[Senate Hearing 115-14]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-14


         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                                   ON

   EXAMINING THE FEDERAL RESERVE'S SEMIANNUAL REPORT TO CONGRESS ON 
              MONETARY POLICY AND THE STATE OF THE ECONOMY

                               __________

                           FEBRUARY 14, 2017

                               __________

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Travis Hill, Senior Counsel

                      Joe Carapiet, Senior Counsel

                      Jared Sawyer, Senior Counsel

                Graham Steele, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

                       Dawn Ratliff, Chief Clerk

                     Cameron Ricker, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       TUESDAY, FEBRUARY 14, 2017

                                                                   Page

Opening statement of Chairman Crapo..............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                                WITNESS

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve 
  System.........................................................     5
    Prepared statement...........................................    45
    Responses to written questions of:
        Senator Toomey...........................................    47
        Senator Reed.............................................    52
        Senator Sasse............................................    53
        Senator Tester...........................................    59
        Senator Rounds...........................................    64
        Senator Tillis...........................................    68
        Senator Perdue...........................................    73

              Additional Material Supplied for the Record

The February 2017 semiannual Monetary Policy Report..............    78
Wall Street Journal article entitled, ``U.S. Banks Report Record 
  Profit in Third Quarter,'' dated November 29, 2016, submitted 
  by Senator Warren..............................................   126
FDIC Quarterly Report, Third Quarter 2016........................   128

                                 (iii)

 
         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

                              ----------                              


                       TUESDAY, FEBRUARY 14, 2017

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. The Committee will come to order.
    Today we will receive testimony from Federal Reserve Chair 
Janet Yellen regarding the Fed's semiannual report to Congress 
on monetary policy and the state of the economy.
    It will come as no surprise to you, Chair Yellen, that 
improving economic growth is a key priority for Congress this 
year.
    Two thousand sixteen was the 11th consecutive year that the 
U.S. economy failed to grow by more than 3 percent. One way to 
improve economic growth is to study and address areas where 
regulations can be improved.
    Since the financial crisis, regulators have imposed 
thousands of pages of new regulations. We all need to better 
understand the combined impact of these rules on lending, 
liquidity, costs for small financial institutions, and broader 
economic growth.
    It is time to reassess what is working and what is not. I 
am encouraged by President Trump's Executive Order on Core 
Principles for regulating the financial system.
    Directing the Treasury Secretary, in consultation with the 
heads of the other member agencies of Financial Stability 
Oversight Council, including you, Chair Yellen, to report on 
how well existing laws and regulations promote or inhibit 
economic growth will be a helpful step as we move forward.
    Financial regulation should strike the proper balance 
between the need for a safe and sound financial system and the 
need to promote a vibrant, growing economy. I expect the Vice 
Chairman for Supervision, once confirmed, will play an 
important role in striking this balance.
    We want our Nation's banks to be well capitalized and well 
regulated, without being drowned by unnecessary compliance 
costs. This is especially important for the community banks and 
credit unions in America, which lack the personnel and 
infrastructure to handle the overwhelming regulatory burden of 
the past few years, yet in many ways are treated the same as 
the world's biggest
institutions.
    At the last Humphrey-Hawkins hearing, Chair Yellen, you 
stated that simplifying regulations for the community banks 
continues to be a focus for the Fed, and I hope that remains 
the case. Our regulatory regime should be properly tailored and 
avoid a one-size-fits-all approach.
    The Fed recently took an encouraging step in that direction 
when it finalized changes to exempt certain banks from the 
qualitative portion of CCAR, and I appreciate that.
    Another area I would like to address is the $50 billion 
SIFI threshold for regional banks. In prior hearings, we have 
discussed whether $50 billion is the appropriate threshold, and 
I hope we can work together to craft a more appropriate 
standard.
    My goal is to work with Senators of this Committee and 
financial regulators to better strike the balance between 
smart, thoughtful regulation and promoting economic growth.
    It has also been nearly a decade since Fannie Mae and 
Freddie Mac were put into conservatorship. Housing finance 
reform remains the most significant piece of unfinished 
business following the crisis, and it is important to build 
bipartisan support for a pathway forward. For many years, the 
Fed expressed concerns about Fannie and Freddie, and I 
encourage you, Chair Yellen, and the Fed to work with this 
Committee to help find a solution.
    With respect to monetary policy, it has now been nearly a 
decade since the Fed began easing monetary policy in the fall 
of 2007 in response to the emerging financial crisis.
    Today the Fed still holds close to $4.5 trillion in assets 
on its balance sheet, which includes approximately 35 percent 
of the outstanding agency mortgage-backed security market. I 
look forward to hearing from you on how the Fed plans to 
normalize monetary policy and wind down its balance sheet.
    The Banking Committee has a lot of work to do this 
Congress. My goal is to work with Ranking Member Brown and 
other Members of the Committee to identify bipartisan 
approaches that we can quickly get signed into law.
    At the same time, we plan to start work on housing finance
reform, flood insurance, sanctions, and legislation to boost 
economic growth in the country.
    I look forward to working with you, Chair Yellen, the 
Federal Reserve, and other Members of the Committee to tackle 
some of these critical issues that I have mentioned this 
morning, as well as a number of others.
    With that, Madam Chair, we look forward to your comments 
today, but first I turn to Ranking Member Brown. Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. I appreciate the 
hearing today. And, Chair Yellen, thank you for--it is an honor 
always to have you here, and a pleasure, and your insight is 
always helpful to all of us. Thank you for that.
    Since your appearance, Madam Chair, last June, the economy 
has improved enough, as we know, that the Fed raised the 
Federal funds rate in December for only the second time since 
the financial crisis. Businesses continue to create jobs on a 
slow but steady pace, some 70-plus months in a row, and there 
finally is some wage growth.
    Yet there are concerns. Too many Americans who want full-
time work still cannot find it. Many workers have left the 
labor force. The gains have been not large enough and been 
uneven. Foreclosures and job losses hit African American and 
Latino communities particularly hard during the crisis. One 
study found that the average wealth of white families has grown 
3 times faster than the rate for African American families and 
1.2 times the growth rate for Latino families over the last 
three decades. At these rates, it will take hundreds of years 
for those families to match where white families are today.
    For affluent Americans, stock portfolios have recovered 
nicely since the crisis, but for most of Ohio and for most of 
our States, the story is very different. The State's job growth 
last year was the lowest since 2009. We actually went backwards 
5 out of 12 months. In many places, one in four homeowners is 
still underwater.
    As you have heard me say and as Members of this Committee 
have heard me say, in the Zip Code my wife and I live in in 
Cleveland, in the first half of 2007 there were more 
foreclosures than any Zip Code in the United States of America. 
For Ohio manufacturers, the strong dollar continues to hurt 
exports, and there is uncertainty, much of it injected into the 
economy by this Administration already and by the majority 
party. Can Americans continue to count on having health 
insurance? Will U.S. manufacturers and exporters have continued 
access to foreign markets? Will importers have to pay a 20-
percent sales tax? Will immigrants to this country have access 
to jobs and to our universities? They do not even know what to 
expect tomorrow let alone to do any kind of long-range 
planning. All of that our country and our economy is dependent 
upon.
    Americans elected the new President based on his promises 
to drain the swamp, to take on Wall Street, and begin to bring 
manufacturing jobs back to the industrial heartland. We are all 
concerned, though, when you look at some of the nominees 
confirmed, with virtually every Republican virtually every time 
voting for amazingly ethically challenged nominees, nominees 
that would have stepped aside 8 years ago or 16 years ago with 
new Presidents, we are all concerned about that.
    Instead of focusing on infrastructure and real job creation 
and tax cuts for the middle class and education and workforce 
development, we have seen the new Administration target working 
Americans, furthering a billionaire's special interest agenda, 
and
threaten Wall Street reform based on the false promises that 
banks are not lending--false promises, some might call them 
lies.
    I think everyone on this dais can agree there are parts of 
Wall Street reform that could be improved and steps that can be 
taken to help small banks and credit unions. That is an ongoing 
process for both Congress and the regulators.
    I applaud the Fed decision, Madam Chair, its recent 
decision to remove banks below $250 billion in assets from part 
of its CCAR process. But many of my Republican colleagues are 
dead set on going beyond the reasonable, consensual, bipartisan 
adjustments and seeking to repeal reforms that are key to 
preventing the next devastating financial crisis. Working 
Americans lost trillions of dollars in their retirement savings 
after large Wall Street firms made risky bets with other 
people's money either failed or were bailed out during the 
crisis. That is why Congress put in place higher capital 
requirements for large banks, mechanisms to identify and 
regulate risky nonbank companies, and tools to make sure 
financial firms can fail without bailouts funded by taxpayers.
    Recent statements by top officials in the White House 
indicate they are specifically targeting these important 
safeguards, even though these parts of the law were supported 
by both parties back less than a decade ago.
    Now the Administration is putting Wall Street bankers in 
charge. Steve Mnuchin--again, every single Republican voted for 
him--was confirmed by the Senate last night. They are going 
after the rules that their former employers do not like. They 
are trying to take away the financial regulators' freedom to 
make difficult decisions that will keep our financial system 
stable.
    These priorities are wrong. American voters agree: 80 
percent--80 percent in one poll, that is Republicans and 
Democrats and Independents--agree we need tough rules and 
stronger, not weaker, penalties for Wall Street.
    I want to take a moment to recognize one person in 
particular who has been one of the chief architects of the 
stronger rules that have been put in place over the past 
several years to rein in Wall Street misbehavior and excess. 
Last week, Governor Tarullo announced he is leaving the Board 
of Governors. I want to thank Governor Tarullo for his service 
to our Nation over the last 8 years. He is one of a handful of 
dedicated public servants who have made our financial system 
safer for a generation to come.
    I also want to recognize Scott Alvarez, who is in his 36th 
year at the Federal Reserve. He is seated right behind--if he 
would put his hand up for a moment, Mr. Alvarez? He is in his 
36th year at the Fed. He has been General Counsel at the Fed I 
believe for over a decade. Thank you for your service, Mr. 
Alvarez.
    Madam Chair, I look forward to hearing more from you about 
the current state of the economy, the importance--especially 
the importance of strong rules to guard against economic 
calamity--I know you are not going to be there forever, 
although I wish you were--and the importance of the strong 
rules that you have put in place and you will continue to put 
in place over the next dozen months or so, more than that, and 
what Congress can do to help the economy create jobs and make 
it easier for all Americans--and I underscore all Americans--to 
accumulate wealth, to buy a home, to pay for college, and to 
have a decent, honorable, dignified retirement.
    Madam Chair, it is a pleasure to see you.
    Chairman Crapo. Thank you, Senator Brown.
    Again, Madam Chair, we appreciate you being here. We look 
forward to your opening statement at this point, and then we 
will
engage in some important discussion. You may proceed.

STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Ms. Yellen. Thank you. Chairman Crapo, Ranking Member 
Brown, and other Members of the Committee, I am pleased to 
present the Federal Reserve's semiannual Monetary Policy Report 
to the Congress. In my remarks today I will briefly discuss the 
current economic situation and outlook before turning to 
monetary
policy.
    Since my appearance before this Committee last June, the 
economy has continued to make progress toward our dual-mandate 
objectives of maximum employment and price stability. In the 
labor market, job gains averaged 190,000 per month over the 
second half of 2016, and the number of jobs rose an additional 
227,000 in January. Those gains bring the total increase in 
employment since its trough in early 2010 to nearly 16 million. 
In addition, the unemployment rate, which stood at 4.8 percent 
in January, is more than 5 percentage points lower than where 
it stood at its peak in 2010 and is now in line with the median 
of the Federal Open Market Committee participants' estimates of 
its longer-run normal level. A broader measure of labor 
underutilization, which includes those marginally attached to 
the labor force and people who are working part time but would 
like full-time jobs, has also continued to improve over the 
past year. In addition, the pace of wage growth has picked up 
relative to its pace of a few years ago, a further indication 
that the job market is tightening. Importantly, improvements in 
the labor market in recent years have been widespread, with 
large declines in the unemployment rates for all major 
demographic groups, including African Americans and Hispanics. 
Even so, it is discouraging that jobless rates for those 
minorities remain significantly higher than the rate for the 
Nation overall.
    Ongoing gains in the labor market have been accompanied by 
a further moderate expansion in economic activity. U.S. real 
gross domestic product is estimated to have risen 1.9 percent 
last year, the same as in 2015. Consumer spending has continued 
to rise at a healthy pace, supported by steady income gains, 
increases in the value of households' financial assets and 
homes, favorable levels of consumer sentiment, and low interest 
rates. Last year's sales of automobiles and light trucks were 
the highest annual total on record. In contrast, business 
investment was relatively soft for much of last year, though it 
posted some larger gains toward the end of the year in part 
reflecting an apparent end to the sharp decline in spending on 
drilling and mining structures; moreover, business sentiment 
has noticeably improved in the past few months. In addition, 
weak foreign growth and the appreciation of the dollar over the 
past 2 years have restrained manufacturing output. Meanwhile, 
housing construction has continued to trend up at only a modest 
pace in recent quarters. And while the lean stock of homes for 
sale and ongoing labor market gains should provide some support 
to housing construction going forward, the recent increases in 
mortgage rates may impart some restraint.
    Inflation moved up over the past year, mainly because of 
the diminishing effects of the earlier declines in energy 
prices and import prices. Total consumer prices as measured by 
the personal consumption expenditure, or PCE, index rose 1.6 
percent in the 12 months ending in December, still below the 
Federal Open Market Committee's (FOMC) 2-percent objective but 
up 1 percentage point from its pace in 2015. Core PCE 
inflation, which excludes the volatile energy and food prices, 
moved up to about 1 \3/4\ percent.
    My colleagues on the FOMC and I expect the economy to 
continue to expand at a moderate pace, with the job market 
strengthening somewhat further and inflation gradually rising 
to 2 percent. This judgment reflects our view that U.S. 
monetary policy remains accommodative, and that the pace of 
global economic activity should pick up over time, supported by 
accommodative monetary policies abroad. Of course, our 
inflation outlook also depends importantly on our assessment 
that longer-run inflation expectations will remain reasonably 
well anchored. It is reassuring that while market-based 
measures of inflation compensation remain low, they have risen 
from the very low levels they reached during the latter part of 
2015 and first half of 2016. Meanwhile, most survey measures of 
longer-term inflation expectations have changed little, on 
balance, in recent months.
    As always, considerable uncertainty attends the economic 
outlook. Among the sources of uncertainty are possible changes 
in U.S. fiscal and other policies, the future path of 
productivity growth, and developments abroad.
    Turning to monetary policy, the FOMC is committed to 
promoting maximum employment and price stability, as mandated 
by the Congress. Against the backdrop of headwinds weighing on 
the economy over the past year, including financial market 
stresses that emanated from developments abroad, the Committee 
maintained an unchanged target range for the Federal funds rate 
for most of the year in order to support improvement in the 
labor market and an increase in inflation toward 2 percent. At 
its December meeting, the Committee raised the target range for 
the Federal funds rate by \1/4\ percentage point, to \1/2\ to 
\3/4\ percent. In doing so, the Committee recognized the 
considerable progress the economy had made toward the FOMC's 
dual objectives. The Committee judged that even after this 
increase in the Federal funds rate target, monetary policy 
remains accommodative, thereby supporting some further 
strengthening in labor market conditions and a return to 2 
percent inflation.
    At its meeting that concluded early this month, the 
Committee left the target range for the Federal funds rate 
unchanged but reiterated that it expects the evolution of the 
economy to warrant further gradual increases in the Federal 
funds rate to achieve and maintain its employment and inflation 
objectives. As I noted on previous occasions, waiting too long 
to remove accommodation would be unwise, potentially requiring 
the FOMC to eventually raise rates rapidly, which could risk 
disrupting financial markets and pushing the economy into 
recession. Incoming data suggest that labor market conditions 
continue to strengthen and inflation is moving up to 2 percent, 
consistent with the Committee's expectations. At our upcoming 
meetings, the Committee will evaluate whether employment and 
inflation are continuing to evolve in line with these 
expectations, in which case a further adjustment of the Federal 
funds rate would likely be appropriate.
    The Committee's view that gradual increases in the Federal 
funds rate will likely be appropriate reflects the expectation 
that the neutral Federal funds rate--that is, the interest rate 
that is neither expansionary nor contractionary and that keeps 
the economy operating on an even keel--will rise somewhat over 
time. Current estimates of the neutral rate are well below pre-
crisis levels--a phenomenon that may reflect slow productivity 
growth, subdued economic growth abroad, strong demand for safe 
longer-term assets, and other factors. The Committee 
anticipates that the depressing effect of these factors will 
diminish somewhat over time, raising the neutral funds rate, 
albeit to levels that are still low by historical standards.
    That said, the economic outlook is uncertain, and monetary 
policy is not on a preset course. FOMC participants will adjust 
their assessments of the appropriate path for the Federal funds 
rate in response to changes to the economic outlook and 
associated risks as informed by incoming data. Also, changes in 
fiscal policy or other economic policies could potentially 
affect the economic outlook. Of course, it is too early to know 
what policy changes will be put in place or how their economic 
effects will unfold. While it is not my intention to opine on 
specific tax or spending proposals, I would point to the 
importance of improving the pace of longer-run economic growth 
and raising American living standards with policies aimed at 
improving productivity. I would also hope that fiscal policy 
changes will be consistent with putting U.S. fiscal accounts on 
a sustainable trajectory. In any event, it is important to 
remember that fiscal policy is only one of the many factors 
that can influence the economic outlook and the appropriate 
course of monetary policy. Overall, the FOMC's monetary policy 
decisions will be directed to the attainment of its 
congressionally mandated objectives of maximum employment and 
price stability.
    Finally, the Committee has continued its policy of 
reinvesting proceeds from maturing Treasury securities and 
principal payments from agency debt and mortgage-backed 
securities. This policy, by keeping the Committee's holdings of 
longer-term securities at sizable levels, has helped maintain 
accommodative financial
conditions.
    Thank you. I would be pleased to take your questions.
    Chairman Crapo. Thank you very much, Chair Yellen, and I 
want to get into that last issue you talked about with regard 
to the Fed's balance sheet. But before that, I have got two or 
three quick questions I just wanted to go through with you.
    First, Dodd-Frank established a new position at the Federal 
Reserve, the Vice Chairman of Supervision. President Obama has 
never yet designated anyone for this role, and instead Fed 
Governor Dan Tarullo has acted as the de facto Vice Chairman 
for Supervision in various ways, including by chairing the 
Federal
Reserve Board's Committee on Supervision and Regulation, 
overseeing the Large Institution Supervision Coordinating 
Committee, and representing the Fed at the Financial Stability 
Board and in Basel, among other functions.
    What role do you envision for the Fed Vice Chairman for 
Supervision having? And how do you envision working with this 
person when we get one nominated? And is it your expectation 
that a Presidentially appointed Federal Vice Chairman for 
Supervision will have the responsibilities that Governor 
Tarullo currently has, including, among other things, chairing 
the Committee on Supervision and Regulation and negotiating on 
behalf of the Federal Reserve in Basel?
    Ms. Yellen. Chairman Crapo, I think, as you know, the 
entire Board has responsibility for approving new rules, but 
the Vice Chair would head our Supervision and Regulation 
Committee and would coordinate our efforts in this area. He or 
she would also represent the Board on international 
negotiations of financial regulatory standards, including 
representing the Fed in Basel. And
beyond that, the new Vice Chair would fulfill any statutory 
obligations such as providing semiannual testimony to Congress 
on
supervision. I look forward to working with that individual.
    Chairman Crapo. Thank you very much.
    Second, President Trump recently issued an Executive order 
directing the Treasury Secretary to work with the member 
agencies of FSOC to review the extent to which existing laws 
and regulations promote certain core principles. First of all, 
do you agree that it is important to promote the core 
principles mentioned in this Executive order? And do you plan 
to work with the Treasury Secretary and other members of FSOC 
to ensure that this review
occurs?
    Ms. Yellen. So I certainly do agree with the core 
principles. They enunciate very important goals for our 
financial system and for supervision and regulation of it. And 
I look forward to working with the Treasury Secretary and other 
members of FSOC to engage in this review.
    Chairman Crapo. Thank you very much.
    My third question before we get to the balance sheet is: 
Fannie Mae and Freddie Mac were put into conservatorship in 
2008 and continue to dominate the mortgage market. I am not 
alone in calling for housing reform and considering it the most 
significant piece of unfinished business following the 
financial crisis.
    Do you believe that finding a durable, comprehensive 
legislative solution for the housing finance market is urgently 
needed? And are you willing to work with us to help achieve 
that?
    Ms. Yellen. Yes, I think it is very important that Congress 
continue to deal with the GSEs and figure out what the 
Government's role in housing finance should look like going 
forward. The goal of bringing private capital back into the 
mortgage market I think is important, and I would hope that 
Congress would decide explicitly on what the Government's role 
is and, if there are guarantees, that they would be recognized 
and priced appropriately. And we look forward to continue 
working with you to help achieve these
objectives.
    Chairman Crapo. Well, thank you. And I just wanted to get 
your comments on those few issues before I go into this final 
question on the balance sheet. The Fed has said that it will 
not begin shrinking its balance sheet until normalization of 
the level of Federal funds rates is well underway. Recently, 
some Reserve Bank Presidents have suggested that it is time to 
consider beginning that process. What are the benefits of 
starting to let the balance sheet run off rather than relying 
solely on short-term rate hikes to
tighten policy? And as short-term rates rise, is it problematic 
to have the large balance sheet continuing to put downward 
pressure on longer-term rates?
    Ms. Yellen. Well, Chairman Crapo, the Federal Reserve 
resorted to purchases of longer-term assets after the financial 
crisis at a time when the economy was very depressed, 
unemployment was very high, inflation running below our 
objectives, and extraordinary support was needed. But we would 
hope that that was a very unusual intervention and one that we 
would not frequently be relying on in the future.
    The FOMC has enunciated that its longer-run goal is to 
shrink our balance sheet to levels consistent with the 
efficient and effective implementation of monetary policy. And 
while our system evolves and I cannot put a number on that, I 
would anticipate a balance sheet that is substantially smaller 
than at the current time.
    In addition, we would like our balance sheet to again be 
primarily Treasury securities; whereas, as you pointed out, we 
have substantial holdings of mortgage-backed securities.
    Now, to adjust financial conditions in order to influence 
economic developments in line with our dual-mandate objectives, 
the Committee would like, to the maximum extent possible, to 
rely on variations in our short-term overnight interest rate to 
accomplish that objective. It is our traditional tool. It is 
the one that we have the most confidence in, that markets best 
understand how we set it, and we have the greatest confidence 
in our ability to calibrate it relative to the needs of the 
economy. So we do not want to use fluctuations in our balance 
sheet policy as an active tool of monetary policy management.
    So what we would like to do is to find a time when we judge 
that our need to provide substantial accommodation to the 
economy in the coming years is minimal, when we have confidence 
that the economy is on a solid course, and the Federal funds 
rate has reached levels where we have some ability to address 
weakness by cutting it. And once we have that confidence, we 
will begin to allow maturing principal from our investments to 
gradually and in an orderly way we will stop reinvestments or 
diminish them, and allow our balance sheet to shrink in an 
orderly and predictable way.
    The Committee has decided that it will not sell mortgage-
backed securities, but as principal matures, we will begin to 
allow those assets to run off our balance sheet. So we do 
expect to be discussing in greater detail. We gave general 
guidance that we want to wait to start this process until the 
process of normalization is well underway, and the Committee in 
the coming months will be discussing issues pertaining to 
reinvestment strategy to try to provide some further guidance.
    Chairman Crapo. Thank you very much.
    Senator Brown.
    Senator Brown. Thank you, Senator Crapo, Mr. Chairman.
    Madam Chair, you testified last year that the banking 
system was more safe, more resilient. Is that still true?
    Ms. Yellen. I believe so. Yes. I mean, there is much more 
capital in the banking system. The quantity of high-quality 
capital, Tier 1 capital, has more than doubled since before the 
financial
crisis. There is much more liquidity. I believe the financial 
system is much more resilient than it was.
    Senator Brown. Thank you. Now that we know that--and I 
think we already knew that--I appreciate your assertion and 
convincing arguments that you have made for some time. Some 
have remarked that banks are not lending now. Is that true?
    Ms. Yellen. Well, a recent survey by the National 
Federation of Independent Business, which is smaller 
businesses, indicated that only 4 percent of respondents were 
unable to get all of the loans that they needed, and the 
fraction of businesses ranking inadequate access to credit as 
their main problem stood at 2 percent, which is an extremely 
low number.
    Senator Brown. So just because people----
    Ms. Yellen. Lending has expanded overall by the banking 
system and also to small businesses----
    Senator Brown. Thank you. Just because people in high 
places say it is true does not make it so.
    Are U.S. banks competing--others have said that U.S. banks 
cannot compete. Are U.S. banks competing relative to their 
international counterparts?
    Ms. Yellen. U.S. banks are generally considered quite 
strong relative to their counterparts. They built up capital 
quickly, partly as a result of our insistence that they do so 
following the financial crisis and, as I mentioned earlier, are 
very well capitalized. And they are lending. Their price-to-
book ratios are substantially higher than the ratios of banks 
headquartered in other areas. And they are gaining market 
share, and they remain quite profitable.
    Senator Brown. So banks are safer and more resilient. Banks 
are lending. Banks are able to compete with international 
counterparts. Consumers--some have said consumers are worse off 
since the crisis. Are consumers better protected today from 
abusive and deceptive and fraudulent practices than they were?
    Ms. Yellen. Well, certainly we have focused very much on 
protecting consumers in our implementation of strengthening the
financial system. And, of course, consumers were very seriously 
harmed by the financial crisis, but I think we have seen a 
significant recovery.
    Senator Brown. And the Fed is tailoring rules, as we have 
discussed personally and in this forum, the Fed is tailoring 
rules for communities and--for community banks, regional banks, 
the largest banks based upon factors including size and 
riskiness, correct?
    Ms. Yellen. Yes.
    Senator Brown. It seems to me that steps taken after the 
crisis with higher capital requirements, as you have said, with 
stress tests, with orderly liquidation authority, with the 
Consumer Financial Protection Bureau have made our economy 
stronger, our financial system more stable, our banks better 
capitalized, and our
consumers better protected. I think that if the rules are 
removed, as one executive said during the crisis, if the music 
is playing, you have got to get up and dance. If the rules are 
removed, Wall Street will almost assuredly be right back to 
their risky and reckless
behavior we experienced before you took this job, back before 
the crisis.
    A couple of other lines of questions, if I could, Madam 
Chair, Mr. Chairman. Recent Executive action directs the 
Secretary of Treasury to chair the Financial Stability 
Oversight Council, FSOC, to review the rules and other 
activities of each member agency of FSOC, including the Fed, to 
determine if they are consistent with the certain core 
principles of the executive branch. I know the Fed and other 
agencies regularly review their work to make sure that the 
rules continue to enhance financial stability and promote 
safety and soundness and to protect consumers.
    To the extent that you provide any information or 
conclusions to Treasury or to FSOC about your agency's rules as 
part of this process, could you provide those materials to the 
Banking Committee?
    Ms. Yellen. So I do not yet have any clarity about what the 
process will involve, but we----
    Senator Brown. But when you do?
    Ms. Yellen. We always try to work with our oversight 
committees to provide materials that are relevant to your 
oversight of us.
    Senator Brown. Thank you.
    Ms. Yellen. And we will strive to be cooperative.
    Senator Brown. And we will count on that. Thank you.
    I have doubts about the Executive order that requires 
Federal agencies to eliminate two rules--in many cases, two 
consumer protections--for every new rule. I am particularly 
troubled by what that means for financial regulators. It is a 
little like telling the highway department to take down 2 feet 
of guardrails for every foot it puts up.
    Is it clear that--I have a series of questions, and I will 
put them together, if you would answer. Is it clear that 
financial regulators, including the Fed, are not covered by 
this rule? Does it make sense to remove two safety and 
soundness rules for every new safety and soundness protection? 
Does it make sense to remove two consumer protections for every 
new consumer protection? Will it make our system more stable 
and better protect consumers from bad actors?
    Ms. Yellen. So I believe that the independent agencies are 
not covered explicitly by the rules, but let me just say that 
considering regulatory burden and looking for ways in issuing 
rules and reviewing outstanding rules, constantly looking for 
ways to mitigate burden I think is an important goal, and it is 
one that we have strived and will strive to achieve. And it is 
a legitimate and important goal.
    Senator Brown. Understanding, of course, what some people 
call ``rules and regulatory overreach,'' others call ``consumer 
protection and environmental protection and work protections.''
    Chair Yellen--last question, Mr. Chairman--I want to follow 
up on an issue we have talked about: diversity in the Federal 
Reserve System. We see the least diverse President's Cabinet 
than we have seen at any time in the last three decades. The 
Presidents of two of the most diverse Federal Reserve districts 
in the country, Richmond and Atlanta, have announced their 
retirement. Each bank has begun its search for the replacement. 
What is the Board of Governors doing to ensure that a diverse 
set of candidates is considered for these positions?
    Ms. Yellen. The Board consults with the search committees 
that are charged with nominating individuals to serve as 
Presidents of the Reserve Banks, and we consistently emphasize 
that diversity is an extremely important goal. We ensure that 
the search is inclusive, that robust efforts are made to 
identify diverse pools, and that the boards are focused on this 
important goal as they go about their searches.
    Senator Brown. And the last connected question, significant 
racial disparities in unemployment and wages persist 
everywhere--not, of course, just Mississippi, Louisiana, 
Maryland, South Carolina, places in both of these districts. 
What is the Fed doing to
ensure that these challenges are understood by the Board of 
Directors in these districts? What can be done by the Fed or 
others to address these issues?
    Ms. Yellen. Well, I think we are trying to address issues 
of high minority unemployment by adopting policies that result 
in a robust labor market and strong overall job conditions. 
Over the last year, for example, the unemployment rate of 
African Americans I believe has come down about a percentage 
point, moved substantially more than that for white Americans. 
So a strong labor market does improve the situation of 
vulnerable minorities, although it is, as I mentioned, 
disturbing that such large disparities continue to exist.
    Senator Brown. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Shelby.
    Senator Shelby. Madam Chair, good to see you.
    Ms. Yellen. Thank you.
    Senator Shelby. I want to pick up on the theme that 
Chairman Crapo got into a minute ago dealing with the Vice 
Chairman of the Fed. We have been hoping that--we did at one 
time hope that President Obama would nominate someone, but he 
did not. But now, as I understand it, there are going to be 
three openings at the Fed. Tarullo--it will come in April, 
whenever it is he has resigned. Two other openings are there. 
And then your tenure, you are appointed to, what, next 
February? Is that correct?
    Ms. Yellen. That is correct.
    Senator Shelby. Do you intend to fulfill this last year of 
your appointment?
    Ms. Yellen. I do intend to complete my term as Chair.
    Senator Shelby. What will be the mechanics of how the Fed 
Vice Chairman will work--the Chairman got into that some--with 
the whole Board? You mentioned that he would come before the 
Committee to testify, he would represent people at the 
international--dealing with regulatory relief, regulatory 
affairs and so forth. Have you got anything else to add to 
that?
    Ms. Yellen. Well, importantly, he would chair our Board 
Committee on Supervision and Regulation, and that Committee 
takes the lead on behalf of the full Board in working with the 
Division of Supervision and Regulation to craft rulemakings 
that are then brought to the full Board for a vote. The Vice 
Chair would head that Committee and would have oversight in 
that role for our Division of Supervision and Regulation and 
would also represent us in international supervision groups 
such as the Basel Committee.
    Senator Shelby. So if we have three new appointments to the 
Fed Board of Governors, that will be three new people to deal 
with, and you will have to deal with that as the Chairman. Is 
that right?
    Ms. Yellen. Of course. We have a diverse membership----
    Senator Shelby. Sure.
    Ms. Yellen.----which changes over time, and the role of the 
Chair is to work constructively with all the Governors to 
manage the matters that Congress has charged us with.
    Senator Shelby. When you are getting into the area of 
monetary policy, inflation, deflation, and so forth, price 
stability, what is the biggest challenge as you are looking at 
all the data inside to see where inflation is rearing its head 
and so forth? Is it wages and salaries? Is that one of the big 
components? Energy is generally a component there, and food is 
a component. But sometimes you do not count that, you know. 
What is your biggest challenge in measuring, engaging, and 
configuring what inflation is doing or not doing?
    Ms. Yellen. So we look at many measures of inflation. Our 
objective--we recognize that food and energy are very important 
parts----
    Senator Shelby. Volatile, isn't it?
    Ms. Yellen. Consumers spend a good share of their budgets 
on food and energy. We do not want to ignore movements in food 
and energy prices in measuring inflation. So in my testimony, I 
began by saying that an overall comprehensive measure of price 
increases that includes food and energy ran at 1.6 percent last 
year. There are many different measures. We have focused 
explicitly in saying that we have a 2-percent inflation goal on 
the measure we regard as the best measure we have of consumer 
prices, which is the personal consumption expenditure price 
index. It is less well known than the CPI, but we think it is 
actually a more comprehensive measure.
    Now, food and energy prices are very volatile, and in 
looking forward over a number of years and trying to estimate 
where inflation is going, we often look at measures called 
``core measures'' that remove food and energy prices.
    Wage developments, it is unclear that they have much direct 
effect on inflation, but generally what we have found is that 
in a situation where labor and product markets are tight, 
inflation tends to move up. And movements in wage growth gives 
us a sense of just how tight labor markets are.
    Senator Shelby. In the area of regulations, the last time 
you came before this Committee that you alluded to--I believe 
it was back in June--I asked you what the Federal Reserve's 
plans were to tailor the CCAR process to provide much needed 
relief to smaller regional banks. On January 30th, the Federal 
Reserve issued its final CCAR rule, which tailored the process 
for institutions that have less than $250 billion in total 
consolidated assets and less than $75 billion of total nonbank 
assets.
    What is the significance of what you did there? And how 
will that help?
    Ms. Yellen. I think that change will reduce burdens 
substantially for----
    Senator Shelby. Regulation?
    Ms. Yellen. Yes, for a significant number of institutions. 
After engaging in a 5-year review of CCAR and our stress-
testing methodologies, we decided that the capital planning 
processes of those smaller institutions could be adequately 
reviewed and commented on through our normal supervisory 
processes, and that it was appropriate to exempt them from the 
qualitative portion of that capital review. But we still are 
subjecting them to our stress tests and requiring that they 
conduct stress tests themselves. That is an important component 
of our supervision.
    Senator Shelby. But as a regulator, you will continue to 
monitor that, and if that needs to be tailored, you will do 
whatever it takes?
    Ms. Yellen. Yes, we believe very strongly in tailoring to 
make sure that our regulations fit the risk profiles of 
particular institutions, and especially for smaller 
institutions, we are very well aware of the burdens that they 
face and are looking for every way we can find to mitigate 
those burdens.
    Senator Shelby. Thank you.
    Chairman Crapo. Senator Reed.
    Senator Reed. Well, thank you, Mr. Chairman, and thank you, 
Madam Chair, for your leadership. Some of my colleagues in the 
Congress have called on the Federal Reserve to use a formula, a 
very strict formula in setting interest rates. Many times they 
refer to the Taylor rule. Could you explain to us how this 
would affect particularly working Americans? Would it be good 
or bad? And how do we explain its ramifications to our 
constituents?
    Ms. Yellen. Well, right now the Taylor rule would call for 
a short-term interest rate somewhere between 3 \1/2\ and 4 
percent, which is obviously a much higher value of the Federal 
funds rate than the FOMC has deemed appropriate given the needs 
of the economy. I believe we would have a much weaker economy 
if in the last number of years we had followed the dictates of 
that rule. Unemployment would be substantially higher. The 
labor market would be weaker. And instead of inflation which is 
running below 2 percent--and we want to see it move up to our 
2-percent objective--I believe inflation would likely be lower 
than it is now.
    Senator Reed. So we would see fewer jobs, higher mortgage 
interest rates, a weaker economy if we were essentially just 
automatically following a formula?
    Ms. Yellen. That is right. I recently, a few weeks ago, 
gave a speech at Stanford where I tried to explain why I 
thought it was appropriate to address the recommendations of 
rules like that, to take into account, for example, the fact 
that not only the FOMC but most outside forecasters believe 
that the so-called neutral rate of interest has been unusually 
low in the aftermath of the crisis. And the Taylor rule would 
assume that it is at 2 percent. Current estimates would put 
that estimate closer to zero.
    Senator Reed. All right. Thank you. There is another aspect 
I have been working on for years, particularly incorporating 
some of the language in the Dodd-Frank bill, ensuring that 
clearing platforms are used, but there is a risk because 
systemic failure would be significant. Can you give us an 
update on what you are doing, and your colleagues, to ensure 
that the central clearing platforms are adequately protected 
from failure, i.e., the consumers are ultimately protected from 
failure?
    Ms. Yellen. Well, we strongly believe that well-regulated 
and well-managed financial market infrastructures--and that 
would include central counterparties--play a positive financial 
stability role. They can help stem the propagation of 
disturbances, and they reduce the volume of transactions among 
key financial institutions. And we think they play a financial 
stability role, but they can also be sources of risk to the 
financial system if they are not themselves well managed. Title 
VIII of Dodd-Frank created a structure in which the Federal 
Reserve, the CFTC, and the SEC have oversight responsibilities 
to make sure that these key infrastructures of our financial 
system are managing their own risks successfully, and we are 
cooperating with the other regulators in our examinations to 
make sure that appropriate risk management standards are in 
place.
    Senator Reed. Thank you. A final question. Cybersecurity is 
the issue on everyone's mind, and you recently have an Advanced 
Notice of Proposed Rulemaking which would require boards of 
directors to have adequate expertise. I have been involved in 
legislation that would apply not just to financial institutions 
but publicly held companies because the cyber threat is not 
limited. It is ubiquitous.
    Could you just briefly--very briefly--give us your sense of 
how important it is to get this cybersecurity expertise on 
boards?
    Ms. Yellen. Well, I think cybersecurity is a major, major 
risk that financial firms face. I think they are very well 
aware of the risks, and my sense is that boards of directors 
generally appreciate the seriousness of cyber threats, but 
sometimes they do not have a comprehensive or enterprise-wide 
view of the institution's capabilities in this area. And so it 
is very important for boards to have appropriate expertise.
    Senator Reed. Thank you very much, Madam Chair.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. And, Madam 
Chairman, thank you for your service and being here today. I, 
too, want to thank Mr. Tarullo. I did not always agree with 
every decision he made, but we had vigorous debate, and I do 
think he was a committed public servant, and I want to thank 
him for his service, along with Mr. Alvarez. We were in the 
foxhole many, many times back in 2008, and, again, I thank you 
for your service.
    Madam Chairman, I was interviewed earlier today, and, you 
know, people have always sort of hinged their futures on what 
you have to say and I guess are somewhat thankful now that it 
looks like you have a little bit of a partner. We knew at one 
time there probably were going to be no changes here--not being 
pejorative, it is just the environment we lived in. And yet now 
we look at potential tax reform, we look at potential changes 
to the health care policy, we look at things relative to 
infrastructure and all of that.
    As you see those possibilities occurring, is that affecting 
how you look at monetary policy decisions moving down the road? 
A stagnant situation before, again, just because of the 
environment, a very changing possibility policy environment 
here, is that something that is affecting your deliberations?
    Ms. Yellen. So we recognize that there may be significant
economic policy changes and that those changes could affect the 
outlook. We are very well aware of that. And we do not yet have 
enough clarity on what changes will be put in place to really 
clearly factor those policy changes into the economic outlook.
    So we do not want to base current policy on speculation 
about what may come down the line. We will wait to gain greater 
clarity on policy changes and try to assess----
    Senator Corker. Well, those policy changes, once you 
develop greater clarity on what you think is coming down the 
pike, could affect monetary policy decisions.
    Ms. Yellen. Well, it is one of many factors that could 
affect monetary policy decisions. So I think the answer is yes, 
they could. Exactly how depends on the timing----
    Senator Corker. I got it.
    Ms. Yellen.----size, composition, and many factors----
    Senator Corker. And growth I guess would generate--growth 
could generate additional inflationary pressures, and so paying 
attention to that, and when that happens, it can happen fairly 
quickly, can it not?
    Ms. Yellen. Well, we will certainly pay attention to it. I 
think some policies may have supply side impacts and raise 
productivity growth----
    Senator Corker. All right.
    Ms. Yellen.----and sustainable growth in the economy, too.
    Senator Corker. You mentioned something about sustainable 
trajectory; you are hoping the Administration will develop 
policies that cause a sustainable trajectory relative to fiscal 
issues. Is there anything that you are seeing coming down the 
pike or being debated that has caused you to raise that issue? 
I agree with you, by the way, but is there something you are 
looking at that caused you to put a note in there, or is that 
just a standard line that would be in a report like this?
    Ms. Yellen. Well, I think we have known for many, many 
years that the U.S. fiscal trajectory is not sustainable, and 
the Congressional Budget Office's most recent forecasts show 
deficits increasing over the next 10-year period under their 
baseline and the ratio of debt to GDP as rising.
    Senator Corker. So nothing--it is just a standard, there is 
nothing that you are looking at coming out of the 
Administration or Congress that is causing you to raise that 
alarm. It is more just the standard concern that many of us 
have that we are really conducting ourselves in a totally 
inappropriate way as it relates to deficits. Nothing that is 
being discussed policy-wise right now.
    Ms. Yellen. Well, I mean, some of the policies that are 
being discussed might well raise deficits, and in that context, 
they may also have impacts on economic growth----
    Senator Corker. Yeah.
    Ms. Yellen.----and the economy's growth potential. So it is 
not a simple matter to evaluate. But I do think it is worth 
pointing out that fiscal sustainability has been a long-
standing problem and that the U.S. fiscal course, as our 
population ages and healthcare costs increase, is already not 
sustainable.
    Senator Corker. I agree 100 percent. You gave a very 
fulsome answer to the balance sheet question, and I understand 
how the Fed's fund rate is much more targetable and much more 
accurate. I guess what I have not understood is just allowing 
the maturity--in other words, allowing these securities, $4.5 
trillion or so, just to mature and rolling off, it is hard to 
understand how that would
create vagaries, if you will, relative to monetary policy that 
would be hard to predict. Could you share----
    Ms. Yellen. Yes, I am sorry, I did not mean to say that it 
would create a problem.
    Senator Corker. Yeah.
    Ms. Yellen. We want to allow that process to occur in a 
gradual and orderly way in order to----
    Senator Corker. But wouldn't just allowing them to mature, 
when they mature, they roll off, isn't that orderly?
    Ms. Yellen. Yes. Yes, it is orderly, and that is why we 
intend to do it that way.
    Senator Corker. But you have not started yet.
    Ms. Yellen. We have not----
    Senator Corker. You are reinvesting now. I am just curious 
why--it just does not seem to me----
    Ms. Yellen. So I agree it is orderly, and that is our 
desire, to have it be an orderly process, which is why we 
intend to allow those assets to run off as principal matures. 
So we recognize, however, that allowing that process to occur 
results in some tightening of financial conditions. And so 
before we turn that process on and start it, we want to make 
sure that we have adequate ability through our normal interest 
rate--overnight interest rate moves to meet the needs of the 
economy, particularly if it were to weaken some, which it would 
be a long process if it is running off, and we want to make 
sure we have enough scope and the economy is strong enough that 
that runoff would not create a problem for the economy.
    Senator Corker. I just want to close with a statement. I 
know when you were coming in and interviewing for this post and 
being affirmed, you mentioned to me that when times called for 
it, you would allow interest rates to rise. And you are known 
as being a dove, but, in fact, you are--I know some people have 
criticized the rate at which those rises have taken place, 
probably me included, but I do want to thank you for allowing 
that to happen, hoping it will continue as we return to more 
normal circumstances. Hopefully the balance sheet will roll 
off, and I hope you will continue to criticize us if we allow 
deficit spending to continue more so than it already is today. 
Thank you so much.
    Ms. Yellen. Thank you, Senator, and I think allowing that 
process to take place, that is something that will show that 
the economy is doing well and the increases have been a 
reflection of the strength we have seen in the economy.
    Senator Shelby. [Presiding.] Senator Menendez.
    Senator Menendez. Thank you. Chairman Yellen, thank you for 
your leadership at the Federal Reserve. Our economy, though not 
perfect, has made tremendous strides since the financial crisis 
and ensuing Great Recession, which wiped out nearly $13 
trillion in household wealth and cost 9 million Americans their 
jobs. And I think these last 6 years have shown us how 
important and positive Wall Street reform and consumer 
protection has been to our economy, to strong markets, and, 
most importantly, to American families and businesses.
    Now, I want to ask you specifically, as you know, 
healthcare
accounts for nearly 20 percent of U.S. GDP, including not only 
the delivery of life-saving, life-enhancing health services, 
but also fueling innovations in patient care, in diagnostics, 
in preventative health, and research and development of cures 
to diseases.
    In response to the fiscal year 2017 budget resolution that 
Congress passed last month, the former Director of the Office 
of Management and Budget sent a letter to Congress saying that 
the resolution would add $9.5 trillion to the deficit. Recent 
studies have shown that a major market disruption would have a 
detrimental impact on the labor market, including a reduction 
in job growth by nearly 2.6 million jobs in 2019.
    My home State of New Jersey is estimated to be among the 
top of the list when it comes to potential job losses as a 
result of a spike in the number of uninsured. Furthermore, 
stripping nearly 30 million people of their health insurance 
would have a significant impact on the productivity of the 
American workforce.
    Are you concerned about how this major increase in debt 
coupled with the downturn in the labor market and decreased 
productivity would have on the larger economy?
    Ms. Yellen. Well, we would have to look at what the impact 
is of shifts in health care on the economic outlook. Health 
care, as you mentioned, does account for a very significant 
share of spending, and a loss of access to health insurance 
could have a significant impact on spending of households for 
other goods and services and, beyond health care itself, have 
impacts on the economy.
    In addition, access to health care has for some individuals 
likely increased their mobility and diminished the phenomenon 
called ``job lock,'' where people are afraid to leave jobs 
because of losing health insurance, and that could have 
implications for the labor market as well that we would try to 
evaluate.
    Senator Menendez. So we should tread lightly before we make 
major changes that create disruptions.
    Let me ask you this: In the years leading up to the 
financial
crisis, many lenders and financial institutions exploited the 
uncoordinated enforcement of consumer protection laws and 
misled consumers into expensive and risky subprime mortgages 
even if they qualified for prime rates. As part of the landmark 
Wall Street Reform and Consumer Protection Act, we were finally 
able to
empower a cop on the beat to protect hardworking Americans from 
unfair, deceptive, and abusive financial practices, and from my 
view it has been working.
    As an independent agency whose sole job is to enforce 
consumer protection laws, the CFPB has returned almost $12 
billion in relief to more than 29 million consumers. And, more 
