen. I am not a proponent of chaining the Federal 
Open Market Committee in its decision making to any rule 
whatsoever. But monetary policy needs to take account of a wide 
range of factors, some of which are unusual and require special 
attention, and that is true even outside times of financial 
crisis.
    In his original paper on this topic, John Taylor himself 
pointed to conditions such as the 1987 stock market crash that 
would have required a different response. I would say that it 
is useful for us to consult the recommendations of rules of the 
Taylor type and others, and we do so routinely, and they are an 
important input into what ultimately is a decision that 
requires sound judgment.
    Chairman Shelby. Thank you.
    In a recent speech, Richard Fisher, the President of the 
Dallas Federal Reserve Bank, has suggested a reorganization of 
the Federal Open Market Committee, specifically advocates for a 
rotating Vice Chairmanship of the Federal Open Market 
Committee, as well as a stronger role for regional banks on the 
Committee.
    Do you support any of Mr. Fisher's proposals? And why, or 
why not?
    Ms. Yellen. Well, Senator Shelby, I think the current 
structure of the Federal Open Market Committee and the voting 
structure was decided on by Congress a long time ago, after 
weighing a whole variety of considerations about the need for 
control in Washington and the importance of regional 
representation.
    It is, of course, something that Congress could, if it 
wished, revisit. But I would say that it has worked very well. 
We have a broad range of opinion that is represented at the 
table, and active debates. The decision to appoint the 
President of the New York Fed as Vice Chair reflected the 
reality that the New York Fed conducts open market operations 
on behalf of the system and has special and deep expertise 
pertaining to financial markets. And I think that has worked 
well and continues to be true, that there is special expertise 
in New York.
    Chairman Shelby. A recent article written by two economists 
for the think tank e21 proposes reducing the number of Federal 
Reserve districts from 12 to 5 and making the Presidents of all 
regional banks voting members of the Federal Open Market 
Committee. The article states that this would preserve regional 
diversity while giving more authority over monetary policy to 
Reserve Banks that currently rotate as voting members. It also 
posits that it could allow for greater safety and soundness and 
remove the uncertainty created by 19 independent FOMC members.
    Do you oppose consolidation of Federal Reserve districts?
    Ms. Yellen. Senator, again, this is a matter for Congress 
to decide. The structure of the Federal Reserve reflects 
choices that were hammered out 100 years ago, and I think the 
current structure works well, so I would not recommend changes. 
But, again, you know, the Federal Reserve Banks are----
    Chairman Shelby. It is up to Congress, is it not?
    Ms. Yellen. ----play important roles in their communities, 
but, again, this is up to Congress to consider.
    Chairman Shelby. My last question to you in this round: 
asset threshold for banks. A recent report by the Office of 
Financial Research shows a large disparity in systemic risk 
between the largest banks and those that are smaller and closer 
to $50 billion in assets. All banks above $50 billion are 
subject to enhanced prudential regulation regardless of where 
they fall in this systemic important scale.
    Do you think the findings of the OFR, the Office of 
Financial Research, should be incorporated or considered in the 
determination of whether a bank is systemically significant?
    Ms. Yellen. Well, Senator, we absolutely recognize in the 
Federal Reserve that the largest banks and those closer to $50 
billion are quite different in terms of their systemic 
footprint, and we have many different measures that help us 
decide on the systemic importance of an institution, and there 
obviously are large differences there.
    In Dodd-Frank, Congress gave us the flexibility to tailor 
our supervision and regulation to make it appropriate to the 
systemic importance and complexity and size of a bank, and to 
the maximum extent possible within that legislation, we have 
tried to use the powers that we have to appropriately tailor 
our supervision and regulation.
    So, for example, we recently proposed extra capital charges 
on the largest and most systemic institutions and higher 
leverage requirements, and those requirements would not apply 
to the smaller institutions. But there are many other examples 
as well.
    Chairman Shelby. Do you know of any community or regional 
bank that has caused systemic risk to our economy?
    Ms. Yellen. There may have been episodes in which there 
were bank failures of smaller banks that did threaten systemic 
consequences, but certainly it is the largest----
    Chairman Shelby. I believe you chose your words carefully. 
You said ``may have been.'' Do you know of any yourself and 
could you furnish any for the record where smaller banks, any 
of them, or regional banks have caused systemic risk to our 
economy or to our banking system? Would you furnish that for 
the record if you do?
    Ms. Yellen. So I will certainly look into it and furnish 
it. I am trying to agree with you that it is----
    Chairman Shelby. That they do not----
    Ms. Yellen. By and large, that has not been the case.
    Chairman Shelby. Thank you.
    Ms. Yellen. Yes, I agree with that.
    Chairman Shelby. Thank you, Madam Chair.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    I have one comment about your answer to the last question 
of the Chairman's about capital requirements that you have 
applied. I think there is no question, as reports have recently 
made pretty clear, that it has made for stronger banks and a 
more stable financial system, so thank you. And Senator Vitter 
on this Committee I know has had special interest, as has 
Senator Shelby, in strong capital standards. So thank you for 
that.
    Madam Chair, I mentioned in my opening statement that last 
October you gave a speech on income and wealth inequality. All 
of us agree the best way to address that is a more robust job-
creating economy. What steps are you taking to incorporate your 
concerns about that into the monetary policy decisions?
    Ms. Yellen. Well, Senator Brown, as you know, we are very 
committed to both parts of the dual mandate--price stability 
and maximum employment. We have been running a very 
accommodative monetary policy in order to promote stronger 
conditions in the labor market. We have been monitoring a wide 
variety of indicators of labor market performance, not focusing 
on any single summary measure, and in particular, for example, 
the large magnitude of part-time involuntary employment workers 
who want full-time jobs, the decline in labor force 
participation, part of which we understand to be or believe to 
be cyclical, these are things that we are monitoring very 
closely.
    We are also looking at wage growth, and the fact that wage 
growth has really not picked up very much during this recovery 
I take to be another signal that, although the labor market is 
improving, we have further to go, and we want to promote full 
recovery.
    Senator Brown. Thank you. For much of our Nation's economic 
history, productivity has tracked wages, but since the 1970s, 
as you know, this has changed; and productivity has continued, 
particularly in the last 15 years or so, to grow while wages 
have not. How do you explain this change? And what are the 
dangers of wages being uncoupled from productivity?
    Ms. Yellen. Well, we have seen a significant increase in 
the share of the pie or GDP that accrues to capital as opposed 
to labor, and that occurs when the growth in inflation-adjusted 
or real wages fails to mirror the growth in productivity. So 
that has been occurring now for some time, and we have seen 
that occur during the recovery.
    Real wages tend to rise more rapidly in a strong labor 
market, so I interpret part of that phenomenon as a signal, a 
sign that the labor market is not yet fully recovered. But I 
should also say that there are longer-term structural factors 
that may also be affecting the shares of the pie that accrue to 
labor and capital.
    I think one of these factors, recent research points to the 
fact that many labor-intensive activities in the global 
production chain are being increasingly outsourced, and that 
phenomenon I think has tended to push down the share of income 
going to labor as opposed to capital over the last decade or 
so. There is research on this topic, so I think it is a 
combination of structural factors, but also remaining cyclical 
weakness----
    Senator Brown. And that includes the organization of labor, 
of workers being organized?
    Ms. Yellen. That certainly could include that as a factor.
    Senator Brown. I appreciate the steps that you and your 
predecessor have made to bring greater transparency to the Fed. 
As you know, there is a proposal in the House and Senate to go 
one step further and require the GAO to audit the Fed's 
monetary policy deliberations. What are your thoughts on that?
    Ms. Yellen. I want to be completely clear that I strongly 
oppose ``audit the Fed.'' I believe the transparency and 
providing Congress and the public with adequate information to 
be able to understand our operations, our financial condition, 
the conduct of our meeting the responsibilities that Congress 
has assigned to us is essential. But ``audit the Fed'' is a 
bill that would politicize monetary policy, would bring short-
term political pressures to bear on the Fed.
    In terms of openness about our financial accounts, we are 
extensively audited. I brought with me this volume which 
contains an independent outside auditor's--Deloitte & 
Touche's--audits of our financial statements. So in the normal 
sense in which people understand what auditing is about, the 
Federal Reserve is extensively audited. What I think is really 
critically important is that the Fed be able to deliberate on 
the best way to meet the responsibilities that Congress has 
assigned to us, to achieve maximum employment and price 
stability, and that we be able to do so free of short-term 
political pressures.
    I would remind you that in the early 1970s, when inflation 
built and became an endemic problem in the U.S. economy, 
history suggests that there was political pressure on the Fed 
that interfered with its decision making. It was in the last 
1970s that Congress put in place the current feature of law 
that exempts monetary policy deliberations and decisions, the 
one area that is exempted from GAO audits. And I really wonder 
whether or not the Volcker Fed would have had the courage to 
take the hard decisions that were necessary to bring down 
inflation and get that finally under control, something I think 
has been very important to the performance of the U.S. economy, 
I wonder if that would have happened with GAO reviews in real 
time of monetary policy decision making.
    So central bank independence in conducting monetary policy 
is considered a best practice for central banks around the 
world. We are one of many, many central banks that are 
independent, and academic studies I think establish beyond the 
shadow of a doubt that independent central banks perform 
better, the economies are more stable and have better 
performance in terms of inflation and macroeconomic stability.
    Senator Brown. A last brief question, Madam Chair. You 
mentioned your Community Advisory Council. What are you doing 
to encourage regional bank presidents to follow suit?
    Ms. Yellen. Well, regional banks, most of the regional 
banks are actively involved with their communities. They have 
community development programs and are really trying to address 
the special needs of their communities. But in Washington, we 
also encourage and have oversight of those activities and 
strongly encourage similar practices.
    Senator Brown. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman, and, Chair Yellen, 
I would like to use my time going over the EGRPRA process that 
we are in right now with you.
    The first Economic Growth and Regulatory Paperwork Act, or 
EGRPRA, review submitted to Congress in 2007 states, ``Besides 
reviewing all of our existing regulations in an effort to 
eliminate unnecessary burdens, the Federal banking agencies 
work together to minimize burdens resulting from new 
regulations and current policy statements as they were being 
adopted.''
    I think you know where I am headed here.
    The report submitted to Congress specifically discussed 
consumer financial protection issues, anti-money-laundering 
issues, and included recently adopted rules. However, included 
in the Federal Register put forward for this current 10-year 
EGRPRA process that we are now in, where we are supposed to be 
having our financial regulators by law look for outdated, 
unnecessary, and unduly burdensome regulatory requirements in 
the system, there was, I think, a remarkable couple of 
footnotes included which basically said that the agencies 
engaged this time around are going to back off. They are 
basically not going to review new regulations that have gone 
into effect, not going to review regulations that are currently 
being considered and will go into effect during the EGRPRA 
process, and have clarified that the CFPB is not even going to 
be a part of the process. The entire Consumer Financial 
Protection Bureau will not be a part of the process.
    My question to you is going to be: Would you not agree that 
we should have a thorough EGRPRA process that reviews all rules 
and that the Consumer Financial Protection Bureau or the 
consumer regulatory system should be a part of the EGRPRA 
process? But before I put that question to you, I would just 
like to say we had a hearing last week which was dealing with 
community banks and credit unions and the regulatory burdens 
that they face. And I asked the witnesses, and every one of 
them said that in the set of rules and regulations that they 
feel are creating unnecessary and unduly burdensome pressures 
are rules and regulations coming from the consumer financial 
arena, coming from the anti-money-laundering arena, and coming 
from the Dodd-Frank legislation that is recently enacted which 
would be exempted from the current agency's review.
    A couple of examples they gave were the qualified mortgage 
rule that needs to be reviewed, the Volcker rule that needs to 
be reviewed, and yet all of this is apparently outside the 
scope of the entire EGRPRA process that the agencies are now 
undertaking.
    Could you respond, please?
    Ms. Yellen. So in the rules that have gone into effect or 
are in the process under consideration and will go into effect 
related to Dodd-Frank, we had Federal Register notices, took 
public comment, an important part of designing those rules was 
considering the costs, the burdens, and what was the most 
effective and appropriate way of designing regulations to meet 
Dodd-Frank objectives.
    So in a sense, what EGRPRA asks of the agencies is 
something that we have gone through very recently in the 
process of designing regulations in some cases that have not 
yet even gone into effect.
    Senator Crapo. Would your answer be the same for the 
Consumer Financial Protection Bureau, because it is new that we 
do not need to review its rules and regulations?
    Ms. Yellen. I really cannot speak to--you know, we do not 
have that rulemaking authority, and, sir, I cannot speak to 
what role the CFPB is going to play.
    Senator Crapo. Well, it seems to me--I understand the 
argument. In fact, that is the argument we got from the 
regulators who were before us 2 weeks ago in one of our 
hearings. But it seems to me that that is not what EGRPRA says. 
EGRPRA does not say, ``Let us review the rules and regulations 
that are old.'' It says, ``Let us review them all.'' That is 
what the law was passed to do. And if you look at the Dodd-
Frank legislation that you were just saying has recently been 
through the process, or many of its rules and regulations have 
recently been through the process, the Dodd-Frank legislation 
itself was 848 pages long. But the page count of the 
regulations required by Dodd-Frank has mushroomed to more than 
15,000 pages so far, and they are not finished, and over 15 
million words of regulatory text. And to say that the fact that 
they are new and the fact that the implementation process has 
just recently been completed on them I do not think is a 
satisfactory response to the requirement of EGRPRA that the 
agencies need to look at their regulations and identify those 
that are unnecessary or unduly burdensome.
    Ms. Yellen. Well, we are holding public hearings and will 
be taking extensive public comments. You mentioned community 
banks. We are very focused on trying to find ways to reduce the 
burdens on community banks, and during this process we will be 
very sensitive to looking for ways in which we can reduce the 
burden of regulation, and we will be reporting back to you.
    Senator Crapo. Well, thank you. My time is up. But I would 
just encourage you and the other Federal regulators to focus on 
the full intent of EGRPRA and expand your review.
    Thank you.
    Ms. Yellen. Thank you.
    Chairman Shelby. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and, 
Madam Chair, welcome.
    The Federal Reserve has significant responsibilities in 
many areas. One is monetary policy, in which the Federal 
Reserve exercises a historic, customary independence. But one 
other area is regulatory policy, actually supervising the 
operation of large financial institutions, which leads 
inevitably back to the New York Federal Reserve, which has a 
great deal of authority, and several of us have had proposals 
to help, we hope, improve this regulatory oversight, which has 
been criticized in the past, I mean not only in the run-up to 
2007 and 2008, but even recently.
    Can you please describe what you have done for greater 
accountability from the New York Fed?
    Ms. Yellen. So in the aftermath of the hearings that were 
held here and the allegations that were raised about the New 
York Fed, we have undertaken an internal review, and that is in 
process.
    Now, I should say that the question that we think is 
important that was raised there is--let me step back. We have a 
process for supervising the largest banks that is a systemwide 
process, involves systemwide committees, and is led by 
Washington, by the Board.
    The Reserve Banks that are involved with the supervision of 
the institutions in that large bank portfolio take part in the 
process that is a groupwide and Board-led process. So the 
question we thought is important for us to look at is: Are we 
in that process, the Board and the group that supervises these 
banks and makes decisions, is the relevant information being 
fed up to the highest decision-making levels, including the 
Board of Governors? And to the extent that within a Reserve 
Bank supervision teams there may be divergent opinions, we want 
to make sure that dissident voices are heard and that dissident 
views can reach the highest levels for consideration.
    So that is the question that we have asked our internal 
team to look at. The review includes the New York Fed, but also 
other Reserve Banks that are also involved in large bank 
supervision, because avoiding group think and making sure that 
dissident views can be heard at the highest levels is really 
critical to sound supervision.
    We have also asked our Inspector General to undertake his 
own independent review, and these are in process, and I expect 
them to be completed this year.
    Senator Reed. And you anticipate that the Federal Reserve, 
the Board of Governors, will take specific action which is 
recognizable and transparent to the Congress and to the people 
that----
    Ms. Yellen. Yes. I mean, we expect to report to you on the 
findings of these investigations, and if the need and 
suggestions for improvement are found, we expect to put those 
into effect.
    Senator Reed. At this point do you anticipate that there 
will be needs to improve? I mean, that is what seems to strike 
most people when you look at some of the incidents that have 
taken place over the last several years, that some change has 
to happen. The question is: Will it be legislative or 
administrative?
    Ms. Yellen. Well, we will certainly take any administrative 
changes that appear to be called for. You know, I would like to 
wait and see what the findings are of the reviews before 
deciding on the appropriate measures.
    Senator Reed. Thank you, Madam Chair. My time has expired, 
but let me put one more issue on the table, and perhaps we 
could follow up with a question. We are all acutely sensitive 
to systemic risk, and in Dodd-Frank we tried to minimize that 
risk by introducing the notion of clearinghouses that would 
take bilateral transactions, derivatives swaps, et cetera, and 
put them onto a platform. But that itself introduces a degree 
of risk in terms of the clearinghouses themselves, and I just 
want to obviously put on your screen, which I think already is, 
the sensitivity that we have to continued oversight of these 
clearinghouses, both our own and others across the globe, 
because of the potential systemic problem. So can I just put 
that on the table?
    Ms. Yellen. Absolutely, and I want you to know that I am--
we are very attuned to the need to be careful in our 
supervision that we have taken a step forward, I think, as you 
mentioned, in moving a great deal of clearing to 
clearinghouses. Eight financial market utilities, including the 
most important central counterparties, have been designated by 
FSOC as systemically important financial market utilities, and 
they are being supervised by the Federal Reserve, those based 
in the United States, the Fed, the CFTC, and the SEC.
    There are a set of principles that have been put in place 
and agreed globally for what best practices are in terms of 
liquidity standards and other risk management standards for 
these financial market utilities, and it is extremely high 
priority for us to make sure that we vigorously enforce those 
standards, and we are in the process of doing so, because 
although these entities reduce risks that were previously 
present, they create their own risks if they are not 
appropriately managed.
    So I completely agree, this is important, and we are giving 
it a great deal of attention.
    Senator Reed. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. And, Chair Yellen, 
thank you for being here today.
    There is a push right now to add a provision addressing 
currency manipulation in the Asian Pacific trade deal. Do you 
think trade negotiations are an appropriate place for these 
currency issues? And what if such an effort leads to the 
inclusion of an international arbitration panel under TPP's 
enforcement procedures where companies or other Nations could 
challenge future monetary policy decisions by the Fed?
    Ms. Yellen. So let me first say that I think currency 
manipulation that is undertaken in order to alter the 
competitive landscape and give one country an advantage in 
international trade is inappropriate and needs to be addressed.
    But, that said, there are many factors that influence the 
value of currencies, including differences in economic growth 
and capital flows, and as you mentioned, monetary policy is a 
factor that can have an impact on currencies.
    So I would really be concerned about a regime that would 
introduce sanctions for currency manipulation into trade 
agreements when it could be the case that it would hamper or 
even hobble monetary policy. Monetary policies we have 
undertaken, the Federal Reserve has undertaken over the last 
number of years, having designed for valid domestic objectives 
of price stability and maximum employment. We have undertaken 
monetary policy in order to achieve those objectives, and that 
certainly is not currency manipulation. But monetary policy 
affects the economy through many channels, perhaps most 
importantly through interest rates, but monetary policy may 
have impact on currency values. And so I would see that kind of 
direction as having the potential to perhaps hamper the conduct 
of monetary policy or even hobble the conduct of monetary 
policy. And I would really worry greatly about that approach.
    Senator Corker. So that is a long answer, but the answer I 
think you just said is you would have a significant problem 
with that being part of a trade deal. Is that correct?
    Ms. Yellen. Yes, I would.
    Senator Corker. OK. I want to follow the ``audit the Fed'' 
questioning a little bit and walk through a series here, and if 
we could be a little briefer with our answers, that would be 
good.
    The first is with respect to the Fed's lending facilities 
and the discount window access during the financial crisis. 
There are legitimate questions about how these facilities were 
conducted, but to a large extent, Congress addressed this issue 
by adopting the Sanders amendment to Dodd-Frank. Can you speak 
to the impact of the Sanders amendment on GAO's ability to 
audit crisis credit facilities?
    Ms. Yellen. Well, in response to that amendment, the GAO 
conducted a complete review of the use of our 13(3) emergency 
lending authorities in all of the programs that were created 
and conducted an audit that was concluded I believe in mid-
2011. In addition, the GAO has the ability to audit open market 
operations and discount window lending, and we now report 
regularly all the details--or the details of our open market 
operations and with a 2-year lag our discount window lending.
    Senator Corker. So those are fully transparent and fully 
audited now. Is that correct?
    Ms. Yellen. That is correct.
    Senator Corker. The second concern I have heard raised by 
the ``audit the Fed'' advocates is the size and composition of 
the Fed's current $4.5 trillion balance sheet. Does the Fed 
disclose the types of assets that make up that $4.5 trillion?
    Ms. Yellen. Yes. We have audited financial statements which 
I have a copy of right here. We report on a security-by-
security basis. All of the securities that are in that 
portfolio, they are reported on the New York Fed's Web site.
    Senator Corker. By CUSIP number, is that correct?
    Ms. Yellen. By CUSIP number. And we have a weekly balance 
sheet that reports significant details of our balance sheet.
    Senator Corker. So I hate to ask this question, but I have 
read some quotes lately, and I would just like for you--not by 
you but by ``audit the Fed'' advocates. While you may issue an 
updated balance sheet each week, how do we know those 
securities actually exist?
    Ms. Yellen. Well, we have an outside accounting firm, an 
independent auditor, currently Deloitte & Touche, that does a 
thorough review of our balance sheet, and that is what is 
contained in our annual report, both the Board and all of the 
Federal Reserve Banks and the consolidated Federal Reserve 
System.
    Senator Corker. So they do exist?
    Ms. Yellen. They do exist, Senator.
    Senator Corker. Just my last point. It is obvious to me 
that the ``audit the Fed'' effort is to not address auditing 
the Fed, because the Fed is audited, and every day you publish 
the CUSIP numbers of the things that you own and the----
    Ms. Yellen. Correct.
    Senator Corker. ----credit facilities that you put in place 
during an emergency, all of that is audited now. So to me, it 
is an attempt to allow Congress to be able to put pressure on 
Fed members relative to monetary policy, and I would just 
advocate that that would not be a particularly good idea and it 
would cause us to put off tough decisions for the future, like 
we currently are doing with budgetary matters. Do you agree 
with that?
    Ms. Yellen. I strongly agree. As I indicated--well, let me 
say more generally, I think if you look around the globe in 
modern times and you consider every country that has gone 
through a period of chronic high inflation or hyperinflation, 
what you will find is a central bank that was pressured to 
print money by----
    Senator Corker. Politicians.
    Ms. Yellen. By politicians who were unable to balance the 
budget.
    Senator Corker. So I will close. I thank you, Mr. Chairman, 
for the little extra time. I do think one area that greater 
transparency could be utilized is in the regulatory area around 
things like CCAR and others. I think that that is an area where 
we should focus, and I hope that over the course of the next 
several months the Fed will work with us in a constructive 
manner so that we more fully understand how you go about that 
process. It does seem like a black box now. It is something 
that I think should be far more transparent, and I hope you 
will work with us in that regard.
    Ms. Yellen. We would be pleased to do so.
    Senator Corker. Thank you.
    Chairman Shelby. Thank you, Senator Corker.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. Thank you, Chair 
Yellen, for your testimony. Your hard work, your dedication, 
what I believe is your sound judgment and timely decision 
making have been a driving force behind the recovery. But I do 
not envy you your position. You and other members of the FOMC 
have important decisions to make in the coming months.
    Let me urge you to act with caution before raising rates. 
While there may be data points, positive signs of economic 
growth, let me be clear. I believe the Fed should remain 
committed to its current accommodative policy until it sees 
clear evidence that shows a consistent improvement in wages. In 
the current environment, wage growth needs to be a major 
factor, maybe even the lodestar, for the Fed when it is 
deciding whether to raise rates.
    As I have said over and over again, to me the single 
biggest problem the country faces is the decline of middle-
class incomes, and while economic progress has been seen in the 
past year--strong expectations for growth of GDP, for 
instance--wage gains have remained sluggish through the 
recovery. Middle-class Americans have not yet seen the benefits 
of this growth in their take-home pay, and we all know the 
statistics of middle-class incomes declining by 6.5 percent 
over the decade, $3,600 lower than when President Bush took 
office in 2001.
    So I think the Fed must think long and hard before 
implementing a monetary policy that could reduce demand and 
hamper the growth of the economy. Wage growth not only serves 
to benefit middle-class workers who have been asked to do more 
with less for too long, but placing a priority on consistent 
wage growth prior to raising rates serves the dual role of 
fostering a rise in inflation toward the Fed's 2-percent 
target, one that you have delineated.
    Overall growth is rightfully a key factor in the decision, 
but I firmly believe the Fed should not raise rates until wages 
are back on a steady trend, steady upward trend.
    So as you begin to consider the path toward normalization 
of rates, I think the Fed must place a priority on seeing 
consistent real wage growth prior to any decision making. Those 
who are worried about inflation--you always have to worry about 
it, but they should look at the last several years. There are 
few signs of incipient inflation, and, in fact, many economists 
believe that the chances of deflation are greater than worries 
of drastic rises in inflation, and concerns of deflation are 
further precipitated by the prospect of the Fed raising rates 
too soon.
    So I think it is a prudent decision for our broader economy 
as well as middle-class families across the country to wait 
until wages really begin to rise.
    So, first, do you agree it is critical for the FOMC to see 
evidence of consistent wage growth prior to deciding to raise 
interest rates absent indicators that inflation is climbing 
well above or above the Fed's 2-percent target? And if the FOMC 
does not wait, what are the potential consequences?
    Ms. Yellen. Well, Senator, our objective is price 
stability, which we have defined as 2-percent inflation. And as 
I indicated, before beginning to raise rates, the Committee 
needs to be reasonably confident that over the medium term 
inflation will move up toward its 2-percent objective.
    I do not want to set down any single criterion that is 
necessary for that to occur. The Committee does look at wage 
growth. We have not yet seen--there are perhaps hints, but we 
have not yet seen any significant pick-up in wage growth. But 
there are a number of different factors that affect the 
inflation outlook, and we will be considering carefully a range 
of evidence that pertains to the inflation outlook and will 
determine the confidence that we feel in our--we forecast that 
inflation will move back up to 2 percent. Certainly seeing 
continued improvement in the labor market adds to that 
confidence, and it would add to our confidence also that over 
time wages will pick up. But our objective is 2-percent 
inflation, and we will look at a wide range of evidence in 
