[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 15, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-1
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
C O N T E N T S
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Page
Hearing held on:
February 15, 2017............................................ 1
Appendix:
February 15, 2017............................................ 67
WITNESSES
Wednesday, February 15, 2017
Yellen, Hon. Janet L., Chair, Board of Governors of the Federal
Reserve System................................................. 5
APPENDIX
Prepared statements:
Yellen, Hon. Janet L......................................... 68
Additional Material Submitted for the Record
Yellen, Hon. Janet L.:
Monetary Policy Report of the Board of Governors of the
Federal Reserve System, dated February 14, 2017............ 74
Written responses to questions for the record submitted by
Representative Emmer....................................... 123
Written responses to questions for the record submitted by
Representative Hill........................................ 127
Written responses to questions for the record submitted by
Representative Hultgren.................................... 128
Written responses to questions for the record submitted by
Representative Loudermilk.................................. 134
Written responses to questions for the record submitted by
Representative Luetkemeyer................................. 136
Written responses to questions for the record submitted by
Representative Moore....................................... 137
Written responses to questions for the record submitted by
Representative Sherman..................................... 140
MONETARY POLICY AND THE
STATE OF THE ECONOMY
----------
Wednesday, February 15, 2017
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, McHenry, King,
Royce, Lucas, Pearce, Posey, Luetkemeyer, Huizenga, Duffy,
Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Messer,
Tipton, Williams, Poliquin, Love, Hill, Emmer, Zeldin, Trott,
Loudermilk, Mooney, MacArthur, Davidson, Budd, Kustoff, Tenney,
Hollingsworth; Waters, Maloney, Sherman, Meeks, Capuano, Clay,
Lynch, Scott, Green, Cleaver, Perlmutter, Himes, Foster,
Kildee, Delaney, Sinema, Beatty, Heck, Vargas, Gottheimer,
Gonzalez, Crist, and Kihuen.
Chairman Hensarling. The Committee on Financial Services
will come to order. Without objection, the Chair is authorized
to declare a recess of the committee at any time.
Today's hearing is for the purpose of receiving the
semiannual testimony of the Chair of the Board of Governors of
the Federal Reserve System on the conduct of monetary policy
and the state of the economy.
I now recognize myself for 3 minutes to give an opening
statement.
After 8 years of the largest monetary policy stimulus in
our history, and the most unconventional monetary policy in our
history, Americans recently received disappointing economic
news yet again. It is official: The economy grew at a measly
1.6 percent in 2016 when our historic norm is twice that. That
makes 8 years of sub-par growth, 8 years of stagnant paychecks,
and 8 years of unreplenished savings.
Notwithstanding good intentions at the Fed, and
notwithstanding good personnel, after 8 years there is zero
evidence that zero interest rates and a bloated Fed balance
sheet leads to a healthy economy.
What also hasn't changed in 8 years is that the Fed
continues to unlawfully pay above-market interest rates to some
of the Nation's largest banks in order to prop up select credit
markets. This very well could be fueling asset bubbles and is
certainly harming the ability of market participants to
accurately price risks. This foray into fiscal policy clearly
threatens the Fed's monetary policy independence, which should
be preserved.
What also hasn't changed in 8 years is that on the
regulatory side the Fed figuratively, if not literally, is
taking up seats in bank boardrooms. This means that unelected
Washington bureaucrats can literally direct who gets credit in
our society, as opposed to competitive markets.
I will continue to say it: We must be vigilant to ensure
that our central bankers do not one day become our central
planners.
Fortunately, there is something big that has changed in the
last 8 years, and that is an intervening election, and with it
the prospect of three new members of the Board of Governors.
The National Federation of Independent Business reports that
optimism on Main Street soared in the wake of the election,
with the Small Business Optimism Index jumping up to a 12-year
high. Likewise, the number of Americans who say the Nation is
now on the right track has risen by 15 percent since the
election.
Clearly, Americans have a newfound expectation that our
economy will grow healthier with different policies coming out
of Washington. I believe the last 8 years have shown that no
amount of monetary policy stimulus can make up for the fiscal
policy headwinds of a cumbersome failed regulatory state, an
uncompetitive tax code, Obamacare, and the Dodd-Frank Act. All
of these must be remedied and changed if we are to have a
healthy economy for all and bank bailouts for none.
Building that healthier economy for all clearly requires
changes at the Fed. We must have a more predictable,
disciplined, and transparent monetary policy.
The Fed's so-called data-dependent monetary policy of today
says nothing about which data matter, let alone how they
matter. This severely compromises the kind of policy
transparency and predictability that is necessary for household
wealth to grow and American companies to create jobs.
Something else that has changed in the last 8 years is the
introduction of the reforms included in the Financial Choice
Act, which would begin to restore the Fed's independence and
promote economic growth.
Several Nobel Prize-winning economists, former Treasury
Secretaries, and former senior economic policy officers have
said, when they endorsed the Financial Choice Act, that these
reforms would ensure a monetary policy framework that is truly
data-dependent, consistent, and predictable. The Financial
Choice Act will help consumers and investors make better
decisions in the present, and form better expectations about
the future, and I look forward to its passage.
I now recognize the ranking member for 4 minutes for an
opening statement.
Ms. Waters. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for testifying here today.
Each day as a new episode of chaos unfolds at the Trump White
House, working families across the country are reminded that
our hard-fought gains to create more than 16 million private
sector jobs, lift wages, stabilize the housing market, rein in
Wall Street's abusive practices, and make affordable health
care accessible are in jeopardy.
Mr. Trump has already shown America what he is really all
about. He has taken steps to roll back the Dodd-Frank Wall
Street reform law based on the false premise that businesses do
not have the ability to get loans, ignoring the National
Federation of Independent Businesses survey showing that 96
percent of small businesses said their borrowing needs are
satisfied.
In addition to rolling back financial protections, Mr.
Trump has moved to eliminate safeguards that protect Americans
planning for retirement from being ripped off by financial
advisers, repealed a plan to cut mortgage insurance premiums
that would have saved homeowners $500 a year, called for tax
cuts for the rich at the expense of the poor and middle class,
vowed to eliminate health insurance for 28 million people,
aligned himself with Republican leaders in Congress in cutting
Social Security and Medicare, threatened a trade war with two
of our largest trading partners, and adopted an anti-immigrant
agenda.
Taken all together, these policies will shrink our economy,
worsen inequality, lift inflation, reduce exports, eliminate
jobs, explode Federal budget deficits, and ultimately steer us
in the direction of another Great Depression. Simply put, the
Trump agenda is bad for America.
Chair Yellen, on top of all of this and despite your
important contributions to our economic recovery, my Republican
colleagues continue to attack your policies, deflecting from
their own failure to provide a fiscal stimulus that would have
complemented rather than undermined the Fed's bold efforts in
recent years.
Now Republicans are doubling down on their efforts to
inject partisan politics into Fed decision-making. Indeed,
Republicans on this committee have sought to weaken the
independence of the Fed and have called for chaining policy
decisions to a mathematical formula that would hamper the Fed's
ability to support the economy amid a severe and persistent
shock.
Their agenda makes you wonder: Do Republicans not remember
the 11 million Americans who lost their homes, the $13 trillion
taken from the savings of hardworking Americans, the nearly 9
million Americans who lost their jobs, and when the
unemployment rate hit 10 percent? While our economy has made
significant gains, hardworking American families simply can't
afford another Great Recession.
Despite the progress we have made, many communities across
America continue to struggle, particularly minority
communities, which were disproportionately hit by the crisis.
On average, African-American households lost 52 percent of
their wealth, Hispanic households lost 66 percent, and White
households lost 16 percent.
In these tumultuous times and with more progress that must
be made for vulnerable communities, your steady leadership and
an independent Fed that advocates for the interests of all
Americans is now more important than ever.
Mr. Chairman, I yield back the balance of my time.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, the chairman of our Monetary Policy and Trade
Subcommittee, for 2 minutes.
Mr. Barr. Thank you, Mr. Chairman.
In November, the American people delivered a loud and clear
message that they want major changes in Washington. With
Governor Tarullo's resignation, President Trump will have an
opportunity to make major changes at the Fed, filling three
vacancies on the Board of Governors, including the Vice Chair
for Supervision.
Many financial institutions in my district and around the
country are concerned that the Fed may cram through a new wave
of regulations before these new Governors are confirmed. Given
the avalanche of red tape produced by Dodd-Frank, and the
disproportionate costs imposed on small community banks, it is
imperative that the Federal Reserve refrain from issuing any
new regulations until the new Governors are confirmed.
New Fed Governors mean a new opportunity to examine the
Fed's unconventional monetary policies. Since the beginning of
the recovery in 2009, the Fed's improvisational policies,
including near-zero interest rates, 3 rounds of quantitative
easing, and a $4.5 trillion balance sheet, have failed to
deliver their predicted result. GDP growth during the Obama
Administration averaged a mere 1.8 percent, well below the
growth forecast by the Fed and not even close to the 3.5
percent to 4 percent growth average during previous recoveries.
The American people are ready for a change--a change from
the Fed's unconventional and unpredictable policies, a change
from the Fed's inaccurate projections of growth, and a change
from disappointing economic results. It is time for the Fed to
begin prudently shrinking its balance sheet; end its easy-money
policies that have fueled government borrowing; and shift to a
more firmly grounded, strategy-based policy that will assure
price stability, facilitate commerce wherever it shows promise,
and create the conditions for strong economic growth.
To paraphrase Milton Friedman, it is time we stop assigning
to monetary policy a larger role than it can perform, asking it
to accomplish tasks that it cannot achieve, and as a result
preventing it from making the contribution that it is capable
of making.
I look forward to your testimony, Chair Yellen, and I thank
you for your time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Michigan, Mr. Kildee, for 1 minute.
Mr. Kildee. Thank you, Mr. Chairman, and Madam Ranking
Member.
And welcome, Chair Yellen.
The new Administration enters with a tailwind of economic
growth at its back. With 83 months of continuous private sector
job growth and an unemployment level of 4.8 percent, we do have
a strong economic foundation to continue to build upon.
So it is important that the growth of the last 8 years is
not put at risk through wholesale repeal of the legislative
framework that has protected consumers, strengthened the
financial system, and helped our economy find its footing after
the greatest financial crisis since the Great Depression.
So I look forward to hearing from you about how the Federal
Reserve will continue to set monetary policies that will expand
our economic progress and allow for growth in areas such as
workers' wages that have been more slow to recover, and in
particular to address the uneven nature of growth. The United
States still has pockets of poverty in urban and rural
communities.
I look forward to hearing your comments, and I appreciate
your attendance here at the committee. Welcome back.
With that, I yield back.
Chairman Hensarling. The gentleman yields back.
Today, we welcome the testimony of the Honorable Janet
Yellen, Chair of the Federal Reserve Board of Governors. Chair
Yellen has previously testified before this committee on
numerous occasions, so I certainly believe she needs no further
introduction.
Welcome, Madam Chair. Without objection, your written
statement will be made a part of the record, and you are now
recognized to give an oral presentation of your testimony.
STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mrs. Yellen. Thank you.
Chairman Hensarling, Ranking Member Waters, and other
members of the committee, I am pleased to present the Federal
Reserve's semiannual monetary policy report to the Congress. In
my remarks today I will briefly discuss the current economic
situation and outlook before turning to monetary policy.
Since my appearance before the committee last June, the
economy has continued to make progress toward our dual-mandate
objectives of maximum employment and price stability. In the
labor market, job gains averaged 190,000 per month over the
second half of 2016, and the number of jobs rose an additional
227,000 in January. Those gains bring the total increase in
employment since its trough in early 2010 to nearly 16 million.
In addition, the unemployment rate, which stood at 4.8
percent in January, is more than 5 percentage points lower than
where it stood at its peak in 2010 and is now in line with the
median of the Federal Open Market Committee (FOMC)
participants' estimates of its longer-run normal level. A
broader measure of labor under-utilization, which includes
those marginally attached to the labor force and people who are
working part time but would like a full-time job, has also
continued to improve over the past year.
In addition, the pace of wage growth has picked up relative
to its pace of a few years ago, a further indication that the
job market is tightening. Importantly, improvements in the
labor market in recent years have been widespread, with large
declines in the unemployment rates for all major demographic
groups, including African-Americans and Hispanics. Even so, it
is discouraging that the jobless rates for those minorities
remain significantly higher than the rate for the Nation
overall.
Ongoing gains in the labor market have been accompanied by
a further moderate expansion in economic activity. U.S. real
gross domestic product is estimated to have risen 1.9 percent
last year, the same as in 2015. Consumer spending has continued
to rise at a healthy pace, supported by steady income gains,
increases in the value of households' financial assets and
homes, favorable levels of consumer sentiment, and low interest
rates. Last year's sales of automobiles and light trucks were
the highest annual total on record.
In contrast, business investment was relatively soft for
much of last year, though it posted some larger gains towards
the end of the year, in part reflecting an apparent end to the
sharp declines in spending on drilling and mining structures.
Moreover, business sentiment has notably improved in the past
few months.
In addition, weak foreign growth and the appreciation of
the dollar over the past 2 years have restrained manufacturing
output. Meanwhile, housing construction has continued to trend
up at only a modest pace in recent quarters. And while the lean
stock of homes for sale and ongoing labor market gains should
provide some support to housing construction going forward, the
recent increases in mortgage rates may impart some restraint.
Inflation moved up over the past year, mainly because of
the diminishing effects of the earlier declines in energy
prices and import prices. Total consumer prices, as measured by
the personal consumption expenditures, or PCE, index, rose 1.6
percent in the 12 months ending in December, still below the
FOMC's 2 percent objective, but up 1 percentage point from its
pace in 2015. Core PCE inflation, which excludes the volatile
energy and food prices, moved up to about 1.75 percent.
My colleagues on the FOMC and I expect the economy to
continue to expand at a moderate pace, with the job market
strengthening somewhat further and inflation gradually rising
to 2 percent. This judgment reflects our view that U.S.
monetary policy remains accommodative, and that the pace of
global economic activity should pick up over time, supported by
accommodative monetary policies abroad.
Of course, our inflation outlook also depends importantly
on our assessment that longer-term inflation expectations will
remain reasonably well-anchored. It is reassuring that while
market-based measures of inflation compensation remain low,
they have risen from the very low levels they reached during
the latter part of 2015 and the first half of 2016.
Meanwhile, most survey measures of longer-term inflation
expectations have changed little on balance in recent months.
As always, considerable uncertainty attends the economic
outlook. Among the sources of uncertainty are possible changes
in U.S. fiscal and other policies, the future path of
productivity growth, and developments abroad.
Turning to monetary policy, the FOMC is committed to
promoting maximum employment and price stability, as mandated
by Congress. Against the backdrop of headwinds weighing on the
economy over the past year, including financial market stresses
that emanated from developments abroad, the committee
maintained an unchanged target range for the Federal funds rate
for most of the year in order to support improvement in the
labor market and an increase in inflation toward 2 percent.
At its December meeting the committee raised the target
range for the Federal funds rate by one-quarter percentage
point to 0.5 to 0.75 percent. In doing so, the committee
recognized the considerable progress the economy made toward
the FOMC's dual objectives. The committee judged that even
after this increase in the Federal funds rate target, monetary
policy remains accommodative, thereby supporting some further
strengthening in labor market conditions and a return to 2
percent inflation.
At its meeting that concluded early this month, the
committee left the target range for the Federal funds rate
unchanged but reiterated that it expects the evolution of the
economy to warrant further gradual increases in the Federal
funds rate to achieve and maintain its employment and inflation
objectives. As I noted on previous occasions, waiting too long
to remove accommodation would be unwise, potentially requiring
the FOMC to eventually raise rates rapidly, which could risk
disrupting financial markets and pushing the economy into
recession. Incoming data suggest that labor market conditions
continue to strengthen and inflation is moving up to 2 percent,
consistent with the committee's expectations.
At our upcoming meetings, the committee will evaluate
whether employment and inflation are continuing to evolve in
line with these expectations, in which case a further
adjustment of the Federal funds rate would likely be
appropriate.
The committee's view that gradual increases in the Federal
funds rate will likely be appropriate reflects the expectation
that the neutral Federal funds rate--that is, the interest rate
that is neither expansionary nor contractionary and that keeps
the economy operating on an even keel--will rise somewhat over
time.
Current estimates of the neutral rate are well below pre-
crisis levels, a phenomenon that may reflect slow productivity
growth, subdued economic growth abroad, strong demand for safe
longer-term assets, and other factors. The committee
anticipates that the depressing effect of these factors will
diminish somewhat over time, raising the neutral funds rate,
albeit to levels that are still low by historical standards.
That said, the economic outlook is uncertain and monetary
policy is not on a preset course. FOMC participants will adjust
their assessments of the appropriate path for the Federal funds
rate in response to changes to the economic outlook and
associated risks, as informed by incoming data. Also, changes
in fiscal policy or other economic policies could potentially
affect the economic outlook.
Of course, it is too early to know what policy changes will
be put in place or how their economic effects will unfold.
While it is not my intention to opine on specific tax or
spending proposals, I would point to the importance of
improving the pace of longer-run economic growth and raising
American living standards with policies aimed at improving
productivity.
I would also hope that fiscal policy changes will be
consistent with putting U.S. fiscal accounts on a sustainable
trajectory.
In any event, it is important to remember that fiscal
policy is only one of the many factors that can influence the
economic outlook and the appropriate course of monetary policy.
Overall, the FOMC's monetary policy decisions will be directed
to the attainment of its congressionally mandated objectives of
maximum employment and price stability.
Finally, the committee has continued its policy of
reinvesting proceeds from maturing Treasury securities and
principal payments from agency debt and mortgage-backed
securities. This policy, by keeping the committee's holdings of
longer-term securities at sizable levels, has helped maintain
accommodative financial conditions.
Thank you. I would be pleased to take your questions.
[The prepared statement of Chair Yellen can be found on
page 68 of the appendix.]
Chairman Hensarling. Thank you, Madam Chair.
The Chair now yields himself 5 minutes for questions.
Madam Chair, as I know you are aware, on February 3rd
President Trump issued an Executive Order of core principles to
regulate the United States' financial system. Section one,
paragraph C says, ``Foster economic growth and vibrant
financial markets through more rigorous regulatory impact
analysis.''
You were quoted yesterday in your Senate testimony saying
that you agree with these core principles. Were you quoted
accurately?
Mrs. Yellen. Yes. I agree with the core principles that the
President enunciated.
Chairman Hensarling. As you probably know, to date, Dodd-
Frank has promulgated at least 22,000 pages of regulations as
part of its 400 rules, I think only roughly three-quarters of
which have been finalized, and certainly the weight and the
volume, the complexity and the cost is one of the headwinds
that we are facing now.
I know that as an independent agency, you are not
necessarily subject to the jurisdiction of the Executive Order,
but we have had testimony in this committee for years about the
challenges of the Volcker Rule and its deleterious impact on
market illiquidity.
On December 22nd of last year, just weeks ago, the Federal
Reserve released a staff paper, an abstract of which says, ``We
document that the illiquidity of stress bonds has increased
after the Volcker Rule. Since Volcker-affected dealers have
been the main liquidity providers, the net effect is that bonds
are less liquid during times of stress due to the Volcker
Rule.'' It goes on to say that the Volcker Rule may have
serious consequences for corporate bond market functioning in
stress times.
Do you agree with the staff paper of the Federal Reserve?
Mrs. Yellen. This was the work of a particular staff member
and not a finding of the Board as a whole.