importantly, the Bureau helps level the playing field for 
hardworking American families, ensuring that consumers are 
protected when they purchase a home, open credit cards, take 
out student loans, and use prepaid cards.
    Do you believe that if an independent consumer-focused 
agency like the CFPB has existed to police mortgage markets 
prior to the financial crisis, much of the economic damage to 
working-class families would have been avoided? In addition to 
protecting individual families, would better enforcement of 
consumer protections also have enhanced national financial 
stability?
    Ms. Yellen. Well, I do agree that consumer abuses in the 
mortgage and securitization areas played a key role in the 
crisis. The Federal Reserve at that time had responsibility for 
enforcement of these regulations, and in retrospect, I wish the 
Fed had acted more aggressively and earlier to address those 
abuses. We have certainly learned from the financial crisis 
that it is critical to monitor this area and the potential for 
deceptive practices in consumer lending to create a financial 
crisis or financial stability issues.
    Senator Menendez. So an entity like the Consumer Financial 
Protection Bureau, which has, in essence, done that since the 
Great Recession, has played a critical role in ensuring that. 
Certainly, I agree that had the Fed been more active, along 
with all our other regulators, about being the cop on the beat 
instead of being asleep at the switch, it would have been 
great. But in the absence of that, a bureau like the Consumer 
Financial Protection Bureau is actually playing a significant 
role in ensuring that consumers have a level playing field. Is 
that not a fair statement?
    Ms. Yellen. Well, they have been focusing certainly on 
these issues.
    Senator Menendez. Let me close by saying in the 104-year 
history of the Federal Reserve, it has had 134 different 
presidents of regional banks. Not one--not one--of those 134 
presidents has been African American or Latino. That is pretty 
outrageous. And it is my hope that now that there are some 
openings, that we begin to change that reality. These are two 
communities that have an enormous part of contributing to the 
Nation's GDP, and for them not to have any representation 
whatsoever in the process of these banks is not acceptable, and 
I hope we can begin to change the
reality.
    Ms. Yellen. Increasing diversity is a critical priority, 
and I share your hope.
    Senator Shelby. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman.
    Madam Chair, thank you very much for joining us yet again. 
I want to briefly ask you a question about the FOMC forecast 
for growth at the December meeting. As we all know, we had an 
election in November in which a President and a Congress were 
elected, and a very, very central part of the message of both 
the President and the Congress included a commitment to tax 
reform, a commitment to a very different regulatory approach, 
including a much lighter regulatory touch and rollback of 
existing regulation, and there was considerable discussion also 
about a fiscal stimulus in the form of an infrastructure bill. 
But I do not think anyone disputes that the President 
campaigned on tax reform, campaigned on lighter regulation, 
campaigned on this.
    It seems that most of the world responded with the view 
that that increases the likelihood--no certainty here, but 
increases the likelihood that we would have stronger economic 
growth. Equity markets responded powerfully and immediately. 
Bond markets sold off, which is consistent with the view of 
stronger economic growth. The IMF projected stronger economic 
growth. A poll of economists by the Wall Street Journal showed 
a very strong consensus that growth was likely to tick up. The 
World Bank suggested that tax reform alone would add eight-
tenths of a percent to American GDP in 2018. And yet at the 
December Fed meeting, the FOMC members had no change in their 
opinion at all, as far as I can gather, about the prospect for 
economic growth. In fact, the upper bound, the highest 
estimate, actually decreased.
    So it just looks on the surface like the FOMC members 
either believe it is unlikely that any of those things will 
actually happen, or they think that those things are not 
particularly pro-growth. And, obviously, the rest of the world 
is of a different opinion.
    Does the Fed have the view that the prospects for growth 
are not at all changed by the prospect of tax reform and 
regulatory reform?
    Ms. Yellen. Well, we do not yet have clarity on what 
economic policy changes will be put in place----
    Senator Toomey. I understand there is no certainty. This is 
about likelihoods.
    Ms. Yellen. Most of my colleagues decided that they would 
not speculate on what economic policy changes would be put into 
effect and what their consequences would be. A few of my 
colleagues mentioned that in writing down those forecasts, they 
assumed that there would be a mild fiscal stimulus. But most of 
my colleagues have taken the view that we want greater clarity 
about the size, timing, and composition of changes to fiscal 
and other policies
before trying to incorporate those into our forecasts.
    Senator Toomey. OK. That is what I suspected. Let me move 
on to CCAR. I sent you a letter last week outlining some of the 
big concerns that I have about CCAR, and let me just touch on a 
few of them briefly.
    First of all, compliance is enormously expensive for the 
banks who are subject to that. There is a recent GAO report 
that suggests that the CCAR models employed by the Fed and 
testing procedures are not transparent. Well, that is, I think, 
generally acknowledged. The GAO report goes on to suggest that 
the Fed does not engage in sufficient risk management of the 
systems of the models it uses. The GAO report also concludes 
that the Fed has not assessed whether CCAR is inadvertently 
procyclical despite the intent that it be countercyclical.
    I am concerned that CCAR might actually increase systematic 
risk in one important respect by correlating the risks of bank
behavior and allocation of capital. And the CCAR's implicit 
risk weighting, which we have to infer because they are not 
explicit, is very, very different from those of the banks and, 
for that matter, Basel III.
    Now, as you know, CCAR is not required by statute. DFAST is 
required by statute, but CCAR is not. And you mentioned earlier 
that there has been a huge increase in the capitalization of 
American banks post crisis, which is certainly the case. And 
the Fed
already has other ways of boosting capital requirements like 
the countercyclical capital buffer and the G-SIB surcharge.
    So my question is: Given all of that, isn't CCAR at least 
somewhat duplicative? And since it is very, very costly and not 
mandated by statute, would you consider bringing it to an end 
at some point in the foreseeable future?
    Ms. Yellen. Well, I think it is a key part of our 
regulatory process. It is a very detailed and institution-
specific and forward-looking assessment of the risks in the 
firm's balance sheet, and I think it has been a cornerstone of 
our efforts to improve supervision, especially of the largest 
banking institutions whose stability is really critical to 
overall U.S. financial stability.
    The GAO in their assessment found that the stress tests 
have been useful and played a useful role. They did not 
recommend that we end them. They made a number of specific 
recommendations which we agree with and are working on, and we 
will, of course, continue to review our practices as we 
recently changed CCAR to exempt most of the institutions under 
$250 billion from the qualitative part of the CCAR review. But 
I do think that stress testing has greatly strengthened our 
process of supervision.
    Senator Toomey. I appreciate that. I would just point out 
that in the absence of CCAR, that does not necessarily imply 
the end of stress testing. DFAST is a mandate for stress 
testing that occurs separately. Banks do their own stress 
testing. So I do think it is duplicative.
    Mr. Chairman, if I could just make one quick closing 
comment? That is, as we all know, we have had a de facto Acting 
Vice Chair of Supervision who never went through the nomination 
or the confirmation process but, nevertheless, exercised the 
powers of that position. It is my hope that the President will 
soon be able to nominate individuals to complete the Board of 
Governors, including a Vice Chair for Supervision who will go 
through the process, who will be vetted and confirmed by the 
Committee. And until such time, I hope the Fed will refrain 
from issuing major new regulations which I think really ought 
to benefit from the input of these new people.
    Thank you.
    Chairman Crapo. [Presiding.] Thank you. Before I go to 
Senator Rounds, Senator Shelby had one quick question he wanted 
to ask.
    Senator Shelby. I will try to be quick. We have not talked 
about this, Madam Chair, but the current account, our trade 
imbalance, would you share with us--and, of course, you are 
sharing this with the American people--the long-term danger of 
an imbalance in trade that we have been running for years and 
years as opposed to short-term and so forth? And where are we--
you were an economics professor, but we were taught that is not 
a good thing in the long run.
    Ms. Yellen. So we have a current account deficit that is--
--
    Senator Shelby. Tell the people what that is. Most people 
here know, but you have a nationwide audience here this 
morning.
    Ms. Yellen. It is the difference between the amount that we 
spend on goods and services that we import from abroad----
    Senator Shelby. Import versus export, is it not?
    Ms. Yellen. Correct, of goods and services. So we do have a 
current account deficit. It has increased in size, and 
ultimately it leads to a buildup of our indebtedness to 
foreigners. And so it can be a long-term concern if it is not 
on a sustainable course.
    Senator Shelby. What is it roughly now?
    Ms. Yellen. I believe it is----
    Senator Shelby. Roughly. You can furnish the exact figure 
for the record if you do not have it.
    Ms. Yellen. I believe that in 2016 it amounted to about 2.6 
percent of GDP.
    Senator Shelby. And in dollars, what would that be, 
roughly?
    Ms. Yellen. At about close to $500 billion is the deficit, 
a little bit below that.
    Senator Shelby. That is in 1 year, right?
    Ms. Yellen. Correct.
    Senator Shelby. What is our total indebtedness?
    Ms. Yellen. I do not have that figure at my----
    Senator Shelby. Would you furnish that for the record?
    Ms. Yellen. Yes. I mean, we have had deficits for some 
time, so substantially----
    Senator Shelby. Would that be in the trillions?
    Ms. Yellen. Yes. I would be happy to furnish you with that 
figure.
    Senator Shelby. Would you call that a troubling thing long 
term?
    Ms. Yellen. It depends on what the long-term trend is. It 
also depends on what we earn on our foreign investments 
versus----
    Senator Shelby. Absolutely.
    Ms. Yellen.----what we pay, and historically we have earned 
more on our assets that we hold abroad than we have paid to 
foreigners who hold our assets. But the trend there is 
important.
    Senator Shelby. When was the last time that we had a 
surplus--small, I am sure--in our current account, roughly?
    Ms. Yellen. I am not sure.
    Senator Shelby. Will you furnish that for the record?
    Ms. Yellen. Certainly.
    Senator Shelby. Has it been a number of years?
    Ms. Yellen. It has been.
    Senator Shelby. OK. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator.
    Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    Madam Chairman, first of all, thanks for being here today. 
You have a difficult position, and you have a very important 
position, and I look forward to working with you in promoting 
sound economic policy in our country.
    As I am sure you are probably aware, the Ag sector of our 
economy is suffering. The Wall Street Journal recently pointed 
out that soon there will be fewer than 2 million farms in 
America for the first time since the Louisiana Purchase. We are 
rapidly approaching a crisis in the Ag sector. Commodity prices 
have been sinking. The Ag Department estimated that those who 
are still able to farm will see their incomes drop by nearly 10 
percent in 2017, and the strength of the dollar is making it 
harder for American farmers to compete abroad. Our Nation's 
farmers are being left behind.
    My question to you is: Recognizing that they need 
compromise to capital and need access to literally being able 
to borrow money and during a time in which we have made it a 
little bit more difficult to borrow money, a lot of these folks 
are now seeing an end in which they--because they work in an 
industry which is seasonal and depends upon the weather, some 
years they make it, some years they do not. Is there something 
that--could you just suggest to us, number one, what you see in 
terms of economic headwinds for our Ag economy and what we as 
policymakers should be
focusing on if we want to help them make it through this next 
couple of years? Colorado right now is setting up an emergency 
hotline for suicides for the farming and ranching communities. 
This is not something that is going to go away quickly, and 
clearly it is gathering momentum.
    Could you just talk to us in terms of what you see things 
that we can do to perhaps take some of the burden off of these 
farming families?
    Ms. Yellen. So I cannot give you recommendations for what 
Congress should do to address the Ag issues. We are focusing on 
the fact that there is pressure on commodity prices and 
particularly on food prices after a number of years in which 
conditions were really very strong and land prices were pushed 
up. So in some cases, we are seeing increases in delinquency 
rates on loans. And certainly weak growth in the global economy 
coupled by a dollar that began to appreciate substantially 
around mid-2014 has pressured farmers and is putting pressure 
on agriculture as you
indicated.
    Senator Rounds. I think more specifically farming moves 
from year to year. You can have a drought. You can have 
excessive moisture sometimes. And not every single year you are 
going to be consistently successful in your endeavor. Would it 
be fair to say, though, that with regard to our financial 
institutions and their ability to either loan or continue to 
carry debt, should there not be some understanding within the 
policy at the Federal level that the ability to survive not 
just a 12-month cycle but perhaps a 24-month cycle or a 36-
month cycle, it would seem that that would be an appropriate 
policy to at least continue to explore? Would you see some 
value in that?
    Ms. Yellen. Honestly, this is something that really is up 
to Congress to consider and to look into. You know, it is not 
something that the Federal Reserve has the ability to mandate.
    Senator Rounds. But the financial institutions, which are 
the source of that ability to borrow money--and during a year 
in which you have a bad year for crops or perhaps commodity 
prices even in a good year with yields may be down for a while, 
but in a cyclical manner, it seems rather illogical simply to 
base the ability to borrow money from a financial institution 
on a 12-month cycle, which seems to be what we do when we talk 
about balance sheets and so forth from one year to the next, 
should an operating loan be extended and so forth.
    What I am asking, I guess, is: Wouldn't it make some 
economic sense to be able to allow this segment of the economy 
perhaps a different cycle to be considered in without having 
their loans being considered nonperforming assets in the 
auditing of those financial institutions that really do want to 
continue on and carry credit forward for more than a 1-year 
period or a short-term period of time?
    Ms. Yellen. You know, it is something that we can look at, 
but, you know, I think financial institutions are trying to 
engage in safe and sound lending and want to be careful to 
protect themselves from losses.
    Senator Rounds. Thank you, Madam Chair.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator.
    Senator Cotton.
    Senator Cotton. Thank you, Mr. Chair, and thank you, Madam 
Chair, for appearing before us once again.
    I would like to discuss with you today wage growth, or 
maybe I should put it better, lack of wage growth. The Federal 
Reserve tracks wage growth as a measure of economic progress 
and inflation. Over the past 8 years, wage growth has been 
largely stagnant, although fortunately we have seen a few 
positive trends in the last few months.
    But I also want to look back beyond just the last few 
years, starting in the 1970s, and I think we have a graphic 
that will display this. Wages for workers with college degrees 
have increased while wages for workers without college degrees 
have declined. For workers with less than a college degree, 
wages have declined by 17 percent, all in inflation-adjusted 
terms.
    Could you comment on what is driving the recent wage growth 
but also what is behind this phenomenon we see on the chart 
behind me?
    Ms. Yellen. Well, over long periods of time, the general 
average nationwide trend in wage growth depends on productivity 
growth. And in recent years, productivity growth has been 
relatively depressed in comparison, say, with the very long 
period from, say, 1949 to 2005, productivity growth was 
probably a percentage point or so higher than it has been 
subsequently. For different groups in the economy, as your 
chart focuses on, changes in wage growth depend on structural 
trends in the labor market and in the economy. And what we have 
seen importantly because of technological change that has 
raised the return to skill, raised the demand for skilled 
workers, and raised the rewards to people who are able to use 
technology, I think coupled with globalization that has made it 
easier to offshore or outsource jobs that involve routine work 
that can be done elsewhere or is subject to technological 
change. We have seen different trends for much faster wage 
growth for higher-skilled individuals and much slower wage 
growth for those who are less skilled. The gap between the 
earnings of college-educated and high school-educated or less 
individuals continues to grow, and this has been a major source 
of the trends that you are describing in your chart.
    Senator Cotton. We have seen some improvement in recent 
months. Do you care to venture an assessment of why we are 
seeing that?
    Ms. Yellen. So the labor market is pretty tight, and wage 
growth has picked up somewhat. For example, average hourly 
earnings were up 2 \1/2\ percent in the 12 months ending in 
January, and that would compare with around 2 percent from 2011 
to 2015. Some other measures are rising somewhat faster. There 
is not a dramatic increase in wage growth in recent years. 
There is some evidence of a pickup, but not dramatic. In part, 
I think you are seeing a reflection of a healthy labor market, 
tight labor market conditions, but the fact that it remains so 
low is also related to weak productivity growth in the U.S. 
economy.
    Senator Cotton. And what has been contributing to a tighter 
labor market?
    Ms. Yellen. Well, you know, we are trying to do our job, 
and we have put in place conditions intended to lower the 
unemployment rate, improve labor market conditions. You have 
seen the unemployment rate come down. The pace of job growth 
really is strong and exceeds what is probably sustainable in 
the longer run, and the labor market has continued in a general 
sense to improve, although clearly the gains are not evenly 
distributed among different segments of the population.
    Senator Cotton. If the labor market were to continue to 
tighten through both more economic growth but also, say, 
through a gradual reduction in the number of unskilled and low-
skilled immigrants or guest workers that we are bringing into 
our country, would we see continued wage growth in particular 
for those with a high school degree or less?
    Ms. Yellen. So I am not certain. I expect the labor market 
to continue to improve somewhat further. We have to be careful 
not to allow conditions to become so tight that we push 
inflation above our 2-percent objective, and we will be 
attentive to that. But I do expect somewhat stronger labor 
conditions----
    Senator Cotton. Is that a serious risk at the time when the 
workforce participation rate is still at a relatively elevated 
level?
    Ms. Yellen. So the workforce participation rate has been 
trending down.
    Senator Cotton. But historically it is still high?
    Ms. Yellen. It is relatively high, but it is over time 
going to be trending down. And immigration has been an 
important source of labor force growth, so that would be 
reduced if immigration were to diminish.
    Senator Cotton. Thank you.
    Chairman Crapo. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. And it is good to 
see you again, Chair Yellen.
    So the 2008 financial crisis cost millions of people their 
jobs, their homes, and their savings. And in response, Congress 
passed the bipartisan Dodd-Frank Act which aimed to prevent big 
banks from blowing up the economy again.
    Now, President Trump has called Dodd-Frank Act a 
``disaster,'' and he has vowed to ``dismantle'' it. He started 
down that road 2 weeks ago when he issued an Executive order on 
financial regulation, and he has put two men, Steve Mnuchin and 
Gary Cohn, who have spent a combined 42 years at Goldman Sachs, 
in charge of
rewriting the rules to help big banks like Goldman.
    Chair Yellen, I know you and the Fed spend an enormous 
amount of time looking at actual data about the economy and 
financial markets, so I want to follow up on Senator Brown's 
questions and get your take on some of the Administration's 
main reasons for calling Dodd-Frank a ``disaster.''
    When he unveiled his Executive order, President Trump said 
he hoped to ``cut a lot out of Dodd-Frank Act'' because 
``friends of mine that have nice businesses cannot borrow 
money.''
    Now, I am aware of the small business survey that you cited 
earlier, but I want to look at the bigger range of data. What 
do the data show about business lending since Dodd-Frank was 
enacted in 2010?
    Ms. Yellen. Well, C&I lending, at this point it has grown, 
and it exceeds--after declining, it exceeds its 2008 peak on an 
inflation-adjusted basis. The same is true for total loans held 
by commercial banks. Since the end of 2010, total C&I loans 
outstanding have grown over 75 percent.
    Senator Warren. Wow.
    Ms. Yellen. And in the most recent period for which we have 
data, the recent 12-month period, C&I loans grew over 7 
percent, and small C&I loans, which are usually sort of small 
business related, grew almost 4 percent. So we have seen 
healthy growth in actual lending in the economy. The survey 
that I mentioned to Senator Brown, I believe over half of small 
businesses indicated that they absolutely did not need to lend 
and had no desire for credit for a variety of reasons.
    Senator Warren. You mean did not need to borrow?
    Ms. Yellen. Did not need to borrow at all, including slow 
growth in the economy.
    Senator Warren. Thank you very much. Very impressive. So 
the data do not back the President up here.
    Another claim, this from President Trump's Economic 
Adviser, Gary Cohn, is that banks have been ``forced to hoard 
capital'' and have ``been forced to literally build capital and 
build capital, instead of lending capital to their clients.''
    Now, Chair Yellen, when regulators impose a capital 
requirement on a bank, does that requirement prevent the bank 
from lending out that capital? Or, in other words, is a capital 
requirement a reserve requirement? Can banks do whatever they 
want with that capital, including lending it?
    Ms. Yellen. It is not a requirement that they take money 
and stick it in a safe where it cannot be used. It is a 
requirement that they finance the lending that they want to do 
with a certain amount of capital and not only with debt. So the 
capital is used to make loans.
    Senator Warren. Good. So the President's Chief Economic 
Adviser is wrong about that pretty basic fact.
    Let us look at another statement by Mr. Cohn. He said, ``We 
have the best, most highly capitalized banks in the world, and 
we should use that to our competitive advantage.'' But on the 
flip side, we also have the most highly regulated, overburdened 
banks in the world. That sounds an awful lot like a 
contradiction to me. Either our banks have a competitive 
advantage because the world knows that we carefully regulate 
our banks, or our banks have a competitive disadvantage because 
of those requirements.
    So, Chair Yellen, which one is it? How have our banks done 
in comparison to their foreign competitors since we put our new 
rules in place?
    Ms. Yellen. So I do not have all the numbers at my 
fingertips, but I believe that our banks are more profitable. 
As I mentioned, they have higher market values relative to 
their book values, and they are capturing market share, for 
example, from European banks. So I guess I see well-capitalized 
banks that are regarded as safe, sound, and strong as 
conferring a competitive advantage on those banks in competing 
for business.
    Senator Warren. Competitive advantage, taking away clients 
from other banks. In fact, our banks have thrived since we 
passed Dodd-Frank. Both big banks and community banks are 
making literally record profits.
    Mr. Chairman, I would like to submit for the record the 
most recent quarterly report from the FDIC to show that banks 
of all sizes are more profitable than ever, as well as this 
Wall Street Journal article from November entitled ``U.S. Banks 
Report Record Profit in the Third Quarter.'' May I do that?
    Chairman Crapo. Without objection.
    Senator Warren. Thank you, Mr. Chair.
    Senator Warren. Look, on any issue, but especially on 
something as important as the rules in place to stop another 
financial crisis, we need to start with facts--real facts, not 
those alternative facts that the Administration has become 
known for--and the facts show that Donald Trump is wrong and 
his Chief Economic Adviser is wrong about every major reason 
that they have given to tear up Dodd-Frank. Commercial and 
consumer lending is robust, bank profits are at record levels, 
and our banks are blowing away their global competitors.
    So why go after banking regulations? The President and the 
team of Goldman Sachs bankers that he has put in charge of the 
economy want to scrap the rules so they can go back to the good 
old days when bankers could take huge risks and get huge 
bonuses if they got lucky, knowing that they could get taxpayer 
bailouts if their bets did not pay off.
    We did this kind of regulation before, and it resulted in 
the worst financial crisis since the Great Depression. We 
cannot afford to go down this road again.
    Thank you, Chair Yellen. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman, and thank you, 
Chair Yellen, for being here this morning.
    I guess about a month ago you had a Teacher Town Hall 
meeting with postsecondary economic educators, and you had a 
question about Dodd-Frank as it relates to repealing it or 
changing it, and part of your answer was, ``Community banks 
feel the burden of regulation is very great,'' and ``I really 
feel strongly that we should be looking for ways to mitigate 
the regulatory burden,'' and we are looking for ways, 
``particularly for smaller institutions'' to mitigate that 
burden. ``There could be modifications to Dodd-Frank that could 
succeed in reducing regulatory burden for smaller 
institutions,'' to quote you.
    I would love to hear your thoughts and your recommendations 
on ways to mitigate that regulatory burden for small banks, 
specifically small banks in places like South Carolina and 
other States.
    Ms. Yellen. So, yes, let me reiterate what I said there. It 
is important to look for every way we can to mitigate the 
regulatory burden. What we have suggested previously and I 
would reiterate with respect to Dodd-Frank is that Congress 
might want to consider exempting community banks from the 
Volcker rule and some of the incentive compensation provisions 
that apply to them, and those would be examples.
    There is quite a bit we see being able to do ourselves, and 
we have taken steps to extend the exam cycle for well-managed 
and well-capitalized banks. We are reducing the duration of our 
onsite loan reviews. We have heard from community bankers that 
when big teams of examiners come in and stay in the bank 
premises for a long time, it can be quite disruptive, and so we 
are doing much more work offsite. We are trying to reduce our 
documentation requests and tailor them to areas that we think 
are high risk that we want to examine.
    We do a lot to--many of the regulations that we put out 
apply to the largest banking organizations and not to community 
banks, and so we try to make clear to community banks this new 
reg, this just does not even apply to you, you do not have to 
worry about that. We try and make clear what does apply to 
community banks and what portions of our regulations do not 
apply to community banks. We are trying to reduce the frequency 
of our consumer compliance exams for banks that are well 
managed and low risk.
    So those are some of the things we are doing. We are 
attempting through our EGPRA review with the other banking 
regulators to identify provisions that can reduce burden. We 
have reduced--we have put out provisions that reduce the amount 
of information that we require on our call reports----
    Senator Scott. Thank you,
    Ms. Yellen.----and many other things.
    Senator Scott. Thank you very much. I look forward to 
seeing some of that in writing so that we can----
    Ms. Yellen. Sure.
    Senator Scott.----fuse it all together. Earlier you noted 
that there was a 1-percent drop in the unemployment rate of 
African Americans, which, of course, is a positive sign. I 
think that there is certainly a correlation between educational 
achievement and unemployment rates. Whether you live in 
Cleveland, Ohio, or Detroit, Michigan, black unemployment 
without a high school diploma is at least twice as high as any 
other demographic with the same level of education. What do you 
think drives the disparity? And what effects have your policies 
had on that specific demographic?
    Ms. Yellen. So African Americans generally have 
unemployment rates and labor market experience that is more 
cyclical. In downturns, they tend to be very badly affected, 
and in a strong upturn, their gains, they are basically 
regaining ground that they lost, and so we can see stronger 
gains.
    So, for example, just over the last year, whereas the white 
unemployment rate remained stable at 4.3 percent, the African 
American rate dropped from 8.8 to 7.7. But, again, as you 
pointed out, that is a much higher rate, and the same is true 
at all education levels. So unemployment rates at lower 
education levels are much higher than those at higher education 
levels. For example, those with at least college had an 
unemployment rate of 2.5 percent in January; those with less 
than high school, 7.7 percent.
    Senator Scott. Yes.
    Ms. Yellen. And, again, African Americans tend to have 
worse experience.
    Senator Scott. One of my concerns is, certainly, if you 
look at the 15.8 percent for African Americans without a high 
school
degree versus the 7.8 percent or the overall 8 percent for all 
demographics versus the unemployment rate of 2.4 percent or 4.4 
percent for an African American versus white folks who have the
college level of education, my concern long term is that as we 
examine the labor force participation rate, we know it is down 
to 62.8
percent or so, so the real unemployment when you add all the 
numbers together, according to the U6, is around 9.2, 9.3 
percent. Our entire financial system is still wired around a 
defined benefits platform. So your lower labor force 
participation rates means that it is incredible difficult for 
us to meet the obligations from Social Security to Medicare. So 
long term, if the growth in our economy from a people 
perspective or African Americans and Hispanics who are 
participating and having more kids in this Nation, the reality 
of it is that if 30 percent, 20 percent unemployment is 
persistent, 16 to 20, it foreshadows a very difficult future 
for this Nation to meet our obligations.
    Ms. Yellen. I agree with you, and I think it is appropriate 
for Congress to focus on policies that might mitigate the 
trends that we have discussed. Clearly, education and training, 
workforce development are part of that, but other things might 
be as well.
    Senator Scott. Thank you.
    Chairman Crapo. Thank you.
    Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman, and thank you, 
Chair Yellen. It is great to see you again.
    I want to associate myself with the remarks of Senator 
Scott, but I also want at least some consideration for the 
underemployment and unemployment of Native American citizens. I 
think where you will look at those numbers, I will tell you 
they are even worse in Indian country because of the isolation 
of the geography and additional education challenges. So I 
think we--I always want to point out that we cannot leave our 
Native American citizens behind.
    I also want to associate with the remarks on small 
community banks, but I do not want to spend all of my time 
talking about it because it gets eaten up pretty quickly. So 
mostly what I use my time for is to say: What is on the 
horizon? What are the challenges that we are going to have? We 
know that retirement security is a huge future burden in this 
country, but I want to focus on automation and what automation 
will mean for employment, especially employment in the 
categories that Senator Scott was talking about.
    In a 2015 speech, the chief economist of the Bank of 
England referenced a startling statistic that 47 percent of all 
U.S. jobs are likely to be replaced by technology over the next 
10 to 15 years, and that would be more than 80 million all 
together.
    Obviously, we see this from automation in trucks; we see 
this from retail moving to online retail. So I am curious what 
steps the Fed has taken to study the issue of automation and 
the impact on the North Dakota economy and the U.S. economy 
moving forward. And I know you always say better training but, 
obviously, a lot of concern on how we implement that and how we 
move forward. So, automation.
    Ms. Yellen. So we know that automation and technological 
change more generally has had very important effects on our 
economy over many decades, and, you know, we are not seers of 
the
future that know exactly where it is going, but certainly there 
are dramatic accounts of changes that are on the horizon that 
could have profound effects on the labor market and on 
productivity growth.
    Senator Heitkamp. Do you think we are paying enough 
attention to this issue? I mean, you know, obviously, during 
the campaign a lot of talk about trade and the displacement 
that globalization has played. A lot less talk about 
automation, which I think has been a larger driver of 
displacement.
    So how do we get the public's attention to this? How do we 
get the educators' attention to this? And how do we change the 
labor market and the skill sets that we need to change so that 
eventually we end up with employment in our country?
    Ms. Yellen. So, generally, automation and technological 
change more broadly has been a source of growth in incomes for 
America generally, but it has created huge disadvantages for 
those with less education and often for those in manufacturing 
in other areas that have seen outsourcing or affected by both 
automation and globalization. And I think we need to think 
about ways to address the needs of those workers because they 
have seen chronic, long-standing downward pressure on their 
wages and income that are making it very hard for them to cope.
    Senator Heitkamp. Yeah, I think one thing that gets lost in 
this is when we talk about those workers, really talking about 
people in their 40s and 50s, they are less concerned about 
their livelihood than the opportunity that their children are 
going to have. And so I think we need to be having a major 
discussion about what the job of the future looks like, what 
the job market of the future looks like.
    I want to get in one more question, and this is about the 
lack of prosecutions after 2008 and what we can do about it to 
hold people more accountable. New York Fed President Bill 
Dudley put forward an interesting idea by requiring firms to 
adopt a so-called performance bond as a large portion of 
executive and senior management compensation. Under his 
proposal, any fines or penalties incurred by the firm would be 
paid directly by performance bonds, which would incentivize 
senior leaders to design and implement systemic changes to 
improve the firm's culture.
    What is your view on the current incentive-based pay on 
Wall Street? Do you think firms rely too much on equity-based 
compensation? And what are the risks with the Dudley model?
    Ms. Yellen. So I think that that was an important factor in 
the financial crisis, in inappropriate incentive schemes, and 
we have worked in our own supervision to insist that firms put 
in place compensation schemes that do not lead to inappropriate 
risk taking. They may include longer periods of deferral or 
clawback or forfeiture provisions if an individual who takes 
risk on behalf of the firm, if there are losses that are 
suffered. But I think it is important to strengthen incentive 
compensation practices.
    Senator Heitkamp. One of the concerns that I have--and, you 
know, I am not a big believer always that enforcement is a 
strong deterrent, especially if someone is addicted, but I do 
believe that enforcement is a strong deterrent in white-collar 
crime, and I think there is way too often the sense that if I 
did not know about it, I am not culpable. And so I think in 
order to really respond to people's concerns about Wall Street 
and what is happening, we need to have a better system of not 
only civil enforcement but criminal enforcement. And so I will 
be looking at this in this Congress and am very interested in 
feedback from the Fed and from other regulatory agencies, 
because I think without that ability to prosecute, you know, a 
$1 million fine may shock a factory worker in Cleveland. It is 
not going to shock a Wall Street banker. And so we need to do a 
better job holding people accountable.
    Chairman Crapo. Senator Tillis.
    Senator Tillis. Thank you, Mr. Chair. Welcome, Madam Chair.
    I have a couple of questions. One relates back to a 
discussion earlier by some of the Members about, I think, a 
discussion around dispelling the myth that banks are not 
lending. I do not agree with that. I think that there are--we 
are comparing probably not the right data sets, so that people 
are absolutely valid in assuming that based on the data they 
are using. There is a fair amount of academic data that says 
increased capital requirements do have a negative effect on 
loan underwriting. And I will not debate the academics, but I 
think there is a fair amount of information out there. I think 
that what we see, particularly among households, household 
lending, and small business loans, it tends to have a downward 
trend.
    You referenced, I think, a survey by the NFIB that said all 
but 4 percent of the people contacted were getting the loans 
they wanted. I am trying to square that with research that 
shows a substantial decrease in the amount of loans pre-crisis 
versus post crisis, and I am not going to talk about household 
loans or mortgages. We know why there is a lower number there, 
because they should not have been underwritten pre-crisis. But 
with the business loans, that is a different--I think that that 
is a different consideration, and I think that I am seeing a 
number here that says that the average growth rate post--2011 
and beyond, so after Dodd-Frank reforms, that we are at about a 
4 percent per annum for large banks, about 7 percent per annum 
for small banks. And that is somewhere around maybe 60 percent 
of pre-crisis for, again, business loans.
    So is it possible that the reason why 4 percent of the 
people would say--only 4 percent would say they are not getting 
the loans they wanted is because far fewer people are asking 
for loans, investing, and creating businesses?
    Ms. Yellen. I think that is true, and we have had a slowly 
growing economy, and many small businesses say their sales 
growth does not justify significant expansion plans that would 
make it desirable to borrow. They are not looking to borrow.
    Senator Tillis. So it is----
    Ms. Yellen. I mean----
    Senator Tillis. To me, though, Madam Chair, isn't it 
problematic to have people leave this meeting thinking that all 
the small businesses that have business plans they think that 
they should move forward with to create jobs and take risk, to 
make us think that this is a phenomenon that only affects about 
4 percent of all small businesses, that everybody else is 
getting the loans? I think that there is a pent-up demand out 
there, and please finish your thought.
    Ms. Yellen. Well, I was going to say that sometimes small 
business loans are underwritten by banks in a way that is 
similar to credit card or home equity loans, and small 
businesses may borrow against home equity lines of credit. So 
one thing that may be happening to some small businesses is 
that because there was a substantial reduction especially in 
some areas of the country in residential property values, their 
ability to finance business loans in that way----
    Senator Tillis. So in your professional opinion, do you 
think that the universe of potential small businesses that 
could be created are businesses that exist that want to expand, 
that they have unfettered access to capital given the current 
environment?
    Ms. Yellen. Well, businesses that want to start up always 
need equity capital, and that can be quite difficult.
    Senator Tillis. Do you think that when we are in an 
environment--now, I hear this at a community bank that I have 
exited any investments in since I have come on to the Banking 
Committee, but I speak with them and they say that the personal 
relationships that they had in the past, where they could get a 
loan, underwrite it, were pivotal to them being able to get a 
loan. Now they feel like they have to go in--and, of course, if 
you have roughly the same amount of assets that you can secure 
the loan, then you can get a loan. But there are a lot stricter 
requirements that have a chilling effect on small business 
lending in the Nation. Do you agree with that?
    Ms. Yellen. So, you know, certainly our objective is to 
encourage banks to lend, safe and sound lending and not be 
caught up in bureaucratic obstacles.
    Senator Tillis. I think what we have here--and I do want to 
ask another question, Mr. Chair. I will go as quickly as 
possible, and I apologize to Senator Kennedy, but I do want to 
touch on a second subject. But I think we are talking out of 
both sides of our mouth in Washington. And I am not criticizing 
you for it, but when I take a look at the movement of capital, 
on the one hand we say, of course, banks can lend to anybody. 
On the other hand, on any given day we could have five or six 
regulators in there saying you better not lend based on outside 
of these very narrow parameters because of what I consider to 
be overreaches in enforcement.
    And so to me, letting a comment stand that banks are 
lending to any commerce is not--and you did not say that. It 
was a supposition by a couple of the Members here on the 
Committee. I think it is just absolutely defiant what I am 
seeing in the small business community and the community banks, 
particularly the community banks but big banks in North 
Carolina, which leads me to my last question.
    The pre-crisis--and, incidentally, I think there were very 
important reforms that had to be implemented with Dodd-Frank. I 
just think what happened is you have a bill that is this big--
