    [Senate Hearing 114-87]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 114-87

            FEDERAL RESERVE'S SECOND 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

                                   __________

                                 JULY 16, 2015

                                   __________

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

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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      RICHARD C. SHELBY, Alabama, Chairman

    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

                        Dana Wade, Deputy Staff Director

                        Jelena McWilliams, Chief Counsel

                         Thomas Hogan, Chief Economist

                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

                                  ----------

                            THURSDAY, JULY 16, 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...........................................    29
        Responses to written questions of:
            Chairman Shelby..........................................    32
            Senator Crapo............................................   173
            Senator Vitter...........................................   175
            Senator Heller...........................................   175
            Senator Sasse............................................   176
            Senator Menendez.........................................   183
            Senator Donnelly.........................................   184

                  Additional Material Supplied for the Record

    Monetary Policy Report to the Congress dated July 15, 2015.......   186

                                     (iii)

            FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2015

                                  ----------

                            THURSDAY, JULY 16, 2015

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 2:32 p.m., in room SD-538, Dirksen
    Senate Office Building, Hon. Richard Shelby, Chairman of the
    Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

        Chairman Shelby. The Committee will come to order.
        Today we will receive testimony from Federal Reserve Chair
    Janet Yellen. These semiannual hearings are an important part
    of the Committee's oversight of the Fed and are among the few
    opportunities that we have for public discussion with the Chair
    of the Federal Reserve.
        The Fed, as we all know, plays an important role in the
    overall economy, both in managing the supply of money and
    monitoring the health of the financial system. Through its
    quantitative easing and other special programs, the Fed's
    balance sheet has expanded to an unprecedented size of $4.5
    trillion.
        To put it in perspective, nearly 20 percent of all Treasury
    securities--20 percent--are held on the Fed's balance sheet.
    Furthermore, rather than using the proceeds from matured
    mortgage-backed securities to reduce its balance sheet, the
    Federal Reserve continues to reinvest these proceeds into even
    more mortgage-backed securities.
        In addition, the Federal Reserve continues to hold down
    interest rates despite potential adverse effects on the U.S.
    economy, including the negative impact on household savings.
        Past announcements by the Federal Open Market Committee
    have stated that it would adjust its interest rate policy once
    unemployment fell to 5.6 percent. The Fed's estimates, however,
    show an unemployment rate of 5.3 percent or lower for 2015, and
    yet interest rates remain unchanged.
        The Monetary Policy Report released yesterday states that
    the Fed will keep rates low, even though ``the unemployment
    rate [will soon] be at or below its longer-run normal level''--
    whatever that means. This is concerning to a lot of people
    because pushing the economy beyond its normal level can have
    negative effects, as we have seen with economic bubbles in
    recent history.
        More than ever, the financial markets have become heavily
    dependent on the Fed's monetary policy decisions, which makes
    transparency I believe even more important.
        The Fed is often described by its own officials as the
    world's most transparent central bank--or at least one of the
    most transparent. But it is worth noting that in several
    respects, Federal Open Market Committee monetary policy
    decisions are less transparent than at other central banks,
    including the European Central Bank and the Bank of England.
        For example, the Bank of England has more annual meetings
    and a shorter delay in publishing its minutes than the Federal
    Reserve, and both banks issue more monetary reports per year.
    In addition, the European Central Bank has twice the number of
    press conferences. So it seems that some aspects of the Fed's
    transparency can be improved.
        Similar concerns exist regarding the Fed's regulatory
    authority. The Federal Reserve's Dodd-Frank and CCAR stress
    tests determine the fate of U.S. banks, but the Fed does not
    reveal exactly how the banks will be tested or in what ways
    they have fallen short.
        Similarly, many banks have been forced to file and refile
    their living wills without a thorough explanation from the Fed
    on why the submissions failed. I believe the Federal Reserve
    must provide more complete explanations of its actions in order
    for the financial system and the U.S. economy to function
    effectively.
        Chair Yellen, we look forward to your testimony here today
    and your appearance and hope that you will be able to shed more
    light on some of the questions I have raised.
        Senator Brown.

                   STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Mr. Chairman, and welcome back to
    the Committee, Chair Yellen. Nice to see you again.
        Five years ago next week, July 21st, the Wall Street Reform
    Act became law. That anniversary serves as an important and
    ever present reminder of the costs of the financial crisis. The
    costs of the crisis were 9 million jobs lost, an unemployment
    rate that reached 10 percent, 5 million Americans who lost
    their homes, $13 trillion in household wealth erased.
        In Ohio alone, unemployment was over 10 percent, and half a
    million homes were foreclosed upon between 2006 and 2011. My
    wife and I live in Zip code 44105 in the city of Cleveland. In
    2007, I believe, that Zip code had the highest number of
    foreclosures of any Zip code in the United States. My State
    suffered 14 years in a row of one foreclosure--my entire State,
    foreclosures more one year to the next year, every year an
    increased number of foreclosures for 14 years.
        As the Chair of the Federal Reserve, Ms. Janet Yellen, has
    said, the unemployed are more than just statistics. Behind each
    job loss, behind each foreclosure were painful conversations,
    parents telling their children they are going to have to share
    a house with their relatives, leaving their neighborhoods,
    schools, and friends, or that they could no longer afford their
    child's education. Think what that would be like.
        The crisis took a devastating financial and psychological
    toll on a generation of workers and their families. We cannot
    forget that is why we passed the Wall Street reform law.
        Today's hearing is a reminder how far we have come in 5
    years. After unprecedented actions by the Government to
    stabilize the economy and the creation of a new regulatory
    framework to maintain financial stability and protect
    consumers, the private sector has created almost 13 million new
    jobs; household wealth has grown by some $30 trillion,
    exceeding precrisis levels; and business lending has climbed
    over 30 percent.
        This hearing is also a reminder of how important it is that
    our financial system remains well regulated for financial
    stability, for consumer protection, and to prevent the next
    crisis. No one wants to return to the days of 2008 and 2009.
        Yet opponents of Wall Street reform continue to say that
    the law has not stabilized the economy and even that new
    regulations will cause--will bring on the next financial
    crisis. Wall Street reform did not ruin the economy. Wall
    Street gambling did, along with the failure of regulators to
    take away the punch bowl.
        Since Wall Street reform's passage, the economy has
    strengthened. We have made it less likely taxpayers will get
    stuck with a tab for another bailout. Polling released last
    week shows that Americans agree with that assessment. They
    overwhelmingly support strong financial rules.
        Some of the behavior in the economy is the product of the
    extraordinary interest rate environment of the past 7 years. So
    it is no surprise that all eyes are on the Fed as it considers
    its first interest rate increase since 2008. There are real
    risks in tightening monetary policy too soon because although
    the economy has made progress since the crisis, we still have a
    ways to go.
        The recovery has been uneven. There are many groups of
    Americans who have not benefited from it. Premature rate
    increases could mean these people do not see new jobs, wage
    increases, or have access to credit. The current economic
    problems in Greece and China also remind us that any progress
    that our economy makes cannot be divorced from what is
    happening overseas. Our manufacturers and our exporters are
    already contending with a very strong dollar.
        Chair Yellen, I look forward to your assessment of our
    Nation's economy as well as your appraisal of the progress made
    from the enactment and the implementation of Wall Street
    reform. Thank you again for joining us.
        Chairman Shelby. Madam Chair, welcome again to the
    Committee. Your written statement will be made part of the
    record in its totality. You proceed as you wish.

