Congressional Testimony

S. HRG. 112–723 FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2012 HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS SECOND SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANTTOTHEFULLEMPLOYMENTANDBALANCEDGROWTHACTOF1978 JULY 17, 2012 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.fdsys.gov/ U.S. GOVERNMENT PRINTING OFFICE 78–978 PDF WASHINGTON : 2013 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS TIM JOHNSON, South Dakota, Chairman JACK REED, Rhode Island RICHARD C. SHELBY, Alabama CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee DANIEL K. AKAKA, Hawaii JIM DEMINT, South Carolina SHERROD BROWN, Ohio DAVID VITTER, Louisiana JON TESTER, Montana MIKE JOHANNS, Nebraska HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania MARK R. WARNER, Virginia MARK KIRK, Illinois JEFF MERKLEY, Oregon JERRY MORAN, Kansas MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi KAY HAGAN, North Carolina DWIGHT FETTIG, Staff Director WILLIAM D. DUHNKE, Republican Staff Director CHARLES YI, Chief Counsel LAURA SWANSON, Policy Director MARC LABONTE, Detailed CRS Economist ANDREW OLMEM, Republican Chief Counsel MICHAEL PIWOWAR, Republican Chief Economist DANA WADE, Republican Professional Staff Member GREGG RICHARDS, Republican Professional Staff Member DAWN RATLIFF, Chief Clerk RYKER VERMILYE, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON C O N T E N T S TUESDAY, JULY 17, 2012 Page Opening statement of Chairman Johnson ............................................................. 1 Opening statements, comments, or prepared statements of: Senator Shelby Prepared statement ................................................................................... 42 Senator Crapo ................................................................................................... 2 WITNESS Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 4 Prepared statement .......................................................................................... 43 Responses to written questions of: Chairman Johnson .................................................................................... 46 Senator Reed .............................................................................................. 51 Senator Warner ......................................................................................... 52 Senator Merkley ........................................................................................ 55 Senator Vitter ............................................................................................ 59 Senator Toomey ......................................................................................... 61 Senator Kirk .............................................................................................. 64 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated July 17, 2012 ............................. 68 (III) VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2012 TUESDAY, JULY 17, 2012 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:03 a.m., in room SD–G50, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Com- mittee, presiding. OPENING STATEMENT OF CHAIRMAN TIM JOHNSON Chairman JOHNSON. I call the hearing to order. Today we wel- come Chairman Bernanke back to the Committee to deliver the Federal Reserve’s semiannual Monetary Policy Report. The legacy of the financial crisis still weighs heavily on our Na- tion’s economy and financial system today. Following the longest and deepest recession since the Great Depression, the economy has grown slowly but steadily since 2009. We have come a long way, but there is still a lot of work left to be done to get our economy back to the point where jobs are readily available and wages are rising for American workers. While the economy is not growing as fast as we would like, it is important to recognize that it would not be growing at all if Con- gress and the Federal Reserve had not taken action to restore fi- nancial stability. The Wall Street Reform Act created a framework for a financial system that is stable, works in the consumers’ interest, and never again allows bank bailouts. Recent events such as CFTC ordering Barclays to pay a $200 million penalty for LIBOR manipulation are reminders that we need tough, fair rules in place and strong, ade- quately funded financial regulators to enforce those rules. Some critics say that the cost of financial regulation is too high, but those same critics seek to underfund our regulators and ignore the reality that today’s high unemployment and battered economy were caused by inadequate and ineffective regulations. That is why we passed the Wall Street Reform Act, and that is why we are safer today than before the crisis. Any cost that Wall Street bears from playing by the rules pales in comparison to the trillions of dollars that Americans lost as a result of the last financial crisis. As we recognize the second anni- versary of the Wall Street Reform Act, I look forward to hearing from Chairman Bernanke on the Fed’s progress in carrying out its new responsibilities and how these efforts have further stabilized the financial system. (1) VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 2 Though policy makers can make the financial system more stable and resilient to negative shocks to the economy, they cannot pre- vent those shocks from occurring in the first place. While recent policy actions taken in Europe are welcome, the eurozone economy remains fragile. I would like to hear the Chairman’s thoughts on the progress that has been made in the eurozone and how U.S. pol- icy makers can protect our economy from the potential fallout if the situation were to worsen. While the Fed’s role in the economy is important, we need to ac- knowledge that the Fed cannot solve all of the economy’s problems. The housing market has been holding back the economy for too long, and I ask this Committee to support efforts of my colleagues to enact legislation to give responsible homeowners the opportunity to refinance their mortgages. This legislation is fair because it helps homeowners who have been playing by the rules, is market- friendly because it eliminates barriers to competition and is a cost- effective way to jump-start the economy because it keeps more of workers’ paychecks in their pockets. Congress also needs to reach a sensible resolution to the fiscal cliff problem at the end of the year. I support the President’s plan to extend expiring tax cuts for the middle class. Today’s hearing underlines the importance of effective oversight, which has been a leading priority of mine as Chairman of the Committee. In the past 18 months, we have conducted frequent oversight hearings with all of the financial regulators. In the coming weeks, we will conduct oversight hearings with Secretary Geithner, in his role as the head of the Financial Stability Oversight Council, and with the Director of the Consumer Financial Protection Bureau, Richard Cordray. I have welcomed the steps that Chairman Bernanke has taken to make the Fed more transparent, including the decision to re- lease its communications with Barclays on LIBOR. I also believe that the Wall Street Reform Act’s enhancements to Fed trans- parency and oversight have had a positive impact. I now turn to Senator Crapo. STATEMENT OF SENATOR MIKE CRAPO Senator CRAPO. Thank you very much, Chairman Johnson. I ap- preciate your holding this hearing today. And, Chairman Bernanke, we appreciate having you with us for your semiannual Monetary Policy Report to Congress. Senator Shelby is unable to attend today because of a family obli- gation, but I ask that his statement be made a part of the record and note that he will be submitting questions for the record. Chairman JOHNSON. Without objection. Senator CRAPO. Thank you, Mr. Chairman. The U.S. economy continues to experience disappointing job growth and faces significant challenges with the eurozone debt cri- sis, the tax cliff, and our broader fiscal crisis, which includes the need to address the impending insolvency of the entitlement pro- grams. A disappointing 80,000 jobs were added in June, holding unemployment steady at 8.2 percent. In June, Chairman Bernanke warned Congress about what could happen if it does not address the so-called fiscal cliff, noting that this would have a very significant impact on the near-term recov- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 3 ery. According to CBO, if all of the tax and spending measures under current law were to occur together, the economy would grow at just 0.5 percent in 2013 compared to a 4.4 percent expectation absent these measures. Recently, one of the largest private owners of U.S. debt said that we have until 2016 to contain our borrowing before bond investors revolt and drive up interest rates. Others suggest the timetable could be much sooner. The lack of economic growth has caused some to call for further expansion of the Federal Reserve’s $2.9 trillion balance sheet through a third round of so-called quantitative easing. However, there are a lot of questions about how effective the first two rounds of quantitative easing have been, what their long-term impacts will be, and how effective an additional round of quantitative easing could be. I am interested in learning what more can be done with Government bond yields that have been so low for so long. Following the June FOMC meeting, the Federal Reserve an- nounced it would continue its maturity extension program, the Op- eration Twist, through the end of the year. I am interested in learning what have been the results so far and what are the expec- tations going forward. Another drag on the economy are the hundreds of Dodd-Frank proposed rules that will increase the cost of capital formation in the long run and in the short term add to the climate of uncer- tainty and complexity. The concern that I hear most is that the regulators do not understand the cumulative effect of the hundreds of proposed rules and that there is a lack of coordination between our domestic and international regulators. That is why it is so im- portant that the regulators perform meaningful cost/benefit anal- ysis so that we can understand how these rules will affect the econ- omy as a whole, interact with one another, and impact our global competitiveness. Ultimately, we need to have rules that are strong enough to pro- tect our economy but that can adapt to changing market conditions to promote credit availability and spur job growth for millions of Americans. Also, like many of my colleagues, I am learning about the issues related to the setting of the London Interbank Offered Rate, or LIBOR, which serves as a benchmark for trillions of dollars of loans and derivatives, including the cost of many mortgages in the United States. Recently, Barclays agreed to pay a $450 million fine to settle manipulation charges brought by the U.S. Department of Justice, the Commodity Futures Trading Commission, and the United Kingdom’s Financial Service Authority. Investigations that banks manipulated the LIBOR process are continuing, and questions are being asked whether international and domestic regulators, including the Federal Reserve, took suffi- cient action. I look forward to hearing from Chairman Bernanke on all of these issues, and, again, Mr. Chairman, I welcome you here for your report today. Chairman JOHNSON. Thank you, Senator Crapo. To preserve time for questions, opening statements will be lim- ited to the Chair and Senator Crapo. However, I would like to re- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 4 mind my colleagues that the record will be open for the next 7 days for additional statements and other materials. With that, I would like to welcome Chairman Bernanke. Dr. Bernanke is currently serving a second term as Chairman of the Board of Governors of the Federal Reserve System. His first term began under President Bush in 2006. Before that, Dr. Bernanke was Chairman of the Council of Economic Advisers and served as a member of the Board of Governors of the Federal Reserve Sys- tem. Chairman Bernanke, please begin your testimony. STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. BERNANKE. Thank you. Chairman Johnson, Senator Crapo, and other Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Con- gress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy. The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 2.5 percent in the second half of 2011, real GDP increased at a 2-percent rate in the first quarter of 2012, and available indicators point to a still smaller gain in the second quarter. Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjust- ment and the unusually warm weather this past winter can ac- count for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent. Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers’ purchasing power, households remain concerned about their employment and income prospects, and their overall level of confidence remains relatively low. We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last sum- mer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mort- gages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater—that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of fore- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 5 closed properties, continues to divert demand from new construc- tion. After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has also slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the dou- ble-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indi- cators of investment demand—such as surveys of business condi- tions and capital spending plans—suggest further weakness ahead. In part, slowing growth in production and capital investment ap- pears to reflect economic stresses in Europe, which, together with some cooling in the economies of other trading partners, is re- straining the demand for U.S. exports. At the time of the June meeting of the Federal Open Market Committee—FOMC—my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013. These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data. In addi- tion, financial strains associated with the crisis in Europe have in- creased since earlier this year, which—as I already noted—are weighing on both global and domestic economic activity. The recov- ery in the United States continues to be held back by a number of other headwinds, including still tight borrowing conditions for some businesses and households, and—as I will discuss in more detail shortly—the restraining effects of fiscal policy and fiscal uncer- tainty. Moreover, although the housing market has shown improve- ment, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants into the labor force, the reduc- tion in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants’ forecasts now has the unemployment rate at 7 percent or higher at the end of 2014. The Committee made comparatively small changes in June to its projections for inflation. Over the first 3 months of 2012, the price index for personal consumption expenditures rose about 3.5 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an an- nual rate of 1.5 percent over the first 5 months of this year, com- pared with a 2.5 percent rise over 2011 as a whole. The central tendency of the Committee’s projections is that inflation will be be- tween 1.2 to 1.7 percent this year and at or below the 2-percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 6 Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fis- cal and banking crisis, and the second is the U.S. Fiscal situation. Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European au- thorities, including the provision of 3-year bank financing by the European Central Bank. However, tensions in euro-area financial markets intensified again more recently, reflecting political uncer- tainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain’s fiscal position and the resil- ience of the euro-area banking system more broadly. Euro-area au- thorities have responded by announcing a number of measures, in- cluding funding for the recapitalization of Spain’s troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announce- ments, however, Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and eco- nomic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook. The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we be- lieve that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial sys- tem to severe shocks, including those that might emanate from Eu- rope. The capital and liquidity positions of U.S. banking institu- tions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Eu- rope. That said, European developments that resulted in a signifi- cant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy. The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. Fiscal policies are on an unsustainable path, and the development of a credible me- dium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fra- gility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congres- sional Budget Office has estimated that, if the full range of tax in- creases and spending cuts were allowed to take effect—a scenario widely referred to as the ‘‘fiscal cliff’’—a shallow recession would occur early next year and about 11⁄ 4 million fewer jobs would be created in 2013. These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 7 Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of the year. The most effective way that the Congress could help to support the economy right now would be to work to address the Nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence. In view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program, or MEP, through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longer- term Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Re- serve’s balance sheet. By removing additional longer-term Treasury securities from the market, the Fed’s asset purchases also induce private investors to acquire other longer-term assets, such as cor- porate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative. Economic growth is also being supported by the exceptionally low level of the target range for the Federal funds rate of 0 to 1⁄ 4 per- cent and the Committee’s forward guidance regarding the antici- pated path of the funds rate. As I reported in my February testi- mony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low lev- els for the Federal funds rate at least through late 2014. The Com- mittee has maintained this conditional forward guidance at its sub- sequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. Thank you. I would be pleased to take your questions. Chairman JOHNSON. Thank you for your testimony. We will now begin the questioning of our witness. Will the clerk please put 5 minutes on the clock for each Member? Chairman Bernanke, I am going to lead off with a question about the LIBOR scandal. Last week, you released documents showing that the Fed provided early warnings on manipulation in the LIBOR market. Then-New York Fed President Timothy Geithner raised concerns with President Bush’s Presidential Working Group and offered reform recommendations to the British authorities. Can you tell the American people, what did you know, when did you know it, and what did you do about it? What can we do to re- store confidence in the system? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 8 Mr. BERNANKE. Thank you, Mr. Chairman. As you know, LIBOR is a critical benchmark for many financial contracts, so the actions of traders and banks that have been disclosed are not only very troubling in themselves, but they have the effect of undermining public confidence in financial markets. Regarding the Federal Reserve’s role, the Federal Reserve Bank of New York takes the lead in gathering market intelligence for the Federal Reserve System. It was in the process of gathering market intelligence when it received information about LIBOR submis- sions, notably a phone call on April 11, 2008, in which a trade in Barclays New York told an employee of the Federal Reserve that he thought that Barclays was underreporting its rate. About that same time, stories began to appear in the media as well. There was an April 16th story in the Wall Street Journal, and the Financial Times also had a number of stories. I would like to make two preliminary points before talking about the Federal Reserve’s response to that information. First, the information the Fed received was about the banks pos- sibly submitting low rates in order to avoid appearing weak during the period of the crisis. The transcripts of the phone calls that were released have no reference to the manipulation of rates for profit by derivatives traders, as alleged by the recent decision. The second point I would like to make is that this issue was com- plicated during the crisis by the fact that there were very few transactions occurring other than overnight, and so banks were asked to report what they would pay if they were borrowing at a certain term. It may have been in many cases that transactions were not taking place at that term. We will get more information on that as the investigations continue. But it is clear that, beyond these disclosures, the LIBOR system is structurally flawed, and part of the response was to address those flaws. The Federal Reserve Bank of New York, after receiving this in- formation from its market inquiries, responded very quickly. It set up an internal working group to address the issue. Importantly, it informed all the relevant authorities in both the U.K. and the United States. Notably, on May 1st, then-President Geithner briefed the President’s Working Group, which consisted of the Treasury, the Fed, the CFTC, and the SEC, among other partici- pants. The New York Fed briefed the Treasury separately on May 6th. The PWG meeting was followed up with interagency staff briefings to provide more information to the staffs of the various agencies. And the New York Fed also communicated with the FSA and the Bank of England in the United Kingdom. So there was ac- tive effort to report to all the relevant policymakers and enforce- ment agencies the information that had been received. The second step that the Federal Reserve Bank of New York took was to develop recommendations to address the structural prob- lems with LIBOR that I mentioned before. The New York Fed re- leased a memorandum, a list of suggested changes that they sub- mitted to the Bank of England on June 1st and following earlier discussions with the Bank of England. There were also communica- tions with the British Bankers Association, which is the private group that constructs LIBOR, prior to June 1st. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 9 So the Federal Reserve Bank of New York took the lead here. They released a good bit of information. They are looking for addi- tional information, and they will certainly release it if they find it. On the Board’s side, we were in supporting mode. We provided analytic support, notably about the issues related to the construc- tion of LIBOR. Our staff were in contact with the CFTC in April and May to provide analytical support. And Governor Kroszner on the Board at that time was in contact with the British authorities and the BBA during May and June. I think it is important to note that, following the Federal Reserve Bank of New York’s disclosures to the appropriate authorities, there was rapid followup. The CFTC was making inquiries as early as April 2008. It sent requests for information to U.S. banks in the fall of 2008. The SEC initiated inquiry in 2009 and the DOJ in 2010. Currently, the European Commission and a range of other foreign regulators, including British regulators, of course, are also investigating. And, of course, we know about the June 27th settle- ment with Barclays. So there was a substantial response by the Federal Reserve Bank of New York both in terms of informing all the appropriate authori- ties. That information led to investigations. The Federal Reserve Bank of New York also contributed substantially to thinking about how to better structure the LIBOR panel and the LIBOR informa- tion collection to avoid some of the weaknesses in the system that became evident during the crisis. Chairman JOHNSON. Chairman Bernanke, what are the factors that led you to support the extension of the so-called Operation Twist program? And what changes in economic conditions might lead you to consider a strong policy response in the future? If fur- ther extensions of Operation Twist are not possible in the future, what other policy tools are available if the Fed decided to provide additional monetary support? Mr. BERNANKE. Well, as you know, Mr. Chairman, the Federal Reserve in December 2008 brought rates down close to zero, and since then we have had to rely on a number of less conventional policy tools in order to achieve additional financial accommodation, and those included, of course, as was mentioned, quantitative eas- ing programs, and the Operation Twist, which, as I discussed in my remarks, also provides extra financial accommodation and provides support for the recovery. The other type of tools that we have include communication tools, notably our forward guidance, which gives the markets some sense of where we think—or how long we think that rates will be kept at their current low level. So those are the principal types of tools that we have. We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we have seen recently is enduring and whether or not the economy is likely to continue to make progress toward lower unemployment and more satisfactory labor market conditions. If that does not occur, obviously we have to consider additional steps. We have looked at a range of possible tools, mostly, again, involving the balance sheet and communication. The Committee meets in a couple of weeks, and we will be discussing those tools. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 10 We have not really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market. Chairman JOHNSON. Senator Crapo. Senator CRAPO. Thank you, Mr. Chairman. Chairman Bernanke, ever since the Dodd-Frank conference, there has been a debate about whether nonfinancial end users were exempt from margin reforms. Then-Chairman Dodd and Chairman Lincoln acknowledged that the language for end users was not per- fect and tried to clarify the intent of the language with a joint let- ter. In the letter, they stated, ‘‘The legislation does not authorize the regulators to impose margin on end users, those exempt enti- ties that use swaps to hedge or mitigate commercial risk.’’ In April 2011, prudential regulator issued a joint proposal that would, in fact, require nonfinancial end users to post margin to their bank counterparties. According to the proposed rule, the proposal to require margin stems directly from what they view to be a legal obligation under Title VII. Recently, I offered an amendment with Senator Johanns to fulfill congressional intent by providing an explicit exemption from margin requirements for nonfinancial end users that qualify for the clearing exemption. The amendment is identical to the House bill which passed the House by a vote of 370–24. Is it accurate, in your opinion, that regardless of congressional intent, the banking regulator view the plain language of the stat- ute as requiring them to impose some kind of margin requirement on nonfinancial end users unless Congress changes the statute? Mr. BERNANKE. We believe that the statute does require us to impose some type of margin requirement. We tried to mitigate the effect as much as possible by allowing for exemptions when the credit risk associated with the margin was viewed as being suffi- ciently small. So many small end users would be exempt in prac- tice. Senator CRAPO. Do you agree that the nonfinancial end users’ hedging does not contribute to systemic risk, that the economic benefits from their risk management activity—excuse me, that the economy benefits from their hedging activity and that it is appro- priate for Congress to provide an explicit exemption from margin requirements for nonfinancial end users that qualify for the clear- ing exemption? Mr. BERNANKE. I certainly agree that nonfinancial end users benefit and that the economy benefits from the use of derivatives. It seems to be the sense of a large portion of the Congress that that exemption should be made explicit, and speaking for the Federal Reserve, we are very comfortable with that proposal. Senator CRAPO. Well, thank you, Mr. Chairman. I want to shift gears for just a minute back to the question that the Chairman asked with regard to what actions you can take. You indicated in your response to his question about what tools you still have and how you may approach them that you still have some possible tools to deal with. There is obviously a lot of speculation and concern about whether you are considering another round of quantitative easing. There are a lot of questions about how effec- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 11 tive quantitative easing has been to date and what more can be done. Could you discuss for us a moment how effective you feel that the quantitative easing has been so far and whether you feel that it is one of those tools that you should seriously consider going for- ward? Mr. BERNANKE. So as I mentioned to the Chairman, we ran out of space to lower short-term rates in the normal way, and we had to look for other tools. Like a number of other major central banks, we have used asset purchases as a way of providing additional sup- port to the economy. Economists differ on terms of how effective the tools have been. My own assessment is that the quantitative easing and the Oper- ation Twist so-called tools have been effective in easing financial conditions and in promoting strength in the economy, and it was most evident in the so-called QE1 in March 2009, which was fol- lowed a few months later by the beginning of the recovery and, by a few days, by the trough in the stock market. QE2 was certainly effective at addressing what was beginning to become a worrisome amount of risk of deflation in the fall of 2010. That issue was addressed. My view and the view of our analysts at the Fed is that it also contributed to economic growth. It is hard to judge because it depends on what you think would have hap- pened in the absence of those actions. So there is a range of views about the efficacy of these programs. There are also questions about side effects, risks that might be as- sociated with their use, and, therefore, I think they should not be used lightly. Nevertheless, my own view is that these tools and other nonstandard tools still do have some capacity to support the economy, and what we will be looking at in thinking about this is, I think, really two things: The first is, as mentioned in our state- ment, whether or not there is, in fact, a sustained recovery going on in the labor market or are we stuck in the mud, so to speak, in terms of employment. That is, of course, our maximum employ- ment mandate. And then the other issue would be price stability, and notably we would certainly want to react against any increase in deflation risk. Senator CRAPO. Thank you, Chairman JOHNSON. Senator Reed. Senator REED. Thank you very much, Mr. Chairman, and thank you, Chairman Bernanke. Let me return for a moment to the issue of LIBOR. Can you give us and the millions of Americans who depend upon LIBOR because it tells them how much they have to pay for their car loan or their student loan, et cetera, that the current LIBOR is reliable, that the changes that were made or suggested by the New York Fed or oth- ers have been put in place, and that this is an index that is, in fact, reliable and not being subject to manipulation going forward? Mr. BERNANKE. I cannot give that assurance with full confidence because the British Bankers Association did not adopt most of the suggestions that were made by the Federal Reserve Bank of New York. They made a relatively small number of changes. I think it is likely that concerns are less now because we are no longer in the crisis period, and that, as I mentioned, was a period in which VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 12 transactions and many maturities were not taking place. I would like to see additional reforms to the LIBOR process, assuming that LIBOR will continue to be a benchmark for financial contracts. Alternatively, there are a number of people looking at alternative benchmarks, like repo rates or the overnight index swap rate or other types of interest rates which have the advantage over LIBOR that they are market rates as opposed to simply reported rates. Senator REED. What steps are you taking, though, given that concern you have expressed, right now, not retrospectively, how we got here and who did what to do, but to provide as much certainty as you can—there are several banking institutions you directly reg- ulate that contribute to LIBOR. There is your relationship directly with the Bank of England. What are you doing—not just you per- sonally but the Federal Reserve—to ensure this index is appro- priate? And, again, I encourage you to study these alternatives, but the LIBOR is so deeply interwoven and embedded into thousands and thousands of contractual arrangements throughout the world that it is going to be hard to next week shift to something else. Mr. BERNANKE. Well, again, I think we are and need to continue advocating for reforms to the LIBOR process. It is constructed by a private organization in the U.K., and so our direct ability to in- fluence that is limited. With respect to the three banks in the United States which con- tribute to the LIBOR panel, two of those banks have reported in their SEC filings that they have been asked for information by in- vestigating agencies. We are following that very carefully. We will see what happens, and we will provide any support and help we can to those investigators. Senator REED. Let me turn to more the monetary issue. The Fed- eral Reserve has been in some cases sort of pursuing aggressive monetary policy while fiscal policy has not kept up in some re- spects, and I presume you are prepared to continue to do that given the unemployment numbers, inflation numbers, et cetera. That is regardless of what we are doing on the fiscal end. Mr. BERNANKE. Our mandate tells us to do the best we can for employment and price stability, and we will continue to do that. Of course, we would appreciate other policymakers playing appro- priate roles themselves as well. Senator REED. One of the comments that you made—and will give you a chance to amplify it—is that there will be a need, I think in your view, next year for continued stimulus, for want of a better term, if we are going to reduce unemployment, which is one of your mandates, and that if we reach a solution that is heavy on cuts to spending, that is heavy perhaps even on cuts to entitle- ments, that would not provide stimulus, in my view, and it could further impact unemployment in the country. Is that an accurate assessment? Mr. BERNANKE. Well, the position we have taken is, I would say, at a first cut is do no harm. What we need is a strategy which ad- dresses the long-run sustainability issues. We cannot forget about that. At the same time, if the fiscal cliff is allowed to happen, it will certainly have major negative effects on the recovery. The CBO, the IMF, and many other observers have made similar rec- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 13 ommendations, and we feel that is a reasonable balance between the short and long term. Senator REED. Some of the specific issues that we face at the end of the year are filling a gap in 2013 in terms of spending, in terms of revenues. And if that 2013, if we avoid the cliff by taking an- other route, but that route significantly decreases spending, de- creases other stimulative effects, would your view be that we could have avoided a cliff but still found ourselves in a very perilous eco- nomic situation because employment will continue to decline? Mr. BERNANKE. It is a question of the timeframe. In the very near term, we already have a lot of fiscal drag coming from State and local governments, for example, as you know, and some coming inevitably from the Federal side. So in no way am I saying that we should not be making strong efforts to achieve long-term sustain- ability and make a credible plan as soon as possible for doing that. But it would be better to make that plan soon but to have the ef- fects come in more gradually to allow the recovery the air it needs in the short term. Senator REED. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Corker. Senator CORKER. Thank you, Mr. Chairman. And thank you, Mr. Chairman, for being here. I was listening to the last dialog there, and I know in your statement you talked about the fiscal cliff that is coming up. And to be clear about the spending reductions, it is $1.2 trillion over the next 10 years that the sequestration amounts to. We are going to spend about $45 to $47 trillion of taxpayer money over the next 10 years. And while I agree we should come up with a much better solution that deals with entitlements and revenues and hopefully something that is much larger, are you se- riously concerned that we are talking about $108 billion next year in reductions, half between defense, half in other mandatory spend- ing, you are seriously concerned that that small amount of spend- ing reductions is something that is going to damage the economy? Mr. BERNANKE. The fiscal cliff includes both the spending reduc- tions and the tax increases. Senator CORKER. I am talking about just the spending piece. It is hard for me to believe—— Mr. BERNANKE. Obviously, a smaller fiscal contraction will have a smaller effect. But, you know, I do not want to make a judgment about—I realize it is very contentious, taxes versus spending. I do not want to get into that. But, clearly, a smaller reduction in the fiscal position would have less effect on the economy than a larger one. Senator CORKER. Yes. But as we look at the economy, would you not also say that the best thing we could do to stimulate the econ- omy, including any actions the Fed might take, is for us to have real balanced fiscal reform? Is that not the thing that would cause our economy to take off more than anything else and alleviate the uncertainty that people have, the investing community? Mr. BERNANKE. Fiscal reform is very important, not only the con- trol of deficits over the long period but also the quality of fiscal pol- icy: What are we spending our money on? What does our Tax Code look like? I think those things are extremely important. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 14 But I think the way the current law is written, we have the max- imum impact right in the very short run on January 1, 2013, and much less happening over the next decade or the next two decades. So I am not advocating an overall increase in fiscal spending or anything like that. I am just saying that the timing should be ad- justed to allow the recovery a little bit more space to continue, but to make a serious efforts to improve our fiscal policy over the next decade. Senator CORKER. So, look, I agree that we should have a better policy than we now have, and I think most of the people on this dais are trying to seek that, and it is unbelievable to me that we have not already done that. But I think, on the other hand, for us to potentially kick the can down the road on sequestration creates even more—if we do not come up with another solution, which I hope we will, but to say that you are recommending in some ways that we kick the can down the road, not do sequestration, and make us look even more irresponsible to me is worse than the $108 billion that might be reduced out of the spending that the Federal Government is going to be doing this next year. Do you understand what I am saying? Mr. BERNANKE. Yes, sir, and I think just delaying everything, just saying we are not going to do it, put it off a year, I think that would be a very bad outcome. Senator CORKER. So I think the actions that you are taking at the Fed—and I understand you have a dual mandate. I think we should have a single mandate, and I know we have talked about that. I know that it creates bipolar activity because you are trying to juggle the two, and we have created that, not you. But I think the actions that you are taking really take the—or you are poten- tially considering—I know QE2 was in response to potential defla- tion. I think further actions actually take the impetus off us to act responsibly. And I candidly wish we had a Chairman of the Fed that sometimes would say, look, we are not doing anything else, we are pushing rope, and it is up to you to act responsibly to deal with these fiscal issues, quit looking to us. I mean, are you tempted ever to say that to Congress? Would you not say that now? Mr. BERNANKE. I do not think that is my responsibility. I have been assigned to focus on maximum employment and price sta- bility, not to hold threats over Congress’ head. Congress is in charge here, not the Federal Reserve. Senator CORKER. A very politic answer. I would say that, you know, you have members that are concerned about the policies that you are putting in place being disruptive. You do have members who are concerned about that. Is that correct? Mr. BERNANKE. We have a range of views on the Committee, yes. Senator CORKER. And let me ask it a different way. If we were to act responsible and to do something in a balanced way that deal with not only the next 10 years but 20 and 30, which most of the plans that have been in the mainstream do that, would that allevi- ate the need possibly for the Fed to consider additional quan- titative easing? Mr. BERNANKE. Well, possibly. As I said, the fiscal issues are a major concern, a major downside risk, and if Congress addressed VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 15 those issues and the economy was—the outlook was better, then it is certainly very possible that that would abrogate any need to take further action. Senator CORKER. You have been a little vague on what additional tools you have, and I understand that. I know the whole world watches when you speak. It does appear that most of the toolkit is utilized at this moment. If you were to consider additional tools at the Fed in the next meeting, what would be the range of options that might exist with rates being where they are today and Operation Twist being in ef- fect? I mean, what else is there that the Fed can responsibly do since the Fed is the biggest lender to the Federal Government al- ready, far more than China and Japan? Mr. BERNANKE. Well, there are a range of possibilities, and I do not want to give any signal that we are choosing one—— Senator CORKER. Well, what is the range? Mr. BERNANKE. The logical range includes different types of pur- chase programs that could include Treasurys or include Treasurys and mortgage-backed securities. Those are the two things we are allowed to buy. We could also use our discount window for lending purposes, but, you know, that is another possibility. We could use communication to talk about our future plans regarding rates or our balance sheet. And a possibility that we have discussed in the past is cutting the interest rate we pay in excess reserves. That is a range of things that we could do. Each one of them has costs and benefits, and that is an important part of the calculation. Senator CORKER. Thank you for your service and for being here. Chairman JOHNSON. Senator Schumer. Senator SCHUMER. Well, thank you, Mr. Chairman. I, too, thank you for your service. I think you have done a superb job in one of the most difficult periods to be Chairman of the Fed. Now, I do not quite agree with my good friend Mr. Corker. I think you have told Congress what you want us to do in your own Fed-speak way of doing it. Just last month, you said you would be ‘‘more comfortable if Congress took off some of the burden in terms of helping the Fed in our economic recovery.’’ What he meant there is not deficit reduction. He meant stimulus. He meant some kind of stimulus, which is the opposite side of the Fed. Now, I agree with you. Under current conditions, fiscal policy should be our first choice. It would be more effective. Unfortu- nately, we can talk all we want—everyone gives speeches how fis- cal policy should be the way to go, and we do not do anything. We have had a hard getting the cooperation necessary to get anything done on the fiscal side. We have tried tax cuts, which supposedly our colleagues on the other side of the aisle like. We have tried in- creased investments in infrastructure, a traditional way of priming the pump. We have tried support for State and local governments where jobs are declining, and we have run into opposition on all fronts. Just last week, on two things that our colleagues have often sup- ported—a tax credit for job creation and accelerated depreciation for capital purchases—we got no support. