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S. HRG. 113–473, VOL. I FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2014 HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION VOLUME I ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 JULY 15, 2014 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00003 Fmt 6011 Sfmt 6011 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00004 Fmt 6011 Sfmt 6011 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON S. HRG. 113–473, VOL. I FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2014 HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION VOLUME I ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 JULY 15, 2014 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http: //www.fdsys.gov / U.S. GOVERNMENT PUBLISHING OFFICE WASHINGTON 91–275 PDF : 2015 For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00005 Fmt 5011 Sfmt 5011 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS TIM JOHNSON, South Dakota, Chairman JACK REED, Rhode Island MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee SHERROD BROWN, Ohio DAVID VITTER, Louisiana JON TESTER, Montana MIKE JOHANNS, Nebraska MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania JEFF MERKLEY, Oregon MARK KIRK, Illinois KAY HAGAN, North Carolina JERRY MORAN, Kansas JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada HEIDI HEITKAMP, North Dakota CHARLES YI, Staff Director GREGG RICHARD, Republican Staff Director BRETT LAURA SWANSON, Deputy Staff Director GLEN SEARS, Deputy Policy Director HEWITT, Policy Analyst and Legislative Assistant DAN FITCHLER, FSOC Detailee GREG DEAN, Republican Chief Counsel MIKE LEE, Republican Professional Staff Member JELENA MCWILLIAMS, Republican Senior Counsel ELAD ROISMAN, Republican Securities Counsel DAWN RATLIFF, Chief Clerk TAYLOR REED, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00006 Fmt 0486 Sfmt 0486 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON C O N T E N T S TUESDAY, JULY 15, 2014 Page Opening statement of Chairman Johnson ............................................................. Opening statements, comments, or prepared statements of: Senator Crapo ................................................................................................... 1 2 WITNESS Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System ...... Prepared statement .......................................................................................... Responses to written questions of: Senator Crapo ............................................................................................ Senator Menendez ..................................................................................... Senator Vitter ............................................................................................ Senator Johanns ........................................................................................ Senator Toomey ......................................................................................... Senator Moran ........................................................................................... Senator Coburn ......................................................................................... ADDITIONAL MATERIAL SUPPLIED FOR THE 3 33 36 44 45 45 47 52 55 RECORD Monetary Policy Report to the Congress dated July 15, 2014 ............................. 1643 Chart submitted by Senator Patrick J. Toomey .................................................... 1701 (III) VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00007 Fmt 5904 Sfmt 5904 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00008 Fmt 5904 Sfmt 5904 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2014 TUESDAY, JULY 15, 2014 U.S. SENATE, URBAN AFFAIRS, Washington, DC. The Committee met at 10:03 a.m., in room SD–106, 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 this hearing to order. This morning we welcome Chair Yellen back to the Committee for testimony on the Federal Reserve’s semiannual Monetary Policy Report to the Congress. Since Chair Yellen was last before the Committee, Stanley Fischer, Lael Brainard, and Jerome Powell were confirmed by the Senate to serve on the Board. It is important that the Fed maintain a full complement of Governors to effectively carry out its monetary policy and regulatory functions. To that end, there are two remaining spots to be filled on the Board, and I hope for the swift nomination of well-qualified candidates with expertise in community banking, as well as tough and effective oversight experience. The Fed continues to grapple with many pressing issues that span both monetary and regulatory policy, and I look forward to hearing Chair Yellen’s perspective on these issues today. The steady path to economic recovery following the Great Recession took a sidestep with first quarter GDP falling. The unemployment rate has continued to drop in recent months, but long-term unemployment and youth unemployment remain unacceptably high. And the housing sector has been slow to rebound from its troubles during the crisis, with too many creditworthy borrowers locked out of the mortgage market. Given these headwinds against a more robust recovery and a low inflation rate, I am encouraged by the FOMC’s view that monetary policy will likely remain accommodative for a considerable time following the completion of the Fed’s asset purchase program. I am also encouraged by the continued progress being made to implement Wall Street reform and improve U.S. financial stability. Chair Yellen, your recent comments outlining the importance of macroprudential tools that lean against financial excesses and focus on building resilience in the financial system rightly point to the need to ensure that firms—particularly the largest and most (1) VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 2 systemically important firms—are prepared for the worst and able to withstand shocks from a variety of sources. To that end, it is imperative that Wall Street reform rules be completed as soon as possible. We must not forget how costly the last financial crisis has been, so regulators and Congress must continue to do all we can to keep our financial system stable and promote strong economic growth. With that, I will now turn to Ranking Member Crapo for his opening statement. STATEMENT OF SENATOR MIKE CRAPO Senator CRAPO. Thank you, Mr. Chairman, and welcome, Chair Yellen. During Chair Yellen’s, Dr. Yellen’s nomination hearing, I noted the need to fill the additional vacancies that the Chairman referenced at the Federal Reserve Board with individuals bringing balanced viewpoints. Again, I stated the President should nominate someone with community bank experience to the Board to fill one of the remaining vacancies. Community banks play an important role in their local economies and face a disproportionate burden from regulation. We should ensure that the perspective of those banks is represented in regulatory policymaking. Today’s hearing is another important opportunity to discuss monetary policy and financial regulatory policy. Since our last hearing with Chair Yellen, the Fed has continued to reduce the pace of its large-scale asset purchases, known as ‘‘quantitative easing’’ or ‘‘QE.’’ It has been a welcome development to see that under the Chair’s direction and that this process of tapering has begun and now we will likely be able to see all QE purchases cease later this year. I have consistently made my opposition to the policy of QE very clear. The quadrupling of the size of the Fed’s balance sheet that has occurred as a result of the Fed’s QE purchases of Treasury and agency-backed mortgage-backed securities is worrisome. These QE assets will remain on the Fed’s balance sheet for a very long time, and the reserves used to purchase them will remain in the financial system. The process of normalizing monetary policy will be difficult, particularly in light of the fact that our economy has failed to strengthen in the way that was promised by the supporters of this unconventional monetary stimulus. Recent Federal Open Market Committee minutes indicate that in the coming years any miscommunication about monetary policy during this normalization period could create risks to the economic outlook. Continued clear communication will be important, particularly as the Fed is seeking to rely on new tools that are unfamiliar to the market. For example, Fed officials have indicated that overnight reverse purchase agreements, also known as ‘‘repos,’’ will likely play a large part in setting monetary policy during normalization, while the Federal funds rate becomes less important. At the FOMC meeting, some raised concerns that the Fed’s overnight repo facility could increase problems during adverse market conditions, poten- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 3 tially causing counterparties to shift funds away from making loans and opting for the Fed’s safety net instead. How will the Fed balance the need for open communication with the ability to preserve flexibility should unintended consequences arise in this important market? I am also interested in your recent comments on the use of macroprudential tools by the Fed. You specifically recognized that experience with these tools is limited and that many central banks will still have much to learn to use these measures effectively. Introducing the concept of managing U.S. monetary policy by regulations and prudential oversight is untested and perhaps more theoretical than real. I agree with those who are concerned that regulators may not be able to get the timing right. Many economists, including those at the Fed, have not been very good judges of identifying market bubbles and predicting when the bubbles will burst. Your speech discussed the ability of regulators to change regulatory standards on mortgage lending, such as debt-to-income and loan-to-value ratios as a macroprudential tool that could slow mortgage lending. I am very skeptical that during a housing boom registration would ever act aggressively to restrict lending to individuals with high levels of debt or low incomes. In fact, recent experience suggests all the political pressures run counter to that happening. It is also highly questionable to think that forecasters will identify beforehand when these tools should be adjusted the credit cycle. While financial stability can complement the goals of monetary policy, it is paramount that the regulators strike the right balance without unduly harming the economy. Again, we have a lot of issues to deal with, and I look forward to your testimony today, Chair Yellen. Thank you. Chairman JOHNSON. Thank you, Senator Crapo. To preserve time for questions, opening statements will be limited to the Chair and Ranking Member. I would like to remind my colleagues that the record will be open for the next 7 days for additional statements and other materials. I would now like to welcome Chair Janet Yellen back to the Committee. Dr. Yellen is serving her first term as Chair of the Board of Governors of the Federal Reserve System. Prior to holding this position, Dr. Yellen served as Vice Chair of the Board for over 3 years. She has also previously served as Chair of the Council of Economic Advisers and President and CEO of the Federal Reserve Bank of San Francisco. Chair Yellen, it is good to see you once again. Please begin your testimony. STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Ms. YELLEN. Thank you. Chairman Johnson, Ranking Member Crapo, and Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. In my remarks today, I will discuss the current economic situation and outlook before turning to monetary policy. I will conclude with a few words about financial stability. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 4 The economy is continuing to make progress toward the Federal Reserve’s objectives of maximum employment and price stability. In the labor market, gains in total nonfarm payroll employment averaged about 230,000 per month over the first half of this year, a somewhat stronger pace than in 2013 and enough to bring the total increase in jobs during the economic recovery thus far to more than 9 million. The unemployment rate has fallen nearly 11⁄2 percentage points over the past year and stood at 6.1 percent in June, down about 4 percentage points from its peak. Broader measures of labor utilization have also registered notable improvements over the past year. Real gross domestic product is estimated to have declined sharply in the first quarter. The decline appears to have resulted mostly from transitory factors, and a number of recent indicators of production and spending suggest that growth rebounded in the second quarter, but this bears close watching. The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing. Although the economy continues to improve, the recovery is not yet complete. Even with the recent declines, the unemployment rate remains above the Federal Open Market Committee participants’ estimates of its longer-run normal level. Labor force participation appears weaker than one would expect based on the aging of the population and the level of unemployment. These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation. Inflation has moved up in recent months but remains below the FOMC’s 2-percent objective for inflation in the longer run. The personal consumption expenditures, or PCE, price index increased 1.8 percent over the 12 months through May. Pressures on food and energy prices account for some of the increase in PCE price inflation. Core inflation, which excludes food and energy prices, rose 1.5 percent. Most committee participants project that both total and core inflation will be between 11⁄2 and 13⁄4 percent for this year as a whole. Although the decline in GDP in the first quarter led to some downgrading of our growth projections for this year, I and other FOMC participants continue to anticipate that economic activity will expand at a moderate pace over the next several years, supported by accommodative monetary policy, a waning drag from fiscal policy, the lagged effects of higher home prices and equity values, and strengthening foreign growth. The committee sees the projected pace of economic growth as sufficient to support ongoing improvement in the labor market with further job gains, and the unemployment rate is anticipated to continue to decline toward its longer-run sustainable level. Consistent with the anticipated further recovery in the labor market, and given that longer-term inflation expectations appear to be well anchored, we expect inflation to move back toward our 2-percent objective over coming years. As always, considerable uncertainty surrounds our projections for economic growth, unemployment, and inflation. FOMC participants VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 5 currently judge these risks to be nearly balanced but to warrant monitoring in the months ahead. I will now turn to monetary policy. The FOMC is committed to policies that promote maximum employment and price stability, consistent with our dual mandate from the Congress. Given the economic situation that I just described, we judge that a high degree of monetary policy accommodation remains appropriate. Consistent with that assessment, we have maintained the target range for the Federal funds rate at 0 to 1⁄4 percent and have continued to rely on large-scale asset purchases and forward guidance about the path of the Federal funds rate to provide the appropriate level of support for the economy. In light of the cumulative progress toward maximum employment that has occurred since the inception of the Federal Reserve’s asset purchase program in September 2012 and the FOMC’s assessment that labor market conditions would continue to improve, the committee has made measured reductions in the monthly pace of our asset purchases at each of our regular meetings this year. If incoming data continue to support our expectation of ongoing improvement in labor market conditions and inflation moving back toward 2 percent, the committee likely will make further measured reductions in the pace of asset purchases at upcoming meetings, with purchases concluding after the October meeting. Even after the committee ends these purchases, the Federal Reserve’s sizable holdings of longer-term securities will help maintain accommodative financial conditions, thus supporting further progress in returning employment and inflation to mandate-consistent levels. The committee is also fostering accommodative financial conditions through forward guidance that provides greater clarity about our policy outlook and expectations for the future path of the Federal funds rate. Since March, our postmeeting statements have included a description of the framework that is guiding our monetary policy decisions. Specifically, our decisions are and will be based on an assessment of the progress—both realized and expected—toward our objectives of maximum employment and 2 percent inflation. Our evaluation will not hinge on one or two factors but, rather, will take into account a wide range of information, including measures of labor market conditions, indicators of inflation and long-term inflation expectations, and readings on financial developments. Based on its assessment of these factors, in June the committee reiterated its expectation that the current target range for the Federal funds rate likely will be appropriate for a considerable period after the asset purchase program ends, especially if projected inflation continues to run below the committee’s 2-percent longer-run goal and provided that inflation expectations remain well anchored. In addition, we currently anticipate that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the Federal funds rate below levels that the committee views as normal in the longer run. Of course, the outlook for the economy and financial markets is never certain, and now is no exception. Therefore, the committee’s decisions about the path of the Federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. If the labor market continues to im- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 6 prove more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the Federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated. The committee remains confident that it has the tools it needs to raise short-term interest rates when the time is right and to achieve the desired level of short-term interest rates thereafter, even with the Federal Reserve’s elevated balance sheet. At our meetings this spring, we have been constructively working through the many issues associated with the eventual normalization of the stance and conduct of monetary policy. These ongoing discussions are a matter of prudent planning and do not imply any imminent change in the stance of monetary policy. The committee will continue its discussions in upcoming meetings, and we expect to provide additional information later this year. The committee recognizes that low interest rates may provide incentives for some investors to ‘‘reach for yield,’’ and those actions could increase vulnerabilities in the financial system to adverse events. While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk. Accordingly, we are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance. More broadly, the financial sector has continued to become more resilient, as banks have continued to boost their capital and liquidity positions, and growth in wholesale short-term funding in financial markets has been modest. In sum, since the February Monetary Policy Report, further important progress has been made in restoring the economy to health and in strengthening the financial system. Yet too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed. The Federal Reserve remains committed to employing all of its resources and tools to achieve its macroeconomic objectives and to foster a stronger and more resilient financial system. Thank you. I would be pleased to take your questions. Chairman JOHNSON. Thank you for your testimony. As we begin questions, will the clerk please put 5 minutes on the clock for each Member? Chair Yellen, there seems to be mixed signals about the economy. In the face of these mixed signals, how cautiously will the Fed proceed as it considers ending large-scale asset purchases? Ms. YELLEN. Chairman Johnson, as you know, there are mixed signals concerning the economy. Most importantly, GDP growth is reported by the Bureau of Economic Analysis to have declined almost 3 percent at an annual rate in the first quarter. That said, many indicators concerning the economy, indicators of spending and production, are substantially more positive than that. As I noted, the labor market throughout that period has also con- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 7 tinued to improve, and at a somewhat faster rate than we had seen previously. Indicators of consumer sentiment and of business sentiment and optimism also seem to be positive. So my reading at the present time is that the GDP decline is largely due to factors I would judge to be transitory, and I do think that that negative number substantially understates the momentum in the economy. But, of course, this is something we need to watch very carefully and are doing so. Nevertheless, my overall view is more positive. Now, as I mentioned, the labor market, I believe, has been improving. Not only has the unemployment rate been declining, but broader measures of performance of the labor market have also shown improvement, and that is important. This is, of course, exactly what we want to achieve. But the Federal Reserve does need to be quite cautious with respect to monetary policy. We have in the past seen sort of false dawns, periods in which we thought growth would speed, pick up, and the labor market would improve more quickly, and later events have proven those hopes to be unfortunately overoptimistic. So we are watching very carefully, especially when short-term overnight rates are at zero, so we have no ability to lower them further. We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates. And I think the forward guidance that we have provided in the policies that we have put in place are providing a great deal of accommodation to the economy to make sure that it is on a sound trajectory. Chairman JOHNSON. Pertaining to the Collins amendment, the Senate recently passed legislation to clarify the Fed’s ability to apply insurance-specific capital standards to insurance companies overseas. Why is it important that Congress act quickly and pass this legislation? Ms. YELLEN. Well, as my colleagues and I have made clear on many occasions, our objective in designing regulations for insurance companies that come under our supervision or other nonbank SIFIs will be to tailor to suit the needs and special characteristics of the entities that we supervise, and we are certainly trying to achieve that in the case of the insurance entities that we supervise. But there are constraints on our ability to tailor appropriate regulations, and the Collins amendment does pose constraints. So I think it would be useful to increase flexibility to allow us greater latitude in tailoring appropriate regulations. Chairman JOHNSON. In light of your recent speech, will you elaborate on how you envision the Fed using macroprudential tools instead of monetary policy to maintain financial stability and build resilience in the financial system? Ms. YELLEN. I think most importantly we have substantially strengthened the capital and liquidity positions of banking firms and financial firms that we supervise more generally. Our objective is to make sure that these firms are on solid footing, and to the extent that the financial system or the economy are buffeted with shocks, that these firms will be resilient, that they can continue to lend to support the credit needs of our economy even under adverse circumstances. And I would say our stress tests are a very important part of that as well. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 8 So, first and foremost, the entire agenda from Dodd-Frank and more broadly coming out of the financial crisis to see a more resilient, better capitalized financial system, banking system, I would say is the core of that effort. If there were an asset price bubble and we did not intervene effectively to deal with that and that bubble burst, we want to make sure that the financial system can withstand such a shock, and that is an objective of our efforts. We can also use more targeted tools that try to make sure that, as business cycle conditions improve as we go into more robust boom times, that, for example, in our stress tests we have automatically designed the scenarios to impose a more severe stress that firms need to be able to survive as asset prices increase and the economy grows more robust. Those are the kinds of tools I largely have in mind. Chairman JOHNSON. Senator Crapo. Senator CRAPO. Thank you, Mr. Chairman. Chair Yellen, in your testimony you mentioned that you currently anticipate that the Federal funds rate will continue below levels that the committee views as normal for an extended period of time. You also added that, depending on the economic outlook, this rate increase could occur sooner or later, as we get a better feeling for the strength of the economy. Based on your view of the economy and the markets, when do you currently anticipate this first rate hike to occur? Ms. YELLEN. The Committee has given guidance that says what we will be looking at is the progress we are making toward our two congressionally mandated objectives—maximum employment and price stability or our 2-percent inflation goal. There is no formula and there is no mechanical answer that I can give you about when the first rate increase will occur. It will depend on the progress of the economy and how we assess it based on a variety of indicators. To get a sense of the views that members of our committee hold, included in the Monetary Policy Report is a summary of economic projections that all participants in the FOMC provided at the beginning of our June meeting. So these projections are just that. They depend on each participant’s own personal economic outlook, and they are not a policy statement of the FOMC. But they provide some sense of concretely what participants expected at the beginning of that meeting. And those projections show that almost all participants anticipate that the first increase in the Federal funds rate, if things continue on the trajectories they expect, would come sometime in 2015, and the median projection for where the Federal funds rate would stand at the end of that year was around 1 percent, so a positive but relatively low level. And I think that gives you a feeling for what participants thought would be appropriate given their projections in June. I want to emphasize, as I have said repeatedly, that what actually happens, our projections change with incoming data. The economy is uncertain, and what will actually happen clearly is going to depend on the progress the economy makes. Senator CRAPO. Thank you. Ms. YELLEN. But I think that is consistent with the forward guidance that is contained in the FOMC statement as well. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 9 Senator CRAPO. Thank you. And based on the minutes of the most recent FOMC meetings, the discussion of monetary policy normalization has become an important topic for the committee. One of the strategies that is discussed is that the Fed will drain reserves by lending its securities out to the market as a part of reverse purchase agreements, or repos. There is concern that such a facility would be a safe haven in times of market street, attracting large funds and depriving business of credit. Is this a concern of yours? And how would the Fed address the potential that the facility could aggravate a market crisis? Ms. YELLEN. Let me say that these are matters that we are discussing in an ongoing basis, and no final decisions have been made about the precise strategy that we will use when the time comes to normalize monetary policy. But we have tried to provide in the minutes a very good summary of the thinking in the Committee as these discussions have taken place. One of the challenges we face is, as you mentioned in your opening remarks, the Fed’s balance sheet is very large; there are very large quantity of reserves in the banking system; and because of that, that poses some limits on our ability to precisely control the Federal funds rate. We cannot really use quite the same strategy of intervention we used prior to the crisis. So we have indicated that the main tool we will use is the interest rate we pay on overnight reserves. The overnight RRP facility that you referred to I think of as a back-up tool that will be used to help us control the Federal funds rate, to improve our control over the Federal funds rate. I think it is a very useful and effective tool. We have gleaned that from the initial testing that we have done. But as you mention, we do have concerns about allowing that facility to become too large or to play too prominent a role, and for precisely the reason that you gave. If stresses were to develop in the market, in effect it provides a safe haven that could cause flight from lending to other participants in the money markets. So two tools that we can use and are discussing to control those risks. One would be to maintain a relatively large spread between the interest rate we pay on overnight reverse RPs and the interest rate on excess reserves. The larger that spread, the less use that facility will be. Also, we can contemplate limits on the extent to which it can be used, either aggregate limits or limits that would apply to individual participants, and all of that is figuring into our discussions. Senator CRAPO. Thank you Chairman JOHNSON. Senator Reed. Senator REED. Thank you very much, Mr. Chairman, and thank you, Madam Chairwoman. You pointed out obviously that the mandate or one of the mandates of the Fed is full employment. We have seen some progress, but there have been variations regionally. My State still suffers from a significant unemployment crisis. And also underlying the overall statistics is the persistently high longterm unemployment number. Can you comment about what the Fed is doing to try to address these two specific issues and further comment upon whether, as I VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 10 feel, Congress can complement your efforts by reinstating longterm unemployment benefits for these people? Ms. YELLEN. As you note, nationally long-term unemployment is at almost unprecedented levels historically, and the average duration of unemployment spells is extremely long. And also, of course, there are variations from State to State in the level of unemployment with some States seeing much lower unemployment than the national average and the reverse. Our monetary policy really cannot affect things at the level of individual States, and we have no specific tools to target long-term unemployment, but my expectation is that as the national unemployment rate comes down and if the pace of job creation stays where it is or even rises, I expect to see improvements on all fronts. And, in fact, long-term unemployment has declined, and the evidence that I have seen, although perhaps not utterly definitive, suggests that the decline in long-term unemployment does on balance reflect those who have experienced long spells getting jobs and moving into employment and not simply becoming so discouraged that they move out of the labor force. So that is a healthy development, and, you know, while longterm unemployment remains at exceptionally high levels and is a grave concern, I do think we are seeing improvements as the job market is strengthening. And I think in every State we should expect to see—as confidence in the recovery grows and it strengthens, we should definitely expect to see improvements. Senator REED. You point out that the Federal Reserve’s monetary policies have limitations, but fiscal policies of the Congress can be much more proactive in terms of, one, unemployment benefits so that these people have some support as they look for and do not get discouraged in their quest for jobs; and, second, infrastructure and a host of programs. And I would assume you would see these as complementary to your goal and necessary to your goal. Ms. YELLEN. Senator, I think that these are really matters for Congress to debate and decide. With respect to long-term unemployment benefits, obviously we have a situation where long-term unemployment is far more common in the population and imposing serious tolls. Senator REED. You do not have to respond, but my sense is that for the last several years you have been the only game in town in terms of trying to deal with this issue, because we have not taken some of the actions that we could that would have been beneficial and see us at a much better situation today. So—— Ms. YELLEN. Fiscal policy has been, I think CBO would confirm, a significant drag on the recovery, and fortunately that is diminishing. And, in fact, I think that is one of the positives for the economic outlook for economic growth going forward. Senator REED. Well, thank you. I hope you are right. Ms. YELLEN. I hope so, too. Senator REED. Just quickly changing the subject and probably making a point, because my time is rapidly diminishing, the Federal Reserve in 2011 had a program, independent foreclosure review process, which they were trying to help people who had been mis-served by the foreclosure process services. That was scrapped shortly afterwards, and essentially you went to a direct payment VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 11 sort of form, about $3.9 billion. I am told that that program still has cash on hand, that you have not been able to reach the people, people receiving checks have not cashed them, or do not intend to. This residual money, can you reprogram to State agencies or local initiatives that are much more effective in getting the money out? Could you consider that? Ms. YELLEN. No decision at all has been made at this point on what to do with residual funds, and so there may be a number of options. We have yet to debate that. Senator REED. Well, again, there are States, you know, and regions that need this help, and if you could get the money to the people who can get it out, that would be, I think, positive. Thank you, Madam Chairwoman. Chairman JOHNSON. Senator Vitter. Senator VITTER. Thank you, Mr. Chairman. Thank you, Madam Chair, for being here and for your work. This week, on the Senate floor, through the TRIA bill, the Senate is expected to adopt and pass my amendment to mandate that at least one member of the Federal Reserve Board have direct community bank or community bank supervisory experience. What is your reaction to that mandate? Ms. YELLEN. Senator, I would welcome the appointment of a community banker to our Board. I think a community banker can add a great deal to the work that we do, and I have worked with community bankers like Governor Duke or community bank supervisors like then-Governor Raskin and have seen how much that experience can contribute to our work. So—— Senator VITTER. Great Ms. YELLEN. I am very positive on the idea of having a community banker appointed to the Board. That said, I do not support requiring it via legislation. There are seven Governorships. The Board has many different needs. I think if we were to sit down and make a list of all of the kinds of expertise that are needed and are useful, there would be more than seven items on that list. And I would, you know, prefer to see appointments made in light of the priorities, including for a community banker, rather than for the indefinite future locking in and earmarking particular seats for particular purposes. I feel that is a road that could go further in a direction that would worry me. If we are earmarking, we could end up earmarking each seat for a particular kind of expertise, and I think greater flexibility needs do change over time. But that is not in any way to diminish my support for seeing a community banker appointed to the Board. Senator VITTER. Well, we look forward to this community bank experience being more forcefully put on the Board through this legislation, so we will agree on that and look forward to it. Madam Chair, we have talked a lot over your various visits about too big to fail. It is a concern of mine and other Members of the Committee on both sides of the aisle. And what I have personally heard is your agreeing with that general concern, but I have not really seen that translate into concrete policy moves to curb and change the continuation of too big to fail. That is my opinion. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 12 So in that context, you were last before us on February 27th. What, if any, specific policy changes, initiatives, movement has the Fed or other regulators taken to curb and help end too big to fail? Ms. YELLEN. We have finalized our Basel III capital requirements that significantly increase the quality and quantity of capital in the banking system. Even before we did that, through our stress tests, we have worked to ensure that especially the largest and most systemic institutions have the ability to not only survive a very adverse stress to the system, but also to lend and support the needs of the economy through such a stress. The amount of capital in the banking system has basically doubled since 2009. We have put out for comment a liquidity coverage ratio rule that we hope to finalize this year. We are in the process of working through a regulation that will implement so-called SIFI surcharges or surcharges for the largest, most systemic firms. We have finalized and enhanced a higher leverage standard for the eight largest firms in the United States. And we are working very hard to make sure that these firms are resolvable in the event they should encounter a stress that overwhelms those substantial defenses. The FDIC, under its orderly liquidation authority, has the ability to resolve such a firm. It has established an architecture for doing so, and the United States is working with other global regulators to think through how that authority could be exercised to deal with crossborder issues. We are discussing in the United States and globally a requirement for the largest and most systemic organizations to hold sufficient unsecured long-term debt at the holding company level to enable a resolution that would be smooth in the event that such a firm had to be resolved. And we are working with those firms also on living wills to enhance their ability to be resolved under the Bankruptcy Code. Senator VITTER. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Schumer. Senator SCHUMER. Thank you, Mr. Chairman, and thank you, Madam Chair. You have done a very good job. You make Brooklyn proud, and I am so glad to have these hearings. I have been sitting at Humphrey-Hawkins hearings since 1981 in the House and Senate, and they are very elucidating. So my first question deals with probably your most difficult issue as Fed Chair and as a member of the Fed: the age-old balancing test between fighting inflation and going to full employment. It is a hard tightrope to walk, particularly as conditions change, and we are now in a period of change. Obviously unemployment has declined, thankfully, and obviously the economy is beginning to pick up. And as a result, there is a lot of pressure coming from many for you to not only accelerate the end of QE2, of quantitative easing, and to raise rates. I would urge caution very strongly. To me, the greatest problem this country still faces is lack of good-paying jobs and decline of middle-class incomes. That is with us very, very strongly. And worldwide labor markets still keep a lid on inflation. Your stated target of 2 percent, 10 years ago if people heard the stated target was 2 percent, your predecessors, their jaws would drop. But we are not even at that. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 13 So I would just ask you to be very cautious before you taper the QE3 program too quickly and entertain the prospect of raising rates. Could you comment? Ms. YELLEN. Yes. I certainly agree and tried to emphasize that while we are making progress in the labor market, we have not achieved our goal. And it is also the case that inflation is running under our 2-percent objective. So both of those facts, plus the fact that there have been substantial headwinds holding the recovery back and those headwinds, while we are, I believe, effectively overcoming them and making progress, until they are completely gone, it calls for an accommodative monetary policy to offset that. And I would say even if you consider our forward guidance we put in place in March, the committee indicated that even after we think the time has come to raise rates, that we think it will be some considerable time before we move them back to historically normal levels. And that reflects—well, different people have different views, but to my mind, it in part reflects the fact that headwinds holding back the recovery do continue. Productivity growth has been slow, and, of course, we need to be cautious to make sure the economy continues to recover. We have tried with respect to our asset purchases to set out a clear objective that we had to see a significant improvement in the outlook for the labor market and to put in place a process by which reductions in the pace of our purchases would be measured, deliberate, and allow us time to assess how the economy is recovering, and we have followed, I think, a very deliberate course. As I have also emphasized, this is not a preset course. If we were to judge the conditions had changed significantly, it is not locked in stone. Senator SCHUMER. Thank you. I am glad and somewhat relieved to hear it. I know there are pressures. I would like to just tweeze each side of that question as my final question. We are seeing improvement in job growth, but we are still seeing declines in median income and middle-class incomes and lower incomes. And what it means is the number of jobs created that really pay well is not growing quickly enough and poorerpaying jobs are growing more quickly. How can the Fed, if any way, deal with that? And on the other side, one of the things you worry about, of course, are bubbles, QE3 and others have pushed a lot of money into corporate bonds, into the stock market. I do not think there are bubbles there yet. But I hope you are considering ways to reduce the possibility of bubbles without wholesale increases in rates. Can you comment on both sides of that? Ms. YELLEN. With respect to wages, most measures of compensation have been running roughly in line with inflation so that real gains in compensation adjusted for prices or in real terms have been nonexistent. So while rising compensation or wage growth is one sign that the labor market is healing, we are not even at the point where wages are rising at a pace that they could give rise to inflation. In fact, real wages have been rising less rapidly than productivity growth, and what we have seen is a shift in the distribution of national income away from labor and toward capital. So there is some room there for faster growth in wages and for real VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 14 wage gains before we need to worry that that is creating overall inflationary pressure for the economy. That is something we are watching closely. With respect to bubbles, I have stated my strong preferences to use macroprudential and supervision policies to address areas where we see concerns, and as I mentioned, we are doing that in the case of, for example, leveraged lending. But I would never take off the table totally the idea that monetary policy might be needed to address financial stability concerns. To me, I do not see financial stability concerns at the level at this point where they need to be a key determinant of monetary policy. And it is not my preference as a first line of defense by any means, but I would never want to take off the table that in some circumstances, particularly if macroprudential tools failed, monetary policy might be called on to play a role. But we are not there. Senator SCHUMER. Thank you. Chairman JOHNSON. Senator Johanns. Senator JOHANNS. Thank you, Mr. Chairman. Madam Chair, thank you for being here today. This is the third time you have been before the Committee—once as a nominee and now twice in your role as Chair. When you came to the Committee last fall, I was concerned about the lack of progress to deal with the $4 trillion balance sheet. I was then and I still am concerned that the risk of quantitative easing outweighs the benefits. Since that time, I want to say to you I think you have moved in the right direction. Ms. YELLEN. Thank you. Senator JOHANNS. In fact, you have moved at a pace that maybe I did not anticipate. You are down to $35 billion per month. But the reality is there is still a $4 trillion balance sheet out there, which is concerning. In your testimony, you speak of your concerns about false dawns, and there has been some fits and starts with the Fed in terms of tapering. So my question gets to this issue: You are anticipating that by October this program will cease, come to an end. What could happen in that period of time that would cause you to recalibrate and decide that October is not the appropriate date; maybe the program should go on for a period of time. Tell me what metrics you are looking at to make these judgments as you go along. Ms. YELLEN. The committee indicated that the path of purchases is not on a preset course, and all along, at each of our meetings where we have had to decide whether or not to cut the pace of purchases or to stop that or even to increase purchases, we have asked ourselves two questions: Is the labor market continuing to improve and do we retain confidence that going forward it will continue to do so? And do we see evidence that inflation is moving and will continue to move back to our 2-percent objective over time? And at every one of our meetings since last December, when we started to taper the pace of purchases, we have asked those questions, and the answer has been, yes, we think inflation stabilized and will gradually move up; and, yes, we think the labor market will continue to improve, and we have cut—and we use the term ‘‘measured pace’’ or $10 billion a meeting. Now our forecast is that VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 15 for the next—that we will continue to see those conditions. And I think the evidence we are seeing is consistent with that, and if we continue to see progress in the labor market, as I expect, and inflation stabilizing or moving up toward 2 percent, we would continue on the course we are, and as I mentioned, purchases would cease after October. But if there were to be some very significant change in the outlook that we see between now and October so that we lost confidence that the labor market will improve for some reason, or that inflation would move back up to 2 percent, then we would have to rethink that plan. Senator JOHANNS. Let—— Ms. YELLEN. But that is the plan. Senator JOHANNS. Excuse me. Let me ask you a question—I am running out of time here—about the labor market, because I think this is a very, very concerning issue for the economy and for the country. The proportion of Americans in the labor force is now less than 63 percent. We have not seen those numbers since Jimmy Carter was President many, many years ago. I do not know if that is you or me, but it is annoying. We have not seen those kinds of numbers since Jimmy Carter was President. The Fed has said that you look at the labor market. You have just reiterated that in your testimony. Originally it seemed like the benchmark you were trying to achieve was 6.5 percent. It is now 6.1 percent. But to me, that does not tell the story. The fact that our unemployment rate is at 6.1 percent does not reflect the reality that really what is happening is people are taking part-time work. Whether that is Obamacare or some other reason we could debate a long time. So tell me what you are looking for when you constantly refer to the labor market? Are you looking for more participation, more fulltime employment? What is it you are trying to achieve? And I am going to ask you to be brief because I am out of time. Ms. YELLEN. Briefly, labor force participation certainly has moved down. Part of that, I believe, is an aging population and demographic. But when we see diminished labor force participation among prime-age men and women, that suggests something that is not just demographic. And so my personal view is that a portion of the decline in labor force participation we have seen is a kind of hidden slack or unemployment. It may be, if that is correct, that as the labor market strengthens, labor force participation will remain flat instead of the demographic trend continuing to pull it down, that as people who have been discouraged come back into the labor force and start looking and getting jobs, we will see the labor force participation rate flatten out, and the unemployment rate may not come down as quickly as it has been. But we will need to look at that. That is a hypothesis. I do want to make clear: 6.5 percent has never been our objective for the labor force. What we said about 6.5 is that we would not— as long as inflation was not a concern, we would not think about raising the Federal funds rate above the 0 to 1⁄4 percent range until unemployment had declined at least below 6.5 percent. So that has never been our target, and 6.1 percent is not our target either. Participants in the FOMC are asked what they think a so-called full VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 16 employment or normal longer-run unemployment rate is, and in the Monetary Policy Report we distributed in June, they thought that was 5.2 to 5.5 percent. But, of course, we do not know, and we are looking at all the things you mentioned in judging the labor force, in judging the labor market, not just the unemployment rate but a broad range of indicators, including involuntary part-time employment, as you mentioned, and broader metrics concerning the labor market. Senator JOHANNS. Thank you, Madam Chair. Chairman JOHNSON. Senator Menendez. Senator MENENDEZ. Thank you, Mr. Chairman. Madam Chair, you were quoted in a New Yorker profile this week saying that while the economy is improving from the depths of the financial crisis and the Great Recession, ‘‘The headwinds are still there.’’ And even when the headwinds have diminished to the point where the economy is finally back on track and it is where we want it to be, ‘‘It is still going to require an unusually accommodative monetary policy.’’ That was your statement. That seems pretty consistent with the concern of prominent economists outside of the Fed, that current economic conditions and fiscal policy are producing an environment that requires low than normal interest rates to generate economic growth and create jobs. Can you explain to me what you mean about the need for ‘‘unusually accommodative monetary policy’’? And do you agree with the views being discussed by many, Larry Summers and others, about lower than normal interest rates and the dangers of tightening too soon? Ms. YELLEN. I do agree with the view that there are substantial headwinds facing the economy. One example would be that we see in surveys of households that their expectations about their future finances and growth in their real incomes are exceptionally depressed. And I think that is a factor that is depressing spending. We see in the housing market, where we had some progress but it now looks like it is stalled, a lack of credit availability for anyone who has anything other than a pristine credit rating I think remains a factor, and that is in many ways and complicated ways a legacy of what we have lived through. So I think there are—and fiscal policy has been a factor, in my view holding back the recovery. And that is what monetary policy has had to counteract, and that is in part why we have needed such an accommodative monetary policy for so long. Now, the economy is making progress. I do believe it is making progress, and eventually, if we continue, a day will come when I think it will be appropriate to begin to raise our target for the Federal funds rate. But to the extent that even when the economy gets back on track, it does not mean that these headwinds will have completely disappeared. And in addition to that, productivity growth is rather low. At least that may not be a permanent state of affairs, but it is certainly something that we have seen in the aftermath—well, we have seen it during most of the recovery. That is a factor that I think is suppressing business investment and will work for some time to hold interest rates down. These concerns and these factors are related to what economists are discussing, including secular stagnation. The committee, when VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 17 it thinks about what is normal in the longer run, the committee has recently slightly reduced their estimates of what will be normal in the longer run. The median view on that is now something around the 33⁄4 percent. But we do not really know. But it is the same factors that are making the committee feel that it will be appropriate to raise rates only gradually, they are some of the same factors that figure in the secular stagnation. Senator MENENDEZ. Let me ask you beyond what the Fed is doing. Are there fiscal policy steps the Congress can take to improve the situation and reduce the headwinds against growth? For example, we have interest rates at near historic lows and construction employment is still below the precrisis levels. For example, would it not be time to invest in repairing our Nation’s transportation and other infrastructure as a way to help against such headwinds? Ms. YELLEN. As I have said, fiscal policy for a number of years has been a drag on growth, and that is, we can translate that into a factor that has necessitated lower than normal interest rates to get the economy moving back on track. And, of course, it is a judgment for Congress what the appropriate priorities are, but I would certainly say that fiscal policy has been unusually tight for a period like we have lived through. Senator MENENDEZ. I understand that you do not want to dictate what Congress’ priorities are, but if, in fact, Congress were to say, well, investing significantly, robustly in our transportation infrastructure and other similar infrastructure projects, would that be something that would help against the headwinds? Ms. YELLEN. Well, certainly it would be a counter to those headwinds, yes. Senator MENENDEZ. Thank you. Chairman JOHNSON. Senator Heller. Senator HELLER. Thank you, Mr. Chairman, and thank you for holding this particular hearing. Chairman, thank you for being here. I apologize. I have not been here for all the questioning. The Ranking Member and myself are running back and forth to the Energy Committee talking about fire suppression. I know you get a lot of credit and blame. I want you to know I am not blaming you for the fires out West, all right? So we can take that question off the table. I know you do take a lot of credit and a lot of blame, and I just want to thank you for taking time. You said in your opening remarks that the recovery is not complete from the Great Recession. And we have had a lot of lively debates here in this Committee over the soundness and the safety of our market structures. We even had a hearing last week on highfrequency trading. Some are going so far to claim that markets perhaps are rigged. If you talked to individuals 5 years ago, in 2008, and told them we were going to go 5 years through a Great Recession and in that 5-year period you are going to see the stock market go from 6,500 to 17,000, not too many people would have believed that. So I guess the question is: Books are being written about this. Individuals are now going as far as to claim the markets are VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 18 rigged. I want to get your feelings on this. Do you believe the stock markets are rigged? Ms. YELLEN. I think there are a number of concerns that have been outlined about high-frequency trading, and I believe it was in June Mary Jo White, the Chair of the SEC, gave a very important and very detailed discussion of high-frequency trading, outlining where she saw problems and what potential solutions might be to those problems. Senator HELLER. The quantitative easing, do you believe that unintended consequences of QE1, 2, and 3 may be with all the bond buying, that it is forcing people into the stock markets, creating this bubble? Ms. YELLEN. I think an environment of low interest rates in general, which have been promoted by both our keeping the Federal funds rate at 0 and additionally by our purchases, low rates do have an incentive to push individuals to look for yield, to reach for yield. And that is both a good thing and a bad thing. On the one hand, we need healthy risk taking in order to spur our recovery. And low interest rates I think have had a positive effect on helping the recovery. But, of course, we have to be careful about looking for situations where low rates may be incenting behavior that can be dangerous to financial stability. And I particularly outlined in my remarks an area like leveraged lending where we are seeing a marked deterioration in underwriting standards, and it looks like it may be part of a reach for yield, and we are trying to deal with that through supervisory means. But the kind of broad-based increase in leverage in the economy and maturity transformation and credit growth that one tends to see in a situation where there are intense financial stability risks, I do not think we see those things. So at this point they are more isolated and not broad-based in general, at least in my assessment. Senator HELLER. Thank you, Dr. Yellen. I will go back to Senator Johanns’ questions on quantitative easing. I may ask it just a little bit differently, but you do see a time when the Federal Reserve stops the bond-buying program? Ms. YELLEN. As I indicated in my opening remarks, if things continue on the current course, as the committee expects, the purchases would cease after our October meeting. Senator HELLER. So if they cease, do you see—I guess my question today would be: Would you ever see the restarting of quantitative easing? In other words, once it ends, do you believe that this is now the new normal, the Federal Government buys these bonds? Or would you commit to saying that quantitative easing has come and gone and we have seen the last of it? Ms. YELLEN. It really depends on what the economy does. The economic outlook is very uncertain. I hope we are on a solid course of recovery and that it will continue and not encounter some serious setback. I would not take it off the table forever as a tool the Federal Reserve might need to someday in some circumstances use again. But my hope is we are on a path of recovery and monetary policy will over time normalize, that our purchases will end, eventually our balance sheet will begin to shrink back toward more normal size, VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 19 and when the time is right, that short-term interest rates will begin to move above their current very, very low levels, too. Senator HELLER. Dr. Yellen, thank you. Mr. Chairman, thank you. Chairman JOHNSON. Senator Brown. Senator BROWN. Thank you, Mr. Chairman. Madam Chair, thank you for being here. These hearings so often focus on when the Fed will change its policies so financial markets will rally and Wall Street lenders can make money. Too often we forget about the human side of these issues. As Federal Reserve Chair, you have worked to put a face on economic numbers. We are appreciative of that. Last February, you spoke of the toll on unemployed workers ‘‘being simply terrible on the mental and physical health of workers, on their marriages, on their children.’’ It seems, though, Madam Chair, too many people around here still view unemployed workers as lazy, as shiftless people who do not really want to work. And so we simply don’t extend programs like unemployment insurance. Talk for a minute or two about the psychological effects that unemployment has on workers, why the psychology is so important, why it should matter to all of us, even a Senator who goes to work in a suit every day and speaks with an upper-class accent. Ms. YELLEN. I think many workers who lose jobs that they are attached to and depend on for their livelihoods experience exceptional psychological trauma when they become unemployed, and especially when the unemployment is of long duration, as it has been for so many individuals who find themselves unemployed now. First of all, there is a very significant loss in lifetime income. Many studies have documented for workers who experience job loss when unemployment is as high as it has been and they find it difficult to get another job. And, of course, there is the fear that goes with that of, ‘‘How will I support my family? How will I take care of my children?’’ I gave a speech in Chicago in February and talked to a number of unemployed workers, and I heard personal stories about individuals who were supporting children and concerned that because in some cases they could only find part-time, low-paying jobs, that they could not continue to support their children adequately. And there are a number of studies when I use those words, that it takes such a toll on families and children and psychologically, that is based on a number of studies that have documented that, that there are health costs to workers who lose their jobs, that in terms of the progress of their children that there are losses to their children when a parent loses a job for a significant amount of time, and in terms of the odds of divorce and breakup of a family, that is obviously present, too. And for people their jobs are often their identities, and when an individual cannot find a job for a prolonged period of time, ‘‘Who am I and what is my role? And how do I contribute to my community and to my family?’’ become a real psychological toll. I think anyone who has ever talked to people experiencing significant unemployment realizes what the psychological toll is and the ways it affects their well-being and that of their community. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 20 Senator BROWN. Thank you for realizing that that is an important part of your job, to continue to forcefully speak out about the human side and the human cost of economic policies. Let me shift to another question. Too many Americans look at Washington’s response to the financial crisis and feel that nothing has changed. After all, the four largest banks are 25 percent larger than they were in 2007. Federal Reserve Vice Chair Stanley Fischer said last week, ‘‘What about simply breaking up the largest financial institutions? While there is no simply,’’ he points out in this area, ‘‘actively breaking up the largest banks would be a very complex task with uncertain payoff.’’ It is troubling to me that the largest banks are so complex that one of our Nation’s top regulators cannot understand these institutions, particularly since he worked at one of them. But Dr. Fischer’s view reflects years-old sentiment expressed by Governor Dan Tarullo in 2009 that ‘‘Break up the banks’’ is more of a slogan, Governor Tarullo said, than a serious policy proposal. But Governor Tarullo’s views evolved. Last year, he praised a plan that I worked on with Senator Kaufman from Delaware, who has since left the Senate, to cap a bank’s nondeposit liabilities at 3 percent of U.S. GDP. My question is: Do you agree with Vice Chair Fischer or do you agree with Governor Tarullo? Ms. YELLEN. I think one of the things that Vice Chair Fischer said that I certainly agree with is that systemic risk in the financial system is not purely a question of too-big-to-fail institutions. And we should not lull ourselves into thinking that if we deal with ways to resolve or diminish the role of those institutions that systemic risk is not still a real phenomenon that we have to worry about. During the Great Depression, when we had a financial crisis, it was mainly a large number of small banks that were affected, and then we saw runs on the banking system that had the potential to and did cause a collapse of credit in the economy. So I think he pointed out, and I agree, that we have to worry about more than the too-big-to-fail firms, and we could have systemic risk if a large number of smaller institutions are hit for some reason. But it is certainly, I agree with my colleague Governor Tarullo, we are completely committed to trying to deal with too big to fail, and we have put in place numerous steps and have more in the works that will strengthen these institutions, force them to hold a great deal of additional capital, and reduce their odds of failure. And then on top of that, if they do fail, it is important that we be able to resolve these firms, and we are also working on having the ability to do that. So, on the one hand, there will be much lower odds that a socalled systemic firm would fail, and should that occur, we will have better tools to be able to deal with it. And through the living will process and through other aspects of our supervision, we are trying to give these firms feedback on ways in which they can alter their structure in order to enhance their resolvability. Senator BROWN. I think the important point you made was during the living will process, for these 11 largest firms, that the issue VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 21 of complex—that we really cannot address the issues of complexity, you and the FDIC. So thank you, Madam Chair. Chairman JOHNSON. Senator Toomey. Senator TOOMEY. Thank you, Mr. Chairman. And thank you, Madam Chair, for joining us yet again. I think you know from our previous conversations I have long been of the view that the risks associated with this unprecedented experiment in monetary policy probably outweigh the meager benefits. So I disclose that up front. But I want to understand better a different aspect of this, and that is, a movement toward normalization, which, arguably, is underway now, necessarily depends on the projections that the Fed makes. You have discussed some of those inflation projections, unemployment projections, GDP projections. What concerns me is that these things are very hard to project, and the Fed does not have a great track record in projecting these things. I do not think the Fed really anticipated, for instance, the extent to which a decline in the workforce participation would drive unemployment rates lower. I have a little graph here, which I know you cannot see from where you are, but, Mr. Chairman, I will ask that it be included in the record. It simply depicts the Fed’s projection of GDP 1 year out, and then compares that to where GDP actually was, and it has been pretty terrible wrong for 10 years. It seems as though there is a systemic bias with a more optimistic outlook than what has actually come to pass. So my question is: To what extent—how introspective is the Fed being about their own limitations in making projections which ultimately are driving a movement in the direction of normalization? And maybe more precisely, do Fed members incorporate into your own decision-making process the fact that these projections have not been so good? And that is not to say you are unique in getting these projections wrong. I understand how difficult they are. But don’t they argue for a more conservative approach and a quicker move to normalization since you know that very frequently these projections have been wrong? Ms. YELLEN. I certainly agree that projecting future economic activity is a very difficult business, and our GDP projections have been for a number of years too optimistic. I would say that our projections about the labor market and unemployment as well as inflation have come closer to the mark. So GDP stands out as someplace where our projections have been systematically off. And, of course, we have to gear monetary policy to what actually occurs in the economy, and not just what we expect will happen in the future to the economy. So our forward guidance, for example, is very explicit in saying that the time of normalization of policy, the time at which we would begin to raise the Federal funds rate above the 0 to 1⁄4 percent range will depend on both actual progress, which we can see that is not a forecast, and our expectations about future progress in achieving both of those goals. So we are looking at what happens in the economy, and when we are wrong, we take that into account. And as we see ourselves coming closer to our goals or failing to achieve our goals, that is VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 22 real live data that we respond to and adjust our policy accordingly. And I think that must be a feature of monetary policy, is that it adjusts to actually unfolding events and not just what we expected. Senator TOOMEY. Thank you. One other question. You know there is often a lot of discussion about the Fed following some kind of well-defined rule, and obviously many central banks do that. The Fed itself has done it in the past. What is your reaction to the idea that the Fed would be able to design its own rule, but it would be an objective, data-driven rule, the Fed would be required to disclose the rule, and the Fed would be allowed to deviate from the rule, but it would have to come to Congress and explain when and why it was doing so? What are your thoughts on an arrangement of that nature? Ms. YELLEN. No central bank in the world follows a mechanical mathematical rule, and I think it would be a terrible mistake to ask the Federal Reserve to specify a mathematical rule—— Senator TOOMEY. Well, we have got central banks that peg their currency. I mean, that is pretty much a well-defined rule. Ms. YELLEN. Or a currency board. Senator TOOMEY. Or having a gold standard is a pretty well-defined rule. So historically it has not been uncommon. Ms. YELLEN. OK. So if that is what you mean by your rule of gold standard or currency board, yes, that has happened. But given the goals that Congress has assigned to us with respect to inflation and employment, I am not aware of any, for example, inflation-targeting country, of which there are many, that has a mathematical rule. Nevertheless, it makes perfect sense to behave in a relatively systematic way, looking, when you have objectives, asking the question how far are you from achieving those objectives, and how fast do you expect progress to be made in determining whether or not—exactly how much accommodation is needed. And a number of different factors come into play at different times. If we were following a specific mathematical rule, I really think performance in this recovery would have been dreadful. Most of the rules we would have used, first of all, we could have not followed in the depths of the downturn. They would have called for negative interest rates. And if we had tightened monetary policies, some of those rules would have called for—given the headwinds we face, the recovery would not be as far advanced as it is. So there are special factors and structural changes that need to be taken into account that would make me very disinclined to follow a mathematical rule. But I think it is important that the central bank behave in a systematic and predictable way and to explain what it is doing and how it sees itself as likely to respond to future economic developments as they unfold, and that is precisely what we are trying to do with our forward guidance. Senator TOOMEY. Thank you, Madam Chair. Chairman JOHNSON. Senator Tester. Senator TESTER. Yes, thank you, Mr. Chairman, and thank you, Chairman Yellen, for the work that you have done. I think in previous sessions that we have had, I think you have agreed that the FSOC and the Fed have and should exercise their authority to develop industry-specific guidelines and metrics rather VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 23 than forcing insurers or asset management firms into a bank-centric regulatory model. I mean, that is still your position, I would assume? Ms. YELLEN. I believe with respect to designation that each unique company that is under consideration needs to be carefully—— Senator TESTER. Good. Ms. YELLEN. ——evaluated in detail. Senator TESTER. OK. Thank you. In the past, some of us on this Committee have raised concerns that the FSOC seems to have a lack of transparency in the SIFI designation process. Could you give me your views as far as whether the process should be transparent or not? Or maybe I should word it this way: Can you tell me why the process should not be transparent if you think it should not be transparent? Ms. YELLEN. I think that it should be transparent what it is that the FSOC is considering and looking for and trying to evaluate when it evaluates any particular firm. And I believe the FSOC has made it clear that they are trying to identify entities that are responsible for systemic risk to the financial system and the metrics that it looks to to evaluate that. But there is a great deal of confidential firm-specific information that comes into play in evaluating a particular firm that I do not think should be in the public domain—— Senator TESTER. I have got—— Ms. YELLEN. ——unless it is actually designated, in which case it has been brought into the public domain. Senator TESTER. Right. But you do believe the metrics should be transparent? Ms. YELLEN. Well, the criteria that we use to establish—to designate should be clear. Senator TESTER. Do you believe they are now? Ms. YELLEN. I believe they are reasonably clear. Senator TESTER. OK, because there are some—well, there are some, and I am one of them, that believe the process has not been transparent at all. And what I would ask of you, because I believe you think it should be—and I agree with you. The information that is specific to a company does not need to be transparent, but I think the metrics they are using, so we know what they are looking for, so that, quite frankly, everybody knows what they are looking for when it comes to designation is important. Ms. YELLEN. Right, and I believe they have indicated what kinds of things they are taking into account. Senator TESTER. About 6 months ago, when you were before this Committee, we talked about clarifying the end user exemption from the margin that was included in the Dodd-Frank, given the minimal risk that they pose in the overall market. You and former Chairman Bernanke and Governor Tarullo all indicated comfort with exempting end users from the costly margin requirements. Is this still true today? Do you still feel this way? Ms. YELLEN. Yes. Senator TESTER. Good. You had indicated that the rule would be out by the end of the year, the end-user rule. I am just wondering if you are still on schedule. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 24 Ms. YELLEN. I think that is correct that we are. Senator TESTER. A few more head nods. OK. That is very, very good. Thank you very much for that. I want to talk a little bit about the assessment just to give me an idea—and I may have asked this question before, and if I have, forgive me. When you are looking at the assessment of incoming information when it comes to the economy and when it comes to the Fed funds, the labor market is one of them. GDP is one of them. I would assume housing is one of them. What are some other indicators you are looking at? Ms. YELLEN. We are really trying to assess the likely path of the labor market and employment and inflation, which are the two goals Congress told us to focus on. But in trying to make those assessments, we have to look at a huge range of data: housing, consumer spending, the strength of investment spending, what is happening in the global economy, what do we expect will happen to our exports and imports. All of that figures into what will growth be in the economy, and then in turn, matters like productivity growth will affect how that translates into progress in the labor market. And with respect to inflation, of course, we are looking at many different metrics. Senator TESTER. And of all those things you listed, which is of the most concern? Ms. YELLEN. Of all of those different metrics? Senator TESTER. Yes. You were talking about the inputs that you consider within the economy. What is of the most concern? Ms. YELLEN. At this moment? Senator TESTER. Yes, Ms. YELLEN. What is of the most concern? Senator TESTER. Yes. Ms. YELLEN. I mean, essentially the committee, having looked at all of these different factors, holds the view that we will enjoy moderate growth for the rest of the year and for the next couple of years, and the labor market will improve. And so while we are concerned that housing is a sector where we expected to see better recovery. We are not, that is a concern. But it is not quantitatively important enough to cause us to judge that it will hold back the recovery. Senator TESTER. Thank you. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Coburn. Senator COBURN. Thank you, Madam Chairman, for being here. I appreciate your work and your interest. You gave a speech recently on the importance of macroprudential tools to curtail financial instability if a particular asset class gets overheated. The persistent low interest rate environment has caused a reach for yield. The Fed is taking the stance that regulatory tools such as increased capital requirements, countercyclical buffers, margining, central clearing, requirements for derivatives will improve the resiliency of our financial system. So my question for you: Rather than preventing asset bubbles from happening, we are now taking the approach that they are going to happen and we are going to deal with them. Is that an accurate statement? VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 25 Ms. YELLEN. I think the steps that you indicated to strengthen the financial system do two things. They diminish the odds that bubbles will develop. For example, these rules diminish the chance that leverage will buildup as an economy strengthens. We have taken steps and will take further steps to diminish the likely buildup in leverage in the economy, so—— Senator COBURN. But you would agree that zero interest rate policy is tending to make people reach for yield now and is an impetus toward bubble creation in certain asset classes? Ms. YELLEN. It can be, and that is why we are watching very carefully, but—— Senator COBURN. Is there any one particular area that you are worried about right now in terms of asset bubbles? Ms. YELLEN. I have mentioned leverage lending and corporate debt markets, especially lower-rated companies. I think we are seeing a deterioration in lending standards. And we are attentive to risks that can develop in this environment, for example, that banks may be or others may be taking on interest rate risk, and when interest rates ultimately begin to rise, that if firms or individuals have taken risks and are not adequately prepared to deal with them, that can cause distress. Among the institutions that we supervise, we are certainly looking at management of interest rate risk. We are using stress testing, and in this latest round, we had specific scenarios designed to look at how large banking organizations would fare if interest rates were to increase rapidly. And we are focused on how firms are managing their own interest rate risk. So I think there are some risks in a low interest rate environment. I have indicated that, and we are aware of them. But I think the improvements we have put in place in terms of regulation both diminishes the odds that risk will develop and, if there is an asset bubble and it bursts, it will—and we are not going to be able to catch every asset bubble or everything that develops—— Senator COBURN. I guess that goes to my core question. Rather than have a policy that causes bubbles to create, why wouldn’t we have a policy that does not cause that, one? And, number two, it just seems to me now that we are kind of locked in this zero interest rate phenomenon, and one of the consequences of that is reaching for yield, and now we are going to try to attenuate the response to the zero interest rate rather than change the zero interest rate policy so that we do not have the bubbles in the first place. Ms. YELLEN. We have to recognize also that we are dealing with a real problem. The reason we have low interest rates is to deal with a very real problem, namely, the economy is operating significantly short of its potential, employment is suppressed well below its maximum sustainable level, and inflation is running below our objectives. That is why we are holding interest rates low, and were we to significantly raise interest rates to deal with a set of concerns that you indicated, we should expect even worse performance on those important goals that Congress has established for the Federal Reserve. And if we were to weaken the economy, it is not even clear that we would be mitigating financial stability risks overall, because—— VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 26 Senator COBURN. We are in the trap. Ms. YELLEN. There are considerations in both directions, and so we need to be very attentive to the financial stability risks. And as I have indicated, if they were to become extreme and other tools were not available or were not successful, I would not take monetary policy off the table as a tool to be used. But we should by no means think that it would be costless because it could be very costly in terms of achieving other very important objectives, and a weak economy creates its own set of financial stability risks. So it is not even clear that on balance we would be promoting financial stability. So this is not a simple matter. There are complex tradeoffs involved here. Senator COBURN. Mr. Chairman, I have additional questions for the record. Chairman JOHNSON. Yes. Senator COBURN. Thank you. Chairman JOHNSON. The Chair notes that we have five Members and less than 20 minutes remaining to devote. Senator Warner. Senator WARNER. Thank you, Mr. Chairman, and thank you, Chairman Yellen, for your good work. I will try to make my questions quick and make one front-end comment. As someone who advocated very strongly during Dodd-Frank that nonbanks could be SIFIs, I have to tell you I share Senator Tester’s concern about the transparency as we go through this process. We have got to get it right, and my concern is that for the nonbank SIFI designation, there is still a great question on transparency about whether it is size or product component, and the more clarity we can get on this, the better. There are two questions I want to get at. One is an issue that has not been raised yet. I know some of us on this side of the aisle have grave concerns around student debt. At $1.1 trillion now, it is greater than credit card debt. I personally believe it is retarding recovery in the housing industry. It is clearly retarding the growth in the number of entrepreneurs. Some of us have proposed refinancing proposals. We have looked at income-based repayment plans. There is a bipartisan opportunity out there that would allow an employer to take a portion of an employee’s salary and apply it directly to the student debt pretax, the same way we already allow for tuition. But is this a subject that at the Fed you have looked at and want to make a comment on in terms of this rising potential bubble in student debt and its effect on the economy? Ms. YELLEN. We certainly are looking at it, and the growth in student debt has been really dramatic. I think there has been some work that documents that it is probably having an effect on the ability of young people to purchase homes. And it certainly is a burden for those individuals that they will be carrying through their lives. On the other hand, education is extremely important, and making available the financing that is necessary in this economy for individuals to acquire an education is of the first order of importance. I would be concerned, of course, that some of the decisions that stu- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 27 dents are making, they may not fully understand the burdens that they are assuming and how they will affect their lives. And, second of all, they may not be always accurately evaluating what the payoffs are to the training that they are taking on, and especially when there is inadequate information about the performance of the schools or programs that they are enrolled in, what are the jobfinding and income prospects, and—— Senator WARNER. We have actually some bipartisan legislation that we ought to have a user-friendly Web site for all institutions, the same way we have got in housing and elsewhere, a Zillow-type site for students. And so know before you go is the approach we have. But I would point out that, you know, we have seen student debt quadruple from about $200 billion—— Ms. YELLEN. It is very—— Senator WARNER. ——to well north of—$240 billion in 2003 to $1.1 trillion roughly now. I would urge you and even at the FSOC level to look at this, and if you have got some additional suggestions. I want to use my last moment to get in a question that I have asked before, but I want to prod you one more time, and that is on excess reserves. And when we were last—before, you kind of gave me the same answer that Chairman Bernanke gave, and the concern that if you kind of got rid of some of these excess reserves, which, you know, you are currently paying 25 basis points, and the excess reserves that have gone from $2.4 trillion to close to $2.6 trillion. The European Central Bank has actually got a negative 10 basis points on their policy toward these excess reserves. I realize your concerns, the effect it might have on money market funds, but with money market fund rates already so low, I still just do not understand why reexamining this policy might push some of our financial institutions to actually be willing to do a little more lending rather than to house these funds at the Fed. Ms. YELLEN. It is a very legitimate question, and it is something that we have considered and debated, and there have been mixed views in the committee on the desirability of doing that. We have been quite concerned about what it might mean, given the structure of our money markets, for money—— Senator WARNER. Money market funds are already pretty low at this point. Ms. YELLEN. Yeah. We have—— Senator WARNER. But my hope would be that you continue that debate, or at least this Member believes that this could be something that could be stimulative to the economy and get these banks taking this capital away from the Fed and actually into the economy. Thank you, Madam Chair. Chairman JOHNSON. Senator Merkley. Senator MERKLEY. Thank you very much, Mr. Chair. And thank you for your testimony today. I will try to be very crisp in these questions, given the time. But insurance advocates have expressed concerns that new regulations might be forthcoming based on an international standard influenced by Nations that do not have our State guarantee system, and they believe that this may result in new capital requirements that VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 28 are unnecessary and inappropriate for the structure of the industry in our Nation. Are there any thoughts that you might have to share on that particular topic? Ms. YELLEN. I would simply say that the Federal Reserve is participating now in an international association of insurance supervisors discussing for internationally active insurance firms what might be appropriate capital standards for groups, you know, for essentially consolidated capital requirements for—not legal entity insurance firms that are regulated by the States—but the consolidated holding companies. Nothing that happens in that context— it is similar to our participation in the Basel Committee. We are looking to put in place appropriate standards here in the United States, and nothing that is decided in that international group has any force in the United States unless we propose rules, put them out for comment, and finalize them. But I think it is helpful to get the perspectives of others and, to the extent possible and appropriate, to have an internationally level playing field. Senator MERKLEY. Thank you. I am going to jump right into the next point, which I wanted to double down on the student loan question, because I feel like there is a huge amount of emerging information about the delay in home acquisition, and this is certainly a drag in itself on our economy as well as an impact on the quality of life of our young folks. But it also has a significant extended effect through the decades to come because of the slow pace of wealth aggregation for families if they do not engage in home ownership earlier on. And it is actually shocking to see a reverse of a key statistic in which folks who are 25 to 30 who have gone to college are now less likely to own a home than folks who did not go to college. So I just want to encourage—this issue really goes to the heart of the American dream because the cost of college is not only affecting those who went and have this debt, but it is affecting the aspirations of our children in high school who are starting to get advice, particularly in blue-collar communities like the one I live in, that maybe you should not risk carrying this mountain of debt in the context of such high uncertainty over jobs that might be able to have a monthly wage that could make those payments. Ms. YELLEN. I agree with you that when you look at the numbers on student debt, it has to be a significant concern for just the reasons you gave. Senator MERKLEY. Thank you. I will look forward to any work that the Fed is doing in this area to understand better the impacts on the economy. I want to turn to the financial reform rulemaking process, and I know you have expressed concern with the frustratingly slow pace of some of the rulemaking, and we have still got quite a long list from Dodd-Frank here 4 years later that has not been completed on credit rating agencies, conflict of interest, and securitization are the issues that Senator Levin was so forceful in bringing forward during Dodd-Frank, security-based swaps, compensation structures, and so forth. Do we have kind of a crisis of confidence in our ability to make the rulemaking system function? When we have in a law a goal for VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 29 a rule and sometimes it is a year, sometimes it is 2 years, and we just cannot seem to get the rules completed and maybe even end up in Never, Never Land, appropriately named because it seems like we are never going to get to final rules, is this a change from two decades ago? What do we do about it? Ms. YELLEN. I know it has been frustratingly slow. It is complicated, and we want to take the time to get it right. We are involved in a lot of rulemakings that involve multiple agencies with different perspectives, and we are also trying to coordinate with other countries to move forward together so we maintain in many areas a level playing field, and this is immensely time-consuming work. I understand your frustration. I guess I see a bunch of rules in the pipeline that I hope will be completed in the not too distant future—the liquidity coverage ratio, QRM, other things that we can expect to come out of the pipeline. And I see a further agenda of rules that I really hope we will make a great deal of progress on this year. So to me, the glass is more half full than half empty, and I actually believe we have made substantial progress and will continue to push forward. Senator MERKLEY. Thank you, Chairman JOHNSON. Senator Hagan. Senator HAGAN. Thank you, Mr. Chairman. And, Chairman Yellen, thank you for your service and for being here today. I wanted to follow up on a letter that I sent to the Federal Reserve, the OCC, and the FDIC, and it is regarding the liquidity coverage ratio standard. I have heard a number of concerns from communities in North Carolina about the exclusion of the municipal securities from the high-quality liquid assets designation, and in particular, I am concerned that this exclusion of the municipal securities could restrict the ability of State and local governments to raise the capital that they need to finance these public investments in schools and hospitals and roads and airports, and then all the other infrastructure systems. And these projects are really the cornerstone of the U.S. economy. What is the justification for excluding these municipal securities when other types of debt, including foreign sovereign debt, are covered? It seems like a strange outcome to me for the debt of some foreign countries to be treated more favorably than the AAA-rated debt of States like North Carolina. Ms. YELLEN. So let me say this is a proposal we have put out for comment, and we will look very carefully at the comments we receive on this and other topics. The rationale for excluding them is that we are expecting firms to hold truly high-quality liquid assets, and the liquidity of municipal bonds is substantially lower than any of the assets that are included on that list. So the absence of liquid markets where those securities are traded was the reason for excluding them, but we will be looking very carefully at comments before we come out with a final proposal. Senator HAGAN. Well, I ask that you consider the impact that this exclusion could have on infrastructure investments and then VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 30 the ability of the States and local governments to actually manage their debt. Ms. YELLEN. We will look at those comments. Senator HAGAN. Thank you. And I also wanted to follow up on Senator Merkley’s question concerning the new global standards for the insurance entities. I believe it is important that the insurance companies be protected and that the State model for regulating the insurance also be respected. And as a member of the Financial Stability Board and a participant in these meetings, can you explain in a little bit more detail what the Federal Reserve is doing to ensure that any international regulations do not harm these companies and respect the State-based model of the insurance regulation? Ms. YELLEN. We are working very closely and the State regulators are participating in these international discussions as well. Nothing that is under consideration would affect the way in which legal entity insurance companies are regulated with respect to capital by the States. So we are looking at a separate set of capital requirements that would apply to the consolidated organization. And, again, nothing that happens in this international forum has any effect on American firms until we have incorporated them into regulations which go out for comment and are ultimately finalized. Senator HAGAN. Thank you. Thank you, Mr. Chairman. Chairman JOHNSON. Senator Warren. Senator WARREN. Thank you, Mr. Chairman. And thank you, Chair Yellen, for being here today. You know, one of the tools that Congress has given the Fed to combat too big to fail is Section 165 of Dodd-Frank. This is the section that requires large financial institutions to submit plans each year describing how they could be liquidated in a rapid and orderly fashion without bringing down the entire economy or needing a taxpayer bailout. Now, the Fed and the FDIC must review these plans, and if they do not buy that the plan would actually result in the rapid and orderly liquidation of the company, then they must order the company to submit a new plan. And here is the key part. As part of the order to submit a new plan, the Fed and the FDIC can require the company to simplify its structure or sell off some of its assets— in other words, break up the bank so that it could be more easily liquidated and not pose a risk to the economy. So let us consider what happened during the Lehman Brothers bankruptcy in 2008. That is the one that sparked the financial crisis, nearly melted down the economy, and triggered the bailout by the taxpayers. The court proceedings took 3 years, clearly not rapid or orderly. But Lehman was tiny compared to today’s biggest banks. When it failed, Lehman had $639 billion in assets. Today JPMorgan has nearly $2.5 trillion in assets. That is 4 times as big as Lehman was when it failed. Lehman had 209 registered subsidiaries when it failed. JPMorgan—I really almost could not believe this when I read it. JPMorgan today has 3,391 subsidiaries. That is more than 15 times the number of subsidiaries that Lehman had when it failed. Three years to resolve Lehman. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 31 Now, JPMorgan has filed resolution plans in each of the last 3 years, and the Fed has not rejected any of them as not credible. Given our recent experience with the bankruptcy of Lehman Brothers, can you honestly say that JPMorgan could be resolved in a rapid and orderly fashion, as described in its plans, with no threats to the economy and no need for a taxpayer bailout? Ms. YELLEN. The living will process, as I understand it, is something that is intended to be iterative in the sense that the firms submit plans and will receive feedback from the regulators on whether or not we think the Fed and the FDIC regard these plans as sufficient to enable resolution under the Bankruptcy Code. We have given feedback on the first round of plans that were submitted and are working actually at this point to give feedback on the second round of plans. In fact, the firms have now submitted a third round of plans—— Senator WARREN. I am sorry, Chairman. I am just a little bit confused. JPMorgan submitted a round of plans in 2012, and my understanding is that neither the Fed nor the FDIC said that those plans were not credible. It then submitted plans in 2013, and neither the Fed nor the FDIC said they were not credible. And it has submitted plans in 2014. So I am not quite sure—— Ms. YELLEN. We have not even—— Senator WARREN. ——whether you are saying the plans are not credible and you are continuing to talk with them and asking them to change their plans. Is that the case? Ms. YELLEN. We are working to give these firms feedback on their second round of submissions, and I think what we need to do is to give them a road map for where we see obstacles to orderly resolution under the bankruptcy Code—— Senator WARREN. Well—— Ms. YELLEN. ——and to give them an opportunity to address those obstacles. Senator WARREN. I appreciate that you are doing that, but the statute, it seems to me, is pretty clear here, that it is mandatory that these plans be submitted each year and that each year you determine whether or not the plans are credible. And I guess the question I am asking is: Have they ever gotten to a plan that you can say with a straight face is credible? Ms. YELLEN. I have understood this to be a process that these are extremely complex documents for these firms to produce. Our second round of submissions, we are looking at plans that run into tens of thousands of pages. And I think what was intended is that this determination you are talking about, about whether or not they are credible, the question is, Do they facilitate an orderly resolution? And I think we need to give these firms feedback—— Senator WARREN. So I will stop there because we are running out of time, but I have to say, Chair Yellen, I think the language in the statute is pretty clear that you are required, the Fed is required to call it every year on whether these institutions have a credible plan. And I remind you, there are very effective tools that you have available to you that you can use if those plans are not credible, including forcing these financial institutions to simplify VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 32 their structure or forcing them to liquidate some of their assets— in other words, break them up. And I just want to say one more thing about this process. The plans are designed not just to be reviewed by the Fed and the FDIC, but also to bring some kind of confidence to the marketplace and to the American taxpayer that, in fact, there really is a plan for doing something if one of these banks starts to implode. You said that these plans run to the tens of thousands of pages. All I can say is that what has been released to the public is 35 pages long. That is about one page for every 100 subsidiaries that have been to be dealt with. I think that the plans that have been released by these companies have not been something that the public can look at and say, yeah, I see that they have got a plan to get through this. So I hope you would urge greater transparency by these large financial institutions that are required to submit these plans, and I hope the Fed will be making a call on whether or not the Fed under its statutory responsibility sees these plans as credible for resolving these financial institutions if they hit financial trouble. Thank you. Thank you, Mr. Chairman. Chairman JOHNSON. Chair Yellen, I would like to thank you for your testimony. This hearing is adjourned. Ms. YELLEN. Thank you, Mr. Chairman. [Whereupon, at 12:06 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and additional material supplied for the record follow:] VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 33 PREPARED STATEMENT OF JANET L. YELLEN CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM JULY 15, 2014 Chairman Johnson, Ranking Member Crapo, and Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. In my remarks today, I will discuss the current economic situation and outlook before turning to monetary policy. I will conclude with a few words about financial stability. Current Economic Situation and Outlook The economy is continuing to make progress toward the Federal Reserve’s objectives of maximum employment and price stability. In the labor market, gains in total nonfarm payroll employment averaged about 230,000 per month over the first half of this year, a somewhat stronger pace than in 2013 and enough to bring the total increase in jobs during the economic recovery thus far to more than 9 million. The unemployment rate has fallen nearly 11⁄2 percentage points over the past year and stood at 6.1 percent in June, down about 4 percentage points from its peak. Broader measures of labor utilization have also registered notable improvements over the past year. Real gross domestic product (GDP) is estimated to have declined sharply in the first quarter. The decline appears to have resulted mostly from transitory factors, and a number of recent indicators of production and spending suggest that growth rebounded in the second quarter, but this bears close watching. The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing. Although the economy continues to improve, the recovery is not yet complete. Even with the recent declines, the unemployment rate remains above Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level. Labor force participation appears weaker than one would expect based on the aging of the population and the level of unemployment. These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation. Inflation has moved up in recent months but remains below the FOMC’s 2 percent objective for inflation over the longer run. The personal consumption expenditures (PCE) price index increased 1.8 percent over the 12 months through May. Pressures on food and energy prices account for some of the increase in PCE price inflation. Core inflation, which excludes food and energy prices, rose 11⁄2 percent. Most committee participants project that both total and core inflation will be between 11⁄2 and 13⁄4 percent for this year as a whole. Although the decline in GDP in the first quarter led to some downgrading of our growth projections for this year, I and other FOMC participants continue to anticipate that economic activity will expand at a moderate pace over the next several years, supported by accommodative monetary policy, a waning drag from fiscal policy, the lagged effects of higher home prices and equity values, and strengthening foreign growth. The committee sees the projected pace of economic growth as sufficient to support ongoing improvement in the labor market with further job gains, and the unemployment rate is anticipated to continue to decline toward its longerrun sustainable level. Consistent with the anticipated further recovery in the labor market, and given that longer-term inflation expectations appear to be well anchored, we expect inflation to move back toward our 2 percent objective over coming years. As always, considerable uncertainty surrounds our projections for economic growth, unemployment, and inflation. FOMC participants currently judge these risks to be nearly balanced but to warrant monitoring in the months ahead. Monetary Policy I will now turn to monetary policy. The FOMC is committed to policies that promote maximum employment and price stability, consistent with our dual mandate from the Congress. Given the economic situation that I just described, we judge that a high degree of monetary policy accommodation remains appropriate. Consistent with that assessment, we have maintained the target range for the Federal funds rate at 0 to 1⁄4 percent and have continued to rely on large-scale asset purchases and forward guidance about the future path of the Federal funds rate to provide the appropriate level of support for the economy. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00041 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 34 In light of the cumulative progress toward maximum employment that has occurred since the inception of the Federal Reserve’s asset purchase program in September 2012 and the FOMC’s assessment that labor market conditions would continue to improve, the committee has made measured reductions in the monthly pace of our asset purchases at each of our regular meetings this year. If incoming data continue to support our expectation of ongoing improvement in labor market conditions and inflation moving back toward 2 percent, the committee likely will make further measured reductions in the pace of asset purchases at upcoming meetings, with purchases concluding after the October meeting. Even after the committee ends these purchases, the Federal Reserve’s sizable holdings of longer-term securities will help maintain accommodative financial conditions, thus supporting further progress in returning employment and inflation to mandate-consistent levels. The committee is also fostering accommodative financial conditions through forward guidance that provides greater clarity about our policy outlook and expectations for the future path of the Federal funds rate. Since March, our postmeeting statements have included a description of the framework that is guiding our monetary policy decisions. Specifically, our decisions are and will be based on an assessment of the progress—both realized and expected—toward our objectives of maximum employment and 2 percent inflation. Our evaluation will not hinge on one or two factors, but rather will take into account a wide range of information, including measures of labor market conditions, indicators of inflation and long-term inflation expectations, and readings on financial developments. Based on its assessment of these factors, in June the committee reiterated its expectation that the current target range for the Federal funds rate likely will be appropriate for a considerable period after the asset purchase program ends, especially if projected inflation continues to run below the committee’s 2 percent longer-run goal and provided that inflation expectations remain well anchored. In addition, we currently anticipate that even after employment and inflation are near mandateconsistent levels, economic conditions may, for some time, warrant keeping the Federal funds rate below levels that the committee views as normal in the longer run. Of course, the outlook for the economy and financial markets is never certain, and now is no exception. Therefore, the committee’s decisions about the path of the Federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the Federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated. The committee remains confident that it has the tools it needs to raise short-term interest rates when the time is right and to achieve the desired level of short-term interest rates thereafter, even with the Federal Reserve’s elevated balance sheet. At our meetings this spring, we have been constructively working through the many issues associated with the eventual normalization of the stance and conduct of monetary policy. These ongoing discussions are a matter of prudent planning and do not imply any imminent change in the stance of monetary policy. The committee will continue its discussions in upcoming meetings, and we expect to provide additional information later this year. Financial Stability The committee recognizes that low interest rates may provide incentives for some investors to ‘‘reach for yield,’’ and those actions could increase vulnerabilities in the financial system to adverse events. While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk. Accordingly, we are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance. More broadly, the financial sector has continued to become more resilient, as banks have continued to boost their capital and liquidity positions, and growth in wholesale short-term funding in financial markets has been modest. Summary In sum, since the February Monetary Policy Report, further important progress has been made in restoring the economy to health and in strengthening the financial system. Yet too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed. The Federal Reserve remains committed to employing all of VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 35 its resources and tools to achieve its macroeconomic objectives and to foster a stronger and more resilient financial system. Thank you. I would be pleased to take your questions. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00043 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 36 RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM JANET L. YELLEN Q.1. I referenced in my opening statement your recent speech in which you discussed the macroprudential tools available to the Fed. Given the international structure of our markets, I am concerned that the use of these tools may simply disadvantage U.S. markets. How will the Fed make sure that other jurisdictions follow our lead so that our financial markets aren’t put at a competitive disadvantage when it comes to serving the global financial system? A.1. Macroprudential policies are designed to promote the stability and resilience of the financial system in the United States. These features surely contribute to the attractiveness of U.S. financial markets to international capital. That said, as you note, given the highly interconnected nature of capital markets, coordinating actions with authorities in other countries is crucial. For that reason, we work closely with other jurisdictions in venues such as the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision to craft regulations that do not disadvantage markets or institutions in the United States. For example, the Basel III capital accord contains a key macroprudential tool, the countercyclical capital buffer, which countries can put in place to provide additional loss-absorbing capacity to the banking system if they see building risks to the financial system. This tool could put U.S. banks at a competitive disadvantage if the United States were to implement the countercyclical capital buffer when other countries did not. However, the Basel III accord requires that banks’ capital ratios be an average of the capital ratios in place across countries, weighted by each bank’s presence in those countries. Thus, foreign banks operating in the United States would be subject to the same effective capital requirement as U.S. banks when making loans to households and businesses in the United States. In addition, in February 2014, the Federal Reserve approved a final rule that, in part, required foreign banking organizations with a significant U.S. presence to establish intermediate holding companies over their U.S. subsidiaries. One result of this rule is to put in place a level playing field among all banking organizations operating in the United States. In other words, they would all be subject to essentially the same set of micro- and macroprudential supervision and regulation. Finally, it is instructive to consider the experience of other developed economies with macroprudential policies. A variety of macroprudential policies, ranging from loan-level underwriting standards, such as minimum downpayments on homes, to policies designed to limit leverage in the whole financial sector, such as capital surcharges on banks, have been put in place by countries including Canada, Norway, and Switzerland. These policies have not, so far as we can observe, resulted in a notable decline of the attractiveness of these countries to global capital. Of course, these policies are still relatively new, and we are closely monitoring their ultimate impacts. Q.2. The bank regulatory agencies are now seeking public comment on the regulations that are outdated, unnecessary, or unduly bur- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00044 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 37 densome. I applaud your effort on this issue and encourage other regulators to follow the same path. It’s important to acknowledge that these regulations don’t just impact the banks—they affect the availability and cost of credit and financial services for small businesses and ordinary Americans. How does the Fed plan to lead this process and how will it achieve its goals? A.2. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires that regulations prescribed by the Federal banking agencies be reviewed by the agencies at least once every 10 years. The purpose of this review is to identify outdated, unnecessary, or unduly burdensome regulations and consider how to reduce regulatory burden on insured depository institutions while, at the same time, ensuring their safety and soundness and the safety and soundness of the financial system. In connection with the review, the agencies are required to categorize the regulations and publish requests for comment on how burden may be reduced. Finally, the agencies must provide a report to Congress summarizing significant issues, the relative merits of such issues, and whether the issues can be addressed by regulation or would require legislative action. The Federal Reserve, working with the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC) and Federal Financial Institutions Examination Council, published the first of four anticipated requests for comment on agency regulations on June 4, 2014. The next request for comment is expected to be published before year end. We are especially interested to hear from community banks and their customers. In addition to the requests for public comment, we intend to hold several public meetings around the country in order to allow the industry and the public an opportunity to present their views on burden reduction directly to agency personnel. The meetings will allow bankers, consumers, representatives of trade or public interest groups, and bank customers to provide their perspectives on how regulations should be changed to promote efficiency and effectiveness, reduce costs and limit burden. Although the focus of the exercise is on regulatory burden reduction, all members of the public may submit comments on how bank regulation may affect their relationship with their banks and their ability to obtain credit. The Federal Reserve is committed to an effective review of its regulations to change any outdated, unnecessary, or overly burdensome rules. To that end, we have devoted considerable staff time to the process so far and will continue to do so. Over a dozen agency staff are currently involved in the public comment process and in planning the public outreach meetings which will be held at various Federal Reserve Banks. Each public meeting will be attended by a number of Federal Reserve staff, including senior officers from the Board and the Reserve Banks. As the process continues, additional staff will participate in reviewing the comments, assessing the burden associated with the targeted regulations, preparing the report to Congress and preparing any recommendations for changes to the regulations. Q.3. Chair Yellen, 2 weeks ago you stated in a speech that reforms to the triparty repo market and money market mutual funds ‘‘has, VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00045 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 38 at times, been frustratingly slow.’’ Given the importance of these markets and instruments, isn’t the goal of such reforms not to get these rules done, but to get them done right and minimize unintended consequences? Can you please elaborate on your comments? A.3. Given the centrality of both the triparty repo market and money market funds (MMFs) to the 2008 financial crisis, the pace of reforms indeed has, at times, been frustratingly slow. As recently as 2012, the triparty repo market continued to be massively dependent on discretionary intraday credit from the large clearing banks in the daily settlement process. And it was only in 2013, that the Securities and Exchange Commission (SEC) formally proposed rules for structural reforms aimed at making MMFs, and therefore the financial system, more resilient. The situation has improved markedly since 2013. Reform efforts in the triparty market have already begun to bear fruit. The share of the market financed by intraday credit has dropped by some 70 percentage points over the past year. By the end of 2014, the longstanding goal of largely eliminating such credit from the triparty settlement process should be reached. Earlier this year, the SEC finalized rules intended to address the structural vulnerability of MMFs. The reforms represent a significant step to making the MMFs more resilient. However, I and others have expressed concerns about some elements and emphasized the need to monitor the overall effects of the package and their implications for systemic risk going forward. Certainly a key explanation for the slow pace of reform in these critical areas is that the triparty market and MMFs both connect disparate parts of the financial system, including large financial institutions, asset management firms, and nonfinancial corporations. For that reason, when MMFs faced runs and the triparty repo market ceased to function, the consequences were visible throughout the financial system. The importance of triparty repo and MMFs also complicated subsequent efforts to address the vulnerabilities, as reform efforts must involve a wide range of stakeholders and be consistent with a variety of different commercial and regulatory requirements. We believe that a reasonable balance has generally been struck between the need to address very significant vulnerabilities and the need to proceed carefully, with an awareness of the broad range of possible implications of reforms. Q.4. It has been reported that the FSOC is undertaking efforts to consider SIFI designations for asset managers. Designation would subject these firms to dual regulation by the Federal Reserve and the SEC. Are you concerned that this potential dual regulation of asset managers that are SIFIs by both the Fed and the SEC is going to lead to regulatory confusion and uncertainty for the markets, and how do you plan to address those concerns? A.4. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established the Financial Stability Oversight Council (FSOC) to bring together regulators from across the U.S. financial system to coordinate their efforts to identify, monitor, and address potential threats to the Nation’s financial stability. As part of this work, the Council is currently assessing potential risks arising from the asset management industry and its industrywide ac- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00046 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 39 tivities. That work is ongoing and has yet to reach any conclusions. Moreover, there is no sense in which its outcome is preordained in any way. It is possible that at the end of the FSOC’s review it may decide to take no action. However, in the event that the FSOC were to identify specific financial stability risks from asset managers or their activities, it has a number of policy options at its disposal. These include: communicating potential threats to stability in its annual report to Congress; recommending that existing primary regulators apply heightened standards and safeguards; and designating individual firms as systemically important financial institutions, thereby subjecting them to supervision and regulation by the Federal Reserve. The appropriate response will depend upon the nature of the risks identified; in the event that no material risks are identified, the FSOC need not take action. The Federal Reserve routinely coordinates supervision of domestic bank holding companies with a number of other agencies, including the SEC; together, the relevant agencies strive to minimize any potential for mixed messages to banks or market participants. Regarding institutions designated by the FSOC, Federal Reserve said it will apply enhanced prudential standards to these institutions through a subsequently issued order or rule following an evaluation of the business model, capital structure, and risk profile of each designated nonbank financial company. This tailoring of orders and rules will mitigate regulatory confusion and the potential for market disruption. The Federal Reserve is committed to continuing to work in a coordinated manner with our fellow regulators on the FSOC to ensure that the organizations we supervise operate in a safe and sound manner and are able to provide financial intermediation services in a durable way to support economic activity in the wider economy. Q.5. Building upon that last question, I would like to get your input on a recent statement by Federal Reserve Governor Tarullo that one way asset managers may be regulated is through Fed-imposed margin requirements on their collateralized lending. This could have a major adverse effect on the availability of credit in the U.S. economy. As the Fed is pondering how best to regulate nonbank SIFIs, including asset managers, what kind of a cost-benefit analysis bas the Fed done to get a clear understanding of the effect the new regulatory framework will have on these entities and the economy at large? A.5. In his recent testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Governor Daniel K. Tarullo, outlined the merits of introducing a minimum ‘‘haircut,’’ or downpayment requirement, for securities financing transactions (SFTs), a category of secured financing that is typically short-term and highly leveraged, of which repurchase agreements (i.e., repos) are an example. This is a policy recommendation being considered and developed by the FSB. 1 1 See ‘‘Dodd-Frank Implementation’’, Testimony before the Committee on Banking; Housing, and Urban Affairs, U.S. Senate, Washington, DC, September 9, 2014. Last August, the FSB Continued VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00047 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 40 Minimum haircuts on SFTs would complement post-crisis reforms aimed at bolstering the stability of the banking sector, such as Basel III. A potential unintended consequence of those banking sector reforms is that systemically risky activity might be driven out of banks and into parts of the financial system where prudential rules do not apply or are less stringent. Like minimum margin requirements for derivatives, numerical floors for SFT haircuts would be intended to serve as a mechanism for limiting the build-up of leverage at the security level and could mitigate the risk of procyclical margin calls. 2 Put another way, in good times, haircuts tend to fall to extremely low levels because market participants perceive there to be little risk. In the event of a sharp drop in asset prices, market participants suddenly raise haircuts in reaction. As a result, borrowers find themselves scrambling to finance their holdings and sometimes dump assets. The resulting ‘‘fire sale’’ price drop harms all market participants, including those who operated more prudently. A minimum margin requirement limits the extent to which such risk can build up. In addition, by limiting the extent to which unregulated entities can borrow against risky collateral, minimum haircuts could in principle limit the build-up of excessive leverage outside the banking system. Haircuts that are more stable through the cycle may also help to reduce other forms of procyclicality of the financial system such as the tendency for credit to be cheap and plentiful in economic expansions only to dry up for some borrowers in downturns. 3 The FSB minimum haircut proposals would not amount to regulating asset managers per se and it would leave important sources of financing untouched. In their current form, the proposals would apply only to SFTs in which entities not subject to capital and liquidity regulation (e.g., hedge funds) receive financing from entities that are subject to regulation (e.g., banks and broker-dealers), and only to transactions in which the collateral is something other than Government or agency securities. This could place an upper bound on the amount of leverage that a hedge fund could obtain from a prime broker if the prime broker would have been willing to accept haircuts below the minimum. However, other activities of asset managers in this market—such as money market funds’ supply of funding to banks through the triparty repo market—would not be affected. The FSB has undertaken a quantitative impact study to assess the potential impact and unintended consequences associated with its recommendations on minimum haircuts. The results of this study have been used to inform the proposed calibration of the numerical floors at relatively low levels. These proposals remain under development at the FSB. issued a consultative document that represented an initial step toward the development of a framework of numerical floors, see ‘‘Strengthening Oversight and Regulation of Shadow Banking: Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos’’, Financial Stability Board (2013). 2 See Governor Daniel K. Tarullo, Remarks at the Americans for Financial Reform and Economic Policy Conference, ‘‘Shadow Banking and Systemic Risk Regulation’’, Washington, DC, November 22, 2013. 3 For an overview of these issues, see Committee on the Global Financial System (2010), ‘‘The Role of Margin Requirements and Haircuts in Procyclicality’’, CGFS Papers No 36. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00048 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 41 Q.6. As you know, regulators are subject to the Regulatory Flexibility Analysis to consider the impact of newly proposed rules on small entities. The agencies have determined that the final Volcker rule will not have a significant economic impact on a substantial number of small banking entities with total assets of $500 million of less. Yet, Dodd-Frank exempts from a number of its requirements entities with total consolidated assets of $10 billion and less. The difference between $500 million and $10 billion is significant enough to raise concerns. Would your agency’s Regulatory Flexibility analysis in the Volcker rule be any different if the $10 billion threshold were applied? If so, how? A.6. Section 619 Dodd-Frank Act, which added a new section 13 to the Bank Holding Company Act (BHC Act), generally prohibits any banking entity from engaging in proprietary trading, and from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exemptions. Under the terms of the statute, section 13 applies to any banking entity regardless of its size. Section 4 of the Regulatory Flexibility Act (RFA) requires an agency to prepare a final regulatory flexibility analysis for a final rule unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities, defined as of July 22, 2013, to include banking entities with total assets of $500 million or less (small banking entities). 