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S. HRG. 112–723 FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2012 HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS SECOND SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 JULY 17, 2012 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http: //www.fdsys.gov / U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 78–978 PDF : 2013 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS TIM JOHNSON, South Dakota, Chairman JACK REED, Rhode Island RICHARD C. SHELBY, Alabama CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee DANIEL K. AKAKA, Hawaii JIM DEMINT, South Carolina DAVID VITTER, Louisiana SHERROD BROWN, Ohio MIKE JOHANNS, Nebraska JON TESTER, Montana PATRICK J. TOOMEY, Pennsylvania HERB KOHL, Wisconsin MARK KIRK, Illinois MARK R. WARNER, Virginia JERRY MORAN, Kansas JEFF MERKLEY, Oregon ROGER F. WICKER, Mississippi MICHAEL F. BENNET, Colorado KAY HAGAN, North Carolina DWIGHT FETTIG, Staff Director WILLIAM D. DUHNKE, Republican Staff Director CHARLES YI, Chief Counsel LAURA SWANSON, Policy Director MARC LABONTE, Detailed CRS Economist ANDREW OLMEM, Republican Chief Counsel MICHAEL PIWOWAR, Republican Chief Economist DANA WADE, Republican Professional Staff Member GREGG RICHARDS, Republican Professional Staff Member DAWN RATLIFF, Chief Clerk RYKER VERMILYE, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON C O N T E N T S TUESDAY, JULY 17, 2012 Page Opening statement of Chairman Johnson ............................................................. Opening statements, comments, or prepared statements of: Senator Shelby Prepared statement ................................................................................... Senator Crapo ................................................................................................... 1 42 2 WITNESS Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... Prepared statement .......................................................................................... Responses to written questions of: Chairman Johnson .................................................................................... Senator Reed .............................................................................................. Senator Warner ......................................................................................... Senator Merkley ........................................................................................ Senator Vitter ............................................................................................ Senator Toomey ......................................................................................... Senator Kirk .............................................................................................. ADDITIONAL MATERIAL SUPPLIED FOR THE 4 43 46 51 52 55 59 61 64 RECORD Monetary Policy Report to the Congress dated July 17, 2012 ............................. 68 (III) VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2012 TUESDAY, JULY 17, 2012 U.S. SENATE, URBAN AFFAIRS, Washington, DC. The Committee met at 10:03 a.m., in room SD–G50, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. COMMITTEE ON BANKING, HOUSING, AND OPENING STATEMENT OF CHAIRMAN TIM JOHNSON Chairman JOHNSON. I call the hearing to order. Today we welcome Chairman Bernanke back to the Committee to deliver the Federal Reserve’s semiannual Monetary Policy Report. The legacy of the financial crisis still weighs heavily on our Nation’s economy and financial system today. Following the longest and deepest recession since the Great Depression, the economy has grown slowly but steadily since 2009. We have come a long way, but there is still a lot of work left to be done to get our economy back to the point where jobs are readily available and wages are rising for American workers. While the economy is not growing as fast as we would like, it is important to recognize that it would not be growing at all if Congress and the Federal Reserve had not taken action to restore financial stability. The Wall Street Reform Act created a framework for a financial system that is stable, works in the consumers’ interest, and never again allows bank bailouts. Recent events such as CFTC ordering Barclays to pay a $200 million penalty for LIBOR manipulation are reminders that we need tough, fair rules in place and strong, adequately funded financial regulators to enforce those rules. Some critics say that the cost of financial regulation is too high, but those same critics seek to underfund our regulators and ignore the reality that today’s high unemployment and battered economy were caused by inadequate and ineffective regulations. That is why we passed the Wall Street Reform Act, and that is why we are safer today than before the crisis. Any cost that Wall Street bears from playing by the rules pales in comparison to the trillions of dollars that Americans lost as a result of the last financial crisis. As we recognize the second anniversary of the Wall Street Reform Act, I look forward to hearing from Chairman Bernanke on the Fed’s progress in carrying out its new responsibilities and how these efforts have further stabilized the financial system. (1) VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 2 Though policy makers can make the financial system more stable and resilient to negative shocks to the economy, they cannot prevent those shocks from occurring in the first place. While recent policy actions taken in Europe are welcome, the eurozone economy remains fragile. I would like to hear the Chairman’s thoughts on the progress that has been made in the eurozone and how U.S. policy makers can protect our economy from the potential fallout if the situation were to worsen. While the Fed’s role in the economy is important, we need to acknowledge that the Fed cannot solve all of the economy’s problems. The housing market has been holding back the economy for too long, and I ask this Committee to support efforts of my colleagues to enact legislation to give responsible homeowners the opportunity to refinance their mortgages. This legislation is fair because it helps homeowners who have been playing by the rules, is marketfriendly because it eliminates barriers to competition and is a costeffective way to jump-start the economy because it keeps more of workers’ paychecks in their pockets. Congress also needs to reach a sensible resolution to the fiscal cliff problem at the end of the year. I support the President’s plan to extend expiring tax cuts for the middle class. Today’s hearing underlines the importance of effective oversight, which has been a leading priority of mine as Chairman of the Committee. In the past 18 months, we have conducted frequent oversight hearings with all of the financial regulators. In the coming weeks, we will conduct oversight hearings with Secretary Geithner, in his role as the head of the Financial Stability Oversight Council, and with the Director of the Consumer Financial Protection Bureau, Richard Cordray. I have welcomed the steps that Chairman Bernanke has taken to make the Fed more transparent, including the decision to release its communications with Barclays on LIBOR. I also believe that the Wall Street Reform Act’s enhancements to Fed transparency and oversight have had a positive impact. I now turn to Senator Crapo. STATEMENT OF SENATOR MIKE CRAPO Senator CRAPO. Thank you very much, Chairman Johnson. I appreciate your holding this hearing today. And, Chairman Bernanke, we appreciate having you with us for your semiannual Monetary Policy Report to Congress. Senator Shelby is unable to attend today because of a family obligation, but I ask that his statement be made a part of the record and note that he will be submitting questions for the record. Chairman JOHNSON. Without objection. Senator CRAPO. Thank you, Mr. Chairman. The U.S. economy continues to experience disappointing job growth and faces significant challenges with the eurozone debt crisis, the tax cliff, and our broader fiscal crisis, which includes the need to address the impending insolvency of the entitlement programs. A disappointing 80,000 jobs were added in June, holding unemployment steady at 8.2 percent. In June, Chairman Bernanke warned Congress about what could happen if it does not address the so-called fiscal cliff, noting that this would have a very significant impact on the near-term recov- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 3 ery. According to CBO, if all of the tax and spending measures under current law were to occur together, the economy would grow at just 0.5 percent in 2013 compared to a 4.4 percent expectation absent these measures. Recently, one of the largest private owners of U.S. debt said that we have until 2016 to contain our borrowing before bond investors revolt and drive up interest rates. Others suggest the timetable could be much sooner. The lack of economic growth has caused some to call for further expansion of the Federal Reserve’s $2.9 trillion balance sheet through a third round of so-called quantitative easing. However, there are a lot of questions about how effective the first two rounds of quantitative easing have been, what their long-term impacts will be, and how effective an additional round of quantitative easing could be. I am interested in learning what more can be done with Government bond yields that have been so low for so long. Following the June FOMC meeting, the Federal Reserve announced it would continue its maturity extension program, the Operation Twist, through the end of the year. I am interested in learning what have been the results so far and what are the expectations going forward. Another drag on the economy are the hundreds of Dodd-Frank proposed rules that will increase the cost of capital formation in the long run and in the short term add to the climate of uncertainty and complexity. The concern that I hear most is that the regulators do not understand the cumulative effect of the hundreds of proposed rules and that there is a lack of coordination between our domestic and international regulators. That is why it is so important that the regulators perform meaningful cost/benefit analysis so that we can understand how these rules will affect the economy as a whole, interact with one another, and impact our global competitiveness. Ultimately, we need to have rules that are strong enough to protect our economy but that can adapt to changing market conditions to promote credit availability and spur job growth for millions of Americans. Also, like many of my colleagues, I am learning about the issues related to the setting of the London Interbank Offered Rate, or LIBOR, which serves as a benchmark for trillions of dollars of loans and derivatives, including the cost of many mortgages in the United States. Recently, Barclays agreed to pay a $450 million fine to settle manipulation charges brought by the U.S. Department of Justice, the Commodity Futures Trading Commission, and the United Kingdom’s Financial Service Authority. Investigations that banks manipulated the LIBOR process are continuing, and questions are being asked whether international and domestic regulators, including the Federal Reserve, took sufficient action. I look forward to hearing from Chairman Bernanke on all of these issues, and, again, Mr. Chairman, I welcome you here for your report today. Chairman JOHNSON. Thank you, Senator Crapo. To preserve time for questions, opening statements will be limited to the Chair and Senator Crapo. However, I would like to re- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 4 mind my colleagues that the record will be open for the next 7 days for additional statements and other materials. With that, I would like to welcome Chairman Bernanke. Dr. Bernanke is currently serving a second term as Chairman of the Board of Governors of the Federal Reserve System. His first term began under President Bush in 2006. Before that, Dr. Bernanke was Chairman of the Council of Economic Advisers and served as a member of the Board of Governors of the Federal Reserve System. Chairman Bernanke, please begin your testimony. STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. BERNANKE. Thank you. Chairman Johnson, Senator Crapo, and other Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy. The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 2.5 percent in the second half of 2011, real GDP increased at a 2-percent rate in the first quarter of 2012, and available indicators point to a still smaller gain in the second quarter. Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent. Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers’ purchasing power, households remain concerned about their employment and income prospects, and their overall level of confidence remains relatively low. We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater—that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of fore- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 5 closed properties, continues to divert demand from new construction. After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has also slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of investment demand—such as surveys of business conditions and capital spending plans—suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with some cooling in the economies of other trading partners, is restraining the demand for U.S. exports. At the time of the June meeting of the Federal Open Market Committee—FOMC—my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013. These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data. In addition, financial strains associated with the crisis in Europe have increased since earlier this year, which—as I already noted—are weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of other headwinds, including still tight borrowing conditions for some businesses and households, and—as I will discuss in more detail shortly—the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants into the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants’ forecasts now has the unemployment rate at 7 percent or higher at the end of 2014. The Committee made comparatively small changes in June to its projections for inflation. Over the first 3 months of 2012, the price index for personal consumption expenditures rose about 3.5 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an annual rate of 1.5 percent over the first 5 months of this year, compared with a 2.5 percent rise over 2011 as a whole. The central tendency of the Committee’s projections is that inflation will be between 1.2 to 1.7 percent this year and at or below the 2-percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 6 Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis, and the second is the U.S. Fiscal situation. Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of 3-year bank financing by the European Central Bank. However, tensions in euro-area financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain’s fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain’s troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook. The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy. The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. Fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect—a scenario widely referred to as the ‘‘fiscal cliff’’—a shallow recession would occur early next year and about 11⁄4 million fewer jobs would be created in 2013. These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 7 Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of the year. The most effective way that the Congress could help to support the economy right now would be to work to address the Nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence. In view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program, or MEP, through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longerterm Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Reserve’s balance sheet. By removing additional longer-term Treasury securities from the market, the Fed’s asset purchases also induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative. Economic growth is also being supported by the exceptionally low level of the target range for the Federal funds rate of 0 to 1⁄4 percent and the Committee’s forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the Federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. Thank you. I would be pleased to take your questions. Chairman JOHNSON. Thank you for your testimony. We will now begin the questioning of our witness. Will the clerk please put 5 minutes on the clock for each Member? Chairman Bernanke, I am going to lead off with a question about the LIBOR scandal. Last week, you released documents showing that the Fed provided early warnings on manipulation in the LIBOR market. Then-New York Fed President Timothy Geithner raised concerns with President Bush’s Presidential Working Group and offered reform recommendations to the British authorities. Can you tell the American people, what did you know, when did you know it, and what did you do about it? What can we do to restore confidence in the system? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 8 Mr. BERNANKE. Thank you, Mr. Chairman. As you know, LIBOR is a critical benchmark for many financial contracts, so the actions of traders and banks that have been disclosed are not only very troubling in themselves, but they have the effect of undermining public confidence in financial markets. Regarding the Federal Reserve’s role, the Federal Reserve Bank of New York takes the lead in gathering market intelligence for the Federal Reserve System. It was in the process of gathering market intelligence when it received information about LIBOR submissions, notably a phone call on April 11, 2008, in which a trade in Barclays New York told an employee of the Federal Reserve that he thought that Barclays was underreporting its rate. About that same time, stories began to appear in the media as well. There was an April 16th story in the Wall Street Journal, and the Financial Times also had a number of stories. I would like to make two preliminary points before talking about the Federal Reserve’s response to that information. First, the information the Fed received was about the banks possibly submitting low rates in order to avoid appearing weak during the period of the crisis. The transcripts of the phone calls that were released have no reference to the manipulation of rates for profit by derivatives traders, as alleged by the recent decision. The second point I would like to make is that this issue was complicated during the crisis by the fact that there were very few transactions occurring other than overnight, and so banks were asked to report what they would pay if they were borrowing at a certain term. It may have been in many cases that transactions were not taking place at that term. We will get more information on that as the investigations continue. But it is clear that, beyond these disclosures, the LIBOR system is structurally flawed, and part of the response was to address those flaws. The Federal Reserve Bank of New York, after receiving this information from its market inquiries, responded very quickly. It set up an internal working group to address the issue. Importantly, it informed all the relevant authorities in both the U.K. and the United States. Notably, on May 1st, then-President Geithner briefed the President’s Working Group, which consisted of the Treasury, the Fed, the CFTC, and the SEC, among other participants. The New York Fed briefed the Treasury separately on May 6th. The PWG meeting was followed up with interagency staff briefings to provide more information to the staffs of the various agencies. And the New York Fed also communicated with the FSA and the Bank of England in the United Kingdom. So there was active effort to report to all the relevant policymakers and enforcement agencies the information that had been received. The second step that the Federal Reserve Bank of New York took was to develop recommendations to address the structural problems with LIBOR that I mentioned before. The New York Fed released a memorandum, a list of suggested changes that they submitted to the Bank of England on June 1st and following earlier discussions with the Bank of England. There were also communications with the British Bankers Association, which is the private group that constructs LIBOR, prior to June 1st. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 9 So the Federal Reserve Bank of New York took the lead here. They released a good bit of information. They are looking for additional information, and they will certainly release it if they find it. On the Board’s side, we were in supporting mode. We provided analytic support, notably about the issues related to the construction of LIBOR. Our staff were in contact with the CFTC in April and May to provide analytical support. And Governor Kroszner on the Board at that time was in contact with the British authorities and the BBA during May and June. I think it is important to note that, following the Federal Reserve Bank of New York’s disclosures to the appropriate authorities, there was rapid followup. The CFTC was making inquiries as early as April 2008. It sent requests for information to U.S. banks in the fall of 2008. The SEC initiated inquiry in 2009 and the DOJ in 2010. Currently, the European Commission and a range of other foreign regulators, including British regulators, of course, are also investigating. And, of course, we know about the June 27th settlement with Barclays. So there was a substantial response by the Federal Reserve Bank of New York both in terms of informing all the appropriate authorities. That information led to investigations. The Federal Reserve Bank of New York also contributed substantially to thinking about how to better structure the LIBOR panel and the LIBOR information collection to avoid some of the weaknesses in the system that became evident during the crisis. Chairman JOHNSON. Chairman Bernanke, what are the factors that led you to support the extension of the so-called Operation Twist program? And what changes in economic conditions might lead you to consider a strong policy response in the future? If further extensions of Operation Twist are not possible in the future, what other policy tools are available if the Fed decided to provide additional monetary support? Mr. BERNANKE. Well, as you know, Mr. Chairman, the Federal Reserve in December 2008 brought rates down close to zero, and since then we have had to rely on a number of less conventional policy tools in order to achieve additional financial accommodation, and those included, of course, as was mentioned, quantitative easing programs, and the Operation Twist, which, as I discussed in my remarks, also provides extra financial accommodation and provides support for the recovery. The other type of tools that we have include communication tools, notably our forward guidance, which gives the markets some sense of where we think—or how long we think that rates will be kept at their current low level. So those are the principal types of tools that we have. We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we have seen recently is enduring and whether or not the economy is likely to continue to make progress toward lower unemployment and more satisfactory labor market conditions. If that does not occur, obviously we have to consider additional steps. We have looked at a range of possible tools, mostly, again, involving the balance sheet and communication. The Committee meets in a couple of weeks, and we will be discussing those tools. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 10 We have not really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market. Chairman JOHNSON. Senator Crapo. Senator CRAPO. Thank you, Mr. Chairman. Chairman Bernanke, ever since the Dodd-Frank conference, there has been a debate about whether nonfinancial end users were exempt from margin reforms. Then-Chairman Dodd and Chairman Lincoln acknowledged that the language for end users was not perfect and tried to clarify the intent of the language with a joint letter. In the letter, they stated, ‘‘The legislation does not authorize the regulators to impose margin on end users, those exempt entities that use swaps to hedge or mitigate commercial risk.’’ In April 2011, prudential regulator issued a joint proposal that would, in fact, require nonfinancial end users to post margin to their bank counterparties. According to the proposed rule, the proposal to require margin stems directly from what they view to be a legal obligation under Title VII. Recently, I offered an amendment with Senator Johanns to fulfill congressional intent by providing an explicit exemption from margin requirements for nonfinancial end users that qualify for the clearing exemption. The amendment is identical to the House bill which passed the House by a vote of 370–24. Is it accurate, in your opinion, that regardless of congressional intent, the banking regulator view the plain language of the statute as requiring them to impose some kind of margin requirement on nonfinancial end users unless Congress changes the statute? Mr. BERNANKE. We believe that the statute does require us to impose some type of margin requirement. We tried to mitigate the effect as much as possible by allowing for exemptions when the credit risk associated with the margin was viewed as being sufficiently small. So many small end users would be exempt in practice. Senator CRAPO. Do you agree that the nonfinancial end users’ hedging does not contribute to systemic risk, that the economic benefits from their risk management activity—excuse me, that the economy benefits from their hedging activity and that it is appropriate for Congress to provide an explicit exemption from margin requirements for nonfinancial end users that qualify for the clearing exemption? Mr. BERNANKE. I certainly agree that nonfinancial end users benefit and that the economy benefits from the use of derivatives. It seems to be the sense of a large portion of the Congress that that exemption should be made explicit, and speaking for the Federal Reserve, we are very comfortable with that proposal. Senator CRAPO. Well, thank you, Mr. Chairman. I want to shift gears for just a minute back to the question that the Chairman asked with regard to what actions you can take. You indicated in your response to his question about what tools you still have and how you may approach them that you still have some possible tools to deal with. There is obviously a lot of speculation and concern about whether you are considering another round of quantitative easing. There are a lot of questions about how effec- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 11 tive quantitative easing has been to date and what more can be done. Could you discuss for us a moment how effective you feel that the quantitative easing has been so far and whether you feel that it is one of those tools that you should seriously consider going forward? Mr. BERNANKE. So as I mentioned to the Chairman, we ran out of space to lower short-term rates in the normal way, and we had to look for other tools. Like a number of other major central banks, we have used asset purchases as a way of providing additional support to the economy. Economists differ on terms of how effective the tools have been. My own assessment is that the quantitative easing and the Operation Twist so-called tools have been effective in easing financial conditions and in promoting strength in the economy, and it was most evident in the so-called QE1 in March 2009, which was followed a few months later by the beginning of the recovery and, by a few days, by the trough in the stock market. QE2 was certainly effective at addressing what was beginning to become a worrisome amount of risk of deflation in the fall of 2010. That issue was addressed. My view and the view of our analysts at the Fed is that it also contributed to economic growth. It is hard to judge because it depends on what you think would have happened in the absence of those actions. So there is a range of views about the efficacy of these programs. There are also questions about side effects, risks that might be associated with their use, and, therefore, I think they should not be used lightly. Nevertheless, my own view is that these tools and other nonstandard tools still do have some capacity to support the economy, and what we will be looking at in thinking about this is, I think, really two things: The first is, as mentioned in our statement, whether or not there is, in fact, a sustained recovery going on in the labor market or are we stuck in the mud, so to speak, in terms of employment. That is, of course, our maximum employment mandate. And then the other issue would be price stability, and notably we would certainly want to react against any increase in deflation risk. Senator CRAPO. Thank you, Chairman JOHNSON. Senator Reed. Senator REED. Thank you very much, Mr. Chairman, and thank you, Chairman Bernanke. Let me return for a moment to the issue of LIBOR. Can you give us and the millions of Americans who depend upon LIBOR because it tells them how much they have to pay for their car loan or their student loan, et cetera, that the current LIBOR is reliable, that the changes that were made or suggested by the New York Fed or others have been put in place, and that this is an index that is, in fact, reliable and not being subject to manipulation going forward? Mr. BERNANKE. I cannot give that assurance with full confidence because the British Bankers Association did not adopt most of the suggestions that were made by the Federal Reserve Bank of New York. They made a relatively small number of changes. I think it is likely that concerns are less now because we are no longer in the crisis period, and that, as I mentioned, was a period in which VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 12 transactions and many maturities were not taking place. I would like to see additional reforms to the LIBOR process, assuming that LIBOR will continue to be a benchmark for financial contracts. Alternatively, there are a number of people looking at alternative benchmarks, like repo rates or the overnight index swap rate or other types of interest rates which have the advantage over LIBOR that they are market rates as opposed to simply reported rates. Senator REED. What steps are you taking, though, given that concern you have expressed, right now, not retrospectively, how we got here and who did what to do, but to provide as much certainty as you can—there are several banking institutions you directly regulate that contribute to LIBOR. There is your relationship directly with the Bank of England. What are you doing—not just you personally but the Federal Reserve—to ensure this index is appropriate? And, again, I encourage you to study these alternatives, but the LIBOR is so deeply interwoven and embedded into thousands and thousands of contractual arrangements throughout the world that it is going to be hard to next week shift to something else. Mr. BERNANKE. Well, again, I think we are and need to continue advocating for reforms to the LIBOR process. It is constructed by a private organization in the U.K., and so our direct ability to influence that is limited. With respect to the three banks in the United States which contribute to the LIBOR panel, two of those banks have reported in their SEC filings that they have been asked for information by investigating agencies. We are following that very carefully. We will see what happens, and we will provide any support and help we can to those investigators. Senator REED. Let me turn to more the monetary issue. The Federal Reserve has been in some cases sort of pursuing aggressive monetary policy while fiscal policy has not kept up in some respects, and I presume you are prepared to continue to do that given the unemployment numbers, inflation numbers, et cetera. That is regardless of what we are doing on the fiscal end. Mr. BERNANKE. Our mandate tells us to do the best we can for employment and price stability, and we will continue to do that. Of course, we would appreciate other policymakers playing appropriate roles themselves as well. Senator REED. One of the comments that you made—and will give you a chance to amplify it—is that there will be a need, I think in your view, next year for continued stimulus, for want of a better term, if we are going to reduce unemployment, which is one of your mandates, and that if we reach a solution that is heavy on cuts to spending, that is heavy perhaps even on cuts to entitlements, that would not provide stimulus, in my view, and it could further impact unemployment in the country. Is that an accurate assessment? Mr. BERNANKE. Well, the position we have taken is, I would say, at a first cut is do no harm. What we need is a strategy which addresses the long-run sustainability issues. We cannot forget about that. At the same time, if the fiscal cliff is allowed to happen, it will certainly have major negative effects on the recovery. The CBO, the IMF, and many other observers have made similar rec- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 13 ommendations, and we feel that is a reasonable balance between the short and long term. Senator REED. Some of the specific issues that we face at the end of the year are filling a gap in 2013 in terms of spending, in terms of revenues. And if that 2013, if we avoid the cliff by taking another route, but that route significantly decreases spending, decreases other stimulative effects, would your view be that we could have avoided a cliff but still found ourselves in a very perilous economic situation because employment will continue to decline? Mr. BERNANKE. It is a question of the timeframe. In the very near term, we already have a lot of fiscal drag coming from State and local governments, for example, as you know, and some coming inevitably from the Federal side. So in no way am I saying that we should not be making strong efforts to achieve long-term sustainability and make a credible plan as soon as possible for doing that. But it would be better to make that plan soon but to have the effects come in more gradually to allow the recovery the air it needs in the short term. Senator REED. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Corker. Senator CORKER. Thank you, Mr. Chairman. And thank you, Mr. Chairman, for being here. I was listening to the last dialog there, and I know in your statement you talked about the fiscal cliff that is coming up. And to be clear about the spending reductions, it is $1.2 trillion over the next 10 years that the sequestration amounts to. We are going to spend about $45 to $47 trillion of taxpayer money over the next 10 years. And while I agree we should come up with a much better solution that deals with entitlements and revenues and hopefully something that is much larger, are you seriously concerned that we are talking about $108 billion next year in reductions, half between defense, half in other mandatory spending, you are seriously concerned that that small amount of spending reductions is something that is going to damage the economy? Mr. BERNANKE. The fiscal cliff includes both the spending reductions and the tax increases. Senator CORKER. I am talking about just the spending piece. It is hard for me to believe—— Mr. BERNANKE. Obviously, a smaller fiscal contraction will have a smaller effect. But, you know, I do not want to make a judgment about—I realize it is very contentious, taxes versus spending. I do not want to get into that. But, clearly, a smaller reduction in the fiscal position would have less effect on the economy than a larger one. Senator CORKER. Yes. But as we look at the economy, would you not also say that the best thing we could do to stimulate the economy, including any actions the Fed might take, is for us to have real balanced fiscal reform? Is that not the thing that would cause our economy to take off more than anything else and alleviate the uncertainty that people have, the investing community? Mr. BERNANKE. Fiscal reform is very important, not only the control of deficits over the long period but also the quality of fiscal policy: What are we spending our money on? What does our Tax Code look like? I think those things are extremely important. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 14 But I think the way the current law is written, we have the maximum impact right in the very short run on January 1, 2013, and much less happening over the next decade or the next two decades. So I am not advocating an overall increase in fiscal spending or anything like that. I am just saying that the timing should be adjusted to allow the recovery a little bit more space to continue, but to make a serious efforts to improve our fiscal policy over the next decade. Senator CORKER. So, look, I agree that we should have a better policy than we now have, and I think most of the people on this dais are trying to seek that, and it is unbelievable to me that we have not already done that. But I think, on the other hand, for us to potentially kick the can down the road on sequestration creates even more—if we do not come up with another solution, which I hope we will, but to say that you are recommending in some ways that we kick the can down the road, not do sequestration, and make us look even more irresponsible to me is worse than the $108 billion that might be reduced out of the spending that the Federal Government is going to be doing this next year. Do you understand what I am saying? Mr. BERNANKE. Yes, sir, and I think just delaying everything, just saying we are not going to do it, put it off a year, I think that would be a very bad outcome. Senator CORKER. So I think the actions that you are taking at the Fed—and I understand you have a dual mandate. I think we should have a single mandate, and I know we have talked about that. I know that it creates bipolar activity because you are trying to juggle the two, and we have created that, not you. But I think the actions that you are taking really take the—or you are potentially considering—I know QE2 was in response to potential deflation. I think further actions actually take the impetus off us to act responsibly. And I candidly wish we had a Chairman of the Fed that sometimes would say, look, we are not doing anything else, we are pushing rope, and it is up to you to act responsibly to deal with these fiscal issues, quit looking to us. I mean, are you tempted ever to say that to Congress? Would you not say that now? Mr. BERNANKE. I do not think that is my responsibility. I have been assigned to focus on maximum employment and price stability, not to hold threats over Congress’ head. Congress is in charge here, not the Federal Reserve. Senator CORKER. A very politic answer. I would say that, you know, you have members that are concerned about the policies that you are putting in place being disruptive. You do have members who are concerned about that. Is that correct? Mr. BERNANKE. We have a range of views on the Committee, yes. Senator CORKER. And let me ask it a different way. If we were to act responsible and to do something in a balanced way that deal with not only the next 10 years but 20 and 30, which most of the plans that have been in the mainstream do that, would that alleviate the need possibly for the Fed to consider additional quantitative easing? Mr. BERNANKE. Well, possibly. As I said, the fiscal issues are a major concern, a major downside risk, and if Congress addressed VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 15 those issues and the economy was—the outlook was better, then it is certainly very possible that that would abrogate any need to take further action. Senator CORKER. You have been a little vague on what additional tools you have, and I understand that. I know the whole world watches when you speak. It does appear that most of the toolkit is utilized at this moment. If you were to consider additional tools at the Fed in the next meeting, what would be the range of options that might exist with rates being where they are today and Operation Twist being in effect? I mean, what else is there that the Fed can responsibly do since the Fed is the biggest lender to the Federal Government already, far more than China and Japan? Mr. BERNANKE. Well, there are a range of possibilities, and I do not want to give any signal that we are choosing one—— Senator CORKER. Well, what is the range? Mr. BERNANKE. The logical range includes different types of purchase programs that could include Treasurys or include Treasurys and mortgage-backed securities. Those are the two things we are allowed to buy. We could also use our discount window for lending purposes, but, you know, that is another possibility. We could use communication to talk about our future plans regarding rates or our balance sheet. And a possibility that we have discussed in the past is cutting the interest rate we pay in excess reserves. That is a range of things that we could do. Each one of them has costs and benefits, and that is an important part of the calculation. Senator CORKER. Thank you for your service and for being here. Chairman JOHNSON. Senator Schumer. Senator SCHUMER. Well, thank you, Mr. Chairman. I, too, thank you for your service. I think you have done a superb job in one of the most difficult periods to be Chairman of the Fed. Now, I do not quite agree with my good friend Mr. Corker. I think you have told Congress what you want us to do in your own Fed-speak way of doing it. Just last month, you said you would be ‘‘more comfortable if Congress took off some of the burden in terms of helping the Fed in our economic recovery.’’ What he meant there is not deficit reduction. He meant stimulus. He meant some kind of stimulus, which is the opposite side of the Fed. Now, I agree with you. Under current conditions, fiscal policy should be our first choice. It would be more effective. Unfortunately, we can talk all we want—everyone gives speeches how fiscal policy should be the way to go, and we do not do anything. We have had a hard getting the cooperation necessary to get anything done on the fiscal side. We have tried tax cuts, which supposedly our colleagues on the other side of the aisle like. We have tried increased investments in infrastructure, a traditional way of priming the pump. We have tried support for State and local governments where jobs are declining, and we have run into opposition on all fronts. Just last week, on two things that our colleagues have often supported—a tax credit for job creation and accelerated depreciation for capital purchases—we got no support. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 16 So the bottom line is very simple. We are not going to get the fiscal relief we want, at least over the next short while. Maybe after November we will. So given the political realities—and the President has been calling for this repeatedly. When the President last fall proposed shortterm fiscal support combined with long-term deficit reduction, which to me is the right way to go, a 10-year plan that really reduces our deficit but a 1- or 2-year plan that pumps the economy up a little bit, he did not get a single Republican vote. And we know the reality. You cannot do it if it is not bipartisan. So given the political realities, Mr. Chairman, particularly in this election year, I am afraid the Fed is the only game in town. And I would urge you to take whatever actions you think would be most helpful in supporting a stronger economic recovery. You have received some harsh criticism for past efforts to help the economy. Republican leadership in the House and Senate, even as they were blocking jobs bills in Congress, sent you a letter opposing more monetary support as well. Well, I would urge you now more than ever to take whatever actions are warranted by the economic conditions, regardless of the political pressure. To that end, the minutes of your last FOMC meeting notes that the forecast for real GDP growth was revised down, the unemployment rate remained elevated, and consumer price inflation declined. Moreover, the economy showed that not a single member of the Committee thought employment would be back to normal levels by the end of 2014. Not a single member forecast inflation even modestly above your 2-percent target in the same timeframe. So the recession is deeper, more prolonged, and stickier than anyone thought. And let us remember, the Fed has a dual mandate: first and foremost to guard against inflation, but also to keep unemployment up and—sorry, to keep employment up and unemployment down. So, to me, these conditions would certainly motivate the Fed to seriously consider taking further action to bolster the economy. What is your opinion about that? Mr. BERNANKE. We take the dual mandate very seriously. We will act in an apolitical, nonpartisan manner to do what is necessary for the economy. We have said we are prepared to take further action. The complication, of course, is that we are dealing with less conventional tools, and we have to make assessments about their efficacy and whatever costs and risks may be associated with them. But it is very important that we see sustained progress in the labor market and avoid deflation risk, and those are the things we will be looking at as the Committee meets later this month and later this summer. Senator SCHUMER. And you still do—I mean, you have used QE1 and QE2, but you still have some other tools in your toolkit? Mr. BERNANKE. I believe we do, yes. Senator SCHUMER. OK. And do you agree that at least for the next few years the danger of inflation is quite low? Mr. BERNANKE. Well, our projection of inflation is that it will be close to or below our 2-percent target, and, yes, so I think inflation risk is relatively low now. Not everyone agrees with that, but my personal opinion is that that risk is reasonably low right now. And indeed, as I mentioned, there is a modest risk—not a large risk but VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 17 a modest risk—of going in the other direction, which is toward the deflationary side. Senator SCHUMER. And you certainly agree that unemployment has been too high and is sticky, and despite two false starts, we are having a much rougher time than we ever imagined getting unemployment down? Mr. BERNANKE. Yes, that is true. Senator SCHUMER. So get to work, Mr. Chairman. Chairman JOHNSON. Senator DeMint. Senator DEMINT. Thank you. Thank you, Mr. Chairman, for being here. It is interesting to hear my colleagues talk, and they seem puzzled why our short-term temporary stimulus gimmicks do not seem to work. And by any analysis, the cliff that is at the end of this year was created by all of these temporary policies that expire at the same time. Clearly, we are throwing a lot on you, but at the same time it appears that we are forcing you into temporary, short-term ideas. And I am concerned that—you mentioned costs and benefits, some of the things that you are clearly considering, such as quantitative easing, as costs that we do not talk about, at least on our side, as well as keeping the interest rates low. I mean, you are well aware that keeping interest rates where they are is costing Americans about $400 billion a year in lost interest on any savings that they might have. So there is a real cost, and over the last 4 years, probably about $1 trillion in loss. So people who are actually trying to save and put aside dollars are on a negative treadmill in the sense that they are losing the value on their dollars. So there is a cost to that stimulus effect. And also a quantitative easing, which you are clearly considering, our own Federal Reserve Bank of New York estimates that about 50 percent of the value of the S&P over the last decade is related to Fed action and the buildup around Fed action of quantitative easing. My concern now is that what we are seeing is not an increase in the value of stock but a projection and a loss of value of our dollar. And while we talk about no inflation, I think what we are talking about is no visible inflation at this time, because clearly, if we are printing more money to buy more of our national debt—and I think you will agree the Federal Reserve through intermediaries has bought over half of our debt the last couple of years—we are diluting the value of our dollar over time. And while it may not show up today or tomorrow, it is inevitable that it will show up. And I think we see that in the reflection of the price of stocks because it is obvious that that does not reflect long-term projections of value and profits as much as it does playing a market and what is coming out of the Federal Reserve. So my concern very much now is another announcement of quantitative easing, which might inflate the stock market temporarily, but another short-term effort that might help employment in the short term but actually reduce the value of the dollar and, therefore, everything we have worked for here in the country. So how are you gauging the cost of another round of quantitative easing? Mr. BERNANKE. Well, let me respond to the specifics that you raised. On savings, we understand that low interest rates are a hardship for many people. The reason the interest rates are low, VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 18 of course, is that we are trying to promote a recovery in the economy. People hold fixed-income types of securities, like CDs or Treasury bonds, but they also hold stocks or corporate bonds or small businesses or other types of assets which depend on the strength of the economy. And raising interest rates might help some folks, but if it caused the economy to weaken considerably, it would be bad for investors broadly speaking. So what we are trying to do, of course, as our mandate suggests is to strengthen the economy, which in turn should make America a more attractive place to invest, provide higher returns for everyone investing in the United States. On the dollar and inflation, I appreciate your concern, and that is obviously one of the things we have paid very close attention to. We have not seen inflation yet, though, and the dollar has been, in fact, recently a good bit stronger. And we are comfortable that we have the tools to unwind these policies in a way that will not threaten inflation. But as I said to Senator Schumer, we take both sides of the mandate very seriously, and as we are looking to try to help reduce unemployment, we also want to be confident that we maintain price stability in the United States. And thus far we have been successful in doing that. Senator DEMINT. The dollar is stronger relative to the euro, but comparative values inside the United States just cause some concerns at this point. But, again, I appreciate what you do. I would just ask caution in diluting our dollar even further for temporary action. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Menendez. Senator MENENDEZ. Thank you, Mr. Chairman. Thank you, Chairman Bernanke, for your service. I want to speak to you about interest rate manipulations by large banks since the Fed plays a role, a key role in ensuring the integrity of interest rates that affect consumers, small businesses, and cities and towns across the country. You know, I look at this most recent set of allegations on the LIBOR manipulation, and once again it exposes to me a culture of greed, a culture of cheating, of lying, at least at one large bank, and probably many more, which is why nine of my colleagues and I wrote to you and other banking regulators and the Department of Justice last week asking for a robust investigation in the role of these banks and how this ultimately affected consumers in this country, investors in this country, cities in this country, because LIBOR is a very—it is far more than a benchmark. It is a very significant indicator here that is used. I know that the Federal Reserve Bank of Cleveland found that 45 percent of prime adjustable rate mortgages are indexed to LIBOR; 80 percent of the subprime ARMs use LIBOR as a benchmark. So this is a huge issue, and it again goes to the integrity of our financial system, and the lack of faith, I think, increasingly that the American public and, for that fact, many of us are having in the system. I looked at the internal emails during 2005 and 2007 of Barclays’ derivative traders asking other employees to submit false survey responses in order to benefit their trading positions, changing VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 19 them, preferring certain LIBOR outcomes on certain days, sometimes for it to be higher, sometimes for it to be lower, depending upon how it would benefit their position. Now, I look at this, and I say to myself this is about trying to manipulate a key economic indicator for the purposes of profit. Am I wrong on that? Mr. BERNANKE. No, I agree absolutely. This is unacceptable behavior. Senator MENENDEZ. Well, let me ask you, clearly, then, banks like Barclays were trying to profit from the LIBOR manipulation, but that profit came not at, you know—actually, it came at the expense of the public in general. Mr. BERNANKE. Some of the public. It is actually an interesting question. You mentioned borrowers. Borrowers may have benefited because LIBOR was underreported. We will probably find out via a number of lawsuits that have been filed, and investigations, exactly how much effect there was. Senator MENENDEZ. But if you got caught in that period of time in which the traders wanted the higher LIBOR and that was a time in which your adjustment was going on, you had a detriment to yourself. Investors obviously had a detriment in not knowing the integrity of the institutions, not knowing the—you know, LIBOR, if it is lower, it means things are working pretty well. When it goes higher, it is sort of like a warning sign, is it not? Mr. BERNANKE. I am not defending it. I think it is a major problem for our financial system and for the confidence in the financial system, and we need to address it. Senator MENENDEZ. So how do we address it? For example, I know that some of my colleagues here bristle at regulation, but it seems that this is an industry that on its own will not work with the integrity that the public deserves. We are talking about pension fund investments, mutual fund investments, investments by regular investors, as well as the consequences to consumers. I am sure that we are talking about billions in effect, if not trillions in effect. For example, do you think that we need additional internal controls or firewalls between reporting personnel and trading employees at these banks so that we do not have this work to manipulate as one example of—I would like to hear what it is we are going to do now that we know all of this, and may have known it before. We are we going to do to ensure the integrity of this banking system? Mr. BERNANKE. Well, first, it is going to have to be an international effort because—LIBOR is constructed by the U.K. organization, and, of course, LIBOR is constructed for about ten different currencies as well. So it has to be an international effort. I think there are broadly two approaches. One would be to fix LIBOR, to make changes to it to increase the visibility, to reduce the ability of individual banks or traders to affect the overall LIBOR, and to increase monitoring of the reporting process that is done. So that would be one strategy. The other strategy, which many people are thinking about, is going from what is essentially a reported rate to an observable market rate as the index, and there are a number of possible can- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 20 didates that have been advanced that might ultimately replace LIBOR. As you point out, though, LIBOR is very deeply ingrained in many contracts, and so that change will be not a simple one to make. But I agree with you that we need to address this problem. Senator MENENDEZ. Well, I would look forward to the Fed’s leadership in this regard and suggestions of how we, in fact, make a system that cannot be manipulated, that has consequences to millions of consumers, investors, pension funds, municipalities, counties, Governments, all affected by LIBOR. And so it may be an international response that we need, but we need to understand what we can do here in the United States to ensure for these investors and these consumers. Chairman JOHNSON. Senator Vitter. Senator VITTER. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for your report. On the LIBOR issue, from everything I have read, reports as well as documents, it seems like in 2008, when the New York Fed learned of this potential scandal, potential misreporting, it reacted on the policy side with various discussions, recommendations, with their British counterparts. I have not seen anything about it reacting as a regulator of U.S. large banks. Did it do anything to investigate whether U.S. banks were guilty of the same practice? Mr. BERNANKE. Well, what it did was it informed the responsible authorities—the CFTC in particular—very quickly. The Bank of New York made a presentation to the President’s Working Group that included the SEC and the CFTC, provided supporting information, as did the Board. So the investigations took place, but they were taken up quite quickly by not the Fed, which is a safety and soundness regulator, but by the authorities that had the most direct responsibility for those issues. I have to say that the Federal Reserve Bank of New York is still investigating the situation itself, digging up documents and the like. I do not know what communications or conversations were had with the three U.S. banks that were on the panel, but the actual enforcement actions were taken by the CFTC and SEC and DOJ. Senator VITTER. So as we sit here today, do we know definitively that no U.S. banks were guilty of the same manipulation? Mr. BERNANKE. No, we do not know that. Senator VITTER. Well, it seems to me that goes back to my question and my concern. If we do not know that, it seems like somebody dropped the ball, the fact that we are 4 years later and we do not know that. Mr. BERNANKE. Well, I mean, as I said, two banks have reported that they have been asked to disclose information to the investigating agencies, and so a robust process is certainly underway. Senator VITTER. It is underway 4 years later. My point is that knowledge of this occurred in 2008, and neither the New York Fed nor other regulators did a sufficient investigation so that we could know one way or the other as we speak today 4 years later that the U.S. banks did not do the same thing. Am I missing something? Mr. BERNANKE. Only that, again, I think the responsibility of the New York Fed was to make sure that the appropriate authorities had the information, which is what they did. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 21 Senator VITTER. Do you think it was a reasonable responsibility for the New York Fed to follow up and say did U.S. banks that we are a primary regulator of do the same thing? Mr. BERNANKE. I do not know what conversations they had. Of course, the New York Fed is the regulator of some banks and of holding companies. There are other regulators, like the OCC and so on. Senator VITTER. But certainly the New York Fed is the primary regulator of the biggest banks with regard to—U.S. banks engaged in LIBOR that we are talking about, correct? Mr. BERNANKE. Two of the three. Senator VITTER. Right. Let me move on to another topic that I am concerned about. The Fed is in the process of rulemaking with regard to the term ‘‘predominantly engaged in financial activities’’ under Dodd-Frank. The rule that has been published and the Fed is now taking comments on seems to me absolutely ignores a very specific criteria that we in Congress placed in Dodd-Frank in Section 102(a)(6). I know about it because it was a Vitter-Pryor amendment, and it is very specific. It uses an 85-percent test. And it seems to me the rule the Fed is in the process of adopting ignores that specific metric. How can the Fed adopt a rule that ignores specific statutory language? Mr. BERNANKE. We would not want to do that, and I will check on that question for you. Senator VITTER. OK. If you could check on that, again, it is 102(a)(6). And I believe the Fed rule that has been published for comment ignores a specific metric in the law, which I would short term call the 85-percent rule, which was a Vitter-Pryor amendment, which is in final law. Mr. BERNANKE. Thank you for that. Senator VITTER. Thank you very much. Finally, capital standards for the largest banks. As I have read your comments in the past, it seems to me that you support somewhat larger capital requirements for mega banks, but that you seem to think where we are headed, about 9.5 percent under Basel III, which is about 2.5 percent more for the mega banks, is roughly appropriate. Is that a fair summary or not? Mr. BERNANKE. Well, there is an international standard which it is not the same for every big bank. It starts at virtually zero for the medium-size banks and then increases up to the largest banks. But it is based on some formulas and some calculations that try to establish parity across banks around the world. Senator VITTER. Well, I guess what I am asking is: To the extent that imposes higher capital standards on the largest U.S. banks, do you think those higher standards are good enough to ensure stability in the future and protection in the future? Mr. BERNANKE. I think they are very useful, very important. Basel III in general is going to increase everybody’s capital and increase the quality of capital, and this will mean that the largest banks have even additional capital. But it is not just capital. It is also going to be the market discipline that comes from orderly liquidation authority, stronger supervision, liquidity requirements, and so on. I think it is extremely important that we address too VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 22 big to fail, and this is one way to make banks take into account that their own size does impose a cost on the rest of society and make them respond to that. Senator VITTER. Beyond the path we are on, do you think we should be looking at higher capital requirements for the biggest banks? Mr. BERNANKE. Well, we will continue to have international discussions. It has been our approach to try to have capital requirements that are broadly consistent with the international standards, and these numbers were based on calculations that drew from the crisis. But we are always open to further discussions, and we will see how effects of the higher capital work through the credit system as we go forward. We are phasing this in relatively slowly, as you know, so we will get a chance to see what the impact is on banks and credit costs. Senator VITTER. My time is up, but I would encourage you to look at that, and I would encourage you to place safety and stability ahead of—I understand the desire for uniformity across the globe, but I do not think it should trump what is best for—— Mr. BERNANKE. You are looking forward to higher capital requirements. Senator VITTER. Yes. Chairman JOHNSON. Senator Akaka. Senator AKAKA. Thank you very much, Mr. Chairman. Let me add my welcome to Chairman Bernanke to the Committee and to thank you so much for your tireless leadership in these challenging times. Recent economic events in Europe and China show us how dependent the United States is on the international markets when it comes to our economic recovery. Despite concerns about the overall rate of recovery, some sectors are beginning to turn around and we are beginning to see some bright spots, as indicated in your opening statement. Hawaii, for example, had record tourism numbers in May, and nationally we see spending by foreign travelers continue to rise, helping to reduce our deficit. My question is: How do you think that current policies and those regarding tourism and exports have affected the recovery? And, also, do you have any suggestions on how to further encourage growth in these areas? Mr. BERNANKE. Well, first, Senator, tourism has been something of a bright spot. We have seen improvements in tourism in not just Hawaii but in a number of places around the country. And you mentioned the international trade deficit. People may not appreciate that when a foreigner comes and visits Hawaii, that actually counts as a U.S. export because we are exporting the tourism services. And the export of tourism services has actually been growing very quickly, something like 14 percent in the last year, faster than other types of exports. And so it contributes to our trade balance as well as to overall economic activity. So it is a positive. With respect to policies that address it, you know, I think there is a lot of incentive. We see that individual States, for example, compete with each other to try to attract visitors. But we can consider issues like visa policies; we can look at any tax or other impli- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 23 cations that might affect the cost of tourism. So it is an area where I think there is a lot of benefit and a lot of scope for economic benefit to Hawaii and the rest of the country. And it has so far been, as I said, a bright spot among the various service industries that we have. Senator AKAKA. Thank you. As you know, I am concerned with the well-being of consumers. During previous hearings, you and I have discussed the importance of improving financial literacy to empower consumers while we work to grow the economy. So my question is: In what ways have you seen financial decision making by individual Americans improve during this recovery? And what more needs to be done, do you think? Mr. BERNANKE. Well, there are two sides to improving decision making. On the one hand, there is education and that effort has continued. The Federal Reserve is continuing its efforts toward promoting financial literacy and economic education. I have an upcoming meeting with teachers across the country, and I will be talking about financial literacy and answering their questions and talking about how to introduce students to these topics. Some of the activities that we had have moved over to the CFPB, which some personnel and some functions went over there, but they are also engaged in those activities. So education is one side. On the other side, it is important that disclosures and the types of products that are offered are such that people have a reasonable chance of understanding what it is that they are buying or investing in. The Federal Reserve pioneered a few years ago the use of consumer testing to improve disclosures for credit card statements and a variety of other types of disclosures, and we hope to see that type of activity continue. I think in general that the experience of the crisis has made many people more aware of the need to be financially literate, schools more aware, and more cautious as well. But it is an ongoing battle. We cannot declare victory. We have to continue to work to try to make sure that both kids in school and also adults who are making financial decisions have access to good advice and good education. Senator AKAKA. Thank you very much for your responses, Mr. Chairman. Chairman JOHNSON. Senator Johanns. Senator JOHANNS. Mr. Chairman, good to see you again. The forecasts that you have testified about today I am assuming do not factor in the results of the fiscal cliff that is headed our way between now and the end of the year. Is that a safe assumption? Mr. BERNANKE. That is correct. Senator JOHANNS. So because of the fact that all of the various items that are included in the so-called fiscal cliff would take affirmative action by Congress to pull us back, which typically means 60 votes in the Senate, a majority in the House, a Presidential signature, my assumption is that if that does not happen, we get caught in a situation where those forecasts would be revised yet again, and it would be even more pessimistic than your testimony today. Would that be correct? Mr. BERNANKE. Absolutely. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 24 Senator JOHANNS. As you think about the sequester, the $1 trillion sequester, as you think about returning to the 2001, 2003 tax policy, as you think about the estate tax and all of the various factors that we are looking at between now and the end of the year, if you were to give a recommendation to Congress as to where to act, would it be act on everything or is there a priority that you would set for action? Mr. BERNANKE. No. I think the choice is between spending and taxes, and the mix and the kinds of taxes and so on, I think that is really a congressional responsibility. I am just pointing to the collective impact of all these different things happening at the same time, and there may be many different ways to mitigate that effect, and I am sure Members of Congress have different views on the best way to do that, which is one of the problems, because you are going to have to come to some kind of agreement. So, no, I do not have a specific recommendation other than to think about not just the individual policies but their collective impact if they all happen at the same time. Senator JOHANNS. Let me talk to you a little bit about the mitigation piece of this. As you know, some of us—in fact, some of us on this Banking Committee—have been meeting for many, many months—in fact, for some members they have been meeting for over a year—talking about an approach, and I would guess the best way of describing that is the outline for the approach is the Simpson-Bowles plan, which came out a year ago. Thinking about that plan, would you be comfortable in testifying today that that at least is an acceptable alternative to what we are facing between now and the end of the year if Congress could see its way to adopting that approach? Mr. BERNANKE. Well, it does have a profile that seems reasonable in terms of addressing longer-term sustainability over the longer period. But, again, I do not want to endorse the individual components, in part because, again, choices between taxes and spending are a congressional prerogative, and also because the Bowles-Simpson plan is not really a complete plan. It does not, for example, say very much about health care and how those costs will be controlled, but it does have the feature that, like many other plans that have been suggested—and there are others, Rivlin and others as well—introduce this discipline, fiscal discipline, in a rigorous way but over a longer period of time to allow the economy to adjust more easily. Senator JOHANNS. You know, Mr. Chairman, I think if the average citizen were to listen in on the political debate that will occur between now and November—and political debate is certainly appropriate; that is how democracies work—you would get very discouraged. But having said that, give us your thoughts. If Congress were able to put a plan in place, whether it is Bowles-Simpson or another approach, that provided that stimulus maybe for a period of time—in my judgment, pull back on the sequester—provided economic stability in terms of tax policy and revenue policy and started stabilizing things with a view toward trying to deal with the deficit over a period of time, what kind of signal would that send to the marketplace? And do you think that would be a positive signal? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 25 Mr. BERNANKE. It would be very positive. It would reduce a lot of the uncertainty that we see. It would address a very important problem, and it would show the ability of our political system to deliver important results. You may recall that when the U.S. Government was downgraded last summer, the putative reason was the concern about the ability of Congress to come to a solution, not a lack of resources for the country as a whole, but it really was this issue about whether the Congress can work together to deliver a satisfactory outcome. So I think something like that, even if it was only an outline, you know, a set of guidelines or guideposts that Congress would fill in as it went forward, I think that would go a long way to reducing uncertainty, increasing confidence, and addressing one of our biggest longer-term problems. Senator JOHANNS. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Brown. Senator BROWN. Thank you, Mr. Chairman. Chairman Bernanke, nice to see you. As you know, as a result of Dodd-Frank, the Federal Reserve has gained a great deal more authority to oversee U.S. banks. Regulators, we know, all of us agree bipartisanly, have a responsibility to ensure that firm rules are in place, that rules are being followed, that bad actors are being punished. Unfortunately, as we all know and read day after day after day, since 2008 we have seen too many examples of Wall Street again breaking rules and laws and common standards of ethical behavior. I follow up on some issues that Senator Vitter talked about, and I want to just run through it for the sake of repetition because it is so important to continue to recognize what these problems are: investor lawsuits; SEC enforcement actions over mortgage-backed securities; municipalities sold overpriced credit derivatives, bankrupting some of them; five of the Nation’s largest servicers found to have forged foreclosure documents and mortgage security legal documents. The Nation’s largest bank in January halted all consumer debt collection lawsuits over concerns about poorly maintained and inaccurate paperwork; the Nation’s largest bank has lost $5.8 billion to date on large, complex derivative trades the regulators either did not know about or looked the other way; it appears their employees misreported losses; 16 global banks are suspected of manipulating LIBOR that is used as a benchmark for mortgages and credit cards and student loans and, as you know, even derivatives. In June, one publication reported on a criminal bid-rigging trial exposing illegal practices by many Wall Street banks and arranging bids so that banks could underpay for municipal bonds. Two weeks ago, former employees of the Nation’s largest bank told the New York Times the company urged them to steer clients to their own mutual funds because they were more profitable for the bank even though they paid investors lower returns than other funds. The Federal Energy Regulatory Commission is investigating whether the biggest U.S. bank manipulated prices in the energy market. I mean, this goes on and on and on and on, not to mention wrongdoing in institutions over which the Fed has no jurisdiction: VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 26 MF Global, PFG Best, the problematic Facebook IPO, recent reports that analysts at Wall Street’s biggest banks are sharing secret information. No wonder the public does not trust you or us or any of the banks—whether the banks on Wall Street, the bank regulatory system. So I do not know any other answer, Mr. Chairman, other than to put out there and again say I think so many of our biggest banks are too big to manage and too big to regulate. I think this behavior shows they are too big to manage and too big to regulate. True? Mr. BERNANKE. There have been many bad practices, I agree. Many of them were tied to the crisis period, a period of excess. I think that is bad business. I think it is important for us to address those issues through enforcement. And, of course, part of the reason—I am not overclaiming here, but part of the reason you could make such a long list is that so many of these things have been turned up by various enforcement—— Senator BROWN. And perhaps many have not. Mr. BERNANKE. Perhaps many have not, that is true. On—— Senator BROWN. Well, Mr. Chairman—and I apologize for interrupting. It is not really fair. But you said this is bad business. Well, for a lot of them, it has been kind of good business. It has been a way for—it has been embarrassing to some, but it has also meant bigger and bigger profits and bigger and bigger bonuses. And to say it is bad business, from an academic viewpoint, from a perch at Princeton perhaps, but it is not good for our economy, but there have been far too many rewards for some of the bad actors. Mr. BERNANKE. It is very shortsighted. It is not the way you build a long-term relationship with customers and not the way you have long-term profits. On the size of banks, I think the real issue is too big to fail. If you conquer too big to fail, then there will be strong market pressures for banks that are too big to manage, too big to operate, to break up. There was a story about that in the media this morning about the benefits of providing shareholders with additional value by breaking up in situations where you do not have good controls and you do not have good synergies between different parts of the bank. And so what Dodd-Frank does is it provides a blueprint for attacking too big to fail, and that includes the liquidation authority, it includes the living wills—which, by the way, do provide a blueprint. If you wanted to break up banks or hive off parts of banks, the living wills provide some information about, you know, how you would do that in a sensible way. So I think it is very important to attack too big to fail, and we are addressing that through capital, through supervision, through orderly liquidation authorities, through living wills. And I think if banks are really exposed to the discipline of the market, we will see some breakups of banks. Senator BROWN. Living wills seem to take effect, at least in the nonfinancial world, only close to somebody’s deathbed, and I do not think these living wills address the issue, nor does this other regulation—other kinds of regulations seem to address the issues of all this litany of problems I mentioned. In the end, if these banks can VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 27 be regulated, then it seems clear to me that the Fed and other regulators—that includes the far too often captured by the regulators OCC—that they are either not up to the job, or they are complicit in Wall Street’s activities. I guess I beg of you to figure out how we are going to restore the confidence of the American people in the financial markets, because we certainly have not yet. Mr. BERNANKE. That is a high priority. I agree. Senator BROWN. Thank you. Chairman JOHNSON. Senator Toomey. Senator TOOMEY. Thank you, Mr. Chairman, and thank you, Chairman Bernanke, for being here. I just want to touch briefly on monetary policy before moving on to the LIBOR scandal. Mr. Chairman, you acknowledged that there is a range of views about the efficacy of the policy that you have been pursuing. I am sure you would also acknowledge that there is a range of views about the risks that are associated with the policies you have been pursuing. And I will acknowledge that I am sympathetic to the fact that we have given you a dual mandate, which I think intrinsically creates the risk that you will be put in a position where you have to deal with the conflict over two conflicting goals. But I just want to stress—and I know you and I disagree on this. We have had this conversation. But I just feel strongly that the problems facing our economy are not monetary in nature. They result from this ongoing deleveraging process that we are suffering through, a regulatory avalanche, completely unsustainable fiscal policy, which you have acknowledged, and the threat of huge tax increases. And so to address this with ever easier monetary policy, I worry very much about the unintended consequences, including the fact that it has the effect of masking the true cost of these deficits and making it easier for us to continue this very imprudent fiscal policy. So I just want to reiterate that point, but what I would like to ask you about, if I could, is this LIBOR scandal. And I will tell you I am very disturbed about this. I am disturbed about the destruction of what little confidence might remain in our financial system. I am very concerned about the direct impact to American citizens, including my constituents, among many. I think of the city of Bethlehem that engaged in interest rate swaps where they were paying a fixed rate, receiving floating rates based on LIBOR, and I wonder whether they were systematically receiving payments that were lower than what they should have gotten because of this. You had mentioned in your testimony or perhaps in answer to a question that Fed officials became aware of Barclays’ manipulating this index in April of 2008. The Wall Street Journal has an editorial today in which they recount an email exchange that occurred in August of 2007 between—or perhaps it was a phone conversation between a Barclays employee and a Fed official. I am just wondering. When did you become aware that there was some lack of integrity in the report of LIBOR rates? Mr. BERNANKE. So on your first point, let me just say that there is not as much disagreement as you imply. Monetary policy is not a panacea. It is not the ideal tool in many cases, and we look forward to having partnerships with other parts of economic policy. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 28 On the telephone contacts, I would just note that these were phone calls, and these were calls made by junior employees whose job was to call and get so-called market color, get information about what was happening in the markets. And I think in one of those calls it was clear that the person calling the Fed employee— not an official, the Fed employee—did not know what LIBOR was or how it was constructed, and so there were some issues about how that was communicated. In any case, I learned about it, to my recollection, at the time when it became covered in the media, which would have been, I guess, in April 2008. Senator TOOMEY. OK. Here is what I do not understand. I know you fully appreciate the importance of this index, how widely used it is for all kinds of transactions and how the American financial system—I do not want to say it is dependent on it, but it is totally integrated into this. And you and many other regulators understood that there were serious questions about the integrity of this, perhaps even systemic problems with the integrity of this, and yet everybody allowed these transactions to continue. Did it not occur to somebody to bring the financial institutions together and say, hey, you probably ought to consider a different way of establishing your floating rate resets because there is this integrity problem? Did that conversation happen with any financial institutions or the public? Mr. BERNANKE. Well, financial institutions are not the only participants in this LIBOR-based market. Senator TOOMEY. OK. Yes, how about making it more broad? Mr. BERNANKE. So I think the best way to address the problem and given all the issues that were occurring during the crisis at that point in time, the best way to address the problem, at least in the near term, would be to reform the way those numbers were collected so that the LIBOR rate that was set would be, in fact, an accurate representation. Senator TOOMEY. I agree. My question, though—and you mentioned observable market transactions would seem like a better way of doing it than a survey of banks. That sounds sensible to me. The question is: Why have we allowed it to go on the old way when we knew it was flawed for the last 4 years, with trillions of dollars of transactions? Mr. BERNANKE. Because the Federal Reserve has no ability to change it. Senator TOOMEY. You have enormous influence over the institutions engaging in this. Mr. BERNANKE. We have been in communication with the British Bankers Association. They made some changes, but not as much as we would like. It is not that market participants do not understand how this thing is collected. It is a freely chosen rate. We were uncomfortable with it. We have talked to the Bank of England. Senator TOOMEY. But I am not sure that market participants were aware of the problem with the integrity of the mechanism by which it is established. And as you point out, there are other ways you could establish a perfectly viable floating rate that would not have these problems. I am just very surprised that this was al- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 29 lowed to continue for so long when the problem with the integrity was known. Mr. BERNANKE. Well, again, Senator, the New York Fed took the lead in making, I think, some very good suggestions about how to clean up the LIBOR process. Senator TOOMEY. Thank you. Chairman JOHNSON. Senator Kohl. Senator KOHL. Chairman Bernanke, last July we discussed how the United States is experiencing a jobless recovery. You agreed then that the long-term unemployment was a major problem and recommended that Congress take a look at ways to help the unemployed through things like training and education. Of course, the Federal Reserve has its own mandate to keep unemployment low, and we continue to see very disappointing jobs numbers. I am sure we agree that the consequences of long-term unemployment are enormous. So why has the Fed been so slow to tackle unemployment? Over the past year, why hasn’t the Fed issued a third round of quantitative easing? And could you expand on your current maturity extension program? Mr. BERNANKE. Certainly. So first, just briefly, of course, we have taken a wide range of extraordinary actions to support the economy. In June, we took the step of continuing the maturity extension program, which has many of the features of quantitative easing in that it involves purchases of longer-term securities which provides financial accommodation and additional support to the economy. And we made clear that we were prepared to take further actions, and we are looking to see if we are going to get sustainable improvements in labor markets. If we are not getting sustainable improvements, we will have to seriously consider taking additional action. The reason that there is any question is really, again, the range of views about efficacy, costs, and risks associated with these nonconventional measures. But that being said, as we said in June, we are prepared to take further action, and we will evaluate our options as we go forward. Senator KOHL. I appreciate that. However, given that unemployment has remained over 8 percent for 41 months, a long enough time for it to be clear, now is the time to be more aggressive, I believe, in your approach to unemployment. And I think we agree the consequences of long-term unemployment are too great for this to go on very much longer. On LIBOR, Mr. Bernanke, one chief executive of a multinational bank was quoted in The Economist as saying that LIBOR is ‘‘the banking industry’s tobacco moment,’’ citing the 1998 federally negotiated settlement that cost American tobacco companies over $200 billion. Can you foresee a scenario where banks would seek any type of taxpayer assistance in order to compensate parties that were victims of LIBOR rigging? Do you believe that potential court cases against banks that participated in LIBOR manipulation could indeed result in another federally negotiated settlement? Mr. BERNANKE. Well, there are many court cases already in progress. I think it is too soon to make any guess at what the outcome of those courts’ cases will be. There have been a few esti- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 30 mates by private analysts of potential costs, but those are admittedly very much back-of-the-envelope types of calculations. So I think we have to let this play out. I do not know what the cost will be, and I really do not think is responsible for me to guess until we get more information about the impact of these actions on the actual LIBOR rate and the implications of that for rates that people paid. So it is obviously very serious, but I think it is too early to judge what the costs will be. Senator KOHL. Yes, and recent press reports indicate that the scandal could cost the banking industry millions, if not trillions of dollars. And as you know, there is no appetite here or anywhere else to do another bailout for the banks. Given the increasing amount of money that is at stake, I would urge you to work, when the time comes, closely with the Justice Department on this, and I think you would agree that you will. Mr. BERNANKE. If we can contribute to a global settlement, as we did in the case of the servicers, we would, of course. Senator KOHL. Thank you. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Moran. Senator MORAN. Mr. Chairman, thank you. Chairman Bernanke, thank you for your testimony. In advance of the crisis, the financial crisis of 2008, at least to many observers of our country’s economy, it came out of the blue, came as a surprise. What is it that you are worried about now? What is out there now that we ought to be paying attention to that has the potential of being the next crisis to the economy of the United States? I often read about credit card debt. You read about student loan debt. What are the things that you are most worried about? And what are we doing to remediate the problem? Mr. BERNANKE. Well, I think the two items—and I mentioned these in my testimony—would first be the European sovereign and banking situation, which remains unresolved. There is still a lot of financial stress associated with that and I think still some distance before they get to a solution. That poses an ongoing drag on our economy, and although I have every hope and expectation that European leaders will find solutions, there is the risk of a more serious financial blowup. And we have been—I do not want to take all your time, but we have been taking appropriate steps here in the United States to try to strengthen our banks and provide—to prepare for whatever events might occur. The other, just briefly, is the domestic fiscal situation which we have been talking about, and I think it is important that in the short term Congress work effectively to address the debt limit and the fiscal cliff and those issues and in the medium term establish a strong, credible plan for fiscal sustainability. Senator MORAN. At what point in time do we have a sense of whether the European crisis is going to have huge consequences to the U.S. economy? What timeframe are we on in which we know whether Europe has appropriately responded to resolve their own problem? Mr. BERNANKE. Well, we appear to be in a muddling-through type of environment, which is costly to everybody, Europe even VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 31 more so than us. They are already in a recession, or at least many countries in Europe are already in recession. I think based on all I can observe, it seems like it could take a very long time because the structural and institutional changes that Europe is trying to make are not ones that take place quickly. For example, they have recently agreed in principle to create a single bank regulator for eurozone banks. To do that could well take— I do not have any inside information here, but obviously it could take some time—it could go into next year—before they have a single bank regulator. Likewise, they are trying to establish a set of fiscal rules and fiscal agreements, and they have made some progress there. But given that there are 17 Governments that have to agree to every major change, it could be some time before they come to a fully satisfactory fiscal arrangement. So it appears to be something that could go on for quite a while, unfortunately. Senator MORAN. Let me ask a more specific question, a more narrow question. The Kaufmann Foundation is a foundation in Kansas City that considers entrepreneurship, and its facts, it studies demonstrate that between 1980 and 2005, companies that are less than 5 years old accounted for nearly all of the net new jobs created in the U.S. economy. In fact, new businesses create an average of 3 million jobs each year. Unfortunately, our own Census Bureau now indicates that the startup engine is engine is slowing down. In 2010, there were about 394,000 new businesses started in the United States. This is the lowest level of new startups since 1977. I would like to hear your perspective on the importance of startups and what policies Congress and the administration should pursue to return to the days in which the United States is at the forefront of innovation and entrepreneurship. Mr. BERNANKE. Well, those facts I believe are correct. Young companies, so-called gazelles, are a big contributor to job creation because if they are successful, they grow quickly, and they add a lot of employees. I do not know the data you cited; I do not know how accurate they are. It is obviously very difficult to measure startups. Many of them are very small enterprises. But I think it is clear that both because of the weak economic conditions but also because of problems relating, for example, to the availability of credit and venture capital and the fact that many entrepreneurs use equity in their home as a form of startup capital, which is not as available now as it was before the crisis, it is very plausible that those companies are not starting up at the rate they have in the past. I do not have a really good program here to suggest other than to try to create as favorable a tax environment, as favorable a credit environment as possible for startup firms, to write regulations in a way that serves their purpose but allows small firms to flourish. According to international agencies who calculate these sorts of things, the U.S. has got a pretty small business friendly environment here in terms of the cost and time required to startup a small business. So it is not like we are in very bad shape on that. But any kind of improvement that would make it easier for small busi- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 32 nesses to get the necessary capital to meet the regulatory and other requirements and to avoid early tax burdens, all those things are obviously approaches that can help these companies startup and provide employment. Senator MORAN. Mr. Chairman, thank you. One would think that we would have significant startups, particularly in light of the unemployment numbers, which creates the opportunity or the necessity for someone to go startup a business on their own. Mr. BERNANKE. Sure. Senator MORAN. Mr. Chairman, thank you. Chairman JOHNSON. Senator Warner. Senator WARNER. Thank you, Mr. Chairman. And, Mr. Chairman, the end is near. Thank you for hanging in this morning. I would echo what my colleague Senator Moran just said. We actually have legislation to try to promote these startup activities, Startup Act 2.0, which addresses the very issues you talked about as well as the issue of talent. We are in a global competition for talent, and I commend Senator Moran’s leadership on this issue. We did make some movement on access to capital earlier. I know most of my colleagues have left, but I would also point out for some of my colleagues that because of the actions we took as this Congress in Dodd-Frank and otherwise, we have seen an increase in capital in American banks in excess of $300 billion, more in capital reserves, since the crisis, and clearly I think that has helped our banking industry relative to some of the banks that are under assault around the world. I also want to commend you for your continuing urging of us to act on fiscal policies. Waiting for Congress is a little bit like waiting for Godot. Hopefully we will see some actions later this year, and a number of us have been working on this. I guess one of the things I—my first question would be: As we grapple with this issue of trying to get an appropriate balance of revenues and entitlement reform to generate at least that $4 trillion, to drive our debt-to-GDP back down, and because, as you have pointed out, we can do this on a moderate—an intermediate basis and have the ability to phase these things in, I sometimes scratch my head, because what is being asked of the American people is so much smaller than what is being asked of the folks within the U.K. or folks within Europe or even folks in India and elsewhere where they are going through policy changes. Have you done any kind of sizing of what a $4 trillion deal relative to the size of our economy and the ask of the American people versus what is being asked of folks all around the rest of the world as they try to move forward and get their own fiscal houses in order? Mr. BERNANKE. Well, I have not done that exercise exactly, but in terms of percentage of GDP, you know, some of the fiscal shifts that are taking place in countries like Spain, Portugal, and Italy are very substantial and in the near term, which is part of the reason why their economies are so weak in the near term. So it is certainly true in terms of the fiscal step that is being taken that it is larger in these countries which are under fiscal stress. But I am not quite sure what the implication of that is. We are lucky that we can borrow at a very low interest rate. We are not currently in the same situation as a Greece or a Portugal. And, therefore, if we VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 33 can intelligently combine a gradual glide path with a strong, credible plan for stabilizing our deficits in the longer term, we can avoid that kind of painful contraction and do it more gradually. Senator WARNER. It almost seems to me that it is remarkable— and I think this is why Congress is at record low levels of approval—that we cannot step up, almost un-American that we cannot do our job relative to what is being asked of other people around the world. One of the things that—I know we have had some policy debate this morning on, additional actions you might take to stimulate the economy. I guess one question I would say for those who have questioned taking these actions, if we look at the European Central Bank’s recent actions in terms of—if we look at the Bank of England, if we look at the Chinese financial institutions, what effect of their stimulus activities or loosening activities does that have on the world economy and in terms of your decision making? Mr. BERNANKE. Well, there has been a global slowdown. A lot of it is emanating from Europe, which through export demand is affecting Asia and other parts of the world, the United States as well. There has been some slowing in Asia as well. The Chinese GDP statistics have been weaker this year than in previous years. Partly that was intentional as they sought to cool their housing market and address inflation concerns. But there is a slowing in the global economy. To the extent that actions taken by our trading partners strengthen those economies, it will help us on the margin because it will increase our markets and provide an overall better economic environment. But I would say at this point that compared to what we saw during the aftermath of the crisis, nothing is happening globally of that kind of scale. There are relatively modest steps being taken in both of those jurisdictions to try to offset some of the slowing. Senator WARNER. But those actions are similar to what you may take in the Fed, and I guess the point I would simply make is that there seems to be a consensus opinion around major economies around the world to take these type of stimulative actions. Mr. BERNANKE. The world is in an easing cycle. That is correct. And in terms of the specific actions, the U.K., for example, has been adding to its quantitative easing program and doing other things as well. So the U.S. is—it should be very clear the United States—the Federal Reserve is not the only central bank that has been using these unconventional policies as a tool for trying to strengthen their economies. Senator WARNER. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Wicker. Senator WICKER. Thank you very much. And, Chairman Bernanke, thank you so much for being here. I have been back in my office listening to most of this on television. I appreciate the fact that you have talked about fiscal policy as well as monetary policy and the overall economy. You note that your forecast is lower than it was back in January, and you say that you now forecast that we will have over 7 percent unemployment on through the end of 2014. I think we would all agree this is not the kind of economic growth that we need and that Americans have had in the past. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 34 If taxes are raised on individuals making over $250,000, many of whom are small business people, many of whom are job creators, what effect will that have on the projection that you have in your written testimony? Mr. BERNANKE. Well, we have not done that specific exercise. I have been focusing on the overall size of the fiscal shock. That includes the expiration of all the 2001 and 2003 tax cuts as well as the end of the payroll tax cut, UI payments, and the sequestration. You put all those things together, and you get a shock which is about 4.5 percent of GDP. Senator WICKER. OK. Because the President came out and reiterated last week his request that we simply raise taxes on $250,000 and above. I think you will agree that in terms of the Federal deficit, that is a relatively small amount. That would be a tax on job creators and would make your numbers worse, wouldn’t it? Mr. BERNANKE. It could, if it reduced incentives and if it reduced aggregate demand, both of those channels. But as often is the case in tax policy, you have got efficiency and growth concerns, and you have also got equity concerns, and all those things feed into tax decisions. Senator WICKER. I realize it is hard to predict with certainty, and I think we have seen that over time. But I would simply suggest to you that you are correct in saying that it could have an adverse effect. Let me ask you about the fiscal shock. I think we have got to do something on the spending side, and I know what you are saying. The economy is fragile, and you do not want it to happen quite so quickly. Senator Kyl and Senator McCain came up with a proposal to dealing with sequestration, and let me just ask you—it went over like a lead balloon, but let me go back to it and ask you what your general impression is of the proposal. It would have raised—it would have saved, rather, $127 billion in spending by simply doing two things: Number one, freezing Federal pay for Federal workers until June of 2014. That would be the first thing. The second thing would have been a 5-percent reduction in the Federal workforce—not a 5-percent reduction in Federal spending but a 5-percent reduction in the Federal workforce—by hiring only two workers to replace every three that are leaving through attrition. And this reduction would have taken up to 10 years to achieve. That is not the sort of thing that you view as a fiscal shock, is it? We could absorb that type of modest spending reduction in order to save us from the meat axe approach of sequestration at the end of this year. Mr. BERNANKE. Well, again, without endorsing the specific program, a spending program that comes in more gradually over a period of time but also is tied to a plan, a credible plan to achieve fiscal sustainability in the medium term is what I am recommending, is something that would avoid this very, very sharp change in the Government’s fiscal position, you know, on 1 day, on January 1, 2013. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 35 Senator WICKER. Let me see if I can squeeze in one more thing. Unemployment rates, unacceptably high, and you have predicted now 7 percent of more by the end of 2014. In January of 2002, unemployment rate 5.7 percent; October of 2003, unemployment rate 6 percent; by October of 2004 down to 5.5 percent. Boy, wouldn’t we love to see that kind of unemployment right now in the United States of America. Down to 4.9 percent by August of 2005; 4.4 percent unemployment rate—these are actual figures—by October of 2006; as late as May of 2007, unemployment rate 4.4 percent; and then, of course, by the end of 2008, it is up to 7.3 percent. We hear a lot of discussion and a lot of warnings by people in this city about not going back to those disastrous policies that got us into the situation we are in in the first place. The fact is we had relatively low and a relatively acceptable unemployment rate for much of the decade until 2008, and we had real GDP growth in 2006, 2007, and 2008. Isn’t that correct? Mr. BERNANKE. Until the end of 2008, yes. Senator WICKER. Now, what happened in 2008? Was it tax cuts for the rich? Mr. BERNANKE. No. We had a major financial crisis, as you know, and it created a global recession. Senator WICKER. Right. Mr. BERNANKE. A very deep one. Senator WICKER. Thank you very much. Chairman JOHNSON. Senator Merkley. Senator MERKLEY. Thank you, Mr. Chair, and thank you, Chairman. In your opening comments, you mentioned the issue of housing refinancing and families that are underwater. We have about 8 million families whose mortgages are underwater. Some can refinance through HARP, but it has been a pretty small number, only about 200,000 so far, in part because of the complexity with second mortgages. But if families who are underwater could refinance from those higher interest rates they are trapped in to lower interest rates, could that be a significant factor and a substantial tool, if you will, in helping to move the construction economy forward and stabilizing those 8 million families? Mr. BERNANKE. If that were possible, it would be helpful because it would both reduce payments and, therefore, reduce defaults and foreclosures, and it would improve the income of the people who could refinance. Senator MERKLEY. Thank you, Mr. Chairman. Let me switch to another comment I believe you made in response to Chairman Johnson, and I did not catch the exact words, but I think you said you had emails about fixing the interest rates to make the banks look more healthy, but we did not have emails related to collusion with derivative traders, or something like that. Could you help clarify what you said there? Mr. BERNANKE. Yes. There have been two somewhat different types of violations: one which was very much intense—that was most intense during the crisis was banks underreporting the cost of their borrowing in order to avoid looking weak in the market. That is the kind of information that people were talking about in the markets and that the New York Fed heard about in 2008. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 36 The other kind of activity is the kind that the investigations have just recently revealed in the case of Barclays involved this very large fine where there was clear evidence of individual traders conspiring with others to manipulate the LIBOR submissions in order to improve or increase their profits from short-term derivatives trades. That is a different type—I am not making a judgment but just a different activity. And I was only making the point that it was only the former that came to the attention of the New York Fed. Senator MERKLEY. And so in terms of the latter, the collaboration between the traders and those who were reporting the LIBOR rates, when did that first come to the attention of the Fed? Mr. BERNANKE. Not until relatively recently. This was something that was discovered by the joint investigation of the CFTC, I think the SEC was involved, the DOJ, and the British authorities. Senator MERKLEY. Thank you. It was very stark to read some of these emails that were reported, such as, ‘‘Hi, Mate. We have an unbelievably large set on Monday. We need a really low 3-month fix. It could potentially cost a fortune.’’ Or another trader who wrote, ‘‘We need a 4.17 fix on the 1-month low fix. We need a’’— the print is a little small for me—‘‘4.41 fix on the 3-month high fix.’’ And certainly this type of activity, does this constitute fraud? Does this fall into a criminal area as well as just really unacceptable manipulation, if you will? Mr. BERNANKE. Based on what I know about it. What I have read about it, it does seem to be so, yes. Senator MERKLEY. I think the point that my colleague Senator DeMint was making earlier was when you know that someone has a thumb on the scale, isn’t there a responsibility to alert the customers about that thumb being on the scale? I know that you all did send this advice to the Bank of England or to others that there are ways to fix the thumb on the scale, get the thumb off the scale. But if you had it to do over again, would you also be alerting the customers, the municipalities that are making swaps, the folks who are getting mortgages based on LIBOR and so forth that something is not quite right here and you should be aware of our concerns? Mr. BERNANKE. Well, it is important that people know about it, but I am not sure I would agree that this was something that was unknown. The financial press was full of stories about it, and the reform proposals that the New York Fed made were also reported in the press. So I think that there was a good bit of knowledge, at least among more sophisticated investors, about this problem. Senator MERKLEY. I do think the municipalities that were involved are feeling that perhaps they were not as aware of the thumb on the scale as they might have been, but that will all be, I guess, sorted out in due course. Mr. BERNANKE. That is right. Senator MERKLEY. If my colleague will just bear with me for 30 seconds, I just want to mention an issue I will follow up with you on, which is related to the growing role of banks in providing crude oil to refineries and then buying the products. We have Goldman that is doing this with a refinery operating in three States. JPMorgan is doing it with the largest east coast supplier. Morgan Stanley is now doing it in several States with PBF Energy. It re- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 37 minds me a little bit of the situation when—and at this point there is no sign of wrongdoing of any kind, but it reminds me of the potential for problems that occurred when Enron was both supplying electricity and running electricity trading markets, because we have that here. We have now the banks involved as a supplier and purchaser of large quantities, but we also have them involved in all kinds of trading, in part because at this point regulators have exempted the spot markets, or at least the draft rules, from the Volcker firewall. Is this an issue that we should be concerned about, this substantial conflict of interest of being a supplier and also kind of, if you will, involved in the trading side? Mr. BERNANKE. Am I mistaken, Senator? I thought that the statute exempted the spot market as opposed to the regulation. Senator MERKLEY. Let us follow up on that. Mr. BERNANKE. Let us follow up on that. Senator MERKLEY. Let us follow up on that because there is also a lot of letters that have been submitted on the futures spot markets, if you will, not futures themselves. The ‘‘forward’’ I think is the right term. Mr. BERNANKE. Correct. Senator MERKLEY. And I believe that that is a gray area. Mr. BERNANKE. Well, except insofar as the statute exempts certain activities, I assume that proprietary trading in this area would be subject to the Volcker rule. Senator MERKLEY. The spot is not excluded in the statute. It does give regulators authority over that. Mr. BERNANKE. All right. We will look at that. Senator MERKLEY. OK. Thank you. Chairman JOHNSON. Senator Bennet. Senator BENNET. Thank you, Mr. Chairman. Sorry. One would have thought I could have gotten the frog out of my throat 2 hours into this hearing. Mr. Chairman, thank you for being here, and thank you for your testimony. I want to make one observation, and then I have got a couple of questions, because there have been traces of a discussion in here today about the nature of the economic growth we need to see in this country, and it really is not just about GDP growth. It is about job growth and wage growth in the United States and whether we can recouple those things together. They decoupled in the last recovery. They are not coupled in this recovery. And as you observed, there are things that we can do in our Tax Code and our regulatory code and our statutes that actually would provide an ecosystem that would deliver on that promise again for the American people. We have been having a hard time getting to that conversation in this Congress, but we need to. That is the fundamental work, in my view, why we were sent here. We spend a lot of time talking about how to avert crisis now, and you are a historian of the Great Depression, I know, and I think 100 years from now, if we do not get our act together here, no historian will be able to fairly record your tenure without saying that you came to the Senate and to the Congress and you very clearly said, ‘‘Here are the things I am most worried about, and if you do VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 38 not deal with it, you risk a real disaster.’’ One is Europe, which you talked a little bit about. I would like to hear on that score a little more about what you say in your testimony are the strong incentives to resolve the crisis that the Europeans have. The IMF, as you know, came out with a report yesterday about some of the challenges they face. Maybe I will start there. What are those strong incentives to resolve the crisis? They have a lot of political dysfunction there, as we do here, but they also have, as you pointed out, a less elegant institutional arrangement right now for dealing with it. Mr. BERNANKE. That is right. Well, they have both economic and political incentives. The European Union and all those Europeanwide institutions that include now the common currency area were created after World War II in part to try to avoid any future war on the European continent, and obviously that is an extremely important objective that people put a lot of weight on. And so closer political union is something that many European leaders consider to be important, and so this is part of—maintaining the currency and achieving stability there is part of that. In addition, both the North and the South, so to speak, benefit from the common currency. In particular, for example, the Germans have an exchange rate in the euro which is probably weaker than they would have if they had a deutsche mark, and, therefore, they have both a weaker currency, a more competitive currency, and, if you will, a captive market for selling their exports, both of which would not be there if the eurozone was not an integrated, stable structure. So even from the point of view of the Germans, who have, you know, the most concern about the potential fiscal costs of greater coordination within the eurozone, they have both very substantial political and economic reasons to try to make this happen, and throughout Europe, the general opinion polls in most cases are that people would still rather have the euro, despite all the problems that they have been facing. Now, as you point out, there are many difficult political problems. We have one Congress here, and we have difficulty coming to decisions. They have 17. Senator BENNET. I cannot even imagine. Mr. BERNANKE. They have 17 different parliaments, and they have a treaty which requires broad if not unanimous agreement. So there are some very substantial problems in getting to agreement. Senator BENNET. Let me, because I do not want the Senator from North Carolina to have to wait on me. Let me come to the second point, the stuff that is actually in our control. This is your testimony today, [Page 45]. ‘‘The most effective way that the Congress could help to support the economy right now would be to work to address the Nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.’’ Tell us what that 100-year history would record if we do not do this. Mr. BERNANKE. Well, in the short term—— Senator BENNET. And I mean short and medium and long. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 39 Mr. BERNANKE. Well, as I was saying as the CBO and others have pointed out, if the fiscal cliff is allowed to happened, as is now programmed in the law, it would probably knock the recovery back into a recession and cost a lot of jobs and would greatly delay the recovery that we are hoping to facilitate. In the longer term, it is simply not possible for deficits to continue along the path that they are currently projected, so either some solution would have to be found that could be very, very painful at some point in the future because of the size of the cuts—we were talking about comparing us to Europe, and some of the countries that are making very, very deep cuts right now and how painful that is. Either we would have to have those kinds of cuts, or we might face a financial crisis where interest rates would rise, as we are seeing now in Europe, and that would feed through to other interest rates, like mortgages and other kinds of rates. And it would be very costly to our economy. So both in the short term and in the longer term, it is important for us as a Nation to create a fiscal policy that achieves both the short-term and long-term objectives. Senator BENNET. I wish I had more time, but I will come back to you with other questions. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Hagan. Senator HAGAN. Thank you, Mr. Chairman. And you, Chairman Bernanke, for enduring the long hearing today. I do want to say thank you, too, for your great work and your sacrifice. Mr. BERNANKE. Thank you. Senator HAGAN. We have talked a lot about LIBOR today. LIBOR, as I understand it, is simply a benchmark that lenders voluntarily use to represent the cost of borrowing by large banks. But there are alternative metrics. You mentioned in your testimony that financial institutions could use alternative benchmarks for loans and derivative contracts, such as commercial paper rates, the Fed funds rates, and the yield on U.S. Treasury. Can you discuss some of these alternatives? What might be a preferable benchmark? Mr. BERNANKE. Well, as you say, there have been a number of different ones. One that has been considered is the so-called general collateral repo rate. It is the rate at which repurchase agreements are done. It has the advantage of being a very thick market. A lot of trades take place, and trades take place at a number of different maturities, which is also important. So that would be a possibility that people are considering. Another possibility is the OIS rate, the so-called overnight index swap rate, which is a measure of expected central bank interest rates, essentially. It is like a measure of—a market-based measure of the longer-term Federal funds rate. And it has some advantages as well. I think the main thing that distinguishes these rates, the ones you mentioned, and the repo rate and others from LIBOR is, of course, that there are observable transactions every day, which means there is no ambiguity about what the rate is. And there would not be any of these issues raised by the LIBOR process that involve verifying whether the reported rates are indeed accurate. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 40 Senator HAGAN. Could you see financial institutions voluntarily adopting an alternate to LIBOR. Mr. BERNANKE. I suspect that it will be seriously considered, unless, of course, measures are taken that restore confidence in LIBOR. The problem is that, of course, we have enormous amounts of existing contracts, not just derivatives contracts but a variety of other kinds of loans and securities, which are based on LIBOR. And until those negotiated away or they expire, we have this huge legacy issue of LIBOR-based financial contracts. So it might be— it is just like the QWERTY typewriter. You know, it is not very efficient, but everybody is used to it, so it is hard to change. You might have the same phenomenon there. But if we are going to keep LIBOR, it is important to make sure that it has the confidence of people in the markets. Senator HAGAN. Thank you. Chairman Bernanke, Section 941 of Dodd-Frank requires the Federal Reserve Board of Governors, along with other Federal agencies, to jointly prescribe regulations that require securitizers to retain credit risk. The proposed rule was issued in March of 2011, and the comment period was subsequently extended. Could you describe the role that the Federal Reserve Bank of New York and its staff are playing in the drafting and completion of that rule? Mr. BERNANKE. Well, we sometimes draw on reserve banks for specialized expertise. For example, in securitization laws, rules, we tried to look at existing arrangements for credit risk retention for different types of markets, and people in New York who deal with those markets on a regular basis would be helpful in providing that kind of information. But, of course, the responsibility for drawing up the regulations and making the final determination lies with the Board of Governors in Washington, and although we may use some expertise from New York, it is a Board decision. Senator HAGAN. Thank you. A last question. When discussing the nonstandard monetary policy tools that the FOMC is currently implementing, you have consistently said that the level of accommodation that the economy is receiving is based on the total stock of outstanding securities in your portfolio. In June, the FOMC announced that it was taking steps to extend the maturity of its Treasury portfolio rather than to expand its size or change its composition. Can you discuss why the FOMC would choose to extend the maturity of its Treasury portfolio and not acquire additional mortgagebacked securities which would have the added benefit of supporting the housing sector? Mr. BERNANKE. Well, when we say that the stock is what matters, we are referring to the stock of longer-term securities specifically. And so what this is doing is replacing very short-term securities with longer-term securities, increasing our stock of longer-term securities, putting downward pressure on longer-term interest rates, and by taking duration risk out of the market, pushing investors into related assets like corporate bonds and lowering the yields there as well. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 41 So this was an effective step, and it was a relatively natural one since the previous program was just coming to an end in June, so we extended it for 6 months. But we continue to look at alternative approaches, including approaches that involve buying MBS, and trying to assess both the efficacy, costs, and risks of those programs as well as the outlook and the extent to which we think we can get a better outcome in the U.S. economy. Senator HAGAN. In the FOMC’s last policy statement, the Committee indicated that it was prepared to take additional steps if it did not see a continued improvement in the labor market. My question is: What would you describe as an improvement in the labor market if the FOMC does not project unemployment to fall much below the current levels before 2013? Mr. BERNANKE. Well, we would want to see unemployment going down. We do not want to see it stuck. Senator HAGAN. Right. We all do. Mr. BERNANKE. We do not want to see it going up. We want to see continued improvement. We had significant improvement between the fall of 2011 and earlier this year. Lately, we have been leveled out, and we would like to see the economy return to a situation where we are making progress on unemployment. Senator HAGAN. What I think about each and every day. Thank you, Mr. Chairman. Chairman JOHNSON. Chairman Bernanke, I want to thank you for your testimony today on the Fed’s economic forecast and its recent actions. Thank you. Mr. BERNANKE. Thank you. Chairman JOHNSON. This hearing is adjourned. [Whereupon, at 12:25 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and additional material supplied for the record follow:] VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 42 PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY Thank you Mr. Chairman. Today, we will hear Federal Reserve Chairman Bernanke testify on monetary policy and the state of the U.S. economy. Four years ago, President Obama campaigned on restoring economic growth and job creation. Today, both remain too weak to produce a meaningful recovery. At less than 2 percent, economic growth appears to be stuck at an anemic level. In June, only 80,000 jobs were added to employer payrolls, not enough to put a dent in the stubbornly high 8.2 percent unemployment rate. The Administration’s policy of more spending, more taxes, and more regulation has clearly impeded an economic recovery. Dodd-Frank rulemaking, of which 63 percent is behind schedule, has cast a dark cloud over the financial system, further chilling consumer and business lending and holding back growth. Housing recovery, too, has been hemmed in by the lack of a clear plan to resolve Fannie Mae and Freddie Mac and to reduce the Federal Government’s 99 percent share of the market. These policy failures are costly and compound the dangers already brought on by our mounting fiscal problems. Concerns of spillover from the European crisis remain front-and-center in the U.S. economy, but Europe also serves as a warning of what could happen if we do not change our own fiscal course. There is no doubt that we face challenging times for our economy and our prosperity as a Nation. In response to the dismal economic forecast, Chairman Bernanke has said that the Federal Reserve is ‘‘prepared to take further steps if necessary to promote sustainable growth and recovery in the labor market.’’ I hope that the Fed weighs carefully the medium- and long-term consequences of further action. Questions remain on the efficacy of additional so-called monetary stimulus, and many wonder what tools the Fed has left to use. The Federal funds rate has been at or near zero for almost 31⁄2 years. The Fed’s balance sheet stands at over $2.9 trillion, almost identical to its size a year ago when Chairman Bernanke delivered his last Humphrey-Hawkins testimony. This is more than three times its pre-crisis size. The Fed has conducted two rounds of balance sheet expansions called ‘‘Quantitative Easing’’ and a maturity extension program called ‘‘Operation Twist’’ that the Fed announced will continue through the end of the year. Even members of the Federal Open Market Committee (FOMC) have their doubts about this decision. Minutes from the June FOMC meeting indicate that several members thought the impact of another round of Operation Twist ‘‘was likely to be modest.’’ One may wonder if the downside risks outweigh the limited upside benefit of continuing the program. Some FOMC members even noted that it ‘‘could lead to deterioration in the functioning of the Treasury securities market.’’ Considering the risks presented by the Fed’s more unconventional programs and the need to unwind the Fed’s balance sheet without causing major economic disruption, some have questioned the prudence of undertaking a new program to provide monetary easing, especially when there appears to be no clear exit strategy. During last year’s Humphrey-Hawkins hearing, I expressed concerns over the lack of transparency of balance sheet operations. The Fed has yet to disclose a plan on how it would reduce its balance sheet holdings, which must be carefully done to avoid dire outcomes like sparking inflation and eroding the dollar’s value. Because so much is at stake for the U.S. economy, the Fed as a public entity has the responsibility to make as much information available as possible on its actions and the risks they entail. Some authorities think there is cause for concern. In its annual report, the Bank of International Settlements laid out the risks entailed with the worldwide expansion of central bank balance sheets and their extended low interest rate policies. Not only did the report conclude that such actions create ‘‘longer-term risks to [central banks’] credibility and operational independence,’’ but they ‘‘may delay the return to a self-sustaining recovery.’’ I hope that Chairman Bernanke will reassure our financial markets during his testimony of the Fed’s credibility and independence, that the actions the Fed takes will not hurt economic recovery. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00046 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 43 Recent events have already shaken confidence in our financial system. In particular, the issue that bankers manipulated the London Interbank Offered Rate (LIBOR) is one that must be fully examined by this Committee. LIBOR is an important interest rate benchmark. It affects nearly every interest rate calculation for consumers, businesses, and banks around the world. While only one bank has admitted its involvement in the manipulation of LIBOR so far, it has been widely reported that the U.S. Department of Justice and regulators are building cases against other banks involved in the LIBOR-fixing process. The American people deserve answers to important questions about the LIBOR manipulation. For example, to what extent were consumers, business, and municipalities harmed by the manipulation of LIBOR? Which financial institutions were involved? When did U.S. regulators, including the Fed, first learn about the manipulation? What steps did the Fed take to restore integrity to the LIBOR market? Could the Fed or other regulators have done more to prevent it? I hope that Chairman Bernanke can provide answers to these critical questions in his testimony before us today. Thank you Mr. Chairman. PREPARED STATEMENT OF BEN S. BERNANKE CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM JULY 17, 2012 Chairman Johnson, Ranking Member Shelby, and other Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy. The Economic Outlook The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 21⁄2 percent in the second half of 2011, real gross domestic product (GDP) increased at a 2 percent pace in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter. Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent. Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers’ purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low. We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater—that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of foreclosed properties, continues to divert demand from new construction. After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of investment demand—such as surveys of business conditions and capital spending plans— suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 44 some cooling in the economies of other trading partners, is restraining the demand for U.S. exports. At the time of the June meeting of the Federal Open Market Committee (FOMC), my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013. 1 These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data. 2 In addition, financial strains associated with the crisis in Europe have increased since earlier in the year, which—as I already noted—are weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households, and—as I will discuss in more detail shortly— the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants’ forecasts now has the unemployment rate at 7 percent or higher at the end of 2014. The Committee made comparatively small changes in June to its projections for inflation. Over the first 3 months of 2012, the price index for personal consumption expenditures (PCE) rose about 31⁄2 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an annual rate of 11⁄2 percent over the first 5 months of this year, compared with a 21⁄2 percent rise over 2011 as a whole. The central tendency of the Committee’s projections is that inflation will be 1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014. Risks to the Outlook Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation. Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of 3-year bank financing by the European Central Bank. However, tensions in euroarea financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain’s fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain’s troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook. The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial sys1 See, table 1, ‘‘Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2012’’, of the Summary of Economic Projections, available at the Board of Governors of the Federal Reserve System (2012), ‘‘Federal Reserve Board and Federal Open Market Committee Release Economic Projections from the June 19–20 FOMC Meeting’’, press release, June 20, www.federalreserve.gov/newsevents/press/monetary/20120620b.htm; table 1 is also available in Part 4 of the July ‘‘Monetary Policy Report to the Congress’’. 2 Ben S. Bernanke (2012), ‘‘Semiannual Monetary Policy Report to the Congress’’, statement before the Committee on Financial Services, U.S. House of Representatives, February 29, www.federalreserve.gov/newsevents/testimony/bernanke20120229a.htm. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 45 tem to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy. The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect—a scenario widely referred to as the fiscal cliff—a shallow recession would occur early next year and about 11⁄4 million fewer jobs would be created in 2013. 3 These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year. The most effective way that the Congress could help to support the economy right now would be to work to address the Nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence. Monetary Policy In view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program (or MEP) through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longer-term Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Reserve’s balance sheet. By removing additional longer-term Treasury securities from the market, the Fed’s asset purchases also induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative. Economic growth is also being supported by the exceptionally low level of the target range for the Federal funds rate of 0 to 1⁄4 percent and the Committee’s forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the Federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. Thank you. I would be pleased to take your questions. 3 Congressional Budget Office (2012), ‘‘Economic Effects of Reducing the Fiscal Restraint That Is Scheduled To Occur in 2013’’ (Washington: CBO, May), available at www.cbo.gov/publication/43262. The effect of the fiscal cliff on real GDP is shown in table 2 (p.6). The effect of the fiscal cliff on employment, relative to a less restrictive alternative fiscal scenario that assumes that most expiring tax provisions are extended and that the spending sequestration does not take effect, is shown in table 3 (p.7). VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00049 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 46 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM BEN S. BERNANKE Q.1. At the hearing you mentioned potential alternatives to LIBOR. What next steps should be taken to either reform or replace LIBOR as a benchmark for the interest rates on financial products? What should the Fed’s role be in any international process to reform or replace it? A.1. Answer not received by time of publication. Q.2. Critics of Wall Street Reform claim that the law is holding back the economic recovery. What has had a greater impact on high unemployment today—the Wall Street Reform Act or the ineffective regulations that led to the financial crisis? Can you offer examples of how the financial system is now safer as a result of policies that the Fed has implemented pursuant to the Wall Street Reform Act? A.2. The recent financial crisis demonstrated that some financial companies had grown so large, leveraged, and interconnected, that their failure could pose a threat to overall financial stability. The crisis also exposed significant weaknesses in banking organizations’ internal management and stress testing practices, as well as deficiencies in the regulators’ toolkit to address them. In addition, the amount of high-quality capital held by banking organizations globally was insufficient to absorb losses that banking organizations experienced during that period. Insufficient liquidity and associated risk management practices also directly contributed to the failure or near failure of many companies and exacerbated the crisis. To address these and other weaknesses, the Federal Reserve has taken various steps to improve the regulation and supervision of individual firms to enhance their resiliency in times of stress, as well as the resiliency of the financial system as a whole. These measures have been taken pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as well as the Federal Reserve’s authority as the supervisor of various financial institutions. For example, in January 2012, the Board published for comment proposed rules that would implement the enhanced prudential standards and early remediation requirements of sections 165 and 166 of the Dodd-Frank Act. The proposal generally applies to all U.S. bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies that the Financial Stability Oversight Council has designated for supervision by the Board (covered companies). The proposal addresses issues such as capital, liquidity, single counterparty credit limits, stress testing, risk management, and early remediation requirements. The Board intends to supplement the enhanced risk-based capital and leverage requirements proposed in January 2012 with a subsequent proposal to implement a quantitative risk-based capital surcharge for covered companies or a subset of covered companies. To further implement the provisions of sections 165 and 166 of the Dodd-Frank Act, the Board issued proposed rules in December 2012 to strengthen the oversight of the U.S. operations of large foreign banking organizations, including measures regarding early remediation, capital stress testing, overall risk management, and enhanced risk- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 47 based and leverage requirements for these organizations. These proposals are aimed at strengthening the regulatory framework to address the risks that large, interconnected financial institutions pose to U.S. financial stability. In addition, in June 2012, the Board and the other Federal banking agencies issued three notices of proposed rulemaking that would effectively result in increasing the quantity and quality of capital held by banking organizations. The proposed rules would introduce a new common equity tier 1 capital requirement, raise existing minimum tier 1 capital requirements, and implement a capital conservation buffer to increase the resiliency of all banking organizations during times of economic and financial stress. The proposed rules would also be incorporated into the enhanced standards for covered companies discussed above. These measures are designed to help address the shortcomings in the international capital standards exposed during the crisis and build additional capacity into the banking system to absorb losses in times of future market and economic stress. The proposals also would enhance the risk-sensitivity of the agencies’ capital requirements by revising the calculation of risk-weighted assets for certain exposures to address weaknesses identified in the capital framework in recent years. The Federal Reserve has also been working to embed its supervisory practices within a broader macroprudential framework that focuses not only on the conditions of individual firms but also on the health of the financial system as a whole. Even before the enactment of the Dodd-Frank Act, the Federal Reserve had begun to overhaul its approach to supervision to better achieve both microprudential and macroprudential goals. For example, in 2009, the Federal Reserve created the Large Institution Supervision Coordinating Committee, which oversees the supervision of the most systemically important financial firms. Another important example of the Federal Reserve’s strengthened, cross-firm supervisory approach is the Comprehensive Capital Analysis and Review, through which the Federal Reserve assesses the internal capital planning processes of the largest bank holding companies and evaluates their capital adequacy under a very severe hypothetical stress scenario. Largely as a result of these efforts and the Federal Reserve’s action during the crisis, the aggregate amount of tier 1 common for the 19 largest bank holding companies increased by more than $300 billion between 2009 and 2012. The Federal Reserve also routinely uses macroprudential tools in analyzing the potential consequences of significant economic events for the individual firms it supervises and for the financial system as a whole. The proposed enhanced prudential standards and regulatory capital requirements, as well as other additional steps that the Federal Reserve has taken in response to the crisis and pursuant to the Dodd-Frank Act, are designed to strengthen the banking system and the financial system as a whole by strengthening regulatory requirements and the supervision of the most systemically important financial firms. Q.3. Do you think that the policy changes announced at the recent EU summit go far enough toward solving the European financial crisis? How will U.S. banks be affected by the proposed eurozone banking union? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00051 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 48 A.3. At their late June summit, European leaders agreed on a number of measures to address the financial crisis. These included, among other steps, establishing a single supervisory mechanism for European banks and, once such a mechanism is in place, enabling the European Stability Mechanism (ESM), the permanent euroarea backstop facility, to recapitalize banks directly. Subsequently, European leaders have also made progress in enhancing regional policy support for vulnerable euro-area countries. The European Central Bank (ECB) has announced a program that would enable it to purchase sovereign debt in order to address market distortions and contain bond yields. Countries benefiting from ECB support will have to enter into assistance programs and commit to achieving appropriate conditions prior to ECB assistance. These developments have helped ease stresses in European financial markets and hold out the hope of further progress toward resolution of the crisis. However, European leaders must follow through on their commitments by agreeing to specific, detailed plans and then implementing them. Market participants have reacted favorably to announcements of the ECB’s new bond purchase framework, but more work must be done to operationalize this strategy. By the same token, further agreements among European authorities will be required before the single supervisory mechanism for banks can be put in place. Additionally, if a full resolution of Europe’s difficulties is to be achieved, these regional initiatives must be complemented by further actions in the vulnerable countries themselves to improve public finances, strengthen banking systems, and promote pro-growth structural reforms. Euro-area banks currently are supervised by 17 national supervisors. Establishing a single supervisory mechanism should help to streamline supervisory compliance costs, further the integration of the European financial market and make it easier for international banks, including U.S. banks, to conduct business within and across euro-area countries. Moreover, tougher and more consistent bank supervision in Europe should reduce the frequency and severity of financial distress of European banks and hence contribute to global financial stability. Q.4. What are the barriers preventing homeowners who are current on their mortgage payments from refinancing? Could legislation address those barriers, and how would such legislation help with economic recovery? A.4. Low credit scores or levels of home equity make it difficult for many borrowers to refinance their mortgages. Initiatives such as the Home Affordable Refinance Program (HARP) and the streamlined refinance program offered by the Federal Housing Administration (FHA) have reduced or eliminated these barriers for many borrowers with loans guaranteed or insured by Fannie Mae, Freddie Mac, or FHA. However, borrowers whose loans are held in bank portfolios or private-label mortgage-backed securities, as well as borrowers who have already refinanced through HARP, often face significant obstacles to refinancing if their credit scores or home equity fall below certain levels. The Monetary Policy Report submitted to the Congress on July 17, 2012, and the staff housing VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00052 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 49 paper sent to the Committee on Banking, Housing, and Urban Affairs on January 4, 2012, provide further discussion of these issues. The Congress could facilitate refinancing for these borrowers by legislating changes to HARP or the FHA refinancing program or by creating a new refinancing program. In designing such legislation, the Congress would have to consider how to balance the interests of borrowers, taxpayers, and investors. A refinancing program might provide a small boost to aggregate consumer spending, decrease the incidence of mortgage default, and improve consumer confidence, but the size of such effects is difficult to predict. Q.5. The Fed is proposing a set of rules implementing Sections 165 and 171 of the Wall Street Reform Act and the Basel III agreements. These rules would apply to insurance companies organized as thrift holding companies or designated as nonbank financial SIFIs. Did the Fed consult with the Federal Insurance Office (FIO)? Do you anticipate that you will consult regularly with FIO as you engage in rulemakings that impact insurance companies? What else is the Fed doing to develop its insurance expertise? As part of these rulemakings, what steps did the Fed take to analyze the differences between banks and insurance companies and to incorporate those findings into the rulemakings? Do you think that the recent actions and rulemakings of the Fed appropriately recognize the differences between insurance companies and banks? A.5. Board staff has consulted with the Federal Insurance Office on issues related to capital requirements, stress testing, and insurance matters generally. Board staff also met with industry representatives and with the National Association of Insurance Commissioners on several occasions to discuss insurance-related issues. The Board also sought public comment on capital and accounting issues as well as on regulatory and supervisory requirements for savings and loan holding companies when it published a notice of intent regarding these institutions on April 22, 2011. The Board expects to continue this practice of consultations with other regulators and standard-setters, as well as the industry and the public, to further the Board’s expertise and to gain additional perspectives on the regulation and supervision of insurance companies as appropriate. In June 2012, the Board and the other Federal banking agencies proposed to revise risk-based and leverage capital requirements in three notices of proposed rulemaking. In proposing the regulatory capital requirements, the Board sought to meet several legal requirements and policy goals. Section 171 of the Dodd-Frank Act, requires that the Board establish minimum consolidated risk-based and leverage capital requirements for savings and loan holding companies that are not less than the ‘‘generally applicable’’ riskbased and leverage capital requirements for insured depository institutions. Accordingly, the proposals include consistent treatment for similar types of exposures, whether held at a depository institution or a savings and loan holding company, as well as provide flexibility for certain insurance-related assets that generally are not held by depository institutions. For example, the proposals include specific risk-weights for policy loans and nonguaranteed sepa- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 50 rate accounts, which are typically held by insurance companies but not depository institutions. The Board has received numerous comments from the public on the proposals with regard to the application of the proposed rules to insurance-centric savings and loan holding companies. The Board will carefully consider all the comments received while finalizing the regulatory capital rules. Q.6. The recent losses at JPMorgan have renewed focus on risk management practices. Additionally, JPMorgan has stated that the firm changed its risk models and trading positions in anticipation of new capital requirements under Basel III. Please provide your comments on how new capital requirements will strengthen the financial system, as well as any potential risks that may arise from these new capital standards. If the new standards encourage institutions to shift their activities into other risky activities, or have other unintended consequences, please comment on how you plan to address those shifts. In your answer, please also include any expectations you may have regarding institutional risk management and the Fed’s supervision of risk management at institutions. A.6. In June 2012, in addition to issuing the proposed rules described in the answer to Question 2 above, the Federal banking agencies approved a final rule to implement changes to the market risk capital rule that applies to banking organizations with significant trading activity. 1 The changes are primarily designed to ensure appropriate capital is held against trading positions, reduce the procyclicality of the capital requirements, and enhance the measure of credit risk of traded positions. Thus, the rule is expected to help ensure that banking organizations maintain stronger capital positions and improve the resilience of the U.S. banking system in times of stress, thus contributing to the overall health of the U.S. economy. There are risks that banking organizations may alter their practices and engage in different activities as a result of new and proposed capital rules. However, the Federal Reserve has a comprehensive supervisory framework and regulations beyond the regulatory capital rules to help address these risks. For example, a supervisory assessment of banking organizations’ capital adequacy takes into account a banking organization’s internal processes for capital adequacy, as well as risks and other factors that can affect the banking organization’s financial condition, including the level and severity of problem assets and the organization’s exposure to operational and interest rate risk. 2 For internationally active institutions, the supervisory review process for capital adequacy (the socalled Pillar 2 approach based on the international Basel II standards) is even more rigorous and comprehensive as it emphasizes the need for these institutions to look beyond the regulatory capital standards and to help institution’s ensure that they maintain adequate capital levels in relation to their risk profiles. Further, for the largest U.S. bank holding companies, the Federal Reserve has 1 77 FR 53060. for example, SR 09-04, ‘‘Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies’’; see also June 2012 proposed regulatory capital rule, 77 FR 52792). 2 See, VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 51 established regulatory requirements for regular stress testing and capital planning and conducts supervisory assessments of the capital planning processes and capital adequacy of these firms. The Federal Reserve has also put forth other guidance for banking organizations related to risk management in Supervision and Regulation Letters. For example, the Federal banking agencies finalized stress testing guidance in May 2012 for banking organizations with total consolidated assets of more than $10 billion that focuses on the importance of banking organizations conducting forward-looking assessments of their risks to better equip them to address a range of adverse outcomes. The supervisory guidance on model risk management, issued in April 2011, describes key aspects of the effective model risk management, as well as key principles of sound governance and internal controls governing the use of models. These and other supervisory guidance and regulations are designed to improve banking organizations’ risk management practices, as well as the supervisory toolkit to enforce robust procedures and sound risk management so that banking organizations manage their risks effectively and hold adequate capital commensurate with their risk profiles. RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM BEN S. BERNANKE Q.1. It is my understanding that the Federal Reserve supervises Citigroup, JPMorgan Chase, Bank of America Corp, and the U.S. branches of foreign banks. As these institutions face potentially billions of dollars in fines, legal costs, and settlements due to their involvement in the LIBOR setting process, why did the Federal Reserve not consider this to be a safety and soundness concern? A.1. Answer not received by time of publication. Q.2. How does the Federal Reserve define an unsafe or unsound practice? What authority does the Federal Reserve have to end an unsafe and unsound practice in institutions it supervises? A.2. Answer not received by time of publication. Q.3. Do you have ‘‘cease and desist’’ authority which could, for example, be used to stop traders and employees responsible for determining LIBOR submissions at supervised institutions from manipulating and falsely reporting LIBOR? If so, why did the Federal Reserve decide not to use it? A.3. Answer not received by time of publication. Q.4. Does the Federal Reserve have authority to require supervised institutions to adopt better internal controls to prevent traders and others from making unlawful requests to employees responsible for determining LIBOR? If so, why did you decide not to use this authority? A.4. Answer not received by time of publication. Q.5. Did analysts with the New York Federal Markets Group analysts engage with Federal Reserve supervisory staff overseeing Citigroup, JPMorgan Chase, or Bank of America regarding potential issues with the accuracy of LIBOR reporting? If so, on what VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00055 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 52 dates did these interactions happen and what was the general substance of those conversations. If not, why not? A.5. Answer not received by time of publication. Q.6. Were the April 2008 briefing notes and the May 20, 2008, report prepared by the Federal Markets Group regarding the accuracy of LIBOR reporting circulated to the staff responsible for supervising these institutions at the New York Fed or the Federal Reserve? Why or why not? A.6. Answer not received by time of publication. Q.7. Were appropriate internal controls in place at the Federal Reserve to make sure that appropriate and timely actions were taken regarding potential LIBOR fraud? Are you reviewing the conduct and behavior of your analysts and supervisory staff with responsibility for overseeing institutions involved in the LIBOR setting process? If not, why not? If so, what changes and remedial actions have you taken? A.7. Answer not received by time of publication. Q.8. Regardless of the fact that direct supervision for the setting of LIBOR was under the purview of U.K. regulators, the Federal Reserve had supervisory responsibility for three of the institutions involved in setting the rate. Was it the policy of the Federal Reserve to defer to foreign regulators even though there was evidence that institutions supervised by the Fed were involved in potential manipulation of LIBOR? A.8. Answer not received by time of publication. RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM BEN S. BERNANKE Q.1. The Bank Supervision Groups of the 12 Federal Reserve Banks include approximately 3,600 staff, and they are scattered across the country. The banking and financial industries, however, are concentrated in New York where 7 of the 10 largest bank holding companies are located. Why are the examination resources of the Federal Reserve System still split up evenly over the 12 regional banks? Should the resources be dispersed in a more proportional manner to the location and size of regulated entities? A.1. The Federal Reserve supervises state-chartered banks that have chosen to become members of the Federal Reserve System (state member banks); bank holding companies and savings and loan holding companies and any nonbanking subsidiary of such companies that is not functionally regulated by another federal or state regulator; foreign branches of member banks; Edge Act and agreement corporations; U.S. State-licensed branches, agencies, and representative offices of foreign banks; and the U.S. nonbanking activities of foreign banks. Supervisory resources and expertise are dispersed across the Federal Reserve System as needed to effectively supervise these institutions based on their number, size, complexity, and activities. The Federal Reserve Bank of New York has the largest number of supervision staff. More than half of all the Reserve Bank supervision staff is located in the New York, Chicago, Richmond, and Atlanta districts. Where cost and su- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 53 pervisory efficiencies can be gained by consolidating or sharing expertise, the Federal Reserve has developed a program for sharing subject matter experts and other staff among the Reserve Banks. Q.2. In 2005, a peer group of other Federal Reserve Banks found that the supervision team at the New York Fed appeared to have ‘‘insufficient resources to conduct continuous supervisory activities in a consistent manner’’ for certain institutions. In 2009, another peer group study concluded that ‘‘there have been significant weaknesses in the execution of the supervisory program’’ at the New York Fed. When the Financial Crisis Inquiry Commission (FCIC) made these criticisms public, the New York Fed responded by increasing the resources applied. Can you give additional detail on how examiners and other supervisory resources have been increased or reallocated since 2005? How many examiners out of 3,600 supervision staff are embedded at each of the 10 largest banks? Are published reports accurate that say about 200 examiners total are embedded at the 5 largest Wall Street banks? A.2. Since 2005, and especially since the financial crisis, the Federal Reserve has sharpened its supervisory focus by increasing its depth of understanding of the supervised organizations and key vulnerabilities and by enhancing the level and size of the embedded onsite teams at the largest institutions. The published reports on the number of examiners cited in the question are generally correct. Resources allocated to the largest organizations have increased and are currently numbered at approximately 230. In addition, a wide range of subject matter experts support the on-site embedded teams. The Federal Reserve’s consolidated supervision framework for large financial institutions is described in greater detail in Supervision and Regulation Letter 12-17 issued on December 17, 2012 (http://www.federalreserve.gov/bankinforeg/srletters/ sr1217.htm). It is also important to note that, by law, the Federal Reserve must rely to the fullest extent possible on examinations conducted by the OCC, the FDIC, and the SEC. Each of these agencies deploys substantial resources in the examination and supervision of large subsidiaries owned by the largest bank holding companies. Q.3. When the term ‘‘unsafe or sound practice’’ was added to Federal law to authorize cease and desist orders, the following was stated to be the working definition of an unsafe or sound practice. Generally speaking, an ‘‘unsafe or unsound practice’’ embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance fund. Financial Institutions Supervisory Act of 1966: Hearings on S.3158 Before the House Committee on Banking and Currency, 89th Cong., 2d Sess. at 49-50 (1966) (statement of Chairman Horne). Given the litigation and other penalties that Barclays and additional banks are confronting, do you believe that the allegedly purposeful false LIBOR reports British Banking Association raise a ‘‘safety and soundness’’ concern? VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00057 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 54 A.3. Answer not received by time of publication. Q.4. In 2008, the New York Federal Reserve Bank had evidence that Barclays was intentionally manipulating LIBOR, and as you said in your testimony, there were numerous reports in the financial press about other apparent misbehavior with respect to LIBOR. The examination and supervision model used by the Federal Reserve relies extensively on the internal risk management reports and internal audit reports of the banking organizations it exams and supervises. Since 2008, has the New York Federal Reserve Bank, or any other Federal Reserve Bank, ever conducted an examination of the internal controls of any banking organization with respect to its provision of LIBOR indications? Could examinations of internal controls have prevented inaccurate reports from Barclays and other LIBOR reporters during the last 5 years? A.4. Answer not received by time of publication. Q.5. I have heard concerns from constituent savings and loan holding companies regarding the length of the comment period and the burden of the accounting changes required by the ‘‘Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule’’ released on June 7th. Can you discuss the expected costs and additional impacts to insurers that own savings and loan banks based on the accounting change to GAAP? Was the Federal Office of Insurance consulted with during the drafting process? A.5.As you know, the Board and the other Federal banking agencies proposed to revise the risk-based and leverage capital requirements in three notices of proposed rulemaking (NPRs) and the Board proposed to apply the revised requirements to SLHCs. 1 The proposals in the NPRs, in part, would apply consolidated risk-based capital requirements to a depository institution holding company and its subsidiaries. Currently, capital requirements for insurance companies are imposed by State insurance laws on a legal entity basis and there are no State-based, consolidated capital requirements that cover subsidiaries and noninsurance affiliates of insurance companies. In developing the NPRs, the Board sought to meet several legal requirements and policy goals. The NPRs are consistent with section 171 of the Dodd-Frank Act, which requires consolidated minimum risk-based and leverage capital requirements for depository institution holding companies, including SLHCs, that are no less than the generally applicable capital requirements that apply to insured depository institutions under the prompt corrective action framework. The current ‘‘generally applicable’’ capital requirements for insured depository institutions are calculated and reported based on the U.S. generally accepted accounting principles (GAAP). This approach is consistent with section 37 of the Federal Deposit Insurance Act which requires that accounting principles applicable to reports or statements that insured depository institutions file with their Federal regulators be ‘‘uniform and consistent’’ with GAAP. If an alternative accounting standard is required by the Federal regulator, it must, by statute, be ‘‘no less stringent’’ than 1 See, VerDate Nov 24 2008 14:28 Apr 25, 2013 77 Federal Register 52888, 52909, 52958 (August 30, 2012). Jkt 048080 PO 00000 Frm 00058 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 55 GAAP. 2 Accordingly, the Board, consistent with section 171 of Dodd-Frank Act and section 37 of the FDI Act, proposed that savings and loan holding companies, like insured depository institutions and bank holding companies, calculate and report their regulatory capital ratios on a consolidated basis using a framework that is based on GAAP. The NPRs also are consistent with the Board’s long-standing practice of applying consolidated minimum capital requirements to bank holding companies, including those that control functionally regulated subsidiary insurance companies. This practice eliminates incentives to engage in capital arbitrage by booking individual exposures in the legal entity in which they receive the most favorable capital requirement. In developing the proposals, Board staff consulted with the Federal Insurance Office on issues related to capital requirements and stress testing. The Board also sought public comment on capital-related and accounting-related issues that may affect savings and loan holding companies when the Board published a notice of intent regarding these companies on April 22, 2011. Board staff also has met with a number of industry representatives to discuss challenges associated with applying consolidated capital requirements to savings and loan holding companies, including those challenges related to using GAAP. The Board has received numerous public comments on the potential cost and implementation challenges for savings and loan holding companies, including those savings and loan holding companies that do not currently use GAAP. Board staff and Board members have also met with representatives of savings and loan holding companies with large insurance operations about the concerns raised in their comment letters. The Board is carefully reviewing all the public comments on the proposal, including those related to potential costs and burdens related to accounting, and will continue to take these concerns into consideration over the course of the rulemaking. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY FROM BEN S. BERNANKE Q.1. During the hearing, I asked you to address concerns I have regarding the increasing role that banks are playing in our spot energy markets, including the crude oil markets. I particularly asked this in light of the regulators’ October proposal on the Volcker Rule that would exclude all spot commodities and physically settled forwards from coverage of the Volcker Rule’s trading account. You responded by suggesting that Dodd-Frank had excluded spot commodities from Volcker Rule coverage, and I indicated that this was not the case. I would like take you up on your offer of further conversation and analysis of the issue. First, let me share some of my views on this matter, and I would like to understand your views in light of them. 2 See, VerDate Nov 24 2008 14:28 Apr 25, 2013 12 U.S.C. 1831n(a)(2). Jkt 048080 PO 00000 Frm 00059 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 56 Although Dodd-Frank does not explicitly name spot commodities and physically settled commodity forwards in the trading account definition under the statutory Volcker Rule, that definition is exceedingly broad and expresses a clear Congressional intent to cover all instruments banks use in the course of their trading activities. Moreover, Dodd-Frank provides regulators broad authority to include ‘‘any other security or financial instrument.’’ In other words, the text of the statute might not explicitly include the items in question, but it does not take that ability away from the regulators. Indeed, any explicit decision to exclude them would be made by the regulators, and I would assert would be a misreading of Congressional intent. For your reference, below is the pertinent statutory text: (4) PROPRIETARY TRADING.—The term ‘‘proprietary trading’’, when used with respect to a banking entity or nonbank financial company supervised by the Board, means engaging as a principal for the trading account of the banking entity or nonbank financial company supervised by the Board in any transaction to purchase or sell, or otherwise acquire or dispose of, any security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative, or contract, or any other security or financial instrument that the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission may, by rule as provided in subsection (b)(2), determine. Senator Levin and I further make this clear in our February 13 comment letter on this subject: The law provides no statutory authority to exclude transactions involving spot commodities or forward contract transactions that are to be physically settled from the Merkley-Levin Provisions, nor should they be excluded. Until relatively recently, banks and their affiliates were not major players in physical commodities. Today, some banks have become major traders of physical commodities, using transactions which can be high risk, give rise to off balance sheet or other hidden liabilities, and involve difficult risk analysis. For example, some banks such as JPMorgan and Morgan Stanley are reportedly trading and storing physical quantities of crude oil and other physical commodities, 1 and engaging in trading activities and investments that regulators may be hard pressed to analyze for risk or conflicts of interest. In addition, these transactions invite the very types of conflicts of interest that the Merkley-Levin Provisions are de1 See, e.g., Ned Molloy, ‘‘Energy Risk Oil & Products House of the Year 2011: JPMorgan’’, Risk.net, Jun. 9, 2011, available at http://www.risk.net/energy-risk/feature/2072271/energyrisk-oil-products-house-2011-jp-morgan; Morning Zhou, ‘‘Traders Boost Oil Storage on Offshore Tankers by 75%, Morgan Stanley Says’’, Bloomberg, Apr. 26, 2010, available at http:// www.bloomberg.com/news/2010-04-26/traders-boost-oil-storage-on-offshore-tankers-by-75-morgan-stanley-says.html; Wall Street Banks Quarterly Commodities Trading Risk, Reuters, Oct. 18, 2011, available at http://www.reuters.com/article/2011/10/18/commodities-banks-riskidUSN1 E79H0M920111018. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 57 signed to prevent, since those same banks frequently engage in commodity transactions with and on behalf of their clients. 2 Although these types of transactions are not explicitly named in the statute, they are covered under the ‘‘any other security or financial instrument’’ language of Section 13(h)(4). In addition, excluding these types of transactions from the statute would create incentives for banks to circumvent the law by designing transactions utilizing these exclusions. In addition, given the strong relationships between spot commodities and their corresponding futures, excluding spot commodities would create a significant loophole that would undermine the intent of the provisions. Given the risk of evasion, all of these transactions should be subject to the Volcker Rule safeguards. Not only do I believe the statutory approach is clear, but the policy basis for being concerned about banks’ spot commodities and physically settled forwards trading is very strong. Recent events, including the JPMorgan Chief trading loss, the trader manipulation of LIBOR cases, and the on-going investigation by the Federal Energy Regulatory Commission into energy manipulation by several large national banks, all highlight how the culture of proprietary trading is so rife with conflicts of interest and risk that it is highly incompatible with client-oriented, economy-serving traditional banking. Indeed, many trading activities may even be so risky as to be beyond cost-effective regulation—a point suggested by Federal Reserve Governor Sarah Bloom Raskin in a recent speech in Colorado. Given these lessons, I am highly concerned the regulators would seek to ignore the statute and pass up the opportunity to use the Volcker Rule to hopefully prevent potential problems in our energy and other commodity markets, including possibly preventing another Enron. Please share any additional views you may have in light of this information. A.1. Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) generally prohibits banking entities from engaging in proprietary trading. As you noted, section 619(h)(4) of that Act defines ‘‘proprietary trading’’ to mean ‘‘engaging as a principal for the trading account of the banking entity or nonbank financial company supervised by the Board in any transaction to purchase or sell, or otherwise acquire or dispose of, any security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative, or contract, or any other security or financial instrument that the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission may, by rule as provided in subsection (b)(2), determine.’’ See 12 U.S.C. 1851(h)(4). By its terms, section 619(h)(4) does not mention or specifically apply to spot transactions in commodities. As you point out, the Act permits the Federal Reserve, OCC, FDIC, SEC, and CFTC (the ‘‘Agencies’’) to extend the prohibition 2 See, VerDate Nov 24 2008 14:28 Apr 25, 2013 Saule Omarova, 63 U. Miami L. Rev. 1041 (2009). Jkt 048080 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 58 on proprietary trading to ‘‘any other security or financial instrument that the [Agencies] may, by rule as provided in subsection (b)(2) [of section 619], determine.’’ See, id., The Agencies invited comment on the appropriate scope of this definition, including whether the Agencies should extend the definition to include spot commodities. The Agencies received over 19,000 comments regarding the proposed implementing rules, including, as noted in our discussion, comments that specifically addressed the definition of covered financial position and the scope of instruments that should be subject to the ban on proprietary trading. The Agencies are currently considering these comments as we work to finalize implementing rules, and will carefully consider your comments in implementing these important provisions. Q.2. Similar to the concern I have with the exclusion of spot commodities and forwards from the definition of the trading account is the proposal to exclude repurchase agreements and ‘‘liquidity management’’ positions from the trading account—and hence the entire coverage of the Volcker Rule. As I indicated in Question 1, the statute does not provide a path for excluding items from, the definition of the trading account. It provides only one avenue for avoiding from the prohibitions of the Volcker Rule: an additional ‘‘permitted activity’’ under subsection (d)(1)(J) of the statute. This path was expressly provided so that regulators could, if needed, add permitted activities. Although these activities would not be subject to the prohibition on proprietary trading, they would remain subject to other protections under the Volcker Rule, including data collection and backstops on highrisk activities and conflicts of interest. Senator Levin and I, in our February comment letter, made this point clearly: The Merkley-Levin Provisions do not provide any statutory authority to create exclusions from the definition of ‘‘trading account’’. To the contrary, it authorizes the regulators only to expand the definition of ‘‘trading account’’ to include ‘‘any such other accounts’’ as they determine. Thus, regulatory discretion is only in one direction. Positions held outside of the ‘‘trading account’’, as defined by the statute and [ ] should [they] be expanded by the regulators, are not directly covered by the restrictions in the Merkley-Levin Provisions against proprietary trading, much less their protections against high-risk assets, conflicts of interest, and other protections. The definition of ‘‘trading account’’ was carefully worded in the statute to take into account multiple concerns and deliberately designed to have a broad reach. The statute does not contemplate or provide for exclusions from this definition. If regulators want to allow a new permitted activity, then they must do so pursuant to the authority under Section 13(d)(1)(J), which would ensure that the new activity remained subject to the other limitations in the law applicable to all permitted activities. In short, there is no legal standing for these regulatory-created exclusions from the VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00062 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 59 definition of ‘‘trading account,’’ and they should be removed. Given that many of JPMorgan’s Chief Investment Office positions were held, they claimed, as liquidity management positions, complete exclusion of liquidity management positions from the Volcker Rule would not only be contrary to the statutory text but also highly troubling from a policy perspective. Please comment on whether you intend to close the liquidity management and other exclusions from the Volcker Rule trading account definition. A.2. The proposal by the Agencies to implement section 619 of the Dodd-Frank Act requested public comment on a definition of ‘‘trading account’’ that generally restates the statutory definition, with the addition of certain details to provide greater clarity regarding the scope of positions that fall within the definition. That definition covers trading activity conducted principally for the purpose of selling in the near term or profiting from short-term price movements. The Agencies proposed to clarify that transactions taken as part of bona fide liquidity management activities, repurchase or reverse repurchase arrangements, or securities lending programs are not covered within the trading account because the banking entity’s purpose for engaging in such transactions is not to engage in selling in the near term or profiting from short-term price movements. For instance, banking entities conduct liquidity management activities as part of a program reviewed by the Agencies to ensure that each banking entity maintains sufficient, readily marketable assets to meet its expected short-term liquidity needs, and thereby enhance the safe and sound operation of the banking entity and reduce its risk to the financial system. Similarly, repurchase or reverse repurchase arrangements and securities lending transactions operate in substance as a secured loan with set terms agreed upon at the start of the arrangement, and are not based on expected or anticipated short-term movements in asset prices. The Agencies invited comment on the proposed exclusions and the Agencies received over 19,000 comments regarding the proposed implementing rules, including comments that specifically addressed the issues you noted in your question. The Federal Reserve and other rulemaking agencies are carefully reviewing those comments and considering the suggestions and issues they raise in light of the statutory restrictions and provisions as we work to finalize implementing rules. RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER FROM BEN S. BERNANKE Q.1. I am concerned about the April 10th supplemental notice of proposed rulemaking issued by the Fed. In this NPR, the Fed ignores the letter of the law in Dodd Frank, and proposes to vastly expand its own authority to designate nonfinancial firms as SIFIs ‘‘predominantly engaged in financial services’’ by adopting a broad definition of the term ‘‘activities that are financial in nature.’’ During the Senate’s consideration of the Dodd-Frank Act a bipartisan amendment that significantly tightened the bill’s language regarding SIFI designation for nonbanks. My concern was that the VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00063 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 60 committee-reported bill gave the Fed and the FSOC broad discretion to adopt a drag-net approach to SIFI designation—and in doing so, pull in many commercial firms that Congress did not want included. The Vitter-Pryor amendment cured this defect by limiting the designation process to only those firms that are ‘‘predominantly engaged’’ in financial services. This amendment created a new standard for SIFI designation. Under it, a firm must be predominantly engaged in activities that are financial in nature to be subject to FSOC designation. It also linked the ‘‘predominantly engaged’’ definition to the tight definition of ‘‘financial activities’’ in the Bank Holding Company Act. The language is crystal clear—‘‘activities that are financial in nature as defined in section 4(k) of the Bank Holding Company Act of 1956’’ qualify as ‘‘financial in nature.’’ The Senate rejected adding a clause to this amendment granting the Board the additional discretion to consider activities ‘‘incidental to a financial activity’’ as defined in section 4(k). Nevertheless, the Fed in its April 10th NPR, has decided to ignore the clear letter of the law and unilaterally expand the definition of this term. In that NPR the Fed rationalizes its action as necessary to not ‘‘severely undermine the purposes of Title I.’’ This is not the Fed’s decision to make. Given the explicit language of the statute, the Fed is not empowered to try to divine the ‘‘purposes’’ of Title I by sifting through the legislative history of Dodd-Frank. The language of Section 102 and the legislative history of this provision make it abundantly clear that the language of Section 4(k) controls, and the Fed has no discretion to bend the law. Moreover, the debate surrounding our Amendment make clear that the Congress intended this language to mean exactly what it says. The Supreme Court has repeatedly upheld the proposition that agencies must defer to clear Congressional intent. In K Mart v. Cartier, Inc., the Court wrote that ‘‘if a statute is clear and unambiguous that is the end of the matter . . . the agency must give effect to the unambiguously expressed intent of Congress.’’ Given the precedents, what basis does the Federal Reserve have for its attempt to qualify the clear language of Section 102(a)(6)? A.1. Questions 1 through 3 relate to the provision of the DoddFrank Act that requires the Board to establish, by regulation, the requirements for determining if a company is predominantly engaged in financial activities. Companies that are predominantly engaged in financial activities can be designated by the Financial Stability Oversight Council for supervision by the Board if the FSOC finds that the firm could pose a threat to the financial stability of the United States. In April 2012, the Board invited public comment on proposed rules implementing these provisions. The public provided a number of comments on the proposed rules, including with respect to the proposed interpretation of section 102 of the Dodd-Frank Act and the treatment of physically settled derivatives transactions. We are carefully considering these comments as we formulate the final rule. Q.2. Chairman Bernanke, in the April 10th release, the Federal Reserve attempts to justify its proposed action by citing section VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 61 102(b) of the Dodd Frank Act. That provision permits the Fed to establish ‘‘requirements’’ for determining whether a company falls within the definition of ‘‘predominantly engaged in financial activities’’. This provision explicitly notes that this term is fully defined in section 102(a)(6) of Dodd Frank, correct? Where in this provision does the Fed get the authority to override clear statutory language and qualify the definition of predominantly engaged in financial activities? A.2. Please see response to Question 1. Q.3. Mr. Chairman, will you assure this Committee that the Federal Reserve will abandon this effort at unilaterally expanding its legislative fiefdom, and comply with clear letter of the law in Section 102? A.3. Please see response to Question 1. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM BEN S. BERNANKE Q.1. As you know, the Volcker Rule becomes effective under the statute on July 21, 2012, regardless of whether a final implementing rule has been finalized. As you suggested before this Committee several weeks ago, the agencies are unlikely to meet that deadline. Also, in the interim, the Fed has issued guidance on actions ‘‘banking entities’’ should take during the 2-year conformance period in preparation for complying with a rule that doesn’t exist. With that as background, can you give us a status report on the interagency negotiations on the Volcker Rule and some idea as to when the agencies are likely to release the next version? Can you give us any insight as to what will be released? A.1. Last year, the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) (also known as the ‘‘Agencies’’) proposed rules to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); as part of those proposals, the Agencies met with many interested representatives of the public, including banking firms, trade associations and consumer advocates, and provided an extended period of time for the public to submit comments to the agencies. To enhance uniformity in both rules that implement section 619 and administration of the requirements of section 619, the Agencies have been regularly consulting with each other in the development of rules and policies that implement section 619 and will continue to do so. The Agencies have received over 19,000 comments addressing a wide variety of aspects of the proposal. The Board and other rulemaking agencies are carefully reviewing those comments and considering the suggestions and issues they raise in light of the statutory restrictions and provisions as we work to finalize implementing rules. The Agencies are also carefully considering different options in order to effectively implement section 619 of the DoddFrank Act in a timely manner. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 62 Q.2. Given the sheer number of questions you asked in the Notice of Proposed Rulemaking (NPR) (several hundred), is it feasible to go forward at this point with a final rule? Or will you need to issue a revised NPR with a comment period? A.2. Please see response to Question 1. Q.3. I disagree with the premise of designating any entity a ‘‘systemically important financial institution’’ (SIFI). However, it is my understanding that, although not perfect, the SIFI designation process in the United States is more transparent than the G–SIFI (Globally Systemically Important Financial Institution) designation process. I am especially troubled that confidential company data is being collected to make G–SIFI determinations without a clearly defined G–SIFI methodology in place. Given that the Federal Reserve is a member of the Financial Stability Board (FSB), which will make G–SIFI determinations, can you clarify how a company that is designated a G–SIFI but not designated a SIFI in the U.S. will be regulated? For instance, how would an insurance company that is currently regulated at the State level be regulated as a G–SIFI? A.3. In considering whether to determine that a nonbank financial company could pose a threat to U.S. financial stability and subject the company to Board supervision and prudential standards, the FSOC is required by statute to consider various factors set forth in the statute that could result in a different determination (either including or excluding a firm) by the FSOC under the Dodd-Frank Act than a determination that may be made by the FSB. For instance, one factor that the FSOC must consider is the degree to which a firm is already regulated by another financial regulatory agency. The Board and the FSOC are working with the FSB on a number of initiatives, including the process for identifying globally systemically important financial institutions and financial market infrastructures. Furthermore, the Board and the FSOC are working to ensure the consistency of the approaches used by the FSB and the FSOC for assessing whether a nonbanking company is systemically important and to better understand the potential for different determinations. Systemically important nonbank firms designated by the FSOC and bank holding companies with total consolidated assets greater than $50 billion will be subject to enhanced prudential standards established by the Board. By contrast, firms that are not designated by the FSOC and are not bank holding companies with total assets greater than $50 billion that are designated as G–SIFIs by the Financial Stability Board would be subject to internationally agreed-upon standards. Q.4. In a hearing on March 22, 2012, I asked Treasury’s Under Secretary for International Affairs, Lael Brainard, if she anticipated a situation where a U.S. company is not designated a SIFI by FSOC, but is designated a G–SIFI by the FSB, and how such an institution would be regulated. In her response, she noted that ‘‘U.S. financial institutions will be regulated in accordance with U.S. laws and regulations.’’ She also said: ‘‘Through its membership on both the Financial Stability Oversight Council and Inter- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 63 national Association of Insurance Supervisors (IAIS) committees involved with the development of the criteria and methodology, Treasury’s Federal Insurance Office (FIO) is pursuing an international consensus that aligns the IAIS criteria, methodology, and timing with the Council (FSOC).’’ How will you ensure that the U.S. SIFI designation process is coordinated with the G–SIFI designation process so that the integrity of U.S. law is protected? A.4. Please see response to Question 3. Q.5. The Federal Reserve’s recently proposed capital standards implementing Basel 3 and section 171 of the Dodd-Frank Act include an effective date of January 2013 for insurance companies organized as thrift holding companies. However, section 171 of the Dodd-Frank Act states that any requirements of that section shall be effective 5 years from date of enactment (July 2015). Can you clarify these effective dates as they apply to insurers? A.5. As you know, the Board and the other Federal banking agencies proposed to revise the risk-based and leverage capital requirements in three notices of proposed rulemaking (NPRs) and the Board proposed to apply the revised requirements to SLHCs. 1 The proposals in the NPRs, in part, would apply consolidated risk-based capital requirements to a depository institution holding company and its subsidiaries. Currently, capital requirements for insurance companies are imposed by State insurance laws on a legal entity basis and there are no State-based, consolidated capital requirements that cover subsidiaries and noninsurance affiliates of insurance companies. In developing the NPRs, the Board sought to meet several legal requirements and policy goals. The NPRs are consistent with section 171 of the Dodd-Frank Act, which requires consolidated minimum risk-based and leverage capital requirements for depository institution holding companies, including SLHCs, that are no less than the generally applicable capital requirements that apply to insured depository institutions under the prompt corrective action framework. The NPRs are also consistent with the Board’s longstanding practice of applying consolidated minimum capital requirements to bank holding companies, including those that control functionally regulated subsidiary insurance companies. This practice eliminates incentives to engage in capital arbitrage by booking individual exposures in the legal entity in which they receive the most favorable capital requirement. The requirements under section 171 generally apply to depository institutions holding companies that were not previously supervised by the Board, including any savings and loan holding company, beginning on July 21, 2015. Separately, section 616(b) of the Dodd-Frank Act modified section 10(g)(1) of the Home Owners’ Loan Act (HOLA) to authorize the Board to establish regulations and orders relating to capital requirements for savings and loan holding companies. Thus, section 10(g)(1) of HOLA provides the Board with separate authority to establish by rule capital requirements for savings and loan holding companies, apart from the spe1 See, VerDate Nov 24 2008 14:28 Apr 25, 2013 77 Federal Register 52888, 52909, 52958 (August 30, 2012). Jkt 048080 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 64 cific minimum requirements and other limitations that are imposed by statute in section 171. Consistent with the Board’s authority under section 10(g)(1) of HOLA, the NPRs provide that savings and loan holding companies would be subject to consolidated minimum capital requirements beginning on January 1, 2013. The Board received numerous comments expressing concern regarding this proposed effective date, including from savings and loan holding companies. In light of the comments and the wide range of views expressed during the comment period, the agencies issued a joint statement on November 9, 2012, noting that the agencies do not expect that any of the proposed rules would become effective on January 1, 2013. The Board is considering carefully all comments received, including potential implementation challenges for savings and loan holding companies with insurance company subsidiaries and the appropriateness of an extended effective date, and will take them into account over the course of the rulemaking. RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK FROM BEN S. BERNANKE Q.1. The Federal Reserve’s strategy of keeping interest rates low through ‘‘Operation Twist’’ has been aided by global uncertainty, which has risk-averse investors seeking the safety of U.S. Treasuries. At the 10-year Treasury note auction on July 11, investors accepted the lowest yields in history, just 1.459 percent. These low rates have neither spurred economic growth nor materially lowered unemployment. Rather, they are creating ‘‘unintended consequences’’: (a) Retirees are facing personal budget cuts as their savings yield next to nothing; (b) Businesses, which finance much of their working capital on a floating rate basis, are reluctant to expand; although their cost of funds is low currently, it is likely to rise just as any expansion plans are implemented and their working capital needs rise; and (c) Independent banks are struggling to remain profitable while managing difficult conditions caused by the combination of artificially low interest rates, weak commercial demand, lower debit card fees, and the rising cost and capital requirements for interest-bearing customer accounts. Since yields are already at historic lows, what purpose will further quantitative easing serve? How much lower could rates reasonably be expected to go with further easing? A.1.It is true that Treasury yields are very low, but there is scope for the Federal Reserve to ease financial conditions further in order to strengthen the economic recovery using nontraditional policy tools, including purchases of longer-term assets. The unconventional easing measures undertaken by the Federal Reserve in recent years have been effective in contributing to lower longer-term interest rates, higher asset prices, and generally more accommodative financial conditions than would have otherwise been the case. More accommodative financial conditions, in turn, stimulate economic growth by reducing the cost of borrowing for businesses and households, and by raising household and business net worth, thereby boosting aggregate demand and reducing unemployment. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 65 At its December meeting, the Committee announced that it was increasing policy accommodation by purchasing additional mortgage-backed securities at a pace of $40 billion per month and would purchase longer-term Treasury securities at a pace of $45 billion per month after the completion of the maturity extension program at the end of the year. The Committee indicated that unless it sees evidence of a substantial improvement in labor market conditions in coming months, it will purchase additional agency MBS securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such an improvement is achieved in a context of price stability. The Committee also indicated that, as always, it would take appropriate account of the likely efficacy and costs of its purchases in determining the size, pace, and composition of such purchases. The conditioning of purchases on economic outcomes helps to create an automatic stabilizing effect in financial markets. If the economy weakens, market participants might expect additional Federal Reserve purchases and that expectation should contribute to a further easing in financial conditions. Conversely, if the economy strengthens, investors might anticipate that the Federal Reserve will scale back its purchase of securities and that should contribute to a firming of financial conditions. Thus, the ultimate extent of the Committee’s purchases, and so their impact on yields, is uncertain at this point. Q.2. How would further easing and low interest rates affect fixedincome seniors unable to move their money into higher risk investments? Given that this segment of the population is growing, could depressed consumer demand have negative effects on the economy? A.2. The Federal Reserve recognizes that the accommodative policy the Fed has put in place means that individuals with savings invested in fixed-income assets may receive lower interest income for a time. However, the returns on fixed-income investments, as well as other assets, fundamentally depend on the strength of the economy. Moreover, the Federal Reserve’s policy actions also boost stock prices, home values, and other assets that are held by many households, contributing to higher household net worth than would otherwise be the case. A stronger economy benefits savers and all Americans in myriad ways, including stronger income growth, improved job prospects, and improved access to credit. Q.3. One major effect of the crisis in Europe is that European sovereign debt from many countries is no longer considered riskless. How has this affected demand for Treasuries? What effect might increased demand have on consideration for further easing? A.3. It seems likely that investor concerns about the situation in Europe have boosted the demand for Treasury securities and put downward pressure on Treasury yields over recent years. In making its monetary policy decisions, the FOMC takes into account all of the factors that it believes are relevant to the U.S. economic outlook, including the effects of the fiscal and banking crisis in Europe on financial conditions and U.S. economic activity. As the FOMC has noted, strains in Europe and global financial markets represent a significant downside risk to the U.S. economic outlook. The relatively modest pace of the U.S. recovery and the associated down- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00069 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 66 side risks, in turn, have been important factors underlying the FOMC’s decision to provide further monetary policy accommodation over recent years. Q.4. The State Budget Crisis Task Force just released a report identifying ‘‘Six Major Threats to Fiscal Sustainability’’ (http:// www.statebudgetcrisis.org/wpcms/wp-content/images/Report-ofthe-State-Budget-Crisis-Task-Force-Full.pdf). One key finding is that ‘‘Underfunded Retirement Promises Create Risks for Future Budgets.’’ One factor that allowed state treasurers to underfund pensions is assuming unrealistically high rates of return for retirement investments. If the Federal Reserve extends ‘‘Operation Twist’’ again, what is a realistic rate of return for conservatively managed pension funds? A.4. The returns to long-term investments depend crucially on the strength of economic activity, the rate of inflation, and the stability of the financial system. The Federal Reserve conducts monetary policy to foster its statutory objectives of maximum employment and stable prices. To this end, the Federal Reserve has reduced the Federal funds rate to its effective lower bound and has increased the size, and changed the composition, of its balance sheet in recent years to help make financial conditions more accommodative. These monetary policy actions have been motivated by the desire to support a more robust pace of economic recovery in a context of price stability. It is in the interest of everyone—including pension funds and their beneficiaries—to have an economy that is performing at its highest level of its capacity consistent with long-term price stability, which, in turn, would increase the returns on longterm investments. Q.5. Recent statements by Barclays Bank and the Bank of England indicate that the LIBOR rate has been subject to manipulation since 2007. Can market confidence in this rate be restored? What is the appropriate role for the Federal Reserve in establishing a credible, transparent market-based interest rate index that protects American borrowers and lenders? A.5. Answer not received by time of publication. Q.6. The Federal Reserve has proposed risk-based capital rules that do not distinguish between Savings and Loan Holding Companies engaged primarily in banking and those engaged predominately in insurance. Considering the differences between these lines of business and their related risk-based capital requirements, is it realistic to expect that the complexity of issues related to this important rule can be adequately addressed in the current comment period, which is scheduled to end on September 7? A.6. As you know, on June 7, 2012, the Board and the other Federal banking agencies (agencies) proposed to revise their risk-based and leverage capital requirements in three notices of proposed rulemaking and to apply the revised requirements to savings and loan holding companies (SLHCs). 1 The agencies jointly extended the comment period from September 7, 2012, until October 22, 2012, in response to requests from the public. The Board is considering 11 VerDate Nov 24 2008 14:28 Apr 25, 2013 See, 77 Federal Register 52888, 52909, 52958 (August 30, 2012). Jkt 048080 PO 00000 Frm 00070 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 67 carefully all comments received, including potential implementation challenges for savings and loan holding companies with insurance company subsidiaries, and will take them into account over the course of the rulemaking. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 68 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00072 Fmt 6621 Sfmt 6621 FOR THE RECORD 71712001.eps ADDITIONAL MATERIAL SUPPLIED L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 69 Monetary Policy Report to the Congress Submitted pursuant to section 2B of the Federal Reserve Act July 17.201 2 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00073 Fmt 6621 Sfmt 6621 71712002.eps Board of Governors of the Federal Reserve System L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 70 Ltltter of Transmittal IlOARoOI' G{)"'I!R>'JOR S or Tll~ FI'Vl,RAL Rf~Ek'lh SYSllit Washington. I).C July 17, 2012 THE I'RESlDhNl 01 11 11; SbNATI. TilE SPEA KI,R or TIlE I rUINeOr REPRESi:NTAlfVI:.s VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00074 Fmt 6621 Sfmt 6621 /(J liJr COIIgru.! 71712003.eps The Iloan! uf Gowmors is pkascd to submit ill; .l!iJllelllrJ' Pi!liry Rrpflf/ pUrl,uanllo iit'\.' LJon 211 of the Fi.'l.kral Rcs<:..'1VC A<.'L L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 71 Contents Part I Oren-iew: Monetary I'olicr and the Economie Outlook ... 1 Part 2 Rt'('('nl Economic and Financial l)ewiopmenls ..................... ".... .. ,.. "........... 5 ..................................................... 6 DOMCSTIC D EV\iWPMf].ITS .................. ...... 6 . ....... ... 6 The Houschold Sector .... CQIl.!tI/lIl'r Sll~ndilt~ (lIId Hfil/st hold Fmollce ............... .. Hliu.\·in~ ACliI'ilYlllllf Housillg Firlilllcf'. 8 The fhL~incss Sector .. .".10 11) Fixl'd "11"1'$1111('111 _ Inr/'lilory fllrt'SIIlIen/ ................ ,', .............. ,', ............................................................. 1\ C(lrf/orale Profits 01111 Busilless FinaneI' ........ 12 H __ • • • Th~ GOVl:rnm~nl SL'l:[ur , """ ................ ................ ,,]4 ................. Fl'lwmi Gorrf/lmrlll .• ........ 14 .... 16 Sum WId lAtal GOI'erml1Rm The hlernal St"CIOr ,.... "",16 E.vwm"mu/lm/Klf/s ,................................................................... ,........................... 16 GlI/llIuodilY and Trude P/'itl'S ....... 17 Jill' Curl"l'nllIllIl Fill(1l1riol AU/Jums ........................ 17 Nalion:tl Saving .. ............................................................ ".18 Th~ L~IXlf Ma rk~l .. ",19 .......... 19 ........ 20 Emfl/I))1l1elllund Ullrlllf!/O}wt'1II .................. PI'Ullurtil'ilY (1lul Lalw ComrenSllliol! Pric~s ..... ",,21 ............ 22 _________"".. 22 F INANCII\L D EV[LOPMIiNTS Potiey Expttlllliuns and Tr~asury Rat.:s Short·T~nn F\lnding M arl.:~ts , ............... ,' ............................. ,' ......... . Financiul lllslilUliuns .............................. "......................... Cnrf"'l)ralC l:kb( ~nd Equity Mark~lS_ Mon~lary Aggregates and th~ F~dcral R.:scrv~·~ Balance Sheel . INTERNATIONAL DJ:V\,LQI'MJ:NTS, ............ " .•.. lnl~matjo nal Financial Markcb .. AdvanCl:d Foreign Economil:S Emerging M~rk~t VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Economi~'S Frm 00075 .• ."-_-"" .... 27 .. ....... ".".29 ............ "" .......... .32 ........ .32 .. ",35 ......."--"..............-""... .37 <0 . . Fmt 6621 ...... ,.. 23 ........ .25 Sfmt 6621 71712004.eps M(ln~lary L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 72 Part 3 Monetary Policy: Recent Developments and Outlook ................................................ 39 Monetary Policy over the First Half of 2012 ........................... FOMC Communications ......................................... . ...... .39 ..... .41 Part 4 Summary of Economic Projections ................................................................................... 43 The Outlook for Economic Activity. .................. The Outlook for Inflation .......................... Appropriate Monetary Policy .................. .... . Uncertainty and Risks ............................. ................ .46 .................. .46 ............ .................... .49 ...... .53 Abbreviations .......................................................................................................................... 57 List of Boxes VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00076 Fmt 6621 Sfmt 6621 71712005.eps The Supply of Mortgage Credit ................... .. ...... .. ............... 10 The Capital and Liquidity Position of Large U.S. Banks ............. .. ............... 24 Implementing the New Financial Regulatory Regime ........... .. .. ................. 28 An Update on the European Fiscal and Banking Crisis ............................................ .34 Forecast Uncertainty .................................................................. ...... 55 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 73 Part I Overview: Monetary Policy and the .Economic Outlook KPr<~rJ 10 h:wo jJ"",\'\I JUT1I\1Ih<: flrll half of lhL'l )'ta~ with rc:.11!ft'JI' d~roo:· lie rnxlU<\ \(JI)I'lI;~y h:t; il\i n!l:1l11! (>n1y. mvd<:'S1 ~. In the Iabolf ",artol. the rill~(I( joh ~ainsh, diminrn.«I """'"IIy, iI/lu, fuU('IIloinj::' peri<J<J of imprm.m~nt, tht unemplulm<!Il nl!~ h., t-..,<,n tiUI< chanl;'<d ~I ~n tlmlcd kvtl .;n..'C lU\~"I)', MtM"hile, oonsull'l<r rri« ,""..lOll ,,,,,r tho Urla fi~ 'Mnths..,r 2012 was kl~'Cr. 00 n~l. Ihnn in 2011, ond 1oo1".-lCrm inlhll"," "'pcc1Hlions h",'~ .. mii"oJ ,table. A numm of faa.,.., ..i lllik<ly "SIr"';" ",,~nom"'W""" lh in Ih. ~,.;oo """ad, inrludiOl .. cal< m)1IOID;" groo>1h abrood "nd. fi~a1 'nvironmcnllhaliook'''1 I~ kl:S u.:C()Illm()dali~ UII<<r1ainlyub.;)u( \btsc fU.1on m~)' .ilio mlnin houl<hoId and W$l1ICSS ~ndin~. In l\Jdilion, credit conditionl an: lik,1y 10 impnlV< only """"III< gr~JII~lIy, au", <!iU.dc"atoo i""'"IOM ,,( ,';loanl and fOl"<kll"d ~Qme$ M~r<m'tr, Ih<-pomibilill'(>f~ rur· lber mal<'1ial dCltfKmilion of oondiliollS in LUNpo:, o. or . ranicularly s.,,"'" ch.n~.. in US fill<3l ""Bd;tion~ 1'-"" "Muilicanl J",.~d< ri<b 10 1I1< (lUI klok Ag1Un~llhi, baokJrop. lh< fakral Open Mark<.1 1;'lIJlmill""ln rM C) look ~Icp< to rrovid< ~ddiliottal 1MIl~.uy rclioy ;J('t~mm~~li()ll durinS the fiNI half of 21)12, In plIrticula,. In. C~mmilla>ch~n~."J ill k>,. wa,d guidaDO< n:gardlllE- Ibc I'-'1lM mer which It ~nllcipal~> the feilt,:ol fundi rlu, la r<1lI.1.io _I o.~I" 1",.>lIly low lc,.b ~nd inooullUll ~ runlinualion of ii, malUrily<mmion program (MEl') lhmugh tllt.nd of tilt yctlr, Tb<!I<' fIillid<s put dO'lltn\ll;\,J pmi'JUn: ~n lon~Nenn WI<",'$\ rales an.l m~ok IlroIid finall<.ial conJiljoo, 1I\<)n: >ICC<lmm<,dlUil\: Iban thc~ would ,.. h· 'f""~ Ix. Ih,~(by SUI'f'Orling In_ <WIIomic """'W.. r Tht [urOf"'a" 6~ IUld bank ilij! ,riu, h~s n:mained u m~j()l" JOur,,, ~f st ... l. on global filUlndal mark<1~ ea,ly in lhe )ur. fma!'ICIal il~ will1io the cum art" mcdcr3lCd som<l<ha\ in hghl of a numoooJ J'Oli'1' ;IC1iM,: ThI' Eumf"an C.mrol ll:lnt (ECII) provi!kd ~mplt- hquiaitY)(j Itt<: rtgion"~ hanks. .uro-art~ I•• den ~gr=I 10 in~n:~1it lhi: k'<ldin~ cavacity of thei, ~"U< focihtin, ancl, O~ :.."Hla= packagcfo, GI\~"'os al'fl11l"'d followil1j! 11 rnutlC\uring of r,rttk ii(M'rclgn drbt , liOl'o\"o"", trn!itllU will1", tile rum an:alncrc~ aga,n in the ij'rllng III political unrcrtainu<! ",bod lw fCOln of ~ disordrrlyGrttk (~it rl'llm the "UIU at<;l ~oJ VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00077 Fmt 6621 m~~n()11$ k'i."" at Sp;onnh Wnk. mlo.",«1 ~u"'li<)ns ~bQul III< !~stain:.b;liIY cf Srain'! 1000000tpl debt anJ lbe rc1il i.1\ty Qf (hotUn"..,.:. brulkinSs)"Sl<m AI )'idJ, \lII tilt ,owmmonl d.'ttl 0( Sf'3in ~nd <lIh •• vu\. nmllk European <:(IUnlnes "»< to""arJ n~w high!, "uro-ma lead.,., I\"Sponded Wi!h lIJJ itlOnol p.lJi<) m•• suIC'$ in late JUI)<'. illduJin~ i ••;rcfIJins.th. ~;bi)" h) ~f the re,wn", tin ..,.",;;01 batk'l~po ",d makiD$ rt~ IOYoa,d grf~tc r c""'p.:ralion in lhc,uJlCfvi~on ltId. IS UC"<:eS!lIry. r=pila/izalion "f furor'." banh. Many crilica1 d.[;jil~ h"",~"" •. n:n,.in 10 be "'lI",.d oul HI/aiM a backJrop of """tinu,d N.'", ..... '" ""ai., nlllll1lJ1d ['Jlili<;al strain Fin,ncial ma,kots "'tre so""",h~1 vo!ltilc <lV<T 1he first h.U of 2012 m<JS1l)" du<to ~"<IUa(ini';<"1 n:(Il\,dil!j! lbe "Tim in the "U,\1 ~",a ~nd the li~"cly r:tl~ M C<,"(llKlmir ~"1h at ~meand abrolW. As in\"rSlill"S' OQIIC<fOS oOOUllh<luu;ilWl1In l:uropo t4<d rally in Ih. Y<4r and "ilb d.ta n:lcasn gcnel1ll1y coming in 10 lh. upsW 01" m.rUt'Ir«lati~ brood .quity I.n.:. i~ .. """,;md risk sr"",d~ in Il<V<tlIl markc\J Il'Ir, "","cd. Su"""'lll<l1lly. no"...... '. n1lll~t I"""ticil'.nll rullal kick from ristie wru amid mtclwd roacern! ~t.Jut IhH~rt, .~a ~DJ <"iJ'met" or JIo .... 'ns ~Io!>al economIC sro"·ln. Rolkctllli UI<SC de_dormonl! 001 also QWin~ 10 IlK J."1IEl~nInS Qf lit( f",.,... tIl rale iuitl ailC\'. c"Ontinuation of Itt<: MI ~ l'. ~od in<rt4'd <X)l«l". lio11s hy maW'1 participant, of adJililmal halanc< Ih .. tllelWn, bylbo Fed'ral Krs<JW. yirlds ~n kmgcrkrm Tre-~SIlry :s<I'untic:t and C<lI"p(>rlUe lkbt lIS IIdJ as nil..., on laldeollal mOl1~ages dIXlilltlt, on n<1. Md ",adlN histM<"tIly1..... 1e",1! iIIllJllCS durin~ tbc first haU of tlw )"31. On Wan"" sine<' th' hesmning"r l~ )".r, ilI\'«d «l~il)' prices NS< '" .;Ql"JIOw< eaminl'S rem.11ntd fairly n:silirntthro"~h tl\c finl qu~rtcr. 1111.,. ruln~'l ~n ~Mual r:ueor 2'> I"fc'el1t in tile lL'Cond half uf lOll . n:nI GDl'mrrcOO:ll a:1 ['CrtTnt pac< in tm ~nl Quarter of :!<l12, tncl avadabk indicatM' PQlnl 10 a i1i1l smaUe, gain in lhc ;.:wnd Quarter Pn"ol.lIpCnclm~ ».1nlWUd '" bo ...... gh<J down b)' II '''''go of f",'(OI}' includ inll unteTlainl~ ~bout d<"'clapm'nll in Eul"01'" and tnc path for U.S. rt!l<'fIl f'l1i<)". C(lnrcrn, about thc !Irtngth .nJ ,uiil"inabililY ()f the ft>.'<1....... y. the SliU-{lncmil: Il;il~ofttt<: hou~n~ markel. and In< difflaJhi<ltnat m.nylOOllld,b.-IlorM>'crsoon- Sfmt 6621 71712006.eps Til< )'('," of <X\!oomic I\"W'~!) L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 74 Monetary Polic)' Kcport to Ihe CongrtSS 0 July 2012 VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00078 Fmt 6621 In Ih. household sector. credit <;ondilion, ""'" gen_ erally rtmaioed light for all but highly rat.d oorfQ\\"rs; among other factors, Ihis tightncss rtfi«:ts th. UOCtrlain economic outlook and the high ull<1Tlployment rate. Total mortgage d.bt d«:rtased funher as the pace of mongage applications to pIli":has< a new home ~-as sluggish. Rrfinancing ac1i'lit ~ increastd o'~r Ih. coo"., of Ih. second quan .. bul rtmained below l""rs rtached in prnious rtfinancing booms despit. historically low mortgage inl.rtS1 rat~ TIt. illCrtast in rtfinancing was partia!ly attrib\llable to f'tCrnt <ohanerm.nts mad. 10 th. Home I\ffordable RrfinaOCt Program thai appearul to boost rtfmallCing acti,;ty somewhat for oorro....rs"ith und.f\\llt.r mortgAgesthat i~ for those: whoo...ed mort on their mortg~~ Ihan Ih.irhomcs ,,~rt "mlh _Consumer credit e.<panded moo..at.ly mainl~ be<:ausc of gro'oI'th in fed_ eral 'Iudenlloan .. Firms in lhe nonfonancial OOTJXl!lIte SWOT continued 10 raise funds at a geOtraily moo""l, pan: in the first half of tt.< ye .., Those: ...ith access to capilal markm look ad'o'antag< of 10'" int.rest rates to rtfinance <:<isling debt. I\s a result. corporate debt i"uance "as solid 0"(1" the first part of the )ur. although issuanCtof speculali""_grade corpora!' bond, " ..ak.ned nOlably in Jun. as in''eSt()l'$ pIlll.d boct from ri,tier assctl Comm.rtial and industrial loans on Ih. books of bank, .. panded brisk I),. oot bo"""ing conditions for small businesses ""'" impnwed more oJo,o.lj.' than have Ihoo< for larger firm .. FinallCing conditions for commercial rea!.,late stayed r.rati,~ly reslrit1i,... and fundamental, in Ihat SCCIor s!lO\O.. d fe.... silins of imrnwemon1. Market s<ntimcnltoward major global banks fluctuated in tho first half of 2012. In Man;n. Ihe .. b .. of the result. from lhe Comprehensi'~ Capilal I\nalysis and Kov;""', ,,-hich inve-st()l'$ interpreted as indicaling continued improvements in lhe hea!th of domestic bank~ provided a significanl boost to the equity prices of U.S. financial inSlilulion .. Those gain. panially .. ' ...... d when m.. let..."timrnt "orsened in May, dri,.... in large part 10)' con=ns about Europe and potrnlia! spil1=" to the Unit.d Slat., and its financial instilutiool On balance, ho-.."'~r. equity prices of banks rose .ignificanll)" from relati'~ly low b"l. at the start of the )"ar. I\n index of credil default ...-.p .pread. for the large bank holding companies declined aboUI &:J basis point .. rot those .pread. remained .1 • high ""'I. f)"spitethe sv.ings in martel sentimenl aooul global bantinll organi!..tion .. condilions in un!<CUred short-Ierm dollar funding markm " .. re fairl)"stabk in the first ha!f of 2012. European financia! institutions h",.. reduced their demand for doUar Sfmt 6621 71712007.eps linu. 10 haY< in oblaining =dit. Such consirlrf1llions h",.. made som. busin.SSts more cautioltS aboUI il'lCl'tasing in'"tSIm.nl Of mal<rially '~p.1lIding Iheir payrolls and h",.. ltd households 10 rtmain quit. pessimistic aboultoor incom. and .mplO)'m.nl prospffit Smoothing through Ihe .ffects of unscasonably warm ~.. ath<r Ihis pasl winter, ac1i"ity in Ihe housing sectOf appears to havr b«cn a liul< strong<f SO far this )..ar. I 1O\O.. ,,,r. the ",.. I of housing OCli"it)' rtmains low and <ontinutS to be h.ld dO\O'n by lighl mongage crulit. M.anwhile, th. dragon rtal GDP gro'oI1h from govtmment pur<:hases is likel)' 10 persist. as budgets for Slal' and local g<».. mments remain strained and federal fiscal pol'-':y is likely to Ixwm. mOrt rtSlrit1i"e in 2011 In Ih. labor mark<1, gains in private pa)'ron .mr!oYment ",=gt<l225.00CI jobs I'" monlh in Ih. first quan." up from 165.00CI jobs per month in It.< second half oflaSl )... r, but fell bock in lhe SIXOfId quanerto just 9O,OOCI jobs per month, Allhough Ih. slO\Oing in lhe pac< of n<l job rn:ation rna)' h"," b«cn .~agg<ral.d by issues rtlat.d to sv.ings in lhe " ...11ler and to SCasonal adjustmenl difficultics wociat.d "ith th.liming of the sharpest job losses durin, the rtCt!:Sion. those fOClors do nOI appear to fuUy aa;ounl fOf th. slowdown. Th. u1l<mplO)'ment rat. dedin.d from about 9 pem:ntlasl summrr 10 a still.. ltvated 81'1 prn:tnt in lanuary, and it has .. mained close to thai b ..1since lhen. l ik....ise, long-term joNe.."... has sho"n liul< nel improyementlhis year. ",ilh the share of Ihose unemployed persons who have been jobless for s,< mont'" or longer rtmaining around 40 prn:tnl. Furth., m.aningful .. dUClions in un.mployment art likely to .. quire SOme pickup in the pac< of teonomic ac1ivit)" Consumerpri« infiation mo'~ dO\01\, on net, during the fi"t half of the )..... The price index for ",-.rail personal consumption expenditures (l'eE) rose rapidly in the first th ...... months of the ).. ar, retketing large illCreases in oil price~ bul inllalion turned dO\OlI in the spring ,,-hen oil prien mo .. than reversed lheir earlier run_ups. In all, th.I'CE price ind.x increased at an annual ,ate of about 1\4 prrc<nt """ the fi"t five monlhs of Ihe ).. ar, compared "ilh a rise of 2~ percent during 2011, E.u:luding food and enel])', consu",", prices rose at aboUI a 2 percent ratc over lhe first five montns of the ).. ar, close 10 the pace ~ """ lOll. In addition 10 the n<1 declin. in crude oil prices <worth. first half of Ih. ).. ar, faclOrs contribut_ ing to low consumer price inflation this ).. ar illClud. lhe de<el.ralion of non..,iI impon prices in the laner part of lOll. subdued labor costs associated -..itb tbe -.."ok labor market, and ,table inllalion expectalion.. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 75 IJiJdni of Govtmon of rh~ fN,ral &sm" ,,= VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00079 Fmt 6621 3 in January and April , Committ«c participants' proj<c_ lions for II>t un<mplo)'m'nl rate had a ctnlra!ttndtncy of 8.0 10 8.2 po"",nl in the fourth quarter of Ihis ).. ar and tl>tn dtdined 10 7.0 10 7.7 ptflXnl "Ililteod of 2014; thost: 1t'~ls are Slin gtnually " ..II aOOvt parlicipanl$' estimates of II>t longtr-run normal ralt of unemploy",ent M.anwhile, participanls" pro~lions for inflalion had a ctnlra!tendency of 1.2 to 1.7 por_ ctnt for 2012 and I.S 10 2.0 po""nl for bolh 2013 and 2014: lhrst proj<clions a~ lo-.."r. parlicularly in 2012. Ihan parricipanls reporred in January and April. in part ~lIt<:ting lbe effects of the """01 drop in crude oil prict~ \W h Ihe uoemplo)"mtnt ratee~pected 10 remain d"'ated 0\.... Ihe proj<clion ptriod and ioHalioo genually e.pected 10 be al or under the Committ ...s 2 por_ ctnl obj<cti.... most participanl$ expecled Ihal. under Ihcir indi,;dual asltssmtnts of appropriale montt.ry policy. lilt fedotal funds ralt would remain .maordinarily low for some lime In particular. II of the 19 participants plactd Ihe largel ftdtral funds rate al 0.75 pem:nt or 1000~r allhe end of 2014; only 4 of th<m SaW the appropriate rate at 2 ptm:nt or highff. All parlicipants rtportffi It,..!!. for lbe approprialc largtl f«l.taI funds rat. al Ih.end of 20141hal ""re ,,~11 btl"", th.ir estimates of II>t ItI-tl0.'pffied 10 prtvail in tbe longtr run. In add ilion to proj<c1ing only slow progress in bringing do ..'n untmplo)'ment. most par· ticipants .....' the ri,h 10 the outlook as ,,-';ghted mainly to\\1Ird slO'o'.. r gr<l"th and higher unemploymont. In panicular, parricipant' notN Ihat main, in global financial markol~ Ihe prospect of reduced fi=l accornmodalion in the United Stain and a general ,1000dO\\n in global <conomic gr<l"tb poltd significanl risk, to the reco'~ry and to a {urther improvement in labor market conditions. Sfmt 6621 71712008.eps funding o.~r """nl quarters. and gtneral funding prts..~re albiar<d by Ih. ECB's IongtrItrm refinancing optralioo~ "" Ih II>t Commill«c anlicipaling only slow progm:s in bringing unemploymenl do... n lo....ard It.ds Ihat it judges to be consistent ";Ih its dual mandate and strains in global financial mark.lS continuing 10 post significanl do.... nsid. risks 10 lhe =nomic outlook. Ihe FOMC took addit ional sttl'S to augment lhe alftady highly acwmmodalivt Slanct for mon.lory policy during the fiN( half of 2012, In January.lhe Committ«c modified ils forward rate guidaoct, nOling Ihal tronomic conditions likely 10 ....arranl.xctplionally low ItI-tls for Ihe federal funds rate at leasl through late 2014, And in June, Ihe FOMC dtcidt<l to continue Ihe M EP unlillilt .nd of Ihe )'ear rather than compl'ling II>t program allh •• nd of June as prtyiously schffiult<!. The Jun, Summary of l!conomie Proje<:1ions is PItStOlt<! in Part 4 of this rtpOft. Allh.timtof IheCommitt«'s June m«1ing. I'OMC participants (lhe 7 members of Ihe Board of Go\"trnors and the pmi<ltots of the 12 Federal RCSl:rvc Banksl""" the cconomy expanding al a modcnuc pace cr.'u coming quart<rs ond tl>tn pitting up gradually undtt th. assumplion of appropriat. monetary policy. Mosl par_ licipanlS marked dO'o'lllhcir pro~lions forcconomic gro ..1h in 2012 and 2013 rdati,.. to .. hal II><y anlicipaled in January and April largely as a result of Ihe ad.~,... developmenls in Europe and the associated effects on financial mark01L Moreover, he"""inds from lhe fiscal and financial siluation in Europe, from the slill_depressed housing martel, and from tighl credil for SOmt be",,,,,.-.,,.. ...-ere ciled u likely 10 hold back lhe pace of <conomic e.pansion ~ tbe fOrecast poriod. FOMC participant' aI"" proje<:1ed slO'o'"<r progress in reducing unemployment than they had anticipated SUttS apparenlly ~)'sum L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 76 , Part 2 Recent Economic and Financial Developments --- """'Iher and 10 >C3SO!I1II "dj""tmrlll~ "nd tbe "'"-'Ill" rloymrnl rm< homed around 8Y. t""""~t an., a ~,.. niuc-.nl d«:rtm (l'o'l"r Ill< 1311'" months ~r 2011 ~nJ in Janu.ry M.~D\tIhile, OOn,UJn¢l' !"i« inll.tkm. in p~r1 bunct<'Il by sh'rr swin.,:1 In lb. prie< ()f gal(>\i,.,. Itepp«! up eorly in Ih< )'a, but SUbsr<juenlly tllm<d down. and longc, .. t<:rm inflation "'~jW1",ionll't'mainod Itabk-(~gurt2~ Hnancial ma,l>et.< "m: SIlmC'oln<ll VIlwi1eovn the fi..t hat/' or»12 monty duel" nllCluatinlll'i ....~ "ga,JinJ lh< emi, in lbe ruru ...a"nd lb. likelyp"'" of e<;<"",mi< i""I"'1h . t hom.and llbro8d. Yields "" I~ngc'.. t~rm T'<lSury &t<:uriG",s h:rvt dtelinoJ lign;t' .. cantb'. I't'nf<'1ing fN'<!le, lIIQ/I<1ary !X'Ii..y IIO.\lII\ntQd:o .. lion. Ih. "~ak('f outlook .. Md saft-ba"011 ROIO'S. Broad in<kIt:! of U .s. ~UU)' prices 1'0'" on not, ris~ ~aJs On oorf'lll'31~ bo:onrl ........ gcncraUy uncbaog..'Il <lr !Iigllll)' !ww. a!>d unICCUred shon"lorm dQllar fundiug OIlI,k.t, wm f.irly <table. I).>bt issuano: by U.S.C<l'" r<oratiilnl "'111 10M. and Nink I""uling!~ lalj,"Cr fimll ""as brisk. In !he ,"",schOld ~or. roruum<r ,.... dil "_'I'"ndcd ..... d m<lftg~ rrnnancing activity in=a",d ",,"""Ii), rdIOC1,oi lhe d."~ ... in m<"'pgc lilies to k~t",ic",1y low kwls as ,,~n "S r=nl ch.1IgC'l to the II!IIIIC Alr"nl:lbl. Rdlnatt"'- 1'rognIm 1 I!II IU'~ 2. Chll,. on !be <1=I-'l'I'" pntt """" lOr J'CI*lII:H _ptioaapendilurc>·. :!OO(i..-11 -......r ...... .....,. __ .. ..-. ........._ ....pm<>I.-........ --.,........... ~,,,,, H. . . . . . I. . _ .... ~ t>ot-"C-_"~""''' VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00080 Fmt 6621 ....... n. ..... - , ......_ .... . - \1.,.3It~ . _ ... SCO<n ~ "' ""-<_",,,,-,11.001!>- Sfmt 6621 71712009.eps reonom'" a<:IIIily al'l"aI'S to k~ .~pa"<kd (II ~ so",.,,,,hal .k>¥.-.:r f"l'" <mr lh< firlll hair of 21112 Ihan in th. >ce\lnJ half ~r WI I. An" rising III an ",,"ual rale of 1'1, p<m.'I\l in I~ 5I.WIIJ h:llf of201 I, ..aI ~ ~<)m<SticrrOOui:l (U DI') L".;;nascd 011.1 1'"""'"1 f'll<" in Ih. fiN! quart.,. of 201 2, IiJld waUa!lk' indicalors roint 10 a still mallor gain in Ih. StC<lnd ~uall.r (figurt I). An impenanl f~IOf in~\It",mimmomk and financial d.,~Iopm<n!llhii )tar Ii Ih. unf.1lJillJ lid ""d b:lnkin~crOO in ~uropc.IGd..d. Ih.<oo· nomic OIIllook fo. Ihc ,.,oond half t>f 2012 dcp<Dd, cf\I<i:l1l)'on th ...lcnllo ,,'hich c",."",1 "",) poi",,!hd distUJ'lion, in Furor< dir«IJ~ ",duce U.s. .<1 ""I"'fli and ind~1y ""fI~il rri_alf OOrm$lic ~ndil1J! through :0.1''<:1"8<: spillo''tf dfe<.1! on U.s. tinanci", mar· ~cu ""J inS1I1UUolll' and on lwusthold and busmess Cl'nfi ....·!IC< AI the same Um<. the etonomy c\'IIlin!le:! 10 r.... Olh,,. heaJwinJ>. ;nduJin~ "",I,;';t.d -acces; II) rome tYf"'$ of h(>ll)<~ld IIIJ small I:.tsin<'$' on'ilil .• shll siubk in>tnlory Qr vacant homos. ~nd 1m.. a~oomm<>da~vt fiit:d pol;""). The W>or marb:1 n:m";"" ,..al:: 1'Ii.0I< p~yroll employment slel'f!<'l up.,my in lbe year rot then ,low"" in lh<<<CO!ld qUar\er(t~oup Ihose m(l'o',," mil)' h"," b<c~ ougger.Jlrd by ~""" rtillttd to ""Uogs in lb. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 77 - OonK'Stic [k\elopments 111e Ill)lIsdwld S«10r Q)",1if1Ml' SPtnJIII# illlJ II(Mf~tllJ f~ A~ .. risinl'al on OM"'" raJ' of *"ul 2 p"''''nl in Ihr SlWnJ half or 2011. ",al p<rs<>naI rons"mption ~'p<n. dilUm/PC£) inm: ...."'<l2'>if'-TCCnl in Ihef,1'$I ~uarlc:r. 001avaibbk infMmllion su~ru Iho' ",:II rCti dettl. ~rato<J SQIll< in Ih< s.:wnJ qUa/Ic:r (f!.!luR: 3), Tit< f,,,,,· qua"cl iw:mISt in spending octurn:d 1IClC& Mbroad array cf and scr;i.'t$ wi,1I Ib< I\()labk r~(>;plion of OUlIo)~ iQ..n<:rgy SCM'<'$, ~'hi<h "'.... hdd d"".. by miuceJ dcmllllJ fo, M:lling hecallSC "f 110<= unllta· iQnahly warm winler. Sr<nclin~ 1)11 cntfsy SCMet< 'rp<'''' '" II"", .. hounclecl in tM <tWnd qu,"", ""Ike "..ropeIOl< W",I<I fM' " .. ~ 10 , ",1.lj,,,"y muR: I}l'ir:ll Jprin\!. ln conlrut, Iht jWXof mOl(l! ''thi.:lual<:!; edged d()'fI'n in Ihr !«Ond qu",w. and rtl'<'rI! on rtlail iIalo:s !UUCSI Ih .. CI,)IISUml:l oullays O~ ~ wid< r"n~ cf i'ems '0$: loss "'ridl)' Ih~n Ihe)' did in III, ~"'I quart.,. Th¢ ",oo<ralt oS' in ",,"Wm<1 sptnding <l"t' Ih. fin.! h;llf of lilt yell! ocru,rtd ~gaimllhe t..<l:cl"'l' of the ron<id ... blc m,nomiccllall..'11S'" <1ill fa<.in, m"ny households. im:lIJ ding high u"emrloy' ,",'Ill, slul'iish pi<l$ in empklytru:nl. ltpi<l Yl''''lh in i!lCQfn<, SliU·slrtSStJ bai:lnC,-d Ih .. l~ li~1 =~ 10 S()II1e 1)1"'" of =di~ and lingering p«<'mism .beut job and In"","", prosI"'m \Vjlh incre",," in <p.'!Iding OUlpatinl! growlh tn income so forthi. ).. ar. th. p;:'. rona! JaVin~ raleconiinueJ to decline, on ntl, Ihough it """"'nod "'ttl ahoVe I<wb th31 prevailed Woreillo -. ,,1(IIh l\ggrI:ga1e re:d d;.po.abk: I"'nona! 'nCOlll" (DI']) less personoll ........ aJju5IN fer ehaIl!!." in prioe._rosc mOrt r~pidly over Ihe tiril 6", "",nih, of Ih. )"<>f thon it did in 2011. iro part b.a.U5l' of d.dining <'"'"y pri"" s (fi~'IIrt S~ Th. "iago and .aIary ooml"'""nl of rtal 01'1 ......lIell rt~eclS hoIb Ih. numbe, of houri "",t.d .nd "'..r~~ hourly "''lI~'' adjulted innllliQn. roll: 31 an annuill rale ,>I' neIIfly ]V, rcrtcnllhrough Ma~ of this)w ~n" hlo\>;1ijl in.·~ lIuimilar p.l«in ))11. Tho: immlS< in mil ,,1Igtl and 5oll.,y income so f<ll' in 2U12 is wBtly .lIti\>o utable 10 lb. m<>dcsl imp",,-.:mrnl in <mplO)omrnt ~nd p<...onol income r"f """,,,,ion (Ii~u", 4), ~. C'b>nJ;< in rd diop<>Wojo r<rSOIIOi ~:on<! '" .... "wuwt.>l"l'd"""",","<Jl(J,~11 -L. I --",0' I j 11 -_.- -, --"--r_._. ___. , , _'lOII'I_:!ItO'I9~lGl&I I _·~ 2jj1! .~._'- _._~ "!ll ll .. ~.lottGll, .. \Ioy,.....t_ .... . . t . y _ ...... ·_...,. .... ....,. _ _ tor .. "":1<1' VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00081 Fmt 6621 ~ Sfmt 6621 ~ .. 71712010.eps -~ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 78 hours work.:.!: noa] "'mlS" hon'lyeomingJ~'" lillie changtd I~UJ for Ih;~ yu. Th. '»Iio <>f nuuscl!,,1d ni,'\ ",mth to in~otn., ill tho "W"<ptc.illOVtIl up J1i!lhlly (uT'lhu In II>< firsl ~uafl'''', n:"<t'linl ;1lCrt'M<"'S ill t>olh "'-'US< prkn anJ f\lU;ly plires lng~rt 6). Takln~ ~ Iongcr 'i~ lhis raliQ ha,s b<en "" &<low UI''''"dfU ~nhi""" 1000l, ~"d ""hii<;1 .. main.. far Ixl""" Ic,d~ srrn in the )tar< l<aJinl ur to 1I1. ,oressioo, il isal)lul(tjuallU ilS II'I'~ tm'nllt "",I 2(1 )'t311- J1000000h"JJ·k~ d:l.l~ Ihrou,gllWIO IndiC.1IC 1001. ""'allh ~ were l""P"rtionalciy Luger (Qr Ill< middkJ'Ol'lion cf lbe "",;)Ih dislrib\llion ""1, ~urprisin, J\'S\I\~ 1Ii'<tIlbc I'<l:I.Ii'l: imJ'Of1ln'" oJ' bo~nt~mVnllhc ~tJO( 10= nou""hoJd!. M(OIn· .,nik, indi<;atof! of rottSUmt, scntiment art ab<:Mo tl1<irl""," (",m l:ut rommorbul h:f.'t )'tIIQ ",Ium 10 I"".~ ",,'CIs lfig"'" 7) 1l<>ll... h~1Ll debt - lb. j"m ~r mOfljWg< aDd",,"~um<' <kbI cdgtd oo..'n again in lbc firs! qllllrt<r "r 21)11 Rj Ill< oonlin",'Ill;Qntr.:lion in m,trtg.w: d<bl '<I'M lIhn<l!ll 01!'.<:1 b)' !IGIW ~rallJivc in ~~mcr crolit With the mhlClion in ft,;\oschold dtt>t.low le,,1 of II'l(Ijl ifllcml raJ", and mOOts! ,iNWlh of incom~ It.: do:bt«rvir:c , .. io lhe IIW'Cg.t10 rcquim! rrincil'aI and inl"",," p"yments "" ~isli"l hou;oll.,ld dd:>I .dati", 10 illCOlllr-<i«l'<a!<'Il furtbcr, ~n~ allhr~nd of lhe fir!! qUMI,'r, il $I()OJ ~l a H:''tI 1.uI.'ItI:n in 1M (fi~ure 8), G.miWner credil <xp,mJcJ 4t an onnuai rale "f ab<lut 6'. j>=tnl in the lirstl;'" 1Il000ths Qf 20Il driwn by &/I increas< In Mnl\.. ~villi credil. nu, romp<)!l\",11I<WUnlS [Of aboull~lhi'<UQfMl\ OQII_"mer cre<\il and plIlIlarily COnsl>lS of autO and ,IU· . , • • -- • ~ ,.... .,.. 'w._ -........,. .. _ .. _.................... . _n.(..,...,.,._"" _ _ ._,, ~"" 1\t~1I<oN_ .. ' - " " ' ' ' _ ' ' ' ' ' ' _ lO'~"""". ~- ,..-y_f«""lOl~ .. _._""""tOll.l"!«1 )01""-"'''-<:<-'' d"nt 10",,\ Th rise in ""nl\"V()lvintcT\:'Il,t W f~, Ihil ye., ..'al pnmlfily du: 10 tbe Sirongth in Jlum,nll"aJU, .. bleh ....., oImOOI onh,dy"rigioal.:.! ~nd IIIn1l.d by lh. ftdcr.>l govtml1lCflt. Mtanwhik, 3Ul0 loani mam· lainod a s1C~d) pIIoX of il\i.~ R<"l'lvmS ('OOSUm<f m,dil (primarily credil tard IrnJing~ n:mJinw much mo", 5lJbd""d .. the firsl """,lit< or In. year in pari boca"", nonprimr borro""l'S conlinuod to f= l;ghl unJcr.o.'rilin¥ ~l3nd".d~ O<.1:rail. lhe i""",,,,,,, in COft"'''III,rcrtJil i'COnslSt"nl wilh "",,"I "'SI"'''''' 10 IIt<Stniur LooD 1)f1ia:r Orin;.,., SU"''<l' OIl 0"". Lrnding Pr.01L'CS (SLOOSI ,~clic.ton~ 1I1al. d<m"ncl fi,,, __- - ", ,,. ... .- .. , -. , t , I - t II - :!III! l/<.,. -Ik_""'_""""""_lt)tl.QI Do_ - _ .... _ . _ ... - " ....... ,..--1 s.-. ........ "" _ _ _ _ _ ... _ _ .. _.,"-"c-._ .. ", ____ VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00082 Fmt 6621 " ' I'>IL ·Ik _ _-_. ... _~ ................ :lll.Q1 Dolo "".... '100 .. "" " - ' " --"---~""""""-"" .-_ ........ :.n .. .. __ -....w _ , _ \)001 -~ Sfmt 6621 71712011.eps " - , L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 79 8 MOl!<ta,,' fu~,,' RI:!Xlrl to 1M U>~ D lui), 2012 [Olorrsl rates on <.IlfUUI!I<-'f lMnl$'1ll'nd\y cdJ!l!d ,Io"'U in the lirl' h'llf of 2012. and Il"/'Ud.< un th<st [!\it"1 rdat"" IV Trta$ury "",urilIN <)( tQItlp3nbk ILWlurily heid fairly Iltad)' In pIIrticular. iDlmsl r~t<$ "" now OnW loans <.Ilntil\ll<J 10 bt ~"il.low_ 1[".... '~r. Ih. 'I""..d of nltes OJ! <",dil",n.I klam ",I,,"... III L/le I"'~~"'J! TI'lOIlUI'Y yi.ld 1111$ rtmalfl(d siD~ Ih" 'nd o[ 2iOl in rail (Ij' ",il:inS .djU3Lm<nli made in rt3poo:iC 10 J1I'O'Iiwns incluJed in Ih. Crrdil c.n.I "'o«Iunlllljlilr Rc"lJ".l"Iibilil) .nd Dii'Clos"rr A<I \If 20"9.1 A~e inJ>c.l4oNof OOIISumercm:iil qulllity iml'fl)'loo [urth.r in Ibe firs( qUllrlu I)[ 2(111 Tbt dcli.qurrn:y 1'111< "" "",Jil <.uti luan$ rtg;Sle:rrd il; I"....• dL If\~ <on<:t Ih. omobtg.n in I~L Tilt or"""1 ;mr"".."n,,n, ;ml""'l."ll), ",",'ell M rmg.'on~ OOIl1posi. 1;'11\;,[ ,lui'! in INal credit ",rd "..t~ncu \(N-lrd I).ormw. t/'$ wllh 1Iigh..,. cmliL=t\'S. ~". in p;!" to' tishl,,. IenJing ,lanJanis. Cba~-()Jfs ''" 01\.'