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

        Ms. Yellen. Thank you. Chairman Shelby, Ranking Member
    Brown, and Members of the Committee, I am pleased to present
    the Federal Reserve's semiannual Monetary Policy Report to the
    Congress. In my remarks today, I will discuss the current
    economic situation and outlook before turning to monetary
    policy.
        Since my appearance before this Committee in February, the
    economy has made further progress toward the Federal Reserve's
    objective of maximum employment, while inflation has continued
    to run below the level that the Federal Open Market Committee
    judges to be most consistent over the longer run with the
    Federal Reserve's statutory mandate to promote maximum
    employment and price stability.
        In the labor market, the unemployment rate now stands at
    5.3 percent, slightly below its level at the end of last year
    and down more than 4\1/2\ percentage points from its 10-percent
    peak in late 2009. Meanwhile, monthly gains in nonfarm payroll
    employment averaged about 210,000 over the first half of this
    year, somewhat less than the robust 260,000 average seen in
    2014 but still sufficient to bring the total increase in
    employment since its trough to more than 12 million jobs.
        Other measures of job market health are also trending in
    the right direction, with noticeable declines over the past
    year in the number of people suffering long-term unemployment
    and in the numbers working part time who would prefer full-time
    employment. However, these measures--as well as the
    unemployment rate--continue to indicate that there is still
    some slack in labor markets. For example, too many people are
    not searching for a job but would likely do so if the labor
    market was stronger. And although there are tentative signs
    that wage growth has picked up, it continues to be relatively
    subdued, consistent with other indications of slack. Thus,
    while labor market conditions have improved substantially, they
    are, in the FOMC's judgment, not yet consistent with maximum
    employment.
        Even as the labor market was improving, domestic spending
    and production softened notably during the first half of this
    year. Real GDP is now estimated to have been little changed in
    the first quarter after having risen at an average annual rate
    of 3\1/2\ percent over the second half of last year, and
    industrial production has declined a bit, on balance, since the
    turn of the year. While these developments bear watching, some
    of this sluggishness seems to be the result of transitory
    factors, including unusually severe winter weather, labor
    disruptions at West Coast ports, and statistical noise. The
    available data suggest a moderate pace of GDP growth in the
    second quarter as these influences dissipate. Notably, consumer
    spending has picked up, and sales of motor vehicles in May and
    June were strong, suggesting that many households have both the
    wherewithal and the confidence to purchase big-ticket items. In
    addition, homebuilding has picked up somewhat lately, although
    the demand for housing is still being restrained by limited
    availability of mortgage loans to many potential homebuyers.
    Business investment has been soft this year, partly reflecting
    the plunge in oil drilling. And net exports are being held down
    by weak economic growth in several of our major trading
    partners and the appreciation of the dollar.
        Looking forward, prospects are favorable for further
    improvement in the U.S. labor market and the economy more
    broadly. Low oil prices and ongoing employment gains should
    continue to bolster consumer spending, financial conditions
    generally remain supportive of growth, and the highly
    accommodative monetary policies abroad should work to
    strengthen global growth. In addition, some of the headwinds
    restraining economic growth, including the effects of dollar
    appreciation on net exports and the effect of lower oil prices
    on capital spending, should diminish over time. As a result,
    the FOMC expects U.S. GDP growth to strengthen over the
    remainder of this year and the unemployment rate to decline
    gradually.
        As always, however, there are some uncertainties in the
    economic outlook. Foreign developments, in particular, pose
    some risks to U.S. growth. Most notably, although the recovery
    in the euro area appears to have gained a firmer footing, the
    situation in Greece remains difficult. And China continues to
    grapple with the challenges posed by high debt, weak property
    markets, and volatile financial conditions. But economic growth
    abroad could also pick up more quickly than observers generally
    anticipate, providing additional support for U.S. economic
    activity. The U.S. economy also might snap back more quickly as
    the transitory influences holding down first-half growth fade
    and the boost to consumer spending from low oil prices shows
    through more definitively.
        As I noted earlier, inflation continues to run below the
    Committee's 2-percent objective, with the personal consumption
    expenditures, or PCE, price index up only \1/4\ percent over
    the 12 months ending in May and the core index, which excludes
    the volatile food and energy components, up only 1\1/4\ percent
    over the same period. To a significant extent, the recent low
    readings on total PCE inflation reflect influences that are
    likely to be transitory, particularly the earlier steep
    declines in oil prices and in the prices of non-energy imported
    goods. Indeed, energy prices appear to have stabilized
    recently.
        Although monthly inflation readings have firmed lately, the
    12-month change in the PCE price index is likely to remain near
    its recent low level in the near term. My colleagues and I
    continue to expect that as the effects of these transitory
    factors dissipate and as the labor market improves further,
    inflation will move gradually back toward our 2-percent
    objective over the medium term. Market-based measures of
    inflation compensation remain low--although they have risen
    some from their levels earlier this year--and survey-based
    measures of longer-term inflation expectations have remained
    stable. The Committee will continue to monitor inflation
    developments carefully.
        Regarding monetary policy, the FOMC conducts policy to
    promote maximum employment and price stability, as required by
    our statutory mandate from the Congress. Given the economic
    situation that I just described, the Committee has judged that
    a high degree of monetary policy accommodation remains
    appropriate. Consistent with that assessment, we have continued
    to maintain the target range for the Federal funds rate at 0 to
    \1/4\ percent and have kept the Federal Reserve's holdings of
    longer-term securities at their current elevated level to help
    maintain accommodative financial conditions.
        In its most recent statement, the FOMC again noted that it
    judged it would be appropriate to raise the target range for
    the Federal funds rate when it has seen further improvement in
    the labor market and is reasonably confident that inflation
    will move back to its 2-percent objective over the medium term.
    The Committee will determine the timing of the initial increase
    in the Federal funds rate on a meeting-by-meeting basis,
    depending on its assessment of realized and expected progress
    toward its objectives of maximum employment and 2-percent
    inflation. If the economy evolves as we expect, economic
    conditions likely would make it appropriate at some point this
    year to raise the Federal funds rate target, thereby beginning
    to normalize the stance of monetary policy. Indeed, most
    participants in June projected that an increase in the Federal
    funds target range would likely become appropriate before year-
    end. But let me emphasize again that these are projections
    based on the anticipated path of the economy, not statements of
    intent to raise rates at any particular time.
        A decision by the Committee to raise its target range for
    the Federal funds rate will signal how much progress the
    economy has made in healing from the trauma of the financial
    crisis. That said, the importance of the initial step to raise
    the Federal funds rate target should not be overemphasized.
    What matters for financial conditions and the broader economy
    is the entire expected path of interest rates, not any
    particular move, including the initial increase, in the Federal
    funds rate. Indeed, the stance of monetary policy will likely
    remain highly accommodative for quite some time after the first
    increase in the Federal funds rate in order to support
    continued progress toward our objectives of maximum employment
    and 2-percent inflation. In the projections prepared for our
    June meeting, most FOMC participants anticipated that economic
    conditions would evolve over time in a way that will warrant
    gradual increases in the Federal funds rate as the headwinds
    that still restrain real activity continue to diminish and
    inflation rises. Of course, if the expansion proves to be more
    vigorous than currently anticipated and inflation moves higher
    than expected, then the appropriate path would likely follow a
    higher and steeper trajectory; conversely, if conditions were
    to prove weaker, then the appropriate trajectory would be lower
    and less steep than currently projected. As always, we will
    regularly reassess what level of the Federal funds rate is
    consistent with achieving and maintaining the Committee's dual
    mandate.
        I would also like to note that the Federal Reserve has
    continued to refine its operational plans pertaining to the
    deployment of our various policy tools when the Committee
    judges it appropriate to begin normalizing the stance of
    policy. Last fall, the Committee issued a detailed statement
    concerning its plans for policy normalization and, over the
    past few months, we have announced a number of additional
    details regarding the approach the Committee intends to use
    when it decides to raise the target range for the Federal funds
    rate.
        These statements pertaining to policy normalization
    constitute recent examples of the many steps the Federal
    Reserve has taken over the years to improve our public
    communications concerning monetary policy. As this Committee
    well knows, the Board has for many years delivered an extensive
    report on monetary policy and economic developments at its
    semiannual hearings such as this one. And the FOMC has long
    announced its monetary policy decisions by issuing statements
    shortly after its meetings, followed by minutes of its meetings
    with a full account of policy discussions and, with an
    appropriate lag, complete meeting transcripts. Innovations in
    recent years have included quarterly press conferences and the
    quarterly release of FOMC participants' projections for
    economic growth, unemployment, inflation, and the appropriate
    path for the Committee's interest rate target. In addition, the
    Committee adopted a statement in 2012 concerning its longer-run
    goals and monetary policy strategy that included a specific 2-
    percent longer-run objective for inflation and a commitment to
    follow a balanced approach in pursuing our mandated goals.
        Transparency concerning the Federal Reserve's conduct of
    monetary policy is desirable because better public
    understanding enhances the effectiveness of policy. More
    important, however, is that transparent communications reflect
    the Federal Reserve's commitment to accountability within our
    democratic system of Government. Our various communications
    tools are important means of implementing monetary policy and
    have many technical elements. Each step forward in our
    communications practices has been taken with the goal of
    enhancing the effectiveness of monetary policy and avoiding
    unintended consequences. Effective communication is also
    crucial to ensuring that the Federal Reserve remains
    accountable, but measures that affect the ability of
    policymakers to make decisions about monetary policy free of
    short-term political pressure, in the name of transparency,
    should be avoided.
        The Federal Reserve ranks among the most transparent
    central banks. We publish a summary of our balance sheet every
    week. Our financial statements are audited annually by an
    outside auditor and made public. Every security we hold is
    listed on the Web site of the Federal Reserve Bank of New York.
    And, in conformance with the Dodd-Frank Act, transaction-level
    data on all of our lending--including the identity of borrowers
    and the amounts borrowed--are published with a 2-year lag.
    Efforts to further increase transparency, no matter how well
    intentioned, must avoid unintended consequences that could
    undermine the Federal Reserve's ability to make policy in the
    long-run best interest of American families and businesses.
        In sum, since the February 2015 Monetary Policy Report, we
    have seen, despite the soft patch in economic activity in the
    first quarter, that the labor market has continued to show
    progress toward our objective of maximum employment. Inflation
    has continued to run below our longer-run objective, but we
    believe transitory factors have played a major role. We
    continue to anticipate that it will be appropriate to raise the
    target range for the Federal funds rate when the Committee has
    seen further improvement in the labor market and is reasonably
    confident that inflation will move back to its 2-percent
    objective over the medium term. As always, the Federal Reserve
    remains committed to employing its tools to best promote the
    attainment of its dual mandate.
        Thank you, and I would be pleased to take your questions.
        Chairman Shelby. Thank you, Madam Chair.
        Madam Chair, recently some of us have raised concerns over
    a proposal to reduce the statutory dividend paid to member
    banks on the shares that they hold in their respective reserve
    banks to help pay for a new transportation bill. Are you aware
    of some of these proposals? And do you have some concerns?
        Ms. Yellen. Chair Shelby, I have heard about this proposal,
    and I guess I would say I would be concerned that reducing the
    dividend could have unintended consequences for banks'
    willingness to be part of the Federal Reserve System, and this
    might particularly apply to smaller institutions.
        I would also say that this is a change that likely would be
    a significant concern to the many small banks that receive this
    dividend.
        So I suppose I would say that this is a change to the law
    that could conceivably have unintended consequences, and I
    think it deserves some serious thought and analysis.
        Chairman Shelby. I agree with you, and I do not see any
    nexus between the dividends coming from members of the Federal
    Reserve System, which are a lot of small- and medium-size
    banks, and funding the highway or transportation system. I
    think that is a pretty far reach, but, you know, people look
    for money everywhere they can get it. But that is something
    that I think we better be working together on, I hope.
        In another area, the impact of regulation on liquidity, the
    issue of liquidity in the fixed-income market has become a
    daily topic in the news and in the markets. Last month,
    Secretary Lew testified in the U.S. House that he does not--and
    I will quote him, he ``does not believe that Federal regulation
    is a significant factor contributing to any liquidity issues.''
    It is interesting.
        So you think that Federal regulation is a significant
    factor impacting market liquidity in any respect? And what work
    has the Federal Reserve done to determine the impact of
    regulation on liquidity, if you have, in our markets?
        Ms. Yellen. So I would say that we are studying this issue
    very carefully. We have certainly heard the market concerns on
    this topic. At this point I can give you a list of factors that
    may be causing this phenomenon.
        Chairman Shelby. OK.
        Ms. Yellen. I should say you see this decline in liquidity
    in some measures but not in others. So the extent of the
    decline----
        Chairman Shelby. But isn't the decline in liquidity an
    important issue to be watching?
        Ms. Yellen. So there are a number of things that might be
    involved. First of all, there have been changes in the
    structure of the market. A larger share of bonds are held by
    buy-and-hold investors such as insurers and pension funds that
    may do less trading than leveraged firms that used to be more
    dominant in this market. We have had higher capital
    requirements and other regulatory changes, but firms are also
    changing their own risk management practices, in some cases in
    a more conservative direction.
        We have seen an increase in algorithmic and high-frequency
    trading, and that may be leading to changes in market trading
    practices. In addition, in the corporate bond market, there
    have been increased reporting requirements that may be reducing
    the desired sizes of trades. And I think all of these factors
    could potentially account for what is going on, but we have not
    really yet been able to figure out what the contribution of
    each is or just how serious.
        I think a concern is that while day-to-day in normal times
    most measures of liquidity seem to be roughly unchanged, there
    is a concern that in stress situations it may be, and we have
    seen some cases where it is less available.
        Chairman Shelby. But in any market, you need risk and you
    need liquidity, do you not?
        Ms. Yellen. Yes, you----
        Chairman Shelby. You do not have a market without it, do
    you?
        Ms. Yellen. Well, we do need liquidity in markets. There
    may be changes, however, that precrisis it was leveraged, even
    highly leveraged banks that were exposed to providing liquidity
    and vulnerable if liquidity were to be reduced. And now it
    seems like more of that risk has moved to unleveraged, low-
    leveraged investors, and that may be a safer situation. So
    there are two sides, I think, to this.
        Chairman Shelby. In the area of reducing systemic risk,
    which we all are interested in, do you believe that having
    fewer systemically risky financial institutions would be a good
    thing?
        Ms. Yellen. Arguably, yes.
        Chairman Shelby. OK. And should banks through regulation,
    like the Fed, be encouraged to reduce systemic risk everywhere
    they can?
        Ms. Yellen. Well, we are certainly trying to put in place a
    set of incentives that will reduce the systemic footprint and
    risk of firms. I think higher capital requirements, we plan to
    impose surcharges, capital surcharges on the most systemic
    firms, and other regulations that will diminish the risks,
    create incentives for their footprints to be reduced in ways
    that will reduce their systemic risk to the financial system.
        Chairman Shelby. Senator Brown.
        Senator Brown. Thank you, Mr. Chairman.
        Madam Chair, I continue to be concerned, as I know you are,
    that the economic recovery has not taken hold for all
    Americans, notably large numbers of women and in communities of
    color. I know that confirmation bias can be a problem in
    investing, and some might think it is a bit--it might exist on
    Capitol Hill, too, but I see lots of evidence of
    underemployment, unemployment, virtually no evidence of
    inflation, and lots of sources of headwinds for our economy.
        What are the risks of tightening monetary policy too soon?
    And once rates are increased, what would be the impact of the
    gradual rate increases on working Americans?
        Ms. Yellen. So, of course, there are risks to the recovery
    of tightening too soon, and we have been highly focused on
    those risks. That is an important reason why we have left rates
    as low as they are for as long as they have been. Over 6 years
    they have been at effectively zero.
        We have had a recovery that has been slow to take hold.
    Growth has been slower than in most U.S. recoveries following a
    severe financial crisis. We have clearly made progress. I agree
    with you that there remain groups that are struggling in the
    labor market, and as we try to show in the Monetary Policy
    Report, arguably the standard unemployment rate that we look at
    that is 5.3 percent may somewhat understate the real degree of
    slack that exists in the labor market. So we clearly want to
    see continued improvement in the labor market, and we want to
    do nothing that would threaten that.
        On the other hand, the labor market is getting demonstrably
    closer, in my view, by almost any metric to a more normal
    state, and the degree of monetary accommodation has been
    sufficient over a long period of time to generate pretty
    significant improvement in the labor market. And as the
    headwinds that are holding the economy diminish--and I believe
    they are diminishing--I think it does become appropriate to
    begin--we are not talking about tightening monetary policy. I
    think we are talking about slightly diminishing the very high
    degree of accommodation that we have in place. And, of course,
    we would not want to do so in a way or at a pace that would
    threaten continued progress in the labor market.
        At the same time, inflation is very low, and while we have
    indicated that a good share of that is for reasons we believe
    will be transitory and we expect inflation--headline inflation
    to rise to much closer to core levels, that is another reason
    why we can be patient in removing accommodation. But I think it
    is also important there are risks on both sides. Just as we do
    not want to tighten too soon to threaten the recovery or to
    jeopardize the return of inflation back to our 2-percent
    target, we also want to be careful not to tighten too late
    because, if we do that, arguably we could overshoot both of our
    goals and be faced with a situation where we would then need to
    tighten monetary policy in a very sharp way that could be
    disruptive.
        My own preference would be to be able to proceed to tighten
    in a prudent and gradual manner, and there are many reasons why
    I would like to be able to do that. So I agree that there are
    certainly risks to the recovery and to the labor market of
    tightening too soon, but there are risks on the other side as
    well. We are trying to balance those.
        Senator Brown. Thank you. Some people have suggested
    recently that American workers need to be willing to work
    longer hours. I do not think many Americans work fewer hours by
    choice unless, of course, there are health issues or child care
    limitations or other responsibilities. I think most or at least
    many Americans working part time would like to work full time.
    This slack in the labor market seems to indicate we still have
    a ways to go.
        Discuss with us your concern about the number of workers
    who are only working part time but would like to be more in the
    labor force, if you would.
        Ms. Yellen. Yes. Well, we have an unusually large share of
    the labor force--I believe it is around 4.5 percent--that
    report themselves as working part time for economic reasons.
    That means they would like to be working more hours than they
    are able to work. And broader measures, the measure of the
    unemployment rate that we normally look at, it is referred to
    as the U-3 measure, that is 5.3 percent. But broader measures
    that capture that part time for economic reasons, a measure
    like U-6, we have a picture in the Monetary Policy Report, and
    we show how high that is. And we show that although, of course,
    it is always higher than the narrower concept of unemployment,
    it is very much higher than you would expect historically given
    the narrower measure of unemployment.
        So to my mind, this really suggests that our standard
    unemployment rate does understate the degree of slack we still
    have in the labor market.
        Senator Brown. Thank you.
        Thank you, Mr. Chairman.
        Chairman Shelby. Senator Corker.
        Senator Corker. Thank you, Mr. Chairman, Ranking Member. I
    appreciate it.
        Madam Chairman, thank you for being here. I spent a lot of
    time with you when you were getting ready to be confirmed, and
    I enjoyed that, and I appreciated talking about views on
    monetary policy. And this is a not a pejorative statement, but
    I know as you were coming in, you were acclaimed to be the
    first ``dove'' coming in as head of the Federal Reserve. I know
    we had numbers of conversations about that, and I know you
    supported all of the rate hikes, on the other hand, that took
    place as we were leading up.
        Ms. Yellen. That is true.
        Senator Corker. So I want to make sure everybody
    understands that.
        Ms. Yellen. Thank you.
        Senator Corker. But we did talk a lot about this moment in
    time we are in, and it seems that many are getting--let me put
    it this way--the impression, many who are spending their daily
    lives dealing with the stock market, that the Fed has become
    very affected by the market swings, and that much of that may
    actually be driving monetary policy, not just the stats. You
    know, we have had--this is the first--I guess we have had two
    other times in modern history where we have had negative
    interest rates, or at least times that I am aware of, from 1974
    to 1976, and 2002 to 2004. And so we have had this long period
    of time where, in essence, we have negative interest rates, and
    yet it seems the Fed continues to watch not just the stats, but
    is very affected by the markets and worried about disruptions
    in the stock market.
        I am wondering if you might address that.
        Ms. Yellen. So I would push back against the notion that we
    are unduly affected by the ups and downs of the stock market.
    We are certainly very focused on the fundamentals and the
    economic statistics that describe where the economy is and in
    terms of the labor market and inflation, which are the two
    goals assigned to us by Congress, and a lot of different kinds
    of economic information go into the forecasts that drive our
    decision making, our forecasts about where the labor market and
    inflation will be moving. But financial conditions broadly--and
    I am not talking about the stock market here uniquely, but a
    wide range of financial variables that I would say go into
    assessing financial conditions, the ease for households and
    businesses of borrowing that affect their spending patterns,
    whether it is consumer spending or investment or our ability,
    our competitive position in the global economy that affects our
    ability to export and the competitiveness of import competing
    goods. The state of financial, conditions broadly speaking, is
    one variable that does affect our forecast of the economy.
        So we cannot completely ignore what is happening in the
    markets to housing prices, to equity prices, to longer-term
    interest rates, to credit spreads that influence borrowing
    costs, to the exchange that affects the competitiveness of U.S.
    goods and services. All those factors feed into financial
    conditions, and they are relevant to forecasting the economy.
    So it is one element of our evaluation, but I do not think we
    pay undue attention to it, and I do not think we should.
        Senator Corker. Yes, I agree. Thank you.
        The living will process is something that--I know the
    Ranking Member alluded to Dodd-Frank, and Senator Warner and
    myself were assigned to work on those particular areas, Title 1
    and Title 2, came to an agreement, and actually Senator Shelby,
    I think, offered an amendment on the floor that passed by 95
    votes to make it even stronger, if I remember correctly. Or at
    least alter it to some degree, but certainly make sure it
    became law.
        We have had some questions about the living wills as they
    have come up. The last round, there was a little bit of
    concern, at least on my part and I think a few others, that
    there was a little regulatory capture taking place, that really
    these living wills were way lacking in substance, and yet maybe
    the Fed really was not, you know, putting the pressure on these
    organizations to deliver as they should.
        I had a good meeting this week with Mr. Tarullo, and my
    understanding is the substance of these living wills--I know
    you all have sent out some statements regarding what has
    happened. I think they are much better than they have been. But
    it is pretty clear these living wills have to be able to
    resolve an institution under bankruptcy, and I just wonder if
    you might speak to that for a moment.
        Ms. Yellen. I agree with you. We worked closely with the
    FDIC in this last round a year ago to set out a clear set of
    expectations for what we want to see in the current round of
    submissions. We have worked closely with the FDIC and the
    banking organizations to make sure that they have been very
    clear about what we expect in this round of submissions. We
    have instructed them to enhance their disclosure in the public
    part of the documents that they produce, and it looks like
    preliminary reads suggest they have made progress there, and we
    are going to be evaluating them in the coming months, and we
    indicated that if we continued to see shortcomings in the
    living wills, we will use our authority to determine that these
    resolution plans do not meet Dodd-Frank requirements. And that
    is where we stand, and that is what we are going to do.
        Senator Corker. Thank you very much for your service. I
    appreciate it.
        Ms. Yellen. Thank you.
        Senator Corker. Thank you, Chairman.
        Chairman Shelby. Senator Menendez.
        Senator Menendez. Thank you, Mr. Chairman.
        Madam Chair, thank you for your service to our country. I
    appreciate the work you have been doing.
        Ms. Yellen. Thank you.
        Senator Menendez. As you know and have stated many times,
    the Fed's dual mandate directs it to pursue maximum employment
    and stable prices. Now, how the Fed chooses to balance these
    goals has significant consequences for the quality of life of
    millions of Americans.
        On the first element, our labor market is improving, but
    most Americans feel like they have a lot of catching up to do
    from the deep hole the financial crisis put us in. They do not
    feel that their personal circumstances have certainly risen at
    all, and they feel enormous challenges.
        Meanwhile, inflation continues to run well below target, as
    it has for an extended period of time, so it would be a mistake
    in my view for the Fed to shift its focus away from jobs at
    this critical time. With interest rates near zero, the Fed has
    essentially no room for error if it tightens too soon. If it
    tightens too late, I think the risks are much lower, and the
    Fed has plenty of ammunition to keep inflation anchored.
        So as a follow-up to Senator Brown's question, I would like
    to know, in order to avoid choking off economic growth
    prematurely, will the Fed wait to raise interest rates until
    after it has seen signs of actual inflation rather than based
    on some intangible fear of future inflation, which may or may
    not ever actually materialize?
        Ms. Yellen. So, Senator, I agree with your characterization
    of the risks that if there is a negative shock to the economy
    within interest rates pinned at zero, we do not have great
    scope to respond by loosening policy further; whereas, with a
    positive shock, of course, we can tighten monetary policy. We
    have the tools, and we know how to do that. That is a
    consideration that has been weighing on our decision making for
