[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 10, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-71
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
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Page
Hearing held on:
February 10, 2016............................................ 1
Appendix:
February 10, 2016............................................ 55
WITNESSES
Wednesday, February 10, 2016
Yellen, Hon. Janet L., Chair, Board of Governors of the Federal
Reserve System................................................. 5
APPENDIX
Prepared statements:
Yellen, Hon. Janet L......................................... 56
Additional Material Submitted for the Record
Yellen, Hon. Janet L.:
Monetary Policy Report of the Board of Governors of the
Federal Reserve System, dated February 10, 2016............ 64
Written responses to questions for the record submitted by
Representative Fincher..................................... 116
Written responses to questions for the record submitted by
Representative Hill........................................ 118
Written responses to questions for the record submitted by
Representative Hultgren.................................... 120
Written responses to questions for the record submitted by
Representative Luetkemeyer................................. 124
Written responses to questions for the record submitted by
Representative Lynch....................................... 128
Written responses to questions for the record submitted by
Representative Messer...................................... 130
Written responses to questions for the record submitted by
Representative Mulvaney.................................... 131
Written responses to questions for the record submitted by
Representative Murphy...................................... 134
Written responses to questions for the record submitted by
Representative Sherman..................................... 135
Written responses to questions for the record submitted by
Representative Tipton...................................... 137
Written responses to questions for the record submitted by
Representative Waters...................................... 139
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Wednesday, February 10, 2016
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Lucas,
Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick,
Luetkemeyer, Duffy, Hurt, Stivers, Stutzman, Mulvaney,
Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Messer,
Schweikert, Guinta, Tipton, Williams, Poliquin, Love, Hill,
Emmer; Waters, Maloney, Velazquez, Sherman, Meeks, Hinojosa,
Clay, Lynch, Scott, Green, Cleaver, Moore, Ellison, Perlmutter,
Himes, Carney, Sewell, Foster, Murphy, Delaney, Sinema, Beatty,
Heck, and Vargas.
Chairman Hensarling. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
This hearing is for the purpose of receiving the semiannual
testimony of the Chair of the Board of Governors of the Federal
Reserve System on the conduct of monetary policy and the state
of the economy. I now recognize myself for 3 minutes for an
opening statement.
Last month, we all heard President Obama attempt to take an
economic victory lap in his State of the Union speech, but the
American people are having none of it. They are tired of
hearing from the out-of-touch ruling class in Washington just
how good things are when their realities are vastly different.
So, Chair Yellen, notwithstanding the fact that you are a
Presidential appointee, I hope you do not follow suit this
morning.
The reality is, since the President was elected and the Fed
embarked upon its unprecedented quantitative easing in zero
real interest rate policies, working families' paychecks have
declined. Their net worth has declined.
The real unemployment rate continues to hover around 10
percent. Approximately one in six is on food stamps and almost
15 percent live in poverty. There hasn't been a single year
when economic growth has reached 3 percent.
As one published report on this failure noted, ``There is
no parallel for this since the end of World War II, maybe not
since the beginning of the Republic.'' Last year's less than 1
percent GDP growth just punctuates the matter for struggling
working families.
I will not use this hearing to either praise or condemn the
Fed's decision to raise by 25 basis points interest rates in
December, nor do I think it appropriate to advise the FOMC on
how to vote during its next meeting. But, given that Article I,
Section 8 of the Constitution gives Congress the power to coin
money and regulate the value thereof, I do feel compelled to
demand that the Fed adopt a monetary policy course that is
predictable, transparent, sustainable, and, barring terribly
exigent circumstances, to stick with it.
This is part of the rationale underlying the House-passed
Fed Oversight Reform and Modernization Act, known as the FORM
Act. To use Austrian economist Friedrich Hayek's phrase: ``It
is fatal conceit to believe that the Fed is capable of
micromanaging our economy to some state of economic nirvana.''
We now have at least 8 years of recent history to prove
otherwise.
Most importantly, no amount of monetary policy can
substitute for sound fiscal policy. Unless and until the
crushing regulatory onslaught of Obamacare, the Dodd-Frank Act,
and the EPA is replaced with greater opportunity, competition,
and innovation, the Fed cannot substantially help our economy;
it can only hurt it.
It can hurt it by continuing to serve as the financier and
facilitator or our unsustainable Federal debt. Just last month,
the Congressional Budget Office yet again warned of our
unsustainable debt in its latest baseline release, which
references the debt 199 times.
The Fed can hurt our economy by continuing to force
investors to chase yield, thus inflating dangerous asset
bubbles, the deflating of which we are likely seeing in our
turbulent equity markets today.
The Fed can continue to hurt our economy by failing to
unwind its unprecedented balance sheet. By growing at almost
500 percent, the Fed itself has become one of our largest
sources of systemic risk.
Finally, separate and apart from monetary policy,
alarmingly, the Fed, under Dodd-Frank, can now functionally
control virtually every major corner of the financial services
sector of our economy. It does so with almost no accountability
or transparency. Not only does this harm economic growth, it is
an affront to due process, checks and balances, and the rule of
law.
The American people should again be duly alarmed that they
may wake up one day to discover that our central bankers have
become our central planners.
The Chair recognizes the ranking member of the committee,
Ms. Waters, for 3 minutes for an opening statement.
Ms. Waters. Thank you, Mr. Chairman, for this meeting here
today.
But I would really like to thank Chair Yellen for being
here with us today to discuss the state of the economy and your
role in ensuring that a full recovery is achieved for all. As a
result of your Herculean efforts, the efforts of Democrats in
Congress, and the Obama Administration, we have truly made
tremendous progress since the darkest days of the financial
crisis.
Over the past 71 consecutive months, our economy has added
more than 14 million private sector jobs, and the unemployment
rate has fallen by more than half. But despite this commendable
progress, significant work remains.
Wages have yet to see real gains: 7.8 million workers
remain jobless; 6 million workers are involuntarily working
part-time jobs; and another 2 million Americans indicate they
would join the workforce if only the economy was strong enough
to support them.
With inflation consistently running below target, I wonder
whether the expected path for further raising rates over the
course of 2016 may overemphasize concerns about inflation and
underestimate the weakness in our labor market.
I look forward to your comments on this issue.
Absent a full recovery, I fear that further raising rates
may be a step that takes us further away from what is needed to
ensure that the needs of vulnerable populations are met. At
today's hearing, I also hope we can explore the ramifications
of an exit strategy that relies heavily on paying private
sector banks not to lend the funds they hold in reserve and to
discuss reasonable alternatives that may exist that do not
involve a massive transfer of wealth from the Federal Reserve
to private sector banks.
I just wonder if it is possible for these funds to be used
for workers who are really worried about whether or not they
are going to have a pension, or if there can be some social
responsibility investment with these funds to help workers in
vulnerable populations?
Finally, many of us have been very patient about the
implementation of the living wills. As you know, this is a
requirement in the Dodd-Frank Act, and it is designed to end
too-big-to-fail.
And I know that you have to give careful consideration to
all of this, but after not one, not two, but five submissions,
the Federal Reserve has yet to impose consequences for living
wills that are not credible. What can we do about this? It is
time we understand that we have given a lot of opportunities to
the banks to get it right and they haven't done that.
Chair Yellen, I look forward to hearing your views on the
economy and I welcome the opportunity to discuss how we can
more effectively elevate the needs of the most vulnerable
populations and promote a safe and sound financial system. And
I want you to know that our audience today is made up of
workers who really want to hear you talk about this, so I would
welcome opportunities to address some of their concerns.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from South Carolina, Mr. Mulvaney, the vice chairman of our
Monetary Policy and Trade Subcommittee, for 2 minutes.
Mr. Mulvaney. Chair Yellen, when I sat down last night to
get ready for this hearing, it occurred to me that I could ask
you about a bunch of things today.
I could ask you about your plans on interest rates and how
you arrived at the decisions that you are going to make, what
you used to arrive at those decisions. I could ask about your
role at the Fed in regulating financial institutions. Dodd-
Frank, for example, has now given you regulatory powers over
banks, nonbanks, clearinghouses, and thrift holding companies.
It also struck me I could even ask you about the role of
the Fed, and more specifically the New York branch, in the
possibly misleading statements that I believe Secretary Lew
made to two congressional committees regarding the Fed and the
Treasury's role in intentionally withholding information from
Congress about plans to prioritize debt payments during the
last government shutdown.
And then, I realized that is too much. That is too much not
just to ask you in the few minutes that we are going to have
today; it is just too much for you to be doing. The Fed has,
like so many other parts of our government, grown way beyond
its original intended scope.
When Congress chartered the Bank in 1913, we asked it to do
one thing: keep the financial system, and primarily currency,
stable. Today, the Fed is involved in everything from how much
purchasing power these people have, to where they can bank, how
they can invest and save, and, to believe some, whether or not
they even have a job.
Maybe you shouldn't be involved in trying to get us to full
employment, something that your own economics orthodoxy teaches
us you don't have the ability to do, but only fiscal policy can
do. Maybe you shouldn't be involved with regulating mortgages
and credit cards. And you certainly shouldn't be involved in
political decisions to intentionally keep Congress in the dark
about how this country is going to pay back its principal and
its interest on the debt.
So I hope today we get a chance to talk about a lot of
things--sound money, the dual mandate, full employment,
regulations, the debt ceiling, community banks, the impact of
zero rates on retirees, asset bubbles--in the hopes that at the
end we discover that perhaps the time has come to get back to
basics, and one and one thing only, which is long-term price
stability.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore, the ranking member of our Monetary Policy and Trade
Subcommittee, for 2 minutes.
Ms. Moore. Thank you so much, Mr. Chairman, and welcome
back, Chair Yellen.
As you can tell from the opening statements, there is
plenty to discuss since your last appearance before this
committee. I supported your rate increase in December. I still
do. And I think you are providing a lot of credibility to
markets with your leadership.
However, these seem to be economic times that are destined
to be interesting. Since December we have witnessed a lot of
global economic turmoil, and now it is turning up in the United
States, as reflected in our stock market.
Foreign central banks are moving to ease rates even as we
are moving to try to tighten them. And I am not saying that we
need to harmonize our monetary policy, but I am very interested
in hearing how you and the Fed are working with foreign central
banks to get in front of these ominous trends.
As you have stated so many times before, monetary policy is
a limited tool. But if we are going to grow our economy and
keep on track, and as I look at the folk in green in the
audience, it causes me to realize that Members of Congress have
to do their part, too, and not just throw it in all in the lap
of the Fed. We have to embrace proven growth strategies like
tackling poverty, especially among women, by providing
vocational training so that they can qualify and compete for
sustainable jobs with living wages.
And with that, I yield back the balance of my time.
Chairman Hensarling. The gentlelady yields back.
Today, we welcome the testimony of the Honorable Janet
Yellen, Chair of the Federal Reserve. Chair Yellen has
previously testified before this committee so I believe she
needs no further introduction.
Without objection, Chair Yellen, your written statement
will be made a part of the record. You are now recognized for 5
minutes to give an oral presentation of your testimony.
Thank you.
STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mrs. Yellen. Thank you. Chairman Hensarling, Ranking Member
Waters, and 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 discuss the current economic
situation and outlook before turning to monetary policy.
Since my appearance before this committee last July, the
economy has made further progress toward the Federal Reserve's
objective of maximum employment. And while inflation is
expected to remain low in the near term, in part because of
further declines in energy prices, the Federal Open Market
Committee (FOMC) expects that inflation will rise to its 2
percent objective over the medium term.
In the labor market, the number of payroll jobs rose 2.7
million in 2015, and posted a further gain of 150,000 in
January of this year. The cumulative increase in employment
since its trough in early 2010 is now more than 13 million
jobs.
Meanwhile, the unemployment rate fell to 4.9 percent in
January, 0.8 of a percentage point below its level a year ago
and in line with the median of FOMC participants' most recent
estimates of its longer-run normal level.
Other measures of labor market conditions have also shown
solid improvement, with noticeable declines over the past year
in the number of individuals who want to work, and are
available to work, but have not actively searched recently, and
in the number of people who are working part-time but would
rather work full-time.
However, these measures remain above the levels seen prior
to the recession, suggesting that some slack in labor markets
remains. Thus, while labor market conditions have improved
substantially, there is still room for further sustainable
improvement.
The strong gains in the job market last year were
accompanied by a continued moderate expansion in economic
activity. U.S. real gross domestic product is estimated to have
increased about 1.75 percent in 2015.
Over the course of the year, subdued foreign growth and the
appreciation of the dollar restrains net exports. In the fourth
quarter of last year, growth in the gross domestic product is
reported to have slowed more sharply, to an annual rate of just
0.75 percent.
Again, growth was held back by weak net exports as well as
by a negative contribution from inventory investment.
Although private domestic final demand appears to have
slowed somewhat in the fourth quarter, it has continued to
advance. Household spending has been supported by steady job
gains and solid growth in real disposable income, aided in part
by the declines in oil prices.
One area of particular strength has been purchases of cars
and light trucks. Sales of these vehicles in 2015 reached their
highest level ever.
In the drilling and mining sector, lower oil prices have
caused companies to slash jobs and sharply cut capital outlays.
But in most other sectors, business investment rose over
the second half of last year, and home-building activity has
continued to move up on balance, although the level of new
construction remains well below the longer-run levels implied
by demographic trends.
Financial conditions in the United States have recently
become less supportive of growth, with declines in broad
measures of equity prices, higher borrowing rates for riskier
borrowers, and a further appreciation of the dollar. These
developments, if they prove persistent, could weigh on the
outlook for economic activity in the labor market, although
declines in longer-term interest rates and oil prices provide
some offset.
Still, ongoing employment gains and faster wage growth
should support the growth of real incomes and, therefore,
consumer spending. And global economic growth should pick up
over time, supported by highly accommodative monetary policies
abroad.
Against this backdrop, the Committee expects that with
gradual adjustments in the stance of monetary policy, economic
activity will expand at a moderate pace in the coming years,
and that labor market indicators will continue to strengthen.
As is always the case, the economic outlook is uncertain.
Foreign economic developments in particular pose risks to U.S.
economic growth. Most notably, although recent economic
indicators do not suggest a sharp slowdown in Chinese growth,
declines in the foreign exchange value of the renminbi have
intensified uncertainty about China's exchange rate policy and
the prospects for its economy.
This uncertainty led to increased volatility in global
financial markets and, against the backdrop of persistent
weakness abroad, exacerbated concerns about the outlook for
global growth. These growth concerns, along with strong supply
conditions and high inventories, contributed to the recent fall
in the prices of oil and other commodities.
In turn, low commodity prices could trigger financial
stresses in commodity-exporting economies, particularly in
vulnerable emerging market economies and for commodity-
producing firms in many countries.
Should any of these downside risks materialize, foreign
activity and demand for U.S. exports could weaken, and
financial market conditions could tighten further. Of course,
economic growth could also exceed our projections for a number
of reasons, including the possibility that low oil prices will
boost U.S. economic growth more than we expect.
At present, the Committee is closely monitoring global
economic and financial developments as well as assessing their
implications for the labor market and inflation and the balance
of risk to the outlook.
As I noted earlier, inflation continues to run below the
Committee's 2-percent objective. Overall, consumer prices, as
measured by the price index for personal consumption
expenditures, increased just 0.5 percent over the 12 months of
2015.
To a large extent, the low average pace of inflation last
year can be traced to the earlier steep declines in oil prices
and the prices of other imported goods. And, given the recent
further decline from the prices of oil and other commodities as
well as the further appreciation of the dollar, the Committee
expects inflation to remain low in the near term.
However, once oil and import prices stop falling, the
downward pressure on domestic inflation from those sources
should wane. And as the labor market strengthens further,
inflation is expected to rise gradually to 2 percent over the
median term.
In light of the current shortfall of inflation from 2
percent, the Committee is carefully monitoring actual and
expected progress toward its inflation goal. Of course,
inflation expectations play an important role in the inflation
process, and the Committee's confidence in the inflation
outlook depends importantly on the degree to which longer-run
inflation expectations remain anchored.
