    [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

                                   __________

                                 JULY 12, 2017

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-27

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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:
        July 12, 2017................................................     1
    Appendix:
        July 12, 2017................................................    55

                                   WITNESSES
                            Wednesday, July 12, 2017

    Yellen, Hon. Janet L., Chair, Board of Governors of the Federal
      Reserve System.................................................     5

                                    APPENDIX

    Prepared statements:
        Yellen, Hon. Janet L.........................................    56

                  Additional Material Submitted for the Record

    Yellen, Hon. Janet L.:
        ``Monetary Policy Report of the Board of Governors of the
          Federal Reserve System,'' dated July 7, 2017...............    63
        Written responses to questions for the record submitted by
          Representative Beatty......................................   125
        Written responses to questions for the record submitted by
          Representative Loudermilk..................................   128
        Written responses to questions for the record submitted by
          Representative Ross........................................   131
        Written responses to questions for the record submitted by
          Representative Rothfus.....................................   133
        Written responses to questions for the record submitted by
          Representative Royce.......................................   134
        Written responses to questions for the record submitted by
          Representative Tipton......................................   140

                              MONETARY POLICY AND

                            THE STATE OF THE ECONOMY

                                  ----------

                            Wednesday, July 12, 2017

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10 a.m., in room
    2128, Rayburn House Office Building, Hon. Jeb Hensarling
    [chairman of the committee] presiding.
        Members present: Representatives Hensarling, 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, Velazquez, Sherman, Capuano, Clay, Scott,
    Green, Moore, Ellison, 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.
        This hearing is for the purpose of receiving the semi-
    annual testimony of the Chair of the Board of Governors of the
    Federal Reserve System on monetary policy and the state of the
    economy.
        I now recognize myself for 3 minutes to give an opening
    statement.
        Since we last convened to take Chair Yellen's testimony on
    monetary policy, there have been some very encouraging economic
    headlines. Confidence is up, headline unemployment remains low,
    as does inflation, but the headline unemployment rate still
    rests too much on an incredibly low labor participation rate
    and, regrettably, high disability payment participation rates.
        Both paychecks and savings for working Americans still have
    considerable room to grow after 8 years of distortionary
    economic policy under the previous Administration.
        Fortunately, on the fiscal front, help is on the way. House
    Republicans have passed both the American Health Care Act, to
    lift the burden of ObamaCare from our economy, and the
    Financial CHOICE Act, to end bank bailouts to unleash trillions
    of dollars of capital sitting on the economic sidelines due to
    the Dodd-Frank Act. These are landmark pieces of legislation.
    In the months to come, the House will vote on a fairer,
    flatter, more competitive Tax Code that will undoubtedly bring
    us a far healthier and dynamic economy, and the Trump
    Administration is busy rolling back rules that harm our economy
    as well.
        Monetary policy must, of course, do its part as well. I am
    highly encouraged that Chair Yellen and her colleagues seem to
    be on track toward some type of monetary policy normalization.
    Keeping interest rates artificially low for too long was a key
    contributing factor to the last crisis. Let's hope it does not
    prove to be a key contributing factor to the next.
        What is most desirable for long-term economic growth is for
    the Fed to set out an easily discernible and transparent policy
    strategy to achieve its mandate and, but for highly exigent
    circumstances, to stick to it. Forays by the Fed into fiscal
    policy, specifically credit allocation, cannot and should not
    be permitted. Assuming press reports are accurate and the Fed
    will soon commence an orderly wind down of its balance sheet,
    this is more good news. Both the size and composition of the
    balance sheet remain alarming.
        Intervention into distinct credit markets like mortgage-
    backed securities is inherently fiscal policy, not monetary
    policy. Already, there is talk of having the Fed bail out
    student loans and public pension funds. I again maintain, if we
    are not careful, we may wake up one day to find our central
    bankers have instead become our central planners. What has
    allowed the Fed's foray into the credit allocation is the
    policy of paying interest on excess reserves and, today, paying
    a premium over market.
        Interest on required reserves was meant to counteract an
    implicit tax. Interest on excess reserves should not become a
    permanent tool of monetary policy. Normalization would suggest,
    after setting a level of reserves, and short-term interest
    rates be set by market forces. But today they are set from the
    top down by an administered rate paid on excess reserves which,
    again, is a premium rate resting on uncertain legal authority.
        Forays into credit allocation in fiscal policy threaten the
    Fed's independence and economic future. So let's hope the
    normalization has truly begun.
        And I now recognize the ranking member for 4 minutes.
        Ms. Waters. Thank you, Mr. Chairman.
        And thank you, Chair Yellen. It is a pleasure to have you
    with us today.
        Since day one, the story of the Trump Administration has
    been one of chaos and turmoil. This creates uncertainty that
    threatens the progress of our economy and the opportunities
    available to all American households. Trump made many big
    promises to hard-working Americans about ushering in a new
    level of economic prosperity in America. Yet, despite all of
    his bluster, let's look at what Trump has actually done when it
    comes to our economy.
        None of it is good. He reversed a planned cut to Federal
    Housing Administration mortgage insurance premiums that would
    have saved homeowners $500 a year. He issued executive actions
    to begin to dismantle Wall Street reforms and embrace the wrong
    choice act, the chairman's bill to gut the Dodd-Frank Wall
    Street Reform and Consumer Protection Act and hobble the Fed.
        There are actions that endanger the economic progress we
    have made since the Great Recession. In passing the wrong
    choice act, House Republicans, once again, are trying to weaken
    the independence of the Fed and chain the Fed's policy
    decisions to a mathematical formula that would diminish its
    ability to support the economy and fulfill its mandate to
    promote full employment.
        The Republicans' bill would also subject Federal financial
    regulators, including the Fed, to the politicized annual
    appropriations process.
        All of this wasn't bad enough. President Trump will soon
    have the opportunity to reshape the makeup of the Board of
    Governors, thereby tilting policy in the direction of Wall
    Street.
        For example, earlier this week, the White House announced
    the President's intent to nominate Randal Quarles to serve as
    the Fed's Vice Chair for Supervision and in part a post
    responsible for overseeing the Fed's implementation of Wall
    Street reform.
        This is troubling, given Quarles' public opposition to key
    aspects of the Dodd-Frank Act and support for measures that
    would curtail the Fed's independence.
        While our economy has made substantial progress since the
    height of the financial crisis and we continue to see positive
    trends in the labor market as a result of the policies put in
    place by the Fed, Congressional Democrats, and President Obama,
    key aspects of our economy have yet to fully recover.
        Since your last testimony before this committee, wage
    growth continues to lag and troubling economic disparities
    continue to exist among racial and ethnic lines. So I hope that
    policymakers will keep these trends in mind and the fact that
    inflation expectations have fallen as they evaluate the stance
    of monetary policy.
        So, Chair Yellen, I commend you for your steady leadership
    and look forward to your testimony.
        And, with that, Mr. Chairman, I yield back the balance of
    my time.
        Chairman Hensarling. The gentlelady yields back.
        The Chair recognizes the gentlemen from Kentucky, Mr. Barr,
    the chairman of our Monetary Policy and Trade Subcommittee, for
    2 minutes.
        Mr. Barr. Chair Yellen, welcome back to the committee. And
    despite nearly 9 years of the most accommodative and
    unconventional monetary policy in U.S. history and despite some
    recent positive economic news, labor force participation
    remains at a disappointing 40-year low, wages are stagnant, and
    economic growth has yet to eclipse 3 percent.
        Making matters worse, just like the farm bill used to pay
    farmers not to plant, the Federal Reserve, by paying interest
    on excess reserves, is effectively paying banks not to lend.
        Former Fed Chairman Ben Bernanke said as much in 2013 when
    he stated, ``Banks are not going to lend out the reserves at a
    rate lower than they can earn at the Fed.''
        The Fed has adopted this interest on excess reserves policy
    to fund its enormous $4.5 trillion balance sheet. By
    guaranteeing the largest banks in America this low-risk, above-
    market rate of return on deposits, the Fed is discouraging
    lending into the real economy, effectively taking money out of
    the communities across America and leaving less capital for
    Main Street households and businesses to prosper.
        I was glad to read about the Fed's intentions to start
    shrinking its oversized portfolio. I share the view of St.
    Louis Fed President James Bullard and others that this decision
    is long overdue. What concerns me, however, is that, once
    again, the Fed seems to be improvising instead of following a
    well-grounded strategy.
        Earlier this year, some officials pointed to another Fed
    funds rate increase in September with a move to start reducing
    the balance sheet beginning in December. Now we are hearing
    that the FOMC might start the portfolio reduction plan in
    September and put off until December any further interest rate
    increase.
        Again, I welcome initiating the process to reduce the size
    of the balance sheet sooner rather than later, but I look
    forward to your testimony and hopefully an explanation of
    whether the Fed is once again changing its strategy and, if so,
    why.
        Thank you for coming today, and I look forward to your
    testimony about these and other topics.
        I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Wisconsin, Ms.
    Moore, the ranking member of our Monetary Policy and Trade
    Subcommittee, for 1 minute.
        Ms. Moore. Thank you so much, Mr. Chairman.
        And thank you, Madam Chairwoman, for appearing here for the
    annual Humphrey-Hawkins report.
        I want to start out by thanking you for your very thorough
    and thoughtful reply to our Congressional letter regarding
    disparities in labor markets for African Americans and other
    minorities. Thank you. It did not have a lot of solutions, but
    it was very thoughtful pointing out projects that seek to find
    the answers.
        This disparity is really clear among minorities, but I am
    concerned that it is also increasing in all populations of
    working Americans. And it seems pretty clear from the research,
    that the challenge moving forward will be able to use fiscal
    policy to address income and wealth inequality in a way that
    the blunt instrument of monetary policy can't, especially as
    the Fed moves forward to raise rates.
        I understand you have to do it, but there is an asymmetric
    recovery that is troubling. Given that the poor and working
    class have not felt the benefits of the booming stock market,
    and that inflation is under control, I think that Congress can
    and should use the power of the purse to shore up those
    segments of the population that are still hurting from the
    recession. And I look forward to hearing your testimony.
        I yield back.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        Today, we welcome the testimony of the Honorable Janet
    Yellen. Chair Yellen has testified before this committee on
    numerous occasions, so I feel she needs no further
    introduction.
        Without objection, the witness' written statement will be
    made a part of the record.
        Chair Yellen, you are now recognized for 5 minutes to give
    an oral presentation of your testimony. Thank you for being
    here.