Chairman Hensarling. I understand. I am just trying to
figure out, do you agree or disagree with these conclusions?
Mrs. Yellen. I think the evidence on this matter is
conflicting, and I think this paper did find evidence of an
impact in one particular area. This is an important question.
It is one we continue to look at. And there are a number of
factors--
Chairman Hensarling. You have been looking at it for years,
though, haven't you, Madam Chair? Haven't you been looking it
for years now?
Mrs. Yellen. Yes, we have been--
Chairman Hensarling. Still no conclusion?
Mrs. Yellen. It is difficult to come to a conclusion
because by most metrics, liquidity in corporate bond markets
still remains healthy, but there is--
Chairman Hensarling. So after a couple of years, not
drawing a conclusion yet, I assume that there is no particular
action the Board intends to take based upon the evidence of
this paper, is that correct?
Mrs. Yellen. There is no action that we intend to take
based on that--
Chairman Hensarling. Okay.
Madam Chair, in the January 25th edition of The Wall Street
Journal, Ms. Nellie Liang, whom I assume you are acquainted
with, stepped down as the Director of your Financial Stability
Division. In this article, she said that, ``Congress should
provide clarity for regulators on how to balance the safety of
the financial system with economic growth.''
Please know that Congress does not believe that you have
found the proper balance and that the Volcker Rule is an
incredibly important channel to fund jobs in America. Again, I
don't know how much stronger the evidence has to be for the Fed
to take action, but please know the proper balance has not been
struck.
On January 12, 2017, the Financial Stability Board released
its policy recommendations to address structural
vulnerabilities from asset management activities. Governor
Tarullo was quoted as saying the policies ``will better prepare
asset managers in funds for future stress events.'' Many cannot
see any association whatsoever with the terms ``systemic risk''
and ``asset management.''
So my first question is, are you aware of anybody in the
Administration directing either you or Governor Tarullo to
negotiate with the Financial Stability Board on asset
management regulation?
Mrs. Yellen. It is done in negotiation with the Financial
Stability Board. Any regulation that is put into effect in the
United States has to go through a rulemaking process.
Chairman Hensarling. I understand that, but the question
was, has there been any contact with the new Administration
authorizing the Fed to carry on any negotiations with respect
to the asset management question with the Financial Stability
Board?
Mrs. Yellen. We participate regularly as part of our
established responsibilities in discussions with colleagues in
the--
Chairman Hensarling. As you know, Governor Tarullo was
never confirmed by the Senate. Are you aware of any specific
statutory authority he has to negotiate on behalf of the United
States on the matter of asset management and systemic risk?
Mrs. Yellen. I don't think it is a negotiation. The SEC is
involved; Treasury takes part in those discussions. There are a
number of U.S.--
Chairman Hensarling. Do you believe that the new
Administration should have the ability to nominate a Vice Chair
for Supervision, and if confirmed, that person would be the one
to be officially tasked with these duties?
Mrs. Yellen. We look forward to a nomination to the
position of Vice Chair for Supervision and--
Chairman Hensarling. Don't we all, Madam Chair. Don't we
all.
My time has expired. I now recognize the ranking member for
5 minutes.
Ms. Waters. Thank you very much.
Madam Chair, we have frequently heard from members on the
opposite side of the aisle that Dodd-Frank has had a
significant adverse impact on our economy. To fact-check some
of this gloomy rhetoric I ask that you provide some brief
responses to the following questions:
Since passage of the Wall Street reform law, has business
lending by commercial banks expanded or contracted?
Mrs. Yellen. Expanded.
Ms. Waters. Roughly how many private sector jobs have been
added to our economy?
Mrs. Yellen. Roughly 16 million since the trough in
employment in early 2010.
Ms. Waters. Have wages increased or decreased in the past
year?
Mrs. Yellen. They have increased, by most measures.
Ms. Waters. Has the trend in aggregate household net worth
been positive or negative?
Mrs. Yellen. Positive.
Ms. Waters. Has the trend in Federal budget deficit risen
or fallen over the past few years?
Mrs. Yellen. Deficits have declined since the financial
crisis and its aftermath.
Ms. Waters. After the economy hit bottom, have the number
of foreclosures increased or decreased in recent years?
Mrs. Yellen. They are, I believe, decreasing now.
Ms. Waters. What, in your view, are the key factors and
policies that have contributed to these positive trends in the
economy?
Mrs. Yellen. The economy is recovering from a very severe
crisis. We have put in place stronger financial regulation that
has armed four-star banks to build up their capital buffers to
deal with problem loans and to strengthen themselves to the
point where they have been able to support economic growth and
recovery in our economy. The U.S. economy has recovered more
quickly, for example, than the E.U. economies have in the
aftermath of the crisis.
And the Federal Reserve has put in place highly
accommodative monetary policies meant to spur spending in the
economy and restore low unemployment or to achieve the goal of
maximum employment and price stability that have been assigned
to us by Congress. As I indicated in my remarks, I believe we
are coming very close to achieving those objectives and that
monetary policy still remains accommodative.
Ms. Waters. Thank you.
Chair Yellen, as the Nation's leading economist, can you
discuss how unraveling the fabric of our social safety net,
such as through cuts to food assistance programs for families
in poverty, eliminating access to affordable health care,
eliminating the earned income tax credit and the child tax
credit, cutting unemployment insurance benefits, and cutting
funding for housing assistance programs could impact the short-
term and long-term health of our workforce and our economy?
Could these types of cuts do permanent damage to our economy's
ability to fulfill its potential? How would cuts to these
programs impact inequality and the chance that families have to
escape poverty?
Mrs. Yellen. I don't want to give detailed guidance to
Congress on these particular programs. But I would say that the
trend of rising inequality and the fact that, although low-
income households have done well over the last couple of years
as the economy has improved relative to before the crisis and
even looking back a number of decades, they have clearly faced
very severe problems that have left many American households
struggling, and these kinds of programs are helpful, I think,
in dealing with such distress.
Ms. Waters. Could you just give me a few more minutes on
the earned income tax credit? Do you think that is important?
Mrs. Yellen. I think it does serve to support the incomes
of many lower-income families.
Ms. Waters. And what about the child tax credit in
particular?
Mrs. Yellen. That works in the same direction.
Ms. Waters. So, as you said, you don't wish to tell
Congress what to do, but these programs are important. And
would you include in that cutting the unemployment insurance
benefits as being beneficial to helping lift families out of
poverty?
Mrs. Yellen. I think unemployment insurance benefits are
important for families who face real distress in the labor
market, and they also serve as automatic stabilizers that
support spending in a the downturn and make our economy less
subject to the fluctuations of the business cycle.
Ms. Waters. Thank you very much.
I yield back.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, chairman of our Monetary Policy and Trade Subcommittee.
Mr. Barr. Thank you, Mr. Chairman.
And, Chair Yellen, welcome back to the committee. This is
the first time I have had an opportunity to visit with you as
the new chairman of the Monetary Policy and Trade Subcommittee,
and I look forward to visiting with you on a more informal
basis to get your thoughts about monetary policy and your
supervisory responsibilities.
My intention is to be fair-minded in our oversight and also
encourage an exchange of differing viewpoints, but we are also
going to ask tough questions because the American people do
deserve a Federal Reserve System that is transparent,
accountable, and predictable.
According to your monetary policy report from a couple of
years ago, Chair Yellen, the Federal Open Market Committee
expected that, ``with appropriate policy accommodation,
economic activity would expand.'' The FOMC certainly pursued
that accommodative policy, holding the Fed funds rate to near
zero for almost a decade and growing the Fed's balance sheet to
one quarter of the size of our economy.
You noted in your prepared testimony that labor market
conditions are strengthening and that we are moving toward that
inflation target of 2 percent. But despite all of the
extraordinary measures and the unconventional policies,
economic activity has still fallen short of FOMC expectations
and has done so throughout the recovery. What does the serial
failure of the Fed's forecasts tell us about the efficacy of
Q.E. and the ballooning balance sheet?
Mrs. Yellen. The Congress' instructions to the Federal
Reserve are to try to achieve maximum employment and price
stability. We have focused on those objectives--not economic
growth per se, but maximum employment.
The economic growth performance has been quite
disappointing and growth is falling short of our expectations,
but unemployment has come down substantially and we are quite
close, I would say, to achieving our labor market objectives.
Now, the reason for this is that productivity growth in the
U.S. economy, which is what really determines in the long run
the pace of growth--
Mr. Barr. Right.
Mrs. Yellen. --our economy is capable of, has been very
disappointing.
Mr. Barr. Right. I understand that and I also recognize
that we have seen a repetitive failure for--of the Fed to
actually achieve the expected growth rates.
And really my question that I am getting at is, doesn't
this underscore the failure of unconventional policies to
deliver the expected results? And if you are a reasonable
person looking at this, wouldn't a reasonable person say,
``Maybe we shouldn't be expecting so much from unconventional
policies, near zero interest rates, 3 rounds of Q.E., a $4.5
trillion balance sheet?''
Mrs. Yellen. My reading would be that putting in place
those policies has enabled us to add 16 million jobs to the
U.S. economy and--
Mr. Barr. And yet, Chair--
Mrs. Yellen. --bring the unemployment rate down to 4.8
percent--
Mr. Barr. Sure, and I acknowledge that, and the ranking
member made a big point of the declining unemployment rate. But
we also have to recognize that almost 15 million people remain
unemployed or underemployed 8 years after the recession. The
labor participation rate is the lowest it has been since 1978.
Mrs. Yellen. The labor--
Mr. Barr. President Obama is the only President in U.S.
history since Herbert Hoover to not preside over a single year
of 3 percent growth. And median household income remains nearly
$1,000 lower than the pre-recession levels. So we have a bit of
a different viewpoint on that.
And I recognize that you believe that the unconventional
strategy has worked. But if it has worked so well, why are we
still reinvesting and why are we not shrinking the balance
sheet?
Mrs. Yellen. We are beginning to remove monetary policy
accommodation and we expect to continue to do so, and we have
decided that the best way to do that is by raising overnight
interest rates--short-term interest rates--by raising our
Federal funds rate target. We are committed to shrinking our
balance sheet but consider it best, from the standpoint of
sustaining the recovery, to do that in a gradual and orderly
way.
Mr. Barr. And I respect that, given the taper tantrum, and
I recognize that viewpoint. But yesterday in the Senate Banking
Committee you said you wouldn't start to shrink the Fed's
balance sheet until the Fed funds rate was high enough that it
could be reduced again in the event of economic turbulence.
What is high enough?
Mrs. Yellen. It depends. There is no unique level that is
high enough. It depends on the strength of the recovery and how
robust it is, how worried we are about downside risk to the
economy. The Federal Open Market Committee in our coming
meetings will be discussing reinvestment policy in greater
detail, and I hope to be able to provide--
Mr. Barr. Thank you, Chair Yellen. I look forward to
continuing to discuss that discretionary policy and the
uncertainty it is creating.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Mr. Chairman, we have had the--obviously I did
not intend my picture to be up there on the board. My staff
has--I will ask them to take this down. This is a beta version
and we will go back to the--okay.
I have always envied the Majority with their national debt
clock. The gentleman from Kentucky tells us that he wants to
blame the Fed for low interest rates, and that is why we have a
national debt.
We all know that the amount of the deficit is set by the
spending. That is in Congress. It is set by the taxes. That is
set by Congress. And in a pitiful attempt to deflect
responsibility for the fact that we have a large national debt,
we are told that the blame goes to the Fed because you haven't
charged us enough for the cost of borrowing.
The national debt would be even higher if our interest
rates were higher and if our cost of financing the national
debt were higher.
We are also told to blame President Obama for the fact that
the catastrophe he inherited has not been rebounded enough.
That is like blaming the firefighter for the fact that there
was a fire. He found this country in freefall, we are now on
the upswing, and those who were here at the time that the
policies were set that created the freefall are saying, ``Well,
why isn't the upswing bigger?''
Finally, thank you for your large balance sheet. That
creates a huge profit. That money goes to the general fund. So
your low interest rates and your huge balance sheet are keeping
that national debt clock that the Majority puts up from turning
much, much faster.
Now, I do want--at the next meeting we will have the
technology done properly. We will have the national trade
deficit clock.
It stands at over $11 trillion of accumulated trade debt
since 1980, and that is including both goods and services. It
would be higher if we just looked at goods. That clock is often
turning faster and that clock is as a result of the terrible
trade policies that have been embraced by both sides of
Pennsylvania Avenue from time to time.
Eric Holder pointed out that he hesitated to engage in
criminal prosecutions of the biggest banks because they were so
large that he feared for the effect on the national economy.
You have been here before and I have urged you to break up the
too-big-to-fail institutions. You have said you are going to
achieve those goals through another means.
So can you assure the current attorney general that we can
enforce the criminal law fairly, we can let the chips fall
where they may, and the economy will be just fine no matter how
big the institution that faces criminal prosecution and no
matter how big the figures are who are put in jail? Can you
tell us that as of today, no one is too-big-to-jail?
Mrs. Yellen. Certainly, I agree that the Justice Department
should pursue any criminal indictments--
Mr. Sherman. Would the downfall of any one or two
institutions have an adverse effect on our economy that should
give a reasonable attorney general some pause before taking
action?
Mrs. Yellen. Through the process that we have put in place,
the living will process, the strengthening of the capital and
liquidity positions of the largest firms--
Mr. Sherman. Yes or no? Can we feel free to engage in
criminal prosecutions of even the largest one or two
institutions without an adverse economic effect? Yes or no?
Mrs. Yellen. I believe there is a very reasonable chance we
would be able to--
Mr. Sherman. One last question. The battle in Dodd-Frank is
basically a battle to reduce the amount of capital that the big
banks have to face. The Wall Street Journal reported that if we
got rid of it or moved against it, that would liberate about
$100 billion that the banks could pay out in dividends or share
buybacks.
Would it increase or decrease the risk that a giant
institution would need a bailout if we told them that they
should have less capital on hand and were free to take some of
the capital they have and pay it out in dividends now?
Mrs. Yellen. We believe very strongly in high capital
levels, especially for the largest and most systemic
institutions, and we think it will support their ability to
supply credit to U.S. households and businesses even in a very
adverse scenario. It strengthens their resilience and vastly
reduce their odds of failing.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, chairman of our Terrorism and Illicit Finance
Subcommittee.
Mr. Pearce. Welcome, Chair Yellen. Thanks for being here. I
always appreciate your viewpoints.
Now, as I read your report that you just gave to us, on
page one you are talking about the progress towards maximum
employment. And so you give--I am just trying to get the flow
in my mind here correctly.
So you have made progress and then later, you say that the
FOMC believes that unemployment is pretty well at its normal
level, that is, it is where it needs to be. Labor under-
utilization is a little bit of a concern but it is kind a
marginal concern, that it is these pockets of maybe minorities
or things.
Is that more or less kind of the summary? Am I reading your
report correctly?
Mrs. Yellen. We think that the economy is--
Mr. Pearce. No. I didn't ask about the economy.
Mrs. Yellen. The labor market--
Mr. Pearce. I was talking the labor force and--
Mrs. Yellen. --is--
Mr. Pearce. --employment and the unemployment seems to be
where you think it ought to be.
Mrs. Yellen. Essentially. There are--
Mr. Pearce. Essentially, okay.
Mrs. Yellen. As you said and as we say in the report, there
are pockets of--
Mr. Pearce. Yes. I understand, but basically you are giving
a fairly glowing, stable report. Okay.
Mrs. Yellen. Well--
Mr. Pearce. Now, my point--
Mrs. Yellen. But let me be clear, I am not saying that all
workers or all individuals--
Mr. Pearce. You give those reservations there. We have
pockets. We have seen large declines in employment for major
demographic groups, but we have discouraging jobless highs for
minorities. I give you your balancing statements there.
My point is that this stable position that you have
established, that we have done pretty well, then we have some
pockets that we need to improve on, is highly discouraging
because 4 out of 10 people who could be in the workforce are
not. And for the 60 percent who are, it tells us that the
highest economic body in the country says it is okay that you
40 percent are not there, that we don't draw attention to the
62 percent labor force participation rate. It is just ignored
and things are fairly stable according to your report and
according to our questions.
Yesterday, a New York Times article stated that--and I am
trying to get at this if it is accurate--Mrs. Yellen and other
Fed officials have suggested that the central bank would seek
to offset such measures--that is, Mr. Trump calling for
stimulating economic growth through tax cuts--but that you
would seek to offset that because the Fed judges the economy to
be growing at roughly the maximum sustainable pace already.
Is that accurate news? Is that accurate, that you believe
that we are pretty close to the maximum sustainable pace
already?
Mrs. Yellen. I have urged Congress and the Administration
to focus on measures that would raise the potential of the
economy to grow, that would increase productivity growth and
the capacity--
Mr. Pearce. So this statement in the New York Times is
incorrect--
Mrs. Yellen. It is not--
Mr. Pearce. --that you all do not believe--you do not--
Mrs. Yellen. It is not quite accurate and I don't believe
that accurately reflects my words.
Mr. Pearce. So this would be some of the fake news coming
out from the New York Times yesterday.
Mrs. Yellen. I think that there are policy measures that
Congress and the Administration could consider--
Mr. Pearce. Okay.
Mrs. Yellen. --that would boost the capacity of the U.S.
economy--
Mr. Pearce. So is there a maximum rate at which you all do
become concerned about economic growth?
Mrs. Yellen. I think faster economic growth, if it is
supported by either faster labor force growth or productivity
growth--
Mr. Pearce. The question is, is there a maximum? I am kind
of running out of time. Is there a position at which the Fed
gets uncomfortable with economic growth? Is there a number at
which you get uncomfortable? If it goes to 7.4 percent you are
going to be okay with that?
Mrs. Yellen. No. I think we would like to see fast growth,
but we do have to control price inflation--
Mr. Pearce. You would do things, then, to offset--this idea
that you would offset fast economic growth, then that has an
element of truth to it?
Mrs. Yellen. Only if we think that it is demand-based and
threatens our inflation objective--
Mr. Pearce. Yes. So let me wrap up here if I can--
Mrs. Yellen. --has assigned to us.
Mr. Pearce. Let me wrap up here, because when I look at
employment figures and 16 million, it indicates that all jobs
are created equal. And frankly, a retail job is not going to
pay as well as a refinery job. And when the President is
talking about expanding the economy and I see comments that
indicate you all from the Fed might do things to sidetrack that
growth rate when he is going to increase infrastructure and the
$60,000 a year jobs, I worry about that.
I worry about it being considered that small business
growth is not as good as or maybe it is even equivalent as the
economic growth by international corporations. So again, I
worry when I see these things.
I yield back the balance of my time, Mr. Chairman. Thank
you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
Madam Chair, it is good to see you. And I can't believe my
ears as I stand here, or sit here, because I guess I am hearing
revisionist history, and I wonder about my colleagues who claim
that they are worried now.
But if I recall correctly--and I think I do because I got
elected in 1998, I came here in 2000--at that time we were
talking about balanced budgets and a moving economy. And in the
2000 election, we had a Republican Majority in the House, a
Republican Majority in the Senate, and a Republican President,
similar to what we have right now.
And as I recall, during that period of time all of a sudden
we were not talking about balanced budgets anymore, we were
talking about rising deficits. Democrats clearly had nothing to
do with that because we had no control over anything, as it is
right now. And we moved forward and we ended up in the greatest
recession since the Great Depression.
