Congressional Testimony

MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTEENTH CONGRESS FIRST SESSION JULY 15, 2015 Printed for the use of the Committee on Financial Services Serial No. 114–42 ( U.S. GOVERNMENT PUBLISHING OFFICE 97–154 PDF WASHINGTON : 2016 For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\97154.TXT TERI HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman PATRICK T. MCHENRY, North Carolina, MAXINE WATERS, California, Ranking Vice Chairman Member PETER T. KING, New York CAROLYN B. MALONEY, New York EDWARD R. ROYCE, California NYDIA M. VELA´ZQUEZ, New York FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts STEVAN PEARCE, New Mexico RUBE´N HINOJOSA, Texas BILL POSEY, Florida WM. LACY CLAY, Missouri MICHAEL G. FITZPATRICK, Pennsylvania STEPHEN F. LYNCH, Massachusetts LYNN A. WESTMORELAND, Georgia DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri AL GREEN, Texas BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin GWEN MOORE, Wisconsin ROBERT HURT, Virginia KEITH ELLISON, Minnesota STEVE STIVERS, Ohio ED PERLMUTTER, Colorado STEPHEN LEE FINCHER, Tennessee JAMES A. HIMES, Connecticut MARLIN A. STUTZMAN, Indiana JOHN C. CARNEY, JR., Delaware MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama RANDY HULTGREN, Illinois BILL FOSTER, Illinois DENNIS A. ROSS, Florida DANIEL T. KILDEE, Michigan ROBERT PITTENGER, North Carolina PATRICK MURPHY, Florida ANN WAGNER, Missouri JOHN K. DELANEY, Maryland ANDY BARR, Kentucky KYRSTEN SINEMA, Arizona KEITH J. ROTHFUS, Pennsylvania JOYCE BEATTY, Ohio LUKE MESSER, Indiana DENNY HECK, Washington DAVID SCHWEIKERT, Arizona JUAN VARGAS, California FRANK GUINTA, New Hampshire SCOTT TIPTON, Colorado ROGER WILLIAMS, Texas BRUCE POLIQUIN, Maine MIA LOVE, Utah FRENCH HILL, Arkansas TOM EMMER, Minnesota SHANNON MCGAHN, Staff Director JAMES H. CLINGER, Chief Counsel (II) VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\97154.TXT TERI C O N T E N T S Page Hearing held on: July 15, 2015 ..................................................................................................... 1 Appendix: July 15, 2015 ..................................................................................................... 55 WITNESSES WEDNESDAY, JULY 15, 2015 Yellen, Hon. Janet L., Chair, Board of Governors of the Federal Reserve System ................................................................................................................... 5 APPENDIX Prepared statements: Yellen, Hon. Janet L. ....................................................................................... 56 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Rothfus, Hon. Keith: Two charts: ‘‘Progress Made Since Wall Street Reform;’’ and ‘‘Quarter- to-Quarter Growth in Real GDP’’ ................................................................ 64 Waters, Hon. Maxine: Letter from the Office of Inspector General, Board of Governors of the Federal Reserve System and the Consumer Financial Protection Bu- reau, dated May 29, 2015 ............................................................................. 66 Yellen, Hon. Janet L.: Monetary Policy Report of the Board of Governors of the Federal Reserve System to the Congress, dated July 15, 2015 ............................................. 69 Written responses to questions for the record submitted by Representa- tive Heck ........................................................................................................ 124 Written responses to questions for the record submitted by Representa- tive Hinojosa .................................................................................................. 126 Written responses to questions for the record submitted by Representa- tive Hultgren ................................................................................................. 132 Written responses to questions for the record submitted by Representa- tive McHenry ................................................................................................. 135 Written responses to questions for the record submitted by Representa- tive Mulvaney ................................................................................................ 137 Written responses to questions for the record submitted by Representa- tive Pearce ..................................................................................................... 148 Written responses to questions for the record submitted by Representa- tive Rothfus ................................................................................................... 152 Written responses to questions for the record submitted by Representa- tive Schweikert .............................................................................................. 154 Written responses to questions for the record submitted by Representa- tive Westmoreland ........................................................................................ 155 (III) VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\97154.TXT TERI VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\97154.TXT TERI MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, July 15, 2015 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10:03 a.m., in room 2128, Rayburn House Office Building, Hon. Jeb Hensarling [chair- man of the committee] presiding. Members present: Representatives Hensarling, Royce, Lucas, Garrett, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, Fincher, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Schweikert, Guinta, Tipton, Wil- liams, Poliquin, Love, Hill, Emmer; Waters, Maloney, Sherman, Capuano, Hinojosa, Clay, Green, Cleaver, Moore, Ellison, Perl- mutter, Himes, Carney, Sewell, Foster, Kildee, Murphy, Delaney, Sinema, Beatty, Heck, and Vargas. Chairman HENSARLING. The Financial Services Committee will come to order. Without objection, the Chair is authorized to declare a recess of the committee at any time. Today’s hearing is for the purpose of receiving the semiannual testimony of the Chair of the Board of Governors of the Federal Re- serve System on monetary policy and the state of the economy. I now recognize myself for 3 minutes to give an opening state- ment. Last week, this committee began a series of hearings examining the Dodd-Frank Act on its 5th anniversary, an Act which vastly ex- panded the powers and reach of the Federal Reserve beyond its tra- ditional monetary policy role in historically unprecedented ways. The evidence continues to mount that since the passage of Dodd- Frank, our Nation is less stable, less prosperous, and less free. We continue to be mired in lackluster, halting economic growth. Middle-income paychecks are nearly $12,000 less compared to the average post-war recovery, and as Ranking Member Waters told us just a few months ago, ‘‘The brutal truth is that millions continue to teeter on the brink of poverty and collapse.’’ One way that our economy could be healthier is for our Federal Reserve to be more predictable in the conduct of monetary policy. During periods of expanded economic growth, like the great mod- eration of 1987 to 2003, the Fed followed a more clearly commu- nicated, understandable, and predictable conventional rule, and America prospered. Today, we are left with so-called forward guidance, which unfor- tunately remains somewhat amorphous, opaque, and (1) VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 2 improvisational. Too often, this leads to investors and consumers being lost in a rather hazy mist as they attempt to plan their eco- nomic futures and create a healthier economy for themselves and for us all. As one former Fed President has written, ‘‘Monetary pol- icy uncertainty creates inefficiency in the capital market. The FOMC gives lip service to policy predictability but its statements are vague. The FOMC preaches that they are data dependent, but will not tell us what data and how.’’ Following a monetary policy convention or rule of the Fed’s own choosing, with the power to amend it or deviate from it at the Fed’s own choosing, in no way interferes with the Fed’s monetary policy independence. Accountability and independence are not mutually exclusive concepts. We in Congress would be grossly negligent if we did not engage in greater oversight of the Federal Reserve System. Again, Dodd-Frank confers sweeping new powers on the Fed to regulate and control virtually every corner of the financial services sector of our economy, completely separate and apart from its tra- ditional monetary policy role. Yet too often, the Fed appears to shield these activities from public view, improperly cloaking them behind monetary policy independence. Second, the Fed has now employed historically unprecedented methods, from intervening to prop up select credit markets, to pay- ing interest on excess reserves, to keeping interest rates near zero for almost 7 years. By doing so, the Fed has certainly blurred the lines between fiscal and monetary policy. Finally, the Fed has recently crossed the line by willfully ignor- ing a lawful congressional subpoena for documents. This is inexcus- able and unsupported by legal precedent. It cannot be allowed to stand. The Fed’s refusal to cooperate in a congressional investigation threatens both its reputation and its credibility. The Fed is not above the law. It is a very serious matter and must be resolved. The Chair now yields to the ranking member for 3 minutes for an opening statement. Ms. WATERS. Thank you, Mr. Chairman, and welcome back, Chair Yellen. I am pleased you are here this month as we com- memorate the 5-year anniversary of the enactment of the Dodd- Frank Wall Street Reform Act. Dodd-Frank was signed into law just as we had emerged from the worst economic collapse in a generation, one which destroyed nearly $16 trillion in household wealth and 9 million jobs, dis- placed 11 million Americans from their homes, and doubled the un- employment rate. But since those dark days, we have seen improvement. Dodd- Frank made significant progress correcting the practices that helped lead us to the crisis. It has delivered billions to victimized consumers, brought greater transparency to the once-opaque bank- ing practices that have caused the crisis, and put in place clear rules of the road that foster stability in our financial system. That stability, along with the help of extraordinary monetary pol- icy accommodation, has led to growth, including the creation of nearly 13 million private sector jobs, unemployment falling to its VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 3 lowest rate since September 2008, a recovering housing market, and significant increases in 401(k) balances and the S&P 500. But these improvements do not paint a picture of an economy that has fully recovered. The gap between communities of color and women versus their white male counterparts remains dramatic. A lackluster first quarter and a strong dollar, coupled with economic instability and slowing growth abroad, have sapped momentum for job creation and economic expansion here at home. As such, I hope the Board of Governors will consider its slow and cautious approach to raising interest rates. Chair Yellen, as you know, raising interest rates does not in itself create a strong econ- omy; it is a strong economy that must be the impetus for raising rates. With inflation continuing to hover near zero and numerous indi- cators of slack in the labor market, it is my hope that the Federal Reserve will fully consider the impact of any potential interest rate increase on the middle class and those communities that have yet to benefit from the economic recovery. So I thank you again, Chair Yellen, and I look forward to your testimony here today. I yield back the balance of my time. Chairman HENSARLING. The gentlelady yields back. The Chair now recognizes the gentleman from Michigan, Mr. Huizenga, chairman of our Monetary Policy and Trade Sub- committee, for 2 minutes. Mr. HUIZENGA. Chair Yellen, up here. Sorry. It feels like you are kind of down closer to the Botanic Garden than you are here in Rayburn, with our new hearing room configuration. But welcome. It is good to see you again, and thank you for hon- oring my request to meet last month. Today’s hearing provides us with another opportunity to examine how the Federal Reserve conducts monetary policy and why the de- velopment of these policies are in desperate need of transparency, I believe. Needless to say, the Fed’s recent high degree of discretion and its lack of transparency in how it conducts policy suggests that re- forms are needed. I have continued to encourage the Federal Reserve, as you well know from that conversation, to adopt a rules-based approach to monetary policy and to communicate that rule to the public. The Fed must be accountable to the people’s representatives as well as, more importantly, to the hardworking taxpayers themselves. Last Congress, Professor Allan Meltzer of Carnegie Mellon Uni- versity testified that over the first 100 years of the Federal Re- serve’s history, monetary policies operated more effectively if they followed simple and clearly understood rules. And I quote from him, ‘‘There are only two periods in Federal Re- serve history where they came close to operating under a rule. That happened to be the best two periods in Fed history in 1923–1928 and in 1985–2003. ‘‘In the first case, they operated under some form of the gold standard; in the second, under the Taylor Rule, more or less; not slavishly, but more or less. And those were the two and the only two periods in Federal history that have low inflation, relatively stable growth, small recessions, and quick recoveries.’’ VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 4 That was Allan Meltzer. Well, Chair Yellen, I ask that you work with me and this com- mittee to develop a foundation for a rules-based monetary policy that will properly, not slavishly—to borrow a phrase—constrain the Fed’s discretion without sacrificing the proper independence that the Fed has while also allowing the Fed to be more transparent in formulating and communicating monetary policy to not only mar- ket participants but also to the American people. So thank you, Mr. Chairman, and I yield back the balance of my time. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentlelady from Wisconsin, Ms. Moore, the ranking member of our Monetary Policy and Trade Sub- committee, for 2 minutes. Ms. MOORE. Thank you so much, Mr. Chairman. Madam Chair, I am so happy to welcome you back, and I look forward to your testimony, to the Q&A period, and I think this committee will benefit from your strong background in economics. We are, of course, in the midst of a strong 2-year job growth of 15 years adding 5.6 million jobs, but I have some concerns. You talk about slack in the labor market. And it seems to me that slack is disproportionately borne by African-Americans and Latinos. This brings me to the critical importance of the full employment part of your dual mandate. And so while we are plodding upwards, there are still many storm clouds. I want to see growth which will create jobs and decrease the national debt. Now I cringe at the austerity policies of this Republican Congress because I think it works at cross-purposes with your pro-growth policies. And I want to hear you talk about that. Your predecessor, Ben Bernanke, came to Congress and told us that the sequester and the shutdown were examples of counter- productivity. We want to get this slack, as you call it, out of the labor market, but Congress needs to embrace growth policies that will help working people. Wall Street is doing just fine. But we need to invest in education and infrastructure, increase the min- imum wage so that we can get more consumers spending money. And I read in your testimony here that U.S. exports are slump- ing, but yet this committee has refused to reauthorize the Export- Import Bank. These are unforced errors and I thank you and I look forward to hearing your testimony. I yield back the balance of my time. Chairman HENSARLING. The gentlelady yields back. Today, we welcome the testimony of the Honorable Janet Yellen. Chair Yellen has previously testified before our committee, so I be- lieve she needs no further introduction. At the request of Chair Yellen, I wish to inform all Members that I intend to adjourn the hearing at 1:00 p.m. this afternoon. Chair Yellen, without objection, your complete written statement will be made a part of the record, and you are now recognized for 5 minutes to give an oral presentation of your testimony. Thank you for being here. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 5 STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mrs. YELLEN. Thank you. Chairman Hensarling, Ranking Member Waters, and members of the committee, I am pleased to present the Federal Reserve’s semi- annual monetary policy report to the Congress. In my remarks today I will discuss the current economic situation and outlook be- fore turning to monetary policy. Since my appearance before this committee in February, the economy has made further progress toward the Federal Reserve’s objective of maximum employment. While inflation has continued to run below the level that the Federal Open Market Committee (FOMC) judges to be most consistent over the longer run with the Federal Reserve’s statutory mandate to promote maximum employ- ment and price stability. In the labor market, the unemployment rate now stands at 5.3 percent, slightly below its level at the end of last year and down more than 4.5 percentage points from its 10 percent peak in late 2009. Meanwhile, monthly gains in nonfarm payroll employment aver- aged about 210,000 over the first half of this year, somewhat less than the robust 260,000 average seen in 2014. It is still sufficient to bring the total increase in employment since its trough to more than 12 million jobs. Other measures of job market health are also trending in the right direction with noticeable declines over the past year in the number of people suffering long-term unemployment and in the numbers working part-time who would prefer full-time employ- ment. However, these measures as well as the unemployment rate con- tinue to indicate that there is still some slack in labor markets. For example, too many people are not searching for a job but would likely do so if the labor market was stronger. And although there are tentative signs that wage growth has picked up, it continues to be relatively subdued, consistent with other indicators of slack. Thus while labor market conditions have improved substantially, they are, in the FOMC’s judgment, not yet consistent with maximum employment. Even as the labor market was improving, domestic spending and production softened notably during the first half of this year. Real GDP is now estimated to have been little changed in the first quar- ter after having risen at an average annual rate of 3.5 percent over the second half of last year. And industrial production has declined a bit on balance since the turn of the year. While these developments bear watching, some of this sluggish- ness seems to be the result of transitory factors, including unusu- ally severe winter weather, labor disruptions at West Coast ports, and statistical noise. The available data suggest a moderate pace of GDP growth in the second quarter as these influences dissipate. Notably, consumer spending has picked up, and sales of motor vehicles in May and June were strong, suggesting that many households have both the wherewithal and the confidence to purchase big ticket items. