[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JULY 16, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-92
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
(II)
C O N T E N T S
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Page
Hearing held on:
July 16, 2014................................................ 1
Appendix:
July 16, 2014................................................ 53
WITNESSES
Wednesday, July 16, 2014
Yellen, Hon. Janet L., Chair, Board of Governors of the Federal
Reserve System................................................. 7
APPENDIX
Prepared statements:
Yellen, Hon. Janet L......................................... 54
Additional Material Submitted for the Record
Duffy, Hon. Sean:
Letter to President Barack Obama, dated June 18, 2014........ 60
Lynch, Hon. Stephen:
Letter from Americans for Financial Reform, dated July 10,
2014....................................................... 66
Yellen, Hon. Janet L.:
Monetary Policy Report of the Board of Governors of the
Federal Reserve System to the Congress, dated July 15, 2014 76
Written responses to questions submitted by Representative
McHenry.................................................... 134
Written responses to questions submitted by Representative
Neugebauer................................................. 136
Written responses to questions submitted by Representative
Luetkemeyer................................................ 141
Written responses to questions submitted by Representative
Ross....................................................... 144
Written responses to questions submitted by Representative
Stutzman................................................... 146
Written responses to questions submitted by Representative
Miller..................................................... 149
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Wednesday, July 16, 2014
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
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Bachus, Royce,
Garrett, Neugebauer, McHenry, Bachmann, Pearce, Posey,
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt,
Stivers, Fincher, Stutzman, Mulvaney, Hultgren, Ross,
Pittenger, Barr, Cotton, Rothfus, Messer; Waters, Maloney,
Velazquez, Sherman, Meeks, Lynch, Scott, Green, Cleaver,
Ellison, Perlmutter, Himes, Carney, Sewell, Foster, Kildee,
Delaney, Sinema, Beatty, Heck, and Horsford.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time.
This hearing is for the purpose of receiving the semi-
annual testimony of the Chair of the Board of Governors of the
Federal Reserve System on monetary policy and the state of the
economy.
I now recognize myself for 5 minutes to give an opening
statement.
We welcome Chair Yellen for another semi-annual Humphrey-
Hawkins appearance before our committee today. Her appearance
performs a double duty, as today's hearing represents the 11th
hearing of our committee's Federal Reserve Centennial Oversight
Project.
As all Members know, last week we held a legislative
hearing on the first piece of legislation to arise from the
Project, namely the Federal Reserve Accountability and
Transparency Act (FRAT Act), co-authored by Mr. Huizenga and
Mr. Garrett.
Not surprisingly, its introduction was met with howling
protests and apocalyptic visions from my Democratic colleagues.
Regrettably, such a reaction has become commonplace on our
committee. With few exceptions, my Democratic colleagues have
proven they do not wish to legislate, nor do they wish to
conduct oversight.
It causes many to wonder why they ran for Congress in the
first place. And the answer: they apparently wish to be
defenders and apologists of the status quo.
But with the real unemployment rate at 12.1 percent, 46
million Americans dependent on food stamps, and real median
income having fallen every year of the Obama Administration,
the status quo is unacceptable.
Additionally, when the Federal Reserve helps precipitate
the financial crisis with loose monetary policy, selectively
intervenes in distinct credit markets, facilitates our
unsustainable national debt, blurs the lines between fiscal and
monetary policy, and has its power vastly expanded, the status
quo is unacceptable.
A dramatic increase in power calls for a corresponding
increase in accountability and transparency, and that is
precisely what the FRAT Act does. The overwhelming weight of
evidence is that monetary policy is at its best in maintaining
stable prices and maximum employment when it follows a clear,
predictable monetary policy rule.
I believe the period of the great moderation between 1987
and 2002 attests to this proposition. Had a clear, predictable
monetary policy rule like the Taylor Rule been in place
throughout the last decade, it is likely the financial crisis
would have been avoided in the first place, or at least
downgraded to a garden variety recession.
The FRAT Act in no way, shape, or form dictates monetary
policy. Anybody who maintains otherwise either hasn't read the
Act, doesn't understand the Act, or regrettably, they are
trying to mislead others.
After the passage of the FRAT Act, if the Fed wants to
conduct monetary policy based upon viewer text messages from
the ``American Idol'' television show, it will retain the
unfettered discretion to do so. If the Fed wishes to conduct
monetary policy based upon a rousing game of rock-paper-
scissors on odd Tuesdays at the Federal Open Market Committee
(FOMC), it will retain the unfettered discretion to do so.
The Fed can set any rule it wishes. It can change the rule
anytime it wishes. It can deviate from the rule any time it
wishes.
Under the FRAT Act, it simply has to report and explain
this to the rest of us. That is what transparency and
accountability are all about.
For those who claim this somehow imposes upon the Fed's
independence, I note that the Fed Chair testifies before our
committee and our Senate counterpart twice a year. The Fed
Chair meets with the Treasury Secretary once a week. And dare I
mention the continuing revolving door between Fed officials and
Treasury officials.
The threat to the Fed's independence does not come from the
Legislative Branch; it comes from the Executive Branch.
And again, I reiterate, this has nothing to do with the
FOMC deliberations or micromanagement of daily Federal Reserve
operations. The Fed just wants to keep the curtains closed and
keep any outside eyes from reviewing how well or how badly its
biggest policies are implemented.
Who knows whether the Fed's engine needs a tune-up if no
one will let the mechanic look under the hood? Oh, by the way,
that is not my quote. It is from a former chairman of this
committee, Henry B. Gonzalez, whose portrait sits to my right,
and who very well may have been the single most liberal
Democrat to ever Chair this committee.
My, how the times have changed.
As our witness, Dr. Mark Calabria of the Cato Institute,
testified last week, the reason it is important for the Fed to
reveal its rule or operating model is, ``so that it can be
examined and tested by those outside the Fed. Only under such
examination can we learn how the model captures the real
world.''
The Fed has yet to corner the market on Ph.D. economists or
monetary policy experts. Quite simply, the Fed's work should
bear the scrutiny and critical examination of others.
With respect to the other portions of the FRAT Act, it
remains an open question whether the Fed should serve any role
as a prudential regulator. But regardless of the answer to that
question, the Fed should no longer be permitted to hide its
prudential regulatory actions behind its monetary policy
independence cloak.
This is particularly true when we consider the Fed's
sweeping powers under the Dodd-Frank Act to control an ever-
increasing share of the American economy.
When it comes to prudential regulations, it is clearly time
to hold the Fed to the same openness and transparency standards
that we require of other Federal agencies. This includes
mandatory cost-benefit analysis, also known as common sense.
Finally, many have wondered about the Fed's view of the
FRAT Act. I have not. During my congressional tenure I have yet
to encounter one Federal agency that has requested less power,
fewer resources, or more accountability. I doubt the Fed will
be the first.
I now yield to the ranking member for an opening statement.
Ms. Waters. Thank you, Mr. Chairman.
And welcome back, Chair Yellen.
Chair Yellen, it has been 5 months since you last appeared
before this committee, and in that time, much has changed.
Absent major changes in our economic outlook, the Federal
Reserve's program of large-scale asset purchases, known as
quantitative easing, is set to end in October, and many are
looking to see what the Fed will do once the program subsides.
The challenges are significant. Although employment levels
for many sectors have continued to rise, stable and consistent
growth is uneven and is not a given.
In a surprise turn, GDP dropped substantially in the first
quarter. Unemployment remains unacceptably high, particularly
for minority groups. African Americans face an unemployment
rate of 10.7 percent; 7.8 percent for Latinos.
So let's be clear. While we have made much progress, the
long-term effects of the financial crisis, the worst since the
Great Depression, can still be felt by working people and
people still looking for work in every one of our communities
across the country.
Of course, the problem of unemployment has only been made
worse by Republican intransigence on any number of measures,
from refusing to invest in our country's job-creating
infrastructure, to cutting investments in education that will
fuel the next generation of American leaders, to their refusal
to extend benefits for our friends and neighbors suffering from
long-term unemployment.
And other important programs that create jobs and economic
growth, such as the Export-Import Bank and the Terrorism Risk
Insurance Act, remain needlessly tied up in a Republican
ideological war, creating widespread uncertainty for our
Nation's job creators.
In the wake of legislative uncertainty and fiscal
recklessness, some of my colleagues on the other side of the
aisle are likewise attempting to stop the Fed from taking
action to jumpstart our economy and preserve economic
stability. They have recently proposed harmful legislation that
would take unprecedented steps to virtually eliminate the
Federal Open Markets Committee's role in shaping monetary
policy.
Instead, Republicans prefer to put decisions related to
inflation and employment on autopilot, determined arbitrarily
based upon a rigid set of factors. If enacted, this proposal
would undercut the Fed's ability to respond to emerging threats
through rules and requirements designed to paralyze Fed
rulemaking and to curtail monetary policy discretion.
This would include concerns emanating from areas like
social media, which the Fed noted just yesterday appears to be
substantially stretched. Quite simply, the straitjacket
approach taken in the Republican bill would leave the Fed with
few options, powerless to deal with an emerging area of concern
even if it were to pose a danger to our economy.
Whether emerging threats to financial stability come from
social media or elsewhere, this shortsighted legislation would
be a recipe for disaster.
Chair Yellen, I am eager to hear your views on how our
economy would have fared during the crisis and would fare in
the future with such a regime in place.
Finally, I am very interested to hear about the Fed's
progress in meeting the heightened regulatory policy mandate
entrusted to the institution under the Wall Street Reform Act.
In particular, I want to urge the Fed to expeditiously
implement the unfinished provisions of the Act and to
faithfully enforce the provisions of the law--provisions like
robust living wills and a strong Volcker Rule that provide the
tools for preventing the next 2008 crisis.
Thank you, Mr. Chairman, and I yield back the balance of my
time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Michigan, Mr. Huizenga, the vice chairman of our Monetary
Policy Subcommittee, and co-author of the Federal Reserve
Accountability and Transparency Act, for 3 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. And, as predicted,
the apocalyptic view has emerged already here in regards to my
particular bill.
But I do have to say, Chair Yellen, that I give you credit.
I watched some of your testimony last evening on TV of what you
did in the Senate, and I give you credit for coming in front of
this committee and giving us time; you have been very generous
with that.
But we both know that over the past several years the
Federal Reserve has gained unprecedented power, influence, and
control over the financial system, while remaining shrouded in
mystery to the American people.
This standard operating procedure, I believe, can't
continue. We must lift the veil of secrecy and ensure that the
Fed is accountable to the people's representatives. This is not
about your independence or the independence of the Federal
Reserve, but about accountability and transparency.
And at this point I won't go on my oversight rant that I
did back at our hearing on the bill, where I just don't
understand why many of my colleagues aren't interested in
embracing the responsibility of their job to go and exercise
oversight, and have a lack of interest in doing that.
But last week my colleague, Scott Garrett, and I introduced
H.R. 5018, and this legislation will start to pull back the
curtain at the Fed to increase accountability and transparency.
The Dodd-Frank Act bestowed massive new regulatory
authority upon the Federal Reserve, yet the Fed is not required
to conduct cost-benefit analysis when it considers new
regulations, unlike all the other financial regulators, such as
the SEC and the CFTC.
Additionally, this legislation urges the Fed to adopt a
rules-based approach, as the chairman had talked about, to the
monetary policy, instead of the continued ad hoc strategy
currently being employed. Should the Fed fail to adopt a rules-
based approach, it would trigger an audit of the Fed's books,
and unlike the view that this is going to somehow chill this, I
can tell you that many people believe this doesn't go far
enough.
In fact, I support that as well, and I never thought that I
would agree with the former chairman, Henry Gonzalez, about
doing an audit of the Fed, but if it was good enough for him in
1993, I think it is probably good enough for us here at the
centennial, as well.
But additionally, this legislation urges the Fed to--
sorry--economists across the ideological spectrum have called
upon the Fed to set this kind of monetary policy according to a
mathematical rule that uses economic data, such as the rates of
inflation and unemployment and to share that rule with the
public.
We cannot have a power entity within the Federal Government
without--just operating on a whim.
This legislation codifies the common-sense principle of
using a rules-based approach when determining monetary policy,
and I believe it is time to bring the Federal Reserve out of
the shadows and provide hardworking taxpayers with a more open
and transparent government.
My bill last week was labeled the ``Spanish Inquisition,''
and all kinds of other things were thrown around. But again, I
believe it is our job, our constitutional duty, our
constitutional responsibility, to work with you and to have
oversight of the operations.
And with that, Mr. Chairman, I yield back. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks, the ranking member of our Financial Institutions
Subcommittee, for a minute and a half.
Mr. Meeks. Thank you, Mr. Chairman.
And thank you, Madam Chair.
Chair Yellen, it is with great pleasure that we welcome you
here again this morning. And I want to extend my deep
appreciation to you and your staff for the significant amount
of time you have spent on the Hill and also for welcoming
congressional staffers at the Federal Reserve. That is
tremendously important.
I, too, was listening to some of your testimony yesterday
before the Senate Banking Committee, and you mentioned that the
United States labor markets are far from healthy.
I applaud your remarks, and I think that you are absolutely
right.
The latest data from the Bureau of Economic Analysis show
that Americans' personal income is barely growing at a tepid
rate of only 0.3 percent. In fact, other reports indicate that
the American real wages are still lower than before the crisis.
Members of this chamber are closest to the American people
that we represent in Congress, and I can assure you that we
hear loudly and clearly from them that they are not feeling
this recovery.
In fact, when preparing for this hearing I took to social
media, just asking them what questions they would like me to
ask you, and what were their current conditions. And they
said--too many said, especially the younger Americans, that
they are struggling to get jobs, and when they do get jobs, the
wages are barely sufficient to make ends meet. Too many have
been unemployed for more than 2 years or 3 years or more, and
they have exited the job market out of frustration.
Too many are concerned about their job security and their
ability to save or invest in their future.
Thank you, and I wait to hear your testimony, Madam Chair.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Alabama, Ms.
Sewell, for a minute and a half.
Ms. Sewell. Mr. Chairman and Ranking Member Waters, I want
to add to the voice--add my voice to the choir of those
welcoming Chair Yellen here today. Today's hearing with Chair
Yellen is critically important as we receive an update on the
state of the economy and the Federal Reserve's essential role
in our economic recovery.
I want to applaud Chair Yellen and the entire Federal
Reserve for their diligent work towards fulfilling its
congressional mandate of helping maximize employment, stabilize
prices, and moderate long-term interest rates. Thanks in part
to the Federal Reserve's insight and pragmatic monetary
policies, our economy continues to experience positive and
steady economy growth.
I also want to encourage the Federal Reserve to continue to
work as quickly as possible to enact rules that fulfill the
promise of strengthening our financial system and protecting
our consumers.
As this committee continues to engage in conversation with
key individuals surrounding the state of our national economy,
we must be ever vigilant in working to ensure that we avoid any
and all self-inflicted economic setbacks. It is important that
we hear from Chair Yellen and work to pass legislation that
fosters a stronger and more resilient financial system, rather
than enacting strict policy rules that would impair the Federal
Reserve's ability to do its job.
We must develop and promote fair and balanced monetary
economic policies that ensure the long-term growth and vitality
of our economy. The American people deserve nothing less.
Thank you.
Chairman Hensarling. The gentlelady yields back.