deciding that.
    Senator Schumer. Do you feel that the worry of rampant 
inflation, above 2-percent inflation, is any greater than the 
worry of deflation given the flatness of wages, 70 percent of 
the economy is wages, jobs, broadly defined?
    Ms. Yellen. The Committee feels, I think anticipates that 
inflation is being held down by transitory factors, 
particularly the decline we have seen in oil prices. We have 
also had considerable slack in the labor market, and it is 
diminishing over time. Now wages tend to be a lagging indicator 
of improvement in the labor market. We have seen improvement, 
and if we continue to see improvement, it would add to my 
confidence, especially as the impact of oil prices diminishes 
over time, that inflation will move back up.
    Senator Schumer. One final question. Do you see any real 
evidence of inflation heading above 2 percent right now given--
--
    Ms. Yellen. I do not see any evidence of that, but 
inflation--we need to be forward-looking. The Committee is 
forward-looking in setting monetary policy, and we do see that 
the labor market is improving, and we are getting closer to our 
goal of maximum employment.
    It is important to remember that monetary policy is highly 
accommodative. We have held the Federal funds rate at a 0 to 
\1/4\ percent range and have a large balance sheet, and these 
policies have been in place for 6 years now. And we do have an 
economy that fortunately appears to be recovering, and we do 
have to be forward-looking in setting monetary policy. But I 
want to assure you we want to see that recovery continue. We do 
not feel the labor market is fully healed, and that is a 
process we want to go on. And we do not want to take policy 
actions that will hamper that, but monetary policy is very 
accommodative at the present----
    Senator Schumer. Thank you. I urge caution.
    Chairman Shelby. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. And thank you, 
Madam Chairman, for joining us today.
    Let me share a completely opposing point of view from that 
of the Senator from New York, which will not be a shock to 
Members of this Committee. I cannot help but observe what 
strikes me as a very obvious paradox here, and that is the 
financial and economic crisis is over. It has been over for 
years, at least 6 or 7 years. And yet we still maintain crisis-
level interest rates. We have got no wave of defaults or 
massive bankruptcies going on. Unemployment has gone from 10 
percent to sub-6 percent. GDP growth has been weak. I think 
that is easily explained by the avalanche of new regulations, 
certainly not monetary policy, but it has been positive for 
years. Consumer sentiment is relatively high. The FOMC in 
January described the economic recovery as solid. Walmart, 
interestingly, has made an announcement that suggests we might 
even be approaching NAIRU.
    The crisis has been over for a long time. And it is not as 
though there is no price to be paid by having this unbelievably 
accommodative policy. Most immediately I see the problem 
incurred by my constituents, who may have spent a lifetime 
working hard, sacrificing, saving, forgoing a vacation they 
might have taken, forgoing a splurge here and there, so that 
they could save for their retirement and buy a CD, have some 
money on deposit at a bank, and use that to supplement a modest 
pension or Social Security payments. Of course, their reward 
now is they get nothing. Zero. That is what they earned on 
their savings year after year.
    Meanwhile, of course, we have all the risks associated with 
this: the risk of bubbles forming, I would argue the fixed 
income markets probably are a huge bubble at the moment. We 
have the inhibition of price discovery in the financial sector. 
We facilitate excessive deficits because they look so 
manageable with zero interest rate environment. Credit is 
rationed. And what are the benefits of this? The benefits are, 
at best, a timing shift in economic activity. At best, we are 
moving economic activity that would otherwise occur in the 
future closer to the present. As we all know, if artificially 
low interest rates led to strong economic growth, then everyone 
around the world would have zero interest rates and everything 
would be booming. And that is not the case.
    So, Madam Chairman, I know you and I disagree on this, but 
I would just suggest the crisis is clearly long over. I think 
the time for normalization is well overdue. I hope we get there 
soon. But I did want to ask you a specific question that is 
related, and that is, you have said repeatedly that the goal of 
price stability is 2-percent inflation. Well, certainly there 
is a congressional mandate on price stability. But when the Fed 
decides that it is acceptable--in fact, that that is met by 
savers losing 2 percent of their purchasing power annually--and 
let me put that a different way. That means a 30-year-old woman 
who is saving, by the time she retires what she has saved at 
that point will have lost half of its value. Half of it is 
gone.
    How is that consistent with price stability?
    Ms. Yellen. Well, the Federal Reserve is--the FOMC, in 
carrying out Congress' mandate, really does have to define how 
we understand price stability operationally. Two-percent 
inflation is an inflation rate that we chose largely for two 
reasons:
    First of all, it is well known that price indices that we 
look at contain upward biases in part because their failure to 
adequately capture the benefits of new goods and quality 
improvement. So there are hard-to-measure but nevertheless 
upward biases in price indices.
    And, second of all, because deflation is so dangerous and 
because an environment of very low inflation and one of 
comparably extremely low interest rates makes it difficult for 
monetary policy to respond to adverse shocks, we decided that 
in order to avoid damaging episodes of deflation, it is wise to 
have a small buffer that gives greater room for monetary policy 
to operate.
    Senator Toomey. Thank you. I am going to run out of time 
here, so I just want to get to my second question. I would just 
urge you to consider the impact of savers losing their 
purchasing power.
    Historically, of course, we have changed the level of 
accommodation through open market activities, typically buying 
and selling securities to have corresponding changes in the 
level of cash. You have suggested, if I understand you 
correctly, that in the process of normalizing, assuming we will 
get to that process, you intend to achieve that principally by 
changing the target level of the Fed funds rate.
    Ms. Yellen. Yes.
    Senator Toomey. And you will do that by increasing the 
interest on excess reserves.
    Ms. Yellen. Correct.
    Senator Toomey. And my question is: Since that means over 
time in a normalizing environment the transfer of tens of 
billions of dollars from what would go to the taxpayers to big 
money center banks, why are you doing that instead of simply 
selling the bonds, which is a more conventional way to operate 
in the open market operation?
    Ms. Yellen. Well, remember that, first of all, we will be 
paying banks rates that are comparable to those that they can 
earn in the marketplace, so those payments do not involve 
subsidies to banks. And, in addition, remember that we have--in 
expanding our provision of reserves, we have acquired longer-
term assets on the asset side of our balance sheet, and the 
spread above what we have been paying in terms of interest on 
excess reserves is quite large. So although that will diminish 
over time as monetary policy is normalized, the expansion of 
our balance sheet, even though we are even at present paying 25 
basis points interest on reserves, we have had record transfers 
to the Treasury close to $100 billion this past year and $500 
billion since 2009. So there have been large transfers 
associated with that policy.
    Senator Toomey. But that situation is likely to reverse if 
we get into a normalization mode.
    Ms. Yellen. So it is very--it is likely that our transfers 
to, our remittances to the Treasury will decline as short-term 
rates rise. We nevertheless expect the remittances to remain 
positive.
    Senator Toomey. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Warner--Senator Menendez. I did 
not know he had come back. Thank you. Sorry.
    Senator Menendez. Thank you, Mr. Chairman. I thank my 
colleague from Virginia.
    Madam Chair, thank you for your service. As you know, our 
economy continues to recover from the damage inflicted by the 
financial crisis and the Great Recession that followed. GDP is 
growing. Employers are hiring. Unemployment is falling. So it 
is only natural that some are starting to look ahead to a time 
when the Federal Reserve can start withdrawing the monetary 
stimulus that has been so critical to our recovery.
    But in my view, we still face challenges. Most Americans 
are still waiting for the recovery to show up in meaningful 
income growth. Long-term unemployment, while down, is still 
high. Inflation continues to run well below target, as it has 
now for an extended period of time. So from my perspective, it 
is critical that the Fed not put the cart before the horse and 
tighten too soon.
    You have said on multiple occasions that the Federal 
Reserve's timetable for raising rates will depend on the data. 
There are some who say the Federal Reserve should tighten 
preemptively based on unemployment or wage growth or at the 
first hint of inflation, without waiting to find out if it is 
just a statistical blip.
    What would be the risks if the Fed raises rates too soon 
compared to the risks of waiting?
    Ms. Yellen. Well, if the Fed were to raise rates too soon, 
Senator, we would risk undermining a recovery that is really 
just taking hold and is really succeeding, I think, in 
improving the labor market. As I said, I do not think we are 
back to attaining yet conditions I would associate with maximum 
employment or normal labor market conditions. Things have 
improved notably, but we are not there yet. And so we want to 
see a healthy recovery continue.
    In addition, as you mentioned, inflation is running well 
below our 2-percent objective, and while we think a significant 
reason for that is because of transitory factors, most 
importantly the decline we have seen in energy prices, we are 
committed to our 2-percent objective. And just as we do not 
want to overshoot 2 percent on the high side, we do not want to 
chronically undershoot 2 percent on the low side either.
    And so before raising rates, we will want to feel confident 
that the recovery will continue and that inflation is moving up 
over time.
    There are also, of course, risks of waiting too long to 
remove accommodation. We have a highly accommodative policy 
that has been in place for some time. We have to be forward-
looking. As the labor market tightens, wage growth and 
inflation can pick up to the point we would overshoot our 
inflation objective, and conceivably there could be financial 
stability risks, and we want to be attentive to those as well.
    Senator Menendez. Right.
    Ms. Yellen. So this is a balancing of costs and risks that 
we are trying to make in a deliberate and thoughtful fashion.
    Senator Menendez. Well, I appreciate that, and it is that 
balance that I hope your wisdom and that of your fellow Board 
members can get just about right, because I could see entering 
and choking off recovery before middle-class families actually 
feel its gains and trapping a too-low inflation or deflation 
set of circumstances, so I appreciate that.
    Let me ask you one other question. I have heard several 
commentators say that the interest rate increase by the Fed 
would signal ``confidence'' to the market about the health of 
the U.S. economy and have a stimulative effect. Do you agree 
with that theory? And if so, wouldn't any so-called confident 
effect be more than offset potentially by a contractionary 
impact of a rate increase?
    Ms. Yellen. Well, I think it is fair to say that when we 
begin to raise our target for the Federal funds rate, it will 
be because we are confident about the recovery and we are 
reasonably confident that inflation will move back to our 2-
percent objective over time. But that confidence will reside in 
real improvements that we see in the underlying condition of 
households and businesses where we would not be attempting to 
somehow boot-strap an improvement in the economy that is purely 
occurring from a confident effect that comes from our raising 
rates.
    There is reason, I think, to feel good about the economic 
outlook. Households have gone through major adjustments in 
their balance sheets and are in better financial condition than 
they were. The job situation is improving. And even though 
wages have not been rising in real terms very rapidly, there 
are more hours of work and more jobs, so household income is 
improving.
    Lower oil prices are boosting household income. Housing 
prices have rebounded, and that has helped a lot of households, 
and businesses are in----
    Senator Menendez. So, in essence, real confidence, not 
confidence that is spun.
    Ms. Yellen. That is right. There is no spin here. Our 
confidence in the economy has improved, and when we raise 
rates, it will be a signal in our confidence in the underlying 
fundamentals.
    Senator Menendez. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Chair Yellen, good 
morning.
    Ms. Yellen. Good morning.
    Senator Scott. Thank you for being here this morning.
    Ms. Yellen. Thank you.
    Senator Scott. I would like to change the conversation a 
little bit and talk about the insurance industry, the SIFIs, 
and its impact on places like South Carolina where we have 
about $354 billion of life insurance in place. As we think 
through the transferring of risk that the insurance industry 
provides, I think it is a very important consideration. I am a 
bit prejudiced in this area because I have spent 25 years in 
the insurance industry, and I appreciate the fact that until 
the insurance company shows up, the ability to transfer risk is 
nonexistent. So the importance of how we impact the insurance 
industry to the Fed I think will reverberate throughout the 
economy.
    I take very specific interest in the impact that the Fed 
may have on regulating the insurance companies now that have 
been designated ``systemically important'' by FSOC, and my 
thought is that last year, I believe it was, the President 
signed a law that clarifies the Fed need not impose bank-like 
capital standards on insurance companies under its supervision. 
I think this is for very obvious reasons. When you look at the 
activities of banks, loans and deposits, compared to speaking 
to the long-term risk that most insurance companies are holding 
their assets for, it is important to have that delineation and 
take a very different approach to insurance companies than we 
do other financial institutions.
    I know from experience that this is an important 
consideration, and I guess my question to you is: What 
expertise does the Fed have or plan to acquire as it begins to 
supervise insurance companies? And how closely are you working 
with State insurance regulators?
    Ms. Yellen. So my answer would be that we have acquired 
expertise; we have hired individuals who have experience in the 
insurance industry and are trying to build our expertise there. 
We consult closely with the NAIC and with State insurance 
regulators and the Federal Insurance Office. We are gaining 
experience because we are now in our fourth annual supervision 
cycle of savings and loan holding companies, many of which 
are--some of which have significant insurance activities. And, 
of course, several insurance companies have been designated as 
SIFIs, and we are supervising those as well.
    We are taking the time and doing the work that is necessary 
to understand their unique characteristics and fully plan to 
tailor our supervision and capital and liquidity requirements 
for those insurance companies to make our supervisory regime 
appropriate. There are very important differences between the 
risks faced by insurance companies and banking organizations. 
We have undertaken a quantitative impact study and are actively 
engaged in working with the firms we will be supervising to 
understand the unique characteristics of their operations 
before a promulgating supervision regime.
    Senator Scott. Thank you. You answered my third question as 
well, so I will just go to the second question at this point 
then.
    Will the Fed issue an Advanced Notice of Proposed 
Rulemaking before issuing proposed rules on insurance capital 
standards then?
    Ms. Yellen. Yes, we will issue proposed rules. We recently 
issued a proposed rule that pertains to our supervision of GE 
Capital, and we would do the same with the other firms.
    Senator Scott. Thank you.
    On the issue of stress tests, I know that the Fed is--
through the supervision of bank holding companies and other 
nonbank financial companies, the Fed conducts stress tests to 
determine how well the entity could withstand different levels 
of financial distress. The Fed currently has on its balance 
sheet about $4.5 trillion as a result of the QE program, much 
larger, of course, than any of the financial entities it 
regulates. But it appears that nobody is stress-testing the 
Fed. The proverbial fox is guarding the henhouse, from my 
perspective.
    So my question really is: As you begin to unwind the Fed's 
massive balance sheet, hopefully in the near future, what 
assurances can you give this Committee that the Fed will 
stress-test its own QE exit plan?
    Ms. Yellen. Well, with respect to our balance sheet, let me 
say that we do stress-test it, and we have issued some reports 
and papers where we describe what stress tests would look like 
when there are interest rate shocks that would affect our 
balance sheet and path of remittances. But it really is 
important to recognize that the Federal Reserve is not 
identical to an ordinary banking organization.
    First of all, capital plays a very different role in a 
central bank than it does for a banking organization. Congress 
and the rules put in place regarding our capital were never 
intended to make our capital play the same role and it is not 
necessary for it to play the same role as in a banking 
organization.
    Importantly, unlike a bank, the Federal Reserve's 
liabilities are mainly reserves to the banking system and 
currency, and these are not like the runnable deposits of an 
ordinary banking organization. So the risks that the Federal 
Reserve faces in our balance sheet are of a different character 
than those facing an ordinary bank. But, that said, we do look 
at the likely consequences for our balance sheet of different 
interest rate scenarios.
    Senator Scott. Certainly very different scenarios between 
the Fed and the banks. Without any question, with $4.5 trillion 
and the way that you wind it down would have--would reverberate 
throughout the economy in a way that no other financial 
organization would have impacted. And the path forward is 
incredibly important to the economy.
    Ms. Yellen. Well, that is one reason that one of the 
principles of our normalization plans is that we want to wind 
down our balance sheet in an orderly, gradual, and predictable 
way. And we have decided to use as our main tool of policy when 
the time comes for normalization something that is much more 
familiar both to us and to markets, and that is, variations in 
short-term interest rates.
    You know, of course, an alternative to that would be to say 
when the time comes to want to tighten monetary policy, we 
could begin to sell assets. That would be another way of going 
about doing business. But we have more experience and markets 
have much more experience with variations in short-term rates, 
and we want to proceed in that way that is familiar to us, 
familiar to market participants and the public, and to let our 
balance sheet play a passive role to gradually diminish in size 
mainly through ending reinvestment of maturing principal.
    Senator Scott. Thank you.
    Chairman Shelby. Senator Warner, finally.
    Senator Warner. Thank you, Mr. Chairman, and thank you, 
Chair Yellen. You are coming down to the home stretch here. I 
appreciate all your good work and this incredibly important 
balance to get right as we start down a path of unwinding. But 
I, like many of my colleagues, share with inflation at such a 
low rate, trying to get this timing right is so critically 
important.
    One of the things we have talked a lot about, the statute 
of the U.S. economy, but I want to raise three quick points.
    One, after the January FOMC meeting, in your readouts one 
of the items you mentioned was international developments. 
Obviously, disruption potentially in Europe, with the ongoing 
struggles with Greece, China's slowing economy, can you rank--
or how will these international developments affect the Fed's 
decision on timing on monetary policy?
    Ms. Yellen. Well, there are a broad range of international 
developments that we monitor, and they do affect the 
performance, the likely performance of the U.S. economy and 
factor both into our economic forecasts and our assessment of 
risks.
    Growth in Europe has been very slow. Growth in China is 
slowing. The huge decline we have seen in oil prices has had 
repercussions all over the global, in some areas positive, very 
positive, in other areas negative. It affects our outlook, 
these developments, both through trade flows and through 
developments in financial markets.
    The attempts of many central banks to add monetary policy 
accommodation is pushing down longer-run interest rates in many 
parts of the world, and that is, as I mentioned in my 
testimony, spilling over to the United States. So there are 
many channels through which these global developments affect 
the U.S. outlook in ways both positive and negative.
    All in all, so factoring all of those things into account, 
while there are risks--and, again, both positive and negative--
stemming from global developments, we still think that the 
risks for the U.S. outlook are nearly balanced, that we have 
got sufficiently strong growth in domestic demand and in 
domestic spending by consumers and businesses, that the 
recovery looks to be on solid ground. We have just, as I 
mentioned in my testimony, had a very strong growth in the 
second half of the year and looking forward and analyzing the 
factors likely to impact domestic spending, we are seeing 
perhaps not as strong as we just had but nevertheless above-
trend growth, and that really factors into account all of the 
global considerations----
    Senator Warner. But, obviously, these international factors 
will affect your decision----
    Ms. Yellen. They do affect our decision, yes.
    Senator Warner. I also want to associate my comments with 
Senator Corker's comments about I would like to make sure that 
we deal in a perfect world with currency manipulation, but 
currency manipulation to one could appear as monetary policy to 
another.
    Ms. Yellen. Yes.
    Senator Warner. And as we have seen Japan and Europe move 
toward more monetary easing, obviously one of the effects of 
that has been strengthening of the dollar and it hurts our 
exports. Speak to that for a moment, and if you could, let me 
get a last 30 seconds in at the end, so if you could take----
    Ms. Yellen. You bet. So, you know, I think we should be on 
guard against currency manipulation. The G7 in international 
fora have agreed, and I know our administration in dealing with 
foreign countries really tries to crack down on currency 
manipulation.
    Nevertheless, I think certainly it is a principle agreed in 
the G7 that monetary policy oriented toward domestic goals like 
price stability or, in our case, price stability and maximum 
employment, this is a very valid use of a domestic tool for a 
domestic purpose.
    It is true that the use of that tool can have repercussions 
on exchanges, but I really think it is not right to call that 
``currency manipulation'' and to put it in the same bucket as 
interventions in the exchange markets that are really geared 
toward changing the competitive landscape to the advantage of a 
country.
    Senator Warner. Mr. Chairman, I would just in my last 
couple of seconds want to make the point that one of the things 
that has been absent from this discussion today has been--we 
have talked a lot about your work. We have not talked as much 
about our work and need to still address our own fiscal 
policies. I would simply point out that because of the 
extraordinary remittances from the Fed's expanded balance 
sheet, we have seen north of $420 billion in net additional 
revenue that has diminished our deficit. But that is not 
something that can be projected on into the future. And as we 
talk about the times of raising interest rates and trying to 
get back to a normalized effort, I would simply point out 
again, you know, a 100-basis-point increase in interest rates 
adds $120 billion a year on debt service.
    Ms. Yellen. Yes.
    Senator Warner. And even CBO projections at this point will 
show that debt service with our current $18 trillion in debt 
will exceed total defense spending or total domestic 
discretionary spending in 10 years, and that is not a good 
business plan for our country.
    Ms. Yellen. All absolutely true.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. Thank you for 
being here, Chair Yellen.
    You know, as you know, Wall Street banks could profit 
handsomely if they knew about the Fed's plans before the rest 
of the market found out, and that is why any leak of 
confidential information from the Fed results in serious 
penalties for the people who are responsible.
    But apparently there have been no consequences for the most 
recent leak. According to public reports, Scott Alvarez, the 
General Counsel of the Fed, was put in charge of investigating 
a leak from the September 2012 meeting of the Federal Open 
Market Committee. Nearly 2\1/2\ years later, the results of 
this investigation have not been made public, and no action has 
been taken.
    On February 5th, Congressman Cummings and I sent a letter 
to Mr. Alvarez requesting a briefing from him in advance of 
your appearance here today, but so far we have not received 
one.
    Can you assure us that the Congressman and I will get a 
briefing soon?
    Ms. Yellen. So if I might say by way of background----
    Senator Warren. I just need a yes or no----
    Ms. Yellen. ----the answer is----
    Senator Warren. I just want to be able to get a briefing on 
what has happened that it has been 2\1/2\ years and there has 
been no public report about what happened from a significant--
--
    Ms. Yellen. We are trying to work with your staff on a 
process to be responsive.
    Senator Warren. I will take that as a yes?
    Ms. Yellen. Yes.
    Senator Warren. OK. Thank you.
    As you know, this past December, House Republicans 
successfully blew a hole in Dodd-Frank protections by tacking 
the repeal of the swaps pushout rule to a must-pass Government 
spending bill. That repeal, which was written by Citigroup 
lobbyists, will allow the biggest banks in the country to 
continue to receive taxpayer protection for some of their 
riskiest derivatives and swaps.
    Now, a month before the repeal, Mr. Alvarez spoke at a 
conference at the American Bar Association, an organization 
that includes many lawyers who represent the banks that are 
affected by the Fed's enforcement of Dodd-Frank. Mr. Alvarez 
openly criticized the swaps pushout rule, saying, ``You can 
tell it was written at 2:30 in the morning, and so it needs to 
be, I think, revisited just to make sense of it.''
    Mr. Alvarez also criticized the new rules Dodd-Frank put 
into place to address conflicts of interest at credit rating 
agencies, saying, ``Restrictions on the agencies really did not 
work, and it does not work, and it is more constraining than I 
think is helpful.''
    So let me start by asking: Does Mr. Alvarez's criticism of 
these two rules reflect your view or the view of the Federal 
Board of Governors?
    Ms. Yellen. So let me just say that over the years we have 
had feedback that we have given on various aspects of Dodd-
Frank, but we are----
    Senator Warren. I appreciate that, Chair. The question I am 
asking, though, is these are specific criticisms he has made of 
Dodd-Frank rules that govern the largest financial institutions 
in this country, and I am just asking: Do his criticisms 
reflect your criticisms or the criticisms of the Federal Board?
    Ms. Yellen. I think we--I personally and the Board consider 
Dodd-Frank to be a very important piece of legislation that has 
provided a road map for us to put in place regulations----
    Senator Warren. I appreciate that, Madam Chairman, but I 
just need a yes or no here. Do his criticisms reflect your 
criticisms?
    Ms. Yellen. I am certainly not seeking in any way to alter 
Dodd-Frank at this time. It is a framework that is----
    Senator Warren. Well, then, let me ask the question 
differently. Do you think it is appropriate that Mr. Alvarez 
took public positions that do not evidently reflect the public 
position of the Fed's Board, especially before an audience that 
has a direct financial interest in how the Fed enforces its 
rules?
    Ms. Yellen. Well, I think the Fed's position and my 
position is that we are able to work very constructively within 
the framework of Dodd-Frank to tailor rules that are 
appropriate for the institutions we supervise, and we are not 
seeking to change the----
    Senator Warren. I appreciate that. You know, we know that 
the Fed staff plays a critical role in shaping Dodd-Frank rules 
and enforcing them. In the case of the swaps pushout, Congress 
passed the law in 2010, but the Fed and the OCC delayed the 
effective date of the rule until 2016, giving Citigroup and 
other big banks time to get the rule repealed before it ever 
went into effect.
    Did Mr. Alvarez provide input into the Fed's decision to 
delay the effective date of the pushout rule?
    Ms. Yellen. I do not know. I mean, we usually have phase-
ins for complicated rules that require adjustments by financial 
firms. This has been true of all of the Dodd-Frank rules that 
we have put into effect.
    Senator Warren. Well, I think this might be worth looking 
into. You know, the Fed is our first line of defense against 
another financial crisis, and the Fed's General Counsel or 
anyone at the Fed staff should not be picking and choosing 
which rules to enforce based on their personal views. So I urge 
you to carefully review this issue and to assess whether the 
leadership of the Fed staff is on the same page as the Federal 
Reserve Board.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Heitkamp.
    Senator Heitkamp. Mr. Chairman, thank you. Always last, 
hopefully not least.
    Chair Yellen, I want to first thank you for your patience 
and your responsiveness, and I was tempted to ask one question, 
which was your definition of ``patience.'' But I will not do 
that today.
    Instead, I want to look to the future. I think Senator 
Warner really outlined one of the concerns that I have. We 
always seem to be fighting the last economic war in the U.S. 
Congress. You are a very astute and very respected student of 
the American economy. It is what you do every day. I am going 
to give you a chance--you have heard a lot of opinions and 
received a lot of advice from this panel. I am going to give 
you a chance to give us some advice.
    When you look at leading and lagging indicators, especially 
leading indicators, what troubles you and what keeps you awake 
at night about the American economy in the next 10 to 15 years? 
And what advice would you give to the U.S. Congress in 
addressing those concerns that you have looking right now at 
those indicators?
    Ms. Yellen. Well, I have said on a number of occasions that 
the rise we have see in inequality in the United States is a 
great concern to me.
    Senator Heitkamp. We discussed this the last time you were 
here, and you offered no solutions toward that problem, you 
might recall.
    Ms. Yellen. I think there are a variety of different things 
that the Congress could consider in policy measures that might 
be appropriate, but this really is a domain for Congress to 
consider. So that is one of the concerns that I have.
    Senator Heitkamp. So no advice on the earned income tax 
credit or on tax rates or----
    Ms. Yellen. I am not going to weigh in on things that 
really are in your domain to evaluate. So I think that is 
important, and I would say something also in Congress' domain 
is longer-run issues with the Federal budget. I think Congress 
has made painful decisions that have now really stabilized, 
brought down the deficit very substantially and stabilized for 
a number of years the debt-to-GDP ratio. But eventually debt-
to-GDP will begin to rise and deficits will increase again as 
the population ages and Medicare, Medicaid, and Social Security 
