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MONETARY POLICY AND THE
STATE OF THE ECONOMY
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
FEBRUARY 10, 2016
Printed for the use of the Committee on Financial Services
Serial No. 114–71
(
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WASHINGTON
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:
2017
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TERI
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. MCHENRY, North Carolina,
Vice Chairman
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
SCOTT GARRETT, New Jersey
RANDY NEUGEBAUER, Texas
STEVAN PEARCE, New Mexico
BILL POSEY, Florida
MICHAEL G. FITZPATRICK, Pennsylvania
LYNN A. WESTMORELAND, Georgia
BLAINE LUETKEMEYER, Missouri
BILL HUIZENGA, Michigan
SEAN P. DUFFY, Wisconsin
ROBERT HURT, Virginia
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
MARLIN A. STUTZMAN, Indiana
MICK MULVANEY, South Carolina
RANDY HULTGREN, Illinois
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
MAXINE WATERS, California, Ranking
Member
CAROLYN B. MALONEY, New York
´
NYDIA M. VELAZQUEZ, New York
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
MICHAEL E. CAPUANO, Massachusetts
´
RUBEN HINOJOSA, Texas
WM. LACY CLAY, Missouri
STEPHEN F. LYNCH, Massachusetts
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
GWEN MOORE, Wisconsin
KEITH ELLISON, Minnesota
ED PERLMUTTER, Colorado
JAMES A. HIMES, Connecticut
JOHN C. CARNEY, JR., Delaware
TERRI A. SEWELL, Alabama
BILL FOSTER, Illinois
DANIEL T. KILDEE, Michigan
PATRICK MURPHY, Florida
JOHN K. DELANEY, Maryland
KYRSTEN SINEMA, Arizona
JOYCE BEATTY, Ohio
DENNY HECK, Washington
JUAN VARGAS, California
SHANNON MCGAHN, Staff Director
JAMES H. CLINGER, Chief Counsel
(II)
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CONTENTS
Page
Hearing held on:
February 10, 2016 ............................................................................................
Appendix:
February 10, 2016 ............................................................................................
1
55
WITNESSES
WEDNESDAY, FEBRUARY 10, 2016
Yellen, Hon. Janet L., Chair, Board of Governors of the Federal Reserve
System ...................................................................................................................
5
APPENDIX
Prepared statements:
Yellen, Hon. Janet L. .......................................................................................
ADDITIONAL MATERIAL SUBMITTED
FOR THE
RECORD
Yellen, Hon. Janet L.:
Monetary Policy Report of the Board of Governors of the Federal Reserve
System, dated February 10, 2016 ................................................................
Written responses to questions for the record submitted by Representative Fincher ...................................................................................................
Written responses to questions for the record submitted by Representative Hill ..........................................................................................................
Written responses to questions for the record submitted by Representative Hultgren .................................................................................................
Written responses to questions for the record submitted by Representative Luetkemeyer ..........................................................................................
Written responses to questions for the record submitted by Representative Lynch ......................................................................................................
Written responses to questions for the record submitted by Representative Messer ....................................................................................................
Written responses to questions for the record submitted by Representative Mulvaney ................................................................................................
Written responses to questions for the record submitted by Representative Murphy ...................................................................................................
Written responses to questions for the record submitted by Representative Sherman .................................................................................................
Written responses to questions for the record submitted by Representative Tipton .....................................................................................................
Written responses to questions for the record submitted by Representative Waters ....................................................................................................
(III)
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MONETARY POLICY AND THE
STATE OF THE ECONOMY
Wednesday, February 10, 2016
U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in room
2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Lucas,
Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick, Luetkemeyer, Duffy, Hurt, Stivers, Stutzman, Mulvaney, Hultgren, Ross,
Pittenger, Wagner, Barr, Rothfus, Messer, Schweikert, Guinta, Tipton, Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney,
Velazquez, Sherman, Meeks, Hinojosa, Clay, Lynch, Scott, Green,
Cleaver, Moore, Ellison, Perlmutter, Himes, Carney, Sewell, Foster,
Murphy, Delaney, Sinema, Beatty, Heck, and Vargas.
Chairman HENSARLING. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to declare
a recess of the committee at any time.
This hearing is for the purpose of receiving the semiannual testimony of the Chair of the Board of Governors of the Federal Reserve
System on the conduct of monetary policy and the state of the economy. I now recognize myself for 3 minutes for an opening statement.
Last month, we all heard President Obama attempt to take an
economic victory lap in his State of the Union speech, but the
American people are having none of it. They are tired of hearing
from the out-of-touch ruling class in Washington just how good
things are when their realities are vastly different.
So, Chair Yellen, notwithstanding the fact that you are a Presidential appointee, I hope you do not follow suit this morning.
The reality is, since the President was elected and the Fed embarked upon its unprecedented quantitative easing in zero real interest rate policies, working families’ paychecks have declined.
Their net worth has declined.
The real unemployment rate continues to hover around 10 percent. Approximately one in six is on food stamps and almost 15
percent live in poverty. There hasn’t been a single year when economic growth has reached 3 percent.
As one published report on this failure noted, ‘‘There is no parallel for this since the end of World War II, maybe not since the
beginning of the Republic.’’ Last year’s less than 1 percent GDP
growth just punctuates the matter for struggling working families.
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I will not use this hearing to either praise or condemn the Fed’s
decision to raise by 25 basis points interest rates in December, nor
do I think it appropriate to advise the FOMC on how to vote during
its next meeting. But, given that Article I, Section 8 of the Constitution gives Congress the power to coin money and regulate the
value thereof, I do feel compelled to demand that the Fed adopt a
monetary policy course that is predictable, transparent, sustainable, and, barring terribly exigent circumstances, to stick with it.
This is part of the rationale underlying the House-passed Fed
Oversight Reform and Modernization Act, known as the FORM Act.
To use Austrian economist Friedrich Hayek’s phrase: ‘‘It is fatal
conceit to believe that the Fed is capable of micromanaging our
economy to some state of economic nirvana.’’ We now have at least
8 years of recent history to prove otherwise.
Most importantly, no amount of monetary policy can substitute
for sound fiscal policy. Unless and until the crushing regulatory onslaught of Obamacare, the Dodd-Frank Act, and the EPA is replaced with greater opportunity, competition, and innovation, the
Fed cannot substantially help our economy; it can only hurt it.
It can hurt it by continuing to serve as the financier and
facilitator or our unsustainable Federal debt. Just last month, the
Congressional Budget Office yet again warned of our unsustainable
debt in its latest baseline release, which references the debt 199
times.
The Fed can hurt our economy by continuing to force investors
to chase yield, thus inflating dangerous asset bubbles, the deflating
of which we are likely seeing in our turbulent equity markets
today.
The Fed can continue to hurt our economy by failing to unwind
its unprecedented balance sheet. By growing at almost 500 percent,
the Fed itself has become one of our largest sources of systemic
risk.
Finally, separate and apart from monetary policy, alarmingly,
the Fed, under Dodd-Frank, can now functionally control virtually
every major corner of the financial services sector of our economy.
It does so with almost no accountability or transparency. Not only
does this harm economic growth, it is an affront to due process,
checks and balances, and the rule of law.
The American people should again be duly alarmed that they
may wake up one day to discover that our central bankers have become our central planners.
The Chair recognizes the ranking member of the committee, Ms.
Waters, for 3 minutes for an opening statement.
Ms. WATERS. Thank you, Mr. Chairman, for this meeting here
today.
But I would really like to thank Chair Yellen for being here with
us today to discuss the state of the economy and your role in ensuring that a full recovery is achieved for all. As a result of your Herculean efforts, the efforts of Democrats in Congress, and the
Obama Administration, we have truly made tremendous progress
since the darkest days of the financial crisis.
Over the past 71 consecutive months, our economy has added
more than 14 million private sector jobs, and the unemployment
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rate has fallen by more than half. But despite this commendable
progress, significant work remains.
Wages have yet to see real gains: 7.8 million workers remain jobless; 6 million workers are involuntarily working part-time jobs;
and another 2 million Americans indicate they would join the workforce if only the economy was strong enough to support them.
With inflation consistently running below target, I wonder
whether the expected path for further raising rates over the course
of 2016 may overemphasize concerns about inflation and underestimate the weakness in our labor market.
I look forward to your comments on this issue.
Absent a full recovery, I fear that further raising rates may be
a step that takes us further away from what is needed to ensure
that the needs of vulnerable populations are met. At today’s hearing, I also hope we can explore the ramifications of an exit strategy
that relies heavily on paying private sector banks not to lend the
funds they hold in reserve and to discuss reasonable alternatives
that may exist that do not involve a massive transfer of wealth
from the Federal Reserve to private sector banks.
I just wonder if it is possible for these funds to be used for workers who are really worried about whether or not they are going to
have a pension, or if there can be some social responsibility investment with these funds to help workers in vulnerable populations?
Finally, many of us have been very patient about the implementation of the living wills. As you know, this is a requirement in the
Dodd-Frank Act, and it is designed to end too-big-to-fail.
And I know that you have to give careful consideration to all of
this, but after not one, not two, but five submissions, the Federal
Reserve has yet to impose consequences for living wills that are not
credible. What can we do about this? It is time we understand that
we have given a lot of opportunities to the banks to get it right and
they haven’t done that.
Chair Yellen, I look forward to hearing your views on the economy and I welcome the opportunity to discuss how we can more effectively elevate the needs of the most vulnerable populations and
promote a safe and sound financial system. And I want you to
know that our audience today is made up of workers who really
want to hear you talk about this, so I would welcome opportunities
to address some of their concerns.
I yield back the balance of my time.
Chairman HENSARLING. The Chair now recognizes the gentleman
from South Carolina, Mr. Mulvaney, the vice chairman of our Monetary Policy and Trade Subcommittee, for 2 minutes.
Mr. MULVANEY. Chair Yellen, when I sat down last night to get
ready for this hearing, it occurred to me that I could ask you about
a bunch of things today.
I could ask you about your plans on interest rates and how you
arrived at the decisions that you are going to make, what you used
to arrive at those decisions. I could ask about your role at the Fed
in regulating financial institutions. Dodd-Frank, for example, has
now given you regulatory powers over banks, nonbanks, clearinghouses, and thrift holding companies.
It also struck me I could even ask you about the role of the Fed,
and more specifically the New York branch, in the possibly mis-
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leading statements that I believe Secretary Lew made to two congressional committees regarding the Fed and the Treasury’s role in
intentionally withholding information from Congress about plans to
prioritize debt payments during the last government shutdown.
And then, I realized that is too much. That is too much not just
to ask you in the few minutes that we are going to have today; it
is just too much for you to be doing. The Fed has, like so many
other parts of our government, grown way beyond its original intended scope.
When Congress chartered the Bank in 1913, we asked it to do
one thing: keep the financial system, and primarily currency, stable. Today, the Fed is involved in everything from how much purchasing power these people have, to where they can bank, how they
can invest and save, and, to believe some, whether or not they even
have a job.
Maybe you shouldn’t be involved in trying to get us to full employment, something that your own economics orthodoxy teaches us
you don’t have the ability to do, but only fiscal policy can do.
Maybe you shouldn’t be involved with regulating mortgages and
credit cards. And you certainly shouldn’t be involved in political decisions to intentionally keep Congress in the dark about how this
country is going to pay back its principal and its interest on the
debt.
So I hope today we get a chance to talk about a lot of things—
sound money, the dual mandate, full employment, regulations, the
debt ceiling, community banks, the impact of zero rates on retirees,
asset bubbles—in the hopes that at the end we discover that perhaps the time has come to get back to basics, and one and one
thing only, which is long-term price stability.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore, the ranking member of our Monetary Policy and Trade Subcommittee, for 2 minutes.
Ms. MOORE. Thank you so much, Mr. Chairman, and welcome
back, Chair Yellen.
As you can tell from the opening statements, there is plenty to
discuss since your last appearance before this committee. I supported your rate increase in December. I still do. And I think you
are providing a lot of credibility to markets with your leadership.
However, these seem to be economic times that are destined to
be interesting. Since December we have witnessed a lot of global
economic turmoil, and now it is turning up in the United States,
as reflected in our stock market.
Foreign central banks are moving to ease rates even as we are
moving to try to tighten them. And I am not saying that we need
to harmonize our monetary policy, but I am very interested in
hearing how you and the Fed are working with foreign central
banks to get in front of these ominous trends.
As you have stated so many times before, monetary policy is a
limited tool. But if we are going to grow our economy and keep on
track, and as I look at the folk in green in the audience, it causes
me to realize that Members of Congress have to do their part, too,
and not just throw it in all in the lap of the Fed. We have to embrace proven growth strategies like tackling poverty, especially
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among women, by providing vocational training so that they can
qualify and compete for sustainable jobs with living wages.
And with that, I yield back the balance of my time.
Chairman HENSARLING. The gentlelady yields back.
Today, we welcome the testimony of the Honorable Janet Yellen,
Chair of the Federal Reserve. Chair Yellen has previously testified
before this committee so I believe she needs no further introduction.
Without objection, Chair Yellen, your written statement will be
made a part of the record. You are now recognized for 5 minutes
to give an oral presentation of your testimony.
Thank you.
STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mrs. YELLEN. Thank you. Chairman Hensarling, Ranking Member Waters, and members of the committee, I am pleased to
present the Federal Reserve’s 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.
Since my appearance before this committee last July, the economy has made further progress toward the Federal Reserve’s objective of maximum employment. And while inflation is expected to
remain low in the near term, in part because of further declines in
energy prices, the Federal Open Market Committee (FOMC) expects that inflation will rise to its 2 percent objective over the medium term.
In the labor market, the number of payroll jobs rose 2.7 million
in 2015, and posted a further gain of 150,000 in January of this
year. The cumulative increase in employment since its trough in
early 2010 is now more than 13 million jobs.
Meanwhile, the unemployment rate fell to 4.9 percent in January, 0.8 of a percentage point below its level a year ago and in line
with the median of FOMC participants’ most recent estimates of its
longer-run normal level.
Other measures of labor market conditions have also shown solid
improvement, with noticeable declines over the past year in the
number of individuals who want to work, and are available to
work, but have not actively searched recently, and in the number
of people who are working part-time but would rather work fulltime.
However, these measures remain above the levels seen prior to
the recession, suggesting that some slack in labor markets remains. Thus, while labor market conditions have improved substantially, there is still room for further sustainable improvement.
The strong gains in the job market last year were accompanied
by a continued moderate expansion in economic activity. U.S. real
gross domestic product is estimated to have increased about 1.75
percent in 2015.
Over the course of the year, subdued foreign growth and the appreciation of the dollar restrains net exports. In the fourth quarter
of last year, growth in the gross domestic product is reported to
have slowed more sharply, to an annual rate of just 0.75 percent.
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Again, growth was held back by weak net exports as well as by
a negative contribution from inventory investment.
Although private domestic final demand appears to have slowed
somewhat in the fourth quarter, it has continued to advance.
Household spending has been supported by steady job gains and
solid growth in real disposable income, aided in part by the declines in oil prices.
One area of particular strength has been purchases of cars and
light trucks. Sales of these vehicles in 2015 reached their highest
level ever.
In the drilling and mining sector, lower oil prices have caused
companies to slash jobs and sharply cut capital outlays.
But in most other sectors, business investment rose over the second half of last year, and home-building activity has continued to
move up on balance, although the level of new construction remains well below the longer-run levels implied by demographic
trends.
Financial conditions in the United States have recently become
less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove
persistent, could weigh on the outlook for economic activity in the
labor market, although declines in longer-term interest rates and
oil prices provide some offset.
Still, ongoing employment gains and faster wage growth should
support the growth of real incomes and, therefore, consumer spending. And global economic growth should pick up over time, supported by highly accommodative monetary policies abroad.
Against this backdrop, the Committee expects that with gradual
adjustments in the stance of monetary policy, economic activity will
expand at a moderate pace in the coming years, and that labor
market indicators will continue to strengthen.
As is always the case, the economic outlook is uncertain. Foreign
economic developments in particular pose risks to U.S. economic
growth. Most notably, although recent economic indicators do not
suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty
about China’s exchange rate policy and the prospects for its economy.
This uncertainty led to increased volatility in global financial
markets and, against the backdrop of persistent weakness abroad,
exacerbated concerns about the outlook for global growth. These
growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and
other commodities.
In turn, low commodity prices could trigger financial stresses in
commodity-exporting economies, particularly in vulnerable emerging market economies and for commodity-producing firms in many
countries.
Should any of these downside risks materialize, foreign activity
and demand for U.S. exports could weaken, and financial market
conditions could tighten further. Of course, economic growth could
also exceed our projections for a number of reasons, including the
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possibility that low oil prices will boost U.S. economic growth more
than we expect.
At present, the Committee is closely monitoring global economic
and financial developments as well as assessing their implications
for the labor market and inflation and the balance of risk to the
outlook.
As I noted earlier, inflation continues to run below the Committee’s 2-percent objective. Overall, consumer prices, as measured by
the price index for personal consumption expenditures, increased
just 0.5 percent over the 12 months of 2015.
To a large extent, the low average pace of inflation last year can
be traced to the earlier steep declines in oil prices and the prices
of other imported goods. And, given the recent further decline from
the prices of oil and other commodities as well as the further appreciation of the dollar, the Committee expects inflation to remain
low in the near term.
However, once oil and import prices stop falling, the downward
pressure on domestic inflation from those sources should wane.
And as the labor market strengthens further, inflation is expected
to rise gradually to 2 percent over the median term.
In light of the current shortfall of inflation from 2 percent, the
Committee is carefully monitoring actual and expected progress toward its inflation goal. Of course, inflation expectations play an important role in the inflation process, and the Committee’s confidence in the inflation outlook depends importantly on the degree
to which longer-run inflation expectations remain anchored.
It is worth noting in this regard that market-based measures of
inflation compensation have moved down to historically low levels.
Our analysis suggests that changes in risk and liquidity premiums
over the past year-and-a-half contributed significantly to these declines. Some survey measures of longer-run inflation expectations
are also at the low end of their recent rages. Overall, however, they
have been reasonably stable.
Turning to monetary policy, the FOMC conducts policy to promote maximum employment and price stability, as required by our
statutory mandate from the Congress. Last March, the Committee
stated that it would be appropriate to raise the target range for the
Federal funds rate when it had seen further improvement in the
labor market and was reasonably confident that inflation would
move back to its 2 percent objective over the medium term.
In December, the Committee judged that these two criteria had
been satisfied and decided to raise the target range for the Federal
funds rate 0.25 percentage point to between 0.25 and 0.5 percent.
This increase marked the end of the 7-year period during which the
Federal funds rate was held near zero. The Committee did not adjust the target range in January.
The decision in December to raise the Federal funds rate reflected the Committee’s assessment that even after a modest reduction in policy accommodation, economic activity would continue to
expand at a moderate pace and labor market indicators would continue to strengthen. Although inflation was running below the
Committee’s longer-run objective, the FOMC judged that much of
the softness in inflation was attributable to transitory factors that
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are likely to abate over time, and the diminishing slack in labor
and product markets would help move inflation toward 2 percent.
In addition, the Committee recognized that it takes time for monetary policy actions to affect economic conditions. If the FOMC delayed the start of policy normalization for too long it might have
to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting
its objective. Such an abrupt tightening could increase the risk of
pushing the economy into recession.
It is important to note that even after this increase, the stance
of monetary policy remains accommodative. The FOMC anticipates
that economic conditions will evolve in a manner that will warrant
only gradual increases in the Federal funds rate. In addition, the
Committee expects that the Federal funds rate is likely to remain
for some time below the levels that are expected to prevail in the
longer run.
This expectation is consistent with the view that the neutral,
nominal Federal funds rate, defined as the value of the Federal
funds rate that would be neither expansionary nor contractionary
if the economy was operating near potential, is currently low by
historical standards and is likely to rise only gradually over time.
The low level of the neutral Federal funds rate may be partly attributable to a range of persistent economic headwinds, such as
limited access to credit for some borrowers, weak growth abroad,
and the significant appreciation of the dollar that have weighed on
aggregate demand.
Of course, monetary policy is by no means on a preset course.
The actual path of the Federal funds rate will depend on what incoming data tell us about the economic outlook, and we will regularly reassess what level of the Federal funds rate is consistent
with achieving and maintaining maximum employment and 2 percent inflation.
In doing so, we will take into account a wide range of information, including measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial and international developments. In particular, stronger
growth or a more rapid increase in inflation than the Committee
currently anticipates would suggest that the neutral Federal funds
rate was rising more quickly than expected, making it appropriate
to raise the Federal funds rate more quickly as well.
Conversely, if the economy were to disappoint, a lower path of
the Federal funds rate would be appropriate. We are committed to
our dual objectives and we will adjust policy as appropriate to foster financial conditions consistent with their attainment over time.
Consistent with its previous communications, the Federal Reserve used interest on excess reserves and overnight reversed repurchase (RRP) operations to move the Federal funds rate into the
new target range. The adjustment to the interest rate on excess reserves (IOER) rate has been particularly important in raising the
Federal funds rate and short-term interest rates more generally in
an environment of abundant bank reserves.
Meanwhile, overnight RRP operations complement the IOER rate
by establishing a soft floor on money market interest rates. The
IOER rate and the overnight RRP operations allowed the FOMC to
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control the Federal funds rate effectively without having to first
shrink its balance sheet by selling a large part of its holdings of
longer-term securities.
The Committee judged that removing monetary policy accommodation by the traditional approach of raising short-term interest
rates is preferable to selling longer-term assets because such sales
could be difficult to calibrate and could generate unexpected financial market reactions. The Committee is continuing its policy of reinvesting proceeds from maturing Treasury securities and principal
payments from agency debt and mortgage-backed securities. As
highlighted in the December statement, the FOMC anticipates continuing this policy until normalization of the level of the Federal
funds rate is well under way.
Maintaining our sizable holdings of longer-term securities should
help maintain accommodative financial conditions and reduce the
risk that we might need to return the Federal funds rate target to
the effective lower bound in response to future adverse shocks.
Thank you. I will be pleased to take your questions.
[The prepared statement of Chair Yellen can be found on page
56 of the appendix.]
Chairman HENSARLING. The Chair now recognizes himself for 5
minutes for questions.
Chair Yellen, I know you are familiar with the Fed Oversight Reform and Modernization Act, known as the FORM Act, which was
passed by the House in November. It is designed to bring about
greater transparency and accountability at the Fed, to respect the
Fed’s independence but also ensure that the Fed lets the rest of us
know the variables that are used in monetary policy and their reaction functions so that working families can plan out their family
economies.
I know that you are not a fan of the FORM Act, because I have
a letter dated November 16th that you sent to the Speaker. In that
letter, you called the Act ‘‘a grave mistake.’’ I have another letter
that describes it as an important reform.
Your letter mentions, or complains that monetary policy would
be forced to be strictly adhered to by the prescriptions of a simple
rule. My letter says the legislation does not chain the Fed to any
rule, and certainly not a mechanical rule.
Your letter says that the Act would undermine the independence
of the Fed. My letter says in no way would the legislation compromise the Fed’s independence. On the contrary, publicly reporting a strategy helps prevent policymakers from bending under
pressure and sacrificing independence.
Your letter states that the FORM Act would ‘‘severely damage
the U.S. economy were it to become law.’’ My letter says the new
legislation would improve economic performance.
By definition, your letter is signed by you. My letter is signed by
Dr. Lars Hansen of the University of Chicago, Nobel laureate in economics.
It is also signed by Robert Lucas, University of Chicago, Nobel
laureate in economics; Edward Prescott, Arizona State University,
Nobel laureate in economics; George Shultz, former Secretary of
the Treasury; Robert Heller, former Federal Reserve Governor;
Jerry Jordan, former President of the Cleveland Federal Reserve
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Bank; William Poole, former President of the St. Louis Federal Reserve Bank, and former member of the Council of Economic Advisers; Michael Boskin, Stanford University, former Chairman of the
President’s Council of Economic Advisers; Charles Calomiris, Columbia University, former consultant, Federal Reserve Board of
Governors; Marvin Goodfriend, Carnegie Mellon, former Research
Director for the Federal Reserve Board of Richmond; Allan Meltzer,
Carnegie Mellon; and John Taylor of Stanford University, former
Under Secretary of the Treasury, member of the Council of Economic Advisers, and author of the Taylor Rule. And there are about
15 other signatories to the letter.
So, Chair Yellen, we have three Nobel prizewinners in economics,
a host of former Federal Reserve officials, and some of the most renowned and respected economists in the country who pretty much
disagree with everything that you asserted in your three-page missive against the FORM Act. I know you are not a fan, but I would
just caution you, Chair Yellen, that when you use such apocalyptic
and hyperbolic language, you might consider whether or not this
undercuts your credibility as Fed Chair.
I have one question. In your testimony, Chair Yellen, in characterizing the Fed strategy to increase policy rates, you testified that,
‘‘removing monetary policy accommodation by the traditional approach is preferable to shrinking the Fed’s balance sheet,’’ which
now holds almost as much in Treasuries as China and Japan do
combined.
I am trying to figure out what precisely is ‘‘traditional’’ about
this current approach where the Fed—and the ranking member, I
think, brought this up in her opening statement—subsidizes deposit rates for some of the biggest banks in our country, which can
distort, as you well know, real asset allocation and constrain economic opportunity. And the last time I checked, as we speak, the
Fed’s fund rate is just above 30 basis points. You are paying banks
50 basis points for excess reserves, which would seem to be above
the market rate.
You have previously testified that this does not involve a subsidy
to the banks. It appears to be a subsidy, and it appears to distort
real asset allocation. So what is traditional about this approach?
Mrs. YELLEN. The tools that we have used to raise our target for
short-term interest rates, namely our key tool being interest on excess reserves, is widely used by central banks as a key tool of monetary policy. And it is the critical tool that we need to rely on in
order to adjust the level of short-term rates to what we regard as
the appropriate stance to achieve congressionally-mandated goals.
I would point out that although we are paying interest to banks
on reserves, those reserves are financing our holdings, a large portfolio of holdings of longer-term Treasury securities and mortgagebacked securities on which we earn substantially greater interest.
And because of that large balance sheet, this past year the Fed
transferred back to the Treasury and to the American taxpayers
$100 billion.
Chairman HENSARLING. But it is true, Chair Yellen, is it not,
that you are paying 50 basis points when the Fed funds rate is 30
basis points?
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Mrs. YELLEN. It is necessary for us to raise benchmark rates in
order for a whole host of short-term interest rates—
Chairman HENSARLING. That would seem to imply a subsidy to
the largest banks. My time has long since expired.
The Chair now recognizes the ranking member for 5 minutes.
Ms. WATERS. Thank you, Mr. Chairman.
Chair Yellen, continuing on the discussion that was just initiated
by the Chairman, as you continue to embark on the path of raising
rates I want to explore the alternative approaches that may exist
for the Federal Reserve to do so in a manner that does not rely so
heavily on paying massive sums to private sector banks to hold
onto the reserves they maintain at the Fed.
While the Fed paid close to $7 billion on reserves in 2015, as the
economy strengthens and rates are further increased, the amounts
paid could increase dramatically into the tens of billions of dollars.
Can you expand on why you believe that paying interest on excess
reserves is particularly important for raising rates in the current
environment and discuss possible alternative approaches that may
exist?
And if you talk about what you believe is the mandate of Congress and how you don’t have the authority for alternatives, I want
to hear more about that and what you do have the authority to do.
Mrs. YELLEN. Prior to the financial crisis, the Fed adjusted the
level of short-term interest rates through small variations in the
supply of reserves to the banking system. Following the financial
crisis, as our balance sheet expanded, reserves became abundant,
and the traditional old-fashioned approach was no longer feasible.
Congress had debated the wisdom of giving us the tool of paying
interest on reserves for many years and decided to do so in 2006,
and then speeded up implementation in 2008. The knowledge that
we had that tool and would be able to use it when we deemed it
appropriate to begin to raise the short-term level of interest rates,
as we did in December—the knowledge that that tool was available, as I just mentioned, the tool that is critical to our control of
short-term rates and widely used globally, that was an important
fact when we considered all the actions that we took—the unconventional actions that we took—to produce the decline in the unemployment rate and improvement in the labor market that we have
achieved.
So if we were denied that tool at the present time, we would not
be able to easily raise the level of short-term rates. Until we—
Ms. WATERS. However, if I may interrupt you for a moment, are
you saying that you are limited only to that action? Or do you have
the authority to make some other decisions relative to what the interest is that you are paying to big banks? Do you have some flexibility here?
Mrs. YELLEN. We would likely, to regain effective control of
short-term interest rates, need to shrink our portfolio from its current large level back to the kinds of levels we had before the crisis.
And we have set out over several years a plan for how we would
normalize policy that relies not on selling long-term assets but on
adjusting short-term interest rates.
I believe that if we were to follow the plan of selling off long-term
assets, it could prove very disruptive to the expansion. It is a strat-
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egy that I think could harm the economic recovery, and it certainly
is not what we have set out to the public. We said we would shrink
our balance sheet in a gradual and predictable way so as to not be
disruptive.