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 6 In addition, homebuilding has picked up somewhat lately, al- though the demand for housing is still being restrained by limited availability of mortgage loans to many potential home buyers. Business investment has been soft this year, partly reflecting the plunge in oil drilling and the fact that exports are being held down by weak economic growth in several of our major trading partners and the appreciation of the dollar. Looking forward, prospects are favorable for further improve- ment in the U.S. labor market and the economy more broadly. Low oil prices and ongoing employment gains should continue to bolster consumer spending. Financial conditions generally remain sup- portive of growth. And the highly accommodative monetary policies abroad should work to strengthen global growth. In addition, some of the headwinds restraining economic growth, including the effects of dollar appreciation on net exports and the effective lower oil prices on capital spending, should diminish over time. As a result, the FOMC expects U.S. GDP growth to strengthen over the remainder of this year and the unemployment rate to de- cline gradually. As always, however, there are some uncertainties in the eco- nomic outlook. Foreign developments in particular pose some risks to U.S. growth, most notably, although the recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains difficult. And China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions. But economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for U.S. economic activity. The U.S. economy also might snap back more quickly as the transitory influences holding down first half growth fade and the boost to consumer spending from oil prices shows through more de- finitively. As I noted earlier, inflation continues to run below the commit- tee’s 2 percent objective, with the personal consumption expendi- tures or PCE price index up only a quarter of a percent over the 12 months ending in May. And the quarter index which excludes the volatile food and energy components, up only one and a quarter percent over the same period. To a significant extent, the recent low readings on total PCE in- flation reflect influences that are likely to be transitory, particu- larly if the early or steep declines in oil prices, and in the prices of non-energy imported goods. Indeed, energy prices appeared to have stabilized recently. Although monthly inflation readings have firmed lately, the 12 month change in the PCE price index is likely to remain near it’s recent low level in the near-term. My colleagues and I continue to expect that as the effects of these transitory factories dissipate, and as the labor market improves further, inflation will move gradually back toward our 2 percent objective over the medium-term. Market-based measures of inflation compensation remain low al- though they have risen some from levels earlier this year, and sur- vey-based measures of longer-term inflation expectations have re- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 7 mained stable. The Committee continues to monitor inflation devel- opments carefully. Regarding monetary policy, the FOMC conducts policy to pro- mote maximum employment and price stability as required by our statutory mandate from the Congress. Given the economic situation that I just described, the committee is judged at a high degree of monetary policy accommodation remains appropriate. Consistent with that assessment, we have continued to maintain the target range for the Federal funds rate at zero to a quarter of a percent, and have kept the Federal Reserve’s holdings of longer- term securities at their current elevated level to help maintain ac- commodative financial conditions. In its most recent statement, the FOMC again noted that it judged it would be appropriate to raise the target range for the Federal funds rate when it has seen fur- ther improvement in the labor market, and is reasonably confident that inflation will move pack to its 2 percent objective to the me- dium-term. The Committee will determine the timing of the initial increase in the Federal funds rate on a meeting by meeting basis, depending on its assessment of realized and expected progress toward its ob- jectives of maximum employment and 2 percent inflation. If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the Federal funds rate target, thereby beginning to normalize the stance of monetary policy. Indeed, most participants in June projected that an increase in the Federal funds target range would likely become appropriate be- fore year end. But let me emphasize again that these are projec- tions based on the anticipated path of the economy, not statements of intent to raise rates at any particular time. The decision by the Committee to raise its target range for the Federal funds rate will signal how much progress the economy has made in healing from the trauma of the financial crisis. That said, the importance of the initial step to raise the funds rate target should not be overemphasized. What matters for financial condi- tions in the broader economy is the entire expected path of interest rates, not any particular move, including the initial increase in the Federal funds rate. Indeed, the stance of monetary policy will likely remain highly accommodative for quite some time after the first increase in the Federal funds rate, in order to support continued progress toward our objectives of maximum employment and 2 percent inflation. In the projections prepared for our June meeting, most FOMC partici- pants anticipated that economic conditions would evolve over time in a way that will warrant gradual increases in the Federal funds rate, as the headwinds that still restrain real activity continue to diminish and inflation rises. Of course, if the expansion proves to be more vigorous than cur- rently anticipated, and inflation moves higher than expected, then the appropriate path would likely follow a higher and steeper tra- jectory. Conversely, if conditions were to prove weaker, then the appropriate trajectory would be lower and less steep than currently projected. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 8 As always, we will regularly reassess what level of the Federal funds rate is consistent with achieving and maintaining the com- mittee’s dual mandate. I would also would like to note that the Federal Reserve has con- tinued to refine its operational plans pertaining to the deployment of our various policy tools when the committee judges it appro- priate to begin normalizing the stance of policy. Last fall, the Committee issued a detailed statement concerning its plans for policy normalization, and over the past few months we have announced a number of additional details regarding the ap- proach that the committee intends to use when it decides to raise the target for the Federal funds rate. These statements pertaining to policy normalization constitute recent examples of the many steps the Federal Reserve has taken over the years to improve our public communications concerning monetary policy. As this committee well knows, the Board has for many years de- livered an extensive report on monetary policy and economic devel- opments at semiannual hearings like this one. And the FOMC has long announced its monetary policy decisions by issuing statements shortly after its meetings, followed by minutes with a full account of policy decisions, and, with an appropriate lag, complete meeting transcripts. Innovations in recent years have included quarterly press con- ferences and the quarterly release of FOMC participants’ projec- tions for economic growth on employment, inflation, and the appro- priate path for the Committee’s interest rate target. In addition, the Committee adopted a statement in 2012 con- cerning its longer-run goals and monetary policy strategy that in- cluded a specific 2 percent longer-run objective for inflation, and a commitment to follow a balanced approach in pursuing our man- dated goals. Transparency concerning the Federal Reserve’s conduct of mone- tary policy is desirable, because better public understanding en- hances the effectiveness of policy. More important, however, is that transparent communications reflect the Federal Reserve’s commit- ment to accountability within our Democratic system of govern- ment. Our various communications tools are important means of imple- menting monetary policy and have many technical elements. Each step forward in our communications practices has been taken with the goal of enhancing the effectiveness of monetary policy and avoiding unintended consequences. Effective communication is also crucial to ensuring that the Fed- eral Reserve remains accountable, but measures that affect the ability of policymakers to make decisions about monetary policy, free of short-term political pressure in the name of transparency, should be avoided. The Federal Reserve ranks among the most transparent of cen- tral banks. We publish a summary of our balance sheet every week, and our financial statements are audited annually by an out- side auditor and made public. Every security we hold is listed on the website of the Federal Reserve Bank of New York, and in con- formance with the Dodd-Frank Act, transactions level data on all VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 9 of our lending, including the identity of borrowers and the amounts borrowed, are published with a 2-year lag. Efforts to further increase transparency, no matter how well-in- tentioned, must avoid unintended consequences that could under- mine the Federal Reserve’s ability to make monetary policy in the long-run best interest of American families and businesses. In sum, since the February 2015 Monetary Policy report, we have seen, despite the soft patch of economic activity in the first quarter, that the labor market has continued to show progress toward our objective of maximum employment. Inflation has continued to run below our longer-run objective, but we believe transitory factors have played a major role. We continue to anticipate that it will be appropriate to raise the target range for the Federal funds rate when the committee has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2-percent objective over the medium term. As always, the Federal Reserve remains committed to employing its tools to best promote the attainment of its dual mandate. Thank you. I would be pleased to take your questions. [The prepared statement of Chair Yellen can be found on page 56 of the appendix.] Chairman HENSARLING. Thank you, Chair Yellen. I now recog- nize myself for 5 minutes for questions. Chair Yellen, I hate to take up time to ask this, but it is an im- portant matter. As we well know, Dodd-Frank vastly expanded the non-monetary policy role of the Fed. Through no fault of your own, there has not been a Vice Chair for Supervision appointed. My counterpart, Chairman Shelby, in the Senate has requested that you come on a semiannual basis until such a time as the President deigns to fill that position and testify on the macroprudential regulatory role of the Fed. Your written response to our request, to put it politely, was not responsive. So will you voluntarily honor our request? And if the answer is ‘‘yes,’’ I will take ‘‘yes’’ for an answer, and if the answer is ‘‘no,’’ I will give you a brief moment to explain. Mrs. YELLEN. I certainly stand ready to respond to requests of this committee for me to testify— Chairman HENSARLING. Thank you. I will take ‘‘yes’’ for an an- swer, and we will certainly issue those invitations. I want to discuss with you, Chair Yellen, the exigent powers Sec- tion 13(3) clause. There seems to be a growing consensus on both sides of the aisle among the right and the left that Dodd-Frank, notwithstanding its intentions to constrain 13(3), did not hit the mark. And in fact, Senator Elizabeth Warren has been rather out- spoken on the matter and has actually introduced bipartisan legis- lation on the Senate side in this regard. Setting aside the arguments of whether or not the AIG bailout, specifically, was a good thing or a bad thing, post-Dodd-Frank, is it your interpretation that the Fed retains the power to do a simi- lar bailout of AIG where counterparties and creditors could receive 100 cents on the dollar, including foreign entities? VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 10 Mrs. YELLEN. Let me start by saying that the role of lender of last resort is a critical responsibility that central banks fulfill around the world, and it is why the Federal Reserve was created. I do believe this is a very important power. We need to address liquidity and credit pressures in times when there is unusual fi- nancial stress. However, Congress did amend Section 13(3) in Dodd-Frank to allow the Federal Reserve to extend emergency credit to the finan- cial system only through facilities that have broad-based eligibility. Chairman HENSARLING. Chair Yellen, you know that— Mrs. YELLEN. So the answer is no, that we could not use those powers to address the needs of a single firm, like the AIG situation. Chairman HENSARLING. But several other firms—if an AIG-like bailout was made available to a specific firm, as long as it was made to multiple firms, there is still nothing preventing the Fed from ensuring counterparties and creditors get 100 cents on the dollar. Is that correct, or do you disagree with that statement? Mrs. YELLEN. Section 13(3) was amended to state specifically that it broadens— Chairman HENSARLING. No, I am familiar with the statute. I am just trying to figure out if you believe it constrains creditors getting 100 cents on the dollar. Mrs. YELLEN. If we have failing financial firms, we would not be able to put in place a broad-based facility that was intended to res- cue those firms. Chairman HENSARLING. If I could, Chair Yellen, let me ask you this— Mrs. YELLEN. But it is not allowed by Dodd-Frank. Chairman HENSARLING. Let me ask you this question. There ob- viously is a difference of opinion there. Federal Reserve Bank President Jeffrey Lacker recently gave a speech dealing with 13(3) and dealing with moral hazard. And I agree with you, the lender-of-last-resort function is important. But so is moral hazard in creating greater systemic risk. President Lacker said, ‘‘A final step may be required before fi- nancial stability can be assured. This would mean repealing the Federal Reserve’s remaining emergency lending powers and further restraining the Fed’s ability to lend to failing institutions.’’ Are you aware of President Lacker’s views on this topic? Mrs. YELLEN. I am aware of his views, but I disagree with him. Chairman HENSARLING. When do you expect— Mrs. YELLEN. Dodd-Frank has been amended to limit our powers, as I mentioned, to bail out a single firm or a failing firm or an in- solvent borrower. Chairman HENSARLING. Chair Yellen, when do you expect that we will have the final rule on 13(3)? Because we know there were 800 pages devoted to helping define ‘‘proprietary trading’’ in the Volcker Rule, but we see no such effort in defining the concepts of ‘‘insolvent’’ and ‘‘broad-based’’ and presently are seeing no real con- straint to your 13(3) abilities. So, when should we expect to see that final rule? Mrs. YELLEN. We put out a draft rule— Chairman HENSARLING. I am aware of that. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 11 Mrs. YELLEN. —and we received a number of comments, and we are working hard to come out with a revision, and I expect that it will certainly be out in the fall. Chairman HENSARLING. Okay. Thank you. The Chair’s time has expired. The Chair now recognizes the ranking member for 5 minutes. Ms. WATERS. Thank you very much, Mr. Chairman. Chair Yellen, this morning, I woke up to yet another story about discrimination against minorities. It seems Honda has been caught charging higher interest rates, I guess, on their loans to African- Americans and Latinos. When I hear those kinds of stories, I am reminded about the predatory lending practices that took place in this country in 2008, et cetera, and how these predatory practices were targeted to mi- nority communities and minorities were charged higher interest rates. And when they compared the income and the credit that Blacks and minorities—their credit records to the credit records of Whites, they could be the same, but they were paying higher interest rates on many of these predatory products. And when I look at the loss of wealth in these communities, based on the subprime lending, I cannot help but wonder, when is this going to stop? When is it going to stop? While we have you here today and we are talking about mone- tary policy and we are talking about interest rates, qualitative eas- ing, et cetera, et cetera—I don’t know how much you can do to deal with this inequality. I don’t know if there is anything that perhaps you can do that deals with discrimination, that deals with racism, that deals with income inequality, that deals with the problems that cause this great wealth gap that is so big now that it will never be closed. We hear a lot of talk about income inequality and the wealth gap, et cetera, and we look at the high unemployment rates in the African-American and Latino communities, and sometimes you just think, despite the struggle, despite all of the work, despite the challenges, some of this stuff just will never go away in this coun- try. So I guess I am asking you, because you have the responsibility for some of what goes on in this economy relative to some of these issues, what can you do about Honda? What can you do about the banks and the predatory practices that continue to gouge Latinos and African-Americans and target these products to our commu- nities? What do you say about all of this? Mrs. YELLEN. Let me start by saying that the practices you de- scribed and the trend toward rising inequality, the impact that it has on African-Americans and disadvantaged groups is something that greatly concerns me, and I think is of tremendous concern to all Americans. In terms of what we can do, when it comes to lending we are re- sponsible for supervision of financial institutions to make sure that they adhere to fair lending practices, and we test regularly in our consumer compliance exams to make sure that the firms that we supervise are abiding by Congress’ rules pertaining to the Equal VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 12 Credit Opportunity Act to make sure there are not unfair credit practices being directed toward minorities or toward any Ameri- cans. So that is an important goal. We, of course, work to make sure that the banks we supervise meet their CRA responsibilities which I think has been of benefit to low- and moderate-income commu- nities. And more broadly, in terms of our monetary policy respon- sibilities, maximum employment along with price stability are the two major goals that Congress has assigned to us. The downturn that we experienced after the financial crisis, where unemployment rose to over 10 percent, was particularly pun- ishing to African-Americans and to lower skilled workers, more broadly. And a strong economy, getting the economy recovering, trying to get it back to maximum employment, lowering the unemployment rate. Traditionally African-Americans and other minorities have had higher unemployment rates. We don’t have the tools to be able to address the structure of unemployment across groups, but a strong economy generally, I think, really does tend to be beneficial to all Americans. So that is what we are working toward, and there are other poli- cies that I think Congress could consider that would address these issues. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from Michigan, Mr. Huizenga, chairman of our Monetary Policy and Trade Sub- committee. Mr. HUIZENGA. Thank you, Mr. Chairman. Chair Yellen, I think we share a respect for rules-based mone- tary policy—as you put it when you served on the Fed Board in the mid-1990s, the Taylor Rule was ‘‘what sensible central banks do.’’ It looks like we are in good company. Dr. Charles Plosser, the immediate past president of the Federal Reserve Bank of Philadel- phia, expressed support for a rules-based framework by setting monetary policy: ‘‘One of the most important ways to support credi- bility, and thus the effectiveness of forward guidance is to practice it as part of a systematic policy framework. I believe that indi- cating the evolution of key economic variables systematically shapes future and current economic policy decisions is critical to such a policy framework.’’ In testimony before this committee in December of 2013, Dr. Douglas Holtz-Eakin, former Director of the Congressional Budget Office, also endorsed a rules-based monetary policy, saying, ‘‘Cer- tainly I would like to see a more rules-based approach by the Fed- eral Reserve that does not rule out discretion, because they can pick the rule they want to operate. But if they provide it to Con- gress and the American people, the American people will know what they are up to. They themselves have said forward guidance is critical. We need to know what they are going to do. Rules pro- vide that.’’ So, I am curious when you and your colleagues at the Fed will adopt a rules-based policy? Mrs. YELLEN. You used the term systematic policy. And I want to say that I strongly endorse, and the FOMC strongly endorses fol- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 13 lowing a systematic policy. And during my term as Vice Chair and as Chair, I have tried to promote a systematic monetary policy. And I believe that we do follow a systematic monetary policy. Mr. HUIZENGA. But not with a rule that you are willing to share, correct? Mrs. YELLEN. Not a simple rule based on two variables, but let me point you first to the monetary policy report: On the second page of the report, we have a clear statement of our longer-run goals and monetary policy strategy. Any systematic policy has to begin by articulating what the goals are very clearly, and the strat- egy that will be followed. And that is what we do there— Mr. HUIZENGA. But you agree that a rules-based policy is a bet- ter way to go? Mrs. YELLEN. I don’t agree that a rules-based policy is a better way to go. There is not a single central bank in the world that fol- lows a rule that would rely on only two variables. Mr. HUIZENGA. So, as you well know— Mrs. YELLEN. What we do is take into account a wealth of infor- mation, informing our judgments about the economic outlook. Mr. HUIZENGA. Sure. Mrs. YELLEN. And the way that we make policies systematic is we provide and you can see this in section three, in part three of the monetary policy report, each individual, each participant, writes down their own forecast for the economy and the appro- priate policy that goes along with that, and from that, you can get a clear sense of how we expect to conduct policy, if the economy evolves in line with our forecast. Mr. HUIZENGA. I am not convinced that is clear, because others in the market don’t believe that is clear. Other economists don’t be- lieve that is clear. We are not trying to handcuff you, but we are asking that you write a rule within descriptive parameters to use as a reference point, purely use it as a reference point. I know you expressed that if we had a rule, we may find ourselves in negative interest rates. Simply solve that by writing a rule that says, once we do that, we are going to zero and no lower, or maybe .25, as you have indi- cation—we won’t call it the ‘‘Taylor Rule,’’ we will call it the ‘‘Yellen Rule.’’ We can have some of those things that are going to give us pre- dictability. So I think that whether it is Douglas Holtz-Eakin or others who have been within the Federal Bank Reserve who have said so, predictability and transparency is the way to go. So I know you know that we have a discussion draft floating around that has some of that information in there. And just so I am clear, you don’t believe that there is a time it will be right to, again, go towards a rules-based policy? Mrs. YELLEN. I think we need a systematic policy, but I would strongly resist agreeing to follow any rule where the stance of mon- etary policy depends on only the current readings of two economic variables, which is what your reference rule relies on. Mr. HUIZENGA. Okay. That is what the reference rule does, but it doesn’t say that is the rule you have to follow. And we have a lot of confusion out there; the IMF is saying you shouldn’t be rais- ing interest rates for international settlements, which is the central VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 14 bank—of central banks, as you well know. Claudie Arborio had said lower rates beget lower rates, and we have a lot of confusion out there as to the direction we are going, and that is what we are asking for as clarity. Thank you, Mr. Chairman. Mrs. YELLEN. I strongly believe in the systematic policy. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentlelady from Wisconsin, Ms. Moore, ranking member of our Monetary Policy and Trade Sub- committee. Ms. MOORE. Thank you so much, Madam Chair. My colleague, the chairman of our Monetary Policy and Trade Subcommittee, has been discussing with you the Taylor Rule, so I would like to pursue that a little bit more. The IMF is warning that if Greece leaves the Eurozone, it might slow growth internationally, and impact the United States much harder than expected. I guess I would like you to just sort of speculate about, if you were handcuffed about the terms used here earlier, the Taylor Rule, how would that impede your response to such a crisis? Mrs. YELLEN. The Taylor Rule would tell us that the current set- ting of monetary policy should depend on only two variables. The current level of real GDP or the output gap, and the current level of inflation. So it obviously wouldn’t take into account in any way our judgments about the likely growth in the global economy, how we expected that the European economy would be affected or global financial markets by these—by such developments. So in that sense, it really restricts any simple rule, restricts the setting of monetary policy to a very short list of variables and typi- cally their current values. That is one of the reasons—we spend a great deal of time and—the forecasts that we include in our mone- tary policy report that the participants write down, we present to the public every 3 months, incorporate all of that kind of informa- tion. What we think is going to happen in the global economy and other economic developments, those factor into our economic fore- casts and our view as to the appropriate role of policy. We are providing a great deal of information to the public by pro- viding these participants forecasts, because participants are telling the public how, in light of their economic forecast, concretely with numbers, they think monetary policy should be set. So that is information about the so-called reaction function, namely the relationship between the economy and monetary policy that is incorporated in something like the Taylor Rule. Ms. MOORE. Thank you so much. Can you provide us with a quick update of the Fed’s implementa- tion of the so-called Collins fix governing insurance capital stand- ards? Mrs. YELLEN. We appreciate Congress passing the Collins fix, and in light of that, we have a great deal of flexibility now to de- sign capital standards that we think will be appropriate for the firms that we supervise, including the insurance-based savings and loan-holding companies and the insurance SIFIs, and we are work- ing hard. We will put in the public domain either orders or a pro- posed rule— VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 15 Ms. MOORE. Thank you. Mrs. YELLEN. —when we have figured that out. Ms. MOORE. Thank you so much. We are at the 5-year lookback of Dodd-Frank. Our colleagues again say that we have enshrined too-big-to-fail. I wonder if you could just set the record straight about whether or not Dodd-Frank enshrined too-big-to-fail. Mrs. YELLEN. I don’t believe that Dodd-Frank enshrined too-big- to-fail. First of all, it directed us to increase the safety and soundness of financial institutions and particularly those that are most sys- temic. So it gave us tools to raise capital and liquidity, to impose capital surcharges on those firms that we deem most systemic, to use stress testing as a methodology, to make these firms much less likely to fail, and the amount of capital and liquidity has increased massively since the crisis. In addition, Dodd-Frank gave us Title II orderly liquidation au- thority, which would be a new tool to resolve the systemic firm in Title I. Ms. MOORE. I have 10 seconds left, so I think you have covered that. Back to my idea about the labor market, do you think ending the sequester and raising the minimum wage would be good strategies for getting our labor markets together? Mrs. YELLEN. These, I think, are matters for Congress to debate. Ms. MOORE. I knew you would say that, so I saved it for last. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from New Jersey, Mr. Garrett, chairman of our Capital Markets Subcommittee. Mr. GARRETT. Good morning. Thanks, Mr. Chairman. Last night, I read through what is called the ‘‘Joint Staff Report: The U.S. Treasury Market,’’ dated October 15, 2014. It is the staff report that looked at what happened in the markets back in mid- October. Are you familiar with that report? And do you adopt that report, even though I see the name of it is the ‘‘Joint Staff Report?’’ Just as a technical matter, does that mean that this is just the staffs’ opinion, or is this also your opinion? Just so I understand that. Mrs. YELLEN. I am certainly aware of the intensive work done by staff and a number of agencies— Mr. GARRETT. But do you adopt— Mrs. YELLEN. —and I think it is a good report. I certainly sup- port the report. Mr. GARRETT. Okay, great. I assumed so. I thought there was one seminal question, but I guess maybe there are two seminal questions, and I read that. And I also read your testimony and the addendums to your testimony this morning, since it only came in this morning. First of all, is there a problem, and second, what was the cause? I thought that we would all have to conclude that there was a prob- lem, but that is not clear from looking at the addendum to your re- port that came out—as far as your testimony, where it says at the bottom, ‘‘Despite the increased market discussions in talking about VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 16 the disruptions, a variety in metric liquidity in the nominal Treas- ury markets do not indicate notable deteriorations.’’ And then you go on to say elsewhere that there really weren’t many problems in the liquidity of the market. And you talk about that. I think there is a problem. Other people think there is a problem. We had hearings on this, and Rick Ketchum, the CEO and chair- man of FINRA, told this committee that there have been dramatic changes with respect to the fixed-income market in recent years. So the question is, is Rick Ketchum right, that there have been dramatic changes to it, and there is a problem in the marketplace, or is your staff, and you are right that there is not a problem in the liquidity and the deterioration in that marketplace? Let’s find out whether there is a problem, first of all. Mrs. YELLEN. I think it is not clear what is happening in these markets and what is causing what. Mr. GARRETT. True, but is there a problem, before we get to— Mrs. YELLEN. The report that you mentioned that was just re- leased looked carefully at a 12-minute window, in which— Mr. GARRETT. But overall, Mr. Ketchum is saying that there has been a deterioration and that there is a problem overall. He is saying there is a problem. Other panelists have said there is a problem overall on the market. You are saying, and your staff is saying that there isn’t any problem? Mrs. YELLEN. It is not clear whether there is or there is not a problem here. Mr. GARRETT. Okay. Mrs. YELLEN. By some metrics, liquidity looks adequate by bid- ask spread and— Mr. GARRETT. But I think that is— Mrs. YELLEN. —trading volumes. We don’t see a problem— Mr. GARRETT. Let me just interrupt, because we only have— Mrs. YELLEN. —but there are metrics that suggest there is a problem. So this is something we need to study further. Mr. GARRETT. So you studied it so far, you have an 80-page re- port that looked at it, and I find it troubling that it really doesn’t come to much of a conclusion. What I was looking for was the second seminal question that the chairman and I have asked Secretary Lew and others: What was the cause of this? And this report still fails to come up with any particular explanation. It runs through about half a dozen expla- nations saying, these are not the problem. Some of them that it does refer to is it says, ‘‘the growth in elec- tronic trading, competitive pressures, other factors, and regula- tion.’’ That word ‘‘regulation’’ only appears twice, but your staff ac- tually says regulation is an indicator to the changes in the vola- tility and the liquidity out in the marketplace. So it says that regulation is part of the problem. Right? Mrs. YELLEN. We just don’t have a conclusion about what hap- pened in the Treasury market at this point. Mr. GARRETT. No, but you don’t have— Mrs. YELLEN. Regulation could have contributed in some way to that, but there are many other things going on as well. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 17 Mr. GARRETT. But it doesn’t say that in your addendum at all. It says that in the staff report. Nowhere did I see that it looks to regulation as being the factor. It looks at all of the other factors that are talked about here, whether it is the size, order trade size, whether it is the electronic trades, whether it is competitive pressures. It doesn’t say that in here. We never heard that from—we can never get that answer from Secretary Lew or anyone else from the Administration. So are you saying today that, yes, regulations such as the Volcker Rule, Basel, and capital requirements are potential prob- lems in this area? Mrs. YELLEN. They are things to look at. We have no evidence that those things that you mentioned are problems. During this window— Mr. GARRETT. Let me ask you this. Mrs. YELLEN. —broker dealers continued to— Mr. GARRETT. May I ask you a question? Did you direct your staff to look to see whether that was a poten- tiality? Because they don’t say it once in their report that they looked into regulation as a causation. They looked at all the metric datas on these other areas. Did you direct them to look at that as a factor, and will you in the future? Mrs. YELLEN. We asked them to take a look at what caused this very unusual movement in Treasury yields— Mr. GARRETT. They didn’t. Mrs. YELLEN. —and to study what possible causes of it were, and they were unable to find any single cause. And they pointed to a number of factors that could have been at play, and it needs further study, and it is right for regulation to be on that list of things that we look at. But there is no evidence at this point— Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentlelady from New York, Mrs. Maloney, ranking member of our Capital Markets Subcommittee. Mrs. MALONEY. Welcome, Chair Yellen. I know that some of my colleagues have been critical of your performance, but I, for one, think you have done a tremendous job, and I want to publicly thank you. You have been very responsive to Congress, and you have also managed to wind down the quantitative easing program very smoothly and right on schedule without causing any major disrup- tions in the financial markets, so thank you. And I would like to ask you some questions about monetary pol- icy. In your testimony today, you said that foreign developments, in- cluding the turmoil in Greece and China, in your words, ‘‘pose some risk to United States growth.’’ Has the turmoil in China and Greece changed your view about the appropriate timing for the first interest rate hike? Mrs. YELLEN. We look at international developments very care- fully in developing our forecast. We have been closely tracking de- velopments in Greece and China and other parts of the world. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 18 The issues that exist are not new. For example, in June the com- mittee was aware of these developments, and in June when the participants wrote down their views of the economy and appro- priate policy, taking into account these developments and the risks they pose, they still thought that the overall risk to the U.S. eco- nomic outlook were balanced and they judged that it would be ap- propriate sometime this year to begin raising our target range for the Federal funds rate. Of course, we continue to watch these developments, these global developments unfold, and we will in the coming months. Were we to judge that these developments did create substantial risks, or were changing the outlook in some notable way, then a change in the outlook is something that would affect monetary policy. As we have said all along, we have no judgment about—at this point about the appropriate date to raise the Federal funds rate. Our judgment about that will depend on unfolding economic develop- ments and how they affect our forecasts. Mrs. MALONEY. You stressed in your testimony that the pace of rate increases is more important than the timing of the first rate hike, and many economists, including the IMF, have argued that the Fed should wait longer to start raising rates, possibly waiting until next year, but should then follow a slightly steeper path of subsequent rate increases. So my question is, if the Fed waits longer than current forecasts to start raising rates, will that mean a steeper path of rate in- creases? Mrs. YELLEN. If we wait longer, it certainly could mean that when we begin to raise rates, we might have to do so more rapidly, so an advantage to beginning a little bit earlier is that we might have a more gradual path of rate increases. As I indicated, the entire path of rate increases does matter. There are many reasons why the committee judges, in effect, that an appropriate path of rate increases is likely to be gradual, but given that we have been at zero for over 6 years, it has been a long time since we have raised rates. Doing so when we finally begin in a deliberate and gradual way, looking at what the impact of those decisions are on the economy, strikes me as a prudent ap- proach to take. Mrs. MALONEY. Okay. And as you know, the markets have been anticipating a rate increase for quite some time, and that it will follow one of the FOMC meetings that has a press conference after- wards. Currently, there is a press conference after every other FOMC meeting, and as a result, in the market’s view, the Fed only has two more chances to raise rates this year in September or De- cember, even though there is an FMOC meeting later this month and one in October. My question is, would the Fed feel comfortable raising rates for the first time at an FOMC meeting without a press conference scheduled afterwards? In other words, are the July and October meetings on the table, so to speak, for rate increases? Mrs. YELLEN. I have tried to emphasize that every meeting is a live meeting. We could make decisions at any meeting of the FOMC, and we have emphasized that if we were to make such a decision, we would likely have a press briefing afterwards. And we VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 19 recently conducted a test to make sure that members of the media, of the press, understand how technically they would participate in such a press briefing. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from Missouri, Mr. Luetkemeyer, chairman of our Housing and Insurance Sub- committee. Mr. LUETKEMEYER. Thank you, Mr. Chairman. Over here, Madam Chair. Thank you. A few weeks ago we met, and we had a long discussion about a number of different topics, and one of them was Operation Chokepoint. And I asked you at that time or made mention of the fact that I was very concerned from the standpoint that the Over- sight and Government Reform Committee had this report that they put out with regard to the internal e-mails and memos, which showed that the FDIC was going well beyond their statutory au- thority and duties in trying to limit the ability of certain legal busi- nesses to do legal business, and was impacting a lot of banks in a very negative way. And the fact that you oversee some of the banks as well, I felt that you should be pushing back and have a meeting with Chair- man Gruenberg, and I asked you to do that. Have you have done that at this point? Mrs. YELLEN. Yes, I have done that. I have discussed Operation Chokepoint with Chairman Gruenberg, and our views on what proper policy is on the part of the banking agencies with respect to how our examiners deal with banks and the services they offer. We both certainly agree on the importance of making sure that examiners and our policies don’t discourage banks from offering services to any business that is operating within State and Federal law. He and I agree that is appropriate policy and— Mr. LUETKEMEYER. Did he indicate to you, though, how he is going to stop Operation Chokepoint within his own agency? Mrs. YELLEN. I don’t want to speak about his policies— Mr. LUETKEMEYER. I think it is important that you make the point to him that he has to stop. In this report, this report of his own e-mails, within his agency, he is implicated as being part of the problem. And therefore it is important, I believe, that you have a discussion and say that he has to cease and desist those kinds of activities, and get assurance from him that he will make sure that is done. Mrs. YELLEN. He explained to me a number of policies that he has put in place to be absolutely certain that his examiners are abiding by the policy that I indicated, which is the banks we super- vise—that examiners in examining them do not— Mr. LUETKEMEYER. If at some point you find that this is still con- tinuing, will you confront him about that? If it is continuing in the banks you oversee, will you confront him and say, we find this operational, and therefore you need to stop it. Will you stop him from doing that, if you see it? Mrs. YELLEN. I will continue to discuss with him this issue and to make sure that our policies— Mr. LUETKEMEYER. Okay. With regard to another issue that we discussed, with regard to SIFI designation, one of the concerns that VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 20 I have, especially with insurers and asset managers, is that as they are designated, there doesn’t seem to be a way for them to become de-designated, and there is no path written out, there is—obvi- ously, you can say, well, they need to change their business model. But I would think it would be helpful whenever they are des- ignated to be able to say if you do this, this and this, these are the problems that have caused you to become designated. If you change these things, do these things differently, it would allow us to de- designate you. And I really don’t see a path to de-designate. Can you elaborate on that? Mrs. YELLEN. Yes, well, FSOC reviews every single year the des- ignations of firms and considers whether or not they are appro- priate or no longer appropriate, and firms that are designated are given very detailed— Mr. LUETKEMEYER. Okay. Mrs. YELLEN. —material to enable them to understand the basis for the designation— Mr. LUETKEMEYER. I would just encourage you every year to be sure you put something like that in there so there is some certainty on the part of those folks who are designated. I have 30 seconds left, so let me get one quick question in here. With regard to the Board’s charge of adopting capital standards for federally-supervised insurers, these capital standards are of concern from the standpoint that this is the first time the Fed ever got involved in domestic capital standards for insurance companies, and I know you—through FIO, you are looking at international capital standards. My question is, would you commit to us that prioritizing domes- tic capital standards will take priority over international capital standards? Mrs. YELLEN. Any international capital standards would not be- come effective in the United States unless a regulation or rule were proposed— Mr. LUETKEMEYER. That is my concern. Mrs. YELLEN. —and went through a full debate. Mr. LUETKEMEYER. That is my concern. We want to make sure that domestic insurance industry is protected. I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Missouri, Mr. Clay, ranking member of our Financial Institutions Subcommittee. Mr. CLAY. Thank you, Mr. Chairman. And welcome back, Chair Yellen. You were quoted in a June 17th American Banker’s article as stating that the Federal Reserve was examining ways to improve its implementation of the Community Reinvestment Act amid con- cerns that regulators are letting too many poor communities go unserved by banks. How would the Federal Reserve’s effort in seeking to improve im- plementation of the Community Reinvestment Act encourage in- vestments in places like the ones that I represent, such as Fer- guson, Missouri, and other communities throughout this country that are mired in poverty? VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 21 Mrs. YELLEN. We have been working to improve implementation of the CRA regulations with other banking regulators, and we have been doing that in part by trying to improve our guidance, adding to a set of interagency questions and answers on the community re- investment. We came out with additional Q&A in 2013, and we are working toward further additions. And so what this guidance does is try to clarify the ways in which basic banking services can help to meet the credit needs of low- and moderate-income people in the context of CRA. And by doing that, I hope what we will be doing is encouraging banks to consider providing the kinds of banking services that people in these communities need to be an important part of their CRA pro- gram. Mr. CLAY. Okay. And along those same lines of questioning, you stated in your testimony your concerns about the limited avail- ability of mortgage loans. As a supporter of Dodd-Frank, has the law given us unintended consequences and tamped down banks’ ability to lend money in order for people to get mortgage loans? Mrs. YELLEN. It is hard to say. Certainly, lending standards are much tighter than they were in the run-up to the financial crisis, and I think most of us think appropriately so; we don’t want to go back to lax lending standards. But it may be that the steps we have taken are having some unintended consequences, and that we need to work on that to make sure that credit is available. Mr. CLAY. So do we need to tweak the law in order to allow banks to really get money out into our economy and allow people to realize the American dream and purchase homes? Mrs. YELLEN. There are a number of obstacles that banks see to lending. Some have to do with put-back risk, which are matters that the FHFA is working on with Fannie Mae and Freddie Mac. And, there remains uncertainty about securitization and the rules around securitization, so we have not really seen an active market come back for private residential mortgage-backed securities. And that could be part of what is happening. Mr. CLAY. Well, okay. The Federal Reserve released a report en- titled, ‘‘Strategies for Improving the U.S. Payment System,’’ a fol- low-up to a 2013 consultation paper that signaled its intention to expand its presence in electronic payments. Why has the Fed embarked on this faster payments initiative? What does it hope to achieve? And what is the Federal Reserve’s plan? Mrs. YELLEN. Our basic plan is that we want to see a faster and safer payment system in the United States. We think that many steps can be taken to make that possible, and the main role we ex- pect to play is that of a convener, to bring a lot of private sector participants to the table to talk through these issues. And for them, we have set up task forces on faster payments and safer pay- ments. Hundreds of private sector participants are discussing what they can do in order to bring this about, so we are trying to play the role of facilitator, of bringing people to the table. Mr. CLAY. Thank you. My time— VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 22 Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Wisconsin, Mr. Duffy, chairman of our Oversight and Investigations Subcommittee. Mr. DUFFY. Thank you, Mr. Chairman. Welcome, Chair Yellen. As you know, I chair the Oversight Subcommittee of the Financial Services Committee, and along with Chairman Hensarling, we have been doing an investigation into the 2012 FOMC leak. We kindly asked you to produce documents in regard to the leak and you failed to comply. The chairman then issued a subpoena for the documents, with which you failed to comply. So I would ask, what is your legal authority? Give me case law or statute that al- lows you to not comply with a congressional subpoena? Mrs. YELLEN. First, let me say that we have cooperated with the committee, and— Mr. DUFFY. No, no, no, listen. I have limited time. So I want to know—give me the legal authority which says that you do not have to comply with a subpoena. We have asked for specific documents and you haven’t given them to us. Mrs. YELLEN. We indicated that we fully intend to cooperate with you to provide the documents that you have requested— Mr. DUFFY. Madam Chair— Mrs. YELLEN. —but that we are not going to provide them now because this matter is the subject of an open criminal investigation by the Board’s Inspector General and by the Department of Justice. They have indicated to us that it will compromise—it will likely compromise their investigation. Mr. DUFFY. You are the Chair. Give me the legal authority—you can read the statement all day long, but I would like to know the legal authority that you have. Basically, what you said in a letter to Chairman Hensarling and myself is that the OIG in essence re- quested that you don’t give it to us. You are not bound by the IG, and you are not bound by the DOJ. Mrs. YELLEN. We have indicated— Mr. DUFFY. We have asked for the documents, and you have said you are not going to give them to us. Is it fair to say you don’t have any legal authority, because you can’t give me case law or statute that says you have an exemption— Mrs. YELLEN. No, we have said that we plan to give them to you— Mr. DUFFY. Just not now. Mrs. YELLEN. —as soon as we are able to do so and not com- promise an open criminal investigation. Mr. DUFFY. Compromising an open— Mrs. YELLEN. We want to see this investigation succeed. Mr. DUFFY. You do? Let’s talk about that. You want to see it suc- ceed. So let’s talk about the timeline. This happened in October of 2012. You didn’t follow your policy. The General Counsel did an ex- tensive 6-month investigation. After that investigation, the General Counsel was supposed to make a referral to the IG. That didn’t happen. The General Counsel gave a report to the committee, right? And when you got that report, because you were so concerned about jus- tice, you were so concerned about bringing the leaker to the fore- front, what did you do? Nothing. You didn’t make a referral to the VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 23 IG. You didn’t make a referral to the FBI, the SEC, the CFTC, or the DOJ. You did absolutely nothing. Zero. And so you are trying to say that Congress is going to obstruct your investigation? When you had information, you did nothing to perpetuate an investigation that would lead us to the truth. Eventually, the IG did their own investigation and then they closed it. And guess what? Congress stood forward and said, listen, this is important stuff. We just—as Elizabeth Warren would say, we don’t want those who are well-connected to get information through the leaks; we should know who the leaker is. And so it was because we pressured the IG—it was a closed in- vestigation and we pressured you that all of a sudden, there is a second investigation, and they say no, no, we can’t give you that documentation because it is a pending investigation and we are concerned about you jeopardizing it. Madam Chair, it appears that you are the one who is jeopard- izing, or the Fed is the one who is jeopardizing this investigation. Am I wrong? Mrs. YELLEN. The FOMC has in place a clear set of rules that are to be followed when there are allegations of a leak. Mr. DUFFY. You didn’t follow them. Mrs. YELLEN. They called for a review of the incident by the Gen- eral Counsel and the FOMC Secretary. We have described to you how that review took place. It took place before the review was complete. The Inspector General— Mr. DUFFY. Did the General Counsel—I am reclaiming my time. Did the General Counsel, per your guidelines, talk to the FOMC Board or did he make a recommendation to the IG? Because the requirement is that they make—that they do an initial review and solely determine whether they make a referral to the IG They didn’t do that, right? Mr. Alvarez didn’t do that. Mrs. YELLEN. Before his review was complete, he was informed by the IG that the IG had undertaken his own investigation and therefore the IG was already looking at it before it was necessary for him to make a decision to refer it to the IG. The IG was already involved. Mr. DUFFY. Madam Chair—my time is almost up. I reclaim my time. If anyone is trying to sweep this under the rug, it is the Fed. It is Congress that is trying to bring light to this. I sent you a let- ter in response to your denial with Chairman Hensarling on the 17th of June, and we have almost a full page of footnotes where Congress has done oversight during an open pending DOJ prosecu- tion. We have the right to the documents, and you have the duty to provide them to us, and you have cited no legal authority to deny that request. We are entitled to do oversight, and you are required to give us the documents, and I hope you reconsider your denial. I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentlelady from Alabama, Ms. Se- well. Ms. SEWELL. Thank you, Mr. Chairman. And thank you, Chair Yellen, for being here today. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 24 I wanted to bring your attention to the wages and what I see is income inequities going on, and really get your take on what we can do as far as monetary policies to close that gap. Since the height of the financial crisis, the U.S. economy has made remarkable progress, particularly compared to other parts of the world. Here in the United States, the unemployment rate fell from 10 percent to 5.3 percent in June, and the President has pointed out in his budget over the past 4 years that we put more people back to work here in the United States than Europe has, and Japan, and other nations. However despite the overall employment gains, there are still some districts, mine included, that have folks who want to work who haven’t been able to find work. The hourly labor compensation has been tending to lag behind the growth, in particular, and the President’s budget projects the share of national income going to labor rather than to capital will remain at historic lows for years to come. What, in your view, can and should be done to reverse this trend and ensure that the workers reap more of the rewards and gains from our growing economy. I am particularly interested in the dis- parity that exists among minority unemployment. I can tell you that in my own district in Alabama, while the overall Nation has 5.3 percent unemployment, our median average unemployment in a district that is disproportionately African-American is right at 9 to 10 percent, which is vastly different. I would love to know how you think our monetary policies can go about changing that trend. Mrs. YELLEN. Monetary policy has been aimed at trying to achieve a strong recovery in the job market, and while we are not there yet, I believe we have made substantial progress. As the economy improves and the labor market gets stronger, I would ex- pect to see the growth of wages pick up over time, and at this point I think we are seeing at least some first tentative signs that wage growth is increasing. It has been running at a very slow pace. There are often lags between improvement in the labor market and a pickup in wage growth. Ms. SEWELL. Do you think unemployment rates—is it more be- cause of structural changes or cyclical factors with respect to— Mrs. YELLEN. Both cyclical and structural factors matter. So cyclically as the labor market picks up, I think the pace of aggre- gate wage growth will pick up. But structural factors are also very important; productivity growth matters over time to real wage in- creases, and productivity growth in recent years has frankly been very disappointing. That may be holding wages down. But across gaps, differences in wage trends across different groups in the labor market, I think, reflect a deeper set of longer term structural influences and go way back to the late 1970s or mid-1970s, where we have seen growing gaps by education. We have seen a persistent increase in the returns to high-skilled work- ers, and stagnation at the middle and at the bottom. Ms. SEWELL. Do you think any changes in our tax or spending policies could help close that gap quicker? I get that systemic prob- lems and persistent poverty cause lots of segments of the popu- lation to have their unemployment lag behind, sort of overall un- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 25 employment, but I really want to know if there are substantive things we can do as far as our tax policies or our spending policies that would hasten the closure of that gap, that unemployment gap? Mrs. YELLEN. Well, there is a large literature on this, and many economists have made suggestions about things that Congress could consider that would address inequality. I am certain with a high return to education and skills being a very important factor in determining wage outcomes, policies that address education at different levels would be relevant to that. Ms. SEWELL. Are there any policies that—or outreach efforts that the Fed has made in order to really understand the difference in communities of color with respect to the wage and the income in- equality? Mrs. YELLEN. We do have surveys. We are trying to collect infor- mation. Household surveys enable us to gain better insight into this, and we have community development efforts that are ad- dressed to low- and moderate-income communities to try to see what could be done. Ms. SEWELL. Thank you for your efforts, and I hope you will con- tinue them. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from Tennessee, Mr. Fincher. Mr. FINCHER. Thank you, Mr. Chairman. And welcome, Chair Yellen. I appreciate you being here today, and I am going to get right to the point. I am going to talk a little bit—a couple of lines of questions, cost-benefit analysis, and then about raising interest rates and what kind of impact that will have on national debt versus personal debt, and the committee room being remodeled, I also have been watching the TVs, which are very informative. And the charts that I think are being shown by my colleagues on the other side of the aisle, if we would just change the top to progress since Republicans took the House in 2011, then I think the charts are great. Mr. PERLMUTTER. Yes! [laughter] Mr. FINCHER. So I appreciate my buddies on the other side of the aisle; I get a big kick out of that. Back to costs-benefit analysis, the small and medium-sized banks, lending institutions all over the country, the impacts of Dodd-Frank being burdensome, over-bur- densome. Just two or three questions, and you can answer and we will move on. Does the Fed’s independence in setting monetary policy mean that financial regulations are above the law, one, and has anyone at the Federal Reserve does an analysis of the cumulative impact of Dodd-Frank regulation on broader economic variables, such as credit availability, economic growth, capital formation, and perhaps most importantly, job creation? Now, the CFTC and the SEC do this. Why aren’t you doing this, and can you shed light on why you are not, and would you be open to doing it? Mrs. YELLEN. We do a great deal of analysis to try and under- stand the costs of regulations that we put in place, and their bene- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 26 fits. For example, with respect to the Basal III capital require- ments, we participated along with other countries in a very de- tailed cost-benefit study of the likely impact of raising capital standards. We came to the conclusion that even though there might be a very modest burden on raising spreads and the cost of capital to the economy, that the costs of financial crises had been so dramatic and so large that the impact that we would have of reducing the odds of a financial crisis passed the cost-benefit test easily. We reg- ularly make sure we comply with the— Mr. FINCHER. So, are you—not to interrupt, but my time is slip- ping away. Would you be open to doing a specific cost-benefit anal- ysis for every big decision? Because, what you are saying there— I get what you are saying and I know it is very complicated, but you are saying that in order to make sure that we hurt this one over here, we are doing this one here, but we are not going to give you the information that you—it is not cut and dried, which we need more than you are getting. Would you be open to doing a cost- benefit analysis, yes or no? Mrs. YELLEN. We do follow the analysis required by current law, and in some cases I think it would be difficult to do that, after all— Mr. FINCHER. So, no? Mrs. YELLEN. —Congress has, for example, in Dodd-Frank, al- ready made a judgment that they want to see us put certain re- quirements into place based on Congress’ judgment that it would make the financial system safer and sounder. We put out proposed regulations for comment to try to accomplish an objective that Con- gress has already assigned to us, because they have determined that it would be beneficial. Mr. FINCHER. Okay. Reclaiming my time, it just seems like a common-sense approach. I know it is very complicated, but again, the SEC, the CFTC, and other agencies are doing this—that we have a common-sense approach, cost-benefit analysis. And you are—I think you are