The fact of the matter is--and these are not alternative
facts--that when Barack Obama became President of the United
States of America, we were losing. You talk about slow growth--
I figure, you can correct me if I am wrong--we were losing
about 700,000 jobs a month, not gaining anything. Not because
of Democrats. Barack Obama wasn't the President.
So he inherited a economy that was falling. I can remember
the Secretary of the Treasury coming over to the House begging
Democrats to do something at the time because even the
Republicans wouldn't do anything, asking for our help to get
something passed to save this economy.
That is not revisionist history; those are facts that took
place.
And under Barack Obama we have made tremendous progress
from where we were. To the fact that as opposed to losing jobs,
as we were beforehand, I think you testified we have now gained
over 16 million jobs. I think that should be something that all
of us as Americans should be applauding and not criticizing
because we have come a mighty long way from an economy that was
in the tank.
And we had to do certain things because we didn't want to
get back there ever again. We wanted to make sure that we
didn't put the American people, the workers--whether you are
Democrat, whether you are Republican, whether you are
independent, whether you are Black, whether you are White,
whether you are Hispanic--we didn't want people to be put in
that position again. So we had to come up with some new laws.
One of them was called Dodd-Frank. And as a result of Dodd-
Frank, we saw some stabilization in institutions and we began
to move forward and we began to create jobs again. And here we
are now creating some of the same kind of uncertainty.
So let me just ask a question because I believe--I don't
know, maybe I am wrong, but I think that in the Fed's monetary
policy report you did with that, uncertainty hurts you with
your report as well as it affects employers and business
owners. And when you have uncertainty, whether or not it is
dealing with immigration, whether or not it is dealing with
trade, whether or not it is dealing with regulatory policy,
that causes problems in the economy. Is that not correct?
Mrs. Yellen. It can be. That is for many years a problem
that businesses have cited that has made them reluctant to make
commitments. It is hard to quantify just how important that is.
Mr. Meeks. One of the things that I do know is that over
the last 14 days, we certainly have had not anything certain
with this current Administration. In fact, every day that we
wake up it is something new and uncertain dealing with this
Administration. Every day. Every day. I don't know one day when
we have not woken up and looked and read the papers or looked
at the television or something and it has been something new.
Now, there have been some excuses--but the fact of the
matter is we have had anything but certainty for the last 14
days in the United States of America. We have had none, and
that thereby will have an effect overall on the average
everyday worker in the United States of America, our
businesses, our small businesses, our banks, our regulations,
and even, in fact, our credibility.
Because guess what? In the current Administration they
don't even trust one another. We have a situation where the
Vice President doesn't trust this one, and the President has
already said, ``It is a matter of trust; I have to get rid of
this one or that one.''
And then you have the situation where one person comes in
and says, ``Oh look, the President didn't do this; the person
resigned by themselves.'' Then the next hour someone says,
``Oh, the President fired them.''
Uncertainty. Our country is in an uncertain position right
now, which will affect our economy and, unfortunately, the
gains that we have made. So I am hoping that there is something
that changes immediately so the gains that we have made over
the last 8 years, we don't go back to where we were, where we
were losing 780,000 jobs.
My time is up and I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. McHenry, vice chairman of the committee.
Mr. McHenry. Chair Yellen, thank you so much for being here
today.
I support the Federal Reserve's function as an independent
policymaker when it comes to our monetary policy. I think an
independent Federal Reserve, for the purposes of monetary
policies, is very important.
You are also a regulator. And as I have asked you before,
that is really what I am interested in what you do in terms of
regulation.
And so let me just ask, do you think it is appropriate for
Congress to have oversight of the Federal Reserve's rulemaking
and regulatory policies?
Mrs. Yellen. Of course.
Mr. McHenry. Okay. That is good. So do you think Congress
should have oversight over the Federal Reserve's regulatory
discussions with international bodies, as well?
Mrs. Yellen. Congress has assigned the various regulatory
agencies responsibilities, and in carrying those out--
Mr. McHenry. And I am asking you as a--
Mrs. Yellen. --we have, and I believe should have,
discussions with our international colleagues.
Mr. McHenry. I will get to that question. I certainly
understand that because Congress has given you this authority
and given you this directive, should Congress not also have
oversight over that authority in which we have given you?
Mrs. Yellen. Congress of course has oversight over our
conduct.
Mr. McHenry. So you agree that both domestically and
internationally, we should have oversight over those rulemaking
activities. Okay.
In accordance with that, I sent you a letter a couple of
weeks ago, and thank you for the reply. I don't actually like
the contents of it, but thank you for replying in a timely
fashion before the hearing.
I asked for your assurance about your participation in
these international agreements, for you to pause until the new
Administration, who has a markedly different approach to these
standards, has actually gotten their appointees in before you
finalize any discussions internationally.
Mrs. Yellen. Congressman, you know that nothing is a rule
that is effective in the United States until regulatory
agencies have gone through a normal rulemaking process, and
nothing in these international discussions binds the U.S.
regulatory agencies, including the Fed, to carry out agreements
in our own rulemakings in the United States.
Mr. McHenry. I certainly understand that.
Mrs. Yellen. And we have, in important cases, indicated
that we don't agree with the outcomes of international
discussions and have no intention of putting in place--
Mr. McHenry. In other cases, we can't even surmise whether
or not your representative from the Fed has voted in the
affirmative or in the negative on these agreements that we are
then, as your agency comes back and foists upon us an
international agreement that has not been apparently voted on
because we can't surmise if you voted yes or no.
And so there is a great deal of opacity with that, and what
we want is transparency in this. And transparency has been
severely lacking.
So my question is very simple: When it comes to the Basel
IV package, do you intend to wait to see if the new
Administration has an opinion on these matters before you would
make some agreement on the Basel IV package?
Mrs. Yellen. These are all ongoing discussions in which
U.S. regulators participate and, as I said, nothing is
effective in the United States unless we go through a
rulemaking process here.
Mr. McHenry. Okay. So--
Mrs. Yellen. It is important--
Mr. McHenry. --I will summarize that--
Mrs. Yellen. It is important for the United States.
Mr. McHenry. --as probably not, that you will probably not
wait for the new Administration to put regulators in place even
if those new regulators are in place and move to counteract
exactly what you have achieved within an international
agreement.
Yesterday, before the Senate Banking Committee, you seemed
to endorse the core principles of President Trump's financial
regulation Executive Order. What steps are you taking to comply
with the Executive Order directive to advance America's
interests in international forums, specifically as it relates
to international standards like the net stable funding ratio
and international insurance regulation?
Mrs. Yellen. In the case of the international insurance
regulation we have indicated that the capital standard that was
proposed is not one that we think is suitable to be put in
place in the United States, and I think that is a good example
of the fact that matters that are discussed and may be agreed
on by others are not effective in the United States unless we
have gone through a full rulemaking process with opportunity
for comment and response.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
And thank you, Madam Chair, for being here today.
You said earlier, and it has been referenced now a couple
of times, that you agree with the core principles enunciated in
the President's Executive Order. I just want to read a couple
of them: to empower Americans to make informed choices; to
prevent taxpayer-funded bailouts; to foster economic growth and
vibrant financial markets; and to restore public
accountability.
Everybody agrees with those core principles, but I don't
see anything in here that specifically says that Dodd-Frank has
been a failure and needs to be repealed. Did I miss it? I
didn't see anything here that said any specific regulation in
any level needs to be repealed or amended. Did I miss that? Is
that in the core principles?
Mrs. Yellen. The Executive Order asks the Treasury
Secretary, working with FSOC--
Mr. Capuano. Just to do these things?
Mrs. Yellen. --members to conduct a review.
Mr. Capuano. So this is all about motherhood, apple pie,
and puppy dogs. We all love this stuff, and therefore the
Executive Order, though wonderful and very powerful, means
nothing.
Let me read a little bit more from it: It is to promote the
financial stability of the United States by improving the
accountability and transparency in the financial system, to end
too-big-to-fail, to protect the American taxpayer by ending
bailouts, and to protect consumers from abusive financial
practices--financial service--oh, oh, excuse me. I was reading
the wrong thing. That is actually the preamble to the Dodd-
Frank bill.
Sounds very familiar, doesn't it? I could have mistaken
that for the President's Executive Order because, again, who
could oppose any of that?
So, that is wonderful. I am glad we all agree that the
President's Executive Order is very powerful. By the way, don't
you love Greg Meeks?
[laughter]
He hit that nail so hard and so well, that ball is still
flying over Fenway Park, I will tell you. It was a great way to
lead this in, and I have almost nothing further to say, but I
will try.
Just out of curiosity, Madam Chair, do you or any of your
high-ranking staff own any banks?
Mrs. Yellen. No.
Mr. Capuano. Do you own any stock in any banks?
Mrs. Yellen. No.
Mr. Capuano. Do any of your immediate family members own
any banks or any stock in any banks?
Mrs. Yellen. No.
Mr. Capuano. So therefore, you have--I don't know if it is
formal or informal--you have no emoluments coming in to anybody
at the Federal Reserve. Is that--
Mrs. Yellen. We have a stringent set of ethics requirements
to which we adhere.
Mr. Capuano. So you think it would be unethical if you, any
of your high-ranking staff, or any of your family members were
to financially benefit from the work that you do?
Mrs. Yellen. It would be a conflict of interest for us
and--
Mr. Capuano. That is good to hear because--
Mrs. Yellen. --we have rules in place to--
Mr. Capuano. --apparently, not everybody--
Mrs. Yellen. --prevent that.
Mr. Capuano. --agrees with that approach, and to me it has
been a little troubling. I am glad to know that you and your
staff and your family have high ethical values. I wish everyone
tried to do that, but I guess that is another discussion for
another day.
I also want to ask you, I know there have been a lot of
concerns about making these banks--getting rid of all these
regulations so they can get rid of all of that capital money
that they are just sitting there doing nothing, which, of
course, is not right, but that is okay. I will take that.
As I understand the capital requirements--and correct me if
I am wrong--if I go to a bank and deposit $100 in my checking
account, I know there will be some dollar fees here and there
that I have to pay, but effectively, pursuant to the general
regulation, the bank is then required to pretty much hold 6 of
those dollars in a capital account, roughly 6 percent of what I
have deposited. That doesn't mean it is just sitting there, but
that is what they have to do.
So if the bank goes belly up and there is a run, or if I
just want my money back, the bank says--if they have a problem,
they have made bad choices, the economy has gone south,
something--maybe there is a President who cut taxes too much or
got involved in too many wars that he didn't want to pay for.
But if anything happened and I went to that bank and there was
a run, I could only get 6 of my dollars back based on those
capital requirements.
Do you think that is sufficient that 6 percent of their
assets are held in capital?
Mrs. Yellen. Let's see. We have liquidity requirements,
which would take some of your deposit and require them to hold
it in--
Mr. Capuano. But my $100 isn't it. They don't have to sit
on my $100 or, even 90 of those dollars, or 80 or 70 or 50 or
20.
Mrs. Yellen. What we want to make sure of is that the loans
that the bank makes are--
Mr. Capuano. Right, but you think--and I am not arguing;
you are the professional--roughly $6 is sufficient to cover
their needs in real times of crisis?
Mrs. Yellen. We have a number of different ways to gauge
how much capital they should have--
Mr. Capuano. But apparently some people on the other side
are saying, ``My God, that is too much. We can't keep that $6.
The heck with those depositors.''
Thank you, Madam Chair.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, chairman of our Financial Institutions
Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And, Chair Yellen, thank you so much for being here today.
Just kind of a refresher course. Some of my friends across the
aisle have been talking about how wonderful and rosy things
are. If you look at the GDP growth for the last several years,
every year it is less than it was the year before. And if I
recall, my high school math teacher called that a negative
trend line, which means you are going the wrong direction fast.
So along that line, yesterday, Chair Yellen, your testimony
in the Banking Committee over in the Senate tried to paint a
very rosy picture of lending in the United States, especially
for small business, and you cited independent national--the
National Federation of Independent Business study confirming
that thought.
But what you have failed to mention was that 65 percent of
the businesses that responded to the survey had no intention of
borrowing. Why?
Why did they not want to borrow any money? That is the
question. That is the concern.
Mrs. Yellen. I think that is a legitimate concern that
small businesses haven't seen rapid enough growth in their
sales and in business overall that they feel the need to
borrow. Of course, that is a concern.
Mr. Luetkemeyer. As I go home every weekend and I talk to
my small business folks, for the last several years it has been
a regulatory onslaught for them, and part of it is banking
regulation, which makes it difficult to get access to credit.
And I will just give you one quick example.
A banker friend of mine sold his bank to a larger bank and
the executive officer stayed in the bank, and over the last
year they made 3 loans--3 loans in the entire bank where he
normally made 30 per month. That is the kind of restriction of
credit that is going on in the real world.
So I guess my question to you is, when is the last time you
talked to a small business owner? Do you talk to small business
owners at all?
Mrs. Yellen. We do talk to small business owners.
Mr. Luetkemeyer. When was the last time you personally
talked to a small business owner?
Mrs. Yellen. We have groups that come in regularly to meet
with me and other Board Members.
Mr. Luetkemeyer. When was the last--can you give me a date?
Last week? Last month? Last year?
Mrs. Yellen. Probably within the last several weeks.
Mr. Luetkemeyer. Okay. Have you talked to a farmer lately?
Mrs. Yellen. Talked to whom?
Mr. Luetkemeyer. Have you talked to a farmer lately? He is
a small business person.
Mrs. Yellen. Not recently.
Mr. Luetkemeyer. Okay. One of the other concerns that I
have is because of this onslaught of regulations, and
especially in the banking community, you are one of the
regulators, there are obviously other groups of them here that
are--in my mind are problematic with the onslaught of rules and
regulations.
In my home State of Missouri, at the end of 2015, which is
the year before last--I haven't gotten the numbers for last
year yet--there were 44 banks total that totaled under $50
million. Those are the little bitty guys, but they service a
community, a very important small community someplace in my
State. Twenty-six of those lost money--26 of those 44 small
banks lost money in 2015.
Now, those are all targets for either closure or a merger,
and that is very concerning because, as I just stated, you wind
up with a small bank being absorbed by a larger bank. It cuts
the ability of small businesses in those communities to be able
to have access to credit as well as every consumer, whether it
is home loans or what.
And so that gets me then to my next concern, which is the
clearinghouse came up with a study--a report on your CCAR. And
in there it makes the statement that the Fed's process--CCAR
process--is restricting lending and thwarting economic growth,
particularly in small business and mortgage lending. What would
your response be to that?
Mrs. Yellen. I think that is a highly flawed study that was
used.
Mr. Luetkemeyer. A highly flawed study?
Mrs. Yellen. Yes, and I would disagree with its findings. I
could go into detail about what some of the flaws are with the
methodology--
Mr. Luetkemeyer. No. Give me an example, please.
Well, one flaw is that the clearinghouse estimates
effective risk weights produced by stress tests by looking at
the average quality of bank portfolios and not the quality of
marginal or new loans. And that is a huge difference because
the existing loan portfolio often has loans that were
originated that are encountering problems and--
Mr. Luetkemeyer. I don't disagree with you on risk
weighting. I am not a big fan of risk weighting either, and as
I go through the chart here it is amazing to me, you wound up
having to have more capital when you risk weight for small
business loans than you do for commercial industrial loans. Can
you explain that?
Mrs. Yellen. Our stress-testing methodology tries to take a
forward-looking and institution-specific approach and capture--
Mr. Luetkemeyer. Okay. Let me reframe the question. If you
have a small business loan at $50,000 and you have a large
industrial loan at $50 million, 100 times larger in size, tell
me where the most risk is to the bank?
Mrs. Yellen. I don't think that is the difference in risk
weights implicit in our stress test.
Mr. Luetkemeyer. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, ranking member of our Financial Institutions
Subcommittee.
Mr. Clay. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for your appearance today.
President Trump's proposals would have far-reaching
negative consequences for the economy. These harmful policies
include rolling back the Dodd-Frank Wall Street Reform and
Consumer Protection Act, cutting taxes for the wealthy,
curtailing immigration and deporting undocumented immigrants,
adopting a protectionist trade policy, eliminating the
Affordable Care Act, and cutting back the social safety net for
vulnerable population.
And the President has also reversed a planned Federal
Housing Administration mortgage insurance premium cut that
would have saved homeowners $500 a year, which may not be much
to some, but for a lot of moderate-income Americans, that means
something to them.
I consider the Trump agenda to be harmful to hardworking
American families, and ultimately catastrophic for the whole
economy.
Here is my question: After the recession of 2008, bringing
in some kind of regulation over--and responsibility--over our
financial institutions, including creation of the Consumer
Financial Protection Bureau (CFPB), have we not learned
anything since 2008?
And now we have this effort to roll back these regulations.
What do you think the impact will be on our economy if we do
this in a willy-nilly way?
Mrs. Yellen. Looking back, I think we know that consumer
abuses in lending and in securitization mortgage lending were
an important contributor to the financial crisis and can be a
source of financial instability in the future if we are not
attentive to those areas and potential abuses.
Mr. Clay. Do you believe that the CFPB has done a pretty
good job of protecting our consumer, of getting them money
back, and has been the backstop for our consumers? Let me hear
your opinion about the CFPB.
Mrs. Yellen. It is really for you to evaluate your judgment
on their performance. But they have had a broad agenda and
taken on attempts to regulate in many important areas.
Mr. Clay. Thank you for that response.
And I know that unemployment is down; however, I think more
work still needs to be done to reverse decades-long inequality
that has left middle-class workers, low-income families, and
minority communities behind.
Generational and systemic inequities continue to distort
progress and opportunity for tens of millions of Americans.
What can we do to address some of those concerns?
Mrs. Yellen. I agree with that, and I think this ongoing
inequality is something on which Congress should focus.
I think there are many public policies that are relevant.
They are largely not in the domain of the Fed, but they would,
for starters, involve focus on education, training, community
development, and other things that would improve the chances
for success of communities that have had historically serious
labor market problems.
Mr. Clay. And I appreciate that response, which tells me
that Congress should be about helping this economy and going
about the business of job creation and not looking to roll back
regulations that are there to protect the American consumer.
My time is up. Thank you so much for your engagement.
Mrs. Yellen. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from Michigan, Mr. Huizenga, chairman of our Capital Markets
Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman.
And, Chair Yellen, it's good to see you. This is my first
time not being able to engage you as Chair of the Monetary
Policy and Trade Subcommittee, as I am now chairing the Capital
Markets Subcommittee. I want to move on to a number of issues,
but quickly, do you plan to have lunch with Secretary Mnuchin
as often as you did with Secretary Lew?
Mrs. Yellen. Yes, absolutely. I look forward to a very
strong working relationship with him--
Mr. Huizenga. Right. That is something that we had talked
about previously. We pulled your public calendar, and over the
last 3 years--34 months, actually--there were 68 official
meetings that you had with Secretary Lew. You had 32 meetings
with Members of Congress, including 8 with the ranking member,
2 with the chairman, and one with myself as Chair of Monetary
Policy, and I think that is one of the reasons why I have
certainly advocated for you to come more often, and as part of
the FORM Act we had put in place a requirement to come up 4
times a year rather than 2 times a year.
I know some on the other side have thought that was
burdensome and intrusive. I think it is good communication. So
I appreciate you being here today.
Does the economy still need improving?
Mrs. Yellen. That is a very broad question and it goes--
Mr. Huizenga. That would seem either yes or no.
Mrs. Yellen. In many dimensions, yes.
Mr. Huizenga. Okay. I will take that.