Ms. WATERS. So if I may interrupt you again, you are saying it
was Congress, starting in 2006, who would have to design this approach, and Congress could, if it decided to, take it away as an approach that you would use even though you do not think it would
be helpful?
Mrs. YELLEN. I think it would be very disruptive to the economy
and I really—I want to point out several things about this. First
of all, although the banks are earning this interest on the excess—
on the reserves that they hold, as the level of short-term rates
rises, first of all, on their wholesale funding that many of the
banks rely on, they are also paying more to gain that funding.
Eventually this will be the mechanism that would lead, as well, to
higher deposit rates to reward savers.
And finally, I really want to emphasize that from the taxpayers’
point of view, the Federal Reserve has transferred, since 2008
through 2015, roughly $600 billion back to Congress, to the taxpayers, to the Treasury, funds that have contributed importantly to
financing the government, and that has only been possible because
we have a larger stock of reserves in the banking system and, correspondingly, hold a far larger stock of interest-bearing assets that
pay in larger amounts.
Prior to the crisis, a typical level of transfers from the Fed to the
Treasury was in the order of $20 billion. For the past 2 years, we
have transferred $100 billion a year.
Ms. WATERS. Thank you very much. We need to talk about this
some more.
I yield back the balance of my time.
Chairman HENSARLING. The Chair now recognizes the gentleman
from South Carolina, Mr. Mulvaney, the vice chairman of our Monetary Policy and Trade Subcommittee.
Mr. MULVANEY. I thank the Chairman.
A quick follow up, Chair Yellen, on the Chairman’s question: You
mentioned that using the IOER or the RRP were traditional tools,
and then you mentioned that other central banks used them before.
Have you ever used them?
Mrs. YELLEN. No.
Mr. MULVANEY. Has the Federal funds rate, which I understand
now is trading on the market at about 30 basis points, ever been—
ever—below the IOER, which is now set at 50 basis points?
Mrs. YELLEN. Has it ever been below?
Mr. MULVANEY. Yes, ma’am.
It is since we set the—when we were first given the power to pay
interest on reserves, we set it at 25 basis points, and the Fed funds
rate traded below it. And when we raised it to 50, the Fed funds
rate moved up by 25 basis points, the amount of the increase in
IOER that continues to trade below it.
Mr. MULVANEY. All right. So your testimony is that those are traditional tools. So let’s move then to a different discussion with that
as a background.
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You have in the past been a proponent, though a reserved proponent, of a rules-based system. Back in 2012, you gave a speech
where you said, ‘‘Why shouldn’t the FOMC adopt such a rule as a
guidepost?’’
The answer is that times are by no means normal now and that
simple rules that perform well under ordinary circumstances just
won’t perform well.
Two years ago, you said something similar to this committee. In
response to a question about rules you said, ‘‘The conditions facing
the economy are extremely unusual. I have tried to argue and believe strongly that while a Taylor Rule, or something like it, provides a sensible approach in normal times, like the Great Moderation, under current situations it is not appropriate.’’
So, that was your testimony in 2014. You gave a speech in 2012.
Here we are in 2016. You, by your own testimony, are using traditional tools of monetary policy. Your written testimony begins by
saying that the economy has made further progress towards the
Federal Reserve’s objective of maximum employment. You go on to
say that inflation is low in the near-term but it will rise to its 2
percent objective over the median term.
Are we in normal times?
Mrs. YELLEN. The economy is in many ways close to normal in
the sense that the unemployment rate has declined to levels that
most of my colleagues believe are consistent with full employment
in the longer run. And inflation, while it is below 2 percent, I do
think there is a good reason to think it will move up over time. And
in that sense things are normal.
But what is not normal is that the so-called neutral level of the
Federal funds rate that I referred to in my testimony and we discuss in the report is by no means normal. In other words, we have
needed for 7 years to hold the Federal funds rate and—both in
nominal and inflation in real terms—inflation adjusted or real
terms—at exceptionally low levels to achieve growth averaging 2
percent or a little bit above.
Mr. MULVANEY. I am sorry to interrupt, but I do want to get—
Mrs. YELLEN. And in that sense, it is not normal. The economy
is being held back by headwinds.
I would point out that a tenet of the Taylor Rule is that it
takes—it assumes and embodies in it an assumption that the equilibrium level of the Fed funds rate with the 2 percent objective is
4 percent, or that the real equilibrium Fed funds rate is 2 percent.
And that simply isn’t the case.
Mr. MULVANEY. Madam Chair, I am not actually, surprisingly,
not pushing the Taylor Rule. I am simply asking about a general
rule-based system because you have shown some support for it in
the past. And I guess my question is this: What does the world
have to look like? Because I think admittedly, employment is better. Inflation, it seems to be under control. Yes, you say that the
Fed funds rate is extraordinarily low, which it is, but that is something under your control.
What does the world have to look like in order for the Federal
Reserve to start considering transitioning to a rule-based system?
Mrs. YELLEN. I think the benefit of a rule-based system is it is
systematic and understandable. And the Federal Reserve has at-
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tempted to engage in the systematic policy. It takes a different
form.
Mr. MULVANEY. I get that, but what does the world have to look
like? When you come back next year, what should the world look
like for you to be saying, you know what, we are considering a
rules-based system? What has to change?
Mrs. YELLEN. The Committee looks at guidelines from rules as
useful benchmarks as it considers the appropriate stance of policy,
but I believe, and I think most of my colleagues would agree, that
we shouldn’t mechanically follow that rule or any other rule, but
that we need to take into account a large set of indicators of how
the economy is performing.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore, ranking member of our Monetary Policy and Trade Subcommittee.
Ms. MOORE. Thank you so much, Mr. Chairman.
And again, welcome, Chair Yellen.
I want to take us in a little different direction. Many of us here
on both sides of the aisle are really concerned about what is happening with our smaller banks. And we understand that because
of Basel III and we had a lot of concerns when we debated DoddFrank, including provisions like Volcker and FSOC.
They were driven by the concerns of the large banks in active
capital markets. And I know that the Fed is not the only regulator
overseeing implementation of Dodd-Frank, but I would like your
thoughts on how the rules may have been tailored, or should have
been tailored, for small and community banks?
The stress tests and the capital standards are killing our small
banks, compliance officers that—where they don’t have the additional staff. Just your thoughts on what should have been done or
how has it been tailored?
Mrs. YELLEN. Let me say that I think community banks and
their vitality is exceptionally important. They provide enormous
benefits to the country and to the economy. I recognize that the
regulatory burden on community banks is intense.
Ms. MOORE. They are shutting down.
Mrs. YELLEN. For our part, we are focused on doing everything
that we conceivably can to minimize and reduce the burden on
these banking organizations.
We have been conducting an EGRPRA review to identify potential burdens that our regulations impose on these banks, and we
will do everything that we can to respond to the concerns that are
identified there to reduce burden.
We are looking for many ways. First of all, we have tried to tailor our regulations to the size and complexity of institutions. The
smaller community banks are not subject to stress-testing requirements. Many aspects of Basel III capital requirements and liquidity
rules do not apply to those banking organizations. We have tried
to simplify those requirements.
We are, in addition to that, trying to reduce the duration of the
time that we spend reviewing banks during exams; we are trying
to simplify and be more targeted in our requests for documentation.
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We try to identify for community bankers what is relevant to
them and what they can safely ignore. And we are looking for ways
to conduct exams that are more focused on the actual risks that are
relevant to a particular organization.
So I recognize that the burdens on those banks have been very
intense and I pledge that we are doing and will continue to do all
we can to reduce burdens on them.
Ms. MOORE. Thank you, Madam Chair.
On this committee, we spend a lot of time talking about moral
hazard, and so I guess I would like your view on whether or not
you think there is any moral hazard on not a single person involved in the 2008 crash having gone to jail. They get fines, they
get sort of compliance letters where they can clean up their act and
avoid prosecution, and I am wondering if you think that it is important for us to seek—so what? You pay a fine. That doesn’t stop
anyone from doing the next crime, unlike other of our criminal
laws.
Mrs. YELLEN. I agree with you. I do not think that individuals
who are guilty of wrongdoing should escape paying appropriate
penalties.
For our own part, we are not allowed, obviously, to put in place
criminal penalties. That is a matter for the Department of Justice.
For our part, we can, when we find individuals to be responsible
for wrongdoing, make sure that they are not allowed to work at the
banking organizations where they committed misdeeds. And in
many cases, we can make sure that they are banned from the business of banking.
And when we have been able to identify individuals who are responsible, we have put in place those sanctions and will continue
to do so. And we always cooperate with the Department of Justice
in their investigations.
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. McHenry, vice chairman of the committee.
Mr. MCHENRY. Thank you, Chair Yellen.
So, does the Federal Reserve have the legal authority to implement negative rates?
Mrs. YELLEN. I’m sorry, do we have the legal authority to—
Mr. MCHENRY. Implement negative rates.
Mrs. YELLEN. This is a matter that the Federal Open Market
Committee considered around 2010, and we didn’t fully—as we
were exploring our options to provide accommodation we decided
not to lower interest rates, either IOER to zero or into negative territory, and we didn’t fully look at the legal issues around that.
I would say that remains a question that we still would need to
investigate more thoroughly.
Mr. MCHENRY. And one of our document requests, that 2010
memo that I assume is connected to that policy discussion—
Mrs. YELLEN. That is right.
Mr. MCHENRY. —raised significant doubts about the Fed’s authority that they currently have to charge—to pay interest on excessive—on excess reserves and whether or not that same authority
would allow you to demand payment for that.
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Mrs. YELLEN. Congressman, I don’t know of any restriction that
would prevent us from doing that. That memo indicated—was intended to indicate that the legal issues had not been seriously considered in the time that went to the FOMC.
Mr. MCHENRY. Have they been seriously considered since 2010?
Mrs. YELLEN. In the spirit of prudent planning, we always try to
look at what options we would have available to us, either if we
need to tighten policy more rapidly than we expect or the opposite,
to loosen policy.
Mr. MCHENRY. Do you—
Mrs. YELLEN. So, we would take a look at it. But the legal issues
I am not prepared to tell you have been thoroughly examined at
this point.
Mr. MCHENRY. So at this point it is unclear whether or not the
Fed does have the legal authority to implement negative rates?
Mrs. YELLEN. I am not aware of anything that would prevent us
from doing it, but I am saying that we have not fully investigated
the legal issues. That still needs to be done.
Mr. MCHENRY. So let’s move to regulation. You run the largest
regulatory organization in the United States of America, perhaps
on the globe—likely on the globe.
And as such, I believe in the independence of the Fed to make
monetary policy, but as a regulator, Congress should have significant oversight of your regulatory action, should they not?
Mrs. YELLEN. Yes.
Mr. MCHENRY. Okay. And as such, as a matter of regulation—
the Chairman raised this question with you the last time you were
here about Federal Reserve regulators, bank examiners demanding
to be a part of board of director meetings at member banks.
And you have exchanged multiple letters on this matter. We still
hear that this is, in fact, taking place.
Would you pledge to this committee that you would direct your
bank examiners and regional bank examiners to stop this practice?
Mrs. YELLEN. I will look into—
Mr. MCHENRY. You have already looked into it, and you have exchanged letters and you gave the Chairman the assurance last
time that you are not aware of it. I assume you are now aware of
whether or not this is taking place, are you not?
Mrs. YELLEN. I think there are occasional situations in which
that occurs.
Mr. MCHENRY. Do you believe that is appropriate?
Mrs. YELLEN. I am not certain that it is inappropriate. I want
to get back to you on that.
Mr. MCHENRY. This was raised about 6 months ago by the Chairman; you have exchanged multiple letters. I would like to have
some greater assurance. This is not meant to be a ‘‘gotcha;’’ this is
a well-worn question.
And we are hearing—and in fact, there is a press report that the
Fed directed one of your member banks to incorporate two additional members of the board of directors. And the Fed directing a
private enterprise to change their board of directors seems somewhat perplexing.
Do you believe that is appropriate authority for the Fed?
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Mrs. YELLEN. I think it is appropriate as a matter of supervision
to—
Mr. MCHENRY. To direct?
Mrs. YELLEN. —ensure that a board of directors of a financial
company that we supervise is appropriately constituted in fulfilling
its corporate governance functions. That is a part of supervision.
Mr. MCHENRY. My time has expired.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets Subcommittee.
Mrs. MALONEY. Chair Yellen, you raised interest rates in December and said that any future interest rate increases, if they happened, would be gradual. I would like to ask you about the recent
turmoil in global markets.
As you know, equity markets around the world, led by China,
have plunged since the beginning of the year as global economic
growth has weakened. And the United States has not been immune. U.S. stock markets have fallen over 9 percent since the beginning of the year and Treasury yields have plunged 23 percent.
So my question is, has the turmoil in global markets changed
your view about the appropriate pace of interest rate increases and
hikes, or will you wait to see how global market turmoil affects the
U.S. economy before raising rates again?
Mrs. YELLEN. We are watching very carefully what is happening
in global financial markets. It would appear that stresses that we
have seen since the turn of the year relate to uncertainties regarding Chinese exchange rate policy. There are uncertainties around
the price of oil. We have not seen shifts in—that seem significant
enough to have driven the sharp moves we have seen in markets.
There would seem to be increased fears of recession risk that is
resulting in rises in risk premium. We have not yet seen a sharp
drop-off in growth, either globally or in the United States, but we
certainly recognize that global market developments bear close
watching. As I mentioned, the financial conditions have become
less supportive to growth and we recognize that these developments may have implications for the outlook, which we are in the
process of assessing.
And I want to make clear that monetary policy is not on a preset
course and so our evaluation of the likely impact of those developments on the economic outlook and our ability to meet both our
employment and inflation objectives, those are the factors that will
govern the future stance of monetary policy. It is not on a preset
course.
Mrs. MALONEY. And given the turmoil in global markets and the
slowing U.S. economy, some analysts are now talking about the
United States possibly falling into a recession this year. What
would it take for you to consider cutting interest rates again? A severe downturn in the economy or just stubbornly low inflation?
Mrs. YELLEN. Our commitment is to achieve our congressionally
mandated goals of maximum employment and price stability. I do
not expect that the FOMC is going to be soon in this situation
where it is necessary to cut rates. Let’s remember that the labor
market is continuing to perform well, to improve. I continue to
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think that many of the factors holding down inflation are transitory.
While there is always some risk of recession, and I recognize and
have just stated that global financial developments could produce
a slowing in the economy, I think we want to be careful not to
jump to a premature conclusion about what is in store for the U.S.
economy.
So I don’t think it is going to be necessary to cut rates, but that
said, monetary policy, as I said, is not on a preset course. And if
it turned out that would be necessary, obviously the FOMC would
do what is needed to achieve our—the goals that Congress has assigned to us.
Mrs. MALONEY. You said in December that you were surprised by
how far oil prices had fallen and that you expected inflation to increase once oil prices stabilized. Since the Fed’s December meeting,
oil prices have fallen even further. They are down about 25 percent
since the December meeting and they have fallen 7 percent since
Friday.
At the same time, we have also seen inflation expectations fall
since the December meeting to the lowest levels in quite some time.
Has this caused you to rethink your inflation projections at all?
Mrs. YELLEN. We indicated in our statement in January that
these developments led us to conclude that inflation will stay low
for a while longer as these developments work through. Clearly, we
are watching inflation expectations and, as I mentioned, marketbased measures of inflation compensation have moved down now to
historically low levels. And that is something we are evaluating
carefully.
In December when we raised rates, we indicated that with inflation so far below our objective, we would carefully watch incoming
data and revise our expectations. So I don’t want to jump to a premature conclusion.
My colleagues and I will issue in March updated projections for
inflation taking all the evidence we have at hand into account,
but—
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair recognizes the gentleman from New Jersey, Mr. Garrett, chairman of our Capital Markets Subcommittee.
Mr. GARRETT. I thank the Chair.
Chair Yellen, thank you for being here.
I would like to talk a little bit—begin on emergency lending
under Section 13(3). It was about a year-and-a-half ago that Senator Elizabeth Warren and myself and Mr. Capuano joined together, and Senator Vitter as well, and sent you a letter expressing
our deep concern with what you were doing with regard to implementing the limiting language in Dodd-Frank at that time.
And of course, you have come out now with a rule, despite our
admonition and questions in that letter, a rule that would basically
allow the Fed to drive a Mack truck through the various loopholes
in it, and also, once again, as is typical with the Fed, lacking in
clarity and transparency.
That being said, the Fed is not always not clear in what they
want to do, and the regulators are not always clear in what they
want to do. For example, they came up with the Volcker Rule, and
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in the Volcker Rule the Fed was not shy about elaborating on concepts in that statute. In fact, it went so far as to adopt prohibitions
in trading assets that were clearly never intended by the statute.
So the Fed and other regulators came up with this part of the
Volcker Rule dealing with defining just what the words ‘‘proprietary trading’’ mean. Over 800 pages to make some definitional
clarity in the area of Volcker and proprietary trading. Compare
that to what you did with—under the limitations that should be in
place under Dodd-Frank of 13(3)—47 pages of definition and a lack
of clarity throughout it.
So the first question is why in one area can you be exact and precise in precision when you are trying to limit what the private market is doing, but when Congress tells you to put limitations on
yourself, you lack that clarity and give it a broad brush?
Mrs. YELLEN. I think we tried in the rule to be as clear as we
possibly could. We—
Mr. GARRETT. Let’s take a look at that then.
Mrs. YELLEN. —took a—we, for example—
Mr. GARRETT. Now, let me give you an example.
The Fed claims that it establishes a penalty rate under 13(3), but
then you failed to provide any specifics whatsoever of what that
rate would be.
Compare that to what Congress did. This committee passed a bill
that would establish a penalty rate that would be commensurate
with ‘‘a distressed borrower.’’
So why wouldn’t the Fed be clear on this? What are the rates
going to be?
Mrs. YELLEN. Because what a penalty rate is depends on the specifics of a particular situation.
Mr. GARRETT. But can’t—
Mrs. YELLEN. A penalty rate is a rate that when conditions normalize—
Mr. GARRETT. But we know what a distressed borrower is and
what the markets are. That is clear. Why didn’t you define it that
way, compare it to the regular markets so that a distressed borrower in the markets would be charged the same if they are borrowing from the Fed—
Mrs. YELLEN. Well, in the—
Mr. GARRETT. —or related to it?
Mrs. YELLEN. In the type of situation that we found ourselves
in—
Mr. GARRETT. Yes.
Mrs. YELLEN. —during the financial crisis, market rates had shot
up to extraordinary levels because liquidity had dried up in the financial—
Mr. GARRETT. I understand what the history of the market was
at that time, but you could have provided clarity in here.
So basically what you are telling us is once again, the Fed is
going to be in the position of picking winners and losers. By your
prior answer, it seems like you are saying that you could charge
borrower A one rate and borrower B another rate under similarly
situated circumstances. Is that not correct?
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Mrs. YELLEN. I think what is an appropriate rate does depend
on the circumstances. Financial crises, which is when we would be
using this authority—
Mr. GARRETT. But that is—
Mrs. YELLEN. —to set up a broad-based program, are always
very unique. And—
Mr. GARRETT. Right. And I think that basically what you are telling us is that nothing really has changed despite the admonition
and the law in Dodd-Frank to put a limitation.
And it is not just me saying that, by the way. It is interesting
that while you are here testifying today, Governor Fisher is also
making public statements as you speak.
We just got part of his statement, and he seems to be saying exactly what you are, that you have not limited 13(3). He said, ‘‘But
in simple language, strengthening fire prevention regulation does
not imply that the fire brigade should be disbanded.’’
He goes on basically to say in his comments today that we are
not seeing the limitations, that you are going to be able to do similar things to what you did back in, or that—before you were here,
that the Fed did the last time around.
Mrs. YELLEN. I want to make clear that I think our 13(3) powers
and ability to lend to keep credit flowing in the economy during a
financial crisis is a critical power. It played a critical role during
the financial crisis.
Mr. GARRETT. So is he wrong when he says that nothing—my interpretation—has really changed? Your powers are the same as
they were before?
Mrs. YELLEN. No, a lot has changed. Congress put in place a series of restrictions that they intended—
Mr. GARRETT. But your rule does not implement those, does it?
Mrs. YELLEN. Yes, it does. Our rule does implement those restrictions.
We cannot lend to an insolvent borrower; we cannot lend to help
one or more failing firms. We can only put in place broad-based
programs, and we have defined pretty clearly in that rule what
constitutes a broad-based program. So Congress clearly changed
what the Fed can do.
Mr. GARRETT. But it does not—
Mrs. YELLEN. It also gave—provided—
Mr. GARRETT. Governor Fisher is saying we have likely reduced
the probability that lender of last resort will be needed, but we
have not reduced that probability to zero. So it appears that, in his
opinion at least, some of those problems remain.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Chair Yellen, the unemployment rate is down to under 5 percent
for the first time in 8 years. However, I remain concerned that unemployment rates remain elevated in the Hispanic and AfricanAmerican communities.
Does the Fed specifically take unemployment within these
groups into consideration when making policy decisions surrounding the Fed fund rate?
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Mrs. YELLEN. We track very carefully the unemployment rates
and experiences of different demographic groups, and we make a
very careful assessment about whether or not the economy is meeting the objective of maximum sustainable employment, which involves taking account of factors like, are particular groups being
discouraged from even participating in the labor force because of
conditions?
But it is important to recognize that our powers, which involve
setting interest rates, affecting financial conditions, are not targeted and can’t be targeted at the experience of particular groups.
I think it always has been true and continues to be true that when
the labor market improves, the experience of all groups does improve.
Roughly now, the unemployment rate in the United States is
close to where it was in the fourth quarter of 2007. Now, AfricanAmericans and Hispanics at that time back in 2007 had higher unemployment rates than the population as a whole. Regrettably, because of the disadvantages that these groups face in the labor market, they have historically tended to have higher unemployment
rates.
But as the economy has improved and unemployment has come
down, the unemployment rates for those groups, for Hispanics and
African-Americans, has come down. They have fallen to roughly the
same levels that they were in at the end of 2007 while, again, remaining higher.
Ms. VELAZQUEZ. So you—
Mrs. YELLEN. We do look at that, but we don’t have tools to target particular groups—
Ms. VELAZQUEZ. I understand that.
Mrs. YELLEN. —rather than others.
Ms. VELAZQUEZ. Do you consider an 8.8 percent unemployment
rate among African-Americans today too high?
Mrs. YELLEN. I do consider it too high, and I think there are any
number of reasons for that. And I think that the reasons for it are
ones that Congress should be considering broadly in designing a
wide range of policies.
It is something that we want to see a strong labor market, we
want to see continued progress, and we will put in place policies
that achieve that. But we cannot target the unemployment rate for
a particular group.
Ms. VELAZQUEZ. I heard you.
As you know, Chair Yellen, U.S. employers have created 14 million jobs during President Obama’s tenure. However, the labor
force participation rate remains low and discouraged people who
want to work have stopped looking. How much of the decline in the
rate can be explained by the trend of flat or declining wages for
many American workers?
Mrs. YELLEN. For the country as a whole, an important reason
that labor force participation has fallen and will continue to fall is
because of the aging of the population. So that is not going to
change and the trend is downward.
But it is also true that for certain subgroups in the population—
for example, prime age but less educated men—the trend downward has been particularly steep. And there is a lot of economic re-
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search that tries to understand why men have—their labor force
participation has declined, and it wouldn’t surprise me if wage
trends are part of the reason for that.
Ms. VELAZQUEZ. Right.
Mrs. YELLEN. So my guess is that they have played a role in discouraging labor force participation.
Ms. VELAZQUEZ. As wages begin to increase, do you anticipate
the participation rate to increase as well?
Mrs. YELLEN. Yes, I anticipate that wage growth will move up
somewhat. And I do think that labor force participation is somewhat depressed relative to where it will be in a really full employment economy.
That is why I say I think there does remain some slack in the
labor market even though the aggregate unemployment rate is at
4.9 percent. So I do hope that—
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee.
Mr. NEUGEBAUER. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being here as well. Part of your
remarks were about the state of the economy, and I think you are
trying to paint a little bit rosier picture, and maybe there is a little
bit of a rosier picture, but it is not a good picture.
I am looking at some stats here that we still have 16 million
American citizens who are unemployed. In fact, the number of
long-term unemployed Americans is 761,000 higher than it was at
the start of the recession.
We have 94 million Americans over the age of 17 who have abandoned the job market. Real disposable income is a paltry annual
rate at 1.2 percent.
The real GDP is growing just under 2.2 percent. We have more
Americans living in poverty than ever before—46.7 million people.
And we have 45 million people on SNAP. I could read more and
more.
I think the issue that I have been thinking about this week is
that when you look at the original purpose the Fed was formed for,
and what the Fed looks like today, and I think my good friend Mr.
Mulvaney pointed this out, is that basically we have a Fed that is
in charge of monetary policy, some other things have been added
to that, and then we have a Fed that is the biggest and largest regulator and regulates more assets than any other financial institution in the world.
And it kind of reminds me that while you all are working on one
side of the Fed to stabilize employment, keep inflation in check,
then on the other side of the Fed you have this huge regulatory
structure that has grown substantially and continues to issue very
complicated, and some people think that you have become a micromanager of these financial institutions with the regulations.
So it reminds me of that statement, ‘‘We have met the enemy
and it is us.’’ Is it counterproductive that you have the—a Fed
working on one side to create jobs, and you have a Fed on the other
side of the building that is doing things that a lot of people think
are killing jobs: micromanaging the financial markets; increasing
the cost of capital; and reducing the availability of capital, which
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has stymied the ability of this economy to grow? Isn’t that self-defeating?
Mrs. YELLEN. I think we have to remember that financial crises
are immensely costly to well-being. And it is important to make
sure that we do everything—almost everything we can to reduce
the odds of another devastating financial crisis.
So we are working hard. We have worked hard in the aftermath
of the crisis to make sure that we have a financial system that is
safer, sounder, has more capital, higher quality capital, more liquidity, and is less crisis-prone than the financial system that we
had that caused this financial crisis.
Mr. NEUGEBAUER. The time is short. You mentioned the word ‘‘liquidity,’’ and I think a lot of people think some of the things that
the Fed has done and some of the regulations have actually reduced liquidity in a number of markets. And in fact, you and I have
had a conversation about the fact that you all have shown some
concern about liquidity.
I wanted to see if you knew that the European Commission has
initiated a review process. They said after 5 years of instituting all
of these regulations and additional capital requirements, and kind
of just piling on of regulation and capital, more capital and regulation—and I am not against having adequate capital, but the problem is that we seem to have an add-on game here and the additional capital also comes with additional regulations.
And so the European Commission has initiated a review process
that said, ‘‘You know what? Time out here; let’s go back and look.
We know what we have asked these entities to do; we know what
we have impounded them with.’’
But the question is, how are the markets responding to this and
how have—basically, it is a cost-benefit analysis of all of the policies that have been in place.
Has the Fed thought about, hey, maybe we should stop and analyze what we have done here and see if it is positive?
Mrs. YELLEN. We have a few things we still need to finalize to
put in place the Dodd-Frank regulations that were called for, and
we hope to complete that work soon. And it certainly is appropriate
to evaluate how the system is working. And we do that on an ongoing basis, and I think it is, of course, appropriate to see whether
or not there are ways in which we can improve or simplify regulations. And we are in the process of doing that in some very important areas.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. SHERMAN. Mr. Chairman, I feel like I am at a ballroom
dance on the deck of the Titanic. The faith of the American people
in our government and institutions is at an all-time low. I have
been sitting in this room for 20 years and the room has the feel
that it had 20 years ago, except we don’t have Alan Greenspan in
front of us.
Government institutions work better if they listen to the American people, first, because the American people will then accept the
decisions, and second, because we get better decisions.
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Yesterday, in a small State that is doing better than most of the
country, two-thirds of the people went out in a very, I think,
record-setting turnout with inclement weather to say that they are
mad as hell, particularly at the financial institutions that this committee deals with. And two-thirds of them voted for the most angry
candidate they could find.
Too-big-to-fail should be too-big-to-exist. Madam Chair, in response to the gentlelady from Wisconsin, you said it was basically
the Department of Justice’s failure to have a single criminal prosecution of those who had robbed the banks and, more importantly,
robbed the American people. And I wonder whether you can really
just put that at the feet of the Department of Justice?
Because we have learned institutions can get so big that they are
too-big-to-fail. Your predecessor was in this room demanding that
we bail them out. And, God forbid, you will be again if you allow
these too-big-to-fail institutions to continue to exist.
They are too-big-to-jail. And as you point out, you may bar somebody from the banking world, but, gee whiz, in a country with more
people incarcerated than any other country in the world, is it really
adequate to those who steal hundreds of millions and billions to
say, ‘‘Well, you can’t go back into the banking world?’’
So I will ask you as a member of FSOC, we need moral hazard
to make sure that major economic decisions made by the giant
banks are made correctly. They don’t have a moral hazard in the
sense of not being able to get capital. People are flooding them with
capital at rates that are said to be up to 80 basis points less than
they would pay if there wasn’t a belief that we would bail them
out. So the too-big-to-fail won’t be allowed to fail. As you point out,
DOJ won’t put anybody in jail.
The solution is, use your power under FSOC to break them up.