Before introducing our witness, I wish to make a scheduling
announcement. Contrary to the Chair's last appearance, where
she stayed to answer all Member questions, she has requested to
be excused at 1 p.m. for today's hearing and for future
hearings, so I wish to alert Members of that. I have neither
the desire nor the ability to hold the Chair against her will,
but I am disappointed in the change of heart.
Notwithstanding my disappointment, Madam Chair, you are
nonetheless welcome. We welcome your testimony today.
Chair Yellen has previously testified before our committee,
so I believe she needs no further introduction. Without
objection, Chair Yellen's written statement will be made a part
of the record.
Chair Yellen, you are now recognized for your oral
presentation of your testimony.
STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mrs. Yellen. 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 before turning to monetary policy. I will
conclude with a few words about financial stability.
The economy is continuing to make progress toward the
Federal Reserve's objectives of maximum employment and price
stability. In the labor market, gains in total nonfarm payroll
employment averaged about 230,000 per month over the first half
of this year, a somewhat stronger pace than in 2013, and enough
to bring the total increase in jobs during the economic
recovery thus far to more than 9 million.
The unemployment rate has fallen nearly 1.5 percentage
points over the past year, and stood at 6.1 percent in June,
down about 4 percentage points from its peak. Broader measures
of labor utilization have also registered notable improvements
over the past year.
Real gross domestic product is estimated to have declined
sharply in the first quarter. The decline appears to have
resulted mostly from transitory factors, and a number of recent
indicators of production and spending suggest that growth
rebounded in the second quarter, but this bears close watching.
The housing sector, however, has shown little recent
progress. While this sector has recovered notably from its
earlier trough, housing activity leveled off in the wake of
last year's increase in mortgage rates, and readings this year
have, overall, continued to be disappointing.
Although the economy continues to improve, the recovery is
not yet complete. Even with the recent declines, the
unemployment rate remains above Federal Open Market Committee
participants' estimates of its longer-run normal level. Labor
force participation appears weaker than one would expect based
on the aging of the population and the level of unemployment.
These and other indications that significant slack remains
in labor markets are corroborated by the continued slow pace of
growth in most measures of hourly compensation.
Inflation has moved up in recent months but remains below
the FOMC's 2 percent objective for inflation over the longer
run. The personal consumption expenditures, or PCE price index,
increased 1.8 percent over the 12 months through May. Pressures
on food and energy prices account for some of the increase in
PCE price inflation.
Core inflation, which excludes food and energy prices, rose
1.5 percent. Most committee participants project that both
total and core inflation will be between 1.5 and 1.75 percent
for this year as a whole.
Although the decline in GDP in the first quarter led to
some downgrading of our growth projections for this year, I and
other FOMC participants continue to anticipate that economic
activity will expand at a moderate pace over the next several
years, supported by accommodative monetary policy, a waning
drag from fiscal policy, the lagged effects of higher home
prices and equity values, and strengthening foreign growth.
The committee sees the projected pace of economic growth as
sufficient to support ongoing improvement in the labor market
with further job gains. And the unemployment rate is
anticipated to decline toward its longer-run, sustainable
level.
Consistent with the anticipated further recovery in the
labor market, and given that longer-term inflation expectations
appear to be well-anchored, we expect inflation to move back
toward our 2 percent objective over coming years. As always,
considerable uncertainty surrounds our projections for economic
growth, unemployment, and inflation. FOMC participants
currently judge these risks to be nearly balanced, but to
warrant monitoring in the months ahead.
I will now turn to monetary policy. The FOMC is committed
to policies that promote maximum employment and price
stability, consistent with our dual mandate from Congress.
Given the economic situation that I just described, we judge
that a high degree of monetary policy accommodation remains
appropriate.
Consistent with that assessment, we have maintained the
target range for the Federal funds rate at 0 to 1/4 percent and
have continued to rely on large-scale asset purchases and
forward guidance about the future path of the Federal funds
rate to provide the appropriate level of support for the
economy.
In light of the cumulative progress toward maximum
employment that has occurred since the inception of the Federal
Reserve's asset purchase program in September 2012, and the
FOMC's assessment that labor market conditions would continue
to improve, the committee has made measured reductions in the
monthly pace of our asset purchases at each of our regular
meetings this year.
If incoming data continue to support our expectation of
ongoing improvement in labor market conditions and inflation
moving back toward 2 percent, the committee likely will make
further measured reductions in the pace of asset purchases at
upcoming meetings, with purchases concluding after the October
meeting. Even after the committee ends these purchases, the
Federal Reserve's sizable holdings of longer-term securities
will help maintain accommodative financial conditions, thus
supporting further progress in returning employment and
inflation to mandate-consistent levels.
The committee is also fostering accommodative financial
conditions through forward guidance that provides greater
clarity about our policy outlook and expectations for the
future path of the Federal funds rate. Since March, our post-
meeting statements have included a description of the framework
that is guiding our monetary policy decisions.
Specifically, our decisions are and will be based on an
assessment of the progress, both realized and expected, toward
our objectives of maximum employment and 2 percent inflation.
Our evaluation will not hinge on one or two factors, but
rather, will take into account a wide range of information,
including measures of labor market conditions, indicators of
inflation, and long-term inflation expectations, and readings
on financial developments.
Based on its assessment of these factors, in June the
committee reiterated its expectation that the current target
range for the Federal funds rate likely will be appropriate for
a considerable period after the asset purchase program ends,
especially if projected inflation continues to run below the
committee's 2 percent longer-run goal, and provided that
inflation expectations remain well-anchored.
In addition, we currently anticipate that even after
employment and inflation are near mandate-consistent levels,
economic conditions may for some time warrant keeping the
Federal funds rate below levels that the committee views as
normal in the longer run. Of course, the outlook for the
economy and financial markets is never certain, and now is no
exception. Therefore, the committee's decisions about the path
of the Federal funds rate remain dependent on our assessment of
incoming information and the implications for the economic
outlook.
If the labor market continues to improve more quickly than
anticipated by the committee, resulting in faster convergence
toward our dual objectives, then increases in the Federal funds
rate target likely would occur sooner and be more rapid than
currently envisioned. Conversely, if economic performance is
disappointing, then the future path of interest rates likely
would be more accommodative than currently anticipated.
The committee remains confident that it has the tools it
needs to raise short-term interest rates when the time is right
and to achieve the desired level of short-term interest rates
thereafter, even with the Federal Reserve's elevated balance
sheet. At our meetings this spring, we have been constructively
working through the many issues associated with the eventual
normalization of the stance and conduct of monetary policy.
These ongoing discussions are a matter of prudent planning
and do not imply any imminent change in the stance of monetary
policy. The committee will continue its discussions in upcoming
meetings, and we expect to provide additional information later
this year.
The committee recognizes that low interest rates may
provide incentives for some investors to reach for yield, and
those actions could increase vulnerabilities in the financial
system to adverse events. While prices of real estate,
equities, and corporate bonds have risen appreciably and
valuation metrics have increased, they remain generally in line
with historical norms.
In some sectors, such as lower-rated corporate debt,
valuations appear stretched and issuance has been brisk.
Accordingly, we are closely monitoring developments in the
leveraged-loan market and are working to enhance the
effectiveness of our supervisory guidance.
More broadly, the financial sector has continued to become
more resilient as banks have continued to boost their capital
and liquidity positions and growth in wholesale short-term
funding in financial markets has been modest.
In sum, since the February monetary policy report, further
important progress has been made in restoring the economy to
health and in strengthening the financial system. Yet too many
Americans remain unemployed, inflation remains below our
longer-run objective, and not all of the necessary financial
reform initiatives have been completed.
The Federal Reserve remains committed to employing all of
its resources and tools to achieve its macroeconomic objectives
and to foster a stronger and more resilient financial system.
Thank you. I would be pleased to take your questions.
[The prepared statement of Chair Yellen can be found on
page 54 of the appendix.]
Chairman Hensarling. The Chair now recognizes himself for
questions.
Chair Yellen, my first question has to do with Mr.
Huizenga's and Mr. Garrett's legislation. On the one hand, it
has only been in the public domain for a little over a week; on
the other hand, it is only 31 pages long. But have you had a
chance to read and review this legislation?
Mrs. Yellen. I have had the chance to review the
legislation, yes.
Chairman Hensarling. Yesterday, before the Senate Banking
Committee, you opined that under this legislation the Fed would
not have had the flexibility it needed to take the actions that
it took during the financial crisis.
I would commend for your review Section 2(e), on page 7 of
the legislation, entitled, ``Changing Market Conditions,''
which reads in part, ``Nothing in this Act shall be construed
to require that the plans with respect to the systematic
quantitative adjustment of the Policy Instrument Target
described under Subsection (c)(2) be implemented if the Federal
Open Market Committee determines that such plans cannot or
should not be achieved due to changing market conditions.''
I personally don't believe the language could have been any
clearer. It is not the intent of the legislation--and I would
certainly welcome any policy feedback from your experts to
assure that it achieves that purpose. But I believe the
language is about as clear as the language could possibly be.
Chair Yellen, let's talk a little bit about independence.
Larry Summers, in a famous paper in the Journal on Money,
Credit & Banking on central bank independence, measures
independence as, ``The institutional relationship between the
central bank and the executive, the procedure to nominate and
dismiss the head of the central bank, the role of government
officials on the central bank board, and the frequency of
contacts between the executive and the bank.''
Do you agree or disagree with his characterization of
Federal Reserve independence?
Mrs. Yellen. I see Federal Reserve independence--of course,
we are a creature of Congress. We have a responsibility to
report to Congress. And you use the term ``Executive Branch,''
I think, in the material--
Chairman Hensarling. Well, I used the term that Larry
Summers used in his paper, yes.
Mrs. Yellen. I see us as needing to report regularly to
Congress about our conduct of monetary policy in the economy.
Chairman Hensarling. Let me ask you this question, Chair
Yellen. I think it is well-established--I am under the
impression, again, that you are required to appear before our
committee and the Senate Banking Committee on a semi-annual
basis. Is it true that there is a weekly meeting between you
and the Secretary of the Treasury?
Mrs. Yellen. Many weeks. It is not every single--
Chairman Hensarling. Most weeks.
Mrs. Yellen. --week. Many weeks we get together and confer
about matters of mutual concern. But we are completely
independent from the Executive Branch in the conduct of--
Chairman Hensarling. Speaking of matters of mutual concern
and independence, I am certainly not interested in a transcript
of a private luncheon, but would you be willing to report to
this committee on the matters of mutual concern that were
discussed in any agreements reached between Treasury and the
Federal Reserve?
Mrs. Yellen. I am not willing to report on a regular basis
on private conversations that I have, but any agreements that
were reached certainly would be in the public domain. But our
conversations do not result--
Chairman Hensarling. How would they get into the public
domain?
Mrs. Yellen. If there were an agreement--
Chairman Hensarling. If you don't report them, how do they
get into the public domain--agreements between the Federal
Reserve and Treasury?
Mrs. Yellen. There was, for example, during the financial
crisis, a question as to what is the appropriate role of the
Federal Reserve in lending programs and when does the Treasury
need to be involved? When is there a fiscal component?
And those discussions led to a formal agreement between the
Treasury and the Federal Reserve--
Chairman Hensarling. My time is starting to wind down.
If I could address another matter, on page three of your
testimony, it reads, ``Even after the Committee ends these
purchases,'' so we are speaking of tapering, ``the Federal
Reserve's sizable holdings of longer-term securities will help
maintain accommodative financial conditions, thus supporting
further progress in returning employment and inflation to
mandate-consistent levels.''
Is there any current plan or any current commitment to
reduce the Fed's balance sheets to historic levels? And I am
not speaking of what you may want to do or what you might do,
but is there any current commitment or plan to reduce the Fed's
balance sheet to historic levels?
Mrs. Yellen. As the FOMC stated in 2012, I believe, we
issued a set of exit principles in which one of the principles
was that over time we sought to normalize the size of our
balance sheet and to bring it down to the smallest level
consistent with the efficient and effective conduct of monetary
policy.
Chairman Hensarling. Chair Yellen, would you characterize
that, then, as a current plan or current commitment to reduce
the Fed's balance sheet to historic levels?
Mrs. Yellen. I would characterize it as a current plan. We
are discussing our principles for the normalization of policy.
And as I indicated in my testimony, I expect we will be able to
give more complete guidance later this year when those
discussions are complete.
And I fully expect that we would reiterate an intention
over time to reduce the size of our balance sheet.
Chairman Hensarling. Thank you.
The Chair now recognizes the ranking member.
Ms. Waters. Thank you very much.
Legislation that was offered by the Republicans on our
committee last week would require the Federal Reserve's Federal
Open Market Committee to issue a rule to dictate the course of
monetary policy.
In your view, how feasible would it be to design a rule
that would act as an appropriate substitute for independent
judgment and discretion in the determination of monetary
policy? And do you expect that such a rule could adequately
respond to the range of economic data that affect the economy
on any given day?
Mrs. Yellen. I feel, Congresswoman, that it would be a
grave mistake for the Fed to commit to conduct monetary policy
according to a mathematical rule. No central bank does that.
I believe that although under the legislation we could
depart from that rule, the level of short-term scrutiny that
would be brought on the Fed in real-time reviews of our policy
decisions would essentially undermine central bank independence
in the conduct of monetary policy.
And I believe that global experience has shown that we have
better macroeconomic performance when central banks are removed
from short-term political pressures and given the independence
to, within a framework in which their goals are clear--and in
our case those are specified by Congress--given operational
independence to decide how to conduct monetary policy.
The Federal Reserve is the most transparent central bank,
to my knowledge, in the world. We have made clear how we
interpret our mandate and our objectives and provide extensive
commentary and guidance on how we go about making monetary
policy decisions.
We do, I should say, routinely consult the recommendations
of a whole variety of rules in thinking about monetary policy.
And I have indicated previously in speeches I have made that
these can be useful starting places or guides to policy. So I
am not 100 percent negative on using rules in thinking through
what we should do.
But I think it is very important to understand that had we
followed, in the aftermath of the financial crisis, the
recommendations of any of the simple rules that are widely
discussed, the outcomes would have been even more disappointing
than what we experienced. Even with the Federal Reserve's
conduct of policy departing very substantially from what those
rules would have recommended, we have had a long, slow grind to
get this economy recovering.
We actually could not have followed the recommendations of
the simple rule. Almost every rule would have called, during,
for example, 2011 and 2012, for negative interest rates,
something that is impossible.
And that is one reason that we began asset purchases. We
needed a further tool.
Given the fact that we have had unusual headwinds
constraining this recovery, I believe it is utterly necessary
for us to provide more monetary policy accommodation than those
simple rules would have suggested.
And I think history would show that following any of those
simple rules would have given us very much worse performance.
So I feel it would be a mistake.
Although those rules sometimes do have merit in normal
times, during the great moderation when there were relatively
few shocks, and the Federal Reserve's behavior was very rule-
like; it corresponded to some of those rules. They can work
well, but not always.
We can't be mathematically bound to a simple formula.
Ms. Waters. I would like to thank you for that explanation.
You could not be clearer.