that is this big--that expands into a regulatory framework that 
was enabled under Dodd-Frank that is that big. And, in 
particular, in North Carolina we had a very thriving financial 
services ecosystem
pre-crisis. We had over 100 community banks. We have a couple 
regional banks in North Carolina and a couple of relatively big 
banks down in Charlotte where I live. Now we have seen a
substantial decline in the community banks in North Carolina, 
and I think that is a national trend. You know the numbers as 
well as I do. And since Dodd-Frank regulations have been 
implemented, we have had two de novo banks chartered. One is on 
an Indian reservation. The other one I think is primarily 
focused on serving the Amish community. So we have completely 
destroyed the lower foundations of the banking ecosystem, in my 
opinion, because it has to be--because the inflection point was 
after Dodd-Frank was implemented and CFPB and all the 
regulatory agencies started, I think, extending their reach.
    Do you believe that that is an area we need to be concerned 
with? You did say, I think, in response to one of the questions 
that the community banks probably do need some relief. You 
mentioned the Volcker rule. But can you talk a little bit more 
about that.
    Mr. Chair, I am sorry for going over my time.
    Ms. Yellen. So I think community banks--I agree with some 
of the trends you just described. I think they have been under 
pressure. You had many years of a weak economy, very low 
interest rates, and pressure on net margins and compliance 
costs. I agree that it is very important for us to look for 
ways to relieve burden, and I am committed, the Federal Reserve 
is committed to doing everything that we can to mitigate the 
burdens on these institutions. They play a very important role, 
as you have indicated, in the economy and so many communities 
in supporting lending.
    Chairman Crapo. Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Thank you, Chair 
Yellen, for your public service, and also thank you for 
enduring quite a long hearing and accommodating all of our 
questions.
    Before we get going on my questions, I want to echo the 
sentiments of my colleagues in terms of what Dodd-Frank has 
done for the economy and for the stability of our financial 
system. It has, in fact, strengthened our economy, and 
undermining Dodd-Frank is not, in my view, the correct course 
of action.
    I wanted to ask you, Chair Yellen, about climate change. It 
is affecting our economy in a number of ways, such as prolonged 
droughts that reduce agriculture yields, coastal flooding, 
increased severity of storms, and the unpredictability of 
weather forecasts on which many of our industries depend.
    In 2016, NOAA reported 15 separate billion-dollar climate 
events. Combined, these events cost the economy over $200 
billion. And lest we think this is an aberration, it is 
important to remember that the number and the cost of these 
events has doubled over the last decade and has increased 
eightfold over the last 30 years. And so climate change events 
are taking a toll on our economy, and they are expected to 
become more and more intense going forward.
    And so my question for you is: To what extent does the Fed 
take into account the impacts of climate change in assessing 
our national economic outlook and future economic risks?
    Ms. Yellen. So in monetary policymaking, our focus is on 
trying to achieve a strong labor market and price stability, 
and our
forecasts usually go out a few years, but not over the decades 
in which climate change plays a role in changing----
    Senator Schatz. Well, let me----
    Ms. Yellen.----affecting the economic outlook, and 
sometimes a hurricane or a drought can have--some of which may 
be related to climate change, but also other factors may have a 
significant economic impact that we take into account that may 
result in a period of weakness or movements in GDP that we see. 
But there is not very much that we can do in incorporating that 
into our forecasts.
    Senator Schatz. Well, I would like to disagree here, and I 
understand that there is going to be a reticence to enter into 
anything that may be either political or unknowable or too long 
term for it to be meaningful in terms of your analysis. But 
that is actually not the case anymore when it comes to what is 
happening in terms of climate change. You know, the billion-
dollar event is a threshold for financial markets, for 
insurance, for NOAA, for the National Weather Service. And we 
are not talking about 15 years from now there may be a higher 
frequency of severe weather events and they may be more severe. 
We are talking about over the last 4 or 5 years we can actually 
measure this trajectory. So there is not a lot of debate in the 
scientific community--and you are all data-driven people--about 
what is happening. So actually in the private sector, in 
financial markets, especially in insurance companies, they are 
responding--the Department of Defense is responding to the 
reality of climate change and not in terms of a 10-, 20-, 30-
year time horizon, but in terms of planning for, you know, Q3, 
Q4 2018.
    And so I would just offer to you that I think that analysis 
and that desire to stay on that which is knowable and that 
which is not in dispute is a good instinct. But we are now at a 
point where we know what is happening to the climate, and it is 
having material impacts on the economy now. Would you care to 
comment?
    Ms. Yellen. So, you know, various international fora I 
think are looking into the economic aspects of climate change, 
for example, that could affect financial stability, the 
exposures of financial organizations. And I think that is 
appropriate.
    We recognize that risk events or severe weather or climate 
changes could have effects on the financial system. Our general 
approach since the financial crisis has been to try to build 
resilience among banking and financial organizations so they 
are well positioned to deal with risk events. And so, I mean, 
those are a couple of reactions.
    Senator Schatz. I appreciate what you are doing here, and I 
understand the difficulty of addressing something, but I would 
just like for you to consider the following proposition, which 
is just
because we do not know the extent of the risk does not mean we 
should book it at zero. It is not zero. It is now material. It 
is also no longer 5, 10, 15 years from now. It is happening to 
us now. And you may need another couple of quarters of 
unfortunate events to be able to kind of assimilate that into 
your decisionmaking process. But at some point the Fed is going 
to have to recognize that climate change is real, and it is not 
merely an ecological issue or political issue but an economic 
one. And I thank you for your indulgence on this issue you may 
not have expected to talk about this morning. Thank you.
    Ms. Yellen. Thank you.
    Chairman Crapo. Thank you.
    Senator Heller.
    Senator Heller. Mr. Chairman, thank you, and thanks for 
holding this hearing. Dr. Yellen, thank you for being here. I 
appreciate your time and coming through and following through 
on some of these questions. And I have not been here for the 
whole hearing, and I apologize for that also. So I will just 
ask the question: Did you make a comment as to whether or not 
interest rates are going to rise in March?
    Ms. Yellen. I indicated that in our upcoming meetings we 
will try to evaluate whether or not the economy is progressing, 
namely, labor market conditions and inflation, in line with our 
expectations. And if we find that they are, it probably will be 
appropriate to raise interest rates further.
    We have indicated that we think a gradual path of rate 
increases is likely to be appropriate if the economy continues 
on its current course.
    Senator Heller. Is that the same answer for an interest 
rate increase for June? Same answer? Because I think those are 
the two most important questions that are going to come out of 
this hearing right now as to how you answer that particular 
question.
    Ms. Yellen. So my colleagues and I, in writing down our 
economic projections, we last did that in September, and, of 
course, the economic outlook is uncertain, and it may change. 
But given our expectations at that time, most of us concluded 
that a few interest rate increases would be appropriate this 
year. The median was three at that time. And that means--we 
have eight meetings a year, and it means that at some meetings 
we would, if things remain on course, increase our target for 
the Federal funds rate and not act at others. And precisely 
when we would take an action, whether it is March or May or 
June, I think--I know people are focused on that. I cannot tell 
exactly----
    Senator Heller. They are. They are. Just so you know, they 
are.
    Ms. Yellen.----which meeting it would be. I would say that 
every meeting is live and we----
    Senator Heller. And I would anticipate that the--or argue 
that the markets are anticipating rate increases and 
individuals are also. Would you agree with that?
    Ms. Yellen. I am sorry. That they are?
    Senator Heller. That they are anticipating rate increases 
this year.
    Ms. Yellen. Well, it is our expectation that rate increases 
this year will be appropriate.
    Senator Heller. OK. Let me tell you why I am asking the 
question. We have average sale prices of houses in southern 
Nevada right now of around $280,000. So I will shift over to 
housing markets for a minute. So $280,000, and at the peak they 
were selling for $315,000. So you can still see that some of 
these homes are still underwater, and we are a long way away 
from a full recovery in the housing markets in the State of 
Nevada. So as the housing markets continue to struggle, how 
does this impact your thoughts on future interest rate hikes?
    Ms. Yellen. So housing has been recovering nationally, but 
at a very slow pace. And we recognize that higher interest 
rates can have a restraining impact on the recovery in housing. 
House prices have been moving up. So it is one of many factors 
that bear on our thinking about the appropriate path of 
interest rates. But remember that employment growth is strong; 
consumers are doing well. That is an important support for 
housing, as well as the fact that there is so much potential 
for an increase in homeownership.
    So I expect housing to continue recovering, but overall we 
need to take account of all the different forces that affect 
job growth and inflation in the economy, and everything put 
together, we think that some removal of accommodation is likely 
to be appropriate.
    Senator Heller. OK. How important is a fiscal stimulus to 
the next interest rate hike?
    Ms. Yellen. So we do not know what fiscal plans Congress 
and the Administration will decide on. We are not basing our 
judgments about current interest rates on speculation about 
that. The economy has been making solid progress toward 
achieving our objectives. The unemployment rate is close to 
levels we regard as sustainable in the longer run. Inflation 
has moved up, and it is those trends that are driving our 
policy decisions and not speculation about fiscal policy.
    Also, remember there are many factors that affect the 
economy. Fiscal policy may matter, but it is only one of many 
things we need to consider.
    Senator Heller. Let me ask you this question on a fiscal 
stimulus. What is better, a tax hike or spending cuts, in your 
opinion?
    Ms. Yellen. I think this is squarely in your domain to 
prioritize and decide on.
    Senator Heller. All right. Let me ask you this question: Is 
it better to cut corporate income taxes or personal income 
taxes?
    Ms. Yellen. Again, this is a decision that Congress needs 
to make, and it is outside of our purview.
    Senator Heller. Do you support a border tax or do you not?
    Ms. Yellen. I am not going to tell you that either.
    [Laughter.]
    Senator Heller. I am trying. I am trying here. Mr. 
Chairman, thank you.
    Chairman Crapo. Thank you.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Chair Yellen, nice to meet 
you.
    Ms. Yellen. Nice to meet you.
    Senator Cortez Masto. I am the new Senator from Nevada, and 
thank you for taking the time with us today.
    Ms. Yellen. Thank you.
    Senator Cortez Masto. So let me just ask you, because I am 
new to the Committee, and keeping on with fiscal policy, some 
would say that the resulting Budget Control Act of 2011 
significantly depressed discretionary spending and in turn 
significantly slowed the pace of the recovery of our economy. 
Would you agree with that?
    Ms. Yellen. Well, I would say that the data suggests that 
the support that fiscal policy provided during the period of 
recovery overall, both Federal and State, was substantially 
lower than would be typical--would have been typical 
historically in an expansionary period. During the downturn, 
there was quite a lot of support, but as the recovery proceeded 
until the last several years,
fiscal policy overall was relatively tight in comparison with 
past historical periods.
    Senator Cortez Masto. Thank you. There are a lot of 
benefits to immigration in America. Our diversity is our 
strength, and the range of perspectives and cultures we have in 
this country are essential for innovation, competitiveness, and 
global leadership. Moreover--and I have said this time and 
again--immigration is important for our economic growth. We 
have proof that it contributes to our GDP and our economy. And 
there is a report out there from the National Academies of 
Sciences, Engineering, and Medicine that, in fact, revealed 
many important benefits of immigration, including on economic 
growth, innovation, and entrepreneurship. And those benefits 
came with little-to-no negative effects on the overall wages or 
employment of native-born workers in the long term. And the 
report also found that children of immigrants on
average go on to be the most positive fiscal contributors in 
the
population.
    But despite this and immigration's importance, we are 
hearing information coming from the White House and 
particularly President Trump's January 29th Executive order 
dramatically expanding the interior immigration enforcement and 
places an estimated 8 million undocumented immigrants at risk 
for deportation, including families and long-time residents.
    The order has the effect of making every undocumented 
immigrant in the U.S. a priority for removal and directs the 
Department of Homeland Security to hire what is essentially a 
deportation force.
    Chair Yellen, in your view as a noted labor economist, what 
impact would that have on our growth in competitiveness as a 
Nation if we continue down the path of President Trump's 
massively expanding immigration? And along with that, what 
would be the consequences for our labor market and the price of 
goods and services?
    Ms. Yellen. So I am not going to comment in detail on 
immigration policy. I think that is for Congress and the 
Administration to decide. But I would say that labor force 
growth has been slowing in the United States. It is one of 
several reasons, along with slow productivity growth, for the 
fact that our economy has been growing at a slow pace, and 
immigration has been an important source of labor force growth. 
So slowing the pace of immigration probably would slow the 
growth rate of the economy.
    Senator Cortez Masto. Thank you. And we are hearing a lot 
about proposals to impose a 20-percent tax on imports from 
Mexico in order to pay for a border wall, and I am concerned 
about the potential for a trade war with our third largest 
trading partner. If the Mexican economy were to go into a 
recession, how would that impact the average American? And, 
specifically, can you speak to any impact on our domestic 
economy?
    Ms. Yellen. Well, our economies are closely tied. Both 
Mexico and Canada are important trade partners of the United 
States, and our economy is in many ways synchronous with the 
Mexican
economy. Our developments here have a significance spillover 
effect to them, and there could be flows in the opposite 
direction as well.
    Senator Cortez Masto. Thank you. Thank you so much for 
joining us today. I appreciate it.
    Ms. Yellen. Thank you.
    Chairman Crapo. Senator Kennedy.
    Senator Kennedy. Madam Chair, I am over here.
    Ms. Yellen. Yes, I am with you.
    Senator Kennedy. Why is the economy growing so slowly?
    Ms. Yellen. So the economy's potential to grow is largely 
determined by the growth of the labor force and by productivity 
growth, output per worker. And labor force growth has slowed. 
We have an aging population, and labor force growth is 
relatively slow, and productivity growth in recent years has 
been depressingly slow. So I guess over the last 6 years, 
business sector productivity has grown at an average of only 
one-half a percent per year.
    Senator Kennedy. OK. So let me ask you--I do not mean to 
interrupt you, but I have just got 5 minutes. So it is labor. 
But we are almost at full employment, aren't we?
    Ms. Yellen. So the economy for a number of years has been 
growing faster than resource growth and productivity growth 
would have allowed, and the labor market has been tightening. 
Unemployment has been coming down, and labor market slack has 
been diminishing, and that----
    Senator Kennedy. Right. That should help the economy.
    Ms. Yellen. Well, it has enabled us to grow at roughly 2 
percent a year, and the fact that labor market slack has 
diminished in the face of 2 percent economic growth----
    Senator Kennedy. Well, we have grown at 1.9 percent. You 
consider that acceptable for the American economy, strongest 
economy in the history of the world?
    Ms. Yellen. Well, when you say ``acceptable,'' I certainly 
wish it were faster.
    Senator Kennedy. Yeah.
    Ms. Yellen. But it is--we have seen, as I said, a slowdown 
in productivity growth.
    Senator Kennedy. Why is that?
    Ms. Yellen. I think nobody is certain exactly why that is. 
There are a number of elements that may play a role. We have 
seen a decline in dynamism in the U.S. economy, in new business 
formation. Some people think that the pace of underlying 
technological change has----
    Senator Kennedy. Do you think it could be that people do 
not have the money to invest, the capital?
    Ms. Yellen. Well, capital investment has also been quite 
slow.
    Senator Kennedy. Yeah. What blame, if any, does the Federal 
Reserve System have to play in the fact that growth is so slow?
    Ms. Yellen. Well, our objectives that the Congress has 
assigned us are price stability, which we interpret as 2 
percent inflation, and maximum employment. And we have put in 
place an accommodative monetary policy now over many years to 
get the economy operating at its potential. So with high 
unemployment, there was a lot of slack in the labor market. The 
economy was falling short of
operating at the level of output that would be consistent with 
what a full-employment economy would produce.
    Senator Kennedy. OK.
    Ms. Yellen. And we have tried to remedy that, and I think 
we have now come close.
    Senator Kennedy. All right.
    Ms. Yellen. So it is growth of labor supply and 
productivity that are going to----
    Senator Kennedy. I get it. I do not mean to interrupt you, 
but I do not have much time. Well, can we agree that 1.9 
percent is not acceptable to most Americans?
    Ms. Yellen. So I think it is a very disappointing level of 
performance.
    Senator Kennedy. Yeah, we can agree on that. OK.
    Let me ask you this: I was not here in 2008. What did the 
community banks do wrong in 2008?
    Ms. Yellen. The----
    Senator Kennedy. By community banks, I mean $50 billion or 
less. What did they do wrong?
    Ms. Yellen. Well, community banks were not the reason for 
the financial crisis. It was larger institutions that took 
risks and risks that developed outside of the banking system--
--
    Senator Kennedy. Right.
    Ms. Yellen.----that resulted in the financial crisis.
    Senator Kennedy. I think I heard you say nothing. They did 
nothing wrong. I do not want to put words in your mouth. So how 
come they are subject to Dodd-Frank, the same rules that apply 
to the people who did do something wrong, either because of 
incompetence or greed?
    Ms. Yellen. It is not the case that the same rules apply to 
community banks that apply to larger institutions, and the most 
severe requirements in Dodd-Frank apply to the very largest and 
most systemic institutions. The Fed and other banking 
regulators have tried to tailor our supervision of banks 
according to their risk profiles, and a large part of Dodd-
Frank does not apply at all to community banks.
    Senator Kennedy. I am going to go over a little bit, Mr. 
Chairman. You are not saying that Dodd-Frank has not imposed 
new regulations on community banks, are you?
    Ms. Yellen. I said it has imposed some, but I said large 
parts of Dodd-Frank do not apply.
    Senator Kennedy. Right, but many parts do.
    Ms. Yellen. Some parts do.
    Senator Kennedy. OK. So the water is not 12 feet deep; it 
is only 10 feet deep. But you can still drown in 10 feet of 
water.
    Ms. Yellen. So we have done our best to tailor our 
regulations so that they are appropriate to the risk profiles 
of banks. But the regulatory burden on community banks is high. 
I would agree with you.
    Senator Kennedy. But why? You just said they did not do 
anything wrong in 2008. I do not understand why.
    Ms. Yellen. So we think it is important for all firms to 
have strong capital standards, including community banks, but 
the most severe increases have been imposed on larger banking 
organizations with more complex activities.
    Senator Kennedy. Did the insufficient capital among the 
community banks cause the meltdown in 2008?
    Ms. Yellen. No, but a number failed. Many failed during the 
crisis because of the lending that they took on.
    Senator Kennedy. I am going to ask one more question, Mr. 
Chairman, with your indulgence. Does it bother you that nobody, 
no individual person really responsible for 2008 went to jail?
    Ms. Yellen. I think those who were accountable should have 
had appropriate punishments. It has been up to the Justice 
Department to--the regulators cannot impose criminal sanctions. 
That is up to the Justice Department. And my understanding has 
been that in many cases they felt they could not get criminal 
convictions.
    Senator Kennedy. Do you understand that--and this is an 
opinion. Let me put it this way: Can we agree that many 
Americans, rightly or wrongly, this is how they feel: They are 
angry in part because they feel there are too many 
undeserving--I want to emphasize ``undeserving.'' I do not want 
to paint with too broad a brush. They feel there are too many 
undeserving people at the top getting special treatment.
    Ms. Yellen. I think that is how Americans feel.
    Senator Kennedy. Do you think that is true?
    Ms. Yellen. I think that we have tried to put in place 
following Dodd-Frank to greatly increase the safety and 
soundness and responsibility for risk management and sound 
compensation systems, especially at the largest and most 
systemic institutions, and in that sense are holding them 
accountable.
    Senator Kennedy. I have gone way over. Thank you, Madam 
Chair.
    Thank you for your indulgence, Mr. Chairman.
    Chairman Crapo. Thank you, Senator.
    And, Madam Chair, I know you need to leave by 12:30. We 
have two Senators left, so if you will allow us, we will let 
them have their time, and we can move forward.
    Ms. Yellen. Yes, sure. Of course.
    Chairman Crapo. Senator Donnelly.
    Senator Donnelly. Madam Chair, thank you for your service. 
We appreciate it.
    Ms. Yellen. Thank you.
    Senator Donnelly. Madam Chair, when we look at some of the 
things that have caused damage over the years--you were here at 
a time about a day or two after the Carrier layoffs occurred, 
if you remember that. And those layoffs in my home State 
brought to light a troubling pattern of corporate executives 
prioritizing immediate profits over the long-term health of 
companies. This short-term mindset may be due to the relentless 
pressure of activist investors or poorly constructed executive 
compensation goals. But it has resulted in executives spending 
trillions to placate shareholders with stock buybacks and 
dividends. It has also occurred at the expense of workers and 
communities and long-term economic value creation. And new 
research finds that companies focused on the long term by 
reinvesting in the company far outperform their short-term 
peers in economic and financial success.
    I am wondering if you agree that short-termism, for want of 
a better term, could hurt economic and financial value over the 
long term.
    Ms. Yellen. So I do not know of any rigorous work on this, 
but I certainly agree with you that focusing on long-term 
investments that have significant payoff for companies and for 
the economy is important to the health of companies and the 
economy.
    Senator Donnelly. Do you agree that the management and 
boards of public companies should be stewards of the whole 
company, including its workers and its long-term health? Do you 
think that makes sense?
    Ms. Yellen. Most companies understand that their workforce 
is a very important asset, and their success requires having a 
focus on their human capital that is a firm asset.
    Senator Donnelly. At the same time that those workers were 
let go, the CEO made over $10 million; the previous CEO before 
him, when he left--and it was about 2 years before--on his last 
day received a payoff of over $150 million. And that is why the 
American people are so angry and they think the system is so 
rigged that you go we are going to fire--between Carrier and 
UTEC in Huntington, we are going to fire 2,100 people who have 
already agreed to a two-tiered wage--they already agreed to a 
two-tiered wage structure, but we are going to pay $150 million 
to our CEO on his last day. Does that not seem like a 
perversion of the American economic system to you?
    Ms. Yellen. I think it is something that makes people mad.
    Senator Donnelly. Yeah. What would you recommend in your 
infinite wisdom to us here in Congress as some steps, if you 
have any ideas, to change the short-term thinking that we see?
    Ms. Yellen. That is really outside the domain of our 
responsibilities, and I believe it is a set of policies that 
Members of Congress and the Administration should be thinking 
about.
    Senator Donnelly. Well, I was thinking that with your 
experience and your abilities and talents, all good advice is 
welcome.
    When a small town is devastated by job losses, as has 
happened to so many towns across this country, where you look 
up and one day you have a company making windshields for one of 
the Big Three, and the next day that windshield company is in 
Mexico, it impacts the future of it, of that town. And it is 
not just the jobs that dry up but the economic development, the 
revenue base, the secondary impact on other businesses, gas 
stations, restaurants, grocery stores. How does a small town 
succeed when it feels like so many of these economic currents 
have been against them for so long? You have driven through 
some of these downtowns, I am sure, over the years and seen the 
devastation that has occurred.
    Ms. Yellen. I mean, I think these are extremely difficult 
trends for towns to cope with, and many towns in rural areas 
have been very badly affected by these developments.
    Senator Donnelly. Here is what also happens, just so you 
know when you make these decisions. You know, as these workers 
are laid off, their children who are dreaming about going to 
college, dreaming about the best schools, and dreaming about 
their chance to make it, you know, Mom or Dad comes home and 
the funds just are not there. The money just is not there to 
give them the shot to do it. And I worry about the 
intergenerational impact of this whole situation, too.
    Have you seen this intergenerational impact and its impact 
on success? And is there anything the Fed can do in terms of 
policies to try to make it so our next generation of leaders 
have a shot?
    Ms. Yellen. Well, I mean, our tools to deal with the issues 
that you are describing are limited, and we generally feel that 
the best contribution we can make is to use our tools to create 
overall strong economic conditions, a labor market that is 
generating enough jobs that there are opportunities there. But 
it does not always mean that the jobs are exactly what people 
want in the places that they are. And I think Congress and the 
Administration need to think about ways in which they can 
foster greater inclusion, greater mobility, provide people with 
the tools that, if your father lost his job, a good 
manufacturing job, that the child can get a strong education 
and can get a job maybe in a sector of the economy that is 
growing more strongly that has strong job opportunities. And 
there certainly are things we can do to foster greater equality 
across generations.
    Senator Donnelly. And I will finish with this, and I guess 
this would be to the CEOs who are thinking about this, the 
short-termism. One of my heroes in life--and you may have heard 
of him--was Father Hesburgh, and the advice he gave me was: Do 
not do what is always easy; just do what is right. Thank you, 
Madam Chair.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman, and thank you, 
Madam Chair, for your service.
    I am going to pick up on a little bit of what Mr. Donnelly 
was raising, but from a slightly different angle, and that is 
the issue of wage growth, because as you know, we have had for 
really a period of decades high productivity growth over time--
not recently. As you say, it is disturbingly low, but we have 
had high productivity rates, and, unfortunately, those 
increases in productivity rates have not translated into large 
increases in real wages. And so I am trying to look forward 
from where we are now to see what the future holds for real 
wages. And as you indicate in your testimony, we have seen a 
tightening of the labor market, and we have seen a slight 
uptick in real wages.
    But as I listened to your testimony, it sounds like you may 
believe that there is not a lot of slack left in the labor 
market. And if that is the case, what are your projections with 
respect to real wage growth going forward?
    Ms. Yellen. So I think that somewhat faster wage growth 
than we are seeing presently would be consistent with our 
inflation objective, and we are projecting--after all, monetary 
policy is still accommodative. Job growth remains strong. The 
labor market is still strengthening, and even if we move to 
gradually diminish monetary policy accommodation, we expect 
some further strengthening in the labor market. And I would 
expect that to push up wage growth somewhat more than we have 
seen so far, but ultimately real wage growth in the economy as 
a whole is limited by
productivity growth, determined by productivity growth, and 
that is why I have lamented the fact that productivity growth 
has been so slow, and even over the last decade is so much 
slower than it was for much of U.S. post-war history and why I 
really urge
Congress to focus on policies--they may be fiscal policies or 
other policies--that would succeed in raising productivity 
growth.
    Beyond that, of course, as you indicated, the gains from 
aggregate productivity growth have been very unevenly 
distributed across the population, and we have had many decades 
of rising income inequality as a consequence, with those at the 
top of the income distribution seeing healthy increases in 
their incomes while those at the median or below have seen 
stagnation, and so that reflects adverse structural trends.
    But when you see that those with more education and skill 
are doing substantially better than those with less education 
and that the trends in the economy are adversely affecting 
those with less education, to my mind that is telling us that 
investing in education and training and workforce development, 
which can take many different forms depending on the population 
we are talking about, is an investment with a payoff, and we 
know that it does have an important payoff.
    Senator Van Hollen. Well, thank you. I think you in part 
anticipated my question. I know you do not want to comment on 
specific policies that are before the Congress, but in terms of 
fiscal policies, actions the Congress can take that could 
increase productivity over time, investments in the area of 
education, is that the area you would most recommend?
    Ms. Yellen. So, generally, there are a number of areas that 
impact productivity growth, and this could look to different 
kinds of policies. But policies that promote investment in 
people or human capital, fiscal capital, both public 
infrastructure and private investment, are also important in 
promoting productivity. And then policies that foster 
innovation, the formation of new firms, research and 
development, dynamism in the business climate, those things can 
also foster faster productivity growth.
    Senator Van Hollen. Thank you. I think in addition to those 
policies--and I support those kinds of investments. As you 
indicated, a number of those policies were in place over the 
last decades, and, nevertheless, you had a very uneven 
distribution of the gains in productivity, and I think there 
are other things.
    Ms. Yellen. Yes, we have.
    Senator Van Hollen. Is there anything--Mr. Donnelly asked 
you about incentives within sort of the corporate sector. Are 
there things that are within the power of the Fed today that 
could influence those long-term versus short-term calculations 
that the Fed is not currently employing fully?
    Ms. Yellen. Well, I think a strong economy and a 
sustainable economic growth so that business firms can look out 
and can see a favorable economic climate that they expect will 
be sustained with low inflation is a business climate that does 
foster investment, and that is the kind of backdrop for 
business decisionmaking that we would hope to provide.
    Senator Van Hollen. All right. Thank you, Madam Chairman.
    Mr. Chairman, I just hope that as the Committee looks 
toward policy changes, we keep in mind the fact that over the 
last three decades we have seen over most of that period rising 
productivity rates, but the gains have been very unevenly 
distributed, which gives rise to what I think is a bipartisan 
sense that is shared by so many of our constituents that, you 
know, folks who are doing really well have the rules stacked in 
their favor against the average American. I think we need to 
look at all our policies that are outside the purview of the 
Fed and change them.
    Thank you.
    Ms. Yellen. Thank you.
    Chairman Crapo. Thank you, Senator. And thank you, Chair 
Yellen. You have spent nearly 3 hours here with us. We 
appreciate the work that you do and also your taking the time 
to spend this time with us here today.
    Senator Brown. Thank you, Madam Chair.
    Chairman Crapo. Without anything further, this hearing is 
adjourned.
    [Whereupon, at 12:38 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                 PREPARED STATEMENT OF JANET L. YELLEN
        Chair, Board of Governors of the Federal Reserve System
                           February 14, 2017
    Chairman Crapo, Ranking Member Brown, and other Members of the 
Committee, I am pleased to present the Federal Reserve's semiannual 
Monetary Policy Report to the Congress. In my remarks today I will 
briefly discuss the current economic situation and outlook before 
turning to monetary policy.
Current Economic Situation and Outlook
    Since my appearance before this Committee last June, the economy 
has continued to make progress toward our dual-mandate objectives of 
maximum employment and price stability. In the labor market, job gains 
averaged 190,000 per month over the second half of 2016, and the number 
of jobs rose an additional 227,000 in January. Those gains bring the 
total increase in employment since its trough in early 2010 to nearly 
16 million. In addition, the unemployment rate, which stood at 4.8 
percent in January, is more than 5 percentage points lower than where 
it stood at its peak in 2010 and is now in line with the median of the 
Federal Open Market Committee (FOMC) participants' estimates of its 
longer-run normal level. A broader measure of labor underutilization, 
which includes those marginally attached to the labor force and people 
who are working part time but would like a full-time job, has also 
continued to improve over the past year. In addition, the pace of wage 
growth has picked up relative to its pace of a few years ago, a further 
indication that the job market is tightening. Importantly, improvements 
in the labor market in recent years have been widespread, with large 
declines in the unemployment rates for all major demographic groups, 
including African Americans and Hispanics. Even so, it is discouraging 
that jobless rates for those minorities remain significantly higher 
than the rate for the Nation overall.
    Ongoing gains in the labor market have been accompanied by a 
further moderate expansion in economic activity. U.S. real gross 
domestic product is estimated to have risen 1.9 percent last year, the 
same as in 2015. Consumer spending has continued to rise at a healthy 
pace, supported by steady income gains, increases in the value of 
households' financial assets and homes, favorable levels of consumer 
sentiment, and low interest rates. Last year's sales of automobiles and 
light trucks were the highest annual total on record. In contrast, 
business investment was relatively soft for much of last year, though 
it posted some larger gains toward the end of the year in part 
reflecting an apparent end to the sharp declines in spending on 
drilling and mining structures; moreover, business sentiment has 
noticeably improved in the past few months. In addition, weak foreign 
growth and the appreciation of the dollar over the past 2 years have 
restrained manufacturing output. Meanwhile, housing construction has 
continued to trend up at only a modest pace in recent quarters. And, 
while the lean stock of homes for sale and ongoing labor market gains 
should provide some support to housing construction going forward, the 
recent increases in mortgage rates may impart some restraint.
    Inflation moved up over the past year, mainly because of the 
diminishing effects of the earlier declines in energy prices and import 
prices. Total consumer prices as measured by the personal consumption 
expenditures (PCE) index rose 1.6 percent in the 12 months ending in 
December, still below the FOMC's 2 percent objective but up 1 
percentage point from its pace in 2015. Core PCE inflation, which 
excludes the volatile energy and food prices, moved up to about 1 \3/4\ 
percent.
    My colleagues on the FOMC and I expect the economy to continue to 
expand at a moderate pace, with the job market strengthening somewhat 
further and inflation gradually rising to 2 percent. This judgment 
reflects our view that U.S. monetary policy remains accommodative, and 
that the pace of global economic activity should pick up over time, 
supported by accommodative monetary policies abroad. Of course, our 
inflation outlook also depends importantly on our assessment that 
longer-run inflation expectations will remain reasonably well anchored. 
It is reassuring that while market-based measures of inflation 
compensation remain low, they have risen from the very low levels they 
reached during the latter part of 2015 and first half of 2016. 
Meanwhile, most survey measures of longer-term inflation expectations 
have changed little, on balance, in recent months.
    As always, considerable uncertainty attends the economic outlook. 
Among the sources of uncertainty are possible changes in U.S. fiscal 
and other policies, the future path of productivity growth, and 
developments abroad.
Monetary Policy
    Turning to monetary policy, the FOMC is committed to promoting 
maximum employment and price stability, as mandated by the Congress. 
Against the backdrop of headwinds weighing on the economy over the past 
year, including financial market stresses that emanated from 
developments abroad, the Committee maintained an unchanged target range 
for the Federal funds rate for most of the year in order to support 
improvement in the labor market and an increase in inflation toward 2 
percent. At its December meeting, the Committee raised the target range 
for the Federal funds rate by \1/4\ percentage point, to \1/2\ to \3/4\ 
percent. In doing so, the Committee recognized the considerable 
progress the economy had made toward the FOMC's dual objectives. The 
Committee judged that even after this increase in the Federal funds 
rate target, monetary policy remains accommodative, thereby supporting 
some further strengthening in labor market conditions and a return to 2 
percent inflation.
    At its meeting that concluded early this month, the Committee left 
the target range for the Federal funds rate unchanged but reiterated 
that it expects the evolution of the economy to warrant further gradual 
increases in the Federal funds rate to achieve and maintain its 
employment and inflation objectives. As I noted on previous occasions, 
waiting too long to remove accommodation would be unwise, potentially 
requiring the FOMC to eventually raise rates rapidly, which could risk 
disrupting financial markets and pushing the economy into recession. 
Incoming data suggest that labor market conditions continue to 
strengthen and inflation is moving up to 2 percent, consistent with the 
Committee's expectations. At our upcoming meetings, the Committee will 
evaluate whether employment and inflation are continuing to evolve in 
line with these expectations, in which case a further adjustment of the 
Federal funds rate would likely be appropriate.
    The Committee's view that gradual increases in the Federal funds 
rate will likely be appropriate reflects the expectation that the 
neutral Federal funds rate--that is, the interest rate that is neither 
expansionary nor contractionary and that keeps the economy operating on 
an even keel--will rise somewhat over time. Current estimates of the 
neutral rate are well below pre-crisis levels--a phenomenon that may 
reflect slow productivity growth, subdued economic growth abroad, 
strong demand for safe longer-term assets, and other factors. The 
Committee anticipates that the depressing effect of these factors will 
diminish somewhat over time, raising the neutral funds rate, albeit to 
levels that are still low by historical standards.
    That said, the economic outlook is uncertain, and monetary policy 
is not on a preset course. FOMC participants will adjust their 
assessments of the appropriate path for the Federal funds rate in 
response to changes to the economic outlook and associated risks as 
informed by incoming data. Also, changes in fiscal policy or other 
economic policies could potentially affect the economic outlook. Of 
course, it is too early to know what policy changes will be put in 
place or how their economic effects will unfold. While it is not my 
intention to opine on specific tax or spending proposals, I would point 
to the importance of improving the pace of longer-run economic growth 
and raising American living standards with policies aimed at improving 
productivity. I would also hope that fiscal policy changes will be 
consistent with putting U.S. fiscal accounts on a sustainable 
trajectory. In any event, it is important to remember that fiscal 
policy is only one of the many factors that can influence the economic 
outlook and the appropriate course of monetary policy. Overall, the 
FOMC's monetary policy decisions will be directed to the attainment of 
its congressionally mandated objectives of maximum employment and price 
stability.
    Finally, the Committee has continued its policy of reinvesting 
proceeds from maturing Treasury securities and principal payments from 
agency debt and mortgage-backed securities. This policy, by keeping the 
Committee's holdings of longer-term securities at sizable levels, has 
helped maintain accommodative financial conditions.
    Thank you. I would be pleased to take your questions.