Are you going to break up the too-big-to-fail institutions?
I have asked you that before, and I will ask you it again. I think
I know the answer.
Mrs. YELLEN. The answer I will give you is that we are using our
powers to make sure that a systemically important institution
could fail and it would have systemic consequences for the country.
We are doing that in a whole variety of ways. First of all, we
have done many things to diminish the odds that they would fail.
We are trying to make them, and I think I can enumerate all the
things we have done—
Mr. SHERMAN. Are you willing to call the attorney general and
say, ‘‘We have this thing handled so well that you can start criminal prosecutions because they are not too-big-to-jail anymore?’’
Mrs. YELLEN. I said that I am in favor of going after individuals
who are guilty of wrongdoing.
Mr. SHERMAN. With such penalties as barring them from the
banking system.
Mrs. YELLEN. Well, —
Mr. SHERMAN. I want to move on—
Mrs. YELLEN. —what I said is those are the sanctions that the
Federal Reserve can impose.
Mr. SHERMAN. I need to move on to another question.
You are a governmental entity, but it is—in some parts of the entity it is one bank, one vote. It is the only part of our constitutional
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system that puts governmental power in the hands of one bank,
one vote.
Are you going to use your considerable power to oppose legislative efforts to try to make the regional bank governors appointed
exclusively by the President and to try to make the regional banks
subject to the Freedom of Information Act?
Mrs. YELLEN. Congressman, I think the current structure of the
Fed is something that Congress decided after a long debate and
weighing of a whole variety of considerations. I would say I think
it has worked pretty well, but it is certainly something—
Mr. SHERMAN. Wait, excuse me, Madam Chair. Are you saying
that the Fed, having just lived through 2008, with people not getting raises, that this whole system has worked well?
Mrs. YELLEN. I’m sorry. I thought you were asking about our
governance.
Mr. SHERMAN. Your governance has led to the decisions that
have nearly brought this country to its knees.
I yield back.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, chairman of our Housing and Insurance Subcommittee.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
And welcome, Madam Chair.
It is kind of interesting, as you discuss all the questions that
have been asked you here with regards to your ability to micromanage the economy, and as you make the decisions at the Federal
Reserve to try and do something about unemployment and try and
do something about the inflation rate, I look at some of these
things and I am just kind of stunned.
Let’s start off first with what happens if we have a downturn and
you already have $4 trillion on your balance sheet? What levers are
still allowed or are available to you to do something?
Mrs. YELLEN. The Fed has an array of tools.
Mr. LUETKEMEYER. Which are?
Mrs. YELLEN. Most importantly, the path of the short-term interest rates.
Mr. LUETKEMEYER. Madam Chair, they are already down to almost nothing. How is lowering the rates going to help when they
are almost nothing right now?
Mrs. YELLEN. One of the ways in which markets work is that
they form expectations about what the likely path of the Fed funds
rate will be over time. Those expectations influence longer-term
rates in the market.
And when the economy weakens, market participants naturally
expect the Fed, in pursuing our mandate, to follow a shallower
path of interest rate increases, and that shift in expectations moves
longer-term rates.
I think you can see that just over the last several weeks, as I
mentioned, longer-term Treasury yields have come down as market
participants have become more fearful about a recession. And
their—
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Mr. LUETKEMEYER. Forgive me for intruding, but I have more
questions here. So are you saying that this is a good time, then,
to start to reduce your balance sheet?
Mrs. YELLEN. We—
Mr. LUETKEMEYER. Lower interest rates, it would be a nice time
to short-shift that, wouldn’t it? Are you intending to do that?
Mrs. YELLEN. We have indicated that we want to make sure that
normalization is well under way before we begin to shrink our balance sheet.
And our decision to do that reflects the fact that we feel that
moving short-term rates is a more reliable and understandable and
predictable way to manage the economy.
Mr. LUETKEMEYER. Okay.
Mrs. YELLEN. And so we are going to wait to shrink our balance
sheet until a point when short-term interest rates are somewhat
higher.
Mr. LUETKEMEYER. So we may never get there, is what you are
saying? Because there is not much room to go down. So, let’s—
Mrs. YELLEN. We will have to see.
Mr. LUETKEMEYER. But let me also go into your decision-making
process, here.
We have a labor market that continues to—the labor force participation rate continues to go down, and yet, according to your report here, the hourly rate of employees went up. There should be
more incentive for people to work, yet they are becoming less. And
you use the demographics of our country to indicate that.
So I am concerned that if you look at those numbers, that there
is minimal ability of your—the way you explained the answer to
Ms. Velazquez a while ago, of you guys to be able to manipulate
this.
The second thing is, I am concerned—what other factors do you
take into consideration when you look at your rates? For instance,
do you look at what the Congress is proposing? Do you look at the
court decisions?
Because we had—and there has been a big discussion about trying to stop the inversion, the ability of our companies to go overseas and be able to take advantage of those tax rates. So the discussion is to try and cut corporate tax rates to bring those dollars
home.
Do you ever think about those sorts of implications about whenever you make decisions on your rates?
Yesterday, we had a dramatic historic decision by the courts with
regards to an EPA ruling that would have dramatically changed
the way that we—the cost of energy in this country.
Do you take those things into consideration when you make your
rates? Because those are dramatic—they will have dramatic increases or significant impact on our economy.
Mrs. YELLEN. We try to take into account in making our decisions any factor that we regard is important in—
Mr. LUETKEMEYER. But do you have in place right now some
modeling with regards to the EPA rule?
Mrs. YELLEN. Not that I know of.
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Mr. LUETKEMEYER. Do you have in place any modeling with regards to potential tax cut for bringing dollars home? Or for corporations?
Mrs. YELLEN. We routinely look at the stance of fiscal policy—
Mr. LUETKEMEYER. Do you have a model in place right now, if
we cut corporate tax rates, that would allow you to make a decision
on that issue?
Mrs. YELLEN. If you were to decide that, our staff would attempt
to evaluate—
Mr. LUETKEMEYER. But you don’t have one in place right now,
is what you just said?
Mrs. YELLEN. Not to the best of my knowledge.
Mr. LUETKEMEYER. Okay. Thank you very much.
I yield back.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair recognizes the gentleman from New York, Mr. Meeks.
Mr. MEEKS. Thank you, Mr. Chairman
And welcome, Chair Yellen.
Some of my colleagues may not have been here 9 years ago, 8
years ago, but I have to tell you, I feel better today than when I
sat here 8 or 9 years ago. I feel much better today than I did then.
I can remember some of what was taking place then, and the
panic that was going on, and the pressure that this government
was under. And though we have not completely done what we need
to do, because we do need to let wages grow, we do need to make
sure we create more jobs, the position that we are in today, would
you agree, is much stronger than the position we were in 2007 and
2008?
Mrs. YELLEN. I believe it is. I believe we have made a lot of
progress, while recognizing at the same time that there are many
households that are suffering and that there are a lot of challenges
that people face and structural—
Mr. MEEKS. Which, and I think it is important to acknowledge
that, that—how far we have come. And then, I would hope that we
would also focus then on what else needs to be done, because we
do need to make sure that—especially those individuals who were
victimized by the financial crises.
For example, if you look at areas in—and I think Ms. Velazquez
talked about it particularly in African-American and Latino communities, they lost a great amount of wealth. Many of them lost
their homes; they lost their jobs. And so, they need something so
that they can get back, and that is why you see this disparity that
is very high right now.
My focus then is we had, and I guess because of what took place
in the past, in 1977 we passed the Community Reinvestment Act
(CRA). Now, the Fed is in charge of CRA and can enforce it. And
today, one of the—what we find still is that individuals in communities that were deeply affected, there is no investment going in,
there is no job creation there, there is no access to credit. They
don’t have credit because of, primarily, the crisis.
So I was wondering, since the Fed oversees and can enforce CRA,
what is the Fed doing in helping to implement CRA, compelling
some of the large banks to make these investments in these communities as well as into CDFIs, who are focused on trying to make
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sure that the kind of investments are there to create jobs, to grow
wages in communities that were devastated by the recession?
Mrs. YELLEN. I think CRA is extremely important in making
sure that financial institutions, depository institutions serve the
needs of their communities, and particularly underserved communities.
We take our enforcement and evaluation of banks’ CRA performance very seriously. We have a whole variety of community development activities and programs that are focused on working, using
our convening power and their CRA obligations to try to understand and identify what the needs are in particular communities
and to try to tell banks what works, what kind of programs are
worth supporting that really seem to make a difference in terms of
alleviating distress in low- and moderate-income communities.
Mr. MEEKS. One of the things I think is important, because I
want to know, and maybe you have the answers, is to show where
the banks are making these investments in compliance with CRA.
Because I have found that those numbers have surely sunk, and
then when I look at access to capital in these communities, you
have about 70 million people now who are underbanked or
unbanked in these communities, and so CRA could definitely help
there.
I would love to follow up with you to find out exactly where the
enforcement—who is, in fact, complying and giving and who is not,
because there has to be some accountability therein.
Lastly, let me just, in the few seconds I have, because the other
thing that I think that is important to look at in some of these
communities, because—and today as well, access to credit is absolutely key and essential. And sometimes, in the way credit is
looked at, are there alternative systems?
For example, you find some people who pay their rent every
month on time, and that is not to be considered when referenced
to credit scoring models. So are there other models that you are
looking at with reference to how credit scores are considered that
the Fed could advocate?
Mrs. YELLEN. I am not sure about credit scores. We would be
glad to get back to you on that.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Oversight and Investigations Subcommittee.
Mr. DUFFY. Thank you, Mr. Chairman.
And welcome, Chair Yellen.
I want to take a trip down memory lane, because I think there
is some rewriting of what happened in the crisis.
There are a lot of people who bought homes, and for lower-income folks, that is their investment. And a lot of them lost their
investment walking into the crisis, devastating families.
I know we want to look to Wall Street and there is blame there.
But I think there is a little bit of revisionist history when we say,
you know what, Fannie Mae and Freddie Mac didn’t have anything
to do with the crisis. Fannie and Freddie allowed no-doc loans, no
income verification, allowing folks to buy homes they couldn’t afford.
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And in Dodd-Frank, that was passed by my friends across the
aisle, Fannie and Freddie weren’t touched at all. Fannie and
Freddie were the ones that were allowing folks in this room to get
homes they couldn’t afford and they were hurt. It didn’t touch
them.
The regulators had wild authority and power. They failed. And
instead of taking a look at the regulation and the regulators, we
have re-empowered regulators.
And it’s no wonder that big banks after Dodd-Frank haven’t gotten smaller. Big banks have gotten bigger. And the small community banks that I am sure service a lot of the folks in this room,
and service folks in my community, are going away. That’s a big
problem.
I just had to get it off my chest.
So there are a lot of exciting things to chat about with you, Chair
Yellen. But as the chairman of the Oversight Subcommittee, I do
have some concerns about your willingness to comply with our requests.
We sent a letter in the Medley investigation in our oversight of
the Fed asking you for information regarding communication. No
compliance. Then, we sent you a subpoena in May. You did not
comply with that.
We had partial compliance in October.
We are now a year after my initial letter. I have asked you for
excerpts of the FOMC transcripts in regard to the discussion—in
regard to the internal investigation on Medley. You have not provided those to me.
Is it your intent today to promise that I will have those if not
this afternoon, then tomorrow?
Mrs. YELLEN. Congressman, I discussed this matter with Chairman Hensarling and indicated we have some concern about providing these transcripts.
Mr. DUFFY. Finding the transcripts?
Mrs. YELLEN. I said with providing transcripts, given their importance in monetary policy.
Mr. DUFFY. So let me just—
Mrs. YELLEN. And I received a note back from Chairman Hensarling last night quite late indicating your response to that. And
we will consider it and get back to you as soon as we can.
Mr. DUFFY. Oh no, no. I don’t want you to consider it. And I
think the Chairman would agree with me that this is a conversation not about monetary policy; this is not market-moving stuff.
This is about the investigation and the conversation of a leak inside of your organization.
This institution is entitled to those documents. Would you agree?
Mrs. YELLEN. I will get back to you with the formal answer.
Mr. DUFFY. No, no, listen.
Mrs. YELLEN. I believe that we have provided you with all the
relevant information.
Mr. DUFFY. That is not my question for you, Chair Yellen. If I
am not entitled to it, can you give me the privilege that you are
going to exert that is going to let me know why I am not entitled
to those documents?
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Mrs. YELLEN. I said we received well after the close of business
yesterday a letter explaining your reasoning, and I will need some
time to discuss this matter with my staff—
Mr. DUFFY. No, I don’t want—
Mrs. YELLEN. —before I give you a final answer.
Mr. DUFFY. I don’t want—listen. I sent you a letter a year ago,
on February 5th. I had to send you a subpoena.
You knew that I was looking for these documents; you knew I
was going to ask you about this today. So if you are not going to
give me the documents, exert your privilege. Tell me your legal authority why you are not going to provide this to us.
If this is market-moving, I would be sensitive to that. This is not
monetary policy conversations; this is about the internal workings
of the Fed.
And I am not asking for all the transcripts; I am just asking for
the excerpts specific to our investigation and oversight of the Fed.
Let me ask you this: You get to oversee banks. If you made a request to a bank for information a year ago and they said, ‘‘Let me
review with my board. Let me talk about it,’’ but they never comply
with your request for documents or information, what would the
Fed do?
Mrs. YELLEN. I think we have complied very fully with the requests that you have made.
Mr. DUFFY. I am asking, what would you do if you made that
kind of a request to a bank that you oversee? What would you do?
Mrs. YELLEN. We work with banks to make sure we have access
to the information.
Mr. DUFFY. If they didn’t, I can’t imagine what the Fed would
do if someone didn’t comply with your request. And guess what, we
are entitled to the documents. We expect to get them unless you
exert a privilege, and there is no privilege that you have. So I expect they will come over.
I yield back.
Ms. WATERS. Mr. Chairman?
Chairman HENSARLING. The time of the gentleman has—for
what purpose is the ranking member seeking recognition?
Ms. WATERS. Is it appropriate to ask for unanimous consent for
clarification on a point of information that was just given by the
gentleman?
Chairman HENSARLING. Does the lady have a parliamentary inquiry?
Ms. WATERS. The inquiry could be considered parliamentary. I
understand the gentleman to say that they subpoenaed the Fed
and it was ignored. Is that what he meant?
Chairman HENSARLING. The gentlelady is not stating a parliamentary inquiry, and as I think the ranking member knows, the
time of the Chair is limited. If other members wish to pursue that
in their questioning, they may pursue it in their questioning.
The Chair now recognizes the gentleman from Texas, Mr. Hinojosa.
Mr. HINOJOSA. Thank you, Chairman Hensarling and Ranking
Member Waters, for holding this hearing today.
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Chair Yellen, I thank you for meeting with our committee today
and for your steadfast leadership at the Federal Reserve. America
has made great progress since the financial crisis of 2008.
Our recovery includes 70 consecutive months of job growth, the
longest streak in our Nation’s history, resulting in an astounding
14 million private-sector jobs created. And an unemployment rate
now standing below 5 percent.
However, we continue to feel the hangover from the financial crisis started during President George W. Bush’s second term. Today,
the slower-than-average economic growth rate is fueling anxiety
and weakening confidence in our Nation’s economic growth prospects.
Additionally, our economy appears to be sailing into strong
headwinds caused by slowing growth in the developing world, stagnant growth in Europe, the dual effects of plunging oil prices and
a strong dollar negatively affecting our manufacturing and export
industries.
Addressing those challenges also requires us to answer questions
regarding the sustainability of our national debt and of the ability
of Congress and the Federal Reserve to act effectively to stimulate
the economy.
Despite that market turmoil and economic uncertainty, however,
I will note that our Nation’s confidence in the safety and soundness
of our financial system has not been shaken. Indeed, we can attribute a much stronger and more resilient financial system in
large part to the protections and improvements of the market oversight under the Dodd-Frank Act.
My first question, Chair Yellen: What else should our Nation be
doing to help us return to normal growth rates?
Mrs. YELLEN. One of the distressing aspects of the recovery we
have seen—I agree with you that we have made progress in the
labor market, created a lot of jobs and the unemployment rate is
low. But the growth in the economy that has been consistent with
that has been quite disappointing.
So another way of saying what that implies is when output is
growing at a very weak pace and you have a lot of job growth, that
means that productivity growth has been very disappointing since
the financial crisis, and ultimately that determines living standards.
Mr. HINOJOSA. Chair Yellen, do you think we are dragging down
the potential growth rate of our economy and doing a disservice to
our young men and women by saddling them with debt just as they
are setting out to become full contributing members of our workforce and economic engine?
Mrs. YELLEN. I think the debt situation that faces this country
over the longer term is something that Congress certainly needs to
address. While at this point the debt-to-GDP ratio looks like it
should be sustainable at present levels for a number of years, as
the population ages, it will—this is evident from CBO projections—
be on an unsustainable upward course, and this is something Congress has known about for decades and it is important to address.
Mr. HINOJOSA. It seems to me that while Congress must do its
part to raise the minimum wage, expand the Social Security safety
net, and provide a more progressive tax code, what steps are you
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taking at the Federal Reserve to address the historic level of inequality in the United States?
Mrs. YELLEN. Congressman, the main contribution that the Fed
can make to inequality, given that we don’t have policies that target particular groups in the labor force, is to make sure that the
labor market is performing well, that we attain Congress’ maximum employment objective.
I am pleased with the progress we have made, but there is further to go, and we are committed to making sure that we stay on
that course of further improvement in the labor market.
And it won’t right every disadvantage that workers face, but it
has resulted and will continue to result in broad-based gains for all
groups in the workforce.
Mr. HINOJOSA. My time has run out, and I yield back.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, Chairman of the House Foreign Affairs Committee.
Mr. ROYCE. Thank you, Mr. Chairman.
Chair Yellen, it’s good to see you. Thank you for being here.
The latest stress-test scenario that was published by the Fed includes this scenario where the rate on 3-month U.S. Treasuries
drops below zero from the second quarter of 2016 through 2019.
And I recognize that this in no way predicts any future action
here. As a matter of fact, CCAR announced specifically in the document there that this scenario does not represent a forecast for the
Federal Reserve.
Nonetheless, this timing is interesting because it comes at a time
when the European Central Bank and the Bank of Japan have
both instituted these negative interest rate policies.
So the question I was going to ask you—and let me make one
other point. It may suggest that the Federal Reserve is not opposed
to reducing its target rate below zero, should economic conditions
warrant, and may be employing the stress-test process as a tool to
consider its possible impacts. That strikes me as maybe the reason
you deployed it in the scenario.
You told the committee in November that if the economy were
to deteriorate in a significant way, potentially anything, including
negative interest rates, would be on the table.
And I remember those remarks were echoed in January by New
York Fed President Bill Dudley.
So assuming for a minute that the Fed figures out this question
about the legal authority, do you still believe that negative rates
are a tool in the toolbox? And can we assume that the Federal Reserve would not include this scenario in a stress test if, in fact, it
were not a potential future action?
Mrs. YELLEN. Let me say that was not what motivated the inclusion of this scenario in the stress test. We are in an environment
where, as you pointed out, a number of the ECB, other European
central banks, and the Bank of Japan, have gone to negative rates.
Through much of Europe, and in Japan, interest rates are negative way at the yield curve. And we have had periods of market
stress, where we see a flight into U.S. Treasuries as a safe haven,
and the scenario that we ask banks to look at is one in which
Treasury bill yields go negative.
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This is something that could potentially happen without the Fed
actually setting negative interest rates. It is something that could
happen, and we have seen it happen for limited periods of time in
stressful situations.
Mr. ROYCE. Let me ask a clarifying point—
Mrs. YELLEN. But—
Mr. ROYCE. —because it has been kicked around since 2010, the
possibility of the Fed maybe setting negative interest rates. Right?
Mrs. YELLEN. Well, yes.
Mr. ROYCE. Quick question on looking at the Fed authority, you
haven’t taken a serious look at the Fed authority until now, while
it was kicked around then and you do the scenario in the interim?
Mrs. YELLEN. Back in 2010 when we were looking for ways to
consider—to add accommodation, to have a toolkit available, it is
something we looked at. We got only to the point of thinking that
it wasn’t a preferred tool.
Mr. ROYCE. Right.
Mrs. YELLEN. We were concerned about the impacts it would
have on money markets. We were worried that it wouldn’t work in
our institutional environment. And we thought that zero was really
the effective or very—
Mr. ROYCE. I got it.
Mrs. YELLEN. —just very little was—could be gained.
Mr. ROYCE. Let me ask you, then, really quickly—
Mrs. YELLEN. We would—in the spirit of prudent planning—
Mr. ROYCE. —right. Yes.
Mrs. YELLEN. —it is something that, in light of European experience, we will look at, we should look at, not because we think there
is any reason to use it but to know what could potentially be available.
And it isn’t just a question of legal authority. It is also a question
of, could the plumbing of the payment system in the United States
handle it? Is our institutional structure of our money markets compatible with it? We have not determined that.
Mr. ROYCE. Let me just say that I think that the central banks
in Japan and Europe are trying to overcompensate for irresponsible
fiscal policy. I think that is what put them in this position.
Can we avoid the same mistake here in the United States if we
get our fiscal house in order? In other words, do you agree that if
we address the long-term structural problems with soaring mandatory spending, we would decrease the potential need for monetary
policy actions that reverse course on interest rates?
Mrs. YELLEN. I think it is certainly desirable and important for
the long-run stability and growth of this country to take the measures that you have suggested and evaluating the stance of fiscal
policy. It is something that affects our monetary policy options.
Mr. ROYCE. Thank you, Chair Yellen. Thank you very much.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. SCOTT. Chair Yellen, thank you for being here. Chair Yellen,
you know I have a lot of respect for you.
Mrs. YELLEN. Thank you.
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Mr. SCOTT. But I very vehemently disagree with you when you
say that you can’t target unemployment.
Let me just say this: It is very important for everyone to know
that you have an equal mission. Part of that mission, one half of
it, is to curb inflation. But the other half is unemployment.
And so just as surely as you go and you target inflation with
movement of your interest rates, surely you have to understand
that you have the same authority to deal with the unemployment.
Now, let me tell you why this is important, Mrs. Yellen: Nobody
is suffering from unemployment like the African-American community. And they are suffering from that because of the very laissezfaire attitude that the Fed historically has dealt with just employment or unemployment altogether.
When you look—yes, we can crow about a 4.5 unemployment
rate. Do you know what the unemployment rate is for AfricanAmerican men between the ages of 18 and 37? It is 36.5 percent
unemployment. And in some communities like Chicago, Baltimore,
Atlanta, Houston, any of these big cities, it is hovering at 50 percent.
When you have this devastating situation, there is nobody else—
there is no other agency that has the mandate to deal with it as
the Fed. Now, in order to deal with it, you have to look at the economy like it is a wheel. The economy is a wheel.
And why is it that we have this high unemployment rate among
African-American young men? And African-American women in
that same age group is 26 percent. So why is it that we can’t? And
a part of that reason is because the Fed has historically
downplayed unemployment.
Never in the history of the Fed have you even seen fit to have
an African-American president of a regional Federal bank for the
Federal Reserve. That is a part of the reason. We are not even a
part of the conversation.
So my whole point is that I want the Fed—nobody is better
equipped to handle this rigid unemployment facing the AfricanAmerican community in that most pliable age group. That is the
child-producing age group, 18 to 37.
Can you imagine if that was the employment rate of 37.6 percent
of white young men in that age group? All hell would be breaking
loose right now to do something about it.
We need that same compassion from you. When you look at the
sectors of the economy that are growing—transportation, energy,
agriculture business, health care, construction, rebuilding the infrastructure, manufacturing—we need an advocacy from you to say
automatically, there must be on-the-job training programs for African-Americans in this hard group to go into these areas and earn
as they learn.
In agro-business, we have 1890s colleges, 19 of them, whose authority and mandate through the Farm Bill is to take the money
that we give them through the Farm Bill and spend in teaching,
research, and extension. Why not create the other spending category for scholarships and loan forgiveness, students who will go
in and take advantage of these job openings in agriculture and
business?
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All I am saying is that, please, we have to get the Fed to get off
the dime and put the issue of African-American unemployment on
the front burner. That is the core of all of the domestic issues that
we are facing. And that is the child-bearing group. What are these
fathers to do? What is there for them?
That is why we have so many of the situations in Baltimore, in
Chicago, and in other places, and it leads to a straight pipeline to
why we have 1.2 million of them sitting in the prisons. Would you
help us with that?
Mrs. YELLEN. Congressman, I—
Mr. SCOTT. I would love to work with you on it.
Mrs. YELLEN. —want to assure you that we recognize how serious the problems are that you have discussed, and we take our employment mandate extremely seriously and have been doing everything that we can to promote a stronger labor market that will benefit African-Americans.
Mr. SCOTT. Would you really consider getting an African-American, for the first time in history, to be a regional president of a
Federal Reserve bank for the first time in history?
Mrs. YELLEN. Absolutely. It is our job to make sure that every
search for those jobs assembles a broad and diverse group of candidates, and I regret that there hasn’t been an appointment of an—
Mr. SCOTT. Thank you, Mrs. Yellen.
Chairman HENSARLING. The time of the gentleman has expired.
Mr. SCOTT. Thank you, Mr. Chairman.
Chairman HENSARLING. The Chair now recognizes the gentleman
from Florida, Mr. Posey.
Mr. POSEY. Thank you, Mr. Chairman.
Madam Chair, the number one thing I hear from my local community banks and credit unions is the need for regulatory release.
That is not news to you, obviously, either. And these financial institutions provide critical services to our communities, and they are
worried that the overregulation is hurting not only their ability to
provide those services, but eventually is clearly leading to increased industry consolidation.
What do you consider to be the negative consequences, if any,
that result from consolidation, and the effects on the local and national economy?
Mrs. YELLEN. I think community banks play a vital role in supplying credit to groups of borrowers whom larger banks often would
not be able to serve. And that is a vital role in all communities
throughout the country, so we want to see those banks thrive, and
are very focused on ways that we can reduce the burden on those
banks.
I mentioned earlier some of the things that we have tried to do
to reduce the burden, and we will continue looking through the
EGRPRA process, and by the regular meetings and contact that we
have with community bankers, to address the burdens that they
face and look for ways to simplify regulation and reduce burden.
Mr. POSEY. Madam Chair, do you think that relationship lending
is important?
Mrs. YELLEN. It has been very important often for community
banks in the kind of business that they do, so yes.
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Mr. POSEY. Just a quick follow up: Can you identify some areas
of priority at the Fed for reducing regulatory burdens on community banks?
Mrs. YELLEN. Yes. We have been focusing, for example, on the
duration of our on-site reviews and looking for ways to have our
examiners spend less time on bank premises. We have been looking
at ways and have simplified and tried to tailor our pre-examination
requests for documentation.
We have been conducting extensive training for examiners to
make sure that our guidance is properly interpreted and applied in
ways that are consistent. We have a number of fora in which we
try to help community bankers understand what new regulations
or proposals are relevant to them and which ones are not intended
at all for their organizations.
As I mentioned, the EGRPRA process is ongoing, and we have
been holding fora around the country to hear the concerns of banks
with regulatory burden and will take all of the steps that we possibly can to address the concerns that surface.
We meet regularly with community bankers through an organization called CDIAC, which is composed of representatives from
each of the 12 Federal Reserve districts. They come to the Board
and we meet with them twice a year, the full Board of Governors,
to discuss their concerns, and we follow up on what we hear.
Mr. POSEY. Thank you.
Finally, this week the House is considering legislation that would
require the Administration to put forth a detailed plan to reduce
the national debt whenever the debt limit is increased—a commonsense concept, I believe. We also just received the President’s budget request, which would, in the face of a $19 trillion—we just
passed the $19 trillion mark in the debt clock—increase spending
by $2.5 trillion.
When the President took office, the national debt was roughly
$10 trillion. When he leaves office, the debt is expected to have
doubled to about $20 trillion. You have also voiced your concerns
about the impact of failing to raise the debt limit, failing to pay our
bills, citing the impact it would have on the economy.
I don’t disagree, but I am curious, do you have similar concerns
about the impact on the economy of failing to address our national
debt? How much debt do you think is too much?
Mrs. YELLEN. I think if you look at the path that the U.S. Fed
is on under current policies, it will rise from the present level to
levels well above 100 percent of GDP and continue rising more or
less indefinitely. And wherever you draw the line, you have to conclude that is an unsustainable economic situation. So I think it is
essential that Congress address this longer-run budget deficit
issue.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr. Green,
the ranking member of our Oversight and Investigations Subcommittee.
Mr. GREEN. Thank you, Mr. Chairman.
I thank Chair Yellen for appearing today, as well.
Mr. Chairman, Chair Yellen and, of course, Ranking Member
Waters, I want you to know that there has not been some sort of
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conspiracy among Congressional Black Caucus members to bring
up this issue of black unemployment, although I think we do talk
about it among ourselves quite regularly.
But I do believe that a basic premise that may be of help to us
is the notion that, ‘‘In the beginning was the Word.’’ And not
enough talk takes place among those who have the power to influence public policy with reference to African-American unemployment. To this end, I am concerned, and would ask if you have, in
your statement, given a specific reference to African-American unemployment in the statement that you made today?