get to be a larger share of GDP under current programs. And 
there are a lot of ways in which--these are problems we have 
known about for a long time.
    I also worry that if we were to again be hit by an adverse 
shock, there is not much scope to use fiscal policy. It was 
used in the early years after the financial crisis. We ran 
large deficits. But in the course of doing that, debt-to-GDP 
rose, and were another negative shock to come along, it is 
questionable how much scope we would now have to put in place 
even on an temporary, multiyear basis expansionary fiscal 
policy. And I think it is important to deal with these issues, 
for the Congress to do so.
    Senator Heitkamp. But your concern about scope does not 
lead you to believe that interest rates should be adjusted at 
this point to give you the flexibility to use interest rates 
should we receive another shock?
    Ms. Yellen. Well, the Fed would, of course, use the tools 
that we have to try to achieve domestic ends, but I think 
having fiscal policy be available as a tool is important as 
well.
    Senator Heitkamp. If we look today at the American economy 
and some of the challenges--and you and I have spoken privately 
about this--of the millennials and saving patterns and 
consumptive patterns, the shared economy, what concerns you 
about the now 8 years of changed behavior in consumption? What 
concerns you about those issues? And do you see those changing 
long-term consumptive patterns that may present some 
interesting challenges for the American economy?
    Ms. Yellen. Well, I think we are just beginning to 
understand how the millennials are behaving. They are certainly 
waiting longer to buy houses, to get married. They have a lot 
of student debt. They seem, you know, quite worried about 
housing as an investment. They have had a tough time in the job 
market. And, as the economy strengthens, I expect more of them 
to form households of their own and buy homes. But we have yet 
to really see how this is going to affect that generation.
    Senator Heitkamp. Or they may have experienced a change in 
consumptive patterns that will present some unique challenges, 
whether it is sharing automobiles, whether it is, in fact, not 
buying homes, doing the things that they have now done to 
accommodate their economic challenges in the long term. And I 
think that one of the things that we need to do much more 
carefully here in the U.S. Congress is begin to look at not 
just having a discussion with you about monetary policy, but 
looking at fiscal policy, whether it is tax reform or whether 
it is, in fact, taking a look at what we are doing with the 
mortgage market, to begin to develop an economy that the 
millennials will fully participate in. And I hope you continue 
to think and provide us the advice that is extraordinarily 
valuable.
    Thank you.
    Ms. Yellen. Thank you.
    Chairman Shelby. Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. And, Madam 
Chair, thanks for your service. And I apologize. I have had to 
go in and out of some other committees, and I know this subject 
has been brought up, but the issue of wage stagnation that we 
have seen and the other piece of student debt.
    When we look at the student debt and the numbers are so 
high and, you know, it has been a long time, but when I 
graduated from college, you could basically work an entire 
summer and wind up paying off about half what your tuition was.
    How big a drag--and you may not have an exact measurement, 
but one of my great concerns has been in some areas of the 
country, how do you buildup the housing market when the young 
people who want to buy a house--the money that I saved up for, 
at that time, that 20-percent downpayment is now in many cases 
being used to pay off a student loan, and it is a box you 
almost can never get out of. So how big a drag do you see that 
being on the economy?
    Ms. Yellen. So it is a little bit hard to tell. I mean, the 
housing market has not recovered in the way that I would have 
anticipated. It has been very slowly improving, but household 
formation has been extremely low in the United States. It is 
hard to tell. You have many young people who are living with 
their families still. It is hard to tell whether that is 
because of student debt or because of a weak job market.
    My guess is that as the economy continues to improve, we 
will see an improvement in household formation, that we will 
see--now, many young people may decide that they prefer to rent 
rather than buy homes. But that will give rise to a boost to 
multifamily construction, even if not so much to single-family 
construction. But the housing market has been very depressed. 
Nevertheless, in spite of that, the economy as a whole and the 
job market has had sufficient strength to recover.
    Senator Donnelly. My other concern in that area is when you 
see a young person who looks up and is dealing with $100,000 in 
student debt and they have this big chunk of money that goes 
off every month to pay that down, those dollars are dollars 
that are never used to go to a restaurant, never used to maybe 
buy a car, never used to travel somewhere. And so overall job-
wise I think it hits or seems to hit--makes it more difficult 
in all those areas to continue job creation.
    Ms. Yellen. It is true, but it also remains true that a 
higher education boosts income and is tremendously important. 
It is not always the case, not for every individual, that it is 
a good investment, but certainly on average, it has been a very 
important and worthwhile investment. So I think to my mind that 
is the other side of it.
    Senator Donnelly. I completely agree what a wonderful 
investment it is. I just want to try to make sure that we can 
get that wonderful opportunity without basically saddling 
yourself for years and years as you look ahead.
    Ms. Yellen. The debt loads are very large and have really 
increased a great deal. You are----
    Senator Donnelly. One other area I wanted to ask you about 
is cybersecurity, and I know that the Fed has certain things 
they focus on on a constant basis. In the area of 
cybersecurity, though, it is, from all the financial 
organizations I talk to, one of the biggest concerns they have, 
for the companies it is. How big a risk do you see that in the 
years moving forward? And how big an effect on the financial 
institutions do you see this being?
    Ms. Yellen. Well, I think it is at the top of the list of 
concerns that we have about the financial system, about the 
problems facing financial organizations, and I would include 
the Federal Reserve in that, too. It is a top concern of our 
own given the importance of our own systems to the payment--the 
functioning of the payment system of the U.S. and global 
economy.
    Internally, we are paying a great deal of attention to make 
sure that we are addressing ever escalating threats to our own 
operations. The banks that we supervise, we are very attentive 
and have experts who work with those banks to make sure that 
they are attentive. It is a larger problem, and this is one 
where cooperation is needed among card systems, retailers, and 
others involved in the financial system, and conceivably, 
legislation might be needed in this area.
    Senator Donnelly. Thank you, and I will conclude with this: 
For the State I represent, Indiana, we for many years were hit 
very, very hard in the manufacturing sector because of currency 
manipulation, among many other areas. And I know this has been 
mentioned, but I would like to make sure that you keep a close 
eye on this, because when we talk about manufacturing, the 
ability to be competitive--and all that was ever said to me by 
our manufacturers was, ``If it is a fair field, we will do 
fine. But if the game is rigged, I do not know how we win that 
kind of game.''
    And I have always, you know, had the same feeling--and my 
Ranking Member, Sherrod Brown, right next to me in Ohio, has 
dealt with this a lot with his manufacturers as well--that if 
currencies are fairly valued and we are not successful, our 
manufacturers, they have always said to me, ``If I cannot win a 
fair game, that is on me. But if I wind up in a situation where 
it is being manipulated against my company, it makes it awful 
tough to keep those workers working and to keep our economy 
growing.''
    So I would just ask that you keep that in mind as you move 
forward, and thank you so much for your service.
    Ms. Yellen. Thank you.
    Chairman Shelby. Madam Chair, you mentioned that the 
current unemployment is listed at 5.7 percent. However, one 
alternative measure that seems to fully capture a better sense 
of labor force participation is the U6 measure that lists total 
unemployed and underemployed at 11.3 percent as of January 
2015. This measure has not dipped below 10-percent unemployment 
since before the crisis. According to the Bureau of Labor 
Statistics data, there are now 12 million more Americans no 
longer participating in the workforce than in January 2009.
    Do you agree that the unemployment number that you cited, 
5.7 percent, in your opening statement paints a rosy or a 
better picture of the true unemployment rate that I just cited?
    Ms. Yellen. So, Senator, the U6 is a broader measure of 
unemployment. It includes marginally attached and discouraged 
workers and also an unusually large number of individuals who 
are working part-time who would like full-time jobs. So it is a 
much broader indicator of underemployment or unemployment in 
the U.S. economy, and while it has come down--it was 12.1 
percent a year ago. It has come down from there to 11.3 
percent. It definitely shows a less rosy picture than U3 or the 
5.7-percent number. And I did mention that we do not at this 
point, in spite of the fact the unemployment rate has come 
down, feel that we have achieved so-called maximum employment, 
in part for these very reasons. Labor force participation has 
come down, has been trending down. That is something that will 
continue for demographic reasons. I do not expect it to move up 
over time, but I do think a portion of the depressed labor 
force participation does reflect cyclical weakness in that in a 
stronger job market more people would enter.
    Chairman Shelby. But you basically concede that 11.3 
percent of underemployed people, that is not good in this 
country, is it?
    Ms. Yellen. That is an abnormally high level, and it 
signifies weakness that would be good to address.
    Chairman Shelby. The Financial Stability Board, FSB, plays 
an important role, as you well know, in implementing financial 
reforms, including completion of a capital framework that you 
alluded to for banks. The Federal Reserve is a member of this 
FSB, the Financial Stability Board. Given that the Financial 
Stability Board is not accountable to Congress or to any branch 
of the U.S. Government, to my knowledge, where do these 
Financial Stability Board reforms fit in the U.S. regulatory 
system? My question is: Does the Federal Reserve treat them as 
mandated directives or suggestions or what? And what statutory 
basis does the Fed have to implement the Financial Stability 
Board's reforms verbatim? Do you think further that the FSB 
decisions are important enough that they should be fully vetted 
by the FSOC before implemented in the U.S.?
    Ms. Yellen. Well, a number of----
    Chairman Shelby. That is two or three questions, but they 
are all tied together.
    Ms. Yellen. So a number of U.S. regulatory agencies 
participate in the FSB, including the administration and other 
regulators.
    Chairman Shelby. Sure.
    Ms. Yellen. Nothing that is decided in the FSB has effect 
in the United States unless the relevant agencies propose rules 
and those are publicly vetted through the normal public comment 
process and our rulemaking process. So those recommendations 
have no force in the United States unless we go through a 
rulemaking process. But there is a good reason for us to 
participate in these international fora. Financial markets are 
global. If we take actions to stiffen supervision and 
regulation in the United States, and other major financial 
centers do not act in similar ways, we will just see activity 
move out of our borders to other parts of the world, and I do 
not think that will make for a safer global financial system.
    So we do want to be part of international discussions that 
lead all countries to work harmoniously together to try to 
raise standards and maintain a level playing field, and that 
explains why we participate. And we can play and I think we do 
play a leadership role in this organization----
    Chairman Shelby. But you do not need to accept that their 
recommendations are verbatim, do you?
    Ms. Yellen. No, we do not, and often we have put in place 
tougher standards than came out of those fora.
    Chairman Shelby. Thank you.
    The Wall Street Journal recently reported that the Federal 
Reserve surcharge for the largest banks is hurting U.S. banks 
because it is not on par with what foreign regulators are 
applying to foreign banks. The article also indicated that the 
Fed's proposal is going beyond an international standard, 
roughly doubling the surcharge for big U.S. banks.
    We all want our banks well capitalized. I think that is 
very important. But does the Fed's proposal indicate its belief 
that foreign banks are not adequately capitalized? That has 
been said before, you know, that when they have stress tests, 
they are in deep stress, as we well know, probably a lot more 
than our banks are.
    Ms. Yellen. Well, our proposal embodies our own analysis of 
the costs to our economy and our financial system of possible 
distress at the largest and most systemic organizations. We 
chose to propose surcharges, capital surcharges, that rose 
above the level that were agreed internationally because we 
think this will make our financial system safer.
    There are other jurisdictions that have similarly put in 
effect a super equivalent regime. Switzerland is an example of 
that, and there are other countries that have gone a similar 
route. The proposal is out for comment, and we look forward to 
seeing what others say. But we do think it is important for the 
most systemic institutions whose distress could lead to 
significant financial impact on the United States, we do think 
it is important for them to hold appropriate capital, and 
especially when in times of stress it is a competitive 
advantage and not a disadvantage for those firms.
    Chairman Shelby. Madam Chair, some of the large foreign 
banks that do business in the U.S., do you hold them to the 
same capital standards that you do our banks? And if not, why 
not?
    Ms. Yellen. Well, we have just put in place a rule 
pertaining to foreign banking organizations that would ask 
them, if they are sufficiently large, require them to form 
intermediate holding companies that would contain their 
activities in the United States. And that is a way to subject 
them to the same capital and liquidity standards as U.S. firms 
doing business in our markets.
    Chairman Shelby. But shouldn't the standard--in other 
words, the foreign banks, as I understand what you are saying, 
they should not have an advantage with lower capital standards 
than our banks when they are doing business in this country.
    Ms. Yellen. Well, to the extent that they are doing 
business in this country, we are going to subject them to the 
same standards as our banking organizations.
    Chairman Shelby. Thank you.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman. Just a comment, 
then a couple of questions, and this side will wrap up.
    I understand, Madam Chair, your reluctance to weigh in on 
specific policy issues that are the province of the Congress, 
such as the earned income tax credit. I appreciate your 
bringing attention to those issues by which taxpayers/workers 
will benefit from the EITC.
    Trade, of course, is another one of those matters, and your 
predecessor had labeled currency manipulation ``an effective 
subsidy,'' his words. Ohio manufacturers, similar to Indiana 
manufacturers that Senator Donnelly mentioned, must compete 
against foreign competitors who are subsidized. I agree with 
your statement that this needs to be addressed.
    Two questions--first, about living wills. The FDIC last 
summer seemed positioned to declare the living wills of some of 
the Nation's largest banks not sufficient. Instead, though, the 
FDIC stepped back, and together you and the FDIC asked for 
resubmissions in July. Two questions, a couple questions. A 
two-part question: Are you prepared to declare living wills 
submitted during this next round of submissions not credible 
if, in fact, they are not? And what actions will you take if 
the living wills are actually deemed insufficient?
    Ms. Yellen. So we have worked, as you mentioned, closely 
with the FDIC to give guidance to the largest firms on what we 
want to see, what changes we want to see in their living wills 
in order to improve their resolvability. There are significant 
changes that we have asked for. Some pertain to their legal 
structure: the ability of critical operations that support an 
entire organization to remain available to the firm in a 
situation of distress, to simplify and make sure that they have 
a holding company structure that would be functional, to 
promote an orderly bankruptcy.
    We agreed with the FDIC on what we want to see. We are 
working with the firms to make sure they understand what we 
expect. We expect to see resubmissions of these plans by July 
of 2015, July of this year, and we have not----
    Senator Brown. Let me interrupt there. Are you willing to--
are you unwilling to accept any of these banks saying that 
``you have not given us enough information on what to do to 
comply by July''? Are you unwilling--will you say, ``We will 
not accept that answer''?
    Ms. Yellen. I feel we have given detailed feedback and 
adequate information, and if we do not see the progress we 
expect, we are fully prepared to declare the living wills to be 
not credible.
    Senator Brown. OK. That is good to hear. One last question, 
Mr. Chairman.
    Earlier this month, the major story broke about a trove of 
HSBC account holder data that reveals that their Swiss banking 
arm collaborated in efforts by some of its account holders to 
engage in tax evasion. On February 10th, I asked Ms. Hunter 
what steps her agency, the Fed, your agency, had taken with 
regard to these allegations. I gather that investigations of 
some individual U.S. account holders have been undertaken by 
IRS. Last week, Geneva prosecutors raided the private bank 
offices of HSBC as part of a new money-laundering 
investigation. We know HSBC has a history of major U.S. 
sanctions, major money-laundering violations. They now face 
major new charges of facilitating tax evasion.
    I know you may be unable to address details of an ongoing 
investigation, but summarize for this Committee, if you would, 
Madam Chair, what the Fed would normally do to pursue 
allegations like these regarding tax evasions by a major 
financial institution, how long you would expect an 
investigation to take--again, not specifically here if you are 
unwilling or unable to share that, but how you would normally 
do it, how long it takes, what steps you normally take with 
other Federal officials, with other countries' regulators?
    Ms. Yellen. Well, we would have some responsibility for 
this if it affected the operations of a bank in the United 
States. In this case, the information has been provided to the 
Justice Department. The Justice Department has primary 
enforcement responsibilities related to U.S. tax laws along 
with the IRS. And the Justice Department normally cooperates 
with us and provides information to us if they think that we 
would have jurisdiction if banking laws have been violated in 
the United States and that we should take action. In this case, 
the Justice Department has not provided us with information.
    Senator Brown. Do you ask them, or must they make the first 
move?
    Ms. Yellen. Well, we have not been privy to any of this 
information, and if they thought it appropriate, we would 
expect them to reach out to us.
    Senator Brown. Don't news reports suggest that there is no 
harm but perhaps reason for you to ask the Justice Department 
for some of this, any of this information that they might think 
important to this country's financial system and to these banks 
and to you?
    Ms. Yellen. Well, this is pretty recent news reports that 
we have learned about this.
    Senator Brown. OK.
    Chairman Shelby. Madam Chair, thank you for appearing again 
before the Committee. We look forward to further appearances, 
and this will conclude the hearing. Thank you.
    The Committee is adjourned.
    [Whereupon, at 12:17 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
                           February 24, 2015
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, I am pleased to present the Federal Reserve's semiannual 
Monetary Policy Report to the Congress. In my remarks today, I will 
discuss the current economic situation and outlook before turning to 
monetary policy.
Current Economic Situation and Outlook
    Since my appearance before this Committee last July, the employment 
situation in the United States has been improving along many 
dimensions. The unemployment rate now stands at 5.7 percent, down from 
just over 6 percent last summer and from 10 percent at its peak in late 
2009. The average pace of monthly job gains picked up from about 
240,000 per month during the first half of last year to 280,000 per 
month during the second half, and employment rose 260,000 in January. 
In addition, long-term unemployment has declined substantially, fewer 
workers are reporting that they can find only part-time work when they 
would prefer full-time employment, and the pace of quits--often 
regarded as a barometer of worker confidence in labor market 
opportunities--has recovered nearly to its prerecession level. However, 
the labor force participation rate is lower than most estimates of its 
trend, and wage growth remains sluggish, suggesting that some cyclical 
weakness persists. In short, considerable progress has been achieved in 
the recovery of the labor market, though room for further improvement 
remains.
    At the same time that the labor market situation has improved, 
domestic spending and production have been increasing at a solid rate. 
Real gross domestic product (GDP) is now estimated to have increased at 
a 3\3/4\-percent annual rate during the second half of last year. While 
GDP growth is not anticipated to be sustained at that pace, it is 
expected to be strong enough to result in a further gradual decline in 
the unemployment rate. Consumer spending has been lifted by the 
improvement in the labor market as well as by the increase in household 
purchasing power resulting from the sharp drop in oil prices. However, 
housing construction continues to lag; activity remains well below 
levels we judge could be supported in the longer run by population 
growth and the likely rate of household formation.
    Despite the overall improvement in the U.S. economy and the U.S. 
economic outlook, longer-term interest rates in the United States and 
other advanced economies have moved down significantly since the middle 
of last year; the declines have reflected, at least in part, 
disappointing foreign growth and changes in monetary policy abroad. 
Another notable development has been the plunge in oil prices. The bulk 
of this decline appears to reflect increased global supply rather than 
weaker global demand. While the drop in oil prices will have negative 
effects on energy producers and will probably result in job losses in 
this sector, causing hardship for affected workers and their families, 
it will likely be a significant overall plus, on net, for our economy. 
Primarily, that boost will arise from U.S. households having the 
wherewithal to increase their spending on other goods and services as 
they spend less on gasoline.
    Foreign economic developments, however, could pose risks to the 
outlook for U.S. economic growth. Although the pace of growth abroad 
appears to have stepped up slightly in the second half of last year, 
foreign economies are confronting a number of challenges that could 
restrain economic activity. In China, economic growth could slow more 
than anticipated as policymakers address financial vulnerabilities and 
manage the desired transition to less reliance on exports and 
investment as sources of growth. In the euro area, recovery remains 
slow, and inflation has fallen to very low levels; although highly 
accommodative monetary policy should help boost economic growth and 
inflation there, downside risks to economic activity in the region 
remain. The uncertainty surrounding the foreign outlook, however, does 
not exclusively reflect downside risks. We could see economic activity 
respond to the policy stimulus now being provided by foreign central 
banks more strongly than we currently anticipate, and the recent 
decline in world oil prices could boost overall global economic growth 
more than we expect.
    U.S. inflation continues to run below the Committee's 2-percent 
objective. In large part, the recent softness in the all-items measure 
of inflation for personal consumption expenditures (PCE) reflects the 
drop in oil prices. Indeed, the PCE price index edged down during the 
fourth quarter of last year and looks to be on track to register a more 
significant decline this quarter because of falling consumer energy 
prices. But core PCE inflation has also slowed since last summer, in 
part reflecting declines in the prices of many imported items and 
perhaps also some pass-through of lower energy costs into core consumer 
prices.
    Despite the very low recent readings on actual inflation, inflation 
expectations as measured in a range of surveys of households and 
professional forecasters have thus far remained stable. However, 
inflation compensation, as calculated from the yields of real and 
nominal Treasury securities, has declined. As best we can tell, the 
fall in inflation compensation mainly reflects factors other than a 
reduction in longer-term inflation expectations. The Committee expects 
inflation to decline further in the near term before rising gradually 
toward 2 percent over the medium term as the labor market improves 
further and the transitory effects of lower energy prices and other 
factors dissipate, but we will continue to monitor inflation 
developments closely.
Monetary Policy
    I will now turn to monetary policy. The Federal Open Market 
Committee (FOMC) is committed to policies that promote maximum 
employment and price stability, consistent with our mandate from the 
Congress. As my description of economic developments indicated, our 
economy has made important progress toward the objective of maximum 
employment, reflecting in part support from the highly accommodative 
stance of monetary policy in recent years. In light of the cumulative 
progress toward maximum employment and the substantial improvement in 
the outlook for labor market conditions--the stated objective of the 
Committee's recent asset purchase program--the FOMC concluded that 
program at the end of October.
    Even so, the Committee judges that a high degree of policy 
accommodation remains appropriate to foster further improvement in 
labor market conditions and to promote a return of inflation toward 2 
percent over the medium term. Accordingly, the FOMC has continued to 
maintain the target range for the Federal funds rate at 0 to \1/4\ 
percent and to keep the Federal Reserve's holdings of longer-term 
securities at their current elevated level to help maintain 
accommodative financial conditions. The FOMC is also providing forward 
guidance that offers information about our policy outlook and 
expectations for the future path of the Federal funds rate. In that 
regard, the Committee judged, in December and January, that it can be 
patient in beginning to raise the Federal funds rate. This judgment 
reflects the fact that inflation continues to run well below the 
Committee's 2-percent objective, and that room for sustainable 
improvements in labor market conditions still remains.
    The FOMC's assessment that it can be patient in beginning to 
normalize policy means that the Committee considers it unlikely that 
economic conditions will warrant an increase in the target range for 
the Federal funds rate for at least the next couple of FOMC meetings. 
If economic conditions continue to improve, as the Committee 
anticipates, the Committee will at some point begin considering an 
increase in the target range for the Federal funds rate on a meeting-
by-meeting basis. Before then, the Committee will change its forward 
guidance. However, it is important to emphasize that a modification of 
the forward guidance should not be read as indicating that the 
Committee will necessarily increase the target range in a couple of 
meetings. Instead the modification should be understood as reflecting 
the Committee's judgment that conditions have improved to the point 
where it will soon be the case that a change in the target range could 
be warranted at any meeting. Provided that labor market conditions 
continue to improve and further improvement is expected, the Committee 
anticipates that it will be appropriate to raise the target range for 
the Federal funds rate when, on the basis of incoming data, the 
Committee is reasonably confident that inflation will move back over 
the medium term toward our 2-percent objective.
    It continues to be the FOMC's assessment that even after employment 
and inflation are near levels consistent with our dual mandate, 
economic conditions may, for some time, warrant keeping the Federal 
funds rate below levels the Committee views as normal in the longer 
run. It is possible, for example, that it may be necessary for the 
Federal funds rate to run temporarily below its normal longer-run level 
because the residual effects of the financial crisis may continue to 
weigh on economic activity. As such factors continue to dissipate, we 
would expect the Federal funds rate to move toward its longer-run 
normal level. In response to unforeseen developments, the Committee 
will adjust the target range for the Federal funds rate to best promote 
the achievement of maximum employment and 2-percent inflation.
Policy Normalization
    Let me now turn to the mechanics of how we intend to normalize the 
stance and conduct of monetary policy when a decision is eventually 
made to raise the target range for the Federal funds rate. Last 
September, the FOMC issued its statement on Policy Normalization 
Principles and Plans. This statement provides information about the 
Committee's likely approach to raising short-term interest rates and 
reducing the Federal Reserve's securities holdings. As is always the 
case in setting policy, the Committee will determine the timing and 
pace of policy normalization so as to promote its statutory mandate to 
foster maximum employment and price stability.
    The FOMC intends to adjust the stance of monetary policy during 
normalization primarily by changing its target range for the Federal 
funds rate and not by actively managing the Federal Reserve's balance 
sheet. The Committee is confident that it has the tools it needs to 
raise short-term interest rates when it becomes appropriate to do so 
and to maintain reasonable control of the level of short-term interest 
rates as policy continues to firm thereafter, even though the level of 
reserves held by depository institutions is likely to diminish only 
gradually. The primary means of raising the Federal funds rate will be 
to increase the rate of interest paid on excess reserves. The Committee 
also will use an overnight reverse repurchase agreement facility and 
other supplementary tools as needed to help control the Federal funds 
rate. As economic and financial conditions evolve, the Committee will 
phase out these supplementary tools when they are no longer needed.
    The Committee intends to reduce its securities holdings in a 
gradual and predictable manner primarily by ceasing to reinvest 
repayments of principal from securities held by the Federal Reserve. It 
is the Committee's intention to hold, in the longer run, no more 
securities than necessary for the efficient and effective 
implementation of monetary policy, and that these securities be 
primarily Treasury securities.
Summary
    In sum, since the July 2014 Monetary Policy Report, there has been 
important progress toward the FOMC's objective of maximum employment. 
However, despite this improvement, too many Americans remain unemployed 
or underemployed, wage growth is still sluggish, and inflation remains 
well below our longer-run objective. As always, the Federal Reserve 
remains committed to employing its tools to best promote the attainment 
of its objectives of maximum employment and price stability.
    Thank you. I would be pleased to take your questions.
       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
                      FROM JANET L. YELLEN