      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 semi-annual 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 this committee in February, the
    labor market has continued to strengthen. Job gains have
    averaged 180,000 per month so far this year, down only slightly
    from the average in 2016 and still well above the pace we
    estimate would be sufficient on average to provide jobs for new
    entrants to the labor force.
        Indeed, the unemployment rate has fallen about a quarter
    percentage point since the start of the year and, at 4.4
    percent in June, is 5\1/2\ percentage points below its peak in
    2010 and modestly below the median of Federal Open Market
    Committee participants' assessments of its longer run normal
    level. The labor force participation rate has changed little on
    net this year, another indication of improving conditions in
    the jobs market given the demographically driven downward trend
    in this series. A broader measure of labor market slack that
    includes workers marginally attached to the labor force and
    those working part time who would prefer full-time work has
    also fallen this year and is now nearly as low as it was just
    before the recession.
        It is also encouraging that jobless rates have continued to
    decline for most major demographic groups, including for
    African Americans and Hispanics. However, as before the
    recession, unemployment rates for these minority groups remain
    higher than for the Nation overall.
        Meanwhile, the economy appears to have grown at a moderate
    pace on average so far this year. Although inflation adjusted
    gross domestic product is currently estimated to have increased
    at an annual rate of only 1\1/2\ percent in the first quarter,
    more recent indicators suggest the growth rebounded in the
    second quarter.
        In particular, growth in household spending, which was weak
    earlier in the year, has picked up in recent months and
    continues to be supported by job gains, rising household
    wealth, and favorable consumer sentiment.
        In addition, business fixed investment has turned up this
    year after having been soft last year. And the strengthening in
    economic growth abroad has provided important support for U.S.
    manufacturing production and exports.
        The housing market has continued to gradually recover,
    aided by the ongoing improvement in the labor market and
    mortgage rates that, although up somewhat from a year ago,
    remain at relatively low levels.
        With regard to inflation, overall consumer prices, as
    measured by the price index for personal consumption
    expenditures, increased 1.4 percent over the 12 months ending
    in May, up from 1 percent a year ago but a little lower than
    earlier in the year.
        Core inflation, which excludes energy and food prices, has
    also edged down in recent months and was 1.4 percent in May, a
    couple of tenths below the year-earlier reading. It appears
    that the recent lower readings on inflation are partly the
    result of a few unusual reductions in certain categories of
    prices. These reductions will hold 12-month inflation down
    until they drop out of the calculation.
        Nevertheless, with inflation continuing to run below the
    Committee's 2 percent longer run objective, the FOMC indicated
    in its June statement that it intends to carefully monitor
    actual and expected progress toward our symmetric inflation
    goal. Looking ahead, my colleagues on the FOMC and I expect
    with further gradual adjustments in the stance of monetary
    policy, the economy will continue to expand at a moderate pace
    over the next couple of years with a job market strengthening
    somewhat further and inflation rising to 2 percent. This
    judgment reflects our view that monetary policy remains
    accommodative.
        Ongoing job gains should continue to support the growth of
    incomes and therefore consumer spending.
        Global economic growth should support further gains in U.S.
    exports. And favorable financial conditions coupled with the
    prospect of continued gains in domestic and foreign spending
    and the ongoing recovery in drilling activity should continue
    to support business investment. These developments should
    increase resource utilization somewhat further, thereby
    fostering a stronger pace of wage and price increases. Of
    course, considerable uncertainty always attends the economic
    outlook.
        There is, for example, uncertainty about when and how much
    inflation will respond to tightening resource utilization.
    Possible changes in fiscal and other government policies here
    in the United States represent another source of uncertainty.
        In addition, although the prospects for the global economy
    appear to have improved somewhat this year, a number of our
    trading partners continue to confront economic challenges. At
    present, I see roughly equal odds that the U.S. economy's
    performance will be somewhat stronger or somewhat less strong
    than we currently project.
        I will now turn to monetary policy. The FOMC seeks to
    foster maximum employment and price stability as required by
    law. Over the first half of 2017, the Committee continued to
    gradually reduce the amount of monetary policy accommodation.
    Specifically, the FOMC raised the target range for the Federal
    funds rate by one-quarter percentage point at both its March
    and June meetings, bringing the target to a range of 1 to 1\1/
    4\ percent. In doing so, the Committee recognized the
    considerable progress the economy had made and is expected to
    continue to make toward our mandated objectives.
        The Committee continues to expect that the evolution of the
    economy will warrant gradual increases in the Federal funds
    rate over time to achieve and maintain maximum employment and
    stable prices. That expectation is based on our view that the
    Federal funds rate remains somewhat below its neutral level.
    That is the level of the Federal funds rate that is neither
    expansionary nor contractionary and keeps the economy operating
    on an even keel. Because the neutral rate is currently quite
    low by historical standards, the Federal funds rate would not
    have to rise all that much further to get to a neutral policy
    stance. But because we also anticipate that the factors that
    are currently holding down neutral rate will diminish somewhat
    over time, additional gradual rate hikes are likely to be
    appropriate over the next few years to sustain the economic
    expansion and return inflation to our 2 percent goal. Even so,
    the Committee continues to anticipate that the longer run
    neutral level of the Federal funds rate is likely to remain
    below levels that prevailed in previous decades.
        As I noted earlier, the economic outlook is always subject
    to considerable uncertainty, and monetary policy is not on a
    preset course. FOMC participants will adjust their assessments
    of the appropriate path of the Federal funds rate in response
    to changes to their economic outlooks and to their judgments of
    the associated risks as informed by incoming data.
        In this regard, as we noted in the FOMC statement last
    month, inflation continues to run below our 2 percent objective
    and has declined recently. The Committee will be monitoring
    inflation developments closely in the months ahead.
        In evaluating the stance of monetary policy, the FOMC
    routinely consults monetary policy rules that connect
    prescriptions for the policy rate with variables associated
    with our mandated objectives.
        However, such prescriptions cannot be applied in a
    mechanical way. Their use requires careful judgments about the
    choice and measurement of the inputs into these rules as well
    as the implications of the many considerations these rules do
    not take into account.
        I would like to note the discussion of simple monetary
    policy rules and their role in the Federal Reserve's policy
    process that appears in our current Monetary Policy Report.
        Let me now turn to our balance sheet. Last month, the FOMC
    augmented its policy normalization principles and plans by
    providing additional details on the process that we will follow
    in normalizing the size of our balance sheet.
        The Committee intends to gradually reduce the Federal
    Reserve's security holdings by decreasing its reinvestment of
    the principal payments it receives from the securities held in
    the System Open Market Account. Specifically, such payments
    will be reinvested only to the extent that they exceed
    gradually rising caps.
        Initially, these caps will be set at relatively low levels
    to limit the volume of securities that private investors will
    have to absorb. The Committee currently expects that, provided
    the economy evolves broadly as anticipated, it will likely
    begin to implement the program this year.
        Once we start to reduce our reinvestments, our securities
    holdings will gradually decline, as will the supply of reserve
    balances in the banking system.
        The longer run normal level of reserve balances will depend
    on a number of as-yet-unknown factors, including the banking
    system's future demand for reserves and the Committee's future
    decisions about how to implement monetary policy most
    efficiently and effectively. The Committee currently
    anticipates reducing the quantity of reserve balances to a
    level that is appreciably below recent levels but larger than
    before the financial crisis.
        Finally, the Committee affirmed in June that changing the
    target range for the Federal funds rate is our primary means of
    adjusting the stance of monetary policy. In other words, we do
    not intend to use the balance sheet as an active tool for
    monetary policy in normal times.
        However, the Committee would be prepared to resume
    reinvestments if a material deterioration in the economic
    outlook were to warrant a sizable reduction in the Federal
    funds rate. More generally, the Committee will be prepared to
    use its full range of tools, including altering the size and
    composition of its balance sheet, if future economic conditions
    were to warrant a more accommodative monetary policy than can
    be achieved solely by reducing the Federal funds rate.
        Thank you. I would be pleased to take your questions.
        [The prepared statement of Chair Yellen can be found on
    page 56 of the appendix.]
        Chairman Hensarling. The Chair now recognizes himself for 5
    minutes for questions.
        Chair Yellen, the first question I have is with respect to
    the 2 percent inflation target that was adopted several years
    ago. I must admit as an aside, a back-of-the-envelope
    calculation tells me that nominal prices will double every
    generation. I am still trying to figure out how that is
    commensurate with price stability, but that is not my question.
        In a recent press conference, some interpreted comments
    that you made to indicate that you were open to an increase in
    the inflation target. Are you pursuing an increase in the
    inflation target? Are other members of the FOMC? Is this a
    matter of discussion within the FOMC to increase the 2 percent
    inflation target?
        Mrs. Yellen. It is not. We reaffirmed our 2 percent
    inflation target in January. We are very focused on trying to
    achieve our 2 percent inflation target, and it is not a subject
    of discussion.
        Chairman Hensarling. Thank you. I will take ``no'' for an
    answer.
        As you heard in my opening statement, I remain concerned,
    as do other Members, about a blurring between the lines of
    monetary policy and fiscal policy, specifically credit
    allocation. We feel that ultimately this could impede upon the
    Fed's independence. Professor Marvin Goodfriend of Carnegie
    Mellon,, whom I think you may be familiar with, gave what I
    thought was an instructive distinction between monetary and
    fiscal policy. And he said, ``Monetary policy does not favor
    one sector of the economy over another, and monetary policy
    does not involve taking credit risk onto the Fed's balance
    sheet.''
        By contrast, he went on to say: ``Credit policy works by
    interposing the government's creditworthiness, the power to
    borrow credibly against future taxes between private borrowers
    and lenders to facilitate credit flows to distressed borrowers.
    Fed credit policy involves lending to private institutions or
    acquiring non-Treasury securities with freshly created bank
    reserves or proceeds from the sale of Treasuries from the Fed
    portfolio.''
        I guess my question is, Chair Yellen, do you agree with
    this distinction? And if you don't agree with this distinction,
    do you feel that credit policy is commensurate with your
    Congressional mandate?
        Mrs. Yellen. The FOMC, in its principles for normalization
    of monetary policy, has clearly indicated that it intends to
    return over time to a primarily Treasury-only portfolio, and
    that is in order not to influence the allocation of credit in
    the economy.
        That said, our purchases of mortgage-backed securities took
    place after a financial crisis when the market for mortgage-
    backed securities was not working at all well, and I believe it
    was appropriate. But we have endorsed the principle--
        Chairman Hensarling. I understand that.
        Mrs. Yellen. --of returning to a Treasury portfolio.
        Chairman Hensarling. So do you or do you not associate
    yourself with Professor Goodfriend's comments? Is that a useful
    distinction to you as he articulated?
        Mrs. Yellen. I think it is a useful distinction.
        Chairman Hensarling. Okay. Thank you.
        It is my understanding that the Fed can legally purchase
    student debt guaranteed by the Federal Government, and
    municipal debt that matures in less than 6 months. Is that your
    understanding as well?
        Mrs. Yellen. I am not sure about student debt. We are able
    to purchase Treasury and agency securities.
        Chairman Hensarling. Has the FOMC ever discussed the
    possibility of purchasing either student debt or municipal
    debt?
        Mrs. Yellen. Not to the best of my knowledge.
        Chairman Hensarling. Finally, in this part of the
    questioning, am I led to believe, then, that your balance sheet
    reduction will allow you to return the Fed funds rate as a
    primary policy instrument instead of interest on reserves? Is
    that my understanding from your testimony?
        Mrs. Yellen. We are reliant on interest on excess reserves
    as our key tool for setting the Federal funds rate. So that is
    a key instrument of monetary policy. But what I said is that we
    intend to rely on adjustments through interest on reserves
    through our Fed funds rate target as a means of regulating--
        Chairman Hensarling. My time is rapidly winding down. I was
    very heartened to see in your report a comparison of Fed policy
    with a number of policy rules. I think this is very helpful,
    Chair Yellen. I would say, though, that, in some respects, your
    report says how the FOMC differed from these policy rules, but
    it does not say why. In order to give the broadest amount of
    information to the markets so that people can plan their lives,
    I would simply encourage you to perhaps go even further and
    discuss why the actual FOMC policy differed from these policy
    rules. I think that would be very encouraging, if you would
    have a brief comment on that.
        Mrs. Yellen. Let me just say that I am very pleased that
    you, the committee, found the material on rules useful, and we
    look forward to working with you to provide further information
    that would be useful to the committee.
        Chairman Hensarling. Thank you.
        I now recognize the ranking member for 5 minutes.
        Ms. Waters. Thank you, Mr. Chairman.
        As part of the Federal Open Market Committee's, ``Statement
    on Longer-Run Goals and Monetary Policy Strategy,'' the
    Committee states that it would be concerned if inflation were
    running persistently above or below its 2 percent objective.
    Given that core inflation has been below the Fed's 2 percent
    target for more than 5 years and is currently at 1.4 percent,
    what is the Fed's rationale for further raising rates at this
    time? If the 2 percent market truly is symmetric, shouldn't the
    Federal Open Market Committee be willing to allow inflation to
    begin rising closer to its 2 percent target before it is able
    to justify additional rate increases?
        Mrs. Yellen. Let me say that we are very committed to
    achieving our 2 percent inflation objective and are well aware
    that, for a number of years, we have been running under that
    and recognize that there are dangers that would be associated
    with persistent undershoots of our inflation objective, and it
    is a symmetric inflation objective; 2 percent is not a ceiling.
    It is a symmetric objective.
        Now, I would say with respect to the inflation outlook,
    although inflation has been running below 2 percent, earlier
    this year, on a 12-month basis, core inflation had reached 1.8
    percent and headline inflation came close to 2 percent.
        We have seen increasing strength in the labor market that
    continues, and although there are lags in this process, I
    believe that is something that over time will put upward
    pressure on both wages and prices.
        Now, for several months running, we have seen unusually low
    inflation readings. As I mentioned, there appear to be some
    special factors that partly account for that. For example,
    quality-adjusted prices of cell phone plans plunged several
    months ago, and prescription drug prices also plunged.
        Some temporary factors appear to be at work. Nevertheless,
    our 12-month inflation rates will remain low until those
    factors drop out. But I would say it is premature to reach the
    judgment that we are not on the path to 2 percent inflation
    over the next couple of years.
        As we indicate in our statement, it is something that we
    are watching very closely, considering risks around the
    inflation outlook. To my mind, a prudent course is to make some
    adjustments as long as our forecast is that we are heading back
    to 2 percent.
        But monetary policy is not on a preset course. We are
    watching this very closely and stand ready to adjust our policy
    if it appears that the inflation undershoot will be persistent.
        Ms. Waters. Thank you very much.
        I would like to move on to ask you a question about
    Deutsche Bank. First, I would like to commend you and your
    colleagues at the Federal Reserve for recently fining Deutsche
    Bank, a top creditor of the President and his immediate family,
    for its failure to comply with anti-money-laundering
    requirements. I would like to learn a bit more about what you
    may have discovered in the course of your investigation of
    Deutsche Bank. Were you able to verify that Deutsche Bank had
    completed its own internal review of a Russian mirror trading
    scheme that took place from 2011 to 2015? And, separately, as
    part of the Fed's supervision of Deutsche Bank's anti-money-
    laundering compliance, can you comment on the due diligence
    that the bank conducted on the accounts of President Trump and
    his immediate family members, given the high-profile nature of
    their accounts?
        Mrs. Yellen. We issued an enforcement action against
    Deutsche Bank for violations of Bank Secrecy Act anti-money-
    laundering procedures in the United States, and that was based
    on our own investigations.
        The mirror trades that you referred to occurred outside the
    United States. Recently, the U.K. FCA took an action against
    Deutsche Bank for those trades. Those are not ones that we are
    involved in looking at, and we haven't, of course, in the
    course of our investigations, looked into individual
    transactions with the President.
        Ms. Waters. That was one of two reviews that was done on
    Deutsche Bank, the mirror trading and the high-profile
    politicians or elected officials review. Are you familiar with
    that?
        Mrs. Yellen. I am not familiar with the details. Our focus
    has been on the safety and soundness of the operations of
    Deutsche in the United States.
        Ms. Waters. Thank you.
        I yield back.
        Chairman Hensarling. The gentlelady yields back.
        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, again, welcome back, Chair Yellen, welcome back. And
    we welcome the decision, the announced intentions of the Fed to
    begin the process of reducing the size of its oversized
    portfolio. But in terms of the plan and in terms of portfolio
    composition and balance sheet normalization, why does your plan
    contemplate rolling off Treasury securities at a faster pace
    than mortgage bonds?
        Mrs. Yellen. The differences are relatively slight. My
    expectation is, although one can't be certain of what the
    prepayments of principal will be on mortgage-backed securities,
    that ultimately our caps on reinvestment of mortgage-backed
    securities will not be binding, that they will only come into
    play in exceptional circumstances.
        So, once we have phased in those caps, I don't expect them
    to be binding. The Treasury market is very deep and liquid. It
    is a huge market. Our intention in gradually phasing up these
    caps is to avoid disruption, and we are comfortable--
        Mr. Barr. Thank you for that.
        And this kind of gets to the question of credit allocation.
    Let me move on quickly to the issue of the Fed's use of
    interest on excess reserves as a monetary policy tool.
        The Fed is now paying banks 1\1/4\ percent on their reserve
    balances, and if the Fed follows through with its normalization
    plans, the Fed will be paying banks a higher interest rate on
    their reserves sometime later this year. These interest rates,
    as I said in my opening statement, provide banks with a
    government subsidy to not lend out their reserves.
        Does the Fed have any evidence that banks are passing on
    these higher interest on excess reserves rates to their
    customers in the form of higher interest rates on customer
    deposits?
        Mrs. Yellen. My impression is that, on larger deposits, on
    CDs, we are beginning to see some upward movement in the rates
    that are available to customers, but not on retail deposit