I apologize if I missed it, but was there a specific reference to African-American unemployment?
Mrs. YELLEN. I referenced in the answer to a previous question
the very high rates of unemployment of African-Americans that
persist even with the current aggregate unemployment rate.
Mr. GREEN. If I may, let me share this thought with you: If it
is—and I believe you are in agreement that it is a serious problem—not just a problem, a serious problem.
Mrs. YELLEN. I certainly agree with that.
Mr. GREEN. If it is a serious problem, I would ask that you make
it a part of your actual statement that you present, and that you
publish it, and that you continue to say to those of us who can
make a difference—and we should be able to make the difference
here in Congress; we have responsibilities here to focus as well—
but if you would make it a part of your statement, and if you would
publish this, I think it can have a meaningful impact on policymakers up and down the line.
So just a small request, but I think it can make a really big difference, so I am going to ask that you do this.
Mrs. YELLEN. I am certainly open to doing so. I will certainly—
Mr. GREEN. Thank you.
Now, let’s move to the Taylor Rule for just a moment. You have
indicated that the Taylor Rule would be a grave mistake and that
it would be detrimental to the economy and the American people.
Could you, in about 1 minute, give some examples or an example
of how it would be detrimental to the economy? That is a sort of
a nebulous term and I think you should provide some clarity.
Mrs. YELLEN. Sometimes, it provides recommendations for what
monetary policy should be that clearly overlook important circumstances, and—
Mr. GREEN. If I may, Madam Chair, would you kindly explain
the impact that it will have on the economy? What would the impact be if it causes us to do something inappropriate? And I will
let you decide what is inappropriate.
Mrs. YELLEN. Either it would have us set a monetary policy that
would result in much higher unemployment than would be desirable or, alternatively, there could be circumstances in which it
would recommend an accommodative policy that would result in extremely high inflation.
Now, I would say right now, as an example, the Taylor Rule
would recommend an overnight short-term interest rate that would
be close to 2.5 percent, and I think in light of the slow growth in
the U.S. economy and the fact that we have needed to hold the
Federal funds rate for almost 7 years—for 7 years at zero to
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achieve the progress that we have made, that setting it at the level
that it would now recommend would be highly damaging to the economic situation.
And we tried to provide some analysis in the monetary policy report we submitted about what—why that is, and in particular this
idea that the neutral Fed funds rate, because of the damage from
the financial crisis—
Mr. GREEN. I regret that I must reclaim my time because I have
one additional thing that I must say. I appreciate your commentary
and I think that a good many people have the point.
But I want to say this: We have some people who are visiting
today. I don’t want any response from them, but I want to acknowledge their presence because they are concerned about these wages.
Now, they are concerned about wages across-the-board, especially
as they impact working people, people who are on salaries, people
who make minimum wage.
And it is our desire to see policies that will have greater employment, greater opportunities, but also policies that will target those
who are hurt the most.
I thank you, Mr. Chairman. I yield back.
Mr. MESSER [presiding]. The gentleman’s time has expired.
The Chair now recognizes the gentleman from Pennsylvania, Mr.
Rothfus, for 5 minutes.
Mr. ROTHFUS. Thank you, Mr. Chairman.
Welcome, Chair Yellen.
I want to talk briefly about custody banks, which you know follow a different business model from other financial institutions.
Custodians do not make consumer loans or engage in investment
banking, and for these reasons pose relatively little credit risk. I
understand that custody banks, whose customers would include, for
example, pension funds with millions of beneficiaries, are finding
it increasingly difficult to provide their core custody services, especially accepting large cash deposits. And this could worsen under
a period of stress.
One of the main reasons for this appears to be recent regulatory
reform, such as the supplementary leverage ratio known as SLR.
Custody banks typically place cash received on deposit with the
Federal Reserve. This is cash that comes from pension funds, endowments, municipalities, and other clients.
However, the Federal Reserve’s supplementary leverage ratio
does not recognize the essentially riskless nature of Fed deposits or
the necessity of these placements by custodians. This may cause
the leading custody banks to reject a customer cash deposit.
My question is: Is the Federal Reserve aware of the impact that
this may be having on custody banks? And if so, what do you propose to do about it?
Mrs. YELLEN. This is something that was considered, what is the
appropriate treatment of central bank deposits, when the supplementary leverage ratio was adopted. And the decision was made at
the time that the leverage ratio is not our main capital tool, but
a backup capital tool that is intended to, in a crude kind of way,
base capital requirements on the overall size of a firm’s balance
sheet, and that for that reason it should be included.
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We have more recently put in place capital surcharges that apply
to the eight largest U.S. banking organizations, including two custody banks. And it is likely that once those are in place, they will
become the binding capital requirement. But—
Mr. ROTHFUS. I would encourage you to take a look at it because
it is an issue for the banks.
Mrs. YELLEN. We have heard of the problem, and I will address
it.
Mr. ROTHFUS. As you know, Chair Yellen, the Bank of Japan recently announced that it would implement a negative interest rate
policy in an effort to increase spending and investment and spur
growth. The decision follows close on the heels of the European
Central Bank’s announcement that it would also launch additional
monetary stimulus in March, and economists have predicted that
Sweden, Denmark, Norway, Canada, Australia, and China may follow suit.
In a recent editorial in The Wall Street Journal, William Poole,
the former president of the Federal Reserve Bank of St. Louis, argued that these sorts of monetary policy gimmicks will not create
their intended effects and instead they will only serve to divert attention from the actual structural problems that have plagued
growth in the United States and around the world over the last
decades, namely regulatory burdens and tax policies that serve to
constrain business investment and long-term growth.
What do you say in response to Mr. Poole?
Mrs. YELLEN. I agree that there are structural factors that have
restrained U.S. growth and also been responsible for rising inequality in the labor market. And it is important to take steps to address those problems. They are steps that are in the domain of
Congress.
But it is important for the Fed to try to achieve its mandate of
ensuring a state of the labor market where people who want to
work are able to find jobs, where there are a sufficient number of
them.
And, given the stressed situations that exist in Europe where
there remains very high unemployment, and in Japan where inflation has for well over a decade undershot their inflation objective,
it is a tool that has proven useful to them.
Mr. ROTHFUS. I want to talk a little bit—you testified earlier that
over the past number of years, the Fed kept the Federal funds rate
at exceptionally low levels. You testified that even with this ‘‘exceptional’’ strategy, the economy achieved only 2 percent growth. And
you added that ‘‘The economy is being held back by headwinds.’’
I am wondering if any of these headwinds are manmade, or, to
borrow a phrase, anthropogenic here in the United States? And I
could identify some: the Affordable Care Act; a Wall Street reform
bill that missed the mark, frankly; EPA regulations.
And these headwinds have hit folks in my district, like a mom
who now has to pay $400 for allergy medicine for her kid when she
used to pay $10; or the coal miner I talked to last week who is taking care of a 5-year-old, a 3-year-old, and a 1-year-old and won’t be
able to pay for his mortgage.
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And I just wonder, when the economic history of this decade is
written, are they going to say that the Fed tried to do with monetary policy what should have been done with fiscal policy?
I yield back.
Mrs. YELLEN. I think it is also important for Congress to address
structural factors that are holding down growth.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver, ranking member of our Housing and Insurance Subcommittee.
Mr. CLEAVER. Thank you, Mr. Chairman.
Thank you for being here, Madam Chair.
Following through on some things that were said earlier, I have
a bad knee and I have had it operated on 11 times, but the weird
thing is that whenever I go to the hospital for another surgery,
they never operate on my shoulder or my fingers. For some strange
reason, they always operate on the same knee that has been hurt.
And I know that is weird.
The issue is we can’t address unemployment in a certain sector
by saying we are going to operate on the whole body and it gets
better. That has never been true.
Now, I differ a little from my colleagues in that I don’t think it
is your responsibility. I don’t think the Fed has the responsibility
even with the dual mandate. I think it is to be handled legislatively, and I don’t think we are going to get that done.
The other thing I have to say is that—and it is been said, and
every time you come I have to say it because I have to just get it
off my chest, because I do think that we are declaring minority unemployment to be too-big-to-curtail, and that is somewhat troublesome.
But Wall Street and the big six banks are too-big-to-jail. If you
rob a convenience store, you go to jail. If you rob 300 million Americans, you get a cocktail. And I think that is what is creating all
this anger around the country.
I know you don’t run the Justice Department, and I know you
don’t vote on legislation that could address some of these other
issues. But I think we have to say it as much as we can because
I don’t think the world is hearing us.
Now, I would like to yield the remainder of my time to the ranking member of the Financial Services Committee.
Ms. WATERS. Thank you very much, Mr. Cleaver.
As you know, originally I was thinking about dealing with the
question of the subpoena, et cetera. Except if you don’t mind, I am
so focused on all of this money that goes to these too-big-to-fail
banks and trying to understand, number one, not only the fact that
Goldman Sachs got $121 million, JPMorgan $910 million, and that
with the rise in interest rates from 0.25 percent to 0.5 percent, this
will double.
And this money keeps—it is going to the big banks. It is a subsidy to keep them from lending money, and we have this big need
that has been discussed by my colleagues about this high unemployment rate and the lack of creativity and thinking about how we
can deal with this. And these banks, too-big-to-fail, who we are
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finding every day because of the predatory lending, et cetera, are
getting support from the Feds.
Please, please explain that.
Mrs. YELLEN. It is an essential tool that we need to adjust the
level of short-term interest rates. And from the standpoint of the
taxpayer, our payment of those interest on reserves—we have very
large reserve balances. We have $2.5 trillion, roughly, of reserves
in the banking system, as compared with $20 billion or $30 billion
prior to the crisis.
The counterpart of that on our balance sheet is that we hold a
very large stock of assets on which we are earning a substantially
higher rate of return than we are paying to the banks. And that
differential between what we earn on our holdings of long-term
Treasuries and mortgage-backed securities and the 25 or 50 basis
points we pay to the banks, that differential all shows up in the
taxpayers’ pocket. It is money that Congress can use to address all
of the problems that you have discussed. Over the last year, we
transferred $100 billion because of that.
Now, if we don’t pay interest on reserves and must use another
technique to adjust short-term interest rates, likely we will be
forced to greatly shrink our balance sheet in a rapid fashion, and
the total amount of money going from the Federal Reserve to Congress will be significantly diminished. In addition to that, it would
have very adverse effects on the economy.
Ms. WATERS. I want you to know that not only am I concerned,
it looks like we are about to have some bipartisan concern on this
issue.
Mrs. YELLEN. I hear that.
Ms. WATERS. And while I understand the argument that you are
making about the big banks, we cannot feel sorry for them in terms
of the amount of interest rates that they are getting or not getting,
et cetera. We really do have to deal with this issue.
I understand what you are trying to explain by short-term interest rates, but if I may, Madam Chair, let me just say this, that we
have an opportunity with the discount window to allow for loans
from some of these small community banks that they are not getting. And if that money went into the small community banks, they
would be able to do job creation and to support small businesses,
et cetera.
And we just don’t get why they are precluded from doing this,
and increasing the job opportunities in the community, while we
have given the subsidy to the big banks. We just don’t get it.
Chairman HENSARLING. Although I agree with much of what the
ranking member has said, she has long since spent her time.
The Chair now recognizes the gentlelady from Utah, Mrs. Love.
Mrs. LOVE. Thank you, Mr. Chairman.
Thank you, Chair Yellen, for being here today. Chair Yellen, I
am increasingly concerned about the impact of Dodd-Frank regulations on real economy, economic growth, and especially job creation, which I wouldd like to just ask you a few questions about.
If you look beyond the headlines, the headline numbers from last
Friday’s job numbers, and include discouraged workers and the
underemployment, real unemployment remains high, nearly 10
percent. In addition, millions of people have stopped looking for
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jobs. They have dropped out of the workforce, and it is a dynamic
that is driving the Nation’s workforce participation rate to an alltime low at 62.7 percent.
And I want you to know that I agree with my colleague on the
other side of the aisle, Representative Scott, when he talks about
the large number of unemployment with our young Black Americans. Meanwhile, economic growth slowed to just 0.7 percent in the
fourth quarter.
I am concerned the Fed and other financial regulators may not
have a firm grip on the cumulative impact on the real economy of
thousands of pages of the new Dodd-Frank regulations, especially
new capital and liquidity rules. I am wondering if you share some
of those concerns?
Mrs. YELLEN. I recognize that some of the new concerns are burdensome and do raise banks’ cost of financial intermediation. In designing those regulations, we are always trying to achieve a balance between the benefits of creating a sounder and more resilient
financial system that is less likely to be subject to the kind of devastating financial crisis that we had.
We are balancing that against burdens that can raise the cost of
capital or diminish financial intermediation. And we have tried to
strike a reasonable balance, remembering that nothing resulted in
more harm for a longer period of time than the financial crisis that
we lived through, and I think we now have a much safer and
sounder financial system.
Mrs. LOVE. Okay, so another study by the American Action
Forum found that consumer credit availability deteriorated 12 percent to 14 percent since the passage of Dodd-Frank. I am also concerned about the growing number of borrowers unable to access affordable banking—including a lot of borrowers from low-income
areas in my district, which is Sigurd, West Valley. These are hardworking Americans who are turning to high cost and unregulated
online lenders to be able to get the access to the credit that they
need, whether it is for purchasing a car or even starting a small
business. They are finding that their ability to access this type of
credit is unavailable to them.
And so I am wondering if you also share some of my concerns
about credit availability and the higher-cost alternatives?
Mrs. YELLEN. I do share your concerns about credit availability.
And I think it is clear that credit availability has, in particular segments, been diminished. Home loans, mortgages, for example, for
individuals without pristine credit ratings is really difficult, remains difficult to obtain.
In part, we have regulations that are meant to address harms.
I think lending standards were too easy prior to the financial crisis.
We don’t want to go back to lending standards that are so loose
that they lead to the kinds of predatory lending and harms that we
had that took a toll on the economy and on low-income households
in communities. We need to achieve a reasonable balance, and we
are searching for that.
Mrs. LOVE. Being on the Subcommittee on Monetary Policy, I
wanted to ask you just a quick question on monetary policy and
what is happening in Europe and what are the implications. I may
have stepped out of the room; I don’t know if you have addressed
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this. But very quickly, what are the implications of the Federal Reserve and the ECB pursuing divergent monetary policy?
Mrs. YELLEN. The ECB has been addressing high unemployment
and inflation that has slipped very meaningfully below their 2-percent goal by putting in place negative interest rates and large-scale
asset purchase programs.
The United States has done better. We are, among advanced
economies, about the strongest, so we have divergent monetary
policies.
It has put upward pressure on the dollar over a long period of
time, which has harmed manufacturing and net exports. And so, it
has resulted in negative influences on the part of our economy.
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, ranking member of our Financial Institutions Subcommittee.
Mr. CLAY. Thank you, Mr. Chairman.
And thank you for being here, Chair Yellen.
The Federal Reserve has a congressional dual mandate to seek
maximum employment while limiting inflation. To limit inflation,
the Federal Reserve raises interest rates, which slows the economy
by discouraging people from borrowing to buy homes and cars, and
discouraging businesses from investing.
With this reduced demand, businesses will hire fewer workers.
And as a result, workers will have less bargaining power, meaning
they will be less likely to get pay increases. The decision to raise
interest rates is based on the assessment of the Federal Open Market Committee of the Federal Reserve about whether inflation or
unemployment poses a greater threat to the American economy.
Unfortunately, the members of the FOMC largely come from the
financial industry and, as a result, tend to be more concerned
about inflation than the population as a whole, and less concerned
about unemployment. So how do we square that, Madam Chair?
Mrs. YELLEN. First of all, I want to say that the committee is
deeply focused on unemployment. We have two objectives, not one:
maximum employment; and price stability, which we have interpreted as a 2 percent inflation objective.
And I would really take issue with the idea that we are not focused on achieving our maximum employment objective. We are.
Monetary policy has been highly accommodative. The Fed funds
rate was at zero for 7 years. And we also have a large balance
sheet that has provided a lot of additional accommodation.
So we are not talking about tightening monetary policy, or a
tight monetary policy. We have an economy that now has made
substantial progress, creating 13 million jobs with the unemployment rate down to 4.9 percent.
We took one small step to raise short-term interest rates but continue to have an accommodative monetary policy, which we see as
consistent with further progress in the labor market. So it is not
that we are trying to reverse progress. We continue to see, even
with modest increases and interest rates, further progress, and we
want to achieve it precisely because we think that although the unemployment rate is at levels that are probably normal in the longer
run, there remains slack in the labor market. We want to see more
progress.
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Mr. CLAY. Although—not to cut you off—we could get to 4 percent unemployment. But, look, while we are pleased to see that
new jobs are continuing to be created in our economy and to learn
that the unemployment rate last month fell below 5 percent broadly, these positive signs may lead some to ignore the persistent economic challenges faced by African-Americans in this country.
The current unemployment rate for African-Americans, for example, remains at nearly 9 percent. It is a commonly accepted view
that access to gainful employment is one of the most important factors in supporting economic mobility and improving health outcomes. It is also widely known that in areas with higher rates of
unemployment, there is a lack of consumption, increased crime
rates, reduced school funding, and reduced political influence.
Please discuss with us any specific actions that you have personally taken or directed your staff to take to identify solutions to help
remedy the historical and continued racial disparity between employment opportunity for African-Americans and Whites.
Mrs. YELLEN. Our staff produces statistics that are among the
most important in documenting and highlighting disparities in the
economic situations in terms of assets and income by demographic
groups. And I have personally given speeches highlighting those
statistics. So our staff certainly looks at and does work to document
those disparities.
And in our community-development programs and work we discussed earlier that relates to the CRA, that is an area in which we
have the capacity to try to identify particular programs that will
be helpful in low- and moderate-income communities that suffer
from special disadvantage in the labor market, and to try to identify programs that work that we encourage to be adopted on a
broader scale—
Chairman HENSARLING. The time of the gentleman has expired.
Mr. CLAY. I would like to work more with you in that area.
Chairman HENSARLING. The Chair now recognizes the gentleman
from North Carolina, Mr. Pittenger.
Mr. PITTENGER. Thank you, Mr. Chairman.
I would like to just welcome those who have come today with
your T-shirts on: ‘‘What recovery?’’ ‘‘Let our wages grow.’’ ‘‘Whose
recovery?’’ These are very pointed and clear statements, and I really commend you for being here and seeing this process.
Yes, the reality is that this recovery is the most dismal, slow,
tepid recovery we have ever had from a recession in recorded history. And we look at the realities of this recovery. This last report
of new jobs was only 150,000 new jobs. We have a 2 percent dismal
economic growth.
Frankly, the demographic group that is the lowest recovery is the
low-income, minority people in this country. That demographic
group has moved up the ladder less than any other group, albeit
an intense effort, well-intended, I am sure, by the Obama Administration, by Chair Yellen.
But through it, what we have seen is very accommodative monetary policy; we have seen a high regulatory environment; we have
seen Obamacare; we have seen the highest corporate tax rates in
the industrialized world. All of this has achieved this dismal recovery.
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And I would say to you that the contrast is back in the 1970s,
we had the same type of dismal economic outlook—high inflation,
high unemployment. And yet, what happened? We reduced the regulatory environment, we reduced the tax burden, and the economy
took off.
We were creating 300,000, 400,000, 500,000 jobs a month. One
month, a million jobs. We were growing up to 6 percent.
It seems to me that—logic may come in—perhaps well-intended
policies have had an adverse outcome of what was ever intended.
And, Chair Yellen, I commend you for your work and what you
have sought to do. But it seems to me that these accommodative
policies have contributed to where we are today.
I would say, Chair Yellen, I would like to thank you in your remarks that you made reference to the fact that there are those who
are available to work but not actively searching for work. You have
also made reference to those who are working part-time and can’t
get full-time jobs.
Now, these numbers are not included in the current unemployment rate of 4.9 percent. So in reality, we are really talking around
10, 11, 12 percent are the stats that I have seen of real unemployment.
Would that not be correct, Chair Yellen?
Mrs. YELLEN. Broader measures of unemployment are significantly higher. For example, a definition that the BLS refers to as
U-6 that includes both of the groups you mentioned—involuntary
part-time—
Mr. PITTENGER. The point I want to make is—
Mrs. YELLEN. —and discouraged—
Mr. PITTENGER. —the real numbers are much higher than 4.9
percent. So it is really disingenuous to say to the American people
that these policies have contributed toward 4.9 percent unemployment.
In the real world, where people are living—and we have some of
them here today—it is far less. And I think that should be understood and absorbed by these wonderful people who have come, that
the types of policies that have been enacted, been enforced this last
7 years, have worked against your interests.
What grew the American economy were small businesses who
could go get loans. That entrepreneur who has been the lifeblood
of our economy can’t go to a bank today to get that new loan because of compliance requirements. They are the people who create
those new jobs.
And on top of that, you have the burden of the obligations of
Obamacare. In small business, what are they doing? They are cutting jobs so they don’t have to comply.
What will grow your economy, what will create the jobs that you
earnestly want, is an open market where companies can grow and
not have this intense regulatory environment, whether it is
through monetary accommodative policy or through onerous regulatory environments placed upon them. So I want to encourage you
with that reality, that we can find that type of opportunity economy.
I would say to you, Chair Yellen, that the regulatory rulebook—
it has been in a constant state of revision for the last 6 years. Can
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you see the benefit, then, as a result of what we discussed, in pausing this process in order to assess the cumulative impact that these
regulations are having on the economy before we proceed further?
Mrs. YELLEN. We have several regulations that we intend to put
out during this coming year. And in terms of the list of what was
mandated by Dodd-Frank, we have made substantial progress.
Mr. PITTENGER. Consider that outcome. We are saying that we
think it needs to be done.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair wishes to remind Members that we expect to excuse
the witness as close to 1:00 p.m. as possible. The Chair anticipates
getting through perhaps four more Members.
The Chair now recognizes the gentleman from the Super Bowl
champion Denver Broncos, Mr. Perlmutter.
Mr. PERLMUTTER. Thanks, Mr. Chairman.
And, Chair Yellen, thank you, as always, for being here today.
I was going to go a little off topic with my first question, to say,
how about those Broncos, but—
Mrs. YELLEN. Way to go.
Mr. PERLMUTTER. —the Chair already beat me to the punch.
But I do want to talk about the overall conversation today, and
I want to thank you and I want to thank the Federal Reserve. I
want to start with the chart that we have on the board, which
shows what happened at the end of the Bush Administration, when
we went to 10 percent unemployment, and under Obama, we are
down to less than half of that.
Okay? So that is your chart number two in your monetary report.
And all the Republicans don’t want to let the facts get in the way
of their rhetoric because then chart number four shows that after
some time—and that is on page five, Chair—wages are beginning
to move up after we started getting people back into the job market.
Chart six, oil prices way down. Chart seven, inflation even. Chart
13, wealth-to-income—disposable income up ‘‘a robust 3.5 percent.’’
Chart 15, household debt service, way down. Chart 20, mortgage
rates, down. Figure one on page 37, unemployment down looking
at the long-term, and core price inflation, even.
Those are your charts. Those are the facts.
Now, have wages gone up as much as we would like to see? No.
But we had to get a lot of people back working. Now, we are starting to see them move.
So the Chair went through a whole list of economists, because
obviously he didn’t have a lot of questions; he wanted to list a lot
of names. And there were a couple of guys there with the Hoover
Institute.
So Herbert Hoover, grand old Republican President who led us
into the Great Depression. Not the kind of economy I would like
to see, all right?
George Bush, we go from 5 percent unemployment to 10 percent
unemployment. We lose millions of jobs.
Under Barack Obama, back down to 4.9 percent. In Colorado, we
are at 3.5 percent.
So I just want to thank you, and I want to thank the Administration for getting this economy back on track.
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Now, can we do better? You bet.
So how would you suggest that we do better? How can this economy get moving so that the folks here can see some real growth
in wages, which I think are beginning to appear, but what would
you suggest?
Mrs. YELLEN. Our objective in terms of what we can do is to try
to make sure that the picture that you have put up here shows continuing improvement in the labor market.
I agree with you, I would say the signs of wage growth increasing—they are tentative at this point. There are some hopeful signs,
but I think if the labor market continues to progress we are very
hopeful we will see faster progress on wages.
And we will try to keep that progress going. That is our objective. Inflation is running under our 2-percent objective. I expect
that will move up over time, as well, with appropriate policy.
But I appreciate your saying that some of the burden should also
be on Congress and others, because there are so many problems in
the labor market and particular groups—we have talked a lot
about African-Americans and the problems they face.
The Fed, of course, has a role to play, but job training, educational programs, programs that address other barriers in the
labor market, I think this is Congress’ job to address.
Productivity growth is very low. I think Congress has always had
a role in supporting basic research, making sure that the infrastructure of our country is adequate and putting in place programs
that make sure that training and education are widely available.
Mr. PERLMUTTER. All right. Let me move to a soft spot that I
think exists in the economy, and you and I have talked about it before, and that is on oil and gas and the fact that the Saudi Arabians are pumping like crazy into what appears to be an oversupplied market, causing the price to drop a lot, which in some
ways is very good for all of us because saves us $10, $15, $20 a
week or a month in our price at the pump.
But it also is causing some job losses in the manufacturing sectors, the oil and gas, obviously, transportation. Can you comment
on what the Fed is doing or reviewing when it comes to oil and gas
production?
Mrs. YELLEN. We are taking account, as you said, of the fact that
the energy sector is very hard-hit. We are losing jobs there. But
with respect to employment, it is—although there really are very
severe losses, it is a pretty small sector of the workforce overall.
We are seeing massive cutbacks in drilling activity, and that is
rippling through to manufacturing generally, where output is depressed. So, it is having negative consequences.
On the other hand, if you look at the difference in oil prices now
relative to 2014, for the average American household, we are looking at a savings of $1,000 a year.
And that is boosting consumer spending. And we have these two:
a negative force, positive forces. We are trying to factor all of that
in as—
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren.
Mr. HULTGREN. Thank you, Mr. Chairman.
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Thank you, Chair Yellen, so much, for being with us today.
As you may know, the Financial Crimes Enforcement Network,
or FinCEN, is in the process of finalizing some new requirements
to prevent terrorism financing and money laundering under its
beneficial ownership rules.
While I fully support efforts to curb terrorism financing, it seems
the application of FinCEN’s rule to certain non-bank subsidiaries,
such as premium finance companies, may not be appropriate.
I understand that my staff is already talking with the Fed about
this issue, but wondered if I could get a commitment from you
today about trying to find clarification for if these rules apply to
premium finance companies that are subsidiaries of banks?
Mrs. YELLEN. We would be happy to work with you on that.
Mr. HULTGREN. Thank you so much.
When you testified before the committee back on November 4th
of 2015, we discussed the impact of the supplementary leverage
ratio on custody banks. At that time, you described it as a kind of
backup ratio that works as a backup to risk-based capital standards.
When responding to questions from Congressman Rothfus earlier
today, you stated that, ‘‘When the supplementary leverage ratio becomes effective, that it will likely become the binding capital requirement for some custody banks.’’
I understand some of these custody banks already feel they must
discourage customer cash deposits. As you know, these institutions
have highly liquid, low-risk balance sheets that support client
needs. In light of this concern, will the Fed consider adjusting the
capital requirements for excess cash deposits held with the Federal
Reserve?
Mrs. YELLEN. I am not sure if they will become the—if the supplementary leverage ratio will become the binding constraint or
not. I didn’t intend to say that it is the binding constraint. There
will also be so-called SIFI capital surcharges that will come into effect that may make those binding constraint.
This is a matter that I understand what the issue is. We can look
at it and discuss it. It was debated at the time. There were considerations on both sides and a decision was made to include Fed deposits.
It is something we can look at, but it was considered.
Mr. HULTGREN. I hope we are able to discuss that and also look
and see if it is necessary for us to have congressional intervention,
as far as legislation, to change the rule.
Let me move on. I am pleased by the news that the Federal Reserve has been engaged with the insurance industry on capital
roles appropriate for the business of insurance.
What are your thoughts on how that process is proceeding, and
when might we suspect to see proposed rules from the Federal Reserve released for public comment?
Mrs. YELLEN. We are working very hard on that. I don’t have an
exact timetable but we are expecting to go out with, for each of the
firms, a notice of proposed rulemaking, so the public can react to
these rules. The staff is fairly far along in developing these, so my
hope is that it won’t be too much longer.
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We have worked hard to have the appropriate interactions with
the firms and other regulators to do this right.
Mr. HULTGREN. I appreciate your work on that. From Illinois, insurance is important. We have some wonderful companies there,
but I know they have questions, and I appreciate the iteration and
hopefully the resolution relatively quickly.
One last question: Will the Federal Reserve issue one proposed
capital rule for all insurers it supervises? And if you could explain
why or why not?
Mrs. YELLEN. I am not positive. I think for the particular SIFIs
that have been designated—Prudential, AIG, and MetLife—they
are likely to be firm-specific rules, but I am not positive. Let me
get back to you on that.
Mr. HULTGREN. That would be great. Thank you. Thanks, Chair
Yellen.