Q.1. The Financial Stability Board (FSB), of which the Federal 
Reserve is a member, recently issued a proposal for a new long-
term debt requirement for large financial institutions. The 
Federal Reserve is expected to base its own long-term debt rule 
on the FSB's proposal. However, the FSB is now conducting a 
quantitative impact study to assess costs and effects of its 
proposal. Because the comment period on the FSB proposal has 
already closed, the public will not be able to comment on the 
results of the FSB study. Do you think it is important for the 
public to be able to comment on the FSB study? Will the Fed do 
its own quantitative impact study before implementing the FSB 
rule? If not, why not and is it appropriate to base a rule for 
U.S. banks on a study conducted by an international regulatory 
body?

A.1. Since the financial crisis, U.S. authorities and foreign 
regulators have been working to identify and mitigate the 
obstacles to an orderly resolution or wind-down of a global 
systemically important bank (GSIB). To achieve this objective, 
a failed GSIB in resolution must have a sufficient amount of 
loss-absorbing resources so that shareholders and creditors--
instead of taxpayers--will bear the costs of its failure. 
Accordingly, in November 2014, the FSB published for 
consultation a proposal for a common international standard on 
the total loss-absorbing capacity for GSIBs (TLAC proposal). 
The comment period for the FSB's TLAC proposal closed in 
February 2015; the FSB received comments from a range of 
commenters, including U.S. trade associations and public policy 
advocates. In connection with the TLAC proposal, the FSB is 
currently coordinating a comprehensive quantitative impact 
study to which the Federal Reserve and other U.S. authorities 
are contributing participants.
    Independently, the Federal Reserve has been developing a 
proposal that would require the largest, most complex U.S. 
banking firms to keep outstanding minimum amounts of long-term, 
unsecured debt at the holding company level (U.S. long-term 
debt proposal). In proposing and adopting rules on long-term 
debt requirements for U.S. banking firms, the Federal Reserve 
will seek public comment and comply fully with the 
Administrative Procedures Act and other applicable Federal law. 
To the extent that the FSB quantitative impact study provides 
information that is relevant to the U.S. long-term debt 
proposal, the Federal Reserve will take that information into 
account in preparing the materials that it publishes for public 
comment. As part of the rulemaking process, the Federal Reserve 
would consider all public comments as well as the public 
benefits and burdens associated with the proposed regulation.