    quite some time and has led us in part to hold interest rates
    at these very low levels for as long as we have.
        So that has been a factor we have been taking into account,
    and it partly explains the policy that we have been following.
    But there are lags in the effect of monetary policy. We need to
    be forward-looking. And on the other side, there are risks from
    waiting too long to act as well. We have to balance those
    risks.
        You asked me if we would likely raise rates before
    inflation has risen substantially, and there I would point you
    to Section 3 of the report that we gave to you where we show
    each summary of their forecast for the economy and for policy.
    And as I mentioned in my testimony, most participants, as of
    our June meeting, envisioned that economic developments would
    proceed in a way for the rest of this year that would, in their
    view for almost all of them, make it appropriate to begin the
    process of normalizing policy sometime this year.
        And if you look at their inflation forecasts, at the end of
    the year, on a year-over-year basis, most participants
    envisioned that total inflation would be running a little bit
    under 1 percent, so that is well below our 2-percent objective.
    And they envisioned core inflation, that is, for the year as a
    whole, at the end of 2015 as running in the neighborhood of 1.3
    to 1.4 percent. So in that sense, you can see in their
    projections that they are envisioning its being appropriate to
    begin tightening policy within inflation below our objective.
    But what we have said is we want to have reasonable confidence
    before we tighten that inflation over the medium term will move
    back to 2 percent. And what is going on here is that we think
    that there are transitory influences--namely, the marked
    decline in oil prices and the strengthening of the dollar--that
    are holding inflation down, and that underlying inflation, even
    with core inflation, that low import prices and declining
    import prices are a transitory factor holding that down, that
    as we see the labor market improve and these transitory
    influences wash out, that we believe that inflation will move
    back to 2 percent. And so if we have that confidence, the
    Committee would be likely to begin before seeing inflation go
    back up to our target.
        Senator Menendez. Now, normally in my experience here I
    would have interrupted you a long time ago because my time has
    expired. But because your response was so interesting and I am
    trying to grasp where your policy view is from it, I let it go.
        Let me, if I may, just make one very brief comment, Mr.
    Chairman, and that is, from my--I listened to you intently.
    From my perspective, I think it is much less of a problem that
    inflation may run high a little bit--I did not say significant
    inflation, which you referenced--to run high for a little bit,
    for a short period of time until the Fed's response to it takes
    effect than the alternative, which is cutting off much needed
    job growth and income growth, too, which would have been my
    second question, but I will submit that for the record.
        Ms. Yellen. We do not want to cutoff job growth and income
    growth, and we do want to see inflation move up to 2 percent.
    We would not be pleased to see it linger indefinitely below 2
    percent.
        Senator Menendez. Thank you, Mr. Chairman.
        Chairman Shelby. Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman.
        Madam Chair, recently the Senate Banking Committee held a
    hearing that examined the role of the Financial Stability Board
    in the U.S. regulatory framework. A lot of concern was
    expressed about international decision making on regulation
    overtaking U.S. decision making. I am just curious if you would
    agree that it is important for the United States to set its own
    insurance capital and other regulatory standards before
    agreeing to any such standards internationally.
        Ms. Yellen. Well, we are working on U.S. standards. Nothing
    applies to U.S. firms until we have gone through a formal
    rulemaking process or process with orders in the United States.
    So no international discussion or agreement applies to U.S.
    firms unless they are consistent with U.S. law and we have gone
    through a full-blown rulemaking process.
        But discussions are taking place internationally about
    appropriate standards. I think it is very important that we
    weigh in on those discussions so that the standards that other
    countries adopt work for our markets and for our firms, and
    that we end up with a playing field that is competitive for our
    own firms to compete in. So we participate in those
    international discussions, but within an understanding that
    nothing applies to U.S. firms until we have gone through a full
    rulemaking process here.
        Senator Rounds. Thank you. I would like to follow up just a
    little bit on what the Chairman was visiting with earlier, and
    that is with regard to SIFI designations, literally in the
    spirit of reducing systemic risk. Do you support giving
    designated firms a specific road map for de-designation, like
    an off ramp or an approach that would allow them to basically
    de-certify?
        Ms. Yellen. So I think firms should have the ability to de-
    certify, and the FSOC every year has to review designations to
    make sure that they remain appropriate. That is an annual
    procedure.
        Now, firms are given very detailed information and interact
    a great deal with FSOC during the process of designation, and
    they understand very clearly what it is about their business
    model and strategy that has caused them to be designated. So it
    is not a mystery to those firms what about their business
    activities is responsible for designation.
        I do not think it is appropriate for FSOC or for the
    regulators to try to run these businesses, to try to
    micromanage what these firms do. I do not think there is any
    single, appropriate off ramp. We should not be telling them
    exactly do the following list of things. They understand what
    they need to do to change their profile in a way that would
    change FSOC's evaluation. And if they were seriously
    contemplating making those kinds of substantial changes, I am
    sure there would be many opportunities to interact with FSOC
    and staff to gain some perspective on whether or not the kinds
    of changes they were thinking of would significantly change
    their systemic footprint.
        Senator Rounds. Thank you.
        One last question. As you know, Madam Chair, when you talk,
    the markets clearly listen. As you work with the Federal
    Reserve's Open Markets Committee, you look at a balanced
    approach, and you are looking at several goals. You have
    clearly defined that your goal is a 2-percent inflation rate.
    What about when we talk about maximum employment? Where do we
    go, and what do you lay out as the firms look at it in terms of
    what to expect from the Committee? What is your goal in terms
    of the maximum employment?
        Ms. Yellen. So as we say in our statement of longer-run
    goals and monetary policy strategies, there is something
    different about the two goals. We have a goal for inflation, 2
    percent, and maximum employment. A central bank can choose or
    determine what its inflation target should be. We chose 2
    percent. We are in good company. That is what most advanced
    central banks have chosen.
        Maximum employment is different. We cannot just decide what
    do we want that to be in the long run. We think there is some
    normal longer-run rate of unemployment or level of maximum
    employment that is consistent with stable inflation, and for us
    it is not something we can say we would like it to be this or
    we would like it to be that. It is something we are trying to
    determine. It can change over time. It is not easy to know
    exactly what is possible given technology and demographics and
    the way the institutions of the labor market function. So we
    are trying to estimate it, not determine it.
        But participants in the Committee are asked every 3 months,
    when they submit their forecasts, to write down their own
    current views on the unemployment rate that corresponds to what
    they regard as normal in the longer run or consistent with
    maximum employment. And most members of our Committee or
    participants currently regard that as an unemployment rate in
    the neighborhood of 5.2 to 5.3. And that is something that can
    change over time. It has changed over time, and we report that
    publicly.
        Senator Rounds. Thank you.
        Thank you, Mr. Chairman.
        Chairman Shelby. Thank you, Senator Rounds.
        Senator Donnelly.
        Senator Donnelly. Thank you, Mr. Chairman, and thank you,
    Madam Chair.
        Madam Chair, I know you share my concerns with income
    inequality and the continuing trend of middle-class wage
    stagnation. In your testimony, you said, `` . . . although
    there are tentative signs that wage growth has picked up, it
    continues to be relatively subdued . . . .''
        So as the economy improves, how do you expect middle-class
    wages to show substantial improvement? What are you looking at?
        Ms. Yellen. Well, we look at several different measures of
    wage growth. Three aggregate measures that we look at are the
    Employment Cost Index, hourly compensation, and average hourly
    earnings. They do not always tell exactly the same story. I
    think we have seen a meaningful pickup over the last year in
    the growth in the Employment Cost Index but less movement in
    the other two measures. So there are early indications or
    conflicting indications there.
        The levels of increase are still relatively low, and in
    real or inflation-adjusted terms, compensation or wages are
    increasing less rapidly than productivity.
        Senator Donnelly. What do you expect to see in the next
    year----
        Ms. Yellen. I would expect to see----
        Senator Donnelly. ----with regard to middle-class wages?
        Ms. Yellen. ----a pickup in--so I am not going to say
    ``middle-class wages'' but aggregate wages in the economy. I
    would expect to see some further upward movement. Where they
    can go depends in part on productivity growth. For example, if
    productivity growth--and there is a lot of uncertainty about
    what it is, but if it were at a trend rate running, say, around
    1.5 percent with a 2-percent inflation, we would expect to see
    wage growth----
        Senator Donnelly. And I guess the key to that is that there
    would actually be some correlation between productivity growth
    and the growth in wages as well.
        Ms. Yellen. There tends to be over long periods of time,
    but it is not always true over shorter periods. So there is
    some uncertainty about this, and we have been through a period
    in which wages have been in real terms----
        Senator Donnelly. We have not seen a closer link----
        Ms. Yellen. ----growing less rapidly than productivity. I
    would expect to see a pickup. It is not a certainty here, but
    it is--and to my mind, it is evidence of some remaining slack
    in the labor market. So that is--my forecast is that we will
    see some pickup in wage growth.
        But it is important to remember that there has been
    increasing wage inequality in the United States over a long
    period of time, certainly going back to the mid-to-late 1970s,
    and that reflects a deeper set of structural factors that the
    Federal Reserve does not have tools to combat. What we are
    looking for is an overall job market that is functioning in
    some sense well, but we see increasing gaps between the wages
    or compensation of more skilled and less skilled workers, and
    that has been holding down middle-class wage growth for a long
    time for other reasons.
        Senator Donnelly. Let me ask you about a little bit
    different subject. You know, I voted for Dodd-Frank because I
    wanted to see safety and stability in the system. It was not a
    desire to load it up with regulations, but it was a desire to
    make sure we had safety and stability. But now what we have
    seen is a growing shadow banking system, which brings other
    concerns, and so as you look at this, since shadow banking
    entities are not subject to the same regulatory oversight, how
    concerned should we be with the potential risk involved here?
    Because that is what we are trying to drive at in the first
    place with Dodd-Frank, was to eliminate some of the systemic
    risk.
        Ms. Yellen. Well, I think you have put your finger on a
    very important phenomenon, and we were well aware when we put
    these regulations in place in Dodd-Frank that wherever you draw
    the regulatory perimeter, there will be a tendency for activity
    to migrate beyond it to what we call ``the shadow banking
    system.'' So we clearly need to be very vigilant about
    monitoring risks that are migrating to that system, and
    certainly in the Federal Reserve, we have hugely ramped up our
    attention to the shadow banking system.
        The FSOC is focused on risks developing broadly through the
    financial system in shadow banking, and the Financial Stability
    Board has a large work program devoted to shadow banking. We
    are thinking about regulations that might address--like minimum
    margin requirements that would apply not only to banking
    organizations but more broadly, that might address some
    potential risks in the shadow banking system.
        Of course, we have seen some heightened attention to risks
    by the SEC in money market funds, which was an important piece
    of the shadow banking system where risks developed leading to
    the crisis. But you are absolutely right to focus on that, and
    we are attempting to address those risks as best we can.
        Senator Donnelly. Thank you, Madam Chair.
        Thank you, Mr. Chairman.
        Chairman Shelby. Senator Scott.
        Senator Scott. Thank you, Mr. Chairman. Chair Yellen, thank
    you for being here today.
        Ms. Yellen. Thank you.
        Senator Scott. As I travel across South Carolina, people
    express concerns about America leading from behind, whether my
    conversations with folks have been about the Administration's
    failure to enforce their own red lines in Syria or more
    recently about the ill-advised nuclear deal with Iran, South
    Carolinians have the sense that our Nation is timid, that it is
    comfortable sitting back and taking cues from foreign actors
    rather than occupying our traditional role a leader of the
    world.
        Now, I am certainly not suggesting that you somehow are in
    charge of military policy or Middle East diplomacy, but you are
    in charge of our regulatory policy for some of our country's
    most successful businesses. And sometimes it seems to me like
    our U.S. regulators are leading from behind, especially when it
    comes to our involvement in international regulatory bodies
    like the Financial Stability Board or the International
    Association of Insurance Supervisors.
        For example, the FSOC designated domestic insurers as SIFIs
    shortly after the FSB did, suggesting that the FSOC was happy
    to follow FSB's lead.
        We saw something very similar happen with capital buffers
    for money market mutual funds. The FSOC and SEC seemed to take
    their cues from the FSB.
        Madam Chair, now that the Fed is writing a capital rule for
    insurance companies, I would encourage you to break from the
    tradition of leading from behind by developing a capital
    standard that first works for our domestic insurance companies
    rather than letting international standard-setting bodies like
    the ones I have mentioned already write rules and export them
    back to our country.
        I would also encourage you in your capacity as a member of
    the IAIS to take the lead in that body in promoting activity-
    based regulations of insurers as the group reconsiders its G-
    SII designation methodology later this year. It appears that
    Governor Tarullo has committed the Fed to an activities-based
    approach for asset managers, but I have not yet heard him say
    that he would do the same for insurers.
        Can you commit today that the Fed will take the lead and
    follow these two courses of action both on insurance company
    capital standards and on promoting the replacement of entity-
    based regulation of insurance with activity-based regulation? I
    think Senator Rounds really was starting down this road when he
    was asking his question. It appears to me that the European
    regulators are concerned about the creditor protections. We at
    home are far more concerned about protecting the policy
    holders. The difference yields different capital philosophies.
    I would like a commitment to use our domestic approach and
    export it as opposed to importing their philosophical
    disposition on capital standards based on creditor protections.
        Ms. Yellen. So I guess all I can really say is that we are
    playing an active role internationally in insurance, which is
    why we joined the IAIS. We are participating jointly with the
    Federal Insurance Office and the State Insurance Commissioners.
    We are collaborating to think through what is an appropriate
    system of capital and liquidity standards for globally active
    firms.
        We have a strong interest in doing that, and it is
    important for us to have our voices heard in that process. So I
    do not think it is accurate to say we are sitting back and not
    trying to play a leadership role. I think we are.
        Domestically, we have been given increased flexibility
    through the Collins fix to design and tailor a set of insurance
    regulations, capital standards that we think are appropriate
    for our institutions. We want to carefully tailor them to the
    unique characteristics of the firms that we supervise, and we
    are taking the time and interacting with those firms to make
    sure we understand what an appropriate insurance-centric, well-
    tailored set of capital standards would look like.
        Senator Scott. Thank you. I think at the end of the day all
    of the Washington regulators speak and sound pretty academic,
    but what it ultimately boils down to is a price that Americans
    will pay for their retirement. One of the things that we are
    trying to do is make sure that that price goes down and not up
    as we find ourselves, from my perspective, adopting
    international standards as opposed to taking ours and exporting
    them.
        Thank you.
        Chairman Shelby. Senator Warren.
        Senator Warren. Thank you, Mr. Chairman, and it is good to
    see you again, Chair Yellen.
        I want to follow up on Senator Corker's question. As you
    know, Dodd-Frank requires big financial institutions to submit
    living wills, a plan for how they could be liquidated--and I
    want to quote the statute here--``in a rapid and orderly
    fashion'' in bankruptcy without bringing down the economy or
    needing a taxpayer bailout.
        Now, by law, the Fed and the FDIC are supposed to determine
    whether these plans are credible or not, and then if they are
    not credible, the agencies can order the institutions either to
    simplify their structures or eventually to sell off assets.
        So last August, the Fed and the FDIC identified significant
    problems with the living wills submitted by 11 of the biggest
    banks in the country. The FDIC determine that these living
    wills were not credible. But the Fed did not. Instead, the Fed
    said that if the banks did not ``take immediate action to
    improve their resolvability and reflect those improvements'' in
    their new living wills, the Fed ``expected'' to find the new
    living wills were not credible.
        Now, the 11 banks submitted their new living wills at the
    beginning of this month, and I know you have not completed
    reviewing them yet. But I just want to make sure we are really
    clear on this point. Will the Fed find living wills not
    credible if the bank has not fixed each of the problems that
    the agencies identified last August?
        Ms. Yellen. We are certainly prepared to make those
    determinations. We will work jointly with the FDIC, as we have
    been doing, to analyze the living wills and see whether or not
    we feel that the responses to the directions that we gave to
    these firms are satisfactory or not. And if we find that they
    are not, we are certainly prepared to say that they are not
    credible.
        Senator Warren. OK. Good. I am glad to hear that.
        Two of the issues the agencies directed the banks to
    address were ``establishing a rational and less complex legal
    structure and developing a holding company structure that
    supports resolvability.''
        Now, JPMorgan Chase, just to pick one example, has over
    3,000 subsidiaries. It will take a lot of work to establish a
    rational structure that permits JPMorgan to be resolved quickly
    as required by law. But to be clear again, the Fed will find
    JPMorgan's living will not credible, and the living wills of
    the other 10 banks not credible, if they have not taken
    concrete steps to significantly simplify their structures and
    are not sleek enough to be resolved quickly?
        Ms. Yellen. Well, we have given them those directions, and
    we will evaluate that. I would simply say that the regulatory
    reports that we receive indicate that these firms since 2009
    have reduced the number of legal entities in their structures
    by approximately a fifth. I guess we will be looking for----
        Senator Warren. You will note that number I gave you is not
    from 2009. It is over 3,000 subsidiaries at latest count that I
    have seen. So I just want to be clear that you are willing to
    say not credible if they do not meet the legal standards that
    they could quickly be resolved, and that includes how complex
    their structure is.
        Ms. Yellen. Well, agreed that they need to be less complex,
    and we have given them that direction. But I am not sure we can
    determine exactly how complex they are by just counting the
    number of legal entities----
        Senator Warren. Fair enough. I am glad to have----
        Ms. Yellen. They are not all----
        Senator Warren. ----lots of ways you look at this.
        Ms. Yellen. They are not all equal. Some are set up for
    very narrow purposes and would not represent serious
    impediments to resolving the firms. So I do not want to----
        Senator Warren. OK. But----
        Ms. Yellen. ----determine this by count of legal entities.
        Senator Warren. Count by itself, I understand that. But we
    do remember that the statute says ``rapid and orderly
    liquidation, and that goes to the question of complexity. I
    raise this because the living wills are one of the primary
    tools the Fed has to make sure that taxpayers will not be on
    the hook if one of these giant banks fails. It is critical that
    the Fed uses this authority, and like the FDIC has been willing
    to do, to make our financial system safer.
        I want to ask you one other question just quickly. In Dodd-
    Frank, Congress directed the Fed to impose some tougher rules
    on banks with more than $50 billion in assets. That covers
    roughly 40 of the biggest banks in the country, about one-half
    of 1 percent of the 6,500 banks that we have in the U.S.
    Together, this one-half of 1 percent holds more than $14
    trillion in assets, about 95 percent of all the banking assets
    in this country--40 banks, 95 percent of all the assets.
        The tougher scrutiny is designed to direct regulator
    attention where serious risk is--in other words, concentrate
    regulatory scrutiny on these 40 banks rather than on community
    banks and credit unions.
        Now, there have been proposals recently about exempting
    many of these banks from tougher rules by raising the $50
    billion threshold to $100 billion, $250 billion, $500 billion.
    The argument I hear is that $50 billion banks just do not pose
    systemic risk. So I just want to ask a question on this one.
        We learned or should have learned in 2008 that in a crisis
    several banks can find themselves on the verge of failure at
    the same time. Do you think it could pose a systemic threat if
    two or three banks with about $50 billion in assets were on the
    verge of failure?
        Ms. Yellen. Well, when a significant number of firms is at
    the risk of failure, often it is because they have highly
    correlated positions. We always have to worry about that
    resulting in a drying up of credit to the economy, and, you
    know, during the Great Depression, most of the banks that
    failed were small. They were a lot smaller than $50 billion or
    adjusted for that time. So when many banks fail, of course, we
    have to be concerned as well, and that is one reason why for
    all institutions, even for community banks, Basel III
    regulatory capital requirements are higher. We want to see
    safety and soundness throughout the entire financial system,
    throughout the banking system, although the most systemic
    firms, as you pointed out, of course, need the greatest
    scrutiny.
        Senator Warren. It is the top 40. So I just want to say
    there are two approaches to this issue. The first, which every
    Republican on this Committee supported, is to raise the
    threshold to $500 billion--that is, cut loose about 30 or so of
    the biggest banks in this country, and just hope for the best.
    And if it does not work out, the taxpayers can pick up the tab
    again.
        The other approach is to play it safe. Keep the threshold
    where it is and rely on the Fed to tailor the rules to fit the
    risks posed by these different banks. That is the approach I
    support, and since the American taxpayers are on the hook when
    the economy starts to implode, I suspect most of them would
    prefer that Congress be careful, too. Thank you, Madam Chair.
        Thank you, Mr. Chairman.
        Chairman Shelby. Madam Chair, some people have proposed
    that we do not have any threshold. You have seen some of that.
    But the regulator having the power to do their job properly,
    you have seen some of that, I am sure.
        Senator Crapo.
        Senator Crapo. Thank you very much, Mr. Chairman, and I
    want to follow up on exactly the same question that Senator
    Warren just finished on.
        Last September, I asked Federal Reserve Governor Tarullo
    about legislatively raising the trigger when a bank is
    systemically important from the $50 billion level. In hearings,
    we have heard that the asset threshold should be raised or
    changed because it is arbitrary, includes institutions that are
    not systemically important, focuses only on size, and produces
    undesirable incentives. Governor Tarullo said that several
    years of testing and assessment have given regulators a better
    understanding of the designation threshold. Given the intensity
    and complexity of work around stress testing, he said that
    regulators have not felt that the additional safety and
    soundness benefits of SIFI regulation are really substantial
    enough to warrant the kinds of compliance and resource
    expenditures required of banks that are above $50 billion in
    assets, but well below the largest systemically important
    institutions.
        And so I guess my question to you, which is sort of another
    way of asking the same question that Senator Warren just asked,
    is: Do you agree with Governor Tarullo's analysis that there
    would be a benefit if Congress changed the current threshold
    and focused more on substantive evaluations of true risk rather
    than on an arbitrary number?
        Ms. Yellen. So like Governor Tarullo, I would be open to a
    modest increase in the threshold. And I guess the reason that I
    would be open to it is, as he indicated and as you just stated,
    we do have some smaller institutions that under Section 165 are
    required to do, for example, supervisory stress testing and
    resolution planning. And for some of those institutions, it
    does look from our experience like the costs exceed the
    benefits.
        But if there were to be a modest increase in the threshold,
    I think what is essential is that the Federal Reserve retain
    the discretionary to subject an institution that might fall
    below the new threshold to higher supervisory requires, for
    example, that we would be able to insist that it perform
    supervisory stress testing if, in our view, the risk profile of
    that firm, in spite of its size, led us to believe that it had
    systemic import that made us think it was appropriate, and that
    is possible that we might feel we would need that discretion.
    But at present, every firm over $50 billion has to do things
    like supervisory stress testing, and I think what we have found
    is in some cases the burden associated with that for many of
    those firms really exceeds the benefit to systemic stability.
    But retaining the discretion to, as supervisors require them
    to, do that if we thought it appropriate, that would be very
    important for me to support that change.
        Senator Crapo. Thank you. I appreciate your openness to
    increasing the threshold and focusing on the flexibility that
    we need there. What I am hearing you say--well, let me put this
    differently. It seems to me that a principle we should follow
    is that banks with similar risk profiles should not be subject
    to different regulatory standards, and that applies on both
    sides of any arbitrary number which we might pick. The question
    that I--what I think I heard you say was that the real issue is
    the risk profile, and that the regulators should have the
    authority to evaluate the risk profile of our financial
    institutions and regulate them appropriately. Did I hear you
    correctly?
        Ms. Yellen. I think that is a fair summary.
        Senator Crapo. Thank you. And the last question I have is:
    The Office of Financial Research recently published a study
    this past February that uses a multifactored approach to
    grading the systemic risk of each of the institutions subjected
    to Section 165 of Dodd-Frank. Are you familiar with that study?
    Do you know what I am referring to?
        Ms. Yellen. I am sorry. I have not really had a chance to
    review the study. I apologize.
        Senator Crapo. Fair enough. I get asked by reporters all
    the time about things, and I have learned, if I do not know
    about it, to tell them, and I appreciate that.
        The point is this study showed that different banks who are
    subject to the $50 billion--who are on the upside of the $50
    billion trigger have vastly different risk profiles. And I
    guess the question I was going to ask you is whether this study
    has validity in showing that there are vastly different risk
    profiles among the different banks who are above the $50
    billion trigger. So let me ask that question without
    referencing the study.
        Isn't it correct that there are very, very different risk
    profiles in this pool of banks that are above the $50 billion
    trigger?
        Ms. Yellen. Yes, they have very different risk profiles.
    Some are essentially large community banks that are not
    especially risky. But, on the other hand, we have a couple of
    U.S. firms that are designated as G-SIBs now. They are a lot
    above 50, but they are certainly a lot smaller than the largest
    U.S. firms. But they have business models that make their
    activities systemically important. And so firms of the same
    size can have very different risk profiles and the appropriate
    supervision of those firms can be quite different.
        Senator Crapo. Well, thank you. And this is not a question.
    I will just conclude with this comment, and that is, I think we
    would be much better served if our regulatory system allowed
    our regulators to focus on risk and regulate to that rather
    than forcing them to utilize arbitrary numbers.
        Chairman Shelby. Thank you, Senator Crapo.
        Senator Reed.