Mrs. Yellen. Many disappointing aspects of U.S. economic
performance--
Mr. Huizenga. Okay. I will take that. We have seen a lot of
rosy scenarios painted by some. And I will fully admit, there
are incongruent data points here. The conflicting information
that comes, brings a couple of jokes to mind:
Have you ever seen a one-handed economist? No.
There are liars, damned liars, and statisticians.
You can make a lot of numbers say a lot of different
things, and I think we have heard some of those. But I am
curious, what is the U6 unemployment rate right now?
Mrs. Yellen. I believe it is 9.4 percent.
Mr. Huizenga. Yes. That is the information that I have, as
well, and you talk about that on page one. You don't talk
specifically about it. You do talk about the unemployment rate
being 4.8 percent. You don't mention that it is the 9.4
percent.
You do use a, I guess, charmingly phrased description here
of those marginally attached to the labor force to describe the
U6. I think that is quite problematic.
And isn't it true, Chair Yellen, that we are in the
slowest, shallowest, and most tepid recovery in the modern era
since World War II?
Mrs. Yellen. It took a long time for the economy to remove
labor market slack and get unemployment down and close--
Mr. Huizenga. Okay. That sounds like a yes, and for--
Mrs. Yellen. --growth has been slow in the process.
Mr. Huizenga. --an economist, that is pretty direct. Okay.
And is it not true that the Obama Administration is the
first Administration since World War II in the modern era which
has not returned the economy to pre-recession levels?
Mrs. Yellen. I would say that the economy is at pre-
recession levels now in terms of the unemployment rate and
other measures of the labor market--
Mr. Huizenga. Unemployment, not U6, according to the
numbers that I have seen. And is it not true that there have
been 30 quarters--not months--30 quarters of recovery?
Mrs. Yellen. Yes.
Mr. Huizenga. Right? Okay. I think that was talked about.
But pretty tepid recovery, don't you think, that it has taken
30 quarters to recover to that level, even if it is close?
Mrs. Yellen. We have had a very deep downturn.
Mr. Huizenga. I fully understand that. But isn't it true
that the labor force participation rates are at record lows?
Mrs. Yellen. The labor force participation rate is largely
declining because we have an aging population--
Mr. Huizenga. Whoa, whoa, whoa.
Mrs. Yellen. --and it will continue to do so.
Mr. Huizenga. Hold on. Hold on. Hold on. I have to throw
the flag on that one because there is an MIT economist report
that just came out recently, which found that younger workers
are not entering the labor force but older workers are, and
that is the only growth area and the only demographic which is
seeing increases is older workers.
You are starting to sell a little flimflam here on, ``No,
no, it is because we are an aging demographic.'' But the only
demographic that is entering the workforce, according to this
study, is the older worker. So--
Mrs. Yellen. The labor force participation rate of older
workers is rising, but their prevalence--they work very much
less, although they work more than previous generations did.
Labor force participation--
Mr. Huizenga. They are hard workers. I am the product of
one of those.
Mrs. Yellen. --falls dramatically when people get into the
retirement years--
Mr. Huizenga. Well, in my--
Mrs. Yellen. --and their fractions in the U.S. population--
Mr. Huizenga. Okay.
Mrs. Yellen. --are increasing.
Mr. Huizenga. In my remaining 10 seconds here, I just want
to know, isn't it true that if we would have thrown off the
shackles of unreasonable regulation, we would have had a
faster, steeper recovery?
Mrs. Yellen. I would not generally agree with that.
Mr. Huizenga. You would not generally agree with that. So
more regulation would have caused faster recovery?
Mrs. Yellen. By cleaning up our financial institutions and
requiring them to build their capital buffers--
Mr. Huizenga. I did use the word ``unreasonable.''
Chairman Hensarling. The time of the gentleman has expired.
Mr. Huizenga. Unreasonable regulation.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Good morning, Madam Chair.
And thank you, Mr. Chairman, and Ranking Member Waters.
Chair Yellen, welcome back to the committee. I do want to
talk about a couple of the statements coming out of the White
House that are similar to statements made by the chairman in
his bill, the Financial Choice Act. There have been extensive
complaints that the level of regulation created in Dodd-Frank
has prevented small businesses and other businesses from
getting loans.
Now, I am in Massachusetts. I realize it is a--it may be an
outlier. We have a very strong economy and the lending
institutions there, I would say the environment is very robust.
But is there any evidence--I talk to my colleagues from
around the country. Is there any evidence that folks aren't
getting loans? Because that--I have not run into any evidence
of that.
Mrs. Yellen. Loans, core loans, and C&I lending has
certainly increased at a solid pace in recent years. Survey
evidence that I have cited from small business owners suggests
that they do not see inadequate access to credit as a
significant problem--
Mr. Lynch. Can you talk about those surveys?
Mrs. Yellen. The National Federation of Independent
Business's most recent survey shows that only 4 percent of
business owners regard themselves as not having all of the
loans available to them that they would ideally like. I can't
remember the exact wording.
Mr. Lynch. So 96--that would imply--
Mrs. Yellen. So 96 percent are fully satisfied with their
access to credit. And only--
Mr. Lynch. That would seem good to me. I don't know, am I
missing something?
Mrs. Yellen. No. And only 2 percent list inadequate access
to credit as their most significant problem.
Now, I think for some small businesses they do access
credit, for example, not by taking out traditional business
loans but, say, by borrowing against a home equity line of
credit.
Mr. Lynch. Okay.
Mrs. Yellen. And I think that the decline in residential
property prices may have impaired that borrowing route for some
small businesses. It wouldn't show up in these numbers, but
generally access to business loans looks to me by most metrics
to be quite adequate.
Mr. Lynch. Thank you.
One of the other efforts in the Dodd-Frank repeal in the
Financial Choice Act would be repeal of the orderly liquidation
authority that was included in Dodd-Frank to preclude taxpayer
bailouts in the future. I actually voted consistently against
the bailouts for our banks because people in my district who
didn't even have bank accounts were being asked to bail out the
banks which had put our economy in the toilet.
What do you think about removing the orderly liquidation
authority in Dodd-Frank?
Mrs. Yellen. I would not want to see it removed, although I
do think that bankruptcy should be the main vehicle for
resolving a firm in distress. We have put in place protections
that both make it much less likely that a firm would fail,
would ensure that if it did that there would be sufficient debt
and equity to recapitalize the firm.
I know that the Choice Act proposes changes to the
bankruptcy code that I think would be helpful in making
bankruptcy work as a preferred option, but I think orderly
liquidation is a backup procedure. We don't know what the
circumstances might be in which a firm might fail.
An issue in bankruptcy is that firms commonly need
liquidity; they need access to the equivalent of debtor-in-
possession financing. Title II provides that kind of liquidity
and puts the burden on the financial sector itself, not U.S.
taxpayers, for bearing any burdens that may be incurred.
And I do continue to worry with bankruptcy. Although we are
working closely with firms to make sure they have liquidity
plans that would enable an orderly bankruptcy, that is always a
concern.
Mr. Lynch. Thank you.
Mr. Chairman, my time has expired. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Housing and Insurance Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman.
Chair Yellen, welcome. You have a wonderful poker face. You
testify well, but I must say that your staff behind you does
not.
It is interesting to watch your staff as the political
shots are taken. You can't see them because they are behind
you, but as the political shots are taken from the other side
of the aisle, the little smiles and joy that they take behind
you and the grimaces that come from our side, I just want to
point that out. They do not have the poker face that you do.
You talked briefly about regulation. I will just make this
point, not a question. You don't necessarily see regulation as
a problem today with regard to economic growth. However, you
did, the last time you testified, answer questions from me
where you did note that they were a headwind to economic
growth.
So I am seeing a little difference in your testimony. I
don't know if that has anything to do with the election and Mr.
Trump's Executive Order to wind back some of the over-
burdensome regulation or not. Just an observation.
But a question for you: The size of a bank--is there any
correlation with large banks and systemic risk, in your
opinion? Or can there be a correlation between the size of a
bank and systemic risk?
Mrs. Yellen. It is not the only measure of systemic risk--
Mr. Duffy. Right.
Mrs. Yellen. --but it is generally true that the largest
banks give rise to the greatest systemic risk.
And I would like to just clarify, I think we should be
concerned, and I am concerned with regulatory burden. And if I
haven't made that clear, that is an oversight on my part.
I didn't agree that regulation was the key factor resulting
in slow growth, but we are concerned about regulatory burden. I
am committed to doing everything that we can--
Mr. Duffy. Thank you for the clarification, yes.
Mrs. Yellen. --to reduce it, and I do want to clarify and
make that clear.
Mr. Duffy. Thank you for the clarification. I appreciate
that.
So you will acknowledge it is a factor, the size of a bank
as it relates to systemic risk. Since Dodd-Frank has passed,
have the largest banks in America gotten bigger or smaller?
Mrs. Yellen. Probably bigger.
Mr. Duffy. It is easy. Bigger, that is right.
Have we seen an increase in the number of small community
banks that dot rural parts of the country, like from where I
come from, or have we seen a contraction of smaller community
banks and credit unions?
Mrs. Yellen. There is a consolidation--
Mr. Duffy. There is a consolidation, right. So since Dodd-
Frank we have seen big banks get bigger and we have seen a
consolidation or an eradication of small community banks and
credit unions.
Question for you in regard to the crisis: Did mortgage-
backed securities have anything to do with the 2008 crisis?
Mrs. Yellen. Of course.
Mr. Duffy. Of course they did. And do you know what reform
came from Dodd-Frank in regard to mortgage-backed securities,
Fannie Mae, and Freddie Mac? Was there any reform to Fannie Mae
and Freddie Mac?
Any GSE reform in Dodd-Frank to address one of the great
causes of the crisis, which was mortgage-backed securities? Did
Dodd-Frank address GSEs?
Mrs. Yellen. It remains an open matter.
Mr. Duffy. It remains an open question. Right, because one
of the main drivers of the crisis, GSEs, weren't even
addressed. They did nothing. On the root driver of the crisis
they left it alone, which is concerning for us.
Now, hopefully in the next year-and-a-half we are going to
be able to address our GSEs, but the promises were great about
all the good that would come from Dodd-Frank, but we can't
underestimate what has happened since it has been passed, where
big banks have gotten bigger and we have seen the small
community banks that serve my community--it is nearly
impossible for them to survive, let alone thrive, with the
regulatory burden.
I want ask you about the labor participation rate based on
Mr. Huizenga's questions, the lack of President Obama hitting 3
percent growth. Not since President Hoover has that happened.
But with the conversation about border adjustment tax, do
you have any opinions on the conversation that is now taking
place in the House and the Senate and the White House on what
that does to bring jobs back to America, what that does to the
economy?
Mrs. Yellen. I don't think it is appropriate for me to
weigh in, in detail, on a specific fiscal measure--
Mr. Duffy. So 30,000 feet. Not specifics, but 30,000 feet.
Good idea? Well over 100 countries have some border adjustment,
right?
Mrs. Yellen. It is a complicated policy, the effects of
which--
Mr. Duffy. But many countries have this?
Mrs. Yellen. Yes.
Mr. Duffy. Yes.
Mrs. Yellen. In connection with VAT taxes.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Thank you.
Welcome, Chair Yellen. First of all, I want to say thank
you. I want to thank you for our work over the past 2 years
together in dealing with and addressing this alarming high
unemployment rate in the African-American community, and that
is especially rampant within the African-American community of
young African-American men ages 18 to 39.
I also appreciate your suggesting to us when we discussed
it that inflation and unemployment is, indeed, your dual
mission, but when it comes to targeted unemployment like this,
you have only a blunt instrument. And what we should do is go
and develop legislation. And in response to Mr. Clay earlier,
you again reiterated that.
So now we have done that, and we have two very important
pieces of legislation that address that by myself and my co-
sponsors, Kevin Cramer of North Dakota, Republican; my good
friend, Reverend Emmanuel Cleaver, Democratic co-sponsor from
Missouri; Mia Love, of Utah; Mrs. Beatty, of Ohio. And
certainly, we believe--along with Pete Sessions, who is at the
Rules Committee.
But here is our issue right now: We need some help in
getting a meeting with the President of the United States. This
is why, as you know, the job component and training will be
attached to his efforts to rebuild the crumbling
infrastructure.
Secondly, the administration of this part of our
legislation will be through his Secretary of Labor. And then on
our education piece, in which we are asking for $95 million to
help these struggling, hardworking African-American 1890s land
grant institutions like Tuskegee University and Florida A&M,
Fort Valley, Prairie View A&M in Texas, Lincoln University up
in Missouri. But we have been unable to get a meeting.
We are at dead water, and I call upon you to ask President
Trump if he would be kind enough just to give me and my co-
sponsors an opportunity to come over to the White House and
talk to him about these bills, because it has to be a
partnership here. His Administration would have to administer
it; we can only produce the policy. But if we can't get a
chance to get in to talk to the President, how are we going to
get his buy-in?
Chair Yellen, President Bush said on numerous occasions
that he wanted to help the African-American community: ``What
the hell have you got to lose?'' he said over and over.
Well, give us that chance.
I ask you to put the unemployment side of your mission hat
on. Nobody, no Federal agency has unemployment as a mandate as
the Fed does. So you have good credit to be able to go to
President Trump and say, ``Mr. President, I am not endorsing
any legislation over there, but there is a very good package of
bipartisan legislation that goes to the heart and the soul of
the most devastating issue facing the African-American
community today.''
Tell him that we now have more African-American young men
ages 18 to 39 in the prisons or on probation or parole with
felony convictions. All hope is gone for them. But the problem
is there is a train leading more and more of these young men
there. But if we can get those scholarships into these African-
American colleges for these kids--the agricultural business and
science and technology is reaching out.
And I thank you for your efforts in doing that.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Missouri, Mrs.
Wagner, chairwoman of our Oversight and Investigations
Subcommittee.
Mrs. Wagner. Thank you, Mr. Chairman.
Chair Yellen, thank you for joining us today. I, too,
noticed yesterday before the Senate Banking Committee that you
agreed with the core principles that were part of President
Trump's Executive Order calling for a review of the U.S.
financial regulatory framework, and I thank you for that.
I hope that you will work with newly confirmed Treasury
Secretary Mnuchin on identifying some of the regulations on the
books that conflict with these principles. We have had a robust
discussion about regulations.
This Executive Order requires you to consult with Treasury.
What are you doing specifically, Chair Yellen, to identify the
regulations that inhibit these core principles?
Mrs. Yellen. We look forward to working with the Treasury
Secretary on this project and we will cooperate fully once it
is under way. I think he has only been in office for a day. The
process is not yet established, but we look forward to
participating in it.
Mrs. Wagner. We look forward to hearing about that process
as it goes forward and how you will be participating and
coordinating with him.
As you know, President Trump has signed a few other
additional Executive Orders relating to regulations--most
notably, an Executive Order issuing a regulatory freeze and an
order repealing two regulations for each new regulation
proposed.
I understand that the Federal Reserve, as an independent
agency, is exempt from these Executive Orders. However, Chair
Yellen, do you plan on volunteering to comply in any capacity
with these orders?
Mrs. Yellen. In the past when there have been similar
freezes put in place the Fed has--when it has had a rulemaking
that has been well-telegraphed, under way for a long time, it
has continued with the regulatory process, and I would expect
that--there is nothing that we have put in place recently that
was not well understood or ready, or most of what we would be
looking at would be notices of proposed rulemaking where there
would be plenty of opportunity for comment by those who might
be appointed to our Board, Members of Congress and others.
Mrs. Wagner. I thank you for that. I hope that you will be
willing to voluntarily comply with these orders as you go
forward when it comes to any additional rule-letting. As you
know, and has been discussed in this hearing and to that point,
the position of the Fed Vice Chair for Supervision has remained
vacant since the passage of Dodd-Frank, and I hope that our
President will be nominating a capable person to fill that
position.
Since Governor Tarullo, who has been performing many of the
regulatory coordination functions of that role in the meantime,
has indicated that he is going to be resigning in April, what
remaining regulatory agenda items, since we are discussing
that, are being planned until he leaves?
Mrs. Yellen. We have a relatively light schedule. We do
have one possible rulemaking.
Mrs. Wagner. And what is that, ma'am?
Mrs. Yellen. I don't know what the timetable would be. It
pertains to our stress tests and what is called the Stress
Capital Buffer that came out of our 5-year review. I don't know
just what the timetable is--it has been in the works a long
time and I think the financial community is aware--
Mrs. Wagner. Do you think that there is some benefit,
ma'am, in waiting until we are able to nominate and confirm a
Vice Chair for Supervision to weigh in before pressing on with
further regulatory initiatives?
Mrs. Yellen. If we were to come out with it, it would be a
notice of proposed rulemaking, and a new Vice Chair for
Supervision would certainly have a chance, along with others,
to weigh in on that.
Mrs. Wagner. Thank you, Chair Yellen.
In my limited time, I applaud the Federal Reserve for
recently providing some limited relief to financial
institutions from the qualitative, I will say, portions of
stress tests, or CCAR.
As you know, the GAO issued a report late last year with
several criticisms and recommendations regarding the stress
testing process, particularly in regards to transparency. What
are the Fed's plans for considering and implementing the GAOs
recommendations, ma'am?
Mrs. Yellen. We certainly value and accept those
recommendations and intend to implement them in our--
Mrs. Wagner. Thank you. Does the Fed have any plans on
doing a more comprehensive review of how it conducts stress
tests?
Mrs. Yellen. We are completing a 5-year review that is
comprehensive, and those changes that you mentioned that
relieved burdens for a large number of medium or larger size
banking organizations, that in one of the outcomes of that.
Mrs. Wagner. Thank you, Chair Yellen.
I yield back my time.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green.
Mr. Green. Thank you, Mr. Chairman.
And I thank the ranking member, as well.
And thank you, Madam Chairlady. It is an honor to have you
with us. You have done an outstanding job, in my opinion, and
you have tried as best as you can to help us to maintain your
mandate.
I would just like to mention initially that President Obama
has made efforts, and many Members of Congress--David Scott,
the Member from Georgia, just mentioned his efforts to bring
down unemployment as it relates to African-Americans, more
specifically African-American males. Congressman Jim Clyburn
has a plan that he calls 10-20-30. The President had a JOBS
Act. We have tried to have summer job training programs. So
there have been efforts made to try to bring down the high rate
of unemployment in the African-American community as well as in
other communities.
But it seems that some of the obstacles include this
process or premise that we can engage in expansionary fiscal
contraction and that will eliminate some of the problems. There
is a fiscal austerity program that has been implemented by my
colleagues on the other side. And these things have actually,
in my opinion, been a hindrance.
So, given that Congress has not acted appropriately and
given that there is this high rate of unemployment in the
African-American community, I am calling on the Fed to do a
little bit more. And I ask that you do this because I have
received an executive summary that I would like to share with
you. It is styled, ``Experiences and Perspectives of Young
Workers.''
This is from December 2016, and this summary gives me
information, including the following: ``The Federal Reserve
conducted its first survey of young workers over November and
December 2013 to develop a deeper understanding of the forces
at play,'' meaning the reasons why young workers may be having
employment problems.
``In December 2015, the Federal Reserve conducted a second
survey of young workers to further explore market issues and
trends among this population.'' You go on in this report to
indicate some of the outlook expectations. Young adults with a
paid job are more optimistic than those without a paid job.
Among young adults, steady employment remains more important
than higher pay--steady employment, important.