Q.2. During a hearing last June in connection with the 
Financial Stability Oversight Council's (FSOC) Annual Report to 
Congress, Treasury Secretary Jack Lew responded to a question 
regarding the designation process for SIFI and G-SIFI 
institutions and the closely correlative timing by saying that, 
`` . . . the FSB does not make decisions for national 
authorities.'' Both the Secretary of the Treasury and the Chair 
of the Federal Reserve are members of both FSOC and FSB. There 
have been instances of FSB designating certain U.S. companies 
as systemically important before the FSOC did so, and other 
instances where the FSB proposed rules that U.S. regulators 
then promulgated domestically. Do you believe it is appropriate 
for a Federal Reserve governor to vote on an FSB proposal or 
determination before the FSOC votes on the same issue? What 
specific processes and safeguards are in place that prevent FSB 
rules and decisions from being implemented in the U.S. through 
FSOC as a matter of formality and without due regard to the 
regulatory process and our existing regulatory framework?

A.2. The FSOC's process for designating nonbank firms as 
systemically important assesses the potential harm that a 
firm's distress or failure would cause to the economy of the 
United States. The methodology underlying this assessment 
process, including the quantitative metrics used to rule out 
smaller, less complex firms, has been made public. \1\ In 
addition, for the firms it ultimately votes to designate, the 
FSOC publishes a description of the basis for its finding. No 
part of this process is linked, mechanically or otherwise, with 
the deliberations or findings of agencies outside the United 
States, including the FSB.
---------------------------------------------------------------------------
     \1\ http://www.treasury.gov/initiatives/fsoc/rulemaking/Documents/
Authority to Require Supervision and Regulation of Certain Nonbank 
Financial Companies.pdf
---------------------------------------------------------------------------
    The leaders of the Group of 20 Nations, including the 
United States, charged the FSB with, in part, identifying firms 
whose distress would threaten the global economy. 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 
which would reasonably be large enough to be considered 
systemically important. However, the specific designation 
frameworks and standards at the FSB and FSOC are materially 
different.
    As an example, the FSB's process for identifying global 
systemically important insurers (G-SIIs) is completely 
independent of the FSOC's designation process. 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 global systemically 
important insurers (G-SIIs) was developed by the International 
Association of Insurance Supervisors (IAIS). The IAIS' 
assessment methodology uses five categories to measure relative 
systemic importance: (1) nontraditional insurance and non-
insurance (NTNI) activities, (2) interconnectedness, (3) 
substitutability, (4) size, and (5) global activity. Within 
these five categories, there are 20 indicators, including: 
intra financial assets and liabilities, gross notional amount 
of derivatives, Level 3 assets, non-policyholder liabilities 
and non-insurance revenues, derivatives trading, short term 
funding, and variable insurance products with minimum 
guarantees.
    The FSOC considers a threat to the financial stability of 
the United States to exist if a nonbank financial company's 
material financial distress or activities could be transmitted 
to, or otherwise affect, other firms or markets, thereby 
causing a broader impairment of financial intermediation or of 
financial market functioning. An impairment of financial 
intermediation and financial market functioning can occur 
through several channels, including through: (1) exposure of 
other financial market participants to the firm; (2) 
liquidation of its assets; or (3) failure of the firm to 
perform a critical service or function that is relied upon by 
other market participants. 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 FSOC by the firm 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 firm.
    Any standards adopted by the FSB, including designation of 
an entity as a global systemically important financial 
institution (G-SIFI), 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 nonbank 
SIFI does not automatically result in the Federal Reserve Board 
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 its 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.