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 16 So the bottom line is very simple. We are not going to get the fiscal relief we want, at least over the next short while. Maybe after November we will. So given the political realities—and the President has been call- ing for this repeatedly. When the President last fall proposed short- term fiscal support combined with long-term deficit reduction, which to me is the right way to go, a 10-year plan that really re- duces our deficit but a 1- or 2-year plan that pumps the economy up a little bit, he did not get a single Republican vote. And we know the reality. You cannot do it if it is not bipartisan. So given the political realities, Mr. Chairman, particularly in this election year, I am afraid the Fed is the only game in town. And I would urge you to take whatever actions you think would be most helpful in supporting a stronger economic recovery. You have received some harsh criticism for past efforts to help the economy. Republican leadership in the House and Senate, even as they were blocking jobs bills in Congress, sent you a letter op- posing more monetary support as well. Well, I would urge you now more than ever to take whatever actions are warranted by the eco- nomic conditions, regardless of the political pressure. To that end, the minutes of your last FOMC meeting notes that the forecast for real GDP growth was revised down, the unemploy- ment rate remained elevated, and consumer price inflation de- clined. Moreover, the economy showed that not a single member of the Committee thought employment would be back to normal levels by the end of 2014. Not a single member forecast inflation even modestly above your 2-percent target in the same timeframe. So the recession is deeper, more prolonged, and stickier than anyone thought. And let us remember, the Fed has a dual mandate: first and foremost to guard against inflation, but also to keep unemploy- ment up and—sorry, to keep employment up and unemployment down. So, to me, these conditions would certainly motivate the Fed to seriously consider taking further action to bolster the economy. What is your opinion about that? Mr. BERNANKE. We take the dual mandate very seriously. We will act in an apolitical, nonpartisan manner to do what is nec- essary for the economy. We have said we are prepared to take fur- ther action. The complication, of course, is that we are dealing with less conventional tools, and we have to make assessments about their efficacy and whatever costs and risks may be associated with them. But it is very important that we see sustained progress in the labor market and avoid deflation risk, and those are the things we will be looking at as the Committee meets later this month and later this summer. Senator SCHUMER. And you still do—I mean, you have used QE1 and QE2, but you still have some other tools in your toolkit? Mr. BERNANKE. I believe we do, yes. Senator SCHUMER. OK. And do you agree that at least for the next few years the danger of inflation is quite low? Mr. BERNANKE. Well, our projection of inflation is that it will be close to or below our 2-percent target, and, yes, so I think inflation risk is relatively low now. Not everyone agrees with that, but my personal opinion is that that risk is reasonably low right now. And indeed, as I mentioned, there is a modest risk—not a large risk but VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 17 a modest risk—of going in the other direction, which is toward the deflationary side. Senator SCHUMER. And you certainly agree that unemployment has been too high and is sticky, and despite two false starts, we are having a much rougher time than we ever imagined getting un- employment down? Mr. BERNANKE. Yes, that is true. Senator SCHUMER. So get to work, Mr. Chairman. Chairman JOHNSON. Senator DeMint. Senator DEMINT. Thank you. Thank you, Mr. Chairman, for being here. It is interesting to hear my colleagues talk, and they seem puzzled why our short-term temporary stimulus gimmicks do not seem to work. And by any analysis, the cliff that is at the end of this year was created by all of these temporary policies that ex- pire at the same time. Clearly, we are throwing a lot on you, but at the same time it appears that we are forcing you into temporary, short-term ideas. And I am concerned that—you mentioned costs and benefits, some of the things that you are clearly considering, such as quantitative easing, as costs that we do not talk about, at least on our side, as well as keeping the interest rates low. I mean, you are well aware that keeping interest rates where they are is costing Americans about $400 billion a year in lost interest on any savings that they might have. So there is a real cost, and over the last 4 years, prob- ably about $1 trillion in loss. So people who are actually trying to save and put aside dollars are on a negative treadmill in the sense that they are losing the value on their dollars. So there is a cost to that stimulus effect. And also a quantitative easing, which you are clearly considering, our own Federal Reserve Bank of New York estimates that about 50 percent of the value of the S&P over the last decade is related to Fed action and the buildup around Fed action of quantitative easing. My concern now is that what we are seeing is not an increase in the value of stock but a projection and a loss of value of our dol- lar. And while we talk about no inflation, I think what we are talk- ing about is no visible inflation at this time, because clearly, if we are printing more money to buy more of our national debt—and I think you will agree the Federal Reserve through intermediaries has bought over half of our debt the last couple of years—we are diluting the value of our dollar over time. And while it may not show up today or tomorrow, it is inevitable that it will show up. And I think we see that in the reflection of the price of stocks be- cause it is obvious that that does not reflect long-term projections of value and profits as much as it does playing a market and what is coming out of the Federal Reserve. So my concern very much now is another announcement of quan- titative easing, which might inflate the stock market temporarily, but another short-term effort that might help employment in the short term but actually reduce the value of the dollar and, there- fore, everything we have worked for here in the country. So how are you gauging the cost of another round of quantitative easing? Mr. BERNANKE. Well, let me respond to the specifics that you raised. On savings, we understand that low interest rates are a hardship for many people. The reason the interest rates are low, VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 18 of course, is that we are trying to promote a recovery in the econ- omy. People hold fixed-income types of securities, like CDs or Treasury bonds, but they also hold stocks or corporate bonds or small businesses or other types of assets which depend on the strength of the economy. And raising interest rates might help some folks, but if it caused the economy to weaken considerably, it would be bad for investors broadly speaking. So what we are trying to do, of course, as our mandate suggests is to strengthen the economy, which in turn should make America a more attractive place to invest, provide higher returns for every- one investing in the United States. On the dollar and inflation, I appreciate your concern, and that is obviously one of the things we have paid very close attention to. We have not seen inflation yet, though, and the dollar has been, in fact, recently a good bit stronger. And we are comfortable that we have the tools to unwind these policies in a way that will not threaten inflation. But as I said to Senator Schumer, we take both sides of the mandate very seriously, and as we are looking to try to help reduce unemployment, we also want to be confident that we maintain price stability in the United States. And thus far we have been successful in doing that. Senator DEMINT. The dollar is stronger relative to the euro, but comparative values inside the United States just cause some con- cerns at this point. But, again, I appreciate what you do. I would just ask caution in diluting our dollar even further for temporary action. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Menendez. Senator MENENDEZ. Thank you, Mr. Chairman. Thank you, Chairman Bernanke, for your service. I want to speak to you about interest rate manipulations by large banks since the Fed plays a role, a key role in ensuring the integrity of interest rates that affect consumers, small businesses, and cities and towns across the country. You know, I look at this most recent set of allegations on the LIBOR manipulation, and once again it exposes to me a culture of greed, a culture of cheating, of lying, at least at one large bank, and probably many more, which is why nine of my colleagues and I wrote to you and other banking regulators and the Department of Justice last week asking for a robust investigation in the role of these banks and how this ultimately affected consumers in this country, investors in this country, cities in this country, because LIBOR is a very—it is far more than a benchmark. It is a very sig- nificant indicator here that is used. I know that the Federal Reserve Bank of Cleveland found that 45 percent of prime adjustable rate mortgages are indexed to LIBOR; 80 percent of the subprime ARMs use LIBOR as a bench- mark. So this is a huge issue, and it again goes to the integrity of our financial system, and the lack of faith, I think, increasingly that the American public and, for that fact, many of us are having in the system. I looked at the internal emails during 2005 and 2007 of Barclays’ derivative traders asking other employees to submit false survey responses in order to benefit their trading positions, changing VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 19 them, preferring certain LIBOR outcomes on certain days, some- times for it to be higher, sometimes for it to be lower, depending upon how it would benefit their position. Now, I look at this, and I say to myself this is about trying to manipulate a key economic indicator for the purposes of profit. Am I wrong on that? Mr. BERNANKE. No, I agree absolutely. This is unacceptable be- havior. Senator MENENDEZ. Well, let me ask you, clearly, then, banks like Barclays were trying to profit from the LIBOR manipulation, but that profit came not at, you know—actually, it came at the ex- pense of the public in general. Mr. BERNANKE. Some of the public. It is actually an interesting question. You mentioned borrowers. Borrowers may have benefited because LIBOR was underreported. We will probably find out via a number of lawsuits that have been filed, and investigations, ex- actly how much effect there was. Senator MENENDEZ. But if you got caught in that period of time in which the traders wanted the higher LIBOR and that was a time in which your adjustment was going on, you had a detriment to yourself. Investors obviously had a detriment in not knowing the integrity of the institutions, not knowing the—you know, LIBOR, if it is lower, it means things are working pretty well. When it goes higher, it is sort of like a warning sign, is it not? Mr. BERNANKE. I am not defending it. I think it is a major prob- lem for our financial system and for the confidence in the financial system, and we need to address it. Senator MENENDEZ. So how do we address it? For example, I know that some of my colleagues here bristle at regulation, but it seems that this is an industry that on its own will not work with the integrity that the public deserves. We are talking about pen- sion fund investments, mutual fund investments, investments by regular investors, as well as the consequences to consumers. I am sure that we are talking about billions in effect, if not trillions in effect. For example, do you think that we need additional internal con- trols or firewalls between reporting personnel and trading employ- ees at these banks so that we do not have this work to manipulate as one example of—I would like to hear what it is we are going to do now that we know all of this, and may have known it before. We are we going to do to ensure the integrity of this banking sys- tem? Mr. BERNANKE. Well, first, it is going to have to be an inter- national effort because—LIBOR is constructed by the U.K. organi- zation, and, of course, LIBOR is constructed for about ten different currencies as well. So it has to be an international effort. I think there are broadly two approaches. One would be to fix LIBOR, to make changes to it to increase the visibility, to reduce the ability of individual banks or traders to affect the overall LIBOR, and to increase monitoring of the reporting process that is done. So that would be one strategy. The other strategy, which many people are thinking about, is going from what is essentially a reported rate to an observable market rate as the index, and there are a number of possible can- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 20 didates that have been advanced that might ultimately replace LIBOR. As you point out, though, LIBOR is very deeply ingrained in many contracts, and so that change will be not a simple one to make. But I agree with you that we need to address this problem. Senator MENENDEZ. Well, I would look forward to the Fed’s lead- ership in this regard and suggestions of how we, in fact, make a system that cannot be manipulated, that has consequences to mil- lions of consumers, investors, pension funds, municipalities, coun- ties, Governments, all affected by LIBOR. And so it may be an international response that we need, but we need to understand what we can do here in the United States to ensure for these inves- tors and these consumers. Chairman JOHNSON. Senator Vitter. Senator VITTER. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for your report. On the LIBOR issue, from everything I have read, reports as well as documents, it seems like in 2008, when the New York Fed learned of this potential scandal, potential misreporting, it reacted on the policy side with various discussions, recommendations, with their British counterparts. I have not seen anything about it react- ing as a regulator of U.S. large banks. Did it do anything to inves- tigate whether U.S. banks were guilty of the same practice? Mr. BERNANKE. Well, what it did was it informed the responsible authorities—the CFTC in particular—very quickly. The Bank of New York made a presentation to the President’s Working Group that included the SEC and the CFTC, provided supporting informa- tion, as did the Board. So the investigations took place, but they were taken up quite quickly by not the Fed, which is a safety and soundness regulator, but by the authorities that had the most di- rect responsibility for those issues. I have to say that the Federal Reserve Bank of New York is still investigating the situation itself, digging up documents and the like. I do not know what communications or conversations were had with the three U.S. banks that were on the panel, but the ac- tual enforcement actions were taken by the CFTC and SEC and DOJ. Senator VITTER. So as we sit here today, do we know definitively that no U.S. banks were guilty of the same manipulation? Mr. BERNANKE. No, we do not know that. Senator VITTER. Well, it seems to me that goes back to my ques- tion and my concern. If we do not know that, it seems like some- body dropped the ball, the fact that we are 4 years later and we do not know that. Mr. BERNANKE. Well, I mean, as I said, two banks have reported that they have been asked to disclose information to the inves- tigating agencies, and so a robust process is certainly underway. Senator VITTER. It is underway 4 years later. My point is that knowledge of this occurred in 2008, and neither the New York Fed nor other regulators did a sufficient investigation so that we could know one way or the other as we speak today 4 years later that the U.S. banks did not do the same thing. Am I missing something? Mr. BERNANKE. Only that, again, I think the responsibility of the New York Fed was to make sure that the appropriate authorities had the information, which is what they did. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 21 Senator VITTER. Do you think it was a reasonable responsibility for the New York Fed to follow up and say did U.S. banks that we are a primary regulator of do the same thing? Mr. BERNANKE. I do not know what conversations they had. Of course, the New York Fed is the regulator of some banks and of holding companies. There are other regulators, like the OCC and so on. Senator VITTER. But certainly the New York Fed is the primary regulator of the biggest banks with regard to—U.S. banks engaged in LIBOR that we are talking about, correct? Mr. BERNANKE. Two of the three. Senator VITTER. Right. Let me move on to another topic that I am concerned about. The Fed is in the process of rulemaking with regard to the term ‘‘predominantly engaged in financial activities’’ under Dodd-Frank. The rule that has been published and the Fed is now taking comments on seems to me absolutely ignores a very specific criteria that we in Congress placed in Dodd-Frank in Sec- tion 102(a)(6). I know about it because it was a Vitter-Pryor amendment, and it is very specific. It uses an 85-percent test. And it seems to me the rule the Fed is in the process of adopting ig- nores that specific metric. How can the Fed adopt a rule that ignores specific statutory lan- guage? Mr. BERNANKE. We would not want to do that, and I will check on that question for you. Senator VITTER. OK. If you could check on that, again, it is 102(a)(6). And I believe the Fed rule that has been published for comment ignores a specific metric in the law, which I would short term call the 85-percent rule, which was a Vitter-Pryor amend- ment, which is in final law. Mr. BERNANKE. Thank you for that. Senator VITTER. Thank you very much. Finally, capital standards for the largest banks. As I have read your comments in the past, it seems to me that you support some- what larger capital requirements for mega banks, but that you seem to think where we are headed, about 9.5 percent under Basel III, which is about 2.5 percent more for the mega banks, is roughly appropriate. Is that a fair summary or not? Mr. BERNANKE. Well, there is an international standard which it is not the same for every big bank. It starts at virtually zero for the medium-size banks and then increases up to the largest banks. But it is based on some formulas and some calculations that try to establish parity across banks around the world. Senator VITTER. Well, I guess what I am asking is: To the extent that imposes higher capital standards on the largest U.S. banks, do you think those higher standards are good enough to ensure sta- bility in the future and protection in the future? Mr. BERNANKE. I think they are very useful, very important. Basel III in general is going to increase everybody’s capital and in- crease the quality of capital, and this will mean that the largest banks have even additional capital. But it is not just capital. It is also going to be the market discipline that comes from orderly liq- uidation authority, stronger supervision, liquidity requirements, and so on. I think it is extremely important that we address too VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 22 big to fail, and this is one way to make banks take into account that their own size does impose a cost on the rest of society and make them respond to that. Senator VITTER. Beyond the path we are on, do you think we should be looking at higher capital requirements for the biggest banks? Mr. BERNANKE. Well, we will continue to have international dis- cussions. It has been our approach to try to have capital require- ments that are broadly consistent with the international standards, and these numbers were based on calculations that drew from the crisis. But we are always open to further discussions, and we will see how effects of the higher capital work through the credit sys- tem as we go forward. We are phasing this in relatively slowly, as you know, so we will get a chance to see what the impact is on banks and credit costs. Senator VITTER. My time is up, but I would encourage you to look at that, and I would encourage you to place safety and sta- bility ahead of—I understand the desire for uniformity across the globe, but I do not think it should trump what is best for—— Mr. BERNANKE. You are looking forward to higher capital re- quirements. Senator VITTER. Yes. Chairman JOHNSON. Senator Akaka. Senator AKAKA. Thank you very much, Mr. Chairman. Let me add my welcome to Chairman Bernanke to the Com- mittee and to thank you so much for your tireless leadership in these challenging times. Recent economic events in Europe and China show us how de- pendent the United States is on the international markets when it comes to our economic recovery. Despite concerns about the overall rate of recovery, some sectors are beginning to turn around and we are beginning to see some bright spots, as indicated in your open- ing statement. Hawaii, for example, had record tourism numbers in May, and nationally we see spending by foreign travelers continue to rise, helping to reduce our deficit. My question is: How do you think that current policies and those regarding tourism and exports have affected the recovery? And, also, do you have any suggestions on how to further encourage growth in these areas? Mr. BERNANKE. Well, first, Senator, tourism has been something of a bright spot. We have seen improvements in tourism in not just Hawaii but in a number of places around the country. And you mentioned the international trade deficit. People may not appre- ciate that when a foreigner comes and visits Hawaii, that actually counts as a U.S. export because we are exporting the tourism serv- ices. And the export of tourism services has actually been growing very quickly, something like 14 percent in the last year, faster than other types of exports. And so it contributes to our trade balance as well as to overall economic activity. So it is a positive. With respect to policies that address it, you know, I think there is a lot of incentive. We see that individual States, for example, compete with each other to try to attract visitors. But we can con- sider issues like visa policies; we can look at any tax or other impli- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 23 cations that might affect the cost of tourism. So it is an area where I think there is a lot of benefit and a lot of scope for economic ben- efit to Hawaii and the rest of the country. And it has so far been, as I said, a bright spot among the various service industries that we have. Senator AKAKA. Thank you. As you know, I am concerned with the well-being of consumers. During previous hearings, you and I have discussed the importance of improving financial literacy to empower consumers while we work to grow the economy. So my question is: In what ways have you seen financial decision making by individual Americans im- prove during this recovery? And what more needs to be done, do you think? Mr. BERNANKE. Well, there are two sides to improving decision making. On the one hand, there is education and that effort has continued. The Federal Reserve is continuing its efforts toward pro- moting financial literacy and economic education. I have an upcom- ing meeting with teachers across the country, and I will be talking about financial literacy and answering their questions and talking about how to introduce students to these topics. Some of the activities that we had have moved over to the CFPB, which some personnel and some functions went over there, but they are also engaged in those activities. So education is one side. On the other side, it is important that disclosures and the types of products that are offered are such that people have a reasonable chance of understanding what it is that they are buying or invest- ing in. The Federal Reserve pioneered a few years ago the use of consumer testing to improve disclosures for credit card statements and a variety of other types of disclosures, and we hope to see that type of activity continue. I think in general that the experience of the crisis has made many people more aware of the need to be financially literate, schools more aware, and more cautious as well. But it is an ongo- ing battle. We cannot declare victory. We have to continue to work to try to make sure that both kids in school and also adults who are making financial decisions have access to good advice and good education. Senator AKAKA. Thank you very much for your responses, Mr. Chairman. Chairman JOHNSON. Senator Johanns. Senator JOHANNS. Mr. Chairman, good to see you again. The forecasts that you have testified about today I am assuming do not factor in the results of the fiscal cliff that is headed our way between now and the end of the year. Is that a safe assumption? Mr. BERNANKE. That is correct. Senator JOHANNS. So because of the fact that all of the various items that are included in the so-called fiscal cliff would take af- firmative action by Congress to pull us back, which typically means 60 votes in the Senate, a majority in the House, a Presidential sig- nature, my assumption is that if that does not happen, we get caught in a situation where those forecasts would be revised yet again, and it would be even more pessimistic than your testimony today. Would that be correct? Mr. BERNANKE. Absolutely. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 24 Senator JOHANNS. As you think about the sequester, the $1 tril- lion sequester, as you think about returning to the 2001, 2003 tax policy, as you think about the estate tax and all of the various fac- tors that we are looking at between now and the end of the year, if you were to give a recommendation to Congress as to where to act, would it be act on everything or is there a priority that you would set for action? Mr. BERNANKE. No. I think the choice is between spending and taxes, and the mix and the kinds of taxes and so on, I think that is really a congressional responsibility. I am just pointing to the collective impact of all these different things happening at the same time, and there may be many different ways to mitigate that effect, and I am sure Members of Congress have different views on the best way to do that, which is one of the problems, because you are going to have to come to some kind of agreement. So, no, I do not have a specific recommendation other than to think about not just the individual policies but their collective im- pact if they all happen at the same time. Senator JOHANNS. Let me talk to you a little bit about the miti- gation piece of this. As you know, some of us—in fact, some of us on this Banking Committee—have been meeting for many, many months—in fact, for some members they have been meeting for over a year—talking about an approach, and I would guess the best way of describing that is the outline for the approach is the Simp- son-Bowles plan, which came out a year ago. Thinking about that plan, would you be comfortable in testifying today that that at least is an acceptable alternative to what we are facing between now and the end of the year if Congress could see its way to adopting that approach? Mr. BERNANKE. Well, it does have a profile that seems reason- able in terms of addressing longer-term sustainability over the longer period. But, again, I do not want to endorse the individual components, in part because, again, choices between taxes and spending are a congressional prerogative, and also because the Bowles-Simpson plan is not really a complete plan. It does not, for example, say very much about health care and how those costs will be controlled, but it does have the feature that, like many other plans that have been suggested—and there are others, Rivlin and others as well—introduce this discipline, fiscal discipline, in a rig- orous way but over a longer period of time to allow the economy to adjust more easily. Senator JOHANNS. You know, Mr. Chairman, I think if the aver- age citizen were to listen in on the political debate that will occur between now and November—and political debate is certainly ap- propriate; that is how democracies work—you would get very dis- couraged. But having said that, give us your thoughts. If Congress were able to put a plan in place, whether it is Bowles-Simpson or another approach, that provided that stimulus maybe for a period of time—in my judgment, pull back on the sequester—provided eco- nomic stability in terms of tax policy and revenue policy and start- ed stabilizing things with a view toward trying to deal with the deficit over a period of time, what kind of signal would that send to the marketplace? And do you think that would be a positive sig- nal? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 25 Mr. BERNANKE. It would be very positive. It would reduce a lot of the uncertainty that we see. It would address a very important problem, and it would show the ability of our political system to de- liver important results. You may recall that when the U.S. Government was downgraded last summer, the putative reason was the concern about the ability of Congress to come to a solution, not a lack of resources for the country as a whole, but it really was this issue about whether the Congress can work together to deliver a satisfactory outcome. So I think something like that, even if it was only an outline, you know, a set of guidelines or guideposts that Congress would fill in as it went forward, I think that would go a long way to reducing uncertainty, increasing confidence, and addressing one of our big- gest longer-term problems. Senator JOHANNS. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Brown. Senator BROWN. Thank you, Mr. Chairman. Chairman Bernanke, nice to see you. As you know, as a result of Dodd-Frank, the Federal Reserve has gained a great deal more authority to oversee U.S. banks. Regulators, we know, all of us agree bipartisanly, have a responsibility to ensure that firm rules are in place, that rules are being followed, that bad actors are being punished. Unfortunately, as we all know and read day after day after day, since 2008 we have seen too many examples of Wall Street again breaking rules and laws and common standards of ethical behavior. I follow up on some issues that Senator Vitter talked about, and I want to just run through it for the sake of rep- etition because it is so important to continue to recognize what these problems are: investor lawsuits; SEC enforcement actions over mortgage-backed securities; municipalities sold overpriced credit derivatives, bankrupting some of them; five of the Nation’s largest servicers found to have forged foreclosure documents and mortgage security legal documents. The Nation’s largest bank in January halted all consumer debt collection lawsuits over concerns about poorly maintained and inac- curate paperwork; the Nation’s largest bank has lost $5.8 billion to date on large, complex derivative trades the regulators either did not know about or looked the other way; it appears their employees misreported losses; 16 global banks are suspected of manipulating LIBOR that is used as a benchmark for mortgages and credit cards and student loans and, as you know, even derivatives. In June, one publication reported on a criminal bid-rigging trial exposing illegal practices by many Wall Street banks and arrang- ing bids so that banks could underpay for municipal bonds. Two weeks ago, former employees of the Nation’s largest bank told the New York Times the company urged them to steer clients to their own mutual funds because they were more profitable for the bank even though they paid investors lower returns than other funds. The Federal Energy Regulatory Commission is investigating whether the biggest U.S. bank manipulated prices in the energy market. I mean, this goes on and on and on and on, not to mention wrongdoing in institutions over which the Fed has no jurisdiction: VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 26 MF Global, PFG Best, the problematic Facebook IPO, recent re- ports that analysts at Wall Street’s biggest banks are sharing se- cret information. No wonder the public does not trust you or us or any of the banks—whether the banks on Wall Street, the bank regulatory sys- tem. So I do not know any other answer, Mr. Chairman, other than to put out there and again say I think so many of our biggest banks are too big to manage and too big to regulate. I think this behavior shows they are too big to manage and too big to regulate. True? Mr. BERNANKE. There have been many bad practices, I agree. Many of them were tied to the crisis period, a period of excess. I think that is bad business. I think it is important for us to address those issues through enforcement. And, of course, part of the rea- son—I am not overclaiming here, but part of the reason you could make such a long list is that so many of these things have been turned up by various enforcement—— Senator BROWN. And perhaps many have not. Mr. BERNANKE. Perhaps many have not, that is true. On—— Senator BROWN. Well, Mr. Chairman—and I apologize for inter- rupting. It is not really fair. But you said this is bad business. Well, for a lot of them, it has been kind of good business. It has been a way for—it has been embarrassing to some, but it has also meant bigger and bigger profits and bigger and bigger bonuses. And to say it is bad business, from an academic viewpoint, from a perch at Princeton perhaps, but it is not good for our economy, but there have been far too many rewards for some of the bad actors. Mr. BERNANKE. It is very shortsighted. It is not the way you build a long-term relationship with customers and not the way you have long-term profits. On the size of banks, I think the real issue is too big to fail. If you conquer too big to fail, then there will be strong market pres- sures for banks that are too big to manage, too big to operate, to break up. There was a story about that in the media this morning about the benefits of providing shareholders with additional value by breaking up in situations where you do not have good controls and you do not have good synergies between different parts of the bank. And so what Dodd-Frank does is it provides a blueprint for at- tacking too big to fail, and that includes the liquidation authority, it includes the living wills—which, by the way, do provide a blue- print. If you wanted to break up banks or hive off parts of banks, the living wills provide some information about, you know, how you would do that in a sensible way. So I think it is very important to attack too big to fail, and we are addressing that through capital, through supervision, through orderly liquidation authorities, through living wills. And I think if banks are really exposed to the discipline of the market, we will see some breakups of banks. Senator BROWN. Living wills seem to take effect, at least in the nonfinancial world, only close to somebody’s deathbed, and I do not think these living wills address the issue, nor does this other regu- lation—other kinds of regulations seem to address the issues of all this litany of problems I mentioned. In the end, if these banks can VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 27 be regulated, then it seems clear to me that the Fed and other reg- ulators—that includes the far too often captured by the regulators OCC—that they are either not up to the job, or they are complicit in Wall Street’s activities. I guess I beg of you to figure out how we are going to restore the confidence of the American people in the financial markets, because we certainly have not yet. Mr. BERNANKE. That is a high priority. I agree. Senator BROWN. Thank you. Chairman JOHNSON. Senator Toomey. Senator TOOMEY. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for being here. I just want to touch briefly on monetary policy before moving on to the LIBOR scandal. Mr. Chairman, you acknowledged that there is a range of views about the efficacy of the policy that you have been pursuing. I am sure you would also acknowledge that there is a range of views about the risks that are associated with the policies you have been pursuing. And I will acknowledge that I am sympathetic to the fact that we have given you a dual mandate, which I think intrinsically creates the risk that you will be put in a position where you have to deal with the conflict over two conflicting goals. But I just want to stress—and I know you and I disagree on this. We have had this conversation. But I just feel strongly that the problems facing our economy are not monetary in nature. They re- sult from this ongoing deleveraging process that we are suffering through, a regulatory avalanche, completely unsustainable fiscal policy, which you have acknowledged, and the threat of huge tax increases. And so to address this with ever easier monetary policy, I worry very much about the unintended consequences, including the fact that it has the effect of masking the true cost of these defi- cits and making it easier for us to continue this very imprudent fis- cal policy. So I just want to reiterate that point, but what I would like to ask you about, if I could, is this LIBOR scandal. And I will tell you I am very disturbed about this. I am disturbed about the destruc- tion of what little confidence might remain in our financial system. I am very concerned about the direct impact to American citizens, including my constituents, among many. I think of the city of Beth- lehem that engaged in interest rate swaps where they were paying a fixed rate, receiving floating rates based on LIBOR, and I wonder whether they were systematically receiving payments that were lower than what they should have gotten because of this. You had mentioned in your testimony or perhaps in answer to a question that Fed officials became aware of Barclays’ manipu- lating this index in April of 2008. The Wall Street Journal has an editorial today in which they recount an email exchange that oc- curred in August of 2007 between—or perhaps it was a phone con- versation between a Barclays employee and a Fed official. I am just wondering. When did you become aware that there was some lack of integrity in the report of LIBOR rates? Mr. BERNANKE. So on your first point, let me just say that there is not as much disagreement as you imply. Monetary policy is not a panacea. It is not the ideal tool in many cases, and we look for- ward to having partnerships with other parts of economic policy. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 28 On the telephone contacts, I would just note that these were phone calls, and these were calls made by junior employees whose job was to call and get so-called market color, get information about what was happening in the markets. And I think in one of those calls it was clear that the person calling the Fed employee— not an official, the Fed employee—did not know what LIBOR was or how it was constructed, and so there were some issues about how that was communicated. In any case, I learned about it, to my recollection, at the time when it became covered in the media, which would have been, I guess, in April 2008. Senator TOOMEY. OK. Here is what I do not understand. I know you fully appreciate the importance of this index, how widely used it is for all kinds of transactions and how the American financial system—I do not want to say it is dependent on it, but it is totally integrated into this. And you and many other regulators under- stood that there were serious questions about the integrity of this, perhaps even systemic problems with the integrity of this, and yet everybody allowed these transactions to continue. Did it not occur to somebody to bring the financial institutions together and say, hey, you probably ought to consider a different way of establishing your floating rate resets because there is this integrity problem? Did that conversation happen with any financial institutions or the public? Mr. BERNANKE. Well, financial institutions are not the only par- ticipants in this LIBOR-based market. Senator TOOMEY. OK. Yes, how about making it more broad? Mr. BERNANKE. So I think the best way to address the problem and given all the issues that were occurring during the crisis at that point in time, the best way to address the problem, at least in the near term, would be to reform the way those numbers were collected so that the LIBOR rate that was set would be, in fact, an accurate representation. Senator TOOMEY. I agree. My question, though—and you men- tioned observable market transactions would seem like a better way of doing it than a survey of banks. That sounds sensible to me. The question is: Why have we allowed it to go on the old way when we knew it was flawed for the last 4 years, with trillions of dollars of transactions? Mr. BERNANKE. Because the Federal Reserve has no ability to change it. Senator TOOMEY. You have enormous influence over the institu- tions engaging in this. Mr. BERNANKE. We have been in communication with the British Bankers Association. They made some changes, but not as much as we would like. It is not that market participants do not understand how this thing is collected. It is a freely chosen rate. We were un- comfortable with it. We have talked to the Bank of England. Senator TOOMEY. But I am not sure that market participants were aware of the problem with the integrity of the mechanism by which it is established. And as you point out, there are other ways you could establish a perfectly viable floating rate that would not have these problems. I am just very surprised that this was al- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 29 lowed to continue for so long when the problem with the integrity was known. Mr. BERNANKE. Well, again, Senator, the New York Fed took the lead in making, I think, some very good suggestions about how to clean up the LIBOR process. Senator TOOMEY. Thank you. Chairman JOHNSON. Senator Kohl. Senator KOHL. Chairman Bernanke, last July we discussed how the United States is experiencing a jobless recovery. You agreed then that the long-term unemployment was a major problem and recommended that Congress take a look at ways to help the unem- ployed through things like training and education. Of course, the Federal Reserve has its own mandate to keep unemployment low, and we continue to see very disappointing jobs numbers. I am sure we agree that the consequences of long-term unem- ployment are enormous. So why has the Fed been so slow to tackle unemployment? Over the past year, why hasn’t the Fed issued a third round of quantitative easing? And could you expand on your current maturity extension program? Mr. BERNANKE. Certainly. So first, just briefly, of course, we have taken a wide range of extraordinary actions to support the economy. In June, we took the step of continuing the maturity ex- tension program, which has many of the features of quantitative easing in that it involves purchases of longer-term securities which provides financial accommodation and additional support to the economy. And we made clear that we were prepared to take further actions, and we are looking to see if we are going to get sustainable improvements in labor markets. If we are not getting sustainable improvements, we will have to seriously consider taking additional action. The reason that there is any question is really, again, the range of views about efficacy, costs, and risks associated with these non- conventional measures. But that being said, as we said in June, we are prepared to take further action, and we will evaluate our op- tions as we go forward. Senator KOHL. I appreciate that. However, given that unemploy- ment has remained over 8 percent for 41 months, a long enough time for it to be clear, now is the time to be more aggressive, I be- lieve, in your approach to unemployment. And I think we agree the consequences of long-term unemployment are too great for this to go on very much longer. On LIBOR, Mr. Bernanke, one chief executive of a multinational bank was quoted in The Economist as saying that LIBOR is ‘‘the banking industry’s tobacco moment,’’ citing the 1998 federally nego- tiated settlement that cost American tobacco companies over $200 billion. Can you foresee a scenario where banks would seek any type of taxpayer assistance in order to compensate parties that were vic- tims of LIBOR rigging? Do you believe that potential court cases against banks that participated in LIBOR manipulation could in- deed result in another federally negotiated settlement? Mr. BERNANKE. Well, there are many court cases already in progress. I think it is too soon to make any guess at what the out- come of those courts’ cases will be. There have been a few esti- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 30 mates by private analysts of potential costs, but those are admit- tedly very much back-of-the-envelope types of calculations. So I think we have to let this play out. I do not know what the cost will be, and I really do not think is responsible for me to guess until we get more information about the impact of these actions on the actual LIBOR rate and the implications of that for rates that peo- ple paid. So it is obviously very serious, but I think it is too early to judge what the costs will be. Senator KOHL. Yes, and recent press reports indicate that the scandal could cost the banking industry millions, if not trillions of dollars. And as you know, there is no appetite here or anywhere else to do another bailout for the banks. Given the increasing amount of money that is at stake, I would urge you to work, when the time comes, closely with the Justice Department on this, and I think you would agree that you will. Mr. BERNANKE. If we can contribute to a global settlement, as we did in the case of the servicers, we would, of course. Senator KOHL. Thank you. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Moran. Senator MORAN. Mr. Chairman, thank you. Chairman Bernanke, thank you for your testimony. In advance of the crisis, the financial crisis of 2008, at least to many observers of our country’s economy, it came out of the blue, came as a surprise. What is it that you are worried about now? What is out there now that we ought to be paying attention to that has the potential of being the next crisis to the economy of the United States? I often read about credit card debt. You read about student loan debt. What are the things that you are most worried about? And what are we doing to remediate the problem? Mr. BERNANKE. Well, I think the two items—and I mentioned these in my testimony—would first be the European sovereign and banking situation, which remains unresolved. There is still a lot of financial stress associated with that and I think still some distance before they get to a solution. That poses an ongoing drag on our economy, and although I have every hope and expectation that Eu- ropean leaders will find solutions, there is the risk of a more seri- ous financial blowup. And we have been—I do not want to take all your time, but we have been taking appropriate steps here in the United States to try to strengthen our banks and provide—to pre- pare for whatever events might occur. The other, just briefly, is the domestic fiscal situation which we have been talking about, and I think it is important that in the short term Congress work effectively to address the debt limit and the fiscal cliff and those issues and in the medium term establish a strong, credible plan for fiscal sustainability. Senator MORAN. At what point in time do we have a sense of whether the European crisis is going to have huge consequences to the U.S. economy? What timeframe are we on in which we know whether Europe has appropriately responded to resolve their own problem? Mr. BERNANKE. Well, we appear to be in a muddling-through type of environment, which is costly to everybody, Europe even VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 31 more so than us. They are already in a recession, or at least many countries in Europe are already in recession. I think based on all I can observe, it seems like it could take a very long time because the structural and institutional changes that Europe is trying to make are not ones that take place quickly. For example, they have recently agreed in principle to create a sin- gle bank regulator for eurozone banks. To do that could well take— I do not have any inside information here, but obviously it could take some time—it could go into next year—before they have a sin- gle bank regulator. Likewise, they are trying to establish a set of fiscal rules and fis- cal agreements, and they have made some progress there. But given that there are 17 Governments that have to agree to every major change, it could be some time before they come to a fully sat- isfactory fiscal arrangement. So it appears to be something that could go on for quite a while, unfortunately. Senator MORAN. Let me ask a more specific question, a more nar- row question. The Kaufmann Foundation is a foundation in Kansas City that considers entrepreneurship, and its facts, it studies dem- onstrate that between 1980 and 2005, companies that are less than 5 years old accounted for nearly all of the net new jobs created in the U.S. economy. In fact, new businesses create an average of 3 million jobs each year. Unfortunately, our own Census Bureau now indicates that the startup engine is engine is slowing down. In 2010, there were about 394,000 new businesses started in the United States. This is the lowest level of new startups since 1977. I would like to hear your perspective on the importance of startups and what policies Congress and the administration should pursue to return to the days in which the United States is at the forefront of innovation and entrepreneurship. Mr. BERNANKE. Well, those facts I believe are correct. Young companies, so-called gazelles, are a big contributor to job creation because if they are successful, they grow quickly, and they add a lot of employees. I do not know the data you cited; I do not know how accurate they are. It is obviously very difficult to measure startups. Many of them are very small enterprises. But I think it is clear that both because of the weak economic conditions but also because of problems relating, for example, to the availability of credit and venture capital and the fact that many entrepreneurs use equity in their home as a form of startup capital, which is not as available now as it was before the crisis, it is very plausible that those companies are not starting up at the rate they have in the past. I do not have a really good program here to suggest other than to try to create as favorable a tax environment, as favorable a cred- it environment as possible for startup firms, to write regulations in a way that serves their purpose but allows small firms to flourish. According to international agencies who calculate these sorts of things, the U.S. has got a pretty small business friendly environ- ment here in terms of the cost and time required to startup a small business. So it is not like we are in very bad shape on that. But any kind of improvement that would make it easier for small busi- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 32 nesses to get the necessary capital to meet the regulatory and other requirements and to avoid early tax burdens, all those things are obviously approaches that can help these companies startup and provide employment. Senator MORAN. Mr. Chairman, thank you. One would think that we would have significant startups, particularly in light of the un- employment numbers, which creates the opportunity or the neces- sity for someone to go startup a business on their own. Mr. BERNANKE. Sure. Senator MORAN. Mr. Chairman, thank you. Chairman JOHNSON. Senator Warner. Senator WARNER. Thank you, Mr. Chairman. And, Mr. Chair- man, the end is near. Thank you for hanging in this morning. I would echo what my colleague Senator Moran just said. We actu- ally have legislation to try to promote these startup activities, Startup Act 2.0, which addresses the very issues you talked about as well as the issue of talent. We are in a global competition for talent, and I commend Senator Moran’s leadership on this issue. We did make some movement on access to capital earlier. I know most of my colleagues have left, but I would also point out for some of my colleagues that because of the actions we took as this Congress in Dodd-Frank and otherwise, we have seen an in- crease in capital in American banks in excess of $300 billion, more in capital reserves, since the crisis, and clearly I think that has helped our banking industry relative to some of the banks that are under assault around the world. I also want to commend you for your continuing urging of us to act on fiscal policies. Waiting for Congress is a little bit like wait- ing for Godot. Hopefully we will see some actions later this year, and a number of us have been working on this. I guess one of the things I—my first question would be: As we grapple with this issue of trying to get an appropriate balance of revenues and entitlement reform to generate at least that $4 tril- lion, to drive our debt-to-GDP back down, and because, as you have pointed out, we can do this on a moderate—an intermediate basis and have the ability to phase these things in, I sometimes scratch my head, because what is being asked of the American people is so much smaller than what is being asked of the folks within the U.K. or folks within Europe or even folks in India and elsewhere where they are going through policy changes. Have you done any kind of sizing of what a $4 trillion deal relative to the size of our economy and the ask of the American people versus what is being asked of folks all around the rest of the world as they try to move forward and get their own fiscal houses in order? Mr. BERNANKE. Well, I have not done that exercise exactly, but in terms of percentage of GDP, you know, some of the fiscal shifts that are taking place in countries like Spain, Portugal, and Italy are very substantial and in the near term, which is part of the rea- son why their economies are so weak in the near term. So it is cer- tainly true in terms of the fiscal step that is being taken that it is larger in these countries which are under fiscal stress. But I am not quite sure what the implication of that is. We are lucky that we can borrow at a very low interest rate. We are not currently in the same situation as a Greece or a Portugal. And, therefore, if we VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 33 can intelligently combine a gradual glide path with a strong, cred- ible plan for stabilizing our deficits in the longer term, we can avoid that kind of painful contraction and do it more gradually. Senator WARNER. It almost seems to me that it is remarkable— and I think this is why Congress is at record low levels of ap- proval—that we cannot step up, almost un-American that we can- not do our job relative to what is being asked of other people around the world. One of the things that—I know we have had some policy debate this morning on, additional actions you might take to stimulate the economy. I guess one question I would say for those who have ques- tioned taking these actions, if we look at the European Central Bank’s recent actions in terms of—if we look at the Bank of Eng- land, if we look at the Chinese financial institutions, what effect of their stimulus activities or loosening activities does that have on the world economy and in terms of your decision making? Mr. BERNANKE. Well, there has been a global slowdown. A lot of it is emanating from Europe, which through export demand is af- fecting Asia and other parts of the world, the United States as well. There has been some slowing in Asia as well. The Chinese GDP statistics have been weaker this year than in previous years. Partly that was intentional as they sought to cool their housing market and address inflation concerns. But there is a slowing in the global economy. To the extent that actions taken by our trading partners strengthen those economies, it will help us on the margin because it will increase our markets and provide an overall better economic environment. But I would say at this point that compared to what we saw dur- ing the aftermath of the crisis, nothing is happening globally of that kind of scale. There are relatively modest steps being taken in both of those jurisdictions to try to offset some of the slowing. Senator WARNER. But those actions are similar to what you may take in the Fed, and I guess the point I would simply make is that there seems to be a consensus opinion around major economies around the world to take these type of stimulative actions. Mr. BERNANKE. The world is in an easing cycle. That is correct. And in terms of the specific actions, the U.K., for example, has been adding to its quantitative easing program and doing other things as well. So the U.S. is—it should be very clear the United States—the Federal Reserve is not the only central bank that has been using these unconventional policies as a tool for trying to strengthen their economies. Senator WARNER. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Wicker. Senator WICKER. Thank you very much. And, Chairman Bernanke, thank you so much for being here. I have been back in my office listening to most of this on television. I appreciate the fact that you have talked about fiscal policy as well as monetary policy and the overall economy. You note that your forecast is lower than it was back in January, and you say that you now forecast that we will have over 7 percent unemploy- ment on through the end of 2014. I think we would all agree this is not the kind of economic growth that we need and that Ameri- cans have had in the past. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 34 If taxes are raised on individuals making over $250,000, many of whom are small business people, many of whom are job creators, what effect will that have on the projection that you have in your written testimony? Mr. BERNANKE. Well, we have not done that specific exercise. I have been focusing on the overall size of the fiscal shock. That in- cludes the expiration of all the 2001 and 2003 tax cuts as well as the end of the payroll tax cut, UI payments, and the sequestration. You put all those things together, and you get a shock which is about 4.5 percent of GDP. Senator WICKER. OK. Because the President came out and reiter- ated last week his request that we simply raise taxes on $250,000 and above. I think you will agree that in terms of the Federal def- icit, that is a relatively small amount. That would be a tax on job creators and would make your numbers worse, wouldn’t it? Mr. BERNANKE. It could, if it reduced incentives and if it reduced aggregate demand, both of those channels. But as often is the case in tax policy, you have got efficiency and growth concerns, and you have also got equity concerns, and all those things feed into tax de- cisions. Senator WICKER. I realize it is hard to predict with certainty, and I think we have seen that over time. But I would simply sug- gest to you that you are correct in saying that it could have an ad- verse effect. Let me ask you about the fiscal shock. I think we have got to do something on the spending side, and I know what you are saying. The economy is fragile, and you do not want it to happen quite so quickly. Senator Kyl and Senator McCain came up with a proposal to dealing with sequestration, and let me just ask you—it went over like a lead balloon, but let me go back to it and ask you what your general impression is of the proposal. It would have raised—it would have saved, rather, $127 billion in spending by simply doing two things: Number one, freezing Federal pay for Federal workers until June of 2014. That would be the first thing. The second thing would have been a 5-percent reduction in the Federal workforce—not a 5-percent reduction in Federal spending but a 5-percent reduction in the Federal workforce—by hiring only two workers to replace every three that are leaving through attri- tion. And this reduction would have taken up to 10 years to achieve. That is not the sort of thing that you view as a fiscal shock, is it? We could absorb that type of modest spending reduction in order to save us from the meat axe approach of sequestration at the end of this year. Mr. BERNANKE. Well, again, without endorsing the specific pro- gram, a spending program that comes in more gradually over a pe- riod of time but also is tied to a plan, a credible plan to achieve fiscal sustainability in the medium term is what I am recom- mending, is something that would avoid this very, very sharp change in the Government’s fiscal position, you know, on 1 day, on January 1, 2013. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 35 Senator WICKER. Let me see if I can squeeze in one more thing. Unemployment rates, unacceptably high, and you have predicted now 7 percent of more by the end of 2014. In January of 2002, unemployment rate 5.7 percent; October of 2003, unemployment rate 6 percent; by October of 2004 down to 5.5 percent. Boy, wouldn’t we love to see that kind of unemployment right now in the United States of America. Down to 4.9 percent by August of 2005; 4.4 percent unemployment rate—these are actual figures—by October of 2006; as late as May of 2007, unemployment rate 4.4 percent; and then, of course, by the end of 2008, it is up to 7.3 percent. We hear a lot of discussion and a lot of warnings by people in this city about not going back to those disastrous policies that got us into the situation we are in in the first place. The fact is we had relatively low and a relatively acceptable unemployment rate for much of the decade until 2008, and we had real GDP growth in 2006, 2007, and 2008. Isn’t that correct? Mr. BERNANKE. Until the end of 2008, yes. Senator WICKER. Now, what happened in 2008? Was it tax cuts for the rich? Mr. BERNANKE. No. We had a major financial crisis, as you know, and it created a global recession. Senator WICKER. Right. Mr. BERNANKE. A very deep one. Senator WICKER. Thank you very much. Chairman JOHNSON. Senator Merkley. Senator MERKLEY. Thank you, Mr. Chair, and thank you, Chair- man. In your opening comments, you mentioned the issue of hous- ing refinancing and families that are underwater. We have about 8 million families whose mortgages are underwater. Some can refi- nance through HARP, but it has been a pretty small number, only about 200,000 so far, in part because of the complexity with second mortgages. But if families who are underwater could refinance from those higher interest rates they are trapped in to lower inter- est rates, could that be a significant factor and a substantial tool, if you will, in helping to move the construction economy forward and stabilizing those 8 million families? Mr. BERNANKE. If that were possible, it would be helpful because it would both reduce payments and, therefore, reduce defaults and foreclosures, and it would improve the income of the people who could refinance. Senator MERKLEY. Thank you, Mr. Chairman. Let me switch to another comment I believe you made in re- sponse to Chairman Johnson, and I did not catch the exact words, but I think you said you had emails about fixing the interest rates to make the banks look more healthy, but we did not have emails related to collusion with derivative traders, or something like that. Could you help clarify what you said there? Mr. BERNANKE. Yes. There have been two somewhat different types of violations: one which was very much intense—that was most intense during the crisis was banks underreporting the cost of their borrowing in order to avoid looking weak in the market. That is the kind of information that people were talking about in the markets and that the New York Fed heard about in 2008. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 36 The other kind of activity is the kind that the investigations have just recently revealed in the case of Barclays involved this very large fine where there was clear evidence of individual traders con- spiring with others to manipulate the LIBOR submissions in order to improve or increase their profits from short-term derivatives trades. That is a different type—I am not making a judgment but just a different activity. And I was only making the point that it was only the former that came to the attention of the New York Fed. Senator MERKLEY. And so in terms of the latter, the collaboration between the traders and those who were reporting the LIBOR rates, when did that first come to the attention of the Fed? Mr. BERNANKE. Not until relatively recently. This was something that was discovered by the joint investigation of the CFTC, I think the SEC was involved, the DOJ, and the British authorities. Senator MERKLEY. Thank you. It was very stark to read some of these emails that were reported, such as, ‘‘Hi, Mate. We have an unbelievably large set on Monday. We need a really low 3-month fix. It could potentially cost a fortune.’’ Or another trader who wrote, ‘‘We need a 4.17 fix on the 1-month low fix. We need a’’— the print is a little small for me—‘‘4.41 fix on the 3-month high fix.’’ And certainly this type of activity, does this constitute fraud? Does this fall into a criminal area as well as just really unaccept- able manipulation, if you will? Mr. BERNANKE. Based on what I know about it. What I have read about it, it does seem to be so, yes. Senator MERKLEY. I think the point that my colleague Senator DeMint was making earlier was when you know that someone has a thumb on the scale, isn’t there a responsibility to alert the cus- tomers about that thumb being on the scale? I know that you all did send this advice to the Bank of England or to others that there are ways to fix the thumb on the scale, get the thumb off the scale. But if you had it to do over again, would you also be alerting the customers, the municipalities that are making swaps, the folks who are getting mortgages based on LIBOR and so forth that something is not quite right here and you should be aware of our concerns? Mr. BERNANKE. Well, it is important that people know about it, but I am not sure I would agree that this was something that was unknown. The financial press was full of stories about it, and the reform proposals that the New York Fed made were also reported in the press. So I think that there was a good bit of knowledge, at least among more sophisticated investors, about this problem. Senator MERKLEY. I do think the municipalities that were in- volved are feeling that perhaps they were not as aware of the thumb on the scale as they might have been, but that will all be, I guess, sorted out in due course. Mr. BERNANKE. That is right. Senator MERKLEY. If my colleague will just bear with me for 30 seconds, I just want to mention an issue I will follow up with you on, which is related to the growing role of banks in providing crude oil to refineries and then buying the products. We have Goldman that is doing this with a refinery operating in three States. JPMorgan is doing it with the largest east coast supplier. Morgan Stanley is now doing it in several States with PBF Energy. It re- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 37 minds me a little bit of the situation when—and at this point there is no sign of wrongdoing of any kind, but it reminds me of the po- tential for problems that occurred when Enron was both supplying electricity and running electricity trading markets, because we have that here. We have now the banks involved as a supplier and purchaser of large quantities, but we also have them involved in all kinds of trading, in part because at this point regulators have exempted the spot markets, or at least the draft rules, from the Volcker firewall. Is this an issue that we should be concerned about, this substan- tial conflict of interest of being a supplier and also kind of, if you will, involved in the trading side? Mr. BERNANKE. Am I mistaken, Senator? I thought that the stat- ute exempted the spot market as opposed to the regulation. Senator MERKLEY. Let us follow up on that. Mr. BERNANKE. Let us follow up on that. Senator MERKLEY. Let us follow up on that because there is also a lot of letters that have been submitted on the futures spot mar- kets, if you will, not futures themselves. The ‘‘forward’’ I think is the right term. Mr. BERNANKE. Correct. Senator MERKLEY. And I believe that that is a gray area. Mr. BERNANKE. Well, except insofar as the statute exempts cer- tain activities, I assume that proprietary trading in this area would be subject to the Volcker rule. Senator MERKLEY. The spot is not excluded in the statute. It does give regulators authority over that. Mr. BERNANKE. All right. We will look at that. Senator MERKLEY. OK. Thank you. Chairman JOHNSON. Senator Bennet. Senator BENNET. Thank you, Mr. Chairman. Sorry. One would have thought I could have gotten the frog out of my throat 2 hours into this hearing. Mr. Chairman, thank you for being here, and thank you for your testimony. I want to make one observation, and then I have got a couple of questions, because there have been traces of a discussion in here today about the nature of the economic growth we need to see in this country, and it really is not just about GDP growth. It is about job growth and wage growth in the United States and whether we can recouple those things together. They decoupled in the last recovery. They are not coupled in this recovery. And as you observed, there are things that we can do in our Tax Code and our regulatory code and our statutes that actually would provide an ecosystem that would deliver on that promise again for the Amer- ican people. We have been having a hard time getting to that conversation in this Congress, but we need to. That is the fundamental work, in my view, why we were sent here. We spend a lot of time talking about how to avert crisis now, and you are a historian of the Great Depression, I know, and I think 100 years from now, if we do not get our act together here, no his- torian will be able to fairly record your tenure without saying that you came to the Senate and to the Congress and you very clearly said, ‘‘Here are the things I am most worried about, and if you do VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 38 not deal with it, you risk a real disaster.’’ One is Europe, which you talked a little bit about. I would like to hear on that score a little more about what you say in your testimony are the strong incen- tives to resolve the crisis that the Europeans have. The IMF, as you know, came out with a report yesterday about some of the challenges they face. Maybe I will start there. What are those strong incentives to re- solve the crisis? They have a lot of political dysfunction there, as we do here, but they also have, as you pointed out, a less elegant institutional arrangement right now for dealing with it. Mr. BERNANKE. That is right. Well, they have both economic and political incentives. The European Union and all those European- wide institutions that include now the common currency area were created after World War II in part to try to avoid any future war on the European continent, and obviously that is an extremely im- portant objective that people put a lot of weight on. And so closer political union is something that many European leaders consider to be important, and so this is part of—maintaining the currency and achieving stability there is part of that. In addition, both the North and the South, so to speak, benefit from the common currency. In particular, for example, the Ger- mans have an exchange rate in the euro which is probably weaker than they would have if they had a deutsche mark, and, therefore, they have both a weaker currency, a more competitive currency, and, if you will, a captive market for selling their exports, both of which would not be there if the eurozone was not an integrated, stable structure. So even from the point of view of the Germans, who have, you know, the most concern about the potential fiscal costs of greater coordination within the eurozone, they have both very substantial political and economic reasons to try to make this happen, and throughout Europe, the general opinion polls in most cases are that people would still rather have the euro, despite all the problems that they have been facing. Now, as you point out, there are many difficult political prob- lems. We have one Congress here, and we have difficulty coming to decisions. They have 17. Senator BENNET. I cannot even imagine. Mr. BERNANKE. They have 17 different parliaments, and they have a treaty which requires broad if not unanimous agreement. So there are some very substantial problems in getting to agreement. Senator BENNET. Let me, because I do not want the Senator from North Carolina to have to wait on me. Let me come to the second point, the stuff that is actually in our control. This is your testi- mony today, [Page 45]. ‘‘The most effective way that the Congress could help to support the economy right now would be to work to address the Nation’s fiscal challenges in a way that takes into ac- count both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.’’ Tell us what that 100-year history would record if we do not do this. Mr. BERNANKE. Well, in the short term—— Senator BENNET. And I mean short and medium and long. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 39 Mr. BERNANKE. Well, as I was saying as the CBO and others have pointed out, if the fiscal cliff is allowed to happened, as is now programmed in the law, it would probably knock the recovery back into a recession and cost a lot of jobs and would greatly delay the recovery that we are hoping to facilitate. In the longer term, it is simply not possible for deficits to con- tinue along the path that they are currently projected, so either some solution would have to be found that could be very, very pain- ful at some point in the future because of the size of the cuts—we were talking about comparing us to Europe, and some of the coun- tries that are making very, very deep cuts right now and how pain- ful that is. Either we would have to have those kinds of cuts, or we might face a financial crisis where interest rates would rise, as we are seeing now in Europe, and that would feed through to other interest rates, like mortgages and other kinds of rates. And it would be very costly to our economy. So both in the short term and in the longer term, it is important for us as a Nation to create a fiscal policy that achieves both the short-term and long-term objectives. Senator BENNET. I wish I had more time, but I will come back to you with other questions. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Hagan. Senator HAGAN. Thank you, Mr. Chairman. And you, Chairman Bernanke, for enduring the long hearing today. I do want to say thank you, too, for your great work and your sacrifice. Mr. BERNANKE. Thank you. Senator HAGAN. We have talked a lot about LIBOR today. LIBOR, as I understand it, is simply a benchmark that lenders vol- untarily use to represent the cost of borrowing by large banks. But there are alternative metrics. You mentioned in your testimony that financial institutions could use alternative benchmarks for loans and derivative contracts, such as commercial paper rates, the Fed funds rates, and the yield on U.S. Treasury. Can you discuss some of these alternatives? What might be a preferable benchmark? Mr. BERNANKE. Well, as you say, there have been a number of different ones. One that has been considered is the so-called gen- eral collateral repo rate. It is the rate at which repurchase agree- ments are done. It has the advantage of being a very thick market. A lot of trades take place, and trades take place at a number of different maturities, which is also important. So that would be a possibility that people are considering. Another possibility is the OIS rate, the so-called overnight index swap rate, which is a measure of expected central bank interest rates, essentially. It is like a measure of—a market-based measure of the longer-term Federal funds rate. And it has some advantages as well. I think the main thing that distinguishes these rates, the ones you mentioned, and the repo rate and others from LIBOR is, of course, that there are observable transactions every day, which means there is no ambiguity about what the rate is. And there would not be any of these issues raised by the LIBOR process that involve verifying whether the reported rates are indeed accurate. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 40 Senator HAGAN. Could you see financial institutions voluntarily adopting an alternate to LIBOR. Mr. BERNANKE. I suspect that it will be seriously considered, un- less, of course, measures are taken that restore confidence in LIBOR. The problem is that, of course, we have enormous amounts of existing contracts, not just derivatives contracts but a variety of other kinds of loans and securities, which are based on LIBOR. And until those negotiated away or they expire, we have this huge legacy issue of LIBOR-based financial contracts. So it might be— it is just like the QWERTY typewriter. You know, it is not very ef- ficient, but everybody is used to it, so it is hard to change. You might have the same phenomenon there. But if we are going to keep LIBOR, it is important to make sure that it has the con- fidence of people in the markets. Senator HAGAN. Thank you. Chairman Bernanke, Section 941 of Dodd-Frank requires the Federal Reserve Board of Governors, along with other Federal agencies, to jointly prescribe regulations that require securitizers to retain credit risk. The proposed rule was issued in March of 2011, and the comment period was subsequently extended. Could you describe the role that the Federal Reserve Bank of New York and its staff are playing in the drafting and completion of that rule? Mr. BERNANKE. Well, we sometimes draw on reserve banks for specialized expertise. For example, in securitization laws, rules, we tried to look at existing arrangements for credit risk retention for different types of markets, and people in New York who deal with those markets on a regular basis would be helpful in providing that kind of information. But, of course, the responsibility for drawing up the regulations and making the final determination lies with the Board of Gov- ernors in Washington, and although we may use some expertise from New York, it is a Board decision. Senator HAGAN. Thank you. A last question. When discussing the nonstandard monetary pol- icy tools that the FOMC is currently implementing, you have con- sistently said that the level of accommodation that the economy is receiving is based on the total stock of outstanding securities in your portfolio. In June, the FOMC announced that it was taking steps to extend the maturity of its Treasury portfolio rather than to expand its size or change its composition. Can you discuss why the FOMC would choose to extend the ma- turity of its Treasury portfolio and not acquire additional mortgage- backed securities which would have the added benefit of supporting the housing sector? Mr. BERNANKE. Well, when we say that the stock is what mat- ters, we are referring to the stock of longer-term securities specifi- cally. And so what this is doing is replacing very short-term securi- ties with longer-term securities, increasing our stock of longer-term securities, putting downward pressure on longer-term interest rates, and by taking duration risk out of the market, pushing in- vestors into related assets like corporate bonds and lowering the yields there as well. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 41 So this was an effective step, and it was a relatively natural one since the previous program was just coming to an end in June, so we extended it for 6 months. But we continue to look at alternative approaches, including approaches that involve buying MBS, and trying to assess both the efficacy, costs, and risks of those pro- grams as well as the outlook and the extent to which we think we can get a better outcome in the U.S. economy. Senator HAGAN. In the FOMC’s last policy statement, the Com- mittee indicated that it was prepared to take additional steps if it did not see a continued improvement in the labor market. My ques- tion is: What would you describe as an improvement in the labor market if the FOMC does not project unemployment to fall much below the current levels before 2013? Mr. BERNANKE. Well, we would want to see unemployment going down. We do not want to see it stuck. Senator HAGAN. Right. We all do. Mr. BERNANKE. We do not want to see it going up. We want to see continued improvement. We had significant improvement be- tween the fall of 2011 and earlier this year. Lately, we have been leveled out, and we would like to see the economy return to a situa- tion where we are making progress on unemployment. Senator HAGAN. What I think about each and every day. Thank you, Mr. Chairman. Chairman JOHNSON. Chairman Bernanke, I want to thank you for your testimony today on the Fed’s economic forecast and its re- cent actions. Thank you. Mr. BERNANKE. Thank you. Chairman JOHNSON. This hearing is adjourned. [Whereupon, at 12:25 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 42 PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY Thank you Mr. Chairman. Today, we will hear Federal Reserve Chairman Bernanke testify on monetary pol- icy and the state of the U.S. economy. Four years ago, President Obama campaigned on restoring economic growth and job creation. Today, both remain too weak to produce a meaningful recovery. At less than 2 percent, economic growth appears to be stuck at an anemic level. In June, only 80,000 jobs were added to employer payrolls, not enough to put a dent in the stubbornly high 8.2 percent unemployment rate. The Administration’s policy of more spending, more taxes, and more regulation has clearly impeded an economic recovery. Dodd-Frank rulemaking, of which 63 percent is behind schedule, has cast a dark cloud over the financial system, further chilling consumer and business lending and holding back growth. Housing recovery, too, has been hemmed in by the lack of a clear plan to resolve Fannie Mae and Freddie Mac and to reduce the Federal Government’s 99 percent share of the market. These policy failures are costly and compound the dangers already brought on by our mounting fiscal problems. Concerns of spillover from the European crisis remain front-and-center in the U.S. economy, but Europe also serves as a warning of what could happen if we do not change our own fiscal course. There is no doubt that we face challenging times for our economy and our pros- perity as a Nation. In response to the dismal economic forecast, Chairman Bernanke has said that the Federal Reserve is ‘‘prepared to take further steps if necessary to promote sus- tainable growth and recovery in the labor market.’’ I hope that the Fed weighs carefully the medium- and long-term consequences of further action. Questions remain on the efficacy of additional so-called monetary stimulus, and many wonder what tools the Fed has left to use. The Federal funds rate has been at or near zero for almost 31⁄2years. The Fed’s balance sheet stands at over $2.9 trillion, almost identical to its size a year ago when Chairman Bernanke delivered his last Humphrey-Hawkins testi- mony. This is more than three times its pre-crisis size. The Fed has conducted two rounds of balance sheet expansions called ‘‘Quan- titative Easing’’ and a maturity extension program called ‘‘Operation Twist’’ that the Fed announced will continue through the end of the year. Even members of the Federal Open Market Committee (FOMC) have their doubts about this decision. Minutes from the June FOMC meeting indicate that several members thought the impact of another round of Operation Twist ‘‘was likely to be modest.’’ One may wonder if the downside risks outweigh the limited upside benefit of con- tinuing the program. Some FOMC members even noted that it ‘‘could lead to deterioration in the func- tioning of the Treasury securities market.’’ Considering the risks presented by the Fed’s more unconventional programs and the need to unwind the Fed’s balance sheet without causing major economic disrup- tion, some have questioned the prudence of undertaking a new program to provide monetary easing, especially when there appears to be no clear exit strategy. During last year’s Humphrey-Hawkins hearing, I expressed concerns over the lack of transparency of balance sheet operations. The Fed has yet to disclose a plan on how it would reduce its balance sheet hold- ings, which must be carefully done to avoid dire outcomes like sparking inflation and eroding the dollar’s value. Because so much is at stake for the U.S. economy, the Fed as a public entity has the responsibility to make as much information available as possible on its actions and the risks they entail. Some authorities think there is cause for concern. In its annual report, the Bank of International Settlements laid out the risks entailed with the worldwide expan- sion of central bank balance sheets and their extended low interest rate policies. Not only did the report conclude that such actions create ‘‘longer-term risks to [central banks’] credibility and operational independence,’’ but they ‘‘may delay the return to a self-sustaining recovery.’’ I hope that Chairman Bernanke will reassure our financial markets during his testimony of the Fed’s credibility and independence, that the actions the Fed takes will not hurt economic recovery. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00046 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 43 Recent events have already shaken confidence in our financial system. In particular, the issue that bankers manipulated the London Interbank Offered Rate (LIBOR) is one that must be fully examined by this Committee. LIBOR is an important interest rate benchmark. It affects nearly every interest rate calculation for consumers, businesses, and banks around the world. While only one bank has admitted its involvement in the manipulation of LIBOR so far, it has been widely reported that the U.S. Department of Justice and regu- lators are building cases against other banks involved in the LIBOR-fixing process. The American people deserve answers to important questions about the LIBOR manipulation. For example, to what extent were consumers, business, and municipalities harmed by the manipulation of LIBOR? Which financial institutions were involved? When did U.S. regulators, including the Fed, first learn about the manipulation? What steps did the Fed take to restore integrity to the LIBOR market? Could the Fed or other regulators have done more to prevent it? I hope that Chairman Bernanke can provide answers to these critical questions in his testimony before us today. Thank you Mr. Chairman. PREPARED STATEMENT OF BEN S. BERNANKE CHAIRMAN, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM JULY17, 2012 Chairman Johnson, Ranking Member Shelby, and other Members of the Com- mittee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy. The Economic Outlook The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 21⁄2 percent in the second half of 2011, real gross domestic product (GDP) increased at a 2 percent pace in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter. Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the un- usually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has re- cently leveled out at just over 8 percent. Household spending has continued to advance, but recent data indicate a some- what slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers’ purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low. We have seen modest signs of improvement in housing. In part because of histori- cally low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sec- tor. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers can- not obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater—that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of foreclosed properties, continues to divert demand from new construction. After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of invest- ment demand—such as surveys of business conditions and capital spending plans— suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 44 some cooling in the economies of other trading partners, is restraining the demand for U.S. exports. At the time of the June meeting of the Federal Open Market Committee (FOMC), my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quar- ters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013.1These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data.2 In addition, financial strains associated with the crisis in Europe have increased since earlier in the year, which—as I already noted—are weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households, and—as I will discuss in more detail shortly— the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recov- ery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unem- ployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants’ forecasts now has the unemploy- ment rate at 7 percent or higher at the end of 2014. The Committee made comparatively small changes in June to its projections for inflation. Over the first 3 months of 2012, the price index for personal consumption expenditures (PCE) rose about 31⁄2 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought in- flation down. In all, the PCE price index rose at an annual rate of 11⁄2 percent over the first 5 months of this year, compared with a 21⁄2 percent rise over 2011 as a whole. The central tendency of the Committee’s projections is that inflation will be 1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014. Risks to the Outlook Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation. Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of 3-year bank financing by the European Central Bank. However, tensions in euro- area financial markets intensified again more recently, reflecting political uncertain- ties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain’s fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain’s troubled banks, greater flexibility in the use of the European financial backstops (including, poten- tially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe’s financial markets and economy re- main under significant stress, with spillover effects on financial and economic condi- tions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook. The Federal Reserve remains in close communication with our European counter- parts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial sys- 1See, table 1, ‘‘Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2012’’, of the Summary of Economic Projections, available at the Board of Governors of the Federal Reserve System (2012), ‘‘Federal Reserve Board and Federal Open Market Committee Release Economic Projections from the June 19–20 FOMC Meeting’’, press release, June 20, www.federalreserve.gov/newsevents/press/monetary/20120620b.htm; table 1 is also available in Part 4 of the July ‘‘Monetary Policy Report to the Congress’’. 2Ben S. Bernanke (2012), ‘‘Semiannual Monetary Policy Report to the Congress’’, statement before the Committee on Financial Services, U.S. House of Representatives, February 29, www.federalreserve.gov/newsevents/testimony/bernanke20120229a.htm. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 45 tem to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial sys- tem and our economy. The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fra- gility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legisla- tive action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect—a scenario widely referred to as the fiscal cliff—a shallow recession would occur early next year and about 11⁄4million fewer jobs would be created in 2013.3These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year. The most effective way that the Congress could help to support the economy right now would be to work to address the Nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recov- ery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence. Monetary Policy In view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program (or MEP) through the end of this year. The MEP combines sales of short-term Treasury secu- rities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longer-term Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Reserve’s balance sheet. By removing additional longer-term Treasury securities from the market, the Fed’s asset purchases also induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative. Economic growth is also being supported by the exceptionally low level of the tar- get range for the Federal funds rate of 0 to 1⁄4percent and the Committee’s forward guidance regarding the anticipated path of the funds rate. As I reported in my Feb- ruary testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions—including low rates of resource uti- lization and a subdued outlook for inflation over the medium run—are likely to war- rant exceptionally low levels for the Federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unem- ployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to pro- mote a stronger economic recovery and sustained improvement in labor market con- ditions in a context of price stability. Thank you. I would be pleased to take your questions. 3 Congressional Budget Office (2012), ‘‘Economic Effects of Reducing the Fiscal Restraint That Is Scheduled To Occur in 2013’’ (Washington: CBO, May), available at www.cbo.gov/publi- cation/43262. The effect of the fiscal cliff on real GDP is shown in table 2 (p.6). The effect of the fiscal cliff on employment, relative to a less restrictive alternative fiscal scenario that as- sumes that most expiring tax provisions are extended and that the spending sequestration does not take effect, is shown in table 3 (p.7). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00049 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 46 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM BEN S. BERNANKE Q.1. At the hearing you mentioned potential alternatives to LIBOR. What next steps should be taken to either reform or re- place LIBOR as a benchmark for the interest rates on financial products? What should the Fed’s role be in any international proc- ess to reform or replace it? A.1. Answer not received by time of publication. Q.2. Critics of Wall Street Reform claim that the law is holding back the economic recovery. What has had a greater impact on high unemployment today—the Wall Street Reform Act or the inef- fective regulations that led to the financial crisis? Can you offer ex- amples of how the financial system is now safer as a result of poli- cies that the Fed has implemented pursuant to the Wall Street Re- form Act? A.2. The recent financial crisis demonstrated that some financial companies had grown so large, leveraged, and interconnected, that their failure could pose a threat to overall financial stability. The crisis also exposed significant weaknesses in banking organizations’ internal management and stress testing practices, as well as defi- ciencies in the regulators’ toolkit to address them. In addition, the amount of high-quality capital held by banking organizations glob- ally was insufficient to absorb losses that banking organizations ex- perienced during that period. Insufficient liquidity and associated risk management practices also directly contributed to the failure or near failure of many companies and exacerbated the crisis. To address these and other weaknesses, the Federal Reserve has taken various steps to improve the regulation and supervision of individual firms to enhance their resiliency in times of stress, as well as the resiliency of the financial system as a whole. These measures have been taken pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as well as the Federal Reserve’s authority as the supervisor of various finan- cial institutions. For example, in January 2012, the Board published for comment proposed rules that would implement the enhanced prudential standards and early remediation requirements of sections 165 and 166 of the Dodd-Frank Act. The proposal generally applies to all U.S. bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies that the Financial Stability Oversight Council has designated for supervision by the Board (covered companies). The proposal addresses issues such as capital, liquidity, single counterparty credit limits, stress testing, risk management, and early remediation requirements. The Board intends to supplement the enhanced risk-based capital and lever- age requirements proposed in January 2012 with a subsequent pro- posal to implement a quantitative risk-based capital surcharge for covered companies or a subset of covered companies. To further im- plement the provisions of sections 165 and 166 of the Dodd-Frank Act, the Board issued proposed rules in December 2012 to strength- en the oversight of the U.S. operations of large foreign banking or- ganizations, including measures regarding early remediation, cap- ital stress testing, overall risk management, and enhanced risk- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 47 based and leverage requirements for these organizations. These proposals are aimed at strengthening the regulatory framework to address the risks that large, interconnected financial institutions pose to U.S. financial stability. In addition, in June 2012, the Board and the other Federal bank- ing agencies issued three notices of proposed rulemaking that would effectively result in increasing the quantity and quality of capital held by banking organizations. The proposed rules would introduce a new common equity tier 1 capital requirement, raise existing minimum tier 1 capital requirements, and implement a capital conservation buffer to increase the resiliency of all banking organizations during times of economic and financial stress. The proposed rules would also be incorporated into the enhanced stand- ards for covered companies discussed above. These measures are designed to help address the shortcomings in the international cap- ital standards exposed during the crisis and build additional capac- ity into the banking system to absorb losses in times of future mar- ket and economic stress. The proposals also would enhance the risk-sensitivity of the agencies’ capital requirements by revising the calculation of risk-weighted assets for certain exposures to address weaknesses identified in the capital framework in recent years. The Federal Reserve has also been working to embed its super- visory practices within a broader macroprudential framework that focuses not only on the conditions of individual firms but also on the health of the financial system as a whole. Even before the en- actment of the Dodd-Frank Act, the Federal Reserve had begun to overhaul its approach to supervision to better achieve both micro- prudential and macroprudential goals. For example, in 2009, the Federal Reserve created the Large Institution Supervision Coordi- nating Committee, which oversees the supervision of the most sys- temically important financial firms. Another important example of the Federal Reserve’s strengthened, cross-firm supervisory ap- proach is the Comprehensive Capital Analysis and Review, through which the Federal Reserve assesses the internal capital planning processes of the largest bank holding companies and evaluates their capital adequacy under a very severe hypothetical stress sce- nario. Largely as a result of these efforts and the Federal Reserve’s action during the crisis, the aggregate amount of tier 1 common for the 19 largest bank holding companies increased by more than $300 billion between 2009 and 2012. The Federal Reserve also rou- tinely uses macroprudential tools in analyzing the potential con- sequences of significant economic events for the individual firms it supervises and for the financial system as a whole. The proposed enhanced prudential standards and regulatory cap- ital requirements, as well as other additional steps that the Fed- eral Reserve has taken in response to the crisis and pursuant to the Dodd-Frank Act, are designed to strengthen the banking sys- tem and the financial system as a whole by strengthening regu- latory requirements and the supervision of the most systemically important financial firms. Q.3. Do you think that the policy changes announced at the recent EU summit go far enough toward solving the European financial crisis? How will U.S. banks be affected by the proposed eurozone banking union? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00051 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 48 A.3. At their late June summit, European leaders agreed on a number of measures to address the financial crisis. These included, among other steps, establishing a single supervisory mechanism for European banks and, once such a mechanism is in place, enabling the European Stability Mechanism (ESM), the permanent euro- area backstop facility, to recapitalize banks directly. Subsequently, European leaders have also made progress in enhancing regional policy support for vulnerable euro-area countries. The European Central Bank (ECB) has announced a program that would enable it to purchase sovereign debt in order to address market distortions and contain bond yields. Countries benefiting from ECB support will have to enter into assistance programs and commit to achiev- ing appropriate conditions prior to ECB assistance. These developments have helped ease stresses in European fi- nancial markets and hold out the hope of further progress toward resolution of the crisis. However, European leaders must follow through on their commitments by agreeing to specific, detailed plans and then implementing them. Market participants have re- acted favorably to announcements of the ECB’s new bond purchase framework, but more work must be done to operationalize this strategy. By the same token, further agreements among European authorities will be required before the single supervisory mecha- nism for banks can be put in place. Additionally, if a full resolution of Europe’s difficulties is to be achieved, these regional initiatives must be complemented by further actions in the vulnerable coun- tries themselves to improve public finances, strengthen banking systems, and promote pro-growth structural reforms. Euro-area banks currently are supervised by 17 national super- visors. Establishing a single supervisory mechanism should help to streamline supervisory compliance costs, further the integration of the European financial market and make it easier for international banks, including U.S. banks, to conduct business within and across euro-area countries. Moreover, tougher and more consistent bank supervision in Europe should reduce the frequency and severity of financial distress of European banks and hence contribute to global financial stability. Q.4. What are the barriers preventing homeowners who are cur- rent on their mortgage payments from refinancing? Could legisla- tion address those barriers, and how would such legislation help with economic recovery? A.4. Low credit scores or levels of home equity make it difficult for many borrowers to refinance their mortgages. Initiatives such as the Home Affordable Refinance Program (HARP) and the stream- lined refinance program offered by the Federal Housing Adminis- tration (FHA) have reduced or eliminated these barriers for many borrowers with loans guaranteed or insured by Fannie Mae, Freddie Mac, or FHA. However, borrowers whose loans are held in bank portfolios or private-label mortgage-backed securities, as well as borrowers who have already refinanced through HARP, often face significant obstacles to refinancing if their credit scores or home equity fall below certain levels. The Monetary Policy Report submitted to the Congress on July 17, 2012, and the staff housing VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00052 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 49 paper sent to the Committee on Banking, Housing, and Urban Af- fairs on January 4, 2012, provide further discussion of these issues. The Congress could facilitate refinancing for these borrowers by legislating changes to HARP or the FHA refinancing program or by creating a new refinancing program. In designing such legislation, the Congress would have to consider how to balance the interests of borrowers, taxpayers, and investors. A refinancing program might provide a small boost to aggregate consumer spending, de- crease the incidence of mortgage default, and improve consumer confidence, but the size of such effects is difficult to predict. Q.5. The Fed is proposing a set of rules implementing Sections 165 and 171 of the Wall Street Reform Act and the Basel III agree- ments. These rules would apply to insurance companies organized as thrift holding companies or designated as nonbank financial SIFIs. Did the Fed consult with the Federal Insurance Office (FIO)? Do you anticipate that you will consult regularly with FIO as you engage in rulemakings that impact insurance companies? What else is the Fed doing to develop its insurance expertise? As part of these rulemakings, what steps did the Fed take to analyze the differences between banks and insurance companies and to in- corporate those findings into the rulemakings? Do you think that the recent actions and rulemakings of the Fed appropriately recog- nize the differences between insurance companies and banks? A.5. Board staff has consulted with the Federal Insurance Office on issues related to capital requirements, stress testing, and insurance matters generally. Board staff also met with industry representa- tives and with the National Association of Insurance Commis- sioners on several occasions to discuss insurance-related issues. The Board also sought public comment on capital and accounting issues as well as on regulatory and supervisory requirements for savings and loan holding companies when it published a notice of intent regarding these institutions on April 22, 2011. The Board ex- pects to continue this practice of consultations with other regu- lators and standard-setters, as well as the industry and the public, to further the Board’s expertise and to gain additional perspectives on the regulation and supervision of insurance companies as appro- priate. In June 2012, the Board and the other Federal banking agencies proposed to revise risk-based and leverage capital requirements in three notices of proposed rulemaking. In proposing the regulatory capital requirements, the Board sought to meet several legal re- quirements and policy goals. Section 171 of the Dodd-Frank Act, re- quires that the Board establish minimum consolidated risk-based and leverage capital requirements for savings and loan holding companies that are not less than the ‘‘generally applicable’’ risk- based and leverage capital requirements for insured depository in- stitutions. Accordingly, the proposals include consistent treatment for similar types of exposures, whether held at a depository institu- tion or a savings and loan holding company, as well as provide flexibility for certain insurance-related assets that generally are not held by depository institutions. For example, the proposals in- clude specific risk-weights for policy loans and nonguaranteed sepa- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 50 rate accounts, which are typically held by insurance companies but not depository institutions. The Board has received numerous comments from the public on the proposals with regard to the application of the proposed rules to insurance-centric savings and loan holding companies. The Board will carefully consider all the comments received while final- izing the regulatory capital rules. Q.6. The recent losses at JPMorgan have renewed focus on risk management practices. Additionally, JPMorgan has stated that the firm changed its risk models and trading positions in anticipation of new capital requirements under Basel III. Please provide your comments on how new capital requirements will strengthen the fi- nancial system, as well as any potential risks that may arise from these new capital standards. If the new standards encourage insti- tutions to shift their activities into other risky activities, or have other unintended consequences, please comment on how you plan to address those shifts. In your answer, please also include any ex- pectations you may have regarding institutional risk management and the Fed’s supervision of risk management at institutions. A.6. In June 2012, in addition to issuing the proposed rules de- scribed in the answer to Question 2 above, the Federal banking agencies approved a final rule to implement changes to the market risk capital rule that applies to banking organizations with signifi- cant trading activity.1 The changes are primarily designed to en- sure appropriate capital is held against trading positions, reduce the procyclicality of the capital requirements, and enhance the measure of credit risk of traded positions. Thus, the rule is ex- pected to help ensure that banking organizations maintain stronger capital positions and improve the resilience of the U.S. banking system in times of stress, thus contributing to the overall health of the U.S. economy. There are risks that banking organizations may alter their prac- tices and engage in different activities as a result of new and pro- posed capital rules. However, the Federal Reserve has a com- prehensive supervisory framework and regulations beyond the reg- ulatory capital rules to help address these risks. For example, a su- pervisory assessment of banking organizations’ capital adequacy takes into account a banking organization’s internal processes for capital adequacy, as well as risks and other factors that can affect the banking organization’s financial condition, including the level and severity of problem assets and the organization’s exposure to operational and interest rate risk.2 For internationally active insti- tutions, the supervisory review process for capital adequacy (the so- called Pillar 2 approach based on the international Basel II stand- ards) is even more rigorous and comprehensive as it emphasizes the need for these institutions to look beyond the regulatory capital standards and to help institution’s ensure that they maintain ade- quate capital levels in relation to their risk profiles. Further, for the largest U.S. bank holding companies, the Federal Reserve has 177 FR 53060. 2See, for example, SR 09-04, ‘‘Applying Supervisory Guidance and Regulations on the Pay- ment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies’’; see also June 2012 proposed regulatory capital rule, 77 FR 52792). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 51 established regulatory requirements for regular stress testing and capital planning and conducts supervisory assessments of the cap- ital planning processes and capital adequacy of these firms. The Federal Reserve has also put forth other guidance for bank- ing organizations related to risk management in Supervision and Regulation Letters. For example, the Federal banking agencies fi- nalized stress testing guidance in May 2012 for banking organiza- tions with total consolidated assets of more than $10 billion that focuses on the importance of banking organizations conducting for- ward-looking assessments of their risks to better equip them to ad- dress a range of adverse outcomes. The supervisory guidance on model risk management, issued in April 2011, describes key as- pects of the effective model risk management, as well as key prin- ciples of sound governance and internal controls governing the use of models. These and other supervisory guidance and regulations are designed to improve banking organizations’ risk management practices, as well as the supervisory toolkit to enforce robust proce- dures and sound risk management so that banking organizations manage their risks effectively and hold adequate capital commen- surate with their risk profiles. RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM BEN S. BERNANKE Q.1. It is my understanding that the Federal Reserve supervises Citigroup, JPMorgan Chase, Bank of America Corp, and the U.S. branches of foreign banks. As these institutions face potentially bil- lions of dollars in fines, legal costs, and settlements due to their in- volvement in the LIBOR setting process, why did the Federal Re- serve not consider this to be a safety and soundness concern? A.1. Answer not received by time of publication. Q.2. How does the Federal Reserve define an unsafe or unsound practice? What authority does the Federal Reserve have to end an unsafe and unsound practice in institutions it supervises? A.2. Answer not received by time of publication. Q.3. Do you have ‘‘cease and desist’’ authority which could, for ex- ample, be used to stop traders and employees responsible for deter- mining LIBOR submissions at supervised institutions from manip- ulating and falsely reporting LIBOR? If so, why did the Federal Re- serve decide not to use it? A.3. Answer not received by time of publication. Q.4. Does the Federal Reserve have authority to require supervised institutions to adopt better internal controls to prevent traders and others from making unlawful requests to employees responsible for determining LIBOR? If so, why did you decide not to use this au- thority? A.4. Answer not received by time of publication. Q.5. Did analysts with the New York Federal Markets Group ana- lysts engage with Federal Reserve supervisory staff overseeing Citigroup, JPMorgan Chase, or Bank of America regarding poten- tial issues with the accuracy of LIBOR reporting? If so, on what VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00055 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 52 dates did these interactions happen and what was the general sub- stance of those conversations. If not, why not? A.5. Answer not received by time of publication. Q.6. Were the April 2008 briefing notes and the May 20, 2008, re- port prepared by the Federal Markets Group regarding the accu- racy of LIBOR reporting circulated to the staff responsible for su- pervising these institutions at the New York Fed or the Federal Reserve? Why or why not? A.6. Answer not received by time of publication. Q.7. Were appropriate internal controls in place at the Federal Re- serve to make sure that appropriate and timely actions were taken regarding potential LIBOR fraud? Are you reviewing the conduct and behavior of your analysts and supervisory staff with responsi- bility for overseeing institutions involved in the LIBOR setting process? If not, why not? If so, what changes and remedial actions have you taken? A.7. Answer not received by time of publication. Q.8. Regardless of the fact that direct supervision for the setting of LIBOR was under the purview of U.K. regulators, the Federal Reserve had supervisory responsibility for three of the institutions involved in setting the rate. Was it the policy of the Federal Re- serve to defer to foreign regulators even though there was evidence that institutions supervised by the Fed were involved in potential manipulation of LIBOR? A.8. Answer not received by time of publication. RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM BEN S. BERNANKE Q.1. The Bank Supervision Groups of the 12 Federal Reserve Banks include approximately 3,600 staff, and they are scattered across the country. The banking and financial industries, however, are concentrated in New York where 7 of the 10 largest bank hold- ing companies are located. Why are the examination resources of the Federal Reserve System still split up evenly over the 12 re- gional banks? Should the resources be dispersed in a more propor- tional manner to the location and size of regulated entities? A.1. The Federal Reserve supervises state-chartered banks that have chosen to become members of the Federal Reserve System (state member banks); bank holding companies and savings and loan holding companies and any nonbanking subsidiary of such companies that is not functionally regulated by another federal or state regulator; foreign branches of member banks; Edge Act and agreement corporations; U.S. State-licensed branches, agencies, and representative offices of foreign banks; and the U.S. non- banking activities of foreign banks. Supervisory resources and ex- pertise are dispersed across the Federal Reserve System as needed to effectively supervise these institutions based on their number, size, complexity, and activities. The Federal Reserve Bank of New York has the largest number of supervision staff. More than half of all the Reserve Bank supervision staff is located in the New York, Chicago, Richmond, and Atlanta districts. Where cost and su- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 53 pervisory efficiencies can be gained by consolidating or sharing ex- pertise, the Federal Reserve has developed a program for sharing subject matter experts and other staff among the Reserve Banks. Q.2. In 2005, a peer group of other Federal Reserve Banks found that the supervision team at the New York Fed appeared to have ‘‘insufficient resources to conduct continuous supervisory activities in a consistent manner’’ for certain institutions. In 2009, another peer group study concluded that ‘‘there have been significant weak- nesses in the execution of the supervisory program’’ at the New York Fed. When the Financial Crisis Inquiry Commission (FCIC) made these criticisms public, the New York Fed responded by in- creasing the resources applied. Can you give additional detail on how examiners and other su- pervisory resources have been increased or reallocated since 2005? How many examiners out of 3,600 supervision staff are embedded at each of the 10 largest banks? Are published reports accurate that say about 200 examiners total are embedded at the 5 largest Wall Street banks? A.2. Since 2005, and especially since the financial crisis, the Fed- eral Reserve has sharpened its supervisory focus by increasing its depth of understanding of the supervised organizations and key vulnerabilities and by enhancing the level and size of the embed- ded onsite teams at the largest institutions. The published reports on the number of examiners cited in the question are generally cor- rect. Resources allocated to the largest organizations have in- creased and are currently numbered at approximately 230. In addi- tion, a wide range of subject matter experts support the on-site em- bedded teams. The Federal Reserve’s consolidated supervision framework for large financial institutions is described in greater detail in Supervision and Regulation Letter 12-17 issued on Decem- ber 17, 2012 (http://www.federalreserve.gov/bankinforeg/srletters/ sr1217.htm). It is also important to note that, by law, the Federal Reserve must rely to the fullest extent possible on examinations conducted by the OCC, the FDIC, and the SEC. Each of these agencies de- ploys substantial resources in the examination and supervision of large subsidiaries owned by the largest bank holding companies. Q.3. When the term ‘‘unsafe or sound practice’’ was added to Fed- eral law to authorize cease and desist orders, the following was stated to be the working definition of an unsafe or sound practice. Generally speaking, an ‘‘unsafe or unsound practice’’ embraces any action, or lack of action, which is contrary to generally accept- ed standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance fund. Financial Institutions Supervisory Act of 1966: Hearings on S.3158 Before the House Committee on Banking and Currency, 89th Cong., 2d Sess. at 49-50 (1966) (statement of Chair- man Horne). Given the litigation and other penalties that Barclays and addi- tional banks are confronting, do you believe that the allegedly pur- poseful false LIBOR reports British Banking Association raise a ‘‘safety and soundness’’ concern? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00057 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 54 A.3. Answer not received by time of publication. Q.4. In 2008, the New York Federal Reserve Bank had evidence that Barclays was intentionally manipulating LIBOR, and as you said in your testimony, there were numerous reports in the finan- cial press about other apparent misbehavior with respect to LIBOR. The examination and supervision model used by the Fed- eral Reserve relies extensively on the internal risk management re- ports and internal audit reports of the banking organizations it exams and supervises. Since 2008, has the New York Federal Reserve Bank, or any other Federal Reserve Bank, ever conducted an examination of the internal controls of any banking organization with respect to its provision of LIBOR indications? Could examinations of internal controls have prevented inaccurate reports from Barclays and other LIBOR reporters during the last 5 years? A.4. Answer not received by time of publication. Q.5. I have heard concerns from constituent savings and loan hold- ing companies regarding the length of the comment period and the burden of the accounting changes required by the ‘‘Advanced Ap- proaches Risk-based Capital Rule; Market Risk Capital Rule’’ re- leased on June 7th. Can you discuss the expected costs and addi- tional impacts to insurers that own savings and loan banks based on the accounting change to GAAP? Was the Federal Office of In- surance consulted with during the drafting process? A.5.As you know, the Board and the other Federal banking agen- cies proposed to revise the risk-based and leverage capital require- ments in three notices of proposed rulemaking (NPRs) and the Board proposed to apply the revised requirements to SLHCs.1 The proposals in the NPRs, in part, would apply consolidated risk-based capital requirements to a depository institution holding company and its subsidiaries. Currently, capital requirements for insurance companies are imposed by State insurance laws on a legal entity basis and there are no State-based, consolidated capital require- ments that cover subsidiaries and noninsurance affiliates of insur- ance companies. In developing the NPRs, the Board sought to meet several legal requirements and policy goals. The NPRs are consistent with sec- tion 171 of the Dodd-Frank Act, which requires consolidated min- imum risk-based and leverage capital requirements for depository institution holding companies, including SLHCs, that are no less than the generally applicable capital requirements that apply to in- sured depository institutions under the prompt corrective action framework. The current ‘‘generally applicable’’ capital requirements for insured depository institutions are calculated and reported based on the U.S. generally accepted accounting principles (GAAP). This approach is consistent with section 37 of the Federal Deposit Insurance Act which requires that accounting principles applicable to reports or statements that insured depository institutions file with their Federal regulators be ‘‘uniform and consistent’’ with GAAP. If an alternative accounting standard is required by the Federal regulator, it must, by statute, be ‘‘no less stringent’’ than 1See, 77 Federal Register 52888, 52909, 52958 (August 30, 2012). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00058 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 55 GAAP.2 Accordingly, the Board, consistent with section 171 of Dodd-Frank Act and section 37 of the FDI Act, proposed that sav- ings and loan holding companies, like insured depository institu- tions and bank holding companies, calculate and report their regu- latory capital ratios on a consolidated basis using a framework that is based on GAAP. The NPRs also are consistent with the Board’s long-standing practice of applying consolidated minimum capital requirements to bank holding companies, including those that control functionally regulated subsidiary insurance companies. This practice eliminates incentives to engage in capital arbitrage by booking individual ex- posures in the legal entity in which they receive the most favorable capital requirement. In developing the proposals, Board staff consulted with the Fed- eral Insurance Office on issues related to capital requirements and stress testing. The Board also sought public comment on capital-re- lated and accounting-related issues that may affect savings and loan holding companies when the Board published a notice of in- tent regarding these companies on April 22, 2011. Board staff also has met with a number of industry representatives to discuss chal- lenges associated with applying consolidated capital requirements to savings and loan holding companies, including those challenges related to using GAAP. The Board has received numerous public comments on the poten- tial cost and implementation challenges for savings and loan hold- ing companies, including those savings and loan holding companies that do not currently use GAAP. Board staff and Board members have also met with representatives of savings and loan holding companies with large insurance operations about the concerns raised in their comment letters. The Board is carefully reviewing all the public comments on the proposal, including those related to potential costs and burdens related to accounting, and will continue to take these concerns into consideration over the course of the rulemaking. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY FROM BEN S. BERNANKE Q.1. During the hearing, I asked you to address concerns I have regarding the increasing role that banks are playing in our spot en- ergy markets, including the crude oil markets. I particularly asked this in light of the regulators’ October proposal on the Volcker Rule that would exclude all spot commodities and physically settled for- wards from coverage of the Volcker Rule’s trading account. You re- sponded by suggesting that Dodd-Frank had excluded spot com- modities from Volcker Rule coverage, and I indicated that this was not the case. I would like take you up on your offer of further conversation and analysis of the issue. First, let me share some of my views on this matter, and I would like to understand your views in light of them. 2See, 12 U.S.C. 1831n(a)(2). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00059 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 56 Although Dodd-Frank does not explicitly name spot commodities and physically settled commodity forwards in the trading account definition under the statutory Volcker Rule, that definition is ex- ceedingly broad and expresses a clear Congressional intent to cover all instruments banks use in the course of their trading activities. Moreover, Dodd-Frank provides regulators broad authority to in- clude ‘‘any other security or financial instrument.’’ In other words, the text of the statute might not explicitly include the items in question, but it does not take that ability away from the regulators. Indeed, any explicit decision to exclude them would be made by the regulators, and I would assert would be a misreading of Congres- sional intent. For your reference, below is the pertinent statutory text: (4) PROPRIETARY TRADING.—The term ‘‘proprietary trading’’, when used with respect to a banking entity or nonbank financial company supervised by the Board, means engaging as a principal for the trading account of the banking entity or nonbank financial company super- vised by the Board in any transaction to purchase or sell, or otherwise acquire or dispose of, any security, any deriv- ative, any contract of sale of a commodity for future deliv- ery, any option on any such security, derivative, or con- tract, or any other security or financial instrument that the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission may, by rule as provided in sub- section (b)(2), determine. Senator Levin and I further make this clear in our February 13 comment letter on this subject: The law provides no statutory authority to exclude trans- actions involving spot commodities or forward contract transactions that are to be physically settled from the Merkley-Levin Provisions, nor should they be excluded. Until relatively recently, banks and their affiliates were not major players in physical commodities. Today, some banks have become major traders of physical commodities, using transactions which can be high risk, give rise to off balance sheet or other hidden liabilities, and involve dif- ficult risk analysis. For example, some banks such as JPMorgan and Morgan Stanley are reportedly trading and storing physical quantities of crude oil and other physical commodities,1 and engaging in trading activities and in- vestments that regulators may be hard pressed to analyze for risk or conflicts of interest. In addition, these transactions invite the very types of con- flicts of interest that the Merkley-Levin Provisions are de- 1See, e.g., Ned Molloy, ‘‘Energy Risk Oil & Products House of the Year 2011: JPMorgan’’, Risk.net, Jun. 9, 2011, available at http://www.risk.net/energy-risk/feature/2072271/energy- risk-oil-products-house-2011-jp-morgan; Morning Zhou, ‘‘Traders Boost Oil Storage on Offshore Tankers by 75%, Morgan Stanley Says’’, Bloomberg, Apr. 26, 2010, available at http:// www.bloomberg.com/news/2010-04-26/traders-boost-oil-storage-on-offshore-tankers-by-75-mor- gan-stanley-says.html; Wall Street Banks Quarterly Commodities Trading Risk, Reuters, Oct. 18, 2011, available at http://www.reuters.com/article/2011/10/18/commodities-banks-risk- idUSN1 E79H0M920111018. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 57 signed to prevent, since those same banks frequently en- gage in commodity transactions with and on behalf of their clients.2 Although these types of transactions are not ex- plicitly named in the statute, they are covered under the ‘‘any other security or financial instrument’’ language of Section 13(h)(4). In addition, excluding these types of transactions from the statute would create incentives for banks to circumvent the law by designing transactions uti- lizing these exclusions. In addition, given the strong rela- tionships between spot commodities and their cor- responding futures, excluding spot commodities would cre- ate a significant loophole that would undermine the intent of the provisions. Given the risk of evasion, all of these transactions should be subject to the Volcker Rule safe- guards. Not only do I believe the statutory approach is clear, but the pol- icy basis for being concerned about banks’ spot commodities and physically settled forwards trading is very strong. Recent events, including the JPMorgan Chief trading loss, the trader manipula- tion of LIBOR cases, and the on-going investigation by the Federal Energy Regulatory Commission into energy manipulation by sev- eral large national banks, all highlight how the culture of propri- etary trading is so rife with conflicts of interest and risk that it is highly incompatible with client-oriented, economy-serving tradi- tional banking. Indeed, many trading activities may even be so risky as to be beyond cost-effective regulation—a point suggested by Federal Reserve Governor Sarah Bloom Raskin in a recent speech in Colorado. Given these lessons, I am highly concerned the regulators would seek to ignore the statute and pass up the opportunity to use the Volcker Rule to hopefully prevent potential problems in our energy and other commodity markets, including possibly preventing an- other Enron. Please share any additional views you may have in light of this information. A.1. Section 619 of the Dodd-Frank Wall Street Reform and Con- sumer Protection Act (Dodd-Frank Act) generally prohibits banking entities from engaging in proprietary trading. As you noted, section 619(h)(4) of that Act defines ‘‘proprietary trading’’ to mean ‘‘engag- ing as a principal for the trading account of the banking entity or nonbank financial company supervised by the Board in any trans- action to purchase or sell, or otherwise acquire or dispose of, any security, any derivative, any contract of sale of a commodity for fu- ture delivery, any option on any such security, derivative, or con- tract, or any other security or financial instrument that the appro- priate Federal banking agencies, the Securities and Exchange Com- mission, and the Commodity Futures Trading Commission may, by rule as provided in subsection (b)(2), determine.’’ See 12 U.S.C. 1851(h)(4). By its terms, section 619(h)(4) does not mention or spe- cifically apply to spot transactions in commodities. As you point out, the Act permits the Federal Reserve, OCC, FDIC, SEC, and CFTC (the ‘‘Agencies’’) to extend the prohibition 2See, Saule Omarova, 63 U. Miami L. Rev. 1041 (2009). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 58 on proprietary trading to ‘‘any other security or financial instru- ment that the [Agencies] may, by rule as provided in subsection (b)(2) [of section 619], determine.’’ See, id., The Agencies invited comment on the appropriate scope of this definition, including whether the Agencies should extend the definition to include spot commodities. The Agencies received over 19,000 comments regard- ing the proposed implementing rules, including, as noted in our discussion, comments that specifically addressed the definition of covered financial position and the scope of instruments that should be subject to the ban on proprietary trading. The Agencies are cur- rently considering these comments as we work to finalize imple- menting rules, and will carefully consider your comments in imple- menting these important provisions. Q.2. Similar to the concern I have with the exclusion of spot com- modities and forwards from the definition of the trading account is the proposal to exclude repurchase agreements and ‘‘liquidity man- agement’’ positions from the trading account—and hence the entire coverage of the Volcker Rule. As I indicated in Question 1, the statute does not provide a path for excluding items from, the definition of the trading account. It provides only one avenue for avoiding from the prohibitions of the Volcker Rule: an additional ‘‘permitted activity’’ under subsection (d)(1)(J) of the statute. This path was expressly provided so that regulators could, if needed, add permitted activities. Although these activities would not be subject to the prohibition on propri- etary trading, they would remain subject to other protections under the Volcker Rule, including data collection and backstops on high- risk activities and conflicts of interest. Senator Levin and I, in our February comment letter, made this point clearly: The Merkley-Levin Provisions do not provide any statutory authority to create exclusions from the definition of ‘‘trad- ing account’’. To the contrary, it authorizes the regulators only to expand the definition of ‘‘trading account’’ to in- clude ‘‘any such other accounts’’ as they determine. Thus, regulatory discretion is only in one direction. Positions held outside of the ‘‘trading account’’, as defined by the statute and [ ] should [they] be expanded by the regulators, are not directly covered by the restrictions in the Merkley-Levin Provisions against proprietary trading, much less their protections against high-risk assets, con- flicts of interest, and other protections. The definition of ‘‘trading account’’ was carefully worded in the statute to take into account multiple concerns and de- liberately designed to have a broad reach. The statute does not contemplate or provide for exclusions from this defini- tion. If regulators want to allow a new permitted activity, then they must do so pursuant to the authority under Sec- tion 13(d)(1)(J), which would ensure that the new activity remained subject to the other limitations in the law appli- cable to all permitted activities. In short, there is no legal standing for these regulatory-created exclusions from the VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00062 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 59 definition of ‘‘trading account,’’ and they should be re- moved. Given that many of JPMorgan’s Chief Investment Office posi- tions were held, they claimed, as liquidity management positions, complete exclusion of liquidity management positions from the Volcker Rule would not only be contrary to the statutory text but also highly troubling from a policy perspective. Please comment on whether you intend to close the liquidity management and other exclusions from the Volcker Rule trading account definition. A.2. The proposal by the Agencies to implement section 619 of the Dodd-Frank Act requested public comment on a definition of ‘‘trad- ing account’’ that generally restates the statutory definition, with the addition of certain details to provide greater clarity regarding the scope of positions that fall within the definition. That definition covers trading activity conducted principally for the purpose of sell- ing in the near term or profiting from short-term price movements. The Agencies proposed to clarify that transactions taken as part of bona fide liquidity management activities, repurchase or reverse repurchase arrangements, or securities lending programs are not covered within the trading account because the banking entity’s purpose for engaging in such transactions is not to engage in sell- ing in the near term or profiting from short-term price movements. For instance, banking entities conduct liquidity management activi- ties as part of a program reviewed by the Agencies to ensure that each banking entity maintains sufficient, readily marketable assets to meet its expected short-term liquidity needs, and thereby en- hance the safe and sound operation of the banking entity and re- duce its risk to the financial system. Similarly, repurchase or re- verse repurchase arrangements and securities lending transactions operate in substance as a secured loan with set terms agreed upon at the start of the arrangement, and are not based on expected or anticipated short-term movements in asset prices. The Agencies invited comment on the proposed exclusions and the Agencies received over 19,000 comments regarding the pro- posed implementing rules, including comments that specifically ad- dressed the issues you noted in your question. The Federal Reserve and other rulemaking agencies are carefully reviewing those com- ments and considering the suggestions and issues they raise in light of the statutory restrictions and provisions as we work to fi- nalize implementing rules. RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER FROM BEN S. BERNANKE Q.1. I am concerned about the April 10th supplemental notice of proposed rulemaking issued by the Fed. In this NPR, the Fed ig- nores the letter of the law in Dodd Frank, and proposes to vastly expand its own authority to designate nonfinancial firms as SIFIs ‘‘predominantly engaged in financial services’’ by adopting a broad definition of the term ‘‘activities that are financial in nature.’’ During the Senate’s consideration of the Dodd-Frank Act a bipar- tisan amendment that significantly tightened the bill’s language re- garding SIFI designation for nonbanks. My concern was that the VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00063 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 60 committee-reported bill gave the Fed and the FSOC broad discre- tion to adopt a drag-net approach to SIFI designation—and in doing so, pull in many commercial firms that Congress did not want included. The Vitter-Pryor amendment cured this defect by limiting the designation process to only those firms that are ‘‘predominantly en- gaged’’ in financial services. This amendment created a new stand- ard for SIFI designation. Under it, a firm must be predominantly engaged in activities that are financial in nature to be subject to FSOC designation. It also linked the ‘‘predominantly engaged’’ defi- nition to the tight definition of ‘‘financial activities’’ in the Bank Holding Company Act. The language is crystal clear—‘‘activities that are financial in nature as defined in section 4(k) of the Bank Holding Company Act of 1956’’ qualify as ‘‘financial in nature.’’ The Senate rejected adding a clause to this amendment granting the Board the additional discretion to consider activities ‘‘incidental to a financial activity’’ as defined in section 4(k). Nevertheless, the Fed in its April 10th NPR, has decided to ignore the clear letter of the law and unilaterally expand the definition of this term. In that NPR the Fed rationalizes its action as necessary to not ‘‘severely undermine the purposes of Title I.’’ This is not the Fed’s decision to make. Given the explicit language of the statute, the Fed is not empowered to try to divine the ‘‘purposes’’ of Title I by sifting through the legislative history of Dodd-Frank. The language of Section 102 and the legislative history of this provision make it abundantly clear that the language of Section 4(k) controls, and the Fed has no discretion to bend the law. Moreover, the debate sur- rounding our Amendment make clear that the Congress intended this language to mean exactly what it says. The Supreme Court has repeatedly upheld the proposition that agencies must defer to clear Congressional intent. In K Mart v. Cartier, Inc., the Court wrote that ‘‘if a statute is clear and unam- biguous that is the end of the matter . . . the agency must give ef- fect to the unambiguously expressed intent of Congress.’’ Given the precedents, what basis does the Federal Reserve have for its at- tempt to qualify the clear language of Section 102(a)(6)? A.1. Questions 1 through 3 relate to the provision of the Dodd- Frank Act that requires the Board to establish, by regulation, the requirements for determining if a company is predominantly en- gaged in financial activities. Companies that are predominantly en- gaged in financial activities can be designated by the Financial Sta- bility Oversight Council for supervision by the Board if the FSOC finds that the firm could pose a threat to the financial stability of the United States. In April 2012, the Board invited public comment on proposed rules implementing these provisions. The public provided a number of comments on the proposed rules, including with respect to the proposed interpretation of section 102 of the Dodd-Frank Act and the treatment of physically settled derivatives transactions. We are carefully considering these comments as we formulate the final rule. Q.2. Chairman Bernanke, in the April 10th release, the Federal Reserve attempts to justify its proposed action by citing section VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 61 102(b) of the Dodd Frank Act. That provision permits the Fed to establish ‘‘requirements’’ for determining whether a company falls within the definition of ‘‘predominantly engaged in financial activi- ties’’. This provision explicitly notes that this term is fully defined in section 102(a)(6) of Dodd Frank, correct? Where in this provision does the Fed get the authority to override clear statutory language and qualify the definition of predominantly engaged in financial ac- tivities? A.2. Please see response to Question 1. Q.3. Mr. Chairman, will you assure this Committee that the Fed- eral Reserve will abandon this effort at unilaterally expanding its legislative fiefdom, and comply with clear letter of the law in Sec- tion 102? A.3. Please see response to Question 1. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM BEN S. BERNANKE Q.1. As you know, the Volcker Rule becomes effective under the statute on July 21, 2012, regardless of whether a final imple- menting rule has been finalized. As you suggested before this Com- mittee several weeks ago, the agencies are unlikely to meet that deadline. Also, in the interim, the Fed has issued guidance on ac- tions ‘‘banking entities’’ should take during the 2-year conformance period in preparation for complying with a rule that doesn’t exist. With that as background, can you give us a status report on the interagency negotiations on the Volcker Rule and some idea as to when the agencies are likely to release the next version? Can you give us any insight as to what will be released? A.1. Last year, the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) (also known as the ‘‘Agencies’’) proposed rules to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); as part of those proposals, the Agencies met with many interested representatives of the public, including bank- ing firms, trade associations and consumer advocates, and provided an extended period of time for the public to submit comments to the agencies. To enhance uniformity in both rules that implement section 619 and administration of the requirements of section 619, the Agencies have been regularly consulting with each other in the development of rules and policies that implement section 619 and will continue to do so. The Agencies have received over 19,000 comments addressing a wide variety of aspects of the proposal. The Board and other rule- making agencies are carefully reviewing those comments and con- sidering the suggestions and issues they raise in light of the statu- tory restrictions and provisions as we work to finalize imple- menting rules. The Agencies are also carefully considering different options in order to effectively implement section 619 of the Dodd- Frank Act in a timely manner. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 62 Q.2. Given the sheer number of questions you asked in the Notice of Proposed Rulemaking (NPR) (several hundred), is it feasible to go forward at this point with a final rule? Or will you need to issue a revised NPR with a comment period? A.2. Please see response to Question 1. Q.3. I disagree with the premise of designating any entity a ‘‘sys- temically important financial institution’’ (SIFI). However, it is my understanding that, although not perfect, the SIFI designation process in the United States is more transparent than the G–SIFI (Globally Systemically Important Financial Institution) designation process. I am especially troubled that confidential company data is being collected to make G–SIFI determinations without a clearly defined G–SIFI methodology in place. Given that the Federal Reserve is a member of the Financial Sta- bility Board (FSB), which will make G–SIFI determinations, can you clarify how a company that is designated a G–SIFI but not des- ignated a SIFI in the U.S. will be regulated? For instance, how would an insurance company that is currently regulated at the State level be regulated as a G–SIFI? A.3. In considering whether to determine that a nonbank financial company could pose a threat to U.S. financial stability and subject the company to Board supervision and prudential standards, the FSOC is required by statute to consider various factors set forth in the statute that could result in a different determination (either in- cluding or excluding a firm) by the FSOC under the Dodd-Frank Act than a determination that may be made by the FSB. For in- stance, one factor that the FSOC must consider is the degree to which a firm is already regulated by another financial regulatory agency. The Board and the FSOC are working with the FSB on a number of initiatives, including the process for identifying globally system- ically important financial institutions and financial market infra- structures. Furthermore, the Board and the FSOC are working to ensure the consistency of the approaches used by the FSB and the FSOC for assessing whether a nonbanking company is systemically important and to better understand the potential for different de- terminations. Systemically important nonbank firms designated by the FSOC and bank holding companies with total consolidated assets greater than $50 billion will be subject to enhanced prudential standards established by the Board. By contrast, firms that are not des- ignated by the FSOC and are not bank holding companies with total assets greater than $50 billion that are designated as G–SIFIs by the Financial Stability Board would be subject to internationally agreed-upon standards. Q.4. In a hearing on March 22, 2012, I asked Treasury’s Under Secretary for International Affairs, Lael Brainard, if she antici- pated a situation where a U.S. company is not designated a SIFI by FSOC, but is designated a G–SIFI by the FSB, and how such an institution would be regulated. In her response, she noted that ‘‘U.S. financial institutions will be regulated in accordance with U.S. laws and regulations.’’ She also said: ‘‘Through its member- ship on both the Financial Stability Oversight Council and Inter- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 63 national Association of Insurance Supervisors (IAIS) committees in- volved with the development of the criteria and methodology, Treasury’s Federal Insurance Office (FIO) is pursuing an inter- national consensus that aligns the IAIS criteria, methodology, and timing with the Council (FSOC).’’ How will you ensure that the U.S. SIFI designation process is co- ordinated with the G–SIFI designation process so that the integrity of U.S. law is protected? A.4. Please see response to Question 3. Q.5. The Federal Reserve’s recently proposed capital standards im- plementing Basel 3 and section 171 of the Dodd-Frank Act include an effective date of January 2013 for insurance companies orga- nized as thrift holding companies. However, section 171 of the Dodd-Frank Act states that any requirements of that section shall be effective 5 years from date of enactment (July 2015). Can you clarify these effective dates as they apply to insurers? A.5. As you know, the Board and the other Federal banking agen- cies proposed to revise the risk-based and leverage capital require- ments in three notices of proposed rulemaking (NPRs) and the Board proposed to apply the revised requirements to SLHCs.1 The proposals in the NPRs, in part, would apply consolidated risk-based capital requirements to a depository institution holding company and its subsidiaries. Currently, capital requirements for insurance companies are imposed by State insurance laws on a legal entity basis and there are no State-based, consolidated capital require- ments that cover subsidiaries and noninsurance affiliates of insur- ance companies. In developing the NPRs, the Board sought to meet several legal requirements and policy goals. The NPRs are consistent with sec- tion 171 of the Dodd-Frank Act, which requires consolidated min- imum risk-based and leverage capital requirements for depository institution holding companies, including SLHCs, that are no less than the generally applicable capital requirements that apply to in- sured depository institutions under the prompt corrective action framework. The NPRs are also consistent with the Board’s long- standing practice of applying consolidated minimum capital re- quirements to bank holding companies, including those that control functionally regulated subsidiary insurance companies. This prac- tice eliminates incentives to engage in capital arbitrage by booking individual exposures in the legal entity in which they receive the most favorable capital requirement. The requirements under section 171 generally apply to deposi- tory institutions holding companies that were not previously super- vised by the Board, including any savings and loan holding com- pany, beginning on July 21, 2015. Separately, section 616(b) of the Dodd-Frank Act modified section 10(g)(1) of the Home Owners’ Loan Act (HOLA) to authorize the Board to establish regulations and orders relating to capital requirements for savings and loan holding companies. Thus, section 10(g)(1) of HOLA provides the Board with separate authority to establish by rule capital require- ments for savings and loan holding companies, apart from the spe- 1See, 77 Federal Register 52888, 52909, 52958 (August 30, 2012). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 64 cific minimum requirements and other limitations that are imposed by statute in section 171. Consistent with the Board’s authority under section 10(g)(1) of HOLA, the NPRs provide that savings and loan holding companies would be subject to consolidated minimum capital requirements be- ginning on January 1, 2013. The Board received numerous com- ments expressing concern regarding this proposed effective date, including from savings and loan holding companies. In light of the comments and the wide range of views expressed during the com- ment period, the agencies issued a joint statement on November 9, 2012, noting that the agencies do not expect that any of the pro- posed rules would become effective on January 1, 2013. The Board is considering carefully all comments received, including potential implementation challenges for savings and loan holding companies with insurance company subsidiaries and the appropriateness of an extended effective date, and will take them into account over the course of the rulemaking. RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK FROM BEN S. BERNANKE Q.1. The Federal Reserve’s strategy of keeping interest rates low through ‘‘Operation Twist’’ has been aided by global uncertainty, which has risk-averse investors seeking the safety of U.S. Treas- uries. At the 10-year Treasury note auction on July 11, investors accepted the lowest yields in history, just 1.459 percent. These low rates have neither spurred economic growth nor materially lowered unemployment. Rather, they are creating ‘‘unintended con- sequences’’: (a) Retirees are facing personal budget cuts as their savings yield next to nothing; (b) Businesses, which finance much of their working capital on a floating rate basis, are reluctant to expand; although their cost of funds is low currently, it is likely to rise just as any expansion plans are implemented and their work- ing capital needs rise; and (c) Independent banks are struggling to remain profitable while managing difficult conditions caused by the combination of artificially low interest rates, weak commercial de- mand, lower debit card fees, and the rising cost and capital re- quirements for interest-bearing customer accounts. Since yields are already at historic lows, what purpose will fur- ther quantitative easing serve? How much lower could rates rea- sonably be expected to go with further easing? A.1.It is true that Treasury yields are very low, but there is scope for the Federal Reserve to ease financial conditions further in order to strengthen the economic recovery using nontraditional policy tools, including purchases of longer-term assets. The unconven- tional easing measures undertaken by the Federal Reserve in re- cent years have been effective in contributing to lower longer-term interest rates, higher asset prices, and generally more accommoda- tive financial conditions than would have otherwise been the case. More accommodative financial conditions, in turn, stimulate eco- nomic growth by reducing the cost of borrowing for businesses and households, and by raising household and business net worth, thereby boosting aggregate demand and reducing unemployment. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 65 At its December meeting, the Committee announced that it was increasing policy accommodation by purchasing additional mort- gage-backed securities at a pace of $40 billion per month and would purchase longer-term Treasury securities at a pace of $45 billion per month after the completion of the maturity extension program at the end of the year. The Committee indicated that unless it sees evidence of a substantial improvement in labor market conditions in coming months, it will purchase additional agency MBS securi- ties, undertake additional asset purchases, and employ its other policy tools as appropriate until such an improvement is achieved in a context of price stability. The Committee also indicated that, as always, it would take appropriate account of the likely efficacy and costs of its purchases in determining the size, pace, and com- position of such purchases. The conditioning of purchases on economic outcomes helps to cre- ate an automatic stabilizing effect in financial markets. If the econ- omy weakens, market participants might expect additional Federal Reserve purchases and that expectation should contribute to a fur- ther easing in financial conditions. Conversely, if the economy strengthens, investors might anticipate that the Federal Reserve will scale back its purchase of securities and that should contribute to a firming of financial conditions. Thus, the ultimate extent of the Committee’s purchases, and so their impact on yields, is uncertain at this point. Q.2. How would further easing and low interest rates affect fixed- income seniors unable to move their money into higher risk invest- ments? Given that this segment of the population is growing, could depressed consumer demand have negative effects on the economy? A.2. The Federal Reserve recognizes that the accommodative policy the Fed has put in place means that individuals with savings in- vested in fixed-income assets may receive lower interest income for a time. However, the returns on fixed-income investments, as well as other assets, fundamentally depend on the strength of the econ- omy. Moreover, the Federal Reserve’s policy actions also boost stock prices, home values, and other assets that are held by many house- holds, contributing to higher household net worth than would oth- erwise be the case. A stronger economy benefits savers and all Americans in myriad ways, including stronger income growth, im- proved job prospects, and improved access to credit. Q.3. One major effect of the crisis in Europe is that European sov- ereign debt from many countries is no longer considered riskless. How has this affected demand for Treasuries? What effect might increased demand have on consideration for further easing? A.3. It seems likely that investor concerns about the situation in Europe have boosted the demand for Treasury securities and put downward pressure on Treasury yields over recent years. In mak- ing its monetary policy decisions, the FOMC takes into account all of the factors that it believes are relevant to the U.S. economic out- look, including the effects of the fiscal and banking crisis in Europe on financial conditions and U.S. economic activity. As the FOMC has noted, strains in Europe and global financial markets represent a significant downside risk to the U.S. economic outlook. The rel- atively modest pace of the U.S. recovery and the associated down- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00069 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 66 side risks, in turn, have been important factors underlying the FOMC’s decision to provide further monetary policy accommodation over recent years. Q.4. The State Budget Crisis Task Force just released a report identifying ‘‘Six Major Threats to Fiscal Sustainability’’ (http:// www.statebudgetcrisis.org/wpcms/wp-content/images/Report-of- the-State-Budget-Crisis-Task-Force-Full.pdf). One key finding is that ‘‘Underfunded Retirement Promises Create Risks for Future Budgets.’’ One factor that allowed state treasurers to underfund pensions is assuming unrealistically high rates of return for retire- ment investments. If the Federal Reserve extends ‘‘Operation Twist’’ again, what is a realistic rate of return for conservatively managed pension funds? A.4. The returns to long-term investments depend crucially on the strength of economic activity, the rate of inflation, and the stability of the financial system. The Federal Reserve conducts monetary policy to foster its statutory objectives of maximum employment and stable prices. To this end, the Federal Reserve has reduced the Federal funds rate to its effective lower bound and has increased the size, and changed the composition, of its balance sheet in re- cent years to help make financial conditions more accommodative. These monetary policy actions have been motivated by the desire to support a more robust pace of economic recovery in a context of price stability. It is in the interest of everyone—including pension funds and their beneficiaries—to have an economy that is per- forming at its highest level of its capacity consistent with long-term price stability, which, in turn, would increase the returns on long- term investments. Q.5. Recent statements by Barclays Bank and the Bank of England indicate that the LIBOR rate has been subject to manipulation since 2007. Can market confidence in this rate be restored? What is the appropriate role for the Federal Reserve in establishing a credible, transparent market-based interest rate index that pro- tects American borrowers and lenders? A.5. Answer not received by time of publication. Q.6. The Federal Reserve has proposed risk-based capital rules that do not distinguish between Savings and Loan Holding Compa- nies engaged primarily in banking and those engaged predomi- nately in insurance. Considering the differences between these lines of business and their related risk-based capital requirements, is it realistic to expect that the complexity of issues related to this important rule can be adequately addressed in the current com- ment period, which is scheduled to end on September 7? A.6. As you know, on June 7, 2012, the Board and the other Fed- eral banking agencies (agencies) proposed to revise their risk-based and leverage capital requirements in three notices of proposed rule- making and to apply the revised requirements to savings and loan holding companies (SLHCs).1 The agencies jointly extended the comment period from September 7, 2012, until October 22, 2012, in response to requests from the public. The Board is considering 11 See, 77 Federal Register 52888, 52909, 52958 (August 30, 2012). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00070 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 67 carefully all comments received, including potential implementa- tion challenges for savings and loan holding companies with insur- ance company subsidiaries, and will take them into account over the course of the rulemaking. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 68 ADDITIONALMATERIALSUPPLIEDFORTHERECORD VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00072 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.10021717 69 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00073 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.20021717 Monetary Policy Report to the Congress Submitted pursuant to section 2B of the Federal Reserve Act July 17.2012 Board of Governors of the Federal Reserve System 70 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00074 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.30021717 Ltltter of Transmittal IlOARoOI' G{)"'I!R>'JORS or Tll~ FI'Vl,RAL Rf~Ek'lh SYSllit Washington. I).C July 17, 2012 THE I'RESlDhNl 01 1111; SbNATI. TilE SPEAKI,R or TIlE I rUINeOr REPRESi:NTAlfVI:.s The Iloan! uf Gowmors is pkascd to submit ill; .l!iJllelllrJ' Pi!liry Rrpflf/ /(J liJr COIIgru.! pUrl,uanllo iit'\.'LJon 211 of the Fi.'l.kral Rcs<:..'1VC A<.'L 71 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00075 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.40021717 Contents Part I Oren-iew: Monetary I'olicr and the Economie Outlook ... 1 Part 2 Rt'('('nl Economic and Financial l)ewiopmenls ..................... ". ... .. ,. . ". .......... 5 DOMCSTIC DEV\iWPMf].ITS ................ .. ..................................................... 6 The Houschold Sector .... .. .... 6 CQIl.!tI/lIl'r Sll~ndilt~ (lIId Hfil/sthold Fmollce ............... .. . .......... 6 Hliu.\·in~ ACliI'ilYlllllf Housillg Firlilllcf'. 8 The fhL~incss Sector .. .".10 Fixl'd "11"1'$1111('111 _ H __ ••• 11) Inr/'lilory fllrt'SIIlIen/ ................ ,', .............. ,', ............................................................. 1 \ C(lrf/orale Profits 01111 Busilless FinaneI' ........ 12 Th~ GOVl:rnm~nl SL'l:[ur , """ ................................ ,,]4 Fl'lwmi Gorrf/lmrlll .• ................. .. ...... 14 Sum WId lAtal GOI'erml1Rm .. .. 16 The hlernal St"CIOr ,. ... "",16 E.vwm"mu/lm/Klf/s ,. .................................................................. ,. .......................... 16 GlI/llIuodilY and Trude P/'itl'S ....... 17 Jill' Curl"l'nllIllIl Fill(1l1riol AU/Jums ........................ 17 Nalion:tl Saving.. .. .......................................................... ".18 Th~ L~IXlf Mark~l .. ",19 Emfl/I))1l1elllund Ullrlllf!/O}wt'1II ................. . .......... 19 PI'Ullurtil'ilY (1lul Lalw ComrenSllliol! .. ...... 20 Pric~s ..... ",,21 FINANCII\L DEV[LOPMIiNTS ............ 22 M(ln~lary Potiey Expttlllliuns and Tr~asury Rat.:s _________" " .. 22 Short·T~nn F\lndingMarl.:~ts , ............... ,' ............................. ,' ......... . .. .... ,. . 23 Financiul lllslilUliuns .............................. " ........................ . .. ...... .25 Cnrf"'l)ralC l:kb( ~nd Equity Mark~lS_ ."-_-"" .... 27 Mon~lary Aggregates and th~ F~dcral R.:scrv~·~ Balance Sheel . .. ....... ".".29 INTERNATIONAL DJ:V\,LQI'MJ:NTS, ............ " .•.. .. .......... "" .......... .32 lnl~matjonal Financial Markcb .. .. ...... .32 AdvanCl:d Foreign Economil:S .. ",35 Emerging M~rk~t Economi~'S .• ....... "--" .............. -"" ... .37 <0 .. 72 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00076 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.50021717 Part 3 Monetary Policy: Recent Developments and Outlook ................................................ 39 Monetary Policy over the First Half of 2012 ........................... .. .... .39 FOMC Communications ......................................... . .. ... .41 Part 4 Summary of Economic Projections ................................................................................... 43 The Outlook for Economic Activity. .................. .. .............. .46 The Outlook for Inflation .......................... .. ................ .46 Appropriate Monetary Policy ...................... . .. .............................. .49 Uncertainty and Risks ............................. ...... .53 Abbreviations .......................................................................................................................... 57 List of Boxes The Supply of Mortgage Credit ........................... .. ............... 10 The Capital and Liquidity Position of Large U.S. Banks ............. .. ............... 24 Implementing the New Financial Regulatory Regime ............. .. ................. 28 An Update on the European Fiscal and Banking Crisis ............................................ .34 Forecast Uncertainty .................................................................. .. .... 55 73 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00077 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.60021717 Part I Overview: Monetary Policy and the .Economic Outlook Til< )'('," of <X\!oomic I\"W'~!) 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Ihnn in 2011, ond 1oo1".-lCrm rt~ IOYoa,d grf~tcr c""'p.:ralion in lhc,uJlCfvi~on inlhll"," "'pcc1Hlions h",'~ ..m ii"oJ ,table. A numm ltId. IS UC"<:eS!lIry. r=pila/izalion "f furor'." banh. of faa.,.., ..i lllik<ly "SIr"';" ",,~nom"'W"""lh in Ih. Many crilica1 d.[;jil~ h"",~"" •. n:n,.in 10 be "'lI",.d ~,.;oo """ad, inrludiOl .. cal< m)1IOID;" gr " o " o " > " 1 I h II < ab rood oul HI/aiM a backJrop of """tinu,d N.'", ..... '" ""ai., "nd. fi~a1 'nvironmcnllhaliook'''1 I~ kl:S nlllll1lJ1d ['Jlili<;al strain u.:C()Illm()dali~ UII<<r1ainlyub.;)u( \btsc fU.1on m~)' Fin,ncial ma,kots "'tre so""",h~1 vo!ltilc <lV<T 1he .ilio mlnin houl<hoId and W$l1ICSS ~ndin~. In first h.U of 2012 m<JS1l)" du<to ~"<IUa(ini';<"1 l\Jdilion, credit conditionl an: lik,1y 10 impnlV< only n:(Il\,dil!j! lbe "Tim in the "U,\1 ~",a ~nd the li~"cly r:tl~ gr~JII~lIy, au", <!iU.dc"atoo i""'"IOM ,,( ,';loanl and M C<,"(llKlmir ~"1h at ~meand abrolW. As in\"rSlill"S' fOl"<kll"d ~Qme$ M~r<m'tr, Ih<-pomibilill'(>f~ rur· OQIIC<fOS oOOUllh<luu;ilWl1In l:uropo t4<d rally in lber mal<'1ial dCltfKmilion of oondiliollS in LUNpo:, o. Ih. Y<4r and "ilb d.ta n:lcasn gcnel1ll1y coming in 10 or. ranicularly s.,,"'" ch.n~. . in US fill<3l ""Bd;tion~ lh. upsW 01" m.rUt'Ir«lati~ brood .quity I.n.:. 1'-"" "Muilicanl J",.~d< ri<b 10 1I1< (lUI klok i~ .. """,;md risk sr"",d~ in Il<V<tlIl markc\J Il'Ir, Ag1Un~llhi, baokJrop. lh< fakral Open Mark<.1 "","cd. Su"""'lll<l1lly. no" ...... '. n1lll~t I"""ticil'.nll 1;'lIJlmill""ln rMC) look ~Icp< to rrovid< ~ddiliottal rullal kick from ristie wru amid mtclwd roacern! 1MIl~.uy rclioy ;J('t~mm~~li()ll durinS the fiNI half ~t.Jut IhH~rt, .~a ~DJ <"iJ'met" or JIo .... 'ns ~Io!>al of 21)12, In plIrticula,. In. C~mmilla>ch~n~."J ill k>,. economIC sro"·ln. Rolkctllli UI<SC de_dormonl! 001 wa,d guidaDO< n:gardlllE-Ibc I'-'1lM mer which It also QWin~ 10 IlK J."1IEl~nInS Qf lit( f",.,. .. tIl rale iuitl ~nllcipal~> the feilt,:ol fundi rlu, la r<1lI.1.io _I o.~I" ailC\'. c"Ontinuation of Itt<: MI ~l'. ~od in<rt4'd <X)l«l". 1",.>lIly low lc,.b ~nd inooullUll ~ runlinualion of ii, lio11s hy maW'1 participant, of adJililmal halanc< malUrily<mmion program (MEl') lhmugh tllt.nd of Ih ..t llelWn, bylbo Fed'ral Krs<JW. yirlds ~n kmgcr tilt yctlr, Tb<!I<' fIillid<s put dO'lltn\ll;\,J pmi'JUn: ~n krm Tre-~SIlry :s<I'untic:t and C<lI"p(>rlUe lkbt lIS IIdJ as lon~Nenn WI<",'$\ rales an.l m~ok IlroIid finall<.ial nil..., on laldeollal mOl1~ages dIXlilltlt, on n<1. Md conJiljoo, 1I\<)n: >ICC<lmm<,dlUil\: Iban thc~ would ,. . h· ",adlN histM<"tIly1. .... 1e",1! iIIllJllCS durin~ tbc first 'f""~ Ix. Ih,~(by SUI'f'Orling In_ <WIIomic """'W. .r haU of tlw )"31. On Wan"" sine<' th' hesmning"r l~ Tht [urOf"'a" 6~ IUld bankilij! ,riu, h~s n:mained )".r, ilI\'«d «l~il)' prices NS< '" .;Ql"JIOw< eaminl'S u m~j()l" JOur,,, ~f st ... l. on global filUlndal mark<1~ rem.11ntd fairly n:silirntthro"~h tl\c finl qu~rtcr. ea,ly in lhe )ur. fma!'ICIal il~ will1io the cum art" 1111.,. ruln~'l ~n ~Mual r:ueor 2'> I"fc'el1t in tile mcdcr3lCd som<l<ha\ in hghl of a numoooJ J'Oli'1' lL'Cond half uf lOll. n:nI GDl'mrrcOO:ll a:1 ['CrtTnt ;IC1iM,: ThI' Eumf"an C.mrolll:lnt (ECII) provi!kd pac< in tm ~nl Quarter of :!<l12, tncl avadabk indica ~mplt-hquiaitY)(j Itt<: rtgion"~ hanks. .uro-art~ I• •d en tM' PQlnl 10 a i1i1l smaUe, gain in lhc ;.:wnd Quarter ~gr=I 10 in~n:~1it lhi: k'<ldin~ cavacity of thei, ~"U< Pn"ol.lIpCnclm~ ».1nlWUd '" bo ...... gh<J down b)' II '''''go focihtin, ancl, O~ :. ." Hla= packagcfo, GI\~"'os of f",'(OI}' includinll unteTlainl~ ~bout d<"'clap al'fl11l"'d followil1j! 11 rnutlC\uring of r,rttk ii(M'rclgn m'nll in Eul"01'" and tnc path for U.S. rt!l<'fIl f'l1i<)". drbt, liOl'o\"o"", trn!itllU will1", tile rum an:alncrc~ C(lnrcrn, about thc !Irtngth .nJ ,uiil"inabililY ()f the aga,n in the ij'rllng III political unrcrtainu<! ",bodlw ft>.'<1 ....... y. the SliU-{lncmil: Il;il~ofttt<: hou~n~ markel. fCOln of ~ disordrrlyGrttk (~it rl'llm the "UIU at<;l ~oJ and In< difflaJhi<ltnat m.nylOOllld,b.-IlorM>'crsoon- 74 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00078 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.70021717 Monetary Polic)' Kcport to Ihe CongrtSS 0 July 2012 linu. 10 haY< in oblaining =dit. Such consirlrf1llions In Ih. household sector. credit <;ondilion, ""'" gen_ h",. . made som. busin.SSts more cautioltS aboUI erally rtmaioed light for all but highly rat.d oorfQ\\"rs; il'lCl'tasing in'"tSIm.nl Of mal<rially '~p.1lIding Iheir among other factors, Ihis tightncss rtfi«:ts th. UOCtr payrolls and h",. . ltd households 10 rtmain quit. pessi lain economic outlook and the high ull<1Tlployment mistic aboultoor incom. and .mplO)'m.nl prospffit rate. Total mortgage d.bt d«:rtased funher as the pace Smoothing through Ihe .ffects of unscasonably warm of mongage applications to pIli":has< a new home ~-as ~. . ath<r Ihis pasl winter, ac1i"ity in Ihe housing sectOf sluggish. Rrfinancing ac1i'lit~ increastd o'~r Ih. coo"., appears to havr b«cn a liul< strong<f SO far this ). .a r. of Ih. second quan .. bul rtmained below l""rs I 1O\O. . ,,,r. the ",. . I of housing OCli"it)' rtmains low and rtached in prnious rtfinancing booms despit. histori <ontinutS to be h.ld dO\O'n by lighl mongage crulit. cally low mortgage inl.rtS1 rat~ TIt. illCrtast in rtfi M.anwhile, th. dragon rtal GDP gro'oI1h from govtm nancing was partia!ly attrib\llable to f'tCrnt <ohaner ment pur<:hases is likel)' 10 persist. as budgets for Slal' m.nts mad. 10 th. Home I\ffordable RrfinaOCt and local g<». . mments remain strained and federal Program thai appearul to boost rtfmallCing acti,;ty fiscal pol'-':y is likely to Ixwm. mOrt rtSlrit1i"e in somewhat for oorro. ...r s"ith und.f\\llt.r mortgAges 2011 that i~ for those: whoo. ..e d mort on their mortg~~ In Ih. labor mark<1, gains in private pa)'ron .mr!oY Ihan Ih.irhomcs ,,~rt "mlh_C onsumer credit ment ",=gt<l225.00CI jobs I'" monlh in Ih. first e.<panded moo..at.ly mainl~ be<:ausc of gro'oI'th in fed_ quan." up from 165.00CI jobs per month in It.< second eral 'Iudenlloan .. half oflaSl ). ..r , but fell bock in lhe SIXOfId quanerto Firms in lhe nonfonancial OOTJXl!lIte SWOT continued just 9O,OOCI jobs per month, Allhough Ih. slO\Oing in 10 raise funds at a geOtraily moo""l, pan: in the first lhe pac< of n<l job rn:ation rna)' h"," b«cn .~agg<ral.d half of tt.< ye .., Those: ... ith access to capilal markm by issues rtlat.d to sv.ings in lhe " ...1 1ler and to SCa look ad'o'antag< of 10'" int.rest rates to rtfinance <:<isl sonal adjustmenl difficultics wociat.d "ith th.liming ing debt. I\s a result. corporate debt i"uance "as solid of the sharpest job losses durin, the rtCt!:Sion. those 0"(1" the first part of the )ur. although issuanCtof fOClors do nOI appear to fuUy aa;ounl fOf th. slow speculali""_grade corpora!' bond, " ..a k.ned nOlably down. Th. u1l<mplO)'ment rat. dedin.d from about in Jun. as in''eSt()l'$ pIlll.d boct from ri,tier assctl 9 pem:ntlasl summrr 10 a still ..l tvated 81'1 prn:tnt in Comm.rtial and industrial loans on Ih. books of lanuary, and it has ..m ained close to thai b ..1 s ince bank, .. panded brisk I),. oot bo"""ing conditions for lhen. lik ....i se, long-term joNe.." ... has sho"n liul< small businesses ""'" impnwed more oJo,o.lj.' than have nel improyementlhis year. ",ilh the share of Ihose Ihoo< for larger firm .. FinallCing conditions for com unemployed persons who have been jobless for mercial rea!.,late stayed r.rati,~ly reslrit1i, ... and fun s,< mont'" or longer rtmaining around 40 prn:tnl. damental, in Ihat SCCIor s!lO\O. . d fe .... silins of Furth., m.aningful ..d UClions in un.mployment art imrnwemon1. likely to ..q uire SOme pickup in the pac< of teonomic Market s<ntimcnltoward major global banks fluctu ac1ivit)" ated in tho first half of 2012. In Man;n. Ihe ..b .. of Consumerpri« infiation mo'~ dO\01\, on net, dur the result. from lhe Comprehensi'~ Capilal I\nalysis ing the fi"t half of the ). .... The price index for ",-.rail and Kov;""', ,,-hich inve-st()l'$ interpreted as indicaling personal consumption expenditures (l'eE) rose rapidly continued improvements in lhe hea!th of domestic in the first th ...... months of the ). . ar, retketing large bank~ provided a significanl boost to the equity prices illCreases in oil price~ bul inllalion turned dO\OlI in the of U.S. financial inSlilulion .. Those gain. panially spring ,,-hen oil prien mo .. than reversed lheir earlier ..' ...... d when m. .l et..."timrnt "orsened in May, run_ups. In all, th.I'CE price ind.x increased at an dri,. ... in large part 10)' con=ns about Europe and annual ,ate of about 1\4 prrc<nt """ the fi"t potrnlia! spil1=" to the Unit.d Slat., and its finan five monlhs of Ihe ). . ar, compared "ilh a rise of cial instilutiool On balance, ho-.."'~r. equity prices of 2~ percent during 2011, E.u:luding food and enel])', banks rose .ignificanll)" from relati'~ly low b"l. at the consu",", prices rose at aboUI a 2 percent ratc over lhe start of the )"ar. I\n index of credil default ...- .p first five montns of the ). . ar, close 10 the pace ~ .pread. for the large bank holding companies declined """ lOll. In addition 10 the n<1 declin. in crude oil aboUI &:J basis point .. rot those .pread. remained .1 • prices <worth. first half of Ih. ). . ar, faclOrs contribut_ high ""'I. f)"spitethe sv.ings in martel sentimenl ing to low consumer price inflation this ). . ar illClud. aooul global bantinll organi!. .t ion .. condilions in lhe de<el.ralion of non..,iI impon prices in the laner un!<CUred short-Ierm dollar funding markm " .. re part of lOll. subdued labor costs associated -..itb tbe fairl)"stabk in the first ha!f of 2012. European finan -.."ok labor market, and ,table inllalion expectalion. . cia! institutions h",. . reduced their demand for doUar 75 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00079 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.80021717 IJiJdni of Govtmon of rh~ fN,ral &sm" ~)'sum 3 funding o.~r """nl quarters. and gtneral funding prts in January and April, Committ«c participants' proj<c_ SUttS apparenlly ..~ re albiar<d by Ih. ECB's Iongtr lions for II>t un<mplo)'m'nl rate had a ctnlra!ttn Itrm refinancing optralioo~ dtncy of 8.0 10 8.2 po"",nl in the fourth quarter of Ihis ""Ih II>t Commill«c anlicipaling only slow progm:s ). . ar and tl>tn dtdined 10 7.0 10 7.7 ptflXnl "Ililteod in bringing unemploymenl do ... n lo. ...a rd It.ds Ihat it of 2014; thost: 1t'~ls are Slin gtnually " .. II aOOvt par judges to be consistent ";Ih its dual mandate and licipanl$' estimates of II>t longtr-run normal ralt of strains in global financial mark.lS continuing 10 post unemploy",ent M.anwhile, participanls" pro~lions significanl do. ... nsid. risks 10 lhe =nomic outlook. Ihe for inflalion had a ctnlra!tendency of 1.2 to 1.7 por_ FOMC took additional sttl'S to augment lhe alftady ctnt for 2012 and I.S 10 2.0 po""nl for bolh 2013 and highly acwmmodalivt Slanct for mon.lory policy dur 2014: lhrst proj<clions a~ lo-.."r. parlicularly in 2012. ing the fiN( half of 2012, In January.lhe Committ«c Ihan parricipanls reporred in January and April. in modified ils forwa , rd , = ra te guidaoct, nOling Ihal tro part ~lIt<:ting lbe effects of the """01 drop in crude oil nomic conditions likely 10 ....a rranl.xctplionally prict~ low ItI-tls for Ihe federal funds rate at leasl through late \Wh Ihe uoemplo)"mtnt ratee~pected 10 remain 2014, And in June, Ihe FOMC dtcidt<l to continue Ihe d"'ated 0\. ... Ihe proj<clion ptriod and ioHalioo genu M EP unlillilt .nd of Ihe )'ear rather than compl'ling ally e.pected 10 be al or under the Committ ...s 2 por_ II>t program allh ••n d of June as prtyiously ctnl obj<cti. ... most participanl$ expecled Ihal. under schffiult<!. Ihcir indi,;dual asltssmtnts of appropriale montt.ry The Jun, Summary of l!conomie Proje<:1ions is PIt policy. lilt fedotal funds ralt would remain .maordi StOlt<! in Part 4 of this rtpOft. Allh.timtof IheCom narily low for some lime In particular. II of the mitt«'s June m«1ing.I'OMC participants (lhe 19 participants plactd Ihe largel ftdtral funds rate al 7 members of Ihe Board of Go\"trnors and the pmi 0.75 pem:nt or 1000~r allhe end of 2014; only 4 of <ltots of the 12 Federal RCSl:rvc Banksl""" the th<m SaW the appropriate rate at 2 ptm:nt or highff. cconomy expanding al a modcnuc pace cr.'u coming All parlicipants rtportffi It,. . !!. for lbe approprialc lar quart<rs ond tl>tn pitting up gradually undtt th. gtl f«l.taI funds rat. al Ih.end of 20141hal ""re ,,~11 assumplion of appropriat. monetary policy. Mosl par_ btl"", th.ir estimates of II>t ItI-tl0.'pffied 10 prtvail in licipanlS marked dO'o'lllhcir pro~lions forcconomic tbe longtr run. In add ilion to proj<c1ing only slow gro ..1 h in 2012 and 2013 rdati,. . to .. hal II><y anlici progress in bringing do ..' n untmplo)'ment. most par· paled in January and April largely as a result of Ihe ticipants .....' the ri,h 10 the outlook as ,,-';ghted ad.~,... developmenls in Europe and the associated mainly to\\1Ird slO'o'. . r gr<l"th and higher unemploy effects on financial mark01L Moreover, he"""inds from mont. In panicular, parricipant' notN Ihat main, in lhe fiscal and financial siluation in Europe, from the global financial markol~ Ihe prospect of reduced fi=l slill_depressed housing martel, and from tighl credil accornmodalion in the United Stain and a general for SOmt be",,,,,.-.,,.. ...-ere ciled u likely 10 hold back ,1000dO\\n in global <conomic gr<l"tb poltd significanl lhe pace of <conomic e.pansion ~ tbe fOrecast risk, to the reco'~ry and to a {urther improvement in poriod. labor market conditions. FOMC participant' aI"" proje<:1ed slO'o'"<r progress in reducing unemployment than they had anticipated 76 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00080 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.90021717 , Part 2 Recent Economic and Financial Developments reonom'" a<:IIIily al'l"aI'S to k~ .~pa"<kd (II ~ """'Iher and 10 >C3SO!I1II "dj""tmrlll~ "nd tbe "'"-'Ill" so",.,,,,hal .k>¥.-.:r f"l'" <mr lh< firlll hair of 21112 Ihan rloymrnl rm< homed around 8Y. t""""~t an., a ~,. . in th. >ce\lnJ half ~r WI I. An" rising III an ",,"ual niuc-.nl d«:rtm (l'o'l"r Ill< 1311'" months ~r 2011 ~nJ in rale of 1'1, p<m.'I\l in I~ 5I.WIIJ h:llf of201 I, ..aI Janu.ry M.~D\tIhile, OOn,UJn¢l' !"i« inll.tkm. in p~r1 ~ ~<)m<SticrrOOui:l (UDI') L".;;nascd 011.1 1'"""'"1 bunct<'Il by sh'rr swin.,:1 In lb. prie< ()f gal(>\i,.,. f'll<" in Ih. fiN! quart.,. of 2012, IiJld waUa!lk' indica Itepp«! up eorly in Ih< )'a, but SUbsr<juenlly tllm<d lors roint 10 a still mallor gain in Ih. StC<lnd ~uall.r down. and longc, .. t<:rm inflation "'~jW1",ionll't'mainod (figurt I). An impenanl f~IOf in~\It",mimmomk Itabk-(~gurt2~ and financial d.,~Iopm<n!llhii )tar Ii Ih. unf.1lJillJ Hnancial ma,l>et.< "m: SIlmC'oln<ll VIlwi1eovn the lid ""d b:lnkin~crOO in ~uropc.IGd. .d . Ih.<oo· fi..t hat/' or»12 monty duel" nllCluatinlll'i ....~ nomic OIIllook fo. Ihc ,.,oond half t>f 2012 dcp<Dd, "ga,JinJ lh< emi, in lbe ruru ...a "nd lb. likelyp"'" cf\I<i:l1l)'on th ...l cnllo ,,'hich c",."",1 "",) poi",,!hd of e<;<"",mi< i""I"'1h.t hom.and llbro8d. Yields "" distUJ'lion, in Furor< dir«IJ~ ",duce U.s. .<1 ""I"'fli I~ngc'. . t~rm T'<lSury &t<:uriG",s h:rvt dtelinoJ lign;t' .. and ind~1y ""fI~il rri_alf OOrm$lic ~ndil1J! cantb'. I't'nf<'1ing fN'<!le, lIIQ/I<1ary !X'Ii..y IIO.\lII\ntQd:o .. through :0.1''<:1"8<: spillo''tf dfe<.1! on U.s. tinanci", mar· lion. Ih. "~ak('f outlook .. Md saft-ba"011 ROIO'S. Broad ~cu ""J inS1I1UUolll' and on lwusthold and busmess in<kIt:! of U.s. ~UU)' prices 1'0'" on not, ris~ ~aJs Cl'nfi ....· !IC< AI the same Um<. the etonomy c\'IIlin!le:! On oorf'lll'31~ bo:onrl ........ gcncraUy uncbaog..'Il <lr 10 r. ... Olh,,. heaJwinJ>. ;nduJin~ "",I,;';t.d -acces; II) !Iigllll)' !ww. a!>d unICCUred shon"lorm dQllar fundiug rome tYf"'$ of h(>ll)<~ld IIIJ small I:.tsin<'$' on'ilil .• OIlI,k.t, wm f.irly <table. I).>bt issuano: by U.S.C<l'" shll siubk in>tnlory Qr vacant homos. ~nd 1m. . r<oratiilnl "'111 10M. and Nink I""uling!~ lalj,"Cr fimll a~oomm<>da~vt fiit:d pol;""). ""as brisk. In !he ,"",schOld ~or. roruum<r ,. ... dil The W>or marb:1 n:m";"" ,. .a l:: 1'Ii.0I< p~yroll "_'I'"ndcd ..... d m<lftg~ rrnnancing activity in=a",d employment slel'f!<'l up.,my in lbe year rot then ",,"""Ii), rdIOC1,oi lhe d."~ ... in m<"'pgc lilies to ,low"" in lh<<<CO!ld qUar\er(t~oup Ihose m(l'o',," mil)' k~t",ic",1y low kwls as ,,~n "S r=nl ch.1IgC'l to the h"," b<c~ ougger.Jlrd by ~""" rtillttd to ""Uogs in lb. II!IIIIC Alr"nl:lbl. Rdlnatt"'-1'rognIm 1I!IIIU'~ &#45;&#45;&#45; 2. Chll,. on !be <1=I-'l'I'" pntt """" lOr J'CI*lII:H _ptioaapendilurc>·. :!OO(i..-11 - pm<>I.-..-........... _.r. .._... .. ....., . .. -.. ........_ .. ~ . ,, . ,, , H. ..... I. . _ .... ~ - .. - ..... . . , n . . . . . . - ... -,. ....._ ..... \ 1.,.3It~._ ... ........ t>ot-"C-_"~""''' SCO<n ~"'""-<_",,,,-,11.001!>- 77 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00081 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.01021717 OonK'Stic [k\elopments - 111e Ill)lIsdwld S«10r Q)",1if1Ml' SPtnJIII# illlJ II(Mf~tllJ f~ -. A~ .. risinl'al on OM"'" raJ' of *"ul 2 p"''''nl in Ihr SlWnJ half or 2011. ",al p<rs<>naI rons"mption ~'p<n. dilUm/PC£)inm: ...." '<l2'>if'-TCCnl in Ihef,1'$I ~uarlc:r. 001a vaibbk infMmllion su~ru Iho' ",:II rCti dettl. ~rato<J SQIll< in Ih< s.:wnJ qUa/Ic:r (f!.!luR: 3), Tit< f,,,,,· qua"cl iw:mISt in spending octurn:d 1IClC& Mb road ,,1(IIh array cf and scr;i.'t$ wi,1I Ib< I\()labk r~(>;plion of OUlIo)~ iQ ..n <:rgy SCM'<'$, ~'hi<h "'. ... hdd d"". . by miuceJ dcmllllJ fo, M:lling hecallSC "f 110<= unllta· iQnahly warm winler. Sr<nclin~ 1)11 cntfsy SCMet< 'rp<'''' '" II"", ..h ounclecl in tM <tWnd qu,"", ""Ike ". . ropeIOl< W",I<I fM' " .. ~ 10 , ",1.lj,,,"y muR: I}l'ir:ll Jprin\!.ln conlrut, Iht jWXof mOl(l! ''thi.:lual<:!; edged d()'fI'n in Ihr !«Ond qu",w. and rtl'<'rI! on rtlail iIalo:s !UUCSI Ih .. CI,)IISUml:l oullays O~ ~ wid< l\ggrI:ga1e re:d d;.po.abk: I"'nona! 'nCOlll" (DI']) r"n~ cf i'ems '0$: loss "'ridl)' Ih~n Ihe)' did in III, p<. ..o nol income less personoll ........ aJju5IN fer ~"'I quart.,. Th¢ ",oo<ralt oS' in ",,"Wm<1 sptnding ehaIl!!." in prioe._rosc mOrt r~pidly over Ihe tiril 6", <l"t' Ih. fin.! h;llf of lilt yell! ocru,rtd ~gaimllhe "",nih, of Ih. )"<>f thon it did in 2011. iro part b.a.U5l' t..<l:cl"'l' of the ron<id ...b lc m,nomiccllall. .'1 1S'" <1ill of d.dining <'"'"y pri""s (fi~'IIrt S~ Th. "iago and .aI fa<.in, m"ny households. im:lIJding high u"emrloy' ary ooml"'""nl of rtal 01'1 ...... lIell rt~eclS hoIb Ih. ,",'Ill, slul'iish pi<l$ in empklytru:nl. ltpi<l Yl''''lh in numbe, of houri "",t.d .nd "'. .r ~~ hourly "''lI~'' i!lCQfn<, SliU·slrtSStJ bai:lnC,-d Ih ..l ~ li~1 =~ 10 adjulted r"f innllliQn. roll: 31 an annuill rale ,>I' neIIfly S()II1e 1)1"'" of =di~ and lingering p«<'mism .beut ]V, rcrtcnllhrough Ma~ of this)w ~n" hlo\>;1ijl job and In"","", prosI"'m \Vjlh incre",," in <p.'!Iding in.·~ lIuimilar p.l«in ))11. Tho: immlS< in mil OUlpatinl! growlh tn income so forthi. ). . ar. th. p;:'. ,,1Igtl and 5oll.,y income so f<ll' in 2U12 is wBtly .lIti\>o rona! JaVin~ raleconiinueJ to decline, on ntl, Ihough it utable 10 lb. m<>dcsl imp",,-.:mrnl in <mplO)omrnt~nd """"'nod "'ttl ahoVe I<wb th31 prevailed Woreillo """,,,,ion (Ii~u", 4), ~. C'b>nJ;< in rd diop<>Wojo r<rSOIIOi ~:on<! '" .... "wuwt.>l"l'd"""",","<Jl(J,~11 -_.- &#45;&#45;&#45; -L. I I ",0' - , j 11 -- , , -~ _'lOII'I_:!ItO'I9~lGl&II "!llll r_._.. _ __ . -"-- .. _·~2jj1!...~ \I.oy_,..'...t-_ .... .~..ltot.tyGl_l, ._..... .·_._..~,. .. .. ....,. __ tor .. ~ "":1<1' .. ~ 78 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00082 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.11021717 hours work.:.!: noa] "'mlS" hon'lyeomingJ~'" lillie changtd I~UJ for Ih;~ yu. Th. '»Iio <>f nuuscl!,,1d ni,'\ ",mth to in~otn., ill tho "W"<ptc.illOVtIl up J1i!lhlly (uT'lhu In II>< firsl ~uafl'''', ... "., n:"<t'linl ;1lCrt'M<"'S ill t>olh "'-'US< prkn anJ f\lU;ly .- ,,. plires lng~rt 6). Ta kln~ ~ Iongcr 'i~ lhis raliQ ha,s , b<en "" &<low UI''''"dfU ~nhi""" 1000l, ~"d ""hii<;1 ..m ain.. far Ixl""" Ic,d~ srrn in the )tar< l<aJinl ur to • 1I1. ,oressioo, il isal)lul(tjuallU ilS II'I'~ tm'nllt "",I 2(1 )'t311-J 1000000h"JJ·k~ d:l.l~ Ihrou,gllWIO Indi • C.1IC 1001. ""'allh ~ were l""P"rtionalciy Luger (Qr Ill< middkJ'Ol'lion cf lbe "",;)Ih dislrib\llion ""1, - - • ~urprisin, J\'S\I\~ 1Ii'<tIlbc I'<l:I.Ii'l: imJ'Of1ln'" oJ' bo~nt~mVnllhc ~tJO( 10= nou""hoJd!. M(OIn· .,nik, indi<;atof! of rottSUmt, scntiment art ab<:Mo ~ tl1<irl""," (",m l:ut rommorbul h:f.'t )'tIIQ ",Ium 10 -~..".". .1..\.t,.~ .1. I_< oN.._ _ . . . . ' . -,... "..." ... ' ..' ., '..._ . . ' . 'w . ' . ' . ' . '. . ' . __ . I"".~ ",,'CIs lfig"'" 7) lO'~"""". 1l<>ll. .. h~1Ll debt- lb. j"m ~r mOfljWg< aDd",," , _ .. n - . y ( _ . f . « ,. " . " .~, l . O ,. l -_ ~ " .. " _ . _ _"""" _ tOll . . l _ "!« , 1 , ~um<' <kbI cdgtd oo..'n again in lbc firs! qllllrt<r "r )01""-"'''-<:<-'' 21)11 Rj Ill< oonlin",'Ill;Qntr.:lion in m,trtg.w: d<bl '<I'M lIhn<l!ll 01!'.<:1 b)' !IGIW ~rallJivc in ~~mcr crolit With the mhlClion in ft,;\oschold dtt>t.low le,,1 d"nt 10",,\ Th rise in ""nl\"V()lvintcT\:'Il,t W f~, Ihil of II'l(Ijl ifllcml raJ", and mOOts! ,iNWlh of incom~ ye., ..' al pnmlfily du: 10 tbe Sirongth in Jlum,nll"aJU, It.: do:bt«rvir:c , .. io lhe IIW'Cg.t10 rcquim! rrincil'aI .. bleh ....., oImOOI onh,dy"rigioal.:.! ~nd IIIn1l.d by and inl"",," p"yments "" ~isli"l hou;oll.,ld dd:>I .da lh. ftdcr.>l govtml1lCflt. Mtanwhik, 3Ul0 loani mam· ti", 10 illCOlllr-<i«l'<a!<'Il furtbcr, ~n~ allhr~nd of lainod a s1C~d) pIIoX of il\i.~ R<"l'lvmS ('OOSUm<f ( lh fi e ~ u fi r r e ! ! 8 q ), U MI,'r, il $I()OJ ~l a H:''tI 1.uI.'ItI:n in 1M m m , o d " i , l 5 ( l p J r b i d m " a "d ri l . y . c t r h e e d i f l i r t s a l r f d i, ,,I r " n " J " i , n li g t ~ < n o : r m I J n in . w ye a m r u in c h G.miWner credil <xp,mJcJ 4t an onnuai rale "f pari boca"", nonprimr borro""l'S conlinuod to f= ab<lut 6'. j>=tnl in the lirstl;'" 1Il000ths Qf 20Il l;ghl unJcr.o.'rilin¥ ~l3nd".d~ O<.1:rail. lhe i""",,,,,,, in driwn by &/I increas< In Mnl\. . ~villi credil. nu, rom COft"'''III,rcrtJil i'COnslSt"nl wilh "",,"I "'SI"'''''' 10 p<)!l\",11I<WUnlS [Of aboull~lhi'<UQfMl\ OQII IIt<Stniur LooD 1)f1ia:r Orin;.,., SU"''<l' OIl 0_"". - _"mer cre<\il and plIlIlarily COnsl>lS of autO and ,IU· Lrnding Pr.01L'CS (SLOOSI ,~clic.ton~ 1I1al. d<m"ncl _ - .. , - -. , - , - " t , I t II - :!III! " ' _-_. l/<.,. -Ik_""'_""""""_lt)tl.QI Do_ I'>IL ·Ik _ ... _~ ................ :lll.Q1 Dolo "". ... -s.-. ._....... ". ". ._. __.__ _... -_" . ..... ._..._ ,..- -.1. --"---~""""""-"" _.,"-"c-._ .. ", ____ -.:-.n .._~.. _. .. ._.... -....w _,_ \)001 '100 .. "" "-'" 79 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00083 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.21021717 8 MOl!<ta,,' fu~,,' RI:!Xlrl to 1M U>~ D lui), 2012 had Jil"'f1glhmed and !<Iatloar<ls ha" ta.!t<l. on "'I. for - !ill con>umorlo.n ca~ I .- [Olorrsl rates on <.IlfUUI!I<-'f lMnl$'1ll'nd\y cdJ!l!d .,-,..- ,Io"'U in the lirl' h'llf of 2012. and Il"/'Ud.< un th<st [!\it"1 rdat"" IV Trta$ury "",urilIN <)( tQItlp3nbk ILWlurily heid fairly Iltad)' In pIIrticular. iDlmsl r~t<$ "" now OnW loans <.Ilntil\ll<J 10 bt ~"il.low_ 1[ ". ... '~r. Ih. 'I""..d of nltes OJ! <",dil",n.I klam ",I,," ... III L/le -..)d. I"'~~"'J! TI 'lOIlUI'Y y b i. t ld c . 1 , 1 " 11 " $ rtmalfl(d siD~ Ih" " 'nd o[ 2iOl in rail (Ij' ",il:inS .djU3Lm<nli made in rt3poo:iC 10 J1I'O'Iiwns incluJed in Ih. Crrdil c.n.I "'o«Iunlllljlilr Rc"lJ".l"Iibilil) .nd Dii'Clos"rr A<I \If 20"9.1 A~e inJ>c.l4oNof OOIISumercm:iil qulllity iml'fl)'loo [urth.r in Ibe firs( qUllrlu I)[ 2(111 Tbt --. dcli.qurrn:y 1'111< "" "",Jil <.uti luan$ rtg;Sle:rrd il; I" ....• dL If\~ <on<:t Ih. omobtg.n in I~L Tilt or"""1 ;mr"". . "n,,n, ;ml""'l."ll), ",",'ell M rmg.'on~ OOIl1posi. 1;'11\;,[ ,lui'! in INal credit ",rd "..t~ncu \(N-lrd I).ormw. Sales or "'· ..... nd o.t~'n~ h()m<>h",~ rm 0(\ f~I IhlS t/'$ wllh 1Iigh..,. cmliL=t\'S. ~". in p;!" to' tishl,,. )'l'8C. ~kd)' wrr<>rted by the low kl'd of ho\l!jC ,,,,,,,OJ IenJing ,lanJanis. Cba~-()Jfs ''" 01\.'(1;1 card lClli.lls ~a~ by 10'" '"tore!! rales for COnWlIt;ilSlal m~rlglgo.'i, .oo<k<:lin~. mtcltinS \c"<i$i!IJ1 iltCn 11111\ ••n d (l( f\lQ"''1heles.. tlw l""lom Ihal h. ..., . rtilr~III~J d'lIlaDJ ~7 DdiMjl.ll.llti\:5.nddlarB"-<,fii on Mnrtl,\lhini f""'-(N-1I<r-«cupie<l nouSlog In """ot yom h.1I> )~I l~ OOn5UnW! it>11I1 al c~mm~rciol bank! 01$0 .....l fCd \qII. .... dmlf'l!~ M~nYl'l'lenlia! t:..y~~ an' ,<luctanl 10 pUr. 10 !rltb '1;$~lly bclO'O-'ll\<il n;<Io>ri<;a[ N>l'ragt~ In clwil homes "'-'Cauoe ,,[ oa~ln¥ OO<IC\,"Qj;;bovt futult' HJ~il;~n. I. ... Jdluqu<ncy rale 011 ~UIO loom .. fin""", l.rolll<. cmr/<l)'lllCDI ••n J Ihc Ju'CClw.. ,,( hoU1< Ll!lmpanics Ikma.;..-d 51itlUly IV ~ \(>1:1 til:!l is <1m IIu: pncc~ In aJd;llon. li~hl mor1,~ll" finan~ cOIldl1l1ln$ middle of II' hlSiOricW rang<, I"""'ludt m~ny borro>omflOO1 ol>l:llnin~ I1\('Irt~j!<" I~LI.l/I""lIf o;omUmtl iW<1-blIdtd >ocurilK:,{AII$) orcJit. M~h 0( II!.: h~m. purch." J.m~nd thlll docs in Ihe lirS! hlll( Ii 2012 ~d iJ5uane< r\ll' Ih~u~ e:.i'l hJI ht<:o chMlndod 1\1 lho al>uotil4nl ~t.lck Ql I"'n.,d In lOt I bill -"'3S slill bcl<l\l ['O'N:rISU \Nol; lfig· 1atal\1 MUses. Ihorcl>y ~mill1'li III-> "'1(>;10.": of_ UN 9~ 1>SWI!lC<'S (11" ,,'<urilie! bili:r;..! fri aUIII kl<lni C<ll1II">C1i~n lICIiv;IY III loch ~xpolniilnn vf Mm~oll al <wmillaltd til< IThIrtol for most uf lb. first holf, ,,'hil. h'" oo:~rrcd. (jlltO lilt laf# nombe ... p[ rropcllits sluMnl Ivan AHS liSU= W3labouIlh< ~m<' itS in 11;11 in. 01 at rl>k or b<in~ in. fi!n\C;IQlIllc, lhit overhang Ill< pa:lt 1'"'<1 yea .. In OOtIlr.rst. i$su."", of credit CliIJ (lI.'tmllil;ol)"tQ C<.>nliollC to ..... igll on \\<III C<.>n.llrUCllun AfiSn'molUlcd weal< til, mrut ofl~ fil'SL holf of 1012 a<1l1uyf~r lIOn'letimo. IU JflJ\'I'th of erNil canll<.'l3ll1 conlinuo.! \0 t.-5<lmo> l).:spito Ilto~ facton. housm~ SI~rLS I"we ri:len "h~1 jubJu,"lI a:tJ Il'IOS! major boInb hJW clioor:n 10 grad~ly 110 far Ihll )\:!If(ti~un' Ill). i"rt!m Jaml4ry to fun~ such loans on lll->ir b.>.lallCO' shed.\. Y. . IJIlln A~S Muy. SI!)g).·fMlill' hQ1I$C1 \\otrc iLatlcd 011 an aonulll ~nd III->ir ~M;. om <X1I!Iparabk·nulurily Slt"ap rales r.lclJf ~1495.uoo unit~ U]'> [n\Jt1450.lU)w L/lo we", link: oh-..ngod, on n<l .....l lh. fil'Jl half of 1:()12 ,,",,000 hlll[ or !OIl buL los. th •• h.df <>f tho .. CnlfC ~nd h<IJ stei<olyln til< I~w rMJ':llbathil>~ pm'aikJ r~1Jf the p;i.'1 31)l~.rJ. Allbougillhc Un ... ,~Ml>Iy 1,"",,<3/'ly20IO 'II';Irm II.lnLer m.)· h(IW(I'otribultJ IOlh. ;n=Mt. lhe untkrlyi~ pac< 01 il<livi!)' likol)' ff!';e 5o.'mo as -..-.11. I""lord . .w~ OIl !ing).·r~m;ly p..,.mll jS>Ulln~ 'II .... kh IS Ic~ Ukoly hI boart",loo by "'CA!herl.oo 1Il1wrd u~ ~ A"lil'ily t. Ihc housi"l: ...,Ior "rl"'ars III b< 011. lillto frum IIJ Ic\d laiCW I )'t'ar, fn lho mUlllfQmii)''''''' ~rddual "rlr<nd. IIlI-dt fro",,, \~ry depn:<sed Ie""l \<If.ikm"od oas~mi"r",d ~>bust. LIS m.)Il)·indi",Jllal~ and f"mili~ Ihal ~rr unOlbtc or UO'lli1linll<! purcha~ boJlM:I h,l>< ""ugbt uut ","1.1 unit~ ""~ ",,",11. L/l< " ... ' : I ! . . _ . . n . T . . J k J ~ ~ " \ " " ' I , X ' " . _ o l . ' < " S l " _ " I ' ~ I o _ , I . , , b " " J ~ I " " _ l ' r I " . < " ' F " . < . « " . . i . " l . < " . _ o " _ > ' U I i u R l t < I p " r . " l . W . " l . ) . I O . - I . < . " _ _ • " •. " ! . . ' " . " . , " ~ , " _ _ , I · c a , c < :m l ~ ." i l n " . : r r a l 2 C 0 0 f 2 ~r . f " lU ,n L l L a U l 1 h , a u u p So " U 'a l r l o h I f l " S I\ - r "i : < l! U k r n r o IQ u i r l c l' n I ! e S .. I . I .' o ! d ! Jpurring n.-w a'l1U1r\K1i01l Owr lilo: firl1 IiI'\! munlh. 80 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00084 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.31021717 TIl< "'m< r..,l<m Ihdl.1't n:'IInUning~"n"g,)wo·. ramily holUing ~)IUIru<:1ion "",0 <;<)tIlinllt 10 "II ho= -~--- prkts, ii>clliding Ih. blJ< in'~!\I"r) oI \~canl noll1<$. I;,hl morl!!ll8<= cn:dil eonJilionJ, and 1",,1:.1\1$1,.,. d<!ll~Dd MQ!1~ rala; dedino:d 10 h!>loncaUy 10'<1' ~~Is - du"n~!h. fir$! Italf or 2012 tfiglll't 12). Whik <ignili. canl. Ih. dl"Ql'm m()l1pg<: rales 8,-", ... all~ ditJ nol totp '" fllIU ,"'ilh Ih. ,\eclines in tJ,. Ii<Ws on Trt~"ry ono mortgage.ba,kcd IC<:",iOO (MilS). ('I\'bably rtHctli~~ slilI·dwdl<d ris.k :rvt:rsion ~nd ""II'!< C~fI"C;l~ .on· slr.inu amOll$ mortg.>g<: origin:tlQIl-Dc!pilc Ihe clrop in mO!1g~ ral.~ Imlny polenl,;lll)'qWil"'-Jrlbyl:»r· ,._._ ru ... crs ba\~ h"" difficulty obtaining mort~ Of n:fi.. .. .... Mncirli ~"'" of litdil Jianu.ard! and (mns (~ lhe .".."... ...,. . . n '._"-"~",_"",,,)lI) , !o , I - ! boo:"Th. Sul'~ly,.r Mon~C",dil"~ A. .H her fae l<)f imr<Jing Ih.lIbi!ily of m~ny oorro.--rrs 10 rt/i. Manet, or 105tll tJ,.ir heme and ru",h;uc • "'" 0!Ie. of the )'Oar, 110\1' muhifomii}' pm';:"1s .... rt Slarl«1 III .n h:l$ hI:cn lhe Pl1-"<';JjC!11X Qf "n<.icr"';!I,'" mcrt$"~ "'mt'C annual r.lIe of.oo..l 22S,OO) "nil~ up rNm 0...,.:>1), rcfinan~in~ lICIi.il~ in.:~ in Ih< SIXOnd about 2OO,Imin lhe OC<'Ond hatr of 2011 bul :t!ill ~ual1<r)..,1 "'as S1illlru Ih~n mighl Ix (~f'."'·I.d. giltn bdll~ Ill< 3I.IO,ooo.unii r~IC Ih~1 pl'l:\'!il'll for much of 1M Itvtl of ;'ltCfI.'SI rales. ~nJ the plI,.~f m~ntmgc Ih. pr<vious dox&it. ~rrlil;31ionj lOr hom<: pun:nas.:s n:mainw sluggish IInu", pri~n.;ij rn.asu..:d by KVtr.,] nali,'IU~ Ilo"'~r. ..f inl~i!lJ acti';ly allribulod 10 m..,,1 in.k.'I(:j, IlImN up in rtttni m()fllhs Mltr ~dgin~ dill> n rhI1lliOl \0 Ih" 1111 RI'-tlno uf ... hieh d""inaled cat" further, 00 b-.l!Jr.tt, i~ 2011( flgu"", II), fur ".ample. on !<-"n·ltl."OII"" 11IIiros for tJ,,,,,, wll" "~"'" rtlioanting III< C()rd.og)C lY!'"'oll.i:l1es ;ndox ""'" 4 p<ro:nl (nol an mort~gcs aln:ady O"II1<J by gOl'tTtlmcnl"f'OI)5<)!N annual rlli<)OVC1" tJ,. fir" r..-. monliu:of the )'.ar. This t'1llrrpnStS (GSf.sI-n-s P!<UU"P OI~r lh. filSl half r=nl ""J1fO\..."..,1 Dtllwilbnanding, Ih" m<~u'" of of Ihe )\'<Ir. 00...,. ('Ii""" """,:oj",30 r=tnl 1x1_,1S I"'at in .'1116. Ino;<31011 <>f eredil quWIIY '" lbe I'eSldrnliol mQrl· -- ga~ ~IIll"ClInljnll<!l (0 I'tnOXl ,lfa'nl OIl homc",",'nors CQIlf!1lnlin~ JepmseJ twm. void" and high "nem· plo)m<nl. TIlt fraclKln Qf cu""nl rrim-m<lrtpgl'I 1.