And you could not have explained better to this committee
why you certainly could not operate with some cookie-cutter
rule when in fact, as you explained, the headwinds that you
were confronted with or that the Feds were confronted with
required discretion. It absolutely required that you had the
flexibility to deal with unforeseen circumstances in having to
make your decisions. And I want to thank you very much.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Michigan, Mr. Huizenga, vice chairman of our Monetary
Policy Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman.
I have a quick question, Chair Yellen. Have you read my
bill--the Garrett-Huizenga bill?
Mrs. Yellen. I have looked at the bill.
Mr. Huizenga. You have looked at it? Okay. Well, that is
good news. I will, then, I guess, just refresh your memory and
address my colleague from California.
We anticipated that might be a concern of yours, so on page
8 of the bill, under subsection 2, the GAO approval of an
update--and we are not going to get into whether there should
or shouldn't be the rule or does the rule go far enough, et
cetera, et cetera.
However, it does say, ``Upon determining that plans
described in paragraph (1) cannot or should not be achieved,
the Federal Open Market Committee shall submit an explanation
for that determination and an updated version of the Directive
Policy Rule to the Comptroller General of the United States and
the appropriate congressional committees not later than 48
hours after making the determination.''
It goes on to say that if they determine that you are not
in compliance with the new rule, then you get audited. It does
not say that you cannot change the rule. What it says is you
have to notify us and notify them.
I am a history buff, so I went back and did a little
history. We got to where we are today because of the Employment
Act of 1946, where Congress felt it needed to lay out what Fed
policy was.
In the 1970s they felt--Congress, my colleagues, felt it
was too vague and therefore created a bill that would
strengthen and clarify the 1946 Act. It actually had three
goals, not two. It is not a dual mandate, it is actually a tri-
mandate by Congress: stable prices; maximized employment; and
moderate long-term interest rates.
So on page three of your testimony you are talking about--
and I am going to quote, it is the second paragraph down--
``Even after the Committee ends these purchases, the Federal
Reserve's sizable holdings of longer-term securities will help
maintain accommodative financial conditions, thus supporting
further progress in returning employment and inflation to
mandate-consistent levels.''
Where in the Humphrey-Hawkins Act--which was signed, oh, by
the way, I'm sorry, my colleagues, by Jimmy Carter in 1978
after Democrats in the House and the Senate passed the bill--do
we lay out a 2 percent inflation rate? Do we do that?
Mrs. Yellen. You do not make specific in the legislation--
Mr. Huizenga. Do we lay out exactly what employment rates
or unemployment rates should be?
Mrs. Yellen. The FOMC has--
Mr. Huizenga. No, no, I'm sorry, Congress--the bill that
was passed by Democrats in the House and the Senate and signed
by Jimmy Carter, does that mandate what the employment rate
should be?
Mrs. Yellen. The bill uses the terms, as you said,
``maximum employment'' and ``price stability.''
Mr. Huizenga. Okay, so we don't prescriptively say it is
going to be a 2 percent inflation rate target and 5 or 6
percent employment rate.
Mrs. Yellen. It is obviously language of the type that is
in the legislation. We need to interpret--
Mr. Huizenga. Do we lay it out?
Mrs. Yellen. You do not, but we have tried to--
Mr. Huizenga. Okay. All right. There we go.
So I am curious how us requesting a rule--a simple step in
most people's view--a simple rules-based policy, how is that
different than the mandate--the tri-mandate that was laid out
in Humphrey-Hawkins and defended every single day by others in
this committee?
How, when we are asking for what the rule is--not telling
you what the rule is, not being prescriptive or even
descriptive, but just saying, ``Set a rule and then let us know
so that we can have oversight.'' I here will reference my rant
on oversight to my colleagues who can go back and watch it on
YouTube if they weren't in the committee room.
So if we can get as detailed as the Humphrey-Hawkins Act,
or lack of detail, why can't we have a rule and have you all at
the Fed accept that? And if you are not willing to accept it
because you are concerned about your independence--is that one
of your reasons? I don't want to put words in your mouth. Is
that one of your reasons why you don't want to sign on to the
Garrett-Huizenga bill?
Mrs. Yellen. I am not aware of any literature which
establishes that a central bank, whether it makes it public or
not, adopting a rule is the most desirable way to run monetary
policy. And I would say that many--
Mr. Huizenga. You might want to talk to the Europeans about
that and a lot of other economists, as well.
Mrs. Yellen. What the Europeans do is the ECB has been
given a great freedom and they have defined a price stability
objective, and they certainly do not--
Mr. Huizenga. Here is my last request: If the Garrett-
Huizenga bill isn't good enough, I would like to know when the
Fed is going to call for a rescission of the Humphrey-Hawkins
Act because it impedes your independence.
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. Thank you.
And welcome, Madam Chair.
I would like to ask you about the Fed's exit from its
monetary stimulus. As you testified, the Fed is currently on
pace to wind down its QE3 purchases by the end of October. But
right now the market isn't expecting the Fed to start raising
interest rates until the third quarter of 2015.
So between October of this year and the third quarter of
2015, what are the main tools that the Fed anticipates using to
exit from its monetary stimulus?
Mrs. Yellen. Well, thank you.
As I indicated, if the committee continues to see
improvement in the labor market and continues to forecast
ongoing progress in the labor market over time, and inflation
moving back toward 2 percent, it is our intention to wind down
our asset purchases, to conclude them after the October
meeting.
Beyond that, we would maintain the zero to quarter percent
range for the Federal funds rate that we have maintained now
for many years. And eventually, as the economy makes further
progress, we would begin to raise our target for short-term
interest rates.
And while we have not laid out a specific timeline for
doing that, we have given a general principle, which is we will
be assessing what is our actual progress and then our expected
future progress toward obtaining the two objectives of maximum
employment and price stability. So we will be looking at how
far we are from our objectives and how rapidly those gaps are
closing.
Now that is a matter that we can't be certain about. We
make forecasts, but incoming data causes us, over time, to
change those forecasts. So I can't be specific about what the
timing of an ultimate increase in our target for short-term
interest rates would be, but we will be assessing incoming
information.
Now, we do give participants in the FOMC--these are not
FOMC policy statements, but we have provided in the monetary
policy report and we provide every 3 months--information about
each FOMC participant's assessment of both the economic outlook
and their views on the likely path of monetary policy. So
again, this is each individual's view walking in to our June
meeting.
As a committee we have to transform that into a single
policy, but it gives some indication, I think. And given their
expectations for progress in the labor market and inflation, at
the beginning of our June meeting, FOMC participants, almost
all of them, saw it appropriate to begin raising our target for
the Federal funds rate sometime during 2015. The median
participant saw the Federal funds rate by the end of that year
standing around 1 percent.
So while there is no exact timing, obviously, in 2015, it
is in some sense roughly consistent with what you said. But
market expectations are--but again, I want to emphasize that
the actual progress we see in the labor market and inflation
and our general assessment of the labor market could change
that over time, so there is no mechanical formula and no clear
date.
Mrs. Maloney. Will the Fed start changing the interest rate
on excess reserves held at the Fed during this time?
Mrs. Yellen. When we decide to raise our target for short-
term interest rates a key tool will be to raise the interest
rate we pay on excess reserves. So we would only raise the
interest rate on excess reserves when we have determined that
the time has come to begin raising short-term interest rates
more generally. That will be a key tool that we will use.
Mrs. Maloney. Last week Federal Reserve Vice Chairman
Stanley Fischer gave a speech in which he suggested that adding
a financial stability mandate to the overall mandates of all
the U.S. financial regulators could help improve financial
stability. Can you comment on the effects of adding an explicit
financial--I guess I will get that response in writing. My time
has expired. Thank you.
Thank you--
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Alabama, Mr.
Bachus, the chairman emeritus of our committee.
Mr. Bachus. Thank you.
Chair Yellen, let me begin by saying that this will be my
final Federal monetary policy hearing that I will participate
in as a Member of Congress because I am retiring at the end of
this year.
During my 22 years of service on this committee, including
my 6-year term as ranking member and then chairman, I have
heard testimony from Federal Reserve Chairs Alan Greenspan, Ben
Bernanke, and now, of course, yourself. My observation during
these times of both prosperity and during times of financial
crisis is that we have leaders and a professional staff at the
Fed who have conducted themselves with honor and who have been
true public servants.
So let me thank you and your professional staff, as well as
your predecessors, for serving the people of America in this
most important and tremendously demanding position.
Mrs. Yellen. Thank you, Congressman. I appreciate that.
Mr. Bachus. Thank you.
We have seen that FSOC, where the Fed is obviously a key
player, exercise the authority granted by Dodd-Frank to
designate institutions as systemically important financial
institutions (SIFIs). This has included asset managers and
insurance companies, which has been somewhat controversial.
My experience is that there is often a greater resistance
to a designation or a ruling when the parties feel they haven't
been consulted or the process is not transparent enough. So one
of the approaches that is attracting some interest is to
require that companies being considered for a SIFI designation
be provided with specific reasons why and also a description of
steps they could take so they might not be named as SIFIs. And
this would be between the particular company and the Fed; it
wouldn't be a public discussion.
Do you agree or would you consider that as a reasonable
approach? It would bring greater transparency to the SIFI
designation process. And I think laying out a clear methodology
actually leads to more certainty and confidence in the process,
and I think would be accepted more readily.
Mrs. Yellen. This is clearly a very important thing that
happens to a company when it is designated, and I believe it
utterly has to be given every opportunity to understand the
logic of why the FSOC is thinking that it poses systemic risk
and every opportunity to present its own analysis of the issues
and to interact with the staff and having a very good and frank
dialogue and back and forth.
I believe that is part of the process. And the firms are
given every opportunity to intensively interact with the
committee and its staff before any organization is designated
as a SIFI. That is completely appropriate.
Now, in that process there is a great deal of confidential
information, so I don't feel it is appropriate for that to take
place in the public domain.
Mr. Bachus. And I would agree with you. I am talking about
a give and take between the parties.
Mrs. Yellen. I think that is absolutely appropriate. And to
the best of my knowledge--I have not served on FSOC when any
institution has been designated--when the institution gets into
the latter stages of the process, there is a great deal of back
and forth.
Mr. Bachus. Thank you.
Let me talk about some demographic influences on labor
force participation, because I know that concerns you; it
concerns all of us.
Part of it is the rise in the service sector employment,
where we have gone to a lot of part-time employment. Some good
reasons by choice, some not. But also, many analysts think that
it is being driven in part by an aging U.S. population,
particularly as retirees exit the workforce.
Does the Fed take that into consideration when they talk--
if labor force participation doesn't pick up and growth does,
how does that affect your decision to keep rates low?
Chairman Hensarling. A very brief answer, please.
Mrs. Yellen. I fully agree with your point. Demographics
and an aging population are driving and should be expected to
drive the labor force participation rate down.
So the question is, has labor force participation fallen
more than would be expected based on demographics? And my
personal judgment is yes, it has fallen somewhat more than
that, but aging is a very important downward force, and that is
what I expect going forward.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Madam Chair, with the prospect of 0 percent interest rates
coming to an end, some have warned that this could unduly
hamper economic growth. Yet artificially low interest rates
pose a real threat of creating asset bubbles.
What has the Fed seen in the market concerning asset
prices, and does the threat of a bubble outweigh any slowdown
in economic growth?
Mrs. Yellen. The Federal Reserve has been increasingly and
intensely focused on financial stability, and we understand
that maintaining interest rates at low levels for a long time
can incent reach for yield or asset bubbles. So we are
monitoring this very closely, and that is, in part, why I
referenced some of these trends in my opening testimony.
My general assessment at this point is that threats to
financial stability are at a moderate level and not a very high
level. Some of the things that I would look at in assessing
threats to financial stability to see if they are broad-based:
broad measures of asset prices--of equities, of real estate, of
debt--do they seem to be out of line with historical norms?
And I think there the answer is no. Some things may be on
the high side and there may be some pockets where we see
valuations becoming very stretched, but not generally.
Ms. Velazquez. Thank you.
Mrs. Yellen. The use of leverage is not broad-based. It
hasn't increased, and credit growth is not at alarming levels
by any means.
Ms. Velazquez. Thank you.
Although the economy is recovering at an accelerated pace,
many experts have warned of the disconnect between stock market
gains and overall economic growth. What impact are the Fed's
current monetary policies having on this phenomenon?
Mrs. Yellen. An environment of low interest rates is one
factor that affects asset prices generally, including equities.
And so a low interest rate policy I think partially accounts
for why housing prices have rebounded and also is an influence
on equity prices, but it is not the only influence.
The economy is recovering and earnings have been--
Ms. Velazquez. But do you find this an issue to be
concerning to you? Is it concerning to you?
Mrs. Yellen. The issue being that monetary policy affects
asset prices?
Ms. Velazquez. Yes.
Mrs. Yellen. That is one of the--
Ms. Velazquez. The disconnect between stock market gains
and overall economic growth?
Mrs. Yellen. I don't have a view--the Federal Reserve
doesn't take a view as to what the right level of equity or
asset prices should be, but we do try to monitor to see if they
are rising outside of levels consistent with historic norms.
And as I indicated, in spite of the fact that equity
prices' broad indices have risen substantially, price equity
ratios and other measures are not outside of historical norms.
And I don't know what the right level of prices is, but in that
sense I am not seeing--
Ms. Velazquez. Thank you.
Mrs. Yellen. --alarming warning signals.
Ms. Velazquez. As we all know, the economy has been
creating jobs at an accelerating pace recently, despite fears
that tapering the Fed's qualitative easing could slow the
recovery.
In your opinion, is this strong evidence that the economy
has turned the corner and now is healthy enough to self-sustain
the recovery?
Mrs. Yellen. I am optimistic about the economy, and that is
reflected in the forecasts that are included in the monetary
policy report. We had a very surprising negative growth in the
first quarter, which is a number that in a way doesn't seem
consistent with the underlying momentum in the economy and many
indicators of spending and production.
I do think the economy is recovering and that growth is
picking up and that we have sufficient growth to support
continued improvement in the labor market. And we have seen,
maybe not progress over many years at the pace that would be
ideal, but real progress that will continue.
Ms. Velazquez. Thank you.
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. Thank you, Mr. Chairman.
I have a couple of questions, Madam Chair.
Finally, after many, many months, we got responses to the
questions that we put to you months ago. One of the questions
came about because one of the Fed Governors has stated that
they believe that a failure of a large broker-dealer would be
destabalizing to the economy.
So we asked you, do you support expanding the Fed's
discount window access to broker-dealers and other nonbanks
during turbulent economic times to expand your regulator. You
said no. You said, ``I do not favor expanding the Fed's
discount window to broker-dealers and nonbanks.''
Instead, you say you support the application of stringent
capital standards and liquidity requirements, and you also said
that you support the development of resolution regimes. I get
that.
If those regulations and the resolution regimes do not
work, do you then rule out access to broker-dealers and other
nonfinancial institutions to the discount window? Is that what
you are saying, that you rule that out?
Mrs. Yellen. Under the terms of the Dodd-Frank Act, the
Federal Reserve is barred from extending discount window
lending to an individual firm--
Mr. Garrett. Right.
Mrs. Yellen. --and we are confined to broad-based
facilities.
Mr. Garrett. Right. So would you rule out, then, extending
Section 13(3) as well?