        Senator Reed. Well, thank you very much, Mr. Chairman. Just
    quickly, because I have had the opportunity to listen to these
    questions, your position would be that a threshold is
    appropriate, but then discretion to look at different banks
    over that threshold differently is what really you think is the
    ideal?
        Ms. Yellen. Well, within limits, we can tailor our
    supervision to the profiles of the firms. I guess I would be
    concerned if the threshold is raised, we are now saying that
    banks that used to be above the threshold now fall below the
    new threshold. They are no longer automatically subject to a
    number of requirements.
        Senator Reed. And they might be engaged in risky behaviors
    that----
        Ms. Yellen. Yeah, and we might want to, as supervisors, say
    no, no, no. But those two firms, they really need to continue
    doing that. We know they are now below the threshold, but we
    want to subject them to it anyhow because it is right for them.
        Now, there may be many other firms that have now been
    relieved from what was a burden that is not appropriate for
    them.
        Senator Reed. So just to be clear, this issue of threshold
    is not to essentially if you get below a threshold, you do not
    have any responsibility. What you want to be able is to follow
    risk even if it is below the threshold.
        Ms. Yellen. That is right. But we have observed that, for
    example, quite a number of firms that are just above the $50
    billion threshold, we are really imposing some burdens on them
    that it is not clear that the benefits exceed the costs there.
        Senator Reed. Just a final point. There is sort of a
    functional value of having a threshold.
        Ms. Yellen. Yes.
        Senator Reed. However you want to characterize it, because
    if you do not, then you have to have sort of a contest with
    each institution about whether they fit within your criteria,
    whether they truly have risk, and you do not have the entree
    you need to basically make your valuation. You know, you have
    to fight your way through the door. Is that correct?
        Ms. Yellen. That is right. And I used the words ``modest
    increase in the threshold.''
        Senator Reed. All right. Thank you.
        My real question is with the now ubiquitous issue of
    cybersecurity. First, a two-pronged question. One is the
    cybersecurity of the Federal Reserve, and then as importantly,
    maybe more importantly, how effective you are in ensuring that
    your regulated institutions have cybersecurity protections that
    are effective, because this is the issue of the moment and of
    the next decade or more--millennium maybe.
        Ms. Yellen. Absolutely agreed. We internally are highly
    focused on cybersecurity. I believe we have a robust and
    comprehensive cybersecurity system in place. We realize that
    the nature of the threats we face are constantly evolving. We
    are routinely doing self-evaluations of our vulnerabilities and
    engaging third parties to review what we are doing.
        We have a National Incident Response Team that is
    constantly 24/7 responsible for looking at intrusion detection,
    incident response, vulnerable assessments, trying to do their
    own penetration tests to see how secure we are. We have
    business continuity plans for all of our business lines,
    including our most systemically important payment systems like
    Fedwire and for our open market operations. If the primary
    operators of these systems were to suffer an attack, we have
    backup facilities that could take over the operations. So that
    is sort of a----
        Senator Reed. Madam Chair, switching to your regulated
    industry, are you testing them as hard? Are you going in with
    teams to assess? Are you trying to sort of break in--I mean, in
    terms of as a regulator looking to see if they are conducting
    operations appropriately?
        Ms. Yellen. So I do not think we are breaking in and doing
    our own detection tests. But it is an important aspect of our
    supervision to ensure financial institutions have appropriate
    measures in place. We have specialized teams of supervisors
    that are trained in IT security who examine the institutions to
    make sure that they are appropriately--taking the appropriate
    steps, and we work jointly with other regulators through the
    FFIEC for the financial sector more broadly under the
    leadership of Treasury. And we support efforts throughout the
    Government to make sure that we are addressing these threats.
        Senator Reed. Thank you very much. I think the nature of
    the threat is we will be having this conversation for a long
    time.
        Ms. Yellen. We will.
        Chairman Shelby. Senator Warner, finally.
        Senator Warner. Thank you, Mr. Chairman. I will go ahead
    and start.
        Chairman Shelby. I am sorry. If I could, Senator Schumer
    came back.
        Senator Schumer. I will let Senator Warner go.
        Chairman Shelby. He was here earlier. He came back.
        Senator Warner. Senator Schumer was hoping to learn from
    some of my comments, and then he can follow up on them.
        Chairman Shelby. He yielded to you, so maybe we will----
        Senator Schumer. Mark, do not mess with me.
        [Laughter.]
        Senator Warner. I want to start by complimenting the
    Chairman on one of his first questions to Chair Yellen about
    the notion of taking some of these funds that are used to shore
    up the financial system and using them for purposes not related
    to the financial system, the way I believe some people have
    proposed related to highways.
        This is what happens when you skip the line in the
    hierarchy on the Democratic side.
        [Laughter.]
        Senator Schumer. Those are the big banks.
        Senator Warner. Although I would acknowledge that while I
    have great sympathy, you know, for the fact that our community-
    based banks, close to 7,000 of them, are buying into this,
    getting the 6-percent return, you know, some of the money
    market funds that can access the emergency window at 50, 60,
    70, 80 basis points, if they have to then get this ability to
    invest at 6 percent, that is a pretty good trade for the money
    center banks that the community banks do not have----
        Senator Schumer. I am going to forgo my line of
    questioning.
        [Laughter.]
        Senator Warner. The one thing I know that I think Senator
    Warren and probably Senator Brown offered, I actually do
    believe on the resolution plans that we have made progress and
    that we are seeing plans with greater rigor and, candidly, even
    some of the plans in terms of the capital standards that are
    being put in place might even get close to meeting Senator
    Brown and Senator Vitter's requirements.
        The one area that we still do not have the regs out on,
    though, is the regs on the long-term debt and how we have got
    to make sure that that long-term debt is clear, that it could
    be convertible in the event of a challenge so that we can use
    bankruptcy, so that we can meet the goals that Senator Brown so
    carefully articulated.
        I think what I would love to just hear is some assurance
    that we are going to see those final regs by the end of the
    year so that we can have this full guidance out about these
    resolution plans.
        Ms. Yellen. So I cannot give you a specific date, but I
    want to assure you it is a very high priority item for us. We
    have not----
        Senator Warner. Chair Yellen, I did not say specific date.
    I am just saying end of the year. You know, that gives you half
    the year.
        Ms. Yellen. I am loath to promise a date. This is really
    important to us. This is not something that we are just letting
    slip. It is right at the top of our agenda----
        Senator Warner. But when we look at----
        Ms. Yellen. ----to get this done.
        Senator Warner. ----the capital structures and the kind of
    increased ability for these large banks to withstand trauma,
    having those rules out on the long-term debt and that
    conversion component really, you know----
        Ms. Yellen. Agreed. I totally agree.
        Senator Warner. Because I really want to be able to respond
    to Senator Brown in an artful and complete way that his
    approach maybe has been solved by those of us who thought Title
    1 and Title 2 got at this issue.
        Ms. Yellen. So we completely agree. It is very important
    for there to be a long-term debt requirement. Most of these
    firms in their living wills propose a resolution strategy that
    is similar to the FDIC's single point of entry strategy that
    they would use under Title 2.
        Senator Warner. Right.
        Ms. Yellen. In either case, it requires adequate long-term
    debt. We are working jointly with the FDIC trying to figure out
    the right parameters. We are working through the FSB. There is
    a TLAC agreement. We want to see this globally. I promise to
    get it done just as soon as we can. I am not going to let it--
    --
        Senator Warner. It sounds like--end of the year sounds like
    a great time. But let me----
        Ms. Yellen. I promise to make every effort to do so.
        Senator Schumer. He has spoken.
        [Laughter.]
        Senator Warner. You know, one of the things that we have
    seen--let us switch to kind of world monetary policy for a
    moment. You know, as we see the Bank of Japan and the ECB
    continue to deal with their currencies, which indirectly
    obviously makes their products cheaper, our products more
    expensive, do you worry at all that the actions of these other
    central banks are putting even more undue pressure on America
    to be the engine that drives and affects the whole world's
    economy because of their monetary policy actions?
        Ms. Yellen. Well, monetary policy for domestic purposes
    often has some impact on a country's exchange rate. So the fact
    that we have a stronger economy, are likely to raise rates
    sooner, and they are continuing to ease monetary policy, those
    factors have tended to push up the dollar. That has tended to
    create a drag for net exports and to diminish our growth
    prospects, and that is something that affects the stance and
    appropriate future stance of monetary policy.
        Now, even taking all of that into account, the very
    significant appreciation we have seen of the dollar, we need to
    put that in the context of the overall strength in domestic
    spending in the U.S. economy. Our committee concluded that even
    taking that into account, the continuing drag there, we still
    think the U.S. economy is going to grow and will probably
    remain appropriate.
        Senator Warner. But this will be a factor--and my time is
    up.
        Ms. Yellen. It is a factor----
        Senator Warner. This will be a factor the FOMC will look at
    since----
        Ms. Yellen. Absolutely, always looking at----
        Senator Warner. ----in effect, they are continuing to put
    all these burdens on our country's economy to kind of carry the
    whole world forward.
        Ms. Yellen. It is a factor. We are constantly looking at
    it. That is essentially what is happening.
        Chairman Shelby. Before I recognize Senator Schumer, I
    would like to clarify the record. The bill that was reported
    out of here, our banking legislation, back in May does not
    raise the threshold in Section 165 of Dodd-Frank to $500
    billion, as a lot of people think. In fact, the legislation
    keeps the $50 billion threshold in place for all institutions
    to be considered for enhanced prudential regulation and gives
    the regulators--the Fed, generally--the discretion to determine
    what institutions above $50 billion should be subject to it.
    Banks above $500 billion would receive no such discretion. I
    just wanted to clear the record on this.
        Senator Schumer.
        Senator Schumer. Thank you, Mr. Chairman----
        Senator Brown. Could I speak for a moment?
        Chairman Shelby. Yes, sir, Senator Brown.
        Senator Brown. While the Chairman technically is correct,
    the difficulty for FSOC designation was made much greater, so
    the--I believe that what Senator Warren said is correct, that
    it does not protect the safety and soundness of our--that
    legislation can threaten the safety and soundness of our
    banking system. I will leave it at that, and we can debate this
    for a long time.
        Chairman Shelby. We will.
        [Laughter.]
        Chairman Shelby. Senator Schumer.
        Senator Schumer. Thank you, Mr. Chairman.
        Chairman Shelby. Thank you for your----
        Senator Schumer. No problem. Thank you. And thank you,
    Chairman.
        As you stated in your testimony, the FOMC will likely look
    to raise the Federal funds rate at some point before the end of
    the year, and you and the others on the FOMC must ultimately
    make this decision, weighing all the information at your
    disposal. I understand that.
        But as we have discussed previously, I am still troubled by
    sluggish wage growth in America. Along with tepid wage growth,
    we continue to see depressed labor force participation,
    inflation continues to run well below the 2-percent target. So
    I am left to question whether there is still significant slack
    in the labor market.
        Views may differ here. I have heard from experts on both
    sides. But I refuse to let the loud voices of those screaming
    for the Fed to act to drown out the voices of middle-class
    working families who continue to wait quietly for economic
    recovery to show up in their take-home pay. And so the question
    of when the Fed will raise rates has received a lot of
    attention, but as I have said before, I believe the single
    biggest problem facing this country is the decline of middle-
    class income. And as you know, middle-class incomes have
    decreased by 6.5 percent. Median income adjusted for inflation
    is $3,600 lower than when President Bush took office.
        So my question is a simple one: What more can be done? How
    can we create better individuals to increase productivity? What
    do you see as critical catalysts for stronger wage growth?
    Because it almost seems we are pushing on a wet noodle?
        Ms. Yellen. Well, we have seen structural forces over a
    long period of time push down on middle-class wages, and the
    economic research that has been done suggests a continuing high
    demand for skilled labor and declining demand for less skilled
    labor. We see an increasing wage gap between those who are more
    skilled and less skilled, partly reflecting the nature of
    technological change and globalization. And productivity
    growth, as you mentioned, has certainly slowed down since 2007.
    We point this out in the Monetary Policy Report. It has been
    decidedly slower than before that. And I think it is important
    to focus on policies that would improve productivity growth.
    They have to do with making sure that every American child is
    able to get a really world-class education and is really able
    to succeed in this economy, and that we take actions to promote
    innovation and entrepreneurship and capital investment, both
    public and private, that are necessary to drive innovation.
        I think those are the kinds of policies that Congress and
    the public need to consider to address these. These are deeper
    structural trends that are not just related to the cyclical
    state of the economy, and they have been around for a long
    time, and it is appropriate----
        Senator Schumer. And there is certainly a limit what
    monetary policy----
        Ms. Yellen. There is.
        Senator Schumer. We understand that. But here we are facing
    sequestration here in the Congress, and current spending bills
    proposed by my colleagues on the other side of the aisle would
    slash funding for key resources--supplemental opportunity
    grants, Pell grants, $300 million from employment and job
    training programs, cuts to education. These are the kinds of
    programs you mentioned in part as catalysts to stronger wage
    growth. So I do not want you to weigh in on specific programs.
    Obviously, that is not your job. But let me ask you this: As we
    look toward the end of the year, can you talk about the broader
    impact to our economic recovery that drastic, automatically
    triggered budget cuts may have as well as the potential for a
    Government shutdown and the uncertainty surrounding the debt
    ceiling? Do you believe these events could create fiscal
    headwinds for our recovery?
        Ms. Yellen. Well, in recent years, fiscal policy has gone
    from creating a significant drag on the economy to being
    roughly neutral, and that shift in a favorable direction I
    think has helped to promote economic recovery. So I would be
    concerned about something that was a large fiscal shift. I do
    not know whether or not this would be. But policies or
    governmental actions that create uncertainty, whether it is a
    Government shutdown or running up against the debt ceiling,
    that reduce the confidence of households and businesses on the
    ability of their Government to function in an effective way and
    create fear and loss of confidence obviously are not helpful to
    recovery.
        Senator Schumer. And just getting to the wage growth
    conundrum, wouldn't cutting education and cutting training
    programs that make workers more able to be productive be
    counter to that?
        Ms. Yellen. So I do not want to, as you indicated, weigh in
    on specific programs, but I do think that education programs,
    programs to promote training and skills acquisition are very
    critical in addressing wage inequality.
        Senator Schumer. Thank you.
        Thank you, Mr. Chairman.
        Chairman Shelby. Madam Chair, we thank you again for your
    appearance and your willingness to come, and we hope we can
    work with you on some of the proposed legislation because I
    think there are some misperceptions of what we are trying to
    do. We are trying to give you a lot of power--you already have
    a lot of power--and some discretion, but none of us wants to
    weaken the banking system.
        Thank you.
        Ms. Yellen. Thank you, Chair Shelby. I look forward to
    working with you and the Committee.
        Chairman Shelby. Thank you. This hearing is 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
                                 July 16, 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 in February, the economy
    has made further progress toward the Federal Reserve's objective of
    maximum employment, while inflation has continued to run below the
    level that the Federal Open Market Committee (FOMC) judges to be most
    consistent over the longer run with the Federal Reserve's statutory
    mandate to promote maximum employment and price stability.
        In the labor market, the unemployment rate now stands at 5.3
    percent, slightly below its level at the end of last year and down more
    than 4\1/2\ percentage points from its 10 percent peak in late 2009.
    Meanwhile, monthly gains in nonfarm payroll employment averaged about
    210,000 over the first half of this year, somewhat less than the robust
    260,000 average seen in 2014 but still sufficient to bring the total
    increase in employment since its trough to more than 12 million jobs.
    Other measures of job market health are also trending in the right
    direction, with noticeable declines over the past year in the number of
    people suffering long-term unemployment and in the numbers working part
    time who would prefer full-time employment. However, these measures--as
    well as the unemployment rate--continue to indicate that there is still
    some slack in labor markets. For example, too many people are not
    searching for a job but would likely do so if the labor market was
    stronger. And, although there are tentative signs that wage growth has
    picked up, it continues to be relatively subdued, consistent with other
    indications of slack. Thus, while labor market conditions have improved
    substantially, they are, in the FOMC's judgment, not yet consistent
    with maximum employment.
        Even as the labor market was improving, domestic spending and
    production softened notably during the first half of this year. Real
    gross domestic product (GDP) is now estimated to have been little
    changed in the first quarter after having risen at an average annual
    rate of 3\1/2\ percent over the second half of last year, and
    industrial production has declined a bit, on balance, since the turn of
    the year. While these developments bear watching, some of this
    sluggishness seems to be the result of transitory factors, including
    unusually severe winter weather, labor disruptions at West Coast ports,
    and statistical noise. The available data suggest a moderate pace of
    GDP growth in the second quarter as these influences dissipate.
    Notably, consumer spending has picked up, and sales of motor vehicles
    in May and June were strong, suggesting that many households have both
    the wherewithal and the confidence to purchase big-ticket items. In
    addition, homebuilding has picked up somewhat lately, although the
    demand for housing is still being restrained by limited availability of
    mortgage loans to many potential homebuyers. Business investment has
    been soft this year, partly reflecting the plunge in oil drilling. And
    net exports are being held down by weak economic growth in several of
    our major trading partners and the appreciation of the dollar.
        Looking forward, prospects are favorable for further improvement in
    the U.S. labor market and the economy more broadly. Low oil prices and
    ongoing employment gains should continue to bolster consumer spending,
    financial conditions generally remain supportive of growth, and the
    highly accommodative monetary policies abroad should work to strengthen
    global growth. In addition, some of the headwinds restraining economic
    growth, including the effects of dollar appreciation on net exports and
    the effect of lower oil prices on capital spending, should diminish
    over time. As a result, the FOMC expects U.S. GDP growth to strengthen
    over the remainder of this year and the unemployment rate to decline
    gradually.
        As always, however, there are some uncertainties in the economic
    outlook. Foreign developments, in particular, pose some risks to U.S.
    growth. Most notably, although the recovery in the euro area appears to
    have gained a firmer footing, the situation in Greece remains
    difficult. And China continues to grapple with the challenges posed by
    high debt, weak property markets, and volatile financial conditions.
    But economic growth abroad could also pick up more quickly than
    observers generally anticipate, providing additional support for U.S.
    economic activity. The U.S. economy also might snap back more quickly
    as the transitory influences holding down first-half growth fade and
    the boost to consumer spending from low oil prices shows through more
    definitively.
        As I noted earlier, inflation continues to run below the
    Committee's 2-percent objective, with the personal consumption
    expenditures (PCE) price index up only \1/4\ percent over the 12 months
    ending in May and the core index, which excludes the volatile food and
    energy components, up only 1\1/4\ percent over the same period. To a
    significant extent, the recent low readings on total PCE inflation
    reflect influences that are likely to be transitory, particularly the
    earlier steep declines in oil prices and in the prices of non-energy
    imported goods. Indeed, energy prices appear to have stabilized
    recently.
        Although monthly inflation readings have firmed lately, the 12-
    month change in the PCE price index is likely to remain near its recent
    low level in the near term. My colleagues and I continue to expect that
    as the effects of these transitory factors dissipate and as the labor
    market improves further, inflation will move gradually back toward our
    2-percent objective over the medium term. Market-based measures of
    inflation compensation remain low--although they have risen some from
    their levels earlier this year--and survey-based measures of longer-
    term inflation expectations have remained stable. The Committee will
    continue to monitor inflation developments carefully.
    Monetary Policy
        Regarding monetary policy, the FOMC conducts policy to promote
    maximum employment and price stability, as required by our statutory
    mandate from the Congress. Given the economic situation that I just
    described, the Committee has judged that a high degree of monetary
    policy accommodation remains appropriate. Consistent with that
    assessment, we have continued to maintain the target range for the
    Federal funds rate at 0 to \1/4\ percent and have kept the Federal
    Reserve's holdings of longer-term securities at their current elevated
    level to help maintain accommodative financial conditions.
        In its most recent statement, the FOMC again noted that it judged
    it would be appropriate to raise the target range for the Federal funds
    rate when it has seen further improvement in the labor market and is
    reasonably confident that inflation will move back to its 2-percent
    objective over the medium term. The Committee will determine the timing
    of the initial increase in the Federal funds rate on a meeting-by-
    meeting basis, depending on its assessment of realized and expected
    progress toward its objectives of maximum employment and 2-percent
    inflation. If the economy evolves as we expect, economic conditions
    likely would make it appropriate at some point this year to raise the
    Federal funds rate target, thereby beginning to normalize the stance of
    monetary policy. Indeed, most participants in June projected that an
    increase in the Federal funds target range would likely become
    appropriate before year-end. But let me emphasize again that these are
    projections based on the anticipated path of the economy, not
    statements of intent to raise rates at any particular time.
        A decision by the Committee to raise its target range for the
    Federal funds rate will signal how much progress the economy has made
    in healing from the trauma of the financial crisis. That said, the
    importance of the initial step to raise the Federal funds rate target
    should not be overemphasized. What matters for financial conditions and
    the broader economy is the entire expected path of interest rates, not
    any particular move, including the initial increase, in the Federal
    funds rate. Indeed, the stance of monetary policy will likely remain
    highly accommodative for quite some time after the first increase in
    the Federal funds rate in order to support continued progress toward
    our objectives of maximum employment and 2-percent inflation. In the
    projections prepared for our June meeting, most FOMC participants
    anticipated that economic conditions would evolve over time in a way
    that will warrant gradual increases in the Federal funds rate as the
    headwinds that still restrain real activity continue to diminish and
    inflation rises. Of course, if the expansion proves to be more vigorous
    than currently anticipated and inflation moves higher than expected,
    then the appropriate path would likely follow a higher and steeper
    trajectory; conversely, if conditions were to prove weaker, then the
    appropriate trajectory would be lower and less steep than currently
    projected. As always, we will regularly reassess what level of the
    Federal funds rate is consistent with achieving and maintaining the
    Committee's dual mandate.
        I would also like to note that the Federal Reserve has continued to
    refine its operational plans pertaining to the deployment of our
    various policy tools when the Committee judges it appropriate to begin
    normalizing the stance of policy. Last fall, the Committee issued a
    detailed statement concerning its plans for policy normalization and,
    over the past few months, we have announced a number of additional
    details regarding the approach the Committee intends to use when it
    decides to raise the target range for the Federal funds rate.
    Federal Reserve Transparency and Accountability
        These statements pertaining to policy normalization constitute
    recent examples of the many steps the Federal Reserve has taken over
    the years to improve our public communications concerning monetary
    policy. As this Committee well knows, the Board has for many years
    delivered an extensive report on monetary policy and economic
    developments at semiannual hearings such as this one. And the FOMC has
    long announced its monetary policy decisions by issuing statements
    shortly after its meetings, followed by minutes of its meetings with a
    full account of policy discussions and, with an appropriate lag,
    complete meeting transcripts. Innovations in recent years have included
    quarterly press conferences and the quarterly release of FOMC
    participants' projections for economic growth, unemployment, inflation,
    and the appropriate path for the Committee's interest rate target. In
    addition, the Committee adopted a statement in 2012 concerning its
    longer-run goals and monetary policy strategy that included a specific
    2-percent longer-run objective for inflation and a commitment to follow
    a balanced approach in pursuing our mandated goals.
        Transparency concerning the Federal Reserve's conduct of monetary
    policy is desirable because better public understanding enhances the
    effectiveness of policy. More important, however, is that transparent
    communications reflect the Federal Reserve's commitment to
    accountability within our democratic system of Government. Our various
    communications tools are important means of implementing monetary
    policy and have many technical elements. Each step forward in our
    communications practices has been taken with the goal of enhancing the
    effectiveness of monetary policy and avoiding unintended consequences.
    Effective communication is also crucial to ensuring that the Federal
    Reserve remains accountable, but measures that affect the ability of
    policymakers to make decisions about monetary policy free of short-term
    political pressure, in the name of transparency, should be avoided.
        The Federal Reserve ranks among the most transparent central banks.
    We publish a summary of our balance sheet every week. Our financial
    statements are audited annually by an outside auditor and made public.
    Every security we hold is listed on the Web site of the Federal Reserve
    Bank of New York. And, in conformance with the Dodd-Frank Act,
    transaction-level data on all of our lending--including the identity of
    borrowers and the amounts borrowed--are published with a 2-year lag.
    Efforts to further increase transparency, no matter how well
    intentioned, must avoid unintended consequences that could undermine
    the Federal Reserve's ability to make policy in the long-run best
    interest of American families and businesses.
    Summary
        In sum, since the February 2015 Monetary Policy Report, we have
    seen, despite the soft patch in economic activity in the first quarter,
    that the labor market has continued to show progress toward our
    objective of maximum employment. Inflation has continued to run below
    our longer-run objective, but we believe transitory factors have played
    a major role. We continue to anticipate that it will be appropriate to
    raise the target range for the Federal funds rate when the Committee
    has seen further improvement in the labor market and is reasonably
    confident that inflation will move back to its 2-percent objective over
    the medium term. As always, the Federal Reserve remains committed to
    employing its tools to best promote the attainment of its dual mandate.
        Thank you. I would be pleased to take your questions.
           RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
                          FROM JANET L. YELLEN