It is worth noting in this regard that market-based
measures of inflation compensation have moved down to
historically low levels. Our analysis suggests that changes in
risk and liquidity premiums over the past year-and-a-half
contributed significantly to these declines. Some survey
measures of longer-run inflation expectations are also at the
low end of their recent rages. Overall, however, they have been
reasonably stable.
Turning to monetary policy, the FOMC conducts policy to
promote maximum employment and price stability, as required by
our statutory mandate from the Congress. Last March, the
Committee stated that it would be appropriate to raise the
target range for the Federal funds rate when it had seen
further improvement in the labor market and was reasonably
confident that inflation would move back to its 2 percent
objective over the medium term.
In December, the Committee judged that these two criteria
had been satisfied and decided to raise the target range for
the Federal funds rate 0.25 percentage point to between 0.25
and 0.5 percent. This increase marked the end of the 7-year
period during which the Federal funds rate was held near zero.
The Committee did not adjust the target range in January.
The decision in December to raise the Federal funds rate
reflected the Committee's assessment that even after a modest
reduction in policy accommodation, economic activity would
continue to expand at a moderate pace and labor market
indicators would continue to strengthen. Although inflation was
running below the Committee's longer-run objective, the FOMC
judged that much of the softness in inflation was attributable
to transitory factors that are likely to abate over time, and
the diminishing slack in labor and product markets would help
move inflation toward 2 percent.
In addition, the Committee recognized that it takes time
for monetary policy actions to affect economic conditions. If
the FOMC delayed the start of policy normalization for too long
it might have to tighten policy relatively abruptly in the
future to keep the economy from overheating and inflation from
significantly overshooting its objective. Such an abrupt
tightening could increase the risk of pushing the economy into
recession.
It is important to note that even after this increase, the
stance of monetary policy remains accommodative. The FOMC
anticipates that economic conditions will evolve in a manner
that will warrant only gradual increases in the Federal funds
rate. In addition, the Committee expects that the Federal funds
rate is likely to remain for some time below the levels that
are expected to prevail in the longer run.
This expectation is consistent with the view that the
neutral, nominal Federal funds rate, defined as the value of
the Federal funds rate that would be neither expansionary nor
contractionary if the economy was operating near potential, is
currently low by historical standards and is likely to rise
only gradually over time.
The low level of the neutral Federal funds rate may be
partly attributable to a range of persistent economic
headwinds, such as limited access to credit for some borrowers,
weak growth abroad, and the significant appreciation of the
dollar that have weighed on aggregate demand.
Of course, monetary policy is by no means on a preset
course. The actual path of the Federal funds rate will depend
on what incoming data tell us about the economic outlook, and
we will regularly reassess what level of the Federal funds rate
is consistent with achieving and maintaining maximum employment
and 2 percent inflation.
In doing so, we will take into account a wide range of
information, including measures of labor market conditions,
indicators of inflation pressures and inflation expectations,
and readings on financial and international developments. In
particular, stronger growth or a more rapid increase in
inflation than the Committee currently anticipates would
suggest that the neutral Federal funds rate was rising more
quickly than expected, making it appropriate to raise the
Federal funds rate more quickly as well.
Conversely, if the economy were to disappoint, a lower path
of the Federal funds rate would be appropriate. We are
committed to our dual objectives and we will adjust policy as
appropriate to foster financial conditions consistent with
their attainment over time.
Consistent with its previous communications, the Federal
Reserve used interest on excess reserves and overnight reversed
repurchase (RRP) operations to move the Federal funds rate into
the new target range. The adjustment to the interest rate on
excess reserves (IOER) rate has been particularly important in
raising the Federal funds rate and short-term interest rates
more generally in an environment of abundant bank reserves.
Meanwhile, overnight RRP operations complement the IOER
rate by establishing a soft floor on money market interest
rates. The IOER rate and the overnight RRP operations allowed
the FOMC to control the Federal funds rate effectively without
having to first shrink its balance sheet by selling a large
part of its holdings of longer-term securities.
The Committee judged that removing monetary policy
accommodation by the traditional approach of raising short-term
interest rates is preferable to selling longer-term assets
because such sales could be difficult to calibrate and could
generate unexpected financial market reactions. The Committee
is continuing its policy of reinvesting proceeds from maturing
Treasury securities and principal payments from agency debt and
mortgage-backed securities. As highlighted in the December
statement, the FOMC anticipates continuing this policy until
normalization of the level of the Federal funds rate is well
under way.
Maintaining our sizable holdings of longer-term securities
should help maintain accommodative financial conditions and
reduce the risk that we might need to return the Federal funds
rate target to the effective lower bound in response to future
adverse shocks.
Thank you. I will be pleased to take your questions.
[The prepared statement of Chair Yellen can be found on
page 56 of the appendix.]
Chairman Hensarling. The Chair now recognizes himself for 5
minutes for questions.
Chair Yellen, I know you are familiar with the Fed
Oversight Reform and Modernization Act, known as the FORM Act,
which was passed by the House in November. It is designed to
bring about greater transparency and accountability at the Fed,
to respect the Fed's independence but also ensure that the Fed
lets the rest of us know the variables that are used in
monetary policy and their reaction functions so that working
families can plan out their family economies.
I know that you are not a fan of the FORM Act, because I
have a letter dated November 16th that you sent to the Speaker.
In that letter, you called the Act ``a grave mistake.'' I have
another letter that describes it as an important reform.
Your letter mentions, or complains that monetary policy
would be forced to be strictly adhered to by the prescriptions
of a simple rule. My letter says the legislation does not chain
the Fed to any rule, and certainly not a mechanical rule.
Your letter says that the Act would undermine the
independence of the Fed. My letter says in no way would the
legislation compromise the Fed's independence. On the contrary,
publicly reporting a strategy helps prevent policymakers from
bending under pressure and sacrificing independence.
Your letter states that the FORM Act would ``severely
damage the U.S. economy were it to become law.'' My letter says
the new legislation would improve economic performance.
By definition, your letter is signed by you. My letter is
signed by Dr. Lars Hansen of the University of Chicago, Nobel
laureate in economics.
It is also signed by Robert Lucas, University of Chicago,
Nobel laureate in economics; Edward Prescott, Arizona State
University, Nobel laureate in economics; George Shultz, former
Secretary of the Treasury; Robert Heller, former Federal
Reserve Governor; Jerry Jordan, former President of the
Cleveland Federal Reserve Bank; William Poole, former President
of the St. Louis Federal Reserve Bank, and former member of the
Council of Economic Advisers; Michael Boskin, Stanford
University, former Chairman of the President's Council of
Economic Advisers; Charles Calomiris, Columbia University,
former consultant, Federal Reserve Board of Governors; Marvin
Goodfriend, Carnegie Mellon, former Research Director for the
Federal Reserve Board of Richmond; Allan Meltzer, Carnegie
Mellon; and John Taylor of Stanford University, former Under
Secretary of the Treasury, member of the Council of Economic
Advisers, and author of the Taylor Rule. And there are about 15
other signatories to the letter.
So, Chair Yellen, we have three Nobel prizewinners in
economics, a host of former Federal Reserve officials, and some
of the most renowned and respected economists in the country
who pretty much disagree with everything that you asserted in
your three-page missive against the FORM Act. I know you are
not a fan, but I would just caution you, Chair Yellen, that
when you use such apocalyptic and hyperbolic language, you
might consider whether or not this undercuts your credibility
as Fed Chair.
I have one question. In your testimony, Chair Yellen, in
characterizing the Fed strategy to increase policy rates, you
testified that, ``removing monetary policy accommodation by the
traditional approach is preferable to shrinking the Fed's
balance sheet,'' which now holds almost as much in Treasuries
as China and Japan do combined.
I am trying to figure out what precisely is ``traditional''
about this current approach where the Fed--and the ranking
member, I think, brought this up in her opening statement--
subsidizes deposit rates for some of the biggest banks in our
country, which can distort, as you well know, real asset
allocation and constrain economic opportunity. And the last
time I checked, as we speak, the Fed's fund rate is just above
30 basis points. You are paying banks 50 basis points for
excess reserves, which would seem to be above the market rate.
You have previously testified that this does not involve a
subsidy to the banks. It appears to be a subsidy, and it
appears to distort real asset allocation. So what is
traditional about this approach?
Mrs. Yellen. The tools that we have used to raise our
target for short-term interest rates, namely our key tool being
interest on excess reserves, is widely used by central banks as
a key tool of monetary policy. And it is the critical tool that
we need to rely on in order to adjust the level of short-term
rates to what we regard as the appropriate stance to achieve
congressionally-mandated goals.
I would point out that although we are paying interest to
banks on reserves, those reserves are financing our holdings, a
large portfolio of holdings of longer-term Treasury securities
and mortgage-backed securities on which we earn substantially
greater interest. And because of that large balance sheet, this
past year the Fed transferred back to the Treasury and to the
American taxpayers $100 billion.
Chairman Hensarling. But it is true, Chair Yellen, is it
not, that you are paying 50 basis points when the Fed funds
rate is 30 basis points?
Mrs. Yellen. It is necessary for us to raise benchmark
rates in order for a whole host of short-term interest rates--
Chairman Hensarling. That would seem to imply a subsidy to
the largest banks. My time has long since expired.
The Chair now recognizes the ranking member for 5 minutes.
Ms. Waters. Thank you, Mr. Chairman.
Chair Yellen, continuing on the discussion that was just
initiated by the Chairman, as you continue to embark on the
path of raising rates I want to explore the alternative
approaches that may exist for the Federal Reserve to do so in a
manner that does not rely so heavily on paying massive sums to
private sector banks to hold onto the reserves they maintain at
the Fed.
While the Fed paid close to $7 billion on reserves in 2015,
as the economy strengthens and rates are further increased, the
amounts paid could increase dramatically into the tens of
billions of dollars. Can you expand on why you believe that
paying interest on excess reserves is particularly important
for raising rates in the current environment and discuss
possible alternative approaches that may exist?
And if you talk about what you believe is the mandate of
Congress and how you don't have the authority for alternatives,
I want to hear more about that and what you do have the
authority to do.
Mrs. Yellen. Prior to the financial crisis, the Fed
adjusted the level of short-term interest rates through small
variations in the supply of reserves to the banking system.
Following the financial crisis, as our balance sheet expanded,
reserves became abundant, and the traditional old-fashioned
approach was no longer feasible.
Congress had debated the wisdom of giving us the tool of
paying interest on reserves for many years and decided to do so
in 2006, and then speeded up implementation in 2008. The
knowledge that we had that tool and would be able to use it
when we deemed it appropriate to begin to raise the short-term
level of interest rates, as we did in December--the knowledge
that that tool was available, as I just mentioned, the tool
that is critical to our control of short-term rates and widely
used globally, that was an important fact when we considered
all the actions that we took--the unconventional actions that
we took--to produce the decline in the unemployment rate and
improvement in the labor market that we have achieved.
So if we were denied that tool at the present time, we
would not be able to easily raise the level of short-term
rates. Until we--
Ms. Waters. However, if I may interrupt you for a moment,
are you saying that you are limited only to that action? Or do
you have the authority to make some other decisions relative to
what the interest is that you are paying to big banks? Do you
have some flexibility here?
Mrs. Yellen. We would likely, to regain effective control
of short-term interest rates, need to shrink our portfolio from
its current large level back to the kinds of levels we had
before the crisis. And we have set out over several years a
plan for how we would normalize policy that relies not on
selling long-term assets but on adjusting short-term interest
rates.
I believe that if we were to follow the plan of selling off
long-term assets, it could prove very disruptive to the
expansion. It is a strategy that I think could harm the
economic recovery, and it certainly is not what we have set out
to the public. We said we would shrink our balance sheet in a
gradual and predictable way so as to not be disruptive.
Ms. Waters. So if I may interrupt you again, you are saying
it was Congress, starting in 2006, who would have to design
this approach, and Congress could, if it decided to, take it
away as an approach that you would use even though you do not
think it would be helpful?
Mrs. Yellen. I think it would be very disruptive to the
economy and I really--I want to point out several things about
this. First of all, although the banks are earning this
interest on the excess--on the reserves that they hold, as the
level of short-term rates rises, first of all, on their
wholesale funding that many of the banks rely on, they are also
paying more to gain that funding. Eventually this will be the
mechanism that would lead, as well, to higher deposit rates to
reward savers.
And finally, I really want to emphasize that from the
taxpayers' point of view, the Federal Reserve has transferred,
since 2008 through 2015, roughly $600 billion back to Congress,
to the taxpayers, to the Treasury, funds that have contributed
importantly to financing the government, and that has only been
possible because we have a larger stock of reserves in the
banking system and, correspondingly, hold a far larger stock of
interest-bearing assets that pay in larger amounts.
Prior to the crisis, a typical level of transfers from the
Fed to the Treasury was in the order of $20 billion. For the
past 2 years, we have transferred $100 billion a year.
Ms. Waters. Thank you very much. We need to talk about this
some more.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from South Carolina, Mr. Mulvaney, the vice chairman of our
Monetary Policy and Trade Subcommittee.
Mr. Mulvaney. I thank the Chairman.
A quick follow up, Chair Yellen, on the Chairman's
question: You mentioned that using the IOER or the RRP were
traditional tools, and then you mentioned that other central
banks used them before. Have you ever used them?
Mrs. Yellen. No.
Mr. Mulvaney. Has the Federal funds rate, which I
understand now is trading on the market at about 30 basis
points, ever been--ever--below the IOER, which is now set at 50
basis points?
Mrs. Yellen. Has it ever been below?
Mr. Mulvaney. Yes, ma'am.
It is since we set the--when we were first given the power
to pay interest on reserves, we set it at 25 basis points, and
the Fed funds rate traded below it. And when we raised it to
50, the Fed funds rate moved up by 25 basis points, the amount
of the increase in IOER that continues to trade below it.
Mr. Mulvaney. All right. So your testimony is that those
are traditional tools. So let's move then to a different
discussion with that as a background.
You have in the past been a proponent, though a reserved
proponent, of a rules-based system. Back in 2012, you gave a
speech where you said, ``Why shouldn't the FOMC adopt such a
rule as a guidepost?''
The answer is that times are by no means normal now and
that simple rules that perform well under ordinary
circumstances just won't perform well.
Two years ago, you said something similar to this
committee. In response to a question about rules you said,
``The conditions facing the economy are extremely unusual. I
have tried to argue and believe strongly that while a Taylor
Rule, or something like it, provides a sensible approach in
normal times, like the Great Moderation, under current
situations it is not appropriate.''
So, that was your testimony in 2014. You gave a speech in
2012.
Here we are in 2016. You, by your own testimony, are using
traditional tools of monetary policy. Your written testimony
begins by saying that the economy has made further progress
towards the Federal Reserve's objective of maximum employment.
You go on to say that inflation is low in the near-term but it
will rise to its 2 percent objective over the median term.
Are we in normal times?
Mrs. Yellen. The economy is in many ways close to normal in
the sense that the unemployment rate has declined to levels
that most of my colleagues believe are consistent with full
employment in the longer run. And inflation, while it is below
2 percent, I do think there is a good reason to think it will
move up over time. And in that sense things are normal.
But what is not normal is that the so-called neutral level
of the Federal funds rate that I referred to in my testimony
and we discuss in the report is by no means normal. In other
words, we have needed for 7 years to hold the Federal funds
rate and--both in nominal and inflation in real terms--
inflation adjusted or real terms--at exceptionally low levels
to achieve growth averaging 2 percent or a little bit above.
Mr. Mulvaney. I am sorry to interrupt, but I do want to
get--
Mrs. Yellen. And in that sense, it is not normal. The
economy is being held back by headwinds.
I would point out that a tenet of the Taylor Rule is that
it takes--it assumes and embodies in it an assumption that the
equilibrium level of the Fed funds rate with the 2 percent
objective is 4 percent, or that the real equilibrium Fed funds
rate is 2 percent. And that simply isn't the case.