    accounts.
        My expectation is, although there will be a lag, that, as
    the general level of short-term interest rates rise, that
    competition among banking organizations will begin to put some
    upward pressure on those rates, and--
        Mr. Barr. And we looked at what some of the big banks pay
    on customer deposits: one basis point for many of them,
    multiple institutions paying only one basis point on customer
    deposits. And the Fed is paying 125 basis points. And so it
    doesn't appear as though any of this pass-through is happening
    to customer accounts, and that might compel the Fed to
    reconsider the merits of its IOER policy.
        Wouldn't it be better for growth if banks were encouraged
    to deploy more capital in the real economy instead of just
    parking it at the Fed in exchange for IOER?
        Mrs. Yellen. I don't see banks as parking it at the Fed and
    not lending. My discussions with bankers and the information
    that we regularly collect suggests that banks are looking to
    make loans. There was a period of very slow loan growth at the
    beginning of the year, but our survey suggests that it was more
    a matter of demand than supply.
        So, remember, our interest on reserves is at a very low
    level--
        Mr. Barr. Yes, ma'am. I would just interject an editorial
    comment, which is that the dilemma that the Fed now appears to
    face is that lowering interest on excess reserves, of course,
    would decrease the Fed funds rate, but normalization would also
    entail moving back to the conventional open market operations.
        Let me, finally, in my limited time left, talk to you a
    little bit about the limits of monetary policy. Of course, we
    know we have been struggling overall with slow growth and low
    labor participation, even though unemployment has come down.
    And you talk a lot about substandard productivity. What many
    employers say to me is that they simply can't compete with the
    government for labor and that the government is paying people
    to not work.
        And as you know, we are in the middle of this big debate in
    Washington about ObamaCare and whether or not we should reform
    Medicaid. Here is what Alan Greenspan, who calls you a first-
    rate economist, said, ``You can't get growth going so long as
    entitlement expansion is anywhere near what it has been
    recently. It is eating up the sources of investment and the
    sources of growth, and you can't have it both ways. You cannot
    fund all of the entitlements everybody wants and expect that
    you are going to get a GDP out of that of 3 percent of more
    than the annual rate. The arithmetic just doesn't work.''
        Wouldn't you agree that the structure of our welfare
    programs, including ObamaCare, contain disincentives for work?
        Chairman Hensarling. A brief answer, please.
        Mrs. Yellen. To my mind, the major factor here is an aging
    population that is putting downward pressure on labor force
    participation. There are other factors that affect labor force
    participation as well, but the slow growth that we have and
    anticipate reflects in part an aging population and slow
    productivity growth.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Wisconsin, Ms.
    Moore, the ranking member of our Monetary Policy and Trade
    Subcommittee.
        Ms. Moore. Thank you so much, Mr. Chairman.
        Let me sort of pursue the question, Madam Chair, that Mr.
    Barr was raising with you with regard to paying people not to
    work, and he gave as an example Medicaid.
        I just want to mention that two-thirds of the people who
    use Medicaid are in nursing homes and they are unable to work.
    I just want to point that out.
        I also want to pursue some questions from you that the
    chairman seemed to be interested in some rules-based policy
    that the FOMC had put out there. And I want to note that, a
    couple of weeks ago, you were very critical of the Taylor Rule,
    one of the rules that seems to be favored by the leadership on
    this committee.
        I was wondering if you could spend just a little time
    talking to us about your reservations about the Taylor Rule and
    the appropriate application of it?
        Mrs. Yellen. I don't believe that the FOMC should
    mechanically follow any single simple rule. But as we point out
    in the Monetary Policy Report, policy rules do embody some
    principles of sound monetary policy that should inform our
    policy decisions. And we have for several decades now looked at
    the recommendations of the Taylor Rule and a number of other
    different rules in deciding on the appropriate stance of
    policy.
        As we try to point out in the report, there are many
    different rules. There is no clear way to decide which one is
    better than the others. They lead to a range of
    recommendations. So there is no single recommendation that
    comes out of a rules-based approach. And they require judgment
    in order to implement about measuring things like the GDP or
    output gap and particularly the neutral real level of interest
    rates, something that we have been struggling with, as has the
    professional economics community, now for many years, so--
        Ms. Moore. Thank you, Chair Yellen.
        So the CHOICE Act is a bill that we pushed out of this
    committee, and it proposes sort of a rules-based monetary
    policy, and I want to know what your thoughts specifically are
    about that piece of legislation?
        Mrs. Yellen. I have said on many occasions that I am
    opposed to the requirements in the CHOICE Act.
        Ms. Moore. Okay. What about subjecting the Fed to the
    appropriations process?
        Mrs. Yellen. I would be very concerned about subjecting the
    Fed to appropriations. We, of course, want to start with saying
    that we are, obviously, operating in all that we do under
    Congressional mandates and laws. We seek to be transparent, to
    be accountable to Congress, and to communicate as clearly as we
    can the basis for our actions in monetary policy and also in
    supervision. But I do think our independence in setting our own
    appropriations--
        Ms. Moore. Thank you for that, Madam Chair.
        Mrs. Yellen. --are safeguarded.
        Ms. Moore. I want to go back to the limitations that the
    FOMC has with regard to closing the disparity and the gap of
    recovery for African Americans, and lower-income Whites. There
    is only so much you can do. So I was wondering if you would
    agree that some of the austerity measures that Congress
    accounts--we place--saying we are paying people not to work
    when, actually, people who receive food stamps are old people,
    disabled people, children, people on Medicaid. Would you say
    that Congress needs to step up on the appropriations side doing
    things for lower-income people to subsidize wages, that that is
    a better tool than what the Fed has to offer in closing those
    gaps?
        Mrs. Yellen. As you indicated in your opening statement,
    monetary policy is a blunt tool, and it is not something that
    we can use to achieve distributional objectives. Although, as
    we point out in the report, a strong labor market does benefit
    all groups, and particularly minority groups, although the
    experience is worse for them.
        So, yes, I think it is absolutely appropriate for Congress
    to consider appropriate fiscal policy and how it might be used
    to advance those objectives.
        Ms. Moore. Thank you so much.
        And my time has expired.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from New Mexico, Mr.
    Pearce, chairman of our Terrorism and Illicit Finance
    Subcommittee.
        Mr. Pearce. Thank you, Mr. Chairman.
        And thank you to the Chair for being here. We always
    appreciate your visits.
        Now, I note in your comments today you are talking about
    the labor force participation rate, and in the past, I think
    you and I have had an opportunity to discuss that, and it was
    not something I have seen to be a concentration on the part of
    the Feds before now--and it is now.
        What changed that it has become a bigger concentration for
    you all?
        Mrs. Yellen. It is important for us to try to determine how
    much slack there is in labor markets, how much potential--
        Mr. Pearce. Sure. I understand that, but that was important
    before, and there didn't seem to be any comments from you. And,
    in fact, in 2016, it was just a number that didn't come readily
    to your mind when you were in front of the committee here. I
    just wondered what has changed since January that you would now
    be concentrating on that?
        Mrs. Yellen. I think I was discussing this last year,
    because it is a source of uncertainty after a very long and
    deep recession. We want to understand what potential there is
    for people to come back. And as I mentioned in my testimony,
    labor force participation rate has been--
        Mr. Pearce. No. I appreciate that. If I could grab back my
    time now. I am going through the Monetary Policy Report here,
    and I am going through your comments, and I almost don't see
    anything about that number on the screen behind you that is
    just constantly rolling there, and it is a debt, and maybe it
    doesn't mean anything, and maybe it does. Do you all ever talk
    about that in your Committee? Do you ever contemplate that in
    your position?
        Mrs. Yellen. I have discussed this previously with this
    committee and others.
        Mr. Pearce. I understand, but we didn't note it in the
    report today as one of the driving factors and something we
    ought to be thinking about.
        So how did it affect you all when Illinois was downgraded--
    their bond rating was downgraded the 1st of the year, and they
    are paying what one analyst said is the highest differential in
    our history? Now, the reason they are having to pay more and
    the bonds are being downgraded is because they can't afford to
    pay the bills, basically. And if you hold their bonds, you may
    not get paid.
        If you went back to Detroit when it filed bankruptcy,
    bondholders only got 74 percent on the dollar. And it all feeds
    back toward this number here and the fact that it doesn't even
    make the print, not even the fine print that I can find. Maybe
    I missed it, but I did see the one sentence about Illinois
    being downgraded, and there was a brief discussion of Puerto
    Rico.
        But the idea that we as a country are not discussing our
    ability to pay our bills is something that, I think, there is a
    downside effect to the problem, but the fact that your report
    doesn't bring it up is a little concerning to me.
        And the way that really played out was a couple of weeks
    ago when Chicago schools tried to issue a bond rating and they
    didn't get any bidders at all, none. So they ended up driving
    the rate up to 7, 7\1/2\, 7\3/4\ or something. But it seems
    like the people in charge of the financial stability of the
    country, the value of our dollar, the value of our promises to
    pay, it just seems like it would have a little bit more
    importance in the document here.
        I would expect, frankly, maybe a whole chapter, because
    there are estimates that we can't pay our bills in this
    country, and so we continue to operate as if--as if it is not
    going to matter if our ratings are downgraded. If our interest
    rate goes up--we are already running deficits, which means we
    have to print the money every year in which to operate, and it
    seems like that the people in charge of the system would be
    talking about it and postulating and telling us: Hey, this is
    kind of serious. Why don't we all work together and start
    figuring out what we can do to live within our means, to just
    make sure that we are not paying triple and quadruple what
    other people are paying for debt? I don't know. I would love to
    hear your comments.
        Mrs. Yellen. Let me state it in the strongest possible
    terms that I agree that what you are showing here represents a
    trend that, given current spending and taxation decisions, is
    going to lead to an unsustainable debt situation with rising
    interest rates and declining investment in the United States
    that will further harm our productivity growth and living
    standards.
        I believe a key thing that Congress should be taking into
    account in designing fiscal policy is the need to achieve
    sustainability of this debt path over time. This is something I
    am not just saying today but have been emphasizing for some
    time in my testimony.
        Mr. Pearce. Thank you very much.
        I yield back, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from New York, Mrs.
    Maloney, ranking member of our Capital Markets Subcommittee.
        Mrs. Maloney. Chair Yellen, as you mentioned earlier,
    inflation has not been moving up as quickly as the Fed had been
    expecting. And given that the labor market has continued to
    tighten and inflation still hasn't increased to the Fed's
    target of 2 percent, do you think the Fed should wait to see
    some improvement in the inflation outlook before it starts the
    process of balance sheet normalization by phasing out the Fed's
    reinvestment policy, or, in other words, are your plans for the
    timing of balance sheet normalization unchanged?
        Mrs. Yellen. We have been trying to very carefully lay out
    our plans to normalize the size of our balance sheet in a
    gradual and predictable way. And my colleagues made the
    judgment in June when we laid out the final details that, if
    the economy continues to evolve in line with our expectations,
    that it is something that we should begin to do this year and,
    to my mind, I would say relatively soon.
        The exact timing of this I don't think matters a great
    deal. It is something we have long been preparing to undertake.
        As I mentioned earlier, we are watching inflation very
    carefully. I do believe that part of the weakness in inflation
    represents transitory factors but will recognize inflation has
    been running under our 2 percent objective, that there could be
    more going on there. It is something that we will watch very
    carefully and will be a factor in our future decisions about
    rate increases.
        Mrs. Maloney. Thank you.
        As you know, your term as Fed Chair ends in 2018. And there
    is a long history of Presidents renominating Fed Chairs that
    their predecessors had originally named. Ronald Reagan
    renominated Paul Volcker. Bill Clinton renominated Alan
    Greenspan. And President Obama renominated Ben Bernanke.
        So my question is, are you open to serving another 4 years
    as Fed Chair if President Trump decides that he wants to
    renominate you?
        Mrs. Yellen. What I previously said is that I absolutely
    intend to serve out my term. I am very focused on trying to
    achieve our Congressionally mandated objectives, and I really
    haven't had to give further thought at this point to this
    question.
        Mrs. Maloney. When the Fed does start the process of
    balance sheet normalization, are you less likely to raise
    interest rates at the same time, or do you view these two
    actions as being on separate tracks?
        Mrs. Yellen. The path for the Federal funds rate is a
    decision for the Committee, and they have made no decision
    about whether or not both things could occur at the same time.
        I would note that in June, at our most recent meeting, we
    produced the, ``Summary of Economic Projections,'' which
    appears in the Monetary Policy Report. Most of my colleagues or
    at least the median anticipated that one further increase in
    the Federal funds rate would likely be appropriate this year,
    but as I say, we constantly watch the economy, the evolution of
    inflation, and the labor market, and we will make decisions on
    the basis of our evaluation of that information.
        Mrs. Maloney. The Fed has suggested that the stock market
    is currently overvalued. Are there other markets that you
    consider or see as overvalued as well, and do you think a
    correction in any of these markets would cause problems for
    financial stability?
        Mrs. Yellen. In looking at asset prices and valuations, we
    try not to opine on whether they are correct or they are not
    correct. But on--as you asked what the potential spillovers or
    impacts on financial stability could be of asset price
    revaluations, my assessment of that is that, as asset prices
    have moved up, we have not seen a substantial increase in
    borrowing based on those asset price movements. We have a
    financial system, a banking system that is well-capitalized and
    strong, and I believe it is resilient.
        Mrs. Maloney. Okay. Thank you.
        Chairman Hensarling. The time of the gentlelady 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 thank you, Madam Chair, for being here today.
        As chairman of the Financial Institutions Subcommittee, one
    of my jobs and my greatest concerns is the regulatory oversight
    by the various financial services agencies.
        Chair Yellen, when it comes to the Fed's supervisory role,
    I want to renew my call and the calls of so many of my
    colleagues that the Fed take a more measured approach and
    withhold any new regulation until the nominee for Vice Chair
    for Supervision has been confirmed by the Senate.
        I do appreciate some of your comments and the comments of
    your colleagues, particularly Governor Powell, on issues such
    as the treatment of margin on the supplemental leverage ratio
    and on CCAR testing. Issues like these have a very real impact
    on the economy. I think it is wise that the Fed ease the
    associated burdens. You recall I sent you a letter on CCAR.
    Your response to me indicated that, while you understood my
    concerns, the Fed wasn't necessarily looking to curtail some of
    its stress-test-related activity.
        So, now that the Vice Chair of Supervision has been named,
    I will again ask that the Fed hold off on imposing any new
    supervisory burdens before the individual is in place, and I
    would just ask for a response to these statements and concerns.
        Mrs. Yellen. We have a relatively light regulatory agenda
    at this point. I am pleased to see a nomination. Clearly, we
    will look very carefully at the whole set of issues around
    regulatory burden.
        Mr. Luetkemeyer. Okay.
        Mrs. Yellen. And I look forward to having the input of that
    individual if he is confirmed.
        Mr. Luetkemeyer. Okay. Thank you.
        To that end, I also want to mention that I am very
    supportive of many provisions included in the recent Treasury
    report. I hope that the Federal Reserve is taking some
    recommendations seriously. Have you read the report yet? Are
    you aware of it?
        Mrs. Yellen. Yes, I have read the report, and there are
    many very useful and productive suggestions that mirror things
    that we have been thinking and doing ourselves with respect to
    tailoring of our regulations, reducing burdens on community
    banks. I think the recommendations pertaining to the Volcker
    Rule and looking for ways to reduce burdens are all very
    useful.
        There are a few points where we have a different view and a
    lot in it that is very useful.
        Mr. Luetkemeyer. I look forward to working with you on that
    because, while our Legislative Branch of the Government is a
    check on the Executive Branch and agencies, we want to work
    with you to try and improve the ability of our banks to be able
    to do the job of helping their communities grow.
        And I am glad you mentioned community banks because I have
    a quick story here for you, and I would like your response to
    it. I have shared this story with the committee in the past
    with regard to Mid America Bank & Trust. It's a small bank in
    my district that has been caught in Federal Reserve purgatory
    for the last 5 years. Your agency has blocked the merger and
    acquisition of this institution because of concerns over
    certain products, the same products that have actually been
    encouraged by the FDIC and the State of Missouri's Division of
    Finance.
        Your staff has forced this bank through the years to
    produce document after document, which they have done. And the
    bank has made now several offers to remediate, but the Fed has
    rejected them. Mid America has spent more than $2 million in
    legal fees. And this is a small bank; they really can't afford
    to do this. And this process has to stop. The Federal Reserve,
    after 5 years, owes this institution a determination of whether
    they can get this done.
        So my first question is, are you aware of this case?
        Mrs. Yellen. I am aware of this case.
        Mr. Luetkemeyer. Okay. What can be our expectation of the
    resolution of this?
        Mrs. Yellen. I am not prepared today to comment in detail
    on what is a confidential supervisory matter, but there have
    been a set of complicated issues pertaining to consumer--
        Mr. Luetkemeyer. Madam Chair, with all due respect, I
    understand where you are coming from. The bank on my side is
    very open about what their problems are, their concerns are. We
    have an elderly individual who has medical problems who wants
    to divest themselves of this bank. They have a very viable,
    well-structured, well-financed, well-capitalized bank that
    wants to take them over. And basically what is happening here
    is a very punitive way of going about punishing this bank for a
    product that was something that the Fed didn't like, quite
    frankly.
        And so the 5 years this has gone on is enough, and the
    opaque rules and the unwillingness of the Fed to work
    cooperatively with the banks and their attorneys and the
    regulators is not something we can continue to go and support.
    And this is why I asked the question when we started back with
    the Treasury report. The Treasury report has, I think, some
    solutions to some of the problems that regulatorily we have.
    And that is the punitive nature of some of the actions taken by
    some of the agencies, including yours.
        And so I think it has to stop. We want to work with you to
    find ways to increase the ability of these community banks to
    be able to improve their communities and help their economies
    grow, and we look forward to that.
        And, with that, I yield back. Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Minnesota, Mr.
    Ellison.