    Q.1. Many economists have proposed that the Federal Reserve
    should adopt a strategy of targeting the growth rate of nominal
    GDP, which would create a countercyclical monetary policy to
    offset booms and downturns in the economy while also reducing
    uncertainty.
        Does the Federal Open Market Committee (FOMC) consider the
    rate of nominal GDP growth as a priority in its monetary policy
    decisions?

    A.1. The Federal Reserve's mandate, as established by Congress
    in the Federal Reserve Act, is ``to promote effectively the
    goals of maximum employment, stable prices, and moderate long-
    term interest rates.'' \1\ To assess progress toward these
    statutory objectives, the FOMC considers information about a
    wide range of variables, including the rate of nominal GDP
    growth. This information encompasses indicators of inflation
    pressures, measures of labor market conditions and real
    economic activity, and readings on financial and international
    developments. Nominal GDP growth, by itself, does not give a
    complete picture of the economy's performance; moderate nominal
    GDP growth could reflect, for example, strong growth of real
    economic activity with low inflation, or weak economic growth
    with high inflation.
    ---------------------------------------------------------------------------
         \1\ The FOMC judges that moderate longer-term interest rates would
    follow if the Federal Reserve achieves its objectives of maximum
    employment and stable prices; hence the FOMC often refers to its
    statutory objectives as the ``dual mandate.'' The FOMC also judges that
    inflation at the rate of 2 percent, as measured by the annual change in
    the price index for personal consumption expenditures, is most
    consistent over the longer run with the Federal Reserve's statutory
    mandate. In setting monetary policy, the FOMC seeks to mitigate
    deviations of inflation from this 2 percent longer-run goal and
    deviations of employment from the committee's assessments of its
    maximum level. See Board of Governors (2015), ``Statement on Longer-Run
    Goals and Monetary Policy Strategy'', press release, January 27, http:/
    /www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf.

    ---------------------------------------------------------------------------
    Q.2. Could the FOMC adopt a strategy of targeting nominal GDP?

    A.2. While, conceptually, the FOMC could adopt a strategy of
    targeting nominal GDP, there are a number considerations
    regarding the satisfaction of the Federal Reserve's statutory
    objectives and the balance of prospective benefits and costs
    that such strategy would entail relative to other policy
    frameworks.
        The expression ``nominal GDP targeting'' has been used to
    refer to two distinct policy strategies. First, a central bank
    could target the growth rate of nominal GDP. \2\ As pointed out
    by Bernanke and Mishkin (1997), and as illustrated by the
    international experience, modern inflation targeting frameworks
    generally allow policymakers ample flexibility to stabilize
    economic activity in the near term or to look beyond transitory
    movements in inflation due to swings in global energy and trade
    prices. The research literature suggests that the macroeconomic
    outcomes achieved by central banks pursuing an inflation
    objective tend to be similar to those they would have achieved
    had they targeted the growth rate of nominal GDP. \3\ Second,
    nominal GDP targeting can be understood as a monetary policy
    strategy in which the central bank seeks to stabilize the level
    of nominal GDP around a preannounced trend path in order to
    achieve its longer-run statutory objectives.
    ---------------------------------------------------------------------------
         \2\ For early arguments in favor of targeting the growth rate of
    nominal GDP, see Taylor (1985), ``What Would Nominal GDP Targeting Do
    to the Business Cycle?'' Carnegie-Rochester Conference Series on Public
    Policy, Amsterdam: North-Holland, vol. 22, pp. 61-84.
         \3\ See Ben S. Bernanke and Frederic S. Mishkin (1997),
    ``Inflation Targeting: A New Framework for Monetary Policy?'' Journal
    of Economic Perspectives, vol. 11(2), pp. 97-116. For arguments that
    policymakers under inflation targeting regimes afforded considerable
    flexibility to respond to the slump in output during the financial
    crisis, see Ben S. Bernanke (2011), ``The Effects of the Great
    Recession on Central Bank Doctrine and Practice'', speech delivered at
    Federal Reserve Bank of Boston 56th Economic Conference, Boston,
    Massachusetts, October 18.
    ---------------------------------------------------------------------------
        Because the difference between nominal GDP and its targeted
    value can be expressed as the sum of a price gap and a real
    activity gap, nominal GDP targeting recognizes, albeit
    imperfectly, elements on both sides of the FOMC's dual mandate.
    \4\ At least in theory, monetary policy that targets nominal
    GDP can help correct the effects of aggregate demand shocks on
    both real GDP and the price level. For instance, under nominal
    GDP level targeting, the central bank would respond to a
    shortfall in the level of nominal GDP by easing monetary policy
    to generate a period of above-trend nominal GDP growth in order
    to bring nominal GDP back to the original trend path; that
    policy easing would increase both real activity and the price
    level. A credible expectation that monetary policy will be
    accommodative in the future, in turn, helps to mitigate the
    initial fall in output and inflation. The theoretical benefits
    of targeting the level of nominal GDP hinge on the credibility
    of the promise to stimulate the economy down the road, the
    public's ability to form accurate expectations of the policy
    response and its effects, and, more generally, the public's
    understanding of the way the economy operates and interacts
    with monetary policy.
    ---------------------------------------------------------------------------
         \4\ Output prices cover a broader set of goods and services prices
    than the index of personal consumption expenditures that the FOMC uses
    to assess progress toward its longer-run inflation objective. Moreover,
    the real activity gap is only imperfectly related to the gap between
    employment and the statutory goal of maximum employment.
    ---------------------------------------------------------------------------
        There are, however, some important practical considerations
    with the pursuit of nominal GDP targeting. First, when faced
    with a very large fall in nominal GDP, as occurred during the
    2008-2009 recession, a central bank committed to a nominal GDP
    target would promise to eventually lower the unemployment rate
    well below the natural rate of unemployment and to raise
    inflation above its longer-run average for some time in order
    to lift nominal GDP back to its targeted level. When that
    promise comes due, it is not obvious that the central bank and
    the public would judge that running the economy that hot--
    possibly over a period of several years after the initial shock
    has come to pass--is desirable. \5\
    ---------------------------------------------------------------------------
         \5\ This phenomenon is known as the time-consistency problem. It
    arises because the benefits of nominal GDP targeting are frontloaded
    whereas the costs are postponed and can be avoided by reneging on the
    promise.
    ---------------------------------------------------------------------------
        Second, if the central bank is intent on delivering the
    promised period of very low unemployment and temporarily high
    inflation, there can be risks to the potency and credibility of
    monetary policy from adverse movements in expectations. Once
    resource slack has been reabsorbed, the maintenance of monetary
    conditions that are sufficiently accommodative to lift
    inflation above the longer-run objective could be
    misinterpreted by the public as evidence that the central bank
    is not committed to its price stability mandate, thus
    heightening the risk that longer-run inflation expectations
    could become unanchored.
        Third, data on nominal GDP are not available as timely and
    frequently as, say, data on inflation and the unemployment
    rate. Moreover, nominal GDP data are subject to revisions,
    which can be large and occur several quarters or even years
    after the release of the initial estimates. These revisions
    directly alter the size of the gap between current nominal GDP
    and its targeted level, and so might call for a change in the
    stance of monetary policy even if the public perceives economic
    conditions as unchanged. Furthermore, nominal GDP is influenced
    by a number of nonmonetary factors such as population growth,
    the labor force participation rate, the pace of technological
    advances, and measurement issues such as price adjustments for
    quality changes. Innovations to these nonmonetary factors
    affect the price level or inflation rate that is consistent
    with the achievement of a given nominal GDP target. \6\ For all
    these reasons, the demands on the public's attention and
    comprehension imposed by nominal GDP targeting are arguably
    nontrivial.
    ---------------------------------------------------------------------------
         \6\ Given a fixed nominal GDP target, volatility in these
    nonmonetary factors thus directly translates into volatility in the
    level of inflation consistent with achieving the target. This
    volatility could conflict with the Federal Reserve's statutory mandate
    of promoting ``stable prices.'' To be sure, the FOMC could offset the
    effects on inflation of movements in these nonmonetary factors by
    adjusting the nominal GDP target. However, occasional adjustments to
    the target could create some communication challenges.

    Q.3. A recent report from the Bank of International Settlements
    (BIS) found that the prolonged period of low interest rates is
    damaging the U.S. economy, resulting in ``too much debt and too
    little growth.'' In addition, the report states that ``low
    rates may in part have contributed to . . . costly financial
    booms and busts.'' Do you agree with the BIS that persistently
    low interest rates can have negative effects on the U.S.
    ---------------------------------------------------------------------------
    economy? Please explain.

    A.3. The accommodative monetary policy of the Federal Reserve
    is designed to fulfill the dual mandates of maximum employment
    and price stability set for us by the Congress. In particular,
    low interest rates are currently needed to provide support for
    a return to full employment and for inflation to return to the
    FOMC's longer run objective over time. When the economy has
    strengthened, interest rates will rise in a sustainable way. In
    particular, the FOMC has indicated that it anticipates that it
    will be appropriate to raise the target range for the Federal
    funds rate when it has seen some further improvement in the
    labor market and is reasonably confident that inflation will
    move back to its 2-percent objective over the medium term.
        However, the Federal Reserve is also mindful that a
    prolonged period of low rates could encourage imprudent risk
    taking by some investors and eventually undermine financial
    stability, with negative effects on the U.S. economy. For this
    reason, the Federal Reserve, on its own and with other domestic
    and international regulators, has taken steps to boost the
    resilience of the financial system and has increased its
    efforts to comprehensively monitor the financial system for
    building vulnerabilities and to guide actions to mitigate those
    risks.