4 As you know, the five agencies with rule-writing authority under section 13 of the BHC Act, including the Federal Reserve, the OCC, the FDIC, the SEC, and the Commodity Futures Trading Commodities (the Agencies) considered the potential economic impact of the final rule on small banking entities in accordance with the RFA, and determined that the final rule would not have a significant economic impact on a substantial number of small banking entities as defined by the RFA largely because banking entities with assets of $500 million or less generally do not engage in the types of activities covered by section 619 of the Dodd-Frank Act. In drafting the implementing rules, the Agencies considered the effect of section 619 on banking entities that are not the focus of the RFA. In particular, the Agencies designed the implementing rules to minimize the compliance burden on banking entities with $10 billion or less in total assets by tiering the compliance program and reporting requirements based on the size and level of covered activity of the banking entity. For example, section 248.20(f)(1) of the final rule provides that a banking entity, regardless of size, that does not engage in covered trading activities (other than trading in U.S. Government or agency obligations, obligations of specified Governments sponsored enterprises, and State and municipal obligations) or covered fund activities and investments need only establish a compliance program prior to becoming engaged in such activities or making such investments. 5 In addition, a banking entity with total consolidated assets of $10 billion or less that engages in covered trading activities and/or covered fund activities may satisfy the requirements of the final rule by including in its 4 As 5 12 VerDate Nov 24 2008 11:04 Mar 16, 2015 of July 14, 2014, the threshold is $550 million in total assets or less. See 13 CFR 121.201. CFR 248.20(f)(1). Jkt 046629 PO 00000 Frm 00049 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 42 existing compliance policies and procedures appropriate references to the requirements of section 13 and the final rule and adjustments as appropriate given the activities, size, scope and complexity of the banking entity. 6 This reduces the compliance program requirements for these banking entities. Only those banking entities with total assets of greater than $10 billion are required to adopt more detailed or enhanced compliance requirements under the final rule. 7 Moreover, the final rule establishes a high threshold for metrics reporting to capture only firms that engage in significant trading activities. Specifically, the metrics reporting requirements under section 248.20 and Appendix A of the final rule apply only to banking entities with average trading assets and liabilities on a consolidated worldwide basis for the preceding year equal to or greater than $10 billion. 8 The compliance program also limits the special covered fund documentation requirements to banking entities with more than $10 billion in total consolidated assets. 9 To help community banks understand the requirements of section 619 and the implementing rules, the Agencies also released a fact sheet regarding the application of section 13 of the final rule to community banks (i.e., those with less than $10 billion in total consolidated assets). 10 The fact sheet provides useful information about provisions of the final rules designed to reduce burden on community banks. Thus, while the RFA focuses on banking entities with assets of $500 million or less, in developing the final rule, the Agencies tried to minimize the impact of the final rule on banking entities with total assets of $10 billion or less. Q.7. I have heard concerns from banks that are subject to the Fed’s annual stress tests that the ever-changing criteria for these tests creates uncertainty and lack of transparency. One of the main complaints from banks is that they do not fully understand why the Federal Reserve’s calculations differ from their internal calculations. Last week, the House Financial Services Committee held a hearing on a bill that requires the Federal Reserve to disclose more details about the annual stress test process including formal rules for stress testing, which the Comptroller General and the Congressional Budget Office would review. Do you agree that the Fed should publish such formal rules to give more clarity to public and Congress on these stress tests? A.7. The Federal Reserve believes that transparency in its stress testing is extremely important and has taken several steps to enhance the transparency of the stress tests and comprehensive capital analysis and review. For example, last November, in order to allow the public to better understand the Federal Reserve’s process for designing scenarios, the Federal Reserve issued a Policy State6 12 CFR 248.20(f)(2). CFR 248.20(b) and (c). CFR 248.20(d). 9 12 CFR 248.20(e). 10 See ‘‘The Volcker Rule: Community Bank Applicability’’, (Dec. 10, 2013), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf. 7 12 8 12 VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 43 ment on the Scenario Design Framework for Stress Testing. 11 Each year, the Federal Reserve publishes a detailed overview of its stress testing methodologies, including a description of the types of models employed in the supervisory stress test. 12 In addition, the Federal Reserve hosts an annual stress test modeling symposium, which brings together experts from the regulatory community and the banking industry to share diverse views and experiences in stress test modeling and to help improve the general understanding of stress test modeling practices and applications. 13 Thus, the Federal Reserve is already providing a substantial amount of the information about the annual stress tests. In evaluating the optimal level of model and scenario disclosure, supervisors must balance the desire for transparency against the benefits of model diversity and potential for negative consequences, such as model convergence or a shift in business activity to areas where risks may not be well captured by the stress testing models. Formal rules for stress testing that include providing companies with the scenarios, methodologies, and loss models in advance of the supervisory stress test would undermine the credibility and effectiveness of the stress tests. By releasing the Federal Reserve’s process for designing the scenarios and conducting the supervisory stress test, we are able to make the process more transparent and predictable, without eliminating the flexibility to make improvements and incorporate new risks that may develop over time. If the Federal Reserve was required to specify a static set of scenarios and the specific models employed in the stress test through notice and comment rulemaking, then covered companies would be able to adjust their business models to focus on activities that are not captured in the particular supervisory stress test. Each year, the Federal Reserve has refined elements of both the substance and process of the annual stress tests. These changes have been informed not only by our own experience, but also by critiques and suggestions offered by others. The Federal Reserve will continue to consider appropriate enhancements to the stress test. In order to give regulators, banks, and the public a dynamic view of the capital positions of large financial firms, supervisory stress testing must itself respond to changes in the economy, the financial system, and risk-management capabilities. Preliminary research by Federal Reserve System economists found that not updating supervisory stress scenarios and models was a key factor in the failure of the supervisory stress tests conducted on Fannie Mae and Freddie Mac before the financial crisis. 14 Finally, if the Federal Reserve released the models it uses in its stress test, that would eliminate incentives for companies to develop their own models to assess how their businesses and expo11 See p. 71443 of Board of Governors of the Federal Reserve System, ‘‘Policy Statement on the Scenario Design Framework for Stress Testing’’, November 2013, available online at: www.federalreserve.gov/newsevents/press/bcreg/20131107a.htm. 12 See Board of Governors of the Federal Reserve System, ‘‘Dodd-Frank Act Stress Test 2014: Supervisory Stress Test Methodology and Results’’, March 2014, available online at: www.federalreserve.gov/newsevents/press/bcreg/bcreg20140320a1.pdf. 13 http://www.bostonfed.org/2014STM/index.htm 14 See Scott Frame, Kristopher Gerardi, and Paul Willen, ‘‘Supervisory Stress Tests, Model Risk, and Model Disclosure: Lessons From OFHEO’’, April 2013. Available online at: www.frbatlanta.org/ documents/news/conferences/13fmclgerardi.pdf. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00051 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 44 sures could be affected by stress. There is no single model that can capture every risk to financial companies, and overreliance on a single approach that is tailored to assess the industry as a whole would make it far more likely that new risks that develop would be missed, potentially undermining financial stability. Reliance on a single model also allows for a larger probability of a single common failure of that model, potentially underestimating the risk of losses. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JANET L. YELLEN Q.1. As the Fed has engaged in measures to strengthen our economy since the financial crisis, some critics have argued that any growth that results might somehow be ‘‘artificial,’’ or that the economy is on some kind of unsustainable ‘‘sugar high’’ due to supposedly ‘‘unnaturally low’’ interest rates. If you look at the underlying economic conditions, though, inflation has been consistently below the Fed’s target. Our economy has been creating jobs—the private sector has now created jobs for 52 straight months, the longest streak on record—but we still have work to do to return our labor markets to full strength after the damage done by the financial crisis and Great Recession. If anything, the data say we should have had even more stimulus in response to the recession, and that pulling back too soon now risks undoing the progress we’ve made so far. Aren’t low interest rates appropriately reflective of economic conditions? If the biggest challenge facing our economy is the need for demand to keep getting stronger, and investors seem to be requiring low returns because of a perceived lack of investment opportunities, wouldn’t it be more ‘‘artificial’’ for the Fed to impose higher interest rates than what market conditions dictate, and risk choking off growth or creating deflation? A.1. The Federal Open Market Committee (committee) designs its policy in light of the dual mandate that the Congress has set for the Federal Reserve—namely, to promote price stability and maximum sustainable employment. Necessarily, the policy judgments that the committee makes are conditioned on the current state of the economy and the prospects for the future evolution of the economy, as best as the committee can discern them. As the committee noted in its most recent post-meeting statement, released July 30, 2014, ‘‘The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate.’’ If the committee were to maintain too restrictive a policy, it would risk failing to best promote the two legs of the dual mandate, resulting in employment below its maximum sustainable level, and inflation running persistently below the 2 percent objective identified by the committee as most consistent with its dual mandate. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00052 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 45 RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER FROM JANET L. YELLEN Q.1. As you know Section 113 of the Dodd-Frank Act authorizes FSOC to designate nonbank financial companies as SIFI (systemically important financial institutions) for enhanced oversight and regulation by the Federal Reserve. Historically, the Fed has focused exclusively on banking regulation and monetary policy. So, Dodd-Frank has made a pretty monumental shift in your focus. So far, FSOC has designated two insurance companies for regulation by the Federal Reserve—American International Group and Prudential Financial, Inc. This is an enormous concern, as you are getting more and more involved yet seem wholly ill-prepared to take on this type of supervision, both with the FSOC and the IAIA. How is the Fed preparing to regulate these companies? Has there been any effort to hire more employees with actual insurance knowledge? If you have hired any employees with background in insurance regulation, is this number sufficient? A.1. The Federal Reserve has hired staff with expertise in insurance to supervise the savings and loan holding companies and designated companies for which the Federal Reserve has responsibility and to assist in training other Federal Reserve examiners and staff on insurance issues. We currently employ approximately 70 fulltime employees for the supervision of insurance firms. Nearly half of these staff members having over 10 years of supervisory experience. Our staff is comprised of individuals with substantial prior experience in both State insurance departments and industry. We plan to continue to add staff, as appropriate, at both the Board and the Reserve Banks. Board staff consult with the Federal Insurance Office on issues related to our supervisory framework, including insurance capital requirements and stress testing. Board staff also meet regularly with industry representatives and with the National Association of lnsurance Commissioners and State insurance regulators to discuss insurance-related issues. The Federal Reserve expects to continue consultations with other regulators and standardsetters, the Financial Stability Oversight Council, the industry and the public, to further the Federal Reserve’s expertise and to gain additional perspectives on the regulation and supervision of insurance companies. RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS FROM JANET L. YELLEN Q.1. Chair Yellen, as you know, in Dodd-Frank, Congress never intended for nonfinancial end users to be subject to costly margin requirements when trading derivatives. Manufacturers, farmers, small businesses use derivatives to manage risk, not create it. We certainly do not want to see billions of dollars sucked out of the economy to post unnecessary margin. Not only would this increase the costs of hedging, which means higher prices for consumers, but it also restricts capital that would otherwise be used for job creation or reinvestment. Furthermore, the high costs of hedging could drive business overseas to foreign derivatives markets. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 46 There is currently a bipartisan bill in the Senate that exempts nonfinancial end users from posting margin (S. 888). A companion bill passed out of the House last year by a vote of 411-12. Chairman Bernanke said in 2011 that he was comfortable with this proposal. Governor Tarullo has also indicated a comfort level with this approach. And the other regulators, CFTC and SEC, seem to agree that nonfinancial end users need to hedge risk and clearly do not pose a threat to the economy. Also, recently an international working group arranged by the G20 has come out in agreement and said that nonfinancial end users should not be subject to margin requirements. Chairman Bernanke, the CFTC, the SEC, the G20 officials, and 411 House members all agree that it’s ill-advised to have nonfinancial end users subject to costly margin requirements, but the Fed has yet to make this exemption clear. Do you support the policy goal, and the original intent of Congress, to exempt end users from margin requirements? In your hearing last week, you mentioned that the Fed was on track to finalize an end-user exemption rule by the end of the year. Can you be a little more specific on timing? How does the Fed intend to harmonize its rule with the internationally proposed standard that does not subject nonfinancial entities to initial margin requirements? A.1. Although section 723 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provides an explicit exemption for certain end users from the swap clearing requirement, there is no exemption from the margin requirement in section 731 or section 764 of the Dodd-Frank Act for a swap dealer’s or major swap participant’s (MSP’s) swaps with end users. Sections 731 and 764 of the Dodd-Frank Act require the Commodity Futures Trading Commission, Securities and Exchange Commission, Federal Reserve Board (Board), and other prudential regulators to adopt rules for swap dealers and MSPs imposing initial and variation margin requirements on all noncleared swaps. The statute directs that these margin requirements be risk-based. Nonfinancial end users appear to pose minimal risks to the safety and soundness of swap dealers and to U.S. financial stability when they hedge commercial risks with derivatives and the related unsecured exposure is appropriately managed within a prudent and well-controlled risk management framework. In September 2014, the Federal Reserve and other prudential regulators issued a new proposal to implement Section 731 and 764 of the Dodd-Frank Act. The new proposal builds on the proposal originally released by the agencies in April 2011, and the Basel Committee on Banking Supervision—International Organization of Securities Commissions framework. The new proposal does not require a covered swap entity to collect specific or minimum amounts of initial margin or variation margin from nonfinancial end users, but rather leaves that decision to the covered swap entity, consistent with its overall credit risk management. The agencies believe this rule maintains the status quo for nonfinancial end users and is consistent with the requirements of the Dodd-Frank Act. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 47 Q.2. Chair Yellen, as you are aware, the Senate recently unanimously passed S. 2270, the Insurance Capital Standards Clarification Act. Considering this recent Congressional action, and the widespread agreement that any capital standards for insurers should be appropriately tailored, how is the Fed planning to design its overall supervisory regime for the insurers it supervises? How much will you rely on the standards in place at the State level to protect policyholders? Also, other than the hiring of Thomas Sullivan as a senior advisor, what steps have you taken to ensure that the Fed has the requisite expertise to regulate insurance companies? A.2. The supervisory programs for insurance savings and loan holding companies and nonbank financial firms designated by the Financial Stability Oversight Committee (FSOC) that engage in insurance activities continues to be tailored to consider the unique characteristics of insurance operations and to rely on the work of the primary functional regulator(s) to the greatest extent possible. The Federal Reserve has hired staff with expertise in insurance to supervise the savings and loan holding companies and designated companies for which the Federal Reserve has responsibility and to assist in training other Federal Reserve examiners and staff on insurance issues. We currently employ approximately 70 fulltime employees for the supervision of insurance firms. Nearly half of these staff members having over 10 years of supervisory experience. Our staff is comprised of individuals with substantial prior experience in both State insurance departments and industry. We plan to continue to add staff, as appropriate, at both the Board and the Reserve Banks. Board staff consult with the Federal Insurance Office on issues related to our supervisory framework, including insurance capital requirements and stress testing. Board staff also meet regularly with industry representatives and with the National Association of insurance Commissioners and State insurance regulators to discuss insurance-related issues. The Board expects to continue consultations with other regulators and standard-setters, the FSOC, the industry and the public, to further the Board’s expertise and to gain additional perspectives on the regulation and supervision of insurance companies. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JANET L. YELLEN Q.1. Regulators have been cracking down on activity in the leveraged loan market, in some cases setting effective caps on how much banks can lend as a multiple of EBITDA. Isn’t the concern about leveraged lending indicative of a broader problem of too much liquidity reaching for yield? A.1. The Federal Open Market Committee (committee) is committed to policies that promote maximum employment and price stability, consistent with our dual mandate from the Congress. Low interest rates have been and continue to be an important tool to promote a strong economy. As I stated in my testimony, however, ‘‘the Committee recognizes that low interest rates may provide incentives for some investors to ‘reach for yield,’ and those actions VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00055 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 48 could increase vulnerabilities in the financial system to adverse events. While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk. Accordingly, we are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance.’’ Specifically, in March of 2013, we issued interagency guidance on leverage lending along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which promotes underwriting practices that should be employed regardless of the interest rate environment. This guidance includes general policy and risk management expectations but does not set caps on how much banks can lend as a multiple of earnings before interest, taxes, depreciation, and amortization. Regulators continue to highlight the importance of adhering to the leverage lending guidance with the institutions we supervise to help ensure their lending practices are safe and sound. Q.2. If policy were to normalize, wouldn’t that effectively reign in the amount of leveraged lending that is taking place? A.2. In a higher rate environment, it is possible that there would be a shift of investor demand away from leveraged lending to other asset classes; however, leveraged loans have experienced rapid expansion in more normal interest rate environments as well, such as the period prior to the 2008 financial crisis. Moreover, monetary policy faces significant limitations as a tool to promote financial stability, and the effects of monetary policy on financial vulnerabilities (such as excessive leverage) are not as well understood or direct as a regulatory or supervisory approach. And while a review of the empirical evidence from recent years suggests that the level of interest rates does influence house prices, leverage, and maturity transformation, it is also clear that tighter monetary policy is a very blunt tool, which could have sizable adverse effects in terms of the Federal Reserve’s mandated goals of maximum employment and price stability. Indeed, in current circumstances, tighter monetary policy could, by undermining the economic recovery, lead to slackening loan demand and higher loan losses, thereby weakening U.S. financial institutions. To promote financial stability and address risk, the Federal Reserve has focused on its tools related to supervision and regulation, taking a range of steps, including strengthening capital and liquidity regulation of the largest banks and conducting annual stress tests, to strengthen the resiliency of the financial sector. And specifically with respect to leveraged lending, we have issued interagency guidance with the FDIC and the OCC, which promotes underwriting practices that should be employed regardless of the interest rate environment. Regulators have highlighted the importance of adhering to the leverage lending guidance with the institutions we supervise to help ensure their lending practices are safe and sound. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 49 Q.3. Is it really desirable to employ more cumbersome and costly regulations to shield us against the negative effects of loose monetary policy? A.3. As mentioned earlier, our review of the evidence from recent years suggests that monetary policy is a very blunt tool with which to address a build-up in risk-taking. In addition, importantly, good risk-management practices, especially in rapidly growing areas like leveraged lending, make sense no matter what the level of interest rates. The guidance outlines sound practices for leveraged lending activities that are applicable in all rate environments. The guidance is designed to assist financial institutions in providing leveraged lending to creditworthy borrowers in a safe-and-sound manner, while avoiding heightening risks to the financial system by originating poorly underwritten loans. Furthermore, implementation of the guidance should be consistent with the size and risk profile of a financial institution’s leveraged activities relative to its assets, earnings, liquidity, and capital. As such, the vast majority of community banks should not be affected by the guidance as they have limited involvement in leveraged lending. The guidance also encourages community and smaller institutions that are involved in leveraged lending to discuss with their primary regulator the implementation of cost-effective controls appropriate for the complexity of their exposures and activities. Q.4. In your recent appearance before the Senate Banking Committee, Senator Crapo asked you if reverse repurchases may deprive businesses of credit and you responded by saying initial tests have indicated that it’s an effective tool and that by maintaining a large spread between overnight reverse RRPs and the interest on excess reserves, this problem could be mitigated. I wanted to follow up with a few questions of my own: What is the consequence of an interbank lending market essentially crowded out by zero interest rates? What is the Federal Reserve’s strategy for returning to a robust and deep interbank lending market rather than relying on the Federal Reserve as the primary counterparty in short-term funding? A.4. Over recent years, the committee has judged that a highly accommodative stance of monetary policy has been necessary to foster progress toward its statutory objectives of maximum employment and stable prices. In providing policy accommodation, the committee cut its target Federal funds rate effectively to zero by the end of 2008 and has also purchased large volumes of long-term Treasury and agency securities over recent years to put additional pressure on long-term rates. These actions have helped to encourage economic recovery, to improve conditions in labor markets, and to guard against disinflationary pressures. The level of reserve balances in the banking system has increased very substantially over recent years in connection with the committee’s purchases of longterm securities. With an elevated level of reserve balances in the banking system, the need for banks to borrow and lend actively in interbank markets has dropped substantially relative to the levels of activity in these markets prior to the crisis. That said, there is still a significant volume of transactions in the Federal funds and VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00057 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 50 other short-term bank funding markets, and the interest rates observed in those markets remain tightly linked with other shortterm interest rates. The committee adjusts the stance of monetary policy over time as appropriate to foster progress toward its long-term objectives of maximum employment and stable prices. As the economy continues to recover and inflation returns toward the committee’s 2 percent objective, the committee will adjust the stance of monetary policy. Part of the process will involve raising the level of short-term interest rates to more normal levels. In addition, the size and composition of the Federal Reserve’s balance sheet will also be normalized. The level of reserve balances in the banking system will fall as the size of the Federal Reserve’s balance sheet is reduced, and activity in the Federal funds market and other short-term bank funding markets likely will increase significantly as the level of reserve balances declines. The committee’s statement on ‘‘Policy Normalization Principles and Plans’’ provides additional information regarding the approach the committee intends to implement when it becomes appropriate to begin normalizing the stance of monetary policy including the size and composition of the Federal Reserve’s balance sheet. Q.5. The Federal Reserve announced on June 4, 2014, that it, along with the FFIEC, the OCC, and the FDIC, are undertaking a review of regulations to identify those that are ‘‘outdated, unnecessary, or unduly burdensome imposed on insured depository institutions.’’ Regulatory burdens are not just borne by banks, but by bank customers, including the consumers and businesses that borrow from these institutions. To what extent is the Federal Reserve including access and cost of credit in its analysis? How does the Federal Reserve define ‘‘unduly burdensome?’’ What resources has the Federal Reserve dedicated to conducting this review? A.5. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires that regulations prescribed by the Federal banking agencies be reviewed by the agencies at least once every 10 years. The purpose of this review is to identify outdated, unnecessary, or unduly burdensome regulations and consider how to reduce regulatory burden on insured depository institutions while, at the same time, ensuring their safety and soundness and the safety and soundness of the financial system. In connection with the review, the agencies are required to categorize the regulations and publish requests for comment on how burden may be reduced. Finally, the agencies must provide a report to Congress summarizing significant issues, the relative merits of such issues, and whether the issues can be addressed by regulation or would require legislative action. The Federal Reserve, working with the OCC, FDIC, and Federal Financial Institutions Examination Council, published the first of four anticipated requests for comment on agency regulations on June 4, 2014. The next request for comment is expected to be published before year end. We are especially interested to hear from community banks and their customers. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00058 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 51 In addition to the requests for public comment, we intend to hold several public meetings around the country in order to allow the industry and the public an opportunity to present their views on burden reduction directly to agency personnel. The meetings will allow bankers, consumers, representatives of trade or public interest groups, and bank customers to provide their perspectives on how regulations should be changed to promote efficiency and effectiveness, reduce costs, and limit burden. Although the focus of the exercise is on regulatory burden reduction, all members of the public may submit comments on how bank regulation may affect their relationship with their banks and their ability to obtain credit. Whether a regulation may be considered ‘‘unduly burdensome’’ would depend on the purpose of the particular regulation and the role that regulation plays in protecting the safety and soundness of the bank, in assuring the stability of the economy, and in protecting the interests of consumers of banking services. In addition, EGRPRA recognizes that some regulatory burden reductions may require legislative changes. The Federal Reserve is committed to an effective review of its regulations to change any outdated, unnecessary, or overly burdensome rules. To that end, we have devoted considerable staff time to the process so far and will continue to do so. Over a dozen agency staff are currently involved in the public comment process and in planning the public outreach meetings which will be held at various Reserve Banks. Each public meeting will be attended by a number of Federal Reserve staff, including senior officers from the Board and the Reserve Banks. As the process continues, additional staff will participate in reviewing the comments, assessing the burden associated with the targeted regulations, preparing the report to Congress and preparing any recommendations for changes to the regulations. Q.6. In a hearing on March 11, I raised an issue at a hearing on insurance capital standards expressing concern with the Financial Stability Board’s plans to apply a European capital standard to American insurance companies. I remain concerned that what may be appropriate for European insurers, may not be appropriate for their American counterparts. What expertise has the Federal Reserve brought in to regulate insurance companies? How is that expertise being used when the Federal Reserve attends FSB meetings where international insurance capital standards are being discussed? To what extent are you concerned that the FSB may force an unworkable insurance standard on American insurers? A.6. The Federal Reserve has hired staff with expertise in insurance to supervise the savings and loan holding companies and designated companies for which the Federal Reserve has responsibility and to assist in training other Federal Reserve examiners and staff on insurance issues. We currently employ approximately 70 fulltime employees for the supervision of insurance firms. Nearly half of these staff members have over 10 years of supervisory experience. Our staff include individuals with substantial prior experience in both State insurance departments and the insurance indus- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00059 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 52 try. We plan to continue to add staff, as appropriate, at both the Board and the Reserve Banks. Staff with insurance expertise fully brief the Federal Reserve’s representative to the Financial Stability Board (FSB) in advance of FSB meetings at which insurance-related issues are addressed. In addition, Federal Reserve staff participate actively in selected International Association of Insurance Supervisors (IAIS) work groups and committees that are developing international insurance capital standard. That participation is undertaken in close cooperation and coordination with U.S. colleagues from the National Association of Insurance Commissioners, the State insurance departments, and the Federal Insurance Office. The capital standard under development by the IAIS are not bank-centric. Moreover, they are not contemplated to replace existing insurance risk-based capital standards at U.S. domiciled insurance legal entities within the broader firm. A goal of the international capital standards being developed by the IAIS is to achieve greater comparability of the capital requirements of internationally active insurance groups across jurisdictions at the groupwide level. This should promote financial stability, provide a more level playing field for firms and enhance supervisory cooperation and coordination by increasing the understanding among groupwide and host supervisors. It should also lead to greater confidence being placed on the groupwide supervisors analysis by host supervisors. Any IAIS capital standard would supplement existing legal entity risk-based capital requirements by evaluating the financial activities of the firm overall rather than by individual legal entity. Once developed by the IAIS, each national supervisor would determine the extent and manner in which any capital standards developed by the IAIS would be applied to Global Systematically Important Insurers (GSIIs) regulated by that national supervisor. The Federal Reserve is fully committed to transparency and due process in the development and promulgation of regulatory standards. We support the practice of the IAIS to release for public comment its proposals for the basic capital requirements for GSIIs and expect that the IAIS will follow a similar process in the development of the insurance capital standards. It is important to note that neither the FSB nor the IAIS has the ability to implement requirements in any jurisdiction. Implementation in the United States would have to be consistent with U.S. law and comply with the administrative rulemaking process, including an opportunity for public comment. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM JANET L. YELLEN Q.1. The role of Vice-Chair for Supervision was created in Section 1108 of Dodd-Frank. To this day, the Administration has not nominated anyone to fill this role. I sent a letter along with Sen. Johanns in July of 2012 to President Obama calling attention to this statutory requirement. With several hundred community banks under the direct supervision of the Federal Reserve, I would VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 53 contend that this position is critically important to coordinate the efforts in D.C. and the regional Federal Reserve banks. I appreciate Governor Tarullo’s appearances before Congress, however, I feel that a fundamental responsibility of the United States Senate is to analyze and approve of a person to fill a position that was created with the requirement of a Senate confirmation. Since the White House has not nominated anyone to fill this position in the 4 years since the passage of Dodd-Frank, it would certainly appear that the Senate’s ability to oversee the business of the Federal Reserve is diminished when such a high ranking position is filled by a person who was not confirmed for that role. What efforts are currently underway by yourself and the Federal Reserve to convince President Obama to send a nomination to the Senate? If no requests from the Federal Reserve have been made, could you explain why this has not occurred? A.1. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) designated a new position, Vice Chairman for Supervision, charged with developing policy recommendations regarding the supervision and regulation of firms supervised by the Federal Reserve Board (Board) and overseeing the supervision and regulation of such firms. In accordance with 12 U.S.C. 242, members of the Board, including the Vice Chairman for Supervision, are appointed by the President, by and with the advice and consent of the U.S. Senate. The Board currently has five members and welcomes the nominations of individuals to fill the remaining vacancies. In the absence of a Vice Chairman for Supervision, the Board and its members, in particular Governor Tarullo, have acted to fulfill the supervisory and regulatory responsibilities conferred on the Board by Congress and to provide testimony to Congress regarding these efforts. With respect to its supervisory and regulatory authorities, the Board oversees a variety of financial institutions and activities with the goal of promoting a safe, sound, and stable financial system that supports the growth and stability of the U.S. economy. The Board takes seriously these responsibilities. Following the crisis, the Board has focused on strengthening regulation and overhauling our supervisory framework to improve consolidated supervision as well as our ability to identify potential threats to the stability of the financial system. We have also worked to implement the reforms contained in the Dodd-Frank Act. Q.2. With respect to the Federal Reserve’s supervisory authority of community banks, consolidations, mergers, and simple bank failures are certainly some reasons for the decline in the number of these institutions. But the regulatory requirements stemming from Dodd-Frank have played a big part in this decline as well. I have no doubts that compliance with these new regulations simply became too much to bear for many small banks. One consequence of this decline is that the bank holding companies absorbing these smaller institutions fall under greater regulatory thresholds due to their increasing asset size. These small bank holding companies are increasingly exposed to the current $500 million threshold under the Federal Reserve’s Small Bank Holding Company Policy Statement. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 54 For example, a small bank holding company located in Kansas has seven branches. These branches are located in rural communities where they are, in some instances, one of the only remaining businesses located on Main Street. But since a small bank holding company brought those small banks under its purview and kept a branch open for these small communities, that same holding company is now in excess of that $500 million threshold. As I understand it, the Federal Reserve has the discretion to alter the Small Bank Holding Company Policy Statement and has exercised that discretion in raising the threshold in the past. I have introduced legislation along with Sen. Tester and Sen. Kirk along with an additional 34 of our Senate colleagues as cosponsors. Section 3 of the CLEAR Relief Act, S.1349, would require the Federal Reserve to raise that threshold. This seems to me a commonsense reform we could make that would ensure that small communities across the country will maintain access to hometown banking services. This is only one example of a regulatory burden the Federal Reserve could lift for the betterment of community banking and it is consistent with some of your public comments since you became Chair of the Federal Reserve. Would you please outline your specific plan as to how you will go about reducing the regulatory burden on small banks, utilizing the Federal Reserve’s discretionary regulatory framework, so that communities in Kansas will still have access to a hometown bank? If you are unable or unwilling to commit to altering the Small Bank Holding Company Policy Act, would you please outline the specific regulatory relief measures you would advocate for consistent with your past recognition of the unique qualities of community banks? A.2. Community banking institutions play a critical role in the economy, and the Board is committed to putting in place regulatory capital rules that strike the right balance between achieving our safety and soundness goals and minimizing regulatory burden for smaller banking organizations. As you know, in December 2014, Congress enacted Public Law 113-250 which directed the Board to make certain changes related to its Small Bank Holding Company Policy Statement (policy statement). Consistent with the statute, in January 2015, the Board issued a rulemaking that immediately excludes noncomplex savings and loan holding companies (SLHCs) under $500 million from the Board’s regulatory capital rules, effectively placing them on equal footing with similar-sized bank holding companies. The Board also issued a notice of proposed rulemaking that would increase the policy statement’s threshold level from $500 million to $1 billion in total consolidated assets, and expand its scope to also include SLHCs. The comment period on the proposal ends on March 4th, and the Board will work to finalize it as quickly as possible. The Board also took related action to reduce the regulatory reporting burden for holding companies that have less than $1 billion in total consolidated assets that meet the qualitative requirements of the policy statement, permitting them to reduce the amount and frequency of their regulatory reporting. The Board has filed a request with the Office of Management and Budget to make these changes effective beginning with reports filed for the period ending VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00062 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 55 March 31, 2015, while it completes the notice and comment process. We are committed to promoting a stable financial system in a manner that does not impose a disproportionate burden on community banking institutions. To help us achieve these goals, we will continue to seek the views of the institutions we supervise and the public as we further develop regulatory and supervisory programs to preserve financial stability at the least cost to credit availability and economic growth. Q.3. A growing concern that many of my colleagues and I are following involves the Financial Stability Board’s (FSB’s) possible effort to impose European-style insurance capital standards on U.S. property/casualty insurers that have not been designated as systemically important, but rather are just ‘‘internationally active.’’ It is my understanding that if an insurer is not a SIFI or a savings and loan holding company, then the insurer would remain subject to the risk-based capital standards of the States. I have received responses from recent Fed nominees that mainly state that these Basel-generated rules would not have any legal effect in the U.S. Those responses seem to ignore the reality that European regulators are pressing for these standards to apply to non-SIFI U.S. insurers, and that those same regulators have any number of ways to force our insurers that do business in Europe to comply with new standards. We need to revisit this specific issue. Do you have any thoughts on how international capital standards for property casualty insurers will be received in the marketplace? A.3. A goal of the international capital standard (ICS) being developed by the IAIS is to achieve greater comparability of the capital requirements of internationally active insurance groups (IAIGs) across jurisdictions at the groupwide level. This should promote financial stability, provide a more level playing field for firms and enhance supervisory cooperation and coordination by increasing the understanding among groupwide and host supervisors. It should also lead to greater confidence being placed on the groupwide supervisory analysis. The standards under development by the IAIS are not contemplated to replace existing insurance risk-based capital standards at U.S. domiciled insurance legal entities. Any IAIS capital standard would supplement existing legal entity risk-based capital requirements by evaluating the financial activities of the firm overall rather than by evaluation of individual legal entities. It is important to note that neither the Financial Stability Board, nor the IAIS, has the ability to implement requirements in any jurisdiction. Implementation in the United States would have to be consistent with U.S. law and comply with the administrative rulemaking process. RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN FROM JANET L. YELLEN Q.1. In a response to a question for the record following your February testimony regarding the Fed’s use of forward guidance, you stated that ‘‘the Committee’s forward guidance is intended to provide the public with a better understanding of how it will conduct monetary policy in the future, but the guidance has consistently VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00063 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 56 been expressed in terms of what policy would be appropriate in the future given the committee’s current outlook for future economic conditions.’’ Of course, there will always be an inherent amount of uncertainty in predicting future economic conditions. But the Fed’s discretionary policy, even when expressed in terms of forward guidance, adds an additional layer of uncertainty for businesses and market participants to interpret how the Fed will react to the range of potential future economic conditions. Can you describe what benefits this additional layer of uncertainty via a discretionary policy, even with forward guidance, provides to the economy versus implementing a rules-based approach? What are the advantages and risks of a discretionary monetary policy? A.1. Similar to the basic principle underlying simple monetary policy rules, the Federal Open Market Committee (FOMC) follows a systematic approach in which it adjusts the stance of monetary policy in response to changes in the economic outlook. In its statement on ‘‘Longer-Run Goals and Policy Strategy’’, the FOMC clearly indicated how it interprets and measures the longer-run goals for monetary policy—maximum employment and stable prices—established by the Congress. 1 Moreover, the statement notes that in conducting monetary policy, the FOMC seeks to minimize deviations of employment and inflation from these long-run objectives over time, by following a balanced approach. The Federal Reserve’s policy actions over recent years have been fully consistent with this general approach to policy. Thus, while monetary policy does not follow a simple mathematical rule, the FOMC adjusts the stance of monetary policy in a systematic way in response to changes in the economic outlook. This approach to policy along with detailed FOMC communications regarding the likely path of short-term interest rates and the Federal Reserve’s asset purchases helps the public to better understand the FOMC’s ‘‘reaction function,’’ enhancing the effectiveness of monetary policy and providing the public with greater clarity about the FOMC’s policy outlook and intentions. Of course, the FOMC regularly reviews the prescriptions of standard monetary policy rules for each meeting. While these rules are very useful in informing policy discussions, no simple policy rule could begin to capture the full range of complexities associated with determining the appropriate monetary policy response to the financial crisis and its aftermath. Indeed, there is no consensus among policymakers or economists about a particular monetary policy rule that would be appropriate across a wide variety of circumstances. Partly for these reasons, no central bank in the world sets policy simply by adhering to the prescriptions of a simple monetary policy rule. Q.2. The Bank of International Settlements (BIS) 2014 annual report warned of the consequences of a long-term biased trend in central bank policymaking that tends to avoid tampering excesses during booms but remains highly accommodative during busts. The annual report states that central bank ‘‘policy does not lean against 1 Statement on ‘‘Longer-Run Goals and Policy Strategy’’ can be found at: http:// www.federalreserve.gov/rnonetarypolicy/files/FOMClLongerRunGoals.pdf. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 57 the booms but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy—a debt trap.’’ Relatedly, in an interview you gave to the New Yorker last month, you indicated that the Federal Reserve will maintain ‘‘unusually accommodative’’ monetary policy even after the economy recovers. Do you agree with the BIS’s concern of uneven monetary policy approaches to booms and busts and the potential consequences on interest rates and debt levels? Would you agree that your stated plans to leave ‘‘unusually accommodative’’ policies intact even after the economy fully recovers could be indicative of BIS’s contention of that central banks generally err towards easing? A.2. As described in the FOMC’s statement on ‘‘Longer-Run Goals and Policy Strategy’’, the FOMC conducts monetary policy so as to achieve its Congressionally established objectives of stable prices and maximum employment, taking a balanced approach to achieving both objectives over time. 2 In the statement released after the September FOMC meeting, the FOMC indicated that it ‘‘ . . . currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target Federal funds rate below levels the FOMC views as normal in the longer run.’’ 3 The FOMC first added this language to its postmeeting statement after the March FOMC. The minutes of the March meeting note that meeting participants cited several reasons for their expectation that a lowerthan-normal Federal funds rate may be necessary to achieve its dual mandate over time: ‘‘ . . . higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit.’’ 4 While several of these reasons are the consequence of the financial crisis, the FOMC’s expectation that the Federal funds rate may need to be lower than normal for some time after inflation and employment return to mandate-consistent levels is not indicative of a bias toward easier policy over time. When asset price booms or excessively easy credit have in the past contributed to aggregate demand that was, or threatened to be, above levels consistent with achieving the dual mandate, the FOMC has tightened monetary policy in response. Indeed, if the FOMC were to conduct policy with a bias toward accommodation, then over time inflation would rise. Instead, inflation has fluctuated in a range around 2 percent—the FOMC’s objective—for the past 25 years. Q.3. Interest payments on the debt are only slightly above the same levels they were 15 years ago in nominal terms ($415 billion in 2013 versus $363 billion in 1998), despite the fact that our national debt is more than three times the size. Moreover, Fed remittances to the Treasury reduced the deficit by $77.7 billion last year, 2 The FOMC’s statement on its longer run goals and policy strategy is renewed annually. The current version is available at http://www.federalreserve.gov/monetarypolicy/files/ FOMClLongerRunGoals.pdf. 3 http://www. federalreserve.gov/newsevents/press/monetary/20140730a.htm 4 http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20140319.pdf VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 58 a figure that the Fed has projected could fall all the way to zero and deferring potential losses thereafter. Is there a medium to long term risk created by Fed policy untethering Treasury rates from natural market forces, allowing Congress to escape the true reality of the fiscal problems facing our country? Moreover, does the enormous size of our public debt have any influence on the Fed’s interest rate policy or balance sheet size to hold down the Federal Government’s external debt servicing costs. If it is not a current consideration, do you believe there is a possibility that the level of interest payments on the national debt could impact FOMC policy decisions in the future? A.3. The Federal Reserve’s accommodative policy is expressly designed to fulfill the dual mandates of maximum employment and price stability set for us by the Congress. Low interest rates are currently needed to help our economy grow at a faster rate and to provide support for a faster return to full employment than would otherwise occur. As interest rates rise, the Federal Reserve’s net income, and thus its remittances to the Treasury, will decline from the unusually high levels seen in recent years. It is not likely that our remittances will fall to zero. However, that could happen if future economic conditions require appreciably larger or more rapid increases in interest rates than now seem likely. That said, it is highly likely that on average over time Federal Reserve remittances will be higher, not lower, as a result of our asset purchase programs. The goal of our monetary policy has been to foster outcomes consistent with our dual mandate, not to make gains on our balance sheet. We believe our policies have provided broad benefits to Americans—including higher employment and incomes—that are likely to dwarf any gains or losses on our portfolio. Moreover, while the direct fiscal impact of our purchases is likely to be modest, the fiscal impact of a stronger economy benefits all Americans. The responsibility for fiscal policy lies with the Administration and the Congress. The country does face important and serious fiscal challenges, but those challenges are primarily long-run in nature, and current interest rates should not be a major fiscal policy consideration as rates will certainly rise as the economic recovery continues. Prematurely raising interest rates could risk choking off the economic recovery and causing the Federal budget-deficit to deteriorate in the near term. Q.4. There is evidence that the Basel II capital requirements helped fuel the European sovereign debt crisis by weighting sovereign debt as less risky than private debt. Citing concerns that European banks assess their home country’s debt more favorably than they otherwise should and that in the aggregate banks assign a zero risk weight to more than half of their sovereign debt holdings, the Basel committee is reportedly considering a change in calculating the risk weighting of sovereign debt. Do you believe that current Basel III risk-weighting rules appropriately treat sovereign debt? Do you believe the existence of any security or instrument with a zero risk weighting for capital standards promotes a sound global financial system? Does the favorable VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 59 regulatory capital treatment of sovereign debt act as a subsidy to Governments to live outside their means? A.4. The U.S. banking agencies’ regulatory capital rules (capital rules) enhance the ability of banking organizations to consistently function as financial intermediaries, particularly during periods of economic and financial stress. The capital requirements under the capital rules were designed to reflect banking organizations’ risk profiles. With regard to sovereign exposures, the treatment under the Basel Accord is to assign risk weights between zero and 150 percent based on either the (a) external credit ratings assigned by a credit rating agency (e.g., Standard & Poor’s), or (b) credit assessments assigned by an export credit agency (e.g., the Organization for Economic Cooperation and Development (OECD)). There is international work underway in which the United States participates that seeks to reduce mechanistic reliance on credit ratings. Overreliance on credit ratings was shown to be a major contributor to the financial crisis, as credit rating agencies underestimated the risk of certain asset categories, including sovereigns, and banks did not possess a full understanding of the risk profile of the assets they owned. Domestically, in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requirement to remove external credit ratings from U.S. Federal regulations, the U.S. banking agencies developed alternatives to credit ratings for certain types of exposures, including exposures to sovereigns. The capital rule’s standardized approach provides for a risk sensitive treatment of sovereign debt that is based on the Country Risk Classification (CRC) assigned by the OECD. Under the capital rules, only the sovereign debt of certain highincome and OECD member countries, such as Japan, Singapore, Germany, and the United Kingdom, receive a zero percent risk weight. The sovereign debt of other countries can receive risk weights between 20 and 150 percent, depending on their CRC rating. The sovereign debt of countries that have defaulted or restructured their debt within the last 5 years (e.g., Argentina and Greece), receive the more punitive risk weight of 150 percent. In addition, the U.S. banking agencies’ capital rules require that banking organizations meet a minimum leverage ratio under which all assets are effectively risk weighted at 100 percent. The leverage ratio requirement complements the risk-based capital standards and ensures that the agencies’ overall capital framework assesses capital against all assets. Q.5. The June FOMC minutes indicate the Fed is still contemplating how to handle the rolling over of maturing securities following the completion of QE3. When do you anticipate the FOMC will discontinue the rollovers and what factors will go into the Fed’s reinvestment policy decision? A.5. As discussed in the September FOMC statement on ‘‘Policy Normalization Principles and Plans’’, the FOMC intends to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the System Open Market Account VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 60 (SOMA) portfolio. The FOMC expects to cease or commence phasing out reinvestments after it begins increasing the target range for the Federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve. All of the FOMC’s policy actions are directed toward fostering its macroeconomic objectives of maximum employment and stable prices. In judging the appropriate timing of various aspects of its normalization strategy including the decision to cease reinvestments, the FOMC will, as always, review a wide range of information on labor market conditions, inflation developments, and conditions in financial markets. Q.6. The Federal Reserve Office of Inspector General has issued two reports detailing concerns with the management and associated costs of the Martin Building project. During the more than 10 years of planning and design, this project has had an alarming number of delays and cost increases prior to even reaching the construction phase. As of September 2012, the Martin Building project is expected to cost $280.4 million dollars, including $179.9 million for the renovation of the Martin Building and the construction of a visitors’ center and conference center. Can you please provide the following information related to the Martin Building project: 1. A copy of all of the contracts and modifications associated with the design and construction for the building that have been awarded to date, as well as a copy of the deliverables provided under each one. 2. A specific and detailed time line of all the Board’s actions related to the Martin Building project through the anticipated completion date. 3. The total amount of fees incurred by modifications to the original design contract. 4. An update of the total claims paid by the Board to Karn Charuhas Chapman & Twohey (KCCT) for the increased costs in the hourly labor rates incurred due to extending the A/E contract from the originally anticipated July 12, 2007, completion date to the now expected completion date of April 2015 (included on p. 4 of OIG Report No. 2013-AA-B-007). 5. The most recent cost projection for the Martin Building project, with a break out of the construction cost and square footage estimates for each of the components associated with the project (the Martin Building renovation, the visitors’ center, and the conference center). 6. All documents related to the analysis and final decision of ‘‘a range of options for the approach to the Martin Building renovations proposed by the Board’s project team’’ initiated in October 2011 that was cited on p. 3 in OIG Report No. 2013-AAB-007. 7. The basis for the $76.7 million line-item for leased space in the September 2012 Martin project cost projection and factors that will be considered when seeking temporary lease space. 8. A comprehensive plan for the Board to mitigate similar cost overruns during the construction phase of the Martin Building project. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 61 A.6. Response to Question 6, parts 1–8. As you know, the Federal Reserve Board (Board) is planning a complete renovation of the William McChesney Martin, Jr., building (Martin building). The project will also include construction of visitor screening and conference center additions to the building. The Martin building was constructed in 1974 and has not undergone significant renovation since its construction. The building is structurally connected to the Board’s historic Marriner S. Eccles building (Eccles building). Normal wear-and-tear, equipment obsolescence, changes in building code, and accessibility issues have resulted in a backlog of deficiencies that require a comprehensive building renovation. In particular, the existing heating, ventilation, and air conditioning system can no longer provide effective and energy efficient temperature and humidity control. Additionally, the plumbing, mechanical, and electrical systems are not compliant with current code and need updating to fully support current information technology, life safety, and security requirements. The project will also include the removal of asbestos. The renovation is unique in that a number of significant security updates will be included within the scope of the project in response to vulnerability assessments provided to the Board. For instance, a security screening center will be added that will centralize, improve, and increase efficiency and effectiveness of security screening of those entering both the Eccles and Martin buildings. The conference center additions will reduce reliance on offsite, nonsecure, leased conference facilities. The conference center will also include a press briefing room to accommodate the Chair’s press conferences, which have unique security needs and are an integral part of the Board’s ongoing transparency initiative. The Board had internal discussions regarding the concept for this renovation in 2001, and researched the potential scope and cost estimates for a renovation in the years following 2001. However, the Board did not begin design work for the renovation until late 2006, when the Board competitively awarded a contract to an architectural/engineering firm, Karn Charuhas Chapman & Twohey (KCCT), to design only a visitor screening and conference center for the building. At this point in time the Board was not considering renovating the entire building. Starting in 2007, Board staff visited various Federal Reserve Banks to investigate how they had designed and utilized visitor screening and conference centers in order to inform the Board’s design. Shortly thereafter, events related to the financial crisis began to arise. During the crisis and for the next several years, the Board and its senior staff shifted their focus away from the building renovation towards addressing the matters raised by the financial crisis and its aftermath. Some elements of the conceptual design for the visitor screening and conference center did progress amidst the crisis, such as conducting the required National Environmental Policy Act (NEPA) study for the space and seeking the required approvals from the National Capital Planning Commission (NCPC) and the U.S. Commission of Fine Arts (CFA). However, the overall pace of the design process slowed significantly in light of the financial crisis. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00069 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 62 Following the Board’s determination that a full renovation would be more cost effective than continuing to incrementally repair the building’s aging structure and systems, in February 2011, the Board modified its contract with KCCT to include the design for a full renovation of the Martin building. As the Board began planning for the renovation, it became clear that integrating plans to address the long-term needs for the building with plans to make broader organizational changes was necessary to make the design and renovation process as economical and practical as possible. Thus, the Board addressed its full building needs as part of its strategic plan. This process revealed, for example, that the Board’s operations would be more efficient and resilient if the Board’s data center was relocated out of the Martin building. The Board expects to complete the construction work related to the data center relocation by the end of 2014. In addition, the Board is planning to complete the design process for the renovation of the Martin building by mid-2015. The Board intends to solicit and competitively award a general construction contract for the renovation in the third quarter of 2015. The Board’s target is to substantially complete construction in the second half of 2018. The Board appreciates that it is undertaking a substantial project and has implemented a variety of cost management measures to control the renovation expenses. For example, the Board is going to hire a qualified, competent general contractor (GC) for construction of the renovation project who is well experienced in projects of similar scope, size, and complexity. This will help ensure that the project stays on budget and on schedule. A multistep, best value solicitation and competitive award process is planned for selecting the GC on a firm-fixed-price basis. Technical qualifications will be solicited from various GC firms as a first step. The GCs will be required to demonstrate extensive experience in projects of similar scope, size, and complexity. The GCs will also be asked to provide details regarding schedule achievement, change order and claims history, and any cost overruns in their prior projects. A selection panel comprised of personnel from the Board’s space planning, construction management, budgeting, and procurement teams will evaluate the GCs’-technical qualification materials. Finally, the Board will retain the right to issue separate contracts for discrete elements of the project, where it could be favorable for the Board to manage a separate contract from a procurement, cost, schedule, or management perspective. The GC will be required to provide a 1-year warranty on the construction work performed. This will be in addition to any extended warranty periods for systems and products identified in the contract documents. Ten months after final completion of the renovation project, a comprehensive walk-through will be conducted, including participation by Board staff, KCCT, and the Board’s construction administrator and commissioning agent, to verify that all building systems are functioning properly. A final list of any required corrective actions will be provided to the GC for correction prior to the expiration of the GC’s warranty period. The Board also has several internal oversight committees in place to supervise specific aspects of the renovation based on the staffs’ relevant areas of expertise. These committees are comprised VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00070 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 63 of senior staff from the Board’s procurement, facilities, and financial management functions, all of whom report to, and are overseen by, the Board’s Chief Operating Officer and Administrative Governor. On the design side, KCCT’s firm-fixed-price contract requires them to design the renovations in a manner that does not exceed the cost limit for the project established under the design contract. KCCT must also develop design alternatives if their original design does not meet the Board’s stated cost limit. These alternatives will afford the Board flexibility to adjust the project scope of work to align with the Board’s cost limit should bid results differ from cost estimate expectations. In developing the Board’s cost limit for the project, the Board and KCCT each retained consultants to provide independent professional cost estimates for the renovation. These two consultants have both verified that the project can be constructed within the cost limit set by the Board. The Board announced a budget of $280.4 million for the renovation project in its Annual Performance Report 2012. This budget includes a $76.7 million line-item for the estimated cost to lease swing space, as further discussed below. The Board is in the process of undertaking its contracting for the renovation project and is striving to achieve a total project cost that is less than the budgeted amount. Due to the extent of the renovations, the Board determined that it will be more cost effective to relocate Board employees to swing space during the renovation project rather than to undertake the project on a floor-by-floor or other similar phased basis. The Board’s project budget, established in 2012, includes a $76.7 million line-item for the estimated cost to lease space for up to 5 years to accommodate the relocated employees during the renovation. This estimated cost of leasing space includes rent, furniture and equipment, security, information technology, moving expenses, and depreciation related to the interior construction within the leased space. The Board actually negotiated a lower rental rate for the swing space than originally budgeted and now anticipates that the costs for the leased swing space during the renovation project will be approximately $72.6 million. The Board will begin moving personnel into the leased space in early 2015. The Board considered many factors in seeking temporary leased space, such as the ability to meet the Board’s space requirements, proximity to the Board’s current owned buildings and leased spaces, proximity to public transportation (e.g., commuter buses, subway, rail), the financial comparison of different leased space options and scenarios on a net present value (NPV) basis, the financial impacts to the Board’s current and future operating budgets, and contiguity of floors and spaces available. You have also asked for information regarding modifications to the Board’s design contract with KCCT. As noted in the time line above, the Board initially contracted with KCCT in 2006 for the design of only a visitor screening and conference center for the building, and not for a full renovation of the building. When the Board determined that renovation of the entire building was needed, the Board modified its contract with KCCT in 2011 to reflect the substantial increase in the scope of the design work. This was a sig- VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 64 nificant contract modification and accounts for the largest increase in the contract fees. The decision to proceed with the full building renovation also resulted in the need to extend the term of KCCT’s contract to reflect the completion of design in 2015. A table which provides detail on all modifications to the KCCT contract, including the total costs incurred, is attached. You also requested copies of several documents, such as a copy of all contracts issued to date for the Martin building design and construction and the documents related to the ‘‘range of options for the approach to the Martin building renovations proposed by the Board’s project team’’ initiated in October 2011. These documents are enclosed. Some portions of the enclosed documents have been withheld because they contain sensitive information regarding security features that, if disclosed in this public response, would jeopardize the security features they are intended to provide. Other portions have been redacted to avoid competitive harm, either to a party who holds an existing contract with the Board (the economic details of which, if made public, would allow competitors to gain an unfair advantage into the party’s business practices) or to the Board’s competitive bid process (as noted previously, a contract has not yet been awarded for the construction of the renovations). Unredacted copies of these documents are available for inspection here at the Board. Finally, please note that the documents related to the ‘‘range of options for the approach to the Martin building renovations proposed by the Board’s project team’’ reflect staff analysis and were prepared at the staff level in order to assist the Governors as they considered whether or not the Board should go forward with the full building renovation. Thus, this document does not necessarily reflect the views of the Board members. We will make all other documents available for your inspection here at the Board. The deliverables under the design contracts contain sensitive information regarding security features. The contract deliverables also include architectural and engineering drawings which are quite voluminous and not easily reproduced. VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00072 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00073 Fmt 6602 Sfmt 6602 71514060.eps 65 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 71514061.eps 66 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 67 VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00075 Fmt 6602 Sfmt 6602 715AA001.eps Contract for architectural and engineering design services between the Board of Governors of the Federal Reserve System and Karn Charuhas Chapman & Twohey, PC dated October 23, 2006 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00076 Fmt 6602 Sfmt 6602 715AA002.eps 68 L:\HEARINGS 2014\07-15 THE 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2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON 802 VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00810 Fmt 6602 Sfmt 6602 715BB001.eps Contract for commissioning services between the Board of Governors of the Federal Reserve System and Jacobs Engineering Group, Inc. dated January 12, 2011 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00811 Fmt 6602 Sfmt 6602 715BB002.eps 803 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00812 Fmt 6602 Sfmt 6602 715BB003.eps 804 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00813 Fmt 6602 Sfmt 6602 715BB004.eps 805 L:\HEARINGS 2014\07-15 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON VerDate Nov 24 2008 11:04 Mar 16, 2015 Jkt 046629 PO 00000 Frm 00814 Fmt 6602 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@FedFRASER