(1;1 card lClli.lls .oo<k<:lin~. mtcltinS \c"<i$i!IJ1 iltCn 11111\ •• nd (l( ~7 DdiMjl.ll.llti\:5.nddlarB"-<,fii on Mnrtl,\lhini OOn5UnW! it>11I1 al c~mm~rciol bank! 01$0 .....lfCd \qII..... 10 !rltb '1;$~lly bclO'O-' ll\<il n;<Io>ri<;a[ N>l'ragt~ In HJ~il;~n. I.... Jdluqu<ncy rale 011 ~UIO loom .. fin""", Ll!lmpanics Ikma.;..-d 51itlUly IV ~ \(>1:1 til:!l is <1m IIu: middle of II ' hlSiOricW rang<, I~LI.l/I"" lIf o;omUmtl iW<1-blIdtd >ocurilK:,{AII$) in Ihe lirS! hlll( Ii 2012 ~d iJ5uane< r\ll' Ih~u~ I"'n.,d In lOt I bill -"'3S slill bcl<l\l ['O'N:rISU \Nol; lfig· UN 9~ 1>SWI!lC<'S (11" ,,'<urilie! bili:r;..! fri aUIII kl<lni <wmillaltd til< IThIrtol for most uf lb. first holf, ,,'hil. sluMnl Ivan AHS liSU= W3labouIlh< ~m<' itS in Ill< pa:lt 1'"'<1 yea .. In OOtIlr.rst. i$su."", of credit CliIJ AfiSn'molUlcd weal< til, mrut ofl~ fil'SL holf of 1012 IU JflJ\'I'th of erNil canll<.'l3ll1 conlinuo.! \0 t.- 5<lmo>"h~1 jubJu,"lI a:tJ Il'IOS! major boInb hJW clioor:n 10 fun~ such loans on lll->ir b.>.lallCO' shed.\. Y.. IJIlln A~S ~nd III->ir ~M;. om <X1I!Iparabk·nulurily Slt"ap rales we", link: oh-..ngod, on n<l .....llh. fil'Jl half of 1:()12 ~nd h<IJ stei<olyln til< I~w rMJ':llbathil>~ pm'aikJ 1,"",,<3/'ly 20IO btc.,"" A"lil'ily t. Ihc housi"l: ...,Ior "rl"'ars III b< 011. "rlr<nd. IIlI-dt fro",,, \~ry depn:<sed Ie""l n.~\IXl'S"~,,"IlI<F«i<o>IR<"""II"••.!'.~_ .......J~",.."_II,J"'.'<.l_'ilIrW)- "'_J"'_"'_"""...... _ ........_ ..""" :!. Tk"' "o<lIo.b~_r""""""UutpllO<_"".",,_ VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 . ,-,..- -..)d. ~rddual I. .--- Frm 00083 Fmt 6621 " --. Sales or "'·..... nd o.t~'n~ h()m<>h",~ rm 0(\ f~I IhlS )'l'8C. ~kd)' wrr<>rted by the low kl'd of ho\l!jC ,,,,,,,OJ ~a~ by 10'" '"tore!! rales for COnWlIt;ilSlal m~rlglgo.'i, f\lQ"''1heles.. tlw l""lom Ihal h....,. rtilr~III~J d'lIlaDJ f""'-(N-1I<r-«cupie<l nouSlog In """ot yom h.1I> )~I l~ dmlf'l!~ M~nYl'l'lenlia! t:..y~~ an' ,<l uctanl 10 pUr. clwil homes "'-'Cauoe ,,[ oa~ln¥ OO<IC\,"Qj;;bovt futult' l.rolll<. cmr/<l)'lllCDI •• nJ Ihc Ju'CClw.. ,,( hoU1< pncc~ In aJd;llon. li~hl mor1,~ll" finan~ cOIldl1l1ln$ I"""'ludt m~ny borro>omflOO1 ol>l:llnin~ I1\('Irt~j!<" orcJit. M~h 0( II!.: h~m. purch." J.m~nd thlll docs e:.i'l hJI ht<:o chMlndod 1\1 lho al>uotil4nl ~t.lck Ql 1atal\1 MUses. Ihorcl>y ~mill1'li III-> "'1(>;10.": of_ C<ll1II">C1i~n lICIiv;IY III loch ~xpolniilnn vf Mm~oll al h'" oo:~rrcd. (jlltO lilt laf# nombe ... p[ rropcllits 11;11 in. 01 at rl>k or b<in~ in. fi!n\C;IQlIllc, lhit overhang (lI.'tmllil;ol)"tQ C<.>nliollC to ..... igll on \\<III C<.>n.llrUCllun a<1l1uyf~r lIOn'letimo. l).:spito Ilto~ facton. housm~ SI~rLS I"we ri:len grad~ly 110 far Ihll )\:!If(ti~un' Ill). i"rt!m Jaml4ry to Muy. SI!)g).·fMlill' hQ1I$C1 \\otrc iLatlcd 011 an aonulll r.lclJf ~ 1 495.uoo unit~ U]'> [n\Jt1 450.lU)w L/lo ,,",,000 hlll[ or !OIl buL los. th •• h.df <>f tho .. CnlfC r~1Jf the p;i.'1 31)l~.rJ. Allbougillhc Un .. .,~Ml>Iy 'II';Irm II.lnLer m.)· h(IW(I'otribultJ IOlh. ;n=Mt. lhe untkrlyi~ pac< 01 il<livi!)' likol)' ff!';e 5o.'mo as -..-.11. I""lord . .w~ OIl !ing).·r~m;ly p..,.mll jS>Ulln~ 'II.... kh IS Ic~ Ukoly hI boart",loo by " 'CA!herl.oo 1Il1wrd u~ ~ lillto frum IIJ Ic\d laiCWI )'t'ar, fn lho mUlllfQmii)' '''''' \<If.ikm"od oas~mi"r",d ~>bust. LIS m.)Il)· indi",Jllal~ and f"mili~ Ihal ~rr unOlbtc or UO'lli1linll<! pu rcha~ boJlM:I h,l>< ""ugbt uut ","1.1 unit~ ""~ ",,",11. L/l< ,·ac:m."l" ralC f~r ",nlal hauSoUll hIlS r:l!kn IQ ill' Ie ....'!! Ic,<l ~in.:r 2002. flULLU1, up"'aro f"I\-"i<Urr ou rcn!SIIod Jpurring n.-w a'l1U1r\K1i01l Owr lilo: firl1 IiI'\! munlh. Sfmt 6621 71712012.eps had Jil"'f1glhmed and !<Iatloar<ls ha" ta.!t<l. on "'I. for !ill con>umorlo.n ca~ I L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 80 TIl< "'m< r..,l<m Ihdl.1't n:'IInUning~ng)o·ramily -~--- holUing ~)IUIru<:1ion "",0 <;<)tIli nllt 10 "",w. "II ho= prkts, ii>clliding Ih. blJ< in'~!\I"r) oI \~canl noll1<$. I;,hl morl!!ll8<= cn:dil eonJilionJ, and 1",,1:.1\1$1,.,. d<!ll~Dd M Q!1~ du"n~!h. . '" ,._._.... "".., n._""~",_"",,,)lI)!oI! .......... ',,- of the )'Oar, 110\1' muhifomii}' pm';:"1s ....rt Slarl«1 III .n "'mt'C annual r.lIe of.oo..l 22S,OO) "nil~ up rNm about 2OO,Imin lhe OC<'O nd hatr of 2011 bul :t!ill bdll~ Ill< 3I.IO,ooo.unii r~IC Ih~1 pl'l:\'!il'll for much of Ih. pr<vious dox&it. IInu", pri~n.;ij rn.asu..:d by KVtr.,] nali,'IU~ in.k.'I(:j, IlImN up in rtttni m()fllhs Mltr ~dgin~ dill> n further, 00 b-.l!Jr.tt, i~ 201 1(flgu"", II), fur ".ample. III< C()rd.og)C lY!'"'oll .i:l1es ;ndox ""'" 4 p<ro:nl (nol an annual rlli<)OVC1" tJ,. fir" r..-. monliu:of the )'.ar. This r=nl ""J1fO\..."..,1 Dtllwilbnanding, Ih" m<~u'" of 00...,. ('Ii""" """,:oj",30 r=tnl 1x1_,1S I"'at in .'1116. -- canl. Ih. dl"Ql'm m()l1pg<: rales 8,-", ...all~ ditJ nol totp fllIU ,"'ilh Ih. ,\eclines in tJ,. Ii<Ws on Trt~"ry ono mortgage.ba,kcd IC<:",iOO (MilS). ('I\'bably rtHctli~~ slilI·dwdl<d ris.k :rvt:rsion ~nd ""II'!< C~fI"C;l~ .on· slr.inu amOll$ mortg.>g<: origin:tlQIl- Dc!pilc Ihe clrop in mO!1g~ ral.~ Imlny polenl,;lll)'qWil"'-Jrlbyl:»r· ru...crs ba\~ h"" difficulty obtaining mort~ Of n:fi.. Mncirli ~"'" of litdil Jianu.ard! and (mns (~ lhe boo:"Th. Sul'~ly,.r M on~ C",dil"~ A.. Hher fael<)f imr<Jing Ih.lIbi!ily of m~ny oorro.--rrs 10 rt/i. Manet, or 105tll tJ,.ir heme and ru",h;uc • "'" 0!Ie. h:l$ hI:cn lhe Pl1-"<';JjC!11X Qf "n<.icr"';!I,'" mcrt$"~ 0...,.:>1), rcfinan~in~ lICIi. il~ in.:~ in Ih< SIXOnd ~ual1<r)..,1 "'as S1illlru Ih~n mighl Ix (~f'."'·I.d. giltn 1M Itvtl of ;'ltCfI.'SI rales. ~nJ the plI,.~f m~ntmgc ~rrlil;31ionj lOr hom<: pun:nas.:s n:mainw sluggish Ilo"'~r... finl~i!lJ acti';ly allribulod 10 m..,,1 rhI1lliOl \0 Ih" 1111 RI'- tlno uf ... hieh d""inaled cat" on !<-"n·ltl."OII"" 11IIiros for tJ,,,,,, wll" "~"'" rtlioanting mort~gcs aln:ady O"II1<J by gOl'tTtlmcnl"f'OI)5<)!N t'1llrrpnStS (GSf.sI- n-s P!<UU"P OI~r lh. filSl half of Ihe )\'<Ir. Ino;<31011 <>f eredil quWIIY '" lbe I'eSldrnliol mQrl· ga~ ~IIll"ClInljnll<!l (0 I'tnOXl ,lfa'nl OIl homc",",'nors CQIlf!1lnlin~ JepmseJ twm. void" and high "nem· plo)m<nl. TIlt fraclKln Qf cu""nl rrim- m<lrtpgl'I 1.>«1Iming ddinq",.,,1 mnain.J at a hitdi .,,,,1 bul o. - • • .. - » • ~ ~~. _ :'IIJO • '----'----. 2OIJ'I !!Ill . . FIIM_ .. ~..w'_ .......... _ .... _ _ 100 _ _ ""' ...... -."'-01.1\11' 110.-'" ~,..,._ . . . . FlWA_I_Iy . . _ - , . ... OIl'" .. ......... - . . . - . - ",.".,.1 _ I"""-< -~,.. ,~->;c.... -~~.(~I \t~ "~ n.~~ ---.... . -........... -.,--.. f'IFA. f«In>Il'-_< ~1<o~.C~ A.-.. · r"" $O~_._A_~ VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00084 Fmt 6621 .- .......-- "',~lIII'!-n.c"",""",_ ~JIII! I I I I I I --,.»ynr---<---<.",....... liIo1! :0_ lPIII lPIll n. ....... MlI., ....." Sfmt 6621 -. ... _ _: ./flIl1 ....... ~ . lOll (I ,'1I~ ... 71712013.eps - rala; dedino:d 10 h!>loncaUy 10'<1' ~~I s fir$! Italf or 2012 tfiglll't 12). Whik <ignili. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 81 l(l MOrn:lary' Policy Ropon 10 II!c l;lngmsD Jul)' 2Q12 The Supply of Mortgage Un>dil """""'f1I<KIW~"~~Iht-i<np<.oI>I\I ("ej,", II .... air", ,II< d.o_wl ('" h<Ming .",11 h'" II", "'t<lYerf in II", l.......... g!l!(l(Jr. lcllding5l.. - d,'nl<"I'I .... w h. ''"''"'''''' ' 1' 1ig!>I<I 1".. ,1"'-"1 """ ....'" ~eb· lr... """;I~ I""""", I"ely r* ."''''''1: hi"")' """lI'iI<>kh ft. ... pul<N!ihfl """"'s IIcroodiRglV II .. SeniQr IJJ;tn ()I'tj(:~{)pIrl"'" XI/\',-,,/ "n Ib", lJoMi"t; P~""(S.lOO';). (,"'" ntid-1OO7 "'I(> 2009, o.aw, JoooId'-"'" li&l>l_ 1M """'-"'8''' ......t.ttlSIor "';&,.;01 ~ Ul bomw.<. wilh I1ri",. <"edit ~ " .. ""'I' to.w h'" C~as<.,J >I.Ind~ .00 Ih", 11igu'" AI. Io\o.Jr<""",. Ih. ... rl< .. k>o .."'t ••d;,;""'" """"S"lI"'' ' ' - Ii""", iii be "~"Il:d "hi\<: lile n",,'" ~ ~ ~rit"."OOO"J...,,"", "~~.....;d,,""J SirnlI.rIy, II.,· oll,# '" ~ .."'~ "" "'....,urij;- .,,<'<1 p<\trII' """'l?8'" h'" ,e"",,,.ed.lo:v:Ud ~oo;e IfflJ,>n ;hiite<l "",,~,d h't:! .... -<;lied 1pQ«(lW'" in 200II (Iigut~ ft~ II~ upwW .hilb" ~Iil "-""'" ~ -..:. ...;dtn! r.... P''''' boJm:t;, .... wll<) Mi.",1Ced I"'it """'!?Ir' ."d ('" ft'(lMj 1I<>u<ing A(""""~IJ\lt;>r1".,.,~ -., " • ., • , likely ",n«.~m~ In rin' $lricl<f underwrilinl'- "f mQr<-n'!Xnl originlliool AdJllkmrilly. m(a,;'\,r<:! "of lalC-5l"i< m<>rlga.... ddin~\k'IIC). ,deh as I~ in*l1lory of nfll1'-'flits in foox:k\sure. OlIllmu,d 10 linger ncar Ih, rook in Ill< firSI q~arlcr of 2<J12 inllUrt HI, C"J1\l!S isJu'n<-: of M U~ gu'ranh'rd by GSI~ rtm.'ned onodC:f;ile In Ihe ~($t holf of lO ll. Nn"SI<:n1 wilh Ih,lJ,)", ft;loI.'" of mOl'\~~ ~nginalionl In oon· Imsi. tlte oe.:uritilali,'n nI;nlC:I for m<lrlt~ kxlni 1101 ¥u.tranl<'Cd by a housing·r<:!~Ic:J GSlO or Ihe Fodtrol Il ou,il\,/! IIdminislfIl1ion - an Unflol"anl jOur", of funding Ixr~", Ihe <Ti$is for prime·v"'" m""gages Ihill e~""CJcJ Ihec:"nronnm~ ~an $i).. hm!1 <'OIII;U· IItd 10 be ~liallydC«\l, VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00085 Fmt 6621 Ttl!! 8usilleS.' ~or n...,lI llt"m_1 Real businm; 'P""din~ f"" <quipmcnl 3nd .01"1 ...•... (r'&s) m.. ;II ~n ""n~:d rale of ] Y:. pcrcctIl in lhi: lirsl quart« of .!OI2 afler h"'ing ,;,.,~ al a doIobl<-dipl r;oa:,on "mage, in tl!c..cood balf of 2011 (tigun: 14 ), Th< dowd""'n in I!&S in.... I!Il(nlIf'O'l1h in lhe fir>t quaricr """ fairly wide<l""ad aT<lS!l calef"ne" of .~uip"""'l and ",n..:are. Thi> do",I'''I;on in I!&S ,prndin~ oIoo¥ "ilh Ih. """,.1 ,oftening in indk:.:il<m of in .... "'TlCnt demand. ",ck .. ~ur>'()~ of bu,iness "nll"",nl 31Id CJlpil:ll <I'-"ndin~ rI.n~ m.y oig.tlal "'!DC Sfmt 6621 71712014.eps niched JcM.tt. OQ~t. OYer I~ fifSl h"e nlonlltt of I~ Y~Ar. - .......... ',,' _ ...... _"IU:ll.............. _ _ -... __ I_.-_ _ ~ ... , ,... "", __ ""''''''..._.lOO'o<. ot. _-.._ '..... _ _>¥'_ _.._-"1U'O .._ :.... L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 82 ~~~,,, ... cJt,.. ,,.,oo,,,,,," -.' .' ri .. ",;l~",,"'!~_.""d'<I"""iI,'I"· eoi"&G1~""'g~w"'''''''''KN.t<o.''''''" 1M<. """J~'l "". iodi<;oe ,..... ""~ mo.ll ont>-N!( ,of~!(lo"."wIy~:I<I"""iI .. ~If~. ,_ II"&" '" hn<row ... "',h mod;t""""'lorId '0"1140....... ';11;0, ""'.. nl' .... kMr, I'fl<h 01'1>0 '""'" :./low.. , by tl ... gtM'I'" ...... ",,"""""'" .," <~~.,.,. (GSUll~n~ M.: ond r~dio ~I«. 1f>Ol .....,1oo I... j"~w(~'.d ""Iy >llgl>tlyftt"" w.o. .'- ~'fIbIolUl!e ... prilSlOOSw."' ...I'lI 'Q i<lemiiy"""""'1U II .." l;d 04 W~""~ KI <>IIgilliIIe"""",CSt..,ligiI'" ~ nw[,,,:I<I. In"" ...... "" .. dy<... d .. ·""'" ;,,..,,.,..,..,,' 01 ""'Y """,~ .... ' _It.. ~ "'" iJ/"''''bxl:s' 01 1It-lir.q...'" "","II"j;e>I>j' ,he G$I,- ,' ... ~. ,II< fIU" ~hii'r.hat ,,,.. GSU "'"!;!" rt'Q\lI/': ",~....,,~ n'l"J'<-1, .... loans"~ h any urld .......... ,'\II ilfl'8lJ 11r;· 1~,..8IP'io'Slh:ll.lhe .~n~ ''''' ....e. 01 •..,..Jit"",., lI... C"'~ is .. in~"""'" (~. ".."" fwo,~her~w ....~ O'!'dIO>""'" in."..,.. ,"",,. YPI)' ;"","n",. "r ol ... ~ '"~ 01 ""'.,....."t~ (I)i""", ...... od W "'...... n..,1I":II" ;""""'''''". i<>I:ludingU.. W...1ff difliru~th'" 1_ """""'1.r..uinob~~""\Jrh~, f>/..... ""~ ,h., 11"-')' 1...:.1""" II'" [1\"'" ,,,,1.I00I< 'm;, ~lt I.. " ..... otk ..,c.., ..., cooc.n,"","" ba<t\., .">ling "'r"',....~ I(J ,e<iol.."ioj ,!I-<1IbI.. ,,,,,e:,,.. 10.... ",.1 ,.,,."....1 e obI." .Im:b ,~"'t illaiw ch.nSl'~ lIII...... b«yO<l;.,rb, (0< ct'''''8I'I: ill rloofl 01«1 ,.... 0wIy r, ... "'''''''''''"'t".. 'l""IIIIy .. 101)' Wffl!"'" ;""''''!IOOn Ikw,., rrll<>'o.d [1IOII<l~ 00 llIe p;!rl ,..r blIsi n<~l, p<rhaf'l! rrl"led I,) 111e 1,1,,"1'00 in EU!<lJ'r. An'rllO>lI"g Albus1 gaw thro~1 ml><h ~I 1011, in~sllI\tnli" n~nr.,;iJtnliai mu..,ul\'$ edged up in Ihe ~rsl quartor of (hi:; )~at. i\ drop io QUII"Js 1M drilling .nJ mining mU.1Ur<> " .... pro~ retaiN 1(1 1110 Low )..'1'd of nalUro] ~as prir<l;. OulSldo ...... the drillil\(l ~nd minin~.ltvn<lll~ irtv'.<lm<nl iocmued .. "" ~nnual nIl.of 7 p(I'I.X'1Il in lll<~'" Quam't. broadl)' , imllar I" ill ...irI in It\< fuuMh q"""er M 2011 Allh<l~gh ~nandn~ c.)fIdit i(ln~ f~, e~i l1'll$ properliol h;r.'~ .ased lorn.', Ihi')' "'m~in light: mo"'O\~r, hi~h '>ICaII<y ral .... I"", <Q\l1l1\trcoal,..aI <SIal. and diflku]( fln.ncin~ wn<iilioos for ""'" con""'~lion will likely \\"i~h on build in~ """viIY fill" Ill< fOlTSt<'abl< f'1"'" , :M ,.... "'"' "''' "'" An od.liliona! 001"" ..... l~hvu"'h(>loJ( ~'o""'~Wo('<!jl;. ,~...,,,!uityth1l! h",,,,,,,loed tmmlh.dod'..... how-pr>.",;", ....."m ~_Itou!;',1y 011<'' hor 1>0.. I(!Wffi" ,,0<1""'''''00 "",,. to...- ~" .. ~ "t>oly 13 nlilllM \IOOj<>1.,ldl .,1111. tlq(j~~, 1>0<1,....... ..-. 'NI<ir.Io;cl it. II",;, ."~~' w' ",fio".~l' iIIIo, .... ~, """'II'" IJI~: .h"Y '''''Y.!sn ","I ,io(>oo".MIl' ~'n•• d b)' ,ht dilk"lly III .~"'U'1 ,I\rjr CU'- ""'''W-' ~.- JIlrt'tltiN)' Jnrtj tm"., Finru accumuiJlted In\tnt~n<s in In. fil'S! quaM., III P""" U io llIe r{HIrth qWl"<, Of Ii:« )".' lti~ure 15). M<)Ior vthklo inwnlQri", !UriC<! ip lbe firs! q ...n.'t, -;os autonl4<r.l ,..huill <.\<;don' illI'onlorio< 10 .-omfoMabit k'voll ~ntr \IIItura! dl$Mtm dis· ,UPI<J l!l~baI sufltlll' ,halns in WI!. S1oXtbuildill,g ~Uliidc' Llf m~IO! vdlid~ modc-l'1uM ~'hal from .b.>ull~lam~ IIIe fOOflh .... Udrtrl j'IliOC<lfaoxumul:\lion. l n\'tnH)I'J~O JaI.""l Nlilus fill" mOSI ,nduMritHO\~"'J by !btt'tnM lIuf\:Ju'l book·,-a)u< dfda, ~s ,,~IJ ., SIlrw)~ of llri:':alt In'''ntOI""),satil(ilClioo _nJ p/:on.<. g<'Iltro/lYluunllhal il<"b~re r.,rlywell ~i~td Wilh the 1);l<.'C ()[ salts VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00086 Fmt 6621 Sfmt 6621 71712015.eps r~lurc; L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 83 12 MOrn:lar}' IIJIicy Reporl 10 Ih. l;)ogr<:!$ 0 July 2Q12 _.__ _. _,---- _ I), C."..., Plllll<II>OI'P!-<" """''''''''' del"'l""n' ...J r"~"""'" im'__ Y. ~m-12 ...... ..- ,. u .~Q " " U ~ --- ... " " ~ ~ ~ " I. III ",OJ - I----._I~ ~l .j.' , • ,.• ," ~ ......... to. _ _ _ _ _ ,,,,,,,,-, ........ ~_ ....,.1II'l llot_Iot _ ..._ ....,. ... .-l_,., _ ..._ _ _ .. _ .. _ ~ - ' . I Q ' J l r , --- -- ...... _ _ n.._ .... _ _ ......... ""' _ _ IJ'S A_ _ _ " ' _ ....... ~-.--- ..... .......... -- • • _. J ,I ',' 1I " LL " • • i\~le ~p:r.t;"~ <-arnutp per 'ihw!<1T $&1' 5(X! obout 1 pelt'.n' at. sc.~nJ!I)' aJjU>ICil ~ulf\uly "'1< i" Ih. [J"1 q..... rter (If 2(111, Fil\.lllQaI 6"", a.:\XlIIntrd fOl' mOSl ,1j" til< gaw. \\ bij~ rnlJiL< f", riflll.\ In Ih, nonf'Mrl<.'ial S<c10r ""'" about unch:llJg<d ["'m,Ile bish h....~1 s<\''11 in the fourth quarter oflast )1:3r. i\s of I"" end of June. [!ri,';lI~~orHnal)'SI' pro)«;t,"\ mo.lmurrarnings groI'o'lh lhf()UgII rho end of Ih. )".ar. The TIIIH) <If OOl"J'llrlllC pmlils to ~ss n~'ional prod. UC1 in Ihe ~rs! ~uan(r of lO t2 h",(ml aWlind ill b~ lOI'kal high. and ,ash 11m. r.:m.m.,J lotid. ln ~ddil ~)n. (he rllli;, of liquid asso:(, 10 lotal ;u,o,:" ",ml;nu(d 10 Ix noar liS Iligjl(<I 1(','<1 in molt" than ltJ )"af~ and Ih. shalt" (If CIlt"(1C>1lll<cash flow nocd<d t~ <>;Wer m'orrsl '~ll<llses fC11Uined low. Again>! (hi, I>a<~drop of ~n· mlly .<Irong c<lI'J"'tille tarnlngs and blil.nee Ihetl:l. ,ltd;t M,nl upgrll<l<'S<:OOli n\J~d 1<) (>utr«~ down· grade! lor nonfinan"aJ corporllhOnl., llI<l Ihe oonJ dcl"auk TIll: f.... nl'nnnaf'l<.i. finn! n:malned low in the firs! h<llf of Ih( yell( The dtlin41.1Cn(:~ .;\lC cn commrr· (ialand ,ndu,trialIC&I) loans d«...taSl:d fu.lbor on lhe firs! q..... ncr o.nd al'!lfoo.thod Ih' (ov,~r end of it. his. firms~ t(\fICa) H .. VerDate Nov 24 2008 14:28 Apr 25, 2013 "...."'t-._ .. _ Jkt 048080 PO 00000 Frm 00087 ........ Fmt 6621 ran&c. "''I!h ool'j).'lfal( crwit Quality n:mall1!ng f\}bu>t. oon· financial finns ....m ~hIe to ,(>rllinuc 10 ra,S( I1.IOIis al a ~.ncrally llron~ raox In the firJl half of Ih~ )"(It (fi,ure 16~ SO far Ihis )·d r. tl()nfinanci<ll commerc,J pap.."f (e!') oUIsianJin8 \'ill.lIOOut unchan~d, Ikm.l issuanl."( b)" bo:llh in..... I""'nl· and Il"«ul;~i"'·gradc nonllnunc;;il firm, ......Imn, 0"'" lb. finl1 rOOf monlre of II\( )'raf. Oullp<\:ulalil'c-grad< aw~n,.., weaktw:d J<l111( in M"l''IInd notlhly furl her in June. Sfmt 6621 71712016.eps _ ~ ~ OGoi _ _ ""'Iiooll>f"' _ _ ot _ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 84 16. Sd<cl«l '_I'OfIOIII>"" 110' r,"""" i", --_... ro..,"...... :!CY'I>-12 .-- :1 _ _ _ _ .~ (Of """r.......-.;,I • • • ... ~ ! lI.llS ~ ~ '·" • • • + ! lI!i'IIl1rll:llUO"lllU :till __ __ no.. .. _ "'" -n.. _ .... - _---,. ...... s.....n ~ The tnSlilUtionai scgmontol'lh< , )'ndicateJ ~or.geJ lo.n marktt mnain<d "'lid in Ih. first h1llf ~f lb<.' yO.,. ",pomO!.lly !upponod ~- wntinued d<llland fOr loam from rIO. bank inmlors.1Udl II> ponsioo pI 'll$~nJ in.uranCf cvmr_mlO' lfigur< 11). In .Jdili<;m, tllr \~~ ume ,~- newly ostab!i.nN coll.lualil.d I~"" obllll"lio,)/I!";' f.r Ihi:! Y•• ' ha, Illreallysul1¥..scJ lOll ""d, MU(h af Ih. b<lI>J anJ I<WI l$SII3JlO: ,,-as n."o<I."IlI), u!<d 10 n:finaOO'. ooJ likely ilro 10 .~lmd the m.lurily of, dlshn, ""hi,,,\'On 11lo It",,- bel of l,'ni-·Wm i"ltTc&llo an!(I~II1;l11dinjll1.ommi:rcial b.mklD! orp· nllalton. ln IJH, UnllN Slal",.~pandN 01 . b~ pac.: 10 Ih.!irsI bJf "r 2012 doopilo di:d i""j in I'" holJ,"p of l!lfh loans by U,s. brJnellcunJ agtncics of [ UN· f'CafI inil;lul;,)nt The stren~h iSCilft" llonl "'ilh. rd.- ...-,",",,' - livI;L" lali<' number of ballls, "n bal_ncr.iIlal h..." ...pont<! Slft>IIgt'. tkmwd w,Ckl loQn, in lhe f'tt<nl SlOOS {fIgu~ \8~ Mnrw>'<!, in Ihe "rriJ SUXl$. bMk! conl;n .... d !<> 1't'f"!I1 ha"ing tastd both I'I"n .nd nl'opri<:t 1.1m.' for (:& I loalU, Ia.r~y in rtSpi)D'" lu slrong 'otnl"liri<m from 0(00 bo.nks and oonb<tok Itodo",- Tho ,,,,-I<n! of e.. in~ J:""rr.lI~ has bo<:n yeat.. for tI.t< wd middle·markel (rrm .. Thill Sllid. """"rd· i!1J: 101M Su.wy of Tormo or i1lliinc'<:i ~ndi~ IST HL~'J1'uJsO!l C&I ~1IIfU""'! bHn~s' rop ~f fuotis. .. hile ""nlinum~ to trend down gnodu"Jly in Ih< February and May ! U,,'t)'$. i\I'<.!AiI! quite hi~h in hisIQr,,'" I<rms. SJ'f<'l'ds \'0 tll:wiy i!.slIOd I)'ndicawd loan> h"'" illsol'tlT1:UJl\.-..l ""rne-o.hal "" ok IloITV"'inS oondilionj for 5ItlaD bu;inC'SStj s.ner:.!!)' hll"t imrfOl'td <lI't. ill. palll f.w yom bul ha>~ door "" fU~h !Il\'I'C gudulilly Iban hlll'O I».dilit>n~ fQr IarJll'f firms; 1I!OI'roVI:~ II!< <ltmand f(ll" ('1"<dil from !/lloll finm appamtt ly mnain" ui>du,d C&lloam with origin:li amounl! (Ii" $1 milh<)ll or kss a l"l'Il"/.harr of ",hich Ii};dy OOns]J1S of loaM 10 lAllall bwillCSS($ "'<n: aboul ul\I:nangro in Ihe fits! ~uarlcr.) Ac.;ordin, I~ msulls from surl'<:}'Honducl<iJ by lhe N:uio(kl/ Fedonll;OIl of Indtpt:nlknt Bus;ocss durins Ihe first n.if of Ihis WU'. th. fr>lClion (Ii" r,,!tIl "; Ih I>.:>rnw.inll need.' Sl~)~ low (fi~u'" !9~ Tho I\I:ll"'1"'nlllg< of n.-;ron· denls lbat found m'dil mOrt diftlcuilio IlblIliD lhan .i b<(Jt1pIt-. ... "'.Cot.l ",""d_tlt/oOCoIl ~ .. ,II< _ _ or''''_orllw~ ... 'II< _lor 1II<!(ouI _ _, Ii, o....s. '" wooiIMII ...J d<o....,.j (,_ M"",,,,,,,I:oM ~ t.;.-. 19') 1-11)12 ~. '" ----- "' •., , . "' "", • 1"11 ..'_- _ .... o\oIiI. .. .... S,.'"" -.. . _ _ _ TOt_r.-1"11Wio ... .,.0.-1_ " " _ _ , '""" n. ... _ _ _ • .....,-"" _ _ _ por ,_ _...... __ ............. lIl tl.....,. __ ... ;jlllQl ___ ..... rw_or--... ___ Io<Wb' .............. _ _ of_ .. _ .. ""' __ .,... ____ ,.-0( __ ___ ~~b _1)' .. _ _ 01 _ _ >... ....... """"""" ....... """ '" n> F _ ....... _ _ 1.oMQffi..... , . . . SOO"l' .. ... CoIli.,..t. _~_ VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00088 Fmt 6621 Sfmt 6621 71712017.eps -~'-("..,...- L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 85 14 MOrn:l:<ry' l\Jliey RtporIIO tl>< <,j)~DJuly 2Q12 - 19. Na f'OIt'''''l!'' 0/ fin"" ..'~h bom>oiirQ "".... 1'1J.l-3))2 20. D<linqU<n<)' ..100 on C<llru".,..,,1 1'<01 ...... ~"" •. 1991-:!Q1l - • " '" ., 11 1"1 I I ! , 11 1901 11 tori II 1 lOOO ~, 11 1Il(1O II lIIOlI 1011_ ,r- - I -- ...._.... -..-..-. . .. .... -...-"-----"" . . .. I~ ~, ·;g.. l k ..... _ _ • ""'_ .. .....,_~_ _ - . . , ....... _ _ ,...so-.. ~_ ... .. -!\II:.....,,.,. ...... """""-n.._~---,. ",,~_"'~_ ... _ _ ... ......... .....,.,. ... ,,--- _JO~,,_,.. ....... __ ~,_t"'''''_,_ h-.r:I- "" . - - . _r_~ ~ ... .-.. .. _<lQ'' ' ' r__ _ I'oknI _ _ _ !l:"" r~~"( . ... " " _ , _ _ f_~ .. ' , _ . " " ~f'''<lIIonllu of 2012. boosled b)' a ...,Iid ~of milia! pyl:olic ~1f",ing5 ([PQ! ),' O:lt3 f~r lilt Ii.... qua ..",.,,1 2012 ,"dic.tt~ lhal ,rune reJ'llreh ...... and cash·6nllltOO m~~rs b)' ncn6nancial firm' I'I'm.!noo I',bu>l. and net ~"Iuity i:<sua""" remained d"rll' ncgal,'" (fig· Ure 21 ~ Howevtt, ItI'.... mtflI.·rsand n,'W sban.· repurth:un progt'JIIU ....... ~nn(lllnccd in II>< second quart«. TIle G\llettUnelll &<tor fleJfflj{ Go1'l'rn".e", kl\l' 1"",11 \ll><tt'\'ed lasl )'ear. Ncnelh<l<S$. th< Jelin· The tkflcitin lhe f,<!enol UniUN budget "'mJ.inj ~k''aled, Tn. COQ~';O"a1 ~ud~1 0fIN;. rl'llJ<.-1S lhllthe dt.1icil lOr fis,:aI)"tar 2(112 "ill I>< close to SI.2 trillion. 0. about 7:1: !""",m of ne>minal Gl>I~ Such a deficil "''OulJ be a nam)wer .ha", (II CIJI' thdn tho,," n.'C(INeJ ow. lbe pu1 ",,-enol )•• ,-; Ih.:lugh iliU queIKY ratc iIIt klanl m e MBS P'><'ls c<)J)l;UUeil Ii! let new highs in June. :IS ~m< fl",·ycar IIlan! iss\lOO in 2007 ~Ith< htiibt \If Ih< mlr~o:1 Wert undhlo H> t<~. nan", ~t maturity b«:a~ I'If their hiJ1lt loan·(C-VIIlue ritllo& (figurt 20), Whik delinquenCy r.td 1m" l;RE loans a! oom,""",i<\l banks improwd ~ightll'in the firOl 4U.rtCf, ! h<)lrema,f\Cd t:klillro, np<ciall~ for ron· slfl1Ltion and landdc""XIl1\entl~n~ In tho <<.lfp)Iitl< <"qYIIY mar\;<\, gross ruNic «!Ylly ibuan« b) nooflnanci.>l firms was AlIlng in tho fiB! 14:28 Apr 25, 2013 ~_-.l ISSIIon..: of colllmm:iat murtga,ge-bw;:k<:,1 St<urili<s (eMRS) haj HIs<l iQcr<ase<!rtt .... tly fmm th< mooestl~ VerDate Nov 24 2008 v ...·'"" ""' ... ..... ..... /O!l;Q1 'llIt ..... I O < _ ___ _ (,".IolII$/ .... -r>o.;l".... .... .... ~ll.'!><~_"'_al _ _ CMI!S .. .. Tlot ~'...t Jkt 048080 PO 00000 Frm 00089 Fmt 6621 ~ 1_.U"_,""",,lfQ"'_ tIoprtl_r '" "ol-),t")' lt"·"""" f'I"'~oAa",. _ .. t:;U,,. ...... , .......... "'"'M< .......... ...J 'I>e..,. IPO..,.",,) """"",'!y..-....J ""'*'"'17 Sfmt 6621 71712018.eps tl\n.'l< monlhs ..... I;.r ...,J Ihol ._, j>X1cd I;ihl",. ~l'<d;1 IXlndll""'" OV<r lhc neXI th~ !I1~nth, hw. hQlh .J.:ciin<d, but Ihey rema;noJ at rdaul'CIl' biph Itvcls in til< June$ut'\ey.ln .,IJilio<t, m:tnl readings lrom lite STil L indicate that tlte spreiUls d,.1'\,'cd by t{lmmcrcial banoon n.wlyllri",naled C&llcal15 wil~ <'rigin>l um~unls los than Sl million mnainro 4U 11, hi~h. ""'n OIIloonl "nh the Ilmnge<l <:n:dit ralings. Fin~ndal C¢Ilditi~ns in Ihe comlll<rcia! 1'1'111 estate (eRE) Ittti">r ~.8scd SUIl\e bul >laycd I'I'llIIil"tly light ~mid wtak fundamentab. AoxornlllS 1" the Ami SLOOS. tome J<.>m<:!1ie banh repomed h:l\';n~ <OIStd ,1andaros on Cit r Io«nund. on balance. • !ignifICant numbtr 01 JM1l<SIi<; hanKS r<pomed incrt8S<'l dtmand for such l""ns, While b~nk{ holdings of CRF klani oontinll<d tn ""l'Iln,<.1 in Ih. flNt half nl IhlS ye:>r. tbtl' did So) at a slcwa pac< than in til< :IC({lnJ h.lf nf lIell ~"tar. Tilt wtakest $I;\'I1lcnt of CR E biding h.i hem th. pocillln lurflOl1ing eonSlru<:IIQn onJ lanJ d<wlopm<nt; Ic)m(> ,)tha !!:gmen!! h ..." rte<"IIll)· eXf\ln,kd L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 86 _ _........ .. .......... ~-T..~ s:. ~ ,, w~J " ," ,. .--.-.-- _ - ,< -~ ~ _"_<Il1' _ _ ~"' _ _ _ _ .. I"bI< .. _ _ .. > "n .• .. t)_. " ...,._-'O __ __ . .___ . . . Tn_ ,, _ _ _ '·_c...,_ .. _ _ . . . ,....... ._ ..... _ __ __ !O!' _._ ... _ _ ~ U_~' ~ - V_ >h':ilT'ly hi~h .. Ibl n Iho,", "-""l1"ded DlIh<f. ..· )~l\I3 to Ih. ''''Itt ~f Ih<' finanri.al cnru ~od ffl:dSIQn. TIN: n.:uro'<I'inll or lite budgel dtlicit •.tr,""lw 10 omIl in th~ curnnl filQ) )~~f ~tly rellc,I, ir.c ",a;es m ta.t m--<nU<, l\.'Ilbc =1I00I), ,,,nlinu<.os to ft<O\ ...., althou~ Ihc~th in vUII.)~ il !>.';ns hdJ bad by Ih. "'indin~ do . . . n of .~pansiollllr)· fl"aI/IOlici.'i Cn:l'leJ in ""ar os "~II ~> sum" nw.IKtl~ry r<>1rainl in dttctJ~ .nJ olhtt dU<TtIIQn...-y S(l<ndl~ """""" rruipll lnm8$N 5 i'CI';rol f~.r-", In lite fiBI nlll( monlh, o[ Mcal2tll l COIllI'>.lr<d wilh Ih<- sam< in fi,,<11 2011. 1{~ipl>wl'ft boJS1=<1 IhllS far Ihi; fl,· cal Ytir by a ~ riSt mC'lf")Xlral< la.< lhal i, 1~lgcly "UnN!llIb1< lo a fOaling bad; in lIN: f<Mml~ la~ Ir«ilmrnl 01 sr>m' busillCSl in''C"Slm<n~ In addl· Ihln. individual ifl(.;lm< ond PdIroUlax I\w1r1j ha'~ JflO,'td hi~h<r, r<rtotllng 'O<:ftascs In ",)minfll \tI:I~ and !al.ry ,",-..:mlC:. Nenclhd.ss, al only aI!oijl 15'1 per",nl. I"" Illllr> "f f~ f'l>:\'I(lIJ 10 n~liIlnai 'nrome ~ ""ilr I(M~:<I r.:ailin~ for Ihis r.lio ~vor Iho ~1(0)'''l"I rmod "'\TIl"'" I"" (~gur< 22). Tolal r.ok1a1 oud.)l nllll'«i siJ......-a)'> in Ih~ ~D! ninc 1OO!11h' ef ~I<3I.:o!l ftM,,'f HI li\( COII1pa11ll* yw. (arl~)'("I'iOO . o..llQ)l "(II: rt<llKl.'1I brlh< "indm~ ,kMn ,)f $IimulUHdat.d rllljrrami (i~cludln¥: 11lt Am(riC"Jn R<.«fltry and Rdnl'tSlm<nl ACI "f 21109~ Il"I\\\'r p"fm(nl~ for Ufl(mrO~·mcnll~ul~nct. "n,IIId!· ing ""[(nS( ~xpondilUrc~ In iIIlJi\;vn. oUllays r", M~d· ic;~iJ iI<l far Ihi, ~:ul )'tar " ..... unu:;ual\y .....,at arp;l!' .nlly r<l\«;1i~in par1lh.impkmmlatlon r4 cos!· oool."om'ol measun:shymanyslal< ~~lllfl\Cnl.< 1,1 mIlKC;rrnding gf<lll,h fOf Ih~1 ~m, InCflulnoSl. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00090 Fmt 6621 0.' A, me.:tiur<d In th. D3u<m.1 illt..'<1me OlId producl orolU"t. (N!I'A~ .....1federal e'llp.:flJuurO" DO am· ,,,mf'li,,,,"nJ BI"'" 1n''tSlmcnl I"" pan or fedcr.ol 'pend"I, induJcd in IboCilicul.li"""f GIlI'- (dl al ." annual r-.lc <If cl".. 10 6 r<rc<nl In the lim '1." ...1., (I~"'" 21~ Ddt"", .pendinB. "hidll.nlh I." br:: ,.,,,,hc (rum ~u'rI.r I" quam,. <.'011\""'1«1 mOil: than 8 f'<'I' a:ft~ ollJ nondrfem:... P"II:M"" <dgcd ~""""!f FMend d. 1It held~' lbe rubl"'''''' 10 abo"l 7~ r<" cenl ~r namino! QOP in lb. """",d ~""r1c" or 21111, lV. p"I<<nI"Jll' I'QinI'l hiP<r lh"" alllI.: crul of wi )..... (6~"'r< 14) T""'my iU<.'lit'n< p ... ll}' "",1"ooJ (0 bo ".n rea:iwd b)' in''''A'''''' InJ~~ ... p( d""'~nd I I Tr=ury .oet""", sucb as bid -I(,""""", , .. "" an<! IndiM.'! bidJinf, nrtio<. ,,~'" ",ilbift Ihci, ruAaria.! ""'" \ 1"Iw ~""" of,~_WA _ I«I;'( 1'I<_ _ ""' '''"",,_ ~ b).pJa!,,,, <3$It'''''' R.or..,"" ..P""""" "'"' .... ~ _IlI<_~. _ (]( ' k_.., ~ . !hdo _~ Sfmt 6621 .. 'h< r«l...Ibudr« . __ "' ~""" "" ........I _ )TO' 71712019.eps ft'l'<ln~tClIhc ~o)A. Social s..curily QUI!1f)'J ,(IS( In """ b<>:~u., of In. fir:<l adjlalm<nlSlinC( 2009. ~nd Olllla)S f<l r financiallran~ j()nl \\~'" booru:J hi' lilt 1I:" ..IIr.II"," of th< (~I'<-,(Icd 00Sl of previ<)\llTro~hkd Aostl Rd~ I'l0tJ3m II'8DsaelJMI and:lll ,"e~ in Ml oullays fot deposil i"""",,,,.:' N<1 ;"I.... Il"'rmon'" incre.... d mQ<\mud),. rtII.aing tho rising 10,01 nflh~ fed •.,,, ~ost4·Ii\il\jl L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 87 16 MOrn:lar}' IIJIicy RoporIIO lhe ljl~D July 2Q12 --- - .s.. . . _ -u receiplS- 11>< IalgcSl SOU".. of hu ",",Mr for Ih~ ¥O"<rnmmls- wm rouJhly flat in 2011 and <...1)' 2012.ldcclif\t( Ih~ <MIl"uliing dJ«'IS nf Ih< .. rl icr declines in home prim "od incl't:>StS in pro!,,!TI), IJX rdlo£. M~l'tOv<T. fcdmd:lid 10 oolh ~al'lUld J,'CaI 110"'''ITlmcnlS It.u """Iin..-d as Slirnuhu·rrhlro vanls !tll\"< b.:en .tm",,1 rompi<lely pha.w.! ou~ On~ of the "1I)'$lhal ~lJle IIIId local !!'>"cr nm.nlJ h:1l~ adJm<S<"d Ibtir lilth1 ~adgl'l $itulIIl~nJ bal I:w:r:tI Ihro"i!h ~ulS In lbe;, mplQYmtllI ""d OOI1$I'()<;llon 'l"l1din, AI'Icr s!to:tLJing';"'lw ~I an aw''ll~ pat. of 19,0(1) r-er mQIIlh in lOll, 111<1' !l';lI'Cfnmrnls ",d",-'Cd Ihdr mj!k'ynttnl Q\(T tile filJl half II( lhe )"<~r ill a 5"'''~! ~ b)i trimming 3.11ll,iol;ls ~ monliton ~"''f . """:lUI Slale and lll<lllll""tfnmcni bud!!"I' !Inuned. bul 0,.....0111 6scllllX>lldiu()f\S fM lbcse ~",""""nL< mly be doIIly imrrovinc.. hi [WI;."I .... I.I. and IO<>iIla. I'<:<Cll'U ill'P<"",d III inm::I>I: "'<ldcrl<leiy OWl lhe ~rst half of lhi. }ur C""M lIu'<3u d~la ind;"'l~ Ih", ~I.l. m'l'lll" caU"'I.",,, rose: 4 1""""'\ in lite fim qu.trt<1 ,dative.lo ~ )'.ar <IIllier.• nd an«d.)(aI ..iIkoct suggt$\$ tbat colk<:lions duMIIJt Ami and M:I)' "t'" wdl m~intainttl . Mcm:OVtT. vnly a few SI~I(s rqmttd budgl'l ~or1falbdurini ft5<:t,I2(lI!(wh;';h .mlc:d ~n Jun.lI!;n mo»l S1ak'5~ Ttt<:inlrI<Mmcnl i> 1m .viJ.nt at IIx: """'" 1",'d. wh.", propC'll)' 11.\ , • ~'-,--./_r\J • • • -_ .. . '1111"'1111. I" I I' I " I'" 1 ,,1 1111 !II I 1'1' ..-_......,tnm. ... .... ,.. _ . ___ .. _ .... ,~ I'm • • 1M:! I~ ~lk_"""'~NlI !Wl .. 1011 " of ,....·......... __ TOo-.-"'lll';<r. .·_ ................. .. """ ""'""""'"',_"" .... _,......IW'!_"..Q< • • s...... VerDate Nov 24 2008 14:28 Apr 25, 2013 .....,~""- Jkt 048080 PO 00000 Frm 00091 Fmt 6621 IIOW<"V<:I, lui "~nSl""'1ion ~f'Cndilu1T$rdl an.. sh.rrJyin Ih. I,rot q"~rt.,. haviQS ,'tlged dO"'n in lhe I.llcr hlllf "f 20\ I, ~nd ",'3.i1aN< in!i>nn,lion<lll Mmi",. wnstruo;\ion JJ'<IIJinglhll>u,lt M"), pGonl.S 10 e"tuinu<:cl dttli"" in !'<WII nwnlM Tile d<'tmual in t'Itlploymrn' .oJ "<'!\SIru'lioo"", <liJ(nl In Ih. lIureau of Ec<,"~mic AnllylU (ilEA) !/Slim.lt r~! rral SIQI. MJ loc"l'I'rcb:ll»S. ~'bich fdl~"1n annualillto of 2),i p:m:nl in the fiBi ~uall<r. abQullh. lam. r;u:< as in2011 GfO<II i5su""", ",. "''Ods b)' SUlI<'l und m"niQ~il"" pick.d up in lb. StOOftd ~"'TI'" nf 2012. emlil quol;ty in Ille !lCCWI l'Onlinu,'tl 10 Ik:lcrior'lr i)\'Cf Ih~ fiBI half of Ihe)'<\!ll lmiral~~. cmlil laung downs... des by M<oody-, In"';wlJs.."";'''esube;l.nl':.l~' O"I~ uwr~ J.nJ CrNlI dcf~ull sW'nICDS)in""~ fill mUnicipal Mnd. lOS< on nOi. YlOIdj on long:"lorm Brn<1111 <)bligJtilln m"~ipal hoods ..~",.bQu1 unchanged OYer Ih. fir.!1 balf oflhq'~ar. TIw- ~ I~ra al Smlll EzII"'" ~N1 lmlwrs ]k)!h r<al ,.,;po,I' ~nd IffilMU ~ motIcr:lldy in Itt< ItM QU.Tlor of 2(l1~(figu", ;>5). ReJl¢.'l/lOm ~r gOod> and ",rv~ IOseat an ~nnual ra!~ ri (I, p<""n~ jUppoTl<d b)' r<~lj\I<\y Sll\lng f<)rcign ""~"""'mic y.:mlh , Exp.ll'1s o! servi= RU1<lmobi\N" rom]llll<rs, and mft rtl'*ndc<i rapidly... hll<lh= ill' ronwmcr gooJs dccH[\(d. Th< ris<" io CX]lOI'ti was p.1'lkul~rly SlrOOg IQ Canada and Me:o:iN. D.l~ for April and M~y~¥:<11 Ih.ot t~p<><li ,'<lnlmued 10 N< .1 ~ moo.rat. pa,,, In Ih< "-""'<'od QWlrtCt. ~aI ill'l[lOlU of gQOI!s ~n6 $t!",iu, ~ • rdlli ....1y modes1 2~i I',,,'''nl in lhe ~rst q~~r1", Idl<ctin~ slilIotr gtO'fI1h in U.s. «~Mm,~ activily. lmport! of SCfViIx~ ~utam.)bil~ alld ."mpllimroao ~~iti<~nlly, "hilt .i,- Sfmt 6621 71712020.eps Cbant< in ",J! ~""""",,,nl ..p<Ildll"" '"' ~lUIlplloo otId inv...unen~ 1OOf>-12 13. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 88 15. o..~ ,n .. >I io'f"IU 0IId <xporU" lOOlk .",J ......l< ... :!I)"l7-12 --- ,.'. -~ -.-,. .... " l...-' "!001 200.II =-1 '" '." ._ L - - _ _ ~ .'O!I~ )'III ........ :!oI1~ )I. .... -_... .....-- r.._ .. . - , ~11). "'. _ f« oiI. " Ih("lf( of r<lJOleum. ~lftr.lfl .• nJ ron.Um,'" ~.:oodj fd l. Th.. ru" In lmflOMS "":IS bl"\>lilly bas<d iICro>S m*,," IraJ ln~ parlnen. wilh imparl! from Jilpoin and Mm ..", showing pal1K:ulali; 1t1\1Il¥ jIfOWIb. April and Ma)' dAla SIl~gc;1 Ih.1 imp«t grO\Ilh rock.-d up in Ih. 5<0(\tid ~uan(T. A~!.IFIMr. nt1 ~porlj made;tSlllfIIJ ('IISI1~~ro"l,,"" hulwn of (lQ<-lrJllh or II"'f'-"nlaA" roinltO real GOI' gnl"th in tho fiBt quamr. !\fler iocttllsinl •• liitr m Ih< )'Car, oil rri<"c; I\av. su~ S<quenlly faU ... b.. k (figurr !~). Ovtr much 'If lhe Il~ quart<f. an im!lfO""<dOlltlook r,lr tho gklbal «<Inomy and IIW1""J~ \1C<1p(lb,ir;;lteO,M1l m();lt nOlilhlywilh Iron hdpeJ!fAIr a run-up In Ih_Ip.l1 prj"" of oil. "lin lho IIrrnl hcn~hm~rk avtragon. SI251"'r baml in Mar~h. ~b.lul $15 ~ ,IS lanuary ~'~rag<. ~,n<. 1ll1d· Marrh, "",,~ ......, oil I"1"'S haw mOIl' Ih_n rrlr.lo:«llil<i. ,""lier gain$ amid an inltl1sik~li~n 111< m~~ in [ uffil'O _oJ in<"rel<Std conco,", _"-.r 111< slrrngth ~ cwMmiegrowlb in China. An easm~ or go'O\XItilicAI I<nsiolns an,\ illLTI'AStd crud. oilluppl} produclion by Saudi Arabia I\J.s I:-«-n running ~I n_.r· ttwrJ higb kvell Mvr al,,) likclyc.)nlnb'l1~ 1\\,/10 dc.:h"" io oi l rri«.\. AU "'IJ. Ih. [l<K"C of IIrrnl h;ll plun,tlJ S2S a ~",,1 fMII MArdi 1,\ Iibo.lUI S)(I)j>.."t b..rrri in miJ.Jub. rn.. ... <>f man~ n~nfucl c'QQ1Ill,>dilk~ fQllo ..~d a (>.lib simililt I" ,b;ol shown by<'>il P"C01 all>o" .. iln less ""Ia· t~il}. larly ill 2011. C\)mmVdily )lIi<<"S mIlitll ai ~baI ,'Wnomi, prospWl and ~n~n<1a1 ,,,ndiIKmi improwd or VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00092 Fmt 6621 '" • • • nt"""""d"'1'0''''''''' ___ ... _ ....._ __ _ •• _" :»Ill"O<_ .,_~_ . ~I1. C--",!, _ _ 11<_1 -, -~Mi ~ilh • Irrnpo.>rar)· >IN":"",n'l.lf SIn.""'" '" Eurupil, 1!""~'tt. ;aS \l1,h ~il rrites. bru.<h.-r commotlil )' price! feU in 1110: scwnd ~uar~r, rcfIe,;j,oB ~rowin~ pesimism I\'gafdin~ f'I"OSr«"ISfor 1M gIob<ll <CMCIIll': l'r..". for non-{oil iml'l".J goods inmas<d k;,j. l/un 'I, p:1\~nl in Ihc lim ~U~"Ct, "1111 IIW mw..'S1 I""'" I.lf jnq_ase likely ",n"'ling tbe lawd dr""lS of bo,h Ihe "Wrt<",lion of Ih_ doUu llnd Ih_ drrlinf In ooml"llool1y ~ th~1 r>CCUrrrd Il0l0 1;lSI)'Cllf M 'wln~ IWI the IIC<OOd qu"rtc"f, imJ'VI1 prier Infta,i()!1 ~l'p<Jrs to hM mn.m_d sllWIICd.o;(lnsiil.nl v.;lh ~ "'rthel awm.-;"Iioo of Ih( dollar. largtly n'fi«"ling ,ho run·up III oil )"IIlCts.~rly in Ih_ Y"at, Ihc IIOIIlmallrad< t1tfJcil wiJentd ~il(h ll y In ,h. ~rsl qu.rlCt(llgurt 21). In addition.!\S tho: nt' InV<"St· llI<nl lll«>m< billMtt 'Ol11lnw:d 11\ d«lillC. t/l( <U11'<O\ _Wl"nl d(fldt tkttriol1li(d from ~n ~nnlta!lI\'t~ of 547U ~i1Ik'n in 2011 I~ SSSlIboU;"n III lho ~r" q\J;l rlrr. !II 311> re,,,,,nl ~f GD~" The ~"anci<ll ~()'M (hod p""iJ. I~ ~nancl.g.,r Ih~ cOUII.nl "o:'lUnl tldicil refto<,rJ III< ~ trrtllbln tin.ncial mark., "'nlimrol $nd in feSt'rve ateumolation l. 1.,m,,""B£A .U,milibtotiu~i\o~ ~"'!'I)"""""""""''' oNcfoooJ,IIo~_~, ","1<ol<~_'1.'''"""",,,''''_01 ___.. _ _ " " _ _ ~ ..........I)_oapoIoI"",,. . ... """nll. odo.!< ""tol ....""" .. ...:1 ................... Mol """""' ......f"'I'Io-I ... Sfmt 6621 r...""" ...... 71712021.eps " , II L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 89 19 Mom:lar}' Policy Ro",:m 10 lh. lvugre:!$ D Jul)' 2\)12 _. _till' lI''C<lnd quaner, b~llhisO<lI"""'" 'I(HII:lhcl~"r'" .!<'!UU" ;n"'''~ ",Iali", lonrlsaksof fo",ign !«ruri· 1)Oi in lhe f""rln 4uart.r of 21)1\ (fig~r.: 19~ Inft(IWJ [rom r""'ll!fI olfll:ial ;/Illtiluli,uu Il","$lh~ncd in Ih. ti('jl 4u_nc, !Ill <Rll:rJing markel goWfIImenu boughl dollars 10 c~unr« ur••ard rmsurc ~n lberr cum"";",, "'''''lItn~ in i",,,,>lJfIl """,umolaliOll of dollar..d.nom;natcd m;er',<:J,. Vlh;"h ~"'Ih"" ;n,,,,,0:<1 in U.S, St<;uriti<-. ({leU'" 30) P'4rtial d:l1n for lbr A"COIld quan<r,uwsllha1 [On:iJPlllftid.. tn~O'fI)'''''main.d ~Ltoni de,rilt ",n<IfII:J d"nar aPl""'"tilll~\n "IlJinSl "~1Ij! mark.1 '-"IIrWII'it>- Us. o~ii."ial ~:!S<u "'~,.. I.ml. 55! billi"n IHnuw during lite filll ~ual1<f III dnrwinp o~ ,he F.,Jenrl R<:SCM'S doU~r """~ lint! ." -- """,-"" ...... """"",, _ _ _ NIl,Q1 <.I!I'o_ ..... ·~"~, Booo."_~ n ~<llJ,S , ~ of ("",w. >«IIrili<>. 28. N<l (om", JlIII'I'~"" ,0( U,S. ""unIi... 200&-12 ""·... ,..._ .. t·S,T""'""l:_ '::- ,,*,,_OC_I'1 .., __ , ~ • ~ -,. - ~ i~IIIIIIIIIIIII'1 ,. ". -. .. _ . c_._. .-._ .. IIIIIII ' lllrll- • ". ~ - ~ """""'?IlI«~,S"""""" VerDate Nov 24 2008 14:28 Apr 25, 2013 ~ ." ." _ _ """",,,,_,,,",, ~- Jkt 048080 PO 00000 Frm 00093 Fmt 6621 ." ." ._ ............,..- . '" :OO""IW _ _ _ .IO_ .. _ _. " '_ .... ~ j'_- ' '' ..... , "" ' - " "" "" ..... _ _ _ " ..... ""_"-"'''c_ _ .. 0 : -........'" Sfmt 6621 71712022.eps • OIf""''''-''\'' r~_... • _.-. 21'080-12 l _.- TOIalU-S. ftl:t IWti<m:>l $>O\'tng IhaL ~ Ihc !la\illj! ,If U.s. oolGthollls, bo~n,-~ and 8£"tmmen", 11<1 of d<rn.'cil lion cho,...'S remains CJllrtmdykM' b) ha.· loricaistanJ..dj lfij:Mn: 11). Na nal,on:ll 5:I"ing fell (1'''''' ~ rcrg,~l t1 ""minal GOP in 200610 ncpti", 1 pc""",t in 2fffl. aJ lhe f"""lIll>udl;<l deftcit widml'd. The n~lional5l1linE rak subS<.'4I11:"li)' ill!.Ttw 10 nnf ~ro, whm" MIUlIn,'tl~Qf lh" firsl quarter o;l201~ (lhe !at.,1 qua"", fon b;en dill" are "'allabk), Tho .dmi.. fialness of Ute S:Wing ralt O\\,r th~ 1'111 MLplt of)~ I"H"", Ih.oll'~lill.ll.rr'''\i of a lliIrrtlll-m, in II\< rN\tra) boJg<1 dtficilliU w.rc ~fMmin:iJG Dr ! by cm.rgill! mark" =lI<1m;<1 (EM Es) ConSlSlenl ... lIh 3 Icmp(lra!)' iml'fll"em'nl in II\< Ion" of lin.nrial m"rk~IS in Ih. fil"$( q~l1er. fortlgn privalo 1••<Slars sk!wtd Ihm II<! pu"'h.~~f U.S T!"a;urYJt<."Uniios ~nd I't"luiOOl n"II1ll"'h~>tSofU.S. ~uiUt,. al1hough lhoy t.'ll1inutd (0 scll ;,In.:r U.S, h,'nm (figu!" 2g), !!(.oW(".I:,. Ih.1tnlaliw intNut In f~mgn risk ~ilt aha lod ....,.ty in lb•." se<:ooJ 4u",ler and fo", i~u pr;'''I< ;nw<w.ufto".d "'"tVl'o:<I domJnJ fOol" U.s. TIU$IlI)' .""'Uf1 linand 1.:", <lemanJ for mho. US '.,":uriln U.s. ;n",gOB' demand fo.IO"';[(II ..... ~nlll:' VI-. . HOI, "" n.~ ;n lhe flrsl quano ••!>d the .a.ty part "I lbe ~ ~ "ilh lhc EuJUI'<"OIl Cmlr:li Dank (I;CI:I)Md Ih. Bank of Jaran (ROl l ,n,,,, p.,";ally rq>aid L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 90 30. _.- u.s.... 11....,iol inflO'O"l. 200II--1 ~ _ (- .... ~ I L~_ ,- .- .. _l ~oII"""'_ ,", Io.!<"~-""""",,_ ""'P.-_ ...... _'"'"'I' _ _ *_Il<W>. ~.~- ~ l:.illph/)'lNfIIl unil (lt1~"'rlll)"III'NI Labo, markot oondi(ioa, remain "d. All .... oM"SlllJ! ... . . """'" . 'rllt Laber Markel . -~ ROO ~ OOwn"'~rd 1II0W"IIlCni in Ihe rri''llI< saving IlIt~. N'tion>lilOMng. wililikdy .. main l<)w litis )~ar in lighl <'f II!< NnlU1l1in~ !alit f<<krnl buclg;:t okl;.,.it A porI"'" of the d.-din< in fClkral SlI\'inp relat;": 10 pItcrisis ~"'~ is <~Iic:aI ~nd _Id bt C\,..-.:I«I 10 re'otlSC allil<: ,'Conom~ rtcOVrn. 110"'= if I()'<I' Ic:,"t\s Ill" n.l!~.r ,""ing I"'rsiSi (IV" til<: liloX'"' run, Ih'Y"ili lil:dy bt ossocialN ""th both low ral"" of "apilal\"" malion and h.3'Y borro<>inll from lIbroaJ. hmll;nB Iho flse in the 'iindard ofli"\II~ 6.» U.s. I\~,.knl. d'~r lime. 1/I5.00'J jobs I"rmonlh in Ih! ~d hJlf of::!OII. rri'"3I' pa)TVIl ontl'!oym<m saini im:"",,.,J to 225,1)1(J job$ 1'" IMIIlb ow, lilt iirst Ib!'Oe month. of Ih! )~a, and Ih'"1I fell back to 90,01'(1 job$ I"'" month (M." lho past th!"to: moa(hs (iigun: 32~ TM aPl"'rcnl , \(M'ins in th. pace of nCl jobereahon ma)" ha>~ been ~uJl8l"fa!cd by iMu.... ~1'led to in\;OES !II lb. "'..alb.. and 10""'" sonii! adJult"",nt difficulues ~".,.'."al<..'<J ,,"'Ih tbe timing of Ihe sh.r~!.i<>b I"""" durinj! !h. """",,;011. ~Io", \lV<!", omp\<J)·m.nl pinJ during Ih. S«<lnd bolf Ilf last yu,. and IIItll 1ht .arly ron of 1lti. )~a, may haw «I1'u«I .... m< <.I<..h-ul'iu b"ing .... , tu, 1""1 vf =r10)~rs Ih~1 a~>'<lypami their woMon:d during and just afu.-r th. rc..-.ssivu. Th. rtO.."111 decckrlllioJn in cmriO)'monl may sugg..-st thai much of thIS C3t.:h.up hai n,l'" t.a\:on pI~ and Ihat, C\llIS<."\ju<n!I)·, n:w",· 'apid gains in ffilMIl\l< tlCti,ily ..ill b. ""Iulred 10 achieve ";gJljf",ant [onh.. illCn'OS<"$ln em~monl Ind d"di~ 111111< U1\C'fnl'k>l'monl rato. unom[)lo}mrnl ralt. !lHlugh d""", from around 9 ptlrenl \liS! suntmer. hal hdd about flat 01 8' '0 pt" tenl silK>! oarly this }""" and """"in, .M.d re\ati>'< to Ie,~ls oincr>'<d prior 10 Ilit rt<knl I"I'<"<'jiijon (tig' Ult )3~ MOrNVcr_long-lemt un<ml,loymonl",SO I\."ll\alns d"yatw. In June. ~roufkl4IJ f.'C"",nl of th~ unempk'ycd h>l!l )x,:n "Ill of 'M)r\; for molt than six m,)nthl (figure 34~ M.~n"hik. th" W>M r,"lt« [llirl..:;f'I'Iion flIte hOll Hu«u~lcd amulkl:lkrli kwl sc far Ihi< year after h.''',"~ _ d d~,,'t1 2 ptrccnl.gc poi"" n" ImOO!2007 11. N«o>,·,,,,.I !.l92-2Il11 ---, -,,-,.., llot'l. '«". 1010 " ':tOOO ''I .!($I " " _ I , lOll n. _ "' ~_"""'''''''' 10 1l\l1~_ _ .... _ .. __ 01 ,.-I0Il ror...__ _ _ ,...... ................. '" lOOO :;nw hot> ' ' - ' 'C - -. _ o I V _ . . I - '. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00094 Fmt 6621 :tJoJ .!OlI lOO\I .!IIIO lOIIt no_ .......... "" "_ ........ _ .!III! .lOll. ""-"",, "'-"1_._"'_- Sfmt 6621 71712023.eps ....J......l.." L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 91 2(l MO",:Iar}' ]1J1icy RoporllO th. C;lngrwD lui)' 2\)12 " .. _ ~, , ,. "" , - ~_"'...-Ir_"-"",,,_lOll _ .. UOoI._ .. ' _ " - ' " "" wlid pin in 1010. A=rdin~ lQ lilt I!lOSl rubljs~.J datil.. (}IlI(1llI pa 11011/ in Ibr IWIIfarm b1u""<S!ICC!'" l"QSO jusl v, rcn:cnt in .)(III and doclinro in Ih. tint q\lllrl'rof 2012 (fiJurt)Sf. .... lllIo\IjIh Ih('jt dlll:t(an b< wlatile frum ~u~rt.r IQ 4u~rt',.. Ih. modtrJI;On in productivily ,,,,.ilh O'Vl:f Ihe J"'SIIWO Jun SUU"Jlllh~1 firnu ha'" been .dding ""r\:en nOl only 1<> """I n,;n~ production n..cIs btu al!O.110 ",Ii..... J'fI'lS"'"'" 011 I~." ~.';!I'ng "'"tfo=~ ,,!I;ch "=<"1 bod Jh~'rlyd"r ing the ,""ssion_ ln~"'ases In h"u,ly romp!;nsalion ..... mln"" lO!lo ItSlraintd by Ii><: ~ry ..."aI:: rondilion of litc IaIJor ~ Tbt 12-lllI.'nlh chanll>' in tlltcrn]1lo)'tnt:nt (()!l ,ntk.1 (01 rri'"alo induslry w,,,,1x1'S, ~'hkh m.OSIln'i bvlb wa~Md Illt CO!I 10crnp/(»'<f1 of ]'ro\"iding bof!dh hIlS b«n aboUI 2 ]"1(="1 '" I... ';nc< Ihe <Ian of .!009 aI"I« :I"'~,ol )'tarl <If in 1/1. neighborhood ,I{ 31""""1 (flS"f< 16). N<)tIlinol"""'j1<nl>3lion pcrhour in tllt lll)Hf~rm ~~fI($S~VI" ~ lIlCastlr< derl""d fWfl1I!lo\abtl!''''1II1po:nsat;'''a ""'. in lilt NIPiI also <.k'ttkraIN .igni!icanlly C\'Cf lile P"5I f~w )'UB: lhil mtasur< roll: jusl 1'.1 ptrctnl QIot, Iht )our 'lIdillj! in Ihe first quarter of 2012. ...~IJ below III.: al-'<tagt" illCl'<:!l>C ofabQul (j1<Mnl in lhe ~nf1 i>:ftII'C Ih. r=mn "m;limy, a.~r~gc h<,urly e:.rn;~1!" for 011 <mp\o)n-s- Iht li",.liosl me$Uf< of w.go d(\t\(>pmcnll ruse ~boul 2 p;:m:nl in numinalltrmS ()Vtr th~ 12 m~nlhHnJln~ ill Jur)e. Aerordin8 10 elIi:h of th~ moai!IJrtS. pins In hc~rlycomp.'ll$Ilion bil<J to 1;,,,'1' up ...ilh i!)Cn"ll<1 in ooltjum'r pnc<'i 'n 1011 lind again In lhe hrol qu.n~ of Ihis )... r. Th. eh'nl!" in unillabor cost> faced hy firm,..... whl<h m<;,sures Ih ••~I.nllO which nominal heurl) il\l;'.""." OIher labo:lf markCl inJi<;aton ""R' consis[(nt "ilh lill!.! th.nrc in 1l~m1II.oor markel c.1nuitivnJ du,i~g the finl holf cf th. yur. lnitial d.im! fll< un.mpkl~ ment i",ur.ln~ ....o:rt not n",ch ehonF<'<k .'M II<It. altllough thci, "'~ ....eI <J'/(f tb. fiBI hlill eM the Ju,Wlj )Q..'(f tb~n in lhc~nd bllf "r )111. Mo.uurt",c JOb varnnc"l<S <dgcd up, on rub"" .• od hOll..,. holds' 1ah.1' milfk<l C.lr«I~liou, J.trg.l~ "'''''TSlld Ih. st«rdrl~r!ott\li,m from laillUmmer. H(lI;tVl'r, i"dbtors of ~iring activily ,,,,,,"ined Jub<iued G"i,., in l:ibor rroJuClivil~ !11M «)nl",ued 1<> Blow 1W:nUy f<>llo.iinlt"n oulJ.il.ed illl'f'CaS< in 2il/)il IIfId a --- -• • • " _... ..,-_..,-_. . - .,. __ . .. _""..........-. _01"""~_ "' .... '......-. ~"'II_ .. -- VerDate Nov 24 2008 14:28 Apr 25, 2013 1<",,- 1'_ _ _ no_ ....................... J_ lIIl no ....... Jkt 048080 PO 00000 _ ... Frm 00095 ,....,."' _ _toooo Fmt 6621 -.,--,..... . ... _ .. .. " " _ ........... JW"'l s..un ~"'t-. . _.I -' Sfmt 6621 71712024.eps Si'lt- L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 92 l/i, ~k.." .... <>I'<nl.~,"lwlvrIY"""l"""'I"', j1. ;w:!-12 Chao,~ ," II>< <ba.,-I)'j"<' rue. indcl. rot 1'""<"'.1 ...,...""'pIKMt '~r<tl!lituJn. 200fr.I~ -- , _- _ r._ ......... ".... -_ " '..... : .. _ .. .... _11'<'tI...... .. .. ,l _ ~"" ~. !001 lO(It !IIO! :'010 )In :!OI! ""_ ........'r .......... -,,.JIII'1l1 ~ ~ _n. _ _ _ ..-"",,,,_,.,._ --'" S<un ~_ coml""'sat><m ri"", in ~1J)CIU of labor r~""1i"I)· n:m,Lnro OIlbdutd. Unil I..... rcosil in It." n()llr~rm OO!IIId; ;0,.·10' nlSC I r<""OI ow, lbe ytarcndin, in III< h'$1 4uo,lI<I" of 21112. (h~ lb.· rrt«din, lear. unil liIbo:r 11051$ i~;1)<J 1'1 "'''''01 Consumt, prict inllillion mIl,-..:l,J".;n. ~n nCI. during IhtfirSl part M 2012, OWrall f'CE pnc<s I'll$< ",pidly in Ih. ~~llh"'" mMIM of lilt l"a~ rrtle<:lIn~ lo'J!< inm~ U\ 'lil Llriu~ bill inn'lion lurn<d ~ilW1I in lilt spnn~ ~I ~II r~ rn(\rr than n'VtrSO\llilrir <1lrli<f rtllH.l1' T~ 0'0",",,1<hMn·lypo:: PCEI',,<dndtx incmt5<d al an ann~a1 rlIk of1lb.1U! II'; P=""'OI btllfflo IXwnImWII and M ~ 2012. oomJ'llrr~ wllh~ ris>< nr2'~ jli:KcnlllWr 2011 (figu~ E.Wud· illj! fOOl! and C11t1X). OQo,umer Ilf'om cos< iI1 a rat. \11' ~b.!uI2 1"'r«111 O\ell/lcli!101 ri....,moolhsM II\r )'Co11. <'IS<nLWly!br!a1D< Jl<I<l' 11$ In 2011. In ~~JILion!o 1110 Qtl .win. in <1"ud< oil rrictl ,n"r Ih< first half of lilt l"ar. f\\(lotS<Mllrioolin); LO low oonsu1l\tr pri« ioft~· 1.10 Iml )..,ar htdu.k tlli: dro::I<1"alinn .If o(\tt-<lil ,mporl priccs in Inc IAlI<r pa,l (or 2011. fIlbJuro I:\b,)r ""IB OlS\Xc,ued wilh ttl< ,,<ali: l.bot m.l rlrrl. "",d ~I:IbI. m. inn~lj(,n Uf'<'i'lat'On~ COMUm<' rn'I~Y /Iri<X-s SIII1<d at ~n ~nnUiJI rot. of 0"" 20 prn... nl in II\< ~rJl In"", monLh.< of 201~. ~. high<;r eOl.lS r..r <rude olil ""'rr pmo:d !hl'llu~ 1(\ toSOline jlrio.n In "rrl~ Ih. nailOn..J..m:rn¥c r<io."f rot VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00096 Fmt 6621 p.!(ltin,-ILI Ihq'umr .I'!'f'OOcl><J 54 [l<T g.llI(1n \lJIC( Ibm. cruJe (~I prirol hal'C t .. mblo:<!. and psoJine f'!rim hal': ~linw ""ughly in li~ .. ilh(;l1ldc =ts. 1Il.m> (han m'm i", the ~di« ,un-ul\ Consumcrrrl«' r~, nlllU,..! Sou ~ung<d (Wt' lh" r.rsl fiw IOonlhl ..". th~ )'tIIr ~f\'T r..llilll! la(O last )~3r. Ihis drop i! .I!ribolabk. 01)<11$1 mPI'". (0 III< un.« ..",milbly "-.. rm Winlcr. which n>Ju,,,,I d,m.nd fo>r nillura! ~t Mnre " ,"'\llly. spill prices fOf lUilurttl ~M h ~1'<: tUloeJ upas po-oou.:lieln n~~n (111 bad, hullb(y ~liII ... maio 'lIll!Ianlially 10,,"1" than lhey "..,.. Ia>t $Umm<r. COOiu!l1tr fO<'<l pnC<' \n~alioo hBs ~Q\\"d nolJceably 50,) f~r tllil }"ar. ~s Ille .n«1 ()!t 1<1~jl roo.! p<1ctS fronl 11«1 )'I'Jr'sJumpin [arm <\IrnmodilY~1IPL"'arJ (0 h.tV< ~rid)' dissi!We.j, InJ<ci. J'C'( pO.:cs j;,)r fuoJ and b<vtral!>" ~oly eJS,d up sti~h!ly. rilin~ .t an ;lImual nlte of :>bout '1 r,orrc..'tIt From 1Xc<.'1'lIiltr 10 Mf<}' lIft<r III<'rCasma lIWl< Ih.n 5 r<Tttnl m 2011. Although farm commodity pcices we .. 1<'Illilefcti earlir. 11115 year by ..tpo.,<tafioos ~f • ;umllutiill in,rrase in er<>p ~UIf"JL Ibis gro~in~ ~awn. Jrain !'lux:s 10." ropidly in laic JUI\<" ~U~ <ally J"ly as a "iJ< $Wain M In.- Mim.'OS1 '~rrri.n'«I a boul rJf hoi, dry wealiltllhal Farm analyl1l beli<w CUI)'ield rr(>:Il'I"IS .'Oos"l<TlihI); SUrvc)-boscJ l1lI:aJul<, of n<aN~tm inftalion eXp«!;uivnsh;<w dI",,~d litlk. on n<1,:IO fQrlniJ)'tti1 Median )~.,.·PheaJ innati<ln c~JlCI.1A1k!nJ. II! n:prn1eJ Iht T ~n Rftll~rslUniV<1"llllyot Midtjpn Sur· W}"S (lfCooillmm (Mwhigan surwy~ rose in M.ren ...h"n ga<olint p:ns "'''rr hi~ hUL thm r,n b;lct u IhllS< pri<xs ,rttDN <"OU"" (~g"T< JIl) LOII~rr-l<1"m '~(I<.'<tal\On' rtmain.d m=~abk. (n !Itt MKh,g:lo SUr\I(Y, mWiom txp«led in~;ui<m oWcr the n,-:'I ~ lr ,n Sfmt 6621 71712025.eps _""'_""_ ......... ., .. 1'£1_""..... ---"'-,,"o.,....."lot«._ .. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 93 L! MOrn:lar}' 11J1icy Report 10 I"" lOngre:l$ 0 Jul)' 2Q12 .l& Median inlblioo "J'C'UI>OO>. ::nJ1-I~ Mltl_ - .1Il, IOIbl","cornptIlntioa.20lJ'l-I! - - , _. _'Il<_ .. . . . . ~ "aly _ _ "" ......... ,., ........ _n.-r _ _ T....... _...-_)'d*" --"'_ (lII':'l,,,-"""_._ .............. dmI _ . _ .. .n,..... _ _""1' _ o....... ".~t~ _~ _T~ ... OII·_lIP5 pore.'nl ill (~t1y July. "ilh",I"" IIIIT' ro.... r~ni~ ~f II>< pagl 1(1 )'<31'1 In lbe: Su".. ), of J>rofwiQnall'=aslm, ronJ~Clcd \l)' the Rdcral R~"" BanI: V( Pbiladdphi:o.. •.~pC<:1 .. i9lIs tOr lile iOO'<lIk in Ihe pric:c mtk.~ Ii" PCE O'otr the n.~t 11) )'<arl rcmain<d at 2'1. potI.':nl, In Ih. midJle-of itj 1'«<"01 ranr<. Me~surcj or medium" lind l\l!Igtr-lcrm mlla1ion oompCllloil!ion d<Ti'otll from nominal ~nd ,nllllllun· rrulMcJ TrelUUJy seCllril;n. \I,h",h tIOl only re~«I inlWMl extx<1;l!iim~ hltl ~cao Ix: alf""l~ by changes in 'rt\~~tor ru~ "·... moo ond by Ih. <lift.renl liquIJiIYI'f(lp.'rlics<>llhr 1'0'0 Iyptlof StC\lril~Vir .. lillie ,hangeJ, \>11 0<1, .10 f41 Ihis ye.r (~u" )9). T~ measures ill<rca~d eally U! 1110' r<'fiikI amid ris· ins prices fM oil and Qlher COmmoJil"" bill IhtysuhStqutnllyd«lioC'd A,(\lmmoJ il) ~ fell ha<k and al \Illlm:.: ~ul dilm<:S1i< an~ j!Iobld C(on(lml< llM'lh inclTaStJ. Financial m.rkclS ,.w< romMl'hai volati!. ()Vef III< tif$1 half of 2012. F4t1y in II>< year. hroad <quil), pric:c indexes ~ and r~k spread! itt ~ mat~.t! nar· rowclllS in'"<:SIOt scn!iJll(!1t rtgatdill$lOOrHmTI Eum~an (If\lsP'Xl$ "nJ Iht «<lnQm;';: o~llool. imfil'O\'~ , n ilS(" gai"s pa,,",11)I rtvmcd ~n<n mHrtct raMicipan!s bcc.mc mQrc pt)$irnlltlc.!>auillio (unl. ~~n sltua1ion and ~Iobld grm<olh PTO!fI<C1s in Mal' and June. YIelds on longer·lrrm Tl'I:asull' li«:urilics d«lintll. Qn balancr, <WeT lilt flf'lhaif <If lh< )'t"". Condil;""1 in un><''<1ImI.<ItoIHtrm do\1;a funding 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00097 - - ~ ......., - .. ~,.. y .... ......,.,-.""" mJrket> itn,rall)I nmaiocd stabt<- as [uroro:~n fiBan· cia! instilulions r<dUC«ll!i<ir demand for <Io\l4r fuod. log and ~rncral funding J'I'I:SSUI'tS ""tre allt\'iat.d by tho I~nser-I.rm rtfinanciBi <>p<rnli",u of the liell In Ibcd,>tDI.'S!;c bankmiRX.1~ II>< r<1 ..",of lhe n3U!II rrom Ihe CompTe""n,;", Capilal Analjoi, ""d (CCAR) in March pnwidcd. signilicMt lloJoo «lthe O\[uil~ pri~ of U.S. financiol inslilulion, (xl: lb. oox "n. Cilpilal .nJ LiqukhlY I\>lilion of l.;11~ U.S Ro,,,,,,, lla"ki~), MOnrtaf), P<lUey EXpH1atfDnund TI't15Ury Ra lt8 In fI"Sp(lnJc lO the llepS laken h)' Ih, Fcderttl (>r<n Vin,neilll Dc.wdopmcnIS. VerDate Nov 24 2008 --- ........ ..... _ , , _ Fmt 6621 MarkO! Cornmill« (FOMe) 10 IIToviik aJdilklna! monr1al')' policy "O<'eOmmodalloD, lind _mid ~",",'ing aru:ktY about Ihe Europtan m'is ;IIld • "'IlNCning ,]f IhetWlI01nieoollook, im'<:stoo plISh«l 001 fUrlhtrlh, dllln.h~o Ihcyc~ptCl tile fcdmll fundj .melO fil'S1 rise ah.....'t.1$ cum:nlla~1 range of 0 1<1 t,. !".:rt'ffll, 10 addilion. Ihoy ft!'P"rtnt!y .'lI:"kd blit~ Ihe P"''' .. "hidl IlI<y ~r«1 lh. fctkral funds rate IUh!oeqllrn!iy 10 1>1 Hlcrea~. M.rk<l parlic:ipan1$cufn.'l'tllyanlkip31< llullhe cltOCiiw f«lora! funJs r;l1e will be aboul 50 b.li! poinls b)' lhe middle ~r WIS. l'Ilu~hl)' S5 basts p.JUlIS l()'ol~r than Ih ..'Y t~pt<:1..-.l1il lhe b<ginnmi of 1012. Sfmt 6621 71712026.eps !l1)'C'N ""iU 2.~ l'"-'~ _ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 94 Yreld< on I<'"ger-lorm nllnlinal T,,".uuTY~"n l i<s drcl;nr:d. on habO<t. <wtI' III< ~rsl h:!lr or 2012 (I\g' Il1" J(\~ I)rly in lilt ~"ar. JoojlC1·I<tm Trr""ul'}, )';"1& r-. n:ftecling~..nmJl)' ~Ii'" us. =nomi<,: dllll. iml'f<""td marl:.:t $tnilln.:nl n:garding Ih~ cri ii, in I!uro~ anJ h~l mOI#)'!'rim. M"", ....'Ctnll)·.h()'<\~ <I'<T. IonjlC1.lerm yield< h..... mme Ihom ",.~ .. d Ibti, Cllfl"" ;~O"'UCi In.""III1'S_ghllh. ",1~ti'''S<lr'ly and ~qu;d;ly ofT", ..!",), serunl'~ 0Ii IhrcriWin ( urol'l" iQlc",ir.. d :wain lind as .... ak.r·lh"ll"'.l l""t.d «Xlnmnic data rcka>ts r~isOO toncorllj ai);.>ullb. P"'''' 0( «'OIIOII!;' ....'<m"TY OOIh in Iii<' Un;l«I SI~I($ and "~d , In addilKlIl.lh<lSl: dc\tk>f'I1I<nls(\l$!mtI c~I'-'CI;dioru thlll tb( FW.:IIII RC5tT'" would PlO\.;oc lli.Idilionai =mmod~I"'n.l\nd Ih. TrtasuIY yiIIlJ cu ..... flOl I.nod further followint-Ih. fOMe'. d.d';on al its J"". 1I>L"1;n~ to Cl'm,n"" the 1I1:1l unty Q I~nsion pt<!,gl.m (Mrp) Ihrough tilt "nJ of 2012. On b;ol>l\CC, )'idll$on .... II\.. ~nd 3('I.)"'a' nominal T",asuly5<l:llri. d«bOl."d roughly 20. .\0, and '5 I>lsis !,"~n~ 1'I'J«<iiv<:ly. (rom Ihcil Ie".ls III Ih. start Qf Ib~ re;or Tilt Or<." Mark.1 [~;'ks C>\lIri.g/l1 ~urth:.."'" and:sldts of TrtlI$ury St<urilio:s und.,. tho: MI;P tlid nOI af'r':"J1' 10 hii''' un)' matm~1 itChI."1l< df<CI ()11 Tn:OSI'IY m~rl:tl fu",lionin,g. I"" ll<'lpliolhe ""'!ne~'!lc:t of StraIn> in ~u~ CIlnd, · lions In un~ short-I<m! dolL>1 fUnding rnlrkcl.l hall'l'"m.irlti! fairly Slahlellline fi",1 half of"ZOll. M.aS<l~sof ilt<), in slNn.l.rm rundingO\OO.l):.<I,have o....d sorno"'h~l, nn b.uaoo:. ~,t>Ce lhe b(ginnl/l¥ or Ihe )""1' A (tw r""'I~!"I !I«ftIIO ha\~ contribuled 10;> In. "'Ial;'~ lIabililY of Ih''''' m:uk.~ (utOf"'an ""'<lilu. OOIlj 1I!'r>-....'!ltly rrouc'ed Ih.ir demand (OJ! f"~lI$ in rtO:nt quart""" by !ll:lIinr rk,Uar«oomiMt«l ~ll and Q.itin~ flQ111 bAAlIus lintS l'C<lu1riD8 bcll\')' doUar funding In addition. European bIln~s I'CPIlllttlly 1i\\·;I~""" t""",,un:<! fundi~ '\I~ro'l.d by ,,"!io~ types of ",bill=!. furth .... lh. Il\'aililbilityor f\lf\ds (I<>m lhe EC ll th,,>ugh >11; 'o;>ng<,·tnm rtf'nan.in~ Ol''f8t;.x,S likely.helped rtdue< (undinll It lain! and II!<. n«d to accc~ iOlo."Tbll1k masl.:ol$ more gt:norally. Rdll"ling thtsc d,,'<'i('I'1JI<1lts. tM ;uno"nl of donar $\I'llV!' (>utstanJing \xt"'ttnlbt 1'«1<101 R<:Si.'I'1: anJ Ih. (CD ha.: d~~nw $uM;,nti:IU~ front its r<ak ell" Ii<:lthil )'ca, Cond itions in Ih. CI' markol "~,,,:I!.oo (ai,ly"'bk. On n<t. lIl-d:o)" JP"'".0.1$ "r IlIICS on lW<Cun:d A:!IP: CP oW, OQmrarat>l.·mJ(Urit)' AA'!UIN nonlinllnc;" CI' d,"linrd ~ bit The \\llume ,,"Ulanding (l( "AA" ,urrd h;.ndal CP i>lllli."\l in 1m, Unit«l SI'I", \))' iM/i· tUIi<.m>wilh Eu!'O)'t3n I"'mtu!k'l:ftm !.lightlY ilt Ihc finl half of Ih.)'taI. Til<: average malUrilyof un>'C· tUl'<d lilU<""ial CPi~UI."d b)' inso;MiOtUwilh Nih U.s. ilIId Eurorcan I"'rtIllJ is ~bou\ 5()d:o)'!.3 levolllt~11S ne~1 Ill< middle <>f its h;'torir.:1tI '~ngt: {figun: 411 Sig:tl'i ~f , t!<'!ll w= '"-'" lalgdy ah5<nl in S«tIh"« <hon'k"fm doUar rund;~ I!1l1rkel~ In Ih~mllllcifoc rtpor:b,se agrc<:m<m" hid-",~ro j~ad, f()r IIlOlL coll.uoral l)'p<s .....", lill~ chang<\!. ! 101.\1:\"1. slum· I,"fm inle""'1 nUes C<lnlinu<d 10 i'dI'< up fl\>ll1lhe 10'.,..1 0\>:9<",00 &round Ih. lum of Ih. Y""'. Ilk"l)" rtfleeling in ran III<: ~n3!1(1!1J! of lhe incl\'lS< in inwnloli<'l' (l( ;bpn<!·I<lmT",asu1')',,-..,urili.. Lh>1 ""uh.J <k-«,,. 41 ~I. In....., rll<:1 Qo T....r."", ""."lInil«" odttl<d AI'tI:l~. "'''''''y """.~ r"""", ..1ro"'tI.,«;'1 f'lpCrOll"lIlllll"" m"'" Uni""S_ ~H)...I! - '1Wl"lIi<>. .!!X)4...f2 • • • -, , ~ ~jO ..".. "" ........ ....,..ooj,......... ~ 1\:,IjU '" ~ '<o.<.iIt> '. -..... T _ VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00098 Fmt 6621 ... " ,""---'~-~ ~-~~-",,,,~ 1010 0!Il<l 1011 5< •._ _ _ _ _ .ol _ _ .. _ _ .. ~... TOt ...... -.tyool"'_ ....... ....., 1L.:lIII.l. "'-T_ ... a...... c.r- Sfmt 6621 71712027.eps , ,. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 95 24 Mom:lar}' IIJIicy Rq><>n 10 Ih< C(lug=: D lui)' 2Q12 The capl!ar and liquilfity floslHon of large U.S. flanks 1<1 miol-l\l>o'd!, !h~ k<ll'llI ~ • •"'IOUOO'd ,he ......" ,~. m. u,,'~""'" (.arM" ...... ~ ""d ~ ((.'(:AI.) :roll. 110" JlfOtPm .... ILIaIe<.I ,he ""1';'<11 p1" ,"i"g I"""""'" ,""I ''310l;0I .. Jec~'"'-r "r I~ (I/'hl'~ borll<, ii. lub"",(J/t""""hillwili 1M' reqt>ftd IQ """'-"I" ~, C"'" II)' II" Ikt¥d (1/ C<Mrr1OO ",)(hot IIII' lI<!<lol 1';onI;\'I'.dI"',.... ~lonn.I<lC' .. ""_~ ... ...., (1/1010 (n.»1-I'*'l....,~' IW 191",rll:1I(oId"g«l~"''' (IU~"'" f\>ni<ip""" io iii. lOO9 SupeM""Y Cai.I" ~">e<>l1'rupo and ,II<CW"20II,llI<lIJl"'n'i""'Y",>:,>,,<;<b,nod.. CC\~ :/011 ",~ ...<:d "helhe' hani<>' """",,,,,, <>I'.:.I ..... pI _ _ ol,-"lI<",., ",.,":oI_'e·'''''8 ,~_ v.. ~I ,"';"IiI;".U!li<k", ~~ '" ""f'P"'IlnMl",S I<> 1"'....,t.IId' .....1I"",_ ~,., ,he ..... ~ri .., .,.",.Ied ('1<',xod 01 h<l;Idy ..too""" """"""" anrJ ~w"d~""". n.,.,lIn" '>CI'f\Oriuin(<J<p<r ,,1«1. I"'. """'OIJ>IoyI""m "•• mIJ ~,,~ • ,ltOp in ~ pOCe (1/ _ 11ta'ISO pem.,H, ..... • ,J.<f. .. in ~ """'I.nc..of11 """",,,L 11.. """'Il< indicott-d '''11\5(1/ I~ 19 81"'",,"id CUOIiQ .... It> ",.,..,~ .. I""""'inn$ w,..........aI ''''''·... ,... OtIequocy II~' llie eO(] of201J (11- capiI" 11 •." .... 1.111;1' IMojN:I«1 1M.... "",I... ,h~ """...... Iv """'"'''''"lI'ypl)l.~;.; .. ><:I'~~I!·,.~' I po<I'<l "l>il.ld iillibutiQ!, pI;im.' lhr~ rnuk, ~1tCl ,he ,;g,.bltllt'P> ,"""" mIG h..... lOk<n "' "'~"""" IIH 0]0,,1I">'i""''' "" ... ,lie p.... ~""" y ...., In pl<1iadilf. Ihp "W". &_ [;"',"""'''''''' ...1<>/''',...,..,,9,...... ''''. '1""bfp,1 /rom obwI 511 ~nl "' ~",Iirst q ...... , "/2OO'l,,, ,to.. ", II """:.. ~ 0' the ~r>I If''''''"' <>f ZOll (~e AI. Mlo<.l1 " It.. imprtN.-me!L! ""'" lhe -. inI"""'~.'gp!'rioll .:-. . , 1.. II\I>buIMlo Inn~ rt!>ined ""~",,d "'"~ of COI!'nQoI)l,JP, dUl,,'K ' /" rlud ",~""oed 11"""'11 .. ,0)1;.... MghIl'tl lhe 1911101 .w!'I"'"' 10 lhe CQ.R h.... :ok<> ~"""W 110"., ",,,,,,,obIIille< l(I i1i«"I~i<Ir"' ", ru.od- int m>IteI>. 101 .'<\""',!Iory h:w. ;igt>iIioo,tty rrdu<l'IIlhcY ~~_. ""s/IIX1."""w~ 1;Wili(ft» ,..bIMO L "' ,,,,,,1-.. ...,,,, 1t..1 "' ~ 01 'loo~oI _ _ ~<nJ< ......... <>f<l. lbIoj-ol' "'t ~ ..... ~""""""""'_ ", • ....-. .... 1«1' ml ~ _ .... .!t>..."...IoooioI_..... Lj....,. _,'01"' 1f_· . . .__ . _ ........"""..... tt.<.t_""""-.. """'2tIII, " _w.. ''''''~_ IIoo ~-w..,..Jbr , .. I,,1I<>I " ' " - - ,..... ........... ... .._ ""' ....... 1.-... 1t _ ... ,.....,.'1Io ~~0I r..t...l ~ ... _ ~~ _ _ .""'...... ~ ....,"",.,.... .. _ r..J.ql~_'lf'k .. s..~oI~oI ... od .. OOll\.,_~ _ .......... _"'_<l"'._ \ .a.t.Mo~. _ ....... ¥ I;\J. _ _ _ _ _ p/ ...... """", l"" ... lJ<>tot'Xo.lfl,o ...... lo.. )ur. In aSSCI·ba<k«lo.Jmlmrciill rap:r(ARCI') mar~ his, IIOIUlMi ,1ulWlndlng ,,"Iinrd I<lr prog:ranli "llh EUrurx:an sp.'Mill'S, and Jj'Ir(~Js On A11(;1' .... Ih E~",· po:an Ixmk 1ptJn$ilTJ "'''main,,\! ~ bh ub.:rvt Ih<lSe ,m AIlCI' wilh Us. bank !p<>nwn. RespOn;k!(ls 10 lb. Senior emlil O/lie<r Opink'm Survey un 1><1ll<r financing Torrn; (SO)OS) in oolh Maro;h and lull' indicMed tMI <'T<d~ lerm! appli<iIhI< I" ,m1"lllanl elllSSl.'S of C(l\ml~l1ies h~\~ "':m Itla. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00099 Fmt 6621 Ii.",)' It lINt sinu: Ill< b<~nning "r tbe )~ar.' In aJJi· lion. tI<tIlcr.; rqXIl1.d Ih~II!Ic u~ of finan., ... k,\'J"agt among hrdllt funds haJ ck>:It~;c.J SIlm«l ho' SIne< ttle ~nningcf lU12. Mctffil1.T. rcsp:mdenl! III lilt lUnt s("OOS nCI<:\l (on inmost on Ihe AmIlUnl of rtSIlUIttS anJ >llt<nliOl'l dc\Q\ed 10 1!Ie mllnalCmonr "r ro!I<'\'Il. l"'h:J .x(l!>surcs t"dealm~"d other fiMnci.l inlwnc· \10:0-.'."""', l. rr..SCOOS .. . ..u.\o ,..... -..R=o.. • ,...... r..tcr.lmrn<.~,~"""'.",_b' .. Sfmt 6621 71712028.eps rmm III< ongoing MEI'3Ild high<1~han~p«;I(d bill by Ih< Trr-JWlY IJotparlmonl ~arlkr ill Ih< i~"an<t L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 96 II, ..... M .... T"', I " ........ "'~"(J/""'CCllk n.:"" n:Ai " II. - 10lJi1.~_1OOl-12 0 K.·li>l>«OIl~lIvksalcfw.Ji~byC( ...1I - ioSli"'''''''.2001-12 L~ 0 " " " , > ;w, )~~ ;tin )m .. _<111.. , _ _ ......... 01*'· .......-c .... ....,.......... ... .. IIr...., _ _oIo..-oI"_~"""" w-aall • ~~"""""' ... iI< ..... M I - * " " ..... _"....,----.-,~ _ ,...... _. .... ~" .. .....JI\'o'<I.'fII~'l.~I .......,.c.,..o_~ ~_-" r __ __ 'XT..\<:.~ s.-",_I!.>IIotoI~ II.. ",,.,..,;;01 <rui<~ ... R). ~ .,M;t"~ tt."", SilO ~ e:q",,;.,~ ~¥Ii .oIIows of ,0\0. t"",,," ~>L4< """, del"","" ow;.,!;'" 1<It In <I ... ri"'"Ilty"I"nl;nIit~~ i""'''''''oo n"'!><lIM a<CQIJ rII$ i,,,,,,,~ """'""....,...b(o.riIIg 1~ 1<.'fi11.J<ovO>i! ~~ (l;>rpo<.lior, "'d~ tilt end "/2011, ., ..~~ lS lllt 8"'","""I~ d,,,,,,,," k,,~"'1I>J liq",,1 ,t.. ClI"" '" W<.., .. ......". ,,"'.IIl.r/o.>r ,.. U.s. ftn,o,oci.II k,lIju.. fMroI( " ••:11 j,),,,~,~ bt-ft., 1~'IiI""''<l to ..'......., "n """.""ok dbr;":iS "ell a. ""olra! <~un~rp;u'1id aDd Clb.,. financial ut ~i l"" (figu.. J1). In n.-.p<>me tn ~ ,p<ciaI qu.,hon in the lUll« SCOOs. &>1 .., "'p<lrt~ Ih~1 dc:<ritrill. pc";'lonlly low 1=1 of ",1'''''1 ral ... only rood ....,. fradion, or Ihm "nle.-.:ml il\Sl.lulionai di· en .. had sh,>WlI &II I!,tn"".,J "PI" lil< r"rcn,.'I1il rid: or durtllHlII Ii'" O"It, lhe 1*'1 lear. Mar ~CI "'.Iimenl 1o.)I'"ltrd lilt ~okin, indumy OUdU. "led in lh. firJI holf of 2012, t:arl) In rh. )....r. ,rr.. ,h< 14:28 Apr 25, 2013 Jkt 048080 PO 00000 .......,..-1 _. ....... --__-..,""'_ );ow: TOo ...... .. _ ...... <:f.:,\ •• ;bllQ' ~"'''-'_ ...<1,....................... ...,.-~......... _ - - _... --,- ... ----~.... ... - . . __ HI y.oc, _ _ "'l.oOl...... C...... ........ _~ C.-.... ,j""""",, "·~iloo .......1i,,~11It ~liI l.....t. ,of 1>QIt:T\1," ~,.d ... . !Iey"""" ....... )"'" ¥\ 1"',,,g....,~.''';.1Iy i""",a"j ,II"" <", fit" ~'"'" ~~II>elr~ ... IirrI¢l!io!I!Wt"I It.. f'I>''''''''''! \'<".... Iloll Jaid.. "",*.. ~ ,,,,. '''I\,ion iuglold oo...o.ia! ",.. lc-t;.~, lO>,,~ .>InIt ~'"" lu",I'""" ""w.,iM "".. 10 ........... "~~."' ... I!I5IiUl_~3I""ctral4tn),"" '" tb., t ,5. """king","1 r"' ....'.I~~'"' .... acli~n! of lb. I!uropcao aU lborill!... lo .aile Ih. eu"," .",a,.. w and lin: ",1.""",[ II>< "".\1, from lb. etAR. "'Iuily pri<e:s lOr bani: boldh" oompani.. (1IllG) i""""oed and Ih.".CDS 'l'f"!!<l,doctined In lale'r"n~ "'I in.~",o", """"ed 10 oon"",n, aboul EUrop<.-quiry"""", """'.... d,.,.,., ,>I" ill""" l!';ns, and ens${'f<J<l.,o", rOf I;ugc HlI Cs. especially thoso wilh subslanlioi in ..s.mc't)l-Nnlcin.. "r<rodio.... Mo.. ..""nlly. Mwdy'Sc!m>ni",dt:d long· and sbort· l ....m credil ralin~(\[ fi", of Ih. <J] I.,~ U.s. bank .. bul Door: of Ihe banko 1",1 Ilreirin.mm.nl·gradc.I~I· us "" Ionr-I<rm debt. Th. ""~'H .. m d.'" r:1U"!.' or I,. Hllllndal l f1j(1illlti~a. VerDate Nov 24 2008 _ . _,....._ _-... _.-__ . . . _ft. . . . _ _ Frm 00100 Fmt 6621 Sfmt 6621 71712029.eps ~ ~'" NOII01Ior"" ... """""ooI_,...".;t)II.QI .... L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 97 26 Mollctary Policy Ro(l'Orl") Ih. CongmsD July Wl2 41. N~ ruc<lll.O!«o( <lc:dao .. fUIUl! i""",.>Cd 1IW:n1U. 10 m",,,!"""" ofoxf"'Wl'<S, 2(J1Q-12 • • • ._ _ " ~. )ft; 1'oo_ ... 1IoiI) ... " ............ 1oIy tl.lOll ......... !or ... ... _ _ _ " _31"_.,.._"""'.'\I'lQ!.'~ ,. " ._"",...-. ............. """""'-... _"_....-"_ . . "'"""' . . . . .... _r_ ~_ -- • " ~.,. • _ 1'00 ...... _ ..... __ .......... , _... _ - Spmds 011 <"I'«liJ <1<1",11,,,,,,,, f.....!«tool U.S. t>Win& orpnil>l.I\)II~ 2007-11 ~ ,~\I .~\ ,- - 44 $u.... ~ -~~",,-~- '-.otf''''-----.. , CooIoou.r...o,o-_'Y_ S«wr ........ _ . _ _ u..Jr.F_T_ S¢m< banI:! Wl"fe dcw.ngr •.w 1(' l'rim.·J, whkh may 1!Ife<1 lhe abilil)' of JOm< 10 pl.aoi: ligniflCanl amOUn!> of ith moncy markcI fund~ blillhe ma,);e\ offrct aprcafi HI hWo'C been mUlro SO far. lU 111= banks ~u,· renlly hal.. limil<u <km~nu for such funding. On 001· ance, <4uil) priru (of bankl rust significanlly from reiJli\"dyl()".ll kvds al Ih. Slar1 of Ih. )"3r (figure 4J~ an indtt of CDS spreads for Iar¥C BllL's declin<d aboul6Q basis poinl. IlIII "."main<d al a high k ....l cr .. Th. profllabilily of " 11 Cs decreased lligbll)" In Ih. lim qual1er of 2(m anJ remain«!,...11 bd<)Wlhe ,",.. is Ihat prt ..... ikd !>:fore III< finallcial crisis (llJure 45). Liligal;on provtSi(l!15 lattn by fllII"I< large banks in COIIncctiQn \lilh Iho mort,.gc .. Itlemonl ,.:a<lI<d e.arI~"'T this )~IU lICCOunled fOf lOme of Ih. '!<'... n.... rJ rrmure on bank proIilabilily The '·~nabiliIY in wningsduc 10 aro,)untin¥gllinl Ifld I~ rel.ltd 10 chall8"! in lhe mar'~1 ,liluc or bank. oWn d.hI3mpli· fitd f«>:tIt""ingl-of bank profi!i' Smooth;"!! Ih",u~ l Ooobr..r,..... ..,."...... . . . . . . . . . Ik~ -- _Q(,BHCIJ"..;r1llt~iollot,. . . . _of .. ~_ l_~_""",~ (figure«). --- ---, ~.- " " .. p..",!oroeo",,'''''_ " ~~- , VerDate Nov 24 2008 14:28 Apr 25, 2013 ~ Jkt 048080 . -.". • Frm 00101 ~ - - ....... " PO 00000 u , ~ - ," ." Sn'I Tk ..... """"" ... _ ...... !III!QI S-''''l'_ --..!IooN, f1l Y-'IC. ~_ Fmt 6621 Sfmt 6621 ~~- 71712030.eps '.. .. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 98 lh<sc "IWiai r~",S. rrof,IHbi1ily bas \>(t~ a\xIul ~>II in fOO'nl qUirI"rs Nri income wnlinucJ IQ IJo, su(ll1'Ol1ed by Ihf n:I...«. o[ kun I~ 1'tU..... " oJ!>.:;liD .I~f ~~Ienllh"n ;n th. PfI:';OtlS }'t~r, .l$ ehaf¥<:~ff rilles lilt l!P'.r~"'''!II ."".,""'- on IIgfncy scwrili~ ~ud rome IafJl' p"ntJ mil)' olio b",,,, b<cn """um"!>lin, ¥1I"11l1ll,,,I.badcd 1OCuriUI:l 10 lmrr<"~ Ihtir li~uid ilY poJi(i(l!lS d""mucd . bil [ul1~er ""IWI m~1 m.jor~' dass.,"S, Slill·,ub.iucd d;,jdrnd Pa)'OUIS ~nd shan: T1:pon:hascs as ,,~Il "" mh":li"",in raI:."~4!hled ~l' ,,"sh,d rtSut.tilry <;apilol ral;"" hj~he. ;n the fi"" QuaM.. of WI! (= Ih. b.J.\ "lmrl.""'"I;ft~ Ihe !'I..... Finanei,. Rr$uli>!OI)' R'$ml"~). CMl,I ('fIWided hy commercial I>.utkin, vr,;anil.11in the Unit.d SI~I"" dll'n!lI!I:d in the first half.)f 2012 at ~"t Iii<' same m....xrJtc pace 1$ 1II11H: "''CORd half or .)1 11 Cllfll kiw Ihe jum I.II'C&lloans. rtal "SI~I" Io~D!, and Cl)nrumcr Ioanj '~rand..'11 modc>tly: as n!>led "'rlier. th' uplum in "'~ding "'JS raM","I "rI~ nOI ....:Ibl<: [",elil klJln.(fi,urt46). T"""")IJIII!~'n in C&llen"i"~ hllS betn OnIJlJ based "uls;d. of us. bran~h~ and agenr;':s of (un'i"'3n bank$ and b.'lS bffi1 ral1icul .tl~ ""id<nt "I IOf¥<: JOIllC!l it: bank~ Thil pullern ~ ..mt;i:ll<~t "';11t SU)OS tl'luJlS jU.\'!J'$ling Ih", a lWlion or lli( incl',,""" in C&I knding (l\>scrl'Cd "I large d<llllC1ilC b'lnkl tl'Hock'd dt.."mISCd comi"'titiQrl flOlll EUr'O!"iI/\ banks .rxIlhcir ailili~lti anJ JIlt>t~ln! ~idiar;ti (OT ';Ih .. ~re>&'l (If <l<>tm-<Iic OU;;11>mers. lI.nu·IK,IJings or "",U"I;"I'(III' m~'Oldl' ,,;th fIIITtha!eS OJn«nlr.MJ in TtI'>lSUT)' "''I:unIO:s Md ~ncy1'u~rantc..'Il MilS, OIVl'n 1M ,lilj-J..1'tI'5«J ",",using marUi. banhWnlQl..J Iv beanr.lol:1N by '~I<ldl 0 0 itlll<::llm<I1l.~( bon.b r'lI<h<~ rroorJ lQ'o\1 10 June. pa.nly •• fl«ling ,helunh by ip\'~I<m for rdaliwly s.lf( !W<IS in lishl of n$log COn<Xll1i abelll EUfI'flC 013 ,..dlas tilt ..... aI;:JI(!< III tit. dilm<:llic and ~ crooomic dala rekam 110"-(1.,. j"iclJ$ On si"<'<'ulatil"·waJ"rorporato Jrhl. "bicb had f'I:'...-:hN =ord-\oIo' k~<1i io F'~I'lnL:tl)'. fl)Je lOm,what in lho .. <-on.! qU41'1.r I'<!k"'!n~ 11K»< lOm' c¢!l"''''' Th. ipread OIl inl'cstm<ntllrad< (vrp.lr.ll. bunJI ""I ~h.) ut un.:haogt\l. OIl ~, relal;I\: In tbe !loUt of lb. )rar. [)<1!litr Iho blIt:k~r In )'i<:\ds (W<;f Ihc ~nd qU~rI.r. J)'IItidIIlll 'f".'C\llal;I'\~f;rlld< <.>.\rpolrnlc I'()nds docfl.'aJN lIOm(.1>fI I>aIJIl(;C, O'IU Iht I.tm( prrioo (fi,· Urt 47~ Prim in Ih. !I.'COn<laJ)' m.r1tt1 f(lf ' l ntlico(<<i b'.ugW !o1ll1' h>l"l: dlolng.:d unle. On bal.",,<. Jintt Ihe b<~innillJ! o( Ihe Y"~r. !klMt><! rrom iollilulio..aI tnw.on for Ihe", m(lSlly ftoalm~..rat.lo.ms h,l !'(n1alncd .I1fQIIj! tb!lilolhc I'ttll1<1tCllCt ~f ~n~,(1y aboUI de,-.Iupm<'" in Eumpe IfiBUrt 4~) SroaJ equily p""y inde ... "",e "",.. led early in Ih. ).... 1». irup",,-.d ",nhmemstemminBin j>Il,1 rrom .d.1t;'V<1y .t roogjoi> gain< as ,,~O .. oclion, lak.n by major conlf:li b;ml;, 10 milig31( th< 6nllJll;i,j main • .II>. C""'~ """"""""""""DlIWn>l """",, ....t""" _ 19'I(l-!Q12 ---• 47. Si!<"... ..r""l'-nI<b.nJyidd. , ..<r<:<o,...,.nbk off tht-nUI Tr<;lSI.Iry )"'lli, "'" «<llnti<o'",""" --.. l W7- 20I~ • " " " ,,, ,- ~1' , , ! " _.-..............._... ~l 'i1Jr ''''''' ........ ... _ • __ _ _ ... _ l\Il~r ... ""-.!odo ... _ ~~ .. ....-,-",_ _ _ _ _ _ 1loIo .... ..... · _ " " ~ t f I o \ ..... ............. "............ -... _-..0.l000<I'.-..,'''-_-.0 N.oo 1000 ... 1f!''''' ...... oIl'.... oIt.,t _ _ _ SOl _ _ _ - . . _ _ ~.r_ VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 ~_ TU.·_ ... l~,.,_· Frm 00102 Fmt 6621 1 I I _1k_ . . . ". . .". . I" I I •" '2Illl ..... .,.... _ :'>"'<1' ..... I ~_ ...... lo.,- -r-,t"""_ ~ .. _ _ ""l'""< ' ''''' _ _ _ " "",I ,990 I0I l'lOl :®i "!!tOo .'tU< JlIO ~/ltIt L'. 31 l l '.,d ___ Sfmt 6621 71712031.eps I I 1'1 I Iii!/! ," ", L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 99 2iI MOrn:l:<ry' II:>Iicy Roporllo lh. l;lDgr<:SS D July 2Q12 Imillementfng the Nl'w financial Re.c:ulalory Regime. l~b"'"fc.:,..;,'O\lISjj"'~""I'~- " ....ly 250 io"i~,od;"g'""'''''kio,gs. """~t:I'Od>,,,,,,, .. '""'1:" udie>"'-''''''''''Ii" ....OoI~ ••1 oI'iI, ... '''oIl'nu.... -",I.. .,) 10 to. Ot><ld- f$!k WIll StteM- tek.ont'llOtl (U"""Tk.'r f'roIfiliMAool'7010{Uodd 1,.. kAttj.11Ie llo,,~ ;"Ihe lead iISP.''''l' ~rO<t!iIlI< lor ioi'{ll!'- """ f'l<jUlr\o<l ,Inde, Ih.;ICI '''''"li''~. ""'ik.i,~ ,....,mili"&' is.wo, (101 many (01 ,Iwt oJ ~ """"il1i1i" ..... """'"'I;inn.'I'''..,''''' .. iIII,'''''-'' Jeik:-ra! ........ ,lo)t."...<'(!II'."'.~...r!l~, linoncialS..l>ilityo,..,.;gtd wmti! (fSOQ, ,lie Iio¥d h.. ,-!.<driOO!~ lv ISOC $h~ "",,,w,<'d b)""""'>11<l""'~thcISOL""'~ I"" """""""'&<. I"'!C<laod Iln.II ",,"'''\'''' 0/ Ihe n.l.,m .... 'I;'< ... dl"'-Ittl III ~ b.onls<~"-""<i>ioo . ",1 fl'\l<lor~i ... .II __ d;<nl$.1n "'''' rt'<.... "'100\ Iht iI<>ard.tId Ih.. !>eo 1011.' On )u ... l'l, 11112.1t.: ....... dund III< 1,."~ •.,.,..(mp<~"'iQoI .. ",,," ........1 Ih .. "'-"llleyw~1 "",10 "'"" ....., durins.n.,..,- (..0..01 0.1""" Hod I,""" 0(2012.11,,, ~ >t1 ''(In .... j.I,,,,, r.oo. """" vll.""~"Sl ;nl""' ....~.aIIr od~ bankiOf: "'ll"''' .......~ IIIw. ~.I 'eo,' fIOIic't-"Qf fIrVI!Q>I'\l '~~m",, o.gs\NPR;J ;'''I~ingl'''' IJudd- Ir.onIt A<1 ~ ...,. bto-n;;,u.d Ihu.lariol 1012. in ~iruIa", on I"'" ~ 2011. tJ.;olloatd;.;u"d "",.""",...",11 ..."" ~ ....bIn... 1j""'lCI!J:eIh••• ioIltgJillelhc ""''''''II ..........,''''~ """"'" 171 "',"" an willi 1"""'",!lj)elIIIGpbI~inonl .. lo 001.,."", J;o",,"'" ,,,... I"y,,,-Iok .... ~ , ... ".,,~1II< ""nlon ,,,,.am,,,, imIll"'_• ",to...- ~"" bank ,i'gUI.""'I .....~ ioot<I ~ R"", ruIr ,'" lu"~ 12012, ,1<;11 ,"""""",,'I$""'~ tolht m •.w <i>I< <l>j)«.1 Ilk. n..... d,~"8t.II!I"g ~ ,ntO CMiorn .. r.ce willi ""."",ion;ol",.tId..-ds ..-.d '~""Y n.. di! ,.,;'1(:> wilh Me" ....... e sI."d.. >d, 0/ tt<'difW()ni<""", I" ..:mId.. .,.. WIIh '" ,,,,,,,,,.moot. 01' """ion 9J9.A 01' til. Oocid 10IIII: A<'\.'!n oddit""" ""I.' __ 1""1'.. <"<1 ,~,ng I»' b..nlc hol.lj,,~c."'~"""-,.w~h """', 01 S5ll 1. ]- 1i<'I!'" "~~I "".fi".j n""",""""in 0,,,,- [rom Eun>JIC. H""",~,. oquilypricc ind .... ",.. rxd a ro<Iio" or lhoi, r.m;." ~"tD~ ... coll<.mS aboul lh. European b;inkin! and fi"oiI erisi, inl<nsifiod "lain and oron,'!IIic "'purl, ,uue;l",t ,10,,-.... wu-..1h, on baI.ncr.. III homo ""d ""n,ad (Ii]!.u",49), The,pmHl bel,..•• Ihe 12-monlh ;;,,,,,,N .arnings p<i« llollo ror lhe :\&1' 500 "uJ • .-...I 101l!!run T", ....rnidJ 8 muth gaul,'<-' or IheoquilY ri<~ premium-,,;d<:a,'tl. hil m(ll"< in lJ.efim hlll( or 2012. and io< nlJ'll <I...... 10 the vuy h..:h Iewll il ","""hod iu ~~nd "l"'iD 1.,1 fill (6~", 50~ ImpOOl ",.loIilily f~r lh<.S&J':SIw) lDJe'X, .. ~a!ClIW"" from <'!'ilon pri=. .pik..J al I""", IhlS ye>.r 001 is <u.",nOy 1",,-a,J .u~ ... nll), VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00103 Fmt 6621 (h. oollom end of I~~ r~ Iballhis lIIdicalO' bas (<<upic:d ,int<-' IJ.. o.~ ..r Ib.' rUlODdal ,Tim (figUR.' SIl. In Ih. """,-,nl ••,irunmenl of '''ry low inlo ....1nll... mUlua! fund. Iha! in,'",1 in hiP<r-yidJ;"g d.bl ;"mumCDI.< linduJln~ .<rCWlali"'-srli<l. COIpIlralc I><md, and 1.",raged loa .. ) 1"",lin.oJ 10 h3\" "gtlifi""nl inflo,,~ I;" mosl IIr the tirsI holr or ltll2. "hi!.: monoy mark,! runJ .... f'I'ri."""'()"ld""~ HiIII''' 52) Equil) mutua! fuod!< oIso rca,nkd moJe.1 0"1/1,,,,.. earl)' i~ lh. }"ar ~"" . .. rnarktt s<:n111ll<nl dCl ...."altd.l>olh tquil~ aDd rutW-yiclcl mulual fund, r<gi.l:I.n.'\l "" lllow, III M ay Sfmt 6621 71712032.eps ~manaliru: L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 100 Ihe 1K.t NF'I( w.,.dd .... ' .... , ... <:/1' ..... 1'1' ald loy, '" I..n. ~q",,;,,&, ,.... It""i' "'''nlWOllnO)(l~, Tier I ~oliO /Jl 4':; I""Wlt. .<I!ilutm~. """"'''''' ,,~'iIy 1.... 1..... ,01 """"""'" I"", b<>IJ.. ui loS 1'<'(\..... iIn<l railingl"" min"'","' /oI11>e bru;odl; I... I ~ rdli<! Ifo<n ~ 1""""nllO 6 1"=...' Nf'II oliJ<'> '1"do<: SbeIIH liql>iditl'ol""d.. <h, wtoido n..", ,Oll ,-" tiolllliffd by 1M ~ Q>mm;fto!l' on 3""~"Ol3 '"!lit" ,,,,,"<14.,. n... ~--.' Tho ....'"I!n<l NP~ ,t"o"i>n "",;lin",,,,,,,,, /Jllhe '''''~<""''''01 'etl";"'''''''''''''",,,,",H. """"""'" ri>k se~ on<!",,""'" w.""","I01.~ n ,""~"",oI,;,I(w"'S"',d=d,.~ ... bt.oc;r!denlm..,IIfto"l"I Iloep;lll.~"')"'""" lhe art"'" ,h,rd Nrl "'4";"" ;'rl<"'''.~'i!IIy 1M,,,, 1<1 .....IMtd'" ri>k~>iI;";'l' ,i "..S 0/ <heir """"'" odv.nM:Ilj~~ '" rilII-blIII'rl <af'JI.I Jl'O" 'C»f) iii toe<t., 3(kl1f» 'VU"I~ erNii fbl" :nl """'''''"''''-'''')'''''''''"'''gr.,.",,,,1 noil,ulen\o~l"gis~ t ~llM"i<1c I'" In"" ~~or,.,-"'Jiri"ll"QI.-""flohipino,,, L'" ;", "".""""f;. '" """"S<O"""' otIIe, 'e"' .... sh"lwtlh. htdjle IIIrld <l< jlTivilie eqtHtyl\Hl<l. On A!~~ 19, It.. il<""d ~. datib,., ~dJ<I)( I"" Vok .... rut.:- rorI,;:"n....... periOO. $I;Iling ,hal • biln~ !"/Ility hIM III<! fItIIIWP-)'I';>I penod pm,i<ltd by ..... ~I~ (Ih.:aa io, ur~i /Utt 11,1014\ ,~ ""","led bylh« lli>;ml, Ii' fuilyron(""" ,ts ....·.. 1... ""'llroy$_'~ lt~·"~"bvll"" Void<; "",, ' Til< ero>"lh mit of M2 ~.(t.I in Ih~6rs1 h:df m 21>12 hl ~n ~nn";rl r.\1C l,r aWul 1 p:m:n! lfi~urt S3) • How~. >t:l-..o((IJ~""'oid<' ... li.S.r~.f«l<r>O !k..n<IIooI< • ..-.l11< ...!tovtol<p> .....1) """' ......... ltll ....... ·• ,·l.;cUof ..._ """"'ll).Itmud dq»IiIo .. _,uI_, 1....tINIo"" _ _ blo<WhI'~iu.i'''_fIIOU~ -.oooIro.:..., ..... ot>J"""""' ..........'I'""''''... ;....... ''''I'''''''I'~ GOII.,'' "• ...J MknIlI<>m<..,., (~I_ _'ud_.... .. ".,"I .. """,,_ .. ~." . oIhIt_ • ... ~~,.(~ooJorf1f.,'bdr....t"'~O\Io: \....,.~.....w_ ...,__ Jkt 048080 PO 00000 <'I'(f,!he itI"tls of 1>1 2 .nd ilsl~~t twml"lnrnl.li<lulll d<f".\Sill.. remain dl:\"atN rriJIII~ 10 V.MI ~"uIJ I\;r."(: betn bjXtttJ ha<eJ ~n hiJlo,lcaI ,dal,,}fl~h;rs w" h nomin.! inwmc and int</ru! fides, like!) fI.'flttlin¥ ihWlIIOJi" CIIntinuocl prefmno:~' hold ~c "nd li"uid asll't!. CumllCY tn <;mll:dioo ;ft<rtaStd roOOtll)'. ,dlottlng ... ,Iid <k"~nd boI~ a! ~omo and ""rolld. R.lail rno,..". marl.-.I fund, ~nd ImAlIlime Ik~! eoolinucd !ocon!nat.1. Allhe SlIme lil'tlt ~ ("\lrrrn~ In cilC~lllIOrt "'as iOCl\:asing. n:iI:fVC hId.ned bdJ ;)I 1M Frocnli Ki."S<"I"t ~~N dOCf(.cing; as I n:sIIll. Ihe monet~f)'m;." ~hich ilC<luai lo 11K: ium url~ I"') ....t~~ 'tdl~(I) ...... ~'I~_OIOI\<I ~""'_"I.(6I~""~llkwol<po» "'~"_"""I""$IIIII.«v)""""",_ 14:28 Apr 25, 2013 wilt""...·.., lot I''''''''''' of ..... 1<>It.... f.IOOd. t:\OnIy "1,.d,nt film, d... "..,. IN' iJI,Ir!l""'<'tl t'ot ~oI'on«-tl ~~ "'" fS(X.' ~, odd~oQ'" 1.. Ilu.itd,oIung"'illl"'hr'...p,...'l .... o6tos,I< 1~"~.oWut 19.000 (Url\noerulenfflo. tto. P"'P'''''''' in~)l.n'''''' ""'"''' G)~ oilhi' Ot:t.."".. n"""r ~~ .. ,10. VoI.:b-r rW.I"," ruIo p" oily prohIbia. b;n,k,"II ~"'i'"" "''8''1:'''11''' Sr.....! <>I.., a.li<IM l;>k .... wilh '''Pd k' !h~ t)o(Id·frollll:MI prtwodo>.l ",Jdi!>lIIlII doli!, Kl "' .... ij$'O'e) Uillilnct ~ VerDate Nov 24 2008 '''''''"''''"'sctarifrlog lhe l1l:I;"01",,<1,01 ""' ~,nO<J 1r.lnI(M. j";I~Ulions. MnnetlUYAggrtglI l~2nlll '" Ftdl'l"lll 1"".. po)oe<l ",t.;,nrJ..in6"-l", '::"'''11'''. (III 1qlriI1. 2012. I.. ~ I'"hlol.td .".."rnd.... n' 10. r.'~~ Frm 00104 Fmt 6621 "'". <lR.I).:I KoosI> ........ "'r>oolort ......,,_ MI (7) _ .. ,.,oD......,. _ _ ~>I_-u._ Sfmt 6621 f...,.brlRA..-.lKo."'~ ... I1...... 71712033.eps '1"'1iIy 01 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 101 3(1 Monctar}'l'olicy Reportt!) the CongrmD July 2\)12 """·fUII r ..""",,,yi<1d IIId 12·,,,,,,u" f""""," e:winp-pi<enliQh Ib<S&P~. 1\m-:!oI! 48. S=ndary' ''''''<l bOJ prices for ",OOka••<1 loaM, SO. Ik.1 :!('()7-12 - "",- ,. ," • • • • ~_'111<_ _,,_·,,_a. . . . _ ...... Ita .. _ S1.uo<T . _ itfflls---~hang<d little. on m'Crago. (l'.'<llhe fil'$l hall pf the )'tat. Total aSS<1S <>f (he I'cu<:ral R<SCI'o'II d«rcascJ (~ S2.f\68 billion as 0[ Jul\·II. 2012, :>bout SOObiliion kss than.t (llecnJ ~r 2011 (table I), The smail <l<:atilt sin", D=mbCf largely (dke\! jo,t,~1 u~o( ~rclgn OOItl1ll bant tiquidity n'illp:illnd declines in the net 1"',(rO~O holdin~ of 1M Maiden Lan. LLCI. Th. composition or T....<U,y ,.";,,,ity holdings ""~nJ!C1l ovcr tke ""0'''' of tbe !irs! half of tbis )'Car as a ""oil of tn. implemont.tion of (he Miii' A, of Jul)' 13, 2011. tho Open MarkO! I)",k aI tho Fcd.ral lI.esen~ Sank "r New York (rR BNY) had purdlased SlH3 billion in T",asury OOC\Ifitin "ith fI.'!naining malurilie< <>I' ,-_... _- I ,!, , m. " I lfIOIl 1II10 10 11 """llot ..... ...,. .... """" ....... J""IJ . :lll~ "....-.0""'---'" VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 61030 )"ta~ and ~Id or ",dcnned $2~3 billion in T",aslll}' 5t<urilie$ with matu';ti., of 3 )'ea~ oll,'$s un(\« th. MI':I""Tolal Fcdmd ReSOI"l-'eholdings of 8~'(1l")' M RS incrt:&<! ""'-lUI $13 biUi<>n a. Ih. pol;")' vf rtinvtSlin3 rrinciplll ~ylJlcn13 from a~n"Y d<bI and a£tncy Mas into "I!"""Y MHS COIl!tr,,>ed. In II>< finl half or 2012.lh, F.deral R<fc,,~ <XInlin· ucd 1<1 rtdu« its ~pUSu", 1<1 fatilil;e" .>lablished du,· til. lld_ ... \tEl'"• ....,.".,..,..'ioSopl<mb<t1011 aoJ .... ....tof'b><),oo<. ,lit (k,/< 1I><I~$lll Wlion i• .....,.,..""'" l.-y .... haJ »IJ II .. bIIooo .. ..,,,~ ... r,.... """".od ~_o -. " ,. '" • • 1t90 IIollI ~ l<IO:! ltOO ... ""')~~_ Frm 00105 - ~ • I ).11.),1 11 i I t I 11It -- ....... I t ~ " Y'1), 1190 1!911 :!IlOO lIIOl lOOI :!OOO _ ~ •" I • • I " :!OIO 00,1 ........... - . . ... _ _ ""11,11I111l< ...... _ .... V1}(- . . . ..,.......,..~ ..- .. i><\P ~ """'_..." .. _ _ • ......., ..""' .. """"' Cko"'_IlJoI-'-"""op. Fmt 6621 Sfmt 6621 71712034.eps ~_ .. ..., ............. _X1"n....,..,.. .... J." '" '0.,- 11-,- ........ _011.·. ,o.,.. T--. """.·III< ... "'...,. ............ ~J..,I',lOl!. $"' ... l-... .... _,.,.". L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 102 I S<loo:=<d,')'''''.''.... lSoT u..~ R........~i:<IbI>co< """',:20 I O. I ! ",_of"""'" -r...,_ r_'...-J .. ~_ ...••..." ... _ .~- c-.I_IotM>,_ r.... ' ......... _ _ ,,...,......, 1... , _·_ _ I_'''''''''IT,,111 '" r"···""~p"'T~U''-1.C s."...<I'7iIl<.I_, ,_ ......._...... . . . .. ~""",of Mo """ ~ a.- 111', \I' ..... l _U ... O\_ I ._~"'" """".~u: ......===.._ _... . . . s.-...,WI-w. nT'-'1_ .•. ~ I I~ood\lmto Io "" 11 U (' AUU) I ~_Uf' ,~~ 1.171 [>}! '"~ i.. ~ I!'I~'" 111..... SoIo.'tN ........ 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April and May ...,hIod ill. ,"",,)'''''' '1, wilb inl ••""I, or II>< enti .... maining OUI«lallJ;~~ bgJan«s ol,II< !IOnior loon! from Ihe rRUNY~, Mai.kn 1..:1"" LLCand Maiden La"," III LLC ill June l'rocff<ls from funn.r ~I ~;r1'l!m ~bidt!ll.>o1lC HI in ]un •• lIlIhkd ""1"')'lIII'0' of Iho<'<luil)' i'<"'lli"o ol AIG in July A nel JI"lin "" 1110: s.'\k of lhe mn:"ning ~tl in M.iden (;,on_Itt L.l C is likdy d~rilll! Ill< nt.~1 fcw mOft' h~ S:.ks of m~ ('Of lhe mn~inil\J ~~\t In MaWe" unt lLC ~h~u1J bt: ComplClo:tI byl/t<: ... J I!f Ihe year, boJl' r"", l'ga\1' m~y lak. l"nll'" I~ dc,f'O'( of, t..."'D~ (lII1. talliling uo<k. Ihe Tmo AJS<1-1j,tkrtJ S<turili(s l'fll" f:.:i!iIY1 TALF1" ,'ft jli~ l ly ~''''CT, ,..,I\t:<tin~, in pj'fi, lh. finllMwrity<:.f. TALf 1''lIn with .InmJlfilr initillilcrm, On Ill< liability side of Ihc F«Ieral R(1C1'\t's baJ~!\IX ~1tt<1, ~\X"!i(j hcld by <l<:1""il(ll')' in>lilUlioll'l d<:<;lined ,D.:>ul $42 billiO<i in the fl(j\ half of 2(1]2, "nik f,der" RN:n~ n\'I<II ;ft cirrul3li<>n in"",;IIIed 1'QU¥1tJ)'.539 bil(i~n M I"'r! 0( ilJ "~I,~ng rrov~m 10",;u", lho: rrldincss ol (ooJs to drain mo:l\\.'S ,,'hen dOlnE >0 becolll<1 "I'rrol'<,alc. the ~~dtrtil R<5<rw ,:... JIlClOO ~ MrI<'$ of ,m.olI-ic40 " ' ' '111< "'pul<'hllS<' IranSllCli""s in""'tnJoll ciiglbi< <X)1Ia!~nd I)~ wilh iii C,'tJllt!ltlo.l list of C(lun~r"'lIlic::;. In the some ""in, lhe I)edm! R,.,.,,,.. iIl>o wnlinu,'d to ~lkr smJ/l.vllu.' tcrm d.I'>sil! Ihrou~h III< Term Ikjl<)S~ 1..,,41). On MD1tb 2\1, (he rcJcraJ R"",,1'\'ll SY<lcm ",k<h'(d il' :WII Nmbt~ annuoJ oompar:luw.audile<i f,nan· cial ;!l1lCmenl<. The Foo~ral ~".. repO"rtJ nel il)o.Ol)!l1<..r AxoUI S77llillion for Ibt yea, ""ding i).'Ctmher 3(, '2011. .kri\~,\ pnlJlJlrily from 'nl~1 I!\COOI' on I«"IIrLiteS aoqUlmJ Ihro"~h opon m.. kCl QPtrati~nl lISul1 ",,:uriti~ fe<lertil HJ!tn('Y and GS~ MUs' ~nd as!: drbl "''Cllrilit;). TIt< Rc:I<fV< flanks l~n~c!1'OO qOOUI S75 billi~n or Inc rn billi~n in~rnltcnll\" in<om.to Ih. U,s. Treasur)' ln 201 \; (hOll"" d,w,'n jl iglnly from 2\)11, Ihe Irltnsf'r 10 lite us. Trasur), "'malll<J htsloncallv VI''}'IIII»'_ "''''IJ n.. InIC!fulti,nnal Oe\\!llIpment!l in add~ill$ iIle crisis hy rll< ",gion'lleadC!'1 ",'nlribul..t 10 ~ 1<"'J>;>rat~ <'".ut.ng or fm"ndal S1~ 1St\: th~ !M.u-··,\ n Upd.nl< on iIl~ Euft'll<'an IW:aI ~Dd Ihnking Oiru. ") 1I0"t'''''_ JmiJ onping f",'I;licaJ UIII'<'"olilly in Greco: ~nd lII(',..,a$<d C01ll.l11I.I aroul Ibe ite;li!b of Spani!li bltni;.s. fin:tnci~1 cond il!(>n! oklerooted "Il'I'" ;~ lhe _<pr,ng. Fo"..i~n """nu",ic groll't11 picked"r in th. first qll:u1 .., ""llhi! >I<'fik1'llli"" I~y ,..,lkaC<llCU1rcrary [uI01r<, >Illd m:tnl d;ua pvinllo wid<$prc.d sk>Io'in$ in Ih~ !I<WIId qUllrter I'ffi Rmi.gn linan.:i:.l m~rh:I~ nlllt b=. ..malile. !nnWI)' in Ih. ~m qua~ er, mtDUl1II!ut~ m:«ft'«l)llOlllicJata "cd S(\m< <J$ingol' Iclllion. lI'ilh,n H,e <Uru artlliod Ie Kn Iml'ftl\"!mtol in global fm,oc.al c~ndj(wn~ Tbii Imlll'\)V<ntml "'lIS ,..,w~ in ,""srringa~ 11K; bi>osI flt'lD rre";ous polq Dl¢/UU,..,S. induJi"l-I/t;.'ltlr l longt'r-I~'m ",fil\lln~mg OI"MKlns. [aJed_nJ {lC'tl1,.-", and banlin~ IIl\'SiO'S io vulncrahh: l;urop:lI!I Ct!uotnes ~llrroc,'d, EUI'(>-3"" k.<lt:rs n:<f1'Jnded (0 Ill< ",,'rs<n· Ing of Ih. cri<~ lrt ann01UlICln~ adJilivn"" mtilSU"" ~I i summit on June 28·19. TIl< rnarxcl rt'<\CIion "':Ii p;l"r,1'! bul short 4iffil Incrca:iC\J untt'nawl)' ~nd grrJICr '>'Ow lilhy him pum.d up Ih. roro:ign '~4n$" ,a1u, (If tb. dllll4r ~bilUI4'~ """",nt Oft a 11~d<- ...'cighIM rn.~s tIjIAtn.ll a I>ro;W SCI of c~m'nci<s sillO< ,~ k,w io e~,1) l'cllniary, ,""Ih moM of the "f'I'I~d"tioo UOC\Imn~ In Mar 1~i!- uro: )It T)'pical ,>f ~ri<>Js o[ fli~hl 10 >a[ety, tl>< d>Jlb, hilS al"!""ciol<J againsllIl'm currencies boJt dtpr«i· ~Ied H~lllSl the lIIjlan* )"n for I))():<l of Ih. pI'riod (~g~re 55), Th. Swi>! rrane hal IllCNtJ "'11' ej;,).'I<ly wiilll"'" <lifO as lb. S"mNr.lion.oi Bank h~inlrt '-('(led 10 m"m!~tn ~ ... ihng f~r Ihe frolIC rdMitt to tho Dum\~ the ~""d ~u.r1er ~!~ty Ho)"1 ~nJ of IhlS y.:ar, "i~l-t'l tlw d.lerlcrrlol;n_ ~~bal «x>nOntK' OU\- 10$ h<ll"'J rush gowrnmnH boItd )'i<Ws fl)!' Citmuht , GmnlD}: ~nd III< UniltJ Klng,lom 10 ~ortl kms (~~ure 56~ U~.w\JC. .laran"'" yic:hls on 1(1.)"01 OOrtdl feU ".,,\1 below I p,'fC<'nl , II)' \'l'nlr.,l. 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" " " " ~ IIIg coocmlJ Ihal <kpoSll fiw.1 ,,".Id ."read 1<> hank· in\li)'.Imu: in lIN: ml or III< .Uroarea, N.",~ Ih~1 across th~ ad"Jno:d romgn «",nomits fA FFJ~ (fi~· UTe ~), ThlSrall"'<UllHrnuat«lt<w>"rd the rnJ ofthc: second quarter by the pMltiY( market rea..1ion 10 lilt Jun. lummil ~uil~ markelJ in Ihe EM& .. ere Ills" m~,kodl~ down in Ih • ..cond qua,k, (/igUrt 59), EUfOl"".n oonls faced rtn ...~d $IreiGC:S 111 m:.nt moolh, In G= ~ft .. incondu.i,~ .lc<lion! in <"I)" Mil)", dcr","1 ""Irto...~ rrom bank. occckrll~, ,......t· 5S. U,S, doII....,bat ~' ,.." . piny <elc<tcd m:tj<>r <IIrn:fIcie>, lI lO-I2 Spain had panl)' nlliooaliled Iholmubkd k... &...,. Banki. and WIluld n""d 10 i"joel an addilion'! £19 bil· Iioo into lit< b.nk .nJ i" bolJin~ compan)' added 10 unease """ullb. regWft •• \~nl.aIIy lcaJing \0 pl.lru [0' an I>fficial aiJ pa<.:kar; <>f ~r 10(100 billion II> I1.'Qlpi· lmete Spanish banh Arr",IN:n.<ion """ut bank •• al,n w"'l",idrsr=d. ",ilh majorinstilUlioos in Ilaly. 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(""'- L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 106 R'negori.ll .... 0/ lh.,lenns (1/11 .. LU-t~1I ~ogr>m jo, C'l'KI'_lfSo..:llt"l (0/ ,1>0 0)I._~04 tllfoSt 'f"'-............. 11<' ~ "ill <fifli<:ull '''''''~ " .........~ I<> cOOIi",,,, itt"Iet,,".. P"""""-"" ""'" ~ n/lici.16",,,<,,,t "..tor I.... PI"!:''''"' 1,.-6.1"'e>;oiS;>Iw """",",,-'<I JJ\;ItpIyI.-.Spoin "' tOOCt'""'""",,~;u J'III'Wt finOO<)'."1I(I ,~".,.. rrI <I.hilit. '8'lI.>bd'oling.,..... ', ",","",oj \\'ott. ""'"",Ii<" "";,if)' d.ditIltog. UI""'~"~"""~ tI ... I... ~ .. oirqO .. :oI A<..... mn"'llI. ,'" II", n.... "'., <l<>(\etro.~""""""'II .. 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III<'It,#",,_iIb<) I'ublicdrbl< ... <kl be ,;groiflCOll1ly bou'''~ 1'1' Iimh..,lMrIk ~ fv, ,na<l.et I_~ ..._<Nt in 10_111<' h,," W"f' Ill""""" t<:UIIOmic p,h "nd SJut"'" go.."'II'\I_' ''''lV''''<'dl"""",.. ,fi,,·,,<..I~,,("P'O (100 billie", j"' .. b..... 'goy>l..n. Mo"M. ,.".. i"''''<\>I''<"III<'d,~.iIlj:lOlll~ !til' MIkIatK'\' _10.1 h.we'~ .tft'CI <>I inmasirtg ~"'l""""""do::bI_ IosI"'..... '" "" Sr ...., no.""N ."d opIi.,I""", In h<liy.II...w ...............'ed nil! 101 rUlo· ..... 1\11, 1I1111k ... d 1"''''' in<l<."" I... ",,1«Jed <<I<I1IU>e '0 "",'" l.....-.d &"-.... <"1 fi><:II iInd Iin.>ncioI """"'. III. ",", Ju, .. i8·1'l t U 1lIIiLi.o, a,"owroc",1 .,;.,t.;"nal "11',""-".,1"",,,"" Ihlt soaI, l .......... I~~,r,,"I... iroItgt"'.tI .. ' '(.>ef\-,· liI)II(l/f1Jf(lf>e""~l$.lIlallo;.ilht ... ,wr .... 1i""""i>1 bad;.r"" (""Hi.,. 10 ,I,,,'<' 1y """Iollaliil' b... J,;, Worp>:lO<llll ""l'<iIifIS .... ~.iW~ l~b(rj ""'" 1<>"1JlIlO'I tl ..it Wt,k;~ >I>d 10 J><I","1e ,."', t..1Il""g ~11'00#0 II", lurop<9O\ kwhl!"~II8atlk in ~'PI"'" '" G"""'~"' .... ~ .... "," I_";'~ ~~ "'")\jl 1o~>Irn'II'<ltl!kIn rrlludo ~ilIIWe!. ~"""""'" 1o;'.... Y"I'Ot..""''''''-'d. iI11jl1_ O")tJtr*lit~."" ill II.. moll .u\<lml!il= ruoJO"l"'" """', '" l""r ",ode~."'"'*" ittcM Mr, ooIidollioll~ ~ ...... k:ofJ8f1lt<nl, l'IIf>:>-arc.lIXlli<)"';01: ......... 10 t;/,hli'" *1 .ff. ....... ""'''util...t (...--.at\: In kill" =<~'-IOO(.IiI\'''ci;i, ,.,<1 fis,;ol int''lI'>l''''.on<l "~"J\3l~~.I<)~"" 1)1, ,.... it:na!,,rlll<' """""M)' ,.,.," ri>k 01 dtf.u!t. I~' CDS pmn,um, OIl Ih< dobl 0/ mlllly l:trgt bank< in £uror< b..~ ,ubotantiolly ns-n EurtJro<;n <:OIIrIIlit>,l()l!_1l I ~¥"n: 61 ~ while iss ...."ct <If un""""",d b.>nk cldll. wInch h~d r=louslyrowvrf"lld. h'" falkn NO''';I!\"""din!! lbose M>'cll>rm<:nlS. funding mafk~1 SI~ h... "'main.d ..laIi,·,~) mlll<d ... mlllly bonk< ,. • ~ f~m,d (lin'" fromlh< Eu""plcrn-Ih<.ysl"", II) tho F.CIl""d Ih. 'aJi<>nalcentr:l!!>anh of 1n."U"'"..... "",,,,ber <l3t~Ih-e' lb. in«.bank market<. r\ "andan! = u.. of I.... C<.\SI of this inl.f_ ba1t~ fundi'l!- Iho ,mj"llOed basil spreJ<! from .um_ dollar swaps. ,,-:u1'ttl. ch~ at $hOl1t:T m~lufilirs. • The f:llrop<'" fiSCld and hankil\ll mru ~"lll thr "<11_ ;0:. _,_ ....... no ........... ..,. ... _ _ 110 _ _ • 'orr ".l$IL 14:28 Apr 25, 2013 Jkt 048080 ""'a. PO 00000 Frm 00110 Fmt 6621 Sfmt 6621 71712039.eps VerDate Nov 24 2008 It:Tof """,,,,,,,,ic ",,,,,Iopm.nt< in the AFt;,,- F.lfro-''''R rrat GO P w:u Oat in tho 61;<1 ~uarter of 2012 tiln"""'1ij • oontr""tion i~ lat. 201 1 Wilhi~ I.... wro 001- L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 107 61. fr<d,r <l<f>lllr ....... I""'"""n. f... buI;. "' ",I«IN i:uropo>ll """"\I.... 1011-11 ,., -- 62. CIwoIC ,n NOI>OtM" pri<.. i<O" moj<. f"'~IY1 ~1e$.~11 --. -. , ,. ." i.oIj --- /Om- .I\I< ...... _ ~!oo> IoI)rl.l(Ir!~"'IuoIO_ s""""' _'~_I' _ _ _ "" _ _ • .a-.I_,·_ .... _ _ "''''''''''''''' ___ JIIII foll lharrl)' in m;)" .uln.... bI. counlrios, Including 11.0)' ~rHl SlX'm. ~'n"""", 0I1m cudnlncs, 01pocial\y Gcrmanj\ r..:rform.:d boucr. Mounlina financiall(nsions and "scalauSlmlY m.alUM 3P1"'3' 10 h_ fu,· Ih<'r restrained lhe euro-a!"t"oI (OO"<mI)' in lilt $C<>.)!IJ quartt,. ~! rvidtnc<d by d«linin~ ou.inm ronfioitnf" ~nd ~ furll\cr drift o1f pUrfh.Rnll. rnanag<rs ind<~C$ inUl oontraclionary !(rril~'), 1lc;)""mlC perfmmlll<."o: in 1110: oilltr Arr", hu 1:«" UnCl'Cn. In 1110 Unltod Kingdum, nal GOP «mlinU<~ 10 foil ""Iy in lilt y.''''. and infulon 1'OlOllofl1l1h.. "".kn<Sl fu.1t<I by li~hl ~>COI ]1(>Iicyand ntpliw iriD· O'o'<r _["-1. from Ih • .ufO ."' •. In Jl1ll<'n. ("IUIllIII rost al ~ roOOSl poct In Ihe firsl qllart<r.ld«ling fiocal slimulus moasura os "",n os a rrrovtry from lhe shaM~ of paruwppli<s mused by Iht lI<l<l\lsin Thailand 1:1$\ j"tllr. bul rro:nl data '~'tSllha! ucillilyJMler' .I~J in Iht sCN.,,1 quane,. The Cana<1i"" e<:ooomy <onliml<:d 10 t.\ranrl moJcrtldy in Ihe firsl Ihrc( 1lWI11hs or In.. year.•upp.>rled by lolk! dmncslk "'mand and ~ milo.:nllabol ma,k~l, In mQII "f'Es. b<ad~lIC inftalion !'3IO- lIl<aslU"td on ~ 12-m(Jfllh <ndngc basls- «>nlinllN lodcdin~ in Ihe firs! half of IheY""T as Iht e[ecl. of lhe la,.,. ,un-op in commooilypriN! ill (Arty 2011 Moo!, The mwlkr run·up ,n rot!¥)' pt'iccf lhat loot pi"", .~,Iy Ihi~ y.~r c)(~l'Iod ~ 1<$:1 maf~.d clfC\':1 on ""OI"lIl<r r<~ Ihough il hd""" k",p 12'monln inn"li,," n<lCS ~b.lY< 1 ]l<1t"ll1 In Ih •• uro ~lta and in In.. Uniled King.iom (fill"'" I\l). Japan~pr<an to bo<"ll\(f¥1n~ frum s<v<rai )t.i'S of okftalion. 001 lap.,,1C9o: iubll.ln VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 ." 5<P< ,;;:- !a' PO 00000 Frm 00111 Fmt 6621 --,........ ~ '" _ _~_"""'''''-'''''''''l1t<l._Joo-'' _ ........ _ .......... _ ... 'l. • _ _ s.-..... fo.- ...... _ ..... ~ _ Il~~ ... . ~ ~~~ __ ~ __ ...... ~ I1< )_ .. 1_ . _ ........ ~~ ...,c-I> .. " ...... .....,"" !'tmaill:! ~'(h< I ]l<m;n( i"flal.,n ",ill inlnl\lu-'Cd b~ Ih. 90J in February. ~rIII ",,",raJ bnnlH"'<:d funl\c, tnci,mo1lCiary polity ;ltan~ Th.1l0J in<;1<.u<Xi11\c !;Ie of its 3SS'1 l'ufl:htlSC$ rrulll Btl lrillion 10 f40 IriitiOll in "pril. and lben 1("1 V45 IriCion in Jul)'. The ECU, aflcr h:MJlI. con· JU<tN til< $<C()!Id of ils thrcc-Y""I!i>ngef-\orrn ",flnan<.in~ o]l<ulion, in lal~ Febru.uy, rut ils policy In1t1<11 rates 10 r<."COnll(>w.l in .arl) July IfigufdJ). In lui' Ju!\<. thc Bank of Cn~lanJ (HOI:) a<li... l.d its 6.1 t)If"iIoI '" 1aq:.,,:<1 mC«i ",I« ill ""1«1«l rodyar.::oJr"",w."",""""",,. m-l1 -.- -- -"",-_ _. _n. . . "'4ooIya! ....... ", '" ......,.)~ II,))I!~ _ ... .. _ ..... ....,.,.. .... ,Iot .. _ _ I l 0 l ...... _ ' " _ _ .100). . . . . _ ".. ............. .. offi<lIII _ _ I00~ _ .... .. ... .. t·_~ ....... --.- Sfmt 6621 71712040.eps ~..wr.....,.. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 108 n~lt)VI"1I$ a disarpoin!il\t I""rformatHX ~, I"" end "r IUll"_r. Tl-,d GOP l!fI.l""lb n:1>,'"JKkd in \Jt,: firJI ~~ar· '<:fin most EMul',...'Onomic /It,i';ly 'll'l'n~<d '''fit. ci;illy briillly;~ <JlIn-gins ~. J~1\'d1' ren''C'Iin~ lhe rr<on"cc:lit," or "Uwly cll.i." d'll\~ b)' lh~ HO<I<Is in Th:tiliond f;ootlcmic ;f09ilb. h"""'~', "'ml;lIIu,d In .Iow in Chin. IlIIcllndia. Mom"',r, rtI.".1 mclirntors $U~ tbat Ih.)'J"" I,r cn'nwnic:lICt;,;!yd"",lrraled in mOSl 1],01 Ea ~i"$ i1l10 the i«<.>IIJ quarte, om;J 1I<~""'.. illJ.$ omcUIIW with III< [urop<~Q <fui,~nd /'I:1~li'<i1511bdutd il'tW>1b ,n Chin._ [n China. rca[ GOP irl\.Tta.;...'ti al ..oout a 7 p.."f(I,!nl p;.oc ,n Ib, fil$l half ['of III< ;d~ dllVl'll from an $'iI r-:r· <nit I""" in The 'IW'ncl h>llf "r [lUI yea, Til< JdmId""," rrll<el(cl .."ak<r (\em..,d r<lf Chi.,!>: ex"'''''.LI ..~U lIS dorrn;sl;';: f~()f3, inciudiDIP1101k1lliini consumer J"""d",~ and ~h< n'Slram,nl'<t'l'<.'CU ()II i"\'t>lnl."~ of p.1:Y101lJ !,,"'mm<nt m••1S!H\:J to «>01 oICt'V1I) in lbe J"OJ"-'rt)' .l<Ct()l". Ma.'rN<O'Hlmf( data f()l" M a~ ~nJ JUn< ,~llhal"'''<>4OII!1C aCl"'lY":a. rie\:,ni up u bli ~(lWiInl ~h~ 'oJ <'It lhe ~nJ qUirl ..., ",th gr(N)1h 01 'n~!lmcnl, ",toil ~ and b;onlle.ro~in!! eJgln~ b,~b<, Ht~d[in.12·m"lllb in!l;u,oo feU ~o l~ J"-'r«nl in JUn<; 1«1 ~'-;lddilionru m(llknj,ioo in ~ rric.:s. AJ ilIll!11onary rm~m ea,,'<l4nJ ro~ms aboJ"t l;I'owlh m~unkd.Ih<-I'eonJo·j IMnk of ('h,no k\WcrtJ hankf res.a ..... requirrnKflll by 50 b.I>Is ))<'Inu;" bolk f,hru,), "lid May and Ihm rtJuct<l tbe benchltWk VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00112 Fmt 6621 on<-)'''''' lending tal. h)o- 21 MJ.,S JI'~nli in .kine and 31 bosi. I"'",I~ in Ju~', Ih. ij"t ebani"'S in lhal mle sin'" an io=""" in July "r lui )~ar_ O...orrhe ijfSl hoi! 1/10 )'(~r, 'ho rrnmin\>i waJ link: chan",d, on O\:t, a~nit IbrdIJ.U:u-, loJl il ~1'\'I"X,al.J iIbout 1'h pmrnt "n. rod Im,*,,'OIhtrd basis. .LI lh. rrnminbi fo[· 1" ..'«II~c d,,11ar up·.... rd ~aill5l {.'hin"~ "lk ... ,""jot lra.jing (l3rln ... [n India. =nomic SI","lh haslllso modcr"'.d lIS $1,,,,' rn'JI"':!:l (!II rifCaI ..,d )1",,1"1:01 ",fOTI"(IJ and f""" vWlIS milnclllfY tiJ;hI.1"U,~alk<l in~m.nl NOIoni ,;,in.....[OOlIbi)ilirs from Ib< counlry', IW;" ii;>:.J ond C"mntl«X(lUlli dtf"'l~ ,,'m. mdil Tilling ~~ ""m(d (hOI [nJi.·, J\lV(rris-n dd'i rist> !.>iIi.., iii invt5lm,.nI·)tI1Idt S1.US In Mniw, """nom,c ""Iivil), rrboondtd bri<\:1) "' lltt lirsl qUllller !IS th~:wic"\t"'>11 _<r<:I<lI' I<'boonded fftlm ,ho: 10ullh",IIJI"<rdfOugh~ dQm..l",d.mand gain<clll1'''Il<nium, ~nd .~J'O'ts 10 the Uniled SWfl"< picked up. J):""~n'ic i~dicatlJf$, he"t'-Of. SUUt>! 'hal 1ll'O""h l\l(>d<r~I<..,j ,I>rot'<IlIoll in!h<' SO:Ulnd 4u~II<!- On J~ly I. Enri~ue Pdl~ Njcll>cf Ih< [o!,itutionill Rc'VI,J[u, !i~narr 1'4f\y, or PRJ , "00 Ih~ MOlltt.m l"«"ido:D\ial ti«1iQn. rr<>miAAg I" pto~u( llI!04'ktl-«ienled r.:fvrnu I" \loIS!or .l"U'''''"' JVl."'lh In 11,,,,';1, real (iOP ~trlllneJ b)' J11i@'1t;.,,,,,,t. menl and ....JlII<r·rrlal~d )'fIlbI<.,ru in the apkullural stelOl"- IncrnseJ >lightly in tt." firsl qualltr, makJn~ it Ihe fourlh oon>t<:uli,. ~u.n<J M bolo"'·I",rnl ~lb. IDJuSlri:.l por<)Il!ICI,on, whiclo hil$ "'..... oo..'!I"'BN I~d sint\: ""'rl)" 2QII.cOnlinued to floIl lhf(\llg!l Ma;: .u~~o~ thAI ''COO~lllic actIvit) In Drilil 'rIlIJIflN ....ak;" Ih.,.,....,d Q~all.r. llffil]'ne infll!ioo ~oo-ally m!>Jenl(<.'ti in IhI: EM 1:$ rr~"""lm!JQ~"" food pritt )'It>sum and w"altor OC<,1· ""Illle ~h In lld Jil"", loCb",!\, s<wral 0I.!wt '~n' lrill Nnks in 1M tM8111"'-' ~ monetary Jl"lic~. 