>«1Iming ddinq",.,,1 mnain.J at a hitdi .,,,,1 bul o. - • • .. - » -~~.(~I • ~ _: • . '----'----. _ ~:'IIJO ~. 2OIJ'I !!Ill \t~ "~ - ~ " J ' > I ; , c. I . ~ . I . l ! n I I_I . '!_- ~ n . .1.0c0 ~ "_", " . _" . " , F "_ I " I . ' M . . . . . _ . . . . . . . - . . . " . ' ~ - . 0-1 . . . 1 _ \ . 1 1' w 1 . 1 ' . 0. . _ -'" . .......-- .. - ~ OI , l'" . -.. . . , .-... . .... _ - . . . . .. . F - lW .- A " _ ,. I ". _ ,. I 1 y. . _ . .._ ...-.I , ".." .." .- ..< ... - I - I , I . » liIo1! I y n lPIII r- lPIl I l -. I ./flIl1 lOll -~,..... -,.,~---- :-0-_- n<. ...-...-. M-l<I., ....".." , ..... _. ......... .. ~ (I,'1I~ ... ~1<o~.C~ .. f'IFA.f«In>Il'-_< A.-..·r""$O~_._A_~ 81 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00085 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.41021717 l(l MOrn:lary' Policy Ropon 10 II!c l;lngmsD Jul)' 2Q12 The Supply of Mortgage Un>dil ( " " " e " j, " ", " I ' I . f ... 1 a I i < r K ", I , W II ~ < " d ~ .o ~I _ h w t l - ( i '" < h n < p M < i . n o g I ." > ,1 I 1 \ h I ' " " h " '" " C ,. ~ I a h s . <. . ,J . . > r l I < . . . I k n > d o ~ .. . " 0 't • 0 • d I ; h ,;" " " , 1 '" 1 i " g " u " '" " A S I " . lIoI\"o.'J''r'<'' ' I d I , " 'n , " l< 't " < I l ' Y I . e . r . f . i n w I I h " . , ' l . ' . " .. ' .. ' . " .. ' . ' g '' ! ' l ' ! '' ( '1 l( ' J 1 r i . g l ! c > l I l < d I i 1 n " g .. 5 ,1 l. "' . -" - 1 I ~ i r " i " t " " , . i " ii O b O e O " " J ~ . " . I . l , : , d " " "h ," i\ ~ < ~ : . l . il . e . n . " ; , d , , '" ," ~ "J ~ "'....,urij; . " " " '''' " '' 1 .. : . h .' " i" ~ ") e ' " b "" · lI l ' r i . I . < . > " k " h " ; ft I . . ~ . I . " p " u "" l< ", N I ! " i e h l f y l " r " * "" 's . S ,, i < rn '< lI 1 .r I p y < , \ t I r I I . I , ' · " o " l " l, 'l # ? ' 8 " ' ~ " h'" , .e."" "',,~,.e"d" . lo:v:Ud IIcroodiRglV II .. SeniQr IJJ;tn ()I'tj(:~{)pIrl"'" ~oo;e IfflJ,>n ;hiite<l "",,~,d h't:! .... -<;lied 1pQ«(lW XI/\',-,,/ "n Ib", lJoMi"t; P~""(S.lOO';). (,"'" '" in 200II (Iigut~ ft~ II~ upwW .hilb" ~Iil . n . t . id .. - . 1 t O .t O tl 7 S I " o 'I r ( > " ' 2 ;& 00 , 9 .; , 0 o 1 .a w "" , " Jo '- o " oI ' d 8 '-" '' '" ' l ~ i&l>l_ 1 M Ul " ." - , " 1 " C '" ed ~ I - " . ' . i : t . " .. " .; d "' t ! n ? ! I r r .. ' .. . P "d '' ' ( ' '" ' b f o t J '( m lM :t;, j . . 1 . I . < w >u ll < < i ) n M g i bomw.<. wilh I1ri",. <"edit ~ " .. ""'I' to.w A(""""~IJ\lt;>r1".,.,~ - ., " • - . • , , __ ""''' '.'.' . _.l.O.., O'o,<..o.t.. _-. . _ '..... _"",_ >¥_' _. . _-"1U'O .._ :. ... __ _... ..-....... ._ ',,'__ .I. _..... _-"IU_:ll. ............. ~ - niched JcM.tt. OQ ~t. OYer I~ fifSl h"e nlonlltt of I~ Ttl!! 8usilleS.' ~or Y~Ar. likely ",n«.~m~ In rin' $lricl<f underwrilinl'-"f n...,lIllt"m_1 mQr<-n'!Xnl originlliool AdJllkmrilly. m(a,;'\,r<:! "of o la f l C n - f 5 ll l 1 "i ' < -'f l m it < s > i r n lg f a o .. o .. x d : d k i \s n u ~\ re k' . I O IC l ) I . ll m ,d u eh ,d a 1 s 0 I li ~ n g i e n r * n l1 c l a o r r y Real businm; 'P""din~ f"" <quipmcnl 3nd .01"1 ...• . .. Ih, rook in Ill< firSI q~arlcr of 2<J12 inllUrt HI, (r'&s) m. . ;II ~n ""n~:d rale of ]Y:. pcrcctIl in lhi: lirsl C"J1\l!S isJu'n<-: of M U~ gu'ranh'rd by GSI~ quart« of .!OI2 afler h"'ing ,;,.,~ al a doIobl<-dipl r;oa:,on "mage, in tl!c..cood balf of 2011 (tigun: 14), rtm.'ned onodC:f;ile In Ihe ~($t holf of lOll. Nn"SI<:n1 Th< dowd""'n in I!&S in .... I!Il(nlIf'O'l1h in lhe fir>t wilh Ih,lJ,)", ft;loI.'" of mOl'\~~ ~nginalionl In oon· ¥ Im u.t s r i a . n t l l < te 'C o d e . b : y u r a it i h l o a u l s i i ,' n n g · n r I < ; : n ! l ~ C I : c I : J fo G r S m lO <l o r r l I t h ~ e F kx o l d n t i r o 1 l 1 01 q .~ u u a i r p i " c " r " " ' " l " a n fa d i rl " y , n w . i . d : a e r < e. l " T " h a i d > a d T o < " lS ,I !l ' ' c 'I a ; l o e n f" i n n e I " ! & o S f Ilou,il\,/! IIdminislfIl1ion-an Unflol"anl jOur", of ,prndin~ oIoo¥ "ilh Ih. """,.1 ,oftening in indk:.:il<m f Ih u i n ll d e in ~ g " " I C x J r c ~ J " , I I h h e e c : <T " i n $ r is o f n o n r m p ~ r ~ im an e · $ v i). " . ' " h m m !1 " "g < a 'O ge II s I; U· " o n f l i l n " .. " .. , " n 'T l lC 31 n I t d d C e J m lpi a l: n ll d < . I " '- ,c "n k d i . n . ~ ~ r u I r . >' n ( ~ ) ~ m o .y f b o u ig , . i t n la e l s " s '! DC IItd 10 be ~liallydC«\l, 82 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00086 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.51021717 ,,.,oo,,,,,," -- ~~~,,, ... cJt,. . ri .. ",;l~",,"'!~_.""d'<I"""iI,'I"· eoi"&G1~""'g~w"'''''''''KN.t<o.''''''" 1M<. """J~'l "". iodi<;oe ,. .... ""~ mo.ll ont>-N!( .' ,of~!(lo"."wIy~:I<I"""iI .. ~If~.,_­ II"&" '" hn<row ... "',h mod;t""""'lorId '0"1140- .' ....... ';11;0, ""'. .n l' .... kMr, I'fl<h 01'1>0 '""'" :./low .., by tl ... gtM'I'" ...... ",,"""""'" .," <~~.,.,. (GSUll~n~ M.: ond r~dio ~I«. 1f>Ol ....., 1oo I ... j"~w(~'.d ""Iy >llgl>tlyftt"" w.o. .' ~'fIbIolUl!e ... prilSlOOSw."' ...I 'lI'Q i<lemiiy"""""'1U II .." l;d 04 W~""~ KI <>IIgi lliIIe"""",CSt..,ligiI'" ~ nw[,,,:I<I. In"" - ...... "". . dy<. ..d .. ·""'" ;,,..,,.,..,..,,' 01 ""'Y """,~ .... ' _It.. ~ "'" iJ/"''''bxl:s' 01 1 ~h It i -l i ir ' .q r . .. h . a ' t " , " , " ,. , . " G II" S j U ;e > "' I " > !; j ! ' " , h r e t' Q G \l $ I/ I ': , - " , , ' ~ .. . . . ~. . . ,I , I< , ~ fI U" , n'l"J'<-1, .... loans"~ h any urld .......... ,' \II ilfl'8lJ 11r;· :M ,.... "'"' "''' "'" 1~,..8IP'io'Slh:ll.lhe .~n~ ''''' ....e . 01 •. .,..Jit"",., lI ... C"'~ is .. in~"""'" (~. ".."" fwo,~her~w .... ~O'!'dIO>""'" in."..,.. ,"",,. YPI)' ;"","n",. "r ol ...~ '"~ 01 ""'.,....."t~ (I)i""", ...... od W "'. ..... n..,1I":II" An od.liliona! 001"" ..... l~hvu"'h(>loJ( ;""""'''''". i<>I:ludingU .. W. ..1 ff difliru~th'" 1_ ~'o""'~Wo('<!jl;.,~...,,,!uityth1l! 1 f " ~ b > l a 0 / t " . < . . I . . t " . . \ . . . . . " , " " " . . , " " " . . . 1 > ~ . ' . , l , o i . 1 h n , tk , . g . . , . " r " . 1 . ' 1 , .r . " c ." - . ' ' . ) . 1 ' , . 1 , ., u . . , . ., . . i ,. . . ,~ : e , n . I 1 : c (,J o " o , ,. " e b o .< " c ~ i o o I . l b ~ I n . ' . I " , " " . " " i [ " " o 1 . , j \ I " \ , " m " ! J I ' - " ' < : r m b , 1 ,, h I ; , b 1 , , ~ I . ~ I . 0 " . , 0 e ' I t < . 1 " I h . > ( t . " > 0 . ! . , < " W o , 1 , m l , , y . , f , . f , . 1 ~ l i . 3 o " _ . . e I n , . , d t l . 0 il . o - l < t u l . m M ! 1 'N ; " m I ' \ " < I , O l ' i ' r 1 h ' O . ' I y ' . o 0 j d < ; 0 c 0 o > 1 l 1 1 d i " . t < , ' . " . l d ' I . , '' I l , . " h . . . , , 1 o ; . t 1 , o r 1 . h . . 1 . " " - o . ~ ~ t " w ~ " ' l ' ' - ' . W q p . w ( ~ r ' > j - " . ' , ~ " f 1 ~ , i > ; o , " 0 " , . . . ~ l' " ill '' a '' i '' w ''' ' c '" h. 't n " Sl . ' . ~ r l l o II o I f . . l . .W.. b«ffyl!O"'<"l ; 0 ., 1 rb «1 , (0 , < . . c . t . ' 0 ''' w '8 I I y 'I r : , . il . l . i " I . II M o, I . l . ' . ~ . ' ~ n , • " • " d " b 'I )' I , ' h " t I d JI i ~ l : k . " h l " l Y y I '' I '' I ' Y .~" . ' ! U s ' n 1 " ,I , \ " r I j r ,i o C (> U oo ' - 'l""IIIIy .. 101)' ;""''''!IOOn Ikw,., ~.- rrll<>'o.d [1IOII<l~ 00 llIe p;!rl ,..r blIsin<~l, p<rhaf'l! JIlrt'tltiN)' Jnrtjtm"., rrl"led I,) 111e 1,1,,"1'00 in EU!<lJ'r. An'rllO>lI"g Albus1 gaw thro~1 ml><h ~I Finru accumuiJlted In\tnt~n<s in In. fil'S! quaM., III 1011, in~sllI\tnli" n~nr.,;iJtnliai mu..,ul\'$ edged up .b.>ull~lam~ P""" U io llIe r{HIrth qWl"<, Of Ii:« in Ihe ~rsl quartor of (hi:; )~at. i\ drop io QUII"Js 1M )".' lti~ure 15). M<)Ior vthklo inwnlQri", !UriC<! ip drilling .nJ mining mU.1Ur<> " .... pro~ retaiN 1(1 lbe firs! q ...n .'t, -;os autonl4<r.l ,..huill <.\<;don' illI'onlo 1110 Low )..'1'd of nalUro] ~as prir<l;. OulSldo ...... the drill rio< 10 .-omfoMabit k'voll ~ntr \IIItura! dl$Mtm dis· il\(l ~nd minin~.ltvn<lll~ irtv'.<lm<nl iocmued .. "" ,UPI<J l!l~baI sufltlll' ,halns in WI!. S1oXtbuildill,g ~nnual nIl.of 7 p(I'I.X'1Il in lll<~'" Quam't. broadl)' ~Uliidc' Llf m~IO! vdlid~ modc-l'1uM ~'hal from ,imllar I" ill ...i rI in It\< fuuMh q"""er M 2011 IIIe fOOflh .... Udrtrl j'IliOC<lfaoxumul:\lion.ln\'tnH)I'J~O­ Allh<l~gh ~nandn~ c.)fIditi(ln~ f~, e~il1'll$ properliol JaI.""l Nlilus fill" mOSI ,nduMritHO\~"'J by !btt'tnM h;r.'~ .ased lorn.', Ihi')' "'m~in light: mo"'Of\'~1r",' "h i~h lIuf\:Ju'l book·,-a)u< dfda, ~s ,,~IJ ., SIlrw)~ of llri:':alt '>ICaII<y ral .... I"", <Q\l1l1\trcoal,..aI <SIal. and In'''ntOI""),satil(ilClioo _nJ p/:on.<. g<'Iltro/lYluunllhal diflku]( fln.ncin~ wn<iilioos for ""'" con""'~lion will il<"b~re r.,rlywell ~i~td Wilh the 1);l<.'C ()[ salts likely \\"i~h on buildin~ """viIY fill" Ill< fOlTSt<'abl< r~lurc; 83 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00087 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.61021717 12 MOrn:lar}' IIJIicy Reporl 10 Ih. l;)ogr<:!$ 0 July 2Q12 _. __ _ I), C.". .., Plllll<II>OI'P!-<" """''''''''' del"'l""n' ...J r"~"""'..". .i.m. '_ _ Y. ~m-12 .. - u " .~Q " U " " -~- " I. .j.' -- , .. .. ... .~,._1II ~ 'l . ... ....~. to . _~_ __~_ , ,,,,,,.,--l, _...,....,.. llot_Iot __. .. ....,. ... , r l J ' Q I . ' - ~ _ ... ____ .. _ .. ...... ~ ~ __ ,---- .. ,. III ",OJ • - I----._I~ ~l ,. • ," -- - OGoi _ - _" "'-Iioo _ ll>f _ "' _ n _ .._ o . t . _ .. _ _ .....-.. .. _ ""' __ IJ'SA_ __ "'_ ~-.---..... ....... i\~le ~p:r.t;"~ <-arnutp per 'ihw!<1T $&1' 5(X! firms~ obout 1 pelt'.n' at. sc.~nJ!I)' aJjU>ICil ~ulf\uly "'1< i" Ih. [J"1 q. .... rter (If 2(111, Fil\.lllQaI 6"", a.:\XlIIntrd fOl' mOSl ,1j" til< gaw. \\ bij~ rnlJiL< f", riflll.\ In Ih, nonf'Mrl<.'ial S<c10r ""'" about unch:llJg<d - - ["'m,Ile bish h.. .. ~1 s<\''11 in the fourth quarter oflast .......... )1:3r. i\s of I"" end of June. [!ri,';lI~~orHnal)'SI' pro • )«;t,"\ mo.lmurrarnings groI'o'lh lhf()UgII rho end of Ih. )".ar. • J The TIIIH) <If OOl"J'llrlllC pmlils to ~ss n~'ional prod. LL _. ,I ',' " l U O C1 I 'k in a l Ih h e ig ~ h r . s a ! n ~ d u a ,a n s ( h r 1 o 1m f l . O r. t : 2 m h .m ", . ( ,J m lo l t a id W . l l i n nd ~ d il d l i b l~ ~ )n . 1 (he rllli;, of liquid asso:(, 10 lotal ;u,o,:" ",ml;nu(d 10 Ix I " noar liS Iligjl(<I 1(','<1 in molt" than ltJ )"af~ and Ih. • shalt" (If CIlt"(1C>1lll<c ash flow nocd<d t~ <>;Wer m'orrsl '~ll<llses fC11Uined low. Again>! (hi, I>a<~drop of ~n· • mlly .<Irong c<lI'J"'tille tarnlngs and blil.nee Ihetl:l. ,ltd;t M,nl upgrll<l<'S<:OOlin\J~d 1<) (>utr«~ down· grade! lor nonfinan"aJ corporllhOnl., llI<l Ihe oonJ dcl"auk TIll: f. ... nl'nnnaf'l<.i. finn! n:malned low in the firs! h<llf of Ih( yell( The dtlin41.1Cn(:~ .;\lC cn commrr· (ialand ,ndu,trialIC&I) loans d«.. .t aSl:d fu.lbor on lhe firs! q. .... ncr o.nd al'!lfoo.thod Ih' (ov,~r end of it. his. t(\fICa) ran&c. "''I!h ool'j).'lfal( crwit Quality n:mall1!ng f\}bu>t. oon· financial finns ....m ~hIe to ,(>rllinuc 10 ra,S( I1.IOIis al a ~.ncrally llron~ raox In the firJl half of Ih~ )"(It (fi, ure 16~ SO far Ihis )·dr. tl()nfinanci<ll commerc,J pap.."f (e!') oUIsianJin8 \'ill.lIOOut unchan~d, Ikm.l issuanl."( b)" bo:llh in ..... I""'nl· and Il"«ul;~i"'·gradc nonllnunc;;il firm, ......I mn, 0"'" lb. finl1 rOOf "...."'t-._ .. _ ........ monlre of II\( )'raf. Oullp<\:ulalil'c-grad< aw~n,.., H .. weaktw:d J<l111( in M"l''IInd notlhly furl her in June. 84 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00088 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.71021717 '_I'OfIOIII>"" --_ 16. S ro d . < .," c . l« .. l . .. 110' r,""""i", (Of """r. ......- .;,I livI;L" lali<' number of ballls, "n bal_ncr.iIlal h. .." . - :!CY'I>-12 ... . S .. l p O o O nt S < ! { S f l I ft g > u I ~ Ig t \ '. 8 ~ tk M m n w rw d > w '<! , , C in k I l he lo " Q r n r , i J in S l U he X f' l t $ t< . nl :1 ____ bMk! conl;n .... d !<>1't'f"!I1 ha"ing tastd both I'I"n .nd ... • nl'opri<:t 1.1m.' for (:& IloalU, Ia.r~y in rtSpi)D'" lu .~ • slrong 'otnl"liri<m from 0(00 bo.nks and oonb<tok Itodo",-Tho ,,,,-I<n! of e. . in~ J:""rr.lI~ has bo<:n yeat. . • for tI.t< wd middle·markel (rrm .. Thill Sllid. """"rd· ~ i!1J: 101M Su.wy of Tormo or i1lliinc'<:i ~ndi~ '·" • ISTHL~'J1'uJsO!l C&I ~1IIfU""'! bHn~s' rop ~f fuotis. .. hile ""nlinum~ to trend down gnodu"Jly in Ih< • February and May !U,,'t)'$. i\I'<.!AiI! quite hi~h in his • IQr,,'" I<rms. SJ'f<'l'ds \'0 tll:wiy i!.slIOd I)'ndicawd loan> h"'" illsol'tlT1:UJl\.-..l ""rne-o.hal ""ok ! ! + IloITV"'inS oondilionj for 5ItlaD bu;inC'SStj s.ner:.!!)' "'" lI. llS -n .._ ~ . _. ~ .. _ _ lI!i'I _n I o l1 .. r . l . l: _ ll - UO _ " - ll l - U - : , til . l . ..... hll"t imrfOl'td <lI't. ill. palll f.w yom bul ha>~ door "" s.....n ~ fU~h !Il\'I'C gudulilly Iban hlll'O I».dilit>n~ fQr IarJll'f firms; 1I!OI'roVI:~ II!< <ltmand f(ll" ('1"<dil from !/lloll finm appamttly mnain"ui>du,d C&lloam with The tnSlilUtionai scgmontol'lh< ,)'ndicateJ ~or.geJ origin:li amounl! (Ii" $1 milh<)ll or kss a l"l'Il"/.harr of lo.n marktt mnain<d "'lid in Ih. first h1llf ~f lb<.' yO.,. ",hich Ii};dy OOns]J1S of loaM 10 lAllall bwillCSS($ ",pomO!.lly !upponod ~-wntinued d<llland fOr loam "'<n: aboul ul\I:nangro in Ihe fits! ~uarlcr.) Ac.;ordin, from rIO.bank inmlors.1Udl II> ponsioo pI'll$~nJ I~ msulls from surl'<:}'Honducl<iJ by lhe N:uio(kl/ Fed in.uranCf cvmr_mlO' lfigur< 11). In .Jdili<;m, tllr \~~ onll;OIl of Indtpt:nlknt Bus;ocss durins Ihe first n.if of ume ,~-newly ostab!i.nN coll.lualil.d I~"" obllll" Ihis WU'. th. fr>lClion (Ii" r,,!tIl ";Ih I>.:>rnw.inll need.' lio,)/I!";' f.r Ihi:! Y• •' ha, Illreallysul1¥..scJ lOll ""d, Sl~)~ low (fi~u'" !9~ Tho I\I:ll"'1"'nlllg< of n.-;ron· MU(h af Ih. b<lI>J anJ I<WI l$SII3JlO: ,,-as n."o<I."IlI), denls lbat found m'dil mOrt diftlcuilio IlblIliD lhan u!<d 10 n:finaOO'. ooJ likely ilro 10 .~lmd the m.lurily of, dlshn, ""hi,, ,\'On 11lo It",,-bel of l,'ni-·Wm i"ltT- .i b<(Jt1pIt-.. .. "'.Cot.l ",""d_tlt/oOCoIl .. ,II< __ ... 'II<_lor c&lloan!(I~II1;l11dinjll1.ommi:rcial b.mklD! orp· 1~II<!(ou I __, or''''_orllw~ nllalton.ln IJH, UnllN Slal",.~pandN 01. b~ pac.: o....s. '" 10 Ih.!irsI bJf "r 2012 doopilo di:di""j in I'" holJ,"p Ii, wooiIMII ...J d<o....,.j (,_ M"",,,,,,,I:oM of l!lfh loans by U,s. brJnellcunJ agtncics of [UN· ~ t.;.-. 19')1-11)12 f'CafI ini - l;lul;,)nt The stren~h iSCilft"llonl "'ilh. rd.- ~. .. ----- '" .-,",",,' "' •. ., - , "' '" • " , ", '""" n. ... ___ • .....,-"" __n_> por ,__. .._... ____ ... ..... r..w..._..o...r l-Il-tl....... _.,. ____. .. ;jI lol<lWQbl' 1"11 . ~ . "" ~ ' _ b _ ...... . . , . . . . . . . _ ... _ _ _ _ o_f ,._-0. .( _ ___ _ _ _ _ _ T..O. t._,r..0-1."-111_W "io" ..' _- _ ... o.\o I_iI. ...._.. S,. '-"" ... _1)' .. __ 01 __ ... " .. " . " . " " " " ....... """ >. .. F_ .......... C_oIli.,_..t. 1.oMQffi.. ... , ... SOO"l' .. _~_ -~'-("..,...- 85 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00089 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.81021717 14 MOrn:l:<ry' l\Jliey RtporIIO tl>< <,j)~DJuly 2Q12 - 19. Na f'OIt'''''l!'' 0/ fin"" ..' ~h bom>oiirQ "" .... 1'1J.l-3))2 20. D<linqU<n<)' ..1 00 on C<llru".,..,,1 1'<01 ...... ~"" •. 1991-:!Q1l - • " ., '" 1 1 1 1 1 1 II 1 1 1 II 1"1 1901 tori lOOO ~, 1Il(1O lIIOlI 1011_ I I -- _ ! , I ,r- - I~ "_ ·; " g. -' . _ lk . - . ..... , . .. . . . . . . _ .. - . _ ._"... _ - • . - . . - .. . . . - - .. .-. - !.\- ,I " I. _:. ~ . " -.~ , .. ._. .,.., .. . , . .. . ~_ ,.. .... ...... ... .. "."so"-.". "-n.._~---,. ",,~_"'~_ I tl X \n l .' n l< d m ll" o " n '" l h O s V < .. r . . l . h I; c . r n . e . X ., I J t Ih h o ~ l . _ ! , I j 1 > ~ X nt 1 h c , d h I; w ih . l " h , Q . ~ lh l' <d;1 . ~_ . v . ' . . . . . . . . _. · . ' . . " " t " _ " . ' . . .. . . _. ~ .. _ . (,.".I - .ol II / $ O. / ! l . ; . Ql . .. 1 . . - . 'r . l . . l>I . . t . _ o. _ ..... ;lI"O _ . _ ... <.. _. . . . . . t J il . < :c i J in u < n d e , $ b u u t' t \ e I y he .l y n r . e , m IJ a i ; l n io o < J t, a m t r : d tn a l u l r 'C ea I d l' i b n i g p s h lr It o v m cl s l i i t n e . . ~ . . . . , . . ~ . _ , l .,t. l _ . " . . J. ,' O ' ! ~ , ' > , ' - , < ' _ ~- ' , _ . _ "- . ' , _ _ a .l.. _ .-. _ . .. C _ M < I!S lQ .. 'T' . 'l'o' . 't STilL indicate that tlte spreiUls d,.1'\,'cd by t{lmmcrcial h-.r:I-"" .- -. I'oknI r_ _ _ banoon n.wlyllri",naled C&llcal15 wil~ <'rigin>l _r_~ r~~"( _ __ !l:"" um~unls los than Sl million mnainro 4U11, hi~h. ""'n ~ .... ""_, __f _~ .. ',_."" OIIloonl "nh the Ilmnge<l <:n:dit ralings. ~- Fin~ndal C¢Ilditi~ns in Ihe comlll<rcia! 1'1'111 estate (eRE) Ittti">r ~.8scd SUIl\e bul >laycd I'I'llIIil"tly f'''<lIIonlluof 2012. boosled b)' a ...,Iid ~of milia! light ~mid wtak fundamentab. AoxornlllS 1" the Ami pyl:olic ~1f",ing5 ([PQ!),' O:lt3 f~r lilt Ii .... qua .. ",.,,1 SLOOS. tome J<.>m<:!1ie banh repomed h:l\';n~ <OIStd 2012 ,"dic.tt~ lhal ,rune reJ'llreh ...... and cash·6nllltOO ,1andaros on Cit r Io«nund. on balance. • !ignifICant m~~rs b)' ncn6nancial firm' I'I'm.!noo I',bu>l. and numbtr 01 JM1l<SIi<; hanKS r<pomed incrt8S<'l dtmand net ~"Iuity i:<sua""" remained d"rll' ncgal,'" (fig· for such l""ns, While b~nk{ holdings of CR F klani Ure 21 ~ Howevtt, ItI'. ... mtflI.·rsand n,'W sban.· repur oontinll<d tn ""l'Iln,<.1 in Ih. flNt half nl IhlS ye:>r. tbtl' th:un progt'JIIU ....... ~nn(lllnccd in II>< second quart«. did So) at a slcwa pac< than in til< :IC({lnJ h.lf nf lIell ~"tar. Tilt wtakest $I;\'I1lcnt of CR E biding h.i hem th. pocillln lurflOl1ing eonSlru<:IIQn onJ lanJ d<wlop m<nt; Ic)m(> ,)tha !!:gmen!! h ..." rte<"IIll)· eXf\ln,kd TIle G\llettUnelll &<tor mooestl~ ISSIIon..: of colllmm:iat murtga,ge-bw;:k<:,1 fleJfflj{ Go1'l'rn".e", St<urili<s (eMR S) haj HIs<l iQcr<ase<!rtt .... tly fmm th< kl\l' 1"",11 \ll><tt'\'ed lasl )'ear. Ncnelh<l<S$. th< Jelin· The tkflcitin lhe f,<!enol UniUN budget "'mJ.inj queIKY ratc iIIt klanl m eMBS P'><'ls c<)J)l;UUeil Ii! let ~k''aled, Tn. COQ~';O"a1 ~ud~1 0fIN;. rl'llJ<.-1S new highs in June. :IS ~m< fl",·ycar IIlan! iss\lOO in lhllthe dt.1icil lOr fis,:aI)"tar 2(112 "ill I>< close to 2007 ~Ith< htiibt \If Ih< mlr~o:1 Wert undhlo H> t<~. SI.2 trillion. 0. about 7:1: !""",m of ne>minal Gl>I~ nan", ~t maturity b«:a~ I'If their hiJ1lt loan·(C-VIIlue Such a deficil "''OulJ be a nam)wer .ha", (II CIJI' thdn ritllo& (figurt 20), Whik delinquenCy r.td 1m" l;RE tho,," n.'C(INeJ ow. lbe pu1 ",,-enol )• • ,-; Ih.:lugh iliU loans a! oom,""",i<\l banks improwd ~ightll'in the firOl 4U.rtCf, ! h<)lrema,f\Cd t:klillro, np<ciall~ for ron· slfl1Ltion and landdc""XIl1\entl~n~ ~ 1_.U"_,""",,lfQ"'_tIoprtl_r'I'">e ..,. In tho <<.lfp)Iitl< <"qYIIY mar\;<\, gross ruNic «!Ylly t " : o ; l U - , ) , , . . t" . ) . ' . lt . " . · , . " .. " . " .. " .. f .. ' "' I "'M " < ' . ~ . o . A .. a . " . , .. . . . _ ..J IP . O . ..,.",,) ibuan« b) nooflnanci.>l firms was AlIlng in tho fiB! """"",'!y..-....J ""'*'"'17 86 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00090 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.91021717 _ _- ........ _"_<Il1' - ,< > - ~ w~J " .-- " n .--- . - ," . • . .,.. .. .......... ~ ~- T. .~ t)_. " s:.~,, __ ~"' _.._.,.__-'O_ _ _ _ ._. I"bI< .._ __. .. _. . __ ...... Tn_ ______! O!' _. _..., .._ . ......... ... U. ___~~ ' _ , - ,~ _ __ '·_c...,_ .. V_ " > " h' a :il r T 'ly hi~h .. Ibln Iho,", "-""l1"ded DlIh<f. ..· )~l\I3 to Ih. ''''Itt ~f Ih<' finanri.al cnru ~od ffl:dSIQn. TIN: n.:uro'<I'inll or lite budgel dtlicit •.t r,""lw 10 omIl Social s..curily QUI!1f)'J ,(IS( In """ b<>:~u., of In. fir:<l in th~ curnnl filQ) )~~f ~tly rellc,I, ir.c",a;es m ta.t ~ost4·Ii\il\jl adjlalm<nlSlinC( 2009. ~nd Olllla)S f<lr m--<nU<, l\.'Ilbc =1I00I), ,,,nlinu<.os to ft<O\ ...., althou~ financiallran~j()nl \\~'" booru:J hi' lilt 1I:" ..I Ir.II"," Ihc~th in vUII.)~ il !>.';ns hdJ bad by Ih. "'indin~ of th< (~I'<-,(Icd 00Sl of previ<)\llTro~hkd Aostl Rd~ do ..... n of .~pansiollllr)· fl"aI/IOlici.'i Cn:l'leJ in I'l0tJ3m II'8DsaelJMI and:lll ,"e~ in Ml oullays fot ft'l'<ln~tClIhc ~o)A. os "~II ~> sum" nw.IKtl~ry deposil i"""",,,,.:' N<1 ;"I ....I l"'rmon'" incre ....d r<>1rainl in dttctJ~ .nJ olhtt dU<TtIIQn...-y S(l<ndl~ mQ<\mud),. rtII.aing tho rising 10,01 nflh~ fed •. ,,, """""" 0.' f~.r-", rruiplllnm8$N 5 i'CI';rol In lite fiB r I m nlolld( A, me.:tiur<d In th. D3u<m.1 illt..'<1me OlId producl monlh,o[ Mcal2tlll COIllI'>.lr<d wilh Ih<-sam< orolU"t. (N!I'A~ ..... 1f ederal e'llp.:flJuurO" DO am· in fi,,<11 2011.1{~ipl>wl'ft boJS1=<1 Ihll " S '\ T far I l" Ih '" i ; fl,· ,,,mf'li,,,,"nJ BI"'" 1n''tSlmcnl I"" pan or fedcr.ol cal Ytir by a ~ riSt mC'lf")Xlral< la.< lhal 'pend"I, induJcd in IboCilicul.li"""f GIlI'-(dlal i, 1~lgcly "UnN!llIb1< loa fOaling bad; in lIN: f<Mml~ ." annual r-.lc <If cl". . 10 6 r<rc<nl In the lim '1." ... 1., la~ Ir«ilmrnl 01 sr>m' busillCSl in''C"Slm<n~ In addl· (I~"'" 21~ Ddt"", .pendinB. "hidll.nlh I." br:: ,.,,,,hc Ihln. individual ifl(.;lm< ond PdIroUl ax I\w1r1j ha'~ (rum ~u'rI.r I" quam,. <.'011\""'1«1 mOil: than 8 f'<'I' JflO,'td hi~h<r, r<rtotllng 'O<:ftascs In ",)minfll \tI:I~ and a:ft~ ollJ nondrfem:. .. P"II:M"" <dgcd ~""""!f !al.ry ,",-..:mlC:. Nenclhd.ss, al only aI!oijl 15'1 per",nl. FMend d.1It held~' lbe rubl"'''''' 10abo"l 7~ r<" II"""" Illllr> "ff~ f'l>:\'I(lIJ 10 n~liIlnai 'nrome ~ ""ilr cenl ~r namino! QOP in lb. """",d ~""r1c" or 21111, I(M~:<I r.:ailin~ for Ihis r.lio ~vor Iho ~1(0)'''l"I lV. p"I<<nI"Jll' I'QinI'l hiP<r lh"" alllI.: crul of wi (~gur< 22). ). .... (6~"'r< 14) T" "'my iU<.'lit'n< p ... ll}' "",1"ooJ Tolal r.ok1a1 oud.)l nllll'«i siJ... ...- a)'> in Ih~ ~D! ninc (0 bo ".n rea:iwd b)' in''''A'''''' InJ~~ ... p( d""'~nd 1OO!11h' ef ~I<3I.:o!l ftM,,'f HIli\( COII1pa11ll* yw. II Tr=ury .oet""", sucb as bid-I(,""""", , .. "" an<! (arl~)'("I'iOO. o..llQ)l "(II: rt<llKl.'1I brlh< "indm~ IndiM.'! bidJinf, nrtio<. ,,~'" ",ilbift Ihci, ruAaria.! ,kMn ,)f $IimulUHdat.d rllljrrami (i~cludln¥:11lt ""'" Am(riC"Jn R<.«fltry and Rdnl'tSlm<nl ACI "f 21109~ Il"I\\\'r p"fm(nl~ for Ufl(mrO~·mcnll~ul~nct. "n,IIId!· ing ""[(nS( ~xpondilUrc~ In iIIlJi\;vn. oUllays r", M~d· ic;~iJ iI<l far Ihi, ~:ul )'tar " ..... unu:;ual\y .... .,at arp;l!' \ 1"Iw~""" of,~_WA_I«I;'( .nlly r<l\«;1i~in par1lh.impkmmlatlon r4 cos!· 1R'I<.o _r..,"" _. . P""""""'"'"''"'' "..".., ,_~b).pJa!,,,,<3$It'''''' oool."om'ol measun:shymanyslal< ~~lllfl\Cnl.< 1,1 _(]('k_..,~ ~ .!hd _ o _I_l I "' < ~ _ " ~ " . " mIlKC;rrnding gf<lll,h fOf Ih~1 ~m, InCflulnoSl. _~ .. 'h<r«l.. .I budr«. "" ........I _)TO' 87 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00091 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.02021717 16 MOrn:lar}' IIJIicy RoporIIO lhe ljl~D July 2Q12 13. Cbant< in ",J! ~""""",,,nl ..p <Ildll"" --- receiplS- 11>< IalgcSl SOU". . of hu ",",Mr for Ih~ '"' ~lUIlplloo otId inv...unen~ 1OOf>-12 ¥O"<rnmmls- wm rouJhly flat in 2011 and <. .. 1)' - .s... ... _ 2012.ldcclif\t( Ih~ <MIl"uliing dJ«'IS nf Ih< ..r licr declines in home prim "od incl't:>StS in pro!,,!TI), IJX -u rdlo£. M~l'tOv<T. fcdmd:lid 10 oolh ~al'lUld J,'CaI 110" '''ITlmcnlS It.u """Iin..-d as Slirnuhu·rrhlro vanls !tll\"< b.:en .tm",,1 rompi<lely pha.w.! ou~ On~ of the "1I)'$lhal ~lJle IIIId local !!'>"crnm.nlJ h:1l~ adJm<S<"d Ibtir lilth1 ~adgl'l $itulIIl~nJ bal I:w:r:tI Ihro"i!h ~ulS In lbe;, mplQYmtllI ""d OOI1$I'()<;llon 'l"l1din, AI'Icr s!to:tLJing';"'lw ~I an aw''ll~ pat. of 19,0(1) r-er mQIIlh in lOll, 111<1' !l';lI'Cfnmrnls ",d",-'Cd Ihdr mj!k'ynttnl Q\(T tile filJl half II( lhe )"<~r ill a 5"'''~! ~ b)i trimming 3.11ll,iol;ls ~ monliton ~"''f­ . IIOW<"V<:I, lui "~nSl""'1ion ~f'Cndilu1T$rdl an .. sh.rrJyin Ih. I,rot q"~rt.,. haviQS ,'tlged dO"'n in lhe I.llcr hlllf "f 20\ I, ~nd ",'3.i1aN< in!i>nn,lion<lll Mmi",. wnstruo;\ion JJ'<IIJinglhll>u,lt M"), pGonl.S 10 e"tuinu<:cl dttli"" in !'<WII nwnlM Tile d<'tmual in t'Itlploymrn' .oJ "<'!\SIru'lioo"", <liJ(nl In Ih. Slale and lll<lllll""tfnmcni bud!!"I' """:lUI !Inuned. lIureau of Ec<,"~mic AnllylU (ilEA) !/Slim.lt r~! rral bul 0,. ....0 111 6scllllX>lldiu()f\S fM lbcse ~",""""nL< mly SIQI. MJ loc"l'I'rcb:ll»S. ~'bich fdl~"1n annualillto be doIIly imrrovinc.. hi [WI;."I ....I .I. and IO<>iIla. of 2),i p:m:nl in the fiBi ~uall<r. abQullh. lam. r;u:< I'<:<Cll'U ill'P<"",d III inm::I>I: "'<ldcrl<leiy OWl lhe ~rst as in2011 half of lhi. }ur C""M lIu'<3u d~la ind;"'l~ Ih", GfO<II i5su""", ",. "''Ods b)' SUlI<'l und m"niQ~il"" ~I.l. m'l'lll" caU"'I.",,, rose: 4 1""""'\ in lite fim pick.d up in lb. StOOftd ~"'TI'" nf 2012. emlil quol;ty qu.trt<1 ,dative.lo ~ )'.ar <IIllier. •n d an«d.)(aI ..i in Ille !lCCWI l'Onlinu,'tl 10 Ik:lcrior'lr i)\'Cf Ih~ fiBI half Ikoct suggt$\$ tbat colk<:lions duMIIJt Ami and M:I)' of Ihe)'<\!ll lmiral~~. cmlil laung downs ... des by "t'" wdl m~intainttl. Mcm:OVtT. vnly a few SI~I(s M<oody-, In"';wlJs.."";'''esube;l.nl':.l~' O"I~ rqmttd budgl'l ~or1falbdurini ft5<:t,I2(lI!(wh;';h uwr~ J.nJ CrNlI dcf~ull sW'nICDS)in""~ fill .mlc:d ~n Jun.lI!;n mo»l S1ak'5~ Ttt<:inlrI<Mmcnl i> mUnicipal Mnd. lOS< on nOi. YlOIdj on long:"lorm Brn 1m .viJ.nt at IIx: """'" 1",'d. wh.", propC'll)' 11.\ <1111 <)bligJtilln m"~ipal hoods ..~ ",.bQu1 unchanged OYer Ih. fir.!1 balf oflhq'~ar. , TIw-~I~raal Smlll • EzII"'" ~N1lmlwrs • ~ _r\J ]k)!h r<al ,.,;po,I' ~nd IffilMU ~ motIcr:lldy in Itt< • ItM QU.Tlor of 2(l1~(figu", ;>5). ReJl¢.'l/lOm ~r gOod> • and ",rv~ IOseat an ~nnual ra!~ ri (I, p<""n~ jUp '-,--./ poTl<d b)' r<~lj\I<\y Sll\lng f<)rcign ""~"""'mic y.:ml.hi,, • Exp.ll'1s o! servi= RU1<lmobi\N" rom]llll<rs, and mft rtl'*ndc<i rapidly ... hll<lh= ill' ronwmcr gooJs -_ • dccH[\(d. Th< ris<" io CX]lOI'ti was p.1'lkul~rly SlrOOg IQ Canada and Me:o:iN. D.l~ for April and M~y~¥:<11 . - "_ . " ~ ' ' " _1 , l _ 1 " ~ 1 " k 1 " " T . ' _ ' 1 . ." 1 .O.' " 1 I , 1 ' " _ m o . " " " " - " I ". " . - . . ' ". . ' 1 I .l . M ~ I l. ' l : '_ ! , ; .N I < . , " l .r _I .. ' . I I " ~ .. ·. _ 1 . . I , . , W 1 1 . " 1 . ! ' 1 W .! o 1 . f _. l . ! ,. I ". . I . .. . I . · . . . 1 1 Q . . 0 '1 . . 1 . ' . 1 <. . . . . . . .• . . . . • . . . . " I m - h " . o " o ~ ' d < t a e 'o t s I ~ d 1 p < Q i 2 l > l ~ W ' < l i [ l l l i O r I t , ' C l , '< U , t , . l ' n ' o ' l n m f l g u i Q n e O d l I h 1 !s 0 e ~ N ~ n r < 6 st $ . q 1 t ~ ! ~ ~ " r , m i 1 u " o , , o ~ I .r d a l< t • . c t p r i a d n , ~ l ,, l s i I l .. n i . l . I 1 I o y h t < r ......,tnm. ___ .. _ .... s. ..... .....,~""- gtO'fI1h in U.s. «~Mm,~ activily.lmport! of SCfViIx~ ~utam.)bil~ alld ."mpllimroao ~~iti<~nlly, "hilt 88 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00092 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.12021717 -.- 15. o..~ ,n ..> I io'f"IU 0IId <xporU" lOO-lk -- .",J ......l <. .. :!I)"l7-12 .... -'. ~ ,... ,. " =-1 II " '" , ''." • • " • -_ -- l. "! . 00 . 1 - ' 200.II ~ .'O . ! _ I~ L )'I - II - _ :!oI1 _ ~ . ) . I. . ... . . . r . .. . _ . .. .-, nt""..".""d.".'1.'0.''''.'''' ' ___ ... ~."1'.1_,).f_«: »I~ll"_O<_ . .... _ ____ ~I1 • . • _" oiI. " C--",!, __ 11<_1 Ih("lf( of r<lJOleum. ~lftr.lfl .•n J ron.Um,'" ~.:oodj fdl. -,-~- Th .. ru" In lmflOMS "":IS bl"\>lilly bas<d iICro>S m*,," IraJln~ parlnen. wilh imparl! from Jilpoin and Mm .". , Mi ~ilh • Irrnpo.>rar)· >IN":"",n'l.lf SIn.""'" '" showing pal1K:ulali; 1t1\1Il¥ jIfOWIb. April and Ma)' Eurupil, 1!""~'tt.;aS \l1,h ~il rrites. bru.<h.-r commotl dAla SIl~gc;1 Ih.1 imp«t grO\Ilh rock.-d up in Ih. 5<0- il)' price! feU in 1110: scwnd ~uar~r, rcfIe,;j,oB ~rowin~ (\tid ~uan(T. pesimism I\'gafdin~ f'I"OSr«"ISf or 1M gIob<ll <CMCIIll': A~!.IFIMr. nt1 ~porlj made;tSlllfIIJ ('IISI1~~ro"l,,"" l'r..". for non-{oil iml'l".J goods inmas<d k;,j. hulwn of (lQ<-lrJllh or II"'f'-"nlaA" roinltO real GOI' l/un 'I, p:1\~nl in Ihc lim ~U~"Ct, "1111 IIW mw..'S1 gnl"th in tho fiBt quamr. I""'" I.lf jnq_ase likely ",n"'ling tbe lawd dr""lS of bo,h Ihe "Wrt<",lion of Ih_ doUu llnd Ih_ drrlinf In ooml"llool1y ~ th~1 r>CCUrrrd Il0l0 1;lSI)'Cllf M'wln~ IWI the IIC<OOd qu"rtc"f, imJ'VI1 prier Infta,i()!1 ~l'p<Jrs to hM mn.m_d sllWIICd.o;(lnsiil.nl v.;lh ~ "'rthel !\fler iocttllsinl ••l iitr m Ih< )'Car, oil rri<"c; I\av. su~ awm.-;"Iioo of Ih( dollar. S<quenlly faU ... b ..k (figurr !~). Ovtr much 'If lhe Il~ quart<f. an im!lfO""<dOlltlook r,lr tho gklbal «<Inomy and IIW1""J~ \1C<1p(lb,ir;;lteO,M1l m();lt nOlilhlywilh Iron hdpeJ!fAIr a run-up In Ih_Ip.l1 prj"" of oil. "lin lho IIrrnl hcn~hm~rk avtragon. SI251"'r baml in largtly n'fi«"ling ,ho run·up III oil )"IIlCts.~rly in Ih_ Mar~h. ~b.lul $15 ~ ,IS lanuary ~'~rag<. ~,n<. Y"at, Ihc IIOIIlmallrad< t1tfJcil wiJentd ~il(hlly In ,h. 1ll1d·Marrh, "",,~ ......, oil I"1"'S haw mOIl' Ih_n or ~rsl qu.rlCt(llgurt 21). In addition.!\S tho: nt' InV<"St· rrlr.lo:«llil<i. ,""lier gain$ amid an inltl1sik~li~n llI<nl lll«>m< billMtt 'Ol11lnw:d 11\ d«lillC. t/l( <U11'<O\ 111< m~~ in [uffil'O _oJ in<"rel<Std conco,", _"-.r 111< _Wl"nl d(fldt tkttriol1li(d from ~n ~nnlta!lI\'t~ of slrrngth ~ cwMmiegrowlb in China. An easm~ or 547U ~i1Ik'n in 2011 I~ SSSlIboU;"n III lho ~r" q\J;lrlrr. go'O\XItilicAI I<nsiolns an,\ illLTI'AStd crud. oilluppl} !II 311> re,,,,,nl ~f GD~" produclion by Saudi Arabia I\J.s I:-«-n running ~I n_.r· The ~"anci<ll ~()'M (hod p""iJ. I~ ~nancl.g.,r Ih~ ttwrJ higb kvell Mvr al,,) likclyc.)nlnb'l1~ 1\\,/10 cOUII.nl "o:'lUnl tldicil refto<,rJ III< ~ trrtllbln dc.:h"" io oil rri«.\. AU "'IJ. Ih. [l<K"C of IIrrnl h;ll tin.ncial mark., "'nlimrol $nd in feSt'rve ateumolation plun,tlJ S2S a ~",,1 fMII MArdi 1,\ Iibo.lUI S)(I)j>.."t b..r rn rr . i . . i . n . < m >f i m J. a J n u ~ b . n ~nfucl c'QQ1Ill,>dilk~ fQllo ..~ d a (>.lib ~" l. ' 1 ! ., ' m I , ) ," " " " B "" £ " A "" "" . ' U '' , m o i N l c i f b oo t o o J t , i I_ u I_ ~ o_ i ~.. \ _ _ o ~ ~ , simililt I" ,b;ol shown by<'>il P"C01 all>o" .. iln less ""Ia· ","1<ol<~_'1.'''"""",,,''''_01 t~il}. larly ill 2011. C\)mmVdily )lIi<<"S mIlitll ai ~baI . _ .. " " ""n " ll . _ odo.!< _ ""tol ~ r. .. . .. . .. . "" . " . "" . " . . . . . . . .. I . . ) .... _ :1 o .. a .. p .. o .. I .. o .. I . " . " .. , .. , . . M . o l ,'Wnomi, prospWl and ~n~n<1a1 ,,,ndiIKmi improwd """""' ......f "'I'Io-I ... 89 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00093 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.22021717 19 Mom:lar}' Policy Ro",:m 10 lh. lvugre:!$ D Jul)' 2\)12 _. . _till' -- ." """,-"" ...... """"",, ___ NIl,Q1 <.I!I'o_ ..... ~ ·~"~,Booo."_~ by cm.rgill! mark" =lI<1m;<1 (EM Es) ConSlSlenl ... lIh 3 Icmp(lra!)' iml'fll"em'nl in II\< Ion" of lin.nrial m"rk~IS in Ih. fil"$( q~l1er. fortlgn privalo 1• •< Slars sk!wtd Ihm II<! pu"'h.~~f U.S T!"a;urYJt<."Uniios ~nd I't"luiOOl n"II1ll"'h~>tSofU.S. ~uiUt,. al1hough lhoy t.'ll1inutd (0 scll ;,In.:r U.S, h,'nm (figu!" 2g), !!(.oW(".I:,. Ih.1tnlaliw intNut In f~mgn risk ~ilt ahalod ....,.ty in lb •." se<:ooJ 4u",ler and fo",i~u pr;'''I< ;nw<w.ufto".d "'"tVl'o:<I domJnJ fOol" U.s. TIU$IlI)' .""'Uf1linand 1.:", <lemanJ for mho. US '.,":uriln U.s. ;n",gOB' demand fo.IO"';[(II ..... ~nlll:' VI-.. HOI, "" n.~ ;n lhe flrsl quano ••! >d the .a.ty part "I lbe _.- 28. N<l (om", JlIII'I'~"" ,0( U,S. ""unIi ... 200&-12 • • O ""·. I . f . , " . " . ' . '' _ '- . ' . ' t \ · ' S ' , r T" ~ "'" _ "l: . _ .. ~ '::-,,*,,_OC_I'1.., __ ~- - ~ i~IIIIIIIIIIIII'1 ~ ,. ,. - - ~ .. ". ." ." __" """,,,,_,,,",, """""'?IlI«~,S"""""" ~- ~ lI''C<lnd quaner, b~llhisO<lI"""'" 'I(HII:lhcl~"r'" .!<'!UU" ;n"'''~ ",Iali", lonrlsaksof fo",ign !«ruri· 1)Oi in lhe f""rln 4uart.r of 21)1\ (fig~r.: 19~ Inft(IWJ [rom r""'ll!fI olfll:ial ;/Illtiluli,uu Il","$lh ~ncd in Ih. ti('jl 4u_nc, !Ill <Rll:rJing markel goWfII menu boughl dollars 10 c~unr« ur• • ard rmsurc ~n lberr cum"";",, "'''''lItn~ in i",,,,>lJfIl """,umolaliOll of dollar..d.nom;natcd m;er',<:J,. Vlh;"h ~"'Ih"" ;n,,,,,0:<1 in U.S, St<;uriti<-. ({leU'" 30) P'4rtial d:l1n for lbr A"COIld quan<r,uwsllha1 [On:iJPlllftid .. tn~O'fI)'''''main.d ~Ltoni de,rilt ",n<IfII:J d"nar aPl""'"tilll~\n "IlJinSl "~1Ij! mark.1 '-"IIrWII'it>-Us. o~ii."ial ~:!S<u "'~,.. I.ml. 55! billi"n IHnuw during lite filll ~ual1<f III dnrwinp o~ ,he F.,Jenrl R<:SCM'S doU~r """~ lint! "ilh lhc EuJUI'<"OIl Cmlr:li Dank (I;CI:I)Md Ih. Bank of Jaran (ROll ,n,,,, p.,";ally rq>aid TOIalU-S. ftl:t IWti<m:>l $>O\'tng IhaL ~ Ihc !la\illj! ,If U.s. oolGthollls, bo~n,-~ and 8£"tmmen", 11<1 of d<rn.'cillion cho,...'S remains CJllrtmdykM' b) ha.· loricaistanJ ..d j lfij:Mn: 11). Na nal,on:ll 5:I"ing fell (1'''''' ~ rcrg,~l t1 ""minal GOP in 200610 ncpti", 1 pc""",t in 2fffl. aJ lhe f"""lIll>udl;<l deftcit widml'd. The n~lional5l1linE rak subS<.'4I11:"li)' ill!.Ttw 10 nnf ~ro, whm" MIUlIn,'tl~Qf lh" firsl quarter o;l201~ (lhe !at.,1 qua"", fon b;en dill" are "'allabk), Tho .dmi .. fialness of Ute S:Wing ralt O\\,r th~ 1'111 MLplt of)~ I"H"", Ih.oll'~lill.ll.rr'''\i of a lliIrrtlll-m, in II\< rN\tra) boJg<1 dtficilliU w.rc ~fMmin:iJGDr _.- n ~<llJ,S, ~ of ("",w. >«IIrili<>. 21'080-12 . , • ll .. IIIIIII'lllr - • .. ". - ." ." .... _ .. c_._ .. .-._ '" :OO""IW ___ .IO_ .. __. -_"'_ .... ~ j' _- ''.'. ._.., ""_'-" "-" """. .. ..... .-. ~!l _ .. ......... ...,..- ""_"-"'''c_ _. . 0:-........' " 90 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00094 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.32021717 _.- 30. u.s .... 11....,iol inflO'O"l. 200II--1 ~ 'rllt Laber Markel l:.illph/)'lNfIIl unil (lt1~"'rlll)"III'NI _ (- .... ~I ...L...~... _""" '" Labo, markot oondi(ioa, remain "d. All .... oM"SlllJ! 1/I5.00'J jobs I"rmonlh in Ih! ~d hJlf of::!OII. rri'"3I' pa)TVIl ontl'!oym<m saini im:"",,.,J to 225,1)1(J job$ 1'" IMIIlb ow, lilt iirst Ib!'Oe month. of Ih! )~a, and Ih'"1I fell back to 90,01'(1 job$ I"'" month (M." lho past th!"to: moa(hs (iigun: 32~ TM aPl"'rcnl ,\(M'ins in th. pace of nCl jobereahon ma)" ha>~ been ~uJl8l"fa!cd by iMu... . ~1'led to in\;OES !II lb. "'..alb .. and 10""'" sonii! adJult"",nt difficulues ~".,.'."al<..'<J ,,"'Ih tbe timing of Ihe sh.r~!.i<>b I"""" durinj! !h. """",,;011. ~Io",­ ,- .- \lV<!", omp\<J)·m.nl pinJ during Ih. S«<lnd bolf Ilf last "_"'lP~.o-I_I"." .". . .'. ._. _,",'I"'"o'I.' _!<._". ~*-_"Il"<"W"">,. ,_ « yu I1 ,. ' u an « d I . I . I .. I t m ll < 1 < h . t I < .a .. r h l - y u l r 'i o u n b o " f in 1 g l t . i . . . . ) , ~ t a u , , m 1" a " y 1 h v a f w ~.~-~ -~ =r10)~rs Ih~1 a~>'<lypami their woMon:d dur ing and just afu.-r th. rc..-.ssivu. Th. rtO.."111 decckrlllioJn in cmriO)'monl may sugg..-st thai much of thIS C3t.:h.up hai n,l'" t.a\:on pI~ and Ihat,C\llIS<."\ju<n!I)·, n:w",· ROO ~ OOwn"'~rd 1II0W"IIlCni in Ihe rri''llI< saving IlIt~. 'apid gains in ffilMIl\l< tlCti,ily ..i ll b. ""Iulred 10 N'tion>lilOMng. wililikdy ..m ain l<)w litis )~ar in lighl achieve ";gJljf",ant [onh .. illCn'OS<"$ln em~monl <'f II!< NnlU1l1in~ !alit f<<krnl buclg;:t okl;.,.it A por In n d d " " di~ 111111< U1\C'fnl'k>l'monl rato. I"'" of the d.-din< in fClkral SlI\'inp relat;": 10 pIt unom[)lo}mrnl ralt. !lHlugh d""", from around crisis ~"'~ is <~Iic:aI ~nd _Id bt C\,..-.:I«I 10 re'otlSC 9 ptlrenl \liS! suntmer. hal hdd about flat 01 8''0 pt" allil<: ,'Conom~ rtcOVrn. 110"'= if I()'<I' Ic:,"t\s Ill" tenl silK>! oarly this }""" and """"in, .M.d re\ati>'< n.l!~.r ,""ing I"'rsiSi (IV" til<: liloX'"' run, Ih'Y"ili to Ie,~ls oincr>'<d prior 10 Ilit rt<knl I"I'<"<'jiijon (tig' lil:dy bt ossocialN ""th both low ral"" of "apilal\"" Ult )3~ MOrNVcr_long-lemt un<ml,loymonl",SO malion and h.3'Y borro<>inll from lIbroaJ. hmll;nB Iho I\."ll\alns d"yatw. In June. ~roufkl4IJ f.'C"",nl of th~ flse in the 'iindard ofli"\II~ 6.» U.s. I\~,.knl. d'~r unempk'ycd h>l!l )x,:n "Ill of 'M)r\; for molt than six lime. m,)nthl (figure 34~ M.~n"hik. th" W>M r,"lt« [llirl..:; f'I'Iion flIte hOll Hu«u~lcd amulkl:lkrli kwl sc far Ihi< poi"" year after h.''',"~ _d d~,,'t1 2 ptrccnl.gc ImOO!2007 11. N«o>,·,,,,.I!.l92-2Il11 -- -,,-,.., --, ...l.loJt.'l.. ....l.."1 010 "' :tO ' OO ' I .!($I " _ " I lOll , __ ' «.".... n_... ___ 01"',.~-_I0"ro"Ilr" ..' ._' _''_' '_'',... .1..0...1.. ... l..\..l..1..~._ '" lOOO :tJoJ .!OlI lOO\I .!IIIO lOIIt .!III! :";"n-w"" ,n, "o'_- .."..1...._.. "."_"_". ...'..._. _ .-lOll. hot> ''-''C--._oIV_..I-'. 91 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00095 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.42021717 2(l MO",:Iar}' ]1J1icy RoporllO th. C;lngrwD lui)' 2\)12 wlid pin in 1010. A=rdin~ lQ lilt I!lOSl rubljs~.J datil.. (}IlI(1llI pa 11011/ in Ibr IWIIfarm b1u""<S!ICC!'" l"QSO jusl v,rcn:cnt in .)(III and doclinro in Ih. tint q\lllrl'rof 2012 (fiJurt)Sf. .... lllIo\IjIh Ih('jt dlll:t(an b< wlatile frum ~u~rt.r IQ 4u~rt',.. Ih. modtrJI;On in pro ductivily ,,,,.ilh O'Vl:f Ihe J"'SIIWO Jun SUU"Jlllh~1 " firnu ha'" been .dding ""r\:en nOl only 1<> """I n,;n~ production n. .c Is btu al!O.110 ",Ii. .... J'fI'lS"'"'" 011 I~." , ~.';!I'ng "'"tfo=~ ,,!I;ch "=<"1 bod Jh~'rlyd"r­ ing the ,""ssion_ , ln~"'ases In h"u,ly romp!;nsalion ..... mln"" lO!lo ,. - ItSlraintd by Ii><: ~ry ..." aI:: rondilion of litc IaIJor ~ Tbt 12-lllI.'nlh chanll>' in tlltcrn]1lo)'tnt:nt (()!l " " "" , b n v t l k b .1 w (0 a 1 ~ rri M '"a d lo I i l n lt d C u O sl !I r y 1 0 w c , r ,, n ,1 p x / 1 ( ' » S, '< ~ f1 'h o k f h ] m 'ro .O \"i S d I i l n n g 'i ~_, .. ~__ "'.....- UIOr_o"I-._"" .., ',_,"_l-O'l"l bof!dh hIlS b«n aboUI 2 ]"1( i = l\ " l; 1 '. " ' " " ." I . .. ';nc< Ihe <Ian of .!009 aI"I« :I"'~,ol )'tarl <If in 1/1. neighbor hood ,I{ 31""""1 (flS"f< 16). N<)tIlinol"""'j1<nl>3lion OIher labo:lf markCl inJi<;aton ""R' consis[(nt "ilh pcrhour in tllt lll)Hf~rm ~~fI($S~VI" ~ lIlCastlr< lill!.! th.nrc in 1l~m1II.oor markel c.1nuitivnJ du,i~g derl""d fWfl1I!lo\abtl!''''1II1po:nsat;'''a ""'. in lilt the finl holf cf th. yur.lnitial d.im! fll< un.mpkl~­ NIPiI also <.k'ttkraIN .igni!icanlly C\'Cf lile P"5I f~w ment i",ur.ln~ .... o:rt not n",ch ehonF<'<k .'M II<It. )'UB: lhil mtasur< roll: jusl 1'.1 ptrctnl QIot, Iht )our altllough thci, "'~ ....e I <J'/(f tb. fiBI hlill eM the 'lIdillj! in Ihe first quarter of 2012. ... ~IJ below III.: al-'<t Ju,Wlj )Q..'(f tb~n in lhc~nd bllf "r )111. Mo.u agt" illCl'<:!l>CofabQul (j1<Mnl in lhe ~nf1 i>:ftII'C Ih. rub"" .• urt",c JOb varnnc"l<S <dgcd up, on od hOll..,. r=mn "m;limy, a.~r~gc h<,urly e:.rn;~1!" for 011 holds' 1ah.1' milfk<l C.lr«I~liou, J.trg.l~ "'''''TSlld Ih. <mp\o)n-s- Iht li",.liosl me$Uf< of w.go d(\t\(>p st«rdrl~r!ott\li,m fro , m ,,, ,, l " a i i n ll e U d m mer. H(lI;tVl'r, i"db mcnll ruse ~boul 2 p;:m:nl in numinalltrmS ()Vtr th~ tors of ~iring activily Jub<iued 12 m~nlhHnJln~ ill Jur)e. Aerordin8 10 elIi:h of th~ moai!IJrtS. pins In hc~rlycomp.'ll$Ilion bil<J to 1;,,,'1' up ...i lh i!)Cn"ll<1 in ooltjum'r pnc<'i 'n 1011 lind again In lhe hrol qu.n~ of Ihis ). ..r . Th. eh'nl!" in unillabor cost> faced hy firm,..... G"i,., in l:ibor rroJuClivil~ !11M «)nl",ued 1<> Blow whl<h m<;,sures Ih ••~ I.nllO which nominal heurl) 1W:nUy f<>llo.iinlt"n oulJ.il.ed illl'f'CaS< in 2il/)il IIfId a &#45;&#45;&#45; - • • • " _.. . .... __ - - ., - .. .. Si'lt-no_ ..... , ... - .. _ ..... .. , . - .... _ . J_lI Il no ....... 1<",,-1'_ __ . ... ,_...".,"." .'.._....-...., --,...... ~"'" ...'. '. I .._. I ..-0 _ . .. . 1 . - " - ".". ~_ .. . _toooo _ s..u . n . . ~ ." "' " t _ -. . . . _ ... . ... I ... - J ' .W.. "_'l 92 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00096 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.52021717 l/i, ; ~ w k : . ! . - " 1 . 2 .. . <>I'<nl.~,"lwlvrIY"""l"""'I"', j1. C .. h ., a ... o " , "' ~ p I , K " M II> t < ' < ~r b < a t . l , ! - l I) i 'j t " u < J ' n r . u 2 e 00 . f i r n . d I c ~ l. rot 1-'""<"'.1- , _- -- r._ _ ~!00.1 lO(It !IIO! :'010 )In :!OI! ~"" ""_ .............' .r. ..... "... ....... . -,,.JII . I' . 1 l1 _11'<'tI. ..... .. .. ,l _-_"' .:.. .. _ ...... _n. __~ _~ ..-"",,,,_,.,._ --'" _""'_""_ ......... ., .. 1'£1_"" ..... ---"'-,,"- S<un o.,....."lot«._ .. ~_ p.!(ltin,-ILI Ihq'umr .I'!'f'OOcl><J 54 [l<T g.llI(1n \lJIC( Ibm. cruJe (~I prirol hal'C t ..m blo:<!. and psoJine f'!rim ri"", coml""'sat><m in ~1J)CIU of labor r~""1i"I)· hal': ~linw ""ughly in li~ .. ilh(;l1ldc =ts. 1Il.m> n:m,Lnro OIlbdutd. Unil I. .... rcosil in It." n()llr~rm (han m'mi", the ~di« ,un-ul\ Consumcrrrl«' r~, OO!IIId; ;0,.·10' nlSC I r<""OI ow, lbe ytarcndin, in nlllU,..! Sou ~ung<d (Wt' lh" r.rsl fiw IOonlhl ..". th~ III< h'$1 4uo,lI<I" of 21112. (h~ lb.· rrt«din, lear. unil )'tIIr ~f\'T r. .l lilll! la(O last )~3r. Ihis drop i! .I!ribolabk. liIbo:r 11051$ i~;1)<J 1'1"'''''01 01)<11$1 mP I'". (0 III< un.« .." ,milbly "-.. rm Winlcr. which n>Ju,,,,I d,m.nd fo>r nillura! ~t Mnre ","'\llly. spill prices fOf lUilurttl ~M h~1'<: tUloeJ upas po-oou.: lieln n~~n (111 bad, hullb(y~liII ... maio 'lIll!Ian lially 10,,"1" than lhey ".., .. Ia>t $Umm<r. Consumt, prict inllillion mIl,-..:l,J".;n. ~n nCI. during COOiu!l1tr fO<'<l pnC<' \n~alioo hBs ~Q\\"d nolJceably IhtfirSl part M 2012, OWrall f'CE pnc<s I'll$< ",pidly 50,) f~r tllil }"ar. ~s Ille .n«1 ()!t 1<1~jl roo.! p<1ctS fronl in Ih. ~~llh"'" mMIM of lilt l"a~ rrtle<:lIn~ lo'J!< 11«1 )'I'Jr'sJumpin [arm <\IrnmodilY~1IPL"'arJ (0 inm~ U\ 'lil Llriu~ bill inn'lion lurn<d ~ilW1I in lilt h.tV< ~rid)' dissi!We.j, InJ<ci. J'C'( pO.:cs j;,)r fuoJ spnn~ ~I ~II r~ rn(\rr than n'VtrSO\llilrir <1lrli<f and b<vtral!>" ~oly eJS,d up sti~h!ly. rilin~ .t an rtllH.l1' T~ 0'0",",,1< hMn·lypo:: PCEI',,<dndtx ;lImual nlte of :>bout '1 r,orrc..'tIt From 1Xc<.'1'lIiltr 10 Mf<}' incmt5<d al an ann~a1 rlIk of1lb.1U! II'; P=""'OI lIft<r III<'rCasma lIWl< Ih.n 5 r<Tttnl m 2011. Although btllfflo IXwnImWII and M~ 2012. oommJ'l.l rr~ farm commodity pcices we .. 1<'Illilefcti earlir. 11115 year wllh~ ris>< nr2'~ jli:KcnlllWr 2011 (figu~ E.Wud· by ..t po.,<tafioos ~f • ;umllutiill in,rrase in er<>p ~UIf"JL illj! fOOl! and C11t1X). OQo,umer Ilf'om cos< iI1 a rat. \11' Ibis gro~in~ ~awn. Jrain !'lux:s 10." ropidly in laic ~b.!uI2 1"'r«111 O\ell/lcli!101 ri....,moolhsM II\r )'Co11. JUI\<" ~U~ <ally J"ly as a "iJ< $Wain M In.-Mim.'OS1 <'IS<nLWly!br!a1D< Jl<I<l' 11$ In 2011. In ~~JILion!o 1110 '~rrri.n'«I a boul rJf hoi, dry wealiltllhal Farm ana Qtl .win. in <1"ud< oil rrictl ,n"r Ih< first half of lilt lyl1l beli<w CUI)'ield rr(>:Il'I"IS .'Oos"l<TlihI); l"ar. f\\(lotS<Mllrioolin); LO low oonsu1l\tr pri« ioft~· SUrvc)-boscJ l1lI:aJul<, of n<aN~tm inftalion eXp« 1.10 Iml )..,ar htdu.k tlli: dro::I<1"alinn .If o(\tt-<lil !;uivnsh;<w dI",,~d litlk. on n<1,:IO fQrlniJ)'tti1 ,mporl priccs in Inc IAlI<r pa,l (or 2011. fIlbJuro I:\b,)r , M n edian )~.,.·PheaJ innati<ln c~JlCI.1A1k!nJ. II! n:prn1eJ ""IB OlS\Xc,ued wilh ttl< ,,<ali: l.bot m.lrlrrl. "",d ~I:IbI. Iht T~n Rftll~rslUniV<1"llllyot Midtjpn Sur· inn~lj(,n Uf'<'i'lat'On~ W}"S (lfCooillmm (Mwhigan surwy~ rose in M.ren COMUm<' rn'I~Y /Iri<X-s SIII1<d at ~n ~nnUiJI rot. of ... h"n ga<olint p:ns "'''rr hi~ hUL thm r,n b;lct u 0"" 20 prn.. . nl in II\< ~rJl In"", monLh.< of 201~. ~. IhllS< pri<xs ,rttDN <"OU"" (~g"T< JIl) LOII~rr-l<1"m high<;r eOl.lS r..r <rude olil ""'rr pmo:d !hl'llu~ 1(\ toSO '~(I<.'<tal\On' rtmain.d m=~abk. (n !Itt MKh,g:lo line jlrio.n In "rrl~ Ih. nailOn..J..m:rn¥c r<io."f rot SUr\I(Y, mWiom txp«led in~;ui<m oWcr the n,-:'I ~ lr 93 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00097 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.62021717 L! MOrn:lar}' 11J1icy Report 10 I"" lOngre:l$ 0 Jul)' 2Q12 .l& Median inlblioo "J'C'UI>OO>. ::nJ1-I~ - .1Il, IOIbl","cornptIlntioa.20lJ'l-I! - - , Mltl_ _. _'Il<_ .. ....... , _ ., n".~.t~- . r ... . _ ...~ __ ~ T " ..a _..l.y.. . _ -.._--_ " ")". '.d. ' .. _*..".. (lII':'l,,,-"""_._ .............. _""1'odmI _._ .. .n, ..... __ ....... -. O .. I I· - _lIP - 5 l'"-'~_ _ T ..... ~ ... ~ . .... _,,_ !l1)'C'N ""iU 2.~ pore.'nl ill (~t1y July. "ilh",I"" IIIIT' ro. ... r~ni~ ~f II>< pagl 1(1 )'<31'1 In lbe: Su". . ), of J>ro - - ......., -.. ~,..y .... ......,.,-.""" fwiQnall'=aslm, ronJ~Clcd \l)' the Rdcral R~"" BanI: V( Pbiladdphi:o.. •.~ pC<:1 ..i 9lIs tOr lile iOO'<lIk in Ihe pric:c mtk.~ Ii" PCE O'otr the n.~t 11) )'<arl rcmain<d at 2'1. potI.':nl, In Ih. midJle-of itj mJrket> itn,rall)I nmaiocd stabt<-as [uroro:~n fiBan· 1'«<"01 ranr<. cia! instilulions r<dUC«ll!i<ir demand for <Io\l4r fuod. Me~surcj or medium" lind l\l!Igtr-lcrm mlla1ion log and ~rncral funding J'I'I:SSUI'tS ""tre allt\'iat.d by oompCllloil!ion d<Ti'otll from nominal ~nd ,nllllllun· tho I~nser-I.rm rtfinanciBi <>p<rnli",u of the liell In rrulMcJ TrelUUJy seCllril;n. \I,h",h tIOl only re~«I Ibcd,>tDI.'S!;c bankmiRX.1~ II>< r<1 .." ,of lhe R n3 o U ,, ! ,, I , I , , inlWMl extx<1;l!iim~ hltl ~cao Ix: alf""l~ by rrom Ihe CompTe""n,;", Capilal Analjoi, ""d changes in 'rt\~~tor ru~ "·. .. moo ond by Ih. <lift.renl (CCAR) in March pnwidcd. signilicMt lloJoo «lthe liquIJiIYI'f(lp.'rlics<>llhr 1'0'0 Iyptlof StC\lril~- O\[uil~ pri~ of U.S. financiol inslilulion, (xl: lb. oox Vir .. lillie ,hangeJ, \>11 0<1, .10 f41 Ihis ye.r (~u" )9). "n. Cilpilal .nJ LiqukhlY I\>lilion of l.;11~ U.S T~ measures ill<rca~d eally U! 1110' r<'fiikI amid ris· lla"ki~), ins prices fM oil and Qlher COmmoJil"" bill Ihtysuh Stqutnllyd«lioC'd A,(\lmmoJil) ~ fell ha<k and al \Illlm:.: ~ul dilm<:S1i< an~ j!Iobld C(on(lml< llM'lh MOnrtaf), P<lUey EXpH1atfDnund inclTaStJ. TI't15Ury Ralt8 In fI"Sp(lnJc lO the llepS laken h)' Ih, Fcderttl (>r<n Vin,neilll Dc.wdopmcnIS. MarkO! Cornmill« (FOMe) 10 IIToviik aJdilklna! monr1al')' policy "O<'eOmmodalloD, lind _mid ~",",'ing Financial m.rkclS ,.w< romMl'hai volati!. ()Vef III< tif$1 aru:ktY about Ihe Europtan m'is ;IIld • "'IlNCning ,]f half of 2012. F4t1y in II>< year. hroad <quil), pric:c IhetWlI01nieoollook, im'<:stoo plISh«l 001 fUrlhtrlh, indexes ~ and r~k spread! itt ~ mat~.t! nar· dllln.h~o Ihcyc~ptCl tile fcdmll fundj .melO fil'S1 rise rowclllS in'"<:SIOt scn!iJll(!1t rtgatdill$lOOrHmTI ah.. ...' t.1$ cum:nlla~1 range of 0 1<1 t,. !".:rt'ffll, 10 Eum~an (If\lsP'Xl$ "nJ Iht «<lnQm;';: o~llool. addilion. Ihoy ft!'P"rtnt!y .'lI:"kd blit~ Ihe P"''' .. "hidl imfil'O\'~, n ilS(" gai"s pa,,",11)I rtvmcd ~n<n mHrtct IlI<y ~r«1 lh. fctkral funds rate IUh!oeqllrn!iy 10 1>1 raMicipan!s bcc.mc mQrc pt)$irnlltlc.!>auillio (unl. Hlcrea~. M.rk<l parlic:ipan1$cufn.'l'tllyanlkip31< ~~n sltua1ion and ~Iobld grm<olh PTO!fI<C1s in Mal' and llullhe cltOCiiw f«lora! funJs r;l1e will be aboul June. YIelds on longer·lrrm Tl'I:asull' li«:urilics 50 b.li! poinls b)'lhe middle ~r WIS. l'Ilu~hl)' S5 basts d«lintll. Qn balancr, <WeT lilt flf'lhaif <If lh< )'t"". p.JUlIS l()'ol~r than Ih ..'Y t~pt<:1..-.l1il lhe b<ginnmi of Condil;""1 in un><''<1ImI.<ItoIHtrm do\1;a funding 1012. 94 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00098 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.72021717 Yreld< on I<'"ger-lorm nllnlinal T,,".uuTY~"nli<s )""1' A (tw r""'I~!"I !I«ftIIO ha\~ contribuled 10;> In. drcl;nr:d. on habO<t. <wtI' III< ~rsl h:!lr or 2012 (I\g' "'Ial;'~ lIabililY of Ih''''' m:uk.~ (utOf"'an ""'<lilu. Il1" J(\~ I)rly in lilt ~"ar. JoojlC1·I<tm Trr""ul'}, )';"1& OOIlj 1I!'r>-...'.! ltly rrouc'ed Ih.ir demand (OJ! f"~lI$ in r-. n:ftecling~. .n mJl)' ~Ii'" us. =nomi<,: dllll. rtO:nt quart""" by !ll:lIinr rk,Uar«oomiMt«l ~ll iml'f<""td marl:.:t $tnilln.:nl n:garding Ih~ criii, in and Q.itin~ flQ111 bAAlIus lintS l'C<lu1riD8 bcll\')' doUar I!uro~ anJ h~l mOI#)'!'rim. M"", ....' Ctnll)·.h()'<\~ funding In addition. European bIln~s I'CPIlllttlly <I'<T. IonjlC1.lerm yield< h. .... mme Ihom ",.~ ..d Ibti, 1i\\·;I~""" t""",,un:<! fundi~ '\I~ro'l.d by ,,"!io~ Cllfl"" ;~O"'UCi In.""III1'S_ghllh. ",1~ti'''S<lr'ly types of ",bill=!. furth .... lh. Il\'aililbilityor f\lf\ds and ~qu;d;ly ofT", ..! ",), serunl'~ 0Ii IhrcriWin (I<>m lhe ECllth,,>ugh >11; 'o;>ng<,·tnm rtf'nan.in~ (urol'l" iQlc",ir. .d :wain lind as .... ak.r·lh"ll"'.ll""t.d Ol''f8t;.x,S likely.helped rtdue< (undinll It lain! and II!<. «Xlnmnic data rcka>ts r~isOO toncorllj ai);.>ullb. P"'''' n«d to accc~ iOlo."Tbll1k masl.:ol$ more gt:norally. 0( «'OIIOII!;' ....' <m"TY OOIh in Iii<' Un;l«I SI~I($ and Rdll"ling thtsc d,,'<'i('I'1JI<1lts. tM ;uno"nl of donar "~d, In addilKlIl.lh<lSl: dc\tk>f'I1I<nls(\l$!mtI $\I'llV!' (>utstanJing \xt"'ttnlbt 1'«1<101 R<:Si.'I'1: anJ c~I'-'CI;dioru thlll tb( FW.:IIII RC5tT'" would PlO\.;oc Ih. (CD ha.: d~~nw $uM;,nti:IU~ front its r<ak ell" lli.Idilionai =mmod~I"'n.l\nd Ih. TrtasuIY yiIIlJ Ii<:lthil )'ca, cu ..... flOlI.nod further followint-Ih. fOMe'. d.d';on Conditions in Ih. CI' markol "~,,,:I!.oo (ai,ly"'bk. al its J"". 1I>L"1;n~ to Cl'm,n"" the 1I1:1l unty QI~nsion On n<t. lIl-d:o)" JP"'".0.1$ "r IlIICS on lW<Cun:d A:!IP: pt<!,gl.m (Mrp) Ihrough tilt "nJ of 2012. On b;ol>l\CC, CP oW, OQmrarat>l.·mJ(Urit)' AA'!UIN nonlinllnc;" )I'"id" ll$on .... II\.. ~nd 3('I.)"'a' nominal T",asuly5<l:llri. CI' d,"linrd ~ bit The \\llume ,,"Ulanding (l( "AA" d«bOl."d roughly 20. .\0, and '5 I>lsis !,"~n~ ,urrd h;.ndal CPi>lllli."\l in 1m, Unit«l SI'I", \))' iM/i· 1'I'J«<iiv<:ly. (rom Ihcil Ie".ls III Ih. start Qf Ib~ re;or tUIi<.m>wilh Eu!'O)'t3n I"'mtu!k'l:ftm !.lightlY ilt Ihc Tilt Or<." Mark.1 [~;'ksC>\lIri.g/l1 ~urth:.."'" and:sldts finl half of Ih.)'taI. Til<: average malUrilyof un>'C· of TrtlI$ury St<urilio:s und.,. tho: M I;P tlid nOI af'r':"J1' tUl'<d lilU<""ial CPi~UI."d b)' inso;MiOtUwilh Nih U.s. 10 hii''' un)' matm~1 itChI."1l< df<CI ()11 Tn:OSI'IY m~rl:tl ilIId Eurorcan I"'rtIllJ is ~bou\ 5()d:o)'!.3 levolllt~11S fu",lionin,g. ne~1 Ill< middle <>f its h;'torir.:1tI '~ngt: {figun: 411 Sig:tl'i ~f ,t!