[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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
28-746 PDF WASHINGTON : 2018
____________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]