Q.3. Governor Tarullo, the Federal Reserve's representative to 
the FSB, stated that the Fed will be promulgating a rule to 
implement domestically the FSB's proposal on minimum margin 
requirements for certain forms of securities financing deals. 
As the FSB has been criticized for lack of transparency and 
accountability by U.S. officials and regulators, it is 
troubling that the Fed's FSB representative would indicate the 
rule's quick adoption in the United States. Is the Federal 
Reserve going to undertake an analysis independent from the FSB 
before promulgating a similar rule domestically? Since 
securities financing regulation has traditionally been within 
the purview of the Securities and Exchange Commission (SEC), 
not the Federal Reserve, how does the Federal Reserve intend to 
proceed with this rule and is the SEC going to be involved in 
that process? If not, why not? What expertise and knowledge 
does the Federal Reserve possess in this area?

A.3. The Federal Reserve would adopt minimum margin 
requirements for securities financing transactions only 
following a notice-and-comment rulemaking process supported by 
an independent assessment of the merits of such an approach. 
During that rulemaking process, the Federal Reserve would 
consult with the SEC, as well as other stakeholders and 
experts. The Federal Reserve would also draw on its extensive 
knowledge of securities financing markets.
    This knowledge derives from multiple sources, including the 
Federal Reserve's supervision of financial institutions that 
are the dominant intermediaries in these markets, as well as 
the Federal Reserve' s direct experience in securities 
financing markets related to the conduct of monetary policy.
    The FSB framework of minimum margin requirements has been 
developed through a multiyear process led by a working group 
that includes representatives of the Federal Reserve and the 
SEC. There have been multiple opportunities for public input 
into the FSB process:

    In April 2012, the FSB published an interim report 
        provided an overview of the securities lending and repo 
        markets, and identified financial stability issues in 
        these markets.

    In August 2013, the FSB published a policy 
        framework for addressing shadow banking risks in 
        securities lending and repos, which included for public 
        consultation the proposed regulatory framework of 
        minimum margin requirements.

    In October 2014, the FSB finalized minimum margin 
        requirements for transactions involving bank lenders 
        and nonbank borrowers, and simultaneously proposed for 
        public consultation the extension of the framework of 
        minimum margin requirements to transactions involving 
        two nonbank entities.

    In addition, the FSB conducted a multistage 
        quantitative impact study to help gauge the impact of 
        minimum margin requirements on market conditions.

Q.4. The Federal Reserve is a participant in negotiations 
within the International Association of Insurance Supervisors, 
which is currently developing a global capital standard for 
international insurance companies. How will these global 
capital standards for insurers impact the development of 
insurance capital standards here in the United States?

A.4. The Federal Reserve participates as a member to the IAIS 
along with our fellow U.S. members from the Federal Insurance 
Office and National Association of Insurance Commissioners. 
Along with these organizations, we advocate for the development 
of international standards that best meet the needs of the U.S. 
insurance market and U.S. consumers. The standards under 
development by the IAIS would only apply in the United States 
if adopted by the appropriate U.S. regulators in accordance 
with applicable domestic rulemaking procedures. Additionally, 
none of the standards are intended to replace the existing 
legal entity risk-based capital requirements that are already 
in place.
    The Federal Reserve continues to focus on constructing a 
domestic regulatory capital framework for our supervised 
insurance holding companies that is well tailored to the 
business of insurance. The timeline for the development of our 
rulemaking is distinct from the activities of the IAIS. We are 
exercising great care as we approach this challenging mandate. 
We are committed to following a transparent rulemaking 
processes to develop our insurance capital framework, which 
will allow for an open public comment period on a concrete 
proposal. We will continue to engage with interested parties as 
we move forward.

Q.5. Over the last few years, the Federal Reserve has issued a 
series of new rules on capital and liquidity requirements for 
banks. Although these rules are important to ensure that the 
banking system is adequately capitalized, the must also strike 
the right balance to promote safety and soundness without 
eroding economic growth and job creation. Has the Federal 
Reserve conducted any cost-benefit analysis of the cumulative 
impact of its capital and liquidity rules on future economic 
growth and job creation? If yes, please share with this 
Committee the results of that study. If no, are you willing to 
conduct a cost-benefit analysis before finalizing the rules?

A.5. As required by the Dodd-Frank Act, the Federal Reserve has 
adopted new risk-based capital and liquidity requirements 
through the rulemaking process to strengthen and enhance the 
safety and soundness of banking organizations and the U.S. 
banking system.
    To become informed about the benefits and burdens of any 
capital and liquidity requirements, the Federal Reserve 
collected information directly from parties that we expect will 
be affected by the rulemaking through surveys and meetings. The 
Federal Reserve also participated in several international 
studies assessing the potential impact of changes to the 
regulatory capital and liquidity requirements, which found that 
stronger capital and liquidity requirements could help reduce 
the likelihood of banking crises while yielding positive net 
economic benefits. \2\ In the rulemaking process, the Federal 
Reserve specifically sought comment from the public on the 
burdens and benefits of the proposed approaches and on a 
variety of alternative approaches to the proposal. The Federal 
Reserve carefully considered public comments received on every 
notice of proposed rulemaking, including information relevant 
to the impact of rulemakings provided by commenters. In 
adopting final rules on these topics, the Federal Reserve 
sought to adopt a regulatory alternative that faithfully 
reflected the statutory provisions and the intent of Congress, 
while minimizing regulatory burden. We also provided an 
analysis of the costs on small depository organizations of our 
rulemaking consistent with the Regulatory Flexibility Act and 
computed the anticipated cost of paperwork consistent with the 
Paperwork Reduction Act. The Federal Reserve performs an impact 
analysis with respect to each final rule pursuant to the 
Congressional Review Act. \3\
---------------------------------------------------------------------------
     \2\ Those studies included the Macroeconomic Assessment Group 
(MAG), a joint group of the Basel Committee on Banking Supervision 
(BCBS) and Financial Stability Board, (ii) the long-term economic 
impact working group of the BCBS, and (iii) the BCBS Quantitative 
Impact Study. See MAG, ``Assessing the Macroeconomic Impact of the 
Transition to Stronger Capital and Liquidity Requirements'' (MAG 
Analysis), available at: http://www.bis.org/publ/othpl2.pdf. See also 
BCBS ``An Assessment of the Long-Term Economic Impact of Stronger 
Capital and Liquidity Requirements'' (LEI Analysis), also available at: 
http://www.bis.org/publ/bcbs173.pdf. See also ``Results of the 
Comprehensive Quantitative Impact Study'', also available at: http://
www.bis.org/publ/bcbs186.pdf.
     \3\ Before issuing any final rule, the Federal Reserve prepares an 
analysis under the CRA and provides the analysis to the Office and 
Management and Budget for its review. As part of this analysis, the 
Federal Reserve assesses whether the final rule is a ``major rule,'' 
meaning the rule could (i) have an annual effect on the economy of $100 
million or more; (ii) increase or process for consumers, individual 
industries, Federal, States, or local government agencies, or 
geographic regions; or (iii) have significant adverse effects on 
competition, employment, investment, productivity, or innovation.
---------------------------------------------------------------------------
    As part of the adoption of Regulation Q, the Federal 
banking agencies performed an analysis that showed that the 
vast majority of U.S. banking organizations, including 
community banks, would have already met the revised capital 
requirements plus the capital conservation buffer on a fully 
phased-in basis, which suggests that any negative impact 
stemming from the revised capital rule on credit availability 
should be small.
                                ------                                


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

Q.1. Will the Federal Reserve follow a formal rulemaking 
process for insurance capital standards and not use an 
expedited process like imposing the standards by order?

A.1. The Federal Reserve is committed a transparent rulemaking 
processes to develop our insurance capital framework. This will 
allow for an open public comment period on a concrete proposal.

Q.2. Recognizing that there are two standard development tracks 
running at the same time--development of a domestic capital 
standard at the Federal Reserve, and development of an 
international capital standard at the IAIS--could you explain 
how the Federal Reserve is coordinating these efforts?

A.2. The Federal Reserve participates as a member to the 
International Association of Insurance Supervisors (IAIS) along 
with our fellow U.S. members from the Federal Insurance Office 
and National Association of Insurance Commissioners. Along with 
these organizations, we advocate for the development of 
international standards that best meet the needs of the United 
States insurance market. The standards under development by the 
IAIS would only apply in the United States if adopted by the 
appropriate U.S. regulators in accordance with applicable 
domestic rulemaking procedures. Additionally, none of the 
standards are intended to replace the existing legal entity 
risk-based capital requirements that are already in place.
    The Federal Reserve continues to focus on constructing a 
domestic regulatory capital framework for our supervised 
insurance holding companies that is well tailored to the 
business of insurance. We are committed to a transparent 
rulemaking process and are engaging stakeholders at various 
levels. The timeline for the development of our rulemaking is 
distinct from the activities of the IAIS. We are exercising 
great care as we approach this challenging mandate. We will 
continue to engage with interested parties as we move forward.

Q.3. The Basel Advanced Approaches regulation provides an 
avenue for companies to request a waiver from the rule. In 
effect, this would allow an institution to use the Basel 
Standardized Approach to calculate its capital ratios. How 
would the waiver process work? What are the types of criteria 
that would be considered?

A.3. Under the banking agencies' regulatory capital rules, \1\ 
internationally active banking organizations (specifically, 
those with total consolidated assets of $250 billion or more or 
with consolidated total on-balance-sheet foreign exposure of 
$10 billion or more) must calculate risk-based capital using 
the advanced approaches risk-based capital rules (the advanced 
approaches rule) in addition to the standardized approach. 
Section 100(b)(2) of the regulatory capital rules provides that 
a banking organization subject to the advanced approaches rule 
shall remain subject to that rule until the primary Federal 
regulator determines that application of the advanced 
approaches rule is not appropriate in light of the banking 
organization's size, level of complexity, risk profile, or 
scope of operations. In making such a determination, the 
primary Federal regulator must apply notice and response 
procedures. The primary Federal regulator may also set 
conditions on the granting of the waiver as appropriate, and 
any waiver granted must be consistent with safety and 
soundness. The capital adequacy of a banking organization that 
meets the thresholds described above but has received a waiver 
from application of the advanced approaches rules would be 
addressed by standardized risk-based capital rules, leverage 
rules, and capital planning and supervisory stress-testing 
requirements.
---------------------------------------------------------------------------
     \1\ 12 CFR part 3 (national banks and Federal savings 
associations), 12 CFR part 217 (State member banks, bank holding 
companies, and savings and loan holding companies), and 12 CFR part 324 
(State nonmember banks and State savings associations).
---------------------------------------------------------------------------
                                ------                                


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

Q.1. Ms. Yellen, in 2013, Bloomberg View, looking at 2009 
credit-rating date prices, placed the value on ``too big to 
fail'' subsidy at $83 billion. Another study by the 
International Monetary Fund released in March, 2014 put the 
number somewhere between $16 billion and $70 billion annually 
in 2011 and 2012 for the eight largest U.S. Banks. The GAO in a 
report released last summer then confirmed the fact that Wall 
Street megabanks have not only received more support from 
Government bailout programs, but enjoy a taxpayer-funded 
advantage over community and regional banks that widens during 
times of economic crisis.
    Do you believe that megabanks, because creditors assume the 
Government can't let them collapse, borrow for less than they 
otherwise would giving them an unfair advantage over regional 
and community banks? Do you think the supplemental leverage 
ratio should be strengthened further to offset this advantage?