Mrs. Yellen. If there were general financial disruption and
we were in the situation of systemic risk, similar to what we
saw during the financial crisis, where we have a general
panic--
Mr. Garrett. Then you would use 13(3) to allow broker-
dealers to have access to either 13(3) potentiality or access
to the broker-dealer--to the discount window is what you are
saying, under those circumstances?
Mrs. Yellen. I believe a broad-based scheme in the
situation of systemic risk is a possibility, but it is
something that would have to be very seriously considered.
Mr. Garrett. Right. So we would be actually extending the
American public backstop to broker-dealers under your
Administration, potentially, under the right circumstances, is
what you just said? That is what I heard.
Mrs. Yellen. It depends on the circumstances. But, again, I
want to emphasize--
Mr. Garrett. That is quite astounding, that broker-dealers
and other nonbanks are on notice that they may have, under the
right circumstances, 13(3)--
Mrs. Yellen. It would have to be unusual and exigent and it
would have to--
Mr. Garrett. Understood. But now we know.
Secondly, Secretary Lew recently testified about the FSB,
and after much questioning and answering we asked him, ``What
is the process?'' And he said, ``The FSB does not act--acts in
a consensus manner.
And we asked, ``Did you, Secretary Lew, consent to the
designation of specific globally systemic firms?'' And he said,
``Yes, I did consent to them.''
So my question to you is very simply, did you agree with
Secretary Lew? Did you also consent to those designations of
globally systemic firms, or did you take a contrary view? Did
you object?
Mrs. Yellen. I have to say I was not at the time involved
in any way with the FSB--
Mr. Garrett. Okay.
Mrs. Yellen. --and I am not at this time either.
Mr. Garrett. Okay. You do not take part in any discussions
with FSB as far as the determination of globally systemic--
Mrs. Yellen. I have personally not been involved in those
discussions. Governor Tarullo is our representative to the FSB,
and he has been--
Mr. Garrett. Governor Tarullo is our representative and not
you. Has he consented, as far as you know?
Mrs. Yellen. He may well have been involved in those
discussions and consented. You would have to pose that question
to him.
Mr. Garrett. Okay. He doesn't come up to testify. That was
one of the provisions of our bill, to see whether we could get
him to start coming up here to testify on that section, but
okay.
Do you believe that with regard to FSOC, the head of the
New York Fed, Mr. Dudley, is an active participant? Is that
correct, with respect to FSOC?
Mrs. Yellen. I believe he has the status of observer.
Mr. Garrett. My understanding is that you have given him
active participation status. Is that correct, or is he just an
observer?
Mrs. Yellen. I am not in a position to make any rules about
who can or cannot attend FSOC. Those are done by the
leadership, which is--
Mr. Garrett. Well, you allow him to attend, and--would you
allow members of this committee to attend?
Mrs. Yellen. It was not my decision.
Mr. Garrett. To allow him to attend?
Chairman Hensarling. The time of the gentleman has--
Mr. Garrett. Can I just get an answer whether or not it was
her decision that he should attend? Who allowed him to attend
these meetings?
Chairman Hensarling. Brief answer, please.
Mrs. Yellen. I believe the Treasury Secretary.
Mr. Garrett. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Sherman.
Mr. Sherman. Chair Yellen, we learn a lot from you. Thanks
for being here.
Mrs. Yellen. Thank you.
Mr. Sherman. You also have a chance to learn from us, not
because we have any great economic theories worthy of your
consideration, but because we represent 60-plus districts from
coast to coast. We are intensely aware of what is going on in
our districts, and we prove that biannually.
And the reports you get from Members in this room as to
what is happening in their districts are uniform even though
our economic theories are disparate and, in many cases,
unworthy of your attention.
The economy is worse than your statement indicates. There
isn't a person in this room who has waxed eloquently about how
everything is going spectacularly in their district. And many,
many Members have told me and spoken about how in a very large
percentage of this country we are still in a recession.
A second reason for you to push toward more quantitative
easing and a continuation of low interest rates is that you
have very few tools left if we slip back into recession, and
you have all the inflation-fighting tools still available to
you. I think you understand that.
There is a second area where I think you can learn from us,
and that is not in the monetary policy area, but you are a top
bank regulator. We had an exchange back in February in which
you described how important it was to loan money in local
communities.
And I explained to you, and I have talked to my colleagues
here, but your regulators haven't gotten the memo. You can send
them a copy of the remarks you made in response to my question
in February. Many, many small businesses can't get loans even
with an appropriate risk premium.
In fact, if you are trying to borrow money at prime plus 5,
oh, my God. You are terrible. We can't talk to you.
Rather than the idea that you are going to make a hundred
loans and one of them is going to go under default, it is,
``You are going to buy a hundred government bonds.'' And that
is not a way that a bank can contribute to the economy.
You may remember back in February we talked about the
Financial Accounting Standards Board lease-accounting project,
which would capitalize all leases and add $2 trillion to the
liabilities of balance sheets of American business. And at that
time you indicated that you would have your staff look at this
both in terms as to whether you would want to comment on
something that other economists have said will cost $400
billion to our GDP as companies try to rebalance their balance
sheets, and because nobody can build a big building without a
long-term tenant, and if you penalize companies for signing
long-term leases you are not going to have long-term tenants.
I wonder if you could at least recommit to having your
staff look at that, and perhaps be willing to comment on it?
Because those folks at the Financial Accounting Standards
Board, the slightest hint from you or your staff would be very
instructive to them.
And if they won't listen to you, at least you could price
into your economic projections economic risk that only an
accountant would bring to your attention. I wonder if you can
comment on the lease accounting?
Mrs. Yellen. We will have a look at that and get back to
you.
Mr. Sherman. Okay. As to designating the SIFIs, I hope that
you would focus not on the size of an entity's assets but the
size of their liabilities. It was Lehman Brothers' inability to
pay its liabilities that was the final straw that broke the
economy.
If you had some blue-chip name that everybody loved and so
they were able to issue trillions of dollars of credit-default
swaps, I would say they would be a SIFI, and they would be
particularly a SIFI if they didn't have a lot of assets because
their failure would have a substantial effect on our economy.
So I hope that you would look at the liabilities and
contingent liabilities of an entity, not their assets. And that
would argue for not designating as a SIFI an unleveraged mutual
fund since they don't have liabilities.
Mrs. Yellen. FSOC is, in its analysis, just as you said,
trying to identify whether there are specific and well-defined
channels by which the failure of a particular organization
would have spillovers to the rest of the financial system that
would be severe. And it is not just a question of size and not
just a question of the assets they hold.
But for example, if there are liabilities, and if they are
highly runnable, and they are a highly-interconnected firm,
that would point in the direction of systemic risk, as you
indicate.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, chairman of our Housing and Insurance Subcommittee.
Mr. Neugebauer. Thank you, Chairman Hensarling.
Chair Yellen, thank you for being here.
I want to go back to something you said in 1995. You said,
``This policy, which fits the behavior of this committee, is an
example of the type of hybrid rule that would be preferable, in
my view, if we wanted a rule. I think the Greenspan Fed has
done very well by following such a rule and I think this is
sensible for central banks to do.''
But earlier you said, ``I am not aware of any literature
that establishes that a central bank adopting a rule, whether
it makes it public or not, is the most desirable way to run
monetary policy.''
So were you for it in 1995 and now you are against it in
2014? I am having trouble reconciling that.
Mrs. Yellen. As I said also this morning, I think simple
rules can be a helpful guide and starting point in thinking
about the appropriate stance of monetary policy. I said that
then and I continue to think that now. And I will say that
before every FOMC meeting, I review the recommendations of a
number of sensible, simple rules. And so as an input, I regard
this as valuable.
Now during the time period that I was referencing in that
1995 statement, that was the so-called great moderation and
there actually had been quite a lot of literature looking at
the different ways to run monetary policy that established that
simple rules, like the Taylor Rule, really could do quite a
good job--maybe not the best possible, but quite a good job of
delivering good economic performance.
And behavior during that time was not bound by a rule, but
I think it was good policy. It had the characteristic that
pretty systematically, as the labor market tightened, the
stance of policy became tighter; and as inflation rose, policy
became tighter, and tighter enough that real interest rates--
the nominal interest rates, were raised more than inflation.
These are sensible ways to conduct monetary policy. Policy
wasn't bound by a formula. It didn't adhere exactly to a
mathematical formula. There were sometimes other factors that
were important and factored in. But it was sensible.
But now in the more recent period--and I remain--I continue
to think it is useful to look at simple rules and think about
their recommendations. What I oppose is tying monetary policy
to a rigid mathematical formula to any rule.
And we have now lived through a period where those rules
would have performed just miserably. And if we had followed
them we would have had even more dreadful macroeconomic
performance than the disappointing recovery we have enjoyed.
I think that if the kinds of analysis that had been
performed earlier that showed that these rules worked well, if
you rerun this, that type of analysis through the period of the
last 6 or 7 years, you would find that they would not have
performed well. Even so, I hope that as the economy becomes
more normal and as interest rates get back to more normal
levels, that the world will be less volatile. I continue to
think that the recommendations of such rules are worthwhile to
look at.
I have given a number of speeches in recent years in which
I have discussed those rules and their recommendations
explicitly, and it is something I wouldn't do if I thought
there wasn't some value in it. On the other hand, I have tried
to explain in a number of speeches why I think they would not
have worked and would not have been appropriate in the
circumstances we have been living--
Mr. Neugebauer. I don't mean to be rude here, but--so what
I hear you saying is that the rule structure is not totally
unacceptable in the Fed scheme here, but you have some--
Mrs. Yellen. Not rigidly tying our hands to something, but
it is useful input. We have models. We have forecasts. We have
a number of inputs into the policy process. And a rule is--
rules, a collection of them, do provide useful input and we do
take it into account. But I just would not go further than
that.
Mr. Neugebauer. Thank you.
And I guess my time has expired, Mr. Chairman.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman. Mr. Chairman, I want to
ask unanimous consent to submit a report for the record from
Americans for Financial Reform, dated July 10, 2014, which I
will refer to in my remarks.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Lynch. Thank you, Mr. Chairman.
Welcome, Madam Chair. Thank you for your willingness to
participate here, and thank you for your patience.
Last month Federal Governor Tarullo gave a speech in Boston
and he described the stress test for the major banks as the
cornerstone of the regulatory response to the recent financial
crisis. Do you tend to agree with that?
Mrs. Yellen. I think they have been very important in
strengthening supervision.
Mr. Lynch. Right. The idea of the stress tests, as I
understand them, is that, well, the value in that annual stress
test is that we inspect the capital reserves, we inspect the
risk management policies within the banks, and when they pass--
ideally, when they pass the stress tests, there is actually
value in passing that stress test because they have a stamp of
approval. Is that the idea behind this?
Mrs. Yellen. I think it is really something more than what
you just said, that we are using our own models and judgments
to take a very detailed look at all of the asset holdings and
transactions and exposures of a large financial firm and we are
attempting to assess, in a well-specified, highly adverse
stress scenario, an economic scenario that is extremely
difficult--we are making our own very detailed assessment of
whether or not that bank would have sufficient capital to
continue to meet the lending needs of the economy and to
continue to function.
And on top of that, we are insisting that the firm
demonstrate to us that they have the ability to do that kind of
analysis themselves and in that way--
Mr. Lynch. Okay.
Mrs. Yellen. --judging their risk management capabilities.
Mr. Lynch. You put it much better than I could, but I agree
with everything you just said.
So the legislation that was offered, called the Federal
Reserve Accountability and Transparency Act, would require the
Fed--in section four, would require the Fed to publish--to give
the information to the major banks that are being tested, all
of your methodologies, all of the--I will read it here--the
hypothetical--excuse me--all of the alternatives that are--and
public notice and comment rulemaking in advance of any stress
test that detail the exact models, the methodologies, and
assumptions to be used in the stress test.
So you would have to give that under this new bill. You
would have to give that to the banks.
You would also have to allow them to comment and to help
design the test that you are going to give them.
Now in my mind, if you are going to give the people the
answers to the test, if you are going to let them design the
test, won't there be an assumption that they can now game this
test?
Mrs. Yellen. Precisely. And that is exactly why we don't
give them the models. We want them to, in a sense, show us
their work and show us that they have the capacity in their
organizations to make well-reasoned judgments about the risks
that they face.
We absolutely don't want to give them the answers. And when
you give the answers then you don't get to see the work that
demonstrates that the student has learned the material and can
apply that kind of logic in the unique circumstances that will
face that firm, as opposed to just the scenarios that we have
laid out.
Those firms need to be able to analyze their own unique and
specific risks that they face. We set out a couple of scenarios
and we do detailed analysis, but what are the unique stresses
that could afflict a particular firm with particular
characteristics?
We want to make sure they have models that will serve to
analyze those situations. And they can't just use our models
for that. They need to show us that they understand what the
unique stresses are that could hit those firms as well.
Mr. Lynch. I thank you, and I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Georgia, Mr. Westmoreland, for 5 minutes.
Mr. Westmoreland. Thank you, Chair Yellen, for being here.
I want to follow up just on one of the things that Mr.
Garrett--one of your answers. You said that Mr. Tarullo is the
Federal Reserve representative to the Financial Stability
Board. You are his boss and you are the Chair of the Federal
Reserve. Are we to really believe that the gentleman acts on
his own without any direction or oversight from you?
Mrs. Yellen. I think Congressman Garrett referred to
decisions that were made about naming global systemically
important banks, and that occurred before I was Chair. I am
sure that he consulted with Chairman Bernanke.
Mr. Westmoreland. Okay. So he is not independent?
Mrs. Yellen. Well, no. The Chairman obviously has
responsibility.
Mr. Westmoreland. Okay. And just to go back to the
independent part of the Federal Reserve from the Executive
Branch, I am sure you are aware that of the 15 Chairmen in the
Fed's history, 10 of them have either served at Treasury or the
White House. And it seems to be a revolving door-type policy
between the Federal Reserve and the Treasury Department, and
that it actually continues today.
And the Fed staff has gone back and forth into the Treasury
Department, including in the current Administration. So do you
believe that this revolving door poses any risk whatsoever to
the Fed's independence?
Mrs. Yellen. I think the Fed's independence is extremely
important and I have never in my many years in the Fed seen
anything occur that led me to believe that it had at any time
been threatened. And while I understand the point you are
making, it is essential that the Federal Reserve remain
independent.
Mr. Westmoreland. Okay. And that kind of leads me--
Mrs. Yellen. I perceive that--
Mr. Westmoreland. And I appreciate it. And that kind of
leads me to the next question.
We here in Congress have been having a vigorous political
debate about infrastructure spending and unemployment benefits
to continue. And in your Senate testimony, you dived into this
political debate, expressing your support for more
infrastructure spending in response to questions from Senator
Menendez.
In a recent letter to Representative Sinema, who is a
member of this committee, you expressed the virtues of
extending unemployment benefits. We will continue to debate the
merits of this, but do you have any reservations that carrying
the water for the Democrats on this fundamentally political
issue risks the Fed's independence, impartiality, and indeed,
its credibility?
Mrs. Yellen. I don't think it is appropriate for me to
weigh in on these issues and I don't--
Mr. Westmoreland. Why did you?
Mrs. Yellen. --interpret--I do not interpret what I said
about infrastructure to have been telling Congress what I think
it should do. I commented, as I recall, to Senator Menendez on
the stance of fiscal policy and the way it had been affecting
the economy.