Mr. Chairman, I have an additional minute. I would yield that
back to the Chairman, if the Chairman wants it. Otherwise, I yield
back.
Chairman HENSARLING. The gentleman yields back.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison.
Mr. ELLISON. Thank you, Mr. Chairman, and Ranking Member
Waters.
As we start out, I also want to thank some of the folks who have
joined us for the hearing today. My good friend, Ron Harris, is here
from Minneapolis.
It’s good to see you, Ron.
And I just want to let you know that this active citizenship of
coming to these hearings, watching things, is exactly what is needed in order for this government to function properly. In my view,
this is what democracy looks like.
Thank you all for being here.
Chair Yellen, let me point your attention to the words of Mr.
Narayana Kocherlakota, who was a former Minneapolis Fed chair,
outgoing President of the Federal Reserve Bank in Minneapolis. On
Martin Luther King Day, he wrote a blog and here is what he said
in part: ‘‘There is one key source of economic difference in American life that is likely underemphasized in the FOMC deliberations—race.’’
He went on to say that for the year—he went on to say that he
searched through the transcripts of the FOMC meetings for the
year 2010, his first year on the committee, and a dire year for African-Americans in our labor market, and in that year our total unemployment rate exceeded 9.25 percent every quarter, but for African-Americans, it exceeded 15.5 percent.
Today, now, White unemployment in Minnesota is 2.9 percent as
of December 2015, but Black unemployment is 14.1 percent. And
in Minneapolis, overall White unemployment is 4 percent, but
Black unemployment is a shocking 18.9 percent.
So I say that because this is something that I think needs the
attention of the Chair. I don’t know what constraints you believe
are out there, but race matters when it comes to how people experience our economy.
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And if we don’t discuss it, talk about it, then we won’t ever get
to the heart of the matter as to how to fix it to make equal justice
for all.
I will quote one Kocherlakota one more time. He said, ‘‘As we all
know too well, race matters. The average African-American’s experience with the U.S. economy is different from that of the average
White person’s.’’
So, my question is, what do you make of the commentary from
the previous Minneapolis Fed president? In your view, is there adequate discussion, attention of the economic situation of AfricanAmerican workers within FOMC deliberations?
And if there is not—and I suspect you will say there is not—
what can we do about it? How can we at least focus the committee’s attention on this segment of our fellow Americans?
Mrs. YELLEN. It is, of course, important that we look at different
groups, and particularly those who are suffering the most in the
labor market. And I am surprised that there was no specific mention of race.
In 2010, the unemployment rate was substantially higher than
it was. The committee was very focused at the time on what we
could do to promote a stronger labor market. And I suppose because our tools are not ones that can be targeted at particular
groups in the labor market, it was clear what we needed to do, and
that was to support a stronger labor market more generally.
Mr. ELLISON. But, Chair Yellen, forgive me for the interruption.
I definitely think that—I get that part. But I would rather talk prospectively, because the past is what happened and there is no
changing it.
How can the Fed Chair get the FOMC to say, ‘‘Wait a minute,
not all Americans, particularly African-Americans, are experiencing
this upsurge in economic activity?’’
For Black Americans, we are still in the midst of a very serious
depression-recession. What can we do about it, and what—and
again, I am not here to say—to wag my finger about what happened. We know what happened and it wasn’t right. But in terms
of what is happening now and what can happen, what can you tell
me?
Mrs. YELLEN. I think you are right that we should pay adequate
attention to how different groups are faring in the labor market.
We have made clear that we don’t focus on any single statistic, that
the unemployment rate is only one measure of what is happening
in the labor market, and it is appropriate for us to really try to do
a much more detailed assessment of where things stand and what
we should be aiming for.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair anticipates calling upon two more Members, Mr. Barr
and Mr. Delaney, and then excusing the witness.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr.
Mr. BARR. Thank you, Mr. Chairman.
And, Chair Yellen, thanks for being back before us.
The last time you were here, we talked about a qualified CLO
concept, and you were kind enough to respond to that question in
writing. I want to thank you for that, and I want to particularly
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51
thank you for recognizing that the qualified CLO concept could be
considered a positive development in the market.
And I would like to continue our discussion about the role that
regulation could very well play in terms of being a source of economic instability, particularly in our capital markets.
The Basel Committee recently finished a rule in January that increases the capital held against securitization exposures in a bank
trading book by up to 5 times the amount already required under
Basel III, as well as the final TLAC rules.
One industry study suggests that trading in U.S. asset-backed
securities will become uneconomical if the rule is not tailored to fit
the U.S. marketplace.
If it is uneconomical to act as a market-maker for commercial
mortgage-backed securities or residential mortgage-backed securities, auto loans, credit cards, collateralized loan obligations, then
banks will pull out of the ABS market, which represents a $1.6 billion source of consumer lending, or 30 percent of all lending to U.S.
consumers.
So my question to you, Chair Yellen, is how will the Fed ensure
that the final rule will be tailored to fit the U.S. market, which is
the most liquid ABS market in the entire world?
Mrs. YELLEN. I will have a careful look at that. I am not familiar
with all of the details of the Basel proposal.
But anything we implement in the United States—there is nothing automatic that is implemented in the United States, and we
will have a careful look at what the impact would be.
Mr. BARR. I appreciate you doing that. And I continue to urge the
Fed, and you in particular, as a member of FSOC, to look at government regulation as a source of economic instability.
To that end, we are told by many of the regulated bank holding
companies that there is no updated organizational chart within the
Fed. And so my question would be, can you share with us—or can
your staff share with us—a detailed organizational chart with the
names and titles of the Bank Supervision and Regulation Division’s
full professional staff?
Mrs. YELLEN. I think so.
Mr. BARR. I am told that whatever organizational chart you have
is very dated, and so—
Mrs. YELLEN. Yes—
Mr. BARR. —we can’t even—many of the folks can’t even ask you
questions.
Mrs. YELLEN. —yes. I don’t see any reason we can’t—
Mr. BARR. I appreciate you doing that.
Switching gears really quickly to the Consumer Financial Protection Bureau and their funding source, which, as you know, according to the budget overview that the Bureau makes public, transfers
from the Federal Reserve System are capped at $618 million for
Fiscal Year 2015, and the transfer cap is estimated to be $631 million for Fiscal Year 2016.
Given that my time is scarce, if you could just answer the following in yes-or-no responses, that would be greatly appreciated.
Does the Fed approve the Bureau’s budget?
Mrs. YELLEN. We fund the Bureau’s budget.
Mr. BARR. You fund it, but do you approve the budget?
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Mrs. YELLEN. I think the answer is no, but—
Mr. BARR. Right. Can you veto specific allocations requested? No.
Mrs. YELLEN. I don’t think so.
Mr. BARR. Okay. And does the Fed have protocols if the bureau
seeks to transfer more than the cap on its transfers under the formula? Do you have a protocol in place to prevent that?
Mrs. YELLEN. We abide by the law. I need to look at the details
of what our obligations and limits are. I need to look at that more
fully.
Mr. BARR. We would like to know if the—
Mrs. YELLEN. But we certainly have protocols to abide by what
Congress set out.
Mr. BARR. This is the problem we have is that we don’t have appropriations control over the Bureau. And so, they get their funding from you. We would hope that they would at least be accountable to you as the funding source.
Is there any direct oversight of the implementation of the Bureau’s budget by the Fed?
Mrs. YELLEN. No. Our Inspector General has authority both for
the Fed and the Bureau, but the Fed does not have authority over
the budget and spending of the—
Mr. BARR. Thank you. In my last 10 seconds, you have talked a
little bit about the need for Congress to address our long-term debt
and deficit crisis. This seems to me a five-alarm fire.
Given that mandatory spending is 70 percent of the Federal
budget, why isn’t the Fed more aggressively warning Congress that
it must reform mandatory entitlement spending?
Mrs. YELLEN. Every Fed Chair that I can remember has come
and told Congress that this is a looming problem with serious economic consequences. I know my predecessor has; I have on many
occasions; and I certainly remember that Chairman Greenspan discussed with Congress the importance of addressing this.
Mr. BARR. Thank you.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Maryland, Mr.
Delaney.
Mr. DELANEY. Thank you, Mr. Chairman.
And I want to thank you, Chair Yellen, for not only your leadership in general, but also your participation and patience at this
hearing.
I also want to welcome our visitors and guests here today and
thank you for bringing your important message.
We do talk about how our unemployment rate has gone down
substantially, which it has—below 5 percent now. But we all know
that when you get behind those numbers there are really only two
types of jobs being created right now in this country: high-skilled,
high-paid jobs, where you need very, very specific skills and advanced educations to get them; and low-skilled, low-paid jobs.
And what we are not creating is middle-skilled, middle-class jobs,
the kind of jobs that have been the backbone of this country for a
long time and allowed wages to grow and people to raise their families with one job.
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The Chair touched on something very important, which is infrastructure, because there is nothing we can do as a country to help
address that problem more than rebuilding our country.
So if I could ever edit your T-shirts I would say, ‘‘Let our wages
grow, rebuild our country,’’ because I do think it would really make
a difference in raising wages.
But my question for the Chair is—and again, thank you for your
patience—in December, when the decision was made to raise the
Federal fund rates, in your testimony you said that was in part
based on a view that economic activity would continue to expand
at a moderate pace and labor market indicators would continue to
strengthen.
And certainly, based on the top-line data from 2015 and 2014,
where we saw decent GDP growth, improvement in the residential
market, business investments at a decent level—not where we
would like them, but at a decent level—increases in R&D investments, et cetera, but even when you take into consideration the
negatives from the oil and gas sector, the outlook for economic
growth was reasonably solid, and the labor market data that you
were looking at, at the time, must have been good because the January numbers were actually encouraging, not only in terms of unemployment but some of the wage data, as you talked about.
So I guess my question is, a lot has happened since that decision
in the markets, and that tends to change behavior. When you look
at the same data you looked at when you made that decision in December, if you look at that data now, does it change your view as
to your perspective on economic activity, economic growth, and general labor market trends?
Mrs. YELLEN. I think the answer is ‘‘maybe,’’ but the jury is out.
We have continued to see progress in the labor market. Over the
last 3 months, there have been 230,000 jobs per month, averaging
through.
GDP growth clearly slowed a lot in the fourth quarter. My expectation is that it will pick up this quarter.
But on the other hand, financial conditions have tightened considerably, and that can have implications for the outlook.
And what the Committee said in January—we had previously
said that we regarded the risks to the outlook for economic activity
and the labor market as balanced.
Mr. DELANEY. Right.
Mrs. YELLEN. What we said in January is that we are evaluating
and assessing the impact of these developments on the outlook for
both the labor market and activity for inflation and the balance of
risks. And that is what we are doing at this point.
Mr. DELANEY. And when you look, Chair Yellen, at recent data
that you get better than anyone about credit formation and borrowing activities in the markets, are you concerned that there has
been a significant contraction in credit availability based on recent
market activities? And how much does that factor in to your—
Mrs. YELLEN. That is an important factor.
Mr. DELANEY. And have you seen it?
Mrs. YELLEN. Not really at this stage. But what we do see is that
spreads, especially on lower-graded bonds, have widened considerably. Borrowing rates have widened.
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Mr. DELANEY. What about bank lending?
Mrs. YELLEN. And it is not just energy. In our most recent survey
of banks on their lending standards, we have seen a tightening
that is reported in C&I loans, in CRE loans, and that certainly
those loans continue to grow but that is something that bears
watching. It is really those kinds of trends that we need to evaluate—
Mr. DELANEY. And very quickly, as you weigh your decisions, obviously inflation and labor-market participation are critical, overall,
the economic activity is critical. This subcomponent, in other
words, what is happening with credit availability—how important
is that in your decision-making process?
Mrs. YELLEN. What we are trying to do is forecast spending in
the economy. Investment spending and housing are two important
forms of spending. And credit availability factors into our forecast
for both of those portions of the economy. They are not the only factors that matter, but they are a factor that is important, and so we
will be considering those.
And there are a number of weeks before we meet again in
March. There is quite a bit of additional data we will want to look
at. But you have pinpointed exactly the kinds of considerations
that will bear on our thinking.
Mr. DELANEY. Thank you again.
Chairman HENSARLING. The time of the gentleman has expired.
The ranking member is recognized for a unanimous consent request.
Ms. WATERS. I ask unanimous consent to insert into the record
the statement from Financial Innovation Now (FIN) that highlights
the very important work the Federal Reserve Board is doing
through the Faster Payments Task Force, of which FIN is a member.
Chairman HENSARLING. Without objection, it is so ordered.
Chair Yellen, I thank you for your testimony today.
The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness
and to place her responses in the record. Also, without objection,
Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record.
I ask Chair Yellen to please respond promptly.
This hearing stands adjourned.
[Whereupon, at 1:12 p.m., the hearing was adjourned.]
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APPENDIX
February 10, 2016
(55)
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For release at
8:30 a.m. EST
February 10,2016
Statement by
Janet L. Yellen
Chair
Board of Governors of the Federal Reserve System
before the
Committee on Financial Services
U.S. House of Representatives
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February 10,2016
57
Chairman Hensarling, Ranking Member Waters, and other 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.
Current Economic Situation and Outlook
Since my appearance before this Committee last July, the economy has made further
progress toward the Federal Reserve's objective of maximum emplo;ment. And while inflation
is expected to remain low in the near term, in part because of the further declines in energy
prices, the Federal Open Market Committee (FOMC) expects that inflation will rise to its
2 percent objective over the medium term.
In the labor market, the number of nonfarm payroll jobs rose 2.7 million in2015, and
posted a further gain of 150,000 in January of this year. The cumulative increase in employment
since its trough in early 20 I 0, is now more than 13 million jobs. Meanwhile, the unemployment
mte fell to 4.9 percent in January, 0.8 percentage point below its level a year ago and in line with
the median ofFOMC participants' most recent estimates of its longer-run normal level. Other
measures oflabor market conditions have also shown solid improvement, with noticeable
declines over the past year in the number of individuals who want and are available to work but
have not actively searched recently, and in the number of people who are working part time but
would rather work full time. However, these measures remain above the levels seen prior to the
recession, suggesting that some slack in labor markets remains. Thus, while labor market
conditions have improved substantially, there is still room for further sustainable improvement.
The strong gains in the job market last year were accompanied by a continued moderate
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expansion in economic activity. U.S. real gross domestic product is estimated to have increased
58
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about 1-3/4 percent in 2015. Over the course of the year, subdued foreign growth and the
appreciation of the dollar restrained net exports. In the fourth quarter of last year, growth in the
gross domestic product is reported to have slowed more sharply, to an annual rate of just
3/4 percent; again, growth was held back by weak net exports as well as by a negative
contribution from inventory investment. Although private domestic final demand appears to
have slowed somewhat in the fourth quarter, it has continued to advance. Household spending
has been supported by steady job gains and solid growth in real disposable income--aided in part
by the declines in oil prices. One area of particular strength has been purchases of cars and light
trucks; sales of these vehicles in 2015, reached their highest level ever. In the drilling and
mining sector, lower oil prices have caused companies to slash jobs and sharply cut capital
outlays, but in most other sectors, business investment rose over the second half of last year.
And homebuilding activity has continued to move up, on balance, although the level of new
construction remains well below the longer-run levels implied by demographic trends.
Financial conditions in the United States have recently become less supportive of growth,
with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers,
and a further appreciation of the dollar. These developments, if they prove persistent, could
weigh on the outlook for economic activity and the labor market, although declines in longerterm interest rates and oil prices provide some offset. Still, ongoing employment gains and faster
wage growth should support the growth of real incomes and therefore consumer spending, and
global economic grov.1h should pick up over time. supported by highly accommodative
monetary policies abroad. Against this backdrop, the Committee expects that with gradual
adjustments in the stance of monetary policy, economic activity will expand at a moderate pace
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in coming years and that labor market indicators will continue to strengthen.
59
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As is always the case, the economic outlook is uncertain. Foreign economic
developments, in particular, pose risks to U.S. economic growth. Most notably, although recent
economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign
exchange value of the renminbi have intensified uncertainty about China's exchange rate policy
and the prospects for its economy. This uncertainty led to increased volatility in global financial
markets and, against the background of persistent weakness abroad, exacerbated concerns about
the outlook for global growth. These growth concerns, along with strong supply conditions and
high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn,
low commodity prices could trigger financial stresses in commodity-exporting economics,
particularly in vulnerable emerging market economies, and for commodity-producing firms in
many countries. Should any of these downside risks materialize, foreign activity and demand for
U.S. exports could weaken and financial market conditions could tighten further.
Of course, economic growth could also exceed our projections for a number of reasons,
including the possibility that low oil prices will boost U.S. economic growth more than we
expect. At present, the Committee is closely monitoring global economic and financial
developments, as well as assessing their implications for the labor market and inflation and the
balance of risks to the outlook.
As Tnoted earlier, inflation continues to run below the Committee's 2 percent objective.
Overall consumer prices, as measured by the price index for personal consumption expenditures,
increased just 1/2 percent over the 12 months of 2015. To a large extent, the low average pace of
inflation last year can be traced to the earlier steep declines in oil prices and in the prices of other
imported goods. And, given the recent further declines in the prices of oil and other
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commodities, as well as the further appreciation of the dollar, the Committee expects inflation to
60
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remain low in the near tenn. However, once oil and impmi prices stop falling, the downward
pressure on domestic inflation from those sources should wane, and as the labor market
strengthens further, inflation is expected to rise gradually to 2 percent over the medium term. In
light of the current shortfall of inflation from 2 percent, the Committee is carefully monitoring
actual and expected progress toward its inflation goal.
Of course, inflation expectations play an important role in the inflation process, and the
Committee's confidence in the inflation outlook depends importantly on the degree to which
longer-run inflation expectations remain well anchored. It is worth noting, in this regard, that
market-based measures of inflation compensation have moved down to historically low levels;
our analysis suggests that changes in risk and liquidity premiums over the past year and a half
contributed significantly to these declines. Some survey measures of longer-run inflation
expectations are also at the low end of their recent ranges; overall, however, they have been
reasonably stable.
Monetary Policy
Turning to monetary policy, the FOMC conducts policy to promote maximum
employment and price stability, as required by our statutory mandate from the Congress. Last
March, the Committee stated that it would be appropriate to raise the target range for the federal
funds rate when it had seen fltrther improvement in the labor market and was reasonably
confident that inflation would move back to its 2 percent objective over the medium term. In
December, the Committee judged that these two criteria had been satisfied and decided to raise
the target range for the federal funds rate 1/4 percentage point, to between 1/4 and 1/2 percent.
This increase marked the end of a seven-year period during which the federal funds rate was held
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near zero. The Committee did not adjust the target range in January.
61
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The decision in December to raise the federal funds rate reflected the Committee's
assessment that, even after a modest reduction in policy accommodation, economic activity
would continue to expand at a moderate pace and labor market indicators would continue to
strengthen. Although inflation was running below the Committee's longer-run objective, the
FOMC judged that much of the softness in inflation was attributable to transitory factors that are
likely to abate over time, and that diminishing slack in labor and product markets would help
move inflation toward 2 percent. In addition, the Committee recognized that it takes time for
monetary policy actions to affect economic conditions. If the FOMC delayed the start of policy
nonnalization for too long, it might have to tighten policy relatively abruptly in the future to
keep the economy from overheating and inflation from significantly overshooting its objective.
Such an abrupt tightening could increase the risk of pushing the economy into recession.
It is important to note that even after this increase, the stance of monetary policy remains
accommodative. The FOMC anticipates that economic conditions will evolve in a manner that
will warrant only gradual increases in the federal funds rate. In addition, the Committee expects
that the federal funds rate is likely to remain, for some time, below the levels that are expected to
prevail in the longer run. This expectation is consistent with the view that the neutral nominal
federal funds rate--defined as the value of the federal funds rate that would be neither
expansionary nor contractionary if the economy was operating near potential--is currently low by
historical standards and is likely to rise only gradually over time. The low level of the neutral
federal funds rate may be partially attributable to a range of persistent economic headwinds-such as limited access to credit for some borrowers, weak growth abroad, and a significant
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appreciation of the dollar--that have weighed on aggregate demand.
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Of course, monetary policy is by no means on a preset course. The actual path of the
federal funds rate will depend on what incoming data tell us about the economic outlook, and we
will regularly reassess what level of the federal funds rate is consistent with achieving and
maintaining maximum employment and 2 percent inflation. In doing so, we will take into
account a wide range of infonnation, including measures of labor market conditions, indicators
of inflation pressures and inflation expectations, and readings on financial and international
developments. In particular, stronger growth or a more rapid increase in inflation than the
Committee currently anticipates would suggest that the neutral federal funds rate was rising more
quickly than expected, making it appropriate to raise the federal funds rate more quickly as welL
Conversely, if the economy were to disappoint, a lower path of the federal funds rate would be
appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate
to foster financial conditions consistent with the attainment of our objectives over time.
Consistent with its previous communications, the Federal Reserve used interest on excess
reserves (IOER) and overnight reverse repurchase (RRP) operations to move the federal funds
rate into the new target range. The adjustment to the IOER rate has been particularly important
in raising the federal funds rate and short-tenn interest rates more generally in an environment of
abundant bank reserves. Meanwhile, overnight RRP operations complement the IOER rate by
establishing a soft floor on money market interest rates. The IOER rate and the overnight RRP
operations allowed the FOMC to control the federal funds rate effectively without having to first
shrink its balance sheet by selling a large part of its holdings of longer-tenn securities. The
Committee judged that removing monetary policy accommodation by the traditional approach of
raising short-tenn interest rates is preferable to selling longer-tenn assets because such sales
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could be difiieult to calibrate and could generate unexpected financial market reactions.
63
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The Committee is continuing its policy of reinvesting proceeds from maturing Treasury
securities and principal payments from agency debt and mortgage-backed securities. As
highlighted in the December statement, the FOMC anticipates continuing this policy "until
normalization of the level oftbe federal funds rate is well under way." Maintaining our sizable
holdings of longer-tenn securities should help maintain accommodative financial conditions and
reduce the risk that we might need to return the federal funds rate target to the effective lower
bound in response to future adverse shocks.
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Thank you. I would be pleased to take your questions.
64
hlr\Jseat8:30a.m. r-:,1
february 10, l016
MoNETARY
Poucv
REPORT
February 10, 2016
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Board of Governors of the Federal Reserve System
65
LETTER OF TRANSMITTAL
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., February 10, 2016
THE PRESIDENT OF THE SENATE
THE SPEAKER OF THE HOUSE OF REPRESENTATIVES
The Board of Governors is pleased to submit its Monetary Policy Report pursuant to
section 2B of the Federal Reserve Act.
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Janet L. Yellen, Chair
66
STATEMENT ON LoNGER-RuN GoALS AND MoNETARY PoucY STRATEGY
/\doptf~d
effective /dnuary
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory
mandate from the Congress of promoting maximum employment, stable prices, and moderate
long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public
as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and
businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary
policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and
financial disturbances. Moreover, monetary policy actions tend to influence economic activity and
prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its mediumterm outlook, and its assessments of the balance of risks, including risks to the financial system that
could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the
Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its
judgment that inflation at the rate of 2 percent, as measured by the annual change in the price
index for personal consumption expenditures, is most consistent over the longer rnn with the
Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running
persistently above or below this objective. Communicating this symmetric inflation goal clearly to the
public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability
and moderate long-term interest rates and enhancing the Committee's ability to promote maximum
employment in the face of signilicant economic disturbances. The maximum level of employment
is largely determined by nonmonetary factors that affect the structure and dynamics of the labor
market. These factors may change over time and may not be directly measurable. Consequently,
it would not be appropriate to specify a ftxed goal for employment; rather, the Committee's policy
decisions must be informed by assessments of the maximum level of employment, recognizing that
such assessments are necessarily uncertain and subject to revision. The Committee considers a
wide range of indicators in making these assessments. Information about Committee participants'
estimates of the longer-run normal rates of outpnt growth and unemployment is published four
times per year in the FOMC's Summary of Economic Projections. for example, in the most
recent projections, the median of FOMC participants' estimates of the longer-run normal rate of
unemployment was 4.9 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its
longer-run goal and deviations of employment from the Committee's assessments of its maximum
level. These objectives are generally complementary. However, nnder circumstances in which the
Committee judges that the objectives are not complementary, it follows a balanced approach in
promoting them, taking into account the magnitude of the deviations and the potentially ditTerent
time horizons over which employment and inflation are projected to return to levels jndged
consistent with its mandate.
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The Committee intends to reaffirm these principles and to make adjustments as appropriate at its
annual organizational meeting each January.
67
CONTENTS
Summary ................................ ................................ 1
Part 1 : Recent Economic and Financial Developments ..................... 3
Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Financial Developments ................................ .................. 16
International Developments ................................ ............... 22
Part 2: Monetary Policy ................................ .................. 29
Part 3: Summary of Economic Projections ................................ 35
The Outlook for Economic Activity ................................ .........
The Outlook for Inflation ................................ ..................
Appropriate Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertainty and Risks . . . . . . . ................................ ............
36
38
41
45
Abbreviations ................................ ........................... 49
List of Boxes
Effects of Movements in Oil Prices and the Dollar on Inflation .................... 8
Developments Related to Financial Stability ................................ .. 20
Monetary Policy Divergence in the Advanced Economies ....................... 24
The Neutral Federal Funds Rate in the Longer Run ............................. 32
Monetary Policy Implementation following the December 2015 FOMC Meeting ... 34
Forecast Uncertainty ................................ ..................... 47
NoTE: Unless stated otherwise, the time series in the
january 20! b; and, for quarterly data, 2015:Q4. In bar
quarter from the final quarter of the preceding period.
extend through, for daily data, February 4, 2016; for monthly data,
exct>t}t dS noted, the ch;mge for a given period is measured to its final
For figures 32 and 36, note that the Dow Jones Bank Index and the S&P 500 Index ("Indexes") are a
Oow jom•s
Indices lLC, a
!ndic('S I LC and/or its affiliates and have been licensed for use by the Board. Copyright© 2016 S&P
subsidiary o{ the McGraw Hill Financial inc., and/or its affiliates. AI! rights rf'servf'd. Redistribution, reproduction and/or photocopying
information on any of S&P Dow
in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more
Jones Indic-es LLC's indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor's Financial Services LLC
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and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow jones Indices LLC, Dow jones
Tradem<Jrk !- !ofdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to
the ability of any index to accurately reprPsent the asset class or market sector that it purports to represent and nell her S&P Dow jones
tndices LLC Dow jones Trademark Holdings LLC, their affiliates nor their third party !icmsors shall have any liability for any errors,
omissions, or interruptions of any index or the data included therein.
68
SuMMARY
Inflation remains below the FOMC's longerrun goal of 2 percent: The price index for
personal consumption expenditures (PCE)
rose only 'h percent over the 12 months ending
in December. The PCE price index excluding
food and energy items, which often provides
a better indication of future inflation, also
remained subdued, rising 1Y, percent over
that period. Inflation has been held down
substantially by the drop in energy prices;
declines in the prices of non-oil imported
goods have contributed as well. Meanwhile,
survey-based measures of longer-run inflation
expectations have drifted down a little
since the middle of last year and generally
stand near the lower ends of their historical
ranges; market-based measures of inflation
compensation have fallen and arc at low levels.
Real gross domestic product (GDP) is
reported to have increased at an annual rate
of about l Y. percent over the second half of
the year, slower than the first-half pace. The
expansion in economic activity reflected
continued increases in private domestic final
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demand, supported by ongoing job gains and
accommodative monetary policy. Government
purchases rose modestly. By contrast, the rise
in the foreign exchange value of the dollar over
the past year and a half and the sluggish pace
of economic activity abroad have continued
to weigh on exports. In addition. the pace of
inventory accumulation slowed markedly from
its elevated first-half pace, thereby reducing
overall GDP growth in the second half of 2015.
Domestic financial conditions have become
somewhat less supportive of economic growth
since mid-2015. Recent months have been
marked by bouts of turbulence in financial
markets that largely reflected concerns
about the global economic outlook and
developments in oil markets. Broad measures
of U.S. equity prices have declined, on net,
roughly returning these indexes to levels that
prevailed during the first half of 2014. And the
dollar has strengthened further, on balance,
since the summer of 2015. Corporate risk
spreads have widened, particularly for lowerrated issuers. Nonetheless, interest rates for
investment-grade issuers are generally still
low, reflecting declines in yields on longerterm Treasury securities. Moreover, although
debt issuance by lower-rated firms bas slowed,
credit flows to nonfinancial businesses have
remained solid since the middle of last year,
supported by continued strong bond issuance
of higher-rated firms and by bank lending.
Household access to credit was mixed, with
mortgages and credit cards still difficult to
access for some borrowers while student
and auto loans remained broadly available,
even to borrowers with lower credit scores.
Overall, debt growth in the household sector
has remained modest and continues to be
concentrated among borrowers with strong
credit histories.
The U.S. financial system overall has been
resilient to the stresses that have emerged
since mid-2015, and financial vulnerabilities
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Labor market conditions continued to
improve during the second half of 2015 and
into early 2016. Payroll employment has
increased at a solid average pace of 225,000
per month since June. The unemployment
rate, which had reached a high of 10 percent
in late 2009, declined from 5.3 percent last
June to 4.9 percent in January. Although the
unemployment rate now equals the median of
Federal Open Market Committee (FOMC)
participants' estimates of its longer-run
normal level, other considerations suggest
that some further improvement in labor
market conditions is needed to achieve the
Committee's maximum employment mandate.