You go on to indicate that many young adults gain early
work experience during high school, college, or both. Early
employment develops a good work ethic.
And then full-time employment is also correlated with a
positive outlook and job satisfaction. So what you have done
with this survey, this report, is get some sense of what is
happening with young adults.
I have not seen a similar report for the African-American
community. Does such a report exist?
If it does, I would like to peruse it. If it does not
exist, I believe, Madam Chair, that you have the mandate and
the authority to produce such a report.
At some point we have to study, and give empirical
evidence, as to why African-American unemployment is almost
always twice that of White unemployment. Pick any period of
time, pick any President, pick any Administration, and this is
a consistent number that you will find. Twice as much as White
unemployment.
We need the empirical evidence so that we can use that here
in Congress to promote better legislation. Possibly, we have
not given the proper legislative answer.
Can the Fed do this? If it has already done it, I would
love to read the report.
Mrs. Yellen. I am not aware that we have already done it,
but we have a great deal of research going on in the Fed, and I
would encourage people at the Fed and will discuss it with
them, trying to look more carefully at this.
Mr. Green. Let me assure you that this will be a quantum
leap forward to receive empirical evidence from the Fed as to
why we have this constant number of 2 times White unemployment.
That would be a quantum leap forward.
I am going to beg, Madam Chair, that you do what you can to
get this done such that maybe when you are back the next time
we can discuss some of these issue related to why African-
American unemployment is so high.
And I would also add this: Much of what I read here
explains some of what is happening in the African-American
community--no summer jobs, no jobs early in life, no
opportunity to develop a work ethic. These things are
important, and I beg that you help us. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
King.
Mr. King. Thank you, Mr. Chairman.
Chair Yellen, I am concerned about proposals that would
change the composition of the FOMC by removing the vice
chairman position and the New York Fed's permanent voting
status. That strikes me as misguided, since the New York Fed
has responsibilities that no other district bank has, including
carrying out our country's monetary policy on behalf of the
FOMC and the entire Federal Reserve System.
Could you discuss some of the differences between the New
York Fed and the other district banks? And would you say that
the New York Fed has unique institutional knowledge of the
financial markets?
Mrs. Yellen. The New York Fed has long had a special and
important role in the Federal Reserve System. It has long been
the bank that is involved in the markets for us, conducts our
open market operations, plays an important role in gathering
market intelligence and understanding financial market trends,
and because so many especially large banks are headquartered in
New York, has very large supervisory staff that plays an
important role in our supervision program.
And the decision that the president of the New York Fed
should serve as the FOMC vice Chair and vote at every meeting
reflects that traditional role. I think it is something that
has worked well.
Mr. King. Not to put you on the spot, but the presidents of
the Federal Reserve Banks of San Francisco, Atlanta, Chicago,
and Cleveland have all publicly stated that they support the
current structure of the FOMC and a permanent seat for New
York. Do you agree with that?
Mrs. Yellen. I think we have a structure that works well,
and I am not seeking changes to that aspect of it.
Mr. King. I will not push my luck, and I will accept that
answer.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver, ranking member of our Housing and Insurance
Subcommittee.
Mr. Cleaver. Thank you, Mr. Chairman.
And thank you, Madam Chair.
Two Saturdays ago in Kansas City, Missouri, where I reside,
I held a town hall meeting where the media said 1,000 people
showed up, but it was probably about 1,100, on the Executive
Order on immigration, and people showed up with great fear. And
this past Saturday--I was in Baltimore on Saturday evening and
all of a sudden my cell phone started ringing, just one call
after another, and there was widespread panic in Kansas City in
the clergy community.
Across-the-board, Catholics, Protestants were all
concerned--there is a pastors' phone chain, so people were
calling each other--that ICE would be at churches on this past
Sunday arresting immigrants--undocumented immigrants. It was
such a big deal that if your staff or if any of my colleagues'
staff would like to check, it is a front-page story in the
Kansas City Star on the rumor. All three--well, four--networks
did stories, and so they were calling asking me, ``How many ICE
agents are coming in?''
It was just an awful kind of a thing, and I felt terrible
because I was in Baltimore and was unable to be there.
How this connects with you is, I am just wondering, if
there is some success at deporting 11 million immigrants, do
you think that will have any kind of impact on the U.S.
economy? If we were able to just get rid of all of the
undocumented workers by next Thursday, do you think there would
be any impact on this economy?
Mrs. Yellen. Immigration has been an important part of
labor force growth in the United States for some time now. We
are in a period in which one factor responsible for slowing
growth is slower labor force growth, and a radical change in
immigration would certainly affect the potential of the economy
to grow.
Mr. Cleaver. I will convey that. And the preachers were
concerned because they had read about a guy who said, ``I was a
stranger and you took me in.'' It was in a book. And so they--
based on that, they thought they had an obligation to respond
affirmatively.
The other thing is that I think in 2012, the Fed did a
study on the housing collapse that we experienced, which
triggered the 2008 economic recession. And over the years, for
whatever reason, the GSEs have been blamed for the economic
collapse, that they set policies that allowed them to give
loans--actually they don't give loans; they were buying loans.
But they were blamed for the economic collapse.
Your study says otherwise. Can you shorten that into a
paragraph?
Mrs. Yellen. A wide range of problems in the mortgage
market, I think, led to the crisis, and the GSEs were probably
not the critical part of what caused it.
Mr. Cleaver. I have too many questions. In all the effort
to repeal Dodd-Frank, there is a section in there where the
wording is not as strong as I am saying it, but they are
essentially saying that we are going to give oil companies the
right to bribe elected officials or officials in company--in
countries. So we are removing a section of Dodd-Frank so that--
so bribery is now a part of--or it is again a part of the way
in which U.S. companies operate in foreign countries.
My time ran out. I apologize.
Chairman Hensarling. The time of the gentlemen has expired.
The Chair wishes to advise Members that I intend to
recognize Mr. Royce, Mrs. Beatty, and Mr. Pittenger, and then
declare a 10-minute recess.
The gentleman from California, Mr. Royce, the chairman of
the House Foreign Affairs Committee, is recognized.
Mr. Royce. Thank you very much, Mr. Chairman.
And, Chair Yellen, it's good to see you.
I would like to follow up on a question here about capital.
We know on the one hand that over-leveraged institutions are
vulnerable to market shocks, and we remember the consequences.
If you look back at the over-leveraging of the investment
banks, for the large ones 40-to-one. And if you look at the
GSEs that were leveraged at that time, over 100-to-one. And
that was in the lead-up to the financial crisis.
And so we can see that capital standards must play a role
in building resilience in the U.S. financial system. On the
other hand, raising capital also has a cost to the economy and
a cost in terms of what it does to the potential for growth.
So what we have here is a classic cost-benefit test. There
is a benefit to higher capital standards. They reduce the risk
of a future financial crisis and bailouts as well as
potentially increasing tax revenues.
And while the cost will be borne by borrowers in the form
of higher funding costs, and the economy as a whole with less
capital formation and a lower GDP, you have that on the other
side of the equation.
So as you have said in the past, the cost-benefit analysis
is difficult work. And I agree. It is not easy.
But it is not impossible and it is important. In 2010, the
Basel Committee did some work on this subject, and also
researchers at George Mason recently published a paper on the
benefits and costs of a higher bank leverage ratio.
So how do we get to the right number? Should it be 5
percent? The 10 percent in the Choice Act? Or 23.5 percent, as
proposed by the Minneapolis Fed President?
There is quite a range there. And I don't expect you to say
a number today, but can't you agree that a cost-benefit
analysis could help us more effectively require that capital?
And I will start with that question.
Mrs. Yellen. I do agree that in deciding on the appropriate
level of capital standards, we are weighing costs and
benefits--the benefit of a lower probability of a financial
crisis that has incredible high costs against the cost of
slightly higher intermediation and borrowing costs. And as you
indicated, Basel III was partly informed by the Basel
Committee's analysis of those costs and benefits, and the
Federal Reserve participated in producing that analysis. And I
think it did inform our views as to what a reasonable level of
capital requirements would be.
The Minneapolis Fed study that you mentioned also contains
cost-benefit analysis and draws the line differently.
Mr. Royce. From my standpoint, it seems to me that the Fed
would be best suited to conduct the analysis and the research
on this. And as you are explaining here, we have such a range
of opinion, although we agree on the basic concept here.
So my question would be, short of us mandating the Fed to
do it, would there be a way for you to try to move forward and
approximate what that ratio should be?
Mrs. Yellen. Through different aspects of it. As I said, we
did do cost-benefit analysis, and it informed our judgments at
the time. You have referred several times to a leverage
requirement--
Mr. Royce. Right.
Mrs. Yellen. --and I think our understanding of the risks
facing banks lead us to think that a simple leverage
requirement would not be an adequate way to determine capital.
In particular, a simple leverage requirement treats the risk
associated with the U.S. Treasury and a junk bond identically,
and we think that capital requirements need to be risk-
sensitive with a leverage ratio serving as a backup--
Mr. Royce. No, I understand. It might not be sufficient,
but in terms of having it be a component, it seems to me that--
well, there is another question I wanted to ask you, too, and
that is yesterday you told Senator Crapo that the goal of
bringing private capital back into the mortgage market is
important and that you hope that if there are guarantees in the
secondary mortgage market, that they would be recognized as
priced appropriately.
It is my understanding, then, that you believe that the
pre-GSE model of private gains and public loses did not price
the government backstop appropriately.
Mrs. Yellen. I think that is correct.
Mr. Royce. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Ohio, Mrs.
Beatty.
Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member
Waters.
And thank you so much for being here, Chair Yellen. In the
form of me trying to be consistent with questions, I would like
to repeat a question that was asked by me before. Certainly, as
you know, I have a strong interest in making sure that we have
equality and equity as it relates to employing women and
minorities.
So I want to start with first thanking you for responding
in writing, and not only in writing but detail, to that
question. I know in the Senate hearings that Senator Brown also
posed some questions as we look at the Federal Reserve Bank and
what is happening.
I know we have a couple of openings since our last
conversation here, but let me just say if there are any
additional things for the first part--I have two questions--
that hopefully you can share we are, if we are making any
headway. Because I also pulled some facts, and according to the
Fed Up campaign at the Center for Popular Democracy, it states
that the board of directors was 83 percent White and 70 percent
male.
Under the Federal Reserve Act, the Board of Governors has
the authority to appoint class C directors. Can you describe
that process for appointing class C directors or give me any
brief update on where we are? Because I am thinking about
reintroducing my bill that was patterned after the Rooney Rule
with the Beatty Rule, that if there is an opening all we are
asking is that you have a pool of candidates in there.
Mrs. Yellen. We are very focused on achieving diversity in
our class C directors--more broadly, on the boards of directors
of all of the Federal Reserve banks and their branches. We
engage in ongoing at least yearly evaluations of the progress
of the reserve banks in achieving diversity. We insist on
recommendations from the reserve banks that will enhance
diversity; make sure that there is adequate representation of
women and of minorities; that we have sectoral diversity, as
well; that consumers, labor, and nonprofits are represented.
It is a constant focus and we give feedback to the banks to
inform their search for directors. I do believe we have made
progress on it and achieved greater diversity. I will say that
it is a very high priority for us.
Mrs. Beatty. Thank you very much.
Chair Yellen, I just learned that last month you did
something which seems unique or different. The Federal Reserve
held a teachers town hall meeting. And I thought that very
interesting and very pleasing because financial literacy is
something to which I have dedicated probably the last 2 decades
of my career.
And I am very pleased to say, Mr. Chairman, and Ranking
Member Waters, that I have been appointed as the new co-Chair
of the Financial and Economic Literacy Council, with my
Republican colleague, Steve Stivers.
Was there anything in this town hall that you can share as
it relates to the financial literacy or it relates to something
we should be looking at? And maybe this could be a bipartisan
thread and we could get your staff to laugh or smile with that
because it would be so positive that we would have a Democrat
and a Republican working together.
Mrs. Yellen. Perhaps we can give you some more detailed
feedback if that would be helpful. I mainly answered questions
that a group of economics educators had for me about what they
should be teaching their students about the Federal Reserve. I
was asked about diversity in the economics profession and what
could be done to foster diversity and shared some thoughts on
that topic and why it is that perhaps women and minorities are
not attracted into economics, even as a major in college, in
the numbers that one would want and expect.
But on financial literacy, maybe we can give you some more
detailed feedback.
Mrs. Beatty. Okay. Thank you so much.
Mr. Chairman, I yield back.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
Good afternoon, Chair Yellen.
Chair Yellen, there has been much said today regarding the
different economies, what is--I heard my good friend Mr. Meeks
in his performance, and basically a diatribe of market-driven
economies and lauding the highly regulatory policies of this
last Administration.
But in North Carolina, we kind of have a way of conveying
this. It is like trying to dress up a pig and put perfume on
it. It doesn't really look as good as it is. The outcomes
really reflect something different.
He had mentioned that there had been 16 million jobs
created from this economy. And when you look at 8 years, that
is 200,000 jobs a month.
So comparing that to the time that I lived in Washington
back in the 1980s when Ronald Reagan was President, he
inherited an economy that was very weak. There was 20 percent
interest rates, high inflation, high unemployment.
And after 2 years with an independent Fed, reduced
regulatory burden, and reduced tax threshold, the economy grew
and began to grow exponentially--300,000 then 400,000 and
500,000 jobs a month; 1 month a million jobs. And we were
growing at one point at 6 percent growth.
We look now at an economy that hasn't even reached 3
percent economic growth, the only Administration since World
War II that hasn't been able to achieve that objective.
I would say to you, Chair Yellen, given that and really the
number of American people who are just living at the margins,
just around the kitchen table, they are struggling. They came
out in droves in this last election because they are upset. It
hasn't worked.
Do you feel that there are different policies that should
have been made in hindsight, that you missed something? In
business, we have a way of assessing what we do right and what
we do wrong. But have we missed the mark?
Have we not--we clearly didn't achieve the objectives that
were intended. Low-income, minority people, frankly, that
demographic group have moved the least up the economic ladder
than any group in the country. And certainly that was a focus
of the folks you were trying to help.
So I would really like to get your analysis of what we
missed. And is there something in our monetary policy we could
have done differently? How about regulations and oversight?
What would you do different today if you were given the chance?
Mrs. Yellen. I think that the trends that you described
that have left so many Americans feeling frustrated with the
labor market and their economic circumstances and success date
back to well before the financial crisis, probably back to the
mid-to late 1980s. And we saw the character and composition of
jobs changing in the United States.
Mr. Pittenger. With all due respect, Chair Yellen, if I
could interrupt, we don't have a lot of time. This recession,
the President, he was only in recession 2 months out of his 32
months. So, he had a chance. And these policies had a chance,
and yet they didn't work.
I would like to ask you a couple of other things, though.
Relative to community banks, you made the statement that
you are concerned about what has happened with community banks
in this country. In North Carolina, we have lost 40 percent of
our banks since 2010. That is a major impact on our economy and
access to capital and credit.
Do you believe that there should have been or should be
today--would you advise us to reduce the regulatory burden on
these community banks?
Mrs. Yellen. Yes. And I think we should be heavily focused
on using every tool available to us to reduce regulatory burden
on those banks.
We ourselves and with other banking agencies have taken a
number of important steps, and I think it is--and we will
continue--
Mr. Pittenger. But you would advise the Congress to be
fully engaged in trying to--
Mrs. Yellen. I would be, yes.
Mr. Pittenger. Yes, ma'am. Thank you very much.
Chair Yellen, Secretary Lew argued that China has become,
in his words, more adept at communicating its policy path in
its analysis of its own economy, which will avoid confusion and
instability in the global economy. Do you agree with Secretary
Lew on his assessment of China?
Mrs. Yellen. I am not privy to all the detail that he may
have given--
Mr. Pittenger. But in principle?
Mrs. Yellen. --on that.
Mr. Pittenger. The principle is there, the greater
oversight, communicating policies. Do you think that is a
healthy thing?
Mrs. Yellen. I do think it is a healthy thing,
Mr. Pittenger. In like manner, would you say that if it is
true for China that it should be true also for our country, for
our Fed, that maybe we could be more up front and the public
could understand our policies? We have the FORM Act that lays
out commonsense steps to achieve this, and I would just like to
know your perspective on that. There are many Federal Reserve
officers who concur, Nobel Peace Prize winners that agree, as
well.
Mrs. Yellen. Transparency is an important objective, and we
are always looking for additional steps. I think it has been
improved. I think, as you know, I am not a supporter of the
FORM Act that would chain the Fed to a simple rule. I think
that would result in poor economic performance. And while
understandability and predictability are important goals--
Mr. Pittenger. My time has expired, Chair Yellen.
Mrs. Yellen. --what matters most at the end of the day is
economic performance--
Chairman Hensarling. The time of the gentleman has expired.
The Chair will now call a recess of the committee for 10
minutes. Members are advised that we anticipate reconvening in
10 minutes.
We intend on adjourning the hearing at approximately 2
o'clock and we anticipate one intervening vote series. The
committee stands in recess.
[recess]
Chairman Hensarling. The committee will come to order.
Members are requested to take their seats.
The Chair now recognizes the gentleman from Connecticut,
Mr. Himes.
Mr. Himes. Thank you, Mr. Chairman.
Chair Yellen, thank you for being with us today. I always
appreciate your testimony and the very good work that is done
and summarized in this report to us.
I have a couple of questions for you, starting with, I want
an opportunity just to sort of reflect on and maybe ask a
question about the economic narrative that we are getting and
that we have gotten for so long from the Majority.
I was here 8 years ago, sworn-in, in a month when the
economy lost almost three-quarters of a million jobs. We were
handed--I think the technical economic term would be a
``dumpster fire'' of an economy, and took a number of measures,
including the Recovery Act and then regulatory measures to
stabilize the financial sector, which was on its knees. Every
single one of those measures, of course, was opposed by my
friends on the other side of the aisle.
My question, though, is, we are now accused of--you are
accused and we are accused, and I think we are probably
properly accused of not doing enough to spur economic growth.
The Fed certainly is. And we have heard that.
Apparently, growth of 2 percent is not the 4 percent
promised by President Trump. And apparently we could have done
better.
I guess my question to you is--my memory of economics is
that economic growth in the end is a function of population
growth and productivity growth. So I guess my question is--and
I have looked at other industrialized countries' OECD growth
rates, and actually the growth of 1.9 percent over time is not
inconsistent with other industrialized countries.
So I wonder, as an economist, whether you agree that our
growth rate has been in some way artificially held back or
whether we are just sort of operating the way economies
operate, growing at just below 2 percent?
Mrs. Yellen. When an economy suffers a deep recession and
unemployment is very high, output is well below the economy's
potential, and it can grow more rapidly than the pace dictated
by population or labor force and productivity. But once the
economy is operating at its potential and unemployment is in
the neighborhood of full employment, as it is now, then I would
certainly agree that it is labor force growth and productivity
that dictate the pace of growth.
Unfortunately, that looks like it is a little bit under 2
percent for the U.S. economy. Labor force growth has slowed and
productivity growth has been very disappointing. And to speed
that up we would have to see an improvement in one or both of
those things.
Mr. Himes. I have been reading these reports since I have
been here, and the reports have always listed factors that have
perhaps dampened growth. And I remember the housing hangover
was cited some years ago, uncertainty, and issues of aggregate
demand.
This report has never highlighted regulation as a
material--and I do mean material; I understand that
overregulation can, in fact, have a quashing result--but this
report has never cited regulation as a material factor in
dampening U.S. growth.