<'!ll w= '"-'" lalgdy ah5<nl in S«tIh"« <hon'k"fm doUar rund;~ I!1l1rkel~ In Ih~mllllcifoc rtpor:b,se agrc<:m<m" hid-",~ro j~ad, f()r IIlOlL coll.uorall)'p<s .... .", lill~ chang<\!. ! 101.\1:\"1. slum· ll<'lpliolhe ""'!ne~'!lc:t of StraIn> in ~u~ CIlnd,· I,"fm inle""'1 nUes C<lnlinu<d 10 i'dI'< up fl\>ll1lhe 10'.,..1 lions In un~ short-I<m! dolL>1 fUnding rnlrkcl.l 0\>:9<",00 &round Ih. lum of Ih. Y""'. Ilk"l)" rtfleeling <k-«,,. hall'l'"m.irlti! fairly Slahlellline fi",1 half of"ZOll. in ran III<: ~n3!1(1!1J! of lhe incl\'lS< in inwnlo M.aS<l~sof ilt<), in slNn.l.rm rundingO\OO.l):.<I,have li<'l' (l( ;bpn<!·I<lmT",asu1')',,-..,urili. . Lh>1 ""uh.J o. ...d sorno"'h~l, nn b.uaoo:. ~,t>Ce lhe b(ginnl/l¥ or Ihe 41 AI'tI:l~. "'''''''y """.~ r"""", .. 1r o"'tI.,«;'1 ~I. In. ...., rll<:1 Qo T....r."", ""."lInil«" odttl<d - f'lpCrOll"lIlllll"" m" '" Uni""S_ ~H)...I! '1Wl"lIi<> . .!!X)4...f2 • • • -, ,. ... " ,""---'~-~ ~-~~-",,,,~ , , 1010 0!Il<l 1011 ~ ~jO '" 5< •. _____ .ol __. . __ .. .." .. "" ........ ....,..ooj, ......... ~. .. TOt ...... -.tyool"'_ ....... ....., 1L.:lIII.l. '~<o .<.iIt> '.-..... T_ ~ 1\:,IjU "'-T_ ... a.. .... c.r- 95 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00099 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.82021717 24 Mom:lar}' IIJIicy Rq><>n 10 Ih< C(lug=: D lui)' 2Q12 The capl!ar and liquilfity floslHon of large U.S. flanks . 1 . <1 . . m .. i " ol - , l\ ~ l . > m o'd . ! u , ! , h , ~ k ' < ~ l " l'l " lI ' ~ " (.ar • M • " " 'I . O ... U .. O ~ O'd " , " h d e ,~,1w«1". I d " ~ '. " """ " 'O " IJ> . I n o . y ,. I , " l " I m n" " '> • C • I m 'f\O IJ ri u ~ in , (< , J< ~ p < • r ~ ((.'(:AI.) :roll. 110" JlfOtPm .... ILIaIe<.I ,he ,ltOp in ~ pOCe (1/ _ 11ta'ISO pem.,H, ..... ""1';'<11 p1","i"g I"""""'" ,""I ''310l;0I .. Jec~'"'-r "r • ,J.<f. .. in ~"""'I.nc..of11 """",,,L 11 .. """'Il< 1 I M ~ ' ( re I q / t> ' f h td l I ' Q ~ " " b " or '- ll " < I , " i i. " l , u . b ," " : " o ,( I J _ /t ' " e "" ·' " '' h '' i 8 ll w ~ i , li ­ i " nd , ic . ot , t-d . '' . '11 , \5 ~ (1 . / . I I " ~ " " 1 " 9 ' i 8 nn 1 $ "' w ", ,. , .. " .. i . d ... . C a U I O ''' Ii ' Q ''· .. . . . . . I , t . > . . C"'" II)' II" Ikt¥d (1/ C<Mrr1OO ",)(hot IIII' lI<!<lol (11-capiI" OtIequocy II~' llie eO(] of201J 1';onI;\'I'.dI"',. ... ~lonn.I<lC' .." "_~ ... 11 •." .... 1.111;1' IMojN:I«1 1M. ... "",I ... ,h~ """ ...... Iv ...., (1/1010 (n.»1-I'*'l....,~' IW 191",rll:1I(oId """'"'''''"lI'ypl)l.~;.; .. ><:I'~~I!·,.~'I­ "g«l~"''' (IU~"'" f\>ni<ip""" io iii. po<I'<l "l>il.ldiillibutiQ!, pI;im.' , lO II O < 9 C S W up " e 2 M 0 " I " I Y ,l l C I< a l i I .I J " l " ~ 'n " ' > i" e " v 'Y < .. > " ,> l : 1 ,> ' ,, r < u ;< p b o ,n o a d n . d . mI l G hr h ~ . . . r . n . l u O k k< , n ~ " 1 ' t " Cl ' ~ ,h " e " " ,; " g I , I .b H l 0 tl ] lt 0 ' , P ,1 > I " , > "" ' " i" " " ''' <C>CI\'.:~.I : / . 0 .. 1 . 1 . , ", ~ ~ _ ...< p :d I _ "he _ lhe ~ ' I ol h , a - n " i l < I > < ' " " " ,. " , " ,,,,,, " & " _ ... [ ,l ; i " e ' p ," .. " .. " ~ '' " '' " '' " '' y . . . . . . 1 . < , I > n / p ''' l , < . 1 .. i , a .., d ,9 il , f. . . I . h .. p . " ''' W '. ". ,"';"IiI;".U!li<k", ~~ '" ""f'P"'IlnMl",S I<> '1""bfp,1 /rom obwI 511 ~nl "' ~",IirIsft'' 'q'' .'"..'. .., . 1 , " . '. " .. , . . , I t e .I d I d' ..... 1I "",_~,., ,he ..... ~ri .. , "/2OO'l,,, ,to.. ", II """:. . ~ 0' the ~r>I <>f ('1<',xod 01 h<l;Idy ..too""" """"""" anrJ -ZOll (.~e AI. Mlo<.l1 " It.. imprtN.-me!L! ""'" lhe inI"""'~.'gp!'rioll.:.-., 1. . II\I>buIMlo Inn~ rt!>ined ""~",,d "'"~ of COI!'nQoI)l,JP, dUl,,'K'/"rlud ",~""oed 11"""'11 .. ,0)1;. ... MghIl'tl lhe 1911101.w!'I"'"' 10 lhe CQ.R h. ... :ok<> ~"""W 110"., ",,,,,,,obIIille< l(I i1i«"I~i<Ir"'", ru.od int m>IteI>. 101 .'<\""',!Iory h:w. ;igt>iIioo,tty rrdu<l'IIlhcY ~~_.""s/IIX1."""w~ 1;Wili(ft» ,..bIMO "' ,,,,,,1-.. ... ,,,, 1t..1"'~ 01 L 'loo~oI __~ <nJ< ......... <>f<l. 1 l m_b l Io f_~ j,-'_ o0· l' 1. " . ' . t". ..'~ .. _. . . . . ..!.t.> ~_.".."".".".I" o"o""o'i_oI_ . .".,. .• L .. j . . . . - . . . , .. . . . 1«1' _ ........ """ .I..I.o.o t~t-.<w.. " .t _ _, w ." . ." . J" '' b" ' r- ' . ' , . . '." "I ~ ",,' _ 21It< I>III , "'"--,. ............... ""' ....... ,1....-...,..'1.Io ~~0I .....1 t __. .. r..t...l~ ..._ ~~ __. ""'. ..... ~ ....,"",.,.... .. _ .. s..~o..I...~...o..I ... r..J.ql~_'lf'k .. OOll\.,_~_ od __ "...'..._. ¥<I;\lJ. _"_'_.___\.pa ./t. ....M.." o"~""., l"". .. lJ<>tot'Xo.lfl,o ...... lo .. rmm III< ongoing MEI'3Ild high<1~han~p«;I(d bill Ii.",)' It lINt sinu: Ill< b<~nning "r tbe )~ar.' In aJJi· i~"an<t by Ih< Trr-JWlY IJotparlmonl ~arlkr ill Ih< lion. tI<tIlcr.; rqXIl1.d Ih~II!Ic u~ of finan., ... k,\'J"agt )ur. In aSSCI·ba<k«lo.Jmlmrciill rap:r(ARCI') mar~ among hrdllt funds haJ ck>:It~;c.J SIlm«l ho' SIne< ttle his, IIOIUlMi ,1ulWlndlng ,,"Iinrd I<lr prog:ranli "llh ~nningcf lU12. Mctffil1.T. rcsp:mdenl! III lilt lUnt EUrurx:an sp.'Mill'S, and Jj'Ir(~Js On A1 1(;1' .... Ih E~",· s("OOS nCI<:\l (on inmost on Ihe AmIlUnl of rtSIlUIttS po:an Ixmk 1ptJn$ilTJ "'''main,,\! ~ bh ub.:rvt Ih<lSe ,m anJ >llt<nliOl'l dc\Q\ed 10 1!Ie mllnalCmonr "r ro!I<'\'Il. AIlCI'wilh Us. bank !p<>nwn. l"'h:J .x(l!>surcs t"dealm~"d other fiMnci.l inlwnc· RespOn;k!(ls 10 lb. Senior emlil O/lie<r Opink'm Survey un 1><1ll<r financing Torrn; (SO)OS) in oolh Maro;h and lull' indicMed tMI <'T<d~ lerm! appli<iIhI< l. rr..SCOOS ... ..u.\o,. .... -..R=o. . \10:0-.'."""', I" ,m1"lllanl elllSSl.'S of C(l\ml~l1ies h~\~ "':m Itla. • ,... ... r..tcr.lmrn<.~,~"""'.",_b' .. 96 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00100 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.92021717 II, ..... M .... T"', I " ........ "'~"(J/""'CCl-lk II. K.·li>l>«OIl~lIvksalcfw.Ji~byC( ...1 I - 10lJi1.~_1OOl-12 ioSli"'''''''.2001-12 n.:"" n:Ai " 0 0 " L~ " " , _- > _ -_-,....._ ....N. _O.I.< ~ I.0 ' .1 " 1I- ~ o1cr""1. ; .. w . ..... , " ,. "._."., ) " . ~ ". ~ .o ._o..I. ; _ t . i ,. n . .. .. .."... ) .; m .t .).I 0I.Q1I *..'.·. - _);o - w.: . T _ . O _ o ... _ ... .. . . . . . . . . . . , . .. _ -1 _ f . t . .. . . . . . . . . . . . . . _ .;.b.l l-Q' . . . . . _oIo..-oI"_~""" I " Ir. . w .., -a _ all• _ _. < . 1 . ,... .. .. . _ . .. . . .. . . . .. . < . . : . f_ . . .: . . ,\ . • . .. , • .- . . ~ -. . .. " . . .~ ' . , .. "' . -_ "''-_ - ' - _ ~~"""""' ... iI< ..... MI-*."...". ... ... _"_... ., .... ...., _-.- - .... - .JI\ . 'o'< - I.' , fII~ ~ 'l.~ I .... --.,.. - -...-. --~- ~" ...._...,_.c. ,..o_~ r _~__ s - .- " " ,_I!.>IIo ' to X I T ~ . .\<:.~ _ ........ __~ " - 'l . .o . O l _ ... _ ... C H . . I . y . . . o . c, C.-.... II. . ",,.,..,;;01 <rui<~ ... R). ~ .,M;t"~ tt."", SilO ~ e:q",,;.,~ ~¥Ii .oIIowsof ,0\0. ,j""""",, t"",,," ~>L4< """,del"","" ow;.,!;'" 1<It In <I ... "·~iloo .......1 i,,~11It ~liIl.....t. ,of "r"i""'"'"".I..l.,t..y.b"(Io".nrilI;nIg I n" i '!> t < ~ lI ~ M a i" < " C ' Q ' I ' J ' rI ' I$ ' i ' , o , o , ,,,,~ 1 ¥ >Q \ It : 1 T " \1 ' , , " ,, ~ g.. , ..,~ . .'' d ';.1 . I . y . i . " ! " I " e , y a " " "" j " , I . I . " .. " . . < . " ) , " fi ' t " " 1~1<.'fi11.J<ovO>i! ~~ (l;>rpo<.lior, "'d~ tilt ~'"'" ~~II>elr~ ... IirrI¢l!io!I!Wt"I end "/2011, ., ..~ ~W lS <. l . l , l . t . 8 "'","""I~ d,,,,,,,," It.. f'I>''''''''''! \'<". ... I loll Jaid.. "",*.. ~ ,,,,. .k.,.,..~." "'..1 , I,">'J., l . i . q ",,1 ,t.. ClI""'" '''I\,ion iuglold oo...o.ia! ", ..l c-t;.~, lO>,,~ " • f • M : 11 r b o t I - ( f t I . I , l .r 1 /o ~ . ' > I r i U I" . " s ' . ' f < t l n , t o o ,o c . i . . ' I . I . . k . , . l . I . j , u " . n . j ,")",,",.~",~" ok . ' " > " ~ I t n b ~ I ., t . t ~ , ' " 5 " . " ' " l " . u " .. k " I , i ! I n ' I g "" 5 " " , I " i 1 "" U r w l "' _ . . , . ~ i . M . 3 ' I . " " I~ " " ~ . c ' . t " 1 r ' 0 . a . . . . l . . . 4 .. t .. n .. ) . ,"" dbr;":iS "ell a. ""olra! <~un~rp;u'1id aDd Clb.,. acli~n! of lb. I!uropcao aUlborill!.. . lo .aile Ih. eu"," "".\1, financial ut~il"" (figu .. J1). In n.-.p<>me tn ~ ,p<ciaI .",a,. . w and lin: ",1.""",[ II>< from lb. qu.,hon in the lUll« SCOOs. &>1 .., "'p<lrt~ Ih~1 etAR. "'Iuily pri<e:s lOr bani: boldh" oompani .. dc:<ritrill. pc";'lonlly low 1=1 of ",1'''''1 ral ... only (1IllG) i""""oed and Ih.".CDS 'l'f"!!<l,doctined In rood ...., . fradion, or Ihm "nle.-.:ml il\Sl.lulionai di· lale'r"n~ "'I in.~",o", """"ed 10 oon"",n, aboul en .. had sh,>WlI &II I!,tn"".,J "PI"lil< r"rcn,.'I1il rid: or EUrop<.-quiry"""", """' .... d,.,.,., ,>I" ill""" l!';ns, durtllHlII Ii'" O"It, lhe 1*'1 lear. and ens ${'f<J<l.,o", rOf I;ugc HlICs. especially thoso wilh subslanlioi in ..s .mc't)l-NnlIc,i.n .. "r<rodio .... Mo. . .." "nlly. Mwdy'Sc!m>ni",dt:d long· and sbort· Hllllndallf1j(1illlti~a. l .... m credil ralin~(\[ fi", of Ih. <J] I.,~ U.s. bank .. Mar~CI "'.Iimenl 1o.)I'"ltrd lilt ~okin, indumy OUdU. bul Door: of Ihe banko 1",1 Ilreirin.mm.nl·gradc.I~I· "led in lh. firJI holf of 2012, t:arl) In rh. ). ...r . ,rr .. ,h< us "" Ionr-I<rm debt. Th. ""~'H ..m d.'" r:1U"!.' or 97 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00101 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.03021717 26 Mollctary Policy Ro(l'Orl") Ih. CongmsD July Wl2 41. N~ ruc<lll.O!«o( <lc:dao ..f UIUl! i""",.>Cd 1IW:n1U. 44 Spmds 011 <"I'«liJ <1<1",11,,,,,,,, f .....! «tool -- 10 m",,,!"""" ofoxf"'Wl'<S, 2(J1Q-12 - U.S. t>Win& orpnil>l.I\)II~ 2007-11 • ,.~\ ,-- • ~\I • ,. • • .. _ ..~ ... . ,.. .. _.1 " .'00. _...... _ ... ~ .. _ _. . . . . . . .. _ . " 3. . ' 1 . "-" . " _ . "". . ' . , .. . , ._. . _ . _ . " . . " .. . . " . . . _ ' _ . " ' " \ ._ I r" " 'l " " Q _ , ! . " . . . ' ' - ~ . ....~...).f.t.; !o1r '..o. o_ ... 1IoiI) ... " ............ 1oIy tl.lOll._ ... -~~",,-~- '- S . « o wr t . f .. ' .. ' . ' .. ' _ -- . - _ --. _ ., C ooIoou.r...o,o-_'Y_ u..Jr.F_T_ S¢m< banI:! Wl"fe dcw.ngr • .w 1(' l'rim.·J, whkh may 1!Ife<1 lhe abilil)' of JOm< 10 pl.aoi: ligniflCanl amOUn!> cr .. of ith moncy markcI fund~ blillhe ma,);e\ offrct aprcafi HI hWo'C been mUlro SO far. lU 111= banks ~u,· renlly hal .. limil<u <km~nu for such funding. On 001· ance, <4uil) priru (of bankl rust significanlly from reiJli\"dyl()".ll kvds al Ih. Slar1 of Ih. )"3r (figure 4J~ an indtt of CDS spreads for Iar¥C BllL's declin<d aboul6Q basis poinl. IlIII "."main<d al a high k .... l (figure«). - . .. • .. ' ." ~ " ~ _ " " " " _ ... __ _ $u. ... ~ Th. profllabilily of "11Cs decreased lligbll)" In Ih. lim qual1er of 2(m anJ remain«!,...11 bd<)Wlhe ,",. . is Ihat prt. .... ikd !>:fore III< finallcial crisis (llJure 45). Liligal;on provtSi(l!15 lattn by fllII"I< large banks in COIIncctiQn \lilh Iho mort,.gc ..I tlemonl ,.:a<lI<d e.ar I~"'T this )~IU lICCOunled fOf lOme of Ih. '!<'. .. n. ... rJ rrmure on bank proIilabilily The '·~nabiliIY in wn ingsduc 10 aro,)untin¥gllinl Ifld I~ rel.ltd 10 chall8"! in lhe mar'~1 ,liluc or bank. oWn d.hI3mpli· fitd f«>:tIt""ingl-of bank profi!i' Smooth;"!! Ih",u~ -- l Ooobr..r,. .... ..,."...... ......... Ik~ _Q(,BHCIJ". .; r1llt~iol..l ot,. ... _of .. ~_ l_~_""",~ p..",!oroeo",,'''''_ &#45;&#45;&#45; &#45;&#45;&#45; , " ~.- " " ~~- , .. " - , u - , ." ~ - ~ Sn'I Tk ..... """"" ... _ ...... !III!QI S-'''.'.l.'._... --..!IooN, f1l Y-'IC. ~_ ~~- 98 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00102 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.13021717 lh<sc "IWiai r~",S. rrof,IHbi1ily bas \>(t~ a\xIul ~>II in fOO'nl qUirI"rs Nri income wnlinucJ IQ IJo, su(ll1'Ol1ed by Ihf n:I ...« .o[ kun I~ 1'tU. .... " oJ!>.:;liD .I~f ~~Ienllh"n ;n th. PfI:';OtlS }'t~r, .l$ ehaf¥<:~ff rilles d""mucd. bil [ul1~er ""IWI m~1 m.jor~' dass.,"S, Slill·,ub.iucd d;,jdrnd Pa)'OUIS ~nd shan: T1:pon:hascs as ,,~Il "" mh":li"",in raI:."~4!hled ~l' ,,"sh,d rtSut.tilry <;apilol ral;"" hj~he. ;n the fi"" QuaM .. of WI! (= Ih. b.J.\ "lmrl.""'"I;ft~ Ihe !'I ..... Finanei,. Rr$uli>!OI)' R'$ml"~). CMl,I ('fIWided hy commercial I>.utkin, vr,;anil.11- t~ln! in the Unit.d SI~I"" dll'n!lI!I:d in the first half.)f 2012 at ~"t Iii<' same m....xrJtc pace 1$1II11H: "''CORd half or .)111 Cllfll kiw Ihe jum I.II'C&lloans. rtal "SI~I" Io~D!, and Cl)nrumcr Ioanj '~rand..'11 modc>tly: as n!>led "'rlier. th' uplum in "'~ding "'JS raM","I"rI~ nOI .... :Ibl<: [",elil klJln.(fi,urt46). T"""")IJIII!~'n in C&llen"i"~ hllS betn OnIJlJ based "uls;d.of us. bran~h~ and agenr;':s of (un'i"'3n bank$ and b.'lS bffi1 ral1icul.tl~ ""id<nt "I IOf¥<: JOIllC!lit: bank~ Thil pullern ~ ..mt;i:ll<~t "';11t SU)OS tl'luJlS jU.\'!J'$ling Ih", alWlion or lli( incl',,""" in C&I knding (l\>scrl'Cd "I large d<llllC1ilC b'lnkl tl'Hock'd dt.."mISCd comi"'ti tiQrl flOlll EUr'O!"iI/\ banks .rxIlhcir ailili~lti anJ JIlt> ~idiar;ti (OT ';Ih. . ~re>&'l (If <l<>tm-<Iic OU;;11>mers. lI.nu·IK,IJingsor "",U"I;"I'(III' m~'Oldl' ,,;th fIIITtha!eS OJn«nlr.MJ in TtI'>lSUT)' "''I:unIO:s Md ~ncy1'u~rantc..'Il MilS, OIVl'n 1M ,lilj-J..1'tI'5«J ",",using marUi. banhWnlQl..J Iv beanr.lol:1N by .II>. C 19 " ' " I( ' l- ~ !Q " 1 " 2 """"""""""DlIWn>l"""",-,..-..t"-""_ • • " ,,, ,- ~- ", I I 1'1 I ! " 1 ' , , Iii!/! ''''''' 'i1Jr ~l ..._.. ... ... ""-...!.od _o ... _• __.. ._...-_,-",. _.. l\Il~r ~~ _____ 1loIo .... \ o I f t ~ " " _ · lilt l!P'.r~"'''!II ."".,""'-on IIgfncy scwrili~ ~ud rome IafJl' p"ntJ mil)' olio b",,,, b<cn """um"!>lin, ¥1I"11l1ll,,,I.badcd 1OCuriUI:l 10 lmrr<"~ Ihtir li~uid­ ilY poJi(i(l!lS '~I<ldl 00 itlll<::llm<I1l.~( bon.b r'lI<h<~ rroorJ lQ'o\1 10 June. pa.nly •• fl«ling ,helunh by ip\'~I<m for rdaliwly s.lf( !W<IS in lishl of n$log COn<Xll1i abelll EUfI'flC 013 ,..dlas tilt ..... aI;:JI(!< III tit. dilm<:llic and ~ crooomic dala rekam 110"-(1.,. j"iclJ$ On si"<'<'ulatil"·waJ"rorporato Jrhl. "bicb had f'I:'...-:hN =ord-\oIo' k~<1i io F'~I'lnL:tl)'. fl)Je lOm,what in lho ..< -on.! qU41'1.r I'<!k"'!n~ 11K»< lOm' c¢!l"''''' Th. ipread OIl inl'cstm<ntllrad< (vrp.lr.ll. bunJI ""I ~h.)ut un.:haogt\l. OIl ~, relal;I\: In tbe !loUt of lb. )rar. [)<1!litr Iho blIt:k~r In )'i<:\ds (W<;f Ihc ~nd qU~rI.r. J)'IItidIIlll 'f".'C\llal;I'\~f;rlld< <.>.\rpolrnlc I'()nds docfl.'aJN lIOm(.1>fI I>aIJIl(;C, O'IU Iht I.tm( prrioo (fi,· Urt 47~ Prim in Ih. !I.'COn<laJ)' m.r1tt1 f(lf 'l ntlico(<<i b'.ugW !o1ll1' h>l"l: dlolng.:d unle. On bal.",,<. Jintt Ihe b<~innillJ! o( Ihe Y"~r. !klMt><! rrom iollilulio..aI tnw.on for Ihe", m(lSlly ftoalm~..rat.lo.ms h,l !'(n1alncd .I1fQIIj! tb!lilolhc I'ttll1<1tCllCt ~f ~n~,(1y aboUI de,-.Iupm<'" in Eumpe IfiBUrt 4~) SroaJ equily p""y inde ... "",e "",. .l ed early in Ih. ). ... 1». irup",,-.d ",nhmemstemminB in j>Il,1 rrom .d.1t;'V<1y .troogjoi> gain< as ,,~O .. oclion, lak.n by major conlf:li b;ml;, 10 milig31( th< 6nllJll;i,j main • 47. Si!<". .. ..r""l'-nI<b.nJyidd., ..< r<:<o,...,.nbk off tht-nUI Tr<;lSI.Iry )"'lli, "'" «<llnti<o'" - ,""" - lW7-20I~ .". " ," _- _ • .. _- . .. -. 0. - l0 .. . 0 . . . 0 .. < ... I .. ' .. . .. - ..... . . .. . .. . . .. . , .. ' ... ' .. ' ."-. . . . .. _ ...... - .. - . . 0 .. _1 I ,9 1 90 k _ I0 . I .. .. l' " lO . l ... : ® ". i I. .. " !!tOo I " .'t U< J I l IO '2Illl I " N.oo 1000 ... 1f!''''' ...... oIl'. ... oIt.,t ___ ..... .,.... SOl ___ -.. __ ~_ TU.·_ ... _ '. :,'>d"' < . _ . 1 . ' . __ . _ ~ . _ . I~__ " . " .~ l . ' . " /. " l. < lt o ' I ' . ' t, '' - ' L- _ '.r-31 _ ,ltl" _ ""- """,I ~.r_ l~,.,_· 99 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00103 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.23021717 2iI MOrn:l:<ry' II:>Iicy Roporllo lh. l;lDgr<:SS D July 2Q12 Imillementfng the Nl'w financial Re.c:ulalory Regime. l~b"'"fc.:,..;,'O\lISjj"'~""I'~- !>eo 1011.' On )u ... l'l, 11112.1t.: ....... dund III< " ... .ly 250 io"i~,od;"g'""'''''kio,gs. """ (..0..01 0.1""" 1,."~ •. ,.,..(mp<~"'iQoI .." ,,," ........ 1 • ~t • : 1 I'' "O"d'1>,:", , o , I , 'i , I, , . . . . . '' u 'o d I ie l' > nu "' . - . '' . '' . '' ' - '' " 'I ,I i" .. . . . , . ) . O 10 o to I . ~ H Ih o .. d " I ' ," - "" " 0 l ( l 20 l 1 e 2 y .1 w 1 ~ , 1 ,, " ~ ",1 > 0 t1 " ' ' " ' " ( . I . n .. . ., . . d . u j. r I, i , n ,, s , . r n .o . o ,. . .,- f O 'r t> o < I l f d i - l f iM $! A k o W ol I ' l 7 l 0 S 1 tte 0 M { - U te o k d . d o n 1 t' , l l . O . t k l A (U tt " j. " 1 " 1 T I k e . 'r " " ' " ll " " " ' 'v'. l.l.....". "~"Sl ;nl""' ....~ .aIIr od~ bankiOf: ~ llo,,~ ;"Ihe lead iISP."''"''l"' ~rO<t!iIlI< lor ioi'{ll!' IIIw. ~.I 'eo,' fIOIic't-"Qf fIrVI!Q>I'\l '~~m",,­ '''''"li''~.,I "n"d'ei,k .i,~ ,Iwt oJ ,....,mili"&' o.gs\NPR;J ;'''I~ingl'''' IJudd-Ir.onIt A<1 f'l<jUlr\o<l Ih.;ICI ~ is.wo, (101 many (01 ~ ..., . bto-n;;,u.d Ihu.lariol 1012. in ~iruIa", on """"il1i1i" ..... """'"'I;inn.'I'''..,''''' ..i III,'''''-'' I"'" ~ 2011. tJ.;olloatd;.;u"d "",.""",...",11 ..." " l J i e n ik o :- n ra c ! i a . l . S . . . . . l> .. il . i , ty l o o) ,. t ., . . " ;g . t . d . < w '( m !II ti ' ! . ( " f ' S . O ~. Q . , . r ,l ! i l e ~ , " ~ "''''''II. .. . . . . .. . . . . b ., I ' n '' . ' . ~ . " 1 " j" " "' " lC '" I! J 17 :e 1 I " h ' • , •• " " io a Il n tg w Ji i l l l l e i lhc Iio¥d h .. ,-!.<driOO!~ lv ISOC $h~ "",,,w,<'d 1"""'",!lj)elIIIGpbI~inonl .. lo b)""""'>11<"l"""""""'"~'&th<c. ISOL""'~ I"" " 0 " 0 n 1 l . o ,." n " ,, ,J,;,o.a",m,"',", ,,,, ,i. m..I "Iyl,l,",-'I_ok • ... . ~, ... ".,,~1II< I"'!C<laod Iln.II ",,"'''\'''' 0/ Ihe n.l.,m ....' I;'< ... dl"'-Ittl III ~ b.onls<~"-""<i>ioo .",1 fl'\l<lor~i ... .II __ d;<nl$.1n "'''' rt'< .... "'100\ Iht iI<>ard.tId Ih .. ",to...-~"" bank ,i'gUI.""'I .....~ ioot<I ~ t R o " l " h , r t u m Ir • , . ' w " l u <i " > ~ I< 1 < 2 l> 0 j) 1 « 2 .1 , , I 1< l ; k 11 . , n".". "..". " d " ,~ , " , 8 ' t I . $ II " ! " I ' " ~ g ~ ,ntO CMiorn ..r .ce willi ""."",ion;ol",.tId..-ds ..-.d '~""Y n. . di! ,.,;'1(:> wilh Me" ....... e sI."d. . >d, 0/ tt<'difW()ni<""", I" ..:mId ... ,.. WIIh '" ,,,,,,,,,.moot. oddi0t1"' """" "ion 9J9.A 01' til. Oocid 10IIII: A<'\.'!n ,~,ng ""I.' __ 1""1' ..< "<1 I»' b..nlc hol.lj,,~c."'~"""-,.w~h """', 01 S 0 5 , ll ,, 1 , . - ]- 1i<'I!'" "~~I"".fi".j n""",""""in ~manaliru: [rom Eun>JIC. H""",~,. oquilypricc ind .... (h. oollom end of I~~ r~ Iballhis lIIdicalO' bas .u~ ... nll), ", ..r xd a ro<Iio" or lhoi, r.m;." ~"tD~ (<<upic:d ,int<-' IJ.. o.~ ..r Ib.' rUlODdal ,Tim (fig ... coll<.mS aboul lh. European b;inkin! and fi"oiI UR.' SIl. erisi, inl<nsifiod "lain and oron,'!IIic "'purl, ,uue;l",t In Ih. """,-,nl ••, irunmenl of '''ry low inlo .... 1 nll ... ,10,,-... . wu-..1h, on baI.ncr.. III homo ""d ""n,ad (Ii]!. mUlua! fund. Iha! in,'",1 in hiP<r-yidJ;"g d.bl ;"mu u",49), The,pmHl bel,..• • Ihe 12-monlh ;;,,,,,,N mCDI.< linduJln~ .<rCWlali"'-srli<l. COIpIlralc I><md, .arnings p<i« llollo ror lhe :\&1' 500 "uJ • .-...I 101l!! and 1.",raged loa .. ) 1"",lin.oJ 10 h3\" "gtlifi""nl or run T", ....r nidJ 8 muth gaul,'<-' IheoquilY ri<~ inflo,,~ I;" mosl IIr the tirsI holr or ltll2. "hi!.: monoy premium-,,;d<:a,'tl. hil m(ll"< in lJ.efim hlll( or 2012. mark,! runJ ....f 'I'ri."""'()"ld""~ HiIII''' 52) Equil) and io< nlJ'll <I ...... 10 the vuy h..:h Iewll il ","""hod iu mutua! fuod!< oIso rca,nkd moJe.1 0"1/1,,,,. . earl)' i~ ~~nd "l"'iD 1.,1 fill (6~", 50~ ImpOOl ",.loIilily lh. }"ar ~"" ... rnarktt s<:n111ll<nl dCl .... "altd.l>olh f~r lh<.S&J':SIw) lDJe'X, .. ~a!ClIW"" from <'!'ilon tquil~ aDd rutW-yiclcl mulual fund, r<gi.l:I.n.'\l ""lllow, pri=. .pik..J al I""", IhlS ye>.r 001 is <u.",nOy 1",,-a,J III May 100 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00104 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.33021717 Ihe 1K.t' "N!Fl'iIt( "w .,.dd ....' .... , ... <:/1' ..... 1'1' ald po)oe<l ",t.;,nrJ..in6"-l", '::"'''11'''. (InII' 1qlriI1. 2012. '1"'1iIy 01 loy, '" I..n. ~q",,;,,&, , .... It""i' I. . ~ I'"hlol.td .".."rnd. ... 10. r.'~~ " .< ' I ' ! ' i n lu l t W m O ~ l . l " n " O " ) " ( '' l '' ~ ' , ' , T ,~ ie ' r i I I y ~ o 1 l . . i . O . 1 /J . l . 4 .. ': . ; , I 01 " " " W "" l " t. " "'" ' w ''''' i ' l " t '' " ''" " ' s .. c . t · a .. r , i l f o r t l o I' g '' l ' h '' e '' ' l1 '' l: o I;" f 0 . 1 . " . , . , . < 1 1 , < 0 > 1 I t " .. " .. ' f ~ .I , O n O O d < . J I"", b<>IJ. . ui loS 1'<'(\. .... iIn<l railingl"" min"'","' 1r.lnI(M. noil,ulen\o~l"gis~t~llM"i<1c 6 /o I 1 11 " >e = b . r . u . ' ; o n d . l . ; . N I. f . ' . II I o ~ liJ<'> ,,, ,r,d"li<<!1 I4fo.<,.n '1 ~ " 1 d " o " < "" : nllO t ~ :\ o O I' n o Iy n « " - 1 tl , . ~ d,nt ~ film, d " . ' " .. I "'".. , f . S IN (X ' iJ . I ' , I ~ r , ! l o " d " d '< ~ 't o l Q t ' 'o " t SbeIIH liql>iditl'ol""d ..< h, wtoido n..", ,Oll ,-" 1. . Ilu.itd,oIung"'illl"'hr'...p,.. .' l .... o6tos,I< tiolllliffd by 1M ~ Q>mm;fto!l' on 3""~"Ol3 1~"~.oWut 19.000 (Url\noerulenfflo. tto. ~--.' P"'P'''''''' in~)l.n'''''' ""'"''' G)~ oilhi' Ot:t.."".. Tho ....'" I!n<l NP~ ,t"o"i>n "",;lin",,,,,,,,, /Jllhe n"""r ~~ .. ,10. VoI.:b-r rW.I"," ruIo p" '''''~<""''''01 'etl";"'''''''''''''",,,,",H. oily prohIbia. b;n,k,"II ~"'i'"" In"" "''8''1:'''11''' """"""'" ri>k se~ on<!",,""'" w.""","I01.~ n ~~or,.,-"'Jiri"ll"QI.-""flohipino,,, ,""~"",oI,;,I(w"'S"',d=d,.~ ... L'" ;", "".""""f;. '" """"S<O"""' otIIe, 'e"' .... bt.oc;r!denlm..,IIfto"l"I Iloep;lll.~"a'r)t""''"" "" lhe sh"lwtlh. htdjle IIIrld <l< jlTivilie eqtHtyl\Hl<l. On ,h,rd Nrl "'4";"" ;'rl<"'''.~'i!IIy 1M,,,, 1<1 A!~~ 19, It.. il<""d ~. datib,., ~dJ<I)( .....I Mtd'" ri>k~>iI;";'l' ,i" ..S 0/ <heir """"'" I" " Vok .... rut.:-rorI,;:"n ....... periOO. $I;Iling ,hal • odv.nM:Ilj~~ '" rilII-blIII'rl <af'JI.I Jl'O" biln~ !"/Ility hIM III<! fItIIIWP-)'I';>I penod pm 'C»f) iii toe<t., 3(kl1f» 'VU"I~ erNii fbl" ,i<ltd by ..... ~I~ (Ih.:aa io, ur~i /Utt 11,1014\ ,~ :nl """'''''"''''-'''')'''''''''"'''gr.,.",,,,1 ""","led bylh« lli>;ml, Ii' fuilyron(""" ,ts ....· . . j";I~Ulions. 1. .. ""'llroy$_'~lt~·"~"bvll"" Sr.....! <>I .., a.li<IM l;>k .... wilh '''Pd k' !h~ Void<; "",,' t)o(Id·frollll:MI prtwodo>.l ",Jdi!>lIIlII doli!, Kl "'. ... MnnetlUY AggrtglIl~2nlll'" Ftdl'l"lll <'I'(f,!he itI"tls of 1>12 .nd ilsl~~t twml"lnrnl.li<lulll ij$'O'e) Uillilnct ~ d<f".\Sill.. remain dl:\"atN rriJIII~ 10 V.MI ~"uIJ I\;r."(: betn bjXtttJ ha<eJ ~n hiJlo,lcaI ,dal,,}fl~h;rs w"h Til< ero>"lh mit of M2 ~.(t.I in Ih~6rs1 h:df m 21>12 nomin.! inwmc and int</ru! fides, like!) fI.'flttlin¥ hl ~n ~nn";rl r.\1C l,r aWul 1 p:m:n! lfi~urt S3) • How- ihWlIIOJi" CIIntinuocl prefmno:~' hold ~c "nd li"uid asll't!. CumllCY tn <;mll:dioo ;ft<rtaStd roOOtll)'. ,dlottlng ... ,Iid <k"~nd boI~ a! ~omo and ""rolld. !k. ~ . . n < > I t Io : o l I< - • . . . .- o .l1 ( 1 ( < I . J . ~ .! " to " vt ' o o l< i p> d . < .. ' .. 1 .. ) . " l " i " . ' S . ._ . .. r .. ~ .,. . . f lut « l l lI . < . r _.. > . O .. ,· • R.lail rno,..". marl.-.I fund, ~nd ImAlIlime Ik~! ,·l.;cUof ..._ """"'ll).Itmud dq»IiIo .. eoolinucd !ocon!nat.1. Allhe SlIme lil'tlt ~ ("\lrrrn~ In ;1 1 . . ." .. ." . . t . I . N .. I . - o . ' " o ' " ' o ' _ I o '' I ' r '' o ' _ ' . I : ' . ~ . . G , b O . l I . I o . ., . '' < '" . W • o th . > . I . J J "' " M ~""i k " n u' . I .. l . I i. < .' > .'. m .'.. < _ ' . If . ' , "I . "I , ' ( 'O'' ~ U ..~. I _ c F i r l o C~ c l n l l l i I O K rt i." S " < 'a "I s " t i O ~ C ~ l N \: a d s O in C g. f ( n .c :i i I: n fV g; C a s h I I d n .n :s e II d ll . b I d he J ; m )I o 1 n M ~_~,'.u(~odoJo_rf1. .f "..,,"I'. .b "dr"."..,.,t_"'. ~. O\Io: .. et~f)'m;." ~hich ilC<luailo 11K: ium url~ I"') \....,.~.....w_ .... oIhIt_• .... ~ t~ . ~ " ... 'tdl~(I) ...... ~'I~_OIOI\<I "_' ". <..l R,..,oI)D.:I.. .K..o.o,.s I_> ...._.... "' r>oolort ...... ,,_ MI (7) ~ "' " ~ " " ' _" _ " " " I I . "" ( $ 6 I I II ~ I " I " . ~ «v l ) l " k "" w " o " l , < _ p...o ,_ »_­ ~>I_-u._ ... I1. ..... f ...,.brlRA..-.lKo."'~ 101 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00105 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.43021717 3(1 Monctar}'l'olicy Reportt!) the CongrmD July 2\)12 """·fUII 48. S=ndary'''''''<l bOJ prices for ",OOka• • <1 loaM, SO. Ik.1 r .. """,,,yi<1d IIId 12·,,,,,,u" f""""," :!('()7-12 e:winp-pi<enliQh Ib<S&P~. 1\m-:!oI! - "",,-. ," • • • • .. ..., ............. _X1"n....,..,.. """.·III< ... "'...,. ............ ...~. _J.'"1 '1"1 <_ _011.·. ,o., .. T--. $"' ... l-... ~_._ ~J ...... _,I,'.,,lO.l"!.. ... S .. 1 . . u It o a <T . . _ ' _ 0 ,.,,-_ . 1 . 1 . ·- " ,,-, " ._.. ' .a.. ) ..... ~ . ... _ ~_ itfflls---~hang<d little. on m'Crago. (l'.'<llhe fil'$l hall pf 61030 )"ta~ and ~Id or ",dcnned $2~3 billion in the )'tat. T",aslll}' 5t<urilie$ with matu';ti., of 3 )'ea~ oll,'$s Total aSS<1S <>f (he I'cu<:ral R<SCI'o'II d«rcascJ (~ un(\« th. MI':I""Tolal Fcdmd ReSOI"l-'eholdings of S2.f\68 billion as 0[ Jul\·II. 2012, :>bout SOObiliion kss 8~'(1l")' M RS incrt:&<! ""'-lUI $13 biUi<>n a. Ih. pol;")' than.t (llecnJ ~r 2011 (table I), The smail <l<:atilt vf rtinvtSlin3 rrinciplll ~ylJlcn13 from a~n"Y d<bI sin", D=mbCf largely (dke\! jo,t,~1 u~o( ~rclgn and a£tncy Ma s into "I!"""Y M HS COIl!tr,,>ed. OOItl1ll bant tiquidity n'illp:illnd declines in the net In II>< finl half or 2012.lh, F.deral R<fc,,~ <XInlin· 1"',(rO~O holdin~ of 1M Maiden Lan. LLCI. Th. ucd 1<1 rtdu« its ~pUSu", 1<1 fatilil;e" .>lablished du,· composition or T. ...< U,y ,.";,,,ity holdings ""~nJ!C1l ""0'''' ovcr tke of tbe !irs! half of tbis )'Car as a ""oil of tn. implemont.tion of (he Mi ii' A, of Jul)' 13, til. lld_ ... \tEl'"• ....,.".,..,..'ioSopl<mb<t1011aoJ .... 2011. tho Open MarkO! I)",k aI tho Fcd.rallI.esen~ . l ... . to - f'b y >< .. ) . , . o" o"<". ",l.iot (dk , h /< a J 1 » I I > J < II I .. ~ b $ II l oo l o l .. W .. li , o , n , i ~ • . .. . .. . . , r ., , . . . . " . " . '" Sank "r New York (rR BNY) had purdlased SlH3 bil ~_o lion in T",asury OOC\Ifitin "ith fI.'!naining malurilie< <>I' -. _- ,-_ .... ,. " " • I '" ).1.),11 Y' 1), • " 1 1 • • • • - i ~ " I t I I t I I " 1190 1!911 :!IlOO lIIOl lOOI :!OOO _ :!OIO 00,1 I , ,!, I -~-11It ....... ~ ........... -.. ... __ """l 1 l t9 o 0 t . I . Io . llI . . ~ ..., . . l< . I . O . : " ! " lt " O " O . .. m ... . . lfIOIl 1II10 1011 . " .- "1 . 1 . , i 1 > 1 <\ I P 1 ~ 11l " < " .. " . ' .. _ . _ . .." . . . . . . _ V1}(-. _ .. .. • , . . .. . . . .. . . . , . . . . " , " . ' . . ~ . "....-.0""'---'" J""IJ.:lll~ """"' Cko"'_IlJoI-'-"""op. 102 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00106 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.53021717 S<loo:=<d,')'''''.''. ... "I ,_of"""'" lSoTu..~ R........~i:<IbI>co<"""',:20IO.I! -- r. .. ,_ ... r_'...-J .. ~_ ..._ ... .c-.~I_-IotM>,_ " 1 r . . . . . .. , ' _ .... · _ ..... _ _ _ I , , _ .. ' . ' , ' . ' . ' . ' .. ' . ' , ' IT,,111 •.•.. ~ • '" r"···""~p"'T~U''-1.C ,s.. ."........< I'7.i.I l<.I_, ._. ~"_"",. o...f...... Mo""" a.- . 1 . 1 . 1 ,'\I' ..... l_U II~ood\lmtoIo"" 11 U(' ~ O\_I._~"'" _ """".~u: AUU)I~_Uf' =s.-.=.. ,W=I-w... _ ..... ... n ... T' .. - . '1_ i. . ~ 1. I 1 ' ! 7 ' 1 " I [ ~ > ~ ' } " ! .. , l\ , ~ S , r ~ r ~ « 111. .... lJIJ.1IJ So "rIo. .." '.tN.".. .." .,. '.. "....- . ..s... ."." "g .. _ __ I.""J~" ,~ I .... ~l~ Il<ooo.,• .•"" ".,..-..t _ ~ _ . 1,J . 09 ~ ~ , ' I,C . < , I , W ~ • 1m . . m ~'" • ...[. ,1=: ~F~Ao-' "'~1•1 .~• • ",. I..,.~ "~ ~" - ._ " n " . " . " . U . , .. : . • - . • .. _...".."..."..,.."...~ ._- "-. .....- U'O .. _ - . - ... _,, ___. ....... l.-UC_..-"'_""'" = -~ ~ _ ...- o - o : - t : - _ : ~ . ~ _ . . . : ... . ; _ ~ ..._ ~~ _ ;:..,... ~:.=~.:'~%:.....-=:~==~ _ .... _-.._ ......... ._. ____. .. ...,.,.."'_. .......... _"_-.... ~UJ ing Ibo ~p~ndill <:rGis 1<) SUI'!,,<,rI ,,,,,,iilc iMlilulmm. In(cll\~lj<)niil Group. Inc. (AlCi), to> lW(ljJ lho dltor. Thq"'r1foIwMlItinp ~r Maidrn Lane LLC. Maiden drl!yfallum; of lh.:m instilUtlons 4t<;line-J. (In 0<1. Lan< II LtC, and Majden Laoe IIILLe (ot;l'" Ih!ll pnmanl)' asa (t,nll ofa~ sakoand prioo~ I""l)' wrn: CTt;\l(U \luring In( ",isis I~ a<' _ luirt ce_rta io_ aSlt IS m(nlJ. Of nOle. (II"OCC(JI from Ihesalcs of all "r lilt from Th( lkarSte.msCUmJl;lnics.In.:" anJ Amcrio.'-.an NfO-,mins an<:11 on lilt Mai,1en Llln~ II LLC porIf"lh' &#45;&#45;&#45; S2. NOI fl<>w> ,,"0 mu~ f",""'. !OO6-12 .. ... .. .(-- .. _~_ "-.0)-.1<-»_ " '" • "4 " ,.. • • II Ii " • " • • -_ _ --~ _ lNI __ 1!1"IJ lOlO 20111 J,m "'-'" n. ........... IO<.IIl' . l< .. ,j . l . .. . . . . __"'A-,,-t' ... . J.I>j '!Io<_ 15<""· '_1 r. .... _ .. _ "_'~ " ' . . . . . . . . . _ ., _' ... _fl~·.\1<01<)0_ ~-""""-- 103 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00107 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.63021717 32 MonOW}' !I:>licy Rtporl 10 III< l;l~ 0 Jul)' :!(lIZ in JJUlliIry .nd fc'\>nlaryrnohlo:tllhel\.11")'lIII'nl '" Ihe I'ffi in add~ill$ iIle crisis hy rll< ",gion'lleadC!'1 ",'n enii,.., I'tm.ining oUI§Ulnding balJllct <)I' I".l't~;or lribul..t 10 ~ 1<"'J>;>rat~ <'".ut.ng or fm"ndal S1~ I"an ff<!lI1lix J'RilNY 10 M"idtn l:tn~!J LLC in 1St\: th~ !M.u-··,\n Upd.nl< on iIl~ Euft'll<'an IW:aI ~Dd Man:h, wilh tnlcrt.!lllnJ .s:!.~ hilli<>n t1L~ lUIin In Ihnking Oiru. ") 1I0"t'''''_ JmiJ onping f",'I;licaJ udd~ion. ~ ff\'II1lbe$llo:st'l ;,j~rl'(lm UIII'<'"olilly in Greco: ~nd lII(',..,a$<d C01ll.l11I.I aroul MaiJ~n Lane LLC~nJ Maida! Lane 111 LLCi. April Ibe ite;li!b of Spani!li bltni;.s. fin:tnci~1 condil!(>n! okle and May ...,hIod ill. ,"",,)'''''''1, wilb inl ••" "I, or II>< rooted "Il'I'" ;~ lhe _<pr,ng. Fo"..i~n """nu",ic groll't11 enti ....m aining OUI«lallJ;~~ bgJan«s ol,II< !IOnior picked"r in th. first qll:u1 .., ""llhi! >I<'fik1'llli"" loon! from Ihe rRUNY~, Mai.kn 1..:1"" LLCand I~y ,..,lkaC<llCU1rcrary [uI01r<, >Illd m:tnl d;ua Maiden La"," III LLC ill June l'rocff<ls from funn.r pvinllo wid<$prc.d sk>Io'in$ in Ih~ !I<WIId qUllrter ~I ~;r1'l!m ~bidt!ll.>o1lC HI in ]un ••l IlIhkd ""1"')'lIII'0' of Iho<'<luil)'i'<"'lli"o ol AIG in July A nel JI"lin "" 1110: s.'\k of lhe mn:"ning ~tl in M.iden (;,on_Itt L.lC is likdy d~rilll! Ill< nt.~1 fcwmOft'h~ S:.ks of m~ ('Of lhe mn~inil\J ~~\t In MaWe" unt Rmi.gn linan.:i:.l m~rh:I~ nlllt b=. ..malile. !nnWI)' in lLC ~h~u1"J' ' b '' t I : J C omplClo:tI byl/t<: ... J I!f Ihe year, boJl' Ih. ~m qua~er, mtDUl1II!ut~ m:«ft'«l)llOlllicJata "cd r"", l'ga\1' m~y lak. l"nll'" I~ dc,f'O'( of, t..."'D~ S(\m< <J$ingol' Iclllion. lI'ilh,n H,e <Uru artlliod Ie Kn (lII1.talliling uo<k. Ihe Tm o AJS<1-1j,tkrtJ S<turili(s Iml'ftl\"!mtol in global fm,oc.al c~ndj(wn~ Tbii l'fll" f:.:i!iIY1TALF1",'ft jli~lly ~''''CT, ,..,I\t:<tin~, in Imlll'\)V<ntml "'lIS ,..,w~ in ,""srringa~ 11K; bi>osI pj'fi,lh. finllMwrity<:.f. TALf 1''lIn with .Inm flt'lD rre";ous polq Dl¢/UU,..,S. induJi"l-I/t;.'ltlrl Jlfilrinitillilcrm, longt'r-I~'m ",fil\lln~mg OI"MKlns. [aJed_nJ {lC'tl1,.-", On Ill< liability side of Ihc F«Ieral R(1C1'\t's baJ~!\IX and banlin~ IIl\'SiO'S io vulncrahh: l;urop:lI!I Ct!uotnes ~1tt<1, ~\X"!i(j hcld by <l<:1""il(ll')' in>lilUlioll'l d<:<;lined ~llrroc,'d, EUI'(>-3"" k.<lt:rs n:<f1'Jnded (0 Ill< ",,'rs<n· ,D.:>ul $42 billiO<i in the fl(j\ half of 2(1]2, "nik f,der" Ing of Ih. cri<~ lrt ann01UlICln~ adJilivn"" mtilSU"" ~I RN:n~ n\'I<II ;ft cirrul3li<>n in"",;IIIed 1'QU¥1tJ)'.539 bil i summit on June 28·19. TIl< rnarxcl rt'<\CIion "':Ii (i~n M I"'r! 0( ilJ "~I,~ng rrov~m 10",;u", lho: p;l"r,1'! bul short 4iffil rrldincss ol (ooJs to drain mo:l\\.'S ,,'hen dOlnE >0 Incrca:iC\J untt'nawl)' ~nd grrJICr '>'Owlilhy him becolll<1 "I'rrol'<,alc. the ~~dtrtil R<5<rw ,:. ..J IlClOO ~ pum.d up Ih. roro:ign '~4n$" ,a1u, (If tb. dllll4r MrI<'$ of ,m.olI-ic40 "'''''111< "'pul<'hllS<' IranSllCli""s ~bilUI4'~ """",nt Oft a 11~d<-...' cighIM rn.~s tIjIAtn.ll a in""'tnJoll ciiglbi< <X)1Ia!~nd I)~ wilh iii C,'tJllt!ltlo.l I>ro;W SCI of c~m'nci<s sillO< ,~ k,w io e~,1) l'cllniary, list of C(lun~r"'lIlic::;. In the some ""in, lhe I)edm! ,""Ih moM of the "f'I'I~d"tioo UOC\Imn~ In Mar 1~i!-­ R,.,.,,,. . iIl>o wnlinu,'d to ~lkr smJ/l.vllu.' tcrm d.I'>s uro: )It T)'pical ,>f ~ri<>Js o[ fli~hl 10 >a[ety, tl>< d>Jlb, il! Ihrou~h III< Term Ikjl<)S~ 1..,,41). hilS al"!""ciol<J againsllIl'm currencies boJt dtpr«i· On MD1tb 2\1, (he rcJcraJ R"",,1'\'ll SY<lcm ",k<h'(d ~Ied H~lllSl the lIIjlan* )"n for I))():<l of Ih. pI'riod il' :WII Nmbt~ annuoJ oompar:luw.audile<i f,nan· (~g~re 55), Th. Swi>! rrane hal IllCNtJ "'11' ej;,).'I<ly cial ;!l1lCmenl<. The Foo~ral ~". . repO"rtJ nel wiilll"'" <lifO as lb. S"mNr.lion.oi Bank h~inlrt­ il)o.Ol)!l1<..r AxoUI S77llillion for Ibt yea, ""ding '-('(led 10 m"m!~tn ~ ... ihng f~r Ihe frolIC rdMitt to tho i).'Ctmher 3(, '2011. .kri\~,\ pnlJlJlrilyfrom 'nl~1 I!\COOI' on nI«".I .Ir LiteS aoqUlmJ Ihro"~h opon m. .k Cl Dum\~ the ~""d ~u.r1er of IhlS y.:ar, "i~l-t'l­ QPtrati~nl lISul1 ",,:uriti~ fe<lertil HJ!tn('Y and ~!~ty Ho)"1 ~nJ tlw d.lerlcrrlol;n_ ~~bal «x>nOntK' OU\- GS~ MUs' ~nd as!: drbl "''Cllrilit;). TIt< Rc:I<fV< 10$ h<ll"'J rush gowrnmnH boItd )'i<Ws fl)!' Citmuht, flanks l~n~c!1'OO qOOUI S75 billi~n or Inc rn billi~n GmnlD}: ~nd III< UniltJ Klng,lom 10 ~ortl kms in~rnltcnll\" in<om.to Ih. U,s. Treasur)'ln 201 \; (~~ure 56~ U~.w\JC. .laran"'" yic:hls on 1(1.)"01 OOrtdl (hOll"" d,w,'n jliglnly from 2\)11, Ihe Irltnsf'r 10 lite feU ".,,\1 below I p,'fC<'nl, II)' \'l'nlr.,l. Sp.nlsh k""r· us. Trasur), "'malll<J htsloncallv VI''}'IIII»'_ ri~ srrtaob """r llClmM ooll<h tme mort Ih~n 250 bi:."ll p.linls bol'.l«n FrllJuary ,oJ JIlnrI dot HI tSC.Jalin~ cu[>""!/ml u. .. r Sf\o1m-s public ~n/UlC\."i (fi~_ InIC!fulti,nnal Oe\\!llIpment!l UII: S7~ ludi.n SO\erc'gn ~""'j rlklwd ur IU wdl ove Ih~ porial/, Til<' [ump:an ~",,;Ii :.nd Ilon~ln~ crist5 wnlinotd lu Equity pric~ ubfo4d ""line.! .i.gnilic~oll)' in tbr ~ni:<1 inlcmtllWn;li ~n.l\ci;li m~rkets and fvlt4;n <;<0_ I<.'(ond~""n.r, mol'tW than In tho Unltrd SllIl"'" ~cmj(: ...i iVity duri~g Iil<" ~m balf ()( :2012, C.rly in In.k~es lumble.! in Iii<' n.lions at !he ,"11111" o! tbt III<)t,v, "¥.-cr<.I:livc ~iM ~ tnc rCBanJ IQllterror.- <uTl)-lll:3 fi~ ."d b.lnl'U'l~ elilis. nnd Ihe f;lil in val"", 104 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00108 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.73021717 =ban:. )4. U,S. doIl.,lIOOIin.J r.l<. """'" ind< •. 2W/-12 '" ,. ". ,. "'._.w, _tw_ ....................., _ ... _, .. ....,. t • w .,. . . . w .. _ .. ' . ... . .. . . 0 . 1 . _..:.:-.. , 1 _ 1, _ lt " l ' l . t . w U _ S _ _ _ •• ............. " ......... oI .. __ l'.S ........ __ 1lI<_ ....., _,. ......, ,-. ... _ ... j,.,.~.~._ . r . . .s. .:" ...."'.". ",.,. ', . . _ .F.-. U o.I -m ,S ! _ . _ .. "'" - "" . _ s .....-.... . "'_ "'0. ~ from tlltif Milrcb r<akly,«s mQrc than 10 pc'l'CCnt across th~ ad"Jno:d romgn «",nomits fA FFJ~ (fi~· UTe ~), ThlSrall"'<UllHrnuat«lt<w>"rd the rnJ ofthc: second quarter by the pMltiY( market rea..1ion 10 lilt Jun. lummil ~uil~ markelJ in Ihe EM& .. ere Ills" m~,kodl~ down in Ih • ..cond qua,k, (/igUrt 59), EUfOl"".n oonls faced rtn ...~ d $IreiGC:S 111 m:.nt moolh, In G= ~ft .. incondu.i,~ .lc<lion! in <"I)" Mil)", dcr","1 ""Irto. .. ~ rrom bank. occckrll~, ,.. ....t · 5S. U,S, doII. ..., bat~' ,.." .piny <elc<tcd m:tj<>r <IIrn:fIcie>, lIlO-I2 ,. ,,,.' '" '" • " • • " " ... .., ll.t ...........• Iootwo "-l" _ r« _ .... .." 1II< .. __ .... __ .""".1IIIl __ ....... ~ :16. a 'l o 'i< l," 1 > d I i ! « O d Il r b . . . . " . " 1 b p t t n ~ lrl n ~"" . ' . " . " , " ~ "" 1 b 2 oot Ii in ..1 «t<->J ....~ ... ...." ... .....n ......_ _o\o_.lo. 1 . 01 . ) , I ," ' lIf(ll.ly . .. _ ... ....,. """" ~ IIIg coocmlJ Ihal <kpoSll fiw.1 ,,".Id ."read 1<> hank· in\li)'.Imu: in lIN: ml or III< .Uroarea, N.",~ Ih~1 Spain had panl)' nlliooaliled Iholmubkd k. .. &...,. Banki. and WIluld n""d 10 i"joel an addilion'! £19 bil· Iioo into lit< b.nk .nJ i" bolJin~ compan)' added 10 unease """ullb. regWft •• \~nl.aIIy lcaJing \0 pl.lru [0' an I>fficial aiJ pa<.:kar; <>f ~r 10 (100 billion II> I1.'Qlpi· lmete Spanish banh Arr",IN:n.<ion """ut bank ••a l,n w"'l",idrsr=d. ",ilh majorinstilUlioos in Ilaly. Ger· ","l'f8I many, aod other [ufll\"'<an <;ountries fLui";"!! <:rOOil ,"lin!» clo.>l\gr~de1 As a rtwh. [ufOp'an bank 51()Ck prites ha\"t lumbkd sltlCt mid·Marth llij!urt (0). Al tllt..,me lim .. rtfie<:lingmar~" "itll-lof i=.oo S7 C'1,)\'<TTIII1<'1 .kbt.pre>di {or p<nph<n.t Europc:.n ~.1OO)..Il - - !l '. • " " __ "'. ... "IO ........ I"tt ~,!- I . {} . ' . " . ' . _ l . I . Z . . . . _. . .. . ".. , " M . 'I '. I. .* u_r 1 1.1<. .".!. "-I*._. . I . ., . 1 ,.. < .. > _ _ .. . . . . .. . . . tIo . r F_ ..... - "" -.. 105 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00109 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.83021717 An Uptlale on the Coropean liscal and Ranking Crisis .,e. ( " )y ' c ' ,, ' !h W e ~ . , ", . " . j . w . • . . ~ .. " .! " . " . " , h " > " , " l " h , e ~ ,ri . oio d in ' 0 1 " .. '0 ,., \ I ' C " Ie1tJ " i " "l 'h lo o f r i m lie . < .. . I ; ll o e n d . , t ~ .. ,"',in ( & .c 0 ili " l " . , .' h '.''.' . f , e t h l > > . m S ( b O" ' " r I > '. « 1 ",&.o.erl"igt> IlOO too U>rnl,t ...... ~-ban.'''S 5<'0.100 peon finonciill Stabiliry I;>::~ ond """" httOj~iI'k3"t, I>tII "'" olt!!Inilnt, J"ky ,he I 1>"'1"''"' SlobdityM. .' '''. ....' ' (15"'1 "~'Ill r~ L\le Ia!I )e., ,he orog<>O'6ditlkulbro,;" t:SOO biIIiott 10 fiOObh,;tnJ lhty ><n~1 u.. ~ coo"h',,"" wi'h d" .. ,;"m~ <roIIOII"" "'" <dI<edui> tOr "'!,.>fil I in w g ., . , . h ,. e [5.\\, I. odtlition. 1(:1<0.O"I"I ( f I i iI n iQ . n . ~ . , ~ '" J i r lQ ul i " l " o , l I i e on f ! u " o " \ d !< . n n s o p no r_ b e et < o ( b w o l. r . ,· c .- " IM '> I < l ~ en j of t " he " (;rQ p op le o d f l r'i abou W t S Il 4 t1 S t 0 r' l b '" il . li n o t n l w n, > O! .~ ~\~. It\< luropt''''' c.n,rall!ao~ I(M)\ ,,~'"'..-.cintwth< IMj. ..~ !."I'I''Q'''U'''k8f ""a/A('~ oai<"" in e>rIy ~n.t..., '0 0>$0 error. ",,,,dl· IMI lO",bo/,"Ui>l!y irto'iI\E it< c.p><iIy. liotu. indudinS,h. ~n 0( '''''''1'''ar ,..Ii. NoIwid'SliI1ding,n-..... "'i\le>, e'ient> in nanrirlgto Nrtl$, >t>d ............ ","'en~ 10 ~...t Sp;oin dlltrng u.. 'I>rioj;"II"''' h<lght. "",,,,hen Ii$tJ fIIb.nd ..,,Il00 ()..,;, ,..we ....d finand.oI5I~ (~ ,he "'1Jioo, 1arili.ic<.1._"""""',"""Iiw;u,,,,,,,,,~ ~oIO!iaI """"rtUttr'" L.....,.,. ~d "'''''''"'' ortd dLKati<>n ""I."';"" oi ,he dpll..-liquidiry ~ obi) •. .,d rn.n.tOOllC<rnSyC'W lWeI' Lhel..",.;t,;1iIy lingw"h I"I~"">I R."",. ., I.<I,,,, ..! (uM",!! ,,4. C"'., ",it (ro", 'II", ""'" _ .. >Ii<>t Ii ... rnutl· "00">"1 r..i.".'...e.d.. . t . O > ~ t> d '" d ""'« ~ I ~ i.IIl " . ." " . " . . . . . . 'I n I> o ~ n " k " $ " ¥ " <I I I '\ r " y " ' I . . A irH 'II :u 1; I o ! < '' 1 ' " '' ' ' ; ' " ' " . ' p '' . '8 . p . o . I . i " t " d Y 1 e '" . $ .. 1 ., ; '' " ''' " '" s '' i " n ' " ~ .,,,1 oond~"""inl .. 11nt Itw _ .., ,""' . i . t . > . o to (. hisyea. ,trung.1odor.II ~ h>r po,,;'" caII'"!;lor I t..~"' 1011. euro·aru loIlowed ,n*"~ioI",,,d,f>e5<'(noid LU 1M! pro. I " , h ~ ~ r " w , " g " h h o e Q n, I . 1 ,.. , ,. h ., e qu , ;r a , o < " ; ') o ' , m o _ f m . l . h l.l e .n w " Ii n n . l a ~ l( n l i d ~ n o g I " ~ ( " "" ' " ' " ' ' ' f(of ! • L I O " r . t . o I . 3 t . " j . < w > . . r . > ir I y < « n g ! t t ' w ~ ld M r 1 1 . ' ~ > lllM 1 m ' ' 1 lO ; )_ ' . > 1 n , , d In gi I l t h ' Iw e O . " .I. ~ "..' " ." " u r ' n o ; a u o l r J . id I ; o f 0 ' in " ( g . r . . u . .. . p m , . ",her..........m:.le l",,,!,,,,, "'. ..1 1n .... It.. c.n".~ 'Q tho-...."",.) ........... withdraw'" '"t I"I><I!i!s .g.<,.Mt-th'Od'd' ' bo ' t ' i ' d n ~ l " c h ~ id d. ! , ~ "'u 1 C U < I > l i . l! m h< g , i " _ ~, .. p .. O .. . . of p kO . . < . r . l ., ~ . k . b o a n r tI ' , . " . ~ d l <l ' ll' \ l< l '< I !i y < i 6 l " l . . ( . J c i ~ .1 ~ " ! i d ~ i " r n t . t U l I ' t ' ~ ' ,hl,d.h4 ""!.Ii~'!y_'!o,,, h~"'" ~ ...d "):ll'!Y' [he twO n..;r>< 1'''''''' iii .. hll<! 'II<'gt'1i~I..,j " • II '. h " 1 , o , 1 ( u I . t I . I . < £ . , I ~ f 7 1 Q P /t " ' " " ' S '' ' '; ; 1 o ; M 0 j m ' " " , ' w . M . il M h .t I ' o h I t e " > ' I O , L h ! o ' o ' r 'l ( ' l $ ( l > u lm e n . ' d " . • ( lJ • lM n , > iQ t l . l I 1 w " ' ( o . L . n , l . h ~ . 1 U , . , . " ~ . " ' ! , " « r t r 1 > > 0 < f r f > o it . d y m ( ' U ' ' , ' h 'l 1 O . ." « " i 1 n . , p . . ~ r ,~ Q . c g o r o l / " n W ,," 1 . , , P lII Q '~M W " t> " I '" e ''~'''' ' ss. I~ ind.w:> in .0<10<10.1 :.J;0lr0<t\I (_'go <l.'OIIOOJ<>. ~, Aw<~"'" «JW1'j indc:< .. ro. <m<I'!'.~ rrrotI;cI .1001-12 """""'"~ .'IX»-I2 .. ,. .... ",..r .. ,. ,. '" ,. ". '" " • ", • .!;-_'.-."'-.,.• • . ,- c-"'_o". ....- ..,_:"• .,o' 3109 ;'0,0 lOll :lII1! Jil S . l . ! U . 1 " < '. t l . t O 1 : . F 1 ! o ._ r( . . - . , . T .." " _ " " , " . ' * . . E .. > d - ro . te . < - " f " t 11 o (_ r _ _ _ . . . ~ . rM_ -s r , I ,, ) . , , ; ' . O . _ . ' - ) . . T .. l . o . l . ."M .. " o " A_ " _ '" . . . . . _ . _ . .. .. . . . . . .... , . .. _ -_ . .. . .. - "_'. . . .0. . 1. . ~ ,,.,.,.,,. . O . " . . . . . . .. . . _ (1 O I'l O I'I O X~a O I, _ .. li . o .. r , om _ lX ~ X . _, . ""_ - ,T . o ... I . . . ) . ' " O "" _ "" _ "" • r • . , . m to • . . . . . w , ......N"'J''''_ .. '''"-._ ..... T_ 'PTlII1$ ..... n~ 106 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00110 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.93021717 R ' i ~ j f o t " t ' , n " ' - C e I .. e g . 'l t . o ' , . K , . r " . i. . I . l . l ' n . _ . . / . . l l < . . i f . c f . S 1 i f i 1 0 l < . o i< ' / 1 . ~ : l . u 6 h : l l l " . l , , t ' l , " ' e , l < ' n ' ( P , 0 n ' , / , " ' s t , ' " 1 " ( ~ > 1 " . 0 / " . " 1 t 0 1 " . o . . ) - r . . " I . I L . " . . . U . . . _ - " . . t ~ .~ P " ~ 0 1 ' I I " < I 4 " > ! " c ~ : t i l O ' o l ' l f ' l ' O o g " S r ' I t i > ", m ,,, l < a c l i . i , < o " . I I . o I < ) . . I w I " 1 . I . " I r . U ( . o " l . > c / " e I " f ' , 1 . ' ~ 1 0 J I I ~ f I . " . ( , , ; " l " . f , , , r t > " ' . e ; , " , " " " , l n J . ~ u . a " l . , . l $ . . I . . - " l . . 1 i d I 8 . 1 l . · & a ' , 1 i l " " r l " - ' o . l o . - . I ; " ". t . < . " g , " i 1 1' t l " " " f h i " > " ' t . , I < t , I . l , : , I . " . I . " . t , i I ' w U n ' I '( h d . 1 > l r t I l e . I in . s I f . i \ o . . L - > a , i · n . I o , , 1,.-6.1" 'e>;oiS;>Iw """",",,-'<I JJ\;ItpIyI.-.Spoin 1i""""i>1 bad;.r"" (""Hi.,. 10 ,I,,,'<'1y """Iollaliil' "' tOOCt'""'""",,~;u J'III'Wt finOO<)'."1I(I ,~".,.. b. .. J,;, Worp>:lO<llll ""l'<iIifIS .... ~.iW~ l~b(rj­ " r " n < " r " " . l I ~ . ' ' < . < " g . , " I > i " . , n ( h I I ' I . i \ i 1 < a l , I e i n W t t " t I . d . " ' r ' . 8 d . " " o ' I ; l i . " I , . I $ . i . " ~ . f > , ) ~ " " " , b ' O " d l d / i " . l . I ' . d e o " i 1 o i U l " t < i I i > " n I l r d t l q ' g o o w I O g . n : , ' I . . . . , < . U y . . . . I . I . s : d o ' S " , I d i t A p " " c i < r a ' , l . " i o . ~ < ' . ' , I . ' " i " ' . i t 8 ! m ~ " l I ' 1 " , " " n o 8 " ' S j ' " " " - ' ' " I ~ l " \ ' f l \ I f ' j , r o . l ' o I I t " O t t . ' I k I k " o , " d t ~ ~ ~ . " " ' . . 1 " P ' I " . I I " I ~ I l . f " " 1 " 0 " " < ' t " . g ' " > > S " " " k < ' ~ ' 1 " 1 t ' " " J ) 1 1 l \ o 1 G I ' j ; l ' .' l 0 O " " . . 0 . " 1 ' . # I I o " " Y 0 h t ~ l > ' e ' I . I " I ~ . r , " I I i n , " t , ' ' , O . ' l l I W . I u . t . t ' e r . . < , . o . l . . k ' " p t . . ; l < " . " ! . ~ ~ 9 ' , k ' , ' O ~ I > ' ' 0 n I ' \ > - ' r " . k d ' r d . ' w l . " 1 ~ l . . h u 0 " l . ; d n , J . " ! > o . ~ " . I < ~ . ~ I _ . " I i . , " I " l . 1 l ; 8 I . W e . I a ' < W , t ~ ' e r l . " ! k " " . , i n ' " , iI . , 2 ~ . , 0 . , . , 1 . , l " 2 l " o o '- r I r t i o . . I , . n r . h ~ " J > t i M t o > . U . e l . . ", " . , . ' ", . '' ' . " M - ' " h _ , " , ' "' . l l I " S h I" " < " f . : " ' . ' . ' ~ I ' . i ' . W : I . I . l . . , i " . . o ' l n ' ) . & s I l , . I . l . . ! b i i t l n . l I : I > u I ! " o ~ i " I1 d ~ ' 0 I I _ " h /) " . _ "_ .n " f . i " . A u. ! . " ' . k O t u n r c o W " f , t ' . o 1 l " h j '( e i ~ > t, I ~ 1 j iq . h 1 " ~ " " i _ , I e " O y O ' . l , . 1 n , _ l a i ( b < ~ < k 0 : h ~ 0 u Iy r II I : . u ~ .. ( h i . " I « , lI e . . I 1 . I . < l . r , ' M u l " m ' g g ~ r i , o "" ' r M t', " I, 1 .. 1 . > ;g <. h "" , I )I " I U th " ~ " " " , ' " ~ "' - m ;.b ilt i t t ; i M rr " rr " I < ', 't . " . " . " .. o . ! . . ~ t " Il d JO I IU o . p . l I I U ",~ I t I 'f a l > " I ' l ~ " " b . . . . O .. l . e . " b , u p t p u ,i r < l" k , ; , & '" o I I h <U ." " , o u 'O r; , ~ y ," r o r f l u " 'S " !(l " < I'ublicdrbl< ... <kl be ,;groiflCOll1ly bou'''~ 1'1' l"'Iio~~tn~""n.i .. III<'It,#",,_iIb<) Iimh..,lMrIk ~ f S v, J u ,n t a " < '" l. e g t o I .." _ 'II' ~ \I_ ' h,," W"f' Ill""""" t<:UIIOmic p,h "nd ..._ <Nt in 10_111<' iI11jl1_ O")tJtr*lit~."" ill II .. moll .u\<lml!il= ''''lV''''<'dl"""",. ., fi,,·,,<..I~,,("P'O ruoJO"l"'" """', '" l""r ",ode~."'"'*" ittcM Mr, (100 billie", j"' .. b. ....' goy>l ..n . Mo"M. ooIidollioll~ ~ ...... k:ofJ8f1lt<nl, l'IIf>:>-arc.lIXlli<) ,.". .i "''''<\>I''<"III<'d,~.iIlj:lOlll~ "';01: ......... 10 t;/,hli'" *1 .ff. ....... ""'''util...t !til' MIkIatK'\' _10.1 h.we'~ .tft'CI <>I inmasirtg (...--.at\: In kill" =<~'-IOO(.IiI\'''ci;i, ,.,<1 fis,;ol ~" I ' o l s " I " "' " . . " .. " . " ' " d o " : " : S b r I .. _ .. , no.""N ."d opIi.,I""", i it n : t n '' a lI ! ' , > ,r l l ' l '' l ' < .o ' n " < "" l """~M"J)'\ ,3.,l.~,~". I<)~"" 1)1, , .... In h<liy.II...w ...............' ed nil! 101 rUlo· ..... ri>k 01 dtf.u!t. I~' CDS pmn,um n , s O - I n l Ih< dobl 0/ 1\11, 1I1111k ...d 1"''''' in<l<."" I. .. ",,1«Jed EurtJro<;n mlllly l:trgt bank< in £uror< b. .~ ,ubotantiolly <:OIIrIIlit>,l()l!_1l I ~¥"n: 61 ~ while iss .... "ct <If un""""",d b.>nk cldll. wInch h~d r=louslyrowvrf"lld. h'" falkn NO''';I!\ """din!! lbose M>'cll>rm<:nlS. funding mafk~1 SI~ h. .. "'main.d ..l aIi,·,~) mlll<d ... mlllly bonk< ,. ~ (lin'" fromlh< Eu""plcrn-Ih<.ysl"", f~m,d II) tho F.CIl""d Ih. 'aJi<>nalcentr:l!!>anh of • 1n."U"'" ..... "",,,,ber <l3t~Ih-e' lb. in«.bank market<. r\ "andan! =u. . of I. ... C<.\SI of this inl.f_ ba1t~ fundi'l!-Iho ,mj"llOed basil spreJ<! from .um_ dollar swaps. ,,-:u1'ttl. ch~ at $hOl1t:T m~lufilirs. • The f:llrop<'" fiSCld and hankil\ll mru ~"lll thr "<11_ ;0:.._,_ ....... no ........... ..,. ... __ 110 __ • It:Tof """,,,,,,,,ic ",,,,,Iopm.nt< in the AFt;,,-F.lfro-''''R 'orr ".l$IL • rr a o t o G nt O r"" P ti w on :u i O ~ a l t a i t n . 2 th 0 o 1 1 61 ;< W 1 i l ~ h ua i r ~ t I e . r .. . o w f r 2 o 0 1 " 2 " t 'a il . n " 0 " 0 " 1 ' - 1ij 107 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00111 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.04021717 61. fr<d,r <l<f>lllr ....... I""'"""n. f. .. buI;. "' -- 62. CIwoIC ,n NOI>OtM" pri<. . i<O" moj<. f"'~IY1 - ",I«IN i:uropo>ll """"\I .... 1011-11 ~1e$.~11 -. ,., -. , ,. ~..wr.....,.. i.o . Ij " 5<P< ,;;:- !a' ." ~'" --- --, /Om-.I\I< ...... _ ~!oo> _ . _ a- _ .I _ "" , · _ _ _ • __~__" .."..". ...'...'...'. .' _' -'..'.'..'.'..'.'. '_ 'l..1. 'tl. <•l .__Jo_o-'' ~ Io s I "" ) " r " l ' . _ l( ' Ir ~ !~ _ "' I Iu ' oI O__ . _ ... _ _ _ "''''''''''''''' ~ s.-.... . .. . f . o . .- I .. l .. ~ .. ~ _ . ... ~ ~_~_~ I _ 1< _ ) _ ... . . .. . ~ 1_ _ ._ ........ ~~ ..., c-I> .. " ...... .....,"" JIIII foll lharrl)' in m;)" .uln. ... bI. counlrios, Including !'tmaill:! ~'(h< I ]l<m;n( i"flal.,n ",ill inlnl\lu-'Cd 11.0)' ~rHl SlX'm. ~'n"""", 0I1m cudnlncs, 01pocial\y b~ Ih. 90J in February. Gcrmanj\ r..:rform.:d boucr. Mounlina financiall(n ~rIII ",,",raJ bnnlH"'<:d funl\c, tnci,mo1lCiary sions and "scalauSlmlY m.alUM 3P1"'3' 10 h_ fu,· polity ;ltan~ Th.1l0J in<;1<.u<Xi11\c !;Ie of its 3SS'1 Ih<'r restrained lhe euro-a!"t"oI (OO"<mI)' in lilt $C<>.)!IJ l'ufl:htlSC$ rrulll Btl lrillion 10 f40 IriitiOll in "pril. and quartt,. ~! rvidtnc<d by d«linin~ ou.inm ronfioitnf" lben 1("1 V45 IriCion in Jul)'. The ECU, aflcr h:MJlI. con· ~nd ~ furll\cr drift o1f pUrfh.Rnll. rnanag<rs ind<~C$ JU<tN til< $<C()!Id of ils thrcc-Y""I!i>ngef-\orrn ",fl inUl oontraclionary !(rril~'), nan<.in~ o]l<ulion, in lal~ Febru.uy, rut ils policy 1lc;)""mlC perfmmlll<."o: in 1110: oilltr Arr", hu 1:«" In1t1<11 rates 10 r<."COnll(>w.l in .arl) July IfigufdJ). In UnCl'Cn. In 1110 Unltod Kingdum, nal GOP «mlinU<~ lui' Ju!\<. thc Bank of Cn~lanJ (HOI:) a<li. .. l.d its 10 foil ""Iy in lilt y.''''. and infulon 1'OlOllofl1l1h .. "".kn<Sl fu.1t<I by li~hl ~>COI ]1(>Iicyand ntpliw iriD· 6.1 t)If"iIoI '" 1aq:.,,:<1 mC«i ",I« ill ""1«1«l O'o'<r _["-1. from Ih • .ufO ."'• . In Jl1ll<'n. ("IUIllIII rost rodyar.::oJr"",w."",""""",,.m-l1 - al ~ roOOSl poct In Ihe firsl qllart<r.ld«ling fiocal slimulus moasura os "",n os a rrrovtry from lhe shaM -. ~ of paruwppli<s mused by Iht lI<l<l\lsin Thailand 1:1$\ j"tllr. bul rro:nl data '~'tSllha! ucillilyJMler' .I~J in Iht sCN.,,1 quane,. The Cana<1i"" e<:ooomy <onliml<:d 10 t.\ranrl moJcrtldy in Ihe firsl Ihrc( 1lWI11hs or In.. year. •u pp.>rled by lolk! dmncslk "'mand and ~ milo.:nllabol ma,k~l, -- In mQII "f'Es. b<ad~lIC inftalion !'3IO- lIl<aslU"td on ~ 12-m(Jfllh <ndngc basls-«>nlinllN lodcdin~ in Ihe firs! half of IheY""T as Iht e[ecl. of lhe la,.,. - ,un-op in commooilypriN! ill (Arty 2011 Moo!, The mwlkr run·up ,n rot!