        Mr. Ellison. Good morning, Chair Yellen.
        Thank you for being here today. Let me start out by saying
    I am really happy about the appointment of Raphael Bostic as
    president of the Federal Reserve Bank of Atlanta. He meets the
    legal mandates, and he has great expertise, and also, he
    increased the number of African-American bank presidents from
    none to one, which I think is important. And so thank you for
    that.
        Mrs. Yellen. Yes.
        Mr. Ellison. We debate around here a lot of the cause of
    slower growth over the last several years. You have already
    been exposed to some people's theories as to why we have slower
    growth, but I was intrigued by this book I read recently
    called, ``Makers and Takers.'' I don't know if you are familiar
    with this particular book, but it is a book that really talks
    about the financialization of the economy.
        And I guess I would like to just get your take on it. The
    author of the book notes that one reason for lower productivity
    and lower wages is the outsized profits earned by some in the
    financial services sector--banking, real estate, insurance,
    hedge funds, Wall Street. And, in fact, the author, whose name
    is Rana Foroohar, and she has the stat up there on the screen
    that I would like you to just take a look at. She says that
    while the financial sector is a little less than 7 percent of
    the economy, it provides about 4 percent of the jobs but earns
    a whopping 25 percent of corporate profits. Twenty-five percent
    of corporate profits is a lot of money. And so, as a result,
    you see money flowing into those sectors rather than plant and
    equipment and the other sectors of the economy that might lend
    themselves to greater employment.
        Do you have any take on that? Do you have any impressions
    about that particular theory?
        Mrs. Yellen. The financial sector has grown in importance
    relative to the U.S. economy, but my sense is that if we look
    at the plight with respect to wages and jobs of middle-class
    families who have seen diminishing opportunities and downward
    pressure on their wages, that we have to take account of
    factors, such as technological change that have eliminated many
    middle-income jobs, and globalization that has reinforced the
    impact of technological change, and that those things have to
    be an important piece of understanding what has happened.
        Mr. Ellison. I am sure that technology does play some role,
    but we have always had technology, haven't we? When we went
    from horse-drawn carriages to cars, people who made horseshoes
    had to find something new to do. So I am always a little
    skeptical when I hear people say technology. We have always had
    technology. We have also had more employment.
        But we have had kind of this slow growth period, and we
    have had some people say: Well, it is because people don't want
    to supply labor because they are living too good on welfare.
        Also, is it possible that the financial services sector is
    sort of channeling investment into financial activity and not
    into agricultural and manufacturing services to actually employ
    people?
        So I will give you an example. If you look at Sears
    Department Store, it is closing about 250 stores this year.
    That means thousands of Sears and Kmart employees are going to
    lose their jobs, and hundreds of communities will lose retail
    access. Of course, you could point to technology. I am sure
    that is part of the explanation, but can you share some ideas
    or point to some analysis to explain why the retail sector is
    being hit so hard? You could say Amazon, but I am doubtful that
    explains the whole problem. Do you have any specific
    information on the role that finance might be playing in part
    of these decisions? And that investors demand outsized returns
    that demanded companies like Sears fire workers, sell real
    estate so that you can have better returns on financial
    equities.
        Mrs. Yellen. I don't have anything specifically for you on
    that. I would be happy to take a look. I would point out that,
    for many years, many American companies have been sitting on a
    lot of cash.
        Mr. Ellison. Yes.
        Mrs. Yellen. --and have been unwilling to undertake
    investment in plant and equipment of the scale that we would
    ideally like to see. So I think there are a number of different
    things going on.
        Mr. Ellison. Thank you very much.
        I yield back my time.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, chairman of our Capital Markets Subcommittee.
        Mr. Huizenga. Thanks, Chair Yellen. It is good to have you
    here. I appreciate the opportunity. And I was not expecting to
    do this, but I want to touch briefly on something that Chairman
    Barr had talked about, the labor workforce participation. These
    are U.S. Bureau of Labor Statistics civilian labor force
    participation rates. This was a study released by the St. Louis
    Fed. I am sure you are familiar with it: fred.stlouisfed.org.
    That was June 17th, and it clearly shows that what I heard you
    say is sort of these disappointing levels of labor force
    participation are unavoidable because of an aging demographic,
    and I wish I had the chart that I was able to put up, but it
    seems to me what is most concerning is this drop in
    participation really comes from youngest Americans, and, in
    fact, that chart, again released by the Fed of St. Louis, shows
    the highest levels we have seen since the 1960s for Americans
    aged 55 and older. And it seems to me this argument that our
    economy hasn't responded the way that it has, we talked about
    this actually the last time you were here, and I think I
    labeled it flim-flam, not in a disrespectful way, but it was
    clearly not what some of those statistics are showing.
        What I want to talk about, though, quickly is that, during
    your semiannual testimony before this committee in 2015, you
    were asked about concerns regarding the lack of liquidity in
    certain fixed-income markets, and you stated that, ``It is not
    clear what is happening in these markets and what is causing
    what.'' You continued that, ``We don't see a problem,''' but
    that it was something that you needed to study further.
        So my question is, has there been additional study and
    follow-up by the Fed on that particular issue?
        Mrs. Yellen. That is something that we continue to look at.
    We provide this committee with regular reports, particularly
    pertaining to corporate bonds. There have been a number of
    studies inside the Fed and also outside of it that show no
    clear pattern, some suggestions that regulations may be
    negatively impacting liquidity but other studies reaching
    different conclusions.
        Mr. Huizenga. So you don't believe there are problems in
    the fixed-income markets?
        Mrs. Yellen. The inventories of bonds held by some of the
    largest banks and market makers have declined. On the other
    hand, bid-ask spreads are low. Corporate bond issuance has been
    healthy. The market has done well.
        Mr. Huizenga. But isn't it true we don't know whether those
    bid-ask spreads are really there because there is a lack of
    transparency?
        Mrs. Yellen. It is hard to draw conclusions purely based on
    that.
        Mr. Huizenga. We are going to actually be exploring this in
    my Capital Markets Subcommittee on Friday. We have a hearing on
    fixed-income markets really just trying to find out what is
    going on. So maybe we can help you with some of that analysis
    with some testimony from here, but we need to have that
    investigative effort by the Fed on this, as well.
        I quickly want to move on. Former Fed Governor Tarullo
    suggested in a speech that, ``A new regulatory paradigm is
    needed to expand fiduciary duties of directors of banking
    institutions.''
        He posed the question whether existing modes of financial
    regulation could be further supplemented by modifying, ``the
    fiduciary duties of the boards of regulated financial firms to
    reflect what I have characterized as regulatory objectives.''
    Specifically, Mr. Tarullo believed that, ``Special corporate
    governance measures are needed as part of an effective
    prudential regulatory system.'' And he argues that traditional
    fiduciary duties focused on shareholders are inadequate for
    banking institutions. So we are not talking about DOL or any of
    the other fiduciary side of this. This is for banking
    institutions. Do you agree with his recommendations?
        Mrs. Yellen. Those are his personal recommendations.
        Mr. Huizenga. So, is that a ``no?''
        Mrs. Yellen. I am not prepared to say that I agree with all
    of those recommendations. We are focused on trying to clarify
    expectations for boards of directors to distinguish what the
    important role that they have in the banking organization and
    what is the job of senior management versus a board of
    directors.
        Mr. Huizenga. That would be a concern that I have here is,
    what expertise the Fed has on corporate governance issues like
    fiduciary duties of corporate boards, and, frankly, under what
    legal authority does the Federal Reserve seek to preempt State
    corporate governance requirements, as well as a number of
    things?
        I appreciate your answer, and thank you for being here.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Colorado, Mr.
    Perlmutter, ranking member of our Terrorism and Illicit Finance
    Subcommittee.
        Mr. Perlmutter. Good morning, Madam Chair, and thank you
    for being here, and thank you for being a steady hand at the
    Federal Reserve.
        Mrs. Yellen. Thank you.
        Mr. Perlmutter. And you must be doing an okay job because I
    have listened to my friends, my Republican friends, who
    generally have very crisp, sharp, piercing, probing, and
    accusatory questions. They don't have those today because
    things are going pretty well.
        In Colorado, I want to thank you. We were in the real dumps
    8 years ago--10 percent unemployment, housing crashing with
    foreclosures through the roof. In my district, we are at 2.1
    percent unemployment; the State, generally, 2.3 percent. And I
    know that is not the same for some of the parts of my State a
    little tougher, and I know across the Nation, but generally
    things have been steady, and I want to thank you and the
    policies of the Fed for helping us get out of what was a very
    bad situation.
        Mrs. Yellen. Thank you for that.
        Mr. Perlmutter. I have a a couple of questions. First,
    there is a guy who has been pretty dogged in telling me that we
    need to shrink the Fed's accommodative policies, and he is in
    the audience today. So explain to me--he is right directly
    behind you a couple of rows. And he has been very firm over
    these years in wanting me to press you on this. So would you
    explain to me how you plan to shrink the accommodative policies
    that we took back in 2008, 2009, and 2010?
        Mrs. Yellen. The Federal Reserve was dealing for many years
    with an economy with very high unemployment and inflation
    running below our 2 percent objective. We did everything that
    we possibly could to try to achieve the goals that we have been
    assigned by Congress, namely maximum employment and price
    stability. We were constrained in our ability to use short-term
    interest rates as a tool, and so we used our balance sheet and
    undertook other measures to try to stimulate the economy. And I
    believe we have been succeeding. While inflation is still
    running below our 2 percent objective, the labor market, as you
    pointed out, is much healthier. The unemployment rate is now
    even running a little bit under levels that we regard as
    sustainable in the longer run. I think that is entirely
    appropriate, given that inflation is running below our
    objective.
        So, as the economy improves and we come closer to achieving
    our objectives, we see it as appropriate to begin to gradually
    remove accommodation and move to a neutral stance. As I have
    said on many occasions, the new normal with respect to what
    level of interest rates is neutral appears to be rather low. So
    we have raised the Federal funds rate target. I believe policy
    remains accommodative, but given how low estimates of the
    neutral Federal funds rate are now, namely levels of the funds
    rate that would just be consistent with sustaining the strong
    labor market over time, we perhaps have some further moves that
    we envision making. If the economy proceeds along the path it
    is on, we anticipate that neutral may move up some, although
    remaining at low levels, and that generates a view that, over
    time, we may want to increase the funds rate a bit more, but
    that all really depends on how things evolve.
        Mr. Perlmutter. Let me change the subject really quick. And
    on page 12 of the report, there are two words that I have never
    seen in any of your reports, and it is ``abysmal performance,''
    and it is as to productivity developments in the advanced
    economics. That is the section. And the combination of
    technology and advances in science and everything else coupled
    with labor, we are seeing something--so it is in the second
    column: A number of potential explanations have been put forth
    for the abysmal performance of TFP, that there is a waning--oh,
    well, I am out of time. I thank you for your service. You are
    doing a heck of a job. Thank you very much.
        Mrs. Yellen. Thank you very much.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Wisconsin, Mr.
    Duffy, the chairman of our Housing and Insurance--
        Mr. Duffy. Thank you.
        Chairman Hensarling. --Subcommittee.
        Mr. Duffy. Welcome, Madam Chair.
        My friends across the aisle seem to be relatively excited
    about lower unemployment, an economy that is picking up.
    Excited that the stock market and people's 401(k)'s are
    improving. And they want to give you a lot of high fives and
    back slapping. You get all the credit. What changes have you
    made since November 8th to kick-start this economy and make it
    grow that you weren't doing before November 8th?
        Mrs. Yellen. What changes have we made to kick-start the
    economy?
        Mr. Duffy. Yes.
        Mrs. Yellen. We have continued on the course that we have
    been on of normalizing the path of monetary policy as the
    economy continues to recovery--
        Mr. Duffy. You haven't changed anything really since
    November 8th. The real change has been we have a new President
    in the White House. I just make that point to my friends across
    the aisle to not get too excited on who should get credit for
    an improving economy.
        But I do want to follow up on what my friend Mr. Huizenga
    was asking about, the gentleman from Michigan, in regard to the
    role that the Fed is playing in corporate board rooms in our
    financial institutions. You acknowledge you do have a role at
    the Fed in these board rooms. What role do you have? What are
    you doing?
        Mrs. Yellen. It is our job to make sure that banking
    organizations are operating in a safe and sound manner and have
    policies in place that ensure both their safe and sound
    management and compliance with Federal laws and regulations,
    and corporate boards play a critical role in ensuring the
    performance of financial institutions.
        Mr. Duffy. Isn't it fair to say though that virtually
    anything could fall under the umbrella of safety and soundness?
    Who is hired and who is fired and who is disciplined within a
    financial institution could fall under safety and soundness,
    right?
        Mrs. Yellen. I think it is important to--and we are going
    to try to do this.
        Mr. Duffy. That could fall under safety and soundness,
    right?
        Mrs. Yellen. Yes, it could.
        Mr. Duffy. And how capital flows, who a financial
    institution lends to could fall under the auspices of safety
    and soundness, right?
        Mrs. Yellen. Yes, it could.
        Mr. Duffy. In essence, the Fed, under the auspices of
    safety and soundness, could replace the board of directors who
    have a fiduciary duty to shareholders and actually take over
    boards all under the premise of safety and soundness.
        Mrs. Yellen. We believe the corporate boards play critical
    roles in ensuring--
        Mr. Duffy. A critical role, okay. What falls outside the
    scope of safety and soundness in a financial institution?
    Exactly.
        Mrs. Yellen. Probably anything that you mentioned would
    have some.
        Mr. Duffy. You can't give me an answer because everything
    falls under that scope, and that is a concern.
        The Fed doesn't have a fiduciary duty to shareholders, and
    actually board members have potential civil and criminal
    liability in their service on a board. Does the Fed have any
    civil or criminal liability should things go wrong on a
    corporate board? Board members are liable, how about the Fed?
        Mrs. Yellen. We have supervisory responsibilities.
        Mr. Duffy. No, you do, but are those Fed members who are
    sitting in on board meetings potentially criminally or civilly
    liable for the decisions they push a board to make?
        Mrs. Yellen. Not to the best of my knowledge.
        Mr. Duffy. Mine either. That is concerning for us, and I am
    pushing you on this because you do have a supervisory role, and
    I want you to do a good job, but from the feedback that we get,
    the involvement that the Fed has in our corporate boardrooms
    has far surpassed I think the vision that any of us had in this
    room. And it concerns us.
        Mrs. Yellen. Let me say that we have talked to many
    corporate board members and understand that there has been an
    accumulation of a large number of items. We have indicated that
    board members along with senior management should be
    responsible for--
        Mr. Duffy. I don't believe you have the authority, Madam
    Chair.
        Mrs. Yellen. --and believe we should clarify--
        Mr. Duffy. I don't think you have the authority to make
    hiring and firing decisions, and that is the feedback that we
    have had from members.
        My time has almost expired. If I could ask you one last
    question, do you anticipate that this will be your last time
    testifying before this committee?
        Mrs. Yellen. My term expires in February, and so--
        Mr. Duffy. That is a roundabout way of asking you--
        Mrs. Yellen. It may well be.
        Mr. Duffy. --are you seeking another term?
        Mrs. Yellen. I have not said anything about that. I intend
    to serve out my term and not--
        Mr. Duffy. I know we push you hard. I want to thank you for
    your service.
        And I yield back. My time has expired.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Illinois, Mr.
    Foster.
        Mr. Foster. Thank you, Mr. Chairman, and, Chair Yellen, for
    your service.
        In the past I have sent letters to you and other Federal
    regulators and asked you in hearings before about the
    requirement that custody banks hold supplementary leverage
    ratio against deposits and at the Federal Reserve presumably
    because of worries that, in some future universe, the Fed
    deposits may become less safe and available than cash, which is
    a universe I don't enjoy contemplating.
        I believe that the Federal Reserve deposits are exactly the
    sort of safe place for these large immediately callable cash
    positions that we should actually be encouraging because of the
    strength and reliability of the Federal Reserve as a
    counterparty.
        Now, as you may be aware, we now have bipartisan
    legislation to require that prudential regulators provide
    relief for institutions that place cash with the Fed at the
    same time as providing significant flexibility for the
    regulators to deal with unusual circumstances.
        So do you see any safety and soundness difficulties if this
    legislation were to go forward?
        Mrs. Yellen. I am not going to comment on the legislation,
    but we are looking at the supplementary leverage ratio because
    of the impacts that you mention. A leverage ratio was meant to
    be a backup, a backup supervisory device calibrated
    appropriately relative to risk-based capital requirements. And
    while, in general, I think risk-based capital requirements,
    especially for the largest and most systemic institutions, are
    at levels that I think are appropriate and I am comfortable
    with, it may be that the supplementary leverage ratio needs to
    be recalibrated relative to that, and I am very much aware of
    the problems you are mentioning, and we are considering how to
    address them.
        Mr. Foster. Thank you.
        And I would like to use a little of my time to just comment
    briefly in defense of my home State of Illinois in response to
    some of the remarks from my colleague from New Mexico. Every
    year, the citizens of Illinois write a check for approximately
    $40 billion to States largely in the Sun Belt and rural areas
    because, for every dollar of tax money, Illinois receives back
    only 75 cents of Federal spending.
        In contrast, New Mexico receives $2.40 back for every
    dollar of tax money.
        And so this check that we write for $40 billion a year, had
    it been put into a rainy day fund instead of redistributed to
    other States in the Union, would have resulted in a balance in
    that rainy day fund in excess of $1.5 trillion today.
        And so that I think that, when people discuss the fiscal
    problems of Illinois, the starting point should be there.
        Now, I would like as my--finally, I would like to--I co-
    Chair a Future of Work Task Force for the New Democrat
    Coalition, and we are looking at the effects of technological
    and other changes that might occur in our workforce in the
    coming years and what policies we should adopt to remediate the
    bad side of those effects.
        There is a lot of discussion now about why inflation is not
    increasing as you would have guessed in the past, particularly
    wage inflation. In the past, when the gap, the gap closed up in
    the job market, that very rapidly employers would start bidding
    up wages. That doesn't appear to be happening the way it used
    to, and one of the explanations that is suggested for that is
    that employers have the opportunity, instead of just bidding up
    wages, to simply invest in technology that replaces jobs.