Is it the opinion of the economists at the Federal Reserve
that regulation has really been a material brake on the U.S.
economy in the last 8 years?
Mrs. Yellen. Investment spending has been quite low, and we
have tried to understand what some of the factors are that are
responsible for it. Businesses in surveys do cite regulation,
taxes, and uncertainty as factors that are holding back
investment.
So we understand it could be contributing to slow growth in
investment spending, but there are also other factors, namely
the economic growth overall has been slow, sales growth for
those firms have been slow, and that, I think, has been
important as well.
Mr. Himes. Thank you.
Last question, I don't have a lot of time. I am a big
believer in preserving monetary independence or independence
for the monetary authorities. You have been vocal on this, most
notably in your letter of November of 2015.
I wonder, in my remaining time can you talk a little bit
about some of the initiatives--Audit the Fed, the FORM Act in
particular, GAO access to the Fed? Do you think that these
initiatives could over time compromise the independence of the
FOMC and of our monetary policy?
Mrs. Yellen. Yes, I do. And this goes beyond the issue of a
rule in the FORM Act. It goes to asking the GAO to come in on a
real-time basis and make policy judgments that would second
guess the decisions of the FOMC.
I think that involves very detailed intervention in
monetary policymaking the compromises independence, and I think
central banks all over the world have recognized that an
independent central bank that can focus on the long-run health
of the economy, maintaining low and stable inflation and steady
employment growth, gives rise to a better economic environment
and has been--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Florida, Mr.
Ross.
Mr. Ross. Thank you, Mr. Chairman.
Chair Yellen, it's good to see you again. And I want to put
in a word, as I have done in the past, with you concerning the
mom-and-pops, the fixed-income people who have really suffered
a lot in their savings and eating into principal. And I am
hoping that monetary policy will be such that they will have an
opportunity that they can survive again and not just those on
Wall Street.
My question to you is, and following up on my colleague,
Mr. Himes, in the FORM Act we passed, the Centennial Monetary
Commission Act, which I am sure you are familiar with. It was
Chairman Brady's idea to have the commission to overlook
oversight of the Fed. In fact, the committee would highlight
opportunities for improvement.
Given our economy's somewhat unconventional and anemic
recovery over the last 6 years, would you agree that it might
be a nice idea to have such a commission as a centennial
commission for oversight?
Mrs. Yellen. I don't think such a commission is needed. It
is, of course, up to Congress to decide if you want to look at
the structure of the Federal Reserve, but my own assessment is
that the Federal Reserve has performed well. We have adapted to
changes and--
Mr. Ross. And if they have there is nothing really to be
concerned about an independent commission reviewing. If you
have set the Fed on the path that you have chosen, then I think
that this would just confirm your suspicions that you are on
the right path, would it not?
Mrs. Yellen. It is a decision that is up to Congress if you
want to make that. I would urge you to decide what the problem
is that needs to be addressed, and I believe we have a
structure that works well.
It was one that was decided on by Congress, and I think we
have adapted to changes in the economy over 100 years. So our
structure is not broken, but it is--
Mr. Ross. So you don't think it is a good idea to have an
extra pair of eyes, just to see?
Mrs. Yellen. We have lots of pairs of eyes and lots of--
Mr. Ross. How far they can see--
Mrs. Yellen. --analysts all over who are looking at the Fed
structure, and it is not a topic that hasn't received a great
deal of attention.
Mr. Ross. Yet.
Let me move on to another topic with regard to State
insurance regulation. Despite its proven track record, our
State-based insurance regulatory structure has faced many
challenges in recent years, especially with dealing with the
IAIS and international standards.
Today, we are faced with potentially more intrusion in
insurance regulation by the Federal and international financial
regulators. With your engagement in international negotiations,
I have just a few questions.
One, would you agree that our State-based form of
regulation in insurance, risk-based capital, is probably doing
its job and is doing a good job?
Mrs. Yellen. State-based regulation is very important. Its
focus has always been on protecting policy holders, which is
one important focus--
Mr. Ross. In fact, we have probably, I think, what is
recognized as the best system of regulation in the insurance
industry through our State-based programs. Would you agree?
Mrs. Yellen. I think those programs have been successful.
But we certainly saw in the financial crisis that we had a
large insurance company that was heavily involved in capital
market activities that were a source of systemic risks. And I
do think--
Mr. Ross. And that was a federally regulated subsidiary of
AIG, though, that had that problem, and not necessarily State--
we have never seen a run on insurance companies, so I guess
that is my concern, because we have a good system in place.
And with that in mind, you have a seat at the table of the
International Association of Insurance Supervisors and the
Financial Stability Board. Are you now working with State
regulators, insurance regulators, commissioners to develop a
consensus before entering into negotiations on an international
basis?
Mrs. Yellen. They all participate in that forum, as we do,
and our participants meet and confer with them and try to
understand what is in the interest of U.S. insurance firms and
to try to influence--
Mr. Ross. And I would hope that you take the position as an
advocate on behalf of our insurance regulation system.
Mrs. Yellen. We are always trying to see other countries
establish regulatory frameworks--
Mr. Ross. Similar to ours?
Mrs. Yellen. --that will be consistent with ours and result
in strong regulation, but a level playing field for our firms.
Mr. Ross. Thank you, Chair Yellen. I appreciate that.
And I yield back. Thank you.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Maryland, Mr.
Delaney.
Mr. Delaney. Thank you, Chair Yellen, for being here and
for your wonderful service to the country.
Mrs. Yellen. Thank you.
Mr. Delaney. I have three questions. I will try to get them
out all up front so you can think about them.
The first is, if policies coming out of Washington across
this next several years fall into the category of protectionist
by nature, putting through unpaid-for tax reductions that
increase the deficit and foreign policy that might cause
foreign investors to recalibrate down their investment in the
United States, how much of an impact--negative impact--do you
think that will be on long-term economic growth? That is my
first question.
My second question is about the labor market. Do you think
the biggest issue in the labor market is employment, or jobs,
or is it pay? What is the real structural problem with the
labor market right now? Is there not enough jobs or is the pay
not good enough, in your opinion?
And my third question is, as you think about the Fed
balance sheet and running off the mortgage investments that you
have, has there been discussions within the Fed about
considering other asset classes, such as infrastructure asset
classes, if eligible bonds were to be created that perhaps the
Fed could invest in?
So those would be my three questions.
Mrs. Yellen. Your first question pertained to
protectionism, the deficit in capital flows and what impact
they would have on growth?
Mr. Delaney. Yes.
Mrs. Yellen. And honestly, without knowing more about the
details of the policies it is really difficult for me to render
a judgment.
In general, we understand that many different economic
policy shifts are under consideration, that they may well
affect economic growth, inflation, have repercussions for our
policy stance. But without knowing something more about the
timing, composition, and details of those changes, I honestly
can't--there are many different effects both positive and
negative.
On labor, in some sense I think we have enough jobs, and
that is what a 4.8 percent unemployment rate tells you is we
have created a lot of jobs, but pay in real terms is not rising
rapidly. And the composition of those jobs over many decades
and even more recently continues to shift in ways that are
leaving particular classes of workers disadvantaged.
Mr. Delaney. So if I could, Chair Yellen, this is my view,
that we have more of a pay issue than a jobs issue, and when
you look at what is happening to the labor market, particularly
the effect of technological innovation, do you see this pay
issue being a persistent enduring issue that we really do need
to think differently about?
Mrs. Yellen. We have had very slow growth in real income.
And going back to the late 1980s, the bottom--probably the
bottom half of the income distribution in terms of pay have
seen no real wage increases.
Disproportionate gains have gone to those at the high end
of the income distribution. That goes to the composition of
jobs and the trends that different jobs have in terms of pay,
and I think it is a serious problem and what we are hearing
from dissatisfied Americans.
Mr. Delaney. And then as it relates to the Fed's balance
sheet, which you don't really need to shrink theoretically. You
are not structured like a normal bank, and as you run off your
mortgage investments in your current portfolio have you thought
about other asset classes for the Fed to invest in that might
be more--
Mrs. Yellen. We are restricted to Treasury and agency debt.
We have not--
Mr. Delaney. Have you ever discussed internally what other
investments might allow you to pursue your mandate?
Mrs. Yellen. I have mentioned that other central banks have
broader authority to purchase different assets and have
sometimes used that authority. We have not. We are not asking
for that authority. I have said that if Congress were to ever
to consider changing that authority there would be both costs
and benefits to consider.
So I do want to be clear, it is not something the FOMC is
looking--
Mr. Delaney. Has it been successful in other countries, do
you think?
Mrs. Yellen. Excuse me?
Mr. Delaney. Has it been a successful policy in other
countries that have done it, pursued it?
Mrs. Yellen. I have not seen detailed studies, but arguably
yes, it may have been.
These are only policies that are used in exceptionally
difficult times. It is not normal monetary policy in countries
like Japan or the euro area that have used it--have done it in
times that called for exceptional monetary policy
accommodation.
Mr. Delaney. Great. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Oklahoma, Mr.
Lucas.
Mr. Lucas. Thank you, Mr. Chairman.
Chair Yellen, I, probably along with maybe a half a dozen
of my colleagues here, date back to the old days of when this
was the Banking and Urban Affairs Committee. And we used to
have these great glorious discussions about Karl Marx and Adam
Smith. It was just awesome in the old days.
But you know, it has always been my policy to try and focus
on the issues that have a direct impact on the constituents and
the people I serve back home. So in that spirit, I would like
to ask you a question, and if you can answer it I would be most
appreciative.
I would like to turn to the Fed's role in uncleared swaps
markets for a moment since Dodd-Frank had an effect on that
above and beyond the jurisdiction of the committee, but also
the Financial Services Committee.
On March 1st of this year, participants in that market will
be required to post variable margin with each other. Updating
those existing swap agreements for these variable margins
involve a complicated process according to market participants.
It takes a lot of time.
I saw a figure that only 0.16 percent, less than two-tenths
of a percent, of all swap agreements have been updated to meet
these various margin requirements. And that is with a deadline
only 2 weeks away.
That instability concerns me because many of the smaller
end users enter in the swaps markets to legitimately hedge
against the market and thus confronting these legal puzzles
with few resources. Turning to your role in this process, 2
days ago the CFTC instituted a temporary grace period, and
under that relief, market participants affected by these
requirements have a 6-month period for compliance. They must be
ready by September 1st.
In addition, regulators in Asia have provided a similar
grace period and the European regulators, it seems, have stated
they are open to similar wiggle room on the March 1st deadline.
With all of that, can you share with me whether the Fed intends
to coordinate with the CFTC on providing relief to entities
under its jurisdiction that are a part of this market?
Mrs. Yellen. We are aware of the problems that you
describe. We have been monitoring trends in compliance very
closely. We are in touch with some of the firms that are
involved, and we will be in discussions with other banking
regulators to discuss what response may be needed to this.
Mr. Lucas. But it is being analyzed that the circumstances
are evolving as they are and the potential impact on the
participants. From my perspective, it is those end users that
matter to me.
And I guess I would have to say thank you for taking that
note, and I hope, like the CFTC and the Asian regulators and
perhaps our European friends, we will see a similar response.
With that, I think, Mr. Chairman, in the brevity I will
yield back the balance of my time.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Washington, Mr.
Heck.
Mr. Heck. Thank you, Mr. Chairman.
Chair Yellen, thank you so much for being here.
Let's talk housing. Often--in fact I would say usually--the
housing market is kind of the big swing industry in the
economy. In recessions you cut interest rates and that leads
more people to buy homes, developers cut ground, building
trades hire up to engage in all of that. The people who buy the
homes go into the local Lowe's and buy furniture or whatever,
and it usually has a materially stimulative effect on the
economy.
Not this time, certainly compared to the past. Housing
starts are now the same they were at the depth of the 2001
recession; and in fact, they are near where they were at the
bottom of the great savings and loan crisis about a quarter of
a century ago.
So my question is, Chair Yellen, as you raise rates do you
worry about choking off an already weak housing recovery, or do
you think housing is just less sensitive to interest rates than
it was pre-bubble?
Mrs. Yellen. I think there is still sensitivity there of
housing to interest rates. And of course, this was a very
different cycle in which it was housing-related problems that
were part and parcel of the crisis. And so when we cut rates we
didn't get the usual response that you would have of housing
quickly responding positively to the rate cut.
So, as I mentioned in my testimony, higher interest rates--
and mortgage rates have gone up some over the last several
months--may play a retarding role in restricting the recovery
of housing. But the other positive side of it is we have good
employment growth, income growth; consumer spending is solid;
house prices have been rising. And all of those are positives.
So on balance, we have seen a very slow but continued
recovery in housing, and I would expect that to continue even
in the context of somewhat rising mortgage rates. And they are
very low, by historic standards.
Mr. Heck. So you mentioned wages in passing. I will mention
before I ask my next question, wages have ticked up in growth,
but only to about 2.5 percent.
The last recovery, they were at 4 percent. I think America
is still wanting to know when they are going to get a raise,
but that is not my question.
One of the things about the housing market that I find
really confusing is that prices seem to be rising in markets
all over the country. In many cities they have even eclipsed
where they were before the bubble.
In the Chair's home State, where, frankly, some would
characterize land as infinite and home prices have historically
always followed inflation, we are now seeing significant real
increases.
It used to be that markets would more quickly balance
supply with demand, and now they seem to have sustained
imbalances. Prices keep rising.
I am privileged to chair a task force that is going to take
a look at this more closely, and I am really interested in your
perspective. My basic question is why are we seeing such weak
home construction, despite the fact that we have rising prices?
Mrs. Yellen. That has been a surprise as well, why
construction remains so weak with house prices--
Mr. Heck. And the answer is?
Mrs. Yellen. We do have robust growth in multifamily. Many
young people, millennials, are delaying buying homes, and I
think that has impacted single-family construction. We have
seen very depressed pace of household formation, a remarkably
large fraction of young people who continue to live with their
families.
And even as the economy has recovered, household formation
has remained quite depressed for reasons that are difficult to
understand.
Mr. Heck. You seem to be implying that they are--they want
to be living in the basement, as opposed to they are unable to
get out of the basement.
Mrs. Yellen. We have seen that continue even as the job
market has strengthened and unemployment rates have come way,
way down. So it is historically low. From builders we hear
about shortage of workers, their skilled workers, and buildable
lots. And there may be some supply issues there, as well.
Mr. Heck. I yield back, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren.
Mr. Hultgren. Thank you, Mr. Chairman.
And thank you, Chair Yellen. I appreciate you being here
today.
I know we are in agreement on the need to prevent bailouts
of our Nation's financial institutions from ever happening
again. However, the Fed has implemented some controversial
policies that I am concerned may have some unintended
consequences that, in fact, could increase systemic risk.
AEI Resident Scholar Paul Kupiec has noted that coordinated
supervisory stress tests encourage a group-think approach to
risk management that may increase the probability of a
financial crisis. If the systemically important banks are all
following the same capital requirements, and they all are being
tested against the same stress scenarios, then isn't the Fed
creating a herd of banks that can easily be pushed off the
cliff? Don't we want a mechanism that is truly capable of
increasing financial resilience, such as real-market
discipline?
Mrs. Yellen. I haven't read Paul's work, but I think that
is an issue. We don't want group-think in management of risk at
banks.
We want banks to be focused on understanding their own
idiosyncratic risks and modeling it. And one reason to avoid
what we would refer to as a model mono-culture, which is this
sort of herd approach, we have consistently resisted sharing
with the banks subject to stress tests our models.
One consideration, gaming it is changing their portfolios
so that they look good on our models is one reason--
Mr. Hultgren. I want to ask you about that quickly, if I
could.
Mrs. Yellen. --but we want to make sure that they don't all
say, ``Okay, this is the way to manage your risk.'' We want
them to develop their own models.
Mr. Hultgren. Yes. Governor Tarullo has emphasized that the
Fed does not want banks to game the model, as you say, for Fed
stress tests.
Can you give us an example of how a bank would game a
stress test?
Mrs. Yellen. Understanding what the particular areas of
risk and scenarios might look like and how we would evaluate
them in our models could induce banks to understand that they
could make portfolio changes that would enable them to fare
better.
Mr. Hultgren. I guess, following up on that some more, if
banks were able to game the Fed's stress test, wouldn't they
have to change their risk profile in a manner that addresses
the very concerns that you and your colleagues have about
systemic risk? And don't you want them to make chose changes?
Mrs. Yellen. No, not necessarily, because banks have their
own individual sources of risk.
Mr. Hultgren. It seems ironic to me. It would seem
transparency in how stress tests are designed would help you
achieve your objective while at the same time reducing
regulatory costs.
Since the enhanced supervisory framework of financial
institutions was put in place, what analysis, if any, has the
Fed done to determine if the increased compliance costs to
financial institutions is commensurate with the risk? And how
about an analysis on the ability of these banks to provide
access to credit?
Mrs. Yellen. Are you talking about with the stress tests?
Mr. Hultgren. Right.
Mrs. Yellen. We have completed a 5-year review of our
stress tests. The GAO has also done a review of our stress
testing methodology. And, as was noted earlier today, we
recently finalized a rule that takes over 20 smaller
institutions and exempts them from the qualitative portion of
our program.
We did conclude that the regulatory burden exceeded the
benefits and changed our rule to diminish regulatory burden in
what I think is a significant and responsive way.
Mr. Hultgren. Earlier in the hearing today, you said that
the Fed is thinking about incorporating a G-SIB surcharge in
CCAR before Governor Tarullo departs. A new Vice Chair for
Supervision nomination is likely weeks away, so why is the Fed
moving ahead on these changes before the nomination and
confirmation of this individual?
Mrs. Yellen. I don't know what the timing is going to be of
those changes. I think we would want to make sure that we had
notice out and an ability to finalize such changes probably
before our 2018 stress tests go into effect.
We look forward the appointment of a Vice Chair. If we go
at it with the--
Mr. Hultgren. I think it makes sense to hold off some,
just--
Mrs. Yellen. --with the notice of proposed rulemaking--
Mr. Hultgren. I have 20 seconds left. Let me ask one more,
quickly.
There are currently three White House orders affecting
potential new rulemakings. Additionally, last year the GAO
found deficiencies with stress testing already affecting
growth. Do you agree that the Fed should act cautiously
regarding any CCAR changes?
Mrs. Yellen. I'm sorry. What?
Mr. Hultgren. Do you agree that the Fed should act
cautiously regarding any CCAR changes?
Mrs. Yellen. In line with GAO recommendations, did you say?
Mr. Hultgren. Last year, the GAO--my time has expired. We
will follow up with a letter.
Chairman Hensarling. The time of the gentleman has expired.
I wish to inform Members that votes are currently pending
on the Floor. I anticipate clearing two more Members, having a
brief recess, and then reconvening. Members are encouraged to
come back promptly after votes.
The gentleman from Pennsylvania, Mr. Rothfus, is
recognized.
Mr. Rothfus. Thank you, Mr. Chairman.
Chair Yellen, last year I asked you about the custody banks
and their concerns about the supplementary leverage ratio. As
you acknowledged, these institutions face unique challenges in
meeting requirements like the SLR.
Former Governor Tarullo has made similar statements
acknowledging the problem. At a conference in December he
stated that, ``As part of our efforts to tailor our regulations
according to the business models of firms we are considering
ways to address the special issues posed for the large custody
banks by certain elements of our regulatory framework.''