Mr. Westmoreland. So you don't think we need to spend on
infrastructure?
Mrs. Yellen. I--
Mr. Westmoreland. And that wasn't what you meant by your
comment?
Mrs. Yellen. I believe it is entirely appropriate for
Congress to debate and decide that.
Mr. Westmoreland. Okay. Was it appropriate just to even
talk about it? Didn't you answer Senator Menendez that, ``it is
up to you all, it is not up to me?''
Mrs. Yellen. I believe that was the spirit, although I did
comment on the fact that fiscal policy had posed a significant
drag to economic growth over the last several years.
Mr. Westmoreland. Okay, quickly, the chairman's staff and
the committee staff discussed the Federal Reserve's role in
operating a payment system for the Treasury Department with the
New York Fed staff.
Mrs. Yellen. I'm sorry, what system? What type of system?
Mr. Westmoreland. The role in operating a payment system
for the Treasury Department.
Mrs. Yellen. A payment--okay.
Mr. Westmoreland. And they discussed it with the New York
Fed staff who operate that system, and the staff of the New
York Fed described the Fed's role there as Treasury's agent and
described the Treasury Department as the Fed's client.
Is that a good characterization--just a yes or no--of your
relationship?
Mrs. Yellen. The Federal Reserve is the fiscal agent of the
government, and in that sense, it is correct.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Thank you, Mr. Chairman.
I am over here in the corner, Mrs. Yellen.
I would like to just take us briefly in another direction,
because we don't operate in a vacuum in the United States. To
what extent are the developments in various parts of the world
that are taking place now, in Ukraine, in Iraq, possible
caliphate there, the Israeli-Palestinian situation, Syria. The
world is aflame, and I am wondering what effect this would have
on our global economic growth and especially the United States
economic outlook.
But something that is going a little bit unnoticed is
another situation, and that situation is Iran.
By Sunday, as the deadline, and their decision and
agreement is supposed to come out. And in collaboration with
all of these other hot spots that are happening around the
world, what would be the global impact in terms of economic
growth, and where would the United States be? I know you and
Treasury talk in concert on this, and particularly Treasury,
which is basically enforcer of our sanctions, which is based
largely on, quite honestly, the well-being of the United States
economy.
What would happen Sunday if they don't come up with an
agreement and ask for an expansion, or they do come up with an
agreement that has nothing to do with dismantling and Israel
will not accept it?
So Sunday presents a very timely issue and I thought we
might benefit from your thoughts on that, including the other
things that are happening in Iraq, Syria, Israel and so forth.
Mrs. Yellen. Certainly, the developments that you are
talking about present risk to the United States through any
number of different channels. In trying to focus simply on the
potential economic impact of these developments on the United
States, I would be thinking particularly about energy markets,
that we have seen some disruptions in energy supplies, and
obviously there could be much larger disruptions in energy
supplies. Such developments clearly would have an impact on the
United States and on the global economy more broadly.
We also look at whether or not there are significant direct
financial exposures, for example, of our banking system to
particular regions that are troubled. In the case of the set of
countries you mentioned, my assessment would be that the direct
financial implications for our banking system would not be
large, but in times of global unrest it is very normal to see
disruptions in risk aversion rise in financial markets
generally, and that would certainly, were that to occur, have
spillovers to the United States and to our outlook.
Mr. Scott. Okay. Thank you.
Now let me ask a question on your asset purchase program,
which I think has done a good job in two important areas. I
think it has made a very major contribution to lowering the
unemployment, creating jobs, and very significantly in the
housing market in terms of reducing mortgage rates.
Is that true? Is that pretty much--
Mrs. Yellen. I believe it has made a positive
contribution--
Mr. Scott. Okay.
Mrs. Yellen. --in the ways that you have mentioned, yes.
Mr. Scott. Okay. I understand that you are going to end
that program within a couple of months. So the issue is, would
that have a downturn impact on the progress we have made in
both unemployment and housing with this program?
Mrs. Yellen. We are continuing to purchase assets, so in
that sense we are continuing to add stimulus. And even if we
stop our purchases, our large holdings will be supporting lower
long-term interest rates and, I think, keeping mortgage rates
lower, and will continue to provide a positive for the housing
market.
If we lacked confidence that the labor market and the
economy will continue to improve, we probably would not have
been comfortable winding down the asset purchase program, but I
do think the economy is improving, the labor market has
improved, and will continue to do so.
Mr. Neugebauer [presiding]. The time of the gentleman has
expired.
Mr. Scott. Thank you very much, Chair Yellen.
Mr. Neugebauer. I now yield to the chairman of our
Oversight and Investigations Subcommittee, Mr. McHenry.
Mr. McHenry. I thank the chairman.
Chair Yellen, thank you for being here.
Mrs. Yellen. Thank you.
Mr. McHenry. I know these days are long, but I wanted to
ask you about something that I care about, which is Section 113
part D of Dodd-Frank. And what this in essence says is that you
will have an annual review of the SIFI designation, right, that
there is a mandate under Dodd-Frank that no less than annually
there will be an undertaking by FSOC to review those SIFI
designations for non-bank financial institutions. You, as well
as Secretary Lew, have both pledged that you are committed to
that process, and I assume that remains the case.
The question I have is what metrics are you going to use
for that annual review?
Mrs. Yellen. I have not been involved in that. It hasn't
come to FSOC yet and I am not certain of exactly what they will
look at. I would assume that they would look at some of the
same metrics and whether or not those have changed, that they
used in deciding to designate those firms--
Mr. McHenry. I would appreciate it if you would follow up
with me on this to give us an understanding of what that is.
The 4-year anniversary of Dodd-Frank is next week, and for
us to not have an annual review process set up on the SIFI
designation is concerning.
Related to that, you also have, under Section 165, the
opportunity for remedies under the--after the CCAR process and
the living will process, to seek remedies from firms. Both
Governor Tarullo and former Governor Stein have told us that
the CCAR process is moving from a wartime setting to more of a
peacetime setting and there is a bit of tension between
customization and standardization under the CCAR metrics.
So once you go through the CCAR process, once you get the
review of this stuff, at the end I am sure you and your staff
pore over the way to improve it for the next time. Are there
some key takeaways that we can understand from the CCAR
process?
Mrs. Yellen. I'm sorry, you are talking about CCAR? You
mentioned living wills as well.
Mr. McHenry. I'm sorry. My next question is about living
wills, so I--yes, I put those two together.
Mrs. Yellen. You are talking about the CCAR process?
Mr. McHenry. My question is about the CCAR process. My next
question, to give you a heads up, is on living wills.
Mrs. Yellen. Okay.
I think we have learned a lot from the CCAR process and we
have refined our own modeling techniques and I think worked
with the firms to clarify over time what our expectations are
for their risk management modeling capabilities, and I think we
have had good back and forth that is leading to improvements in
how we conduct this.
Mr. McHenry. Okay.
About living wills, you said yesterday in front of the
Senate--I know one Senator asked you this question rather
directly and apparently wasn't satisfied with your answer about
living wills--that you continue to work to improve living
wills. Can you give us greater clarity on that? Because you
judge whether or not living wills are credible, right? And if
you are continuing to work with firms on their living wills,
does that mean that they are currently not credible?
Mrs. Yellen. Well, we do not make some annual determination
as to whether or not they are credible. We may make a
determination. We are not required by the statute, but the FDIC
and the Fed can make a determination at some point that the
living will is not credible, of a particular firm, or that it
would not facilitate resolution.
My own understanding of the process is that this is a
difficult and new responsibility for the banking organizations
and for us, and that we would have iterations back and forth
with the firms in trying to set out a set of expectations, look
at what they are provided, give feedback, and set out a set of
expectations we want to see.
Mr. McHenry. So if the living wills are accepted, then
therefore they are credible.
Mrs. Yellen. Accepted does not necessarily mean they are
credible. We can determine under Dodd-Frank--
Mr. McHenry. That is disconcerting because if living wills
are intended for that purpose, to help unwind these firms and
be a road map for unwinding these firms in the advent of a
cataclysmic event, then they should be credible.
Mrs. Yellen. We will work with the FDIC to give these firms
feedback on what we want to see them do to facilitate
resolution. And of course, that is the objective. But although
we are close, we have not even finalized feedback to the firms
on their second round submissions.
Chairman Hensarling. The time of the gentlemen has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, ranking member of our Oversight and Investigations
Subcommittee.
Mr. Green. Thank you, Mr. Chairman.
Good morning, Madam Chair, and welcome again to the
committee. I have three questions, each of which could easily
consume 5 minutes of your time. And I do not believe that I
will get through all three but I will ask, if possible, that
you give a laconic answer to each.
The first, you have used the term ``unusual headwinds,''
and I have noted that the term ``fiscal policies'' has been
associated with this. Would you, as tersely as possible,
explain some of the unusual headwinds that we have faced or are
facing?
Mrs. Yellen. Tight fiscal policy is one of them. Although
there was a stimulus for a number of years, in more recent
years fiscal policy, in addressing deficits and attempting to
reduce deficits, has created drag on economic growth. And that
is unusual in times like these.
In addition, the system of housing finance and the
willingness of residential mortgage lenders to provide credit,
the standards should have escalated, they have escalated, but
it has now become the case that any borrower without a pretty
pristine credit rating finds it awfully hard to get a mortgage.
And I think that there are a number of reasons for it coming
out of the crisis, but I think that is a headwind.
So credit availability for some purposes, I think is
diminished relative to historical norms.
Coming out of this crisis, we also see that households have
unusually depressed expectations about their own future income
gains, and I think that weighs on their feelings about their
own household finances and is holding back consumer spending.
So those are some of the things that I would see as
headwinds from the crisis. In addition, productivity growth has
really been quite slow for a number of years.
Mr. Green. I am going to abandon my other two questions
because I now have a follow-up to this one.
Mrs. Yellen. Okay.
Mr. Green. You indicated that these fiscal policies are
unusual for times such as these. What would you expect usual
fiscal policies to be for times such as these?
Mrs. Yellen. I think historically, when the economy has
been weak, fiscal policy has, at least on average, provided
greater stimulus than it has over the last several years.
And I understand there are reasons that Congress has chosen
this course. But simply what I would see as a factual matter,
the degree of drag from fiscal policy in a high unemployment
situation has been unusual.
Mr. Green. And could you kindly give an example or two of
the kinds of fiscal policies that historically have been
employed in times such as these?
Mrs. Yellen. Typically, there would be tax cuts and
increases in spending that would allow automatic stabilizers to
go into effect in circumstances where unemployment was high.
It has been very rare--we haven't, in the post-war period,
had really a recession that has been as long and as deep as
this one, so it has been an unusual period.
Mr. Green. Thank you.
I will take one more question and just ask you about
indicators. We have leading indicators, lagging indicators,
and, of course, we have coincidental indicators.
I try to follow these, but what I would like from you is
just as you look at them in general, could you give me just an
assessment of where these indicators seem to indicate we are
going?
Mrs. Yellen. I see most indicators that I look at in the
economy as suggesting improvement. I look at things like
industrial production, the labor market, auto sales. What is
happening in the housing sector, that may be an exception that
we don't see a lot of improvement there.
But most measures of spending in the economy, consumer and
business attitudes, through all of those I think we see
positive signs.
Mr. Green. Thank you very much.
Thank you, Mr. Chairman, I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Wisconsin, Mr. Duffy, vice chairman of our Financial
Institutions Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman.
And, Madam Chair, thank you for being here. I want to
commend you for the last time you were here, staying for as
much time as we would need to have everyone on the committee
ask you questions. I thought that was fantastic. I was hoping
that was going to be a continual policy, but maybe it was not
as pleasurable for you as it was for us.
But I appreciate you being here today.
On June 18th Representative Perlmutter and I, along with 84
of our colleagues, wrote a letter to the President asking that
he appoint someone to the Federal Reserve with banking
experience. I would ask that that letter be included in the
record.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Duffy. And I know yesterday Senator Vitter asked you
about this very issue, and I think you indicated your support
that we--you would support having someone with banking
experience, community banking experience, on the Fed Board. Is
that correct?
Mrs. Yellen. Yes, I would.
Mr. Duffy. And it is fair to say that your role has
expanded. Traditionally you were dealing with monetary policy,
but through Dodd-Frank and the Fed's own action you have had an
increased role on the regulatory side, correct?
Mrs. Yellen. Yes.
Mr. Duffy. And, we are familiar with your dual mandate of
maximum employment and price stability. Is it almost fair to
say there is an unwritten third mandate that would bring us to
protecting the country from systemic risk?
Mrs. Yellen. I think that is fair to say for the Federal
Reserve, although it is not something that applies specifically
to monetary policy, but we have a number of different tools,
and I interpret that as an unwritten third mandate for the
Federal Reserve.
Mr. Duffy. Right. And kind of talking about that, right,
there is--you have the monetary policy side and you also have
the regulatory side. And just on the good government side for
us, we get concerned, not about your blackout period during the
FOMC meetings; we agree that you should have the blackout
period.
We do get concerned in Congress when you take the blackout
period that applies to monetary policy and when we ask you to
come in and talk about the regulatory side, you use the
argument on monetary policy and the blackout and use if for--
Mrs. Yellen. We have no blackout period that applies to
anything other than monetary policy in the economy. There is no
blackout period with respect to supervision and regulation.
And, it is conceivable that you asked someone to testify and
they had a problem--I don't know what specifically you have in
mind here, but a--
Mr. Duffy. Yes. I--
Mrs. Yellen. --blackout period does not apply to
supervision and regulation.
Mr. Duffy. Thank you, and I would agree with you. It does
not apply.
But I would just reference, we had a December 2012
meeting--and there are a number of examples, but in December
2012 we wanted to have a hearing on Volcker and we didn't get a
witness because the blackout period was cited.
So just if you would take a look at that, we want to make
sure that there is a blackout period that does not apply to the
regulatory side.
Mrs. Yellen. It does not apply.
Mr. Duffy. Okay.
If you haven't noticed, this side of the aisle gets very
concerned about the debt. I think that is why the chairman at
our hearings will put up the fact that we have an almost $17.6
trillion debt. And by way of your accommodative policy,
quantitative easing, we have had historically low interest
rates, you would agree.
Today I think to the Budget Committee we will pay $227
billion a year to service our debt. And you would agree we pay
historic low interest rates on that debt, correct?
Mrs. Yellen. Yes.
Mr. Duffy. Have you taken a look at what it would cost to
service the debt if interest rates go to historic norms?
Mrs. Yellen. I don't have those calculations in front of
me, but certainly the Congress should be thinking about the
fact that over time, as the economy recovers, interest rates
will move back up to more normal levels.
Mr. Duffy. And the cost to service that debt does not stay
at $230 billion. Even if we were able to stop that clock from
turning and we were able to hold it at $17.6 trillion, the cost
to service that debt is going to increase dramatically when
interest rates go up, correct?
Mrs. Yellen. It will certainly increase.
Mr. Duffy. So, there is not a correlation--
Mrs. Yellen. Yes. Higher interest rates will increase the
cost of servicing that debt.
Mr. Duffy. Right.
And some of the projections I have seen, if the debt stays
the same it brings us to around $500 billion, $550 billion a
year, an additional $300 billion that doesn't go to whether we
are building our defense, whether we are using that money for
food stamps, the social good of the country.