    Q.4. In your previous testimony before this Committee on
    February 24th, you stated that in the FOMC's monetary policy
    decisionmaking process, ``it is useful for us to consult the
    recommendations of rules of the Taylor type. We do so
    routinely, and they are an important input into what ultimately
    is a decision that requires sound judgment.''
        Which monetary policy rules are used by the FOMC?

    A.4. The FOMC treats the prescriptions of monetary policy rules
    as useful benchmarks for setting the Federal funds rate.
    Accordingly, ahead of every FOMC meeting, Federal Reserve staff
    prepare a discussion of policy prescriptions from several
    policy rules for the committee's consideration. For example,
    the most recent staff briefing materials that are available to
    the public, which cover FOMC meetings in 2009, considered
    prescriptions from the following five simple rules: the
    canonical Taylor (1993) rule, the Taylor (1999) rule, a first-
    difference rule, an empirical rule approximating past FOMC
    behavior, and an estimated forecast-based rule. Those materials
    also discussed ``optimal control'' policy prescriptions, which
    are simulations of the path for the Federal funds rate that
    delivers the best macroeconomic outcomes given the Federal
    Reserve staffs baseline economic outlook and a ``loss
    function'' that considers larger deviations of real GDP from
    the level consistent with full employment to be appreciably
    more costly than smaller deviations, and similarly for
    deviations of inflation from the longer-run objective and for
    volatility in the Federal funds rate. \7\ In addition, FOMC
    discussion of monetary policy rules is informed by in-depth
    technical memos and working papers that are periodically
    prepared by Federal Reserve staff, as well as by contributions
    from the academic literature. \8\
    ---------------------------------------------------------------------------
         \7\ For an example of policy prescriptions from simple rules and
    optimal control exercises, along with a discussion of how they inform
    policy, see Janet Yellen (2012), ``Perspectives on Monetary Policy'',
    speech delivered at the Boston Economic Club Dinner, Boston,
    Massachusetts, June 6. Complete model code of the Federal Reserve's
    FRB/US model and illustrative simulation programs, including sample
    code for optimal control policy, are publicly available on the Federal
    Reserve's Web site.
         \8\ Some of the staff's technical analysis reviewed by FOMC
    participants may be made public in the form of technical working
    papers, staff notes, and publications in academic journals. For an
    illustration of in-depth staff analysis using simple policy rules,
    including nominal GDP targeting rules, see William B. English, David
    Lopez-Salido, and Robert J. Tetlow, ``The Federal Reserve's Framework
    for Monetary Policy: Recent Changes and New Questions'', IMF Economic
    Review, vol. 63(1), pp. 22-70.
    ---------------------------------------------------------------------------
        The FOMC considers the prescriptions of a variety of
    monetary policy rules because no single rule has been shown to
    be fully satisfactory given the complexity of the economy and
    constantly evolving economic relationships. Many studies have
    shown that in normal times, when the economy is buffeted by
    typical shocks, simple rules can deliver outcomes that are
    close to those under optimal policies. However, the simple
    rules that perform well under ordinary circumstances may
    disappoint during periods of, say, persistently strong
    headwinds restraining recovery. \9\ Moreover, simple rules that
    perform well in some economic environments may perform poorly
    when economic relationships are unstable, because such rules do
    not quickly adapt to changes in potential output growth or fail
    to incorporate financial stability concerns in times of crisis.
    \10\
    ---------------------------------------------------------------------------
         \9\ For a discussion and an illustration of the shortcomings of
    simple Taylor-type rules in the wake of the Great Recession, see Janet
    Yellen (2012), ``Revolution and Evolution in Central Bank
    Communications'', speech delivered at the Haas School of Business,
    University of California, Berkeley, Berkeley, California, November 13.
         \10\ For studies of rule robustness, see, among others, John B.
    Taylor and John C. William (2011), ``Simple and Robust Rules for
    Monetary Policy'', in John C. Williams, Benjamin Friedman, and Michael
    Woodford (Eds.), Handbook of Monetary Economics, vol. 3, pp. 829-859.

    Q.5. Please submit to us a list of each rule discussed by the
    ---------------------------------------------------------------------------
    FOMC at its most recent meeting.

    A.5. Please see response to Question 4.

    Q.6. Federal Reserve officials have stated that the Federal
    Reserve's practice of paying interest on banks' reserve
    balances has become an important tool of monetary policy. If
    that is the case, should this rate be set by the FOMC, which is
    responsible for monetary policy, rather than by the Federal
    Reserve Board of Governors? Please explain.

    A.6. By statute, both the Federal Reserve and FOMC play
    important roles in the conduct of monetary policy, with the
    Federal Reserve being responsible for some policy tools and the
    FOMC being responsible for the others. The Federal Reserve and
    FOMC have worked collaboratively for decades to employ these
    policy tools in concert to effectively promote the Federal
    Reserve's long-run goals of maximum employment and stable
    prices.
        Under the Federal Reserve Act, the Federal Reserve has
    authority over changes in reserve requirements and on interest
    on reserves. In addition, any change in the discount rate
    initiated by a Federal Reserve Bank is subject to review and
    determination by the Federal Reserve. Reserve requirements and
    the discount rate have been employed for many years as key
    elements of the framework that the FOMC has relied upon in
    managing the level of the Federal funds rate.
        The interest rate paid on banks' reserve balances is an
    important new tool of monetary policy that is determined by the
    Federal Reserve. Following the examples of the discount rate
    and reserve requirements, the Federal Reserve has indicated
    that the interest on excess reserves rate will be set in a way
    to keep the Federal funds rate in the range established by the
    FOMC. Indeed, the FOMC noted in its September 2014 Policy
    Normalization Principles and Plans that the Federal Reserve
    intends to move the Federal funds rate into the target range
    set by the FOMC primarily by adjusting the interest rate it
    pays on excess reserve balances. The collaborative approach to
    monetary policy implementation to achieve overall monetary
    policy objectives was reiterated in the June 2015 FOMC meeting
    minutes, which noted that operational decisions regarding
    policy tools will be made in concert by the Federal Reserve and
    the FOMC.

    Q.7. A Federal judge recently ruled in Starr International Co.
    v. U.S. that the actions in the bailout of AIG were beyond the
    authority of the Federal Reserve since ``Section 13(3) did not
    authorize the Federal Reserve Bank to acquire a borrower's
    equity as consideration for the loan.'' The Board of Governors
    responded in a press release that its ``actions in the AIG
    rescue during the height of the financial crisis in 2008 were
    legal, proper and effective.''
        Did the Federal Reserve conduct a legal analysis to reach
    this conclusion?

    A.7. A comprehensive legal analysis supporting the conclusion
    that the Federal Reserve's actions in the American
    International Group (AIG) rescue were consistent with all
    applicable laws can be found in the United States' Post-Trial
    Brief in the Starr International court case, filed on March 23,
    2015. Starr International Co. v. U.S., No. 11-779C, U.S. Court
    of Federal Claims (Docket No. 434, pages 6-19). Attached is a
    copy of that brief, along with two internal Federal Reserve
    memoranda cited in it that relate to the issue of authority
    (JX-13 and DX-484). Some other publicly available filings in
    this case that also address the authority issue are Docket Nos.
    55, 63, 248-1, 279, and 426; these can be found through the
    Federal Judiciary's system, ``Public Access to Court's
    Electronic Records'' or PACER, at www.pacer.gov. As you may be
    aware, the Department of Justice has cross-appealed the Court
    of Federal Claims decision in Starr, and we expect that the
    issue of the Federal Reserve' s authority will be addressed by
    the Federal Circuit.

    Q.8. Please provide a copy of this analysis and all memoranda
    and related documents.

    A.8. Please see response to question 5a.

    Q.9. Market-based indicators of future economic activity are
    often more accurate than research-based predictions.
        Does the FOMC use any market-based indicators (such as TIPS
    spreads) in its monetary policy decisions?

    A.9. The FOMC is firmly committed to fulfilling its statutory
    mandate of promoting maximum employment and stable prices. The
    FOMC recognizes that the inflation expectations of those who
    set prices in the economy are an important determinant of the
    behavior of actual inflation. Consequently, the FOMC monitors
    both inflation expectations and the actual inflation rate in
    setting monetary policy.
        The FOMC follows various measures of inflation
    expectations. One set of measures is based on financial
    instruments whose payouts are linked to inflation. For example,
    Treasury inflation protection securities (TIPS)--implied
    inflation compensation (or the TIPS break even inflation rate)
    is defined as the difference at comparable maturities between
    yields on nominal Treasury securities and yields on Treasury
    securities that are indexed to headline CPI inflation (or
    TIPS). Inflation swaps--contracts in which one party pays a
    certain fixed amount in exchange--for cash flows that are
    indexed to cumulative CPI inflation over some horizon--provide
    alternative measures of inflation compensation. These market-
    based measures provide information about market participants'
    expectations of inflation. However, extracting that information
    generally requires the application of economic theory and
    statistical models because these market-based measures reflect
    not only expected inflation, but also an inflation risk
    premium--the compensation that holders of nominal securities
    demand for bearing inflation risk--as well as other premiums
    driven by liquidity differences and shifts in the relative
    supply and demand of nominal versus inflation-indexed
    securities. Staff in the Federal Reserve System maintain
    several term structure models aimed at providing estimates of
    the inflation expectations and risk premiums that make up
    inflation compensation but results from those decompositions
    are sensitive to model specification.
        In addition, the FOMC monitors measures of inflation
    expectations that are based on surveys of households, market
    participants, and professional forecasters. These measures
    elicit respondents' inflation expectations directly, although
    survey participants are not necessarily the price setters in
    the economy.
        As none of available measures of inflation expectations is
    perfect, staff in the Federal Reserve System keep track of a
    wide array of such measures and continue their efforts to
    develop deeper understanding of the measures' behavior.

    Q.10. Does the Federal Reserve have the authority to create a
    prediction market for economic indicators to help inform its
    monetary policy decisions?

    A.10. A predictions market is a market where investors purchase
    financial contracts--futures or options for example--with real
    funds and the contract payoffs depend on the outcome of events,
    such as economic data releases or events. The Federal Reserve
    Act does not expressly provide the Federal Reserve with
    authority to establish and operate a predictions market. The
    Federal Reserve has not considered whether it has inherent
    authority or authority under other more general provisions of
    law to establish and operate a predictions market.
        From time to time, there have been private sector efforts
    to create prediction markets for economic variables but they
    have not attracted widespread interest from investors. Indeed,
    some financial firms have experimented with running prediction
    markets for major economic releases. This information was
    useful in gauging market expectations ahead of economic
    releases but those markets are no longer active.
        More broadly, the Federal Reserve regularly reviews
    information from financial markets to gauge market expectations
    about economic variables such as inflation or the Federal funds
    rate.

    Q.11. If not, what clarification or authorization would be
    necessary from Congress to assure the Federal Reserve that
    predictions markets are an authorized tool for its economic
    research?

    A.11. As noted above, the Federal Reserve regularly reviews
    financial data to gauge market participants' outlook for
    economic variables such as inflation or the Federal funds rate.
    If there were actively traded instruments based on other
    economic variables, the Federal Reserve would use that
    information for economic research and policy analysis as well.
    The Federal Reserve is not requesting specific authority to
    establish and operate a predictions market. In effect,
    establishing a predictions market would amount to establishing
    a futures and options exchange for special types of derivatives
    contracts. This is an undertaking that would involve many
    important operational and policy challenges for the Federal
    Reserve. Perhaps more importantly, the fact that existing
    futures and options exchanges and other large financial
    institutions have been unable to launch successful financial
    contracts of this type suggests that investor interest in such
    instruments is limited.

    Q.12. On July 20, 2015, the Federal Reserve finalized the G-SIB
    surcharge proposal. The final rule adopts the proposed rule's
    methodology to identify whether a bank holding company is a G-
    SIB by considering the institution's size, interconnectedness,
    substitutability, complexity, and cross-jurisdictional
    activity. The final rule states that there ``is general global
    consensus that each category included in the BCBS framework is
    a contributor to the risk a banking organization poses to
    financial stability.'' Please explain why the Federal Reserve
    believes that this multifactor approach is an appropriate way
    to measure systemic importance.

    A.12. The Federal Reserve believes that the multifactor
    approach used in the final G-SIB surcharge rule (final rule) is
    appropriate because it closely aligns with the considerations
    that the Federal Reserve may consider under section 165 of the
    Dodd-Frank Wall Street Reform and Consumer Protection Act
    (Dodd-Frank Act). Section 165 of the Dodd-Frank Act (12 U.S.C.
    5365) directs the Federal Reserve to implement enhanced
    prudential standards for certain bank holdings companies and
    nonbank financial companies. In prescribing more stringent
    prudential standards, the Federal Reserve may differentiate
    among companies on an individual basis or by category, capital
    structure, riskiness, complexity, financial activities
    (including the financial activities of their subsidiaries),
    size, and any other risk-related factors that the Federal
    Reserve deems appropriate. \11\ Similarly, the final rule takes
    into account leverage, off-balance sheet exposures,
    interconnectedness with significant financial counterparties,
    the nature, scope, size, scale and mix of activities, degree of
    regulation, and liabilities. Consistent with that requirement,
    under the final rule, a firm's method 1 and method 2 scores are
    calculated using a measure of each firm's nature, scope, size,
    scale, concentration, interconnectedness, and mix of the
    activities. Global systemically important bank holding company
    (G-SIB) capital surcharges are established using these scores,
    and G-SIBs with higher scores are subject to higher G-SIB
    capital surcharges.
    ---------------------------------------------------------------------------
         \11\ 12 U.S.C. 5365(a)(2)(A).
    ---------------------------------------------------------------------------
        In addition, the Federal Reserve, along with other central
    banks, informed and contributed to the preparation of the 2009
    Report to the G20 Finance Ministers and Central Bank Governors,
    titled ``Guidance to Assess the Systemic Importance of
    Financial Institutions, Markets and Instruments: Initial
    Considerations--Background Paper'' (available at http://
    www.bis.org/publ/othp07b.pdf) by participating in a
    comprehensive survey on what factors contribute to the
    classification of systemic importance. This report identified
    size, interconnectedness, substitutability, complexity, and
    cross-jurisdictional activity as trends in countries'
    assessments of systemic importance.

    Q.13. It is my understanding that custodial banks have faced
    increasing difficulty in accepting cash deposits from their
    clients such as investment funds and institutional investors,
    in part due to regulatory requirements that provide
    disincentive for custodial banks to hold cash. Nonetheless,
    custodial banks play an important role of handling cash for
    investment funds and now face a multitude of regulations that
    inhibit their core activities.
        Please provide a copy of any analysis the Federal Reserve
    has conducted to evaluate the impact of new regulations on
    custody banks' ability to accept cash deposits.
        Please provide a copy of each analysis conducted by the
    Federal Reserve which considers the impact that such
    regulations would have on a custody bank during times of
    financial stress.
        Please explain policy rationale for disincentivizing cash
    holdings by custodial banks.