¥)' pt'iccf lhat loot pi"", .~,Iy _n. ... ", Ihi~ y.~r c)(~l'Iod ~ 1<$:1 maf~.d clfC\':1 on ""OI"lIl<r '" ~ K r b. i < n lY g ~ < . i o 1 I m h ]l o < ( u 1 f g t i " l h l l l " 1 i ' l " I h n I d \ I l " ) h . " • " J • a u k p r " o a , n p ~ ~ l 1 p ta 2 r ' < a m a n o d n n t i l o n n I b i n n o< . n . " " l U l l i \ n , ( , i " f le ¥ d 1 n n < ~ lC S " _ _ . - . I .. l " . . . 0 . . . " . I l .. . , . 0 . . . . 0 . - . . . " . ~ ' t _ _4 . o ' . · o " _ I . y _ _. a .. ! . . .~ . . . . . . _ . . . . . . _ . . . . . . . o . . - . f f ., i< .. l ,. I- . I . . I . 1 , _ . 0 .. . 0 ). ) .~ . , - I _ . oIt . I . . ,. . ) _ _ ) I!.~. . . . . . _ . . . . frum s<v<rai )t.i'S of okftalion. 001 lap.,,1C9o: iubll.ln 108 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00112 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.14021717 [,.t.,,,l<d CiJn~flll T. .m Rrro f"";lily. <I[JffiQi.u,· on<-)'''''' lending tal. h)o-21 MJ.,S JI'~nli in .kine and monlh rundJa,gain!" "'i.k~ ~I' ""IIW,lII. In addi. 31 bosi. I"'",I~ in Ju~', Ih. ij"t ebani"'S in lhal mle lion, in July, Ih~lIOf IntTl'"",d Ibc_oiv.: ,>( il'~l sin'" an io=""" in July "r lui )~ar_ O.. .o rrhe ijfSl hoi! "r ru"'ila5<ll"ov~m r",m £325 billion I~ 07S hill.'D, 1/10 )'(~r, 'ho rrnmin\>i waJ link: chan",d, on O\:t, and.I<>g<Ih<:T "il/i Ihc UK Trnsul)\ iwvdu"",,, ~ a~nit IbrdIJ.U:u-, loJl il ~1'\'I"X,al.J iIbout 1'h pmrnt nt'W Funding for Ltrnhng SclIctn. dC1"~ 10 boIb1 "n. rod Im,*,,'OIhtrd basis. .LIlh. rrnminbi fo[· "'"dlD~ 10 hnU«bnl<l$ I!I\J fi,ms 1" ..' «II~c d,,11ar up·. ... rd ~aill5l {.'hin"~ "lk ... ,""jot lra.jing (l3rln ... [n India. =nomic SI","lh haslllso modcr"'.d lIS $1,,,,' rn'JI"':!:l (!II rifCaI ..,d )1",,1"1:01 ",fOTI"(IJ and f""" vWlIS milnclllfY tiJ;hI.1"U,~alk<l in~m.nl NOIoni n~lt)VI"1I$ a disarpoin!il\t I""rformatHX ~, I"" end "r ,;,in .....[ OOlIbi)ilirs from Ib< counlry', IW;" ii;>:.J ond IUll"_r. Tl-,d GOP l!fI.l""lb n:1>,'"JKkd in \Jt,: firJI ~~ar· C"mntl«X(lUlli dtf"'l~ ,,'m. mdil Tilling ~~ '<:fin most EMul',...'Onomic /It,i';ly 'll'l'n~<d '''fit. ""m(d (hOI [nJi.·, J\lV(rris-n dd'i rist> !.>iIi.., iii ci;illy briillly;~ <JlIn-gins ~. J~1\'d1' ren''C'Iin~ lhe invt5lm,.nI·)tI1Idt S1.US rr<on"cc:lit," or "Uwly cll.i." d'll\~ b)' lh~ HO<I<Is In Mniw, """nom,c ""Iivil), rrboondtd bri<\:1) "' in Th:tiliond f;ootlcmic ;f09ilb. h"""'~', "'ml;lIIu,d In lltt lirsl qUllller !IS th~:wic"\t"'>11 _<r<:I<lI' I<'boonded .Iow in Chin. IlIIcllndia. Mom"',r, rtI.".1 mclirntors fftlm ,ho: 10ullh",IIJI"<rdfOugh~ dQm ..l ",d.mand $U~ tbat Ih.)'J"" I,r cn'nwnic:lICt;,;!yd"",lrraled gain<clll1'''Il<nium, ~nd .~J'O'ts 10 the Uniled SWfl"< in mOSl 1],01 Ea ~i"$ i1l10 the i«<.>IIJ quarte, om;J picked up. J):""~n'ic i~dicatlJf$, he"t'-Of. SUUt>! 'hal 1I<~""'. . illJ.$ omcUIIW with III< [urop<~Q <fui,~nd 1ll'O""h l\l(>d<r~I<..,j ,I>rot'<IlIoll in!h<' SO:Ulnd 4u~II<!-On /'I:1~li'<i1511bdutd il'tW>1b ,n Chin._ J~ly I. Enri~ue Pdl~ Njcll>cf Ih< [o!,itutionill Rc'VI,J[u, [n China. rca[ GOP irl\.Tta.;...'ti al ..oout a 7 p.."f(I,!nl !i~narr 1'4f\y, or PRJ, "00 Ih~ MOlltt.m l"«"ido:D\ial p;.oc ,n Ib, fil$l half ['of III< ;d~ dllVl'll from an $'iI r-:r· ti«1iQn. rr<>miAAg I" pto~u( llI!04'ktl-«ienled r.:fvrnu <nit I""" in The 'IW'ncl h>llf "r [lUI yea, Til< JdmId""," I" \loIS!or .l"U'''''"' JVl."'lh rrll<el(cl .." ak<r (\em..,d r<lf Chi.,!>: ex"'''''.LI ..~ U lIS In 11,,,,';1, real (iOP ~trlllneJ b)' J11i@'1t;.,,,,,,t. dorrn;sl;';: f~()f3, inciudiDIP1101k1lliini consumer menl and .... JlII<r·rrlal~d )'fIlbI<.,ru in the apkullural J"""d",~ and ~h< n'Slram,nl'<t'l'<.'CU ()II i"\'t>lnl."~ of stelOl"- IncrnseJ >lightly in tt." firsl qualltr, makJn~ it p.1:Y101lJ !,,"'mm<nt m• •1 S!H\:J to «>01 oICt'V1I) in lbe Ihe fourlh oon>t<:uli,. ~u.n<J M bolo" '' '· I I I " ' ,r nl ~lb. J"OJ"-'rt)' .l<Ct()l". Ma.'rN<O'Hlmf( data f()l" Ma~ ~nJ IDJuSlri:.l por<)Il!ICI,on, whiclo hil$ "'.. ... oo..'!I"'BN JUn< ,~llhal"'''<>4OII!1C aCl"'lY":a. rie\:,ni upu I~d sint\: ""'rl)" 2QII.cOnlinued to floIl lhf(\llg!l Ma;: bli ~(lWiInl ~h~ 'oJ <'It lhe ~nJ qUirl ..., ",th gr(N)1h .u~~o~ thAI ''COO~lllic actIvit) In Drilil 'rIlIJIflN 01 'n~!lmcnl, ",toil ~ and b;onlle.ro~in!! eJgln~ ....a k;" Ih.,.,....,d Q~all.r. b,~b<, Ht~d[in.12·m"lllb in!l;u,oo feU ~o l~ J"-'r«nl llffil]'ne infll!ioo ~oo-ally m!>Jenl(<.'ti in IhI: EM 1:$ in JUn<; 1«1 ~'-;lddilionru m(llknj,ioo in ~ rric.:s. rr~"""lm!JQ~"" food pritt )'It>sum and w"altor OC<,1· AJ ilIll!11onary rm~m ea,,'<l4nJ ro~ms aboJ"t ""Illle ~h In lldJil"", loCb",!\, s<wral 0I.!wt '~n' l;I'owlh m~unkd.Ih<-I'eonJo·j IMnk of ('h,no k\WcrtJ lrill Nnks in 1M tM8111"'-' ~ monetary Jl"lic~. hankf res.a ..... requirrnKflll by 50 b.I>Is ))<'Inu;" bolk 'nclud'n~ 1h.J.sc m 9r~[, Chile, [nd"" lnJon~i •. lhe f,hru,), "lid May and Ihm rtJuct<l tbe benchltWk l'holiM'lfl'"S, Soulh KDra. ""d Th.iland, 109 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00113 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.24021717 " Part 3 Monetary Policy: Recent Developments and Outlook ~10nela,)' l'oUt)' 11\\'1' tilt ~''''lllalf r\)l' I~ P<'I'iod o'cr "ni<:h IX(In('lIli~ condili\'UI "ill oflOU .... ruDt .,'-«plNnall)' low k\o\.~1 for th~ fClkral. funds l'lII<; ,'(lOlinuins 1110: c.mtmlll<.""·~ maturity '~Icn>ion T" I'fllmotc the Federal ()riIn Mark<l Ccmm'II«'~ l"'''Il1''m (MI'I') Ih",ugh the end orlhi. ~ar ratll", (FOMq objtxl;.'cS <If mUimum ~mpli'l)mo1<lt and than completing th< rr"irBl" in Jun. as l'fCy~~ rr~ Jtabilily,lhcCommillte mainl~in.d a la,¥"l ....ncdultd, rt"lining its t);iSlin!! )X'lici(-s rtprdin¥ lbe I1In~ f()f the f«!mll funds r!l!~ of 0 10 '\ ptlWnl (tin'"nlm<nl Q{ rrill<ipal p.ymcnts nn 111,'1'1>1.1' ~"ri­ throughout lhe ~rsl half of 2012 (iilul<: 64~ " With Ih. lits in agcll<y-suarlllllm I11()rtgall''-b!w:kt'd -.>rilits if\(omi~ dauoluUtslinga s<'mIC'oIhlllllo"tt ""'..: ~r (MilS). •n u wm,nu,ng 10 rtUl"'Si IItt JYIICI>.'IIs 01 ro:mO!lli<: rro;)\«Y th;u, Ihc C:ommiuox had anlj,:j· maluri,,!! Tl'(alury ill:\;uriti<.'S. pate,l, ~"d "ilh intlal;.:>n 5ftn as StIlUng at It-."ds at or The infQfmilliun rt\';....'t<J at the hnllar)' 14 :!S belowlho!lO! oons"l~nl. ()\'tr the long run. "lin ilS !!I<'<lin~inJic.ltro Ih.1 U.s. <COMmie aclivilyh~d ~li1lU1Dry ,,'Umdal~ Ihc C"mmlll .. look !lopsdunng •.t r~o<lcd m(ldtraldj: ~hil<= tlQball(t~'lh 'rr""rtd In Ih. first h;l!f of Y1121Q ['Mid. ~ddil.)nal mnnelary \leo $l('l\\in~ Uobor mark<l indical<m poinlrd 10,.:'m<: a<.'C<>mmOOalion tn oll,k, 10 .. "",,11 ~ sl,"n¥Crcro (urlh<f iUlI'f{wcR1<lnl in laM mark" t()..Jilioll~ bul nomiem:o'l:ry and Iii II<:lpo"l\Il<' IMI inM ... ",". ..,.,...,. ~~ "':U i\laJuai and Ihc uocmplo)1\'K'nI ,Ole lam. run! at ..." ",1, OOnsislcnl with II; mllndale, Thc"SC ftma,ncJ don,IN. Iioust'bo;tld Jp<.lIding had conlmucl I[er' includCll knglhrnil\ll, Ih.lwnron ~f Ihe for.>1lfJ 10 aJ'llncc al • moocrale pact' dcspilo diminished rale MUI~ "gardin~ thc Cummill""s t.\JlCC1a1ions gn;>Wlb m mil dispo5/lble inwmc, bul JIro'I'lh in bu!i nt:ss fI~<"d inl~SlrIl.nl had d"",~d Th< housmg 5<'<ICf ftmainoo d<prose.l. I nftali<.ln had bc<n 5Ubdurd in "" I " I O~t(oGtl\<be>no_l', . > .. ( r , . o .. \ r tc _ .. _ llm _ _ ' S " ) '" '_ ,, " " _ "' _ II< u ~ f '" r h e a c d t n l\ l " m I < I1 . a l l n n l ~ h d ~ S a l n ab d k l o M " ' ~ ' ' ' r l - i ! n o ~ r r m , , i " nl . \ .i .1 p ll a on m ~ t. o p b t > a « 4 > t .. ; , " .:1 " S . \ . ; . , . . . t. . 0 ~ (11 ~ " P s alm . i ~ . F JI'.a-oU',o( . .".., , . - . l . . ! . / .. I . t u ... - . . . d H - ) '. , .' , ' ( '' ' ' _ . Iholl f,nanci&l COIldilW!tl had impro ... d and financial .... C""...,..._I1,..".,·III .. ~C._,..,.,.'11< nwkcl Jl,"",,' had • ....,d wm. ... h. . duri"~ Ih. inltr• .......... ofO'W'-''''''''''''''u.._~ofFO~''_b<n m<eliog ptriod, in part I>ocaus< uf III< CUI'IlfI'.n eMl to Il, lral Bank', ([CU) Ih""'·I"ar rclinan<;ng O[l<r;lllOn. - ....... .. "" .,""- .....,. ....,. . ...... ""..," , " ~.. " ",,", :> ... "'."" "'... "" ,.,,.1. " om .. ro ", " ' . ' " ' '' >'I' ... _ ::'001 ;lOOI ~o 10" :lll! ...:< _om 11n00.""_' .. ........ .01 )_ ....". " "' . * . _ .... _ . ,. . o . Ilf , 1 ' 0 11Nr1'll _.1lI<1(l._l'f'O'~ "'."_ _ _ _ P'"_'''''_.'~''''''' ilpOo)~r ~, l~oI .. T,..., ..... I<donl~_ 110 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00114 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.34021717 4() Mollctal)'Policy KoJ>Oft to the CongRSS 0 July 2012 Nonetheless. panicipants eXpoc1ed that global financial of <conomic gn;n<1h Ihan at tile time of Ihe january markets "'Quid remain focllStd {)1l the el'O"'ing situa_ m«lIng. tion in "urope. and they anticipated that furtlle, policy Members ,",,,'til lhe infOfmation 00 Us. =nomic efrons would be required 10 fully address Ihe fis<:al and aclivily as ,uggnling Ihatthe =nomy "'"Quid continue financial problems Ihert. 10 e~pand moderalely, 1I000~"er. despile Ihe easing of "',lh Ihe =nomy facing conlinuing headllinds and slrains in global financial markets, members conlinued gn;n<1h slowing in St"erai US «pon maruts.. mem_ 10 perceive si~ificant downside rish 10 <conomic btrs ge!\C'rally expoc1ed a modest pact of <conomie aclivily. Members genmllly anlicipatrd Ihatthe =1 grQ"1h Q\~r coming quantI'S. wilh Ihe unemployn""t inclt3S" in oil and gasoline pr;"'s ""Quid push up inna_ rate declining only gradually. Allhe same time. mem_ lion tcmporari!y. bul that inflation SlIWquenlly "'"QuId btrs thought that in~ali{)1l w"uld run at 1c,~1s al Of run at <M bdow tile rate IhatlheComm;lI«: judges btlow thoSt consistent with the Commil1«:'sdual most cons"lent wilh it, mandate. As. result. Ihe mandai¢. Against this backdrop. membtrsagrwJ to COmmill« decided to k«:p the largel range for lh. k«:p the larget range for Ihe federal funds rate at 0 to federal funds rale at 0 10 Yo polWnl. to Ititerate its Yo p;:rccnl. to conlinue tile program of extending the anlicipation that=nomicconditions "tit likdy 10 "'=ge malurity of the FeJ.ra! Rts<r .... ·s holdings of " .. rranl e.=pI;onally low I<,'el$ for the feokra! funds securities. 8$ announctd in Scplembtr. and to "'lain tile rate at I<asl through late 2014, 10 continue Ihe program e~isting policies ",garding Ihe "';n''eStment of princi_ of e~t"1ding Ille "'"<1'lIgc maturity of tile Federal pal payments from Fweral Reser .... holdings of securi Rostl'\'.-s holdings of s«uril;cS thal;1 had adopl«l in ties. In light of the<conomicouilook. most membtrs September, and 10 maintain the exisling policies also agrttd to indicate Ihat the Commill«: anlicipates Itprding the ,..;n .... slm"11 of principal pa)'m"1lS from Ihal =nomie conditions a",likely 10 warranl excep Federal Reser'~ holdings of S<C\Irilics. ThcCommill«: tionall)'1ow 1<\~ls for Ihe federal funds rale all<asl apin staled thai il is i'J'Cpart<l to adjust the size and Ihrough late 2014.lo~ than had b«:n indiealed in compos.ilion of its StCUrilics hotdio,s as appropriate to r=nl FOMCstat"""ntl TheCommill«: also lIalW promole astronger economic n:covrry in a conteXI of Ihat it is prcpart<l 10 adjUSllhe si7~and composition of price stability. its s«urilic:s holdings 8$ appropriate to promole a Urthe limcof lhe April 24 25 FOMC m«ling. Ihe Slrollj!<r <conomie """""ry in a conlexl of price data again indicaled Ihat<conomic acti';ly ":as siability, expanding moderal.ly. l'ayroll employmenl had con The dala in hand at the Mar<h 13 FOMCmeeling linued 10 move up; and lhe un.mployment rale, ... nile indicaled that u.s. =nomic aclivity had continued 10 still elevatrd, had declined • little fu'ther. Household ..p and moderatel¥ Although tile unemplo)'ment rate spending and busin ..s hed in'~stm.nt had conlinued rem.ined ele'OIled, il had declined nOlably in =1 10 e.'pand. The housing sector sh""'ed ligns of monlh. and payroU emplo)1nI.'IIt had il>Cf<aStd. improvemenl bUI from a wry low b'd of activity. IlouSthold sp;:nding and business fued in.~stmenl had Mainly reReeling the increase in Ihe pr~of crude oil advanced, Signs of imp"""n>etlt Of slabilization and gasoline earlier this )~ar. inRation had picked up .merged in some local housing markels.. but ",nall solIlC\\nat; ho"'cvcr. me. .., .. of long-run inRation housing acti,;ty conlinued 10 be reslrained by lbe sub expoc1alions remained stable. Mffiing participanIO stanlial invonlOfY of foreclosed and dislres ..d proper judged that. in gen.ral, conditions in dom ..t ic <:r<dit I;'" tight credil conditions for monpge Io.ns.. and markets had imJ'l'O"!d further, bul noted that in,. ... uncenainlyaboulthe =nomic outlook and fUlure 101'< concernl aboUI Ihe so,~rtign debt and banking horne pr~ ln~ation continued to be suMurd, .iluation in lhe .uro area inlensifled during Ih. inler alllwugh prien of crude oil and gasolin. had increas.:d m«ling period, Many U.s. finat>cial inslilution. had subslantially. Longer4e"" in8alion expeclalion' had been laking stops 10 bolster their resilicnce, including remained slable. expanding their capitall ....l s and liquidilY buffers and Many panicipanIO believed Ihat policy aclions in lhe redueing their European exJlOOU= euro are •. notably the Greck debt ..... p and lhe ECH', Members expected VO""lh 10 be moderate over com longer_torm refinancing <>pOration" h.d help;:d e. .. ing quaners and th"1IO pick up Oller time. Strains in slrains in financial m.rtets and reduced the downside global financial maruts slemming from the sovon:i~ '''h to Ihe U.s. and global <COllOmie outlook. Against debt and banting situation in Europe as ... tll 8$ ullCtr_ lhal backdrop, "'Iuity prices had nStn and condilions lainl)' aboul u.s, ftseal policy conlinued 10 pose sig incrt<lil martets impt'<l"ed. leading many II1«ling par. nificanl d",,'nside risks 10 <CODOmic acti_il)' bolh here licipanls to ... finat>cial conditions as more supponi ... and abroad, Mosl membersanticipaled Ihat Ihe 111 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00115 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.44021717 in=ur In inn~tion """.1Id ('1'01"( loml''''''ry and Ih!ll or <nuil\ll lhe rrq:Tlll1l m Juno."" haJ br<:tt rlsnnrd.ln ~"l><cqUtnlly in~allon _IJ run al 01' ~k>'<.' Ihe ,al. d~ing so, lb. fo.t<kl1ll R<5<TVI." ~-ill p"rch;u< Trc'ISllIY 1~'IlI~Cummitl",jud~ II' be 1lI~ Ctlllji"'ul",iln ,,-"\'Urities ~'ilh ~tn"i,nillllllIltl"l urit"" 0( 6 )'0"" 10 ilJ mandale. A$ainjllhi:s b.>I:kdrol\ Inr CQmmiUre l(j )(111 ~nJ;.<1I ~{rWrcm tquall'1,vaI\lI: of 1\I<.'IIllxn rtllCncd Ib<Nll«:li....,jll<l~m~llhal il ~"Id Trt"Wf)' !J<'CIlrilies "';I~ remaming 1Il"lurit~ of bo: aP('fllrri~lr I~ mawl.in Ih~ e.,i5lin~ hl~lr IIOC<)m .f'l"'"'Jlim~ldr ' )UI'S ~rlt$s. Thil (."OOlinUlllion ()( Ihc mod.ti,o SI&I1'" <If 1!WlI00"'1' plllie)lln ('Ink"lar, II!< M(I' will l"to<'O<d alliboUl the JII/!\O p3L" :u had been Ctmimill,", ~ I{I k"'p,helargct "'0,# ro, liIr f\'d. •." "ulrd I~ lb. firsl rh:!SC ,,(Ibe pNgnlIll. ed fund, nU. II 0 1(1 '/0 I"'-'=t, to ~nlinU( lhe rro in""""ing Ill< Ferler><l Rcso ....· s hokl;~of 10"111'" gum or e';Jl<1ldlngtl>e "'~!1l# malurily.lI Ih. froool 1<f1Jl Trt<Uury ;w<urilit$ by aboul S2(;7 ~iHit'" "hile I It ( m 's< br n r, " ' a . n h d o l ' d 0 i n t< i! ! $ " ; \ n 1{ , S ~ I " -'C e U .1 1 ~ 'i 1 u I u j 1 ! 1 $ i " a < n ,u n c l'u i" l , K I > tf -' a d r d \. i u /W l S e l l i l l " t I r< ;' : " d 1 b X y i ,n I g b r it t l ; I ! h m c I l : d i ~ l t \ 2 .. I u ,) n "n f l _ $ b I" Q " r t l ( h r o - l t o d r u m r> T li " o ,< n u o u r l )" I h < i e ' < r : m tln · I'I'inl't'llml'Otof rrin~ 1'3)'J1I~l.l from r'(do.T.II gram. III< C"IItniill<c dir«I.:d 1be Open Mar1:(l Orol; RrJm" holdinllS ~f 5C\'Ufil~ TheOm!mitl ..... irfl Ih. 10 IUIp:nJ ,~."llrrenl ro1ky ~f rollin~ ~''I.'f m~lurin)t f(ltWJro ~"idlll<X for IIx: largtl r«<nu (un.!, rate TI\';uuf)' S<1.'urillt; inlo DrW ~116 ~l autli,'n ("ltd uuchllll#d al Ihi< mffi'"! M.mhc,s rmpl!asiJ\'d lhill i ..t .aJ pu,dlaot only 3ddilionai ""'JI<I'.lenn l;I'Curil;'S tbcir fOI"l",rd guiJilI\<.'f "'''S coudili""ol,," e:.pccloJ ",ilh Ih. rna.d, of m.r"tUlt~uri!icJ), n, 0\111· <'!:llnmtic do •• llIf"l'enu, bIl, lhry !'f"frrred »djnS/ing m>u<:< o_\i"<'-"(.d III< conlin"~lion of the Mrl' 10 rUI IIx: (o",ard guit!aOt" <1fIly (If!<." rb,cy "~r< 1lU"" ""nfi· d""Tlward j1f<"<!Ull' \111 k.ogor-torm inl~!O:$t ""'<'$ and Jrnllh.r lh, m<dium'l<rl\\ twnom;'" OUltr.ok !If tbr helpm"'" b<\, • .kr linaneial ""ndirit>rn; mo ..... IOtCOltl· M.lol/1atoulln<,ik haJthan~ signille<tntly. owdali"" 10 a\klilion., I~ U'mmill<'\' dtcid.d I~ <:OIl' 0 ..3 !'<tti"," IlVI', Ih( 1",. . n<I<J k.Jin~ up 10 Ih. Jun. lin. ... rcin't ... in~ J'fi",iral ro)'mcnlJ from il! holding! l~ 211 rOMCmn~iog iruJi<;aln! tbll =001111<: ~<:1ivil~ of l\gtll\.'Y 1kb4 dnd ag.r.cy MAS in ."111;)' MilS, The was <~ranJintal J !IolI1I",,'hal m= mOOcs. piI~ Ihan (:Qmmlll .... ai:JI.• ..t.<:iJ."\I 10 kco!ptlte.l~'i'1 ,~nll< fo' ...I i<! in ,h. ) .... Iml"""''IlJ''''L< in lobor mart., ""n· lhe r<dorJl flllllll' rate ~I 0 10 '4 I","''''M ond tv rn!Iirm ditioM hid ,I". ..n ! in rooetlt monlh$, .nd Ih. uo""'· ilS ""IOCll"'lion 111m o:<:o!Iomk _d~ionl """" 6k<ly to rloytncnl r.tl~~"'!1I<"If to hiM: nall.ncd QUI. Ilou..:h<)!d w~mll11 <.U'I.'ptionall) low tcvdj (or Iht fctkTlli funJj l~ndUl~ ~ I~ 1>:'=8'" ~ ><'!lk",1t.t w\\n '~16al4'a~ throup lala:!014. In II! !13ICmmt. I~ nlto; and buSIness '",,,Stme. .1 had tunt,nued 10 t::\'mm"t~ DOted Ih.t i\ "';15~ Ie) t.k< [unho, aJl>ilntX. [)e'Sl"'to some ""~'ni ji~s or iml'"m~nl. a.:ti~o as .lp1'f01"'31C 10 1""1ll01C $11QIl~' ,wnoml< II>< h""'Sln~ >«to, rcmail)fd tkpIt~. CQnlu""" «':0\'/1')' _oJ 5U,\1iIM'.,J jlll~tn<m in labVf m",k", rei...., I"Hallon baJ d.dined. m"tnly rcne'C"o~ lilwer wnJlti('Il, in Br onl~~1 Qr rn« Itilbi~I)'. !'lito:< pf <l\IcIt oil and ~awlin .. And loog<'·t<fm in",, lion <xpcct~lionl rtmained ... tll a""no",J, Me'IUlg ,,",f1icipbnl:!o~'rl'<d I~I fmallCl.! m~,kd. "\.""\'(II~­ l li i m lt o O o ' l o 't w r I as ~ ! l " l ' I I tt t n " g " ly "c i t n " Q , u ~ e l p lC e < ,l l ( J ) J b y li , n II d < I h d l t ll ' l "'' ~ tS n I< t lr j st n in T I,a ,a t n b s a r n a k m in « g ; y t « is B a u n ; e OS i $ l e c n o u n ~ tr p ib n u n l< c - i s p l t < o o th f i. " m ~ \ U >\ O le l rn t b ~ l n l ­ ­ I:b~ <lnJ '''IJert<T (>I" sktwtn~ ~!IlIC growth ;1\ II)' Qr centriO! b;iOi(11O 1110 go ... rnrnonl anJ 10 lhel1\lb home ... nd.~, lic anJ b<callS< il con .nhJ.!lOllhedf<i:lj"'n~~r In Ih~ Ji;culSi"" fIf "",.rur)· pOli<). mo)$\ m<'lnb<ri ",ntrlll t.;oi(~ in IICh.'l'ing Ibtir mllCro«"""",ii; tWjrc ~ Ih"ll!tt outlook had dcteriowt.l loO~"'h.1 ll. .. l Tothl ••n d. lho I eID.'fa) R..'S<.,,~ I>nlVlJulo lhe rrliOw 10 III< lim< ~rtb< April n""-1i~. lind tlul I~' r~~icli Nll$>ll.erllb!e apt(>U!l11>f inWm,.tion ""~m' nlf~:""1 d""'nsitk nib ""'rc p~l. iml"'f1B1ltly ing Ibc_Jucl of m~<'tary pO~"1. I"OUCI"'Ulg ~ach u lD n C t : < l r u t J ; i U n~ n l I ) h c ib o f . i lI n ll i I \ II . < l d l o m " l " l " l ~ o i f o n t ; h co e l < r 1 t I S fO lr 3 ~ lll1 ' ~ " n J III <> n m' .i ' c - ; ' lS Ij e n S ~ a ~ r st a th le e m t' e O n M l I c ha ' l I h li e ) U , : '- 1 'I m ll m th i ~ U I " ' , 3 l ; w m n m .l « ]t l i ( ii o le r ! I y I> UnJl.'d $lalC\, and it. <ffoct. \lit OWMmic &cll¥lly <M' polk-y ID.'<ision and IlOiU<!! det.iled minutes or Ihe lill mNiUm lem, i\$a "",,11, lit< Cilmmillte dOO:~oJ m~lin, oOOullhm ""I>.'~j W. ... Ushtlyedito.l Ir.ln· Ihlll'l""lJiIIgliddiu(mai m"''''tal)' pclicy omImlJllJ )O:rlills of FUMC mrclin~i arc rcl< .." ,d IP Iho pu!>l" datloo "oulJ be "I'(lf(I!'rillo to sur!')" 11 >lrong<! e.::(l "'lIh. fi .... ·yea,1Jj! I, M~II.-oo:r, be!!""'n, '" ApnJ lIOInir II.""''''')' and to IIdl> enlUI\' Ibal ineill1011. over lime, ~·as~l. lo\ltl ,"OnJ.isl<n1 wllh tbcCommill<e', I!, JU:ll m~nJ~1c. St«ifi;:ally. 1M C~mmillaugl\'o!d 10 odotod f io U l" ~ ' .. " .. ' .. ~ .. ~ .. _ .. I ._ o <, . " . " ""-f".,k.,rol.-.~.."...&"'..a'''.'.Ir'.' '' conllnu< Ill< MU'lbrougb III< mel of lh<l';U,;nsl~;;d ._• • " """*'''''''''''.~J,..,..",''''''' . ... 112 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00116 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.54021717 42 Mollcta!)'Policy KoJ>Oft to the CongRSSD July 2012 2011, thd~"airman has held press ronfertflCt! on an d.""rit,.d the key factOl"$ unMrI)'ing thOlt 3'lStssm<nts apPfO.';mately quarterly basi~ At the prtSS confeT' .nd provided some qualitativt information "'garding eflCt~ the Chairman prtS<11ts Ihe cumot ceonomit: participants' .~pectations for tho Fewal Roscr.-.:·s proj<cti<>1U of FOMC participants and pMidcs addi· balanct mt, tional ronlw for the Committ«'s policy d<cision~ fli Ihe Marth metting. partit:ipants discussed a The Commill« conlinued loconsider further rang< of addilional Sleps that the Commillco might ;mprm=ent$ in itscommunicat;oll$approach in Ihe tal:e to II<lp th. public II<tt., undmt.nd th. linloges fi1"$l half of 2012. Atthe January metting. the FOMC bet~".n lh. rvol.ing economic outlook and the Fed_ rtleast<! • st.t ...... nt of its long<r.run goal! and policy eral ReStr ..: "s monrtal)' polic~ d<cisioo~ .nd thu! til< strategy in an effort to enhance the t,"nspart!'lC)'. condilionalily in the Committ«'s forward guirlanoe. =unlability. and eff«ti.~ness of monetary policy Participants diocussed ~4)~ in ~hich theCommill« and to facililate \\"ell-info1"<ooJ d«isioomal<ing by might include. in its postmcoting Slal<ments and other houstholdund busin=" Ttl< statemenl did not communications, addilional qualitati"e or quantilali''t rtprtStnl achang< in theCommill«'S policy informalion Ihal could con''ty a StnSt of how Ihe approach, but rather W1I$ inlended 10 help enhance the Commiltco might adjusl po~c)'in rrspon .. lochang<s Iranspa ... ncy, accounlamlity. and cffectivtn<SS of mono in the ceonomic outlook. 11"",,,,,,r. participants also etary policy. Til< statement emphasiJ,CS til< Federal obstrvtd lhallhe Committ« had intro,Juctd Stv.-ra! Restr"e'! firm commit",."t to pursue its congrt'SSionai importanl ",hanctments to its policy communicalions mandate 10 promote m8JIimum cmI'lO)'meot. stable O\~ til< past )'tar or so: Ih<Sl: induded lho Chairman, pritts, and mooerale )oog·l<rm int<r<st ,"Ie~ To postmetting pl'tSS confemtct as ~'tll as (hang<! to til< clarify its longer·lerm ohj<cli'"cs' til< FOMC stated FOMe statement and the SlOP, Against lhis backdrop, Ihal inftalion at the rate of 2 ptrttnl. as mcasul'W by some participant! notedlhat additiooal e~pt:ri<fICt Itl< annual chang< in Ihe j"II"icc index for pmonal con· wilh the changesimpkmcnted to date could t,. hdrfui sumplion eXpt"nditur(!, is most consistent O"Cf the long· in evalualing potenlial furthcr enhaflCtments. er run w'ith til< Fed<ral Restr."·s statulory mandate. flilhe April m«li.,. Ihe Committco discussrd the Whitt noting that the Committ«'s asstlSments of the rtlationship bet,... .n til< poSIm«ling stat. .... nt, which ma~imum lc>'eI of employment art ~rily uncer· oxpresses Ihe collt«io-t view of Ihe Committ~ and lhe lain and subj<clto revision. lhe 'tat.ment indicaled po~cy proj<clions of indi'idual participants, "hich are lhatthe eentralt.nder>eyof FOMe participants' cur included in the sm~ Thc<-1tairman asked lhe ,ubcom renl <SIimates of the longer-run normal rale of unem mittee on communicati<>1U 10 conride, possible plo),ment is between 5,2 and 6,0 percent. It 'tressed enhancements and ",finemenlS 10 the SU' that might Ihat the Federal Rcserveulatutory objecti.es are gen_ heip darify the link between ooonorni< de",loprnontl erally complementary. but when they.", not, ttl< Corn. .nd th. Committee, view of the appropriat. ,lance of mittlX "iU foliO\<' a baI~ approach in it. effOfls to menOla!)' poli<l' 1'0U"",ing up on Ihi. is:rue at th. Juno return both inHation and emplo)-lOOIIl to Itvtls consis IJIIXling. participants discussed ....,ral possibilities for lent \lilh itsmandale. enhancing lhe clarilY and transpa"'OC}' of the Com· In addition. in light of a decisioo made allh< millco's ooonomi< proj<clion. as "dl .. the rok: the}' December metting. the Committee pro.ided. "arting play in policy decisioll$ and policy communications. in the January Summa!)' of l'.conomi< l'rojectio", Many participant. indicaled thai if it w~re possible to (SEn information about each parti<ipant', assess· constrtlC1 a quantilali", economi< projection and asso ment of appropriale mooetary policy. Specillcally. the ciated path of appropriale policy that rt!leetedlhe rol· SEPinduded information about participantf esti. l<Cli.~jurlgmenl of tll<Committ~ such a projection mates of the appropriateltvd of the larget federal could potentiall)' he helpful in clarif)inS hO\<' the out· fund. rate in th. fourth quarter of lhe currenl )Ur and look and policy decisions a", related. Il""''''~r, many Ihe nexl f",,' caltndar }"ar~ and over lhe longer run: parti<ipanlS noted that developing a quantitati.~ fo",· Ihe SEP also ",ported participants' ""rrent proj<clions can that ",!leets the Committee's collective judgment of the likely liminil of the appropriate firs! inc",ase in could be challenging. given the range of their view~ Ihe target federal fund. rate given their as ..s sments of aboUI lbe economy's .lrt1C1ure and dynamics. l'artici_ Ihe ooonomic outlook. The =mpanying narralive pants agreed to conlinue to explore way. 10 inc ...... clarity and transpartncy in th. Committee's policy communications, but many emphasiud Ihat further i." 11. , T _ loo .. F , O . .. ) , F lC ..J " m " I " R " e " o " m of < l ! o to " o " r '. d . " .. • . . .. . ,.. - ao . J . p . < >ti<y ....< fj' change' in Ihost communicatioll$ should be consid· ..... J..JmI.....,..~potic)-_b'"'- el'W carefully. 113 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00117 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.64021717 Part 4 Summary of Economic Projections /~. fols""",,~ mQIfI'1(J1 1ll'/'ftI'Wi us "" uJJm.l_ 10 Ih, o. .. rall, II>< IU<l:Sl'mntlJ thai r.OMCl"'ni<"p.nli m~'w.,~{,htlum' /Q :V. J(JJ~, ","'~" 1M I''''',rul submilt<d in Iun. i"d;':'led thai. under al'l""pri ... 0(1.- M,m", eo"''''''" ..... m"rtetary 1",liI;y. the pace cf t(:('n~mi< ¢,Ipl!lt$i(llll)'o\;f Ihe 2011-14 "",AA! "'Ould lit.1y conlwu<to I>< mooer· !n ronjij""ioo ",jlh the Jun~ 19 20,2012, Federal ate >md inH:IIKm wtouW !<:ltI4iQ lul;ldu¢d (SO<: tabk " I " e Op.n Markol Comnlllte< (FOMCfm«:ltn.g. """"iIII ""d 6gu", I), 1·".ticip.naju.d1l:C'l Ihal 1M gr<11'11h p:d'ticipanlli-lhe 7 ...." ,/X-'" or IIu: Ilo.orJ of Oo>~r. of n:1lI JltIlU (\!)rnc:sI;': product ((.lOP) I(.Uuld pick" up nQrS llId Ih. 12 prtSid<n" ~r Ih.l;'deraI ~~ graduollyand ill ... thr u"~mrlO)'meMi '~I' IIOOld edt< S.nks, .u of ~ bom parlkirmdn lhe tkli!;"""li0!l5 or dO'iII '~ry $Iov.ly. P.mioip"nli pwj<clCl! thai iorl~!"m. ,''' rOMe -submillcd tl\ci, owmmClI1J, "flUor.",," as m.asurr<.l b)-Ih. annual <bonG" in th~ prK:r ;nd.>.1 pa1\Itlpanl's }ud!'fll<nl of Ilf',,",Pf'~I' monctaTY Ii)\' p<l'SUIIal <"'Ill'umplJOo .::Il"'l\(hlura (I'C~~ ..' Ould IX'lky, of real OUlp"' tlf'U\'11l. Ih. unomplV)'IIll'll1 ralC, runde,,,, I~ or 1:<:10 ... Ih. FO~tC.lonllCNtln innllli~n illfi~li<>n. ilIJ Ih< 1:II1e\ fcdtr.l! f"odl rale [,II ~lch ~\• . If 011;.'l:1h--.: of2 ('tfCI'nl [""m 2012 Ihru~gb WI4and Om'!he I~ngcr run Nshown;" fifurd. m(!$1 ranllil"lnt&)udll:C'llhal The.<.. ....." '"...,,1< ....... bastd on inf",,,,'ll<;m ,..,aibItM: hig)tly """"mm,>dat,", mQ1l<lary j'Olicy """-' ~",Iy w al 1110 I"". {lr lh. l!I<t'Iinll"nd !".tiaranl,· illd~'idual be Wllfl1ll\tr<,!.,.., lbe f<lf't<:llSl renoo In I"l1icub •. li>"!IumJlliOllj gbou\ tho filClors 6hlr '" a(fret tCQn(lt1lic 13 p.rtk:ir:mlitboug/!t Ibal ~ ..' OoIJ II< "l'I''''f''Ialr OUlWnlOS Tho: long.:r-run pmjcrtioni rtprtl<m cach for lhe f,rsl in"",,,,,, in Ihe (81)11'1 frdo.,,) funds rot. 10 f'II.,ocipan('$ jll<lgmon1 of the ratr IQW hich oa(:h _:m_ l)Q;ur duriltji 2Ul4 <I. 1It1<1 A maJo)rit)' of I"'ni~ranlS abie "'lIJIJ Ix: t.'pcc1w to ('(>II'~rgo; ('I\tT lim •• unJtr judllCd Iha' "I'I'f'.'rrillle m"""I~ry polil:), wo~ld ill\'~l"" arrrornalf mO!1<tar~ rolic)' ~nd In Ihc ahlIolW< of fur an e,\l''II';on ~(IM m:>lurity almllwn prosram lber dl(>Cu 10 1M ewn~my. *i\P/lIVr". . te 1l'I0Dtlllf)' (MEl') Ihrou~ th~~nd of 2(112, [""hcy" is defined as lhe [UIUI\! rath of po.lhry llIal r.r o."rnll. 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I. , __I 000<10'..,10 I_ T'" dol> b ''''1<1"," ..I . ... nit'" , .. io/>Io..'" ...... 1 115 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00119 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.84021717 "",""",,,,,,ls Fig"", 2, 0.'..,.;... .. or Fo.\rC I"rlicip""ts' of '1Ipropriat~ mv"ehry J>OIi<--y. JUII" 2012 -, , .n ." .n 1Il1~ - ; .. - • -_ . , - - . - • •. .. • .. .. , ,- -• • , .. .. - .. -- . - • ................ .. · .. -- - , ........ l .. .M. .. , ""-" , .n .n I oppr . ( ~ ; I f l > "I l E ' : l _ I O . , l • . • - ' .r p r ". " w . k po ) M ', I '1 , > ,l 0 i e li n h < e I ~ P1 01 _ ill I . . • . • .. ~ _" ' It , d o .. n . J . . . . . . . . . . I . . . , o .t t < f i O~ " t ", C . . p . o <n';I"Il'p"'o'' '. ' . '' . I . I 'f ' o o 0 j ( 1 0 l< h l" I " 1 I . / . 4 . " J . I , < .. f ; _ . 1 " "I\I ..~ ., ill '.~w«11100 <._~, I. April 211l1, ,''' ......... (lI"OMC port .." """, .'lo.I ""',..1 ..... , ... &. .. 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"l$ $.2 hl ~_III"l'-'tIlI. unclt~n!,"d ff\)fl1 broadly bioi_ned April M<nII':mici~~nlO rrojw<:d lhat th<l Pll boiI"«n lbt~"\Irr.:nt UfI(:rn~1 role ~nd IlIei, <"it;. m~!a of it> lung«'rIlI\ n~l'1!\lIl'JlrWOlJId bt~ in r". '" "-, }".'" Ko ~urJe ju.J~ed 1I1>l 1<<$ lim. ""uld C ~r O p I r k o Ii l li l o r ln M a ~ i T u I p l< .l l n n~ l I a l ( lc } ir [ 'C In Ii d it: i y ~ , i ! d ) l iI 4 T < h l C ll i S r . a < n um ~ p l ju k d 'O g j o ~ d I ! t o h u ~ l t b ~ e b i n : r a e r d . .d u , > a c n " d f ' ~ h n < . l l h "' " r u s ~ i~ 1 " " m II O . . r . t d T, w ,, i , n rl < '. U tlu ;m ld l " b d e il n \ < !l e l < " s , I ~ r;l ~ <. ~ = 1 < I > n I n 1 2 \ o < 0 . 1 " m ' 2 1 y I ' . ~ ll o u d n l /x 2 d > 0 ' H . r 't o n . b . l r h ln f ; u U O l . f : ~ t n h p i l ! ( c d : ; l i i p n p a ~ ; n m u d I p I a V I t i n a t l W O m I i O s l 4 k l 1 h r ~ e a _ t~ c o r r u ! o 'l T l n " 1 o f G i l m i n < D " i : < , ! ip ~ : ' a J ' ' f ~ _ D O r A a t W > l' a ' l lh n v S ' J i a 0 c 1 n , 3 I . . J D , I f b ~ tI e r l " u a ' r n i d r t , m k " ~ p r k / l < b la e 'l i 'T l l s i Il t < I ~ > 'n l I l l y l r o a h u l c < ' o d , o n ; m ' ' ~ n < f! s i I l r ~ } " ' , kmj;Cr·run mi. uf "Ulf"ll JO", .. lh, The ()('nlriJ leroJaocy O U ~1 " f ' j l p h 1 l n t _ l 9 T r ' l " < < " l o h 2 j . M r 4 t l ~ " n 1 " l \ " l : l r i " i " n r l " < . J lr I , < 1 h h l < " . A ' c ~ " h r ,. . l m . h ,m a g n c i i n n in l A ~ ~ a p a 1 I A ri - l G - . -- M D <' ! a . ' n o I r ) n , > « p ! W a U 1 " y l l ~ Im n i " e t " x " a , ! t T S. i I n ' h m ! m I l h t o C t e t l " l ! < $ " ' ! l u I a r 1 r r . < y o I n j H , 1 t ; ~ s c " d ' ! o , i l o i r ~ c n ' y m s t a a n r n n t d f h y l , e i " l f l I < " ; k ! " ! o I > C i d n i " f ~ " f ~ f i r D u w O n C : Il . I m u I T ~ d h i i h u n n r g c d o p " i . a " ! . J a l " X l m i " c 1 , i y · . · , f~r hou~hold sll"ndi~ ~nd Ih.l~bot mark<I--Il! h. .• !h. "nJ«lying m(lftlrnt"m in «:<lDomioo 81;';";1)', 1II. Q i ~ j [ " p p l o " d I ; a u , o ' ~ , m I J n r " l n i n b I l I l ( i ! ' c . e i l o ' " < h i i I " m i l - . o p n n . a " , - . a : 1 n - . w d . n a i m t d ' l l s ; t \ . ~ l T . - a ' g . l d i 1 y o k t l " h ! e " « . t a ' o " n h I J O u t O l o i t l h m h n i < l l r $ , a e l . - . l d . n W ~ m O . 1 r . . 0 l A I T h l e 1 I h a l d h a > m l a l e l i H s u y I l _ . 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I n t c i w h I l a n I h l i m b l l . e a l : I : i I m W n < : r 1 i l i g l a m 1 n < l " ( ~ I : < " i i r m U d n < n t i 0 a y ~ l s ( 1 r J ' . l t k t l ' . a . ¢ h C i l I r n r l ! l e 2013 ~nd 2014 "''Off ~,llo H ptrc~nl and.l 0 I,' , a i< b m .)u o l f U i n n d J l i" l id m u ~ a , i lo Q r m ttl I l i S 31 l$ .t l n O l r ~ ; g I I h l l I " h 1 e " ; ~ " () 2 " 0 <\ 1 n 4 w a .. n ." J " > /iirl 1.5 Il"r<~"l. rts/lf<li",\),. Til< <,<,",,:.II.nocnry fur l~e III lhe dtllnbia!IOlI of fOffl'OSIS rOT economic. J!fO\'lh 2 In 5 n R i' < tr r < -r : u e n n l r .l . i l l < li e "I " d w in > e g t ; \ :d :_ ( r , ( , ! ( m n ; A al p G ri l D l I > ' . :. . r . ti . c ~ if " 3 l 'l l > .o lhe di'lribianon of rr~jttliO!lS for the U!)crllpl.lymtmT died ... ,-«aJ ht.J..inJs 1II., "", .. likely 1<> iIQId back 'al~shin<J UPIlI :!01l'nJ 1"1) ""d. tOII~~I~nl. p th e e r i P o J d I , " " l Q nd f u e J co i" n ~ n m ,h i e c: d < il l l P ic J u lm h io fi n sc f a I l > a '« n d Ih ~ fi n f a o J m II: : i a a s l t . ilu •• l g in o < n N n g e 1 tH l 4 il . I i I l A I y I s in " , . n ' ! r f A a r I n I r I I ' ~ '" o , u o I l f l p l n u . , d g j T 'I n O ' r ¢ 2 . ! \ . ' l 7 T " i l , p n " t ' r < o c Ij c f f n < 4 > l t 1 1 I 1 1 I 1 y n t ii n 1 t 1 i \ l < l J - n s m l [ W 0 M 1 , [ t , h e \i.ln in furop<. ••l ill.d~d housUlgmlltl:el. tighl raniciNnl!' viN-Iab.lullh<'levd lo>lhi<h TlI< un<m· CreJilltlr .''''><cb."roo.-m.;md n>tal rnlfll<nl in lhe Un ( i '. l , e n d ,o s S l l e o ro l l ~ " ;Ib Iii< J.",·n"lrJ rtVi';"!I' 10 th. .. rro p m I< ~ l)'l l J ll j ' v n e l r f " l " it , , ~ w ft o C u d ld in r ~ o . m llm '.I O l!" ll l i n O l l h h, e ., . IO I h I l l D Sf g f ) . r o d n if f " e '~ " n n : l vic ... s on lhe outlool:. fur labor JUJ'!'I}' :.nd ,lit <lflICIU", j.:ction! for ..3 1 (jbl' [tI'O"1h in :!I'111."d 201 J, nearly an ,,"'lic:ip,mh m3fk.d up lheira ...." ,menl, fur lhe Qf Ib~ w.", mll~"C!. rat. or unomrloym<nL J":micir3fll' proj«lcd lhe un.",plO)'menl= roll<, a llll< enJ ,,( 2012 10, ",,,,run.1 or .~i,'hnll y ildrow hots. ",ilh a <:Clllrall<"rk....,· 0( ,(0 ~:' rer=1.~-h.l ~iI!bt1" lIIan their A('IiI I';nlicip.nt' , ..~ ~ aboJullhe medi " u " m " · " ru 'm n o "u le li O.,k for iubnussi""t I'articiranl, aoliclpolod grllduol impfQV< rnlIoIion WlIkr lbe aswmpl;",n of moo· menl i~ labor mork<1 c6nJiliollS by211l4, bul nen so, " e " l " ,r , y I) ' p ol;;y ~ ... 1i1l1. chaul}'d from April "". .... .,~ they ",ncnrlly th<>ughllh31lhe unempl<l)-mcnl ,ale al all ~f lh<m mmed do. .n Ib.ir ...." 'm •• ' of lhe ond of Ihol jOlt ... uuld &liU Ii< ,..,u -.bow their inJi_ !loaJlin. inflali,m i. III< ...... Ienn, roinlin~ tr' r=nl viduol ..t imat .. or ilS lunga.nm lI<lMIlallr'~1 The d«Ii .., ;" It.. priceo of mid. <iii and ,"""I;"elll.! c<tllnollen<lrncie. <Jf rarticipant>' f(lft<ll<I' f~r I"" wm:<IIarl"" lb •• p""i(lusly rr<lj<ctod_ Alrno<l all p;tr. u""mr/<lymenl r.1< ..." .. 7.S m KO 1"'""nlll1 !b<""d 10:;1'""1' judged lhal both he:ul1;". and ""'" onnalion or :lOlllllld 7.0t~ U p<n:en! -.! lbr~nd or 1014 The ",,'Old ['eIJIaIlI subdued "'''' tbc 20 12-14 ("'ri<Kl, ",p. "c"rallcnden"Y of partici(IIlI1\>' eslimat.~ 0( ,b. n;"~OII. "I. . 31 or bdow the FOMC"l!OII~r-flln lenK"r-run nonnal ,01,· of uOOlIrl<>Ymcm lluil .... 'uld ,,").'CIi ... of 1 pt=IIL Some panicip,mts n,~"J Ih.1 117 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00121 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.05021717 ." - 0 "" .. 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(!/" the MEl; IIJlJ:! parli.,j Spc<:ificalJ)" lile ",nlra)l""d.,WY of J"I1i"J'o'Inlf rro r~nts ,/'III(lilion«l llJ.:ir rroaom;" rO~IH'II' n.~' jc<:li<llli r(lr inn.'.,m, M 1I)I.1ISUI'I:d b)' Inf POl rvic< I'fOVolm or 5<:I:UrilicJ rutUllUl'l-T"9 inJitatod lhal ind<::<. 1ll<W«t oO'<o'n in 2()121~ 121~ I? I'=nl Mil I~ "'\lulu c~n'lkkf.wclt ru ... h~srs in t",,<""nllh~1 "'lISbll1<dllll1~i"20I .. ""d 2OIhlljIo1.0J'l'" In. «X,)"",ny did MI mako <aWfaa,,'Y~' i.n """I Th. c<wlli I<ndol1cic< of 1.< km:<:1'iL! ('" rolt ;mprovlflS ,..bot 11I'lrk<1 co~Ji!ioo~ o. ,II Ih. ,"""nl t)( a inti.,ion "01't bro>odl~ lhe sam< 0; Ib ...... ro, Ih. head, siJPlifocant (kH.'riQI'IIli<>n in Ih< 0X0110lllOc ')\It,""", '" 3 U"" m'&S1IJO in 2011l1li11 2(l14. fUl'lhrr in<:n:lIJ< ill oo..''''';J. rim 10 I~!II ~I)oQk. n",~ 1,CanJ J 1) prvo_i.i"de": inli>nnal~'~ aboollhc AIIII\.'<I:III r~rt!<;p~n!Ja»U!1U.'J (hll th.Commill<e di":I!ll~...r pankipan';' "jx,ullh~ O"'I<.~'~ for would ~arry "U' Ih~ nllfmldilll!iott "f Ih~ Nolan"" ~""\ inl\~liou, R<lal"~ '\' Ill< ~nt~oomrikd in a.wnling IOI~ principks ~J'I'lIlYIXI.u Ill< JIUI< 2011 Apritlnr i""}.'ttion! for ~d)i[l( in~~lion Ibil\,'(i fOMC' """",ling Th~' i~ l"'ior'" Ibr fi['ll inC!'<Ul in down in 2012, rt!kclmi1l~ dc<linc. in "u<'8Ypri<:~ Ihr kdcr:d funtUl:de. theCommillc< "<lIIkllikdy Th~ dl!lriilulioQJ 0( rarl"'I'",,,i JlMj«:IiolU fCH' bruJ "'. ... ,...;",.,.lin~!I<>1II< or all rri"dpdll"')'IlI'nl~!HI lin~ and ~/I ,"fi~tion in:>Oll 8nd 2ll1~ "'Ol"llishlly «<-urillt' in tho SYJ"m Opm Mark<! An.'"""l l(l'<~r In&n Ih<>s< n:f'O',,:d in ,\prj! (SOM~). gnd 111>O"ld liko'y bcginm or ~O)' ",-,uriws rl\l!Illn..SOM~ ""llI<Olilll< afi.(1' lh< filii rot. IDC/QS(.', ~iming 10 dimin~1O the SOMA) holdlllg! ,t( agtllcy ~ril~ O~. t:w:ri<Jod "f (Dttt 10 ft,,!: )'<ar! In A<mdic:~I<J In O£UI< 2. ",<,>! rarticlJ"'lOI'i JlId~ th31 t<1II:r.d, pamcipanu Iinko:J thl;r ptl.ferw.l SI.I'I dol<'5 ~W<f'li,'nally low ieI'd! of tn. r.'\Icr"j funlb ralr ..o old (or lhe lI(Ornt.1liuliim ~t"lll<ITvic ... , f~nho ",maUl .M'«'pn:u~;/;! bit Wltil lal. 2u14 In 1'"11JI:II' ~f1lroj11'iat< limi", for lh. linl ,1Ir",a5c in lh< l~rgt1 la" t<:\tn rwli";panUIIw~ghllh~1 il "ould I>t!l(:>fll'> f<dr"d r " ~ct.< r:<te. One raTlicit>~nt "h~ IO".,bl Ihal pri_le IO.:(lm""'ntr ])Oli"" ftrmins in 2014, "bile Iho liOolf '" Ih' '<d.raJ lund! ral: sI:t()lllJ ~w ",la_ anvlh<r SU p.I1licil'ilnlS Ihoughl lhat Iho first tn<T<U)l; li>tly;oon indicat,,j Ib~l Ih~ n:m"t:$In-.:nl of mliuring jp Ibe I~r~"\ (.!krlll fund! !'lIt,-MlulJ n~! be w~rr~n!<d $truril"'! .h(lllW c~"hlll><! fo, 1I lime Wter "fI~If, ~ntjl 20 I Sl uJ"I"T JlIioo), l:k,", p..rtj'lJllinlllndiraICli Th" k,y r. ...1 ..., '''formlllJ partictpanl{ 'nJi"i.:IUl<1 lho\lllw "PI1,vrria!< f<d<.TaI fund. mit aI tilt rod 'f ~WllCJlII ,..r th. 11'JII'I'(Jriat.< ~lIing 101 m~lrlrY 2014 ""wid be 75 b;ts;s ~ou or IolwIor(kl"~r pand), policy jll<luJ~d lh.,'r judgmmts r<gardilllllh< mJXI >ln~ Ihos< wl\o JuJ~eJ Ihol no)i<')' liOcll WIluld nM mum .....1 o f elllpl<lYlll<nl, lilt o~t<nl 10 whkh """,,,1 omIr unl ~ 201 S lhought Ih. feJe~1 funds r.1tt ""uld C\lfId!li~n~ IlJJ tIt,i.i<d from m.nd.iI"~ll~nll"', h< 1'h p<r<tnl <M" """"I ~l lho <1ld or tlut I'"~I, M;n cl~ anJ 1'~r1lC1ranIS' proJX~~no; of ,he hk.l~ lilli' April, ~x p.lrliciranl' judaeJ lhal c<OlIomlC condltj.)oS hO~n ~ry 10 r<lurD "",ploymtnt and innatlOn ""uld .... rrJnl an ilK"'a~ In tbola'l<l f<"d<r3I flllltb 10 Sut~ hcl~ S<>tnl! rarliapanlS n(ll,tllh.llh-'j, rate In tltbtr 2012 Of 2(11; In orMt 1.0 ~hicvt Ill< 1W<IoS"",nll .>[ ~1'I'1'Of"!o11< monew}' polley ",I\ec!td C~Pl'II~"!t:llulolr)'nundate. ThOl1ill pJrliop.tntl (lit IUbpu pace of lit<: «>.lO<lmic ..' jl.tnsl~n .nd Ih" JuJ~..:J Ih:llllw ~l'I'«'pnAlo vAluo fo, the r.1lml fundI {'Cl$illenl shollf.n m .W.galt demanJ Iltte< Ih. r1Ito \O\)uld r~ngl' fMn III. hI J rcrwnl at Ill< end "f 1001 09 m.'<,);SI,'n, lind lWO 'cmmrn!cJ Ih.ll Ih. !l<U 2014, IraJ It\1:I of (ho kd,ra) funw flII<"'a! ~l;rlp('mt'I\o'bll All J'ilrlicil'i'oli "'J")rIW l<,"t!. fOllh. ullplllrriale I>clow il'i hi!lorKai QNm, On<: j)i<r1i<jranl ~nlt$S<ll lal#! f<dml fundj mi' ~Ilhc ""d 01 2(l1411lal 'Rf<' t()f[C~ln Ihat a f'I'\ItracltJ period of ~y acromm<'lla wcll hd"",' Ib,:;r e,h11l'l1<1 ~f Ih. "vcl.~pcel<d I" PI" Uti! m<WlrlrY pohq c.'uld leaJ (0 .. bttildupof riskl In ..~ ~ jn the lol1jl('l ruo, ESlumles Ii Ihe kll\!:cr-fu" lar Iho fin.lI<ial J)'jIOll\, l'ar1icip.lnl> ali>.> ncl<d that #! f<!k11ll fuo.lJ r1IlC nutgc.l from 3 10 ~'., [Xrwnl, hecauS<.' lh< "PI'I'Ilrrilile Slanc< Qf """"'11~ roIicy rdloo.1iog the Commillrt '$ inHalil>n ~bjc(liyt "f 21'" Jop<nJs impv , l " 't ' l e o r n tly on Ihe "o]ulicn of "oI ... ri~iry crnt ~nd f""rtiopanltf" "ju dp!rtnl:i :lOOUI lh< Iong.:r-run and inlla1iOll 11m .. Ilteir 4U<'>'m(,'nU 01 '~"PI1~ equilibrium """") ~f ",:II f<dcrul funlls ral. pllal< fUlure ralh of Ih< r""end funds lol' ~nd lh. b.II. ~rtldJ1<l"[j abo rllll'k\r.l qui<lilJ[liVt inhlrma(i<)p u« she<1 ""ulJ ,'hang< If <C(IlIQIIljc oondlli~", """" un Iheir .i("o\11'<:l/Ml,"~ lh< ¥1'll'olfJI'ial< !Mil of Ihe to e~,~ in 1In UIl<~I"'ctw m""nfl', I'(ikral Rm",,'s Nl;..n,~.<OO1, ()f the 12 jl.trlidf>;lnIJ JIg"'" 3.1; J<\ilib the d,Stribution of l"r1icil"'nl{ ...h oi< ;mw;:uncll{j of "'I"1'f\lI"l.iI~ mOll"~rJ f"'1"'), juJgmentl f«lal'litng tho "I'fI<'II'l'iat<.' \e"c! of lho l<II'g<l 120 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00124 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.35021717 S(I Monetary Policy Report to tho Coni"'" D Jul)' 2(l12 • -" - " -" --". --0, -- ~!, ~~~~~~~~~~u : " • --0" --." --". -" -, , ~-;;------..---~ 121 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00125 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.45021717 -"- ." -. ." -" -" -" -". --". - --,. 122 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00126 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.55021717 52 MOncla,yl'{)licy Report 10 tho CongmsD Jul)' :!()12 -. -~---.. M1" ""'-- - -.AptjI __ -" -" -". ~L --,", -, .. - . --.. .. .. .. .. .. - , ~ . ~. ~ • . • " - - ," - . , 1 ••» • • • • • • ," • m w •• , w . '" ." ... • • • • " . ,,' .•»• I~ .,- ... ..--.. ." -" -" -" --", --., ~I - , .. .. .. .. 1- -.. .. .. .. ... • •• • •• ' • . • ~ ." _ I.n I •• • ''7 • .... m •u• w ... '" , ~ . w •• . • " • •• • • • •- ::l' I'er<n, '''''V ......... . ." -- "0 -" -" --". .... -- - " ., ~"-, .. -, .. .. --, .. . . . .... .. ,o.. • o • . •• •.•.. .. " •• _ . • " • . . . ~ ~. !' ' mt " r< I o - o~ .., _ - • w •~ '- u - o •• , ,•.• .w" , •• I' - -. ..... -,. -" - " -" -.- ", __ - - . - ... .. I.:.~; . I . I . ; . , " ., ... . . , . ". ' ' " " , ," , , . .. , . ' , . " .. V '" 1 • .. • .. . , 'f . .) , - IIIn• ' u ' ; ' '' ' i " . '" . ... H .. ' " '' , ' . .. . . , . . f'tmoac ....... .. ,"S"("J1"t".:" " n " o '" . " "'" ~*"" (,,'" ",".10 _ .... a. ,10< ...... <>fU• • ,. ......... ,"tbd 0(1"" ..1 <0<1><,.. "'" 123 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00127 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.65021717 - rt<k11ll run<4 rate aI lhe end or .""h caltndar ye~r T.:.to.I.<. 2... A """,!!" , h - tot<rQQl ~J"1"'" <'f1\If ,..""~ rrom ))12 HI :!I'll~ .nd ove, thrl'>ll$"rrun M\nt r~r­ :ni1 tj,;,:'r:mlSjudgcd lhal =n~mi"<:(lnJitjQnl ~"uld ~. .r 13'1' ,lInl mainlaimll$ Ih. culTtnllcw "-"":1 ,yi It..: fro.:r.Ii :'Ill! ~ ru rr n r d u s p n ri i " l. l . Il \ \ r c ( < I . u ~1 g h r. r I n Ih " e < r n N il m oJ' l : J ! u fI n l3 d V sm . ... t . : l o o t n l i t I b o e end"( O ,- " ... ~ . IIIDP' •' 11 "• .· ! ,, I - -I - O ' ,!1,'1 2614 were !I)Q'" ",i(kly cli<p(rliOJ, ~ ilh II parlicil'"nlJ , .... __ p"'" ,,~ !I.1 =,n, In. "M""I'riai< ~",I orin. rclmil r"nih ... 1. 0$ ';'I"=OUl~'tta p,o. inl 'If w..tr ""J 4<,f IlI<m ""'-ll$lbo :'Jll"'lrrial~ as 2 I"'""nl Qr bighe, Th(1St ",hO judg<'d th:U ~ k>ngtr JIO'riod QC 'tr)'~mmod:lli'" mon,1ary pol;(), would bo: arrrorrial~ gcncr"uy pro p;ltd 1Ill1lth< ulI<m~'Ill"nt rate would remain Cor I~r aIxr.'e il! k>nscr-rull n04'mli k ... 1A l Ih. end of 2(>14 Inronlr.t>I.11x: 6 par1icir.mls whojudg,:d (hI ro1;.,y forminl ,h''Ilhl begin in 2fl!2 or 2013 inJ\<:81c<i thOi II!<: C<>mmillllCO "",uld n''l:d IQ1 <\;1 $001110 l«fI inll~li<Jn 11<"' Iho FOl>ICs loager·run ,'bjrdj"o( 2 l''!1XOIlllJ II' f"""1\( l Ii>< in inJlati\!ll .~(l«"latimt. . ,"<I."i<KIn IhOil uill"md m,"'o:.lly [rom n:crnl bi:!loncal t.\pcooo<C. wr.!«>mm<nl«ilbal;" 11M: allmn.lln of tIM: r.n.oci.l<ri, ... I""~""'" more """"rlain.bool It.: 10,01 or P<ll.ntial OUlpul "".I II< In:n.d raI. of 1!IUWIh A ma,.,.-'Iy..( part;';pi!nl< I(J!Ofted Ihlll til<)' sa" Ne~,ly.u p.trlkip3nl!juu.od Ihal Ih,,~ «11m" ((wI of (ho risk. to Ihdr for=m or ",01 GIli' gro ..l h itS ull<"'fUinIY~1 GDPI1;r\""h and ulI<miW~m''fll WC1j!bI.J ""''l<ru the dooro"do and_ >ICIXI,din¥iy, tile "'.1.1 hi,ncr lnan ""lIlh. norm dunng II!<: pl(vious risk, !o !h"n rrnF'1ioo, of lbe unornpiO)m.nl rAI. '" 2())'tan (!lgul( 4)." AOOYI half I1f 1iI11'"r1idrants tillN 10 llle "psi&' Th musl fn:4""ollVilk.'Otifi ..- d j in u H d "" ~ o n l b 1 . ; " 1 " ." " , " 1 < o Ii f 1 " 0 o b o < m h a ig in h ( t y r . a . s. w "'~ c U i , a k " d h i " l i . l " h " , I h ~ e n i . r , i m O . U ut r y « : p S a O r r l i r c n ir k a n ~ l = ! ! th h ~" ' . g . h - l it u hO .l l i d o n lb i e l l p l .: : > " !o " n ' li ~ :< l " l( h l i ~ c " h ) W eighl p"'licipanl< vi<v.~J u""'."rl.3inly :m.>UI irulalion as glc>b.ol <roJIomi<: 'ltIil'ily. pIIn;';ubrly "'tT Ih. n<~r < !> il m od a d . l . y u :< n i t m le i r h l . y r L I l ~ u : h t i h :! o l. o d r < ic V aJ '. lt 1 < '' d ''1 1 , 1 , < "= I T ~ h in . l r y n . a t , > " o < ( . s o c l u o m w Icr M m ( . lS ~ I n p d a l r h t o i< l i iK pa a n l t l g il " u " ll o li t < i" ln u , i d Il li I w O ;: j u U dl n l" il e t d h . S ,. ! ; a , l . t u !- 10 n'ItIlic:oUlrnme< Mtt Ihe~lliflSQl30d fin.ln<ial Ihtj, rroj«li"". fot ,nnHli"" ... broldly bolli.ad, "ith .itullion iu !;.,opc. Ih. oull{)O~ lOr tid 1'"1;.,y;,, lb. i'. ..." bighligluing th. rtCtnl jlJb;lrly oJ" in~aljOll U no n m it i . c d g S r" lo " l 't " h " . i i IJ o I c J l l ~ ll l " in , j o 1 e t n ho I g p l 1 " > . . s .d . si o b ~ ili n ly I o n f g • lo S b l a g l n " if " i " ca . n l e.tf'«1a~on~ 'l""~' ... 6. ... ""rtiril"'"1< .....' lb. risb !o inflation :os lillN 1<1 Ih, d""ru:ido, ~ l>,¥,r numllo, .k>w.!own in Ch,.". M;" April plIrlicipanlS n"'.~ It.: IMn in Arril; ~ (>.lurk...r lilI:m nOled thaI slack in d U i . f S J . i c e u w lu n . o . m :lS i M c > " < " rJ " l. " d " " y " I r b u 1 f I" o '' n -' : ''M cu ~ • n l g in a Ih n . e i ! . ' 1 11 c th r i o si f s I . n n . d n ru :5O t t U T ! i ' O t1 t ' t m d a o r w kt n 1 w 5 ( . . r " t O l u p l l J \ 'S tu II m U' " " U on l 1 i 0 n~ b .u e i t ( . ! > I n l" : I .l b c . r n I ' t f c ~ ou lJ .... ,ro anli,ip.1lin$, Two parl",ipilllt5!I;!W Ih. rilts l;l .,..I.~. .,T .h.I >ltlr<O> ......_ ... ''''~-.._.'!'''',1I< inn", it," as woi~h"d 10 lilt "psidt. ill lil1nl ,,( ""('u'. . m~ , _ .. ' . I , o ._ o !. t ,a. . l" . G, . O . · .~ " '.'' ; o'' , j . '« . w . lO .. ~ , d l r " "_ " " " " ' " . l . " . l " I l''·~ " -Y'-1 _ .1d A " l, o' " ..-. . ' -,..J. _ o.ll . . . . .... . , m 0 \ 0 X U 1l I ! ! V ivI: S ~ . III f !IC ~ <' o im f , b " a " ! " a , n ,' w lif , f l h I" e ' t l u ic l y T , t o n r l Ih hi o g C "l ., ~ m a m "" j o l- m_ , , ..C " <p ' r<t> ~ 1 .. _ . o ' l o ._...~....... \_k, _....,. y."-"." .....o..o.J J< " O p d I io > t < rt' " 1..,·J lIhtlity 10 &",,1;'..-1), reml)'o'< ",,!icy """'-'mmO<la ~I"'I"""" tNn ~ btn il bccornl:ll ~rJlfOpri~ .. 10 do i(!. 124 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00128 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.75021717 54 Monctary Policy Repor1 IQl ho Ceng"," D Jul)' 2Q12 - ....... -, -_t.:I.I. ..J.._ ." ••_b o'u, G UP """,. - •• Apnl"""""" _ lIi&bot - .. -0 - " Il;p.. \\<ip...!10 ....; lor -"-- -,~ o -" -". -u. --u, - - ~-: -. -u -" -u.. -" --," - 1. ____ - ~ ji,ii,i;]' ..... \\'~\II ~".." ~.,.. ,J.otlaII_oI". .' ti~' 00.1 , .. In _"""'" r"''''u.-.... '"" bo> ·~_I!", ..t .... y .· Dotl.1- "". . "I ,~ .. _ "'. '" tho "'. ....1 ...... ", ... bI. I 125 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00129 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON spe.85021717 ForeGtS,1U ncerlilinly' I~ f<'<>IIOIoic 1"*". .... ptDI'i<l<od by U. . ""'. ... .. It. .. "",.Id V" .., ..> <I IJ tn 0 I""""'~"' til<'. u ~ I v " I '" , l h ~ e i f I m I , ~ " ... . o .... ( " C &0 q " .. , . _ '''', . m .. , ~ ,b I~ " " . , .. ~ , > ." t a ; f " lh ," ir , a It t ) ' " i " r " ." . ' ' 1 ' 1 ' . ' . ' . ~ 0 W ) I n . " ... ~ .. o . . d a i ; n "f 8 u ; II o ! " ~ " w< ~ .,~1 r b <1 e lo 11· m<>neIarypol·l·m''''g~~'~_~ 1.11<1 l.lIl""WIl in lilt aomnt "'., 1.0 '" 30 pe'. 1'"1>1 .. uod.",.n<J-.gvllhto to .... '" policy '""'" '" d. .......o od y~ .., ....d o.g '" J.I l><tUrI4., ~j. t"<",~deJabI. ~0W1>i"1)" <I\Iend, lIone Ihc'J,i"ly ..... 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Ben S. Bernanke (2012, July 16). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20120717_chair_federal_reserves_second_monetary_policy

@misc{wtfs_testimony_20120717_chair_federal_reserves_second_monetary_policy,
  author = {Ben S. Bernanke},
  title = {Congressional Testimony},
  year = {2012},
  month = {Jul},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20120717_chair_federal_reserves_second_monetary_policy},
  note = {Retrieved via When the Fed Speaks corpus}
}