A.1. It is well documented that large banks generally fund 
themselves at lower cost than smaller banks. Identifying a 
single, specific reason for this funding differential, however, 
is challenging since large banks and small banks differ along 
many different dimensions. At the same time, it is not 
unreasonable to assume that at least some of the observed 
funding differential owes to heightened investor expectations 
of public support for large banks.
    Despite the fact that large banks may benefit to some 
degree from heightened investor expectations of Government 
support, it should be noted that the evidence in favor of such 
a ``Too Big to Fail'' (TBTF) subsidy has waned in recent years. 
In particular, the cited Government Accountability Office (GAO) 
study documents that the estimated size of the TBTF subsidy has 
declined significantly since the financial crisis. In addition, 
rating agencies have begun to remove their explicit rating 
uplift that was directly tied to expectations of Government 
support.
    This decline in the observed TBTF subsidy is not an 
accident. Rather, a number of coordinated policies are working 
in concert to improve the capital and liquidity position as 
well as the resolvability of our largest and most systemic 
banks which will reduce both the probability of any future 
insolvency as well the need to provide Government support in 
the event that a large bank fails in the future. More 
specifically, the capital position of our largest banks has 
been improved with the finalization of Basel III and the 
recently proposed Systemically Important Financial Institution 
(SIFI) capital surcharges will further enhance the resiliency 
of our largest and most systemic banks. The new liquidity 
coverage requirement (LCR) will further help to ensure that 
large and systemic banks have the needed liquidity to manage 
through a period of financial stress. Finally, provisions of 
Dodd-Frank Wall Street Reform and Consumer Protection Act's 
(Dodd-Frank Act) Title II were designed to ensure that a large 
and systemically important bank could be resolved in bankruptcy 
without requiring any taxpayer support.
    Accordingly, a number of policies that were put in place 
following the financial crisis have resulted in much tighter 
regulation of large and systemically important banks and are 
reducing any TBTF subsidy resulting from heightened investor 
expectations of Government support.

Q.2. The Dodd-Frank Act arguably allows the assets of an 
insurance company affiliated with a failing depository 
institution to be used to cover the costs of resolving the 
depository institution. Such action could significantly harm 
the policyholders of the insurance company.
    Accordingly, do you support legislation clarifying that 
money held by insurance affiliates of failing depository 
institutions cannot be transferred without the consent of State 
insurance regulators?

A.2. The Federal Reserve has long considered the source of 
strength doctrine, which was codified in the Dodd-Frank Act, to 
be an important component of reducing the likelihood of bank 
failures and protecting taxpayers against losses that might 
arise from bank failures. Section 616 of the Dodd-Frank Act 
requires all depository institution holding companies to serve 
as a source of financial strength to their subsidiary 
depository institutions, including bank holding companies, 
savings and loan holding companies, and any other company that 
controls an insured depository institution. Under section 5(g) 
of the Bank Holding Company Act, the ability of the Federal 
Reserve to require a bank holding company to provide funds to a 
subsidiary insured depository institution may be blocked by a 
State insurance regulator if the funds would be provided by a 
bank holding company or a subsidiary of the holding company 
that is an insurance company.
    We understand that legislation has been proposed which 
would extend the same treatment to insurance companies that are 
savings and loan holding companies or are companies that 
otherwise control an insured depository institution. While this 
legislation would provide consistency of treatment between bank 
holding companies and other depository institution holding 
companies, it would weaken the ability of these companies to be 
a source of strength to their insured depository institutions.
                                ------                                


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

Q.1. Chair Yellen, what is the appropriate response time for 
the Fed to respond to a written question by a Senator on the 
Banking Committee?
    Would you agree that over 6 months is unacceptable?
    What is the average response time for the Fed to respond to 
Congress?
    What is the Federal Reserve Board process for responding to 
official Congressional correspondence?

A.1. The Board recognizes the oversight function that the 
Committee exercises over the Federal Reserve and has long and 
consistently cooperated to provide the Committee with 
information that it needs to conduct its oversight role. It is 
the custom and practice of the Federal Reserve to respond fully 
to requests for information from Congress, including responses 
to questions for the record following hearings. As always, we 
endeavor to respond to requests fully and in as timely a manner 
as possible.

Q.2. Now that the Federal Reserve oversees approximately \1/3\ 
of the life insurance industry by premium volume, it is 
essential that the Federal Reserve has the proper person[ne]l 
and expertise to support proper insurance regulatory oversight. 
In addition to the hiring of former Connecticut Insurance 
Commissioner Tom Sullivan, how many other individuals has the 
Board hired that have experience regulating insurance 
companies?

A.2. The Federal Reserve is investing significant time and 
effort into enhancing our understanding of the insurance 
industry and firms we supervise, and we are committed to 
tailoring our supervisory framework to the specific business 
lines, risk profiles, and systemic footprints of the insurance 
holding companies we oversee. As part of this, we have hired a 
significant number of staff who have prior experience 
regulating insurance companies.

Q.3. How does the Board assign examiners to insurance 
companies?

A.3. The Federal Reserve considers a number of factors when 
assigning staff to supervisory teams in order to best meet our 
supervisory objectives of protecting the safety and soundness 
of consolidated firms and mitigating any risks to financial 
stability. These teams are combination of Federal Reserve staff 
with expertise in risk management, insurance, and specific 
areas of supervision.

Q.4. How many examiners with insurance experience currently 
work for the Federal Reserve?

A.4. The Federal Reserve employs approximately 70 people to 
supervise insurance holding companies. We will continue to 
evaluate our needs and increase our hiring as needed.

Q.5. What policies and procedures has the Federal Reserve 
established for conducting supervision of insurance companies?

A.5. After the passage of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), the Federal Reserve 
moved quickly to develop a supervisory framework that is 
appropriate for insurance holding companies that own depository 
institutions and promptly assigned supervisory teams to handle 
day-to-day supervision of those insurance holding companies. We 
also acted promptly to commence supervision of the three 
insurance holding companies designated by the Financial 
Stability Oversight Council for Federal Reserve supervision. 
While building our supervisory regime for these firms, we have 
reached out to our colleagues in the State insurance 
departments. Our supervisory efforts to date have focused on 
strengthening firms' risk identification, measurement, and 
management; internal controls; and corporate governance. Our 
principal supervisory objectives for insurance holding 
companies are protecting the safety and soundness of the 
consolidated firms and their subsidiary depository institutions 
while mitigating any risks to financial stability. The 
supervisory program continues to be tailored to consider the 
unique characteristics of insurance operations and to rely on 
the work of the primary functional regulator to the greatest 
extent possible.

Q.6. The International Association of Insurance Supervisors 
(IAIS) is currently developing global insurance capital 
standards. This process is occurring at the same time the Fed 
is implementing the Insurance Capital Standards Clarification 
Act and authoring domestic insurance capital standards. The 
international standards have received a good amount of 
criticism here in the U.S. There is particular concern that the 
Fed may agree to IAIS standards before domestic standards are 
finalized. Does the Federal Reserve intend to precede these 
international efforts?

A.6. The Federal Reserve participates as a member to the IAIS 
along with our fellow U.S. members from the Federal Insurance 
Office (FIO) and National Association of Insurance 
Commissioners (NAIC). Along with these organizations, we 
advocate for the development of international standards that 
best meet the needs of the U.S. insurance market and U.S. 
consumers. The standards under development by the IAIS would 
only apply in the United States if adopted by the appropriate 
U.S. regulators in accordance with applicable domestic 
rulemaking procedures. Additionally, none of the standards are 
intended to replace the existing legal entity risk-based 
capital requirements that are already in place.
    The Federal Reserve continues to focus on constructing a 
domestic regulatory capital framework for our supervised 
insurance holding companies that is well tailored to the 
business of insurance. The timeline for the development of our 
rulemaking is distinct from the activities of the IAIS. We are 
exercising great care as we approach this challenging mandate. 
We are committed to following a transparent rulemaking 
processes to develop our insurance capital framework, which 
will allow for an open public comment period on a concrete 
proposal. We will continue to engage with interested parties as 
we move forward.

Q.7. Who represents the Federal Reserve Board at meetings of 
the IAIS?

A.7. Since joining the IAIS in late 2013, the Federal Reserve 
has been an active participant in several key committees, 
working groups, and work streams. We currently hold a seat on 
the Financial Stability Committee and the Technical Committee 
of the IAIS. Our participation in these activities is primarily 
overseen by Thomas Sullivan, Associate Director, Division of 
Banking Supervision and Regulation, with support and 
participation of other staff of the Federal Reserve System at 
the direction and under the supervision of the Board of 
Governors which ultimately is responsible for our policy 
positions.

Q.8. Can you describe the process the U.S. uses to present a 
position during IAIS negotiations?

A.8. The Federal Reserve has acted on the international 
insurance stage in an engaged partnership with our colleagues 
from the FIO, the State insurance commissioners, and the NAIC. 
We collaborate with one another both formally and informally on 
matters of import which are before the IAIS membership. Our 
multiparty dialogue, while respectful of each of our individual 
authorities, strives to develop a central ``Team USA'' position 
on the most critical matters of global insurance regulatory 
policy.
                                ------                                


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

Q.1. Shortly after the Federal Reserve joined the International 
Association of Insurance Supervisors (IAIS), the IAIS voted to 
shut out public observers including consumer groups from most 
of their meetings. How did the Federal Reserve representative 
vote on this issue? If the Federal Reserve is committed to 
being transparent in its operations, will you support allowing 
the public to observe the IAIS meetings in the same way 
Congress--and this Committee--does with its hearings and mark-
ups?

A.1. The Federal Reserve, along with our partners, the State 
insurance commissioners, the National Association of Insurance 
Commissioners and the Federal Insurance Office have, and will 
continue to actively seek out U.S. insurance stakeholders to 
ensure we are fully engaged and understanding of their 
perspectives as we negotiate global insurance standards at 
IAIS. For instance, the U.S. delegation has hosted several 
meetings in recent months, where we invited in U.S. insurance 
stakeholders for open dialogue and active working sessions 
regarding matters of policy which are currently before the 
IAIS. This level of engagement will continue with U.S. 
interested parties.
    The Federal Reserve supports intervals and protocols for 
stakeholders to provide comment and input. We believe strongly 
in independence within the standard setting process and would 
also seek to mitigate any opportunity for regulatory capture 
within the proceedings. The IAIS voted to revise its approach 
for industry participation in standard setting. Under the new 
process, industry will no longer provide financial support to 
the IAIS or be day-to-day participants in the development of 
international supervisory standards for insurance. The industry 
and public will be able to provide input through stakeholder 
meetings as well as through comments on exposures of draft IAIS 
proposals. The Federal Reserve supports transparency in 
rulemaking and policy development and believes that it is 
critical that standard-setting bodies be fully independent of 
the regulated.

Q.2. The Financial Stability Oversight Council (FSOC) recently 
adopted guidance on how it deals with entities it is 
considering for SIFI designation, however the Council's actions 
did not address concerns about how it mitigates systemic risk. 
In particular, the Council did not create a process that would 
reduce potential threats to the financial system by allowing a 
company or its primary regulator to address identified risks 
before designation. Shouldn't FSOC's primary focus be to 
identify and ensure systemic risks are addressed rather than 
simply sending a nonbank entity to the Federal Reserve for 
undefined regulation? Why should the Federal Reserve regulate 
nonbank systemically important financial institutions as 
opposed to their primary regulator?

A.2. The Dodd-Frank Act gives the FSOC authority to reduce 
systemic risks by requiring that systemically important 
financial institutions be supervised by the Federal Reserve and 
subject to enhanced prudential standards. Such enhanced 
prudential standards are designed to reduce systemic risk by 
ensuring that these firms maintain adequate capital and 
liquidity, and that they appropriately plan for an orderly 
resolution in the event of their failure. In supervising 
systemically important financial institutions, the Federal 
Reserve's role is not to replace the functional regulator, but 
rather to focus on consolidated supervision and systemic risk 
reduction. The Federal Reserve is committed to tailoring its 
enhanced prudential standards for systemically important firms 
it supervises to the specific risks posed by each firm. The 
Dodd-Frank Act requires the FSOC to reevaluate each designation 
annually to consider whether the designation should be 
rescinded. This annual review process establishes a process for 
the FSOC to rescind a designation if the company has taken 
steps to reduce the risk that the firm poses a threat to the 
financial stability of the United States.
                                ------                                


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

Q.1. With Congress preparing to consider a budget in the near 
future, some members on the other side of the aisle are calling 
for severe, across-the-board funding cuts. In addition to being 
bad policy for many of the priorities that could be cut, what 
would be the impact on the economy of a major fiscal 
tightening? How is the Fed taking into account the risk of new 
fiscal austerity in its timeline for tightening?
    If Congress were to impose severe fiscal cuts, would the 
Fed have to delay its timeline for tightening monetary policy 
to compensate for the contractionary effect? Given where 
monetary policy is with respect to the zero lower bound, 
wouldn't it be better policy to allow monetary policy to 
normalize first, before considering severe budget cuts?

A.1. The implications for the economy of a fiscal contraction 
would depend on many aspects of the situation. But in general, 
a fiscal contraction would generally be associated with slower 
GDP growth for a time, higher unemployment for a time, and 
somewhat lower inflation for a time, holding all other 
influences on the economy constant. As time passed, these 
effects would normally be expected to fade, as a result of the 
normal pursuit of monetary policy objectives, namely price 
stability and maximum employment. In other words, monetary 
would seek to restore the economy to its mandate-consistent 
performance, with labor fully employed and with inflation 
running at its mandate-consistent pace of 2 percent.
    As the Federal Open Market Committee (FOMC) assesses the 
best path for monetary policy to follow, the Committee attempts 
to take into account the totality of factors affecting the pace 
of progress toward the Committee's congressionally mandated 
policy objectives. Moreover, as I have noted many times, our 
policy decisions will evolve in light of the latest evidence 
concerning the position of the economy relative to our policy 
objectives. Specifically, if the sum total of factors 
restraining the pace of activity proves to be stronger than 
anticipated, then a more-accommodative monetary policy will be 
warranted to best promote attainment of the policy objectives. 
Conversely, if the factors restraining the pace of activity 
prove to be less potent than anticipated, then a less-
accommodative monetary policy will be warranted, all else 
equal.

Q.2. Long-term unemployment is coming down from its peak after 
the financial crisis, but the level is still high. As you know, 
Americans who have been hit with long-term unemployment face 
greater obstacles to returning to work, which, in addition to 
the human toll on these families, reduces our economy's overall 
productive capacity. How can monetary policy help address the 
challenge of long-term unemployment? Is long-term unemployment 
a reason to let the economy run a little bit ``hotter'' for a 
little bit longer before tightening?

A.2. The issue of long-term unemployment is very serious, as it 
has enormous implications in human terms for those most 
directly affected by it--first and foremost the workers 
themselves and their immediate families--but also for the 
overall performance of the economy. I would note that there are 
some reasonably encouraging signs that, as overall labor-market 
conditions have improved, the situation of the long-term 
unemployed has also improved. The best contribution that the 
Federal Reserve can make to the ongoing reduction in long-term 
unemployment is to continue to pursue our congressionally 
mandated objectives of price stability and maximum employment. 
A broad consensus agrees that by pursuing these objectives, the 
Federal Reserve provides the best possible backdrop for the 
economy to perform as well as possible.

Q.3. As you may be aware, some of my colleagues on the other 
side of the aisle would like to throw sand in the gears of our 
financial regulators by tampering with the way agencies 
evaluate the benefits and costs of their actions. These 
proposals would impose a rigged version of cost-benefit 
analysis that would prevent the implementation of financial 
reform laws, create a nearly insurmountable obstacle to action, 
and invite frivolous legal challenges at taxpayers' expense. 
Can you elaborate on some of the problems with proposals such 
as these?

A.3. The Federal Reserve takes quite seriously the importance 
of evaluating the benefits and burdens associated with our 
rulemaking efforts. To become informed about these benefits and 
burdens, before we develop a regulatory proposal, we often 
collect information directly from parties that we expect will 
be affected by the rulemaking. This helps us craft a proposal 
that is both effective and minimizes regulatory burden. In the 
rulemaking process, we also specifically seek comment from the 
public on the burdens and benefits of our proposed approach as 
well as on a variety of alternative approaches to the proposal. 
In adopting a final rule, we seek to adopt a regulatory 
alternative that faithfully reflects the statutory provisions 
and the intent of Congress while minimizing regulatory burden. 
We also provide an analysis of the costs on small depository 
organizations of our rulemaking consistent with the Regulatory 
Flexibility Act and compute the anticipated cost of paperwork 
consistent with the Paperwork Reduction Act.
    Imposing additional procedural steps and providing new 
avenues for legal challenge to the Federal Reserve's rulemaking 
process would likely extend the amount of time it takes the 
Federal Reserve to promulgate new regulations and to revise 
existing regulations. This could slow the pace at which the 
Federal Reserve implements financial reform laws and could 
limit the Federal Reserve's ability to respond promptly to 
situations where amendments to Board regulations are deemed to 
be necessary.