        I was wondering if you think there is a reasonable chance
    that you are going to have to change your macroeconomic models
    to reflect the loosening of the link between the closeness of
    the--the tightness in the job market and the increase in wages.
        Mrs. Yellen. We are seeing attenuated links, I think,
    between the labor market and wages, but even to a greater
    extent prices and inflation. The relationship between those two
    things has become more attenuated than we have been accustomed
    to historically and--
        Mr. Foster. In general, when the robots show up, they show
    up as low prices. If you ask the average farmer what forced
    them to consolidate, they don't say it is the machines; they
    say it is low grain prices. And that goes on in many ways.
    Retailers are struggling with price competition from Amazon.
    They don't often name, well, we are not as efficient as the
    robots in Amazon distribution centers and so on. And so I think
    that really we have to look at this in a macroeconomic sense
    because its effects will not be small, and I encourage you to
    think about that.
        Mrs. Yellen. Thank you.
        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.
        And Chair Yellen, our committee has been concerned for some
    time about confidential FOMC information being shared with
    favored constituents. In March, Vice Chair Fischer delivered
    the keynote for a Brookings Institution dinner and reportedly
    delivered remarks and took questions on interest rate policy. I
    say ``reportedly'' because the dinner was closed to the public
    and the press but open to Wall Street and other financial
    interests.
        In addition, Vice Chair Fischer's prepared comments have
    not been made available, and the fact the speech took place,
    frankly, at all was not widely known. This keynote flies in the
    face of the FOMC's policy on external communications of
    Committee participants, which states that, and I am going to
    read this right out of the policy, ``Committee participants
    will strive to ensure that their contacts with members of the
    public do not provide any profit-making person or organization
    with the prestige advantage over its competitors. They will
    consider this principle carefully and rigorously in scheduling
    meetings with anyone who might benefit financially from
    apparently exclusive contacts with Federal Reserve officials
    and in considering invitations to speak at meetings that are
    sponsored by profit-making organizations or that are closed to
    the public and the media.''
        Chair Yellen, we all want transparency and accountability
    for our monetary policy so that it remains insulated from
    political and profit-making interests. The Vice Chair's speech
    does not help with that at all and in fact, flagrantly flies in
    the face of policy.
        The speech occurred just days before another Fed official,
    Jeffrey Lacker, abruptly resigned as Richmond Fed President
    after admitting to playing a role in the 2012 FOMC leak, where
    market-sensitive details of the central bank's internal
    deliberations were leaked to a private consultant that then
    shared the details with clients who stood to net millions in
    profits by trading ahead of the release of the news. However,
    the true leaker still remains at large apparently as former
    President Lacker appears to have only incidentally confirmed
    insider information that Medley had already received. This is
    something that I, certainly as Chair of the Oversight and
    Investigations Subcommittee, will continue to look into. Chair
    Yellen, how could this speech have been allowed to happen,
    given everything that had occurred with the 2012 FOMC leak?
        Mrs. Yellen. Okay. So let me start by saying that the very
    beginning of our policy on FOMC external communications states
    the two-way communications between members of the Committee and
    members of the public are very important both to communicate
    with the public and also to gain information, and that these
    will occur in a variety of ways, including in some closed-door
    meetings.
        So there is no requirement that FOMC members cannot meet in
    closed-door sessions. The Brookings Institution is not a for-
    profit institution. It is a nonprofit. And we have a clear set
    of guidelines governing what can and cannot happen in such--
        Mrs. Wagner. Will the remarks be released to the public?
        Mrs. Yellen. The clear rules are that no FOMC confidential
    information can be divulged ever, including in a closed-door
    setting, and that FOMC officials may not discuss even their own
    views on policy, except to the extent that they have already
    been presented in a public forum.
        Mrs. Wagner. So Wall Street--
        Mrs. Yellen. The Vice Chair's remarks did not pertain to
    monetary policy. They pertained to financial--
        Mrs. Wagner. Reclaiming my time, Chair Yellen, the
    difficulty with this is that we don't know that. And in the
    interest of transparency and accountability, perhaps it would
    be good to show the light of day on whatever his remarks were
    to Wall Street bankers that were invited to a speech at the
    Brookings Institution. And I have to say, Madam Chair, it is
    very clear that these should not be closed to the public or the
    media. So I am very concerned about this going forward, and I
    am also concerned about the resolution with the Board due to
    the internal governance that happened on the FOMC leak. So I
    would like to submit that in writing and get your information
    on that.
        Thank you, Mr. Chairman. I am sorry to have gone over my
    time.
        Mrs. Yellen. I want to say that we have cooperated fully
    with our inspector general and law enforcement agencies, that
    they have had access to all information that is relevant to
    this matter and that they announced simultaneously with
    President Lacker.
        Mrs. Wagner. The Board must improve the standards and keep
    to its standard, Madam Chair. Thank you.
        Chairman Hensarling. The time of the gentlelady 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.
        Thank you, Chair Yellen, for being here.
        Perhaps we should replace some of the fantasy that we have
    heard today on the other side with the reality. I hear my
    colleagues over there say that, within 6 months of this new
    Administration, we have improved the economy, we have improved
    employment opportunities for Americans. I guess they are
    pointing to the Carrier deal in Indiana where they were
    promised over 1,000 jobs to stay in this country, and about
    750, we hear, are moving to Mexico. But we will give the
    President credit for that deal.
        And really I know that the reason why the economy has
    turned around is the sustained job growth of the previous
    Administration over more than 6 years.
        So here's my question to you, Chair Yellen: In May, the
    overall unemployment rate of 4.3 percent hit a 16-year low.
    Although the unemployment rate rose one-tenth of a percent in
    June, this reflected the positive news that more workers who
    had dropped out of the labor force have returned to look for
    work. With the overall rate of employment now down at
    historically low levels, would you say that the economy has
    reached full employment, or do you believe that this headline
    rate masked weaknesses is in the labor market where additional
    progress must be made?
        Mrs. Yellen. Not all groups in the labor market are faring
    equally well, and we remain concerned about, particularly for
    African Americans and Hispanics, weaker job market outcomes,
    but monetary policy is a blunt tool.
        As you point out, the unemployment rate and overall state
    of the labor market is strong with many job openings and
    opportunities for workers. The unemployment rate has even
    fallen slightly below levels that my colleagues would regard as
    sustainable in the longer run. We have seen a steady rate for
    several years now, a constant rate more or less of labor force
    participation, which, with an aging population tending to push
    it down, suggests that groups that have been sidelined are
    finding opportunities and entering the labor force and gaining
    employment. So that is a strong performance. And this has now
    been going on, as you said, for a number of years and has
    continued--is continued this year.
        Mr. Clay. And thank you for that response because progress
    doesn't happen in 6 months, especially when you have to recover
    from a devastating recession. And so for the other side to give
    credit to someone who is not even focused on our economy is
    ridiculous.
        One more question: What in your view have been the key
    drivers of the job gains since your last testimony before this
    committee 6 months ago? Have job gains been driven by longer
    term trends from a growing economy, or have they largely
    resulted from new policies adopted in recent months?
        Mrs. Yellen. The global economy has recovered. It was a
    source of weakness earlier. That has been a source of support.
    And we have had ongoing job gains and increases in, for
    example, housing prices that are boosting the wealth and
    consumer sentiment of Americans, and that is driving
    consumption spending that is strong enough to create ongoing
    job gains that exceed what is needed for an expanding labor
    force. So the job market continues to strengthen, and
    unemployment continues to move down.
        Mr. Clay. And thank you for that response. I hope this is
    not your last visit to this committee, but I am sure it won't
    be the last time we visit.
        Thank you, and I yield back.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Mr. Florida,
    Mr. Posey.
        Mr. Posey. Thank you, Mr. Chairman.
        I hate to get into the cat fight or dog fight of who shot
    John and whose policies are doing what, and I heard the remark
    that the economic analysis cannot show any significant short-
    term results or something to that effect, and I would just like
    to remind the other side that I saw dramatic overnight change
    in the stock market from the election to the inauguration. And
    I think we will go on.
        Chair Yellen, it's good to see you again. Since I arrived
    in Congress, the most cosponsored bipartisan significant piece
    of legislation has been Dr. Paul's original legislation to
    audit the Fed. We passed it. But it goes nowhere at the other
    end of the building. Are you afraid of getting that passed?
        Mrs. Yellen. I am strongly opposed to audit the Fed. What
    audit? The Fed is audited in every way that normal Americans
    would regard an audit. Our financial accounts and holdings
    are--
        Mr. Posey. It is not audited like all other agencies. You
    are aware, as well as I am, of the list of exemptions to the
    Fed.
        Mrs. Yellen. Audit the Fed removes exactly one exemption
    that the Federal Reserve enjoys, which is real-time policy
    reviews by the GAO of our monetary policy decisions, and that
    is the essence of Federal Reserve independence and trying to
    keep politics out of decisions that should be technical,
    professional, and nonpartisan.
        Mr. Posey. I would agree if I thought there was a lot of
    truth to that statement, but auditing something after the fact
    has nothing to do with influencing the decision, I wouldn't
    think. I would consider it a matter--an important matter,
    actually, of transparency, and I, for the life of me, cannot
    understand what the Fed fears.
        Can you give me an example that would justify the lack of
    transparency?
        Mrs. Yellen. We don't have a lack of transparency.
        Mr. Posey. You do if you can't audit it. It is a lack of
    transparency. To most people I know, it is lack of
    transparency. To some people, it may not be, but I don't
    understand that. That is the reason I am questioning you about
    it.
        Mrs. Yellen. I regard the Federal Reserve as one of the
    most transparent central banks in the world.
        Mr. Posey. That is a statement. What do you fear about the
    audit? Give me a real-time example.
        Mrs. Yellen. I think the FOMC needs a space in which it can
    have honest conversations and deliberate in real time about the
    decisions that we make without having political influence
    brought to bear and second-guessing decisions that we have made
    and opining on them possibly with the idea of revisiting them.
        Mr. Posey. We can discuss things in public that are
    sensitive, talk about national security. The Supreme Court does
    the same thing. They don't worry about the transparency
    influencing them. Just give me an example. Give me an example
    of how transparency could hurt the Fed? Just give me one
    example how it could hurt the Fed being transparent.
        Mrs. Yellen. Because what you are talking about with the
    GAO are policy reviews--
        Mr. Posey. No, give me an example, not a general swipe of
    review. Just say: Take for example this. If somebody said this,
    it would be horrible; it would be the end of the world for the
    Fed. Give me an example like that.
        Mrs. Yellen. I would envision a situation where the GAO at
    the request of Members of Congress might come in and say, at
    our meeting a week ago, they have taken the transcripts and
    reviewed what we said; they believe that the decision we made
    was the wrong one at that particular meeting. And I would say
    that is an extreme interference and politicization of our
    ability to make independent monetary policy decisions.
        Mr. Posey. So you are telling me we shouldn't be
    transparent for the fear of being second-guessed or somebody
    criticizing you because they thought you were wrong. Do I get
    it?
        Mrs. Yellen. What we are talking about is political
    interference in decision-making by the Committee.
        Mr. Posey. I don't see that. If it is after the fact, I
    don't see the interference in decision-making.
        Mrs. Yellen. Well, I do, so I--
        Mr. Posey. Give me an example.
        Mrs. Yellen. I gave you an example.
        Mr. Posey. Give me one example why they shouldn't have that
    transparency.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Georgia, Mr.
    Scott.
        Mr. Scott. Thank you very much, Mr. Chairman.
        Chair Yellen, welcome. It's good to have you here again.
    Chair Yellen, I, first of all, want to thank you and the
    Federal Reserve. Under the leadership of our ranking member,
    Ms. Waters, and the ranking member of Judiciary, John Conyers,
    and myself and others, we were hopeful that, for the first time
    in history, American history, that the Federal Reserve would
    appoint and hire the very first African American ever to hold
    the position as a regional president of the Fed, and you all
    did that. And we want to say thank you so much. We deeply
    appreciate that. That means a lot, not just to the African-
    American community, but to all Americans. That is what this
    great country is about.
        Now let me go to one other thing. Chair Yellen, you and I
    have had ongoings about, of course, the high unemployment rate
    of African Americans, and I always remember fondly when you
    referred to that as a blunt instrument. As I said, that is what
    M said to James Bond to describe him. In other words, he
    couldn't go through it. So you said that Congress had to come
    up with some legislation. We did that, House Resolutions 51 and
    52, of which we sent a copy to you, which would tie the
    staggering unemployment rate of African-American young men in
    the inner city to apprenticeship training programs attached to
    rebuilding the crumbling infrastructure. That has been
    introduced, and, of course, each 5 years, we have to by law
    fund the 1890s, African-American colleges. So we put $95
    million in the appropriations hopefully that we will be able to
    spread over for 5 years at $5 million for each of these
    universities over that period.
        Now I have read your past reports that you have given and
    you have talked about housing. And we would like to move to
    that next, and in your past three reports, you made a point to
    dedicate full sections of the report to specific topics related
    to the disparity that the Federal Reserve is seeing in the data
    for the African-American community. So I want to call your
    attention specifically to those sections from the three most
    recent reports to Congress. The titles of these--and you
    referred to them as boxes, if you recall, boxes. That is what
    the Fed calls them. And one box was, have the gains of the
    economic expansion been widely shared? Box No. 3, homeownership
    by race, ethnicity. And box No. 3, does education determine who
    climbs the economic ladder? And in that discussion of those
    problems you highlighted--included socioeconomic differences
    between Whites and Blacks, poor credit scores due to income
    disparities, and continued discrimination. That lays it bare.
        So, Chair Yellen, let me just ask you, of all of these
    factors in your boxes, which of these factors is most pressing
    and what recommendations on substantive solutions can we in
    Congress work on to help address the homeownership problem
    hurting African Americans, much as you suggested that we
    develop this legislation that is moving forward on the
    unemployment of African Americans?
        Mrs. Yellen. I don't want to try to give you detailed
    suggestions for what legislation you can put forward. Our job
    is to try to do the best we can to provide information and
    background that will be helpful to you as you decide what is
    appropriate. And I do believe this is squarely in the domain of
    Congress and the President, and we are trying to provide useful
    information.
        Mr. Scott. Absolutely. And we will pursue that. I commend
    you for bringing that up, and I would love for you to stay on
    in your position as Chair of the Fed.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes--
        Mr. Scott. If I have a chance to speak to Mr. Trump, I will
    mention that.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from New Jersey, Mr.
    MacArthur.
        Mr. MacArthur. Thank you. Chair Yellen, welcome.
        I want to thank you for your service to our country, and I
    appreciate you being here today. Your testimony has been
    helpful to me. I had two areas I wanted to explore. One is
    nonbank SIFIs. My State, New Jersey, in 2014 authorized by
    legislation our Department of Banking and Insurance to do group
    supervision of insurers that were involved in the international
    marketplace. And I know that FSOC, under Dodd-Frank, when it
    reevaluates SIFI designations annually is required to consult
    with State regulators, and I wanted to get a sense from you of
    whether--how you would view now a State insurance department
    doing regulatory work of a group insurer, does that impact, in
    your view, how FSOC might look at the SIFI designation of an
    insurer?
        Mrs. Yellen. This is a matter for FSOC to decide. We have
    met with State regulators in New Jersey, and I am aware of this
    development, which is a heartening one. I would say that the
    FSOC's focus in designation is the systemic risk that the
    failure of a given entity could pose to the broader financial
    system. To the best of my knowledge, most State regulators
    focus in supervision on protection of policyholders, which is,
    of course, a very important objective, but not on the systemic
    risk that the activities of a company could pose to the broader
    financial system. And so, in considering this matter, FSOC
    would, I think, have to take account of what the focus of that
    holding company supervision would be.
        Mr. MacArthur. I appreciate that, although I would add as
    just somebody who spent a lifetime in insurance, I think State
    regulation has proven to be, when you regulate individual
    companies within a group, you create a safer company, and I
    think our system is better than the European system, which
    focuses on the group, not the company. But that is another
    matter.
        The other area I wanted to explore with you was the labor
    participation rate. You have mentioned it twice today, and each
    time, you have said that our aging population is pushing it
    down. And I guess, on the one hand, that makes a certain amount
    of intuitive sense. We have a Baby Boomer bubble working its
    way through, but I did want to ask you about a few particulars
    with that. Do you use--does the Fed use the Bureau of Labor
    Statistics' data on labor participation?
        Mrs. Yellen. I believe that is the core data we have on--
        Mr. MacArthur. That is the core data. So I have the Bureau
    of Labor Statistics' employment data on my iPad. I am looking
    at it. Unfortunately, I didn't do it ahead of time, so I can't
    put it on the screen. But when I look at the actual data, all
    people over 16 years old--so basically everyone who is of
    working age--that has gone--labor participation rate has gone
    from 66.6 percent in 1994 to 62.9 percent in 2014. So it is a
    3.7 percentage point decline in labor participation. And you
    have suggested that is because people are getting older, and
    they are dropping out of the workforce. But that is not what
    this chart says. What it says is that 65 and older has actually
    increased from 12.4 percent in 1994 to 18.6 percent. That is a
    6.2-percent increase in that 20-year period--let me just finish
    the question--for that group, and then for 55 and older, which
    is broader and includes those of normal retirement age, that
    number has gone up by 10 percentage points. The one that has
    gone down, the group that has gone down is the 25- to 50-year-
    old. They have declined from 83.4 percent participation to 80.9
    percent participation. That group, the 25- to 54-year-old group
    peak earning years has declined by 2.5 percent; 2.5 percent
    times 324 million population is 8.1 million unemployed people
    in peak earning years. It doesn't seem to square with your
    assertion earlier twice.
        Mrs. Yellen. So, very quickly, it is true that people in
    the retirement years 65 and older are working more now than
    they used to, but the level of labor force participation of
    that group is dramatically lower than of prime age workers, and
    an increasing share of the population is now moving into those