Mr. Mulvaney. Madam Chair, I am not actually, surprisingly,
not pushing the Taylor Rule. I am simply asking about a general
rule-based system because you have shown some support for it in
the past. And I guess my question is this: What does the world
have to look like? Because I think admittedly, employment is
better. Inflation, it seems to be under control. Yes, you say
that the Fed funds rate is extraordinarily low, which it is,
but that is something under your control.
What does the world have to look like in order for the
Federal Reserve to start considering transitioning to a rule-
based system?
Mrs. Yellen. I think the benefit of a rule-based system is
it is systematic and understandable. And the Federal Reserve
has attempted to engage in the systematic policy. It takes a
different form.
Mr. Mulvaney. I get that, but what does the world have to
look like? When you come back next year, what should the world
look like for you to be saying, you know what, we are
considering a rules-based system? What has to change?
Mrs. Yellen. The Committee looks at guidelines from rules
as useful benchmarks as it considers the appropriate stance of
policy, but I believe, and I think most of my colleagues would
agree, that we shouldn't mechanically follow that rule or any
other rule, but that we need to take into account a large set
of indicators of how the economy is performing.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore, ranking member of our Monetary Policy and Trade
Subcommittee.
Ms. Moore. Thank you so much, Mr. Chairman.
And again, welcome, Chair Yellen.
I want to take us in a little different direction. Many of
us here on both sides of the aisle are really concerned about
what is happening with our smaller banks. And we understand
that because of Basel III and we had a lot of concerns when we
debated Dodd-Frank, including provisions like Volcker and FSOC.
They were driven by the concerns of the large banks in
active capital markets. And I know that the Fed is not the only
regulator overseeing implementation of Dodd-Frank, but I would
like your thoughts on how the rules may have been tailored, or
should have been tailored, for small and community banks?
The stress tests and the capital standards are killing our
small banks, compliance officers that--where they don't have
the additional staff. Just your thoughts on what should have
been done or how has it been tailored?
Mrs. Yellen. Let me say that I think community banks and
their vitality is exceptionally important. They provide
enormous benefits to the country and to the economy. I
recognize that the regulatory burden on community banks is
intense.
Ms. Moore. They are shutting down.
Mrs. Yellen. For our part, we are focused on doing
everything that we conceivably can to minimize and reduce the
burden on these banking organizations.
We have been conducting an EGRPRA review to identify
potential burdens that our regulations impose on these banks,
and we will do everything that we can to respond to the
concerns that are identified there to reduce burden.
We are looking for many ways. First of all, we have tried
to tailor our regulations to the size and complexity of
institutions. The smaller community banks are not subject to
stress-testing requirements. Many aspects of Basel III capital
requirements and liquidity rules do not apply to those banking
organizations. We have tried to simplify those requirements.
We are, in addition to that, trying to reduce the duration
of the time that we spend reviewing banks during exams; we are
trying to simplify and be more targeted in our requests for
documentation.
We try to identify for community bankers what is relevant
to them and what they can safely ignore. And we are looking for
ways to conduct exams that are more focused on the actual risks
that are relevant to a particular organization.
So I recognize that the burdens on those banks have been
very intense and I pledge that we are doing and will continue
to do all we can to reduce burdens on them.
Ms. Moore. Thank you, Madam Chair.
On this committee, we spend a lot of time talking about
moral hazard, and so I guess I would like your view on whether
or not you think there is any moral hazard on not a single
person involved in the 2008 crash having gone to jail. They get
fines, they get sort of compliance letters where they can clean
up their act and avoid prosecution, and I am wondering if you
think that it is important for us to seek--so what? You pay a
fine. That doesn't stop anyone from doing the next crime,
unlike other of our criminal laws.
Mrs. Yellen. I agree with you. I do not think that
individuals who are guilty of wrongdoing should escape paying
appropriate penalties.
For our own part, we are not allowed, obviously, to put in
place criminal penalties. That is a matter for the Department
of Justice. For our part, we can, when we find individuals to
be responsible for wrongdoing, make sure that they are not
allowed to work at the banking organizations where they
committed misdeeds. And in many cases, we can make sure that
they are banned from the business of banking.
And when we have been able to identify individuals who are
responsible, we have put in place those sanctions and will
continue to do so. And we always cooperate with the Department
of Justice in their investigations.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. McHenry, vice chairman of the committee.
Mr. McHenry. Thank you, Chair Yellen.
So, does the Federal Reserve have the legal authority to
implement negative rates?
Mrs. Yellen. I'm sorry, do we have the legal authority to--
Mr. McHenry. Implement negative rates.
Mrs. Yellen. This is a matter that the Federal Open Market
Committee considered around 2010, and we didn't fully--as we
were exploring our options to provide accommodation we decided
not to lower interest rates, either IOER to zero or into
negative territory, and we didn't fully look at the legal
issues around that.
I would say that remains a question that we still would
need to investigate more thoroughly.
Mr. McHenry. And one of our document requests, that 2010
memo that I assume is connected to that policy discussion--
Mrs. Yellen. That is right.
Mr. McHenry. --raised significant doubts about the Fed's
authority that they currently have to charge--to pay interest
on excessive--on excess reserves and whether or not that same
authority would allow you to demand payment for that.
Mrs. Yellen. Congressman, I don't know of any restriction
that would prevent us from doing that. That memo indicated--was
intended to indicate that the legal issues had not been
seriously considered in the time that went to the FOMC.
Mr. McHenry. Have they been seriously considered since
2010?
Mrs. Yellen. In the spirit of prudent planning, we always
try to look at what options we would have available to us,
either if we need to tighten policy more rapidly than we expect
or the opposite, to loosen policy.
Mr. McHenry. Do you--
Mrs. Yellen. So, we would take a look at it. But the legal
issues I am not prepared to tell you have been thoroughly
examined at this point.
Mr. McHenry. So at this point it is unclear whether or not
the Fed does have the legal authority to implement negative
rates?
Mrs. Yellen. I am not aware of anything that would prevent
us from doing it, but I am saying that we have not fully
investigated the legal issues. That still needs to be done.
Mr. McHenry. So let's move to regulation. You run the
largest regulatory organization in the United States of
America, perhaps on the globe--likely on the globe.
And as such, I believe in the independence of the Fed to
make monetary policy, but as a regulator, Congress should have
significant oversight of your regulatory action, should they
not?
Mrs. Yellen. Yes.
Mr. McHenry. Okay. And as such, as a matter of regulation--
the Chairman raised this question with you the last time you
were here about Federal Reserve regulators, bank examiners
demanding to be a part of board of director meetings at member
banks.
And you have exchanged multiple letters on this matter. We
still hear that this is, in fact, taking place.
Would you pledge to this committee that you would direct
your bank examiners and regional bank examiners to stop this
practice?
Mrs. Yellen. I will look into--
Mr. McHenry. You have already looked into it, and you have
exchanged letters and you gave the Chairman the assurance last
time that you are not aware of it. I assume you are now aware
of whether or not this is taking place, are you not?
Mrs. Yellen. I think there are occasional situations in
which that occurs.
Mr. McHenry. Do you believe that is appropriate?
Mrs. Yellen. I am not certain that it is inappropriate. I
want to get back to you on that.
Mr. McHenry. This was raised about 6 months ago by the
Chairman; you have exchanged multiple letters. I would like to
have some greater assurance. This is not meant to be a
``gotcha;'' this is a well-worn question.
And we are hearing--and in fact, there is a press report
that the Fed directed one of your member banks to incorporate
two additional members of the board of directors. And the Fed
directing a private enterprise to change their board of
directors seems somewhat perplexing.
Do you believe that is appropriate authority for the Fed?
Mrs. Yellen. I think it is appropriate as a matter of
supervision to--
Mr. McHenry. To direct?
Mrs. Yellen. --ensure that a board of directors of a
financial company that we supervise is appropriately
constituted in fulfilling its corporate governance functions.
That is a part of supervision.
Mr. McHenry. My time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets Subcommittee.
Mrs. Maloney. Chair Yellen, you raised interest rates in
December and said that any future interest rate increases, if
they happened, would be gradual. I would like to ask you about
the recent turmoil in global markets.
As you know, equity markets around the world, led by China,
have plunged since the beginning of the year as global economic
growth has weakened. And the United States has not been immune.
U.S. stock markets have fallen over 9 percent since the
beginning of the year and Treasury yields have plunged 23
percent.
So my question is, has the turmoil in global markets
changed your view about the appropriate pace of interest rate
increases and hikes, or will you wait to see how global market
turmoil affects the U.S. economy before raising rates again?
Mrs. Yellen. We are watching very carefully what is
happening in global financial markets. It would appear that
stresses that we have seen since the turn of the year relate to
uncertainties regarding Chinese exchange rate policy. There are
uncertainties around the price of oil. We have not seen shifts
in--that seem significant enough to have driven the sharp moves
we have seen in markets.
There would seem to be increased fears of recession risk
that is resulting in rises in risk premium. We have not yet
seen a sharp drop-off in growth, either globally or in the
United States, but we certainly recognize that global market
developments bear close watching. As I mentioned, the financial
conditions have become less supportive to growth and we
recognize that these developments may have implications for the
outlook, which we are in the process of assessing.
And I want to make clear that monetary policy is not on a
preset course and so our evaluation of the likely impact of
those developments on the economic outlook and our ability to
meet both our employment and inflation objectives, those are
the factors that will govern the future stance of monetary
policy. It is not on a preset course.
Mrs. Maloney. And given the turmoil in global markets and
the slowing U.S. economy, some analysts are now talking about
the United States possibly falling into a recession this year.
What would it take for you to consider cutting interest rates
again? A severe downturn in the economy or just stubbornly low
inflation?
Mrs. Yellen. Our commitment is to achieve our
congressionally mandated goals of maximum employment and price
stability. I do not expect that the FOMC is going to be soon in
this situation where it is necessary to cut rates. Let's
remember that the labor market is continuing to perform well,
to improve. I continue to think that many of the factors
holding down inflation are transitory.
While there is always some risk of recession, and I
recognize and have just stated that global financial
developments could produce a slowing in the economy, I think we
want to be careful not to jump to a premature conclusion about
what is in store for the U.S. economy.
So I don't think it is going to be necessary to cut rates,
but that said, monetary policy, as I said, is not on a preset
course. And if it turned out that would be necessary, obviously
the FOMC would do what is needed to achieve our--the goals that
Congress has assigned to us.
Mrs. Maloney. You said in December that you were surprised
by how far oil prices had fallen and that you expected
inflation to increase once oil prices stabilized. Since the
Fed's December meeting, oil prices have fallen even further.
They are down about 25 percent since the December meeting and
they have fallen 7 percent since Friday.
At the same time, we have also seen inflation expectations
fall since the December meeting to the lowest levels in quite
some time. Has this caused you to rethink your inflation
projections at all?
Mrs. Yellen. We indicated in our statement in January that
these developments led us to conclude that inflation will stay
low for a while longer as these developments work through.
Clearly, we are watching inflation expectations and, as I
mentioned, market-based measures of inflation compensation have
moved down now to historically low levels. And that is
something we are evaluating carefully.
In December when we raised rates, we indicated that with
inflation so far below our objective, we would carefully watch
incoming data and revise our expectations. So I don't want to
jump to a premature conclusion.
My colleagues and I will issue in March updated projections
for inflation taking all the evidence we have at hand into
account, but--
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair recognizes the gentleman from New Jersey, Mr.
Garrett, chairman of our Capital Markets Subcommittee.
Mr. Garrett. I thank the Chair.
Chair Yellen, thank you for being here.
I would like to talk a little bit--begin on emergency
lending under Section 13(3). It was about a year-and-a-half ago
that Senator Elizabeth Warren and myself and Mr. Capuano joined
together, and Senator Vitter as well, and sent you a letter
expressing our deep concern with what you were doing with
regard to implementing the limiting language in Dodd-Frank at
that time.
And of course, you have come out now with a rule, despite
our admonition and questions in that letter, a rule that would
basically allow the Fed to drive a Mack truck through the
various loopholes in it, and also, once again, as is typical
with the Fed, lacking in clarity and transparency.
That being said, the Fed is not always not clear in what
they want to do, and the regulators are not always clear in
what they want to do. For example, they came up with the
Volcker Rule, and in the Volcker Rule the Fed was not shy about
elaborating on concepts in that statute. In fact, it went so
far as to adopt prohibitions in trading assets that were
clearly never intended by the statute.
So the Fed and other regulators came up with this part of
the Volcker Rule dealing with defining just what the words
``proprietary trading'' mean. Over 800 pages to make some
definitional clarity in the area of Volcker and proprietary
trading. Compare that to what you did with--under the
limitations that should be in place under Dodd-Frank of 13(3)--
47 pages of definition and a lack of clarity throughout it.
So the first question is why in one area can you be exact
and precise in precision when you are trying to limit what the
private market is doing, but when Congress tells you to put
limitations on yourself, you lack that clarity and give it a
broad brush?
Mrs. Yellen. I think we tried in the rule to be as clear as
we possibly could. We--
Mr. Garrett. Let's take a look at that then.
Mrs. Yellen. --took a--we, for example--
Mr. Garrett. Now, let me give you an example.
The Fed claims that it establishes a penalty rate under
13(3), but then you failed to provide any specifics whatsoever
of what that rate would be.
Compare that to what Congress did. This committee passed a
bill that would establish a penalty rate that would be
commensurate with ``a distressed borrower.''
So why wouldn't the Fed be clear on this? What are the
rates going to be?
Mrs. Yellen. Because what a penalty rate is depends on the
specifics of a particular situation.
Mr. Garrett. But can't--
Mrs. Yellen. A penalty rate is a rate that when conditions
normalize--
Mr. Garrett. But we know what a distressed borrower is and
what the markets are. That is clear. Why didn't you define it
that way, compare it to the regular markets so that a
distressed borrower in the markets would be charged the same if
they are borrowing from the Fed--
Mrs. Yellen. Well, in the--
Mr. Garrett. --or related to it?
Mrs. Yellen. In the type of situation that we found
ourselves in--
Mr. Garrett. Yes.
Mrs. Yellen. --during the financial crisis, market rates
had shot up to extraordinary levels because liquidity had dried
up in the financial--
Mr. Garrett. I understand what the history of the market
was at that time, but you could have provided clarity in here.
So basically what you are telling us is once again, the Fed
is going to be in the position of picking winners and losers.
By your prior answer, it seems like you are saying that you
could charge borrower A one rate and borrower B another rate
under similarly situated circumstances. Is that not correct?
Mrs. Yellen. I think what is an appropriate rate does
depend on the circumstances. Financial crises, which is when we
would be using this authority--
Mr. Garrett. But that is--
Mrs. Yellen. --to set up a broad-based program, are always
very unique. And--
Mr. Garrett. Right. And I think that basically what you are
telling us is that nothing really has changed despite the
admonition and the law in Dodd-Frank to put a limitation.
And it is not just me saying that, by the way. It is
interesting that while you are here testifying today, Governor
Fisher is also making public statements as you speak.
We just got part of his statement, and he seems to be
saying exactly what you are, that you have not limited 13(3).
He said, ``But in simple language, strengthening fire
prevention regulation does not imply that the fire brigade
should be disbanded.''
He goes on basically to say in his comments today that we
are not seeing the limitations, that you are going to be able
to do similar things to what you did back in, or that--before
you were here, that the Fed did the last time around.
Mrs. Yellen. I want to make clear that I think our 13(3)
powers and ability to lend to keep credit flowing in the
economy during a financial crisis is a critical power. It
played a critical role during the financial crisis.
Mr. Garrett. So is he wrong when he says that nothing--my
interpretation--has really changed? Your powers are the same as
they were before?
Mrs. Yellen. No, a lot has changed. Congress put in place a
series of restrictions that they intended--
Mr. Garrett. But your rule does not implement those, does
it?