Q.4. In the aftermath of the financial crisis, there was a 
clear consensus that the compensation practices of some 
financial companies created incentives for employees to chase 
profits by taking on large, inappropriate risks, where 
taxpayers could be stuck with the downside if things went 
wrong. We're now approaching 5 years after the passage of the 
2010 Wall Street Reform law, and many of the compensation 
reforms have yet to be implemented.
    The Federal Reserve, with our other financial regulators, 
has responsibility for implementing Section 956 of the Wall 
Street Reform law, which prohibits compensation arrangements at 
financial companies that could drive inappropriate risk-taking. 
Can you please provide an update on the status of this 
rulemaking?

A.4. Section 956 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) requires the Federal 
Reserve, the Office of the Comptroller of the Currency (OCC), 
the Federal Deposit Insurance Corporation (FDIC), the 
Securities and Exchange Commission, the National Credit Union 
Administration Board, and the Federal Housing Finance Agency 
(the Agencies) to jointly issue regulations or guidelines that 
would prohibit any types of incentive based payment 
arrangement, or any feature of any such arrangement, that 
regulators determine encourage inappropriate risks by providing 
excessive compensation or that could lead to material financial 
loss to a covered financial institution.
    Section 956 helps address a critical safety and soundness 
issue that may have contributed to the financial crisis: poorly 
designed compensation structures that can misalign incentives 
and result in excessive risk-taking in financial organizations. 
The Agencies' implementation of this and other sections of the 
Dodd-Frank Act, as Congress directed, is designed to address 
many of the systemic issues that contributed to the crisis. To 
that end, an interagency notice of proposed rulemaking to 
implement the provisions of section 956, titled Incentive-Based 
Compensation Arrangements, was published in the Federal 
Register on April 14, 2011. The Agencies received more than 
11,000 comments on the proposal, many of which raised complex 
issues requiring additional research and analysis.
    The Agencies' staffs are meeting regularly to work through 
the issues raised in the comments, which the Agencies will 
consider carefully before proceeding. The Federal Reserve 
expects that the Agencies will take further action to implement 
section 956 soon and the Federal Reserve recognizes the 
importance of completing this rulemaking as expeditiously as 
possible. In the meantime, the Federal Reserve will continue 
its ongoing supervisory and regulatory work addressing 
compensation-related issues at financial institutions that it 
supervises. Currently this work is based on the Interagency 
Guidance on Sound Incentive Compensation Policies, \1\ enacted 
by the Federal Reserve, OCC and FDIC after being proposed by 
the Federal Reserve, as well as interagency guidelines adopted 
by the same agencies implementing the compensation-related 
safety and soundness standards in section 39 of the Federal 
Deposit Insurance Act. \2\
---------------------------------------------------------------------------
     \1\ 75 Federal Register 36395 (June 25, 2010).
     \2\ 12 U.S.C. 1831p-1(c); 12 CFR Part 208, Appendix D-1.

Q.5. The Federal Reserve, OCC, and FDIC have on several 
occasions expressed concern about the risk management practices 
of regulated institutions with respect to leveraged lending. As 
regulators have required banks to reduce their risks in this 
area, however, there have been reports that nonbank lenders are 
stepping in to fill the void. Even if regulated institutions 
reduce their direct exposure to leveraged loans, they still 
face risks from lending that occurs through the ``shadow 
banking'' sector--for example, if a regulated bank is lending 
money to a hedge fund or other entity that invests in risky 
loans, if a crisis occurs with nonbank lenders that could 
depresses bank asset values through a fire sale or destabilize 
credit availability marketwide, or through a cascade of 
defaults that could find its way back to a bank's doorstep.
    How is the Federal Reserve working with other regulators, 
the Financial Stability Oversight Council, and the Office of 
Financial Research to monitor leveraged lending by institutions 
other than those it regulates?

A.5. Within the Federal Reserve, staff regularly review 
marketwide information on underwriting trends as well as deals 
being made by lenders to assess the effects of supervisory 
actions to require banks to reduce their risks in leveraged 
lending. An important part of the analysis is the extent to 
which the origination of leveraged loans is migrating to 
nonbank institutions. Federal Reserve staff's financial 
stability analysis looks at various sources to assess this, 
including market data sources which provide information on the 
bookrunners, or main underwriters, for highly leveraged 
transaction deals that have closed in the last quarter as well 
anecdotal evidence based on regular staff meetings with market 
participants. Federal Reserve staff have presented on the issue 
of leveraged lending to the principals of the Financial 
Stability Oversight Council. \3\
---------------------------------------------------------------------------
     \3\ See the readout from the January 21, 2015 meeting at http://
www.treasury.gov/initiatives/fsoc/council-meetings/Documents/
January%2021,%202015.pdf.

Q.6. How is the Fed monitoring the direct and indirect exposure 
of its regulated institutions to nonbank entities that are 
---------------------------------------------------------------------------
engaging in leveraged lending?

A.6. The Federal Reserve studied extensively the exposures of 
the majority of its regulated institutions (specifically, about 
80 percent of the banking sector) to a sudden reversal in 
conditions in leveraged lending--alongside a severe recession--
in the severely adverse scenario used in the recently completed 
stress test exercise. This exercise studied both direct 
exposures--including from loans held in the pipeline prior to 
sale to nonbank entities and holdings of securities issued by 
collateralized loan obligations--as well as indirect 
exposures--including (as described in the scenario narrative) a 
sharp deterioration in the secondary market for leveraged loans 
and related assets consistent with the distress of a number of 
nonbank entities engaged in leveraged lending.
    Regular assessments of financial stability by Federal 
Reserve staff also consider other channels through which a 
deterioration in the leveraged lending market--and speculative 
debt markets more broadly--could create strains that could then 
indirectly feedback on the financial sector, including the 
institutions that the Federal Reserve regulates. One such 
channel, which was highlighted in the February 24, 2015 
Monetary Policy Report, is the growth in mutual funds and 
exchange-traded funds. These investors, which now hold a much 
higher fraction of the available stock of relatively less 
liquid assets (including leveraged loans), give the appearance 
of offering greater liquidity than the markets in which they 
transact and, as a result, heighten the potential for forced 
sales in underlying markets.

Q.7. What is the Fed's assessment of the risks currently posed 
by leveraged lending outside of the institutions it regulates?

A.7. Currently, the Federal Reserve sees little migration in 
the origination of leveraged loans as a result of supervisory 
actions, although staff are continuing to monitor closely this 
issue as described in the answer to Question 5. In terms of 
investors in leveraged loans, however, and as described in the 
answer to Question 6, mutual funds' and exchange-traded funds' 
holdings of a higher fraction of the available stock of 
relatively less liquid assets (including leveraged loans) 
heightens the potential for forced sales in underlying markets.

Q.8. What data can you provide regarding the share and relative 
riskiness of leveraged lending by nonbanks vs. regulated 
institutions, the exposure of regulated institutions to 
leveraged lending by nonbanks, and any systemic risk concerns 
relating to leveraged lending by nonbanks?

A.8. As described earlier, the Federal Reserve relies on a 
variety of market data sources--which are broadly available--to 
assess the state of the speculative grade corporate debt market 
across a variety of dimensions. Importantly, the Federal 
Reserve has highlighted key trends in speculative-grade 
corporate debt markets, including issuance volume and important 
underwriting trends in recent Monetary Policy Reports.
    The Federal Reserve sees little migration in the 
origination of leveraged loans as a result of supervisory 
actions. However, in the instances where nonbanks have 
increased their share of originations of leveraged loans, often 
these transactions have been higher risk.
    The Federal Reserve's views on leveraged lending are 
informed by the findings of ongoing supervisory examinations of 
practices at banks. We publish the findings of an important 
part of this supervisory exercise, the Shared National Credits 
review. \4\
---------------------------------------------------------------------------
     \4\ See the results of the review at: http://
www.federalreserve.gov/newsevents/press/bcreg/20141107a.htm.

Q.9. In your remarks at the National Summit on Diversity in the 
Economics Profession on October 30, 2014, you highlighted the 
need for diversity in the economics profession--both at the 
Federal Reserve and elsewhere--and discussed how a diversity of 
perspectives can lead to more informed policy decisions and 
research that informs policy. What steps is the Federal Reserve 
taking to cultivate diversity among its economists and more 
broadly, and in particular among its senior and mid-level 
leadership? How would you rate the Federal Reserve's progress 
so far? What role does the Office of Minority and Women 
---------------------------------------------------------------------------
Inclusion play in this process?

A.9. I would reiterate the Federal Reserve's commitment to 
diversity, and while we continue to work towards achieving a 
more diverse workforce, we recognize that we need to do more. 
During the initial stages of appointing official staff, the 
Director of the Office of Minority and Women Inclusion (OMWI), 
who also is the Director of Office of Diversity and Inclusion 
(ODI), is consulted and is a member of the reviewing team that 
evaluates proposed official staff actions.
    This allows the ODI Director to better support inclusion 
and diversity at the official staff level and to ensure that 
the Board's leadership nomination criteria and process are 
inclusive.
    In 2014, the Federal Reserve hired 36 economists, of which 
33 percent were minorities and 19 percent were women. Based on 
the 2010 Census civilian labor force data and subsequent 
updates, the availability of minority and female candidates in 
the economist job occupation remains low. To foster 
recruitment, the Federal Reserve continues to organize, 
oversee, and participate in the three programs under the 
purview of the American Economic Association's (AEA) Committee 
on the Status of Minority Groups in the Economics Profession 
(CSMGEP): (1) the Summer Economics Fellow Program, (2) the 
Summer Training Program, and (3) the Mentoring Program. Also, 
through its participation in the Science Technology Engineering 
and Mathematics (STEM) Education Coalition and financial 
literacy programs, the Federal Reserve aims to stimulate an 
interest in economics and math among minorities and women.
    However, the Federal Reserve faces real challenges in 
hiring minorities in the economist job family as does the rest 
of the economics profession. The Federal Reserve has addressed 
these challenges as an active member of the AEA's CSMGEP, which 
was established by the AEA to increase the representation of 
minorities in the economics profession, primarily by broadening 
opportunities for a training of underrepresented minorities. 
The Board continues to be involved in the range of program 
(from undergraduate to post-Ph.D.) sponsored by CSMGEP 
including the following:

    The Federal Reserve partnered with the AEA to host 
        the National Summit on Diversity in the Economics 
        Profession at the Federal Reserve on October 30, 2014, 
        in Washington, DC. This conference brought together 
        presidents and research directors of the Federal 
        Reserve Banks and chairs of economics departments from 
        around the country to open a profession-wide dialogue 
        about diversity. Speakers and panelists discussed the 
        state of diversity in the economics profession and 
        examples of successful diversity initiatives in 
        academia. A hallmark of the conference was the 
        opportunity for collegial learning, discussion, and 
        sharing among faculty peers to develop practical ideas 
        about what can be accomplished to attract and retain 
        diversity in the economics profession. The proceedings 
        of the conference are available on the Federal 
        Reserve's public Web site; \5\
---------------------------------------------------------------------------
     \5\ http://www.federalreserve.gov/newsevents/conferences/national-
summit-diversity-economics-profession-program.htm

    Board staff have been involved with the CSMGEP 
        Summer Training Program since its inception in 1974. 
        That program is designed to provide undergraduate 
        students with a program of study and research 
        opportunities that prepare then to enter doctoral level 
        Ph.D. programs in economics. Board staff regularly 
        participate as adjunct faculty in the Summer Training 
---------------------------------------------------------------------------
        Program;

    The Federal Reserve strives to encourage summer 
        intern applicants from the CSMGEP Summer Fellows 
        Program for the Board's summer internship program and 
        also focuses on matching minority advanced graduate 
        students with research-oriented sponsoring institutions 
        to work on their own research projects while 
        participating in the research community at the Federal 
        Reserve; and

    Board staff have served as mentors through the 
        CSMGEP Mentoring Program in which students are matched 
        with a mentor who sees them through the critical 
        junctures of their graduate program.

    In addition, the Federal Reserve has participated in or 
initiated other outreach efforts including the following:

    The Federal Reserve has hosted the ``Math x Econ'' 
        (math times econ) program for the past 3 years which is 
        aimed at high-performing math students in minority-
        serving high schools in the Washington, DC, 
        metropolitan area. Math x Econ brings math students to 
        the Board for a one-day program that introduces them to 
        the field of economics with the goal of encouraging 
        them to explore economics when they begin their college 
        educations.

    A group of research assistants in our economics 
        divisions as well as our supervision division continued 
        with the fourth year of the Fed Ed Outreach program to 
        present information on monetary policy, financial 
        literacy, and the role of the Federal Reserve in the 
        economy to local high school students. The program 
        consists of hour-long presentations presented in high 
        school classrooms or at the Board. This past school 
        year, the program delivered 18 presentations to 11 
        schools and more than 500 students.

Q.10. As you know, I worked during Wall Street Reform to 
include provisions in the law to create Offices of Minority and 
Women Inclusion, or OMWIs, at the Federal financial regulators, 
including the Federal Reserve. In 2013, the financial 
regulators jointly issued proposed interagency OMWI standards 
for assessing the diversity policies and practices of regulated 
entities, and it is my understanding that the regulators intend 
to issue final joint standards later this year. Some community 
groups have expressed concerns that the proposal needs stronger 
standards and accountability measures in order to meet its 
objectives and improve workforce and supplier diversity for 
regulated institutions, such as mandating reporting on employee 
and supplier diversity rather than proposing that regulated 
entities voluntarily submit self-assessments to the agencies.
    How is the Fed responding to these concerns, and what plans 
do the financial regulators have to ensure the final 
interagency standards will be best designed to improve 
diversity and promote inclusion in recruiting, advancement, 
leadership, and contracting? What steps is the Fed taking to 
strengthen the final interagency standards to ensure real 
progress in expanding the role of women, people of color, and 
other underrepresented groups in the financial sector? What is 
the expected timeline for adopting final standards?

A.10. In 2013, an interagency working group comprising the OMWI 
directors from each of the financial agencies (the Federal 
Reserve, the Federal Deposit Insurance Corporation, the Office 
of the Comptroller of the Currency, the National Credit Union 
Administration, the Consumer Financial Protection Bureau, and 
the Securities and Exchange Commission) published proposed 
standards for assessing the diversity policies and practices of 
entities regulated by each agency. The proposed standards were 
published in the Federal Register on October 25, 2013, for 
public comment; the comment period was later extended to 
February 7, 2014, to allow interested parties adequate time to 
respond.
    The standards seek to promote transparency and awareness of 
diversity policies and practices within regulated entities, and 
provide a framework for assessing diversity in four major 
areas:

    Organizational commitment to diversity and 
        inclusion

    Workforce profile and employment practices

    Procurement and business practices and supplier 
        diversity

    Practices to promote transparency of organizational 
        diversity and inclusion

    The agencies carefully considered over 200 comments 
received and on June 9, 2015, issued a joint press release 
announcing publication in the Federal Register of the final 
policy statement that establishes joint standards for assessing 
the diversity policies and practices of the entities they 
regulate. The final policy statement establishing joint 
standards is effective as of the date it is published in the 
Federal Register, June 10, 2015. The press release and policy 
statement are posted on our public Web site. \6\
---------------------------------------------------------------------------
     \6\ http://www.federalreserve.gov/newsevents/press/bcreg/
20150609a.htm
---------------------------------------------------------------------------
    The joint standards, which are generally similar to the 
proposed standards, provide a framework for regulated entities 
to create and strengthen their diversity policies and 
practices--including their organizational commitment to 
diversity, workforce and employment practices, procurement and 
business practices, and practices to promote transparency of 
organizational diversity and inclusion within the entities' 
U.S. operations.
              Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]