saying that you are in favor of doing it this time. Maybe Congress needs to do something else— let me move on—but you are not in favor of it. Raising interest rates, nationally, the debt that we owe, we see the current national debt, personally, the debt that every—many Americans owe in this country. When we start down this path of raising rates, I am afraid—there is a whole generation of people now who think that zero percent is the standard interest rate, be- cause they don’t know what the interest rates—back when I was a kid, when interest rates were 18 or 20 percent under the Carter Administration. But when you start down this path of raising rates, my theory is we go into another recession, then you can’t raise rates again, because rates are already low, because you haven’t raised them much anyway. And then the only answer is more quantitative eas- ing, more dumping money into the economy, and that gets very se- rious very quickly. What is your—do you fear that raising rates is going to do this? I know my time is— Mrs. YELLEN. We are not going to raise rates if we think it is going to tip the economy into a recession. We will raise rates be- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 27 cause we believe the economy is strong enough that it is appro- priate to have higher rates to meet the objectives we have been as- signed by Congress and— Mr. FINCHER. This is a concern for you as well? Mrs. YELLEN. We wouldn’t do something that would threaten a recession— Mr. FINCHER. I yield back. Mrs. YELLEN. —unless inflation were at risk with— Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Illinois, Mr. Fos- ter. Mr. FOSTER. Thank you, Mr. Chairman. And thank you, Chair Yellen, for appearing today. On page 12 of your report, you note that exports, that is to say, trade imbalance, has been a substantial drag on GDP growth. The House and Senate will soon go to conference on a customs bill that was part of a trade package that was mostly passed into law last month. So my concern is and continues to be around the potential for our trade partners to undermine the value that free-trade agreements can have without strong, enforceable prohibitions on currency ma- nipulation. During the trade debates, the Administration put forth the posi- tion—they basically insisted that it was impossible to define cur- rency manipulation in any way—for example, with the IMF defini- tion of currency manipulation, in any way that would not have sig- nificantly impinged on your ability to have accommodative mone- tary policy, including quantitative easing, in response to the down- turn. So my question to you is, do you agree with that? Specifically, in what ways would, for example, the IMF definition of currency manipulation, have prevented you from accommodative monetary policy? Mrs. YELLEN. I do agree with the concerns that were expressed about currency manipulation. First, let me make clear that I am opposed, and the G-7 and G-20 have weighed in, that intervention in currency markets by governments for the sake of changing the competitive landscape and purposely trying to— Mr. FOSTER. Agreed. Mrs. YELLEN. —convert trade to a country is wrong. It is inap- propriate behavior. Our Treasury Department is deeply engaged with other countries— Mr. FOSTER. I understand. Mrs. YELLEN. —when they think they see that. Mr. FOSTER. The question is, is it possible to make actionable ob- jective criteria, defining currency manipulation, which would not have impinged on what we had to do in response to the crisis? Mrs. YELLEN. I believe it is difficult because many factors influ- ence the value of currencies that are traded in markets. Mr. FOSTER. You are aware the IMF definition does not talk about the value of currencies; it talks about action. It has three indicia: you have to be running a persistent trade surplus; you have to be accumulating additional foreign-exchange VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 28 reserves; and you have to be holding excess foreign exchange re- serves. It is my belief that none of those three would have been triggered by our response. And the question is, in so that the Administration’s position was just fundamentally wrong, that IMF definition would have pre- vented us from the accommodative monetary policy that was so im- portant to rescuing our economy? Mrs. YELLEN. My concern with this is that I think it is important for countries to be able to conduct monetary policies that best pur- sue domestic objectives. Those policies are not intended to impact currencies, but because they do affect interest rates, and interest rates affect global capital flows, they have impacts on currency val- ues. All I have said about this topic is that I would worry about any type of legislation that could cripple monetary policy from achiev- ing the objectives that Congress has assigned to us. Mr. FOSTER. I understand you are worried about it. The question, the precise question is, is there anything you did that would have triggered the IMF definition of currency— Mrs. YELLEN. I am not sure. I haven’t studied that carefully enough. Mr. FOSTER. Would you be able to get back to us? Would it be possible to get back with an answer for the record— Mrs. YELLEN. We will try to look at that. Mr. FOSTER. —of that precise question? Thank you. I really ap- preciate that. Let’s see. I have a little bit of time left, so I guess—are you famil- iar with—I am a physicist, are you familiar with Albert Einstein’s quote that any theory of the universe should be made as simple as possible but not simpler? And are you ever reminded of that quote when you talk about these—things like the Taylor Rule, where you imagine that the entire universe can be reserved—reduced to a lin- ear relation between a handful of variables? Mrs. YELLEN. I think that is a very good point, and I think it is apropos of the Taylor Rule. It would be nice to be able to reduce appropriate policy to the current values of two simple variables, but I think the world is more complicated than that. We can’t take everything into account, but there are important things that need to be considered, and that is why we have an FOMC that has been asked to bring a great deal of information to the table. Mr. FOSTER. Right. And the last thing is sort of a mathematical corollary of that, which is that if you have something that is really a function of many, many variables, and it is changing over a pe- riod of time in response to a single one of those variables, that ob- viously does not mean that the real response function is a single variable—single function of the single variable, which is— Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from California, Mr. Royce, chairman of the House Foreign Affairs Committee. Mr. ROYCE. Thank you, Mr. Chairman. Chair Yellen, in your first appearance as Fed Chair before this committee, you commented on the need to move forward with housing finance reform. Do you con- tinue to believe the current state of our secondary mortgage mar- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 29 ket poses a systemic risk, and should Congress and the FHFA be taking steps to share that public risk backed by taxpayers with the private sector? Secretary Lew suggested that such an approach would have his support. Mrs. YELLEN. I have long said, and my predecessors have as well, that we think it would be desirable to see Congress address GSE reform to decide explicitly, self-consciously what is the appro- priate role of the government in the mortgage market, and to try to bring private capital back into the mortgage market. There are a number of different ways, different strategies Con- gress could take to accomplish that, but I do think it is important for Congress to try to resolve those issues. Mr. ROYCE. Thank you. Chair Yellen, last year, I, along with other members of the House Financial Services Committee, wrote to Treasury Secretary Lew and copied you regarding our concerns about FSOC’s lack of a formalized process for reviewing non-bank financial institutions facing designation, and we shared concerns about the FSOC’s need to conduct a thoughtful review of the insur- ance industry before moving to designate individual insurers. Since sending that letter, the FSOC has taken additional steps to understand the asset management industry which was clearly needed after the flawed Office of Financial Research report. Specifically, Federal Reserve Governor Tarullo has endorsed an in-depth marketwide analysis and an activities-based systemic risk review, but the FSOC has still not taken steps to study and better understand the insurance industry. So, do you think it would be appropriate to conduct a thorough study and analysis of the insurance industry as well? Shouldn’t all non-bank financial institutions face a similar process for review? Mrs. YELLEN. The asset management industry is one where FSOC thought it appropriate to focus on activities and to look at whether or not there are systemic risks associated with some asset management activities. Examples would include liquidity and re- demption risk and use of off-balance-sheet leverage. With respect to insurance, this is not a matter of going from re- views of individual companies to the activities type of approach— it is not something that FSOC, to the best of my knowledge, has discussed. Mr. ROYCE. Let me go then to my last question. In February of 2014, I asked you about the deepening economic crisis in the Com- monwealth of Puerto Rico. You said then that the Federal Reserve was monitoring developments and would continue to analyze the potential consequences for financial stability for these events. You also said that it would be best to not have the Federal Reserve step in as a creditor of a State or municipality. In fact, you said it was more appropriate for Congress and not the Federal Reserve to ad- dress financial issues faced by States and municipalities. Do you believe that the best outcome would be that the Puerto Rico Electric Power Authority and its creditors would come to an agreement without any government intervention with respect to this issue? Mrs. YELLEN. Without what intervention? Mr. ROYCE. Without government intervention, and instead work it out between the Power Authority and the creditors? VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 30 Mrs. YELLEN. This is not a matter in which I have an opinion. It is something the Federal Reserve can’t and shouldn’t be involved in. I think it is important for Congress to consider what is best to do in this case. And it is not a question on which I have an in- formed judgment. What we have been doing is obviously monitoring developments in Puerto Rico, which economically, are very, very difficult. We are looking to see if there are risks that are being transmitted to the broader municipal debt market, and we are not seeing signs of con- tagion. That is another topic that is obviously important, but ex- actly what should be done in this situation, I think, is a matter for Congress to consider. Mr. ROYCE. In the past, you have said it is best not to have the Federal Reserve step in as a creditor of a State or municipality. Mrs. YELLEN. And I continue to believe that very strongly. Mr. ROYCE. Thank you very much. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty. Mrs. BEATTY. Thank you, Mr. Chairman, and thank you, Rank- ing Member Waters. Chair Yellen, thank you for being here today, and let me just say that we were very proud to have you last week in the great State of Ohio. Mrs. YELLEN. Thank you. Mrs. BEATTY. Although it was not Columbus, the capital, we would look forward to having you come just a few miles south to visit us. My first question is a follow-up on Congresswoman Waters’ ques- tion, when she asked about discrimination and the loss of wealth based on subprime lending, and in part of your answer, which I am not sure you got to finish, when you said there were other policies that Congress could pursue to address discrimination and inequal- ity. Can you elaborate on what those policies are? Mrs. YELLEN. I meant more broadly in terms of inequality among households, in terms of wealth and income. There are many factors that affect inequality. They tend to be deeper structural forces, in- cluding technological change that has increasingly upped the skill demands for our workforce and raised the return to skilled workers relative to those who are less skilled. Certainly, education and training are matters that are within Congress’ domain to consider how to make sure that individuals have access to a world-class education that is going to enable them to earn a higher wage; policies affecting infrastructure and capital formation, entrepreneurship, other things also affect trends and in- equality. And I was referring to all of those factors where Congress could potentially play a role. Mrs. BEATTY. Okay, thank you. When you testified before this committee in February, January’s unemployment rate was about 6.6 percent overall. About 4 months later, the rate decreased to about 5.3 percent. However, in African- American communities, while it declined, it went from 12.1 percent to 9.5 percent over that same period. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 31 And while African-Americans’ unemployment rate did decrease, the number is still too high. In fact, it is double the national unem- ployment rate, and I think most people—you included—would agree that is unacceptably high. So my question is, as you assess the health of the labor market, to what extent are you taking into account the fact that minority communities still face unacceptably high rates of unemployment, and is there any outreach or anything that the Federal Reserve has engaged in to understand the extent in communities such as the one I represent? Mrs. YELLEN. There really isn’t anything directly that the Fed- eral Reserve can do to affect the structure of unemployment across groups. And unfortunately, it has long been the case that African- American unemployment rates tend to be higher than those on av- erage among those in the Nation as a whole. It reflects a number of different sources of disadvantage that are operative there. In our national monetary policy, we are trying to achieve a situa- tion where jobs are broadly available in the economy to those who want to work. But we seek the maximum sustainable level of em- ployment or we have to be careful not to try to push the economy to a point we have to worry about inflation remaining under con- trol. And given our focus on inflation, there are certainly limits on what we can do for any particular group. Mrs. BEATTY. Okay. Thank you. I have a few seconds left. Let me continue on this theme on the other side as I talk about the Office of Minority and Women Inclu- sion (OMWI). Certainly, you know that Section 342 of Dodd-Frank created that office. Part of what we have struggled with is the whole reporting authority and the standards for reporting back what the Federal regulation offices are doing. Do you have any insight on that? Mrs. YELLEN. We make each of the Federal agencies or entities that are covered by this make annual reports to the Congress. So the Board is reported annually on our efforts, and we are very com- mitted to doing what we can to facilitate inclusion of minorities and women. And we have many programs and have tried to detail them in those reports— Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentlelady from Missouri, Mrs. Wagner. Mrs. WAGNER. Thank you, Mr. Chairman. Chair Yellen, thank you for joining us today. I want to touch on some issues that some of my colleagues have also brought up. But keeping in that vein, and particularly with the news coming out of Greece for the past few weeks, I think it is important for countries to take a hard look at their own debt. It is time for us to look in the mirror and address our own problems, including the over $18 trillion in debt that we have accumulated. Now, the Federal Reserve has employed an, I will say exception- ally accommodating, monetary policy since the financial crisis to spur economic growth. However we are now nearly 7 years, ma’am out with the Federal funds rate still at the lower zero bound. The quantitative easing and low interest rates have made financing of VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 32 the Nation’s deficits much easier, and certainly has relieved pres- sure through fiscal reforms to solve our long-term debt problem. Chair Yellen, both you and your predecessor, Chair Bernanke, have argued that fiscal reform is important over the long term. However, you have also stated that fiscal prudence can be ignored in the short term to not hamper the economic recovery. Chair Yellen, it has now been 7 years. We can no longer say we are looking at the short term when we are dealing with our coun- try’s debt problem, can we? Mrs. YELLEN. I, like my predecessor, believe the Nation faces a very serious debt problem in the years ahead. At the moment our deficit, mainly because of congressional ac- tions and those by the Administration, have succeeded in lowering deficits to the point where for the next several years, the debt-to- GDP ratio is stable. But over time, under CBO projections, as the population ages, and especially if health care costs rise above trends, the country will face an unsustainable debt path, in which debt to GDP ratio rises and that requires further action. That is mainly related to retirement programs, to Social Security and even more important, to Medicare and health care cost trends. And so, we have known about this for decades, and there remains a need for action on this front. Mrs. WAGNER. There does remain a need for action. And citing those latest CBO long-term budget outlook reports on some of the consequences of large and growing Federal debt, this comes again from the CBO’s long-term budget outlook, it cites things like less national savings, lower income, pressure for larger tax increases or spending cuts, reduced ability to respond to domestic and inter- national problems, and a greater chance of a fiscal crisis. Are these things that you all consider at the Federal Reserve with regard to monetary policy? Mrs. YELLEN. I agree with the set of consequences that you just read to me. And ultimately, when we see those things being mani- fest, those consequences. So in the years ahead, if deficits aren’t addressed and become very large, they will put pressure on the economy that—not right now, but in future years, likely will cause us to have higher levels of interest rates than we otherwise would have, diminished levels of investment and productivity growth in this economy. We would have to offset those forces by having a tighter monetary policy. But we are not in that situation now. Mrs. WAGNER. Particularly relating to long-term debt leading to a greater chance of fiscal crisis, as they say, is this something you discuss as part of FSOC when you are looking at systemic risk? Mrs. YELLEN. I have not been part of an FSOC discussion of this, but it obviously is a significant issue for the long term. Mrs. WAGNER. I only have a short amount of time. When do we get to the long term, Chair Yellen? When are we there after 7 years and adding $8 trillion in debt over the last handful of years? When do we get to the long term? Mrs. YELLEN. The economy is recovering. I am pleased by its progress. As I indicated, my colleagues and I think if the economy progresses as we expect, we probably will begin to raise interest rates some time this year, and that takes us toward the long term. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 33 Mrs. WAGNER. How does that affect our current debt, Chair Yellen? Mrs. YELLEN. Well, two ways. Higher interest rates will raise the cost of servicing the debt, but a stronger economy, which is what will cause us to raise interest rates, boosts tax receipts and is fa- vorable for the Federal budget. Mrs. WAGNER. Thank you. I appreciate you being here. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from Michigan, Mr. Kil- dee. Mr. KILDEE. Thank you, Mr. Chairman. Chair Yellen, thank you for being here. The work that I did before I came to Congress and a lot of the work that I have been focused on since I have been here relates to the economic health of America’s cities and towns. And I know that a lot of the regional banks, most notably Boston, Cleveland, Chicago, and in some ways Philadelphia, have been focusing some attention on this issue of the fiscal health of communities within their supervisory area. And I have raised this with your prede- cessor and again with you. I am curious as to whether the Board of Governors might in the near future take up this question. What we have, and I have talked about this before, I know other Members have heard me go on about it, is we have looming a pending institutional failure in this country. There is often a tendency to think about cities facing sig- nificant municipal stress as being anomalies, or having that prob- lem as a result of significant mismanagement, or an episodic sort of fiscal stress situation. But what we are seeing, and what the data shows us, is there is a structural problem. Municipal governments of all types are fac- ing enormous stress. Hundreds of millions of dollars in general fund revenues and expenditures in many, many dozens of these municipal institutions that are facing potential failure. While I know the Fed has involved itself most recently in the question of municipal bonds, potentially as a source of liquidity for banks, looking at the municipal financial situation from the inves- tor side is only one-half of the equation. And I think it is overdue that the Fed, with its strong voice and its dual mandate, particularly its mandate related to employment, take a look at the potential employment impacts of the failure of dozens, potentially, of American cities that are really central to our economy. I wonder if you might comment on the problem and offer any thoughts as to whether you think the Board of Governors might take this question up. I think it would be an important issue to take up. Mrs. YELLEN. That is something I am happy to raise with my col- leagues. I am well aware of the work that has gone on in a number of Reserve banks. Reserve banks all have active community devel- opment functions, and many of them have been very focused on older cities or cities that have suffered declines, in some cases be- cause of the decline of manufacturing, and trying to help them work toward strategies that would lead to their revitalization. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 34 And a number of them have done some very creative work. So I can discuss with my colleagues what we might do in that space. I am pleased to see the efforts and the good work that many of the Reserve banks have undertaken. I think it has been helpful to com- munity leaders as they try to devise strategies for revitalization. Mr. KILDEE. Thank you. I would just encourage you to look at this as potentially a part of the work of the Board of Governors itself and looking at the role that the banks, regional banks have done. It is important. But I think often what happens is, when it is looked at from a perspective of a region, it is seen as an anomaly. And I think if the Fed would be willing to use its research capacity to help elucidate to many policymakers that not only does this problem have a po- tential negative impact on employment, but it is a structural and pervasive problem that goes beyond what normally had been seen as an anomaly, or as an episode based on management failure or some unforeseen circumstance. It is a structural problem, and I really do think it fits within the responsibility of the Fed. Mrs. YELLEN. I appreciate your suggestion. I know a number of years ago the Reserve banks collaborated to initiate work on this topic. They chose a number of communities around the country, cit- ies that were hard pressed, and tried to work on understanding what strategies worked to revitalize these different kinds of com- munities. And it could be collaborative work the Reserve banks un- dertake together. Mr. KILDEE. Thank you very much. I appreciate it. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Kentucky, Mr. Barr. Mr. BARR. Chair Yellen, welcome back to the committee. And I wanted to talk to you a little bit about the low rate policy, effec- tively, it is almost a zero short-term interest rate policy, that the Federal Reserve has pursued now for 6 years. One of the original targets the Fed set to begin raising rates was when unemployment reached 6.5 percent. We are well below that target now; as you testify today, we are at about 5.3 percent unemployment. And I appreciate your testi- mony that you expect to raise the target Federal funds rate gradu- ally by the end of this year, but what I want to explore are the rea- sons why the Fed has delayed normalizing monetary policy beyond the point that you originally targeted for increasing rates and what that says about a few issues. First of all, what does it say about the unpredictability of Fed policy? And I appreciate in your testimony that effective commu- nication is critical, that transparency is desirable. But doesn’t the fact that we have been below 6.5 percent unem- ployment now for almost a year-and-a-half, and you still haven’t raised rates, undermine the commitment to transparency and the commitment to communication? Mrs. YELLEN. I want to make clear that we never said that we intended to raise rates when unemployment fell to 6.5 percent. Instead, we said it was a threshold and if unemployment was above that level and inflation was well under control, we would not VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 35 raise rates; that once unemployment fell below that level, we would then begin to consider whether it was appropriate to raise rates. And we have followed that policy, and we never said that it was a target— Mr. BARR. I understand that. Mrs. YELLEN. —at which we would begin to raise rates. Mr. BARR. I understand that, and I appreciate the caveats, and I appreciate the fact— Mrs. YELLEN. Well, it is more than a caveat. It is— Mr. BARR. You are very good at caveats. I appreciate that. But I think that brings me to my second point, which is that a full 61⁄ 2 years after the recovery, even though we have seen a de- cline in unemployment, as you acknowledge, there is slack in the labor market, and there are significant, significant weaknesses in the labor market, in the overall economy. In fact, a recent ‘‘Investor’s Business Daily’’ article said that the overall growth in the 23 quarters of the Obama recovery has been 13.3 percent. That is less than half the average growth rate achieved at this point in the previous 10 recoveries since World War II. Looked at another way, had the Obama recovery been merely av- erage, GDP would be $1.9 trillion larger than today. That trans- lates into $6,000 per household. And I think you recognize this in your report, saying that the measure of labor under-utilization remains elevated relative to the unemployment rate, and that would explain why you have invoked that caveat and haven’t raised the rates, even though you came below that 6.5 percent. So I understand that analysis. But let’s talk about the cause of that underlying weakness. It is clearly not monetary policy from your standpoint, because you have engaged in these extraordinary measures—6 years of zero rates, very accommodative policy, bond buying, quantitative easing. Shouldn’t we start looking at fiscal policy: Obamacare, which CBO says is contracting employment by 2.5 million jobs; the 30- hour work week, which is forcing people to go part-time; the EPA’s rationing of energy; 8,000 lost coal miners in my State and we are losing employment by the day. The American Action Forum says that over the next 10 years, Dodd-Frank will reduce GDP output by almost a trillion dollars. And just last week, one of your colleagues on the Federal Re- serve, Board Governor Lael Brainard, acknowledged that regula- tions may be a factor in diminished fixed-income liquidity in the capital markets. The Federal Reserve has gone to extraordinary lengths to produce robust economic growth, and yet we see this lag and this slack, as you say. Shouldn’t we start diagnosing the problem differently, that this is a fiscal policy disaster? Mrs. YELLEN. Of course, it is appropriate to look at why we have had such a slow recovery. It really has been painstakingly slow get- ting the economy to the point where unemployment is 5.3 percent. Remember, we had a devastating financial crisis. It took a huge toll on households, left many of them struggling with debt, with VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 36 massive losses in wealth, underwater on their mortgages. They have been trying to get that debt under control. Businesses have been very cautious about investing. We are— Mr. BARR. And I have 15 seconds left. Mrs. YELLEN. —partly living with the headwinds from that cri- sis. But— Mr. BARR. Just one final point. I think you know that low rates are not the problem. And in fact, what I am concerned about now is that because we have delayed raising rates below that 6.5 per- cent unemployment rate, now we have no tools left. And what is your response now? If we go back into recession with a $4.5 trillion balance sheet and zero rates, we have no tools to address the next recession. Chairman HENSARLING. The time of the gentleman has expired. The Chair recognizes the gentleman from Florida, Mr. Murphy. Mr. MURPHY. Thank you, Mr. Chairman, and Ranking Member Waters. Chair Yellen, thank you for being here. One of the biggest problems we have in our country is the dis- appearing middle class, and one of the factors that isn’t addressed in that conversation is often housing. And in my home State of Florida, in areas like Miami, and Coral Gables, there is a lot of growth. In fact, a lot of the numbers there for growth are through the roof, way better than ever expected. But unfortunately, that is for folks who have the 700-plus credit scores, while the middle- to lower-middle-income families, espe- cially a lot of the minority communities, are neither experiencing this bounce-back, nor building the equity that I think is important to get into the middle class. My question relates to regulatory relief for banks lending to these families. When does the Federal Reserve intend to finalize its list of domestic systemically important banks so that this com- mittee can have an idea, better than just the $50 billion line, which American banks are vanilla, making 30-year fixed-rate mortgages and small business loans important in our communities, versus the ones that carry systemic risk. Mrs. YELLEN. I am not sure exactly what your— Mr. MURPHY. When do you intend to finalize the list of domestic systemically important banks? Mrs. YELLEN. We have eight domestic banks that have been des- ignated globally as global systemically important banks (G-SIBs). They are among the banks that are over $50 billion and subject to the enhanced prudential standards in Dodd-Frank. And those banks we have, for example, subjected to a higher le- verage requirement than other banks. We supervise them in a dif- ferent process, and we will be proposing enhanced capital stand- ards or surcharges for those eight systemically important banks. But others that are not in that group also are important and have systemic significance and are subject to enhanced prudential standards and supervision. Mr. MURPHY. And will you be putting that list out? Mrs. YELLEN. The list exists. Mr. MURPHY. Other than the G-SIBs. Mrs. YELLEN. I am not sure—what list? VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 37 Mr. MURPHY. For what I just said. For the domestic systemically important banks. And there has been a lot of conversation here in the committee as to whether it is just a $50 billion, what I would say, arbitrary line that is being considered instead of qualitative measures like interconnectedness, derivatives, substitutability, et cetera, and if that is going to be taken into consideration. Mrs. YELLEN. We give special attention to all banks that are over that threshold. But they differ in terms of their characteristics. And we have tried throughout to tailor supervision and regulation to the systemic footprint of the bank. So there is no list of banks that meet this criteria. And there are, of course, several that have been designated for supervision by FSOC that—or also subject to enhanced supervision. Mr. MURPHY. Switching gears a little bit, and we have already had some discussion related to employment, most economists say that 5 percent is full employment. Right now, U3 is at, what, 5.3 percent? So we are pretty close. Why do you think we haven’t had wage growth yet, and what do you think needs to be done to begin to feel that? Mrs. YELLEN. First of all, I think there is more slack in the labor market than you would think by the 5.3 percent measure, some- what more. And I have pointed to the very high levels, unusually high, and we detailed this in the Monetary Policy Report. The fact that involuntary part-time employment is unusually high given the unemployment rate. So that is one factor. In addition, I think that labor force participation, while it has mainly declined for demographic reasons, there remains some com- ponent of depressed labor force participation that does reflect a weak economy, a weak labor market that more people would rejoin the labor market if it were stronger. So to my mind, the U3, the 5.3, somewhat overstates just how strong the labor market is. But there are also lags in the time the labor market strengthens and wage growth picks up. Mr. MURPHY. What rate do you think we as policymakers should use as full employment? Mrs. YELLEN. The—what? Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Pennsylvania, Mr. Rothfus. Mr. ROTHFUS. Thank you, Mr. Chairman. Welcome, Chair Yellen. Last week, the Federal Reserve Board approved the merger of a $188 billion bank with an $18 billion bank. This will put the new entity above $200 billion. In the Federal Reserve’s final order ap- proving the merger, it analyzed the financial stability implications of the merger. The Federal Reserve noted that the merger did not present a meaningful, greater risk to the stability of the United States financial sector. In analyzing the stability implications, the Federal Reserve used a factor-based model. Chair Yellen, based on the analysis in the final order, should we consider this analysis an endorsement by the Federal Reserve of a factor-based approach to measuring systemic importance and finan- cial sustainability? Mrs. YELLEN. The staff looked at the detailed circumstances sur- rounding the characteristics of this particular merger and tried to VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 38 arrive at a reasoned judgment, taking many different factors into account of whether or not this would create a financial stability threat. And they didn’t use just a formulaic approach but they looked at the details of situation— Mr. ROTHFUS. So the factor-based model worked in this case? Mrs. YELLEN. They listed a number of factors they took into con- sideration, and that is a useful list, but then they did a detailed analysis— Mr. ROTHFUS. Thank you. Chair Yellen, as you know, this month marks 5 years since the enactment of the Dodd-Frank Act. At the signing ceremony, President Obama proclaimed that the law would help lift our economy and lead all of us to a stronger, more pros- perous future. Yet since that time, the law has resulted in some 400 new gov- ernment mandates, which research has shown will reduce gross do- mestic product by $895 billion over the next decade, or $3,346 for each working-age person. These costs are a large reason why more than 17 million Americans are still unemployed or underemployed today. Why the percentage of adults who are employed is just 62 percent, the lowest in 37 years. And why even Bernie Sanders has admitted that an honest assessment of real unemployment in the United States is 10.5 percent. In your speech to the City Club in Cleveland last week you said, ‘‘Growth in real GDP has averaged only 2.25 percent per year since 2009; about 1 percent less than the average rate seen over the 25 years preceding the great recession.’’ I would note that by compari- son, the GDP growth rate for a comparable period after the Reagan recovery was 4.8 percent. That was a recovery marked by less regu- lation, lower taxes compared to higher taxes, and a higher regula- tion environment than we have here. Considering that average 2.25 percent per year since 2009, that number hides quarters where we actually contracted. For example, in both the first quarter in 2014 and in the first quarter in 2015, the economy actually shrank. Is that correct? Mrs. YELLEN. According to the statistics we have, yes. Mr. ROTHFUS. In light of the negative growth in those quarters, I would like to draw your attention to the slide that has been shown by my colleagues from across the aisle. I don’t see any nega- tive growth quarters in that. Do you think this slide is an accurate reflection of the economy’s GDP growth? Mrs. YELLEN. It looks like the numbers you have on this chart are year over year numbers rather than quarterly numbers. Mr. ROTHFUS. Counting the bars between 2011 and 2015, I see more than 4 bars there; I see quite a few bars. It is hard to see what is represented here. What I don’t see are the negative quar- ters we have had in there. Mrs. YELLEN. I don’t know, this isn’t my chart, but— Mr. ROTHFUS. Would you agree the chart does not show the neg- ative quarters? Mrs. YELLEN. I don’t see the negative quarters. I see your label says year over year. Mr. ROTHFUS. But you do see more than 4 or 5 years there be- tween 2010 and 2015—more bars that would represent— VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 39 Mrs. YELLEN. Year over year often means the fourth quarter of one year over the fourth quarter of the previous year, or the third quarter over the third quarter of the previous year. And because negative quarters are infrequent, typically in a four quarter year over year— Mr. ROTHFUS. Negative quarters and near zero quarters, which we also missed in that chart. I would be interested in your perspec- tive given these anemic GDP numbers when you compare a 2.25 percent growth since 2009, and your own acknowledgment that is a percentage less than the 25 years proceeding the great—this is the more accurate slide, by the way, which does show the negative or near zero growth in some of the quarters. Mrs. YELLEN. Okay. Mr. ROTHFUS. Given that anemic growth, 2.25 percent, and you compare the deregulatory, lower tax environment in the 1980s where we had 4.8 percent growth, do you think Dodd-Frank has lifted the economy? Mrs. YELLEN. I think Dodd-Frank has led to a stronger and more resilient financial system, and the years that you showed on your previous graph that were negative and year over year negatives, that was what we suffered in the financial crisis—a huge loss in output and in jobs. And to have a stronger, more resilient financial system means the odds of such a devastating episode is dramati- cally reduced. Mr. ROTHFUS. I yield back my time. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Washington, Mr. Heck. Mr. HECK. Thank you, Mr. Chairman. And Madam Chair, thank you so much for being here. I am aware that there is an accumulating amount of research and scholarship, as a matter of fact, kind of tracking the decline of entrepreneurship and business formation. Fewer businesses are being started and fewer are surviving past the first year. And as we all know, there is a declining number of community banks in this country. So my question to you is, what can you do, and what can we do to help community banks serve their local economies? Mrs. YELLEN. Community banks are really vital to local econo- mies. I saw this firsthand when I was in San Francisco as Presi- dent of the Reserve bank there. It is something we are very focused on at the Federal Reserve. We want to see community banks thrive, and we know that for many different reasons, this is a very difficult environment for community banks: the slow pace of eco- nomic growth and recovery that we have had; the low interest envi- ronment is squeezing their margins; and the regulatory burdens that they face have been really quite high and they are struggling with it. For our part, we are looking at the way that we supervise com- munity banks to do everything within our power to reduce the reg- ulatory burden. And I could give you a list of things that we are trying to do to minimize the burden: more off-site exams; more spe- cial tailoring of our exams to the risk profile of the bank. Mr. HECK. If I could reclaim my time, thank you. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 40 Mrs. YELLEN. Yes, sure. Mr. HECK. Kind of in the spirit of this, Congresswoman Beatty asked you about what you could do specifically to help communities of color who have disproportionately high unemployment rates. And you indicated that you don’t have specialized tools. I am going to respectfully disagree. And I would encourage you and others at the Fed to take note of some recent research done by a graduate student at MIT named Mr. Nguyen, who indicates that when community banks branches leave census tracks where there is a concentration of either low-in- come or communities of color, that local business lending declines precipitously, even when there are other national or international bank branches retained in that community. He tracks that it is not true with mortgage lending, but it is true with small business lending. And with all due respect, Madam Chair, you have merger approval authority oftentimes when com- munity banks are purchased, and you could make conditional the continuing presence of branches in those census tracks or in those neighborhoods where we have begun to document a decline. So with the little amount of time I have left, I am always inter- ested in your opinion about what you see as the threats to our con- tinuing recovery. And I will use this opportunity to suggest that I don’t think it is as robust as it can be. You and I have had the con- versation about the output gap and the dire need for the Fed to begin to think of itself differently as it relates to investment and infrastructure. But I am not going to go there today with you. What do you see as the threats that could induce—or the factors that could contribute to another downturn in the economy? What are you worried about? What keeps you up at night? Mrs. YELLEN. Let me first start by saying that I do think the economy has improved a great deal. And in a way, I am focused on the economy’s strength and its good performance, rather than mainly lying awake at night and worrying about a further down- turn. I think we are doing pretty well. Mr. HECK. The Fed has reduced the projected growth rate of the GDP by 20 percent in just the last few years, from 2.5 to 2.8 to 2.3 percent. That is a material downward projection. Mrs. YELLEN. It is— Mr. HECK. But the question still is, what is out there that wor- ries you? Mrs. YELLEN. Okay, let me just say that the writing down for our projections on growth in part reflects the fact that productivity growth has consistently disappointed now for a number of years. So our unemployment projections have proven more accurate than our output projections. In essence, we have had decent job growth and better job growth than you would have anticipated, or we would have anticipated with weaker growth. In part, it is a re- flection of quite disappointing productivity growth. Chairman HENSARLING. The time of the gentleman has expired. The Chair recognizes the gentleman from Arizona, Mr. Schweikert. Mr. SCHWEIKERT. Thank you, Chairman Hensarling. Madam Chair, first, on a personal basis, you have always been very kind to me, particularly on some of the more abstract ques- tions I have thrown at you. But in a couple of the conversations VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 41 here, there has been the discussion of interest rate policy, ulti- mately what it does to us and our fiscal policy. In an FOMC meet- ing, does it ever reach the level of conversation of, as interest rates go back to some level of normalization, what it actually means to our debt and deficit and the projection of our financing costs? Mrs. YELLEN. That is something our staff looks at and I have looked at. Congress should expect, and this is embodied in CBO projections that as the economy recovers, short-term interest rates will rise. Long-term interest rates already reflect that, and as the years go by, if short-term interest rates do indeed rise with the re- covering economy, long rates will move up further and this will af- fect the interest burden of the debt, and other things equal will add to deficit. So that is clear. But it is also true that a strengthening economy means stronger tax receipts. So this will have an effect. Mr. SCHWEIKERT. You and I see that as somewhat obvious. But I see many discussions around here when we are looking at an en- vironment where reports are telling us that just in a few years, in- terest is going to equal our entire defense budget. And that is actu- ally the new normal—we will call it the new normal interest rate models we are heading towards. My great fear is current monetary policy ultimately emboldens us to engage in bad fiscal policy. And we are going to pay a price for that. I think that in the future, particularly if we keep seeing the revisions on our GDP growth, we may have to deal with this much sooner than later. Mrs. YELLEN. You should be aware that interest rates are likely to rise and that will raise the interest cost of the debt. That should be part of the calculation that you are making. Mr. SCHWEIKERT. I have sort of a one-off type question, and you and I touched on this earlier; you were very kind to engage in con- versation with me. I have an interest in the distortion of the price of money. And more than just what the Fed does in its liquidity and claim on bank reserves and the purchase. It is what we do tax policy-wise on what interest is deductible and what isn’t, and what is guaranteed. We sat down with some Richmond Fed folks a while back, and they told us that the majority, the vast majority of total debt, not including student loans in this country, has full faith or implied credit. Are we in the time of an absolute distortion of the price of money, and does that make your job much more difficult to use money as a communication of activity in the markets? Mrs. YELLEN. It is absolutely true that when—whether it is a student or a business or a household, considers what the relevant cost of borrowing or debt is to them, they look not only at the inter- est rate they have to pay, but what the other terms are of that bor- rowing. And if, for example, it is tax advantage, that has an impact on what the relevant cost of money is to them. So, of course, it is true that many things other than just the headline interest rate matters in the incentives facing borrowers. Mr. SCHWEIKERT. Well, my thesis on that is that ultimately hits to your concern of our savings rates. We have created so much dis- tortion over here on the price of money that we have VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 42 disincentivized proper savings and frugality, you now, particularly in our part of Congress. You have been asked a couple of questions, and you have always been very good at bringing up entrepreneurship. One of the things that seems to be working in the economy is some of the alternate access to capital platforms, whether they be crowd-sourced lending or crowd-sourced equity. Much of the regulatory environment is about the systemic risk and a cascade effect to the banking financial systems. But these, when they are crowd-sourced, actually have almost no cascade ef- fect. Do you believe the Fed will take a light regulatory touch to sort of the alternative financing models out there that are much more egalitarian, reaching into some of our smaller communities, but ac- tually in many ways are much safer? Mrs. YELLEN. I am so happy to see innovation in the financial sector that makes new forms of financing available. I am not aware of regulatory issues at this point that affects those vehicles. But I can get back to you if we do have concerns. Mr. SCHWEIKERT. Thank you, Madam Chair. And thank you, Mr. Chairman. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from California, Mr. Sher- man. Mr. SHERMAN. Thank you, Mr. Chairman. Madam Chair, I have 5 minutes to try to convince you not to raise interest rates until the spring. Spring is when things natu- rally are risen. It is when plants come out of the ground. It is a better time than winter to do so. And there are some reasons that I think you are already aware of. The IMF study, for example, argues that things should be de- layed until early next year. You have more economic experience than all of us in this room, of course. But on the political side, you should not underestimate the ability of politicians in Europe to screw things up. You should not underestimate the ability of politicians in Wash- ington to screw things up. You need to price in the prospect that we do not pass all the appropriations bills, that we do not raise the debt limit. I am sure you factored in China, but it is not just Beijing and Washington that you need to worry about. You need to worry about Norwalk, Connecticut. I mentioned this to you when you were here a few months ago. And I am hoping that you can get your staff to do a study on this for two purposes: one, to let the country know how important this is and what its economic effect will be; and two, to inform your own decision so that if this prospective terrible decision does occur, you factor in the fact that it is going to shave half a point away from our economic growth at least. I am referring, of course, as you know, to the argument that we are going to capitalize all leases. This would add $2 trillion to the corporate balance sheets liabilities of America—a $2 trillion in- crease in liabilities. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 43 Not because anything has happened in the economy, but just be- cause as a matter of theological esoteric accounting thinking that I have to confess I actually understand and no one should. But for no benefit to our economy, we may add $2 trillion. When you do that, you throw all the balance sheet ratios out of whack. You force companies to try to retrench and make their bal- ance sheets look better. And you strongly disincentivize entering into long-term leases. Companies will say well gee, yes, you could open that shopping center. Why don’t we sign a 1-year lease for the anchor store? And oh, we will renew it later, but we can’t sign more than a 1-year lease because our balance sheet will look terrible. So, if you factor all those reasons in, maybe that will push you in the right direction. But there are more. The reason to raise interest rates, well the one other that you are already aware of is that our unemployment rate doesn’t capture all those who have dropped out of the labor market. We have an all- time low labor participation rate. When you adjust for that, the un- employment rate does not just define increase. The reason given to raise interest rates is to deal with the pros- pect of inflation. Inflation is already very low. You have a 2 percent target and you are not hitting it. You have to keep interest rates low to hit that target. But by the way, that is too low a target. Laurence Ball, another economist, has argued for even a 4 percent rate. And it is in real business where things stick, where you may have an employee who gets fired who might not get fired if there was an easy way to reduce their costs by 2 or 3 percent. And then finally, you have all the Baby Boomer retirees. And I will point—it is not in your mandate, but it is in the Declaration of Independence, a desire for happiness. There are economists and CPAs for whom a 1 percent real inter- est rate is always a 1 percent real interest rate. That is way less than 1 percent of the people. For everyone else, they live in a nominal world. And if you are a retiree in a zero inflation rate, 1 percent real interest rate world, you are living on 1 percent because you psychologically cannot in- vade principal. If instead you are in a 3 percent inflation, 4 percent interest rate, 1 percent real rate of return world, you are deliriously happy. You are earning 4 percent, and nominally you are not invading prin- cipal. And this works for everybody except economists and CPAs, which means just about everybody. So please, wait until spring. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Colorado, Mr. Tip- ton. Mr. TIPTON. Thank you, Mr. Chairman. And thank you, Chair Yellen, for taking the time to be here today. We have heard comments from our colleagues across the aisle in terms of the disparate impact that we are seeing in the failed econ- omy for minority communities. And I would like to be able to ex- pand that actually for what we are seeing in rural America as well, VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 44 where the economy simply isn’t moving. And one of the key compo- nents for that is obviously access to capital for our community banks. You just stated a few moments ago that it has been a difficult period for community banks. Regulatory burdens have been high. And I guess what my question is, as follows up on comments that you made earlier in the year, which were then supplemented by FDIC Chairman Sheila Bair as well, that we have an overzealous regulatory burden which is impacting some of the community banks that are going. And what assurances, what policies are you going to be putting forward? Because it seems to be that through Dodd-Frank, it is a matter of shoot, then aim. And now we are trying to be reactive. But at home our people are feeling the pain of bad policy that has come out of Dodd-Frank. And what we are feeling—and what are you going to be doing at the Fed to be able to alleviate this? Mrs. YELLEN. We are very focused on community banks. We want to— Mr. TIPTON. That is what they are worried about, by the way. [laughter] Mrs. YELLEN. We formed a council called the Community Deposi- tory Institutions Advisory Council (CDIAC), that consists of com- munity bankers. And they come to see us twice a year. The entire Board meets with them. There are also in each of the 12 Federal Reserve districts, versions of, on a regional scale, a council to advise the Reserve banks on factors affecting community banks. So we are listening. We are taking seriously the complaints that we hear, and the specifics about our supervision, and trying to be responsive— Mr. TIPTON. I appreciate that, but if I can put a little excla- mation point on this. I sat down with community banks in my dis- trict. They feel that they are no longer working as a banker, but they are working for the Federal Government. They are working just for—to be able to comply with regulations that are currently in place. And while we may have hearings, they don’t feel that anyone is actually listening, because this is stagnating that growth in those community banks. Mrs. YELLEN. We are listening and we are taking a series of steps that I believe are meaningful to reduce burden, including re- ducing the amount of time we spend in these banks, disrupting other activities that they want to be doing, by reducing our de- mands for documentation, taking a more risk-focused approach to reduce the burdens of exams. We are trying to make clear to the community banks what is rel- evant to them. And so many of the regulations under Dodd-Frank we have put in effect only affect larger banks, and particularly the most systemically important banks— Mr. TIPTON. But you do recognize that a lot of our community banks de facto feel they still have to be able to comply with those Dodd-Frank regulations. Even though you are saying, ‘‘We are going to look the other way, it doesn’t really apply to you,’’ they are still feeling the impacts that are coming out of Dodd-Frank. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 45 Mrs. YELLEN. There are some things that Dodd-Frank imposed on all firms. For example, the Volcker Rule could envision their community banks being exempt from Volcker. Now, we are trying to tailor our implementation of Volcker to utterly minimize the bur- den on community banks, but they are subject to it. There may be some steps that could be taken. Mr. TIPTON. We just introduced legislation for tailoring bank reg- ulations. We have 55 banking organizations that have endorsed the legislation, and we hope you will, too, because we have to be able to get the economies moving in rural America and our minority communities. Because when we are looking at that 5.3 percent, and we are talking about, as Mr. Rothfus had pointed out, a real unemploy- ment level that is 10.5 percent, part of the problem is that when you aren’t raising interest rates right now, what you are really say- ing is, our economy stinks right now. We are just not seeing real movement and what tools do you have left in the toolbox to be able to stimulate this? Mrs. YELLEN. I would say our economy is in a much better state. Low interest rates have facilitated it, and a decision on our part to raise rates won’t say, no, the economy doesn’t stink. We are close to where we want to be, and we now think the economy cannot only tolerate, but needs higher rates. So, there have been head winds and we have tried to use monetary policy to overcome them. But I want you to know that we share the goal of minimizing burden on community banks and will remain very focused on it. We have the Agrippa process that is in play at the moment, and it is focusing particularly on burdens in community banks. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Minnesota, Mr. Elli- son. Mr. ELLISON. Thank you, Mr. Chairman, and I also thank you, Chair Yellen, for being here. Is it regulation from Dodd-Frank that is keeping our economy— for the people who haven’t been able to benefit from the economy in the recovery, is it regulation that is causing the problem? Mrs. YELLEN. To my mind, there has been an increase in regu- latory burden on banks. What we are doing is trying to create a healthier, safer, sounder financial system that will keep credit flowing to the economy and particularly, if we ever experience a stress situation where in this financial crisis, we saw banks just withdraw credit for the economy, which took a huge toll on eco- nomic activity by having more capital and liquidity and a safer and sounder financial system. We hope we are preventing future episodes like the devastating one we just lived in. And if there is some burden that is associated with that and some cost, the benefit is a far reduced chance of a financial crisis that will take the kind of toll you have just de- scribed. Mr. ELLISON. Thank you. So it has been pointed out that we have a low labor participation rate. Is it because of Dodd-Frank? Mrs. YELLEN. No. And also there are very—we are going to have over time a declining labor force participation rate, first and fore- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 46 most because we have an aging population, more individuals in the retirement years. This is going to continue. Now, I have said, and my colleagues have said, that over and above that, we think there is something holding labor force partici- pation back that reflects weakness in the economy and that as things strengthen, we would expect some people who have been too discouraged to look for work to move back into employment. But the major reason that we are seeing a trend downward in labor force participation is because of demographics, and it will continue. Mr. ELLISON. Has the Consumer Financial Protection Bureau (CFPB) been harmful to the U.S. economy in the recovery? Mrs. YELLEN. Congress created the CFPB to enhance consumer protection, and they have been very focused on doing that. Mr. ELLISON. I just ask because some of my good friends com- plain about it a lot, and I am just trying to get an expert opinion on whether it is a good thing or a bad thing for our economy. Mrs. YELLEN. It is addressing potential consumer abuses and try- ing to enhance consumer protection. Mr. ELLISON. Does addressing consumer issues like say, the problems that the mortgage issues that we saw in the 2008 period and before that, help the overall economy? Does that strengthen— does that help markets operate more accurately? Does it help em- ployment? Mrs. YELLEN. We certainly saw that the subprime crisis where there was irresponsible lending had a very harmful effect on the economy and on low-income communities, and that burden con- tinues to exist. So we are going through a period in which we are trying to address all of the issues, including improper securitization and mortgage underwriting practices, that led to that devastating experience. It is difficult to get the balance right and to figure out what the best way is to design regulations. There are always consequences in terms of unintended effects of regulation. We need to be vigilant about trying to address that. Mr. ELLISON. What about student debt? You know how big it is. Is it a drag on the overall functioning of the economy? Mrs. YELLEN. It has increased enormously. I am worried about the high levels of student debt, and it is debt that if an individual can’t repay, it never goes away. It can’t be written off in bank- ruptcy. But on the other hand, education is really critical to suc- ceeding in this economy. And it is critically important to make sure that students have access to quality education so they can get ahead. They need good information about programs and their suc- cess rates in order to avoid mistakes. Mr. ELLISON. Thank you. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Texas, Mr. Wil- liams. Mr. WILLIAMS. Thank you Mr. Chairman, and Chair Yellen, thank you for being here today. I am a small business owner from Texas. I am a Main Street guy. I am a car dealer, one of your favorites. And I can tell you small business is hurting. Main Street America is hurting, and it VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 47 is hurting because regulations, which you have talked about today, are literally choking the heart out of small business. And I think, too, that we talked earlier about inequalities. And I would say that competition is the key. Competition in business takes care of inequalities, not the Fed- eral Government. And my colleague here just was asking for an ex- pert opinion on whether Dodd-Frank and the CFPB are good for the economy. I can tell you as an expert opinion that they are bad for the economy, the worst. With that being said, in 2014, in comments before the Joint Eco- nomic Committee, and I will be somewhat repetitious here, but I think it is important that we remind you where we need to head our economy, you stated in questioning from Senator Coats that, ‘‘In my own discussions with businesses, I hear exactly the same things that you are citing. Concerns with regulations, about tax- ation, about uncertainty about fiscal policy.’’ You went on to say, ‘‘There is more work to do to put fiscal policy on a sustainable course.’’ That, ‘‘progress has been made over the last several years in bringing down deficits in the short term, but that a combination of demographics, the structure of entitlement programs and his- toric trends in health care costs, we can see that over the long term, deficits will rise to unsustainable levels relative to the econ- omy.’’ Now, my constituents back home in Texas are very concerned about the health of our economy, because it is not good. And in Texas, we are the—we have great things going but it can still be better. In Texas, a State that has somewhat recovered since 2008, you have 115 fewer community banks and you have 105 fewer cred- it unions. Tons of consolidation and a lot of uncertainty about where the economy is headed. So, my question, Chair Yellen, is what do you say to those com- munity-based institutions that former Fed Chair Bernanke charac- terized as saying, we are being penalized, and you touched on this today, by your policies, particularly when these policies have at the same time, failed to produce meaningful economic growth in the communities those institutions serve, which further erodes their profitability? Mrs. YELLEN. What I have said is we are trying to do everything we possibly can to relieve burdens on community banks. They have been through very difficult times. First of all, a period that has been very rough for the economy, and a slow recovery. And that has taken a toll on their profitability and that of the businesses, as you noted. And in a low interest rate environment, net margins tend to be low. I think that the low interest rate environment we have had and accommodative monetary policies have served to help our economy overall and get it moving and moving back to full employment. If you compare the Unites States with any number of other economies that also suffered in the aftermath of the crisis, we are among the leaders in terms of how we are doing economically. And other countries are now pursuing the same kinds of mone- tary policies that we put into place earlier, which in a way is an endorsement of their effectiveness. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 48 Mr. WILLIAMS. It still is very hard to borrow money for small businesses. And I can tell you that banks, and you probably heard this too, are having to hire more compliance officers than loan offi- cers. That takes money out of the system, money which could be loaned to people like me to hire people and create jobs. We had CFPB Director Cordray here before us and I asked him if he would slow down this Dodd-Frank legislation because a lot of it is not completed, and because we are losing so many banks and credit unions. And he said, no, we are going to go 100 percent and take a look at it. That is a bad policy. You stated that the community banks shouldn’t face the same scrutiny as the bigger banks. You said that today, and I agree. And if the Fed will tailor its supervision to reduce regulatory burden. I heard you say in 2014, I heard you say—you said, I had commu- nity bankers in my office just yesterday, from what you said, and I heard today from community bankers asking me, ‘‘What do I do?’’ We say the right thing, but what do we do? They are fearful of things that can happen of what they may not do. They don’t know what to do. What would you tell these people? We talk a good game but we don’t come through. Mrs. YELLEN. We are trying to make clear our supervisory expec- tations and work carefully with them to let them know what rules and regulations apply and how and what don’t and to try to shield them from many of the things with which larger banks have to comply. Mr. WILLIAMS. It is very vague. I hope you will understand that. Mr. Chairman, I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Maine, Mr. Poliquin. Mr. POLIQUIN. Thank you, Mr. Chairman. And thank you, Chair Yellen, for being here. I appreciate it very much. You know, every- body wants the same thing. We want more jobs, we want higher- paying jobs. I am a business owner like Mr. Williams and other folks in this room. I love talking to other business owners because they grow our economy and create opportunities for our kids. Now if you are in my district, and you are talking to the owners of a paper mill or convenience store, they say the same thing, that they are spending so much time and so much money to comply with government regulations that they can’t afford to grow their business and hire more workers. The Competitive Enterprise Institute calculates that the cost of businesses in America in one year to comply with just Federal Gov- ernment regulations is $1.9 trillion—$1.9 trillion. Now, these busi- nesses pass on the cost of these regulations in the price of their products. So, our families are spending about $15,000 a year for businesses to comply with government regulation. I am sure we can agree, Chair Yellen, that businesses need to be fairly regulated, and predictably regulated, but when those reg- ulations are killing jobs, it is just not right. Several years ago, in a highly partisan vote with very little Re- publican support, the 2,300-page Dodd-Frank bill was passed. Since then, there have been mountains and mountains of regulations and rules that are starting to smother our financial services industry. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 49 And one part of Dodd-Frank that is a great concern of mine is the too-big-to-fail regulations, the SIFI designation. When FSOC is trying to determine what banks and other non- financial institutions, like asset managers, should be designated as too-big-to-fail, it means that if they fail, the taxpayers will have to step in and bail them out. We all know that there is a huge dif- ference, Chair Yellen, between large money center banks with all kinds of tentacles running through our economy and asset man- agers, mutual funds, and pension fund managers that handle the retirement savings for millions of Americans, with no systemic risk to the economy. The former director of a nonpartisan congressional office cali- brates that if asset managers have to comply with these too-big-to- fail regulations, with no systemic risk imposed to the market, it will drive up the cost of their operation to the extent where the long-term rates return that they can generate for millions of Amer- icans in this country while saving for their retirements will be dinged by about 25 percent. I don’t know about you, but where I come from, 25 percent is a lot of money. Can’t we agree, Chair Yellen, right now, that it just doesn’t make any sense for non-bank financial institutions that pose no systemic risk to the market, like asset managers—they should escape this Dodd-Frank regulation that penalizes our sav- ers? Mrs. YELLEN. The FSOC is charged with attempting to identify threats to the financial stability of our country. And they issued a public notice indicating what they are going to do is to look at par- ticular activities— Mr. POLIQUIN. Okay. So they are still looking at it. Mrs. YELLEN. —not firms but asset management activities that could pose risks. Mr. POLIQUIN. I appreciate that. Mrs. YELLEN. That is the focus. Mr. POLIQUIN. You are still looking at it. Okay, I would like to switch gears if I can in my remaining minute. You stated on a number of occasions that you are very con- cerned about unstable deficit spending in this country, how it might impact economic growth and job creation, and I agree. Everybody who is on a family budget or a small business budget knows that you can’t spend more than you take in for long periods of time and borrow to make up the difference without getting into trouble. But that is exactly what Congress has done. That is why we have an $18 trillion national debt. Now, we have some folks who come before our committee, Mrs. Yellen, including the Secretary of the Treasury, Mr. Lew, who was here a few weeks ago and said, ‘‘You know, a $500 billion annual deficit is no big deal. It is only 3 percent of our GDP.’’ I disagree with that, and I bet you do, too. I was a State treasurer in Maine and I can tell you that high levels of public debt caused by long periods of deficit spending can do great damage to our economy be- cause we need to pay the interest on that rising debt, therefore, we are not able to spend it to build roads and bridges, and to educate our kids. VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 50 This year, Chair Yellen, we are spending about $230 billion in interest payments on that debt. And in 10 years, it is projected to be $800 billion, more than we pay to defend our country. Can’t we agree that it is about time you help us, and Congress gets its act together, when it come to our deficit spending and our debt? Mrs. YELLEN. I did indicate my concern with the sustainability of the debt path that the Unites States is on. Mr. POLIQUIN. I hope you use your influence in this town, Chair Yellen, to make sure you talk with the— Chairman HENSARLING. Time. Mr. POLIQUIN. —Administration to make sure— Chairman HENSARLING. The time of the gentleman has expired. Mr. POLIQUIN. Thank you, sir. Chairman HENSARLING. The Chair wishes to inform the remain- ing Members that the Chair anticipates clearing two more Mem- bers in the queue, the gentleman from Arkansas, Mr. Hill, and the gentleman from Oklahoma, Mr. Lucas. At that point, I anticipate adjourning the hearing. The gentlemen from Arkansas, Mr. Hill, is recognized. Mr. HILL. Thank you, Mr. Chairman. And Chair Yellen, thank you very much for being here today. There are a couple of items I want to bring up. Mr. Heck talked about banking availability and the Harvard Study that everyone has read the last few months, you see that one out of five counties, particularly rural counties, now no longer have a physical presence of a bank. So not a branch of a national bank, but not even a pres- ence of a commercial bank. I think that is concerning, and speaks to his point. There are two things on that item I want to call to your attention that relate to merger approval issues at the Fed. One is the Herfindahl-Hirschman index. I think the Herfindahl-Hirschman index, which was adopted back in the 1960s as bank mergers be- came subject to the anti-trust rule, discriminates against rural areas. I think the idea of using county designations and using deposits as the sole indicia for what business is in trade area is incorrect. And I can give you many examples of this. But I would invite the Board staff to reconsider how to do bank mergers, not base them on deposits only, not base them on the Herfindahl-Hirschman index, particularly in the rural counties. Second, is the issue of comment letters on mergers. Mergers for a bank—between bank holding companies, if there is no comment, you have a 56-day approval process. If they get one comment letter, that extends to 206 days for approval, which reduces efficiency and reduces productivity of that. And I would like to see the Board adopt a new approach on com- ment letters and distinguish between real comment letters from the geographies connected to the merger and just promotional fish- ing expedition comment letters, and let the Reserve banks have more power and not force a Board of Governors approval of merg- ers. I am going to write you about this, you don’t need to comment on it today. I would like you to comment on the labor force participation rate, because my reading of the cohorts that you referenced a minute VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 51 ago, actually is that younger people are who have dropped out of the labor force. In fact, people over 55 are working more than ever before, and I really take issue with your point that those of us in the Baby Boom generation are retiring. I think if you go back and look at those numbers, you will find that it is actually young people being forced out—or not having the opportunity to participate in the labor force. Mrs. YELLEN. I agree with you, that younger cohorts of retirees are working more than their parents and grandparents did. That is absolutely true. It is just that there is such a substantial drop- off in labor force participation when people retire that, when you look at the joint effect of an aging population, more people in age brackets where they do retire, that the working more is only an off- set. It is not the same order of magnitude as the demographic ef- fect of the aging. I don’t disagree with what you have said about that. Mr. HILL. Let me change subjects and go back to liquidity. Sec- retary Lew, when he was here, talked in his testimony about the factors including technology, regulation, and competition, that have reduced liquidity in the market . He said, ‘‘The business models and risk appetite of traditional broker-dealers have changed, with some broker-dealers reducing their securities’ inventories, and in certain cases, exiting certain markets.’’ Notwithstanding the Octo- ber study, Chairman Neugebauer also had a roundtable last week in which a participant, JPMorgan, I believe, stated that in the Treasury market it used—you could be able to do a $500 million trade and not have a bid ask spread move. The market would not move. Now her estimate is, it is down to $292 million. There is an indi- cation of—even in the Treasury, the most liquid market, we have significantly reduced liquidity. In the FSOC report, on page 68, the primary securities dealings, shows since the crash and since the implementation of Dodd-Frank, Treasury holdings have gone up to high levels and all other cat- egories, corporates and even agency securities have dropped, which implies to me that people are holding Treasuries, holding liquidity, and not making a market in that. And I really think regulation is being shortchanged in its impact. I would like you to comment on Basel, the liquidity rules all work- ing together that are causing a lack of liquidity. Mrs. YELLEN. I am not ruling out the possibility that regulations could play a role here, it is simply we have not been able to under- stand through a lot of different factors and we need to look at it more to sort out just what is going on and what the different influ- ences are, but I am not ruling that out. Chairman HENSARLING. The Chair now recognizes the gentleman from Oklahoma, Mr. Lucas. Mr. LUCAS. Thank you, Mr. Chairman, and I appreciate your in- dulgence at the end of the hearing, and Chair Yellen, I will try to move in an expeditious sort of a fashion. First, an observation. As we discussed before, my part of the country is very economically dependent on the oil and gas industry. And I am hearing from those involved in energy lending about reg- ulatory pressure on the treatment of energy loans. Reserve-based VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 52 loans, crude oil in the ground, proven reserves during this current period of low prices. I am concerned that if banks have less flexibility in dealing with lending to these companies in this sector, that an accumulative im- pact of all the factors as we move towards the end of the year could result in loans potentially being defaulted on or bankruptcy filings. It would be devastatingly destructive to the domestic energy indus- try. So, I just ask that we be understanding of the nature of those proven barrels in the ground. Second question, or second observa- tion of the question, the last time we were together before this com- mittee we discussed the Basel III leverage ratio rule as it relates to the treatment of segregated margin. And I appreciated your response in addressing the matter of on- balance sheet accounting treatment. But I would like to go just a little further today and specifically talk about the Basel leverage ratio now extending to off-balance-sheet exposures that are not driven by accounting rules. And in this off-balance-sheet context, why is customer margin collected by a bank-affiliated member of a clearinghouse being treated as something the bank can leverage, when Congress very explicitly required that such margin be seg- regated away from the bank’s own resources? And for the benefit of my colleagues, I suspect on any given day we are probably talking a couple hundred—$200 million, oh, these big numbers here, $200 billion in resources on any given day. Could you enlighten us a little bit on that, Chair Yellen, please? Mrs. YELLEN. The leverage ratio was meant to be a very simple non-risk-based measure that pertains to all assets that are carried on a bank’s balance sheet and that includes derivative trans- actions. It is not clear that for many companies the leverage ratio is what is binding rather than risk-based capital standards in many cases, but this is something we are having a look at. I recognize it is a concern. It is something that the Basel committee is discussing, and trying to gather additional information on what impact it is having. And it is something that is very useful to put on the agen- da that we will have a close look at. Mr. LUCAS. And that is all I can ask, Chair Yellen, that you work with our friends at the CFTC here, and our foreign regulator friends to come up with a sensible approach. Two hundred billion dollars that can’t be touched by the banks, but yet they have to have extra resources to cover. It just seems like the net effect would be more cost and more strain on those trying to use these resources. So, I appreciate your comments. With that, Mr. Chairman, and out of character, I yield back. Chairman HENSARLING. The gentleman yields back. Chair Yellen, I want to thank you for your testimony today be- fore the committee. Pursuant to our earlier discussion, we look for- ward to having you back soon, separate and apart from your Hum- phrey Hawkins appearances. The Chair notes that some Members may have additional ques- tions for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legis- VerDate Nov 24 2008 15:37 Jul 07, 2016 Jkt 097154 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\97154.TXT TERI 53 lative days for Members to submit written questions to this witness and to place her responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous mate- rials to the Chair for inclusion in the record. This hearing stands adjourned. 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Janet L. Yellen (2015, July 14). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20150715_chair_monetary_policy_and_the_state_of_the

@misc{wtfs_testimony_20150715_chair_monetary_policy_and_the_state_of_the,
  author = {Janet L. Yellen},
  title = {Congressional Testimony},
  year = {2015},
  month = {Jul},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20150715_chair_monetary_policy_and_the_state_of_the},
  note = {Retrieved via When the Fed Speaks corpus}
}