[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

                              ----------                              
                                                                   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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