And I think it is important that the country understand
that there is a consequence for the spending binge that this
town has gone on and that we will pay it as rates go up and it
will have a significant impact on our budget in our out years,
which might start, as you have indicated, next year.
Thank you for your testimony. Thank you for your honesty in
actually answering our questions. I appreciate that. It is very
nice and refreshing.
With that, I yield back.
Mrs. Yellen. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman.
Madam Chair, thank you for being here.
I want to talk about unemployment because that continues to
be a major concern of mine and, frankly, a major concern in the
district that I represent. Obviously, the macroeconomic
situation is thriving, but when it comes to unemployment,
particularly for minorities, it is still almost in recession
levels.
And I am wondering if you think that is some kind of a
structural unemployment issue, or do you believe in the, as it
is called, Luddite, is that how you--
Mrs. Yellen. Luddite?
Mr. Cleaver. Yes.
Mrs. Yellen. I think the labor market is afflicted both by
weakness in the overall economy, and so things should broadly
improve as the economy strengthens and the unemployment rate
and other broader indicators come down. But on top of that,
there are also structural factors that are currently, and have
for a long time been, creating problems for many, many American
families.
Luddite tends to refer to technology, and we have seen a
widening of the income distribution, the wage distribution in
the United States, going back to the mid-1980s. Economists have
been debating the causes, and they do see technological changes
that have favored skilled workers as being one of the causes of
a widening income distribution. To some extent, globalization
probably also plays a role and there may be other factors.
But I think when we think about all of the pressures that
middle- and lower-income families in the United States are
facing, some of them come from the generally weak economy, and
I think that is the part the Federal Reserve can contribute to.
But there are deeper adverse trends at work on top of that, and
perhaps they have even been exacerbated during this downturn.
Mr. Cleaver. Some economists seem to believe that as
technology expands, it will create more jobs than it will
destroy. Do you embrace that economic theory?
Mrs. Yellen. I think the total number of jobs in the
economy is not just determined by technology; it is determined
by macroeconomic policy. I wouldn't believe people have for
centuries worried that advancing technology, for example, would
destroy jobs and people would become unemployed just because
technology enables more to be produced with fewer workers.
Time and time again, we have seen that is not the case,
that even with productivity growth and improving technology we
can have jobs with appropriate policy for people who want to
work. So I don't endorse that.
But patterns of technological change can favor some groups
in the labor market and disfavor other groups in the labor
market. And many economists have been writing about the fact
that so-called skill-biased technical change--in part, the use
of computers and new information technologies--has raised the
productivity in the income-earning capacity of more-skilled
workers and has worked to the disadvantage of less-skilled
workers.
So technological changes can produce winners and losers, at
least in a relative sense.
Mr. Cleaver. Yes. The latter--in restaurants, for example,
I have seen that. I have said here in the committee before, I
went to a restaurant in Cape Girardeau, Missouri--I am from
Missouri--where you order your meal from the table through a
computer, which means that there is no waitress or waiter with
that job now.
That still doesn't answer, for me at least, the question
about a cure for the unemployment levels that are so high in
urban centers, even if you are a college graduate. If you are
an African-American or a Latino college graduate you are still
going to have a difficult time getting a job.
Now, there may be some sociological--thank you, Mr.
Chairman.
Mrs. Yellen. I hope that will improve in a stronger
economy.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Indiana, Mr.
Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being here today and for
your testimony. I would like to talk a little bit about the
dual mandate. And your comments and your testimony are that you
are making progress towards the Federal Reserve's objectives of
maximum employment and price stability.
One of the things that we are starting to see in northeast
Indiana is there is demand for labor, and even some wage
increase. One of the concerns that I have is in the long term,
how do you--I believe that the dual mandate is conflicting and
would like to hear some of your thoughts on how do you decide
when is the right time to increase interest rates? How do we
grow the economy but keep inflation in check?
One of the things that I do believe is that the dollar is a
unit of measure. It is something that we use to measure a
current value. Shouldn't it be stable just like any other
measurement, whether it is a foot, hour, pound? Shouldn't it be
stable like those measurements?
Mrs. Yellen. Almost every central bank that has an explicit
inflation target has chosen a low positive number as their
objective for inflation rather than zero, and there are a
number of reasons for that.
One reason is that if zero is the target, one is bound to
have episodes of deflation, which can be associated with very
highly adverse outcomes, which almost every country wants to
avoid.
Mr. Stutzman. So let me get to inflation. The Fed's
favorite measurement of inflation is the PCE deflator. Is that
right?
Mrs. Yellen. Yes.
Mr. Stutzman. Okay. Is that a leading coincident or is it a
lagging indicator?
Mrs. Yellen. I am not sure I quite understand what that
means.
Mr. Stutzman. How do you gather information? What
information are you gathering to then declare that we are
seeing inflationary pressures?
Mrs. Yellen. The PCE price index is issued. Data on it
comes out every single month that is produced by the Bureau of
Economic Analysis. So we have monthly data on it.
We are measuring, and the Bureau of Labor statistics is
going out and collecting data on a wide range of goods and
services that they incorporate into the consumer price index.
So we have pretty good real-time data on prices in the economy.
Mr. Stutzman. Is wage growth that part of the calculation?
Mrs. Yellen. It is not explicitly part of inflation, but in
trying to forecast inflationary pressures, one question is,
what is the price level or inflation now? Another question is,
what is its likely trajectory over time?
And in trying to understand and forecast where is inflation
going--
Mr. Stutzman. How much are wage increases calculated into
inflation?
Mrs. Yellen. It doesn't directly enter into inflation, but
the prices of some goods, and particularly services, depend
very heavily on the cost of labor. So it is an important--
Mr. Stutzman. So would the cost of--
Mrs. Yellen. --influence on the rate of inflation.
Mr. Stutzman. So we are trying to get wage increases. Is
that correct?
Mrs. Yellen. We are trying to hold stable, or to have 2
percent growth in an index of consumer--
Mr. Stutzman. But why wouldn't we want unlimited wage
increases? Why wouldn't we let the market drive wage increases?
Mrs. Yellen. We are letting the market drive wage
increases.
Mr. Stutzman. But if we--
Mrs. Yellen. We don't have a target for wage increases. We
have to target for increases in the prices--
Mr. Stutzman. Am I not understanding that wage increases
would then factor into inflationary pressure, and then you
would take that into calculation for interest rates?
Mrs. Yellen. We have an objective for a price index that is
a broad measure of the cost of a basket of consumer goods to
the typical American consumer, and we are trying to achieve a
longer-term objective of 2 percent for that. Looking at wage
behavior, we don't have a target for wage increases, but wage
increases can be a determinant of inflation of goods and
services and have predictive power for inflation in the future.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison.
Mr. Ellison. I thank the chairman and the ranking member.
Good morning, ma'am. It is good to see you again.
Just with regard to this issue of wage increases and the
implication that they could be a driver of inflation, could you
speak on the relationship between increases in wages and
productivity? And if you have an increase in work productivity,
you could also have increases in wages that are not
inflationary. Could you comment on that?
Mrs. Yellen. That is certainly true. And often, instead of
looking at just wages, we would look at a different measure
called ``unit labor costs,'' which compounds together both
productivity or output per hour and wage or compensation costs.
And that is a broader measure--taking account of
productivity of what does it cost or how is the cost changing
over time, of what firms need to pay basically to produce a
certain amount of output. So certainly productivity is a key
factor and not only wages.
Over the last several years, what we have seen is that real
wages, or wages in real terms, are not growing as fast as
productivity.
Mr. Ellison. Thank you for making that point. I was going
to ask you, but you anticipated my question, which is that we
have room for wage increases, given our rate of productivity in
this economy. And I would argue that wages are depressed and
sometimes you need government to intervene in labor markets
through--in minimum wage in order to catch up because there is
no equality of bargaining power, given the decline of union
representation in our country.
Anyway, I have to ask you a question on behalf of my
constituents. I represent a very large percentage of people
whose roots are in Somalia, and I am very proud to represent
that community.
One of the problems we have been having is that because of
certain regulations like the PATRIOT Act, the Bank Secrecy Act,
and others, that the regulatory--I hate to use the term
``regulatory burden'' because that sounds so Republican, but
the regulatory burden, okay--it is my move on bipartisanship
today--is such that a lot of the banks that facilitate these
money-wiring transfers are opting out of that market.
Usually we are not talking about them remitting a lot of
money, and the banks tell me they do it but it is just
expensive and the liability associated with making a mistake is
pretty high when it comes to having to do all the documentation
of knowing your customer.
What can be done? Because we have hardworking people who
are trying to send money back home to their families, and our
government correctly is trying to stop terrorism financing,
which I completely support. But in so doing, a lot of folks are
very hard-pressed to get money back home. Can you speak to this
issue?
Mrs. Yellen. This is an issue that the Federal Reserve has
been aware of and it has been discussed, I know, on an
interagency basis for a number of years. It is certainly a
legitimate need to make remittances to Somalia, and I think
part of the issue is with the need to also manage money-
laundering and terrorist-financing risks.
This is a hard issue. I would say the Federal Reserve--I
think it is important to understand, the Federal Reserve
absolutely does not prohibit businesses from providing
remittances to Somalia. To the extent that the banks we
supervise are involved with customers who are in this business,
we would supervise to make sure that they are abiding with BSA/
AML requirements. But we are not prohibiting banks from serving
the needs of these customers.
Now, it is a decision that they make whether or not they
want to take these risks. And, I know--and this is not the only
area where this comes up--some firms may be reluctant to
undertake those risks.
Mr. Ellison. Forgive me, Madam Chair, because my time is
running short, but I think that one of the ways to solve this
problem is for some developed governments like ours to engage
with the Somali government, which seems to be getting its feet
on the ground, and help them stand up their central banking
system so that it can meet international standards. I think
this would be money well spent to help them get their processes
in order because every penny that Somali Americans send to
their families is a penny we don't have to send in foreign aid.
But we are not going to stand by and let people starve, so we
will step in when we need to, and remittances take a lot of
pressure off.
Thank you very much. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
And the Chair would note for the record that I am aware of many
accusations against my friend from Minnesota, but sounding like
a Republican is not one of them.
The Chair now recognizes the gentlelady from Minnesota,
Mrs. Bachmann, for 5 minutes.
Mrs. Bachmann. Thank you, Mr. Chairman.
Continuing on with the Minnesota line of questioning here
in the Financial Services Committee, my questions for you--and
thank you again for coming before this committee, Chair Yellen,
today--as of July 9, 2014, my understanding is that the bank
reserves at the Federal Reserve are something close to $2.8
trillion, and I am wondering if you could explain to the
committee why is this number so high, the amount of reserves
that are on hand at the Federal Reserve?
Does this show that businesses are leery of investing in
the U.S. economy? And if these reserves enter the economy too
quickly, what is your assessment on the impact of inflation if
this $2.8 trillion adds to our money supply too quickly? And
what, if anything, would the Federal Reserve do to stop this
inflation?
Mrs. Yellen. The reason that bank reserves are so high is
because we are creating those reserves when we purchased
longer-term assets. So we have been involved in a program of
purchasing longer-term treasury and mortgage agency mortgage-
backed securities in order to provide financial conditions that
are appropriate to stimulate the recovery, and when we
purchased those assets we create those reserves. Any individual
bank can decide what they want their deposits to be with the
Federal Reserve, but in the aggregate that total is determined
by the Federal Reserve and not the banking system.
Now, as the economy recovers and we come closer to our
goals of maximum employment and our 2 percent longer-run
objective, it will be appropriate for the Fed to tighten
monetary policy to avoid inflation picking up to undesirable
levels. And we can do that with a balance sheet that is as
large as we have with reserves at these high levels, and we
have been discussing the exact procedures we will use when the
time comes to normalize policy.
We have had a number of discussions in recent meetings, and
the minutes of our last meeting, as I referred to in my
testimony, give some details of our thinking. We hope to set it
out in detail before the end of the year.
But we will move to raise short-term interest rates when
the time is appropriate. We will use tools like our ability to
pay interest on excess reserves and a host of subsidiary tools
that we can use to move up the general level of short-term
interest rates, and that is how we will tighten monetary
policy.
Eventually the committee sees it as appropriate to operate
with a much smaller balance sheet and smaller reserves than we
have now. Looking into the distant future, I think it is quite
reasonable to predict that our balance sheet will eventually
shrink in size, but only much later in the process of
normalizing policy.
Mrs. Bachmann. You had touched on the issue of recovery. We
have been in recovery for approximately 6 years. That seems
like historically a very long period of time, an unusually long
period of time for the United States economy to be in a so-
called period of recovery.
Normally, when we have a recession or if we have a
backtracking in our economy, usually we see almost like a
bungee cord effect. We see the economy grow at a rapid pace. We
haven't seen that for the last 6 years.
Can you tell this committee why haven't we seen the--what--
historically we would see robust recoveries, but we do not see
them now. Why, in your opinion, has that happened?
Mrs. Yellen. I think because this downturn was caused by a
financial crisis, and the study of financial crises around the
world suggests that when they occur, the downturns that follow
them and the recoveries take a very long time and they have a
pronounced effect on the economy. The typical post-war
recession--
Mrs. Bachmann. But so much of the recoveries--isn't it true
that so many of the recoveries, usually the further down you go
you see a quicker move up in recovery? Why aren't we seeing
that?
Mrs. Yellen. I think that is when it is not caused by a
financial crisis. For example--
Mrs. Bachmann. What makes it different?
Mrs. Yellen. For example in 1981 we had a tightening of
monetary policy because inflation had risen to unacceptably
high levels. When inflation came down, there was the ability to
then step on the gas with respect to monetary policy, and
intra-sensitive sectors like housing that had been suppressed,
immediately began to grow and bring the economy back. And of
course, this is a very different episode.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Washington, Mr.
Heck.
Mr. Heck. Thank you, Mr. Chairman.
Chair Yellen, thanks very much for your presence today. I
want to follow up on a question that Congresswoman Velazquez
asked you about what you highlighted in your own testimony,
your increasing concern about reach for yield activity. I
effectively have concluded you placed it kind of on your watch
list and your amber light is on.
The follow up question is this: Can you, without speaking
to broad policy, nonetheless give an example of what it would
look like in order for you to take that from your amber light
to your red light? And secondly, an example--again, not the
broad policy--about what kind of an action step you might take
to deal with it. Is that clear?
Mrs. Yellen. Yes.
I would look at broad measures of leverage and the extent
of maturity transformation and credit growth and asset prices
generally--broad measures--if I saw a leverage growing rapidly
in the economy, asset prices rising to levels that were--
Mr. Heck. Got it.
Mrs. Yellen. --outside of historic valuations.
Mr. Heck. And what is an example of what you might then do?
Mrs. Yellen. An important thing that we have done is to
take steps to make the financial system stronger. All the steps
coming out of Dodd-Frank to increase the quantity and quality
of capital, to put in place tougher leverage standards--all the
different things--liquidity rules--I won't go through the full
list of them, but let me just say these do two things.
First of all, if we were to have an unwinding of imbalances
that occurred, it means that financial institutions and the
financial sector would be in a much stronger position to
withstand the shocks and to go on meeting the credit needs of
the economy than they were in the run-up to this crisis.