    years with low labor force participation. So there is no
    conflict between the number that you cited and my statement
    that an aging labor force--
        Mr. MacArthur. My time has expired.
        Mrs. Yellen. It is also true--
        Chairman Hensarling. The time of the gentleman has expired.
        Mrs. Yellen. --that participation of prime age workers has
    declined.
        Chairman Hensarling. The Chair now recognizes the gentleman
    from California, Mr. Sherman.
        Mr. Sherman. Thank you, Madam Chair, for coming here.
        Every few months I remind you that you have not yet used
    your authority to break up the too-big-to-fail institutions.
    And I will spend the next minute reminding you. They are too-
    big-to-fail. If the entity, just one entity, goes down, it
    could take our whole economy down with them. They are too-big-
    to-compete-against because economic studies say that they--that
    investors and the markets assume that they will be bailed out.
    They have seen that Congress will pass new legislation to bail
    out if that is thought necessary to save the economy, and that,
    therefore, they are able to get a cost of funds that may be as
    much as 80 basis points less than they would otherwise. They
    are too-big-to-jail, as former attorney generals have said they
    wouldn't criminally prosecute because it might take down the
    whole economy. If the same thing was done by a medium-sized
    bank, no economic problem, go ahead and prosecute.
        And then, with the Wells Fargo debacle, we have a
    difference between Republicans and Democrats. Democrats tend to
    blame the management of Wells Fargo and say that that proves
    they were too big to manage, and Republicans tend to blame you,
    the regulators, which just proves that they were too-big-to-
    regulate. So too-big-to-fail, too-big-to-compete-against, too-
    big-to-jail, too-big-to-manage, too-big-to-regulate. When a
    protozoa gets too big, it is able to split into two healthy
    cells, and I would think that the geniuses on Wall Street would
    have at least the same level of intelligence as the average
    one-celled aquatic animal.
        Every time you come here, you are attacked by those who
    criticize the low interest rates that we have had in our
    economy. Now with low interest rates, you get more economic
    growth, but you might also get more inflation.
        Over the last 5 years, has rampant inflation been a
    disastrous difficulty for the American economy?
        Mrs. Yellen. Inflation has been running under our 2 percent
    objective for the last 5 years and continues to do so.
        Mr. Sherman. And I won't even ask you this question,
    because it is so obvious. Has economic growth been too robust?
    Go ahead.
        Mrs. Yellen. It has not been particularly robust, but it
    has been sufficiently robust to create a lot of jobs and drive
    down the unemployment rate.
        Mr. Sherman. But every day, every time you come here, you
    are told that the interest rates are too low, but you are also
    criticized because the economic growth has not been robust
    enough.
        Now, behind you, at the request of the Majority, is the
    National Debt Clock. The Majority always comes and tells you
    that you should shrink your balance sheet, that you should sell
    off your assets. Of course, you in effect are lending money for
    longer terms and borrowing money for shorter terms or just
    printing it, one way or the other, and you create a tremendous
    profit for the Federal Government by having a big balance
    sheet. So people want you to have a small balance sheet when
    your big balance sheet is creating a lot of profits for the
    Federal Government.
        Have any of the advocates for a smaller balance sheet
    proposed to you the taxes they want to increase in order to
    replace the profits that you are earning on the balance sheet
    that they are telling you to shrink?
        Mrs. Yellen. It is certainly true that our large balance
    sheet has resulted in very substantial transfers to the
    Treasury and to the Federal budget. Let me say our objective is
    not to make a profit and to maximize those transfers, but
    rather to do what is right in the pursuit of our objectives,
    but it is true.
        Mr. Sherman. I would say that the millions of Americans who
    want us to run the Federal Government more like a business
    would say that perhaps profit should be thought of as an
    important objective. And I will take your answer as that you
    have not heard any proponent of a smaller balance sheet put
    forward a tax increase proposal designed to replace those
    revenues or to keep that clock behind you from turning more
    quickly.
        Finally, we want businesses to do things that require
    longer-term capital. You tend to focus on short-term interest
    rates. What has your big balance sheet done to decrease the gap
    between short- and long-term interest rates, the yield curve?
        Mrs. Yellen. We purchase those assets to drive down long-
    term interest rates relative to short or to flatten the yield
    curve and lower longer-term borrowing rates.
        Mr. Sherman. And so the proposals are to make it more
    difficult to borrow money long term.
        Mrs. Yellen. That is correct.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Tennessee, Mr.
    Kustoff.
        Mr. Kustoff. Thank you, Mr. Chairman.
        Thank you, Madam Chair, for appearing this morning.
        In the next hour or so when this hearing ends, if you were
    to receive a call from the President telling you that he
    intended to nominate you for another term, would you accept?
        Mrs. Yellen. It is something that hasn't been an issue so
    far. It has not been something that has come up. But it is
    certainly something that I would discuss with the President,
    obviously.
        Mr. Kustoff. Thank you.
        And yesterday, when I asked you about comments that Jamie
    Dimon made as it relates to assets coming off your books, you
    have stated here today and you have stated in previous reports
    that the Fed does intend to reduce its asset, the balance
    sheet, assets off the balance sheet.
        I would like to ask you first, before I ask you about Mr.
    Dimon, if you could address the timing of when those assets
    will come off the books, the amounts, and procedurally, how
    that will be done?
        Mrs. Yellen. Yes. We have tried to set out a relatively
    complete plan. Our assets currently total close to $4.5
    trillion, consisting of roughly $2.5 trillion of Treasuries and
    $1.7 trillion of mortgage-backed securities.
        We have said that we intend to shrink our balance sheet and
    particularly the outstanding quantity of reserves in the
    banking system, which are now around $2.2 trillion, in a
    gradual and predictable way. And we have said that what we
    intend to do is, once we begin this, as we receive principal
    payments on Treasuries and the agency securities and our
    portfolio, currently, we are reinvesting all of those principal
    payments, we will begin to diminish our reinvestments and only
    reinvest to the extent that our monthly receipt of principal
    exceeds a cap.
        The cap will initially start at low levels, $6 billion a
    month for Treasuries and $4 billion a month for mortgage-backed
    securities, and over the space of a year will ramp up to $20
    billion for mortgage-backed securities and $30 billion for
    Treasuries. So after a year of this process running, the caps
    will remain in place but bind only infrequently when there are
    unusually large redemptions of principal that take place.
        And we have not decided yet on what our longer-run monetary
    policy framework will be and what quantity of reserves that
    will entail our supplying to the banking system. We expect it
    to be substantially larger than pre-crisis but substantially
    less than we have now. And I would say this process will play
    out probably to around 2022 when our balance sheet would
    probably somewhere in that range shrink to normal levels.
        Now, since the crisis, currency has more than doubled in
    quantity from about $700 billion to $1.5 trillion now. So our
    balance sheet will end up substantially larger than it was
    before the crisis but appreciably lower than it is now. And
    then over time when this process is complete, if currency and
    circulation continues to grow, our balance sheet would likely
    grow in line with the overall economy.
        Mr. Kustoff. I think you probably saw the comments
    yesterday from Jamie Dimon, chairman of JPMorgan Chase, about
    his concerns about assets being moved off the balance sheet. Do
    you share those concerns?
        Mrs. Yellen. We have tried to be very methodical about
    informing the public and the markets about how we are going to
    do this. We have provided essentially complete information. We
    have not heard significant concerns or seen a significant
    market reaction.
        So we have indicated we expect to begin this if the economy
    stays on track this year. I expect and certainly hope that this
    will go smoothly and it will be a gradual and orderly process,
    one that we will not be revisiting on a regular basis. It is
    something that we will run. It will be understood and play out
    over time.
        So, obviously, we will watch what the market impacts of
    this are when we put it into effect, but I expect this to play
    out smoothly. It is certainly my hope and expectation.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Kildee, the vice ranking member of the committee.
        Mr. Kildee. Thank you, Mr. Chairman.
        And thank you, Chair Yellen. It is good to see you. Glad to
    have you back.
        As you may recall, and I am sure some committee members
    will recall from previous discussions, I sort of consistently
    raise this issue of older industrial cities, the condition of
    older communities, a subset of American cities that are
    continuing to struggle.
        In fact, I am launching an effort actually beginning today
    with a discussion at 2:00, entitled, ``The Future of America's
    Cities and Towns,'' specifically to raise more attention around
    this question.
        And we have talked in the past about the role that regional
    banks might play in working with these particular cities that
    face both economic challenges, but specifically the cities that
    face fiscal stress.
        The thing that I am concerned about is that when we look at
    aggregate data, even with relatively slow growth in the
    economy, the assumption is that even a slowly rising tide
    raises all boats. Well, it does not, and we know that.
        And so the question I have that I would like you to comment
    on is what policies might the Fed engage in? And to the extent
    that your mandate regarding employment is also affected by
    policy that we make, what are the sorts of initiatives that you
    think should be engaged, both by the Fed and by Congress, to
    help deal with this real disparity which continues to grow?
        And I will just underscore this point by saying, there is a
    whole set of American cities that are really struggling, both
    in terms of the growing unemployment, increased poverty, lack
    of opportunity, low educational attainment, aging
    infrastructure, fiscal stress in these cities where we are
    going to see bankruptcies, or at least insolvency. If the
    States won't allow those communities to go into bankruptcy,
    they are still insolvent.
        These are communities that have high concentrations of
    minority populations, and you note in your testimony the
    disparity that those particular communities face. And this is
    not some sort of accident where just by bad luck a bunch of
    communities are struggling. It is a result of policy.
        And I wonder if you just might comment on what you think
    the Fed can do and what Congress can do to help achieve not
    only growth in terms of employment and wages, but greater
    equity in terms of how those areas of growth might be shared.
        Mrs. Yellen. So the Federal Reserve, and particularly the
    Reserve Banks around the country, play an important role in
    doing research on community development and try to understand
    and publicize what kinds of strategies seem to work. Of course,
    we play a role in the Community Reinvestment Act, which
    financial institutions are looking to ways--for effective ways
    of promoting development.
        A number of Reserve Banks have looked specifically at older
    industrial cities and tried to study, and we have volumes that
    have been published on this. The Boston Fed in particular has
    been very active in trying to understand what strategies have
    been effective in older industrial cities in regenerating
    activity in dealing with these problems.
        And of course they are complex, but there are workforce
    development programs and collaborations between governments,
    local governments, State governments, nonprofits, businesses,
    that have been singled out as ones that appear to be promising.
    But of course these are very difficult issues, and Congress and
    policymakers as well as the Fed may have a role. Ours is mainly
    research and trying to disseminate findings that we have.
        Mr. Kildee. I appreciate that. And I have in my past work
    worked with the Philadelphia Fed, and Cleveland, on these
    issues.
        I wonder if you might just in the final 2 seconds that we
    have comment on policy that Congress might enact, basically
    around budgetary policies that we have in place. I am really
    concerned that is an area where we may undermine not only your
    mandate but also our own work, in the 1 second remaining.
        Mrs. Yellen. I am not going to give you detailed advice on
    fiscal policy. I think focusing on policies that promote
    productivity growth and stronger economic growth should be near
    the top of your list.
        Mr. Kildee. Thank you, and I appreciate you coming back
    again.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from New York, Ms.
    Tenney.
        Ms. Tenney. Thank you, Mr. Chairman.
        And thank you, Chair Yellen, for being here today, and also
    for your service to our country.
        I want to touch on exactly the same issues that my
    colleague just touched on, and it sounds like our districts are
    very similar. I come from upstate New York, a very highly
    agricultural area, but a place that has seen better days in
    terms of our economy. We once had many, many community banks.
    And I might quote a very interesting comment that was made by
    President Trump in his inaugural address in describing our
    manufacturing landscape. And he described it as, ``rusted-out
    factories scattered like tombstones across the landscape.''
        And you can look at our community banks much the same way.
    You can go to just about any corner in any suburban or small
    city area in my district and find community banks closed and
    overgrown with grass and not operating and empty where they
    once were providing great resource to our community, our small-
    business community.
        Fifty percent of the small-business loans are made by
    community banks, 77 percent of agricultural loans are made by
    small community banks and credit unions in our community, and
    agriculture is still the number one industry in New York State,
    believe it or not.
        And what I see, and very similar, I think this mirrors what
    has been going on in the business community as well as the
    banking community, as you provided in your prior comments to my
    predecessor speaker, that you think that a lot of government
    programs can help this and taxpayer money may be spent for work
    revitalization, but I am suggesting possibly the free market,
    since in New York State we spend 4 times more using taxpayer
    money in so-called ``cronyism'' on producing jobs and have the
    worst job production record in the Nation, the highest out-
    migration of jobs and the highest out-migration of people
    because of our regulatory burden.
        And I thank you for indicating earlier that you do think
    that there are some ways that we can reduce regulations on some
    of these banks, especially the smaller ones who can't compete
    because of their compliance requirements. We now have the
    growing cybersecurity issue, where that is becoming very costly
    and burdensome. Obviously, lending to mortgages and to personal
    loans are very difficult.
        You indicated earlier that you would support the Treasury's
    release that certain regulatory relief is in order. Could you
    tell me a couple of those recommendations that you would
    support in reducing regulations to help our small community
    banks and credit unions?
        Mrs. Yellen. I am very supportive of trying to reduce the
    burdens on community banks. We have suggested that there are
    things that Congress could do to help reduce burdens, for
    example, Volcker Rule and incentive compensation.
        Ms. Tenney. Are you saying you would eliminate the Volcker
    Rule for small community banks?
        Mrs. Yellen. I wouldn't apply it to community banks.
        Ms. Tenney. And where would you make that cutoff? Would it
    be something you would be interested in using overall
    eliminating the Volcker Rule or just--where would you make that
    arbitrary decision on what makes a small bank?
        Mrs. Yellen. We could discuss that. I don't have--
        Ms. Tenney. So you don't have an idea in mind where we
    could actually do that? I would love to know. Honestly, I am
    asking your--
        Mrs. Yellen. I would prefer to get back to you with a
    suggestion on that.
        Ms. Tenney. Okay. So we don't have a specific cutoff?
        Mrs. Yellen. But I think there is a lot that the banking
    regulators can do on their own. We have finished an EGRPRA
    review. The banking regulators are committed to addressing
    concerns of community banks about the complexity of capital
    regulations to come out with a simplified capital regime. We
    have recently cut reporting requirements for community banks.
    We are trying to extend exam cycles and to tailor the work that
    we do so more of it is done offsite in ways that are less
    burdensome to community banks and to risk focus our supervision
    so that we are focusing in our exams on the areas that are
    really of greatest risk. So we have a long list of suggestions
    coming out of the EGRPRA review that we will be working on.
        Ms. Tenney. Could you tell me what--so you indicated that
    there were some--earlier, you testified that these are some of
    the ones that you would support. Which ones wouldn't you
    support that are recommended by Treasury, as you indicated?
        Mrs. Yellen. I don't have that list before me. Let me say
    in general that is an area of the report that we are quite
    supportive of.
        Ms. Tenney. But definitely the Volcker Rule, at some point
    you would like to eliminate that especially regarding community
    banks?
        Mrs. Yellen. Yes.
        Ms. Tenney. Can you give me an estimate about where the
    capitalization requirement would be eliminated?
        Mrs. Yellen. What we would try to do is simplify
    requirements for things like commercial real estate, high
    volatility commercial real estate that banks have--community
    banks have found very complex or tax-deferred assets or whether
    capital instruments that have resulted in complexity.
        Chairman Hensarling. The time of the gentlelady 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, Chair Yellen. Let me just first take a point
    of privilege to thank you for all of your work and tell you
    what an honor it is for me to have been in Congress at the time
    that I could sit here and ask questions of you.
        And secondly, you will hear throughout all of our hearings
    colleagues oftentimes referencing that letters were written and
    30 days have gone by, or months, or they did not receive an
    answer.
        I want, Mr. Chairman and Ranking Member Waters, to state
    for the record that every single letter I addressed to you, I
    got a response. And not only did I get a response, I got a note
    or something attached with it from a staff person, and one I
    believe was actually your thanks.
        So I think it is important because so often we criticize
    those. And I support colleagues on either side when someone
    does not respond to us. So I wanted to say thank you.
        I am going to be consistent, but I am going to use some
    words I had not intended to use, but after my colleague from
    New York, Congresswoman Tenney, used the words, ``finding
    common ground.'' I want to thank her for that, and I am going
    to start with common ground.
        I think it is important when you represent a subset or you
    have a background, which we hear from real estate to small
    business to legal to housing or bankers, that you should use
    that expertise. Well, what I have is something that is
    oftentimes not included in the subset. While, yes, I am a
    small-business owner, I understand finance, I have been on a
    bank board, what is important to me is when we have
    inequalities when we are talking about economic development and
    monetary growth and we don't count ethnicity and race because
    it is a subset.
        And while I appreciate your comments on page 1 of your
    testimony when you talk about the jobless rates have decreased,
    but because we know there is still so much disparity when we
    get to unemployment with people who look like me. So I have to
    be that voice for Black people and for minorities who get
    caught in the gap.
        So with that, I am very afraid, because I know when we look
    at the economy and growth, if 22 million people are going to
    lose their healthcare, if we are going to cut programs where
    people then will have to or won't have the money to pay for
    them, I am nervous.
        Now, with that said, I serve on the Financial and Economic
    Literacy Caucus. It is a Democrat and Republican. And as we are
    speaking now, I am being appointed to the Congressional Black
    Caucus Economic Development and Wealth Creation task force as
    co-chair.
        You have stated that income equality is a long-term risk to
    our economy. We cannot talk about income equality without
    looking at the disparities and the discrepancies in household
    wealth among African Americans and minorities.
        So I would like to say that recessions like the one we have
    just had--and there is a chart on the board, and I think it