Mrs. Yellen. Yes, it does. Our rule does implement those
restrictions.
We cannot lend to an insolvent borrower; we cannot lend to
help one or more failing firms. We can only put in place broad-
based programs, and we have defined pretty clearly in that rule
what constitutes a broad-based program. So Congress clearly
changed what the Fed can do.
Mr. Garrett. But it does not--
Mrs. Yellen. It also gave--provided--
Mr. Garrett. Governor Fisher is saying we have likely
reduced the probability that lender of last resort will be
needed, but we have not reduced that probability to zero. So it
appears that, in his opinion at least, some of those problems
remain.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Chair Yellen, the unemployment rate is down to under 5
percent for the first time in 8 years. However, I remain
concerned that unemployment rates remain elevated in the
Hispanic and African-American communities.
Does the Fed specifically take unemployment within these
groups into consideration when making policy decisions
surrounding the Fed fund rate?
Mrs. Yellen. We track very carefully the unemployment rates
and experiences of different demographic groups, and we make a
very careful assessment about whether or not the economy is
meeting the objective of maximum sustainable employment, which
involves taking account of factors like, are particular groups
being discouraged from even participating in the labor force
because of conditions?
But it is important to recognize that our powers, which
involve setting interest rates, affecting financial conditions,
are not targeted and can't be targeted at the experience of
particular groups. I think it always has been true and
continues to be true that when the labor market improves, the
experience of all groups does improve.
Roughly now, the unemployment rate in the United States is
close to where it was in the fourth quarter of 2007. Now,
African-Americans and Hispanics at that time back in 2007 had
higher unemployment rates than the population as a whole.
Regrettably, because of the disadvantages that these groups
face in the labor market, they have historically tended to have
higher unemployment rates.
But as the economy has improved and unemployment has come
down, the unemployment rates for those groups, for Hispanics
and African-Americans, has come down. They have fallen to
roughly the same levels that they were in at the end of 2007
while, again, remaining higher.
Ms. Velazquez. So you--
Mrs. Yellen. We do look at that, but we don't have tools to
target particular groups--
Ms. Velazquez. I understand that.
Mrs. Yellen. --rather than others.
Ms. Velazquez. Do you consider an 8.8 percent unemployment
rate among African-Americans today too high?
Mrs. Yellen. I do consider it too high, and I think there
are any number of reasons for that. And I think that the
reasons for it are ones that Congress should be considering
broadly in designing a wide range of policies.
It is something that we want to see a strong labor market,
we want to see continued progress, and we will put in place
policies that achieve that. But we cannot target the
unemployment rate for a particular group.
Ms. Velazquez. I heard you.
As you know, Chair Yellen, U.S. employers have created 14
million jobs during President Obama's tenure. However, the
labor force participation rate remains low and discouraged
people who want to work have stopped looking. How much of the
decline in the rate can be explained by the trend of flat or
declining wages for many American workers?
Mrs. Yellen. For the country as a whole, an important
reason that labor force participation has fallen and will
continue to fall is because of the aging of the population. So
that is not going to change and the trend is downward.
But it is also true that for certain subgroups in the
population--for example, prime age but less educated men--the
trend downward has been particularly steep. And there is a lot
of economic research that tries to understand why men have--
their labor force participation has declined, and it wouldn't
surprise me if wage trends are part of the reason for that.
Ms. Velazquez. Right.
Mrs. Yellen. So my guess is that they have played a role in
discouraging labor force participation.
Ms. Velazquez. As wages begin to increase, do you
anticipate the participation rate to increase as well?
Mrs. Yellen. Yes, I anticipate that wage growth will move
up somewhat. And I do think that labor force participation is
somewhat depressed relative to where it will be in a really
full employment economy.
That is why I say I think there does remain some slack in
the labor market even though the aggregate unemployment rate is
at 4.9 percent. So I do hope that--
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, chairman of our Financial Institutions
Subcommittee.
Mr. Neugebauer. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being here as well. Part
of your remarks were about the state of the economy, and I
think you are trying to paint a little bit rosier picture, and
maybe there is a little bit of a rosier picture, but it is not
a good picture.
I am looking at some stats here that we still have 16
million American citizens who are unemployed. In fact, the
number of long-term unemployed Americans is 761,000 higher than
it was at the start of the recession.
We have 94 million Americans over the age of 17 who have
abandoned the job market. Real disposable income is a paltry
annual rate at 1.2 percent.
The real GDP is growing just under 2.2 percent. We have
more Americans living in poverty than ever before--46.7 million
people. And we have 45 million people on SNAP. I could read
more and more.
I think the issue that I have been thinking about this week
is that when you look at the original purpose the Fed was
formed for, and what the Fed looks like today, and I think my
good friend Mr. Mulvaney pointed this out, is that basically we
have a Fed that is in charge of monetary policy, some other
things have been added to that, and then we have a Fed that is
the biggest and largest regulator and regulates more assets
than any other financial institution in the world.
And it kind of reminds me that while you all are working on
one side of the Fed to stabilize employment, keep inflation in
check, then on the other side of the Fed you have this huge
regulatory structure that has grown substantially and continues
to issue very complicated, and some people think that you have
become a micromanager of these financial institutions with the
regulations.
So it reminds me of that statement, ``We have met the enemy
and it is us.'' Is it counterproductive that you have the--a
Fed working on one side to create jobs, and you have a Fed on
the other side of the building that is doing things that a lot
of people think are killing jobs: micromanaging the financial
markets; increasing the cost of capital; and reducing the
availability of capital, which has stymied the ability of this
economy to grow? Isn't that self-defeating?
Mrs. Yellen. I think we have to remember that financial
crises are immensely costly to well-being. And it is important
to make sure that we do everything--almost everything we can to
reduce the odds of another devastating financial crisis.
So we are working hard. We have worked hard in the
aftermath of the crisis to make sure that we have a financial
system that is safer, sounder, has more capital, higher quality
capital, more liquidity, and is less crisis-prone than the
financial system that we had that caused this financial crisis.
Mr. Neugebauer. The time is short. You mentioned the word
``liquidity,'' and I think a lot of people think some of the
things that the Fed has done and some of the regulations have
actually reduced liquidity in a number of markets. And in fact,
you and I have had a conversation about the fact that you all
have shown some concern about liquidity.
I wanted to see if you knew that the European Commission
has initiated a review process. They said after 5 years of
instituting all of these regulations and additional capital
requirements, and kind of just piling on of regulation and
capital, more capital and regulation--and I am not against
having adequate capital, but the problem is that we seem to
have an add-on game here and the additional capital also comes
with additional regulations.
And so the European Commission has initiated a review
process that said, ``You know what? Time out here; let's go
back and look. We know what we have asked these entities to do;
we know what we have impounded them with.''
But the question is, how are the markets responding to this
and how have--basically, it is a cost-benefit analysis of all
of the policies that have been in place.
Has the Fed thought about, hey, maybe we should stop and
analyze what we have done here and see if it is positive?
Mrs. Yellen. We have a few things we still need to finalize
to put in place the Dodd-Frank regulations that were called
for, and we hope to complete that work soon. And it certainly
is appropriate to evaluate how the system is working. And we do
that on an ongoing basis, and I think it is, of course,
appropriate to see whether or not there are ways in which we
can improve or simplify regulations. And we are in the process
of doing that in some very important areas.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Mr. Chairman, I feel like I am at a ballroom
dance on the deck of the Titanic. The faith of the American
people in our government and institutions is at an all-time
low. I have been sitting in this room for 20 years and the room
has the feel that it had 20 years ago, except we don't have
Alan Greenspan in front of us.
Government institutions work better if they listen to the
American people, first, because the American people will then
accept the decisions, and second, because we get better
decisions.
Yesterday, in a small State that is doing better than most
of the country, two-thirds of the people went out in a very, I
think, record-setting turnout with inclement weather to say
that they are mad as hell, particularly at the financial
institutions that this committee deals with. And two-thirds of
them voted for the most angry candidate they could find.
Too-big-to-fail should be too-big-to-exist. Madam Chair, in
response to the gentlelady from Wisconsin, you said it was
basically the Department of Justice's failure to have a single
criminal prosecution of those who had robbed the banks and,
more importantly, robbed the American people. And I wonder
whether you can really just put that at the feet of the
Department of Justice?
Because we have learned institutions can get so big that
they are too-big-to-fail. Your predecessor was in this room
demanding that we bail them out. And, God forbid, you will be
again if you allow these too-big-to-fail institutions to
continue to exist.
They are too-big-to-jail. And as you point out, you may bar
somebody from the banking world, but, gee whiz, in a country
with more people incarcerated than any other country in the
world, is it really adequate to those who steal hundreds of
millions and billions to say, ``Well, you can't go back into
the banking world?''
So I will ask you as a member of FSOC, we need moral hazard
to make sure that major economic decisions made by the giant
banks are made correctly. They don't have a moral hazard in the
sense of not being able to get capital. People are flooding
them with capital at rates that are said to be up to 80 basis
points less than they would pay if there wasn't a belief that
we would bail them out. So the too-big-to-fail won't be allowed
to fail. As you point out, DOJ won't put anybody in jail.
The solution is, use your power under FSOC to break them
up. Are you going to break up the too-big-to-fail institutions?
I have asked you that before, and I will ask you it again.
I think I know the answer.
Mrs. Yellen. The answer I will give you is that we are
using our powers to make sure that a systemically important
institution could fail and it would have systemic consequences
for the country.
We are doing that in a whole variety of ways. First of all,
we have done many things to diminish the odds that they would
fail. We are trying to make them, and I think I can enumerate
all the things we have done--
Mr. Sherman. Are you willing to call the attorney general
and say, ``We have this thing handled so well that you can
start criminal prosecutions because they are not too-big-to-
jail anymore?''
Mrs. Yellen. I said that I am in favor of going after
individuals who are guilty of wrongdoing.
Mr. Sherman. With such penalties as barring them from the
banking system.
Mrs. Yellen. Well, --
Mr. Sherman. I want to move on--
Mrs. Yellen. --what I said is those are the sanctions that
the Federal Reserve can impose.
Mr. Sherman. I need to move on to another question.
You are a governmental entity, but it is--in some parts of
the entity it is one bank, one vote. It is the only part of our
constitutional system that puts governmental power in the hands
of one bank, one vote.
Are you going to use your considerable power to oppose
legislative efforts to try to make the regional bank governors
appointed exclusively by the President and to try to make the
regional banks subject to the Freedom of Information Act?
Mrs. Yellen. Congressman, I think the current structure of
the Fed is something that Congress decided after a long debate
and weighing of a whole variety of considerations. I would say
I think it has worked pretty well, but it is certainly
something--
Mr. Sherman. Wait, excuse me, Madam Chair. Are you saying
that the Fed, having just lived through 2008, with people not
getting raises, that this whole system has worked well?
Mrs. Yellen. I'm sorry. I thought you were asking about our
governance.
Mr. Sherman. Your governance has led to the decisions that
have nearly brought this country to its knees.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, chairman of our Housing and Insurance
Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And welcome, Madam Chair.
It is kind of interesting, as you discuss all the questions
that have been asked you here with regards to your ability to
micromanage the economy, and as you make the decisions at the
Federal Reserve to try and do something about unemployment and
try and do something about the inflation rate, I look at some
of these things and I am just kind of stunned.
Let's start off first with what happens if we have a
downturn and you already have $4 trillion on your balance
sheet? What levers are still allowed or are available to you to
do something?
Mrs. Yellen. The Fed has an array of tools.
Mr. Luetkemeyer. Which are?
Mrs. Yellen. Most importantly, the path of the short-term
interest rates.
Mr. Luetkemeyer. Madam Chair, they are already down to
almost nothing. How is lowering the rates going to help when
they are almost nothing right now?
Mrs. Yellen. One of the ways in which markets work is that
they form expectations about what the likely path of the Fed
funds rate will be over time. Those expectations influence
longer-term rates in the market.
And when the economy weakens, market participants naturally
expect the Fed, in pursuing our mandate, to follow a shallower
path of interest rate increases, and that shift in expectations
moves longer-term rates.
I think you can see that just over the last several weeks,
as I mentioned, longer-term Treasury yields have come down as
market participants have become more fearful about a recession.
And their--
Mr. Luetkemeyer. Forgive me for intruding, but I have more
questions here. So are you saying that this is a good time,
then, to start to reduce your balance sheet?
Mrs. Yellen. We--
Mr. Luetkemeyer. Lower interest rates, it would be a nice
time to short-shift that, wouldn't it? Are you intending to do
that?
Mrs. Yellen. We have indicated that we want to make sure
that normalization is well under way before we begin to shrink
our balance sheet.
And our decision to do that reflects the fact that we feel
that moving short-term rates is a more reliable and
understandable and predictable way to manage the economy.
Mr. Luetkemeyer. Okay.
Mrs. Yellen. And so we are going to wait to shrink our
balance sheet until a point when short-term interest rates are
somewhat higher.
Mr. Luetkemeyer. So we may never get there, is what you are
saying? Because there is not much room to go down. So, let's--
Mrs. Yellen. We will have to see.
Mr. Luetkemeyer. But let me also go into your decision-
making process, here.
We have a labor market that continues to--the labor force
participation rate continues to go down, and yet, according to
your report here, the hourly rate of employees went up. There
should be more incentive for people to work, yet they are
becoming less. And you use the demographics of our country to
indicate that.
So I am concerned that if you look at those numbers, that
there is minimal ability of your--the way you explained the
answer to Ms. Velazquez a while ago, of you guys to be able to
manipulate this.
The second thing is, I am concerned--what other factors do
you take into consideration when you look at your rates? For
instance, do you look at what the Congress is proposing? Do you
look at the court decisions?
Because we had--and there has been a big discussion about
trying to stop the inversion, the ability of our companies to
go overseas and be able to take advantage of those tax rates.
So the discussion is to try and cut corporate tax rates to
bring those dollars home.
Do you ever think about those sorts of implications about
whenever you make decisions on your rates?
Yesterday, we had a dramatic historic decision by the
courts with regards to an EPA ruling that would have
dramatically changed the way that we--the cost of energy in
this country.
Do you take those things into consideration when you make
your rates? Because those are dramatic--they will have dramatic
increases or significant impact on our economy.
Mrs. Yellen. We try to take into account in making our
decisions any factor that we regard is important in--
Mr. Luetkemeyer. But do you have in place right now some
modeling with regards to the EPA rule?
Mrs. Yellen. Not that I know of.
Mr. Luetkemeyer. Do you have in place any modeling with
regards to potential tax cut for bringing dollars home? Or for
corporations?
Mrs. Yellen. We routinely look at the stance of fiscal
policy--
Mr. Luetkemeyer. Do you have a model in place right now, if
we cut corporate tax rates, that would allow you to make a
decision on that issue?
Mrs. Yellen. If you were to decide that, our staff would
attempt to evaluate--
Mr. Luetkemeyer. But you don't have one in place right now,
is what you just said?
Mrs. Yellen. Not to the best of my knowledge.
Mr. Luetkemeyer. Okay. Thank you very much.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from New York, Mr.
Meeks.
Mr. Meeks. Thank you, Mr. Chairman
And welcome, Chair Yellen.
Some of my colleagues may not have been here 9 years ago, 8
years ago, but I have to tell you, I feel better today than
when I sat here 8 or 9 years ago. I feel much better today than
I did then.
I can remember some of what was taking place then, and the
panic that was going on, and the pressure that this government
was under. And though we have not completely done what we need
to do, because we do need to let wages grow, we do need to make
sure we create more jobs, the position that we are in today,
would you agree, is much stronger than the position we were in
2007 and 2008?
Mrs. Yellen. I believe it is. I believe we have made a lot
of progress, while recognizing at the same time that there are
many households that are suffering and that there are a lot of
challenges that people face and structural--
Mr. Meeks. Which, and I think it is important to
acknowledge that, that--how far we have come. And then, I would
hope that we would also focus then on what else needs to be
done, because we do need to make sure that--especially those
individuals who were victimized by the financial crises.