    A.13. I will first respond to your last inquiry, then to the
    first two. With regards to part (c), regulatory requirements
    that have been established by the Federal Reserve since the
    financial crisis are meant to address risks to which banking
    organizations are exposed, including the risks associated with
    funding in the form of cash deposits. The requirements were
    designed to increase the resiliency of banking organizations,
    enabling them to continue serving as financial intermediaries
    for the U.S. financial system and as sources of credit to
    households, businesses, State governments, and low-income,
    minority, or underserved communities during times of stress.
        The supplementary leverage ratio rule (SLR rule), which
    requires internationally active banking organizations to hold
    at least 3 percent of total leverage exposure in tier 1
    capital, calculates total leverage exposure as the sum of
    certain off-balance sheet items and all on-balance sheet
    assets. \12\ The on-balance sheet portion does not take into
    account the level of risk of each type of exposure and includes
    cash. As designed, the SLR rule requires a banking organization
    to hold a minimum amount of capital against on-balance sheet
    assets and off-balance sheet exposures, regardless of the risk
    associated with the individual exposures. This leverage
    requirement is designed to recognize that the risk a banking
    organization poses to the financial system is a factor of its
    size as well as the composition of its assets. Excluding select
    categories of on-balance sheet assets, such as cash, from the
    total leverage exposure would generally be inconsistent with
    this principle.
    ---------------------------------------------------------------------------
         \12\ See 79 FR 57725 (September 26, 2014), available at http://
    www.gpo.gov/fdsys/pkg/FR-2014-09-26/pdf/2014-22083.pdf.
    ---------------------------------------------------------------------------
        Moreover, in some instances the regulatory requirements
    regarding liquidity and liquidity risk management provide a
    favorable treatment to specific types of cash deposits. For
    example, the outflow rates for deposits under the Liquidity
    Coverage Ratio: Liquidity Risk Management Standards rule (LCR
    rule) are based on factors such as counterparty type and tenor.
    \13\ Relevant to the activities of custodial banks, the LCR
    rule provides favorable outflow treatment to operational
    deposits because the LCR rule acknowledges that these types of
    deposits exhibit a more stable funding profile than non-
    operational funding. \14\ To be afforded this favorable
    treatment, the deposits must meet a set of specific criteria
    associated with such increased stability. \15\ In this way, the
    LCR rule takes into account the risk that is inherent in the
    particular type of deposit held at the bank.
    ---------------------------------------------------------------------------
         \13\ See 79 FR 61440 (October 10, 2014), available at http://
    www.gpo.gov/fdsys/pkg/FR-2014-10-10/pdf/201422520.pdf.
         \14\ See page 61502 of 79 FR 61440 (October 10, 2014), available
    at http://www.gpo.gov/fdsys/pkg/FR-2014-1010/pdf/2014-22520.pdf.
         \15\ See page 61498 of 79 FR 61440 (October 10, 2014), available
    at: http://www.gpo.gov/fdsys/pkg/FR-2014-1010/pdf/2014-22520.pdf.
    ---------------------------------------------------------------------------
        With regard to parts (a) and (b) of Question 13, as part of
    several rulemakings that are applicable to U.S. banking
    organizations identified as global systemically important
    banking organizations (G-SIBs), which includes the largest U.S.
    custodial banking organizations, Federal Reserve staff
    estimated the impact that such rulemakings would have on these
    firms' regulatory capital ratios, including on the leverage
    ratio.
        For example, in April 2014, the Federal Reserve issued a
    final rule that would require U.S. top-tier bank holding
    companies identified as G-SIBs to maintain an SLR of more than
    5 percent to avoid restrictions on capital distributions and
    discretionary bonus payments to executive officers. \16\
    Insured depository institutions of these BHCs must maintain at
    least a 6 percent SLR to be ``well-capitalized'' under the
    Federal banking agencies' prompt corrective action framework.
    Prior to finalizing these requirements, the staff of the
    Federal banking agencies, including the Federal Reserve,
    analyzed regulatory and confidential supervisory data to
    determine the quantitative impact of these rules on subject
    firms. Federal Reserve staff estimated a tier 1 capital
    shortfall across U.S. G-SIBs of approximately $68 billion to
    meet a 5 percent SLR, but all internationally active banking
    organizations firms were estimated to already meet the minimum
    3 percent SLR requirement. \17\ The SLR rule requires public
    disclosures beginning in 2015, and provides a transitional
    period until January 1, 2018, for firms to comply with these
    standards. According to their public disclosures, U.S. G-SIBs
    have made significant progress in complying with the enhanced
    SLR standards that take effect in 2018.
    ---------------------------------------------------------------------------
         \16\ See 79 FR 24528 (May 1, 2014), available athttp://
    www.gpo.gov/fdsys/pkg/FR-2014-05-0l/pdf/2014-09367.pdf.
         \17\ See Staff memo to the Board ``Draft Final Rule on Enhanced
    Supplementary Leverage Ratio (SLR) Standards''; p. 2, available at
    http://www.federalreserve.gov/aboutthefed/boardmeetings/
    20140408openmaterials.htm.
    ---------------------------------------------------------------------------
        As another example, more recently, in July 2015, the
    Federal Reserve finalized a rule that would implement risk-
    based capital surcharges for U.S. G-SIBs. \18\ Federal Reserve
    staff estimated the capital surcharges that would apply to the
    eight U.S. bank holding companies identified as G-SIBs under
    the final rule. Based upon these estimates, seven of the eight
    G-SIBs already meet their G-SIB surcharges on a fully phased-in
    basis, and all such firms are on their way to meeting their
    surcharges over the 3-year phase-in period from January 1,
    2016, to fully phased in on January 1, 2019. Therefore, it is
    likely that the immediate costs of the final rule on individual
    institutions are significantly mitigated by the implementation
    timeframe. \19\
    ---------------------------------------------------------------------------
         \18\ See 80 FR 49107 (August 14, 2015), available at http://
    www.gpo.gov/fdsys/pkg/FR-2015-08-14/pdf/201518702.pdf.
         \19\ See Staff memo to the Board ``Draft Final Rule Regarding
    Risk-Based Capital Surcharges for Systemically Important U.S. Bank
    Holding Companies''; p. 9, available at http://www.federalreserve.gov/
    aboutthefed/boardmeetings/board-memo-gsib-20150720.pdf.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

    Q.1. I submitted a question for the record at your last hearing
    that focuses on the Federal Reserve's waiver authority under
    the advanced approaches regulation. In the response, you noted
    there were five criteria against which the Federal Reserve
    would judge a waiver application. Please provide information on
    how you define those criteria and how you would apply them.

    A.1. As set forth in the advanced approaches risk-based capital
    rule (the advanced approaches rule), the Board of Governors of
    the Federal Reserve System (Board) may determine that the
    application of the advanced approaches rule to a particular
    firm is not appropriate in light of the firm's asset size,
    level of complexity, risk profile, or scope of operations. \1\
    Based on these criteria, the Board has exempted from, or
    determined not to apply, the advanced approaches rule to two
    State member banks, certain U.S. subsidiaries of foreign
    banking organizations, and GE Capital Corporation (GECC).
    ---------------------------------------------------------------------------
         \1\ 12 CFR 217.100(b)(2).
    ---------------------------------------------------------------------------

    Exemption for Two State Member Banks

        The Board has exempted from the advanced approaches rule
    two special purpose State member banks that were subsidiaries
    of bank holding companies. \2\ In each case, the State member
    bank was subject to the advanced approaches rule because the
    parent bank holding company was subject to the advanced
    approaches rule. Each of the banks had limited credit risk
    because each engaged in a narrow range of deposit, loan, and
    other banking services. One of the banks was a limited purpose
    trust bank with no FDIC-insured deposits. The other bank
    engaged primarily in back-office operations and maintained very
    high capital levels. In addition, each bank's total assets
    represented less than 1 percent of the total consolidated
    assets of its bank holding company.
    ---------------------------------------------------------------------------
         \2\ The advanced approaches rule applies to a State member bank
    that has total consolidated assets equal to $250 billion or more, that
    has consolidated total on-balance sheet foreign exposure equal to $10
    billion or more, or that is a subsidiary of a holding company or
    depository institution that is subject to the advanced approaches rule.
    See 12 CFR 217.100(b)(1)(ii).
    ---------------------------------------------------------------------------
        In exempting these banks from the advanced approaches rule,
    the Board considered the limited activities and operations of
    the banks, risks posed by the banks to the overall banking
    organization, and the enterprise-wide risk-management practices
    and ongoing implementation of the advanced approaches rule by
    the holding company. After the Board granted the exemptions,
    each of the bank holding companies continued to be required to
    capture the risks of its subsidiary bank in its advanced
    systems and to hold capital at the consolidated level against
    these risks.

    Certain U.S. Subsidiaries of Foreign Banking Organizations

        The Board also has exempted certain U.S. subsidiaries of
    foreign banking organizations from the requirements of the
    advanced approaches rule. Under the enhanced prudential
    standards regulation (Regulation YY, 12 CFR part 252), a
    foreign banking organization with U.S. nonbranch assets of $50
    billion or more is required to form or designate a U.S.
    intermediate holding company (IHC) to hold its interests in its
    U.S. subsidiaries. \3\ While an IHC is generally subject to the
    same risk-based and leverage capital rules that apply to a bank
    holding company, the IHC is not required to comply with the
    Board's advanced approaches rule. \4\ Prior to IHC formation, a
    bank holding company that is a subsidiary of a foreign banking
    organization and that currently is subject to the advanced
    approaches rules may, with the Board's prior written approval,
    elect not to comply with the advanced approaches rule. \5\
    ---------------------------------------------------------------------------
         \3\ See 12 CFR 252.153.
         \4\ 12 CFR 252.153(e)(2)(i)(A).
         \5\ 12 CFR 252.153(e)(2)(i)(C).
    ---------------------------------------------------------------------------
        As with the exemptions for the two limited purpose State
    member banks, the risks of the IHCs are captured in the
    consolidated capital requirements and risk management systems
    of its parent foreign banking organization. In addition, each
    IHC will remain subject to the Board's standardized risk-based
    capital rules, leverage capital rules, and capital planning and
    supervisory stress testing requirements.

    GECC

        Section 165 of the Dodd-Frank Wall Street Reform and
    Consumer Protection Act generally requires the Board to apply
    enhanced prudential standards, including risk-based capital
    requirements, to nonbank financial companies supervised by the
    Board. \6\ In the case of GECC, the Board applied the same
    risk-based capital requirements that apply to bank holding
    companies, except for the advanced approaches rule. \7\ In
    particular, as noted in the Board's draft order applying
    enhanced prudential standards to GECC, the advanced approaches
    rule requires the development of models for calculating
    advanced approaches risk-weighted assets, and can require a
    lengthy parallel run period of no less than four consecutive
    calendar quarters during which the firm must submit its models
    for supervisory approval. \8\ While GECC exceeds the threshold
    for application of the requirements that apply to advanced
    approaches banking organizations, GECC had not previously been
    subject to regulatory capital requirements and had not
    developed the infrastructure and systems required to begin
    calculating its capital ratios under the advanced approaches
    rule. \9\ Moreover, GECC is undergoing a substantial
    reorganization. The Board determined to apply to GECC the same
    minimum capital requirements that apply to all bank holding
    companies under the Board's Regulation Q (12 CFR part 217)
    through December 31, 2017, and the Board's regulatory capital
    framework applicable to advanced approaches banking
    organizations, except for the advanced approaches rule,
    thereafter unless GECC is no longer designated for Board
    supervision at that time. \10\
    ---------------------------------------------------------------------------
         \6\ 12 U.S.C. 5365.
         \7\ 79 FR 71768, 71772 (Dec. 3, 2014).
         \8\ Id. The Board referenced these considerations in the final
    order applying enhanced prudential standards to GECC. See 80 FR 44111,
    44117 (July 24, 2015).
         \9\ 79 FR at 71772.
         \10\ See 80 FR at 44125.
    ---------------------------------------------------------------------------

    Other Firms

        In determining whether to apply the advanced approaches
    rule to other firms, the Board would, in each case, make a
    determination based on the relevant facts and circumstances,
    consistent with the safety and soundness of the firm. As shown
    in these examples, this would include, among other things,
    consideration of the firm's size, complexity, risk profile, and
    scope of operations, including its capacity to implement the
    advanced approaches rule; a balancing of the cost to implement
    advanced approaches systems against the added risk management
    value; whether the firm's risks are captured by a parent
    banking organization's systems; and other relevant facts.
                                    ------

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

    Q.1. Ms. Yellen, is the Federal Reserve Board involved in
    negotiating international insurance standards for entities
    beyond those you supervise?

    A.1. The Federal Reserve participates in the International
    Association of lnsurance Supervisors (IAIS) as the supervisor
    of nonbank systemically important financial institutions and
    savings and loan holding companies with significant insurance
    activities. Along with members from the Federal Insurance
    Office and the National Association of lnsurance Commissioners,
    we advocate for the development of international standards at
    the IAIS that meet the needs of the our domestic insurance
    market and consumers. Standards developed at the IAIS are not
    self-executing, or binding on the U.S. insurance companies
    unless adopted by the appropriate U.S. regulators in accordance
    with applicable domestic laws and rulemaking procedures. The
    IAIS standards could apply to entities that we do not supervise
    if they were adopted as law or regulation by the appropriate
    authorities in a particular jurisdiction. This is true of all
    supervisors who participate at the IAIS since no insurance
    supervisor has global authority.
                                    ------

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

    Q.1. During your July 15, 2015, testimony in the House
    Committee on Financial Services you briefly indicated some
    vagueness on the path forward regarding the development of
    domestic insurance capital standards for companies in the
    United States. On April 1, 2015, you wrote a letter to me
    stating: ``we are committed to inviting public comment on a
    draft proposal through a formal rulemaking process.'' I request
    your confirmation that it is your final decision to develop
    domestic insurance capital standards through formal rulemaking
    and public comment and not by an order.

    A.1. Thank you for the opportunity to clarify. The response
    provided to you in my letter dated April 1, 2015, is accurate.
    We are committed to a formal rulemaking process in the
    development of a domestic insurance capital standard. Issuance
    of a final rule will commence after we assess the feedback
    given during the Notice of Proposed Rulemaking.
                                    ------

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

    Q.1. In 2013, Senator Crapo asked then Chairman Bernanke to
    list bipartisan financial regulatory reforms that Congress
    should consider enacting. Bernanke responded by mentioning end-
    user issues, the swaps push out, and regulatory relief for
    small financial institutions. Certainly everyone can agree that
    Dodd-Frank is not perfect. Can you list bipartisan financial
    regulatory reforms that you believe Congress should enact?

    A.1. The core Dodd-Frank Act and Basel III reforms have made
    the global and U.S. financial systems more resilient. These
    core reforms include much stronger capital requirements and
    stress testing for large banking firms; strong liquidity
    requirements for large banking firms; a new resolution regime
    for systemically important financial institutions (SIFIs) and
    improvements to the resolvability of SIFIs; central clearing
    and margin requirements for over-the-counter derivatives; and
    the creation of the Financial Stability Oversight Council.
        I believe these reforms have made the financial system
    significantly more stable, but we have more work to do. Some of
    the remaining steps include: (i) finalization of a few
    remaining Dodd-Frank Act reforms, such as swap margin rules and
    single-counterparty credit limits for large bank holding
    companies; implementation of the Net Stable Funding Ratio
    (NSFR) in the United States to reduce risks from short-term
    wholesale funding in our banking system; and continued
    improvements to the resolvability of our largest and most
    complex firms, including through issuance by the Board of a
    long-term debt proposal and continuing work by the Board and
    the FDIC to improve resolution planning by these firms.
        The Board has supported targeted financial regulatory
    reforms in the past few years, including amendments to the
    Dodd-Frank Act provisions that address treatment of end users
    in the swap margin rules and changes to the Collins Amendment
    of the Dodd-Frank Act to better enable the Board to design
    capital requirements for insurance holding companies as well as
    provisions to expand the scope of coverage of our Small Bank
    Holding Company Policy Statement. The Board continues to
    support additional targeted relief for small banking
    organizations, such as exempting banking firms with less than
    $10 billion in assets from the Volcker rule and the incentive
    compensation provisions of the Dodd-Frank Act. As I have
    previously stated, I would also support a modest increase in
    the $50 billion threshold in section 165 of the Dodd-Frank Act,
    so long as such modest increase did not reduce the Board's
    authority to apply an appropriate set of prudential standards
    on any firms that fell below the new threshold.

    Q.2. I'm very concerned about the troubling developments in
    Greece, including their inability to keep their fiscal house in
    order. Over the long-term horizon, are there parallels that
    exist now or that could develop between the United States and
    Greece that would trouble you? What steps could we take now to
    prevent these parallels from developing?

    A.2. Greece's current fiscal and economic situations are
    difficult. However, there are no real parallels between Greece
    and the United States. Greece's precarious fiscal position
    prior to the crisis left it ill-equipped to use fiscal policy
    to buffer the effects of the recession, which was particularly
    problematic as Greece could not avail itself of its own
    monetary policy because it is a member of the euro area. In
    addition, its access to financial markets was hampered by a
    lack of trust in Greek fiscal institutions. It is important to
    note that Greece's troubles reflect much more than just its
    fiscal position. In sum, the events in underscore the value of
    sound structural policies, Government finances, and
    macroeconomic institutions.

    Q.3. My understanding is that the Financial Stability Board's
    proposed methodologies for designating asset manager companies
    and mutual funds as G-SIFIs, as proposed in the FSB's March
    2015 report, ``Assessment Methodologies for Identifying Non-
    Bank NonInsurer Global Systemically Important Financial
    Institutions'' uses size thresholds that singles out only U.S.
    entities. Is this true and is there a risk that designating
    only U.S. entities would create competitiveness concerns for
    the U.S.?

    A.3. Under the March 2015 report of the Financial Stability
    Board (FSB), materiality thresholds would be used to provide an
    initial filter of nonbank, non-insurance (NBNI) entities that
    would be subject to further analysis to determine whether such
    entities should be designated as NBNI global systemically
    important financial institutions (NBNI G-SIFls). Thus, while
    NBNI entities that exceed the thresholds would be subject to
    further analysis, they would not necessarily be designated as
    NBNI G-SIFIs. It is important to note that none of the
    thresholds are tied to a firm's place of domicile or
    incorporation; an entity from any jurisdiction could qualify
    for further analysis.
        The March 2015 proposal described two possible materiality
    thresholds that could be used exclusively or in combination to
    evaluate asset management companies. Under the first option, an
    asset manager would be subject to further assessment if its
    balance sheet exceeded a particular threshold (e.g., $100
    billion). Under the second option, an asset manager would be
    subject to further assessment if it had more than a particular
    amount of assets under management (e.g., $1 trillion).
        Two possible materiality thresholders were also proposed
    for traditional investment funds. Under the first option, a
    traditional investment fund would be subject to further
    assessment if (1) its net asset value (NAV) exceeded $30
    billion and it had balance sheet leverage of three times NAV or
    (2) the assets under management of the fund exceeded $100
    billion. Under the second option, a traditional investment fund
    would be subject to further analysis if its gross assets under
    management exceeded $200 billion, unless it can be demonstrated
    that the fund is not a dominant player in relevant markets.
        On July 30, 2015, the FSB announced that it will wait to
    finalize the assessment methodologies for NBNI G-SIFIs until
    further work on financial stability risks from asset management
    activities is completed. This will allow further analysis of
    potential financial stability issues associated with asset
    management entities and activities to inform the revised NBNI
    methodology.

    Q.4. I am concerned that international regulators do not
    understand the unique aspects of our financial system. For
    example, Basel III's capital framework severely limits the
    amount of mortgage servicing asset banks can hold without
    paying a significant capital charge. Many think it doesn't make
    sense to draw such an arbitrary line, especially when it comes
    at such a cost to community banks. Banks in my State tell me
    that the Basel III negotiators ignored or failed to understand
    the important role of community banks in the United States
    financial system. That's cause for deep concern. Are there
    areas where you believe the FSB has ignored or failed to
    understand aspects of our U.S. financial system, for example in
    Basel III's treatment of community banks?