    speaks for itself--that led to African Americans losing 52
    percent of their wealth while White households only lost about
    16 percent of their wealth, I am concerned that rising income
    equality will further exacerbate the problems for minorities
    with historically lower household wealth and higher
    unemployment.
        Can you explain to this committee why income inequality is
    a long-term threat to the United States economy and who has the
    power to help us fix this?
        Mrs. Yellen. I am very concerned about inequality in income
    and wealth. I think Americans need to feel that this system,
    our economic system, is one where rewards come to those who
    work hard and play by the rules. And when some groups do
    disproportionately well and others seem to be lagging behind,
    as has been the case, there is a sense of its being a very
    unfair system.
        Worse, to the extent that resources are important in
    assuring intergenerational mobility, that parents want to make
    sure that their children have access to the opportunities and
    ability to gain education--
        Mrs. Beatty. Thank you. I going to interrupt you to yield
    my time back on opportunities. Thank you, because we introduced
    the Beatty rule after the Rooney rule, and now we have a Black
    man for the first time, Chairman Bostic out of Atlanta, who is
    on the National Federal Reserve Board.
        Thank you, and I yield back.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Indiana, Mr.
    Hollingsworth.
        Mr. Hollingsworth. It is time to take a deep breath. You
    have reached the bottom of the rank on our side of the aisle, a
    mere private and freshman.
        So I wanted to touch on something that my colleague Ms.
    Tenney had talked about in the Treasury report and kind of
    better understand some of those recommendations that you might
    agree with and disagree with as well.
        I went through the report and kind of pulled out some of
    the ones that I think are most pertinent to your role in the
    Federal Reserve generally, either from a regulatory standpoint
    or with regard to monetary policy, and just thought I would ask
    very specifically, kind of agree, disagree. And I know there
    may be some follow-up after that, but you have to remember, I
    got probably a C-minus and probably deserved worse in
    economics, so mainly focus on the agree and disagree.
        Do you agree or disagree that there should be expanded
    treatment of certain qualifying instruments as HQLA, including
    high-grade municipal bonds as level 2B liquid assets, and
    improvements to the degree of conservatism and cash flow
    assumptions incorporated into the LCR to more fully reflect
    banks' historical experience with calculation methodologies?
    That is a long-winded one. Take a deep breath.
        Mrs. Yellen. So let me see. On the first part of it, I
    think the Fed has gone further than the other regulators in
    including the more liquid municipal securities as level 2B
    assets, and so we are supportive of that.
        Mr. Hollingsworth. Marvelous.
        Second one, do you agree or disagree that U.S. rules
    implementing international standards should be revisited,
    including the G-SIB risk-based surcharge, including the short-
    term wholesale funding component?
        Mrs. Yellen. We recently finalized that rule, and I
    participated in that review and I regard that as appropriate.
    And I think the G-SIB surcharges are at a level that I think is
    justifiable given the--
        Mr. Hollingsworth. What about the mandatory minimum debt
    ratio, including the Fed's TLAC minimum debt rule?
        Mrs. Yellen. I believe that is important as well to ensure
    that systemically important firms can be resolved.
        Mr. Hollingsworth. Disagree with revisiting that.
        And the calibration of the eSLR for G-SIBS?
        Mrs. Yellen. We discussed that earlier in connection with
    custody banks, and it is something I think we should look at.
    It may be having an unintended consequence.
        Mr. Hollingsworth. So that we might agree with.
        Do you agree or disagree with the efforts to finalize
    remaining elements of the international reforms of the Basel
    Committee, including establishing a global risk-based capital
    for it to promote a more level playing field for U.S. firms
    competing internationally?
        Mrs. Yellen. I would like to see Basel III finalized. Our
    banking organizations are operating with very high capital
    standards.
        Mr. Hollingsworth. Correct.
        Mrs. Yellen. And this is mainly a matter of ensuring that
    other countries put into place appropriate capital regulation
    so that we have a level playing field. So, yes, I would like to
    see that happen.
        Mr. Hollingsworth. Perfect. So agree with that.
        In the final implementation-slash-finalization of the Basel
    III standard, would you exempt community banks from this? Would
    you exempt them from the risk-based capital regime that is
    promoted by Basel III?
        Mrs. Yellen. I am supportive of developing a simplified
    capital regime.
        Mr. Hollingsworth. For community banks specifically?
        Mrs. Yellen. But to the extent that community banks were
    affected by Basel III, I am supportive of that.
        Mr. Hollingsworth. Okay. Would you agree or disagree with
    raising the asset threshold of the Fed small bank holding
    company and savings and loan holding company policy to $2
    billion from the current $1 billion?
        Mrs. Yellen. I think that is something we could look at.
        Mr. Hollingsworth. Great.
        And then the last one of these that I had was, do you agree
    or disagree that the Fed should carefully consider the
    implications on U.S. credit intermediation and systemic risk
    from implementation in the United States of a revised
    standardized approach to credit risk under Basel III capital
    framework?
        Mrs. Yellen. That was a mouthful.
        Mr. Hollingsworth. Indeed.
        Mrs. Yellen. Excuse me?
        Mr. Hollingsworth. Indeed, yes.
        Mrs. Yellen. I need to get back to you on that.
        Mr. Hollingsworth. Okay. Thank you so much. I really
    appreciate you taking some time and coming to see us again. I
    really enjoyed your first testimony and this one as well.
        Mrs. Yellen. Thank you.
        Mr. Hollingsworth. With that, I yield back, Mr. Chairman.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Washington, Mr.
    Heck.
        Mr. Heck. Thank you, Mr. Chairman and Ranking Member
    Waters.
        Chair Yellen, a couple of years ago at the Humphrey-Hawkins
    hearing I asked you, when does America get a raise? I asserted
    America deserves a raise, fueled in part on my behalf, because
    we have been through 30 years of fairly stagnant wage growth
    with the exception of some warmth, as it were, in the late
    1990s.
        I respect you because of your prowess as an economist. I
    admire you because of what I perceive to be your commitment to
    some values, including a concern for how the Fed's policies
    actually impact Americans, and that includes in this area of
    wage growth.
        I believed it 2 years ago, I believe it now, 2.5 percent
    nominal growth, while better than a few years ago, does not
    render Americans feeling as though they are getting ahead, let
    alone staying even.
        So given your commitment or my perception of your
    commitment to the average American, if such a thing exists, I
    read with great interest in the Monetary Policy Report the
    table on page 42, which essentially indicates that you project
    a definition of full employment over the long term of between
    4.5 and 4.8 percent if you get monetary policy right, 4.5 to
    4.8 percent, and yet, an indication that 2 years hence, the
    unemployment rate will be 3.8 to 4.5 percent.
        It was a little hard for me to read that as other than your
    trying to or willing to let the economy run a little warm,
    presumably because maybe we can get wage growth above 2.5
    percent and maybe closer to historic recovery rates of 4.0
    percent.
        Mrs. Yellen. Inflation is running over the last 12 months
    at 1.4 percent below our 2 percent objective. And we have had 5
    years or more of inflation running under our 2 percent
    objective. That is a commitment that we have, and it is a
    symmetric objective. And I think allowing the labor market,
    allowing unemployment to decline to the kinds of levels that
    you cited looks to be consistent with achieving our inflation
    objective.
        Mr. Heck. And would yield higher wage growth than 2.5
    percent, you would expect?
        Mrs. Yellen. I think wage growth seems somewhat low given
    our 2 percent objective, but it is very important to remember
    that one of the things that is holding down wage growth in real
    terms is very low productivity growth over the last--
        Mr. Heck. I don't want to go down that rabbit hole. We did
    that last time.
        Mrs. Yellen. Without that changing, that really limits the
    long run prospects for workers.
        Mr. Heck. I get that. And I get the controversy surrounding
    our measure of productivity of late. The fact remains, America
    needs a pay raise.
        I take a fairly straightforward view of this. It seems to
    me--the economy--if we fall into a recession, the Fed cuts
    interest rates, and that increases availability and demand for
    loans, for the purchase of homes, for the purchase of
    automobiles, which has a stimulative effect on the economy.
        It didn't happen this time with respect to housing,
    necessarily. It didn't respond. It did in autos, in fact,
    fairly robust until recently. And now auto sales are going
    down. There are layoffs, literally, in the industry.
        You have described the monetary policy approach you are
    taking as still accommodative or stimulative, but that is not
    occurring in autos, especially given what I said earlier about
    I genuinely believe you care about how average Americans are
    impacted.
        Homes and autos are the two biggest purchases that most
    Americans ever make. It didn't work at all through the
    recession in homes, we are stuck back at 1994 construction
    levels, and it is now not working on autos. Are you concerned?
        Mrs. Yellen. Mortgage rates are a little bit off their
    lows, although they are down from last year.
        Look, I think you have to look at the bottom line, which is
    this year we have had 180,000 jobs created a month, only
    slightly lower than last year, 190,000 or so. The unemployment
    rate continues to decline. The labor market continues to
    strengthen.
        And that means that even if auto sales are off their highs,
    that we have strong enough demand through consumer spending, a
    recovering global economy, a pickup in spending on plant and
    equipment, that it is supporting continued job creation at
    rates greater than the labor force growth.
        Mr. Heck. Thank you.
        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, before asking you anything, I would like to
    express concerns about the treatment of centrally cleared
    customer margin under the supplemental leverage ratio. I am
    concerned, as others are, that including this margin in the
    denominator of the ratio is artificially reducing the number of
    clearing options available to customers.
        As you may be aware, lots of end users in my district use
    clearinghouses to hedge against risk in both agriculture and
    energy markets. But I am encouraged by the recent Treasury
    report on rate reform suggesting that this margin no longer
    should be a part of the ratio calculation.
        In addition, your colleague, Governor Powell, told the
    Senate recently that the Fed is reviewing the leverage ratio.
    And I would agree with him that fixing this is critical for the
    health of the markets, and I look forward to the outcome of
    this review.
        Madam Chair, I would like to discuss the 2013 leveraged
    lending guidance. In my district, the energy sector is one of
    the largest employers. As you and everyone else is aware, the
    energy industry is going through a bit of a tough time these
    days. And now for the purposes of leveraged lending guidance,
    the recent energy downturn means many, if not most, energy
    companies are qualified as distressed industries, meaning the
    guidance limits the ability of those companies to get credit
    and the loans they need to stay in operation and to employ my
    constituents.
        The guidance also concerns me a bit because of the manner
    in which it was rolled out. The guidance in 2013 and in a
    series of FAQs in 2014--that is not exactly the most clear
    process--has forced institutions to review every loan they made
    to ensure compliance. The Administration also appears to share
    my concerns, recommending in their recent Treasury report that
    the guidance be revisited.
        Chair Yellen, have you considered retracting the guidance?
    And along with that thought, also have you met with any
    industries that are considered distressed to hear about their
    difficulties in obtaining credit?
        Mrs. Yellen. We have put in place the leverage lending
    guidance I think for a very good reason, which is we were
    concerned about underwriting practices for those kinds of loans
    and want to make sure that lending is safe and sound.
        We had shared national credit exams that resulted in
    disturbing findings about the quality of underwriting of those
    loans, and I think it was appropriate to put such guidance in
    place.
        If they are having unintended consequences, I will discuss
    with my colleagues looking at that, but believe it was
    important to have put that in place.
        Mr. Lucas. I very much appreciate that, because the energy
    sector is not just important to the Third District of Oklahoma,
    but it is important to the entire national economy. And with
    the technological advances they have adopted where we have now
    gone from in many regions of the country no longer being
    importers of, for instance, crude oil and natural gas, but
    exporters, the effect that they are having on our overall
    balance of payments, the potential opportunities there are just
    incredible.
        And these guidances from 2013 and the FAQs from 2014 seem
    to be causing some real stress out there as they are being
    interpreted, and your commitment to look at those to try and
    make sure we don't create unintended consequences--because the
    number of barrels of oil are still in the ground in those
    proven reserves, the number of BCF of natural gas is still
    there, the technologies that have been enhanced and reduce the
    cost of our production are still in place. It is just we have
    to work our way through a tough time, and bearing that in mind,
    by the Fed and yourself, I very much appreciate that, Chair
    Yellen.
        And with that, Mr. Chairman, I yield back.
        Chairman Hensarling. The gentleman yields back.
        The Chair will now recognize the gentleman from Maryland,
    Mr. Delaney.
        Mr. Delaney. Thank you, Mr. Chairman.
        And thank you, Chair Yellen, for your incomparable
    leadership at the Federal Reserve. It is always nice to have
    you here. And we are getting towards the end, so I thought I
    would ask a question and kind of tap into your knowledge as a
    macro economist and think about some of the long-term trends of
    employment.
        There has been a lot of talk recently about what will
    happen to the future of work and jobs based on technological
    innovation, automation, machine learning, artificial
    intelligence, whatever the category may be. And while,
    historically, innovation has created more jobs than it has
    displaced, it generally does come with a lot of fear as to what
    will happen to the labor market. And maybe that is because we
    can see the jobs that will be displaced, but we don't really
    have a good ability to really imagine the jobs that will be
    created by this innovation.
        And this has caused many people to start talking about
    things like universal basic income, where they are kind of
    talking about how there will be no jobs in the future and
    robots and machine learning will displace all the jobs and we
    are going to have to figure out ways of supporting people.
        To me, that is premature for obvious reasons. Unemployment
    is very low. There are a lot of jobs in society that are being
    done that no one gets paid for, and we should certainly try to
    figure out how to pay those people for what they are doing
    before we start paying people to do nothing. And again,
    historically, more jobs have been created.
        But what are your thoughts on this topic as someone who
    spends a lot of time not only thinking about the macro, but
    obviously someone who cares deeply about employment and its
    importance to people's dignity and ability to raise their
    family and earn a living? So how is this going to play out, in
    your opinion?
        Mrs. Yellen. I don't have a crystal ball and these are very
    difficult issues.
        Mr. Delaney. None of us do. I know. But you are very smart
    and you look at a lot of data, so--
        Mrs. Yellen. I know technological change has been a
    tremendously important source of growth and improvement in
    living standards in the United States and around the world, and
    so it is something that we should want to see and foster. But
    it is disruptive and it can cause considerable harm to groups
    whose livelihood is disrupted by technological change that
    renders their skills less valuable or not at all valuable in
    the market.
        And I would expect that the kinds of technological changes
    that you describe will continue to change the nature of work,
    the kinds of jobs that will be available, and the skills that
    will be needed to fill those jobs. And to my mind, a very
    important focus for all of us should be on--
        Mr. Delaney. So what should be the three things we should
    do to prepare? Because I agree with you, it is going to change
    the nature of work, it will create jobs, it will displace jobs,
    and people need different skills. What would the two or three
    things you would do to best prepare the future to be able to
    succeed now?
        Mrs. Yellen. To my mind, education and training are
    absolutely central to the ability of workers to fill the new
    kinds of jobs that will be available and to have the skills.
        When I talk to businesses that are adopting new
    technologies, they tell me it is also creating new kinds of
    jobs, that they find that younger workers, even those with less
    education, have nevertheless been exposed to the kind of
    training that will enable them to fill the kinds of technical
    jobs that have been created with appropriate training. But it
    is a tremendous challenge for older workers who don't have that
    kind of training to make adjustments.
        I would look both to ensure that we have appropriate
    training, education, apprenticeship programs, and other things
    for younger people, and also to see what we can do to relieve
    the burdens on older workers who are displaced.
        Mr. Delaney. So if I could kind of summarize what I think I
    just heard you say, you are not necessarily bearish on the
    future of jobs and work?
        Mrs. Yellen. Correct.
        Mr. Delaney. You agree that new jobs will get created to
    offset displaced, probably a net positive?
        Mrs. Yellen. I believe so.
        Mr. Delaney. But you are worried that we are not doing
    enough or you think we should do more in reforming education,
    training, apprenticeship programs, et cetera, because the
    challenges are going to be very significant.
        Mrs. Yellen. That is certainly a key focus for me.
        Mr. Delaney. Great. Thank you again, Chair Yellen.
        Mrs. Yellen. Thank you.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Illinois, Mr.
    Hultgren.
        Mr. Hultgren. Thank you, Mr. Chairman.
        And thank you, Chair Yellen, for being here.
        Chair Yellen, the financial sector's commitment to
    cybersecurity is perhaps better than any other. Unfortunately,
    many have recently raised concerns that while well intentioned,
    many regulators are starting to require duplicative,
    conflicting, and improperly calibrated requirements. We want to
    keep everyone, regulators and industry, moving in the same
    direction, and that is to achieve stronger cybersecurity.
        Do you believe the efforts by the Treasury Department to
    coordinate regulatory harmonization of rules and requirements
    with respect to cybersecurity, do you support those efforts?
        Mrs. Yellen. I am supportive of those efforts. And we have
    certainly heard in our own outreach on cybersecurity the
    importance of having uniform standards so that firms are not
    facing different regulatory demands that may be technologically
    conflicting, and I think that is an important goal.
        Mr. Hultgren. You maybe have answered this enough, but just
    to dig in a little bit more specifically, in its recently
    released report in response to the President's Executive Order
    on financial regulation, the Treasury Department called for
    Federal banking regulators to harmonize cybersecurity
    regulations using a common lexicon. I wondered if the Federal
    Reserve is committed to achieving this goal?
        Mrs. Yellen. Yes.
        Mr. Hultgren. Great.
        During the last appearance that you had before this
    committee, I expressed my concern about the treatment of
    centrally cleared customer margin under the supplemental
    leverage ratio. The regulatory treatment of customer margin
    diminishes clearing options for customers while forcing them to
    pay more for these services.
        I applaud the Treasury Department's recommendation in its
    core principles report to grant an offset for a centrally
    cleared customer margin under the leveraged ratio. An offset
    would have a relatively insignificant impact on bank capital
    while driving down costs for clearing services.
        I understand British regulators have already granted an
    offset for client margins in the U.K., and the EU is expected
    to offer European banks an offset as well for the sake of
    clearing customers in the United States. I hope the Federal
    Reserve will follow suit and work with its fellow regulators to
    adopt an offset for U.S. firms.
        Mrs. Yellen. I think the supplementary leverage ratio may