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JANET L. 
                             YELLEN

Q.1. You indicated that you disagreed with a recent study that 
attempted to derive the relative risk weightings and capital 
charges for assets under CCAR, when compared to the risk 
weightings imposed under capital methodologies. Please indicate 
whether the Board has conducted its own independent analysis of 
the relative risk weights implicit in the CCAR exercise and the 
potential impact thereof on bank lending activity. If so, 
please provide the analysis. If not, please undertake such 
analysis and provide it as promptly as possible.

A.1. Although I agree with the spirit of the particular study 
you mention, which is to improve understanding of the benefits 
and costs of the Federal Reserve Board's (Board) regulations, 
including the stress testing rules, I disagree with the study's 
conclusions and methodology.\1\ The study attempts to derive an 
``average implicit risk weight'' from the losses projected in 
the Board's supervisory stress tests. This approach 
fundamentally mischaracterizes the nature and purpose of stress 
tests. Stress tests differ from capital regulations, where 
assets are allocated to relatively simple categories and then 
assigned risk weights that are roughly proportional to the 
average risk of these asset categories in order to establish a 
minimum capital standard at any given point in time. Instead, 
stress tests serve a complementary purpose, which is to 
determine the amount of a bank's losses and revenues through 
severe recession, like the one we experienced in 2007-2009. 
Unlike the capital rules, which have as a chief aim making sure 
that banks have sufficient capital in normal times, the stress 
tests address whether a bank can remain a going concern and 
continue to make loans through a severe recession.
---------------------------------------------------------------------------
    \1\ https://www.theclearinghouse.org//media/TCH/Documents/
TCHWEEKLY/2017/20170130_WP_Implicit_Risk_Weights_in_CCAR.pdf.
---------------------------------------------------------------------------
    Some examples highlight this point:

    In a stress test, a bank's revenues and losses have to be 
projected--income is an important source of loss-absorbing 
capacity. However, many of the banks that are the focus of our 
supervisory stress tests earn significant income from 
activities that are not connected to particular assets on their 
balance sheet, such as asset management fees. An approach like 
the one taken in the study that attempts to convert the dynamic 
firm-wide path of revenues and expenses produced by the stress 
test into a single factor attached only to the firm's assets at 
a single point in time, likely will misattribute the benefits 
from such income, producing potentially inaccurate results.
    An additional important feature of stress tests is their 
ability to use extremely granular, loan-level data. This 
results in projections of losses that are quite sensitive to 
the risks of the underlying assets and thus will necessarily 
differ across banks depending on portfolio characteristics. In 
contrast, the study attempts to infer a single average 
``implicit risk weight'' across banks for each asset category. 
Further, the study does not control for any difference in the 
riskiness of those portfolios across banks. Thus, the study 
treats a bank with a portfolio of auto loans weighted toward 
subprime borrowers as having the same risk profile as a bank 
with a portfolio of auto loans weighted toward prime borrowers. 
This has the potential to result in misleading results because 
loan loss rates in the stress tests for a particular asset 
class, such as auto loans, may differ substantially across 
banks, depending on how the risk profile of the banks differ 
for that asset class.
    Table 1 summarizes the projected loan loss rates across 
banks for eight of the asset categories considered in the 
supervisory stress test and Comprehensive Capital Analysis and 
Review (CCAR). The results show how the assumption of a single 
average implicit risk weight can be quite misleading. This is 
because the loss rates differ across banks due to differences 
in the relative riskiness of their portfolios for a given asset 
class.\2\ Thus, the appropriate way to calculate an ``implicit 
risk weight'' in CCAR would be to consider the riskiness of a 
specific loan or subportfolio of loans at a specific bank. As 
with point-in-time risk weights, an average risk weight across 
all loans of a certain broad type--such as ``auto loans''--that 
is bluntly applied to all banks will miss important differences 
in how the individual loan portfolios would perform in an 
actual economic downturn. For these reasons, the results from 
the study should not be interpreted as capturing ``implicit 
risk weights'' from the CCAR, as the study suggested.\3\
---------------------------------------------------------------------------
    \2\ These projected loss rates are determined by the relative 
amount of each risk portfolio within an asset class at a given bank. A 
bank that does not have any portfolios in a particular asset class will 
have a projected loan loss rate of zero for that class.
    \3\ In addition to the conceptual arguments above, certain results 
from the study suggest that something other than implicit risk weights 
are being captured. An example is that the ``implicit risk weight'' for 
junior liens and HELOCs is estimated to be negative or zero, which is 
inconsistent with the actual CCAR loss rates (which are not zero) shown 
in Table 1.
---------------------------------------------------------------------------
    We also note the Federal Reserve closely monitors bank 
lending and credit availability as part of its bank supervision 
and research functions, including the distribution of credit 
across segments of the U.S. economy. For instance, the 
availability of credit to new and small businesses is an area 
of the economy that we pay particular attention to. The Federal 
Reserve's most direct measures of the amount of credit provided 
to small businesses by banks are commercial and industrial 
(C&I) and commercial real estate (CRE) loans with balances 
under $1 million. If regulation is impeding the flow of credit 
to small businesses, we would expect slower growth in small 
business lending by banks that face greater regulation, for 
example, banks with assets over $50 billion. Since 2011, 
however, small C&I loans held at banks with assets over $50 
billion have grown more quickly than at the smaller banks. 
Small CRE loans have declined somewhat in recent years at both 
large and small banks. Although we continue to study these 
trends, these results are not consistent with the view that 
either supervisory stress tests or the Board's more stringent 
capital rules for large institutions are meaningful constraints 
on the provision of credit to small
businesses. In addition, Federal Reserve staff continue to 
investigate the expanding role of nonbank providers of small 
business credit, who we estimate account for more than half of 
all credit provided to small businesses, based on available 
data. These firms, which include credit unions, finance 
companies, farm credit bureaus, and online platforms, could 
help to offset any reduction in credit availability from banks.
    More generally, however, quantifying the specific effects 
of capital regulation, and CCAR in particular, on credit 
provision is made more difficult by a number of confounding 
factors, which could also result in less credit provision by 
large banks. For instance, one of the goals of incentivizing 
large banks to fund assets with additional capital is to reduce 
the value of any remaining too-big-to-fail subsidy. With the 
reduction in that subsidy, the funding costs of large banks 
should rise relative to community banks, thus making the 
community banks more competitive in attracting new business. It 
will take some time to gain a more concrete understanding of 
the effects of new financial regulations, including capital 
regulation, on bank lending and the availability of credit, but 
the Federal Reserve is engaged and will continue to push ahead 
on this research
agenda.\4\
---------------------------------------------------------------------------
    \4\ At present, most research on the new regulations focuses on 
specific pockets of the economy or financial system. For example, 
Calem, Correa, and Lee (2016) find that the market share of jumbo 
mortgage originations at banks participating in the 2011 CCAR exercise 
declined after that exercise (Paul Calem, Ricardo Correa, and Seung 
Jung Lee (2016)), ``Prudential Policies and Their Impact on Credit in 
the United States,'' International Finance Discussion Papers 1186 
(Washington: Board of Governors of the Federal Reserve System, 
November, https://doi.org/10.17016/IFDP.2016.1186). Morris-Levenson, 
Sarama, and Ungerer (2017) find that while recent bank regulation has 
contributed to a reduction in mortgage lending by large banks, counties 
most dependent on lending from the most heavily regulated banks have 
not experienced significantly slower mortgage origination or house 
price growth than less dependent counties (Joshua A. Morris-Levenson, 
Robert F. Sarama, and Christoph Underer (2017), ``Does Tighter Bank 
Regulation Affect Mortgage Originations?'' paper, January, available at 
Social Science Research Network, http://dx.doi.org/10.2139/
ssrn.2941177). This suggests that the reduction in lending by the 
largest banks has been largely filled by expanded origination activity 
from small banks and nonbanks.
---------------------------------------------------------------------------
    Finally, undercapitalized banks are unlikely to be able to 
provide credit on a sustainable basis. Loans that are withdrawn 
at the first signs of a downturn exacerbate recessions with a 
``credit crunch.'' Indeed, research by Federal Reserve 
economists has shown that banks with higher capital buffers 
(i.e., banks with capital ratios well above regulatory 
minimums) lend more freely during downturns, reducing both the 
severity of the downturn and the likelihood of a crisis.\5\ The 
supervisory stress tests and CCAR help to ensure that banks 
will be able to maintain such buffers above the regulatory 
minimums even during a downturn. Related research by Federal 
Reserve economists focuses on different channels through which 
bank capital levels affect the likelihood and severity of a 
financial crisis.\6\
---------------------------------------------------------------------------
    \5\ See, for example, Mark Carlson, Hui Shan, and Missaka 
Warusawitharana (2013), ``Capital Ratios and Bank Lending: A Matched 
Bank Approach,'' Journal of Financial Intermediation, vol. 22 
(October), pp. 663-87; Seung Jung Lee and Viktors Stebunovs (2016), 
``Bank Capital Pressures, Loan Substitutability, and Nonfinancial 
Employment,'' Journal of Economics and Business, vol. 83 (January-
February), pp. 44-69; and Ozge Akinci and Albert Queralto (2014), 
``Banks, Capital Flows and Financial Crises,'' International Finance 
Discussion Papers 1121 (Washington: Board of Governors of the Federal 
Reserve System, October), https://www.federalreserve.gov/econresdata/
ifdp/2014/files/ifdp1121.pdf.
    \6\ See Luca Guerrieri, Matteo Iacoviello, Francisco B. Covas, John 
C. Driscoll, Michael T. Kiley, Mohammad Jahan-Parvar, Albert Queralto 
Olive, and Jae W. Sim (2015), ``Macroeconomic Effects of Banking Sector 
Losses across Structural Models; Finance and Economics Discussion 
Series 2015-044 (Washington: Board of Governors of the Federal Reserve 
System, June), http://dx.doi.org/10.17016/FEDS.2015.044; and Gazi I. 
Kara and S. Mehmet Ozsoy (2016), ``Bank Regulation under Fire Sale 
Externalities,'' Finance and Economics Discussion Series 2016-026 
(Washington: Board of Governors of the Federal Reserve System, April), 
http://dx.doi.org/10.17016/FEDS. 2016.026.