'nclud'n~ 1h.J.sc m 9r~[, Chile, [nd"" lnJon~i •. lhe l'holiM'lfl'"S, Soulh KDra. ""d Th.iland, "r ''II' Sfmt 6621 71712041.eps [,.t.,,,l<d CiJn~flll T.. m Rrro f"";lily. <I[JffiQi.u,· monlh rundJa,gain!" "'i.k~ ~I' ""IIW,lII. In addi. lion, in July, Ih~lIOf IntTl'"",d Ibc_oiv.: ,>( il'~l ru"'ila5<ll"ov~m r",m £325 billion I~ 07S hill.'D, and.I<>g<Ih<:T "il/i Ihc UK Trnsul)\ iwvdu"",,, ~ nt'W Funding for Ltrnhng SclIctn. dC1"~ 10 boIb1 "'"dlD~ 10 hnU«bnl<l$ I!I\J fi,ms L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 109 " Part 3 Monetary Policy: Recent Developments and Outlook ~ 1 0ne la,)' l'oUt)' 11\\'1' tilt ~''''llla lf oflOU T" I'fllmotc the Federal ()riIn Mark<l Ccmm'II«'~ (FOMq objtxl;.'cS <If mUimum ~mpli'l)mo1<lt and rr~ Jtabilily,lhcCommillte mainl~in.d a la,¥"l I1In~ f()f the f«!mll funds r!l!~ of 0 10 '\ ptlWnl throughout lhe ~rsl half of 2012 (iilul<: 64~ " With Ih. if\(omi~ dauoluUtslinga s<'mIC'oIhlllllo"tt ""'..: ~r ro:mO!lli<: rro;)\«Y th;u, Ihc C:ommiuox had anlj,:j· pate,l, ~"d "ilh intlal;.:>n 5ftn as StIlUng at It-."ds at or belowlho!lO! oons"l~nl. ()\'tr the long run. "lin ilS ~li1lU1Dry ,,'Umdal~ Ihc C"mmlll .. look !lopsdun ng Ih. first h;l!f of Y1121Q ['Mid. ~ddil.)nal mnnelary a<.'C<>mmOOalion tn oll,k, 10 .. "",,11 ~ sl,"n¥Crcronomiem:o'l:ry and Iii II<:lpo"l\Il<' IMI inM ...",". ..,.,...,. lam. run! at ..."",1, OOnsislcnl with II; mllndale, Thc"SC I[er' includCll knglhrnil\ll, Ih.lwnron ~f Ihe for.>1lfJ rale MUI~ "gardin~ thc Cummill""s t.\JlCC1a1ions II ~totl\benol' ... ro\tc .. llm_"'",, __ uf'" """O(G<>_,>(,... r _ _ _ 'S)'_"""'II<~ ...... 0(11" Palmi ~ JI.aoUo( ", ........ u-.d-'. .' '''' \;,.t. ~~s.. F'-', .... ,-l !/It ..... H),,('_. .... C""...,..._I1,..".,·III . . ~ C._,..,.,. '11< .......... ofO'W'-''''''''''''''u.._~ofFO~''_b<n to Il, r\)l' I~ P<'I'iod o'cr "ni<:h IX(In('lIli~ condili\'UI "ill .... ruDt .,'-«plNnall)' low k\o\.~1 for th~ fClkral. funds l'lII<; ,'(lOlinuins 1110: c.mtmlll<.""·~ maturity '~Icn>ion l"'''Il1''m (MI'I') Ih",ugh the end or lhi. ~ar ratll", than completing th< rr"irBl" in Jun. as l'fCy~~ ....ncdultd, rt"lining its t);iSlin!! )X'lici(-s rtprdin¥ lbe (tin'"nlm<nl Q{ rrill<ipal p.ymcnts nn 111,'1'1>1.1' ~"ri lits in agcll<y-suarlllllm I11()rtgall''-b!w:kt'd -.>rilits (MilS).• nu wm,nu,ng 10 rtUl"'Si IItt JYIICI>.'IIs 01 maluri,,!! Tl'(alury ill:\;uriti<.'S. The infQfmilliun rt\';....'t<J at the hnllar)' 14 :!S !!I<'<lin~inJic.ltro Ih.1 U.s. <COMmie aclivilyh~d •.tr~o<lcd m(ldtraldj: ~hil<= tlQball(t~'lh 'rr""rtd In \leo $l('l\\in~ Uobor mark<l indical<m poinlrd 10 ,.:'m<: (urlh<f iUlI'f{wcR1<lnl in laM mark" t()..Jilioll~ bul ~~ "':U i\laJuai and Ihc uocmplo)1\'K'nI ,Ole ftma,ncJ don,IN. Iioust'bo;tld Jp<.lIding had conlmucl 10 aJ'llncc al • moocrale pact' dcspilo diminished gn;>Wlb m mil dispo5/lble inwmc, bul JIro'I'lh in bu!int:ss fI~<"d inl~SlrIl.nl had d"",~d Th< housmg 5<'<ICf ftmainoo d<prose.l. Inftali<.ln had bc<n 5Ubdurd in rectnl m<.lnlh~ and lo"~'r-!orm inl\.1llon t.pta4t;""S had l\"II1aln~d Slabk M'''lin~ r,," ..ipam~ ob>«>..,.:1 Iholl f,nanci&l COIldilW!tl had impro ... d and financial nwkcl Jl,"",,' had • ....,d wm.... h.. duri"~ Ih. inltr• m<eliog ptriod, in part I>ocaus< uf III< CUI'IlfI'.n eMl- lral Bank', ([CU) Ih""'·I"ar rclinan<;ng O[l<r;lllOn. ...... ... "" .,-..,..,. "" .... ... ...... """""",:> .., ,~.. ,," ... "'""'.",..." ." .." ,,1 om .. ro ",''''' "." >'I'... _ ::'001 10" ~o ;lOOI :lll! ..... * ...... ,' N 'l_ .1lI< 1 (l.l'f'O' ~"'." __ _ P'"_'''''_.'~''''''' ...:<om _ 1100""' n._...... .....01)_ """'. __,... oIlf1011r1l _ _ ilpOo )~ r VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00113 Fmt 6621 Sfmt 6621 71712042.eps ~, l~ oI .. T,..., ..... I<donl~_ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 110 Mollctal)'Policy KoJ>Oft to the CongRSS 0 July 2012 Nonetheless. panicipants eXpoc1ed that global financial markets "'Quid remain focllStd {)1l the el'O"'ing situa_ tion in " urope. and they anticipated that furtlle, policy efrons would be required 10 fully address Ihe fis<:al and financial problems Ihert. "',lh Ihe =nomy facing conlinuing headllinds and gn;n<1h slowing in St"erai US «pon maruts.. mem_ btrs ge!\C'rally expoc1ed a modest pact of <conomie grQ"1h Q\~r coming quantI'S. wilh Ihe unemployn""t rate declining only gradually. Allhe same time. mem_ btrs thought that in~ali{)1l w"uld run at 1c,~1s al Of btlow thoSt consistent with the Commil1«:'sdual mandai¢. Against this backdrop. membtrsagrwJ to k«:p the larget range for Ihe federal funds rate at 0 to Yo p;:rccnl. to conlinue tile program of extending the "'=ge malurity of the FeJ.ra! Rts<r .... ·s holdings of securities. 8$ announctd in Scplembtr. and to "'lain tile e~isting policies ",garding Ihe "';n''eStment of princi_ pal payments from Fweral Reser .... holdings of securities. In light of the<conomicouilook. most membtrs also agrttd to indicate Ihat the Commill«: anlicipates Ihal =nomie conditions a",likely 10 warranl exceptionall)' 1ow 1<\~ls for Ihe federal funds rale all<asl Ihrough late 2014.lo~ than had b«:n indiealed in r=nl FOMCstat"""ntl TheCommill«: also lIalW Ihat it is prcpart<l 10 adjUSllhe si7~and composition of its s«urilic:s holdings 8$ appropriate to promole a Slrollj!<r <conomie """""ry in a conlexl of price siability, The dala in hand at the Mar<h 13 FOMCmeeling indicaled that u.s. =nomic aclivity had continued 10 .. pand moderatel¥ Although tile unemplo)'ment rate rem.ined ele'OIled, il had declined nOlably in = 1 monlh. and payroU emplo)1nI.'IIt had il>Cf<aStd. IlouSthold sp;:nding and business fued in.~stmenl had advanced, Signs of imp"""n>etlt Of slabilization .merged in some local housing markels.. but ",nall housing acti,;ty conlinued 10 be reslrained by lbe substanlial invonlOfY of foreclosed and dislres .. d properI;'" tight credil cond itions for monpge Io.ns.. and uncenainlyaboulthe =nomic outlook and fUlure horne pr~ ln~ation continued to be suMurd, alllwugh prien of crude oil and gasolin. had increas.:d subslantially. Longer4e"" in8alion expeclalion' had remained slable. Many panicipanIO believed Ihat policy aclions in lhe euro are •. notably the Greck debt ..... p and lhe ECH', longer_torm refinancing <>pOration" h.d help;:d e... slrains in financial m.rtets and reduced the downside '''h to Ihe U.s. and global <COllOmie outlook. Against lhal backdrop, "'Iuity prices had nStn and condilions incrt<lil martets impt'<l"ed. leading many II1«ling par. licipanls to ... finat>cial conditions as more supponi ... VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00114 Fmt 6621 of <conomic gn;n<1h Ihan at tile time of Ihe january m«lIng. Members ,",,,'til lhe infOfmation 00 Us. =nomic aclivily as ,uggnling Ihatthe =nomy "'"Quid continue 10 e~pand moderalely, 1I000~"er. despile Ihe easing of slrains in global financial markets, members conlinued 10 perceive si~ificant downside rish 10 <conomic aclivily. Members genmllly anlicipatrd Ihatthe = 1 inclt3S" in oil and gasoline pr;"'s ""Quid push up inna_ lion tcmporari!y. bul that inflation SlIWquenlly "'"QuId run at <M bdow tile rate IhatlheComm;lI«: judges most cons"lent wilh it, mandate. As. result. Ihe COmmill« decided to k«:p the largel range for lh. federal funds rale at 0 10 Yo polWnl. to Ititerate its anlicipation that=nomicconditions "tit likdy 10 " .. rranl e.=pI;onally low I<,'el$ for the feokra! funds rate at I<asl through late 2014, 10 continue Ihe program of e~t"1ding Ille "'"<1'lIgc maturity of tile Federal Rostl'\'.-s holdings of s«uril;cS thal;1 had adopl«l in September, and 10 maintain the exisling policies Itprding the ,..;n .... slm"11 of principal pa)'m"1lS from Federal Reser'~ holdings of S<C\Irilics. ThcCommill«: apin staled thai il is i'J'Cpart<l to adjust the size and compos.ilion of its StCUrilics hotdio,s as appropriate to promole astronger economic n:covrry in a conteXI of price stability. Urthe limcof lhe April 24 25 FOMC m«ling. Ihe data again indicaled Ihat<conomic acti';ly ":as expanding moderal.ly. l'ayroll employmenl had conlinued 10 move up; and lhe un.mployment rale, ...nile still elevatrd, had declined • little fu'ther. Household spending and busin..s hed in'~stm.nt had conlinued 10 e.'pand. The housing sector sh""'ed ligns of improvemenl bUI from a wry low b 'd of activity. Mainly reReeling the increase in Ihe pr~of crude oil and gasoline earlier this )~ar. inRation had picked up solIlC\\nat; ho"'cvcr. me...,.. of long-run inRation expoc1alions remained stable. Mffiing participanIO judged that. in gen.ral, conditions in dom .. tic <:r<dit markets had imJ'l'O"!d further, bul noted that in,.... 101'< concernl aboUI Ihe so,~rtign debt and banking .iluation in lhe .uro area inlensifled during Ih. inlerm«ling period, Many U.s. finat>cial inslilution. had been laking stops 10 bolster their resilicnce, including expanding their capitall ....ls and liquidilY buffers and redueing their European exJlOOU= Members expected VO""lh 10 be moderate over coming quaners and th"1IO pick up Oller time. Strains in global financial maruts slemming from the sovon:i~ debt and banting situation in Europe as ...tll 8$ ullCtr_ lainl)' aboul u.s, ftseal policy conlinued 10 pose significanl d",,'nside risks 10 <CODOmic acti_il)' bolh here and abroad, Mosl membersanticipaled Ihat Ihe Sfmt 6621 71712043.eps 4() L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 111 ('1'01"( loml''''''ry and Ih!ll _IJ run al 01' ~k>'<.' Ihe ,al. 1~'IlI~Cummitl",jud~ II' be 1lI~ Ctlllji"'ul ",iln ilJ mandale. A$ainjllhi:s b.>I:kdrol\ Inr CQmmiUre 1\I<.'IIllxn rtllCncd Ib<Nll«:li....,jll<l~m~llhal il ~"Id bo: aP('fllrri~lr I~ mawl.in Ih~ e.,i5lin~ hl ~lr IIOC<)mmod.ti,o SI&I1'" <If 1!WlI00"'1' plllie)l ln ('Ink"lar, II!< Ctmimill,", ~ I{I k"'p ,helargct "'0,# ro, liIr f\'d. ed fund, nU. II 0 1(1 '/0 I"'-'=t, to ~nlinU( lhe rrogum or e';Jl<1ldlngtl>e "'~!1l# malurily.lI Ih. froool I('s<n"'. holdini!$ \1{ SI-'CU1'iuu 11$ annl'ulK>-'d \.ul Sell" Itmbrr, and '0 t<!";n ,~" e.1~1Ij! i"<,uci", Itfardi/W lilt I'I'inl't'llml'Otof rrin~ 1'3)'J1I~l.l from r'(do.T.II RrJm" holdinllS ~f 5C\'Ufil~ TheOm!mitl ..... irfl Ih. f(ltWJro ~"idlll<X for IIx: largtl r«<nu (un.!, rate uuchllll#d al Ihi< mffi'"! M.mhc,s rmpl!asiJ\'d lhill tbcir fOI"l",rd guiJilI\<.'f "'''S coudili""ol,," e:.pccloJ <'!:llnmtic do •• llIf"l'enu, bIl, lhry !'f"frrred »djnS/ing IIx: (o",ard guit!aOt" <1fIly (If!<." rb,cy "~r< 1lU"" ""nfi· Jrnllh.r lh, m<dium'l<rl\\ twnom;'" OUltr.ok !If tbr M.lol/1atoulln<,ik haJ than~ signille<tntly. 0 .. 3 !'<tti"," IlVI', Ih( 1",..n<I<J k.Jin~ up 10 Ih. Jun. l~ 211 rOM Cmn~iog iruJi<;aln! tbll =001111<: ~<:1ivil~ was <~ranJintal J !IolI1I",,'hal m= mOOcs. piI~ Ihan ... Ii<! in ,h. ) .... Iml"""''IlJ''''L< in lobor mart., ""n· ditioM hid ,I"...n! in rooetlt monlh$, .nd Ih. uo""'· rloytncnl r.tl~~"'!1I<"If to hiM: nall.ncd QUI. Ilou..:h<)!d l~ndUl~ ~ I~ 1>:'=8'" ~ ><'!lk",1t.t w\\n nlto; and buSIness '",,,Stme..1 had tunt,nued 10 aJl>ilntX. [)e'Sl"'to some ""~'ni ji~s or iml'"m~nl. II>< h""'Sln~ >«to, rcmail)fd tkpIt~. CQnlu""" rei...., I"Hallon baJ d.dined. m"tnly rcne'C"o~ lilwer !'lito:< pf <l\IcIt oil and ~awlin .. And loog<'·t<fm in",,lion <xpcct~lionl rtmained ...tll a""no",J, Me'IUlg ,,",f1icipbnl:!o~'rl'<d I~I fmallCl.! m~,kd. "\.""\'(II~ lilt O'o'tr I~ "'It """ct",~ pe,l()J lind Ihlll '"''tSI<lr stnlimool was !llIttngly inQuellC<lJ by,II< dtl~ntj in I:b~ <lnJ '''IJert<T (>I" sktwtn~ ~!IlIC growth ;1\ home ... nd.~, In Ih~ Ji;culSi"" fIf "",.rur)· pOli<). mo)$\ m<'lnb<ri ~ Ih"l l!tt outlook had dcteriowt.l loO~"'h.1 rrliOw 10 III< lim< ~rtb< April n""-1i~. lind tlul I~' nlf~:""1 d""'nsitk nib ""'rc p~l. iml"'f1B1ltly lDC:luJin~ Ihc fini\.llmlll~ io the <1IfO ~ ~nJ unt<rt;Unl) ibo.lIll III< do""" of n;col rtSlr3lll1 '" III<> UnJl.'d $lalC\, and it. <ffoct. \lit OWMmic &cll¥lly <M' lill mNiUm lem, i\$ a "",,11, lit< Cilmmillte dOO:~oJ Ihlll'l""lJiIIgliddiu(mai m"''''tal)' pclicy omImlJllJdatloo "oulJ be "I'(lf(I!'rillo to sur!')" 11 >lrong<! e.::(llIOInir II.""''''')' and to IIdl> enlUI\' Ibal ineill1011. over lime, ~·as~l. lo\ltl ,"OnJ.isl<n1 wllh tbcCommill<e', JU:ll m~nJ~1c. St«ifi;:ally. 1M C~mmillaugl\'o!d 10 conllnu< Ill< MU' lbrougb III< mel of lh<l';U,;nsl~;;d VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00115 Fmt 6621 or <nuil\ll lhe rrq:Tlll1l mJuno."" haJ br<:tt rlsnnrd. ln d~ing so, lb. fo.t<kl1ll R<5<TVI." ~-ill p"rch;u< Trc'ISllIY ,,-"\'Urities ~'ilh ~tn"i,nilllllllllurit"" 0( 6 )'0"" 10 l(j )(111 ~nJ;.<1I ~{rWrcm tquall'1,vaI\lI: of Trt"Wf)' !J<'CIlrilies "';I~ remaming 1Il"lurit~ of .f'l"'"'Jlim~ldr ' )UI'S ~rlt$s. Thil (."OOlinUlllion ()( Ihc M( I' will l"to<'O<d alliboUl the JII/!\O p3L" :u had been •.""ulrd I~ lb. firsl rh:!SC ,,(Ibe pNgnlIll. in""""ing Ill< Ferler><l Rcso ....·s hokl; ~of 10"111'" 1<f1Jl Trt<Uury ;w<urilit$ by aboul S2(;7 ~iHit'" "hile r<:d1Xi,ng itt; hcldil\..u nf $bQrt(r-torm T",<uul)" <e<:tln· I;'" by Ibr lI!mI: ~t2I,)"nl_ I"" lhol dur>lion or Ihi' rmgram. III< C"IItniill<c dir«I.:d 1be Open Mar1:(l Orol; 10 IUIp:nJ ,~."llrrenl ro1ky ~f rollin~ ~''I.'f m~lurin)t TI\';uuf)' S<1.'urillt; inlo DrW ~116 ~l autli,'n ("ltd i ..t.aJ pu,dlaot only 3ddilionai ""'JI<I'.lenn l;I'Curil;'S ", ilh Ih. rna.d, of m.r"tUlt~uri!icJ), n, 0\111· m>u<:< o_\i"<'-"(.d III< conlin"~lion of the Mrl' 10 rUI d""Tlward j1f<"<!Ull' \111 k.ogor-torm inl~!O:$t ""'<'$ and helpm"'" b<\, •.kr linaneial ""ndirit>rn; mo ..... IOtCOltl· owdali"" 10 a\klilion., I~ U'mmill<'\' dtcid.d I~ <:OIl' lin .... rcin't ... in~ J'fi",iral ro)'mcnlJ from il! holding! of l\gtll\.'Y 1kb4 dnd ag.r.cy MAS in ."111;)' MilS, The (:Qmmlll .... ai:JI.•..t.<:iJ."\I 10 kco!ptlte.l~'i'1 ,~nll< fo' lhe r<dorJl flllllll' rate ~I 0 10 '4 I","''''M ond tv rn!Iirm ilS ""IOCll"'lion 111m o:<:o!Iomk _d~ionl """" 6k<ly to w~mll11 <.U'I.'ptionall) low tcvdj (or Iht fctkTlli funJj '~16al4'a~ throup lala:!014. In II! !13ICmmt. I~ t::\'mm"t~ DOted Ih.t i\ "';15~ Ie) t.k< [unho, a.:ti~o as .lp1'f01"'31C 10 1""1ll01C $11QIl~' ,wnoml< «':0\'/1')' _oJ 5U,\1iIM'.,J jlll~tn<m in labVf m",k", wnJlti('Il, in Bronl~~1 Qr rn« Itilbi~I)'. It" T,ansram«;y is an OS$enu~ pnncipl< of m\>\lern ~n I,at banking t«Bu;e il contribul<-s to thi." ~UOltbll II)' Qr centriO! b;iOi(11O 1110 go ... rnrnonl anJ 10 lhel1\lblic anJ b<callS< il con .nhJ.!lOllhedf<i:lj"'n~~r ",ntrlll t.;oi(~ in IICh.'l'ing Ibtir mllCro«"""",ii; tWjrcll...l Tothl •• nd. lho I eID.'fa) R..'S<.,,~ I>nlVlJulo lhe r ~~icli Nll$>ll.erllb!e apt(>U!l11>f inWm,.tion ""~m' ing Ibc_Jucl of m~<'tary pO~"1. I"OUCI"'Ulg ~ach m''-'Ijn~ ~r the t'OMc' Ihe U:1mmiU", ;mm«liiile!y n.ic;lSeS a stalemenl Ihal li), '-'Ill th~ I'3lwn.l]t (or II> polk-y ID.'<ision and IlOiU<!! det.iled minutes or Ihe m~lin, oOOullhm ""I>.'~j W.... Ushtlyedito.l Ir.ln· )O:rlills of FUMC mrclin~i arc rcl< ..",d IP Iho pu!>l" "'lIh . fi .... ·yea,1Jj! I, M~II.-oo:r, be!!""'n, '" ApnJ I!, fU~"'~~_Io<,""-..r.~"."' ''''I'''' odotodiol"' ............._ .. ""f",k,ol-.....&..a..r. ._ •• """"*'''''''''''.~J,..,..",'''''''.... Sfmt 6621 71712044.eps in=ur In inn~tion """.1Id ~"l><cqUtnlly in~allon L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 112 42 Mollcta!)' Policy KoJ>Oft to the CongRSSD July 2012 11. TlooFO),lC""""""oflo""'..... ..,..aoJp<>ti<y .... <fj' i.",_ .. ,... F..JmIReom<!toord" • ..-. .. .....J..JmI.....,. . ~potic)-_b'"'- VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00116 Fmt 6621 d.""rit,.d the key factOl"$ unMrI)'ing thOlt 3'lStssm<nts .nd provided some qual itativt information "'garding participants' .~pectations for tho Fewal Roscr.-.:·s balanct mt, fli Ihe Marth metting. partit:ipants discussed a rang< of addilional Sleps that the Commillco might tal:e to II<lp th. public II<tt., undmt.nd th. linloges bet~".n lh. rvol.ing economic outlook and the Fed_ eral ReStr..:"s monrtal)' polic~ d<cisioo~ .nd thu! til< condilionalily in the Committ«'s forward guirlanoe. Participants diocussed ~4)~ in ~hich theCommill« might include. in its postmcoting Slal<ments and other communications, addilional qualitati"e or quantilali''t informalion Ihal could con''ty a StnSt of how Ihe Commiltco might adjusl po~c)' in rrspon .. lochang<s in the ceonomic outlook. 11"",,,,,,r. participants also obstrvtd lhallhe Committ« had intro,Juctd Stv.-ra! importanl ",hanctments to its policy communicalions O\~ til< past )'tar or so: Ih<Sl: induded lho Chairman, postmetting pl'tSS confemtct as ~'tll as (hang<! to til< FOMe statement and the SlOP, Against lhis backdrop, some participant! notedlhat additiooal e~pt:ri<fICt wilh the changesimpkmcnted to date could t,. hdrfui in evalualing potenlial furthcr enhaflCtments. flilhe April m«li.,. Ihe Committco discussrd the rtlationship bet,.... n til< poSIm«ling stat..... nt, which oxpresses Ihe collt«io-t view of Ihe Committ~ and lhe po~cy proj<clions of indi'idual participants, "hich are included in the s m ~ Thc<-1tairman asked lhe ,ubcommittee on communicati<>1U 10 conride, possible enhancements and ",finemenlS 10 the SU' that might heip darify the lin k between ooonorni< de",loprnontl .nd th. Comm ittee, view of the appropriat. ,lance of menOla!)' poli<l' 1'0U"",ing up on Ihi. is:rue at th. Juno IJIIXling. participants discussed ....,ral possibilities for enhancing lhe clarilY and transpa"'OC}' of the Com· millco's ooonomi< proj<clion. as "dl .. the rok: the}' play in policy decisioll$ and policy communications. Many participant. indicaled thai if it w~re possible to constrtlC1 a quantilali", economi< projection and associated path of appropriale policy that rt!leetedlhe rol· l<Cli.~jurlgmenl of tll<Committ~ such a projection could potentiall)' he helpful in clarif)inS hO\<' the out· look and policy decisions a", related. Il""''''~r, many parti<ipanlS noted that developing a quantitati .~ fo",· can that ",!leets the Committee's collective judgment could be challenging. given the range of their view~ aboUI lbe economy's .lrt1C1ure and dynamics. l'artici_ pants agreed to conlinue to explore way. 10 inc ...... clarity and transpartncy in th. Committee's policy communications, but many emphasiud Ihat further change' in Ihost communicatioll$ should be consid· el'W carefully. Sfmt 6621 71712045.eps 2011, thd~"airman has held press ronfertflCt! on an apPfO.';mately quarterly basi~ At the prtSS confeT' eflCt~ the Chairman prtS<11ts Ihe cumot ceonomit: proj<cti<>1U of FOMC participants and pMidcs addi· tional ronlw for the Committ«'s policy d<cision~ The Comm ill« conlinued loconsider further ;mprm=ent$ in itscommunicat;oll$approach in Ihe fi1"$l half of 2012. At the January metting. the FOMC rtleast<! • st.t ...... nt of its long<r.run goal! and policy strategy in an effort to enhance the t,"nspart!'lC)'. =unlability. and eff«ti .~ness of monetary policy and to facili late \\"ell-info1"<ooJ d«isioomal<ing by houstholdund busin=" Ttl< statemenl did not rtprtStnl achang< in theCommill«'S policy approach, but rather W1I$ inlended 10 help enhance the Iranspa ... ncy, accounlamlity. and cffectivtn<SS of mono etary policy. Til< statement emphasiJ,CS til< Federal Restr"e'! firm commit",."t to pursue its congrt'SSionai mandate 10 promote m8JIimum cmI'lO)'meot. stable pritts, and mooerale )oog·l<rm int<r<st ,"Ie~ To clarify its longer·lerm ohj<cli'"cs' til< FO MC stated Ihal inftalion at the rate of 2 ptrttnl. as mcasul'W by Itl< annual chang< in Ihe j"II"icc index for pmonal con· sumplion eXpt"nd itur(!, is most consistent O"Cf the long· er run w'i th til< Fed<ral Restr."·s statulory mandate. Whitt noting that the Committ«'s asstlSments of the ma~imum lc>'eI of employment art ~rily uncer· lain and subj<clto revision. lhe 'tat.ment indicaled lhatthe eentralt.nder>eyof FOMe participants' currenl <SIimates of the longer-run normal rale of unemplo),ment is between 5,2 and 6,0 percent. It 'tressed Ihat the Federal Rcserveulatutory objecti.es are gen_ erally complementary. but when they.", not, ttl< Corn . mittlX "iU foliO\<' a baI~ approach in it. effOfls to return both inHation and emplo)-lOOIIl to Itvtls consislent \lilh itsmandale. In addition. in light of a decisioo made allh< December metting. the Committee pro.ided. "arting in the January Summa!)' of l'.conomi< l'rojectio", (SEn information about each parti<ipant', assess· ment of appropriale mooetary policy. Specillcally. the SEP ind uded information about participantf esti. mates of the appropriateltvd of the larget federal fund. rate in th. fourth quarter of lhe currenl )Ur and Ihe nexl f",,' caltndar }"ar~ and over lhe longer run: Ihe SEP also ",ported participants' ""rrent proj<clions of the likely liminil of the appropriate firs! inc",ase in Ihe target federal fund. rate given their as ..ssments of Ihe ooonomic outlook. The =mpanying narralive L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 113 Part 4 Summary of Economic Projections o...rall, II>< IU<l:Sl'mntlJ thai r.OMCl"'ni<"p.nli submilt<d in Iun. i"d;':'led thai. under al'l""pri ... m"rtetary 1",liI;y. the pace cf t(:('n~mi< ¢,Ipl!lt$i(llll)'o\;f Ihe 2011-14 "",AA! "'O uld lit.1y conlwu<to I>< mooer· ate >md inH:IIKm wtouW !<:ltI4iQ lul;ldu¢d (SO<: tabk I ""d 6gu", I), 1·".ticip.naju.d1l:C'l Ihal 1M gr<11'11h of n:1lI JltIlU (\!)rnc:sI;': product ((.l OP) I(.Uuld pick" up graduollyand ill... thr u"~mrlO)'meMi '~I' IIOOld edt< dO'iII '~ry $Iov.ly. P.mioip"nli pwj<clCl! thai iorl~! "m. as m.asurr<.l b)- Ih. annual <bonG" in th~ prK:r ;nd.>.1 Ii)\' p<l'SUIIal <"'Ill'umplJOo .::Il"'l\(hlura (I'C~~ ..'Ould runde,,,, I~ or 1:<:10... Ih. FO~t C.lonllCNtln innllli~n 011;.'l:1h--.: of2 ('tfCI'nl Nshown;" fifurd. m (!$1 ranllil"lnt&)udll:C'llhal hig)tly """"mm,>dat,", mQ1l<lary j'Olicy """-' ~",Iy w be Wllfl1ll\tr<,!.,.., lbe f<lf't<:llSl renoo In I"l1icub •. 13 p.rtk:ir:mli tboug/!t Ibal ~ ..'OoIJ II< "l'I''''f''Ialr for lhe f,rsl in"",,,,,, in Ihe (81)11'1 frdo.,,) funds rot. 10 l)Q;ur duriltji 2Ul4 <I. 1It1<1 A maJo)rit)' of I"'ni~ranlS judllCd Iha' "I'I'f'.'rrillle m"""I~ry polil:), wo~ld ill\'~l"" an e,\l''II';on ~(IM m:>lurity almllwn prosram (MEl') Ihrou~ th~~nd of 2(112, o."rnll. I"niL~panl$ jUJt!<"Ill!< uncrfl"mlY lSS(>Ci· lIMI ","h the oUllook for ",alat:livity 4nJ lilt lln.n]pioymont ral< 10 be unusuall)' b1Sh mali\'< (0 hl<!oncal n~nns, WIth t~ risIr.~ \\I:lghlrd mal1ll), tOlOllrd slower ,'«)n(>m1C J!fO"'·lh aruJ II higbo... ~n.mplo)'rn''Il1 r.lte. /~. fols""",,~ mQIfI'1(J1 1ll'/'ftI'Wi us "" uJJm.l_ 10 Ih, m~'w.,~{ ,ht lum' /Q :V. J(JJ~, ","'~" 1M I''''',rul M,m", eo"''''''". . . 0(1.- !n ronjij""ioo ",jlh the Jun~ 19 20, 2012, Federal Op.n Markol Comnlllte< (FOMCfm«:ltn.g. """"iIIIp:d'ticipanlli-lhe 7 ....",/X-'" or IIu: Ilo.orJ of Oo>~r. nQrS llId Ih. 12 prtSid<n" ~r Ih.l;'deraI ~~ S.nks, .u of ~ bom parlkirmdn lhe tkli!;"""li0!l5 or ,''' rOMe ""e -submillcd tl\ci, owmmClI1J, "flUor.",," pa1\Itlpanl 's }ud!'fll<nl of Ilf',,",Pf'~I' monctaTY IX'lky, of real OUlp"' tlf'U\'11l. Ih. unomplV)'IIll'll1 ralC, illfi~li<>n. ilIJ Ih< 1:II1e\ fcdtr.l! f"odl rale [,II ~lch ~\•.If [""m 2012 Ihru~gb WI4and Om'!he I~ngcr run The.<.. ..... "'"...,,1< ....... bastd on inf",,,,'ll<;m ,..,aibItM: al 1110 I"". {lr lh. l!I<t'Iinll"nd !".tiaranl,· illd~'idual li>"!IumJlliOllj gbou\ tho filClors 6hlr '" a(fret tCQn(lt1lic OUlWnlOS Tho: long.:r-run pmjcrtioni rtprtl<m cach f'II.,ocipan('$ jll<lgmon1 of the ratr IQWhich oa(:h _:m_ abie "'lIJIJ Ix: t.'pcc1w to ('(>II'~rgo; ('I\tT lim •• unJtr arrrornalf mO!1<tar~ rolic)' ~nd In Ihc ahlIolW< of furlber dl(>Cu 10 1M ewn~my. *i\P/lIVr"..te 1l'I0Dtlllf)' [""hcy" is defined as lhe [UIUI\! rath of po.lhry llIal r.rlicir~ots de<mI mOSI likely 10 [~<r OUltOrn(:S fo. toonomit ttetivity and I1Illatioo tht btsl o:attSfy their indi· vidulll intt.l'M~i<.'!Is of lilt F«kral R.ser..... j ohj.,,,,,cs of mLUPlUm ompll'Ym<nt Ind Stobie """""' - ........ 'T>bIo11 ~"",""'" f"I'iodi,m .,j' I'<>lmI R..-v. 1kIan! ~bm.oJ ' .~.11 H........ i!onl( pn:;odonlS j,,,,, 1I'Ill ~.ooIGIlI' A/'riI~ __ , t~ .\t<ill'l..,..o!oo rcr ...... I:... rcr ........' . -~ c.., ~~ ' JUt, "" ,.... ::.. ::'l",U l70HI U'_I~ ',.,," I,''',.' ....... c I~ .. I ' 1,'''..0 1.1 .. ,.0 I" .. !II ).\"..., ." J.~'o'-' J.tlHI l.u .. ", L".U H,.v> tJ " I.~ I.... ;..J 1.".1.1 ' .... ;0.0 1,0,.:.0 1.1 .. 1~ u .. UI -- ..... "" 1.IIHj ~I ,,-, .. ).$ .".. ~~", ~ '-1~ .. l.II ll .. l" tllo!.j ,.''''~ !I .. n ~~"'" j,!",'.11 HI·'! 1.6 .... , '-010"-' ~ ".1.' ~J"7.7 U .. O " .. u 1.1"1." U"'~) H"'~ I 1.' .. l. L 1''''1,1 I.),,:; u 1.1 .. ~O 1.'",1.. I.' ,.:.. I .... ~l L.',,:,) 7.1 .. ", '"'" l-',.'" l-'"U ~ "ioU _~;..'":.!..~P,i..::-..:=I'1.~~~.:;""..:.t""'...:.t:::::"=~;" ""oooI_""-...... _ " " ........ _ ... _ _ _ ....... ....".....,P<:1,l............... I>oIO... .......... ~,~!:".,'::~.=-...:~:.::.:;::'~..,:~~~-r:" ... _n.A ... _ _ _ _ • .....-....... _ ..... .. >""_. _____ ".....,.""._...." " 1.''' ...... - , _ ... __ ... ___ t._,..,..,I0 ..... ,..,. r_O"'_~ l.llo<""" .... , _ . , .... ..,...~\lII~. VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00117 Fmt 6621 Sfmt 6621 71712046.eps " 1_ _ .Jor""'f'n_. ~ ""_ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 114 Mon<1ary Policy Repor110 lhe CongIWO Jul)' 2()12 Figure I Cel lluil CI.Jenrie; arHl r~uges of (,«)IIOIllie l)I'ojoc1iolls. _Cli.t.oc< ...... GIW . c-.._" ........... :I~oIpoo,..,_ ~ .~ I I "" '" 2(l!1' ." ." ~D11 ~'(l12 l~ ~lId Q""! -- ." 1:-....-' .... - ~ - the longer tun C'011 ..... ~ -• -, - , I I -0 , ~ I I ... I I ..... ." ." "" '" '" "" "" 1'C""'ttow. iii I I = '" ~ "" ;mil c_PC£ ........ ~ I I ~, .~OT" '" 14:28 Apr 25, 2013 Jkt 048080 ." ." ." .. - - ." ." ." ." ." -,- - '- Oo/i.lt"""o..... i.b ...... I. , _ _ I 000<10'..,10 I_ T'" dol> b ''''1<1"," ..I.... nit'" , .. io/>Io..'" ...... 1 VerDate Nov 24 2008 - • • - PO 00000 Frm 00118 Fmt 6621 Sfmt 6621 71712047.eps ~ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 115 Fig"", 2, 0.'..,.;..... or Fo.\rC I"rlicip""ts' "",""",,,,,,ls of '1Ipropriat~ mv"ehry J>OIi<--y. J UII" 2012 -, , .n ." .n 1Il1~ ; .. .---........ • .., .... ..• • .. ....· .M... .n .n -._-. •. • - l ................ - -- - • - , - • .... ,- , - , - , ,I" ""- I. , •• ' p".". poMI, ,lie heIP1 01_ ..... _ " ' , ........... ot fO~tC pon;"lpo ....'fooj1l<l"" I ...".,..;." oppr(;f>l'l_ Ol.-.rr wk)', '1>0 lin< ~ ill I •• ~ ItdonJ ....I. i "", ... 0(0 hI 1/ 4 JI<f_1 "I\I ..~., ill ' .~ w«11100 <._~ , I. April 211l1, ,''' ......... (lI"OMC port .. """", .'lo.I ""',..1 ..... , ... &... I.......... ' . I ... "''l'Iiod.nl r......... ~ _Ioi _ ..... 'lOl l . 'lOlil, "<111 1.... , lOI5 ....... ""V"" ' ~, 3, , .•• • '" t. I. lI•• - . . po .... _ I I . - t ,it'd. bid ...,,,, , ... ",h.. (ro.1ltIod \0.> , ... _ 1/ 1 _ poioM) 01 •• iod"id..1 poni<lpoot "je<Ip", .. o(lloo.pp<oprio,.level oI",I>e,oqd IedonI f..... ,....a' ,he eod oflloe..,..,iIitd Nndar 1"" .~Il"IE: ,.t< <'II'"'''' '''II' VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00119 Fmt 6621 Sfmt 6621 71712048.eps \It_('''~'ru. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 116 46 Monel&r}' Policy llc(lOTl 10 lh.l.'<!ngr& 0 lui}' Wl2 Many !",n~'l"lIla"bo '''''''c.llhr un""rl .. iMYJU'· roundin.g Thei' proj\"c1ion, for inaal ton 1<> he gt:aTcr Ih_q nonnal, bol 111(><1.'.'" III< ris~~ I<>;o.n:ll~'n In be broadly bioi_ned rrt:VllJl U/ld<: the wumr"on of ~PI'f<'I"iale rnonel&r)' I'Olicy and i~ !b~ :lb!:<oo: of furlher Ih''''k5 10 lb. ';"'m"mj· ..."l$ $.2 hl ~_III"l'-'tIlI. unclt~n!,"d ff\)fl1 April M<nII':mici~~nlO rrojw<:d lhat th<l Pll boiI"«n lbt~"\Irr.:nt UfI(:rn~1 role ~nd IlIei, <"it;. m~!a of it> lung«'rIlI\ n~l'1!\lIl'JlrWOlJId bt~ in Ko~urJe ju.J~ed 1I1>l 1<<$ lim. ""uld be nred.d, and ~n.lh"u~1 mOrt T,,,,rl'.tluld be n<e<s~bi:ar.u>c"f'h< l"'rsi~""II... dwin<U;ml"dil\!ll", cronomi<: '~ral'lS'01I T1in",~ '_A anJ 3D ~r"'irk rklails I>Il lhc d;'~f!il}' o!'l"fli<:ipaDt>' vic,.., ftIlard,"~ lbe lit~ly ou'oom<s r", rul GD!' JfOWlh anJ Ibe untmp/<'l'TIl<'nl ral< ,n'n I~ next Ihltt l'u.IH~d ~'tnhe k>n~ run. Thrdi!JX1· ~it", in Ihe"" rroj,;c!ions rtfl,"I;!! diffw:m~in pallici· I""!S' !mC!$lI1<nts or many f""IC"" iDCIuding """",. motl<!ary 1"',licyand ill< oif~ OIl Ihuco..amy, !h. "nJ«lying m(lftlrnt"m in «:<lDomioo 81;';" ;1)', 1II. ~rill"",'Cf cfTcc!S <If" lhi: fl!<'a! ~nd fiuancilll i<i1""U01t in r:u~ lilt ~Ti"" ""th fOf U,S. ftnlWIi<y.lhr ~~l''!ll \lr ' 1fU(lur,.j diskll'aliolU in 1110 IIIbIIr m~rt~'. and Ihe ~kdy <"tIlu!;on 01 emli! and finam::1al markC! oondilion~ C<>mpllrrcl ,..ith Ihrir Ami w.:mn<nlJ. Ille flng( M pJlIi<:iranll' f~llli,)r 'hc chang(in (tal GO!' in 2(112 ~nd !fill shined hfl"r, ... hile ill<: disl'¢r,i<m of inJi"iduailorttllSl$lOr gIll"1";" 2014 ..."" ab.)ul Undllm~, QmIi31.tnl ~;Ih Ihe ~()"<\nwanJ >/iirl III lhe dtllnbia!IOlI of fOffl'OSIS rOT economic. J!fO\'lhlhe di'lribianon of rr~jttliO!lS for the U!)crllpl.lymtmT 'al~shin<J UPIlI :!01l'nJ 1"1) ""d. tOII~~ I~nl. in N14. As ,n Arr~, Ill. dj'I'¢!l",n of <>1I11tii11<-s [01 the longtHIIII "'!f III' oulpu, gnr.\'Til "'<Ij f4t11y nilJmW, g<nelililyin. ranI'" of n TO 2.7 ptrccnl In t\lnlM[, raniciNnl!' viN-Iab.lullh<'levd lo>lhi<h TlI< un<m· pI<l)'llll'nl flit, would rom'.Il!" in lhe IOIlSff ron "'~n: m~ Jjver"", ~ftCdin~. llmOlll Olh,.,. IhlDg). diffe"nl vic ... s on lhe outlool:. fur labor JUJ'!'I}' :.nd ,lit <lflICIU", Qf Ib~ w.", mll~"C!. r". '" "-, }".'" COIkIiliolnai up.ln Illcir Indi~idl4<lllS.<umplk'Oj ~I!oul ~rprollrM~ TIl<ln~la(} ['CIiit:y, !)iI T hCiran~ judgod th~t I~ =n omy~uld ronllnul: hl(:lpand at a mOlkrat~ ~ In 2012 . od 20H brfOftp!din~ up InlOI 4 1~_ r;l<.~1<>I1\<."'1I'll n/x>'.'t .. h;U.~nic;ip;mIIVitW is lhe kmj;Cr·run mi. uf "Ulf"ll JO", .. lh, The ()('nlriJ leroJaocy Oflhnr ""ojrtlnllli r<lr 1h< ch.mgc in ~aI GD!' In !Ull ~1' 1_9 l<l 2.4 ~1\:"nl.I<l"A~rlhan in April. Man), pa" U"jpltlT' <hM"""ri""J ,h. '",..,minl ~a1A----<'.or>«W1y f~r hou~hold sll"ndi~ ~nd Ih. l~bot mark<I- -Il! h..• io~ bc<-n wtak« than They h.d anTkipalcd in Anril. In ~ dJiliiln, m~1 nOled Ihallh< worscninglilU<uiM in [ urn!"" "-as lo!aJill$ 10 a s.I,ywll<l'll'n in giobQI tton~mic jlI'IlI'lh and gte"tn WlIalHily in tioanci~ ma,l:ctl Q,m('im:d ...ilh lh ,-~r Ami ~t>mi$so~nt mQSI partb· panl. Io-..tl\-d thoir medium·run [lI'ljtttj~ni <If ro>"","Ie ...1i';Ty .oum...... hlll_TIl< (>;"Iralltnd.nd,-~ or p;onioipanll' ""'IO<llOl1> III' n;;iI <<OIWml\." JUO"1h I" 2013 ~nd 2014 "''Off ~, l lo H ptrc~nl and .l 0 I,' 1.5 Il"r<~"l. rts/lf<li",\),. Til< <,<,",,:.II.nocnry fur l~e InnR<r-run r.l< "I" inet\:_ ,,( n;al G DI' .... ~ 3 l.o 25 i'tr<:enl.lillie dw>g;:d (r(!m April l>:.rticif"l'l> died ... ,-«aJ ht.J..inJs 1II., "",.. likely 1<> iIQId back the PJI"" Qf econnmic: <lPJlmion fI>'« Ih~ fom:ast period, lnduJ i"~ ,he dillicuh fiscal and finaJII:ial . ilu •• \i.ln in furop<. •• lill.d~d housUlgmlltl:el. tighl CreJilltlr .''''><cb."roo.-m.;md n>tal rnlfll<nl in lhe Uniled Slol~ ('.,n,oslerol ";Ib Iii< J.",·n"lrJ rtVi';"!I' 10 th... rroj.:ction! for .. 31 (j bl' [tI'O"1h in :!I'111."d 201 J, nearly an ,,"'lic:ip,mh m3fk.d up lheira ....",menl, fur lhe rat. or unomrloym<nL J":micir3fll' proj«lcd lhe un.",plO)'menl roll< allll< enJ ,,( 2012 10, ",,,,run.1 or .~i,hlly ildrow hots. ",ilh a <:Clllrall<"rk....,· 0( ,(0 ~ :' rer=1.~-h.l ~iI!bt1" lIIan their A('IiI iubnussi""t I'articiranl, aoliclpolod grllduol impfQV<menl i~ labor mork<1 c6nJiliollS by211l4, bul nen so, they ",ncnrlly th<>ughllh31lhe unempl<l)-mcnl ,ale al lhe ond of Ihol jOlt ...uuld &liU Ii< ,..,u -.bow their inJi_ viduol ..timat .. or ilS lunga.nm lI<lMIlallr'~1 The c<tllnollen<lrncie. <Jf rarticipant>' f(lft<ll<I' f~r I"" u""mr/<lymenl r.1< ..." .. 7.S m KO 1"'""nlll1 !b<""d or :lO lllllld 7.0t~ U p<n:en! -.! lbr~nd or 1014 The "c"rallcnden"Y of partici(IIlI1\>' eslimat.~ 0( ,b. lenK"r-run nonnal ,01,· of uOOlIrl<>Ymcm lluil .... 'uld VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 =, PO 00000 Frm 00120 Fmt 6621 I';nlicip.nt' , .. ~~ aboJullhe medium·run "uliO.,k for rnlIoIion WlIkr lbe aswmpl;",n of moo· el,ry pol;;y ~ ... 1i1l1. chaul}'d from April ""......,~ all ~f lh<m mmed do.. n Ib.ir ...."'m •• ' of !loaJlin. inflali,m i. III< ...... Ienn, roin l in~ tr' r=n l d«Ii .., ;" It.. priceo of mid. <iii and ,"""I;"elll.! wm:<IIarl"" lb •• p""i(lusly rr<lj<ctod_ Alrno<l all p;tr. 10:;1'""1' judged lhal both he:ul1;". and ""'" onnalion ",,'Old ['eIJIaIlI subdued "'''' tbc 20 12- 14 ("'ri<Kl, ",p. n;"~OII. "I.. 31 or bdow the FOM C"l!OII~ r-flln ,,").'CIi ... of 1 pt=IIL Some panicip,mts n,~"J Ih.1 """"'mole """,I)' Sfmt 6621 71712049.eps 'n maT. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 117 ." - 0--Apo;I "" .. IO">Joo'" . .,... _ _.1...--, - - ---, ,. ,. " " -.. . .. ,. ,. ,." "" " " " "" " "" " " u ." .. __ 0 1 _ -,I , ." • -" -" -" -" -0 .. "" "" "" " "" u u _,n U I. ~ . -. -- U U M U u " u U ." -I - , u ! " .... - -"• -" -" -" -, -, " VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 I. " "" "" PO 00000 "" Frm 00121 u" •• U ,. " " U f'<moat f&IIIIJI' Fmt 6621 Sfmt 6621 "" ." .." ." ." .. 71712050.eps I. -I -I L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 118 - -'- 2Oj~ D "" .. _ _ Apq,...... _ -- ... ... ." .. .... ".. .. .." "" ~ol,..._ . • -" -" -" -" -" -, . -. .-.... . ....... .. ... . . .. ... . - "" " " ~, -I' ., " " " " " ~""'ol .... _ . • -" -" -" -" •n -. -. ,- .. .. .. . . _,-*C.- _.. •... • •• . " . .. .. " " "" .." "" .. " . ... .." .." .." .. .. -- " -I' u " ~."" .... It VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 It- ., --. .. ." .." ... ." ." u PO 00000 • Frm 00122 _.- ~ " II " Fmt 6621 -" -" -" - , - , -.-. ~ t. " " ,. .1 ~ .p •• U J' " " " ,. .... •, Sfmt 6621 • 71712051.eps .. • -" -" L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 119 vi."" 2. ",<,>! rarticlJ"'lOI'i JlId~ th31 ieI'd! of tn. r.'\Icr"j funlb ralr ..oold ",maUl .M'«'pn:u~;/;! bit Wltil lal. 2u14 In 1'"11JI:II' la" t<:\tn rwli";panUIIw~ghllh~1 il "ould I>t!l(:>fll'>pri_le IO.:(lm""'ntr ])Oli"" ftrmins in 201 4, "bile anvlh<r SU p.I1licil'ilnlS Ihoughl lhat Iho first tn<T<U)l; jp Ibe I~r~"\ (.!krlll fund! !'lIt,- MlulJ n~! be w~rr~n!<d ~ntjl 20 I SluJ"I"T JlIioo), l:k,", p..rtj'lJllinlllndiraICli lho\lllw "PI1,vrria!< f<d<.TaI fund. mit aI tilt rod 'f 2014 ""wid be 75 b;ts;s ~ou or IolwIor(kl"~r pand), >ln~ Ihos< wl\o JuJ~eJ Ihol no)i<')' liOcll WIluld nM omIr unl ~ 201 S lhought Ih. feJe~1 funds r.1tt ""uld h< 1'h p<r<tnl <M" """"I ~l lho <1l d or tlut I'"~I, M;n April, ~x p.lrliciranl' judaeJ lhal c<OlIomlC condltj.)oS ""uld .... rrJnl an ilK"'a~ In tbola'l<l f<"d<r3I flllltb rate In tltbtr 2012 Of 2(11; In orMt 1.0 ~hicvt Ill< C~Pl'II~"!t:llulolr)'nundate. ThOl1ill pJrliop.tntl JuJ~..:J Ih:llllw ~l'I'«'pnAlo vAluo fo, the r.1lml fundI r1Ito \O\)u ld r~ngl' fMn III. hI J rcrwnl at Ill< end "f A<mdic:~I<J In O£UI< ~W<f'li,'nally low 2014, All J'ilrlicil'i'oli "'J")rIW l<,"t!. fOllh. ullplllrriale lal#! f<dml fundj mi' ~Ilhc ""d 01 2(l1411lal 'Rf<' wcll hd"",' Ib,:;r e,h11l'l1<1 ~f Ih. "vcl.~pcel<d I" PI"..~~ jn the lol1jl('l ruo, ESlumles Ii Ihe kll\!:cr-fu" lar#! f<!k11ll fuo.lJ r1IlC nutgc.l from 3 10 ~'., [Xrwnl, rdloo.1iog the Commillrt '$ inHalil>n ~bjc(liyt "f 21'"crnt ~nd f""rtiopanlf judp!rtnl:i :lOOUI lh< Iong.:r-run equi librium """") ~f ",:II f<dcrul funlls ral. ~rtldJ1<l"[j abo rllll'k\r.l qui<lilJ[liVt inhlrma(i<)p un Iheir .i("o\11'<:l/Ml,"~ lh< ¥1'll'olfJI'ial< !Mil of Ihe I'(ikral Rm",,'s Nl;..n,~.<OO1, ()f the 12 jl.trlidf>;lnIJ ...hoi< ;mw;:uncll{j of "'I"1'f\lI"l.iI~ mOll"~rJ f"'1"'), t"" VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00123 Fmt 6621 ,nduJcd aJdillOll:ll b81:!n"" sh..,1 f"'l~ II i6~<d Ih.t Ih.illl'l!UllIl'lioru: illl'orpoml.d ~~ ,,"oJl!:lon IhrouJ!/! In.. <Ild of 2QI! (!/" the MEl; IIJlJ:! parli.,jr~nts ,/'III(lilion«l llJ.:ir rroaom;" rO~IH'II ' n.~' I'fOVolm or 5<:I:UrilicJ rutUllUl'l- T"9 inJitatod lhal I~ "'\lulu c~n'lkkf.wclt ru ...h~srs in t",,<""nllh~1 In. «X,)"",ny did MI mako <aWfaa,,'Y~' i.n ;mprovlflS ,..bot 11I'lrk<1 co~Ji!ioo~ o. ,II Ih. ,"""nl t)( a siJPlifocant (kH.'riQI'IIli<>n in Ih< 0X0110lllOc ')\It,""", '" 3 fUl'lhrr in<:n:lIJ< ill oo..''''';J. rim 10 I~!II ~I)oQk. AIIII\.'<I:III r~rt!<;p~n!Ja»U!1U.'J (hll th.Commill<e would ~arry "U' Ih~ nllfmldilll!iott "f Ih~ Nolan"" ~""\ a.wnling IOI~ principks ~J'I'lIlYIXI.u Ill< JIUI< 2011 fOMC' """",ling Th~' i~ l"'ior'" Ibr fi['ll inC!'<Ul in Ihr kdcr:d funtUl:de. theCommillc< "<lIIkllikdy "'.... ,...;",.,.lin~!I<>1II< or all rri"dpdll"')'IlI'nl~!HI «<-urillt' in tho SYJ"m Opm Mark<! An.'"""l (SO M~). gnd 111>O"ld liko'y bcginm or ~O)' ",-,uriws rl\l!Illn..SOM~ ""llI<Olilll< afi.(1' lh< filii rot. IDC/QS(.', ~iming 10 dim in~ 1O the SOMA) holdlllg! ,t( agtllcy ~ril~ O~ . t:w:ri<Jod "f (Dttt 10 ft,,!: )'<ar! In t<1II:r.d, pamcipanu Iinko:J thl;r ptl.ferw.l SI.I'I dol<'5 (or lhe lI(Ornt.1liuliim ~t"lll<ITvic ... , f~nho ~f1lroj11'iat< limi", for lh. linl ,1Ir",a5c in lh< l~rgt1 f<dr"d r"~ct.< r:<te. One raTlicit>~nt "h~ IO".,bl Ihal Iho liOolf '" Ih' '<d.raJ lund! ral: sI:t()lllJ ~w ",la_ li>tly;oon indicat,,j Ib~l Ih~ n:m"t:$In-.:nl of mliuring $truril"'! .h(lllW c~"hlll><! fo, 1I lime Wter "fI~If, Th" k,y r....1..., '''formlllJ partictpanl{ 'nJi"i.:IUl<1 ~WllCJlII ,..r th. 11'JII'I'(Jriat.< ~lIing 101 m~lrlrY policy jll<luJ~d lh.,'r judgmmts r<gardilllllh< mJXImum .....1of elllpl<lYlll<nl, lilt o~t<nl 10 whkh " " ",,,1 C\lfId!li~n~ IlJJ tIt,i.i<d from m .nd.iI"~ll~nll"', cl~ anJ 1'~r1lC1ranIS' proJX~~no; of ,he hk.l~ lilli' hO~n ~ry 10 r<lurD "",ploymtnt and innatlOn 10 Sut~ hcl~ S<>tnl! rarliapanlS n(ll,tllh.llh-'j, 1W<IoS"",nll .>[ ~1'I'1'Of"!o11< monew}' polley ",I\ec!td (lit IUbpu pace of lit<: «>.lO<lmic ..'jl.tnsl~n .nd Ih" {'Cl$illenl shollf.n m .W.galt demanJ Iltte< Ih. 1001 09 m.'<,);SI,'n, lind lWO 'cmmrn!cJ Ih.ll Ih. !l<UIraJ It\1:I of (ho kd,ra) funw flII<"'a! ~l;rlp('mt'I\o'bll I>clow il'i hi!lorKai QNm, On<: j)i<r1i<jranl ~nlt$S<ll t()f[C~ln Ihat a f'I'\ItracltJ period of ~y acromm<'llaUti! m<WlrlrY pohq c.'uld leaJ (0 .. bttildupof riskl In Iho fin.lI<ial J)'jIOll\, l'ar1icip.lnl> ali>.> ncl<d that hecauS<.' lh< "PI'I'Ilrrilile Slanc< Qf """"'11~ roIicy Jop<nJs impvl'tlontly on Ihe "o]ulicn of "oI ... ri~iry and inlla1iOll ,"'er 11m.. Ilte ir 4U<'>'m(,'nU 01 '~"PI1~ pllal< fUlure ralh of Ih< r""end funds lol' ~nd lh. b.II. u« she<1 ""ulJ ,'hang< If <C(IlIQIIljc oondll i~", """" to e~,~ in 1In UIl<~I"'ctw m""nfl', J Ig"'" 3.1; J<\ilib the d,Stribution of l"r1 icil"'nl{ juJgmentl f«lal'litng tho "I'fI<'II'l'iat<.' \e"c! of lho l<II'g<l Sfmt 6621 71712052.eps inll,,;"'n "'l',,"La1ions haJ I'I'11I4;""d ;!ul)k:, .nd """..01 poinlw 10 rtSOu= Jla(:k _od modtfal. intl'l'U<:S ill IIIbor oolllll'-'I1.llIli~n as 'IOum;s of n:~r"itll <'II j11'i= Spc<:ificalJ)" lile ",nlra)l""d.,WY of J"I1i"J'o'Inlf rrojc<:li<llli r(lr inn.'.,m, M 1I)I.1ISUI'I:d b)' Inf PO l rvic< ind<::<. 1ll<W«t oO'<o'n in 2()121~ 121~ I? I'=nl Mil "'lISbl l1<dllll1~i"20I .. ""d 2OIhlljIo1.0J'l'" """I Th. c<wlli I<ndol1cic< of 1.< km:<:1'iL! ('" rolt inti.,ion " 01't bro>odl~ lhe sam< 0; Ib ...... ro, Ih. head, U"" m'&S1IJO in 2011l1li11 2(l14. n",~ 1,CanJ J 1) pro_ide: inli>nnal~'~ aboollhc di":I!ll ~...r pankipan';' "jx,ullh~ O"'I<.~'~ for inl\~liou, R<lal"~ '\' Ill< ~nt~oomrikd in Apritlnr i""}.'ttion! for ~d)i[l( in~~lion Ibil\,'(i down in 2012, rt!kclmi1l~ dc<linc. in "u<'8Ypri<:~ Th~ dl!lriilu lioQJ 0( rarl"'I'",,,i JlMj«:IiolU fCH' bruJlin~ and ~/I ,"fi~tion in:>Oll 8nd 2ll1~ "'Ol"llishlly l(l'<~r In&n Ih<>s< n:f'O',,:d in ,\ prj! L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 120 S(I Monetary Policy Report to tho Coni"'" D Jul)' 2(l12 • -" --"" -" -0 -. ~!,~~~~~~~~~~u : -, " -- • -0 -" -" -" -" -, -. , VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00124 Fmt 6621 Sfmt 6621 71712053.eps ~-;;------..---~ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 121 -"- ." -. -". -. ." -" -" -" -" - VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00125 Fmt 6621 Sfmt 6621 71712054.eps -, -. L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 122 52 MOncla,y l'{)licy Report 10 tho CongmsD Jul)' :!()12 -."""'-~L.. - -~- -.-.-" M1 - -. AptjI _ _ ,. ~. ~ ~ -" -" -, -, - ..•• ,. .. .".. ..... ••• ... ,,'. •• . -," . - --1 " •• •• •• •• •• ," ." ,., •» ." -w m w • '" .» " I ~ .,- .....-. -. -" -" -" -" -, ~I .. 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"'" 71712055.eps o. o. -- , _~ I--~- -" -" -" -" -" -, L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 123 rt<k11ll run<4 rate aI lhe end or .""h caltndar ye~r rrom ))12 HI :!I'll~ .nd ove, thrl'>ll$"rrun M \nt r~r tj,;,:'r:mlSjudgcd lhal =n~mi"<:(lnJitjQnl ~"uld ~.. r,lInl mainlaimll$ Ih. culTtnllcw "-"":1 ,yi It..: fro.:r.Ii runds nil. Il\r(Iugh In" <nil oJ' :!fIl3 V.....l on tbe~rrrupri"l. \c<.~1 r.r Ihe rNmlJundsmt:ot liIoend"( 261 4 were !I)Q'" ",i(kly cli<p(rliOJ, ~ ilh II parlicil'"nlJ =,n, In. "M""I'riai< ~",I orin. rclmil r"nih ...1. 0$ ';'I"=OUl~'t poinl 'If w..tr ""J 4<,f IlI<m ""'-ll$lbo :'Jll"'lrrial~ as 2 I"'""nl Qr bighe, Th(1St ",hO judg<'d th:U ~ k>ngtr JIO'riod QC 'tr)'~mmod:lli'" mon,1ary pol;(), would bo: arrrorrial~ gcncr"uy prop;ltd 1Ill1lth< ulI<m~'Ill"nt rate would remain CorI~r aIxr.'e il! k>nscr-rull n04'mli k ...1Al Ih. end of 2(>1 4 Inronlr.t>I.11x: 6 par1icir.mls whojudg,:d (hI ro1;.,y forminl ,h''Ilhl begin in 2fl!2 or 2013 inJ\<:81c<i thOi II!<: C<>mmillllCO "",uld n''l:d IQ1<\;1 $001110 l«fI inll~li<Jn 11<"' Iho FOl>ICs loager·run ,'bjrdj"o( 2 l''!1XOIlllJ II' f"""1\( l Ii>< in inJlati\!ll .~(l«"latimt.. -,- T:toI< 2. A""",!!" htot<rQQl ~J"1"'" <'f1\If ,..""~ ....... :ni1 :'Ill! O" .. . . IIIDP' 11 .· !I-IO ,-~ '" •• ,, ~ , .... _ _ p"'" ,,--' 13'1' !1 1 ,, ' !I.1 ta,. p.trlkip3nl!juu.od Ihal Ih,,~ «11m" ((wI of GDP I1;r\""h and ulI<miW~m''fll " '.1.1 hi,ncr lnan ""lIlh. norm dunng II!<: pl(vious 2())'tan (!lgul( 4). " AOOYI half I1f 1iI11'"r1idrants jud~ lb. 1.",1 of "oomain(y as.wciakd "ilh Iheir inH""on 1;""""<Ii 10 b< hightr .. "'~U, "hil. "",~n., eighl p"'licipanl< vi<v.~J u""'."rl.3inly :m.>UI irulalion as !>madly :<imih.r I~ hi:!l.oricaJ 1''''111< Th. rna," (scum <ilod .. untlerlyLlu: tho d<V'.lt<d ,,"=I~inly.t>o<.ol own'ItIlic:oUlrnme< Mtt Ihe~lliflSQl30d fin.ln<ial .itullion iu !;.,opc. Ih. oull{)O~ lOr tid 1'"1;.,y;,, lb. Unit.d Slol"" iIJIJ ~ ",oenI gl"...do~n In global """ . nomic gr""'th. ioclllllinj1 tho p1>s.sibilily of • Slgnificanl .k>w.!own in Ch,.". M;" April plIrlicipanlS n"'.~ It.: difJiculu.. :lSM><rJl.d ""Ib fon:cu~ng Ih. !'11th of In. U.S. ewnomic """""y ru1I"''-'''M • linanei.1 crisis .nd ull<"'fUinIY~1 I~ ThI>ltlr<O> ...... _ ... ''''~-.._.'!'''',1I< .,....., .. !alGO~. ow~_"""_""'_ ,...,._.,.",.. ' ' 'j'«lOdr""" l"l'~Y'11 A, ' ... .,.Joll ... _'Ioot...·";,.....,l"""'...Il'·--.dlo--... .... , .. C<pr<t>1 ... ol_~ . \k,_.,.-...ooJ"pI>< ,"'~_'o .. .......... _ ....y""" ......J<Odiotrt'" ~I"'I"""" VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00127 Fmt 6621 e.tf'«1a~on ~ 'l""~' ... 6.... ""rtiril"'"1< .....' lb. risb !o inflation :os lillN 1<1 Ih, d""ru:ido, ~ l>,¥,r numllo, IMn in Arril; ~ (>.lurk...r lilI:m nOled thaI slack in n:5OU!'t1' markt15 (."OulJ tum "Ul 10 be (!Il":.lcr I'f coulJ rut tTiOtt downw.rtl pl\'SIIU'" on in~.uit.>n Ib.n t~ .... ,ro anli,ip.1lin$, Two parl",ipilllt5 !I;!W Ih. rilts l;l inn", it," as woi~h"d 10 lilt "psidt. ill lil1nl ,,( ""('u'.. m~ ,00UI VS.f~ imba!anw,lhetulTtnl hig"l~a""om_ m\X1l!!ivI: ~III!IC<' of ,""",,'liff I"'licy, or Iho C.,mmjl1..,·J lIhtlity 10 &",,1;'..-1), reml)'o'< ",,!icy """'-'mmO<latNn ~ btn il bccornl:ll ~rJlfOpri~ .. 10 do i(!. Sfmt 6621 71712056.eps Ne~, ly.u ,"<I."i<KIn IhOil uill"md m,"'o:.lly [rom n:crnl bi:!loncal t.\pcooo<C. wr.!«>mm<nl«ilbal;" 11M: allmn.lln of tIM: r.n.oci.l<ri, ... I""~""'" more """"rlain.bool It.: 10,01 or P<ll.ntial OUlpul "".I II< In:n.d raI. of 1!IUWIh A ma,.,.-'Iy..( part;';pi!nl< I(J!Ofted Ihlll til<)' sa" (ho risk. to Ihdr for=m or ",01 GIli' gro ..lh itS WC1j!bI.J ""''l<ru the dooro"do and_ >ICIXI,din¥iy, tile risk, !o !h"n rrnF'1ioo, of lbe unornpiO)m.nl rAI. '" tillN 10 llle "psi&' Th musl fn:4""ollVilk.'Otifi ..-d iOUr«:SOr rnk ~=!h' .-itu.lion ill l:""'~ "hich m.uty parliciranl! th~".ghl hOld lbe p.:>!onli:<ll(l ~")W glc>b.ol <roJIomi<: 'ltIil'ily. pIIn;';ubrly "'tT Ih. n<~r Icrm.~nd lho liKal lilullli<ln iIlliw;: Uniled S!alt!M(lSI parti<ipantg""oti"u,d IOjudll" th.,.;,.u 10 Ihtj, rroj«li"". fot ,nnHli"" ... broldly bolli.ad, "ith i'...." bighligluing th. rtCtnl j lJb;lrly oJ" in~aljOll L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 124 54 Monctary Policy Repor1 IQlho Ceng"," D Jul)' 2Q12 - -,....... -t.:......." _ II J_ ••_ bo'u, GUP """,. - •• Apnl"""""" _- lI i&bot .. -0 "- - Il;p.. \\<ip...!10 .... ;lor -"-- -,~ o -" -" -u .. -, -u ~-: -. -u -" -u -" . -," 1. ____ - ~ ji,ii,i;] ' ..... \\'~\II VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 ,J.otlaII_oI" ..'ti~' 00.1 ,. . In _"""'" r"''''u.- .... '"" bo> ·~_I!",..t .... y.· Dotl.1- "'. '" tho "' ..... 1...... ", ... bI. I PO 00000 Frm 00128 Fmt 6621 Sfmt 6621 71712057.eps ~".." ~.,.. "".. "I ,~ .. _ L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 125 ForeGtS,1Uncerlilinly' by U.. ""'.... uI "'" l~iII ~ ........" &0" ... '''',m, ,b"...,."af m<>neIarypol·l·m''''g~~'~_~ 1'"1>1.. uod.",.n<J-.gvllhto to .... '" policy ~j. t"<",~deJabI. ~0W1>i"1)" <I\Iend, lIone IKojo'd ..... hOllo',,",. 1hi' ......nomic ....1;I",~,,, m«Icls onoJ ",1011 N:Inlhip! l....-d l~ h<lr p'"d",," ",,"""'KfmK_.,.~iI"I""1'd d<,cliloikM .. .;i1h. 1"1'01 world,. .nd 11,. ~ h Nt",,, .. ulll.. N:t>I.. ,,,ca,t...:oIfent<lby~ """"" ,......"d/>oIeIoJi"r"ml>-a,Id"""flI>.·I"'" "'''lIi''tlU'' >!;wavl_.'\" poIiry, p;ll1i6p'''''_Ii<l<'r ,'-II ,,10>1 il('I"~ 1(1 be the nlO>ll"",""':", ,..,,,,,, . ..,,,,,, .. ,,,,,,,,,I><o!;"" in I",", projo-<1~"" 10,11 ~ the 1lII~ «1IktlMli'.e""",bililrt., U,. Ijl.~IIo<><I 0/ theiI """limn". wm II.. p,.......!>1 """1i>1""'CO<"IO«'I"f~I""l'I>I:Q/<. 101>110 l .. ' h~.""'''U 1Ii<I0<"ic>I >n'~ .....)uI~ ~"k>r.,;ast;,1I1<"1WlogIho>< "'po<t",1 in piO'll ,lbol'lal)'l't!IirrR'fK'l1> or.d tho", 1""Ih"'-d loy .... 11'de<,oI R.......e 8oiIro', S!oIf'n ,,<1'1>11<]' vi n"""'"&,'~ lheled<lol Opm M" ~" CommilI.,... lhe ",",*",ilIII..,,,,, in Ih"""1e ~I""""""" "",.ocs.',:lbk- """"n"~Y ;t>SOOoled »iJh I"tOOQrn'r "'"~ IOf~""'I>IIo. ",,'I">"" p,niril""" pr<>jo:'r:u ,II... mI ""'_ic l","1U<.111'PPlond ~~ .. ",i<.. lIi~ Ii:\e ~,.,.jl~" ..,nLloi <¥(1.o( ~"rtr. ) pMrnl .. ><I 11"'''~1II. HIt>r .. """oinIy_n<l til"" ,,,,,,,.rit,,, '''''IP''''''''"'' sr0>IlWf.,.' "'sIM"!I~"l!is$iINI"IQIMI"I~ '" li">e f"'~ ",.11"" "'"" .,,,, ••1"'" f"'>i"<I-.' broMI\-" b.~~ lilt ",,,.~.,.,rqlOr1td in fAA 2 II,<,,,IJ ~oI)' • 1"""aI.~iIy'~ .10<." 70 1""0000 Iio>l l1l:I""' (".{"IP,.".uI(I elI_t ""'h.,.,~ filOlQ 4.0 flI""'OO" ;"It>. 1..1 I~ 4.~ !"".... ~ .,,,,t'fII ),,".., VerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00129 Fmt 6621 .. It ... "",. 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