For example, if you look at areas in--and I think Ms.
Velazquez talked about it particularly in African-American and
Latino communities, they lost a great amount of wealth. Many of
them lost their homes; they lost their jobs. And so, they need
something so that they can get back, and that is why you see
this disparity that is very high right now.
My focus then is we had, and I guess because of what took
place in the past, in 1977 we passed the Community Reinvestment
Act (CRA). Now, the Fed is in charge of CRA and can enforce it.
And today, one of the--what we find still is that individuals
in communities that were deeply affected, there is no
investment going in, there is no job creation there, there is
no access to credit. They don't have credit because of,
primarily, the crisis.
So I was wondering, since the Fed oversees and can enforce
CRA, what is the Fed doing in helping to implement CRA,
compelling some of the large banks to make these investments in
these communities as well as into CDFIs, who are focused on
trying to make sure that the kind of investments are there to
create jobs, to grow wages in communities that were devastated
by the recession?
Mrs. Yellen. I think CRA is extremely important in making
sure that financial institutions, depository institutions serve
the needs of their communities, and particularly underserved
communities.
We take our enforcement and evaluation of banks' CRA
performance very seriously. We have a whole variety of
community development activities and programs that are focused
on working, using our convening power and their CRA obligations
to try to understand and identify what the needs are in
particular communities and to try to tell banks what works,
what kind of programs are worth supporting that really seem to
make a difference in terms of alleviating distress in low- and
moderate-income communities.
Mr. Meeks. One of the things I think is important, because
I want to know, and maybe you have the answers, is to show
where the banks are making these investments in compliance with
CRA. Because I have found that those numbers have surely sunk,
and then when I look at access to capital in these communities,
you have about 70 million people now who are underbanked or
unbanked in these communities, and so CRA could definitely help
there.
I would love to follow up with you to find out exactly
where the enforcement--who is, in fact, complying and giving
and who is not, because there has to be some accountability
therein.
Lastly, let me just, in the few seconds I have, because the
other thing that I think that is important to look at in some
of these communities, because--and today as well, access to
credit is absolutely key and essential. And sometimes, in the
way credit is looked at, are there alternative systems?
For example, you find some people who pay their rent every
month on time, and that is not to be considered when referenced
to credit scoring models. So are there other models that you
are looking at with reference to how credit scores are
considered that the Fed could advocate?
Mrs. Yellen. I am not sure about credit scores. We would be
glad to get back to you on that.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Oversight and Investigations
Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman.
And welcome, Chair Yellen.
I want to take a trip down memory lane, because I think
there is some rewriting of what happened in the crisis.
There are a lot of people who bought homes, and for lower-
income folks, that is their investment. And a lot of them lost
their investment walking into the crisis, devastating families.
I know we want to look to Wall Street and there is blame
there. But I think there is a little bit of revisionist history
when we say, you know what, Fannie Mae and Freddie Mac didn't
have anything to do with the crisis. Fannie and Freddie allowed
no-doc loans, no income verification, allowing folks to buy
homes they couldn't afford.
And in Dodd-Frank, that was passed by my friends across the
aisle, Fannie and Freddie weren't touched at all. Fannie and
Freddie were the ones that were allowing folks in this room to
get homes they couldn't afford and they were hurt. It didn't
touch them.
The regulators had wild authority and power. They failed.
And instead of taking a look at the regulation and the
regulators, we have re-empowered regulators.
And it's no wonder that big banks after Dodd-Frank haven't
gotten smaller. Big banks have gotten bigger. And the small
community banks that I am sure service a lot of the folks in
this room, and service folks in my community, are going away.
That's a big problem.
I just had to get it off my chest.
So there are a lot of exciting things to chat about with
you, Chair Yellen. But as the chairman of the Oversight
Subcommittee, I do have some concerns about your willingness to
comply with our requests.
We sent a letter in the Medley investigation in our
oversight of the Fed asking you for information regarding
communication. No compliance. Then, we sent you a subpoena in
May. You did not comply with that.
We had partial compliance in October.
We are now a year after my initial letter. I have asked you
for excerpts of the FOMC transcripts in regard to the
discussion--in regard to the internal investigation on Medley.
You have not provided those to me.
Is it your intent today to promise that I will have those
if not this afternoon, then tomorrow?
Mrs. Yellen. Congressman, I discussed this matter with
Chairman Hensarling and indicated we have some concern about
providing these transcripts.
Mr. Duffy. Finding the transcripts?
Mrs. Yellen. I said with providing transcripts, given their
importance in monetary policy.
Mr. Duffy. So let me just--
Mrs. Yellen. And I received a note back from Chairman
Hensarling last night quite late indicating your response to
that. And we will consider it and get back to you as soon as we
can.
Mr. Duffy. Oh no, no. I don't want you to consider it. And
I think the Chairman would agree with me that this is a
conversation not about monetary policy; this is not market-
moving stuff. This is about the investigation and the
conversation of a leak inside of your organization.
This institution is entitled to those documents. Would you
agree?
Mrs. Yellen. I will get back to you with the formal answer.
Mr. Duffy. No, no, listen.
Mrs. Yellen. I believe that we have provided you with all
the relevant information.
Mr. Duffy. That is not my question for you, Chair Yellen.
If I am not entitled to it, can you give me the privilege that
you are going to exert that is going to let me know why I am
not entitled to those documents?
Mrs. Yellen. I said we received well after the close of
business yesterday a letter explaining your reasoning, and I
will need some time to discuss this matter with my staff--
Mr. Duffy. No, I don't want--
Mrs. Yellen. --before I give you a final answer.
Mr. Duffy. I don't want--listen. I sent you a letter a year
ago, on February 5th. I had to send you a subpoena.
You knew that I was looking for these documents; you knew I
was going to ask you about this today. So if you are not going
to give me the documents, exert your privilege. Tell me your
legal authority why you are not going to provide this to us.
If this is market-moving, I would be sensitive to that.
This is not monetary policy conversations; this is about the
internal workings of the Fed.
And I am not asking for all the transcripts; I am just
asking for the excerpts specific to our investigation and
oversight of the Fed.
Let me ask you this: You get to oversee banks. If you made
a request to a bank for information a year ago and they said,
``Let me review with my board. Let me talk about it,'' but they
never comply with your request for documents or information,
what would the Fed do?
Mrs. Yellen. I think we have complied very fully with the
requests that you have made.
Mr. Duffy. I am asking, what would you do if you made that
kind of a request to a bank that you oversee? What would you
do?
Mrs. Yellen. We work with banks to make sure we have access
to the information.
Mr. Duffy. If they didn't, I can't imagine what the Fed
would do if someone didn't comply with your request. And guess
what, we are entitled to the documents. We expect to get them
unless you exert a privilege, and there is no privilege that
you have. So I expect they will come over.
I yield back.
Ms. Waters. Mr. Chairman?
Chairman Hensarling. The time of the gentleman has--for
what purpose is the ranking member seeking recognition?
Ms. Waters. Is it appropriate to ask for unanimous consent
for clarification on a point of information that was just given
by the gentleman?
Chairman Hensarling. Does the lady have a parliamentary
inquiry?
Ms. Waters. The inquiry could be considered parliamentary.
I understand the gentleman to say that they subpoenaed the Fed
and it was ignored. Is that what he meant?
Chairman Hensarling. The gentlelady is not stating a
parliamentary inquiry, and as I think the ranking member knows,
the time of the Chair is limited. If other members wish to
pursue that in their questioning, they may pursue it in their
questioning.
The Chair now recognizes the gentleman from Texas, Mr.
Hinojosa.
Mr. Hinojosa. Thank you, Chairman Hensarling and Ranking
Member Waters, for holding this hearing today.
Chair Yellen, I thank you for meeting with our committee
today and for your steadfast leadership at the Federal Reserve.
America has made great progress since the financial crisis of
2008.
Our recovery includes 70 consecutive months of job growth,
the longest streak in our Nation's history, resulting in an
astounding 14 million private-sector jobs created. And an
unemployment rate now standing below 5 percent.
However, we continue to feel the hangover from the
financial crisis started during President George W. Bush's
second term. Today, the slower-than-average economic growth
rate is fueling anxiety and weakening confidence in our
Nation's economic growth prospects.
Additionally, our economy appears to be sailing into strong
headwinds caused by slowing growth in the developing world,
stagnant growth in Europe, the dual effects of plunging oil
prices and a strong dollar negatively affecting our
manufacturing and export industries.
Addressing those challenges also requires us to answer
questions regarding the sustainability of our national debt and
of the ability of Congress and the Federal Reserve to act
effectively to stimulate the economy.
Despite that market turmoil and economic uncertainty,
however, I will note that our Nation's confidence in the safety
and soundness of our financial system has not been shaken.
Indeed, we can attribute a much stronger and more resilient
financial system in large part to the protections and
improvements of the market oversight under the Dodd-Frank Act.
My first question, Chair Yellen: What else should our
Nation be doing to help us return to normal growth rates?
Mrs. Yellen. One of the distressing aspects of the recovery
we have seen--I agree with you that we have made progress in
the labor market, created a lot of jobs and the unemployment
rate is low. But the growth in the economy that has been
consistent with that has been quite disappointing.
So another way of saying what that implies is when output
is growing at a very weak pace and you have a lot of job
growth, that means that productivity growth has been very
disappointing since the financial crisis, and ultimately that
determines living standards.
Mr. Hinojosa. Chair Yellen, do you think we are dragging
down the potential growth rate of our economy and doing a
disservice to our young men and women by saddling them with
debt just as they are setting out to become full contributing
members of our workforce and economic engine?
Mrs. Yellen. I think the debt situation that faces this
country over the longer term is something that Congress
certainly needs to address. While at this point the debt-to-GDP
ratio looks like it should be sustainable at present levels for
a number of years, as the population ages, it will--this is
evident from CBO projections--be on an unsustainable upward
course, and this is something Congress has known about for
decades and it is important to address.
Mr. Hinojosa. It seems to me that while Congress must do
its part to raise the minimum wage, expand the Social Security
safety net, and provide a more progressive tax code, what steps
are you taking at the Federal Reserve to address the historic
level of inequality in the United States?
Mrs. Yellen. Congressman, the main contribution that the
Fed can make to inequality, given that we don't have policies
that target particular groups in the labor force, is to make
sure that the labor market is performing well, that we attain
Congress' maximum employment objective.
I am pleased with the progress we have made, but there is
further to go, and we are committed to making sure that we stay
on that course of further improvement in the labor market.
And it won't right every disadvantage that workers face,
but it has resulted and will continue to result in broad-based
gains for all groups in the workforce.
Mr. Hinojosa. My time has run out, and I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, Chairman of the House Foreign Affairs Committee.
Mr. Royce. Thank you, Mr. Chairman.
Chair Yellen, it's good to see you. Thank you for being
here.
The latest stress-test scenario that was published by the
Fed includes this scenario where the rate on 3-month U.S.
Treasuries drops below zero from the second quarter of 2016
through 2019.
And I recognize that this in no way predicts any future
action here. As a matter of fact, CCAR announced specifically
in the document there that this scenario does not represent a
forecast for the Federal Reserve.
Nonetheless, this timing is interesting because it comes at
a time when the European Central Bank and the Bank of Japan
have both instituted these negative interest rate policies.
So the question I was going to ask you--and let me make one
other point. It may suggest that the Federal Reserve is not
opposed to reducing its target rate below zero, should economic
conditions warrant, and may be employing the stress-test
process as a tool to consider its possible impacts. That
strikes me as maybe the reason you deployed it in the scenario.
You told the committee in November that if the economy were
to deteriorate in a significant way, potentially anything,
including negative interest rates, would be on the table.
And I remember those remarks were echoed in January by New
York Fed President Bill Dudley.
So assuming for a minute that the Fed figures out this
question about the legal authority, do you still believe that
negative rates are a tool in the toolbox? And can we assume
that the Federal Reserve would not include this scenario in a
stress test if, in fact, it were not a potential future action?
Mrs. Yellen. Let me say that was not what motivated the
inclusion of this scenario in the stress test. We are in an
environment where, as you pointed out, a number of the ECB,
other European central banks, and the Bank of Japan, have gone
to negative rates.
Through much of Europe, and in Japan, interest rates are
negative way at the yield curve. And we have had periods of
market stress, where we see a flight into U.S. Treasuries as a
safe haven, and the scenario that we ask banks to look at is
one in which Treasury bill yields go negative.
This is something that could potentially happen without the
Fed actually setting negative interest rates. It is something
that could happen, and we have seen it happen for limited
periods of time in stressful situations.
Mr. Royce. Let me ask a clarifying point--
Mrs. Yellen. But--
Mr. Royce. --because it has been kicked around since 2010,
the possibility of the Fed maybe setting negative interest
rates. Right?
Mrs. Yellen. Well, yes.
Mr. Royce. Quick question on looking at the Fed authority,
you haven't taken a serious look at the Fed authority until
now, while it was kicked around then and you do the scenario in
the interim?
Mrs. Yellen. Back in 2010 when we were looking for ways to
consider--to add accommodation, to have a toolkit available, it
is something we looked at. We got only to the point of thinking
that it wasn't a preferred tool.
Mr. Royce. Right.
Mrs. Yellen. We were concerned about the impacts it would
have on money markets. We were worried that it wouldn't work in
our institutional environment. And we thought that zero was
really the effective or very--
Mr. Royce. I got it.
Mrs. Yellen. --just very little was--could be gained.
Mr. Royce. Let me ask you, then, really quickly--
Mrs. Yellen. We would--in the spirit of prudent planning--
Mr. Royce. --right. Yes.
Mrs. Yellen. --it is something that, in light of European
experience, we will look at, we should look at, not because we
think there is any reason to use it but to know what could
potentially be available.
And it isn't just a question of legal authority. It is also
a question of, could the plumbing of the payment system in the
United States handle it? Is our institutional structure of our
money markets compatible with it? We have not determined that.
Mr. Royce. Let me just say that I think that the central
banks in Japan and Europe are trying to overcompensate for
irresponsible fiscal policy. I think that is what put them in
this position.
Can we avoid the same mistake here in the United States if
we get our fiscal house in order? In other words, do you agree
that if we address the long-term structural problems with
soaring mandatory spending, we would decrease the potential
need for monetary policy actions that reverse course on
interest rates?
Mrs. Yellen. I think it is certainly desirable and
important for the long-run stability and growth of this country
to take the measures that you have suggested and evaluating the
stance of fiscal policy. It is something that affects our
monetary policy options.
Mr. Royce. Thank you, Chair Yellen. Thank you very much.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Chair Yellen, thank you for being here. Chair
Yellen, you know I have a lot of respect for you.
Mrs. Yellen. Thank you.
Mr. Scott. But I very vehemently disagree with you when you
say that you can't target unemployment.
Let me just say this: It is very important for everyone to
know that you have an equal mission. Part of that mission, one
half of it, is to curb inflation. But the other half is
unemployment.
And so just as surely as you go and you target inflation
with movement of your interest rates, surely you have to
understand that you have the same authority to deal with the
unemployment.
Now, let me tell you why this is important, Mrs. Yellen:
Nobody is suffering from unemployment like the African-American
community. And they are suffering from that because of the very
laissez-faire attitude that the Fed historically has dealt with
just employment or unemployment altogether.
When you look--yes, we can crow about a 4.5 unemployment
rate. Do you know what the unemployment rate is for African-
American men between the ages of 18 and 37? It is 36.5 percent
unemployment. And in some communities like Chicago, Baltimore,
Atlanta, Houston, any of these big cities, it is hovering at 50
percent.
When you have this devastating situation, there is nobody
else--there is no other agency that has the mandate to deal
with it as the Fed. Now, in order to deal with it, you have to
look at the economy like it is a wheel. The economy is a wheel.
And why is it that we have this high unemployment rate
among African-American young men? And African-American women in
that same age group is 26 percent. So why is it that we can't?