The labor force participation rate remains
somewhat below most assessments of its trend,
and an unusually large number of people
continue to work part time when they would
prefer full-time employment.
69
2
SUMMARY
remain moderate. Regulatory capital ratios
and holdings of liquid assets at large banking
firms arc at historically high levels. Usage
of short-term wholesale funding in the
11nancial system is relatively low, and the usc
of leverage to finance securities purchases has
declined somewhat. The ratio of aggregate
private nonfinancial credit to GDP is below
most estimates of its long-run trend, although
leverage of speculative-grade nonfinancial
corporations has risen further since the
middle of last year and is relatively high.
Risk premiums for many asset classes have
increased. For instance, the rise in spreads on
corporate debt has been larger than would
be expected given the evolution of expected
defaults. The direct exposures of the largest
U.S. banking firms to the oil sector and to
emerging market economies are limited. If
conditions in those sectors worsen, however,
wider stresses could emerge and be transmitted
to the United States through indirect global
financial linkages.
gradually over time, as headwinds to economic
growth dissipate slowly and as inflation rises
toward the Committee's goal of 2 percent.
Consistent with this outlook, in the most
recent Summary of Economic Projections
(SEP), which was compiled at the time of the
December FOMC meeting, FOMC participants projected that the appropriate level
of the federal funds rate would be below its
longer-run level through 2018. (The December
SEP is included as Part3 of this report.)
With respect to its securities holdings, the
Committee will continue to reinvest principal
payments from its securities portfolio, and it
expects to maintain this reinvestment policy
until normalization of the level of the federal
funds rate is well under way. This policy, by
keeping the Committee's holdings of longerterm securities at sizable levels, should help
maintain accommodative financial conditions.
The Committee anticipates that economic
conditions will evolve in a manner that will
warrant only gradual increases in the federal
funds rate. This expectation is consistent with
the view that the neutral nominal federal funds
rate-defined as the value of the federal funds
rate that would be neither expansionary nor
contraetionary if the economy was operating
at its productive potential-is currently low by
historical standards and is likely to rise only
VerDate Nov 24 2008
To move the federal funds rate into the new
target range announced in December, the
Federal Reserve raised the rate of interest paid
on required and excess reserve balances and
also employed an overnight reverse repurchase
agreement facility. The effective federal funds
rate was moved successfnlly into the increased
target range. The FOMC remains confident
that it has the tools it needs to adjust shortterm interest rates as appropriate.
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In December, after holding the federal funds
rate near zero for seven years, the FOMC
raised the target range for that rate to '/. to
Y, percent. The decision to increase the
federal funds rate reflected the Committee's
assessment that there had been considerable
improvement in the labor market last year and
that the Committee was reasonably confident
that inflation would move back to 2 percent
over the medium term; thus, the criteria set
out by the Committee in March 2015 had
been met.
The Committee has emphasized that the actual
path of monetary policy will depend on how
incoming data affect the economic outlook.
In determining the timing and size of future
adjustments to the target range of the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to
its objectives of maximum employment and
2 percent inflation. Stronger growth or a more
rapid increase in inflation than the Committee
currently anticipates would likely call for faster
increases in the federal funds rate; conversely,
if conditions prove weaker, a lower path of the
federal funds rate would likely be appropriate.
70
3
PART
1
RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS
The labor market continued to improve during the second half of last year and early this
year. Payroll employment has increased 225,000 per month, on average, since june. The
unemployment rate fell from 5.3 percent in june to 4.9 percent in january and thus has reached
the median estimate among Federal Open Market Committee ( FOMC) participants of the level of
unemployment that is considered to be normal in the longer run. Even so, the relatively low labor
force participation rate and the unusually large number of people working part time who would
prefer full-time employment suggest that some cyclical weakness is still present in the labor market.
Since mid-2014, a steep drop in crude oil prices has exerted significant downward pressure on
overall inflation, and declines in the prices of non-oil imported goods have held down inflation
as well. The price index for personal consumption expenditures (PCE) increased only 'h percent
during the 12 months ending in December, a rate that is well below the FOMCs longeNun
objective of 2 percent; the index excluding food and energy prices rose 1'h percent over the same
period. Both survey- and market-based measures of inflation expectations have moved down since
June. Meanwhile, real gross domestic product (COP) increased at an annual rate of 1'4 percent
over the second half of 20 15, slower than in the first half. The growth in COP has been supported
by accommodative monetary policy, favorable consumer confidence, and the boost to household
purchasing power from lower oil prices. However, lower oil prices have also exerted downward
pressure on domestic investment in the energy sector. In addition, sluggish growth abroad and the
higher foreign exchange value of the dollar have weighed on exports, and financial conditions more
generally have become somewhat less supportive of economic growth. Concerns about economic
conditions abroad and the energy sector have contributed to lower equity prices and higher
borrowing rates for some businesses.
Domestic Developments
The labor market has continued to
improve ...
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I.
Net change in payroll employment
Thousands of Jobs
3-momhrnovwg<lverages
---------------·--
- -----------
--- 400
P1ivatc
200
200
400
600
800
SouRCE Department of Labor, Bureau of Labor Statlsttcs
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23566.015
Labor market conditions strengthened
further across a variety of dimensions over
the second half of 2015 and early this year.
Payroll employment gains remained robust,
averaging about 235,000 per month over the
second half of last year, similar to the gains
over the first half; factoring in the January
increase of about 150,000, monthly gains since
June have averaged about 225,000 (figure !).
The increase in 2015 followed an even faster
pace of job gains in 2014, and, in total, some
5'14 million jobs were added over the two years.
In addition, the unemployment rate-which
had reached I 0 percent in late 2009----declined
from 5.3 percent in June 2015 to 4.9 percent in
January of this year; this level is '14 percentage
point lower than a year earlier and is equal to
71
4
PART 1: RECENT ECONOMIC AND FINANCIAL DEVEl OPMFNTS
2.
Measures oflabor underutilization
Percem
16
14
!J-4
12
10
~__j_ _____ _L _ _ _ j _ _ _ _l __ _ _ _ l __ _ _ j _ _ _
2010
2012
_L__j_J
2014
2016
NoTE U-4 measures total unemployed plus dlSCOuraged workers, as a percent of the labor force plus discouraged workers. Discouraged workers are a subset of
marginally attached workers who are not currently looking for work b(X:ause they believe no jobs are available for them. U-5 measures total unemployed plus aH
marginally attached to the labor force, as a percent of the labor force plus persons margmally attached to the labor force. Marginally attached workers are not in
the labor force, want and are available for work, and have looked for a JOb m the past 12 months. U-6 measures total unemployed plus aH marginally attached
workers plus total employed part time for <..-conomic rea<;ons, as a percent of the labor force plus all marginally attached workers. The shaded bar md1cates a
penod of business recession as defined by the National Bureau of Econom1c Research_
SouRcE: Department of Labor, Bureau of Labor Statistics.
Labor force participation rate and
ratio
empJoyment~to~population
Monthly
68
66
64
62
60
58
EmploymcnHo-popula!!On !Dl!O
L_LLLLl.J_J__ _j_ L.L_l ___ LLLLLLLJ
2000 2002 2004
2006
2008
2010
2012
2014
~016
Both series are a percent of the population aged 16 and over.
Department of Labor, Bureau of Labor Statistics
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... though some labor market slack likely
remains ...
While payroll employment and the
unemployment rate have improved further
since mid-2015, the labor force participation
rate fell from an average of 62.7 percent of
the working-age population during the second
quarter of 2015 to 62.5 percent in the fourth
quarter; the participation rate moved back np
to 62.7 percent in January (figure 3)_ Changing
demographics-most notably the increasing
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23566.016
3.
the median of FOMC participants' estimates
of its longer-run normal level (figure 2).
Broader measures of labor underutilization,
such as those including individuals who
are classified as marginally attached to the
labor force, declined by similar amounts_ (A
"marginally attached" individual is defined as
someone who is not looking for work currently
and therefore treated as not in the labor force,
but who wants and is available for work and
has looked for a job in the past 12 months_)
72
MONETARY POLICY REPORT: FEBRUARY 2016
5
share of older people in the population, who
are less likely to be in the labor force--and
other longer-run structural changes in the
labor market have continued to push down
the participation rate even as cyclical forces
have been pushing it up. That said, labor
force participation appears to remain a little
weaker than can be explained by structural
factors alone, pointing to the likelihood that
some slack remains in this dimension of labor
utilization. In addition, although the share of
workers who arc employed part time but would
like to work full time has fallen noticeably
since June, it is still relatively high, indicating
some scope for improvement on this dimension
as well.
... while labor compensation has shown
some tentative signs of accelerating ...
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4.
Measures of change in hourly compensation
_ _ _P_o_rcentchange
from~earearher
Compensation per hour,
business sector
Non: The average hourly eaminp.s data series begins in March 2007 and
extends through January 2016. The compensatiOn per hour and employment
cost index data extend through 20t5:Q4. For busmess~sector compensation,
change 1s over four quarters; for the employmem cost index, change is over
the 12 months ending m the last month of each quarter; fOr average hourly
ean1ings, change is !Tom 12 months earlier
SOURCE, Departrnent ofl.abor, Bureau of Labor Statistics
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23566.017
As the labor market has continued to improve,
the rates of increase in some measures of
hourly labor compensation have begun to pick
up while others remain relatively subdued.
.For example, average hourly earnings for
all employees increased 2'h percent over
the 12 months ending in January, above the
2 percent pace seen throughout most of the
recovery (tlgurc 4). In addition, compensation
per hour in the business sector-a volatile
measure derived from the labor compensation
data in the national income and product
accounts, or NJPA-is reported to have
increased more quickly in 2015 than its
average pace throughout most of the recovery.
In contrast, the employment cost index for
private industry workers, which measures both
wages and the cost to employers of providing
benefits, increased about 2 percent over the
12 months ending in December, similar to the
pace seen throughout most of the recovery.
All of these measures of compensation are
increasing at slower rates than those seen prior
to the recession. This deceleration probably
reflects a variety of factors, including the
slower growth of productivity, the slower pace
of inflation, and perhaps some remaining slack
in the labor market. Despite the continued
relatively small increases in nominal wages, the
recent very low inflation led to a noticeably
73
6
PART 1o RECENT ECONOMIC AND fiNANCIAL DEVELOPMENTS
larger wage gain last year on a purchasingpower-adjusted (or so-called real) basis than
had been evident earlier in the expansion_
... and productivity growth has been
lackluster
5, Change in business sector output per hour
.Percent_ annual rate
---~-----
-- 4
1948"
73
197495
1996-2000
200107
2008
15
Non:: Changes are measured from Q4 of the year immediately preceding
the period through Q4 of the fmal year of the penod
SouRCE: Department of Labor, Bureau of Labor Statistics.
Over time, increases in productivity are a key
determinant of the rise in real wages and living
standards. Labor productivity in the business
sector increased at an annual rate of just
'/,percent in 2015 and at an average annual
rate of just 1 percent since tbe last business
cycle peak in 2007 (figure 5). The average pace
since 2007 is a little below the 1974-95 average
and well below the pace during the period
from the mid-1990s to 2007_ The reasons
behind the slower productivity performance in
recent years arc not well understood, but one
factor seems to be the slower pace of capital
accumulation_
Falling oil prices continue to hold down
overall consumer prices ...
6.
Brent spot and futures prices
Weekl)
flo!larspo.'<llmsrel
-------~
·--------
Consumer price increases have remained
muted and below the FOMC's longer-run
objective of 2 percent. As discussed in the
box "Effects of Movements in Oil Prices and
the Dollar on Inflation," crude oil prices have
plummeted since June 2014, and the dollar has
moved appreciably higher; both factors have
contributed importantly to the low inflation
readings of the past year-
DO
110
100
90
80
70
60
50
40
30
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Since July, the price of crude oil has fallen
appreciably further, on net, with the spot price
of Brent crude oil dropping below $35 per
barrel, a level last seen more than a decade ago
(the blue line in figure 6). Futures prices have
also dropped significantly and indicate that
market participants expect only modest price
increases over the next few years_ Although
concerns about global growth have contributed
to the fall in prices, much of the recent decline
can be attributed to the abundance of global
supply_ Reductions in US_ production have
been slower and smaller than expected, and
OPEC has abandoned its official production
target in favor of maintaining robust
production despite declining prices and the
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23566.018
120
74
MONETARY POLICY RFPORT: FEBRUARY 2016
7
likely increase in Iranian oil exports in the
coming months. The drop in crude oil prices
continues to pass through to gasoline prices:
The national average of retail gasoline prices
(on a seasonally adjusted basis) moved down
from more than $2.50 per gallon in June to
about $2.00 per gallon in January.
Largely because of the decline in energy
prices, overall consumer price inflation, as
measured by the PCE price index, was running
at just Y. percent for the 12 months ending
in June 2015; the 12-month change remained
near that pace until year-end, when it edged up
to 1;2 percent as some of the sharpest declines
from a year earlier fell out of the 12-month
calculation (figure 7).
7. Change in the price index for personal consumption
expenditures
Month I~
- - -!2-momhpercentchange
----
Food prices were little changed over the past
six months after edging down during the first
half of 2015. Consumer food prices were
held down in 2015 by falling food commodity
prices, but futures markets suggest that these
commodity prices will flatten out, implying
that this source of downward pressure on
consumer food price inflation is likely to wane.
. . . but even outside of the energy and
food
inflalion has remained
subdued
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8.
Non-oil import prices and U.S. dollar exchange rate
Month!~
20
16
12
12
~oo9
2010 20ll 2012
201~4"'zo::cl5c-'-:-:2o,.,-J6,-L--J
Nm&. The data for non-oilnnpon pnces extend 1hrough D<X:ember 2015
SouRCE. Department of Labor, Bureau of Labor Statistics: Federal Reserve
Board, Statistical Release H.JO, "Foreign Exchange Rates··
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23566.019
As is also discussed in the box "Effects of
Movements in Oil Prices and the Dollar on
Inflation," another important factor holding
down inflation has been the behavior of import
prices. After declining sharply in the first half
of 2015, non-oil import prices continued to
fall in the second half, albeit at a slightly more
modest pace; the further declines in the second
half rcllected lower commodity prices as well
as additional increases in the foreign exchange
value of the dollar (figure 8). In addition, slack
in labor and product markets likely placed
downward pressure on inflation, although this
factor has probably waned signilicantly. For
all of these reasons, inflation for items other
than food and energy (so-called core inflation)
remained modest. Core PCE prices rose about
1'h. percent over the 12 months ending in
December, similar to the increase in 2014.
75
8
PART 1, RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS
Effects of Movements in Oil Prices and the Dollar on Inflation
Over the past year, inflation has continued to run
well below the Federal Open Market Committee's
longer-run objective of 2 percent (text figure 7).
The 12-month change in the personal consumption
expenditures (PCE) price index, which was about
lf2 percent in 2015, was held down most clearly by
falling prices for oil and farm commodities. Falling
prices for other commodities and lhe rise in the
foreign exchange value of the dollar have also
contributed importantly to continued low rates of
inflation. Indeed, reflecting these influences, inflation
for items other than food and energy remained
relatively low, with core PCE price inflation at slightly
under 1 111 percent last year.
Since the middle of 2014, crude oil prices have
tumbled, with the spot price of the global benchmark
Brent crude oil falling from over $115 per barrel to
under $35 per barrel in recent weeks; prices for a
wide variety of other commodities have also declined
C(>nsiderably. The
pass~through
declines in energy prices since the middle of 2014
have likely been holding down core consumer price
inflation somewhat.
The broad dollar has appreciated more than
20 percent since the middle of 2014, reflecting both
heightened concerns about the global outlook, which
have resulted in safe-haven flows toward dollar assets,
and diverging expectations regarding domestic and
foreign monetary policy (iigure A). A stronger dollar
makes foreign goods cheaperfor U.S. consumers. An
extensive literature, however, has found that the passthrough of exchange rate changes to U.S. import prices
is incomplete-that is, less than proportionate-as
foreign exporters prefer to absorb part of the exchange
rate change by narrowing profit margins. For example,
a typical estimate is that a 10 percent appreciation
A.
U.S. dollar exchange rate: Broad nominal dollar
of falling oil prices into
Jrumal) 3.2005
lower gasoline prices is typically relatively rapid, and
the drop in consumer energy prices held down overall
PCE inilation directly by more than 'h percentage
point in 2015. Falling farm commodity prices also
reduced consumer food price inflation over the past
120
1!5
Ito
105
year, although the pass-through oi these commodity
price changes into overall PCE inflation tends to be
somewhat smaller and more gradual than with oil
JOO
95
prices. Additionally, the sustained reduction in both oil
90
and non-oil commodity prices has likely lowered core
even with a small degree of pass-through, the very large
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85
SOURCE: Federal Reserve Board. Statistical Release H. 10, ''Foreign
Exchange Rates "
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TERI
23566.020
inflation somewhat by holding down firms' prorluction
and distribution costs. rmpirical estimates of the passthrough of energy costs into core inflation are generally
quite small, with long and variable tags. Nonetheless,
76
MONETARY POLICY REPORT: FEBRUARY 2016
of the dollar causes the prices of non-oil imported
goods to decline about 3 percent after one year, 1
Roughly one-third of this effect occurs through the
effect on imported commodities, as an increase in the
value of the dollar tends to lower commodity prices
proportionately.
Because imported goods and services make up
only a modest share of lJ .S. consumption, a given
percentage decline in import prices causes a much
smaller percentage reduction in core PCE prices.
Figure B uses a simple econometric model to illustrate
how a 10 percent appreciation of the do! far might affect
core PCE inflation through this channeL' According to
9
this exercise suggests that the stronger dollar has played
a material role in holding down PCE inflation.
Although further declines in energy prices or a
further rise in the exchange value of the dollar are
certainly possible, those movements will eventually
stop. As these prices stabilize, the drag on consumer
price inflation from oil and import prices will dissipate.
Moreover, with margins of resource utilization having
already diminished appreciably and longer-run inflation
expectations reasonably stable, both core and overall
inflation are likely to rise gradually toward 2 percent
over the medium term as these transitory factors fade
and the labor market improves further.
this model, core PCE inflation dips in the two quarters
following the appreciation before gradually returning to
the baseline, leading to a four-quarter decline in core
PCE inflation of about 1/4 percentage point relative to
B.
Effect of 10 percent appreciation on core PCE inflation
Quarters after shock
DemiiJOn from baselme (percentage JXHI'lL~). annual
-·--------~-·
_._
..
~
the size of the dollar's appreciation since the middle
of 2014, this model suggests that falling import prices
depressed core PCE inflation about 1h percentage point
last year. Although the exact magnitude of the dollar's
effect on infbtion depends on the specific model used,
r;~.te
~·-----
the baseline in the first year following the shock. Given
+
------~"··~·-----=:::::::==~- 0.0
-0.1
0.2
0.3
1. r'<>r more detail, see Joseph Gruber, Andrew McCallum,
and Robert J. Vigfusson (2016), "The Dollar in the US
International Transactions (USlT) Model," IFDP Notes
(Washington; Board of Governors of the Federal Reserve
System, FebruJry 8), wwwJederalreserve.gov/econresdata/
0.4
-05
notes/ifdp-notes/2016/the-dollar-in-the-us-internation<~l
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Nor.E: TI1e x·axis represents the quarters followmg the 10 percent
appreciation shock
SouRct: Federal Reserve Board staff calculattons based on an econometric
model descnbed in the appendix to Janet L Yellen (2015), "InflatiOn
Dynarmcs and Monetary Policy," speech delivered at the Philip Gamble
Memorial Lecture, University of Massachusetts. Amherst, Mass., September
24, www.federalreserve gov/ncwsevcn1slspeedv'ydlcn20 l50924a.h!m.
Sfmt 6601
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23566.021
transactions-mode!-20 160208. htm!.
2. This model was discussed in a recent speech by Chair
Yellen and is described in its appendix. See janet L Yellen
"lni!arion Dynamics and Monetary Policy,"
the Philip Gamble Memorial lecture,
Massa<chusetts, Amherst, Mass., September 24, www.
fcdera!reserve.gov/newseventslspeech/ye!len20150924a.htm.
77
10
9,
PART 1 o RECENT fCONOMIC AND fiNANCIAl DEVELOPMENTS
Survey- and market-based measures of
inflation expectations have moved down
since june
Median inflation expectations
-~
~
SPF expectatiOns
for next 10 years
2002
2004
2006
2008
2010
2012
2014
2016
NoTE: lbe Mlch1gan survey data are monthly The SPF data for inflation
expectattons for personal consumpuon expenditures are quarterly and extend
IJom 2007.Ql through 2015.Q4
SoURCE: University of Michigan Surveys of Consumers; Federal Reserve
Bank of Philadelphm, Survey of Professional Forecasters (SPF)
lO.
5-to-10-year-forward inflation compensation
Week!;.------- - - - - -
4"0
3,5
30
25
2.0
1.5
Non:· lbe data are weekly averages of daily data and extend tlu·ough
February 3, 2016, for inflat10n swaps, and February 4, 2016, for TIPS
breakevens. TIPS is Tre.'lsury inflation-Protected Secunties
SOURcE: Federal Reserve Bank of New York; Hardays, Fctkral Reserve
.
Board staff estimates
11.
Change in real gross domestic product, gross domestic
income, and private domestic final purcha,;;es
_______
l'ercent.aunualmhJ
• Gross domestJC product
Ill Gross domestic income
Private domestic final purchases
Economic activity expanded at a
moderate pace in the second half of 2015
Real GDP is reported to have increased at an
annual rate of IV. percent in the second half
of last year, slower than the first-half pace
(figure II)" As in the first half of the year,
economic activity during the second half
was supported by solid gains in private
I. For further discussion of inferring inflation
expectations from market-based measures, sec the box
"Challenges in Interpreting Measures of Longer-Term
Inflation Expectations." in Board of Governors of the
Federal Reserve System (2015), Monetary Polhy Report
(Washington: Board of Governors. February), www.
fcdcralreservc"gov/monctarypo1icylmpr_20 150224__part 1"htm
L-l _"""-L"--" _t"
2009
Wage- and price-setting decisions arc likely
influenced by expectations for inflation" Survey
measures of longer-term inflation expectations
have been quite stable over the past 15 years
but appear to have moved down some lately,
including over the past 6 months, to the lower
end of their historical ranges" This decline has
occurred both for the measure of inflation
expectations over the next 5 to I 0 years
as reported in the University of Michigan
Surveys of Consumers and for the median
expectation for the annual rate of increase in
the PCE price index over the next I 0 years
from the Survey of Professional Forecasters,
conducted by the Federal Reserve Bank of
Philadelphia (figure 9)" Market -based measures
of medium- (5-year) and longer-term (5-to10-year-ahead) inflation compensation derived
from the difference between yields on nominal
Treasury securities and Treasury InflationProtected Securities moved down further, on
net, over the second half of the year after
having declined notably between mid-2014
and mid-2015 (figure 10)" Although changes in
inflation compensation could reflect changes
in expected inllation, they also may reflect a
variety of other considerations, including an
inflation risk premium, liquidity premiums,
and other factors"'
2010
*
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23566.022
Gross domestic income is not yet avai!ahlc for 20 15·H2
SouRcE: Depa1tmenl of Commerce. Bureau ofEconom1c Analysis
78
11
MONETARY POLICY REPORT: FEBRUARY 2016
domestic final purchases- that is, final
purchases by households and businesses--and by modest increases in government
purchases of goods and services. By contrast,
aggregate demand continued to be held down
by weak export performance, reflecting the rise
in the foreign exchange value of the dollar
and sluggish foreign economic growth.
In addition, inventory investment slowed
markedly from its elevated first-half pace,
thereby reducing overall GDP growth in the
second half of 2015.
Frm 00082
4
I _____ __!__L_L.J
2011
2010
H2~
2012
2013
2014
2015
Fmt 6601
13.
Wealth-to-income ratio
Q""'_"'-'----- 6.5
6.0
5.5
5.0
U_l_LLLLLLLLI
LLLLL
1995
1999
2003
2007
2011
2015
Norc· The data extend through 2015.Q3. lhc series is the ratiO of
household net worth to disposable personal income
For net worth, Federal Reserve Board, Statistical Release Z L
Accounts of tl1e United States". for mcome, Department of
Commerce, Bureau of Economic Analysis
14.
Nominal house prices and price-rent ratio
Index
!'.101lth!y
200
190
180
170
160
150
130
120
110
100
90
RO
70
Noll'.. lhe data e:-;;tend thmugh December 2015. ll1c Corclogic price
index is seas.onaHy adjusted by Federal Reserve Board staff. l11e pricc"rent
ratio is the ratio of nominal house pnccs to the consumer price index of rent
of primary residence. lhe data are indexed to !00 m January 2000
SoVRCf.: For prices, C'oreLogic; for rents, Department of labor, Bureau of
Labor Statistics.
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Coupled with low interest rates, the rise in
incomes has lowered debt payment burdens for
many households. The household debt service
burden-the ratio of required principal and
interest payments on outstanding household
debt to disposable income, measured for the
household sector as a whole-has remained
at a very low level by historical standards
PO 00000
Hl
SouRcE· Department of Commerce, Bureau ofEconom1c Analysis
Consumer spending last year was also likely
supported by further increases in household
net worth. Although the value of corporate
equities edged down last year, prices of
houses---- which are owned much more widely
than are corporate equities-posted significant
gains, and the wealth-to-income ratio remained
elevated relative to its historical average
(figure 13). In nominal terms, national house
price indexes are now close to their peaks of
the mid-2000s, but relative to rents, house price
valuations are much lower than a decade ago
(figure 14).
Jkt 023566
11 Personal consumption expenditures
Disposable persona! income
2009
Real personal consumption expenditures rose
at an annual rate of 2'1, percent in the second
half of 2015, about the same as the first-half
pace (figure 12). These increases have been
supported by income gains from the improving
labor market as well as the fall in gasoline
and other energy prices, which has bolstered
consumers' purchasing power. As a result, real
disposable income-that is, income after taxes
and adjusted for price changes--rose a robust
31/z percent in 2015 after a similar gain in 2014.
17:34 Jun 29, 2017
Change in real personal consumption expenditures
and disposable personal income
._L___,-L___,_l
Gains in income and wealth arc
supporting consumer spending ...
VerDate Nov 24 2008
12.
79
12
15.
PART 1: RECENT ECONOMIC AND FINANCIAl DEVElOPMENTS
Household debt service
_<l<>_:_""_"c..''-----------'-"-""_tofd!sposab!emcome
(figure 15). As interest rates rise, the debt
burden will move up only gradually, as most
household debt is in fixed-interest products.
14
... as is credit availability
13
Consumer credit continued to expand
moderately through late 2015, as lending
standards for both auto lending and student
loans remained accommodative (figure 16).
In addition, credit card lending has been
rebounding since early last year. Standards
and terms on credit cards are still relatively
tight for riskier borrowers, although there
has been some modest increase in access for
borrowers with subprime credit histories.
Delinquencies on credit card and auto loans
are still near historical lows, in part due to the
tight standards.
12
ll
10
LllLLLLLU_LI II 111111!!! 111!11111! I I I ! !
1983 1987 J9t)J
I
1995 1999 2003 2007 2011 2015
Norr. 'l"he data extend through 20 l5:Q3. Debt scrv1ce payments consist of
estimated required payments on outstanding mortgage and consumer debt
SOURCE: Federal Reserve Board, Statistical Release, "Household Debt
Service and Financ1al Obligations Ratios."
16.
Changes in household debt
Bllll<msofdollars . .annualrate
Mortgages
B Consumer credit
1,000
-Sum
800
600
400
200
200
400
600
L_i_~L~- L
__j
2007 2008 2009 2010 2011 2012 20!3 2014 2015
year~end
to year-end, except 2015
AccOlmt~
17_
of the !Jnited States,.
income changes over the next year or lwo,
Indexes of consmner sentiment and income expectations
01ffuSn:mmde.'
lm!e't
110
100
·-- 100
9()
90
80
80
70
70
60
60
50
50
N01 E: The data are three-month movmg averages and extend through
January 2016 Consumer sentiment is indexed to 100 in 1%6. Rea! income
expectations arc calculated as the net percent of survey respondents ex"{)ectmg
family inwme to go up more than prices dunng the next year or two
SOURCE: University of\11chigan Surveys of Consumers
VerDate Nov 24 2008
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Household spending has also been supported
by favorable consumer sentiment. For the
past year or so, the overall index of consumer
sentiment from the University of Michigan
Surveys of Consumers has registered levels
comparable to those that prevailed before
the recession (figure 17). Rising real incomes.
partly driven by falling energy prices and
improvements in the labor market, have likely
driven up consumer confidence. These same
factors are probably behind the more upbeat
expectations that households report for real
Frm 00083
Fmt 6601
which are now near pre-recession levels.