But second of all, all of those--the collection of rules we
have put into effect and are now completing, we have to work
our way through them, will work to restrain the build-up of
these imbalances. For example, we will expect to put in place,
are likely to put in place, measures that will require extra
capital holdings against short-term wholesale financing. That
discourages the build-up of leverage and overnight borrow that
creates these risks.
Mr. Heck. I got it. Thank you. Financial institutions
should be put on notice as of now.
I want to ask a question about the output gap, the
difference between actual economic activity and that which
would be sustaining at maximum employment and peak industrial
output.
The IMF puts America's output gap at $720 billion a year.
The CBO puts it at a trillion. What is your personal opinion of
about what it is?
Mrs. Yellen. We don't have any official--
Mr. Heck. I know. I asked your personal opinion, Madam
Chair.
Mrs. Yellen. Okay. So can I put it in a slightly different
metric?
Mr. Heck. You will anyway, so please go ahead.
Mrs. Yellen. The unemployment rate is 6.1 percent. Members
of our participants in the FOMC would see a normal, longer-term
unemployment rate in the range of 5.2 to 5.5 percent. So,
taking the lower end of that range is say a .9 percent gap in
terms of the unemployment rate.
A simple historical relationship that has fit pretty well--
this is just back of the envelope; it is not precise--called
Okun's Law, would say that--
Mr. Heck. Okun's?
Mrs. Yellen. Okun's law, after Arthur Okun, would say that
the output gap tends to be on the order of two or 2\1/2\ times
that in terms of a percentage of GDP, so I think that gets us
in the range of something like 2 or a little bit over 2 percent
in terms of an output gap. But I want to emphasize, that is a
back of the envelope calculation I am trying at your request
rather than any official. But that is probably in line with
what you said, but I am not sure.
Mr. Heck. Thank you, Madam Chair.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from South Carolina,
Mr. Mulvaney.
Mr. Mulvaney. Thank you.
Madam Chair, last time you were here you and I talked
briefly about some discussions between Treasury and the Fed in
the fall of 2013 regarding the debt ceiling, the possible
prioritization of payments. I sent you several questions for
the record in follow up to that and I received a response last
week, which I appreciate.
And I have to ask, just for the record, ma'am, do you
actually read those or are they done by staff and you just sign
them?
Mrs. Yellen. I absolutely read them.
Mr. Mulvaney. Thank you. You didn't answer a lot of my
questions. I had asked for names of specific folks who were
involved in those discussions.
I asked--for example, you had invoked a certain privilege.
You said you couldn't tell Congress what you had talked about
because you have an agency relationship with the New York Fed
and you couldn't tell us what you talked to them about.
And I asked you for a specific legal justification for that
privilege and you didn't answer that. So without wasting a lot
of the time to actually get the answers, which I will do in a
follow-up QFR today, do you think it is appropriate not to
answer congressional inquiries on QFRs?
Mrs. Yellen. I think we have answered to the best of our
ability the questions you posed.
Mr. Mulvaney. Good. And I will give you a chance in the
follow-up to point out, in the answers you gave, where you are
actually answering those questions.
Let's get to the substance of the answers, because you gave
me a very interesting answer, one that I have heard from
members of the Administration several times, where you
distinguish between a default on debt and a default on
obligations. It is a term that has changed over the course of
the discussion regarding the debt ceiling.
It used to be that not raising the debt ceiling would
supposedly lead to a default on the debt and the members of the
Administration changed that language to use the term default on
our obligations.
And you continued that verbiage in your response where you
said, ``A failure to pay Social Security benefits, contractors,
or Armed Forces, et cetera, and other obligations as they come
due will, in fact, be and will be viewed publicly as a default
by the United States on its obligations.''
And I won't go in now to Social Security benefits,
contractors, Armed Forces. I will ask you this: We spent $1.9
million last year on lifestyle training for Senate staffers.
Would not doing that be deemed a default by the United States
on its obligations?
Mrs. Yellen. I really can't comment on a specific like
that. I would simply say that the government has a wide range
of obligations to contractors, to Social Security recipients--
Mr. Mulvaney. They do. Would you agree with me that some
are more important than others?
Mrs. Yellen. That is not my judgment to make. That is up to
Treasury and to the Congress to decide, not me.
Mr. Mulvaney. But I guess if you are taking the position
that not paying any of the obligations is a default, then not
paying the $300,000 we spent to encourage Americans to eat
caviar last year would be a default?
Mrs. Yellen. When the government has purchased goods and
services and is presented with a bill that has come due for
those goods and services and it fails to pay bills when they
come due--
Mr. Mulvaney. Fair enough. But not paying things that
haven't yet incurred and become due would not be a default,
then, in your definition. So if we have an expense that we are
going to incur next month but we do not, and therefore it does
not come due, it is not a default, using your definition.
Mrs. Yellen. The Treasury is making payments--
Mr. Mulvaney. Treasury.
Let's move on to the other topic I want to talk about,
because we received a letter last week or late last month from
Sheila Bair, former head of the FDIC, regarding the new reverse
repo facility at the Fed. She had raised some concerns about
it. I know I think the President of the New York Fed and also
the Boston Fed raised some questions about it in a recent Wall
Street Journal blog.
Two questions, as quickly as I can. Number one, why did you
not come to Congress to seek authority to create that facility?
Mrs. Yellen. This is a repurchase agreement, which is a
standard tool that we use in open market operations. It has
long been--we have long had--
Mr. Mulvaney. True, but this is a dramatic expansion, which
is why you are doing it, I think correctly, on a test basis,
correct? This is a new facility for you. It may be a
reinvention of something that you have used or a re-
characterization, but it is a new facility.
So I guess the answer is you didn't think you needed
authority to come to Congress?
Mrs. Yellen. We do have authority under the Federal Reserve
Act to purchase and sell securities in the open market and in
conduct of monetary policy, and I believe it falls under
standing authority that the Federal Reserve has and we will use
this facility only for the purpose of implementing monetary
policy.
Mr. Mulvaney. Fair enough. And let me ask you this: Do you
share Ms. Bair's concern and that expressed by the Presidents
of the New York and Boston Fed that perhaps this facility needs
to be limited in its size and application?
Mrs. Yellen. We have discussed and are aware of the
potential--if it is available on very large scale and can be
expanded and contracted very quickly--to create financial
stability risks. And we absolutely intend to make sure that we
address those risks.
Mr. Mulvaney. Thank you, ma'am.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Nevada, Mr.
Horsford.
Mr. Horsford. Thank you, Mr. Chairman, and Ranking Member
Waters.
And thank you, Chair Yellen, for being here today. It has
been a very informative session on the state of the U.S.
economy.
An area that I wanted to explore from the monetary policy
report is the issue of the slow recovery of housing and the
housing market. I am from Nevada. We have the most unstable
housing market in the country. About a third of our homeowners
are upside-down, negative equity, some of them as high as 50
percent or more.
And so in the report, it indicates that while there was a
slight increase in values and an uptick in the housing market,
we are beginning to see a decline or a slowdown in that. And so
I wanted to ask, what forces are contributing to this
lackluster housing recovery?
Mrs. Yellen. Housing did seem to be recovering throughout
most of the recovery, and it looked like it was on a reasonably
solid course, recovering from a very low level. And then we saw
essentially a cessation of progress when mortgage rates rose
significantly last year.
I think my expectation was that would be a temporary
setback for housing, and with mortgage rates higher but still
at very low levels, and with a period of very weak household
formation, I expected that we would see a rebound by now, a
pickup in the housing sector.
And frankly, it continues to be sluggish. I can't give you
a precise reason why that has occurred. We are certainly aware
of the fact that mortgage credit remains very, very tight, as I
have said several times this morning, for a wide range of
borrowers. And that may be part of it.
We also hear about some supply constraints that builders
face. Perhaps that is contributing. But I have to say that I am
somewhat surprised.
Mr. Horsford. So what more do you think the Fed can do to
help stimulate recovery in the housing sector, both for those
homeowners who are upside-down in the values, as well as to
help new entrants be able to qualify for homes?
Mrs. Yellen. Housing prices are continuing to increase, and
they have increased substantially, and I think particularly in
the markets that saw the worst booms and busts.
I know particularly in Nevada, there is a very large
fraction of homeowners who are underwater, but I think if you
look at the aggregate numbers, just the increase in house
prices we have seen--and I think that is in part reflecting our
accommodative monetary policy--many fewer borrowers are
underwater. The numbers have diminished substantially.
And, I know the Las Vegas area particularly is one of the
most hard-hit and still has about the highest numbers on this.
But I really think that our policy is helping, and I think
eventually we will see greater progress in the housing market.
But, there are many impediments that servicers face in the
aftermath of the problems and the foreclosure problems we have
had during the crisis and things have not yet settled out
there.
Mr. Horsford. Definitely.
At yesterday's Senate Banking Committee hearing, you stated
that, ``Too many Americans remain unemployed, inflation remains
below our longer-run objective, and not all of the necessary
financial reform initiatives have been completed.''
What benchmarks are you looking at when determining if a
full recovery has taken place? And what does a full recovery
look like, from your perspective?
Mrs. Yellen. We have emphasized that at this stage we are
not looking at just one or two statistics and assessing the
labor market. We are taking into account many different
measures of performance.
Probably the unemployment rate is the single best
indicator, and it has come down to 6.1 percent, which is really
notable progress, and broader indicators that include
marginally attached workers, discouraged workers, and those
with involuntary unemployment, part-time employment, those have
come down as well. But that is not at levels that most members
of our committee would consider full employment.
We are looking at the extent of long-term unemployment. We
are looking to see if there are groups that have dropped out of
the labor force that may indicate why labor force participation
has declined so much. I am hopeful that some of that will
reverse as the economy strengthens.
We are looking at measures of hiring and quits that remain
below normal and suggest not a normal labor market at this
point.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Florida, Mr.
Ross.
Mr. Ross. Thank you, Mr. Chairman.
Chair Yellen, thank you very much for being here. In your
role, you are balancing the metaphorical gold standard of our
currency, and I know that can be very difficult.
In your opening statement, with regard to the monetary
policy, it says that the committee seeks to explain its
monetary policy decisions to the public as clearly as possible.
In trying to keep it as clear as possible for my constituency
back home, especially those who are on fixed incomes, what hope
or what prognosis can you give, as clearly as possible, to
those on fixed incomes?
Is this a positive? Is there an opportunity that they are
going to see greater returns on their investments, or are they
going to have to see eating into principal? Fixed-income people
in central Florida--there are a lot of them.
Mrs. Yellen. I know it has been a really hard time for
savers who are trying to exist on the returns you would earn on
a safe investment, like a savings account. And that has been a
heavy toll for those households.
Mr. Ross. It has led to abbreviated retirements and return
to the workforce. That might be one of the reasons why
unemployment has gone down.
Mrs. Yellen. But they can be hopeful that as the economy
recovers, and interest rates in a sense, they are not just set
arbitrarily; they reflect fundamental economic forces. And the
fundamental--
Mr. Ross. That you control, fortunately--or unfortunately,
depending on who you are talking to. But yes, you are right.
Mrs. Yellen. It is a lot to save, and there is not much
demand for those savings in the form of investment. And that
means that--
Mr. Ross. As you discontinue the buyback, I think that
should hopefully put some more pressure on upward rates for
savings. Wouldn't you agree?
Mrs. Yellen. As the economy recovers and we begin to
normalize policy, eventually interest rates will go up. So if
the recovery continues, I would envision rising interest rates
over time. And we have tried to spell out what we envision.
Mr. Ross. Thank you.
Let's talk briefly about SIFIs, because the last time you
were here we discussed this. And specifically, I think you
would agree that the fewer systemically important financial
institutions that we have, the better off we are.
And in fact, we have now have some insurance companies that
are being designated SIFIs. My big concern is that they should
be designated as a SIFI as a last resort, when nothing else is
out there to help them. I think you would agree with that.
Mrs. Yellen. Well, sure. I think there has to be clear
evidence that--
Mr. Ross. But when they are at that level, shouldn't we
allow for some opportunity for self-correction, or an
opportunity so that they can keep from being designated as a
SIFI? In other words, these entities don't know they are a SIFI
until it is too late.
Wouldn't you agree that there should be more transparency,
more involvement, whether it be some role for the Fed to come
in there and keep them from being a SIFI? And wouldn't that
send a message to keep others from also ever being designated
as that, taking appropriate action?
Mrs. Yellen. I think the FSOC has tried to make clear what
the criteria are,--
Mr. Ross. I would differ with you on that--
Mrs. Yellen. --that they will take into account, and I
don't really think it was any surprise to these institutions
that they are on the list. And of course, after they are
designated, if they wanted to change their structure
substantially enough, that situation could potentially change.
Mr. Ross. Quickly, I see that you have just commissioned
Tom Sullivan to assist in capital standards, and I think that
is a very good move. I want to make sure that we are adequately
representing this industry, this insurance industry, especially
with regard to international capital standards.
And that has me concerned because I think you have
testified yesterday that maybe if--even if there are
international standards, that we may not abide by them. And
that--
Mrs. Yellen. What I said was that if international
standards are agreed to, nothing becomes--
Mr. Ross. We are not compelled to do it.
Mrs. Yellen. --nothing happens in the United States unless
we go through a full range of--
Mr. Ross. We are still going to be at the table, though,
with regard to the negotiation of those standards, correct?
Mrs. Yellen. We are sitting at the table, and state
insurance commissioners are there with us. We--
Mr. Ross. Good.
Mrs. Yellen. --consult with the Federal Insurance Office.
And as you noted, we are adding--
Mr. Ross. I just have one little quick question, one last
question. Just recently this month the President was speaking
and he said, ``Right now, if you are one of the big banks,
profit center is the trading desk, and you can generate a huge
amount of bonuses by making some big bets. You will be rewarded
on the upside. That is going to require some further reforms,''
the President said. ``That is going to require us taking
additional--looking at additional steps that we can take.''
Have you talked to the President about further reforms?
Mrs. Yellen. No.
Mr. Ross. Okay. Do you think that Dodd-Frank is appropriate
in terms of its reforms that have been imposed on the market so
far?
Mrs. Yellen. I am not certain what he is referring to
there.
Mr. Ross. Okay. Thank you.
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. Chair Yellen, how are you?
Mrs. Yellen. Good, thank you.
Mr. Royce. I am glad you are with us again. I want to
encourage you on a theme that you spoke to recently, and that
is this question of the unsustainable path, as you mentioned,
of entitlement spending that we have known about for decades.
There is a new Congressional Budget Office report that just
came out and it releases new numbers. It says that the long-
term debt will equal 100 percent of the overall economy within
25 years.
I think this goes to your point that, in your words, this
is a critical issue facing the country. I talked to Ben
Bernanke about this and his predecessor, Alan Greenspan. Isn't
there a way to ring that bell a little louder so that people
understand what this means for the next generation? And I will
ask you that and give you the floor here to amplify that
message if you would like.
Mrs. Yellen. I believe this is a critical problem that
Congress should really try very hard to address in the
Administration. It is one we have known about for decades.
There is nothing fundamentally new here. We have just come
closer to the problem without taking the necessary steps.
I think it relates to trends in health care costs, combined
with an aging population. That is certainly not news. There are
many organizations that have been trying to explain, I believe,
to the American people how serious this problem is.