And a part of that reason is because the Fed has historically
downplayed unemployment.
Never in the history of the Fed have you even seen fit to
have an African-American president of a regional Federal bank
for the Federal Reserve. That is a part of the reason. We are
not even a part of the conversation.
So my whole point is that I want the Fed--nobody is better
equipped to handle this rigid unemployment facing the African-
American community in that most pliable age group. That is the
child-producing age group, 18 to 37.
Can you imagine if that was the employment rate of 37.6
percent of white young men in that age group? All hell would be
breaking loose right now to do something about it.
We need that same compassion from you. When you look at the
sectors of the economy that are growing--transportation,
energy, agriculture business, health care, construction,
rebuilding the infrastructure, manufacturing--we need an
advocacy from you to say automatically, there must be on-the-
job training programs for African-Americans in this hard group
to go into these areas and earn as they learn.
In agro-business, we have 1890s colleges, 19 of them, whose
authority and mandate through the Farm Bill is to take the
money that we give them through the Farm Bill and spend in
teaching, research, and extension. Why not create the other
spending category for scholarships and loan forgiveness,
students who will go in and take advantage of these job
openings in agriculture and business?
All I am saying is that, please, we have to get the Fed to
get off the dime and put the issue of African-American
unemployment on the front burner. That is the core of all of
the domestic issues that we are facing. And that is the child-
bearing group. What are these fathers to do? What is there for
them?
That is why we have so many of the situations in Baltimore,
in Chicago, and in other places, and it leads to a straight
pipeline to why we have 1.2 million of them sitting in the
prisons. Would you help us with that?
Mrs. Yellen. Congressman, I--
Mr. Scott. I would love to work with you on it.
Mrs. Yellen. --want to assure you that we recognize how
serious the problems are that you have discussed, and we take
our employment mandate extremely seriously and have been doing
everything that we can to promote a stronger labor market that
will benefit African-Americans.
Mr. Scott. Would you really consider getting an African-
American, for the first time in history, to be a regional
president of a Federal Reserve bank for the first time in
history?
Mrs. Yellen. Absolutely. It is our job to make sure that
every search for those jobs assembles a broad and diverse group
of candidates, and I regret that there hasn't been an
appointment of an--
Mr. Scott. Thank you, Mrs. Yellen.
Chairman Hensarling. The time of the gentleman has expired.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Florida, Mr. Posey.
Mr. Posey. Thank you, Mr. Chairman.
Madam Chair, the number one thing I hear from my local
community banks and credit unions is the need for regulatory
release. That is not news to you, obviously, either. And these
financial institutions provide critical services to our
communities, and they are worried that the overregulation is
hurting not only their ability to provide those services, but
eventually is clearly leading to increased industry
consolidation.
What do you consider to be the negative consequences, if
any, that result from consolidation, and the effects on the
local and national economy?
Mrs. Yellen. I think community banks play a vital role in
supplying credit to groups of borrowers whom larger banks often
would not be able to serve. And that is a vital role in all
communities throughout the country, so we want to see those
banks thrive, and are very focused on ways that we can reduce
the burden on those banks.
I mentioned earlier some of the things that we have tried
to do to reduce the burden, and we will continue looking
through the EGRPRA process, and by the regular meetings and
contact that we have with community bankers, to address the
burdens that they face and look for ways to simplify regulation
and reduce burden.
Mr. Posey. Madam Chair, do you think that relationship
lending is important?
Mrs. Yellen. It has been very important often for community
banks in the kind of business that they do, so yes.
Mr. Posey. Just a quick follow up: Can you identify some
areas of priority at the Fed for reducing regulatory burdens on
community banks?
Mrs. Yellen. Yes. We have been focusing, for example, on
the duration of our on-site reviews and looking for ways to
have our examiners spend less time on bank premises. We have
been looking at ways and have simplified and tried to tailor
our pre-examination requests for documentation.
We have been conducting extensive training for examiners to
make sure that our guidance is properly interpreted and applied
in ways that are consistent. We have a number of fora in which
we try to help community bankers understand what new
regulations or proposals are relevant to them and which ones
are not intended at all for their organizations.
As I mentioned, the EGRPRA process is ongoing, and we have
been holding fora around the country to hear the concerns of
banks with regulatory burden and will take all of the steps
that we possibly can to address the concerns that surface.
We meet regularly with community bankers through an
organization called CDIAC, which is composed of representatives
from each of the 12 Federal Reserve districts. They come to the
Board and we meet with them twice a year, the full Board of
Governors, to discuss their concerns, and we follow up on what
we hear.
Mr. Posey. Thank you.
Finally, this week the House is considering legislation
that would require the Administration to put forth a detailed
plan to reduce the national debt whenever the debt limit is
increased--a commonsense concept, I believe. We also just
received the President's budget request, which would, in the
face of a $19 trillion--we just passed the $19 trillion mark in
the debt clock--increase spending by $2.5 trillion.
When the President took office, the national debt was
roughly $10 trillion. When he leaves office, the debt is
expected to have doubled to about $20 trillion. You have also
voiced your concerns about the impact of failing to raise the
debt limit, failing to pay our bills, citing the impact it
would have on the economy.
I don't disagree, but I am curious, do you have similar
concerns about the impact on the economy of failing to address
our national debt? How much debt do you think is too much?
Mrs. Yellen. I think if you look at the path that the U.S.
Fed is on under current policies, it will rise from the present
level to levels well above 100 percent of GDP and continue
rising more or less indefinitely. And wherever you draw the
line, you have to conclude that is an unsustainable economic
situation. So I think it is essential that Congress address
this longer-run budget deficit issue.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, the ranking member of our Oversight and Investigations
Subcommittee.
Mr. Green. Thank you, Mr. Chairman.
I thank Chair Yellen for appearing today, as well.
Mr. Chairman, Chair Yellen and, of course, Ranking Member
Waters, I want you to know that there has not been some sort of
conspiracy among Congressional Black Caucus members to bring up
this issue of black unemployment, although I think we do talk
about it among ourselves quite regularly.
But I do believe that a basic premise that may be of help
to us is the notion that, ``In the beginning was the Word.''
And not enough talk takes place among those who have the power
to influence public policy with reference to African-American
unemployment. To this end, I am concerned, and would ask if you
have, in your statement, given a specific reference to African-
American unemployment in the statement that you made today?
I apologize if I missed it, but was there a specific
reference to African-American unemployment?
Mrs. Yellen. I referenced in the answer to a previous
question the very high rates of unemployment of African-
Americans that persist even with the current aggregate
unemployment rate.
Mr. Green. If I may, let me share this thought with you: If
it is--and I believe you are in agreement that it is a serious
problem--not just a problem, a serious problem.
Mrs. Yellen. I certainly agree with that.
Mr. Green. If it is a serious problem, I would ask that you
make it a part of your actual statement that you present, and
that you publish it, and that you continue to say to those of
us who can make a difference--and we should be able to make the
difference here in Congress; we have responsibilities here to
focus as well--but if you would make it a part of your
statement, and if you would publish this, I think it can have a
meaningful impact on policymakers up and down the line.
So just a small request, but I think it can make a really
big difference, so I am going to ask that you do this.
Mrs. Yellen. I am certainly open to doing so. I will
certainly--
Mr. Green. Thank you.
Now, let's move to the Taylor Rule for just a moment. You
have indicated that the Taylor Rule would be a grave mistake
and that it would be detrimental to the economy and the
American people. Could you, in about 1 minute, give some
examples or an example of how it would be detrimental to the
economy? That is a sort of a nebulous term and I think you
should provide some clarity.
Mrs. Yellen. Sometimes, it provides recommendations for
what monetary policy should be that clearly overlook important
circumstances, and--
Mr. Green. If I may, Madam Chair, would you kindly explain
the impact that it will have on the economy? What would the
impact be if it causes us to do something inappropriate? And I
will let you decide what is inappropriate.
Mrs. Yellen. Either it would have us set a monetary policy
that would result in much higher unemployment than would be
desirable or, alternatively, there could be circumstances in
which it would recommend an accommodative policy that would
result in extremely high inflation.
Now, I would say right now, as an example, the Taylor Rule
would recommend an overnight short-term interest rate that
would be close to 2.5 percent, and I think in light of the slow
growth in the U.S. economy and the fact that we have needed to
hold the Federal funds rate for almost 7 years--for 7 years at
zero to achieve the progress that we have made, that setting it
at the level that it would now recommend would be highly
damaging to the economic situation.
And we tried to provide some analysis in the monetary
policy report we submitted about what--why that is, and in
particular this idea that the neutral Fed funds rate, because
of the damage from the financial crisis--
Mr. Green. I regret that I must reclaim my time because I
have one additional thing that I must say. I appreciate your
commentary and I think that a good many people have the point.
But I want to say this: We have some people who are
visiting today. I don't want any response from them, but I want
to acknowledge their presence because they are concerned about
these wages. Now, they are concerned about wages across-the-
board, especially as they impact working people, people who are
on salaries, people who make minimum wage.
And it is our desire to see policies that will have greater
employment, greater opportunities, but also policies that will
target those who are hurt the most.
I thank you, Mr. Chairman. I yield back.
Mr. Messer [presiding]. The gentleman's time has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Welcome, Chair Yellen.
I want to talk briefly about custody banks, which you know
follow a different business model from other financial
institutions. Custodians do not make consumer loans or engage
in investment banking, and for these reasons pose relatively
little credit risk. I understand that custody banks, whose
customers would include, for example, pension funds with
millions of beneficiaries, are finding it increasingly
difficult to provide their core custody services, especially
accepting large cash deposits. And this could worsen under a
period of stress.
One of the main reasons for this appears to be recent
regulatory reform, such as the supplementary leverage ratio
known as SLR. Custody banks typically place cash received on
deposit with the Federal Reserve. This is cash that comes from
pension funds, endowments, municipalities, and other clients.
However, the Federal Reserve's supplementary leverage ratio
does not recognize the essentially riskless nature of Fed
deposits or the necessity of these placements by custodians.
This may cause the leading custody banks to reject a customer
cash deposit.
My question is: Is the Federal Reserve aware of the impact
that this may be having on custody banks? And if so, what do
you propose to do about it?
Mrs. Yellen. This is something that was considered, what is
the appropriate treatment of central bank deposits, when the
supplementary leverage ratio was adopted. And the decision was
made at the time that the leverage ratio is not our main
capital tool, but a backup capital tool that is intended to, in
a crude kind of way, base capital requirements on the overall
size of a firm's balance sheet, and that for that reason it
should be included.
We have more recently put in place capital surcharges that
apply to the eight largest U.S. banking organizations,
including two custody banks. And it is likely that once those
are in place, they will become the binding capital requirement.
But--
Mr. Rothfus. I would encourage you to take a look at it
because it is an issue for the banks.
Mrs. Yellen. We have heard of the problem, and I will
address it.
Mr. Rothfus. As you know, Chair Yellen, the Bank of Japan
recently announced that it would implement a negative interest
rate policy in an effort to increase spending and investment
and spur growth. The decision follows close on the heels of the
European Central Bank's announcement that it would also launch
additional monetary stimulus in March, and economists have
predicted that Sweden, Denmark, Norway, Canada, Australia, and
China may follow suit.
In a recent editorial in The Wall Street Journal, William
Poole, the former president of the Federal Reserve Bank of St.
Louis, argued that these sorts of monetary policy gimmicks will
not create their intended effects and instead they will only
serve to divert attention from the actual structural problems
that have plagued growth in the United States and around the
world over the last decades, namely regulatory burdens and tax
policies that serve to constrain business investment and long-
term growth.
What do you say in response to Mr. Poole?
Mrs. Yellen. I agree that there are structural factors that
have restrained U.S. growth and also been responsible for
rising inequality in the labor market. And it is important to
take steps to address those problems. They are steps that are
in the domain of Congress.
But it is important for the Fed to try to achieve its
mandate of ensuring a state of the labor market where people
who want to work are able to find jobs, where there are a
sufficient number of them.
And, given the stressed situations that exist in Europe
where there remains very high unemployment, and in Japan where
inflation has for well over a decade undershot their inflation
objective, it is a tool that has proven useful to them.
Mr. Rothfus. I want to talk a little bit--you testified
earlier that over the past number of years, the Fed kept the
Federal funds rate at exceptionally low levels. You testified
that even with this ``exceptional'' strategy, the economy
achieved only 2 percent growth. And you added that ``The
economy is being held back by headwinds.''
I am wondering if any of these headwinds are manmade, or,
to borrow a phrase, anthropogenic here in the United States?
And I could identify some: the Affordable Care Act; a Wall
Street reform bill that missed the mark, frankly; EPA
regulations.
And these headwinds have hit folks in my district, like a
mom who now has to pay $400 for allergy medicine for her kid
when she used to pay $10; or the coal miner I talked to last
week who is taking care of a 5-year-old, a 3-year-old, and a 1-
year-old and won't be able to pay for his mortgage.
And I just wonder, when the economic history of this decade
is written, are they going to say that the Fed tried to do with
monetary policy what should have been done with fiscal policy?
I yield back.
Mrs. Yellen. I think it is also important for Congress to
address structural factors that are holding down growth.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver, ranking member of our Housing and Insurance
Subcommittee.
Mr. Cleaver. Thank you, Mr. Chairman.
Thank you for being here, Madam Chair.
Following through on some things that were said earlier, I
have a bad knee and I have had it operated on 11 times, but the
weird thing is that whenever I go to the hospital for another
surgery, they never operate on my shoulder or my fingers. For
some strange reason, they always operate on the same knee that
has been hurt. And I know that is weird.
The issue is we can't address unemployment in a certain
sector by saying we are going to operate on the whole body and
it gets better. That has never been true.
Now, I differ a little from my colleagues in that I don't
think it is your responsibility. I don't think the Fed has the
responsibility even with the dual mandate. I think it is to be
handled legislatively, and I don't think we are going to get
that done.
The other thing I have to say is that--and it is been said,
and every time you come I have to say it because I have to just
get it off my chest, because I do think that we are declaring
minority unemployment to be too-big-to-curtail, and that is
somewhat troublesome.
But Wall Street and the big six banks are too-big-to-jail.
If you rob a convenience store, you go to jail. If you rob 300
million Americans, you get a cocktail. And I think that is what
is creating all this anger around the country.
I know you don't run the Justice Department, and I know you
don't vote on legislation that could address some of these
other issues. But I think we have to say it as much as we can
because I don't think the world is hearing us.
Now, I would like to yield the remainder of my time to the
ranking member of the Financial Services Committee.
Ms. Waters. Thank you very much, Mr. Cleaver.
As you know, originally I was thinking about dealing with
the question of the subpoena, et cetera. Except if you don't
mind, I am so focused on all of this money that goes to these
too-big-to-fail banks and trying to understand, number one, not
only the fact that Goldman Sachs got $121 million, JPMorgan
$910 million, and that with the rise in interest rates from
0.25 percent to 0.5 percent, this will double.
And this money keeps--it is going to the big banks. It is a
subsidy to keep them from lending money, and we have this big
need that has been discussed by my colleagues about this high
unemployment rate and the lack of creativity and thinking about
how we can deal with this. And these banks, too-big-to-fail,
who we are finding every day because of the predatory lending,
et cetera, are getting support from the Feds.
Please, please explain that.
Mrs. Yellen. It is an essential tool that we need to adjust
the level of short-term interest rates. And from the standpoint
of the taxpayer, our payment of those interest on reserves--we
have very large reserve balances. We have $2.5 trillion,
roughly, of reserves in the banking system, as compared with
$20 billion or $30 billion prior to the crisis.
The counterpart of that on our balance sheet is that we
hold a very large stock of assets on which we are earning a
substantially higher rate of return than we are paying to the
banks. And that differential between what we earn on our
holdings of long-term Treasuries and mortgage-backed securities
and the 25 or 50 basis points we pay to the banks, that
differential all shows up in the taxpayers' pocket. It is money
that Congress can use to address all of the problems that you
have discussed. Over the last year, we transferred $100 billion
because of that.