Q.2. Last year, the Federal Reserve agreed to implement a 
series of changes to its CCAR processes recommended in both an 
internal IG report and a GAO study. Please provide a detailed 
update identifying what progress the Federal Reserve has made 
in addressing each of these individual recommendations and, 
with respect to any item not yet fully addressed, please 
describe the Federal Reserve's remediation plan to ensure its 
implementation and identify the resources dedicated to that 
---------------------------------------------------------------------------
remediation.

A.2. The Federal Reserve is making progress on addressing the 
recommendations made in U.S. Government Accountability Office 
Report GAO-17-18, Additional Actions Could Help Ensure the 
Achievement of Stress Test Goals (GAO report). In a January 13, 
2017, letter to Members of the House of Representative's 
Committee on Oversight and Government Reform and the Senate's 
Committee on Homeland Security and Governmental Affairs, I 
provided an update on the Federal Reserve's plans to address 
these recommendations. Additional information on these plans is 
provided below:
Inter-agency Coordination
    The GAO report recommended that the Federal Reserve, 
Federal Deposit Insurance Corporation (FDIC), and Office of the 
Comptroller of the Currency (OCC) (collectively, the agencies) 
harmonize their approach to granting extensions and exemptions 
from stress test requirements.
    Consistent with the plans outlined in the January 13 
letter, Federal Reserve staff, in consultation with staff of 
the OCC and FDIC, have established a process to meet at least 
annually, and more frequently as needed, to coordinate 
regarding requests for extensions and exemptions from stress 
test rules. Federal Reserve staff met with staff of the OCC and 
FDIC on January 26, 2017, to review all the stress testing-
related exemptions and extensions that the agencies granted to 
firms in 2016. The staff of the agencies have agreed to 
continue this practice. Federal Reserve staff will continue to 
work with the FDIC and OCC on a harmonized approach to granting 
extensions and exemptions from stress testing requirements.
Exclusion of Company-Run Tests from CCAR
    The GAO report recommended that the Federal Reserve remove 
company-run stress tests from the CCAR quantitative assessment.
    As indicated in the January 13 letter, Federal Reserve 
staff continue to evaluate the benefits and costs of modifying 
its rules to
remove company-run stress test results from the factors that 
are considered in the CCAR quantitative assessment. Before 
modifying its rules, the Board would provide notice and invite 
public comments regarding any proposed changes.
Transparency of the Qualitative Assessment
    The GAO's report recommended that the Federal Reserve 
publicly disclose additional information about the CCAR 
qualitative assessments; the basis for the Federal Reserve's 
decisions to object or conditionally not object to a company's 
capital plan on qualitative grounds; and information on capital 
planning practices observed during CCAR qualitative 
assessments, including practices the Federal Reserve considers 
stronger or leading practices. The GAO report also recommends 
that the Federal Reserve notify companies about timeframes 
relating to Federal Reserve responses to company inquiries.
    We continue to look for ways to further enhance the 
transparency of CCAR and respond to the GAO findings. For 
example, the Federal Reserve expects to publish a summary of 
the current range of capital planning practices after the 
completion of CCAR 2017.
    In addition, consistent with the plans outlined in the 
January 13 letter, effective with the first quarter of 2017, 
all firms that are subject to the Board's capital plan rule, 
including FR-Y14 regulatory report filers, receive a 
confirmation email that acknowledges receipt of their question 
and provides an expected timeline for a response. Additionally, 
firms now receive a direct response to questions related to 
CCAR in accordance with the communicated timeline. Questions 
that the Federal Reserve receives regarding CCAR which pertain 
to all firms subject to the Board's capital plan rule are 
included in a general communication sent to all firms at least 
quarterly, or more frequently, as needed.
Scenario Design Process
    The GAO's report recommends the Federal Reserve take 
several actions to broaden the consideration of the types of 
scenarios to use in the stress tests and to better understand 
the implications of scenario choices.
    The Federal Reserve has procedures for generating and 
considering scenarios with severity that falls outside of post-
war U.S. history, and that is reflected in the published 
scenarios. Federal Reserve staff continue to explore mechanisms 
in which the severely adverse scenario in the stress tests 
would include deteriorations in scenario variables that lie 
beyond those historically observed. Staff also are developing 
additional analytical tools, including exploring a stress 
testing model based on more aggregated, bank-level data, to 
assess the capital levels that will likely be implied by 
scenarios of differing severities. Finally, staff are 
developing a process to analyze the severely adverse scenario 
for potential procyclicality.
Model Risk Management and Communication
    The GAO's report recommends the Federal Reserve take 
several actions to improve its ability to manage model risk and 
ensure decisions based on supervisory stress test results are 
informed by an understanding of model risk, such as by applying 
model development principles to the entire system of models 
that are used to estimate losses and revenue in the stress 
tests.
    Consistent with the plans outlined in the January 13 
letter, Federal Reserve staff have amended the principles used 
to develop models to explicitly state that the principles apply 
to the overarching system of models, in addition to each of its 
component models. In addition, Federal Reserve staff are 
developing separate documentation that describes the system of 
models. Several projects are currently underway to further test 
and document the sensitivity and uncertainty of the system of 
models, including reviewing the relevant finance and statistics 
literature and exploring various methods to test the 
sensitivity and measure uncertainty. Finally, the Supervisory 
Stress Test Model Governance Committee has issued a memo to the 
Board describing the state of model risk and plans to issue 
this memo annually at the conclusion of each year's supervisory 
stress test. This memo describes the general outcomes of the 
model development and validation processes for the models used 
in the supervisory stress test exercise, and provides a more 
detailed discussion of the potential impact of modeling issues 
on the uncertainty of post-stress capital ratio estimates.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM JANET L. 
                             YELLEN

Q.1. You have said the United States is at or near full 
employment. You have also said that fiscal policy changes are 
not necessary to reach full employment under current economic 
conditions. There are, however, many long-term unemployed 
individuals in my home State of Rhode Island, and around the 
country, who would take issue with the statement that we are at 
full employment. They would also argue that our unemployment 
system did not adequately adjust, as they continue to struggle 
in the wake of the Great Recession. How would you recommend 
that I answer my constituents whose experience leads them to 
question whether we are truly at full employment? What 
safeguards need to be put in place now to protect against job 
loss in the next economic downturn?

A.1. The statement that the U.S. economy is at or near full 
employment pertains to the national economy. Within that 
overall national situation, there will be important variation 
by geographic
location, industry, and skill set. As you correctly observe, it 
remains the case that not every willing worker in every 
location can currently find a job that she or he is qualified 
to fill. The policies
(including monetary policy) that affect aggregate demand at the 
national level will generally not be well suited to address 
these sorts of more-localized and more-specialized situations, 
as real and as painful as they are for those experiencing them.
    To address the real and important aspects of unemployment 
that remain today, a more-detailed set of interventions will 
probably be more appropriate and effective. These interventions 
may be
designed at the Federal, State or local level, and may involve 
Government actions at that level, private actions, or 
partnerships involving both the public and private sectors. In 
one of my earliest speeches as Chair of the Federal Reserve in 
October 2014, for example, I highlighted some potential 
``building blocks'' for greater economic opportunity; these 
included strengthening the educational and other resources 
available for lower-income children, making college more 
affordable, and building wealth and job creation through 
strengthening Americans' ability to start and grow
businesses.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JANET L. 
                             YELLEN

Q.1. I'd like you to elaborate on your statement to Senator 
Reed during your Senate Banking testimony that ``cybersecurity 
is a major, major risk that financial firms face.''

Q.1.a. How could a large scale cyberattack on our financial 
system impact the U.S. economy and international economy?

A.1.a. The global financial system has a heightened level of 
exposure to cyber risk due to the high degree of information 
technology intensive activities and the increasing 
interconnection between firms across the financial services 
sector. In addition, the presence of active, persistent, and 
sometimes sophisticated adversaries means that malicious cyber 
attacks are often difficult to identify or fully eradicate, may 
propagate rapidly through the system, and have potentially 
systemic consequences.
    Given the highly interconnected nature of the financial 
sector and its dependencies on critical service providers, all 
participants in the financial system face cyber threats. The 
potential scenarios and resulting impact are diverse in nature 
and scale. In some cases, attackers may seek to undermine 
public confidence and impact an institution's and/or country's 
reputation. In other cases, a cyber attack on a financial 
institution or a group of financial
institutions could impact liquidity, thereby causing insolvency 
issues at the affected firms which could lead to systemic 
consequences.

Q.1.b. What is the most likely cyber-threat to our financial 
system?

A.1.b. In general, cyber threats against financial institutions 
are becoming more frequent, sophisticated, and widespread. The 
rise in frequency and sophistication of cyber attacks can be 
attributed to numerous factors including nation-states that 
breach systems to seek intelligence or intellectual property, 
hacktivists making political statements through systems 
disruptions, and criminals seeking to breach systems for 
monetary gain. While Internet-based denial-of-service attacks 
intended to disrupt or impede financial market activities are 
among the most frequent attacks on U.S. financial institutions, 
potential attacks that alter or destroy financial institution 
data are more likely to threaten U.S. financial stability.

Q.1.c. When does the Federal Reserve expect to issue a proposed 
rule relating to cybersecurity?

A.1.c. The Federal Reserve, Federal Deposit Insurance 
Corporation and the Office of the Comptroller of the Currency 
issued an advance notice of proposed rulemaking (ANPR) on 
October 20, 2016, inviting comment on a set of potential 
enhanced cybersecurity risk management and resilience standards 
that would apply to large and interconnected entities under 
their supervision. The agencies received substantial feedback 
from industry on the ANPR through the public comment period 
that ended on February 17, 2017. In general, the feedback 
emphasized the burden on firms of trying to comply with 
multiple cybersecurity frameworks and encouraged the agencies 
to adhere to a common approach to cybersecurity developed in 
collaboration with industry that leverages the work done by 
organizations such as the National Institute of Standards and 
Technology. The Federal Reserve is considering options for 
better integration with existing efforts and has not committed 
to a timeframe for any future notice of proposed rulemaking.

Q.2. I'd like to continue our discussion about deficits and the 
debt. During your Senate Banking Testimony, you told Senator 
Corker that ``fiscal sustainability has been a longstanding 
problem, and . . . the U.S. fiscal course, as our population 
ages and healthcare costs increase, is already not 
sustainable.''

Q.2.a. In correspondence with me last year, you told me that 
``fiscal policymakers should soon put in place a credible plan 
for reducing deficits to sustainable levels over time.'' What 
level of deficits and debt would the Federal Reserve consider 
sustainable over the long run?

A.2.a. A sustainable level of Federal debt is when the ratio of 
debt to nominal gross domestic product (GDP) remains 
essentially constant or is decreasing over the longer run. 
Sustainability can potentially be achieved at different levels 
of the debt-to-GDP ratio. For example, the Congressional Budget 
Office (CBO) recently illustrated the fiscal policy changes 
necessary in two different scenarios to put the Federal debt on 
a sustainable path over the next 30 years: one in which the 
debt-to-GDP ratio would remain constant at its current level of 
about 75 percent and another where the
debt-to-GDP ratio would be brought down to its 50-year average 
of around 40 percent.
    In regards to the deficit, a good rule-of-thumb is that the 
``primary'' budget deficit--which is defined as Federal non-
interest spending minus tax revenues--needs to be around zero, 
on average, for the debt-to-GDP ratio to remain constant over 
the longer run. A declining debt-to-GDP ratio usually requires 
primary budget surpluses--that is, tax revenues must be greater 
than non-interest spending--on average.

Q.2.b. What metrics would the Federal Reserve consult in order 
to evaluate the impact of the U.S.'s debt and deficit levels? 
What levels must these metrics reach in order for the U.S. debt 
and deficit to be sustainable?

A.2.b. The Federal Reserve uses monthly data produced by the 
Department of the Treasury to evaluate the current state of the 
budget deficit and the debt. We use the periodic Federal budget 
and debt projections provided by the CBO to inform our view of 
the expected future paths of Federal deficits and debt. As I 
described earlier, a sustainable fiscal policy is one in which 
projected budget deficits are at low enough levels such that 
the debt-to-GDP ratio is projected to remain constant or to be 
decreasing.

Q.2.c. Assuming current policy and current demographic trends, 
how will population aging impact the U.S. fiscal situation over 
the next 10 years?

A.2.c. As described in the CBO's most recent budget outlook, 
population aging contributes importantly to the projected 
growth in Federal spending for retirement and healthcare 
programs over the next 10 years. Growth in these Federal 
spending programs is expected to outpace growth in tax 
revenues, which is reflected in the CBO's projection of rising 
budget deficits over the next decade.

Q.2.d. Assuming current policy and current demographic trends, 
how large does the Federal Reserve expect the shortfall to be 
between retiring workers and new entrants into the workforce, 
over the next 10 years?

A.2.d. Most economic analysts expect that labor force growth 
will be slower over the next 10 years than it has been, on 
average, over the past several decades. This outlook reflects 
the well-known demographic trends of both a faster pace of 
workers retiring and a slower pace of new entrants. I do not 
think that our views on how these trends will evolve in the 
future--which are quite uncertain--differ materially from the 
projections of others, such as the CBO.

Q.2.e. What policy changes could Congress consider to address 
the impact of population aging on our fiscal situation?

A.2.e. In general, simple arithmetic indicates that the policy 
changes will need to include restraining Federal spending or 
increasing tax revenues or some combination of both. All other 
things being the same, policy changes that are more likely to 
help promote economic growth would ease the fiscal challenges 
somewhat, although it is quite unlikely that our economy could 
grow its way out of the long-run fiscal situation. Ultimately 
it is the responsibility of the Congress and the Administration 
to decide on the
appropriate policy changes to put the fiscal situation on a 
sustainable path in the long run.

Q.2.f. How would the Federal Reserve evaluate the economic 
impact of an unfunded $1 trillion infrastructure spending 
package,
especially in light of the Federal Reserve's concerns about 
fiscal sustainability?

A.2.f. Federal spending for public infrastructure can 
potentially increase productivity and the size of the economy, 
although the magnitude and timing of these potential gains 
would depend on the composition of the infrastructure spending. 
Moreover, as the CBO has reported, the overall gains to the 
economy and the effects on the budget would depend importantly 
on whether the increased infrastructure was financed by 
borrowing or by changes in other Government spending or 
revenues.

Q.3. I'd like you to elaborate on your discussion with Senator 
Cotton during your Senate Banking testimony regarding depressed 
wage growth in particular fields.

Q.3.a. You stated that the United States has seen ``much faster 
wage growth for higher skilled individuals and much slower wage 
growth for those who are less skilled.'' Are there any fields 
where less skilled workers have seen more robust wage growth?

Q.3.b. What conditions must be present in the U.S. economy for 
lower-skilled wages to increase?

Q.3.c. Typically, the barrier to entry for entering a high-
skilled profession is high. Do you know of any high-skilled 
professions that lower-skilled workers have had an easier time 
transitioning into? If so, what conditions allow for this to 
occur?

Q.3.d. What higher-skilled professions are currently facing a 
labor shortage?

A.3.a.-d. The widening of the U.S. income distribution over the 
past several decades has been evident in the wage outcomes for 
people of different skill and educational levels. For example, 
on average over the past decade (according to data from the 
Current Population Survey), wages of people with a high school 
education but no college have just kept up with inflation, 
while wages of people with a college degree have exceeded 
inflation by about \1/2\
percent per year. Similarly, wage gains for occupations 
typically classified as high-skill (managers, professionals, 
and technicians) have far outpaced wage gains for low-skill 
occupations (food preparation and serving, cleaning, and 
personal care services).
    This pattern changed somewhat over the past year or so, as 
we have seen relatively large gains for the lower-skill, lower-
education portion of the workforce. For example, median usual 
weekly earnings were almost identical for workers with college 
degrees, some college, and high school graduates in 2016 (all 
between 2.2 and 2.4 percent, not adjusting for inflation). This 
pattern is also visible in the wages for different industries; 
the leisure and hospitality sector, for example, is dominated 
by lower-paid workers who for the past decade have had the 
lowest wage gains of any major industry group, but wages in 
this sector rose well above average in 2016. A portion of the 
explanation for the differing results last year is probably 
that a number of States increased their minimum wages in 2016. 
But another portion of the explanation may be that the 
strengthening labor market, with ongoing solid rates of job 
creation and declining unemployment, has reached a point that 
it is benefiting these lower-skill workers more visibly. I am 
hopeful that continued gains in the labor market will further 
benefit workers throughout the income distribution.
    Despite this recent wage news, it remains the case that 
signs of labor shortages appear most prevalent in higher-
skilled occupations. Data point to shortages primarily in 
management, business and financial services occupation, or in 
professional and related services occupations. Other anecdotal 
evidence points to labor shortages for some types of 
manufacturing and construction work, and in health care.
    As I noted, a strong labor market seems to be helping 
generate higher wages throughout the income distribution. 
Effective Federal Reserve policy can therefore contribute to 
further such progress, but I would emphasize that the primary 
forces leading to different economic outcomes for workers of 
different skill levels are beyond the realm of monetary policy. 
Most especially, I see education as a critical factor in 
enabling individuals to succeed in a labor market that 
increasingly rewards higher skills. And there are many
aspects to improved education, from the quality of our primary 
and secondary schools, to the ability of high school graduates 
to afford college without incurring excessive debt, to improved 
job training opportunities for people of any age. Improved 
education, through any of these channels, is surely an 
important part of a strategy to help more Americans become 
qualified for these higher-skilled jobs.

Q.4. I'd like to discuss the U-6 real unemployment rate.

Q.4.a. What is the Federal Reserve's estimation of the longer-
run normal level U-6 rate?

Q.4.b. Has the Federal Reserve's estimation of this longer-run 
normal U-6 rate decreased since the 2008 financial crisis? If 
so, why?

A.4.a.-b. Federal Open Market Committee participants do not 
submit an estimate of the longer-run normal level of the U-6 
measure of labor underutilization. (This measure augments the 
official unemployment rate by also including the ``marginally 
attached''--individuals who would like to work, are available 
to work, and have sought employment within the past 12 months 
but not in the past 4 weeks--and those who are working part-
time, but say they would like to be working full-time.) As with 
other such measures, the U-6 rose substantially during the 
recession and has been coming down since then. However, the U-6 
measure still remains a little above its pre-recession level, 
and the difference between the U-6 measure and the official 
unemployment rate has widened by about 1 percentage point since 
that time. Some economists think that the higher level of U-6 
could reflect structural changes in the economy, for example, 
because employers in some growing service sectors may have a 
relatively high propensity to use part-time labor. But the 
somewhat elevated level of U-6 also may indicate some remaining 
labor market slack that is not captured by the official 
unemployment rate.

Q.5. I'd like to discuss the U.S. agricultural markets.

Q.5.a. How would an interest-rate hike impact the agricultural 
sector, given current economic conditions? How will the Federal 
Reserve take this into account when evaluating current economic 
conditions?

Q.5.b. According to the United States Trade Representative, 
Nebraska goods exports totaled $7.9 billion in 2014. This 
number is a 238 percent increase from export levels in 2004. A 
recent report released by the Department of Agriculture titled, 
``USDA Agricultural Projections to 2026'' predicts that over 
the next 10 years the U.S. dollar will remain stronger than any 
year since 2006. According to the report, ``A stronger U.S. 
dollar will increase the relative price of U.S. exports, 
thereby constraining export growth.'' Does the Federal Reserve 
share this opinion about a stronger dollar and the impact on 
export levels?

A.5.a.-b. The Federal Reserve considers all segments of the 
U.S. economy during the regular course of monetary policy 
deliberations. Our monetary policy mandate, given to us in law 
by the Congress, is to pursue price stability and maximum 
sustainable employment. The concepts that constitute the so-
called dual mandate apply across the full economy. That is 
appropriate because our policy tools likewise have their 
effects across the full economy; they cannot be targeted to 
specific sectors.
    Turning to the agricultural sector, conditions there have 
softened in recent years. Many factors influence profitability 
in the agricultural sector, but a prolonged downturn in the 
prices of agricultural commodities has been the primary driver 
of the weakness in the farm economy over the past few years; in 
turn, the prices of many agricultural commodities are heavily 
influenced by global supply and demand conditions, not just 
domestic conditions. The nominal value of U.S. agricultural 
exports has declined modestly since 2014, on the tide of lower 
commodity prices and a stronger dollar. A modest increase in 
interest rates will affect economic and financial
conditions in the agricultural sector through multiple 
different channels. For one thing, a modest increase in 
interest rates will often--as in the present circumstances--be 
accompanied by a strengthening overall economy, and so, 
generally speaking, will be accompanied by sustained domestic 
demand for the output of the
agriculture sector. A modest increase in interest rates may 
also result in a possible increase in borrowing costs. However, 
interest expenses account for a relatively small portion of 
production costs in the U.S. farm sector and farm loan 
delinquencies remain historically low. As economic and 
financial conditions evolve, the Federal Reserve will continue 
to carefully monitor developments in the
agricultural sector.

Q.6. I'd like you to elaborate on your statement regarding 
automation to Senator Heitkamp during your Senate Banking 
testimony that ``there are dramatic accounts of changes that 
are on the horizon that could have profound effects on the 
labor market.''

  a. LWhat industries are most vulnerable to automation?

  b. LWhat industries will see the most growth because of 
        automation?

  c. LDoes the Federal Reserve expect automation to permanently 
        increase unemployment for lower-skilled workers? Or 
        will the impacts of automation primarily be 
        transitional, as new entrants into the workforce adapt 
        to new technologies?