Mr. Royce. I want to encourage you to continue to do what
you are doing on that front. If I might recommend opening every
speech with trying to get people's attention, both in Congress
and around the country, about this problem and what it will
mean for future generations.
I also have a fiscal policy question for you, and it is on
an issue on which I find myself in agreement with our current
Treasury Secretary. We must do more to discourage these
inversion transactions, and that is the use of mergers and a
change of the P.O. box to avoid paying higher taxes here in the
United States.
And in 1997 in your confirmation hearing, you said that the
tax structure impacts decisions about work and investment.
Other things being equal, lower taxes are better than higher
taxes.
I am wondering, on the corporate tax part of this, if you
have looked at this issue of inversion or if you have been
involved in any conversations about the impact of our current
tax system and relatively high marginal corporate tax rates, on
job loss? And is this something you have discussed with
Secretary Lew?
And on comprehensive tax reform, including a reduction of
U.S. corporate tax rates, that is one possible solution to this
problem. I wish we had--as you say, I wish we had more than a
letter from the Treasury Secretary calling for--the words here
that he used were, ``a new sense of economic patriotism.''
We are going to need more than that new sense of economic
patriotism. We need real leadership. And we need leadership out
of the White House and we need leadership all around to pass a
comprehensive tax reform.
Only President Reagan made it possible in 1986, in my view,
and he did that in engagement with Tip O'Neill, right? And only
an engaged President will make it possible today.
But could you speak to this inversion issue on what we
might be able to do?
Mrs. Yellen. I am sorry to say this is an issue that, while
I am aware of it, I am not an expert on it. And it is a complex
set of issues, and I think it is entirely appropriate for the
Congress and the Administration to frame policy to deal with
it.
But I don't think it is appropriate for me to give specific
advice about how--
Mr. Royce. I understand that. But we are going to continue
to lose ground in terms of economic productivity that you have
spoken to in the country. If companies continue to change their
domicile, we are going to lose receipts, we are going to lose
jobs.
All of that is going to compound that problem that we spoke
to earlier, which is now the long-term debt equals 100 percent
of the overall economy 25 years from now under current
trajectory. So if we want to change the trajectory, we have to
do something, in my view, about this problem as well.
Mrs. Yellen. I think it is entirely appropriate to try to
frame appropriate policies to deal with this issue.
Mr. Royce. Thank you, Chair Yellen.
And thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair wishes to announce that we have three Members
left in the queue. It is the Chair's intention to clear these
three Members and excuse our witness, so if there are Members
monitoring the hearing in their offices wanting to hasten over
here to ask questions, do not bother.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being with us again today.
Mrs. Yellen. Thank you.
Mr. Pittenger. Chair Yellen, Alice Rivlin, who was
President Clinton's appointee to be Vice Chair of the Fed,
endorsed the cost-benefit analysis requirement of the FRAT Act.
Do you agree with her?
Mrs. Yellen. I'm sorry, what did she endorse?
Mr. Pittenger. She endorsed the cost-benefit analysis of
the FRAT Act, the bill that we have been discussing today with
Mr. Huizenga. Do you agree with her?
Mrs. Yellen. I believe the Federal Reserve does do cost-
benefit analysis where it is appropriate. When we--
Mr. Pittenger. Do you believe it is appropriate in this
case?
Mrs. Yellen. I don't endorse the version of what is
required in the FRAT Act. But I think we do appropriate and
detailed and careful analysis of alternative ways to implement
a regulation that implements a law that is passed by Congress.
Rules--
Mr. Pittenger. I appreciate what you are saying, Chair
Yellen, but--so the bottom line is that you would not agree
with Ms. Rivlin on this?
Mrs. Yellen. I didn't have a chance to review her remarks,
but I wouldn't endorse what is in the FRAT Act.
Mr. Pittenger. Chair Yellen, we saw a recent report from
the CBO that Obamacare is estimated to cost 2.5 million jobs
over the next decade. Has the Fed done any estimates of how
many jobs the implementation of Dodd-Frank is expected to cost
the economy? Or is the Fed even interested in that?
Mrs. Yellen. In evaluating a number of different
regulations, we have attempted to do cost-benefit analysis. The
overall conclusion we came to, for example, when we looked at
our capital rules, was that the reduced probability of a
financial crisis, which takes an enormous toll on jobs--and we
have just lived through that so we can see how large that can
be--that the reduction in the odds we would live through a
period like this again resulted in benefits that exceeded the
cost of implementing higher capital standards.
Mr. Pittenger. We sure are seeing it in North Carolina. In
my district alone, the building permits aren't even up to 50
percent of what they were in 2008. That is a lot of lost jobs.
The same is true with community banks, the consolidations.
There has been a lot of impact. And I would think that a
measurable effect of Dodd-Frank would certainly be warranted.
Chair Yellen, with the lackluster growth we have had,
though, there have been some bright spots. One in particular is
in the energy sector. The Dakotas, Texas, Oklahoma, and other
energy-producing States have presented--have had great job
growth, particularly as it relates to the energy revolution
that has come from the fracturing and other production of
fossil fuels.
Chair Yellen, what effect would opening up other resources,
the OCS, expanded drilling areas on land, ANWR, across the
United States, have on the GDP, and what type of impact would
that have on job growth?
Mrs. Yellen. I would agree that we have seen a remarkable
growth in the energy industry and a transformation of energy,
our dependence on the rest of the world for energy.
We don't do calculations in the Federal Reserve of the type
that you have asked about, what impact it would have on GDP--
Mr. Pittenger. But it is common sense. You would agree that
if we opened it up to the OCS and the other lands and ANWR that
it could make an even greater, measurable difference?
Mrs. Yellen. As you know, there are complicated policy
issues and a number of different factors that come into play.
And I think that is not in the domain of the Federal Reserve to
opine on what is the right public policy in this area.
Mr. Pittenger. Given the right political atmosphere, it
would create jobs.
Chair Yellen, the Federal Reserve is now in the business of
regulating insurance companies and currently supervises two
insurance companies which have been designated as SIFIs, AIG
and Prudential, and nearly a dozen insurance companies that
have owned depository institutions, the likes of Nationwide
Insurance, State Farm, and TIAA-CREF, to name a few.
Chair Yellen, other than one appointee who is now on that
Board, a recently hired senior adviser with extensive
background in insurance, how many full-time employees has the
Fed hired with insurance expertise in the last year? And did
the hires possess a particular insurance expertise?
Mrs. Yellen. I can't give you a number, but I can tell you
that we have worked hard both at the Board and in the Reserve
Banks to increase our expertise. We are working closely with
the Federal Insurance Office, with State regulators, and are
trying to tailor supervision--
Mr. Pittenger. Thank you. We are out of time. It does make
sense, though, doesn't it?
Thank you.
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.
And thank you, Chair Yellen, for being with us today.
I would like to talk a little bit about the Federal Reserve
Accountability and Transparency Act, which has been the topic
of some discussion today. And what I am hearing from across the
aisle with our colleagues, I have heard talk of a straitjacket.
And then I think I heard you testifying about a ``rigid rule''
that you described in the proposed legislation.
Is it your testimony that this bill requires the Fed to
follow a rigid rule for monetary policy?
Mrs. Yellen. It requires us, as I understand it, to specify
a rule, and when we don't follow it, to explain exactly what
the logic is or how we have changed the rule, and then calls
for very rapid GAO involvement in overseeing the conduct of
monetary policy if for any reason we were to deviate from the
rule and--
Mr. Rothfus. I look at the Act and I see two rules
described: a directive policy rule; and a reference policy
rule. Now, the reference policy rule does set forth parameters
for calculating a Fed funds rate. But there is no requirement
in this Act that would require the FOMC to follow the reference
policy rule, correct?
Mrs. Yellen. That is what I see in the legislation, but--
Mr. Rothfus. So then we have a directive policy rule that
simply requires the Fed to identify an interest rate. That is
what the Fed is already doing when it announces a policy. It
identifies an interest rate--and an explanation of what the
FOMC doing.
If we were to boil down the directive policy rule, that is
essentially saying it is--we are going to say there is going to
be an interest rate and an explanation of what the Fed--FOMC is
doing. Is that right?
Mrs. Yellen. I think we regard it as incumbent upon
ourselves to explain why we have adopted the policy we have,
and--
Mr. Rothfus. And so that is what--basically that is what we
are talking about here--
Mrs. Yellen. Well, no--
Mr. Rothfus. --and the added requirement that you would
explain or educate the Members of Congress and the American
people on why you would deviate from a standard that was in
place, similar to what was happening during the great
moderation.
Mrs. Yellen. It requires the specification of a
mathematical rule and models and forecasts, which goes much,
much, much further in straitjacketing how we would set monetary
policy than setting an interest rate and providing Congress and
the public with a explanation of the rationale for our policy
decision, and then would bring to bear on Federal Reserve
decision-making very quickly, in real time, oversight from the
GAO and from Congress, and I believe fully bring into the
process of Federal Reserve decision-making essentially short-
term political influences.
I don't believe it is--
Mr. Rothfus. I would like to talk a little bit about the
independence of the Fed--again, another focus of our hearing
today. Does this apply to the Fed's regulatory responsibilities
as well as its monetary policy?
Mrs. Yellen. It is an exception that Congress made for
monetary policy.
Mr. Rothfus. Okay. When we talk about writing a cost-
benefit analysis requirement into law to ensure that the
benefits of the Fed's regulations are greater than their costs,
the same requirement that currently applies to the SEC and
CFTC, we hear that judicial review under such a statute would
compromise the Fed's independence.
Does the Fed's independence require that the Fed be exempt
from review of its rules by the courts?
Mrs. Yellen. The term, to me, ``Fed independence,'' applies
to monetary policy. I feel the cost-benefit analysis that we do
is adequate, but that is a separate matter.
Mr. Rothfus. Okay. I want to follow up on Congressman
Pittenger's line of questioning about the designation of
insurance companies as SIFIs.
Other than hiring Thomas Sullivan as a senior adviser, what
steps have you taken to ensure that the Federal Reserve has the
requisite expertise to regulate insurance companies?
Mrs. Yellen. We have hired individuals with that expertise,
especially when we have taken on the oversight and supervision
of savings and loan holding companies, some of which have heavy
insurance involvement, including the ones that the Congressman
mentioned. We have really greatly built our expertise and
understanding of the insurance industry and its unique
characteristics.
We have explicitly, when we came out with our 165 rules,
refrained from putting in effect capital rules that would apply
to heavily insurance-based companies in order to make sure that
we thoroughly understand their unique characteristics.
Mr. Rothfus. I thank the chairman.
Chairman Hensarling. The time of the gentleman has expired.
Last but not least, another gentleman from Pennsylvania,
Mr. Fitzpatrick?
Mr. Fitzpatrick. Thank you, Chairman Hensarling.
I also want to thank Chair Yellen for the investment of
time you have made here. I think you have been very generous
with your time, which I know we all appreciate.
The number one issue in my district back in Bucks County,
Pennsylvania, is jobs and the economy. And there has been much
said about what appears to be a government rate of improving
unemployment rate and what that says about our economy. And you
have talked about that both in your policy report and your
written statement here today.
In your oral statement, Chair Yellen, you said the
unemployment rate has fallen nearly 1.5 percentage points over
the past year. It stood at 6.1 percent in June, which is down 4
points--
Chairman Hensarling. The gentleman will suspend. The clerk
is having a little trouble hearing the gentleman. If you could
speak a little closer to the microphone?
Mr. Fitzpatrick. Much has been said about the unemployment
rate falling 4 points from the height. My concern is that these
government numbers don't seem to distinguish between full-time
employment and part-time employment--
Chairman Hensarling. I'm sorry. If the gentleman would
suspend one more time. For whatever reason, the clerk still
can't hear the gentleman. Would you mind using the microphone
adjacent to you and let's see if that corrects the problem?
Mr. Fitzpatrick. Is that better?
Chairman Hensarling. Perhaps the microphone for Mr.
Westmoreland might work?
I apologize. Let's try this.
Mr. Fitzpatrick. Okay.
Chair Yellen, in March you gave a speech about what the Fed
is going to tackle the unemployment rate, and you made this
observation--this is a quote: ``The existence of such a large
pool of partly unemployed workers is a sign that labor
conditions are worse than indicated by the unemployment rate.''
That was the National Interagency Community Reinvestment
Conference in Chicago. That was back in March.
Do you believe that the unemployment rate, as currently
reported by the Bureau of Labor Statistics, is an accurate
snapshot of the labor market?
Mrs. Yellen. It is one particular measure but it is
obviously not complete. The Bureau of Labor Statistics reports
on the number of individuals who are part-time employed and
involuntarily so would like more work, and that figure has been
running about 5 percent of the labor force, which is an
unusually high level.
The Labor Department computes some broader statistics
pertaining to unemployment. One of them is called U-6, and it
is the standard civilian unemployment rate with those
involuntary part-time employees added in, and also those who
were discouraged or marginally attached to the labor force, and
that is a number that is much higher. It is running around 12
percent; it has come down significantly, along with the
narrower measure of unemployment. But clearly what is called
the U-3, or the 6.1 percent unemployment rate, is not a
complete measure of what is happening in the labor market.
That is why we have said, the Federal Reserve, the FOMC has
said, we are looking at a broad measure of indicators,
including many indicators of the labor market, to assess where
it stands.
Mr. Fitzpatrick. Because many here on the legislative side
look at the unemployment rate, I guess it is the U-3, which is
6.1 percent, and looking at that to drive policy decisions on
spending, on programs, and the like.
So which do you think is the better reflection of the true
employment picture of our Nation? Because my constituents are
not buying the 6.1 percent. It doesn't feel right. They know it
is not right. It is not an accurate reflection of what is
really going on in the economy in real towns across America.
Mrs. Yellen. That is why I believe you have to look at many
measures of the labor market, and there obviously is more
distress than is captured in that 6.1 percent number, and the
12 percent, for example, or roughly the U-6 measure is
capturing a broader range of distress.
But there are many metrics. We can't judge something as
complicated as the labor market by one number--
Mr. Fitzpatrick. Is there anything in particular that the
Bureau of Labor Statistics can do to create a more accurate
picture of the economy?
Mrs. Yellen. I think we shouldn't try to look for one
single number to assess what is a complicated phenomenon. If I
had to choose one and only one number to look at, I would
choose the 6.1 percent U-3 number. But I don't think that is
adequate and I think we should want a broad range of
measurements of different aspects of the labor market and to
keep them all in mind.
Mr. Fitzpatrick. I remain concerned by these monthly
reports that say the unemployment rate is coming down not
counting individuals who are--distinguishing between those who
work part-time and those who work full-time, not counting
individuals who are not actively engaged in a search, who have
given up on the search. People are desperately looking for
work. They are not reflected in the numbers of the government
that is supposed to care about that.
Mrs. Yellen. I agree, and I mentioned my own concern with
some who are simply measured as out of the labor force who
might rejoin and want work if it were available.
Mr. Fitzpatrick. Madam Chair, thanks for your service. I
appreciate it.
Mrs. Yellen. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
I would like to thank Chair Yellen for her testimony today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place her responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
This hearing stands adjourned.
[Whereupon, at 1:03 p.m., the hearing was adjourned.]
A P P E N D I X
July 16, 2014
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