Now, if we don't pay interest on reserves and must use
another technique to adjust short-term interest rates, likely
we will be forced to greatly shrink our balance sheet in a
rapid fashion, and the total amount of money going from the
Federal Reserve to Congress will be significantly diminished.
In addition to that, it would have very adverse effects on the
economy.
Ms. Waters. I want you to know that not only am I
concerned, it looks like we are about to have some bipartisan
concern on this issue.
Mrs. Yellen. I hear that.
Ms. Waters. And while I understand the argument that you
are making about the big banks, we cannot feel sorry for them
in terms of the amount of interest rates that they are getting
or not getting, et cetera. We really do have to deal with this
issue.
I understand what you are trying to explain by short-term
interest rates, but if I may, Madam Chair, let me just say
this, that we have an opportunity with the discount window to
allow for loans from some of these small community banks that
they are not getting. And if that money went into the small
community banks, they would be able to do job creation and to
support small businesses, et cetera.
And we just don't get why they are precluded from doing
this, and increasing the job opportunities in the community,
while we have given the subsidy to the big banks. We just don't
get it.
Chairman Hensarling. Although I agree with much of what the
ranking member has said, she has long since spent her time.
The Chair now recognizes the gentlelady from Utah, Mrs.
Love.
Mrs. Love. Thank you, Mr. Chairman.
Thank you, Chair Yellen, for being here today. Chair
Yellen, I am increasingly concerned about the impact of Dodd-
Frank regulations on real economy, economic growth, and
especially job creation, which I wouldd like to just ask you a
few questions about.
If you look beyond the headlines, the headline numbers from
last Friday's job numbers, and include discouraged workers and
the underemployment, real unemployment remains high, nearly 10
percent. In addition, millions of people have stopped looking
for jobs. They have dropped out of the workforce, and it is a
dynamic that is driving the Nation's workforce participation
rate to an all-time low at 62.7 percent.
And I want you to know that I agree with my colleague on
the other side of the aisle, Representative Scott, when he
talks about the large number of unemployment with our young
Black Americans. Meanwhile, economic growth slowed to just 0.7
percent in the fourth quarter.
I am concerned the Fed and other financial regulators may
not have a firm grip on the cumulative impact on the real
economy of thousands of pages of the new Dodd-Frank
regulations, especially new capital and liquidity rules. I am
wondering if you share some of those concerns?
Mrs. Yellen. I recognize that some of the new concerns are
burdensome and do raise banks' cost of financial
intermediation. In designing those regulations, we are always
trying to achieve a balance between the benefits of creating a
sounder and more resilient financial system that is less likely
to be subject to the kind of devastating financial crisis that
we had.
We are balancing that against burdens that can raise the
cost of capital or diminish financial intermediation. And we
have tried to strike a reasonable balance, remembering that
nothing resulted in more harm for a longer period of time than
the financial crisis that we lived through, and I think we now
have a much safer and sounder financial system.
Mrs. Love. Okay, so another study by the American Action
Forum found that consumer credit availability deteriorated 12
percent to 14 percent since the passage of Dodd-Frank. I am
also concerned about the growing number of borrowers unable to
access affordable banking--including a lot of borrowers from
low-income areas in my district, which is Sigurd, West Valley.
These are hardworking Americans who are turning to high cost
and unregulated online lenders to be able to get the access to
the credit that they need, whether it is for purchasing a car
or even starting a small business. They are finding that their
ability to access this type of credit is unavailable to them.
And so I am wondering if you also share some of my concerns
about credit availability and the higher-cost alternatives?
Mrs. Yellen. I do share your concerns about credit
availability. And I think it is clear that credit availability
has, in particular segments, been diminished. Home loans,
mortgages, for example, for individuals without pristine credit
ratings is really difficult, remains difficult to obtain.
In part, we have regulations that are meant to address
harms. I think lending standards were too easy prior to the
financial crisis. We don't want to go back to lending standards
that are so loose that they lead to the kinds of predatory
lending and harms that we had that took a toll on the economy
and on low-income households in communities. We need to achieve
a reasonable balance, and we are searching for that.
Mrs. Love. Being on the Subcommittee on Monetary Policy, I
wanted to ask you just a quick question on monetary policy and
what is happening in Europe and what are the implications. I
may have stepped out of the room; I don't know if you have
addressed this. But very quickly, what are the implications of
the Federal Reserve and the ECB pursuing divergent monetary
policy?
Mrs. Yellen. The ECB has been addressing high unemployment
and inflation that has slipped very meaningfully below their 2-
percent goal by putting in place negative interest rates and
large-scale asset purchase programs.
The United States has done better. We are, among advanced
economies, about the strongest, so we have divergent monetary
policies.
It has put upward pressure on the dollar over a long period
of time, which has harmed manufacturing and net exports. And
so, it has resulted in negative influences on the part of our
economy.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, ranking member of our Financial Institutions
Subcommittee.
Mr. Clay. Thank you, Mr. Chairman.
And thank you for being here, Chair Yellen.
The Federal Reserve has a congressional dual mandate to
seek maximum employment while limiting inflation. To limit
inflation, the Federal Reserve raises interest rates, which
slows the economy by discouraging people from borrowing to buy
homes and cars, and discouraging businesses from investing.
With this reduced demand, businesses will hire fewer
workers. And as a result, workers will have less bargaining
power, meaning they will be less likely to get pay increases.
The decision to raise interest rates is based on the assessment
of the Federal Open Market Committee of the Federal Reserve
about whether inflation or unemployment poses a greater threat
to the American economy.
Unfortunately, the members of the FOMC largely come from
the financial industry and, as a result, tend to be more
concerned about inflation than the population as a whole, and
less concerned about unemployment. So how do we square that,
Madam Chair?
Mrs. Yellen. First of all, I want to say that the committee
is deeply focused on unemployment. We have two objectives, not
one: maximum employment; and price stability, which we have
interpreted as a 2 percent inflation objective.
And I would really take issue with the idea that we are not
focused on achieving our maximum employment objective. We are.
Monetary policy has been highly accommodative. The Fed
funds rate was at zero for 7 years. And we also have a large
balance sheet that has provided a lot of additional
accommodation.
So we are not talking about tightening monetary policy, or
a tight monetary policy. We have an economy that now has made
substantial progress, creating 13 million jobs with the
unemployment rate down to 4.9 percent.
We took one small step to raise short-term interest rates
but continue to have an accommodative monetary policy, which we
see as consistent with further progress in the labor market. So
it is not that we are trying to reverse progress. We continue
to see, even with modest increases and interest rates, further
progress, and we want to achieve it precisely because we think
that although the unemployment rate is at levels that are
probably normal in the longer run, there remains slack in the
labor market. We want to see more progress.
Mr. Clay. Although--not to cut you off--we could get to 4
percent unemployment. But, look, while we are pleased to see
that new jobs are continuing to be created in our economy and
to learn that the unemployment rate last month fell below 5
percent broadly, these positive signs may lead some to ignore
the persistent economic challenges faced by African-Americans
in this country.
The current unemployment rate for African-Americans, for
example, remains at nearly 9 percent. It is a commonly accepted
view that access to gainful employment is one of the most
important factors in supporting economic mobility and improving
health outcomes. It is also widely known that in areas with
higher rates of unemployment, there is a lack of consumption,
increased crime rates, reduced school funding, and reduced
political influence.
Please discuss with us any specific actions that you have
personally taken or directed your staff to take to identify
solutions to help remedy the historical and continued racial
disparity between employment opportunity for African-Americans
and Whites.
Mrs. Yellen. Our staff produces statistics that are among
the most important in documenting and highlighting disparities
in the economic situations in terms of assets and income by
demographic groups. And I have personally given speeches
highlighting those statistics. So our staff certainly looks at
and does work to document those disparities.
And in our community-development programs and work we
discussed earlier that relates to the CRA, that is an area in
which we have the capacity to try to identify particular
programs that will be helpful in low- and moderate-income
communities that suffer from special disadvantage in the labor
market, and to try to identify programs that work that we
encourage to be adopted on a broader scale--
Chairman Hensarling. The time of the gentleman has expired.
Mr. Clay. I would like to work more with you in that area.
Chairman Hensarling. The Chair now recognizes the gentleman
from North Carolina, Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
I would like to just welcome those who have come today with
your T-shirts on: ``What recovery?'' ``Let our wages grow.''
``Whose recovery?'' These are very pointed and clear
statements, and I really commend you for being here and seeing
this process.
Yes, the reality is that this recovery is the most dismal,
slow, tepid recovery we have ever had from a recession in
recorded history. And we look at the realities of this
recovery. This last report of new jobs was only 150,000 new
jobs. We have a 2 percent dismal economic growth.
Frankly, the demographic group that is the lowest recovery
is the low-income, minority people in this country. That
demographic group has moved up the ladder less than any other
group, albeit an intense effort, well-intended, I am sure, by
the Obama Administration, by Chair Yellen.
But through it, what we have seen is very accommodative
monetary policy; we have seen a high regulatory environment; we
have seen Obamacare; we have seen the highest corporate tax
rates in the industrialized world. All of this has achieved
this dismal recovery.
And I would say to you that the contrast is back in the
1970s, we had the same type of dismal economic outlook--high
inflation, high unemployment. And yet, what happened? We
reduced the regulatory environment, we reduced the tax burden,
and the economy took off.
We were creating 300,000, 400,000, 500,000 jobs a month.
One month, a million jobs. We were growing up to 6 percent.
It seems to me that--logic may come in--perhaps well-
intended policies have had an adverse outcome of what was ever
intended.
And, Chair Yellen, I commend you for your work and what you
have sought to do. But it seems to me that these accommodative
policies have contributed to where we are today.
I would say, Chair Yellen, I would like to thank you in
your remarks that you made reference to the fact that there are
those who are available to work but not actively searching for
work. You have also made reference to those who are working
part-time and can't get full-time jobs.
Now, these numbers are not included in the current
unemployment rate of 4.9 percent. So in reality, we are really
talking around 10, 11, 12 percent are the stats that I have
seen of real unemployment.
Would that not be correct, Chair Yellen?
Mrs. Yellen. Broader measures of unemployment are
significantly higher. For example, a definition that the BLS
refers to as U-6 that includes both of the groups you
mentioned--involuntary part-time--
Mr. Pittenger. The point I want to make is--
Mrs. Yellen. --and discouraged--
Mr. Pittenger. --the real numbers are much higher than 4.9
percent. So it is really disingenuous to say to the American
people that these policies have contributed toward 4.9 percent
unemployment.
In the real world, where people are living--and we have
some of them here today--it is far less. And I think that
should be understood and absorbed by these wonderful people who
have come, that the types of policies that have been enacted,
been enforced this last 7 years, have worked against your
interests.
What grew the American economy were small businesses who
could go get loans. That entrepreneur who has been the
lifeblood of our economy can't go to a bank today to get that
new loan because of compliance requirements. They are the
people who create those new jobs.
And on top of that, you have the burden of the obligations
of Obamacare. In small business, what are they doing? They are
cutting jobs so they don't have to comply.
What will grow your economy, what will create the jobs that
you earnestly want, is an open market where companies can grow
and not have this intense regulatory environment, whether it is
through monetary accommodative policy or through onerous
regulatory environments placed upon them. So I want to
encourage you with that reality, that we can find that type of
opportunity economy.
I would say to you, Chair Yellen, that the regulatory
rulebook--it has been in a constant state of revision for the
last 6 years. Can you see the benefit, then, as a result of
what we discussed, in pausing this process in order to assess
the cumulative impact that these regulations are having on the
economy before we proceed further?
Mrs. Yellen. We have several regulations that we intend to
put out during this coming year. And in terms of the list of
what was mandated by Dodd-Frank, we have made substantial
progress.
Mr. Pittenger. Consider that outcome. We are saying that we
think it needs to be done.
Chairman Hensarling. The time of the gentleman has expired.
The Chair wishes to remind Members that we expect to excuse
the witness as close to 1:00 p.m. as possible. The Chair
anticipates getting through perhaps four more Members.
The Chair now recognizes the gentleman from the Super Bowl
champion Denver Broncos, Mr. Perlmutter.
Mr. Perlmutter. Thanks, Mr. Chairman.
And, Chair Yellen, thank you, as always, for being here
today. I was going to go a little off topic with my first
question, to say, how about those Broncos, but--
Mrs. Yellen. Way to go.
Mr. Perlmutter. --the Chair already beat me to the punch.
But I do want to talk about the overall conversation today,
and I want to thank you and I want to thank the Federal
Reserve. I want to start with the chart that we have on the
board, which shows what happened at the end of the Bush
Administration, when we went to 10 percent unemployment, and
under Obama, we are down to less than half of that.
Okay? So that is your chart number two in your monetary
report. And all the Republicans don't want to let the facts get
in the way of their rhetoric because then chart number four
shows that after some time--and that is on page five, Chair--
wages are beginning to move up after we started getting people
back into the job market.
Chart six, oil prices way down. Chart seven, inflation
even. Chart 13, wealth-to-income--disposable income up ``a
robust 3.5 percent.'' Chart 15, household debt service, way
down. Chart 20, mortgage rates, down. Figure one on page 37,
unemployment down looking at the long-term, and core price
inflation, even.
Those are your charts. Those are the facts.
Now, have wages gone up as much as we would like to see?
No. But we had to get a lot of people back working. Now, we are
starting to see them move.
So the Chair went through a whole list of economists,
because obviously he didn't have a lot of questions; he wanted
to list a lot of names. And there were a couple of guys there
with the Hoover Institute.
So Herbert Hoover, grand old Republican President who led
us into the Great Depression. Not the kind of economy I would
like to see, all right?
George Bush, we go from 5 percent unemployment to 10
percent unemployment. We lose millions of jobs.
Under Barack Obama, back down to 4.9 percent. In Colorado,
we are at 3.5 percent.
So I just want to thank you, and I want to thank the
Administration for getting this economy back on track.
Now, can we do better? You bet.
So how would you suggest that we do better? How can this
economy get moving so that the folks here can see some real
growth in wages, which I think are beginning to appear, but
what would you suggest?
Mrs. Yellen. Our objective in terms of what we can do is to
try to make sure that the picture that you have put up here
shows continuing improvement in the labor market.
I agree with you, I would say the signs of wage growth
increasing--they are tentative at this point. There are some
hopeful signs, but I think if the labor market continues to
progress we are very hopeful we will see faster progress on
wages.
And we will try to keep that progress going. That is our
objective. Inflation is running under our 2-percent objective.
I expect that will move up over time, as well, with appropriate
policy.
But I appreciate your saying that some of the burden should
also be on Congress and others, because there are so many
problems in the labor market and particular groups--we have
talked a lot about African-Americans and the problems they
face.
The Fed, of course, has a role to play, but job training,
educational programs, programs that address other barriers in
the labor market, I think this is Congress' job to address.
Productivity growth is very low. I think Congress has
always had a role in supporting basic research, making sure
that the infrastructure of our country is adequate and putting
in place programs that make sure that training and education
are widely available.
Mr. Perlmutter. All right. Let me move to a soft spot that
I think exists in the economy, and you and I have talked about
it before, and that is on oil and gas and the fact that the
Saudi Arabians are pumping like crazy into what appears to be
an oversupplied market, causing the price to drop a lot, which
in some ways is very good for all of us because saves us $10,
$15, $20 a week or a month in our price at the pump.
But it also is causing some job losses in the manufacturing
sectors, the oil and gas, obviously, transportation. Can you
comment on what the Fed is doing or reviewing when it comes to
oil and gas production?
Mrs. Yellen. We are taking account, as you said, of the
fact that the energy sector is very hard-hit. We are losing
jobs there. But with respect to employment, it is--although
there really are very severe losses, it is a pretty small
sector of the workforce overall.
We are seeing massive cutbacks in drilling activity, and
that is rippling through to manufacturing generally, where
output is depressed. So, it is having negative consequences.