A.6.a.-c. The jobs that are most susceptible to automation 
appear to be those that involve routine tasks, either physical 
or cognitive. Many tasks in the manufacturing sector fall into 
this category, as machines or robots are able to carry out 
physical tasks. This is also the case for some services, where 
automation can substitute for routine cognitive tasks; 
prominent examples include banking, where ATMs have substituted 
for tellers, or sales workers who have been displaced by 
internet shopping. Conversely, tasks that require nonroutine 
skills appear least vulnerable to automation, and they may 
expand as other jobs are automated. These nonroutine tasks cut 
across the skill distribution, and include laborers and 
personal care providers along with higher-skilled workers such 
as managers and software developers. Of course, as technology 
changes, it may be that more types of occupations become 
susceptible to at least partial automation. As a result, demand 
and workers will shift to new occupations, some of which may 
not even exist today.
    Even though the likelihood of a job being automated cuts to 
some extent across the skill distribution, on balance, changes 
in technology appear to have reduced demand for lower-skilled 
workers and have contributed to the increased inequality of 
incomes that have been in train for several decades. Moreover, 
as a recent report from the Council of Economic Advisers \1\ 
highlighted, reduced demand for lower-skilled workers also can 
help explain the ongoing decline in labor force participation 
of men 25-54 years old, which has been most concentrated among 
those with a high school degree or less.
---------------------------------------------------------------------------
    \1\ https://obamawhitehouse.archives.gov/sites/default/files/page/
files/20160620_cea_
primeage_male_lfp.pdf.
---------------------------------------------------------------------------
    Knowing whether these trends will continue is of course 
difficult, and there is debate among economists about the pace 
of automation and its likely effects. But as I said in the 
response to question 3, I see education as critically important 
for ensuring that new entrants to the labor force are prepared 
for a work environment dominated by new technologies.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER FROM JANET L. 
                             YELLEN

Debt/Deficit
Q.1. Chair Yellen, I want to start this morning by talking 
about our Nation's debt and deficit. Now, it's my belief that 
our Nation's debt and deficit continues to be unsustainable. I 
think we refuse to actually take a long hard look at our 
Federal budget to see what simply doesn't make sense anymore 
and at the same time we continue to hand out unpaid-for tax 
credits like candy.
    Now just recently my friends on the other side of the isle 
have proposed repealing the Affordable Care Act, which will 
reduce revenues by $350 billion over the next decade. On top of 
that, they have proposed a tax plan that would reduce Federal 
revenue more than 2 trillion dollars.

Q.1.a. So I guess my first question is, what sort of effect 
will that kind of new debt have on our economy?

A.1.a. The current level of Federal debt is equal to more than 
75 percent of nominal gross domestic product (GDP), which is 
far higher than the average debt-to-GDP ratio of about 40 
percent over the past 50 years. Moreover, the Congressional 
Budget Office (CBO) projects that Federal budget deficits and 
Federal debt will be increasing, relative to the size of the 
economy, over the next decade and in the longer run.\1\ 
Additional Federal borrowing would accelerate those 
unsustainable trends. The CBO appropriately
describes several reasons why high and rising Federal 
Government debt could have serious negative consequences for 
the economy over time. First, because Federal borrowing 
eventually reduces total saving in the economy, the Nation's 
capital stock would ultimately be smaller than it would be if 
debt was lower; as a result, productivity and overall economic 
growth would be slower. Second, fiscal policymakers would have 
less flexibility to use tax and spending policies to respond to 
unexpected negative shocks to the economy. Third, the 
likelihood of a fiscal crisis in the United States would tend 
to increase. However, there is no way to predict with any 
confidence whether and when such a crisis could occur; in 
particular, there is no identifiable level of Federal 
Government debt, relative to the size of the economy, 
indicating that this would be likely or imminent.
---------------------------------------------------------------------------
    \1\ Congressional Budget Office, ``The Budget and Economic Outlook: 
2017 to 2027,'' January 2017, and ``The 2016 Long-Term Budget 
Outlook,'' July 2016.

Q.1.b. Do you believe our debt and deficit levels are 
---------------------------------------------------------------------------
unsustainable in the longer term?

A.1.b. I agree, as do most economists, with the assessment that 
the Federal Government budget is on an unsustainable path, 
given current fiscal policies. As I noted earlier, the CBO 
projects that Federal budget deficits and Federal debt will be 
increasing, relative to the size of the economy, over the next 
decade and in the longer run, which is unsustainable. In the 
CBO's projections, growth in Federal spending--particularly for 
mandatory entitlement programs and interest payments on Federal 
debt--outpaces growth in revenues in the coming years. The 
increases in entitlement programs, such as Social Security and 
programs providing health care, are mainly attributable to the 
aging of the population and rising healthcare costs per person. 
For fiscal sustainability to be achieved, whatever level of 
spending is chosen, revenues must be sufficient to sustain that 
spending in the long run.

Q.1.c. Does it inhibit our labor market?

A.1.c. As I mentioned earlier, increasing Federal borrowing 
reduces total savings in the economy over time, ultimately 
leading to the Nation's capital stock being smaller than it 
would be if debt was lower. As a result, productivity and 
overall economic growth would be slower. As described by the 
CBO, lower productivity growth would slow the pace of gains in 
labor compensation, which would tend to provide individuals 
less incentive to work.\2\
---------------------------------------------------------------------------
    \2\ Congressional Budget Office, ``The 2016 Long-Term Budget 
Outlook,'' July 2016.

Q.1.d. During the course of several meetings with President 
Trump's nominees, folks kept telling me that they believe we 
can grow the economy so much that it will offset $2 trillion in 
---------------------------------------------------------------------------
tax cuts. Do you believe this is possible?

A.1.d. In general, I think most economists tend to agree that 
the historical evidence suggests that most tax cuts do not 
usually pay for themselves.\3\ Even though well-designed tax 
changes could increase household incentives to work and save, 
along with potentially enhancing business incentives to hire 
and invest, the positive effects of these changes on overall 
economic growth appear to usually not be large enough to offset 
the direct budgetary effects of a tax cut. Ultimately, the 
challenge for fiscal policymakers is that the tax policies 
chosen must generate revenue sufficient to sustain the level of 
Government spending that is also chosen.
---------------------------------------------------------------------------
    \3\ For example, see the Tax Foundation, ``Do Tax Cuts Pay for 
Themselves?'' at https://taxfoundation.org/do-taxcuts-pay-themselves; 
and the Tax Policy Center, ``Do Tax Cuts Pay for Themselves?'' at 
http://www.taxpolicycenter.org/briefing-book/do-tax-cuts-pay-
themselves.
---------------------------------------------------------------------------
Economy
Q.2. Chair Yellen, are there particular areas in the labor 
market that give you concern? Are there specific sectors you 
see strong growth in vs. others that are struggling?

A.2. The solid gains in payroll employment that we have seen 
over the past several years have generally been fairly 
widespread across different sectors of the labor market. 
However, manufacturing employment has been relatively flat more 
recently, reflecting in part the effects of the higher foreign 
exchange value of the dollar, weak foreign economic growth, and 
tepid domestic demand for capital
investment. Particularly as economic activity continues to 
strengthen, both domestically and abroad, the prospects for the 
U.S. manufacturing sector should improve. Indeed, the 
manufacturing
employment has picked up in recent months as factory output has
accelerated somewhat.

Community Banks
Q.3. Chair Yellen, I strongly believe that our community banks 
serve the folks that keep State's like mine running. And I 
think everyone up here knows that our community banks weren't 
involved in developing and selling exotic and risky financial 
products, and they didn't stray from the products that have 
served them and their customers for generations. I think it's 
time that we provide our community banks with some regulatory 
relief. I don't believe they caused the financial crisis and 
they shouldn't have to pay for it either.
    Over the last several years, I've seen dozens of mergers 
and
acquisitions of community banks across Montana and its very 
concerning to me. If community banks continue to consolidate, 
the real losers will be folks living in rural America, States 
where a majority of our institutions are community banks, and 
I'm not so sure anyone will fill the void once they are gone.

Q.3.a. Can you give me a sense of what the Federal Reserve did 
in 2016 to ensure that we are protecting consumers, but at the 
same time differentiating regulations between community banks, 
regional banks, and global banks?

A.3.a. In 2016, the Federal Reserve took a number of steps to 
reduce regulatory burden on community banks. For example, in 
response to bankers' concerns about the burden imposed on small 
banks when large numbers of examiners participate in onsite 
examinations, the Federal Reserve issued guidance to encourage 
examiners to review loan files offsite for examinations of 
banks with less than $50 billion in total assets, if requested 
by the bank. Together with the other banking regulators, the 
Federal Reserve also reduced the regulatory filing requirements 
for banks with less than $1 billion in consolidated assets by 
eliminating about 40 percent of the items in the required 
quarterly financial reporting form known as the Call Report. In 
addition, the Federal Reserve enhanced its examination planning 
process to use updated statistical models to tier community 
banks by risk level. These enhancements allow examiners to 
better target their work and should result in less examination 
time being spent reviewing well-managed, lower-risk community 
banks. For regional banks with assets between $10 and $50 
billion, the Federal Reserve continued to refine its 
expectations for company-run annual stress tests required by 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act). This included providing banks with additional 
flexibility with respect to required assumptions that must be 
included in the stress test and extending the length of time 
allowed to perform and report on the results of the tests. 
These actions are examples of how the Federal Reserve seeks to 
tailor its supervisory programs to reflect the lower systemic 
risks presented by community and regional banks.
    The March 2017 Joint Report to Congress on the results from 
the second Economic Growth and Regulatory Paperwork Reduction 
Act (EGRPRA) review highlights many of the actions that the 
Federal Reserve is undertaking to further reduce regulatory 
burden on community banks, including simplifying regulatory 
capital requirements, addressing challenges in obtaining 
appraisals, and further reducing items collected on the Call 
Report.
    With respect to protecting consumers in their banking 
activities, the Federal Reserve System conducts specialized 
examinations to ensure compliance with consumer protection laws 
and regulations in the institutions under its purview.\4\ 
During 2016, the Federal Reserve Banks completed 209 consumer 
compliance examinations and 206 examinations for the Community 
Reinvestment Act (CRA) of State member banks. The Federal 
Reserve is mindful of the importance to balance efforts to 
tailor our supervisory approach in consumer compliance with our 
responsibility to ensure that banks are transparent and fair in 
their dealings with consumers, regardless of the size or type 
of institution involved.
---------------------------------------------------------------------------
    \4\ For consumer financial protection, the Federal Reserve has 
examination and enforcement authority for Federal consumer financial 
laws and regulations for insured depository institutions with $10 
billion or less that are State member banks and not affiliates of 
covered institutions, as well as for conducting CRA examinations for 
all State member banks regardless of size. The Federal Reserve Board 
also has examination and enforcement authority for certain Federal 
consumer financial laws and regulations for insured depository 
institutions that are State member banks with over $10 billion in 
assets, while the Consumer Financial Protection Bureau has examination 
and enforcement authority for many Federal consumer financial laws and 
regulations for insured depository institutions with over $10 billion 
in assets and their affiliates (covered institutions), as mandated by 
the Dodd-Frank Act.
---------------------------------------------------------------------------
    Toward this end, the Federal Reserve has adopted the 
following procedures to conduct risk-focused consumer 
compliance supervision, implementing this program in January 
2014. Examination intensity is based on the individual bank's 
risk profile and effectiveness of its compliance controls. In 
addition, more up-front work is completed offsite. This has 
improved the efficiency and effectiveness of our examinations 
and reduced regulatory burden for many community banks. In 
addition, we have lengthened time between consumer compliance 
examinations for community banks with lower-risk profiles. 
Banks with satisfactory consumer compliance ratings are now 
examined every 48 to 60 months if they have assets under $350 
million (up from every 24 months). And banks with satisfactory 
ratings and assets between $350 million and $1 billion are 
examined every 36 months instead of every 24 months.
    The Federal Reserve also works to support institutions in 
their consumer compliance efforts through guidance and outreach 
to clarify supervisory expectations. For example, the banking 
agencies have revised the CRA Q&As twice in the past 5 years. 
The agencies are also working together to update interagency 
examination procedures and other process improvements. With 
respect to fair-lending examinations, the agencies issued 
revised Interagency Fair Lending Examination Procedures that 
provide more detailed information regarding current fair-
lending risk factors that can aid a bank in its analysis of 
fair-lending risks and to prepare for fair-lending exams. We 
have also increased our communications with banks during the 
exam process and engaged in a variety of outreach activities, 
such as regular participation in conferences
sponsored by both industry and advocacy groups with the goal to 
highlight fair lending risks so that institutions can take 
steps to
effectively manage compliance.

Q.3.b. Is the Federal Reserve concerned about the consolidation 
we continue to see throughout the industry?

A.3.b. The Federal Reserve recognizes the vital role community 
banks play in local economies and closely monitors 
consolidation trends at community banks. While several factors 
have contributed to the decline in the number of community 
banks, some have attributed a significant part of the decline 
to regulatory compliance costs. Recognizing that regulatory 
compliance costs may be a contributing factor to consolidation, 
the Federal Reserve seeks to ensure that its regulations are 
balanced and provide safety and soundness benefits that are 
relatively proportional to the resulting compliance costs. In 
addition, the Federal Reserve tailors its prudential standards 
and examination procedures to banks based on their risk 
profile, size and complexity. Doing so allows the Federal 
Reserve to achieve its goal of promoting a strong banking 
system and preventing or mitigating against the risk of bank 
failures while minimizing regulatory compliance costs to 
community banks.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JANET L. 
                             YELLEN

Q.1. Small banks and community financial institutions are the 
cornerstones of cities and towns across the country, but they 
play an especially important part in the economy of my State, 
South Dakota. While South Dakotans are proud of the role that 
smaller financial institutions have, the rules and regulations 
promulgated by the Federal Government since the financial 
crisis are making it harder for smaller institutions to 
compete.
    The Economist recently pointed out that more rules and 
regulations were heaped on our financial institutions between 
2010 and 2014 than the total number of all financial 
regulations that existed in 1980. And a study by the 
Minneapolis Federal Reserve found that adding two extra 
staffers to the compliance department of a small bank would 
make the difference for one-third of all small banks between 
operating at a profit and operating at a loss.
    Recently I introduced legislation called the TAILOR Act to 
help ease regulatory overreach for our Nation's small banks and 
community financial institutions. Is our regulatory framework 
for small banks and community financial institutions 
appropriate for the current macroeconomic environment? What 
further adjustments are needed by Congress?

A.1. The Federal Reserve recognizes that the costs of 
regulation can be a significant challenge for small banks. 
Accordingly, it seeks to tailor prudential standards and 
supervisory guidance to community banks based on their risk, 
size, and complexity and to minimize unnecessary burdens 
whenever possible. Moreover, as discussed in the March 2017 
Economic Growth and Regulatory Paperwork Reduction Act Joint 
Report to Congress, the Federal Reserve has taken a number of 
actions independently and jointly with the other regulatory 
agencies to address issues raised during the review that should 
reduce regulatory burden for community banks. These include 
leveraging technology to conduct as much of the
examination work offsite as possible, significantly cutting the 
information collected from small banks on the Call Report, and 
improving examination planning efforts to better tailor 
examination work so that well-run, low-risk banks receive 
significantly less supervisory scrutiny. In addition, the 
agencies are initiating efforts to ease the conditions under 
which an appraisal is required to support a commercial loan and 
to develop a simplified regulatory capital regime for community 
banks.
    To help further ease regulatory burdens for small banks, 
Congress could consider exempting community banks from two sets 
of Dodd-Frank Wall Street Reform and Consumer Protection Act 
requirements: the Volcker rule and the incentive compensation 
limits in section 956. The risks addressed by these statutory 
provisions are far more significant at larger institutions than 
they are at community banks. In the event that a community bank 
engages in practices in either of these areas that raise 
heightened concerns, we believe that the banking agencies would 
be able to address them as part of the normal safety-and-
soundness supervisory
process.

Q.2. Congress has significant responsibilities with respect to 
cybersecurity, and I'm honored to chair the new Armed Services 
Subcommittee on Cybersecurity. With its advanced rulemaking 
notice on cybersecurity in October, the Federal Reserve rightly 
recognized that our financial infrastructure is a significant 
target for our Nation's adversaries.

Q.2.a. Can you comment on the threats that our financial sector 
faces and the vulnerabilities that exist in the system?

A.2.a. In general, cyber threats against financial institutions 
are becoming more frequent, sophisticated, and widespread. The 
rise in frequency and sophistication of cyber attacks can be 
attributed to numerous factors including nation-states that 
breach systems to seek intelligence or intellectual property, 
hacktivists making political statements through systems 
disruptions, or bad actors seeking to breach systems for 
monetary gain.
    Despite the increasing level of attack sophistication, it 
is more apparent that a significant portion of successful 
breaches could have been avoided by adhering to basic 
information security te-
nets, sound technology governance and network administration
practices.

Q.2.b. Do you have the regulatory authority you need to keep 
this important part of our economy safe, or is additional 
action needed on the part of Congress?

A.2.b. The Federal Reserve's general safety and soundness 
authority is the primary source of its information technology 
requirements, including those for cybersecurity. In addition, 
the Federal Reserve, Federal Deposit Insurance Corporation, and 
the Office of the Comptroller of the Currency have authority 
under the Bank Service Company Act to examine the services that 
third parties provide to financial institutions that are 
supervised under each of the agency's regulatory authorities. 
At the present time, the Federal Reserve is not seeking 
additional regulatory authority in this area.

Q.3. The Federal Reserve recently issued a final rule in 
regards to its Comprehensive Capital Analysis and Review and 
stress testing rules. In September, Federal Reserve Board 
Governor Daniel Tarullo gave a speech on the next steps in 
stress testing.
    Governor Tarullo's speech covered numerous areas of stress 
testing, but one particular aspect stood out: the stress 
capital buffer. Governor Tarullo noted that the Fed ``will be 
considering adoption of a `stress capital buffer . . . ' '' 
From his remarks, it appears that the stress capital buffer, 
which would include an additional risk-based capital 
requirement, would be substituted for the capital conservation 
buffer.

A.3. Could you give us your take on the stress capital buffer? 
And is the Federal Reserve still considering its adoption?
    At this time, the Federal Reserve Board (Board) does not 
have plans to propose any significant rules. However, the Board 
continues to consider ways to more closely integrate CCAR and 
the Board's regulatory capital rules. Before making any changes 
to the Board's rules, we would provide notice of any proposed 
changes and invite public comment on them.

Q.4. President Trump's recent Executive actions took a strong 
stance on financial regulatory reform, and Congress has started 
to revisit and in some cases rescind financial regulations 
proposed by the previous Administration.
    Given these developments, do you think that the Federal 
Financial Institutions Examination Council, including the 
Federal Reserve, should take up review of the Dodd-Frank Act 
and recommend to Congress what rules should be rolled back in 
light of the President's recent Executive orders?

A.4. The President issued an Executive order on February 3, 
2017, that articulates his Administration's core principles of 
financial regulation. The Executive order also instructs the 
Secretary of the Treasury to consult with the heads of the 
member agencies of the Financial Stability Oversight Council 
and report to the President within 120 days on (i) the extent 
to which existing laws and regulations promote the core 
principles; and (ii) any laws or regulations that inhibit 
Federal regulation of the U.S. financial system in a manner 
consistent with the core principles.
    I intend to participate in this Treasury-led review of U.S. 
financial law and regulation, which will include all the 
Federal agency members of the Federal Financial Institutions 
Examination Council and likely will include review of the Dodd-
Frank Wall Street Reform and Consumer Protection Act.

Q.5. I'm concerned that a number of factors abroad could be 
threatening our Nation's economic recovery. The stalemate 
between Greece and its international creditors over the past 
week has been troublesome. And elsewhere around the world, 
major economies like China are grappling with trouble in their 
own real estate markets as well as with ballooning debt.
    Can you discuss the downside risks to the U.S. economy 
given continued slowdown in China's economy and Europe's debt 
crisis? Do you think China and Europe could become more of a 
problem for the U.S. economy?

A.5. In our highly globalized economic and financial system, no 
economy can be fully insulated from developments outside its 
borders. Over the past several years, a series of foreign 
shocks have buffeted the U.S. economy--including the euro-area 
debt crisis, uncertainty about Chinese economic policy, and the 
sizable run-up in the dollar and sharp decline in oil prices. 
These developments have directly impacted the U.S. economy 
through their effects on trade and inflation and indirectly 
through confidence and financial
channels.
    At present, the effects of these past headwinds appear to 
be waning. Oil prices have stopped falling, thereby easing 
pressure on energy companies and oil-reliant economies, 
concerns about financial stability in Europe and China have 
eased somewhat, and economies abroad have been recovering. 
These are hopeful signs for the U.S. economy. However, several 
foreign risks remain a concern, including those that you raise 
about China and Europe.
    Chinese economic growth has been on a general slowing trend 
over the past few years as a result of demographic changes and 
the moderation in growth typical of maturing economies. There 
are concerns, however, that the rapid credit growth in China in 
recent years may have increased financial risks, and a 
materialization of those risks could trigger a much sharper 
slowdown in the economy. Specific concerns include mounting 
nonperforming corporate debts; a growing reliance on short-term 
sources of funding in the financial system; rapid growth in 
house prices; and the possibility that expectations of currency 
depreciation could cause an acceleration of capital outflows. 
Should the Chinese economy decelerate abruptly and severely, 
there would clearly be an impact on the global economy. China 
is an important market for the exports of other Asian economies 
as well as for commodity exporters, and these economies would 
be hit particularly hard. U.S. export growth also would be 
restrained, both directly, as China has accounted for a 
significant portion of U.S. export growth since 2007, and 
indirectly, as other markets for U.S. exports are hindered.
    While we are attuned to these risks, we do not view a 
Chinese financial crisis and sharp slowdown in GDP growth as 
the most likely scenario. Growth remains relatively solid. 
Chinese authorities have recently taken measures to curb the 
rapid rise in house prices and slow the growth of lending. 
Market participants seem more comfortable with the Chinese 
authorities' current approach to their currency. And the 
government has sufficient resources to provide important 
support to the financial sector in case of distress.
    Regarding your concern about Greece, and Europe more 
generally, European economies have shown considerable 
improvement over the past few years. The economic recovery 
appears to be gaining momentum and unemployment rates have been 
falling. Moreover, the European Central Bank has taken a number 
of actions to help backstop sovereign debt, and the region has 
made substantial progress toward banking union. Thus, other 
European countries are better insulated from the situation in 
Greece than they were in 2010 when the debt crisis broke out.
    However, Greece still faces daunting financial and economic 
challenges, including its very high and growing level of public 
debt, the resolution of which will require further difficult 
steps--including additional Greek reforms and additional debt 
relief from Greece's creditors. Developments in Greece continue 
to have the potential for disruptions that could spill over and 
affect the European economic outlook and global financial 
markets. It is encouraging that Greek and European authorities 
have reached a preliminary agreement on a package of economic 
reforms that Greece must implement to receive another 
disbursement of official financing.
    Europe faces other challenges as well, such as negotiating 
the United Kingdom's withdrawal from the European Union (EU), 
following through on the EU's structural reform agenda, and
continuing to make progress on economic recovery and lowering 
unemployment. We will continue to monitor the European economy, 
as we consider how foreign developments may affect the 
achievement of our domestic objectives of price stability and 
maximum
employment.

Q.6. The Federal Funds rate has been at an extremely low, 
nearly zero level for quite some time since the financial 
crisis. On February 1, the Federal Open Market Committee (FOMC) 
decided to keep the target range for the Federal funds rate at 
a half to three quarters of 1 percent. The FOMC's press release 
cited improving conditions in the economy including a 
strengthening labor market, solid job gains and increasing 
inflation.
    Where would the Fed like to see additional improvements in 
the economy before raising the target rate?

A.6. At the Federal Reserve, we are squarely focused on 
achieving our congressionally mandated goals of maximum 
employment and price stability. These goals guide our decisions 
regarding the appropriate level of the Federal funds rate.
    At our most recent meeting, on March 14-15, the Federal 
Open Market Committee (FOMC) did raise the target range for the 
Federal funds rate by \1/4\ percentage point, to \3/4\ to 1 
percent. That decision was based in part on incoming data 
indicating that the labor market had continued to strengthen 
and that inflation had moved closer to the FOMC's 2 percent 
objective. In addition, our decision in March reflected our 
expectation that, with gradual adjustments in the stance of 
monetary policy, economic activity will expand at a moderate 
pace, labor market conditions will strengthen somewhat further, 
and inflation will reach 2 percent on a sustained basis.
    The same factors that drove our decision in March will be 
key for our future deliberations about the appropriate path for 
the Federal funds rate. In particular, if the U.S. economy 
continues to evolve broadly as the FOMC anticipates--economic 
activity expanding at a moderate pace, labor market conditions 
strengthening somewhat further, and inflation reaching 2 
percent on a sustained basis--additional increases in the 
Federal funds rate are likely this year. Indeed, the median 
assessment of FOMC participants at our March meeting was that 
an additional \1/2\ percentage point cumulative increase in the 
Federal funds rate would likely be appropriate over the 
remainder of this year, which would bring the year-end target 
range for that rate to 1 \1/4\ to 1 \1/2\ percent.
    Nonetheless, as my FOMC colleagues and I have said many 
times, monetary policy cannot be and is not on a preset course. 
The FOMC stands ready to adjust its assessment of the 
appropriate path for the Federal funds rate if unanticipated 
developments materially change the economic outlook.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JANET L. 
                             YELLEN

Q.1. Chair Yellen, in your testimony you stated that you expect 
inflation to ``gradually [rise] to 2 percent;'' ``toward 2 
percent;'' ``return to 2 percent;'' etc. Can you expound on 
whether 2 percent inflation represents a target objective or is 
a ceiling?