Residential construction has improved
modestly
The gradual recovery in residential
construction activity continued over the second
half of last year. Both single- and multifamily
housing starts registered moderate increases
in 2015 (figure 18). Sales of new and existing
homes also rose moderately, abstracting from
the temporary plunge in existing home sales
in November, which reportedly rcllected
a lengthening in closing times due to new
mortgage disclosure rules (figure 19). But
while multifamily starts have recovered to their
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23566.024
Nor"E. Changes are calculated from
changes, which are calculated from Q3 to Q3
SouRCE: Federal Reserve Board, Statisucal Release Z.l, "Financial
Consumer confidence remains high
80
MONETARY POLICY REPORT: FEBRUARY 2016
pre-recession level, single-family construction
continues to be well below its earlier pace. The
level of housing starts is still being held down
by a meager pace of household formation,
tighter-than-average mortgage credit supply,
and shortages of skilled labor and other inputs
in the construction sector.
13
18. Private housing starts and pem1its
Month!~
M!lhonsoftnuts.armualrate
18
14
1.0
Although the October 2015 and January 2016
Senior Loan Officer Opinion Survey on
Bank Lending Practices (SLOOS) reports
suggest that a gradual easing of bank lending
standards has continued over the past six
months, mortgage credit is still difficult to
access for borrowers with low credit scores,
undocumented income, or high debt-toincome ratios2 For borrowers who can obtain
credit, interest rates on mortgages remain near
their historical lows, although they inched
up, on net, over the second half of the year
(figure 20). In 2015, outstanding mortgage
debt rose for the first time since the recession
as mortgage originations for home purchases
increased and write-downs of mortgage debt
continued to ebb.
19.
New and existing home sales
M!lhons.annualrate
Mdhons.arumalrate
7.5
I8
7.0
16
Exi~!ing
6.5
bnme sales
I4
6.0
L2
55
1.0
5.0
45
Business investment (private nonresidential
fixed investment) rose at an annual rate of
only Yi percent during the second half of 2015
after increasing at a 3 percent pace during the
first half of the year (figure 21). Spending on
equipment rose modestly, and a bit faster than
during the first half of 2015, but spending on
intangibles, such as research and development,
and investment in structures outside of
drilling and mining flattened out after posting
strong gains during the first half of the year.
Investment in structures used in the energy
sector continued to fall precipitously, as the
drop in oil prices has scuttled investment in
higher-cost oil and gas wells. For the year as a
whole, the pace of overall business investment
40
3.5
NOTE 'flle data extend through December 2015. "Ex1stmg home sales"
includes single-family, condo, townhome, and co..op sales
SoURCE: For new single-fam1ly home sales, Census Bureau; for existmg
bome sales, National As.socJation of Realtors
20.
Mortgage rates and housing affordability
lnde~
:\1ortgag_cratcs
185
165
145
125
105
85
2006
2. The SLOOS is available on the Board's website at
www.fcderalreserve.gov/boarddocs/snloansurvey.
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205
2008
2010
2012
2014
2016
NoTE· The housmg affordab1hty mdex data are monihly lhrough
November 2015 and t11e mortgage rate data are weekly through Febmary .'L
2016. At an index value of 100, a median-income family has exactly enough
income to qualify for a median-priced home mortgage. Housing a!Tordablhty
is seasonally adjusted by Board staff
SOURCE For housmg aiTordabihty index, Nat!OIJal AssociatJon of Realtors;
lOr mortgage rates, Freddie Mac Pnmary Mortgage Market Survey
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23566.025
Overall business investment has slowed
as a result of a sharp drop in investment
in the energy sector
81
14
21.
PART 1; RECENT ECONOMIC AND fiNANCIAl DEVElOPMENTS
Change in real private nonresidential fixed investment
PercenLannualrate
----------------113 Structures
II Equipment and intangible capital
16
slowed compared with 2014, mostly as a result
of the drop in the energy sector. Investment
has been supported by low interest rates and
financing conditions that are still generally
accommodative, though somewhat less so
than earlier.
Corporate financing conditions have
become somewhat less supportive
SouRCE' Department of Commerce, Bureau of Ewnomic Analysis
22.
Selected components of net financing for nonfinancial
businesses
Bt!honsofdo!lars,month!)·rate
Ill Commercial paper
fiR Bonds
80
II
HI
Bank loans
-Sum
60
40
20
20
40
Norr: The da1a for the components except bonds are seasonally adjusted
SouRCE Federal Reserve Board, Statistical Release Z.l, ''Financial
Accow1ts of the United States··
23.
Corporate bond yields, by securities rating
Perccntagepomt~
20
!8
!6
!4
!2
10
8
[_LLLLLLLLLLLLLLLLLLLLLJ
1998
2001
2004
2007
2010
20l3
2016
Non:. The y1elds shown are y1elds on 10-ycar bonds
So\JR(E BofA Merrill Lynch Global Research. used w1tb. penmssJOU
VerDate Nov 24 2008
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Domestic financial conditions for nonfinancial
firms have become somewhat less supportive
of growth since last June, particularly for
non-investment-grade firms. Equity prices have
declined and bond spreads have widened amid
concerns about the global economic outlook
and oil prices. Downgrades of bonds issued by
nonfinancial companies have increased, and
the leverage of these companies is near the
top end of its range over the past few decades.
Nonetheless, profitability has remained high
outside the energy sector. Against a backdrop
of low interest rates, investment-grade
nonfinancial businesses have continued to raise
substantial amounts of funds in bond and
loan markets since last June, in part to finance
mergers and acquisitions activity (figure 22).
Speculative-grade bond issuance also was solid
for much of 2015 but diminished toward the
end of the year as spreads widened notably,
particularly for firms in the energy sector
(figure 23).
Loan demand remained strong across most
major categories through the end of 2015.
Of note, demand for commercial real estate
(CRE) loans strengthened further and
issuance of commercial mortgage-backed
securities (CMBS) remained robust Credit
conditions tightened for this sector as concerns
about credit quality led to wider spreads
on CMBS and, according to the results of
the October and January SLOOS reports, a
moderate number of banks had tightened
lending standards for CRE loans, particularly
for construction and land development A
modest fraction of banks also reported having
tightened lending standards for commercial
and industrial loans to firms of all sizes since
the second quarter.
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23566.026
32
82
MONETARY POliCY REPORT: FEBRUARY 2016
The
from federal fiscal policy has
ended ...
24.
Change in real government expenditures on
consumption and investment
Perceot.mmualrale
After being a drag on aggregate demand
during much of the expansion, federal fiscal
policy has shifted to a more neutral stance as
fiscal consolidation efforts have abated. During
2015, policy actions had little effect on taxes
and transfers, and real federal purchases of
goods and services edged up (figure 24).
The federal budget deficit narrowed further in
fiscal year 2015 to 2'h percent of GOP, largely
reflecting the increase in tax receipts owing to
the ongoing economic expansion as well as the
modest increase in purchases (figure 25). A
deficit of this size is small enough to stabilize
the ratio of the debt held by the public to
nominal GOP; that said, the current level of
that ratio is elevated relative to its average
over the post-World War II period (figure 26).
The Congressional Budget Office projects the
deficit to move up to about 3 percent of GOP
in Jisca12016.
Federal
Ill State and local
2010
20li
2012
2013
2014
So\JRCE Department of Commerce, Bureau of EconomiC AnalySIS
25.
Federal receipts and expenditures
Percentofnomma!GDP
Anmci
Expenditures
22
Receipts
20
/\_/
18
16
14
NoTE. The recc1pts and expenditures data are on a unified~budget baSIS and
arc for fiscal years (October through September); gross domestic product
(GOP) data are for the four quarters ending in Q3
SouRn:: Office of Management and Budget.
26.
Federal government debt held by the public
Quarterly
90
80
70
60
In contrast, net exports still held down
growth in gross domestic product slightly
Exports held about flat in the second half of
2015, weighed down by the appreciation of the
dollar and by soft foreign economic growth
(figure 28). Although the stronger dollar made
imports more affordable, import growth was
also relatively subdued. Imports for inputs
related to oil exploration and production
26
24
... and state and local government
expenditures are rising moderately
Fiscal conditions of most state and local
governments continue to improve gradually.
Tax revenues have been rising moderately,
supported by the expansion of economic
activity and increasing house prices. These
governments boosted spending at a moderate
rate in 2015. In particular, real state and
local purchases of goods and services rose
1y, percent last year, as employment posted
another modest gain and real construction
spending rose markedly for the first time since
the recession (figure 27).
15
40
30
20
Non, The data extend through 2015:Q3. The data fOr gross domestic
prodttct (GDP) are at an annual rate Federal debt held by the pubhc equals
federal debt less Treas<uy secunties held in federal employee defined benefit
retirement accounts, evaluated at the end of the quaner.
SouRcE. For GOP, Department of Commerce, Bureau of Econom1c
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23566.027
Analysts; for federal debt, Federal Reserve Board, Statisllcal Release Z.l,
"Ftnancial Accounts oftl1e United States"
83
16
27.
PART 1: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
State and local employment and structures investment
B•llums of chamed (2009) dollars, llruluaJ ra!e
Emplov«.>s m m!l!wos
~-------- --------
320
--·l9.8
300
-!9.6
280
--·19.4
?60
-19.2
240
--19.0
220
were particularly weak, consistent with steep
declines in that industry. In all, real net trade
continued to be a drag on real GDP growth
in the second half of 2015. Although the
real trade balance deteriorated, the nominal
trade balance was little changed in 2015 in
part because the value of imports declined,
largely because of the decline in oil prices.
Still, the current account deficit widened a bit
to ncar 3 percent of nominal GDP as U.S. net
investment income declined (figure 29).
Financial Developments
Non;: The employment data are monthly, and the structures <lata are
q11arter!y
SoVRCF.: For employment data, Department of Labor, Bureau of Labor
S!atJstics; for structures data, DepartnH."'tt of Commerce, Bureau of Economic
Analysis.
28. Change in real imports and exports of goods
and services
Percenl.annualrate
II Imports
!5
Exports
12
HI
SouRCE: Department of Commerce, Bureau of Economic Analysis
29.
U.S. trade and current account balances
Pcrccrl!ofnomma!GOP
Quancdy
The expected path for the federal funds
rate over the next several years declined
Despite further strengthening in labor market
conditions and a range of other indicators
that market participants viewed as consistent
with continued expansion in the U.S. economy,
market -based measures of the expected path
of the federal funds rate over the next several
years have moved down, on balance, since the
middle of last year. Contributing to this shift
were concerns abont the foreign economic
outlook and global disinllationary pressures,
as well as Federal Reserve communications
anticipating that economic conditions will
warrant only gradual increases in the federal
funds rate. Survey-based measures of the
expected path of policy also moved down.
According to the results of the most recent
Survey of Primary Dealers, conducted by the
Federal Reserve Bank of New York just prior
to the January FOMC meeting, respondents'
expectations for the federal funds rate target
at the end of this year and next year were
lower than those reported last June. Marketbased measures of uncertainty about the
policy rate approximately one to two years
ahead declined, on balance, from their mid20 15 levels.
Longer-term Treasury yields decreased
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TERI
23566.028
Yields on longer-term nominal Treasury
securities have declined since the middle of
last year on net (figure 30). The decreases in
nominal yields largely reflected reductions
('uJTentaccount
84
17
MONETARY POliCY REPORT: FEBRUARY 2016
in inflation compensation; yields on longterm inflation-protected Treasury securities
were little changed. Participants in the U.S.
Treasury market reportedly were particularly
attentive to developments abroad, especially
turbulence in Chinese financial markets, and
to fluctuations in oil prices. Consistent with
the changes in yields on Treasury securities,
yields on 30-year agency mortgage-backed
securities (MBS)--an important determinant
of mortgage interest rates----decreased, on
balance, over the second half of 2015 and early
2016 (figure 31).
Broad equity price indexes decreased ...
Since the middle of last year, amid
considerable volatility, broad measures of
U.S. equity prices have decreased notably, on
net, as concerns about the foreign economic
outlook appeared to weigh on risk sentiment
and the outlook for corporate earnings growth
(figure 32). Stock prices for companies in the
energy and basic materials sectors dropped
sharply, reflecting the continued fall in oil and
other commodity prices. Implied volatility for
the overall S&P 500 index, as calculated from
options prices, increased, on balance, since
the middle of last year; at times, its movement
was notable.
. . . and risk spreads on speculative-grade
corporate bonds moved up substantially,
particularly for firms in lne energy sector
Credit spreads in the corporate sector have
widened across the credit spectrum. The
spread of yields on investment-grade corporate
bonds to yields on Treasury securities of
comparable maturity rose moderately, and
credit spreads on speculative-grade bonds
widened substantially. Spreads for firms in the
energy sector increased particularly sharply,
reflecting the further drops in the price of
oil since late June. Mutual funds investing in
speculative-grade bonds experienced significant
outflows over the second half of 2015 and
early 2016, and, in December, redemptions
from one such fund were suspended. During
the second half of last year, the respondents
30. Yields on nominal Treasury securities
NoTE" The Treaswy ceased pubhcation of the 30-year constant maturity
series on Febmary 18, 2002, and resumed that series on February 9, 2006
SoURcE: Department of the Treasury.
31.
Yield and spread on agency
securities
mortgage~ backed
_P_cr_ooo_'- - - - - - - - - - · - - - - - - B a m points
400
350
300
250
--- 200
150
JOO
50
Nou:_ The data are daily. Y1eld shov.n is for the Fannie Mae 30~ycar
current coupon, the coupon rate at which nevt mortgage-backed secuntws
would be priced at par, or face, value. Spread shown is to the average of the
5- and 10-year nominal Treasury yields
SoURce: Department of the Treasury; Bardays
32.
Equity prices
December3L2001"" 100
----------------
160
140
120
100
so
60
40
20
NoTE: For Dow Jones Indices licensing informatiOn, sec lhe note on the
Contents page
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SouRcE The Dow Jones Bank Index and the S&P 500 Index are a product
of S&P Dow Jones Indices LLC and/or its affiliates
85
18
PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS
to the Senior Credit Officer Opinion Survey
on Dealer Financing Terms reported a
moderate deterioration in liquidity and market
functioning in speculative-grade corporate
bonds and some tightening of the terms under
which dealers were willing to provide financing
to clients against such bonds.' In addition,
some metrics of corporate bond market
liquidity suggest a slight deterioration over the
second half of 2015 and early 2016, though
most indicators remain at levels comparable
with those seen prior to the crisis. For further
discussion of corporate bond markets and
other financial stability issues, see the box
"Developments Related to Financial Stability."
Short-term funding markets continued to
function well
Short-term dollar funding markets have
functioned smoothly during the second half
of 2015 and early 2016. Markets for unsecured
offshore dollar funding and repurchase
agreements, or repos, generally did not exhibit
signs of stress. Year-end funding pressures
were modest.
Money market participants continued to focus
on the Federal Reserve's use of its monetary
policy tools. These tools proved elfective in
raising the federal funds rate following the
FO M C's decision to increase the target range
in December, while other money market rates
also moved up broadly in line with the increase
in the federal funds target range. For a detailed
discussion, see the box "Monetary Policy
Implementation following the December 2015
FOMC Meeting" in Part 2.
Treasury market functioning and liquidity
conditions in the mortgage-backed
securities market were generally stable
Indicators of Treasury market functioning
have remained broadly stable over the second
half of 2015 and early 2016. A variety of
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3. More information on the Senior Credit Officer
Opinion Survey on Dealer Financing Terms is available
on the Board's website at www.federalreservc.gov/
econresdata/rcleases/scoos.htm.
86
MONETARY POLICY REPORTc FEBRUARY 2016
]
9
liquidity metrics-including bid-asked spreads
and bid sizes-have displayed no notable signs
of liquidity pressures over the same period.
In addition, Treasury auctions generally
continued to be well received by investors.
33.
Ratio of total commercial bank credit to nominal gross
domestic product
Quarter!~._·- - - -
Percent
Bank credit has continued to expand and
ban!<
rose further
Aggregate credit provided by commercial
banks increased at a solid pace in the second
half of 2015 (figure 33). The expansion in bank
credit was mainly driven by strong growth
in loans coupled with an increase in banks'
holdings of agency MBS. The growth of loans
on banks' books was generally consistent with
the SLOOS reports of increased loan demand
for many loan categories.
Measures of bank profitability remained
below their historical averages but improved
slightly during the third quarter of 2015 (the
latest available data), supported by lower
nonintcrest expenses (figure 34). Net interest
margins were about unchanged, on average,
during the third quarter. Delinquency and
charge-otl rates for most major loan types
were generally stable, near or at their lowest
levels since the financial crisis.
Among large bank holding companies (BHCs),
despite generally positive third- and fourthquarter earnings reports, equity prices have
decreased markedly, on balance, since the
middle of last year. The decline in bank equity
prices likely reflected concerns about global
growth, the etlccts of a flatter yield curve
on the outlook for bank profitability, and
potential losses due to the decrease in energy
prices. Credit default swap (CDS) spreads for
large BHCs increased on net.
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75
70
-~
65
60
55
I
l!!!l!!!l!!II.Utl!!!ll!!l!!!l!I!!Jt!!t!!l!!ll
2005
2007
2009
20ll
2013
!
2015
SouRcE: federal Rest'fVe Board, Statistical Release H.R, "Assel~ and
Liabilines of Commercial Banks in the United States''; DepartmeJJt of
Commerce, Bureau ofF..(;()nomic Analysis
34.
Profitability of bank holding companies
P..rcenf.annualrate
L5 --
l'ercent,ann!.lalrate
Retumonassets
20
TO
10
I0
20
Reserve Board, FR Y-9C, Consolidated Financial
Statements !Or Bank Holding Compames
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Liquidity conditions in the agency MBS
market were also generally stable. Dollarroll-implied financing rates for production
coupon MBS-an indicator of the scarcity of
agency MBS for settlement--suggested limited
settlement pressures over the second half of
2015 and early 2016.
87
20
PART 1: RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS
Developments Related to Financial Stability
Financial vulnerabilities in the U.S. financial system
overall have continued to be moderate since mid-2015.
Regulatory capital and liquidity ratios at large banking
firms are at historically high levels, and the use of
A.
Corporate bond spreads to similar-maturity Treasury
securities
Month!\'
Percent
short-term wholesale funding remains relatively !ow.
Debt growth in the household sector continues to be
modest and concentrated among borrowers with strong
!5
13
credit histories. Some areas where valuation pressures
were a concern have cooled recently; in particular,
II
High·yield spread
risk premiums for below-investment-grade debt have
widened. However, high leverage of nonfinancial
corporations makes some firms highly vulnerable to
adverse developments, such as lower oil prices or
slowing global growth,
Vulnerabilities owing to leverage and maturity
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NOTE. The spread is the IO·year yield for corporate bonds less the 10-year
Treasury yield; bond yields are estimated from a smoothed curve fit to OOnd
yields. and Treasury yield.~ are estimated from a smoothed curve fit to
off·tlJe-run Treasury securities
SOURCE: Department of the Treasury; SofA Merrill Lynch Global
Research, used with perm1ssion.
of speculative-grade bonds and leveraged loans has
slowed significantly, which also could reflect, in
part, an increase in investors' risk aversion. Despite
the volatility, most indicators of liquidity conditions
in corporate bond markets, such as trading volumes
and bid-asked spreads, deteriorated only slightly.
Nonetheless, the suspension of redemptions in
December by a high-yield hond mutual fund that
had a high concentration of very low-rated debt and
had experienced persistent outflows high lighted a
vulnerability at open-end mutual funds that offer
daily redemptions to investors while holding
Jess-liquid assets.
Commercia! real estate prices continued to rise,
supported in part by improved fundamentals, and
commercial real estate lending by banks accelerated
in recent quarters. However, spreads on securities
backed by commercial mortgages widened further
and bank lending standards reportedly have tightened
since july, suggesting that financing conditions have
become- a little less accommodative. In addition, late
last year, federal banking regulators issued a joint
statement reinforcing existing guidance for prudent risk
management in that sector. 1 Residential home prices
also continued to increase. However, price-to-rent
ratios do not suggest that valuations are notably above
1 _See Board of Governors of the Federal Reserve System,
and Office of the
Federal Deposit
Comptroller of the Currency
on Prudent Risk Manae,ement
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TERI
23566.032
transformation in the financial sector remain low.
Regulatory capital ratios at U.S, banking firms
increased further in the third quarter of 2015, and
holdings of high-quality liquid assets at banking firms
also remain at very high levels. In addition, some of the
largest domestic banks have reduced their reliance on
potentially less stable types of short-term funding. The
aggregate delinquency rate on bank loans declined to
its lowest level since 2006, though delinquency rates
on loans to the oil and gas industry, which account for
a small share of most banks' portfolios, have increased.
Bank underwriting practices in the leveraged loan
market have improved, on balance, over the past
year but occasionally still fall short of supervisory
expectations. Moreover, domestic banking firms have
only limited exposure to emerging market economies.
However, developments in foreign economies and
financial markets, particularly an escalation of recent
volatility or a worsening of the outlook for China, could
transmit risks through indirect financial linkages.
Net secured borrowing by dealers, primarily used
to finance their own portfolios of securities, continued
to decrease and is near historical lows, while securities
financing activities aimed at facilitating clients'
transactions also remain at low levels. The fatter is
consistent with reports that dealers have tightened
price terms for securities financing and derivatives. The
volume of margin loans outstanding-an important
component of overall leverage used by hedge fundsappears to have moderated. Short-term funding
levels remain relatively low, though reforms aimed at
reducing structural vulnerabilities in those markets are
still being implemented.
Overall asset valuation pressures have eased.
Corporate bond spreads increased notably and are
now above their historical norms (figure A). Those
spreads appear to have risen by more than the
compensation required for higher expected losses,
suggesting risk premiums have also increased. Issuance
88
MONETARY POLICY REPORT: FEBRUARY 2016
since July 2015, and forward price-to-earnings ratios
have fallen to a level closer to their averages of the past
three decades. Yields on longer-term Treasury securities
decreased over that period, and estimates of term
premiums remained low. Because many assets are priced
based on Treasury yields, their low level continues to
pose a risk to valuations of assets that have lower-thanaverage earnings yields. However, in December, the
Federal Reserve's increase in the target range for the
federal funds rate did not result in significant changes in
longer-term interest rates or their volatility.
The ratio of private nonfinancial sector credit to
gross domestic product remains below estimates of
its long-term upward trend, reflecting subdued levels
of household debt. Debt growth in the nonfinancial
business sector has slowed in recent months,
particularly among speculative-grade and unrated firms.
However, leverage of such firms has risen to historical
highs, especially among those in the oil industry, a
development that points to somewhat elevated risks of
distress for some business borrowers.
As part of its effort to improve the resilience of
financial institutions and overall financial stability,
the Federal Reserve Board has taken several further
regulatory steps. First, the Board finalized a rule that
increases risk-based capital requirements for U.S.
global systemically important bank holding companies
(G-SIBs)-' The applicable surcharges are calibrated
based on the systemic footprint of each U.S. G-SIB so
that the amount of additional capita! a firm must hold
increases with the costs that its failure would impose
in terms of U.S. financial stability. The G-SIB surcharge
rule is designed to ensure that U.S. G-SIBs either hold
substantially more capital, reducing the likelihood
that they will fail, or choose to shrink their systemic
footprint, reducing the harm that their failure would do
to the financial system.
Second, the Board announced that it is seeking
public comment on its proposed framework for
setting the Countercyclical Capital Buffer (CCyB)
and voted to affirm the CCyB amount at the current
level of 0 percent--consistent with the continued
moderate level of financial vu!nerabi!ities. 3 The
2. See Board of Governors of the Federal Reserve System
(2015}, "f-ederal Reserve Board Approves Final Rule Requiring
the largest, Most Systemically Important U.S. Bank Holding
Companies to Further Strengthen 1heir Capita! Positions;' press
release, July 20, www.federalreserve.gov/newsevents/press/
bcregl20150720a.htm.
3. See Board of Governors of the Federal Reserve System
(2015}, "FederJ! Res~rv{> Board SE'€'ks Public Comment on
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buffer is a macroprudential tool that can be used
to increase the resilience of the financial system by
raising capital requirements on internationally active
banking organizations when there is an elevated risk
of above-normal losses in the future. The CCyB would
then be available to help those banking organizations
absorb shocks associated with worsening credit
conditions, and it may also help moderate fluctuations
in the supply of credit. In releasing the framework
for comment, the Board consulted with the Federal
Deposit Insurance Corporation and the Office of the
Comptroller of the Currency. Should the Board decide
to increase the CCyB amount in the future, banking
organizations would have 12 months before the change
became effective, unless the Board established an
earlier effective date.
Third, the Board issued for public comment a proposed
rule that would impose total loss-absorbing capacity and
long-term debt requirements on U.S. G-S!Bs and on the
U.S. operations of certain foreign G-SIBs.' The proposal
would require each covered firm to maintain a minimum
amount of unsecured long-term debt that could be
converted into equity in a resolution of the firm, thereby
recapitalizing the finn without putting public money at
risk. The proposal would diminish the threat that a G-SIB's
failure would pose to financial stability and is an important
step in addressing the perception that certain institutions
are "too big to fail."
Finally, the Board, acting in conjunction with
other federal regulatory agencies, issued a final
rule imposing minimum margin requirements on
certain derivatives transactions that are not centrally
deared. 5 The swap margin rule will reduce the risk
that derivatives transactions would act as a channel for
fin;mcia! contagion and, by imposing higher margin
requirements on uncleared swaps than apply to cleared
swaps, will incentivize market participants to shift
derivatives activity to central clearinghouses.
Proposed Polley Statement Detailing the Framework the Board
Would r-ollow in Setting the Countercyclical Capital Buffer
(CCyB)," press rdease, December 21, www.federalreserve.gov/
newsf.'vents/pressAxreg/201.'> 1221 b.htm.
4. See Board of Governors of the Federal Reserve System
(2015), "Federal Reserve Board Proposes New Rule to
Strengthen the Ability of largest Domestic and Foreign
Banks Operating in the United States to Be Resolved without
Extraordinary Government Support or Taxpayer Assistance,"
press release, October 30, www.federalreserve.gov/
newsevents/presslbcreg/20151 030a.htm.
5. See Board of Governors of the Federal Reserve System,
redera! Deposit Insurance Corporation, Office of the
Comptroller of th(• Currency, Farm Credit Administr<Jtion, and
Federal Housing Finance Agency (2015), "Agencies Finalize
Swap Margin Rule," joint press release, October 30, www.
federa!reserve.gov/newsevents/press/bcreg/20 151 030b.htm.
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historical norms, and residential mortgage debt growth
remains minimal.
Broad equity indexes have declined significantly
21
89
22
PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS
The M2 measure of the money stock has
increased at an average annualized rate of
about 6 percent since last June, about the
same pace registered in the first half of
2015 and faster than nominal GDP growth.
Demand for liquid deposits has continued to
boost M2 growth.
Municipal bond markets functioned
smoothly, but some issuers remained
strained
Credit conditions in municipal bond markets
have generally remained stable since the middle
of last year. Over that period, the MCDX · an
index of CDS spreads for a broad portfolio
of municipal bonds-and ratios of yields on
20-year general obligation municipal bonds to
those on longer-term Treasury securities edged
up on net.
Nevertheless, significant financial strains
were still evident for some issuers. In
particular, Puerto Rico, which continued
to face challenges from subdued economic
performance, severe indebtedness, and other
fiscal pressures, defaulted on some bond
issues not backed by guarantees from the
commonwealth and is seeking to restructure
its debt.
International Developments
The dollar continued to strengthen ...
130
125
120
115
110
105
100
95
Nmc: The data, which are m fore1gn currency units per dollar, arc weekly
averages of datly data and extend through Febmary 4, 2016
Federal Reserve Board. Statistical Release H.IO, "Foreign
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The foreign exchange value of the dollar
rose further, on net, since the middle of
last year, bringing its increase since mid2014, when the most recent run-up began,
to over 20 percent by the beginning of 2016
(figure 35). Expectations that the Federal
Reserve would soon start increasing its policy
interest rates, even while most foreign central
banks maintained or expanded monetary
policy accommodation, boosted the value
of the dollar. (For more discussion, see the
box "Monetary Policy Divergence in the
Advanced Economies.") The dollar has also
appreciated against the renminbi since last
summer, when the People's Bank of China
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35. U.S. dollar exchange rate indexes
90
MONETARY POLICY REPORT: FEBRUARY 201 &
(PBOC) announced it was changing its policy
to allow market forces to play a greater role
in determining the renminbi's exchange rate.
The PBOC allowed the renminbi to depreciate
3 percent against the dollar in August and
another 1y, percent after the turn of the
year. These developments, which contributed
to intensified uncertainty about China's
exchange rate policy and the prospects for its
economy, fostered episodes of global market
turbulence that further boosted the dollar.
Investors became more focused on downside
risks to prospects for growth in China and, by
implication, global growth. These concerns
about growth, along with still-strong oil
production and high inventories, contributed
to a sharp drop in commodity prices, which
in turn weighed on the currencies of several
commodity-exporting countries.
36.