    be having an unintended consequences, and it is something that
    we should look at very carefully, and I am committed to doing
    that.
        Mr. Hultgren. Thank you.
        Chair Yellen, on a similar note, on June 22nd, Federal
    Reserve Governor Powell testified before the Senate Banking
    Committee that, ``We believe that the leverage ratio is an
    important backstop to the risk-based capital framework, but
    that it is important to get the relative calibration of the
    leverage ratio and the risk-based capital requirements right.
    Doing so is critical to mitigating any perverse incentives and
    preventing distortions in money markets and other safe asset
    markets. Changes along these lines could also address concerns
    of custody banks that their business model is
    disproportionately affected by the leverage ratio.''
        And on April 4th, former Governor Tarullo gave a speech
    where he stated, ``As to the impact of the 2 percent enhanced
    supplementary leverage ratio, our experience leads me to
    believe that it may be worth changing to account for the quite
    different business operations of the G-SIBS, particularly those
    in custody business.''
        He further said, ``In practical terms, the asymmetry is
    most significant for the two banks that are dominantly
    custodial and transactional in nature rather than lending and
    trading firms. These banks have had the lowest risk-based
    surcharges of the eight G-SIBS, currently 1.5 percent, but
    their leverage surcharge is 2 percent. This is especially
    problematic for their operations, since they prudently reinvest
    customer deposits into safe and liquid assets.''
        Furthermore, the Treasury Department's June 2017 report
    states, ``Exceptions from the denominator of total exposure
    should include cash on deposit with central banks.''
        I wonder, do you agree with this assessment, and when could
    we expect the Fed to take action to address these concerns?
        Mrs. Yellen. I agree with the comments of my colleagues
    that the supplementary leverage ratio may be creating this set
    of problems that you addressed. You discussed that there are
    different ways of dealing with it. I am committed to looking at
    it and trying to recalibrate it so that it avoids these adverse
    consequences.
        Mr. Hultgren. I know it is going to be difficult to say,
    but do you expect that the Fed will take action before January
    2018 when the new enhanced supplementary leverage ratio goes
    into effect?
        Mrs. Yellen. Let me get back to you on the timetable.
        Mr. Hultgren. Great. Thanks again, Chair Yellen. I
    appreciate your work, and I appreciate you being here today.
        I yield back.
        Chairman Hensarling. The gentleman yields back.
        The Chair wishes to advise all Members that the Chair
    intends to release the witness at 1:00, and anticipates
    clearing four more Members from the queue.
        The Chair now recognizes the gentleman from Texas, Mr.
    Green.
        Mr. Green. Thank you, Mr. Chairman. I thank the ranking
    member as well.
        And, Chair Yellen, I thank you for appearing today.
        I am looking at currently an article from The Washington
    Post dated May 17, 2017. It is styled, ``The Nation's Biggest
    Banks Have a Common Gripe. They Have Too Much Money.'' I would
    just like to read some of the relevant portions.
        Banks are sitting on a $131 billion in excess capital,
    according to a March research report by Goldman Sachs. If
    capital requirements are lowered, banks can return the money to
    shareholders in the form of dividends, boosting the payouts
    perhaps by 45 percent in 2018. This is according to the Goldman
    Sachs report.
        Hampering the industry's arguments has been record profits.
    Despite higher capital requirements, the country's banking
    industry reported more than $171 billion in profit last year,
    and the volume of bank loans has increased significantly since
    the financial crisis.
        So the question I have, Madam Chair, is this: Should we
    change the capital requirements simply because we can have the
    opportunity to return more dividends, boost more payouts? Is
    that a good reason to change capital requirements?
        Mrs. Yellen. I strongly believe that we should have strong
    capital requirements for the safety and soundness of the
    banking system and the financial sector more broadly.
        I am comfortable with the level of risk-based capital
    requirements that are in place at this point, and especially
    the most systemic firms should have the largest capital
    buffers.
        So once those capital buffers are in place, the Federal
    Reserve has no objection to firms distributing profits as
    dividends to shareholders or in the form of share repurchases.
        This year in our stress tests we approved the plans of
    almost all of the firms involved to return capital of their
    shareholders, but that is because we are comfortable that they
    have built the capital buffers that are necessary for a safe
    and sound banking system and comfortable that they can go on,
    even under severe stress, meeting the credit needs of the U.S.
    economy.
        Mr. Green. Thank you.
        Let me move to another topic, because this is quite
    important and I don't want to neglect it.
        Thank you for your response to the letter that I and some
    36 colleagues sent you concerning the African Americans,
    Latinos, and the fact that the unemployment rate for African
    Americans and Latinos always seem to lag behind Anglos.
        I am mentioning this to you now because in your letter you
    do cite some things that may be beneficial in terms of some
    studies that will take place. But I do want to call one thing
    to your attention, and it has to do with something that these
    studies probably won't address, and it is just the issue of
    race itself, just race itself, plain old invidious
    discrimination.
        We have a difficult time legitimizing invidious
    discrimination as a cause for unemployment being higher among
    certain groups. We know that it exists, but we can't get the
    actual empirical evidence to legitimize the existence.
        Can the Fed, aside from these additional things that you
    will be doing, and I salute and applaud you for doing them, but
    can the Fed endeavor to engage in some sort of process that
    will allow us to acquire this empirical evidence? Because until
    we can present that, we still have persons who are in denial.
    Your response, please?
        Mrs. Yellen. It is certainly something that we can try to
    get at, although perhaps not definitively in studies that we
    do. There are studies that I am aware of, experimental-type
    studies, that do pretty clearly document what you are talking
    about, that economists have produced.
        Mr. Green. Could we explore the possibility of allowing
    testing to take place within banks? That is something that we
    have difficulty acquiring, testing empirical evidence?
        Mrs. Yellen. I need to look into that. I am not--
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from North Carolina,
    Mr. Pittenger.
        Mr. Pittenger. Thank you, Mr. Chairman.
        Good afternoon, Chair Yellen.
        Chair Yellen, do you subscribe to the theory that monetary
    policy can work better if it is independent of politics?
        Mrs. Yellen. Yes, I do.
        Mr. Pittenger. In that light, does your opinion about
    monetary policy independence also extend to independence from
    distributional politics?
        Mrs. Yellen. Distributional politics? I think the Fed
    should be nonpolitical.
        Mr. Pittenger. Yes, ma'am.
        I have reviewed some of your speeches since last March. I
    didn't see a lot relative to monetary policy. I did see one
    speech where you appeared before a community development
    research conference, and it was a conference on creating ``a
    just economy.'' And the conference that you also spoke at on
    women at Brown University, the monetary policy was mentioned
    only one time in that speech, and that reference was in context
    of explaining why monetary policy is poorly equipped to address
    ``pockets of persistently high unemployment.''
        It just appears that these speeches represent efforts to
    address social issues in a way that establishes the limits of
    sound monetary policy.
        Do you also worry that these in the same way it exposes
    monetary policy to increased risk from distributional politics?
        Mrs. Yellen. Let me say that it is my core responsibility
    to speak to the American people in a wide range of forums about
    the conduct of monetary policy in the economy, and I would
    disagree with your characterization of my presentations.
        In March, I gave an important speech in Chicago on monetary
    policy. I have had two press conferences after the March and
    June meetings. I recently gave remarks in London bearing on the
    U.S. economy and monetary policy. And if you go back a little
    longer to January, you will see many speeches to many different
    audiences at many levels as well as testimony pertaining to
    monetary--
        Mr. Pittenger. Yes, ma'am, I was just looking at the topics
    of those--to the two speeches, at Brown University and at
    this--
        Mrs. Yellen. Let me just say that the Federal Reserve has
    other responsibilities, and in particular we have--
        Mr. Pittenger. Well, you understand my--
        Mrs. Yellen. --extensive programs in community development
    that are related to what CRA--
        Mr. Pittenger. It was just the appearance that they were
    political.
        Mrs. Yellen. I spoke at a conference--
        Mr. Pittenger. Can I go on?
        Mrs. Yellen. --relating to community development that was
    run by the Board of Governors, which is entirely appropriate.
        Mr. Pittenger. Reclaiming my time, if you don't mind. I
    think I made my point that those particular ones were
    political.
        Paul Kupiec, a resident scholar at the American Enterprise
    Institute, stated that, ``Supervision and regulation are now so
    intrusive that it is not a stretch to say that the largest
    financial institutions are being run by the Fed.''
        Do you agree with that assessment?
        Mrs. Yellen. No, I don't.
        Mr. Pittenger. Well, do you believe it is appropriate for
    the Federal Reserve to engage in specific firm risk management
    by influencing corporate governance structures across any
    industry?
        Mrs. Yellen. I do believe it is appropriate--
        Mr. Pittenger. So why--then why do you--
        Mrs. Yellen. --for the Fed to ensure that there is sound
    corporate governance in major financial institutions. And we
    saw what happens when that is not the case. That was part of
    how we ended up with the financial crisis.
        Mr. Pittenger. So you believe that we needed more
    government intrusion and more government management and that
    would have salvaged the problem?
        Mrs. Yellen. I believe that we should ensure that--
        Mr. Pittenger. You don't believe that the government itself
    played a direct role in the financial collapse that we had in
    terms of forcing financial institutions to make loans to people
    who weren't even creditworthy?
        Mrs. Yellen. I don't believe that was the main cause of the
    financial crisis.
        Mr. Pittenger. Many of us disagree with that.
        Chair Yellen, do you believe that the Federal Reserve has
    the ability and the authority to usurp or preempt State
    corporate law?
        Mrs. Yellen. I am not sure what you have in mind there, and
    I am not going to give a simple yes-or-no answer to the
    question--
        Mr. Pittenger. Are you aware that companies that are
    incorporated in each State are subject to that State's
    corporate law requirements, including the fiduciary duties and
    obligations imposed upon the directors of a company's board?
        Mrs. Yellen. Okay.
        Mr. Pittenger. Do you believe that you have the ability,
    then, to usurp the laws?
        Mrs. Yellen. We are not usurping the laws. We are making
    sure that companies operate in a safe and sound fashion and
    that their boards of directors--
        Mr. Pittenger. If the State has laws relative to those
    corporate boards, do you believe that you have the authority to
    usurp those laws?
        Mrs. Yellen. Congress has passed laws that place
    obligations on us to supervise these financial institutions.
        Mr. Pittenger. My time has expired. Thank you.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Arkansas, Mr.
    Hill.
        Mr. Hill. I thank the chairman.
        And, Chair Yellen, it is nice to see you here and looking
    fit and rested from all your travels.
        Mrs. Yellen. Thank you.
        Mr. Hill. Thanks for your perseverance in front of us.
        We have talked before about monetary policy, and I haven't
    been a fan as a banker before I was in Congress of going beyond
    the Fed's initial interest rate policies. I felt like QE1, 2,
    and 3 didn't produce the GDP effects or the job increases that
    perhaps Fed policymakers at the time thought. And I have also
    been concerned that, as we go back and look backwards now since
    2008, that Fed officials really not have--have always been a
    little reluctant to talk about some of the unintended
    consequences of that, such as distorting the price mechanism in
    our economy, depressing cap rates for commercial real estate,
    or running up equity prices, which I think are a result when
    you have that--we have flooded from QE2 into our economy
    affecting price earnings, multiples, et cetera.
        But, today, I haven't heard any discussion about--we talked
    about the balance sheet. We talked about setting interest
    rates, but I want to talk a little bit about the money
    multiplier aspect in your toolbox. We have flooded the system
    with reserves, but we have a money multiplier that is down at
    Eccles rates, 1930s type rates. And I guess my view is,
    shouldn't you lower the rate of interest paid on banks on
    excess reserves as you are raising rates and planning this very
    thoughtful, careful shrinkage of the Fed's balance sheet?
        Mrs. Yellen. The interest we pay on excess reserves is our
    key tool to adjust the general level of short-term interest
    rates in the economy, and the Committee has deemed it
    appropriate to gradually raise the level of short-term rates as
    the labor market has strengthened and we have come closer to
    achieving our objectives. So, no, I wouldn't agree that we
    shouldn't be using that tool to normalize the general level of
    short rates in the economy.
        Mr. Hill. The rates on excess reserves.
        Mrs. Yellen. That is our key tool that we use to encourage
    the--
        Mr. Hill. How do we get the money multiplier to increase
    then?
        Mrs. Yellen. I guess I don't look at the impact of monetary
    policy on the economy through the money multiplier. I think the
    complex--
        Mr. Hill. What do you think accounts for it being at 1930s
    levels when we have advanced reserves into the system as
    mightily as we have over the last 8 years?
        Mrs. Yellen. We had a highly depressed economy where
    interest rates fell close to zero and banks were willing to
    hold onto excess reserves given the shortage.
        Mr. Hill. But my colleagues on the other side say that the
    lending business is booming and the economy is growing
    successfully, so why has the multiplier not changed? Why is the
    velocity still low like that, in your view? That is something
    we measure--that is how we measure successful Fed policy by
    looking at that, so I'm just curious.
        Mrs. Yellen. I wouldn't agree at all that we measure the
    success of Fed policy by looking at the money multiplier. I
    think the quantity of money and its relationship to GDP has
    been extremely unstable and not a good way of running monetary
    policy. I am not aware of any central bank that would any
    longer approach it that way.
        Mr. Hill. And why is that? Why is it, though, that it was,
    between World War II and 2008, something that people looked at
    and it was talked about as a way that shows that we have a
    healthy investment and lending market and growing economy, but
    in the 1930s and since 2008, we are just satisfied with it that
    it is low and we don't say it is important anymore? Can you put
    some perspective on that?
        Mrs. Yellen. Both in the Great Depression and in our more
    recent Great Recession we have had a situation where short-term
    rates fell essentially to zero percent, and pushing out
    additional reserves was essentially what they said during the
    Depression was like pushing on a string, and we encountered--or
    a so-called liquidity trap, and the relationship then between
    the quantity of reserves and nominal income begins to break
    down in those situations. And we faced a similar situation as
    to what we had during the Great Depression.
        Mr. Hill. My time has expired, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The next Member will be the last Member we call upon. I now
    recognize the gentleman from Ohio, Mr. Davidson for 5 minutes.
        Mr. Davidson. Thank you, Mr. Chairman.
        Chair Yellen, thank you for being here today.
        I really appreciate your testimony, and thanks for the work
    you and the team at the Federal Reserve do to get our monetary
    policy right.
        Mrs. Yellen. Thank you.
        Mr. Davidson. I want to understand that a little bit. You
    talked about your policy is neutral to accommodative, but what
    you have started to do is at least talk about applying the
    brakes. You have raised rates. You're talking about how to
    frankly do--you talked just briefly about the supply of money
    being a little unstable. Well, $4 trillion of it, we know where
    it went, but it did create some velocity in the money supply
    that is nontypical. So is what you are doing now essentially
    gently applying the brakes if you feel like the economy is
    doing it--
        Mrs. Yellen. Yes, I think that is a fair characterization.
    We have had our foot on the gas. We have been in an
    accommodative stance, and as we have come closer to achieving
    our objectives, we have taken our foot off the gas to some
    extent so that we can sustain a strong recovery, but we are
    moving towards something closer to let's call it a neutral
    stance that keeps the economy operating on an even keel.
        Mr. Davidson. Historically, applying the brakes gently or
    at the right time has been a challenge, just like it has been a
    challenge to hit the gas. I guess everyone always feels
    optimistic about their course of action at the time. Generally,
    people say bubbles have been one of the things that have caused
    this miscalculation. What bubbles do you see out there in the
    macro economy right now?
        Mrs. Yellen. I try not to opine on the level of asset
    prices, although our report notes that valuations generally are
    toward the top of their historical ranges. What I try to think
    about is, if there are adjustments in asset prices, what
    consequences would they have on our financial system and our
    economy, and in that context, look for evidence that surging
    asset prices might be leading to imprudent borrowing, a buildup
    in leverage in the economy that would be dangerous if the
    prices were to unwind. And we are not seeing that. So we sort
    of judge financial stability risks at this point as moderate.
        Mr. Davidson. So you have laid out a good plan, and I don't
    really want to go over the whole thing. You have talked a lot
    about it, but I am particularly concerned about the role that
    you kind of allude to here, as we start to see instability, you
    kind of shift hats from monetary policy to regulator. And in
    the regulation you talked about really a pretty heavy hand in
    the sense of steering companies on policies. The Financial
    Times has highlighted cases where you have even, as regulator,
    addressed HR practices up to the point of advising terminating
    or replacing certain employees in companies. And at that point,
    I guess, how critical is it that our agent of monetary policy
    also serve as a regulator? I am not saying that regulation
    doesn't need to be done. How important is it that our central
    banker does that?
        Mrs. Yellen. I would say, especially in the aftermath of
    the financial crisis, we have found that our understanding of
    the economy, of the financial system, and of appropriate
    monetary policy has been greatly informed by the role we play
    in supervision. It has helped us understand risks to financial
    stability, pressures in particular portions of credit markets,
    and there has been a close integration between what we learn in
    bank supervision, financial stability, and monetary policy.
        Mr. Davidson. And most closely on the mortgage-backed
    securities markets, where the Fed developed a strong affinity
    for them and accumulated quite a lot of them, which gets to the
    monetary supply.
        So, at this point, you are looking at some of the asset
    purchases that you have made, really directly interacting with
    a key part of the market, putting those on your balance sheet,
    unwinding them. You have talked about a plan to do it. You have
    talked about a change of plan to do it. What do you see as the
    risk to the monetary supply? And you talk about, not to say it
    is a bubble, but clearly there is going to be an effect on
    asset prices as you try get that right.
        Mrs. Yellen. We do believe that our asset purchase programs
    were effective in pushing down longer-term rates and the so-
    called term premium embodied in longer-term rates, and very
    gradually over time, as we shrink our balance sheet, I would
    expect some modest but, over a number of years, upward pressure
    on longer term rates. It is not something very substantial, but
    it is something that we have taken into account in deciding on
    what is the appropriate path for the Federal funds rate.
        Mr. Davidson. Thank you, Chair Yellen.
        Thank you, Mr. Chairman. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        And I want to thank our witness, 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.
        This hearing stands adjourned.
        [Whereupon, at 1:11 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 12, 2017

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