[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.
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     \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.

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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.
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     \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\
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     \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\
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     \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\
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     \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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