A.1. The Federal Open Market Committee (FOMC) sets monetary 
policy to achieve its statutory goals of maximum employment and 
price stability set forth in the Federal Reserve Act. As 
indicated in its Statement on Longer-Run Goals and Monetary 
Policy Strategy, which the Committee first agreed to in January 
2012 and reaffirms each year, the FOMC judges that inflation at 
the rate of 2 percent, as measured by the annual change in the 
price index for personal consumption expenditures (PCE), is 
most consistent over the longer run with the Federal Reserve's 
statutory mandate for price stability. The Committee's 2 
percent inflation objective is not a ceiling. Indeed, the 
Committee indicates in the Statement of Longer Run Goals that 
it would be concerned if inflation were running persistently 
above or below 2 percent, and that its inflation goal is 
symmetric. Communicating this symmetric inflation goal clearly 
to the public is important because it helps keep longer-term 
inflation expectations firmly anchored, thereby fostering price 
stability and moderate long-term interest rates and enhancing 
the Committee's ability to promote maximum employment in the 
face of significant economic disturbances.
    In communications with the public over the past year--the 
statement issued after FOMC meetings, the minutes of those 
meetings, the Chair's quarterly post-meeting press conferences, 
and the Monetary Policy Report and testimony--the Federal 
Reserve has indicated that it expected headline inflation to 
rise over time to the Committee's 2 percent objective. In the 
event, 12-month PCE price inflation rose to nearly 2 percent in 
January, up from less than 1 percent last summer. That rise was 
largely driven by energy prices, which have been increasing 
recently after earlier declines. Core inflation, which excludes 
volatile energy and food prices and tends to be a better 
indicator of future inflation, has been little changed in 
recent months at about 1 \3/4\ percent. The Committee expects 
core inflation to move up and overall inflation to stabilize 
around 2 percent over the next couple of years, in line with 
its longer-run objective. The economic projections submitted by 
individual FOMC participants before the March 2017 FOMC meeting 
are consistent with this view, with projections for headline 
and core inflation in 2019 ranging from 1.8 percent to 2.2 
percent, with a median projection of 2.0 percent.

Q.2. Chair Yellen, the Federal Financial Institutions 
Examination Council is supposed to coordinate the work of 
different regulators, but I am hearing that in practice this is 
not happening. Do you believe we need separate layers of 
examination at the holding-company level by the Fed and OCC? 
What added value is there for having both the Fed and OCC 
examine a bank--is one incapable of doing the job? Does the Fed 
not trust the OCC to conduct examinations or the OCC's 
expertise? Do you believe that there is regulatory cooperation 
taking place as it should?

A.2. The Federal Reserve has statutory responsibility for 
supervising bank and savings and loan holding companies on both 
a
consolidated and parent-company-only basis. Holding company 
supervision complements the examination work completed by the 
other banking agencies, including the Office of the Comptroller 
of the Currency, but its focus is different than that of bank 
supervision. Specifically, holding company supervision aims to 
ensure that the parent serves as a source of strength to its 
depository institutions and that nonbank activities conducted 
by the holding company, many of which are supervised solely by 
the Federal Reserve and can be quite substantial for some 
complex holding companies, do not adversely affect the safety 
and soundness of insured depositories. Lastly, holding company 
supervision assesses the overall consolidated financial and 
managerial condition of the consolidated organization, 
including all subsidiary banks, nonbanks and the parent 
company.
    In fulfilling its holding company supervision 
responsibilities, the Federal Reserve cooperates and 
coordinates closely with the Federal and State supervisors of 
insured depositories and nonbank entities and relies 
substantially on the work and expertise of these agencies in 
evaluating the condition of any banks or nonbanks they directly 
supervise. The principle of coordinating with the other 
regulatory agencies is required by statute and is a well-
established tenet of the Federal Reserve's supervisory process. 
For example, section 604 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, now codified in the Bank Holding 
Company Act, requires that the Federal Reserve rely to the 
fullest extent possible on the work of other regulators. The 
Federal Reserve reinforced this requirement by issuing SR 12-
17, Consolidated Supervision Framework for Large Financial 
Institutions, and SR 16-4, Relying on the Work of the 
Regulators of the Subsidiary Insured Depository Institutions) 
of Bank Holding Companies and Savings and Loan Holding 
Companies with Total Consolidated Assets of Less than $50 
Billion. Both of these supervisory directives require Federal 
Reserve examiners to work with the primary regulators of 
insured depositories to avoid duplication of effort and 
minimize regulatory burden.
    These directives and other Federal Reserve guidance also 
tailor expectations for examiners depending on an 
organization's size, complexity, and degree of systemic risk. 
For smaller bank holding companies, where consolidated assets 
are composed principally of the assets of the subsidiary bank, 
nonbank activities are minimal, and parent company leverage is 
low, the Federal Reserve limits its work and relies 
substantially on the primary regulator's examination of the 
insured depository to assess the condition of the holding 
company. As holding companies become larger and more complex, 
and nonbank activities become more important to the 
organization, inspection work correspondingly expands. However, 
regardless of the size, complexity and risk of the holding 
company, the Federal Reserve endeavors to avoid duplication by 
relying on primary regulators whenever possible, meeting 
regularly with them to ensure we are not duplicating efforts, 
and using their examination work to reach a consolidated 
supervisory view.

Q.3. Chair Yellen, you have been asked in the past whether 
there are liquidity problems in the bond market--can you tell 
me whether or not there is a present or imminent problem? I 
think it is important to get the diagnosis right, so I want to 
understand whether you think there is a liquidity problem in 
the bond market, and that if you are merely monitoring the 
situation, whether or not that indicates a cause for concern in 
terms of what lies ahead.

A.3. In corporate bond markets, estimated bid-ask spreads have 
declined and estimated price impacts are lower than in the 
early 2000s, indicating that, if anything, liquidity may have 
improved despite the reduction in dealer holdings of these 
securities.\1\ Demand from buy-side market participants has 
been very high, which has likely helped to support market 
liquidity. Partly as a result of this high demand, corporate 
debt issuance has been quite robust, which in turn can help to 
explain some of the decline in turnover as some of these 
investors may be more likely to buy and then hold the 
securities for some time.
---------------------------------------------------------------------------
    \1\ See Bruce Mizrach, ``Analysis of Corporate Bond Liquidity,'' 
Financial Industry Regulatory Authority (FINRA), Office of the Chief 
Economist Research Note, December 2015.
---------------------------------------------------------------------------
    However, while acknowledging that some key measures do not 
show a decline in liquidity, we must recognize that our ability 
to measure market liquidity is imperfect. We have less data on 
dealer-to-customer trading in Treasury markets than in the 
interdealer market, and, given the nature of the corporate bond 
market, estimates of liquidity are based on transactions rather 
than on direct observations of quotes to buy or sell these 
bonds. We have heard the concerns from market participants that 
they may not be able to buy or sell large quantities of 
securities in a timely fashion. The Federal Reserve is taking 
these concerns about market liquidity seriously. We are 
committed to analyzing liquidity conditions across a wide array 
of financial markets as market liquidity is important for the 
conduct of monetary policy, the health of the financial system 
and financial stability. Federal Reserve staff regularly assess 
and monitor liquidity conditions on an ongoing basis for all of 
the reasons cited.
    Federal Reserve Board staff have also been involved in 
several projects on market liquidity both internally and with 
other U.S. Government agencies. Internally, staff have studied 
and are continuing to study whether there has been a decline in 
secondary market liquidity in the fixed-income markets. 
Although we have not found strong evidence of a significant 
deterioration in day-to-day liquidity, it is possible that 
changes in the structure of markets have made liquidity less 
resilient. This is more difficult to analyze because it 
involves the study of relatively infrequent events. Among the 
factors we have looked at, algorithmic traders have become more 
prevalent in the Treasury market, and the share of bond 
holdings held by open-end mutual funds, some of which provide 
significant liquidity transformation, has grown significantly 
in the post-crisis period. Internal work has explored the 
importance of these factors, and it has also focused on changes 
in the broker dealer business model and on the potential impact 
of regulatory changes on market liquidity. We note that staff 
at the Federal Reserve Bank of New York have also done a number 
of studies on market liquidity and have recently published some 
of this work
online.\2\
---------------------------------------------------------------------------
    \2\ http://libertystreeteconomics.newyorkfed.org/2016/02/
continuing-the-conversation-on-liquidity.html#.Vs3HdXIUWmR.
---------------------------------------------------------------------------
    Federal Reserve staff have also played a key role in the 
interagency work on the events of October 15, 2014, when fixed-
income markets experienced a sudden and extreme increase in 
market
volatility.\3\ Staff also continue to engage actively with the 
U.S. Treasury, the Commodity Futures Trading Commission, and 
the Securities and Exchange Commission (SEC) on work examining 
longer term changes in fixed-income market structure and their 
potential impact on market liquidity.
---------------------------------------------------------------------------
    \3\ http://www.federalreserve.gov/newsevents/press/other/
20150713a.htm.

Q.4. Chair Yellen, can you let me know Governor Tarullo's 
precise responsibilities at the Fed, how you work with Governor 
Tarullo in his execution of those responsibilities, and can you 
commit to me that you will work with whomever President Trump 
nominates to serve as the Vice Chair for Supervision at the 
---------------------------------------------------------------------------
Fed?

A.4. As you know, among the duties assigned by Congress to the 
Federal Reserve Board (Board) is responsibility for promoting a 
safe, sound, and stable financial system that supports the 
growth and stability of the U.S. economy. The Board as a whole 
is charged with this important duty and is held accountable by 
Congress and the taxpayer for carrying out this responsibility 
continuously and under all circumstances. In order to better be 
able to carry out its responsibilities, the Board would welcome 
action by the President and the Senate to appoint and confirm a 
Vice Chairman for Supervision as well as to fill the other 
vacancies on the Board.
    To update you on our internal leadership, as you may know, 
Governor Jay Powell is now Chairman of the Federal Reserve 
Board's Committee on Supervision and Regulation. As a longtime 
member of the committee and a Governor steeped with financial 
services experience, I believe Governor Powell will serve as an 
excellent chairman. As I have indicated in my testimony, upon 
confirmation, the new Vice Chairman for Supervision will assume 
the chairmanship of this committee.

Q.5. Chair Yellen, aside from the Joint Agency Frequently Asked 
Questions document circulated with supervisory letter SR-16-19, 
has the Federal Reserve conducted any research into the impact 
that the Current Expected Credit Loss (CECL) standard will have 
on capital reserves, credit availability, and the potential for 
a reduction in credit during times of economic stress? If so, 
please detail. If not, why not?

Q.5.a. While CECL is designed to help prevent the credit 
bubbles such as the one that fueled events surrounding the 2008 
financial crisis, many have expressed concerns given the need 
for a financial institution to account for losses on the life 
of a loan at the time of origination and thus the capital 
reserves held against those losses-that in times of economic 
stress, financial institutions may reduce lending exacerbating 
the economic stress. What has the Federal Reserve done to 
address this concern and has the Federal Reserve discussed this 
with the other Federal financial regulators?

A.5.a. The Financial Accounting Standards Board (FASB) issued 
the final Current Expected Credit Loss (CECL) standard on June 
16, 2016, with the earliest mandatorily effective date of 
January 1, 2020, for calendar year-end SEC registrants. We 
followed the FASB's CECL standard during its development and 
will continue to do so through implementation. One of the 
stated intents of the CECL standard is to align the accounting 
with the economics of lending by requiring banks and other 
lending institutions to record the full amount of credit losses 
that are expected over the life of a loan on a more timely 
basis. There was a general belief that the existing accounting 
framework resulted in loan loss allowances that were ``too 
little, too late'' and that the accounting framework should be 
changed to address this weakness. This goal is accomplished in 
part by requiring that the allowance reflects losses a firm 
expects to experience over the remaining life of their loans 
instead of unduly delaying recognition until the point where 
losses have already been incurred. The CECL standard also 
requires incorporation of a reasonable and supportable forecast 
of future conditions allowing firms to incorporate on a more 
timely basis early indicators of de-
terioration in credit quality such as loosening underwriting
standards.
    Since the FASB's final issuance of the CECL standard, we 
have established various groups to conduct research on the 
impact of the CECL standard on loan loss provisioning, 
regulatory capital, and the availability of credit through the 
economic cycle. We are in the earlier phases of our research 
given that FASB issued the CECL standard in June 2016. We are 
working closely with other U.S. Federal financial institution 
regulators to monitor the implementation of the CECL standard 
and its micro-prudential and macroprudential impacts. We meet 
on a regular basis to ensure consistent resolution of key 
issues and timely communication to the industry.

Q.5.b. The annual Comprehensive Capital Analysis and Review 
(CCAR) and Dodd-Frank Stress Tests (DFAST) require a covered 
financial institution to project potential losses under each 
scenario for eight quarters into the future. Starting in 2018, 
this eight quarter projection will begin to run until January 
2020, the date at which CECL would begin implementation. While 
CCAR does not currently require calculations based upon future 
changes to the accounting rules, there is uncertainty about 
whether the Federal Reserve will require institutions to 
essentially run two sets of calculations for each scenario, one 
under the Allowance for Loan and Lease Losses (ALLL) and one 
under CCAR. How does the Federal Reserve plan to implement CECL 
into CCAR in 2018? Will covered financial institutions need to 
prepare two sets of calculations based on differing accounting 
standards for each scenario? Please describe in detail how the 
Federal Reserve intends to address this matter.

A.5.b. On January 6, 2017, we provided instructions to firms to 
exclude the effect of the CECL standard in 2018 Dodd-Frank Act 
Stress Tests/Comprehensive Capital Analysis Review (DFAST/
CCAR). In past CCAR submissions, bank holding companies were 
instructed not to reflect the adoption of new accounting 
standards in their projections unless a firm had already 
adopted the accounting standard for financial reporting 
purposes. For 2018 DFAST/CCAR, consistent with previous 
guidance, we instructed firms to exclude the effect of the CECL 
standard.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE FROM JANET L. 
                             YELLEN

Q.1. Madame Chair, currently among all the financial 
institutions under the Federal Reserve's supervision:

Q.1.a. How much are all the member institutions combined 
holdings in Total Risk-Based Capital?

A.1.a. The Federal Reserve is the consolidated supervisor of 
all U.S. bank holding companies and savings and loan holding
companies (U.S. depository institution holding companies), as 
well as the supervisor for State member banks. The Federal 
Reserve Board's (Board) capital rules, which include the 
requirement to hold a minimum amount of total (risk-based) 
capital, apply to all State member banks and to certain bank 
holding companies and savings and loan holding companies.\1\ 
The aggregate amount of total capital held by U.S. depository 
institution holding companies that are subject to the Board's 
capital rules at the consolidated level is approximately $2.007 
trillion as of December 31, 2016.\2\ The aggregate amount of 
total capital held by State member banks is approximately 
$272.3 billion as of December 31, 2016.\3\
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    \1\ Total capital is defined in the Board's capital rules under 12 
CFR 217.20.
    \2\ This figure reflects the aggregate value of the total capital 
as reported by U.S. holding companies subject to consolidated capital 
requirements, including bank holding companies, savings and loan 
holding companies, and intermediate holding companies of foreign 
banking organizations, on Schedule HC-R of the Consolidated Financial 
Statements for Holding Companies report (FR Y-9C).
    \3\ This figure reflects the aggregate value of the total capital 
as reported by State member banks on Schedule RC-R of the Call Report 
(Consolidated Reports of Condition and Income for a Bank with Domestic 
and Foreign Offices (FFIEC 031) and Consolidated Reports of Condition 
and Income for a Bank with Domestic Offices Only (FFIEC 041)).

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Q.1.b. How much of it is comprised of Common Equity Tier 1?

A.1.b. Approximately $1.554 trillion (77 percent of aggregate 
total capital) held by U.S. depository institution holding 
companies described above is in the form of common equity tier 
1 (CET1) capital.\4\ Approximately $247.4 billion (91 percent 
of the aggregate total capital) held by State member banks is 
in the form of CET1 capital.
---------------------------------------------------------------------------
    \4\ CET1 capital is defined in the Board's capital rules under 12 
CFR 217.20(b).

Q.1.c. Are there comparable figures that you can disclose from 
---------------------------------------------------------------------------
2007?

A.1.c. U.S. bank holding companies reported an aggregate amount 
of approximately $1.017 trillion in total capital as of 
December 31, 2007.\5\ The CET1 capital measure was not in 
effect as of year-end 2007. However, we estimate that, as of 
December 31, 2007, approximately $523.8 billion (52 percent of 
the total capital) held by U.S. bank holding companies was in a 
form that would qualify as CET1 capital under the current 
capital rules of the Board.\6\ State member banks reported an 
aggregate amount of approximately $148.3 billion in total 
capital as of December 31, 2007.\7\ Using the same methodology 
as used for U.S. bank holding companies, we estimate that, as 
of December 31, 2007, approximately $114.6 billion (77 percent 
of the total capital) held by State member banks was in a form 
that would qualify as CET1 capital under the current capital 
rules of the Board.
---------------------------------------------------------------------------
    \5\ This figure reflects the aggregate value of the total capital 
as reported by U.S. bank holding companies that were subject to 
consolidated capital requirements on Schedule HC-R of the Consolidated 
Financial Statements for Holding Companies report (FR Y-9C), as of 
December 31, 2007. The Board's revised regulatory capital framework, 
adopted in 2013, amended the definition of total capital. Note that 
Title III of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act) transferred to the Board the supervisory functions 
of the Office of Thrift Supervision related to savings and loan holding 
companies beginning on July 21, 2011. Thus, 2007 data do not reflect 
capital requirements for these firms. In addition, intermediate holding 
companies of foreign banking organizations were formed pursuant to the 
Board's Regulation YY, which implements the enhanced prudential 
standards mandated by the Dodd-Frank Act. Thus, 2007 data similarly do 
not reflect capital requirements for these firms.
    \6\ This methodology used to create this estimate is consistent 
with that used by the Federal Reserve in 2012 to estimate the impact of 
changes to the regulatorily capital rule. That methodology was made 
publicly available on November 14, 2012, as part of remarks made to the 
Senate Committee on Banking, Housing, and Urban Affairs by Michael 
Gibson, Director of the Division of Banking Supervision and Regulation 
at the Board. Those remarks and the methodology used by the Federal 
Reserve (see Attachment A) are available here: https://
www.federalreserve.gov/newsevents/testimony/gibson20121114a.htm.
    \7\ This figure reflects the aggregate value of the total capital 
as reported by State member banks on Schedule RC-R of the Call Report 
(Consolidated Reports of Condition and Income for a Bank with Domestic 
and Foreign Offices (FFIEC 031) and Consolidated Reports of Condition 
and Income for a Bank with Domestic Offices Only (FFIEC 041)). The 
Board's revised regulatory capital framework, issued in 2013, amended 
the definition of what qualifies as total capital.

Q.2. Madame Chair, I am grateful for all the hard work that you 
and your colleagues at the Federal Reserve have undertaken. 
However, I am concerned about the rising levels of global debt. 
Since 2007, governments alone have added over $25 trillion in 
debt, with the advanced economics contributing to 75 percent of 
the increase. The combined global household, corporate, and 
---------------------------------------------------------------------------
government debt has exceeded $200 trillion.

  a. LAt $200 trillion in global debt, global debt is leveraged 
        at nearly 3 times as much as the global economy. Do you 
        have concerns that the world is overleveraged?

  b. LWhere do you see the systemic risks in the global 
        economy?

      i. LChinese corporate debt?

      ii. LGreek debt default?

      iii. LCapital flight from emerging markets as the Fed and 
        Bank of England raise rates?

      iv. LJapanese governmental debt?

A.2.a.-A.2.b. Rising debt levels are a concern to the extent 
that borrowers could face difficulty servicing that debt if 
their incomes decline or the interest rates that they pay 
increase. Debt servicing can also potentially crowd out other 
spending, thereby placing a drag on the economy.
    Since the global financial crisis, debt has grown in many 
countries. Much of that growth reflects increases in sovereign 
debt that were accumulated as governments supported their 
economies during the crisis, recession, and slow recovery. Such 
higher debt levels are a source of concern, both because they 
may signal diminished creditworthiness and because they may 
constrain governments in responding to future economic shocks. 
However, in most cases, debt remains on a sustainable path as 
evidenced by the very low level of sovereign bond yields. In 
some countries, however, sovereign debt and bond yields are at 
more worrisome levels, and more concerted efforts at debt 
reduction are needed.
    In addition to sovereign debt, corporate debt levels have 
also increased in a number of countries, especially emerging 
market economies. By many assessments, the risks associated 
with high leverage do not appear to be widespread across 
countries and sectors. In addition, rising interest rates in 
advanced economies by themselves should not be problematic for 
emerging market borrowers if they are associated with stronger 
global economic activity. However, a sudden reversal in 
sentiment that leads to a revaluation of risk-return tradeoffs 
and a rapid reversal in capital flows can certainly have 
adverse consequences, especially for highly leveraged emerging 
market firms. This is a risk that we continue to monitor, 
although U.S. investors' direct exposures to the emerging 
market corporate sector remain fairly limited.
    U.S. investors' direct exposures to China's corporate debt 
are also low, but China is a significant part of the global 
economy, and its corporate debt has risen rapidly in recent 
years. China's corporate debt is currently estimated to be 
about 170 percent of gross
domestic product (GDP), which is high for an emerging market 
economy. That poses a potential vulnerability for the Chinese 
economy, particularly to the extent that this debt has financed 
low-
return investments. A mitigating factor is that policymakers 
have substantial resources and tools to address the issue, 
especially
because the banks and most of the entities borrowing are
state-owned.
    Greece still faces daunting financial and economic 
challenges, including its very high and growing level of public 
debt. European authorities acknowledge that Greek public debt 
sustainability remains a serious concern, and that a resolution 
will require further difficult steps--including additional 
Greek reforms and additional debt relief from Greece's 
creditors. It is encouraging that Greek and European 
authorities have reached preliminary agreement on a package of 
economic reforms that Greece must implement to receive another 
disbursement of official financing.
    Japan's government debt is equal to about 200 percent of 
GDP, the highest among the G-7 economies. Ratings agencies have 
cited that high debt level in downgrading the rating of 
Japanese government bonds over the past few years. The burden 
of that debt is
currently reduced by the extremely low interest rates that the 
government pays, with 10-year Japanese government bond yields 
around zero. Domestic Japanese investors, including banks and 
insurance companies, are willing to hold most of this debt at 
those low interest rates. Eventual rises in Japanese bond 
yields would increase the burden of that debt, but if the yield 
rises are driven by improving economic growth and rising 
prices, tax revenues would rise as well. Eventually, action 
will be needed to reduce the debt.

Q.3.a. Madame Chair, I want to focus on the issue of currency 
revaluations. With the election of President Trump and a 
likelihood of tax reform and an infrastructure package, the 
market is already building in higher inflation prospects into 
the value of the dollar. Now, we have discussions of a border-
adjustment tax that some wish to implement.
    Do you believe that the authors of the Border Adjustment 
Tax are correct, that the imposition of a 20 percent tax on 
imports would result in an immediate 20-25 percent appreciation 
of the dollar or do you believe the effect of a border tax on 
the currency market is harder to both calculate and anticipate?

A.3.a. There is now substantial literature on the potential 
effects of the border adjustment tax. While there is a logic 
for why the dollar might fully adjust to offset the effects on 
U.S. trade and import prices, it is unclear whether that would 
happen in practice. Based on experience looking at foreign 
exchange markets and the many factors that can affect them, 
there is considerable uncertainty about how exchange rates 
would evolve following the imposition of a border adjustment 
tax.

Q.3.b. What is the effect of an overnight 20 percent 
appreciation of the dollar on the global economy, especially 
the emerging markets?

A.3.b. The economic effects of exchange rate movements will 
depend in part on the factors behind those movements. For 
example, if dollar appreciation were caused by a stronger 
outlook for U.S. economic growth, then one might expect a 
relatively favorable
impact on the global economy. All else equal, however, dollar 
appreciation makes U.S. goods more expensive abroad and foreign 
goods cheaper in the United States. Over time this should have 
several effects. First, it should restrain U.S. exports and 
boost U.S. imports, reducing U.S. aggregate demand and economic 
activity. Second, it should put some downward pressure on 
import prices in the United States and eventually may put some 
upward pressure on prices of some consumer goods. The 
counterpart of dollar appreciation is the depreciation of 
foreign currencies. Currency depreciation would tend to boost 
the net exports of our trading partners, but that positive 
effect on their economies could be offset by negative impacts 
from a tightening of financial conditions, especially in 
emerging market economies, as capital inflows slow and some 
central banks are forced to tighten monetary policy to resist 
rising inflation. In addition, some emerging-market 
corporations that have debt denominated in dollars could face 
difficulties.

Q.3.c. If the dollar appreciates as anticipated, would there be 
substantial risks to U.S. pension funds and other U.S. 
investors that hold foreign assets?

A.3.c. U.S. investors hold nearly $8 trillion in foreign-
currency denominated financial assets and nearly $4 trillion in 
foreign-currency denominated foreign direct investment. Thus a 
20 percent appreciation of the dollar, were it to occur, could 
generate significant wealth losses. These foreign-currency 
assets are held by a variety of U.S. investors, including 
households in the form of mutual fund investments, as well as 
by pension funds, insurance companies, and other financial 
intermediaries. For pension funds specifically, foreign-
currency assets are a relatively small portion of their $19 
trillion in total financial assets. However, for U.S. investors 
more generally, a decline in wealth would be expected to have 
some effect in reducing spending. Again, it is worth noting, 
there is much uncertainty about these potential outcomes.

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