On the other hand, if you look at the difference in oil
prices now relative to 2014, for the average American
household, we are looking at a savings of $1,000 a year.
And that is boosting consumer spending. And we have these
two: a negative force, positive forces. We are trying to factor
all of that in as--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you, Chair Yellen, so much, for being with us today.
As you may know, the Financial Crimes Enforcement Network,
or FinCEN, is in the process of finalizing some new
requirements to prevent terrorism financing and money
laundering under its beneficial ownership rules.
While I fully support efforts to curb terrorism financing,
it seems the application of FinCEN's rule to certain non-bank
subsidiaries, such as premium finance companies, may not be
appropriate.
I understand that my staff is already talking with the Fed
about this issue, but wondered if I could get a commitment from
you today about trying to find clarification for if these rules
apply to premium finance companies that are subsidiaries of
banks?
Mrs. Yellen. We would be happy to work with you on that.
Mr. Hultgren. Thank you so much.
When you testified before the committee back on November
4th of 2015, we discussed the impact of the supplementary
leverage ratio on custody banks. At that time, you described it
as a kind of backup ratio that works as a backup to risk-based
capital standards.
When responding to questions from Congressman Rothfus
earlier today, you stated that, ``When the supplementary
leverage ratio becomes effective, that it will likely become
the binding capital requirement for some custody banks.''
I understand some of these custody banks already feel they
must discourage customer cash deposits. As you know, these
institutions have highly liquid, low-risk balance sheets that
support client needs. In light of this concern, will the Fed
consider adjusting the capital requirements for excess cash
deposits held with the Federal Reserve?
Mrs. Yellen. I am not sure if they will become the--if the
supplementary leverage ratio will become the binding constraint
or not. I didn't intend to say that it is the binding
constraint. There will also be so-called SIFI capital
surcharges that will come into effect that may make those
binding constraint.
This is a matter that I understand what the issue is. We
can look at it and discuss it. It was debated at the time.
There were considerations on both sides and a decision was made
to include Fed deposits.
It is something we can look at, but it was considered.
Mr. Hultgren. I hope we are able to discuss that and also
look and see if it is necessary for us to have congressional
intervention, as far as legislation, to change the rule.
Let me move on. I am pleased by the news that the Federal
Reserve has been engaged with the insurance industry on capital
roles appropriate for the business of insurance.
What are your thoughts on how that process is proceeding,
and when might we suspect to see proposed rules from the
Federal Reserve released for public comment?
Mrs. Yellen. We are working very hard on that. I don't have
an exact timetable but we are expecting to go out with, for
each of the firms, a notice of proposed rulemaking, so the
public can react to these rules. The staff is fairly far along
in developing these, so my hope is that it won't be too much
longer.
We have worked hard to have the appropriate interactions
with the firms and other regulators to do this right.
Mr. Hultgren. I appreciate your work on that. From
Illinois, insurance is important. We have some wonderful
companies there, but I know they have questions, and I
appreciate the iteration and hopefully the resolution
relatively quickly.
One last question: Will the Federal Reserve issue one
proposed capital rule for all insurers it supervises? And if
you could explain why or why not?
Mrs. Yellen. I am not positive. I think for the particular
SIFIs that have been designated--Prudential, AIG, and MetLife--
they are likely to be firm-specific rules, but I am not
positive. Let me get back to you on that.
Mr. Hultgren. That would be great. Thank you. Thanks, Chair
Yellen.
Mr. Chairman, I have an additional minute. I would yield
that back to the Chairman, if the Chairman wants it. Otherwise,
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison.
Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member
Waters.
As we start out, I also want to thank some of the folks who
have joined us for the hearing today. My good friend, Ron
Harris, is here from Minneapolis.
It's good to see you, Ron.
And I just want to let you know that this active
citizenship of coming to these hearings, watching things, is
exactly what is needed in order for this government to function
properly. In my view, this is what democracy looks like.
Thank you all for being here.
Chair Yellen, let me point your attention to the words of
Mr. Narayana Kocherlakota, who was a former Minneapolis Fed
chair, outgoing President of the Federal Reserve Bank in
Minneapolis. On Martin Luther King Day, he wrote a blog and
here is what he said in part: ``There is one key source of
economic difference in American life that is likely
underemphasized in the FOMC deliberations--race.''
He went on to say that for the year--he went on to say that
he searched through the transcripts of the FOMC meetings for
the year 2010, his first year on the committee, and a dire year
for African-Americans in our labor market, and in that year our
total unemployment rate exceeded 9.25 percent every quarter,
but for African-Americans, it exceeded 15.5 percent.
Today, now, White unemployment in Minnesota is 2.9 percent
as of December 2015, but Black unemployment is 14.1 percent.
And in Minneapolis, overall White unemployment is 4 percent,
but Black unemployment is a shocking 18.9 percent.
So I say that because this is something that I think needs
the attention of the Chair. I don't know what constraints you
believe are out there, but race matters when it comes to how
people experience our economy.
And if we don't discuss it, talk about it, then we won't
ever get to the heart of the matter as to how to fix it to make
equal justice for all.
I will quote one Kocherlakota one more time. He said, ``As
we all know too well, race matters. The average African-
American's experience with the U.S. economy is different from
that of the average White person's.''
So, my question is, what do you make of the commentary from
the previous Minneapolis Fed president? In your view, is there
adequate discussion, attention of the economic situation of
African-American workers within FOMC deliberations?
And if there is not--and I suspect you will say there is
not--what can we do about it? How can we at least focus the
committee's attention on this segment of our fellow Americans?
Mrs. Yellen. It is, of course, important that we look at
different groups, and particularly those who are suffering the
most in the labor market. And I am surprised that there was no
specific mention of race.
In 2010, the unemployment rate was substantially higher
than it was. The committee was very focused at the time on what
we could do to promote a stronger labor market. And I suppose
because our tools are not ones that can be targeted at
particular groups in the labor market, it was clear what we
needed to do, and that was to support a stronger labor market
more generally.
Mr. Ellison. But, Chair Yellen, forgive me for the
interruption. I definitely think that--I get that part. But I
would rather talk prospectively, because the past is what
happened and there is no changing it.
How can the Fed Chair get the FOMC to say, ``Wait a minute,
not all Americans, particularly African-Americans, are
experiencing this upsurge in economic activity?''
For Black Americans, we are still in the midst of a very
serious depression-recession. What can we do about it, and
what--and again, I am not here to say--to wag my finger about
what happened. We know what happened and it wasn't right. But
in terms of what is happening now and what can happen, what can
you tell me?
Mrs. Yellen. I think you are right that we should pay
adequate attention to how different groups are faring in the
labor market. We have made clear that we don't focus on any
single statistic, that the unemployment rate is only one
measure of what is happening in the labor market, and it is
appropriate for us to really try to do a much more detailed
assessment of where things stand and what we should be aiming
for.
Chairman Hensarling. The time of the gentleman has expired.
The Chair anticipates calling upon two more Members, Mr.
Barr and Mr. Delaney, and then excusing the witness.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr.
Mr. Barr. Thank you, Mr. Chairman.
And, Chair Yellen, thanks for being back before us.
The last time you were here, we talked about a qualified
CLO concept, and you were kind enough to respond to that
question in writing. I want to thank you for that, and I want
to particularly thank you for recognizing that the qualified
CLO concept could be considered a positive development in the
market.
And I would like to continue our discussion about the role
that regulation could very well play in terms of being a source
of economic instability, particularly in our capital markets.
The Basel Committee recently finished a rule in January
that increases the capital held against securitization
exposures in a bank trading book by up to 5 times the amount
already required under Basel III, as well as the final TLAC
rules.
One industry study suggests that trading in U.S. asset-
backed securities will become uneconomical if the rule is not
tailored to fit the U.S. marketplace.
If it is uneconomical to act as a market-maker for
commercial mortgage-backed securities or residential mortgage-
backed securities, auto loans, credit cards, collateralized
loan obligations, then banks will pull out of the ABS market,
which represents a $1.6 billion source of consumer lending, or
30 percent of all lending to U.S. consumers.
So my question to you, Chair Yellen, is how will the Fed
ensure that the final rule will be tailored to fit the U.S.
market, which is the most liquid ABS market in the entire
world?
Mrs. Yellen. I will have a careful look at that. I am not
familiar with all of the details of the Basel proposal.
But anything we implement in the United States--there is
nothing automatic that is implemented in the United States, and
we will have a careful look at what the impact would be.
Mr. Barr. I appreciate you doing that. And I continue to
urge the Fed, and you in particular, as a member of FSOC, to
look at government regulation as a source of economic
instability.
To that end, we are told by many of the regulated bank
holding companies that there is no updated organizational chart
within the Fed. And so my question would be, can you share with
us--or can your staff share with us--a detailed organizational
chart with the names and titles of the Bank Supervision and
Regulation Division's full professional staff?
Mrs. Yellen. I think so.
Mr. Barr. I am told that whatever organizational chart you
have is very dated, and so--
Mrs. Yellen. Yes--
Mr. Barr. --we can't even--many of the folks can't even ask
you questions.
Mrs. Yellen. --yes. I don't see any reason we can't--
Mr. Barr. I appreciate you doing that.
Switching gears really quickly to the Consumer Financial
Protection Bureau and their funding source, which, as you know,
according to the budget overview that the Bureau makes public,
transfers from the Federal Reserve System are capped at $618
million for Fiscal Year 2015, and the transfer cap is estimated
to be $631 million for Fiscal Year 2016.
Given that my time is scarce, if you could just answer the
following in yes-or-no responses, that would be greatly
appreciated. Does the Fed approve the Bureau's budget?
Mrs. Yellen. We fund the Bureau's budget.
Mr. Barr. You fund it, but do you approve the budget?
Mrs. Yellen. I think the answer is no, but--
Mr. Barr. Right. Can you veto specific allocations
requested? No.
Mrs. Yellen. I don't think so.
Mr. Barr. Okay. And does the Fed have protocols if the
bureau seeks to transfer more than the cap on its transfers
under the formula? Do you have a protocol in place to prevent
that?
Mrs. Yellen. We abide by the law. I need to look at the
details of what our obligations and limits are. I need to look
at that more fully.
Mr. Barr. We would like to know if the--
Mrs. Yellen. But we certainly have protocols to abide by
what Congress set out.
Mr. Barr. This is the problem we have is that we don't have
appropriations control over the Bureau. And so, they get their
funding from you. We would hope that they would at least be
accountable to you as the funding source.
Is there any direct oversight of the implementation of the
Bureau's budget by the Fed?
Mrs. Yellen. No. Our Inspector General has authority both
for the Fed and the Bureau, but the Fed does not have authority
over the budget and spending of the--
Mr. Barr. Thank you. In my last 10 seconds, you have talked
a little bit about the need for Congress to address our long-
term debt and deficit crisis. This seems to me a five-alarm
fire.
Given that mandatory spending is 70 percent of the Federal
budget, why isn't the Fed more aggressively warning Congress
that it must reform mandatory entitlement spending?
Mrs. Yellen. Every Fed Chair that I can remember has come
and told Congress that this is a looming problem with serious
economic consequences. I know my predecessor has; I have on
many occasions; and I certainly remember that Chairman
Greenspan discussed with Congress the importance of addressing
this.
Mr. Barr. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Maryland, Mr.
Delaney.
Mr. Delaney. Thank you, Mr. Chairman.
And I want to thank you, Chair Yellen, for not only your
leadership in general, but also your participation and patience
at this hearing.
I also want to welcome our visitors and guests here today
and thank you for bringing your important message.
We do talk about how our unemployment rate has gone down
substantially, which it has--below 5 percent now. But we all
know that when you get behind those numbers there are really
only two types of jobs being created right now in this country:
high-skilled, high-paid jobs, where you need very, very
specific skills and advanced educations to get them; and low-
skilled, low-paid jobs.
And what we are not creating is middle-skilled, middle-
class jobs, the kind of jobs that have been the backbone of
this country for a long time and allowed wages to grow and
people to raise their families with one job.
The Chair touched on something very important, which is
infrastructure, because there is nothing we can do as a country
to help address that problem more than rebuilding our country.
So if I could ever edit your T-shirts I would say, ``Let
our wages grow, rebuild our country,'' because I do think it
would really make a difference in raising wages.
But my question for the Chair is--and again, thank you for
your patience--in December, when the decision was made to raise
the Federal fund rates, in your testimony you said that was in
part based on a view that economic activity would continue to
expand at a moderate pace and labor market indicators would
continue to strengthen.
And certainly, based on the top-line data from 2015 and
2014, where we saw decent GDP growth, improvement in the
residential market, business investments at a decent level--not
where we would like them, but at a decent level--increases in
R&D investments, et cetera, but even when you take into
consideration the negatives from the oil and gas sector, the
outlook for economic growth was reasonably solid, and the labor
market data that you were looking at, at the time, must have
been good because the January numbers were actually
encouraging, not only in terms of unemployment but some of the
wage data, as you talked about.
So I guess my question is, a lot has happened since that
decision in the markets, and that tends to change behavior.
When you look at the same data you looked at when you made that
decision in December, if you look at that data now, does it
change your view as to your perspective on economic activity,
economic growth, and general labor market trends?
Mrs. Yellen. I think the answer is ``maybe,'' but the jury
is out. We have continued to see progress in the labor market.
Over the last 3 months, there have been 230,000 jobs per month,
averaging through.
GDP growth clearly slowed a lot in the fourth quarter. My
expectation is that it will pick up this quarter.
But on the other hand, financial conditions have tightened
considerably, and that can have implications for the outlook.
And what the Committee said in January--we had previously
said that we regarded the risks to the outlook for economic
activity and the labor market as balanced.
Mr. Delaney. Right.
Mrs. Yellen. What we said in January is that we are
evaluating and assessing the impact of these developments on
the outlook for both the labor market and activity for
inflation and the balance of risks. And that is what we are
doing at this point.
Mr. Delaney. And when you look, Chair Yellen, at recent
data that you get better than anyone about credit formation and
borrowing activities in the markets, are you concerned that
there has been a significant contraction in credit availability
based on recent market activities? And how much does that
factor in to your--
Mrs. Yellen. That is an important factor.
Mr. Delaney. And have you seen it?
Mrs. Yellen. Not really at this stage. But what we do see
is that spreads, especially on lower-graded bonds, have widened
considerably. Borrowing rates have widened.
Mr. Delaney. What about bank lending?
Mrs. Yellen. And it is not just energy. In our most recent
survey of banks on their lending standards, we have seen a
tightening that is reported in C&I loans, in CRE loans, and
that certainly those loans continue to grow but that is
something that bears watching. It is really those kinds of
trends that we need to evaluate--
Mr. Delaney. And very quickly, as you weigh your decisions,
obviously inflation and labor-market participation are
critical, overall, the economic activity is critical. This
subcomponent, in other words, what is happening with credit
availability--how important is that in your decision-making
process?
Mrs. Yellen. What we are trying to do is forecast spending
in the economy. Investment spending and housing are two
important forms of spending. And credit availability factors
into our forecast for both of those portions of the economy.
They are not the only factors that matter, but they are a
factor that is important, and so we will be considering those.
And there are a number of weeks before we meet again in
March. There is quite a bit of additional data we will want to
look at. But you have pinpointed exactly the kinds of
considerations that will bear on our thinking.
Mr. Delaney. Thank you again.
Chairman Hensarling. The time of the gentleman has expired.
The ranking member is recognized for a unanimous consent
request.
Ms. Waters. I ask unanimous consent to insert into the
record the statement from Financial Innovation Now (FIN) that
highlights the very important work the Federal Reserve Board is
doing through the Faster Payments Task Force, of which FIN is a
member.
Chairman Hensarling. Without objection, it is so ordered.
Chair Yellen, I thank you for your testimony today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place her responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
I ask Chair Yellen to please respond promptly.
This hearing stands adjourned.
[Whereupon, at 1:12 p.m., the hearing was adjourned.]
A P P E N D I X
February 10, 2016
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