    A.4. The Federal Reserve recognizes the critical role community
    banking organizations play in the U.S. economy, and the revised
    regulatory capital rule (rule) puts in place a regulatory
    regime that takes into account their business model and
    economic function, as well as the reduced risks to U.S.
    financial stability presented by community banks.
        Prior to issuing the final rule, the agencies conducted a
    pro forma impact analysis as of March 31, 2012. The analysis,
    which incorporated the rule's revised treatment of mortgage
    servicing assets (MSAs), indicated that more than 90 percent of
    bank holding companies with assets under $10 billion that met
    the existing capital requirements at the time would meet the
    minimum common equity tier 1 (CET1) capital ratio of 4\1/2\
    percent and that more than 80 percent of such bank holding
    companies would meet the fully phased-in common equity plus
    capital conservation buffer level of 7 percent. \1\ Based on
    data publicly reported from these institutions on the
    Consolidated Financial Statements for Holding Companies (FR Y-
    9C), as of July 31, 2015, more than 95 percent of these bank
    holding companies would exceed a 7 percent CET1 capital ratio.
    \2\
    ---------------------------------------------------------------------------
         \1\ See Attachment A ``FRB Impact, Methodology, and Assumptions''
    to Michael S. Gibson's testimony on Basel III before the Committee on
    Banking, Housing, and Urban Affairs on November 14, 2012, available at
    http://www.federalreserve.gov/newsevents/testimony/
    gibson20121l14a2.pdf. The final rule implementing the Regulatory
    Capital Rules, 78 FR 62018 (October 11, 2013) is available at: http://
    www.gpo.gov/fdsys/pkg/FR2013-11-29/pdf/2013-27082.pdf.
         \2\ FR Y-9C data is publicly available from the National
    Information Center, available at: http://www.ffiec.gov/nicpubweb/
    nicweb/nichome.aspx.
    ---------------------------------------------------------------------------
        With regard to MSAs in particular, as noted in the preamble
    to the final rule, the Federal banking agencies' capital rules
    have long limited the inclusion of MSAs and other intangible
    assets in regulatory capital. This is because of the high level
    of uncertainty regarding the ability of banking organizations
    to realize value from these assets, especially under adverse
    financial conditions.
        Under the final rule, certain deferred tax assets (DTAs)
    arising from temporary differences, MSAs, and significant
    investments in the capital of unconsolidated financial
    institutions in the form of common stock are each subject to an
    individual limit of 10 percent of CET1 capital elements and are
    subject to an aggregate limit of 15 percent of CET1 capital
    elements. The amount of these items in excess of the 10 and 15
    percent thresholds are to be deducted from CET1 capital.
    Amounts of MSAs, DTAs, and significant investments in
    unconsolidated financial institutions that are not deducted due
    to the aforementioned 10 and 15 percent thresholds must be
    assigned to the 250 percent risk weight. \3\
    ---------------------------------------------------------------------------
         \3\ See 79 FR 62018 (October 11, 2013), available at http://
    www.gpo.gov/fdsys/pkg/FR-2013-11-29/pdf/201327082.pdf. See also ``Final
    Rule on Enhanced Regulatory Capital Standards--Implications for
    Community Banking Organizations'', available at http://www.gpo.gov/
    fdsys/pkg/FR-2013-11-29/pdf/2013-27082.pdf.
    ---------------------------------------------------------------------------
        The rule's treatment of MSAs contributes to the safety and
    soundness of banking organizations by mitigating against MSA
    market value fluctuations that may adversely affect banking
    organizations' regulatory capital base.
        Moreover, the financial crisis demonstrated that the
    liquidity--in the form of sales, exchanges, or transfers--of
    MSAs may become unreliable at a time when banking organizations
    are especially in need of such liquidity. Furthermore, the
    Federal Deposit Insurance Corporation, as receiver of failed
    insured depository institutions, has generally found MSAs to be
    unmarketable during periods of adverse economic and financial
    conditions for a variety of reasons related to the size of the
    mortgage portfolio and contingent liabilities arising from
    selling representations and warranties associated with MSAs.
    \4\
    ---------------------------------------------------------------------------
         \4\ See 79 FR 62018 (October 11, 2013), available at http://
    www.gpo.gov/fdsys/pkg/FR-2013-11-29/pdf/201327082.pdf.
    ---------------------------------------------------------------------------
        The Federal Reserve is mindful of community banking
    organizations' concerns about aggregate regulatory burden,
    including both safety and soundness and consumer regulation. In
    that regard, several elements of the revised capital rule only
    apply to large banking organizations and do not apply to
    community banking organizations. Specifically, banking
    organizations that qualify as advanced approaches Board-
    regulated institutions (those with $250 billion or more in
    consolidated total assets or $10 billion or more in
    consolidated total on-balance-sheet foreign exposures) are
    subject to the countercyclical capital buffer, supplementary
    leverage ratio, capital requirements for credit valuation
    adjustments, and disclosure requirements. \5\ Banking
    organizations with trading assets and liabilities of at least
    $1 billion or 10 percent of its total assets are subject to
    market risk capital requirements. \6\ Community banking
    organizations also are not subject to the enhanced standards
    that larger bank holding companies face related to capital
    plans, stress testing, liquidity and risk management
    requirements, and the global systemically important banking
    organization surcharge. In addition, consistent with recent
    statutory changes, the Federal Reserve expanded the
    applicability of its Small Bank Holding Company Policy
    Statement, which has the effect of exempting virtually all bank
    holding companies and savings and loan holding companies with
    less than $1 billion in total consolidated assets from the
    Federal Reserve's regulatory capital rules. \7\
    ---------------------------------------------------------------------------
         \5\ Id.
         \6\ See 78 FR 76521 (December 18, 2013), available at http://
    www.gpo.gov/fdsys/pkg/FR-2013-12-18/pdf/201329785.pdf.
         \7\ See 80 FR 20153 (April 15, 2015) available at: http://
    www.gpo.gov/fdsys/pkg/FR-2015-04-15/pdf/201508513.pdf.

    Q.5. Securities and Exchange Commissioner Dan Gallagher
    recently argued that ``it remains the height of regulatory
    hubris to assume that not only is there a single regulatory
    solution to any given problem facing our markets, but that a
    handful of mandarins working in an opaque international forum
    can find those perfect solutions.'' He argues that when
    regulators get things wrong, they risk things going wrong
    everywhere because of the regulatory international cooperation.
    He cites Basel's classification of residential mortgage backed
    securities as lower-risk as an example, which partially led to
    the housing bubble and subsequent financial crisis. Given this
    example, is there a risk that increasing international
    regulations actually increases systemic risk by creating a firm
    homogeneity that's shaped by regulation?
        If firms are all subjected to similar regulatory
    standards--a ``one-size-fits-all approach''--won't their
    balance sheets end up looking the same, and thus subject to the
    same risk?

    A.5. It is important for financial regulation to be tailored to
    the business mix, risk profile, size, and systemic footprint of
    individual financial firms.
        The Federal Reserve is a strong supporter of gradating the
    stringency of supervision and regulation to the size and
    systemic footprint of individual banking firms. And we have
    been doing what we can with our existing legal authority to do
    that kind of tailoring, including with respect to the enhanced
    prudential standards for large bank holding companies in
    section 165 of the Dodd-Frank Act. We have already done quite a
    bit of tailoring in this area to make sure that the most
    systemic banking firms are subject to a much tougher regulatory
    and supervisory framework than regional banking firms, and we
    are analyzing whether there is more that we can do.
        The Federal Reserve's commitment to regulatory tailoring is
    also manifest in our support of Congressional efforts to modify
    the Collins Amendment in the Dodd-Frank Act to better enable us
    to design a regulatory framework for insurance holding
    companies that is appropriately tailored to the business of
    insurance. We appreciate the work of Congress to give us this
    flexibility through the passage of The Insurance Capital
    Standards Clarification Act of 2014. Similarly, we would not
    support any international insurance capital standard that is
    not appropriately tailored to the business of insurance.
        The Federal Reserve participates in various international
    standard setting and policymaking bodies--including the Basel
    Committee on Banking Supervision (BCBS), the Financial
    Stability Board (FSB), and the International Association of
    Insurance Supervisors (IAIS). Our work in these organizations
    is designed in significant part to achieve greater
    comparability across jurisdictions in the core prudential
    supervisory and regulatory frameworks that apply to
    internationally active financial firms. Well-designed
    international prudential frameworks for large, globally active
    financial firms should promote global and U.S. financial
    stability, provide a more level playing field for
    internationally active U.S. financial firms, and enhance
    supervisory cooperation and coordination among global
    supervisors. The Federal Reserve is committed in its
    international regulatory work to ensure that any global
    standards work well for U.S. financial firms and U.S. financial
    markets. Moreover, no global standard has binding effect in the
    United States unless and until a U.S. regulatory authority goes
    through appropriate domestic notice-and-comment processes.

    Q.6. Capital regulations for insurance companies is an
    important issue that has a significant impact on insurance
    policyholders in my State.
        This April, Mark Van Der Weide, Deputy Director for the
    Federal Reserve's Division of Banking Supervision and
    Regulation, explained that the Federal Reserve supports
    developing an International Capital Standard (JCS) because it
    can promote financial stability and ``help provide a level
    playing field for global financial institutions.''
        I'm concerned that efforts to ``level the playing field,''
    will ``level'' the field by hurting U.S. insurance companies
    and their policyholders, by forcing them to comply with
    Europe's overly stringent insurance regulations. As Dr. Adam
    Posen recently argued at a hearing with the Senate Banking
    Committee, the FSB's efforts to ``extend Solvency II, the
    European Commission's regulation for insurance firms, to global
    application'' will be harmful for U.S. insurance policyholders,
    because it ``tries to add on capital holding requirements of
    Government bonds and short-term assets akin to what is
    (rightly) required for banks.'' He goes on to argue that
    European insurers are now ``using the FSB to impose it on the
    U.S., Japanese, and other competing insurers.''
        Are there aspects of Solvency II would be harmful if they
    were imposed on U.S. insurers?
        Are there other areas where you believe the FSB has ignored
    or failed to understand aspects of our State-based insurance
    regulatory system?
        What is the Federal Reserve doing to ensure that
    international insurance standards do not encroach on the U.S.
    State-based insurance system and that other countries don't use
    the FSB and the IAIS to impose stringent and senseless
    regulations on U.S.-based insurers?

    A.6. The Federal Reserve participates as a member of the
    Financial Stability Board (FSB) and International Association
    of Insurance Supervisors (IAIS). Along with other organizations
    from the United States including the Federal Insurance Office
    and the National Association of Insurance Commissioners, the
    Federal Reserve advocates for the development of international
    standards that best meet the needs of the U.S. insurance
    market. The details of these international standards are still
    being determined. The FSB's work to date has primarily focused
    on the identification and development of policy measures for
    Globally Systemically Important Insurers (G-SIIs) including
    through the adoption of an assessment methodology built by the
    IAIS. The IAIS continues to work on developing policy measures
    to be applied to G-SIIs.
        The Federal Reserve would not support any international
    insurance standard that is not appropriately tailored to the
    business of insurance and in the best interest of the United
    States insurance market. Aspects of Solvency II that could be
    problematic include its reliance on models built by the
    regulated companies and its accounting systems market value
    basis.
        The international insurance standards currently under
    development at the IAIS are not self-executing or binding on
    the U.S., either at the State or the Federal level. They would
    only apply in the U.S. if adopted by the appropriate U.S.
    regulators in accordance with applicable domestic rulemaking
    procedures. The Federal Reserve is working to ensure that any
    standard adopted allows for the equitable treatment of U.S.-
    based insurers operating abroad. None of the standards are
    intended to replace the existing legal entity risk-based
    capital requirements that are already in place within the
    State-based regulatory regime.

    Q.7. Insurance experts have levied a number of criticisms
    against the Financial Stability Board as it relates to the
    international regulatory process. This includes that the FSB
    designates insurance companies as globally systemically
    important before the FSOC designates them as systemically
    important, concerns about the unaccountable process by which
    the FSB arrives at its decision to label global systemically
    important insurers, the lack of a clear ``off-ramp'' for
    companies to lose their designation, and the risk that
    international regulations undermine our State-based regulatory
    system.
        What FSOC or FSB reforms are you prepared to support on
    these issues?

    A.7. The IAIS, in coordination with the FSB, developed a
    proposed methodology and framework for measuring the systemic
    footprint of global insurers. IAIS made public its proposed
    designation framework and methodology for global systemically
    important insurers (G-SIIs) multiple times for public comment.
    Any insurance company, and any member of the public, had the
    opportunity to comment on the proposal. The Federal Reserve
    strongly supports public transparency in the methods and
    processes that international organizations use to identify
    systemically important financial firms.
        Importantly, IAIS and FSB decisions about the
    identification of global systemically important insurers are
    not binding on the United States. FSOC makes its own
    independent decisions on designating nonbank financial firms,
    using the statutory standards set forth in the Dodd-Frank Act.
    I would note that the IAIS and FSB use a somewhat different
    standard to make designation decisions than does the FSOC. The
    international organizations focus on a firm's global systemic
    footprint and primarily use an algorithm to make their
    decisions, whereas the FSOC focuses on impact on U.S. financial
    stability and uses a more judgment-based, firm-specific
    approach.
        With respect to the FSOC, I am firmly committed to
    promoting transparency and accountability in connection with
    the FSOC's activities. To implement its designation authority,
    FSOC initially developed a framework and criteria and sought
    public comments twice on the framework. After publishing
    guidance, FSOC began the process of assessing individual
    companies from a list of companies that met the quantitative
    criteria set out in the guidance. Throughout the fall of 2014,
    FSOC engaged in outreach to stakeholders regarding the
    designations process. Based on that outreach, FSOC identified
    changes to the designations process that would enable earlier
    engagement with companies under review and increase
    transparency to the public, without compromising the FSOC's
    ability to conduct its work and protect confidential company
    information. These new processes went into effect in February.
    We will continue to work with the FSOC and the Congress to
    ensure that the process for designations is transparent and
    accountable.
        The FSOC's designation of a nonbank financial firm is not
    intended to be permanent. Dodd-Frank Act provides that FSOC
    annually review designations to make sure that they remain
    appropriate, and take into account significant changes at the
    firms. At the time of designation, firms are given a detailed
    explanation as to the specific factors that led to their
    designation. Firms can use that information, as well as the
    public criteria set forth by FSOC, to guide their efforts to
    reduce their systemic footprint.
                                    ------

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

    Q.1. Before the financial crisis under President Bush, our
    country saw policies of ``trickle-down economics,'' focused on
    tax benefits for individuals at the top of the distribution and
    budget cuts for everyone else. The results were predictable--
    incomes grew at the very top, but stagnated for everyone else.
        Then, during the crisis and recession, families in the
    middle and at the bottom were hit particularly hard. So for the
    vast majority of families, it's been a long time since they've
    seen a meaningful raise. Now, our economy is recovering, but we
    haven't reached the point yet where growth feels truly broad-
    based.
        Like most Americans, I don't begrudge financial success,
    but I'm concerned when the vast majority of people in our
    country feel they are not sharing in economic growth, and when
    widening disparity makes it harder for ordinary working
    families to move up the ladder.
        In balancing the Fed's dual mandate of creating jobs and
    fighting inflation, how does the Fed account for the very
    different ways Americans are experiencing the same economy,
    depending on where they are on the income and wealth spectrum?

    A.1. The Congress has instructed the Federal Reserve to pursue
    a dual mandate, which involves promoting both maximum
    employment and price stability. Generally speaking, these
    objectives pertain to the overall national situation. The
    Federal Reserve will aim, to the best of its ability, to
    deliver the strongest labor market consistent with its 2
    percent inflation objective. In doing so, we will be setting
    the best possible macroeconomic backdrop for all groups to
    attain the greatest prosperity that can be sustained. To be
    sure, a range of other policy steps outside the realm of
    monetary policy may be appropriate to achieve additional
    objectives, but such policy steps are not within the remit of
    the Federal Reserve.

    Q.2. How does the Fed factor in wage history when looking for
    signs of when to tighten? Meaning, if average working families
    have gone a long period without real wage growth, would that
    call for waiting longer to tighten instead of raising rates at
    the first sign of an increase?

    A.2. Wage data are one of many sets of indicators that we
    consult in determining the appropriate stance of monetary
    policy. In principle, wage behavior can be informative about
    both aspects of our dual mandate--price stability and maximum
    employment. If wage growth is weak, that may be a sign both
    that labor markets are in a relatively slack condition, and
    thus that the maximum employment aspect of our mandate is not
    fulfilled; and it may be a sign that inflation pressures will
    be less intense. The symmetric statements could be made if wage
    growth were strong. That said, many factors affect wages,
    including productivity growth, global competition, the nature
    of technological change, and trends in unionization, that are
    outside of the Federal Reserve's control. For such reasons,
    wages are but one of many indicators that policymakers consult
    for evidence of how close or far we are from achieving our dual
    mandate.
                                    ------

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

    Q.1. Chair Yellen, in addition to your comments about the
    shadow banking system, are there other developments in the
    global or domestic economy that you are monitoring for
    potential risks to financial stability?
        Many people are rightly focused on Greece and China, but I
    worry about the economic obstacles we do not see coming. Should
    we be worried about increasing corporate debt, a liquidity
    crisis, or is it something else entirely? In other words, what
    are the less obvious threats to economic and financial
    stability that you are watching closely?

    A.1. As you know, since the financial crisis and recession of
    2007-2009, we have put in place a comprehensive system to
    monitor the financial system for building vulnerabilities. The
    financial system and the broader economy will always be
    buffeted by shocks that are unexpected or that cannot be
    mitigated by policymakers, including, as you point out, events
    abroad. However, the potential for these shocks to grow and
    spread is greater when the financial system is more vulnerable.
    This effect was on full display during the last recession, when
    losses on risky mortgages led to problems in the financial
    system that ultimately impeded the ability of creditworthy
    businesses and households to finance investments.
        We judge that financial vulnerabilities in the U.S.
    financial system overall continue to be about where they have
    been for the past 6 months--at a moderate level. Factors
    suggesting that the financial system remains robust include the
    extremely strong capital and liquidity positions of the largest
    banking organizations relative to recent history and modest
    debt growth among households. Among factors suggesting
    increasing vulnerabilities are, as you pointed out, the
    continued rapid clip of borrowing by lower-rated businesses and
    stretched valuations among a number of assets, including
    commercial real estate.
        Liquidity has indeed been an issue raised by policymakers,
    market participants, academics and others. In particular, the
    concern is that liquidity, especially in fixed-income markets,
    is now more likely to deteriorate significantly even under
    moderate stress. However, a variety of metrics do not suggest a
    deterioration in day-to-day liquidity, with some mixed evidence
    that may point to less resilient liquidity. This evidence is
    described in greater detail in July's Monetary Policy Report.
    \1\ In addition, on July 13, 2015, the Federal Reserve,
    together with the Commodity Futures Trading Commission, the
    Securities and Exchange Commission, and the Department of
    Treasury published a joint report examining the events in the
    Treasury market on October 15, 2014--an episode when Treasury
    yields moved dramatically over a brief span of time. \2\ The
    Federal Reserve, together with other financial regulatory
    agencies, is continuing to study and monitor developments in
    market liquidity.
    ---------------------------------------------------------------------------
         \1\ See http://www.federalreserve.gov/monetarypolicy/files/
    20150715_mprfullreport.pdf.
         \2\ See http://www.treasury.gov/press-center/press-releases/
    Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf.
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