I appreciate the Fed's understanding of the unique
regulatory issues custody banks face, and I would like to
continue to work with you on the issue. Can you tell me what
progress the Fed has made on addressing this issue over the
last year?
Mrs. Yellen. I can't give you details but I can tell you
that we have continued to engage in conversation with those
banks to try to understand in detail the issues they face and
possible strategies that they or we could undertake to mitigate
some of those burdens.
Mr. Rothfus. Thank you.
Mrs. Yellen. I promise we will continue to work with them.
Mr. Rothfus. Thank you.
As you know, the President recently issued the Executive
Order laying out core principles for regulating the U.S.
financial system. This order includes a list with the following
core principles: enable American companies to be competitive
with foreign firms in domestic and foreign markets; and advance
American interests in international financial regulatory
negotiations and meetings.
When Senator Crapo asked you about the core principles
yesterday you expressed support, saying, ``I certainly do agree
with the core principles. They enunciate very important goals
for our financial system and for supervision and regulation of
it, and I look forward to working with the Treasury Secretary
and other members of FSOC to engage in this review.''
I appreciate your support for the principles, but I would
like to get a better understanding of how you foresee the Fed
putting them into action. Specifically, how should the United
States alter its approach to international insurance regulatory
discussions in response to these core principles?
Mrs. Yellen. We have been involved with State regulators,
the NAIC, the Federal Insurance Office, and others in
international--
Mr. Rothfus. What about with designating G-SIBs? Would
allowing a firm that is not a SIFI in the United States to be
designated as a global systemically important insurer be
consistent with American interests?
Mrs. Yellen. Our designation of firms for special
supervision for SIFI status in the United States takes account
of their threats to U.S. financial stability. In foreign
countries where those firms operate, the regulators are also
concerned about their impact on financial stability in their
countries. And the two perspectives may not always line up.
Mr. Rothfus. You testified earlier today that the FORM Act
would ``chain the Fed to a simple rule.'' But the FORM Act
permits the Fed to deviate from the rule, does it not?
Mrs. Yellen. Every deviation involves review by GAO of our
decision-making--
Mr. Rothfus. Wouldn't every deviation, though, provide an
opportunity to educate the American people and Members of
Congress as to what you are doing?
Mrs. Yellen. I believe it is important to provide that
education, and I try to do so in my testimony, and press
conferences, and our minutes, and our monetary policy report.
Mr. Rothfus. And you could do that to explain your
deviation from the rule. Because right now we are looking at
the policy over the last 6, 7, 8 years, and it is like, I blew
up the balance sheet, and all I got was 6 years of substandard
growth.
Mrs. Yellen. I am prepared to explain our policies. And as
I have said previously, we routinely look at rules as useful
guidelines. I recently gave a speech just a few weeks ago at
Stanford where I explained in detail--I would really recommend
it to you--reasons why the recommendations of some simple rules
would not have been a good guide for us over the last several
years or currently.
Mr. Rothfus. But you would still be permitted to deviate
from them.
Mrs. Yellen. I think that bringing GAO into routine real-
time reviews of our policy decisions simply compromises the
independence of monetary policy.
Mr. Rothfus. Let me shift gears a little bit. The CFPB
receives its funding from the Fed, correct?
Mrs. Yellen. I'm sorry?
Mr. Rothfus. The CFPB receives its funding from the Fed?
Mrs. Yellen. Yes.
Mr. Rothfus. Does the Fed have any oversight responsibility
for the CFPB?
Mrs. Yellen. No.
Mr. Rothfus. Has the Fed ever denied a disbursement request
for the CFPB?
Mrs. Yellen. No.
Mr. Rothfus. I guess I am running out of time, but you
talked about the 2 percent target for inflation. And we talked
a little bit about some financial literacy; you had a teachers'
town hall.
I am curious, do teachers in financial literacy teach that
a pound of ground beef at $6 is going to cost $6.60 in 5 years,
or a gallon of milk that costs $4 now is going to cost $4.40 in
5 years if you hit that target?
Mrs. Yellen. I don't know what--
Chairman Hensarling. The time of the gentleman has expired.
Mr. Rothfus. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Colorado, Mr. Tipton.
Mr. Tipton. Thank you, Mr. Chairman.
Chair Yellen, thank you for taking the time to be here.
When we previously had an opportunity to be able to visit
you had cited in the past that you recognize the trickle-down
effect of regulations that are going on. And I have a primary
concern of community banks. And I believe we share--you believe
that community banks are important for the economic health of
the country?
Mrs. Yellen. I do.
Mr. Tipton. And in recognizing that, and in view of your
past statements, I will speak actually to my colleague, Mr.
Himes', comment when he was referring to your report. He had
noted that he is concerned that you are not addressing or you
have not addressed regulatory burden in regards to your report.
You had recently had a meeting in St. Louis, I believe in
September, being able to meet with a variety of people in the
banking industry, and they had cited and discussed with you at
this conference the number one reason for community banks to
stop offering some products was an ongoing concern of the
regulatory burden.
So I guess my question to you is, you have stated to us in
the past that you recognize the trickle-down effect. You have
heard from community bankers that you cite or is important to
our economy and the country. What is the Fed doing to actually
help resolve some of the challenges that they face?
Mrs. Yellen. We have taken many steps that I think--based
on my regular meetings with community bankers--they see as
quite positive.
We are coming into many banks less frequently, extending
exam cycles. We have heard from them that having large groups
of examiners on their premises for long periods of time is
burdensome, and so we are giving them the opportunity to let us
do much more work off site. We are risk-focusing our exams so
that for well-managed, well-capitalized firms, we are spending
less time and focusing on real sources of risk to those banks.
We are reducing the frequency of consumer compliance exams
for well-run and well-managed banks. We have gone through the
Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA)
process. There are a number of changes that are going to come
out of that that will simplify burden. We are looking at
reducing--
Mr. Tipton. If I may, since we are going to run out--and I
appreciate the extensive list that you are putting out, but I
have to be able to actually look at the results. When we go
back to the September meeting that you had had with community
bankers, they are still citing regulatory compliance.
I just received an e-mail yesterday from a small bank on
the western side of Colorado. And going a little bit to your
unemployment numbers, I guess the good news is they created
three jobs. The bad news is for that small community bank, it
is all in compliance.
So are we really seeing the results for the community banks
in terms of everything that you were just citing? We continue
to hear out of our community banks it is regulatory burden that
is inhibiting their ability to be able to provide the
liquidity, to be able to grow the communities, and to be able
to create jobs.
Mrs. Yellen. Community banks labor under a number of
burdens, not all of which reflect compliance burden. But I
think that if you--
Mr. Tipton. But it is the number one thing that they cite
to us.
Mrs. Yellen. We do meet regularly with a council, so-called
CDIAC, community development, community banks, and discuss with
them how they experience our supervision. And I would say--
Mr. Tipton. Can we look at maybe just some outcomes? How
many new bank charters were requested last year?
Mrs. Yellen. There are virtually no new bank charters.
Mr. Tipton. No new bank charters. How many consolidations
were there?
Mrs. Yellen. There are a lot. They are a fundamental--
Mr. Tipton. How many shut down?
Mrs. Yellen. I don't know the numbers of how many shut
down.
Mr. Tipton. I know that you understand the problem. I guess
what I am questioning is, are the results actually yielding the
desired result?
We have the lowest labor participation rate in this country
in decades. We have more small businesses that are shutting
down. You had cited that NFIB report, hey, they aren't really
even asking for loans.
But you cited earlier today that they are looking for
alternative methods, going to second mortgages on homes, to be
able to get a loan out of the bank. So is this impacting the
economy, job creation, and the overall health for rural
America, which is of deep concern to me?
Chairman Hensarling. The time of the gentleman has expired.
The committee stands in recess.
[recess]
Chairman Hensarling. The committee will come to order.
The Chair now recognizes the gentleman from Texas, Mr.
Williams.
Mr. Williams. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for your testimony this
morning.
Mr. Chairman, before I begin my questioning I wanted to
briefly discuss Chair Yellen's testimony from yesterday's
Senate Banking hearing and some comments by Senator Elizabeth
Warren, whom, I might add, must live in a different business
climate environment than I do; and also, for the record, remind
my colleague on the other side that when we talk about hitting
homeruns out of Fenway Park, the fences are very short in
Fenway Park.
[laughter]
Senator Warren, in an exchange with you, Chair Yellen,
noted that, ``Our banks have thrived since we passed Dodd-
Frank. Both big banks and community banks are literally making
record profits.''
Now, Chair Yellen, while I don't know about the big banks
and their record profits, what I do know is this: I am a Main
Street America guy; I am a small business owner. Main Street
America is hurting. Community financial institutions are
hurting. And they both see no relief in sight.
So I would be interested to hear what Texas community
bankers would say to Senator Warren's comments. I would also
like to know what Senator Warren would say to the 126 banks in
my home State of Texas that have closed since 2010. What would
she say to the community bankers who have, since 2007, been hit
with over 150 new regulations with over 100 rules still to be
considered?
In fact, every time a rule is changed these same community
financial institutions incur a cost. Even the simplest change
can cost thousands of dollars and hundreds of man-hours to
comply with.
Sure, some community financial institutions have
consolidated to survive, swallowed by the larger banks. But
others have not been so lucky. According to the FDIC, more than
1,200 counties in the United States, encompassing 16.3 million
people, would have limited physical access to Main Street
banking without a presence of a community bank. As someone who
represents a large rural district in Texas, that is a large
section of my constituency.
So, Chair Yellen, while I do not expect my colleague from
Massachusetts to understand Main Street America's burdens, I
truly hope that you do understand those, that the position of
many of these community banks, financial institutions find
themselves in, and that you stay true to your word in finding a
way to provide meaningful relief.
Now, I want to briefly go back and touch on the Federal
Reserve's balance sheet. You seem to have indicated yesterday
that the Fed was in no hurry to reduce its massive $4.5
trillion balance sheet, and you said that today.
So following up on some questions from Mr. Barr, we have
heard a lot of talk the last couple of days from you and others
on the strength of the economy and, again, how banks are making
record profits, but you also stated that the Fed wouldn't
reduce the balance sheet until it has confidence the economy is
on a solid course.
So I guess my question to you is, which is it? And if our
economy is headed in the right direction, as you have said, why
wouldn't the Fed reduce its balance sheet? So my question would
be, what is stopping the Fed from naturally winding down its
balance sheet, let alone offering a clear and credible strategy
for doing so?
Mrs. Yellen. I think the economy is doing well, but it has
required a highly accommodative policy from the Fed to
accomplish that. So our overnight Federal funds rate at 50 to
75 basis points remains quite low. If the economy were to now
be hit by a negative shock--not something I expect, but we have
to prepare for--we would not have a great deal of scope to
support the economy by cutting that overnight rate.
My colleagues and I have said we want to wait to start
running off our balance sheet until normalization is well under
way. That means we would like to have a bit more buffer room to
cut our overnight rate in the event that there is a negative
shock because once we start running off the balance sheet it
creates some drag, and we want to make sure that the economy is
robust enough and we have enough policy space.
Mr. Williams. My next question is, in terms of
opportunities that American households have gone without during
this lackluster recovery, does the Fed's oversized and
distortionary balance sheet, as well as the uncertainty that
follows from the lack of a credible exit plan, create an
unacceptable economic risk? And should it?
Mrs. Yellen. What do you mean by economic risk from our
balance sheet? We added to our balance sheet to push down
interest rates and spur spending to ease financial conditions
at a time when the economy was very weak, and it has
strengthened substantially. And I think we have made a
contribution to that, so I don't think that is a significant
risk. And we have indicated that we intend to contract our
balance sheet substantially, but in a gradual way that is not
risky.
Mr. Williams. Okay. Thank you.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Maine, Mr.
Poliquin.
Mr. Poliquin. Thank you, Mr. Chairman, very much.
And thank you very much, Chair Yellen, for being here. You
know, we got about 2 feet of snow, Chair Yellen, in Maine on
Monday, and we have another 2 or 3 feet coming this weekend, so
if you haven't made your vacation plans for the great State of
Maine, this is something you ought to consider, especially
since it was Valentine's Day yesterday, and I am sure your
husband would love to go up there with you, and we need the
business.
Mrs. Yellen. I am sure. Thank you for the invitation.
Mr. Poliquin. Yes, ma'am.
Chair Yellen, across my district and across America we have
been very concerned about the weakest economy we have had in
decades--and the recovery, I should say. The GDP is growing at
about 1.5 percent roughly instead of 3, which has been the
average. Folks are living paycheck to paycheck in my district.
They are having a hard time saving. Millions of folks have just
given up looking for work.
And earlier in this hearing I remember, in response to a
question from Mr. Huizenga, I believe what you said is that our
labor participation rate has been so high because there are so
many people who are aging out of the workforce. Well, let me
tell you a little story if I may, Chair Yellen, with all due
respect.
Mrs. Yellen. It has been falling for that reason.
Mr. Poliquin. I beg your pardon.
A few months ago I was at a shoemaker in Lewiston, Quoddy
Shoes, one of the greatest shoemakers still left in America,
and I ran into a fellow who was working part time, at 80 years
old--80 years old and he is making shoes. And he was very
concerned about running out of money before he runs out of
time.
Now, I happen to think, Chair Yellen, that we ought to do
everything we can to grow this economy because that is just not
fair and it is not right.
Now, I am sure you look at the same data we do. In December
we saw that consumer confidence was at a 15-year high. Now, I
know it ticked down a little bit in January, but it was at a
15-year high. Business confidence is at about a 2-year high.
And so this is all good when people are buying and businesses
are investing and creating jobs, and we have more opportunity
for our families.
And I talk to job creators all the time. That has been my
background. And I will tell you why they are so confident is
because they are no longer worried about another layer of
regulations and taxes falling on their shoulders that is making
it hard for them to succeed and create jobs.
So can't we agree, Chair Yellen, that this overregulation
that we have seen in this economy for the past 7 or 8 years has
been stifling growth and opportunity?
Mrs. Yellen. We even noted in our FOMC statement the pickup
we have seen in recent months in business and consumer
confidence. That is very real and--
Mr. Poliquin. Would you attribute that in part to
overregulation or going in a different direction now? Less
regulations, lower taxes, more confidence, more spending, more
jobs.
Mrs. Yellen. I think we should do everything we can to
relieve regulatory burden, and I pledge to do so and to focus
intensely with it to work with the new Administration.
Mr. Poliquin. Thank you for that.
I noticed yesterday in front of the Senate you mentioned
that you were very supportive of adjusting financial
regulations, especially for small community banks, and I am
thrilled about that.
But you know, it is not only the financial regulations that
you folks are responsible for that permeate our economy, but it
is also regulations at the EPA. For example, we have a great
paper mill in Skowhegan with 850 jobs, and they are worried
about biomass energy being carbon neutral or not and the
additional regulations that come with it.
So it is in all different sectors of the economy, Chair
Yellen.
During your June 22nd testimony, when a question was asked
of you by Representative Barr about the economy being
underperforming, your response was, ``Our growth has been
disappointing. I am not sure of the reason why.''
Now, can't we agree here today that part of the reason is
overregulation and that you and everybody else in a position of
influence in this town can support what is going on now, which
is less regulation, more jobs?
Mrs. Yellen. Productivity growth has been quite weak for
the last 6 years, and even going back before the financial
crisis. It seems as though there has been a step down in the
pace of productivity growth. It is not only something that we
have seen in the aftermath of the crisis.
So I think there may be deeper trends there that are
depressing productivity growth than just regulations.
Mr. Poliquin. Let me shift gears a little bit in my
remaining time, Chair Yellen.
We now have almost $20 trillion in debt. The interest
payments on that debt with rates at a historic low are about
$240 billion a year, which is about twice what we spend on
veterans' benefits.
Do you think, Chair Yellen, if this town can ever get its
spending act together, balance the books, and start paying down
the debt, it will give us additional confidence in the business
community and among our consumers, which will lead to a growing
economy and more jobs?
Mrs. Yellen. I am not sure what the bottom line would be,
but we have had a looming problem of an unsustainable--
Mr. Poliquin. Do you think if we are able to balance our
books, ma'am, and start paying down our debt, that would help
our economy grow?
Mrs. Yellen. It could.
Mr. Poliquin. Thank you very much.
Chairman Hensarling. The time of the gentleman has expired.
As the Chair advised Members earlier, we plan to adjourn
this hearing in approximately 30 minutes. If any Member wishes
to utilize less than their 5 minutes of allotted time, I am
sure other people farther down the dais would be appreciative.
The Chair now recognizes the gentlelady from Utah, Mrs.
Love.
Mrs. Love. Thank you, Chair Yellen, and thank you for being
here today. I always find myself pinching myself whenever we
are in a hearing with you because of the importance of what we
are doing here. And so I want you to know how sincere I am with
respect to the questions and the answers that we get here. So
thank you for being here.
Mrs. Yellen. Thank you.
Mrs. Love. In creating the Federal Reserve in 1913,
Congress charged the new central bank with the authority to set
monetary policy, with the objective of ensuring price
stability--that is, avoiding inflation that could undermine
economic growth.
In 1978 the Humphrey Hawkins Act expanded the Fed's mandate
to include goals of maximum employment, stable prices, and
moderate long-term interest rates. And of course, along with
its responsibilities over monetary policy, the Fed also enjoys
very significant powers and responsibilities with regards to
bank supervision and now also systemic stability.
This array of powers has left Congress, the markets, and
the public looking to the Fed for progress and assurance on
nearly every conceivable topic having to do with the Nation's
financial and economic well-being. So just listening to the
range of questions that you have been asked and the Humphrey
Hawkins hearing shows that it is true, including questions
about topics like income inequality with African-American
unemployment.
This is my question to you: Do you agree with my
observations in how much the Fed is doing, along with
Representative Barr's observations and his testimony, to the
extent in which Congress is looking to the Fed for answers and
guidance?
Mrs. Yellen. I do see that and we have, as you pointed out,
a huge range of important responsibilities which we try to
carry out as best we can.
It is also important for you to understand that there are
limits on what we can do. We are not able to address every
problem. If there is slow productivity growth in the United
States, that is not something that the Fed has much ability to
address.
Mrs. Love. Do you think--
Mrs. Yellen. If there is income inequality, or the
composition of jobs has changed in an adverse way--
Mrs. Love. I get it.
Okay, do you think that we are looking to the Fed for too
much, in your opinion?
Mrs. Yellen. Sometimes I do feel that, yes.
Mrs. Love. If so, how do you think we can pare down our
expectations of the Federal Reserve?
Mrs. Yellen. You have set forth your expectations in
legislation very clearly and you described them. You said our
responsibility for monetary policy is stable prices, maximum
employment, and moderate long-term interest rates--
Mrs. Love. Do you think that there is room here to pare
down or to eliminate the dual mandate that is set on--
Mrs. Yellen. No, I don't think that would be a good idea.
Those two goals of maximum employment and stable prices are
rarely in conflict--
Mrs. Love. Okay. So we talked about a couple of things. One
of the things that we have talked about was our regulation and
the regulatory burdens.
Here is my problem: In April of 2011, the Fed predicted a
3.25 percent real annual growth rate. Actual real GDP growth
rate for that year was 1.6 percent, according to official BEA
data.
Fed forecasts for 2012 and 2013 were both close to 4
percent. Actual for 2012 was 2.2 percent; 2013 fell even
further short of original predictions. I can go on and on.
Annual growth came in far less, at 1.9 percent in 2016,
when it was predicted at 3 percent. So I am asking if you
think--do you think that these numbers underscore the failures
of unconventional policies to try and deliver expected results?
Is there too much going on? Is there a way that through
both paring down the dual mandate and also paring down
regulations that we can actually bring that growth rate up?
Mrs. Yellen. Our unemployment rate forecasts prove much
closer to being accurate. You have asked us to focus on maximum
employment. We have, and I believe we have succeeded in meeting
Congress' goal for us.
Mrs. Love. But we are still looking at--
Mrs. Yellen. The fact that economic growth--
Mrs. Love. We--
Mrs. Yellen. --has been so disappointing, been so low--
Mrs. Love. Okay. I have about 2 seconds, and I just wanted
to say that we are still not happy with the rate of employment
when it comes to African-Americans. We can do a lot better. We
can do a lot better in our--
Mrs. Yellen. As you just recognized, there are limits on
what the Fed can accomplish--
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Arkansas, Mr.
Hill.
Mr. Hill. Thank you, Mr. Chairman.
Chair Yellen, it's nice to have you back before the
committee. Thank you for your patience today.
One of the great compromises back in 1913 on the formation
of the Federal Reserve regarded the importance and political
decision to have the district banks, how they were owned, how
they were spread around the country, and that--do you agree
generally that they provided a good, diverse, strong voice in
both supervisory and monetary policymaking over that 10
decades?
Mrs. Yellen. With respect to monetary policy, I feel it has
been very good to have the diversity, the input from around the
country, and a large group of people with diverse views trying
to form a consensus. That has been very healthy.
On supervisory policy, the reserve banks execute a great
deal of supervision. They have responsibility, particularly for
community banks. But it is the Board of Governors that is
charged with setting supervisory policy and putting regulations
into effect, and so that policy guidance comes from the Board
of Governors that is carried out in the reserve banks.
Mr. Hill. But you do believe the Board of Governors listens
to the members of the boards of the district banks, even on
their supervisory suggestions, don't you?
Mrs. Yellen. I'm sorry, the members of the Board or--
Mr. Hill. The members of the Board of Governors in
Washington, they do listen to the views of the district bank
board members as it relates to supervisory policy, do they not?
Mrs. Yellen. The directors of the reserve banks don't weigh
in on bank supervision and--
Mr. Hill. Should they?
Mrs. Yellen. --that supervision policy.
Mr. Hill. Should they have that added to their list of
suggestions? You have--
Mrs. Yellen. No. I think that the directors, especially
given the role of banks on the boards and the fact that there
are bank directors, it has been important to wall them off
from--
Mr. Hill. There are a lot of district bank directors that
are not bank directors. They are citizens, just from various
industries.
Mrs. Yellen. Yes.
Mr. Hill. Do you think that the supervisors in the district
banks have a good handle on their banks, their bankers, their
bank asset quality, their bank supervision within the confines
of their district?
Mrs. Yellen. Yes.
Mr. Hill. So wouldn't it be a good idea to try to have
merger and acquisition applications and expansion-type
applications and business combination applications all handled
at the district bank level?
Mrs. Yellen. The Board has responsibility ultimately for
those decisions, and much of the work on them is done at the
reserve banks. But in some cases, the Board has legal authority
to make decisions.
Mr. Hill. Do you think it is a decent policy to defer to
the local reserve bank as a general statement and only in
special instances have decisions come to the Board of Governors
level for approval?
Mrs. Yellen. I think in many cases decisions are routine,
and the recommendations to the Board come from the reserve
banks. I wouldn't favor changing the governance structure
around that.
Mr. Hill. Thank you.
On the subject of Mr. Williams' questions about the size of
the Federal Reserve balance sheet, obviously during the crisis
you owned a lot of nontraditional assets as a function of
getting through the crisis period.
And you have, through the payment of reserves, built a
large portfolio of government securities. It looks like you
have 40 percent of the mortgage-backed--your portfolio is 40
percent in mortgage-backed securities; you have 20 percent of
the balance sheet with a maturity greater than 5 years in
Treasuries; and that you, at last count I saw, owned 15 percent
of the world's total supply of U.S. Treasuries.
Do those numbers sound generally right?
Mrs. Yellen. I don't have them in front of me, but they
sound generally right.
Mr. Hill. When banks have to go through a bank examination,
there is a section of the CAMELS rating that has an S for
interest rate sensitivity. And it would seem to me that you
have a very substantial concentration of risk in that balance
sheet and the size that it is and a significant sensitivity to
risk because you have extended duration.
When I was looking at the numbers I was reminded of two of
my favorite quotes. One was old--Mr. Oakley Hunter, who used to
be the CEO of Fannie Mae back in the late 1970s, described his
own company when he was president as the world's largest crap
game. And then Mr. Buffett in 2008 described the Federal
Reserve as history's greatest hedge fund.
And so my concern is that through Operation Twist, as you
try to undo the portfolio, that you have a real interest rate
sensitivity problem. I hope you will address that and move
quickly to reduce the size of the Fed's balance sheet.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Gonzalez.
Mr. Gonzalez. Thank you.
I have a couple of questions.
Chair Yellen, President Trump has stated he intends to
create 25 million new jobs. However, given Trump's anti-
immigrant stance, where would the President get 25 million
people to fill these jobs?
Mrs. Yellen. Immigration has been a very important source
of labor force growth. I would estimate that with the economy
having a 4.8 percent unemployment rate, looking forward job
growth mainly has to come from additions to the labor force.
There might be some increase in labor force participation, but
we would need labor force growth.
Given our projections on labor force growth, something like
75,000 to 125,000 jobs a month would be consistent with a
stable unemployment rate. And so if immigration were to reduce
labor force growth, the pace of job growth consistent with our
staying with roughly 4.8 percent unemployment would move down,
not up.
Mr. Gonzalez. Right. What role does immigration into the
United States have on the growth and competitiveness of our
economy?
Mrs. Yellen. That is a broad question I am not sure that I
can answer, but it has been an important support for labor
force growth, and it has been important in many sectors.
Mr. Gonzalez. Thank you for your response.
Chairman Hensarling. The gentleman yield back.
The Chair now recognizes the gentleman from Michigan, Mr.
Trott.
Mr. Trott. Thank you, Mr. Chairman.
And, Chair Yellen, thank you for your time today and for
your service.
I want to follow up on a question that Mr. Lynch was asking
earlier regarding the OLA under Title II of Dodd-Frank. And I
think you said that you preferred a bankruptcy alternative but
wanted to maintain the OLA just in case there was a scenario
that couldn't be anticipated.
I think you also said, though, that under OLA, the
taxpayers wouldn't be put at risk. Did I misunderstand, or do
you stand by that statement?
Mrs. Yellen. Yes. The way it is set up is that if the FDIC
realized any losses they would be passed onto the banking
industry, which would chip in to compensate.
Mr. Trott. So if the FDIC borrows trillions of dollars to
compensate creditors it is not going to put taxpayers at risk?
Mrs. Yellen. I'm sorry, if the what?
Mr. Trott. If the FDIC borrows trillions of dollars to
compensate creditors, the bank, it is not putting taxpayers at
risk?
Mrs. Yellen. I think there is a limit on what they can
borrow and it wouldn't be trillions of dollars.
Mr. Trott. But taxpayers would be at risk under that
scenario if they were borrowing, wouldn't they?
Mrs. Yellen. It is structured so that the costs would be
borne by the financial sector.
Mr. Trott. Okay.
In December I was back home and I went to a holiday party
at the Bank of Birmingham, which is a community bank in
Birmingham, Michigan. And the CEO pulled me in his office and
he said, ``I just want to let you know we are selling. We can't
continue.'' And they have since sold to the Bank of Ann Arbor.
So I would like to know what you are doing today and what
we can do to help save our community banks. Because I really
see it as an obstacle to growth in our economy, and I really
believe it is one of the reasons why no one is starting small
businesses and young people under 30 aren't owning businesses.
The lack of credit for small business is a big issue, and I
would like to hear your thoughts on that.
Mrs. Yellen. So small businesses don't by and large report
in surveys when they are asked that lack of access to loans or
credit is one of the significant problems that they face, and
we have seen pretty solid growth of credit overall from the
banking sector, including small business loans.
Banks are under a great deal of pressure for a number of
different reasons. We have a low interest rate environment.
Their net interest margins have been compressed and that tends
to reduce profitability.
Still, I believe community banks in the United States last
year made profits of something like $5.5 billion. But there are
banks that are under pressure and, of course, consolidation is
a trend.
For our part, I have emphasized repeatedly today that
regulatory burdens on community banks need to be reduced. I
would be very pleased to see Congress take steps in that
direction, and we will also do all that we can to cooperate in
reducing those burdens.
Mr. Trott. Great.
I want to save some time for my colleagues, so my last
question is, we have heard a lot of nice speeches from my
friends on the other side of the aisle today about all the
problems that President Trump has created in the last 25 days.
Why is the stock market doing so well? Why do we have a record
high in the stock market?
Mrs. Yellen. I think market participants likely are
anticipating shifts in fiscal policy that will stimulate
growth, perhaps raise earnings, maybe tax cuts that will boost
earnings. We have seen longer-term interest rates go up and the
dollar strengthen, and that is consistent with expectations of
an expansionary fiscal policy.
Mr. Trott. Would it be fair to say then, the prospect of
easing the regulatory burden created by Dodd-Frank is causing
investors and businesses to feel more optimistic about our
economy?
Mrs. Yellen. I have no idea what portion Dodd-Frank plays
in that. I have no way of knowing that.
Mr. Trott. Thank you, Chair Yellen.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Georgia, Mr.
Loudermilk.
Mr. Loudermilk. Thank you, Mr. Chairman.
Chair Yellen, as many have discussed here today, the Fed
currently holds about $1.7 trillion worth of mortgage-backed
securities, which, surprisingly, equates to about 21 percent of
all the mortgage-backed securities. This has been unprecedented
because in the decades before the recession, the Fed had
virtually zero mortgage-backed securities on its book.
But yesterday at the Senate Banking Committee hearing when
this issue was brought up, why such a large number of mortgage-
backed securities are currently on the books of the Fed, you
stated that, ``After the financial crisis, at a time when the
economy was very depressed, unemployment was very high,
inflation was running below the Fed's objectives and
extraordinary support was needed.''
And that is how you explained why you purchased so many
mortgage-backed securities when prior to that, you had none.
Mrs. Yellen. Treasury securities.
Mr. Loudermilk. Right.
Mrs. Yellen. Both.
Mr. Loudermilk. However, today, we have heard from you and
some others in here about how well we are doing now. The
economy is going well, unemployment is going down.
If the reason that you bought those, and you said that you
are going to divest yourself of those via attrition over time,
but my question is just last week the Fed purchased $8.5
billion of mortgage-backed securities.
Mrs. Yellen. All we do is reinvest proceeds of maturing
principal to keep the size of our balance sheet unchanged. We
are not doing any net purchases of either Treasuries or
mortgage-backed securities.
Mr. Loudermilk. But is this in any way divesting yourself?
Mrs. Yellen. We have not started the process of divesting
ourselves. We are maintaining at a constant level the size of
our portfolio and leaving the composition unchanged for now.
But we anticipate at some point beginning the process you
described of allowing maturing principal--we will stop
reinvesting it and our balance sheet will gradually shrink.
Mr. Loudermilk. So what you are telling me is the Reuters
report that came out on Thursday which reported that you bought
$8.5 billion worth of mortgage-backed securities isn't exactly
accurate?
Mrs. Yellen. If we had, I don't know the details, but to
the extent we have principal repayments on mortgage-backed
securities, we would take those principal repayments and
reinvest in mortgage-backed securities to keep our holdings at
a constant level.
So that is our reinvestment. We are reinvesting maturing
principal and it might have amounted to the number that you
cited. I don't know for sure.
Mr. Loudermilk. $8.5 billion, that is a pretty significant
number, especially holding 21 percent of all mortgage-backed
securities.
Mrs. Yellen. We are not--
Mr. Loudermilk. Does that not put you and the taxpayers at
a significant risk?
Mrs. Yellen. We are not adding to our holdings of mortgage-
backed securities. We are maintaining our holdings unchanged in
dollar terms. And these are securities that have essentially no
credit risk. And of course, there is interest rate risk in our
portfolio--
Mr. Loudermilk. And can you remind me, what was the
significant factor in causing the crash in 2008? Wasn't it the
same idea that these have very little credit risk, but yet,
that was the impetus with what brought us into the recession?
Mrs. Yellen. These are government-guaranteed mortgages. And
we are entitled, again, in the terms of our charter to invest
in Treasury and agency debt, and these are agencies--
Mr. Loudermilk. In your opinion, then, this doesn't put the
American taxpayer at risk or the Fed at significant risk by
holding 21 percent of mortgage-backed securities, and you are
not divesting at this time?
Mrs. Yellen. I don't see that there is significant risk. A
central bank operates in a very different way than a normal
commercial bank. Our ability to conduct monetary policy, which
is our prime responsibility, doesn't depend on if they
reflect--the value of those securities may fluctuate, but that
has no impact on our ability to conduct monetary policy.
We could have unrealized losses in those portfolios, but we
have no intention and we have stated for a long time that we do
not intend to sell mortgage-backed securities, so we would not
realize those losses.
Our holdings of them have swelled since the financial
crisis. The payments that we are making to the Treasury that
positively impact the Federal budget--prior to the crisis our
payments to the Treasury ran around $20 billion to $25 billion,
and last year they came close to $100 billion. And--
Chairman Hensarling. Time--
Mrs. Yellen. --we have supported growth in the economy.
Chairman Hensarling. The time of the gentleman has expired.
The Chair wishes to advise Members that currently, I intend
to recognize the gentleman from Ohio, Mr. Davidson, and the
gentleman from North Carolina, Mr. Budd, and we will adjourn at
that time.
The gentleman from Ohio, Mr. Davidson, is recognized.
Mr. Davidson. Thank you, Mr. Chairman.
And thank you, Chair Yellen. It is an honor to speak with
you, and thanks for taking a big chunk of time to talk with us
today.
What we have raised on the screen here is a trade-weighted
U.S. dollar index. And for an extended period of time, your
time as Chair of the Fed, you have emphasized a desire to raise
rates. To what extent has currency appreciation impacted your
ability to do that?
Mrs. Yellen. I think the appreciation of the dollar partly
reflects market expectations that we would be raising rates
faster than many other advanced countries. Our economy has been
growing more strongly and we have had stronger economic
performance.
The expectation that rates would diverge with the United
States moving to higher rates than other counties has induced
capital inflows, which have served to push up the dollar, as
your chart influences shows. And that is one of the ways in
which monetary policy normally works.
Mr. Davidson. Right.
Mrs. Yellen. Of course, it has tended to diminish net
exports. It has had a negative effect on our exports. It has
diminished spending in the economy, and it is part of how a
tighter monetary policy or perceptions that there will be works
to slow aggregate demand.
Mr. Davidson. Right. And so in that sense, it is holding
down the same pressures that you would hope to do, so the
strong dollar is doing some of the same things you would hope
to do with the rate appreciation.
Mrs. Yellen. That is right.
Mr. Davidson. But the effect for the saver, then, with the
currency appreciating, is that rates are still low, so time,
value, and money, the rates are still held low, and it has an
impact on hardworking families trying to save for retirement.
While it might have a similar effect for monetary policy, the
effect on Americans in the domestic economy. Would you agree
with that?
Mrs. Yellen. Yes, how the dollar moves is a factor. As I
say, it is part of a response to monetary policy, but it is not
mechanical and that does affect the interest rate path we put
in place that is appropriate.
Mr. Davidson. Thank you for that.
Now, one of the things that you had talked about as--you
were commenting on policy so I won't ask you a specific policy
question, but in theory, if there were an adjustment that had
an effect of raising the cost of imports by, say, 20 percent,
and there was something that had the effect of lowering the
cost of exports, would the currency market fully clear? Do you
believe that would happen? And if so, would that still resolve
in a net change in our balance of trade?
Mrs. Yellen. I would note that there have been discussions
and academic work in connection with the border tax that
suggests that an appreciation of the dollar could fully offset,
as you have said, a tax change that raised the cost of imports
and provided a comparable export subsidy. And in principle that
could provide a full offset.
The problem is there is great uncertainty about how, in
reality, markets would really respond to these changes, and a
strong set of assumptions is needed to believe that markets
would fully offset those changes.
It is very difficult to know just what would happen. There
is more than trade that affects a country's exchange rates.
Market participants' expectations matter and there is a
great deal of wealth. There would be shifts in wealth. The
value of U.S. assets held in foreign currencies would be
greatly diminished by that--
Mr. Davidson. Thanks. I think you anticipate my next
question, which is $2-plus trillion of U.S. assets held
offshore, one of the desires would be to see some of that put
to work in the U.S. economy.
To what extent over the past several years of high
appreciation of the U.S. dollar does that affect the value of
the repatriation, and do you feel that currency would have an
impact in the present context of relatively high rates in
anything we would do policy-wise with fiscal policy to drive
those balance of payments?
Mrs. Yellen. That was a complicated question and I am not
sure I have--
Mr. Davidson. Sorry. And you have been answering them for a
long time, so the net effect of the currency appreciation on
repatriation. Is there a fiscal policy that we would do that
you feel that would be offset by the strong dollar? What would
happen in that context?
Mrs. Yellen. I am not sure I have a simple answer for you
to that complicated question.
Mr. Davidson. My time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Budd.
Mr. Budd. Thank you, Chair Yellen, for joining us today.
I will shorten the question. Something has changed in our
economy since 2009, and I want to know if you think that in the
last 8 years, the expansionary monetary policy or the financial
regulations have played a role in the growing populations of
both the poor and the very wealthy by hurting middle-class
savers?
Mrs. Yellen. Are you referring to the fact that we have had
low interest rates and it has hurt middle-class savers?
Mr. Budd. I would say that combined with the financial
regulations and how it has had an effect on those middle-class
savers, if you see a correlation there.
Mrs. Yellen. I am not sure I see how--I think financial
regulation has resulted in a stronger financial system and less
risk substantially than we have had before the crisis. I think
it has enabled us to have stronger growth and a faster recovery
than some other advanced nations, including European nations.
And in that sense, I think it has been beneficial.
But, of course, savers have been impacted by the low
interest rate environments, and I hear from them every day, as
I am sure you do. They would welcome higher interest rates, and
if the economy continues to move along a solid path, it is my
hope that we will be able to raise interest rates more rapidly
and they will see some of that pass through to their savings
earn higher returns on them.
Mr. Budd. Thank you. So the next part of that--so when I do
talk to the community banks in my district they keep telling me
that the fastest-growing department in their business, in their
bank, is the compliance department. So this seems to be borne
out of the fact that we are now near zero as far as it comes to
new bank charters, where it used to be hundreds of new bank
charters a year.
Do you think the fact that banks have had to massively
increase their spending on regulatory compliance is helpful or
harmful to banks' abilities to make loans for individuals and
small businesses?
Mrs. Yellen. I agree with everyone this morning who has
expressed concern about regulatory burdens on community banks,
and I pledge to do everything in our power to attempt to look
for ways to mitigate those burdens.
Mr. Budd. Thank you.
I yield back my time.
Chairman Hensarling. The gentleman yields back.
I would like to thank Chair Yellen for her testimony today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place her responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
I would ask, Chair Yellen, that you please respond as
promptly as you are able.
This hearing stands adjourned.
[Whereupon, at 2:11 p.m., the hearing was adjourned.]
A P P E N D I X
February 15, 2017
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