Equity indexes for selected foreign economies
Week!~
Januarv4,2{)13~JOO
240
220
200
ISO
!60
140
I20
... while equity prices and foreign
sovereign bond yields have declined
Triggered in part by the unexpected
devaluation of the renminbi and an ensuing
increase in concerns about global economic
growth, equity indexes have dropped, on net,
in most emerging market economies (EMEs)
and advanced foreign economies (AFEs)
since the beginning of the summer (figure 36).
In particular, Chinese stock prices tumbled
more than 40 percent despite official
interventions, including circuit breakers and
bans on stock sales, that were intended to mute
some of the downward pressure. The fall in
Brazilian stock prices was also very sharp, as
global market turbulence as well as domestic
developments, including a corruption scandal,
declining output, and persistent high inflation,
prompted stock prices to fall nearly 25 percent
since last summer.
23
100
80
60
No1E: The data are weekly averages of daily data and extend through
February 4, 2016. For Dow Jones Indices licensmg informatiOn, see the note
on the Contents page.
SO"L"RCE: For Japan, Tokyo Stock Price Index (TOPIX): for the euro area,
Dow Jones Euro STOA'X Index; for China, Shanghai Composite Index: ti:x
emerging markets, Morgan Stanley Emergmg Markets MXEF Capital Index:
all vm Bloomberg
37.
10-year nominal benchmark yields in selected
advanced economies
Weekly
3.0
2.5
2.0
]5
I0
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As in the United States, I0-year sovereign
yields declined in most AFEs, likely in part
because of increasing concerns about potential
deflationary pressure amid falling commodity
prices (figure 37). In the euro area, Greek
sovereign yields, which had risen sharply in
the first half of the year, declined substantially
91
24
PART 1o RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS
Monetary Policy Divergence in the Advanced Economies
As recovery has gradually taken hold in the U.S.
economy over the past few years, both activity and
A. Two-year overnight index swap rates in selected
advanced economies
inflation in the advanced foreign economies {AFEs)
have remained persistently weak. This divergence in the
economic outlooks for the United States and the AFEs
Percent
United Kingdom
has led to expectations of divergence in their monetary
1.2
policies. Although the Federal Reserve raised its target
for the federal funds rate in December, policy rates
in most AFfs are near zero (and negative for several
economies) and are expected to remain low for several
years. Furthermore, the European Central Bank (ECB)
and Bank of Japan are providing further monetary
accommodation through sizable asset purchase
programs, and both of these central banks have
-
.8
.4
.4
indicated that asset purchases will continue, given that
inflation remains well below target. Given this ongoing
monetary easing, the average policy rate expected
by market participants over the next 24 months has
declined in the euro area and Japan since 2014, while
that of the federal funds rate gradually increased over
this period as "liftoff" approached (figure A).
Two effects of these policy divergences that operate
SoURcE: Bloomberg.
are observed between U.S. and German yields on
days when the Federal Reserve has made policy
announcements. In the context of economic and policy
divergences, these monetary policy spillovers may
through financial markets have important consequences
for the economies invo!ved. 1 First, and most obviously,
monetary policy divergences have given rise to changes
in exchange rates: Portfolio rebalancing by international
investors toward economies and currencies with higher
interest rates has put downward pressure on AFE
currencies, and the dollar has appreciated significantly
against these currencies since mid-2014 (text figure 35).
alter financial conditions in other countries in ways
that are not necessarily consistent with their cyclical
stabilization needs. For example, recent monetary
This dollar appreciation has contributed to the drag
accommodation abroad. However, the implications
of current policy divergences for monetary spillovers
that U.S. net exports have exerted on U.S. economic
growth in recent quarters, but the stronger dollar also
has contributed to cyclical stabilization abroad as
expenditures have shifted toward weaker economies.
This effect on international trade is also a consideration
easing abroad likely has had a tempering effect on
longer-term U.S. interest rates that partially offsets the
effect of our own policy normalization. Analogously,
reduced monetary accommodation in the United States
likely will partially offset the effect of greater monetary
should not be exaggerated: U.S. policy remains
accommodative and, on net, likely continues to
contribute to accommodative conditions abroad.
for U.S. and foreign monetary policies: All else being
equal, a smaller contribution to the U.S. economy
from the external sector likely points to a more gradual
pace of policy normalization in the United States. By
the same token, the economic stimulus from moredepreciated currencies abroad may allow AFE central
banks to provide less monetary accommodation~-or
to start removing it earlier-than would otherwise be
the case.
Second, the effect of monetary policy actions
on financial conditions may spill over to interest
rates in other countries. For example, on ECB policy
announcement days, changes in U.S. and German
long-term sovereign yields historically have been
B.
--
One-day changes in U.S. and Gennan 10-year yields
on ECB policy announcement days, 1999·-2015
US JQ.yearymldcbanges
.Bas!spoints,l...tayctmnges
·-·--·~~-
Correlation '"' 0.58
..
25
-20
L'
10
highly correlated (figure B); similarly large correlations
policy-20160208.html.
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NoTE" Each point represents the one-day change in
to-year yields on the day of an ECB pOii\.-.)' announcement
1E)<)9 and April 2015. 111e !me indicates the line of best fit
SOURL'E: For U.S. y1elds, Department of the Treasury: for German yields,
Bf<mmberg; for announcement dates, European Central Bank
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1. for more detail, see John Ammer, Michiel De Pooter,
Christopher Erceg, and Steven Kamin (2016), "International
Spillovers of Monetary Policy," IFOP Notes (Washington:
Board of Governors of the Federal Reserve System,
Februmy 8), www.federalreserve.gov/econresdataJnotcsf
lfdp-notes/2016/inteniationa!-spillovers-of-monetary-
92
MONFTARY POLICY REPORT: FEBRUARY 2016
as an agreement was reached last summer
between the European Union and Greece. In
contrast, bond spreads in a number of EMEs
rose modestly, on net, in the second half of the
year before moving up more steeply after the
start of 2016 amid a widespread increase in
risk aversion.
Growth in the emerging market
economies moved back up from earlier in
2015 ...
38.
Real gross domestic product growth in selected
emerging market economies
Percent, annual rate
Quarterly
II. China
15
~Korea
•
Following weak growth in the first half
of 2015, economic activity in the EMEs
improved in the second half, as the pace of
growth picked up in Asia and Latin America
(figure 38). However, growth has been held
back in part by exports from EMEs, which
declined appreciably early in 2015 and remain
subdued on average.
Economic activity in most of emerging Asia,
which had been restrained in the first half of
the year by soft external demand and by the
outbreak of MERS (Middle East Respiratory
Syndrome) in South Korea, picked up in the
second half, as the drag from these pressures
subsided. In China, GDP growth is reported
to have held steady around 7 percent in the
second half of the year, boosted in part by
relatively strong growth in services. However,
weak manufacturing, as well as the financial
market volatility noted previously, Jed to a
pronounced heightening of concerns about the
economy during the second half of the year.
25
Mexico
Brazil
• Gross domestic product of Brazil is not yet available for 201 5:Q4
Non:.: The data for Mexico incorporate the flash: estimate for 20I5·Q4
staff The data for Mexico,
Bruni, and Korea are seasonally adjusted by their respective government
·nlC data for China are seasonally adjusted by
agenc1es.
SOURCE: For Ch:ina, China Natioool Bureau ofStatJstics; for Korea, Bank
of Korea; for Mexico, Instttuto Nacional de Estadistica Geografia e
Informatica; for Braz1l, Instituto Brasileiro de Geografia e Estadistica; all via
Haver Analyncs
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In Latin America, the decline in commodity
prices, along with other macroeconomic
challenges, continued to weigh on the
economic activity of several countries. In
Mexico, the economy continued to grow at
a moderate pace in the second half of 2015,
supported by improving household demand.
However, low oil prices have pressured
public finances, and manufacturing exports
faltered toward the end of the year. In Brazil,
the economy is undergoing its most severe
recession in decades. Tight monetary policy
in response to high inflation, low commodity
93
26
PART 1: RECENT ECONOMIC AND FINANCIAl DEVELOPMENTS
prices, and the fallout from a high-profile
corruption scandal eroded business confidence
and contributed to a collapse in investment.
Inflation remained subdued in many EMEs,
as the continuing decline in commodity prices
contributed to a moderation of headline
inflation. Consequently, some central banks,
including those of Korea and India, loosened
monetary policy to support growth. In China,
the PBOC also lowered its benchmark rate and
cut the reserve requirement ratio in August and
October to address weakness in the economy.
In contrast, faced with inflationary pressures
stemming partly from their depreciating
currencies, Brazil, Chile, and Colombia raised
their policy rates in the second half of 2015 .
. . . and in the advanced foreign
economies, economic activity expanded
at a moderate pace
Percem,mmualrate
8 Umted Kingdom
Will Japan
__ , 4
- ~~::~ ~ II li't ,
::__u_ I
-
I
~L
-,
-2
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As in the United States, inflation remained low
in most advanced foreign economies. Further
declines in commodity prices weighed on
in11ation in the AFEs; in the euro area, Japan,
and the United Kingdom, consumer prices
changed little in 2015. Over the same period,
consumer prices rose about l Y2 percent in
Canada, reflecting the boost to import prices
from the sharp depreciation of the Canadian
dollar over the past year.
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39. Real gross domestic product gwwth in selected
advanced t{>reign economies
In Canada, where low oil prices induced a
mild contraction earlier in the year, economic
activity rebounded in the third quarter
as exports recovered and business-sector
investment contracted at a slower pace.
That said, more recent indicators of growth
weakened markedly during the fourth quarter.
In contrast, in the euro area, Japan, and the
United Kingdom, economic activity grew
moderately in the third quarter, and recent
indicators for fourth-quarter growth, such as
purchasing managers indexes, have largely held
steady (figure 39).
94
MONETARY POLICY REPORT: FEBRUARY 201 n
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as necessary. The Bank of England announced
that it will start shrinking its balance sheet
only after its policy rate rises to about
2 percent from its current level of 'h percent.
Meanwhile, in response to weak economic
performance earlier in 2015, the Bank of
Canada cut its policy rate further. More
recently, the Bank of Japan cut the interest
rate that it pays on a portion of banks' current
account deposits to negative 0.1 percent.
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With inflation low, AFE central banks
maintained highly accommodative monetary
policies, and some signaled their intention
to maintain large balance sheets well in to
the future. The European Central Bank, in
addition to lowering its deposit rate further
into negative territory, announced an extension
of the intended duration of its asset purchase
program through at least March 2017 and that
it would reinvest principal payments for as long
27
95
29
PART
2
MoNETARY Poucy
In December, the f"ederal Open Market Committee (FOMC) raised the target range for the federal
funds rate by '14 percentage point after seven years in which that rate had been held near zero.
The FOMCs decision reflected the considerable improvement in the labor market last year and
the Committee's assessment that, even with the modest reduction in policy accommodation, the
labor market would continue to strengthen and inflation would return over the medium term to
the f"OMCs 2 percent objective. Monetary policy remains accommodative, and the Committee
expects that economic conditions will warrant only gradual increases in the federal funds rate.
However, the actual path of the federal funds rate will depend on the economic outlook as
informed by incoming data.
The FOMC raised the federal funds rate
target range in December ...
Since last March, the FOMC had anticipated
that it would be appropriate to increase the
federal funds rate when it had seen further
improvement in the labor market and was
reasonably confident that inflation would
move back to 2 percent over the medium term.
In December, the FOMC,judging that these
criteria had been met, raised the target range
for the federal funds rate to '14 to y, percent
(figure 40) 4
4. See Board of Governors of the Federal Reserve System (2015), "Federal Reserve Issues FOMC Statement,"
press release, December 16, www.federa1reserve.gov/news
events/press/monctary/20 151216a.htm.
40.
The Committee's decision to raise the federal
funds rate recognized the time it takes for
policy actions to affect future economic
outcomes; if the FOMC delayed the start of
policy normalization for too long, a relatively
abrupt tightening of policy might eventually be
needed to keep the economy from overheating
and inflation from significantly overshooting
the Committee's 2 percent objective. Such
an abrupt tightening cDuld disrupt financial
markets and perhaps even inadvertently push
the economy into recession.
... but monetary policy remains
accommodative
Even after the increase in the federal funds
rate late last year, the stance of monetary
Selected interest rates
Dmty
Percent
1130 4130 815 !0/~9 !/28 4/29 &ll2 !114 1127 4128 \'.lltl ll/3 !/26 4127 8N 11/2 !125 4115 ~fl !(1114 t!JO Vl 7!}1 1013() 1129 4/30 7130 10/29!/)8 4/2Q 7/2Q J0/28 J/27
3fll\ 61259!16 121163/18 6124 WlJ121J63!!6 6123 Q/11121!43/15 6!'11 «11112!133.!13 6!20 91!312/12 3120 6/JQ 9/l& 1211:0!!9 6Jl8 9117 !21!73/18 6!!7 9/1712116
2008
2009
2010
2011
2012
20l3
2014
2015
2016
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NOIE. 'l11e 2~year and I 0-year Treasury rates arc the constant-maturity yJCids based on the most ac!Jve!y traded securities. The dates on the honzontal axis are
those of regularly scheduled Federal Open Market Committee meetmgs.
SOURCE: Deparimenl of the T rcasury, Federal Reserve Board
96
PART 2: MONETARY POLICY
policy remains accommodative. The FOMC
anticipates that economic conditions will
evolve in a manner that will warrant only
gradual increases in the federal funds rate,
and that the federal funds rate is likely to
remain, for some time, below the levels that are
expected to prevail in the longer run.
This expectation is consistent with the view
that the neutral nominal federal funds ratedefined as the value of the federal funds
rate that would be neither expansionary nor
contractionary if the economy was operating
at its productive potential-is currently low by
historical standards and is likely to rise only
gradually over time. One indication that the
neutral federal funds rate is low is that U.S.
economic growth has been only moderate in
recent years despite the very low level of the
federal funds rate and the Federal Reserve's
very large holdings of longer-term securities.
Had the neutral rate been running closer to
the average level estimated to have prevailed in
recent decades, these policy actions would have
been expected to foster a much more rapid
economic expansion.
An array of persistent economic headwinds
have weighed on aggregate demand since the
financial crisis; these headwinds included, at
various times, limited access to credit for some
borrowers, contractionary fiscal policy, and
weak growth abroad coupled with a significant
appreciation of the dollar. Although the
overall restraint imposed by such headwinds
has declined over the past few years, the effects
of some headwinds have remained significant.
As these effects abate further, the neutral
federal funds rate should gradually move
higher over time. (for a discussion of how the
neutral federal funds rate is likely to evolve
over time, see the box "The Neutral Federal
Funds Rate in the Longer Run.")
Another reason that the Committee expects
only a gradual increase in the federal funds
rate will be warranted is that, with the federal
funds rate near zero, the FOMC can respond
more readily to upside surprises to inflation,
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economic growth, and employment than to
downside shocks. This asymmetry suggests
that it is appropriate to be more cautious in
normalizing the stance of monetary policy
than would be the case if short-term nominal
interest rates were appreciably above zero.
In part reflecting this concern, the FOMC
continued to reinvest principal payments from
its securities portfolio, and the Committee
expects that this reinvestment policy will be
maintained until normalization of the level
of the federal funds rate is well under way.
Maintaining sizable holdings of longer-term
securities should help support accommodative
financial conditions and reduce the risk that
the Committee would not be able to deliver
sufficient accommodation by lowering the
federal funds rate in the event of future
adverse shocks.
The FOMC expects that, supported by an
accommodative monetary policy, economic
activity will continue to expand at a moderate
pace and the labor market will continue to
strengthen. Inflation is expected to remain
low in the near term, in part because of recent
further declines in energy prices, but to rise
to 2 percent over the medium term as the
transitory effects of declines in energy and
import prices dissipate and the labor market
strengthens further. ln light of the current
shortfall of inflation from 2 percent, the
Committee is carefully monitoring actual and
expected progress toward its intlation goal.
The FOMC's policy decisions will
continue to be data dependent
Although the Committee expects that
economic conditions will warrant only
gradual increases in the federal funds rate,
the Committee has emphasized that the
actual path of monetary policy will depend
on how incoming data affect the economic
outlook. In determining the timing and
size of future adjustments to the target
range, the Committee will assess realized
and expected economic conditions relative
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30
97
31
MONETARY POLICY REPORT: ffBRUARY 2016
mortgage-backed securities at approximately
$1.8 trillion. Consequently, total liabilities
on the Federal Reserve's balance sheet were
largely unchanged.
to its objectives of maximum employment
and 2 percent inflation. Stronger growth or
a more rapid increase in inflation than the
Committee currently anticipates would likely
call for faster increases in the federal funds
rate; conversely. if conditions prove weaker,
a lower path of the federal funds rate would
likely be appropriate. Similarly, the timing
of a change in the reinvestment policy will
depend on economic developments and their
implications for progress toward the FOMC's
goals of maximum employment and price
stability. In assessing realized changes in
economic conditions and forming its outlook,
the Committee will take into account a
wide range of measures, including measures
of labor market conditions, indicators of
inflation pressures and inflation expectations,
and readings on financial and international
developments.
Given the Federal Reserve's large securities
holdings, interest income on the SOMA
portfolio has continued to support substantial
remittances to the U.S. Treasury Department.
Preliminary results indicate that the Reserve
Banks provided for payments of $97.7 billion
of their estimated 2015 net income to the
Treasury. In addition, the Reserve Banks
transferred to the Treasury $19.3 billion
from their capital surplus as required by
an amendment to the Federal Reserve Act
contained in the Fixing America's Surface
Transportation Act of 2015. Remittances from
2008 through 2015 total about $600 billion
on a cumulative basis-an average of about
$75 billion a year, compared with about
$25 billion a year, on average, over the decade
prior to 2008.
The size of the Federal Reserve's balance
sheet has remained stable
With the continuation of the Committee's
reinvestment policy, the Federal Reserve's total
assets have held steady at around $4.5 trillion
(figure 41 ). Holdings of U.S. Treasury
securities in the System Open Market Account
(SOMA) have remained at $2.5 trillion,
and holdings of agency debt and agency
4l
The Committee continued to focus on the
implementation of monetary policy
Consistent with the FOMC's Policy
Normalization Principles and Plans published
on September 17, 2014, the Federal Reserve
used interest paid on reserve balances
Federal Reserve assets and liabilities
Tn!!u:msofdollars
Week!"-'---------
-45
-Assets
4.0
-3.5
Other assets
3.0
2.5
-2.0
-L5
I0
'
-0
5
·-· 1.0
-1.5
-20
2.5
-3.0
-3.5
-- 4 0
4.5
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Non:. "Credit and hquidity facilities". cons is~ of J?fllUaJY, second~, and seasonal cr~dit, tc_rm auction credit; central bank hq0 d1ty swaps; support for !\1aiden Lane,
Bear_ Steams. ~nd AlG; and oth?r credit facilttJcs, mc_!uding the Primary Dealer Crcd1t Fac1!ity. the Asset~-!3acked Commcn;Jal_Papcr Money M~rkct Mutual Fund
Ll(jULdJty Facthty, ~e C'onunercJal Paper ~undin~t Fac1liry, -~d the_ Tcnn Asset-Backed Securitws Loan Fac1hty. "Other assets" mdudes unamortJ;r..ed premitmts and
discmmts on scct~nttes held outright. "Cap1tal and other habd!tles" mcludes reverse repurchase agreements, the US. Treastuy Genera! Accmmt, and rhe US Treasury
Supplementary Fmancing AccoWlt. The data extend through February 3. 2016
Somwr Federal Reserve Board, Statistical Release H.4.l, '·Factors Atfectmg Reserve Balances"
98
32
PART L
MONETARY POLICY
The Neutral Federal Funds Rate in the longer Run
As discussed in the main text, t.."Conomic growth
has been only moderate in recent years despite
the very low level of the federal funds rate and the
Federal Reserve's large-scale purchases of longer-term
securities. This observation suggests that headwinds
have lowered the "neutral" federal funds rate-<Jefined
as the value of the federal funds rate that would be
neither expansionary nor contractionary if the economy
was operating at its productive potential-to historically
low levels.
As economic disturbances dissipate, the neutral
federal funds rate should rise to its expected longer-run
level. This longer-run value of the neutral rate plays an
important role in monetary policy analysis: It is a key
determinant of the longer-run level of the federal funds
rate and other nominal interest rates. When expressed
on a real basis, it also corresponds to the intercept
of simple policy rules such as those studied in Taylor
(1993).' Like the current neutral rate, the longerrun value of the neutral rate is not directly observed
and must be estimated using the available data and
potentially imperfect models of the economy.
Since 2012, the median of the projections of
the longer-run level of the federal funds rate in the
Federal Open Market Comminee's Summary of
Economic Projections has fallen from 4.25 percent to
3.50 percent. 2 In addition, several econometric studies
have estimated a decline in the longer-run value of the
neutral rate by statistically modeling the co-movements
between variables like inflation, interest rates, output,
and unemployment. 3 Figure A shows estimates from
2. See the December 2015 Summary of Economic
Projections, which appeared as an addendum to the minutes
of the December 15·-16, 2015, meeting of the Federal Open
Market Committee and is included as Part 3 of this report.
3. See, for example, Benjamin K. Johannsen and Elmar
Mertens (forthcoming), "The Expected Real Interest Rate in
the long Run: Time Series Evidence with the Effective lower
Bound," FEDS Notes {Washington: Board of Governors of
the federal Reserve System); Michael T. Klley (2015), 'What
Can the Data Tel! Us about the Equilibrium Real Interest
Rate?" Finance and Economics Discussion Series 2015-077
(Washington: Board of Governors of the Federal Reserve
System, August), www.federalreserve.gov/econresdata/
feds/201 S/fi!es/2D15077pap.pdf; Thomas Laubach and John
Wi!Hams (2015), "Measuring the Natural Rate of Interest
Redux," Hutchins Center Working Papers 15 (Washington:
Brookings Institution, November), www.brookings.edu/-/
media/Research/Fi!es/Papers/2015/l 0/30-laubach~wil!iams/
WP15~lauhach-Wi!liams-natural~interest~rate-redux-2.
pdf?!a=en; and Thomas A lubik and Christian Matthes {2015),
"Calculating the Natural Rate of Interest: A Comparison of Two
15~ 10 (Richmond:
Federal Reserve Bank of Richmond, October), https://www.
r!chmondfed.orgl-/mt"dialrlchmondfedorglpub!ications/
rese<uch/economic~brief/2015/pdf/eh_lS-1 O.pdf. In these
Alternative Approaches," Economic Brief
and also employed an overnigbt reverse
repurchase agreement (ON RRP) facility
to implement its decision in December to
raise the target range for the federal funds
rate.' Specifically, the Board of Governors
raised the interest rate paid on required and
excess reserve balances to y, percent, while
the FOMC authorized ON RRP operations
at an o(fering rate of Y. percent. (For further
information, sec the box "Monetary Policy
5. See Board of Governors of the Federal Reserve
System (2014), "Federal Reserve Issues FOMC
Statement on Policy Normalization Principles and
Plans," press release, September 17, www.federalreserve.
gov/ncwsevents/prcss/monctary/20 l40917c.h tm.
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Implementation following the December 2015
FOMC Meeting.") In addition, the Board
of Governors approved an increase in the
discount rate (the primary credit rate) to
I percent.
Along with the decision to increase the target
range for the federal funds rate, the FOMC
also temporarily suspended the aggregate
cap on ON RRP transactions, indicating that
ON RRP operations would be undertaken in
amounts limited only by the value of Treasury
securities held outright in the SOMA that
are available for such operations and by a
per-counterparty limit of $30 billion per
day. Nonetheless, total reverse repurchase
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23566.043
1. See- john B. Taylor (1993), "Discretion versus Policy Rules
ln Practice," Carnegie-Rochester Conference Series on Public
Policy, vol. 39 (December), pp. 195~214.
99
MONETARY POLICY REPORT: FEBRUARY 2016
two time-series models of the longer-run value of the
A
33
Estimates of the neutral real rate in the longer run
neutral rate, expressed on a real basis. One is from
Johannsen and Mertens (forthcoming), and the other
is from Laubach and Williams (2015).' The figure
includes the uncertainty bands for the Johannsen and
Mertens estimates, which indicate that the uncertainty
surrounding the longer-run value of the neutral rate is
substantial (as it is in other model frameworks).
Uncertainty about the longer-run value of the
neutral rate implies uncertainty about the expected
cumulative rise in policy rates during the policy
normalization process. The risk that the longer-run
value of the neutral rate going forward could be
lower than currently estimated is especially pertinent,
because such a scenario would likely increase the
probability that monetary policy will be constrained
by the effective lower bound on nominal interest
rates in the future 1 with adverse consequences for
macroeconomic outcomes.
studies, the longer-run value of the neutral rate is sometimes
referred to as the longer-run value of the "natural" rate or the
longer-run "equilibrium" federal funds rate.
4. The estimates from the Johannsen-Mertens and laubachWil!iams models are not the same because the models use
different data to infer slack in the economy and because the
model restrictions and estimation methods are different.
agreement transactions with the Federal
Reserve have remained near levels observed
prior to the increase in the target range for
the federal funds rate and the suspension of
the aggregate cap. The Committee intends
to phase out this facility when it is no longer
needed to help control the federal funds rate.
Non::: The data extend through 20l5:Q3. For the Johannsen-Mertens
model, at each date, the parameters of the model and the longer-nm
equilibrium real rate are JOintly estimated u..<>ing data up to that date. For the
Laubach-Williams model, the parameters are estimated on the enttre data
sample, bllt estimates of the longer-run equilibrium rca! rate use data only up
to the: date of interest Shaded regions are 50 and 90 percent uncertainty
bands from the Johannsen-Mcrtens mode!. The shaded bars indicate periods
of busmess recession as defined by the National Bureau of Economic
Research.
SOURCE; Benjamin K. Johannsen and Elmar Mertens (forthcoming), "The
Expected Real Interest Rate in the Long. Run: Time Series Evidence with the
EffectJVe Lower Bound," FEDS Notes (Washington: Board of Governors of
the Federal Reserve System). and Thomas Laubach and Jolm Williams
(20 15), "Measuring the Natural Rate of Interest R<..-dux," Hutchins Center
Workmg Papers 15 {Washington: Brookings lmtitution, November).
www. brookings edu/-/media!Research/Files!Papersno 1511 0/30-JauhachwiHiams!WPJ5-Laubach-Williams-natural-interest-rate-redux-2.pdf?la=en
tools. Three Term Deposit Facility operations
were conducted in the second half of 2015.
The operations offered either 7- or 14-day
deposits at a floating rate of l basis point over
the interest rate on excess reserves. In these
operations, deposit volumes declined slightly
from previous tests with similar parameters.
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The Federal Reserve also continued to test
the operational readiness of other policy
100
34
PART 2: MONETARY POLICY
Monetary Policy Implementation following the
December 2015 FOMC Meeting
At its December 2015 meeting, the Federal Open
Market Committee (FOMC) increased the target range
for the federal funds rate from between 0 and 1/4 percent
to between v.~ and 112 percent, effective December 17. 1
In order to implement the monetary policy stance
announced in December, the Board of Governors also
voted to raise the interest rate paid on required and
excess reserve balances to 0.50 percent Moreover, the
fOMC authorized an increase in the overnight reverse
repurchase agreement (ON RRP) facility offering rate to
0.25 percent and indicated that the aggregate amount
of the ON RRP operations would be constrained only
by the value of Treasury securities held outright in
the System Open Market Account that are available
for such operations. 2 Each of these monetary policy
decisions is consistent with the guidance provided in
the Policy Normalization Principles and Plans outlined
in the july 2015 Monetary Policy Report. 3
Federal Reserve System
Reserve Issues FOMC Statement," press
December 16, www.federa!reserve.gov/newsevents!
press/monetary/20151216a.htm.
2. In a related action, the Board of Governors voted to
approve a lf4 percentage point increase in the discount rate to
1 percent
3. See the box "Policy Normalization Principles and Plans:
Additional Details" in Board of Governors of the Federal
Reserve System (2015), Monetary Policy Report (Washington:
Board of Governors, July), p. 35, www.federalreserve.gov/
The effective federal funds rate rose to 0.37 percent
at the time of the change to the target range lor the
federal funds rate amid orderly trading conditions in
money markets (figure A}. Since the increase in the
target range, the effective federal funds rate has traded
in a relatively narrow range of 0.35 to 0.38 percent,
with !he exception of month-ends, when the rate fell
temporarily in typical fashion. Increases in interest rates
in other money markets were similar to the rise in the
federal funds rate following the December meeting,
with overnight Eurodollar rates closely tracking the
effective federal funds rate and the general collateral
repurchase agreement (or repo) rate maintaining
spreads to unsecured rates similar to those observed
before the December meeting.
Total volume in the ON RRP facility was virtually
unchanged on the day after the December meeting
(figure B). In the weeks following the December
meeting, the total amount of Federal Reserve reverse
repurchase agreement {RRP) operations reflected
typical calendar-related effects. On year-end, volume
in the ON RRP facility was nearly $475 billion, roughly
in line with aggregate RRP operations seen on recent
quarter-ends. Following year-end, usage of the ON RRP
facility rapidly returned to--and has remained at-levels that prevailed before year-end, consistent with
recent quarter-end patterns.
monetarypolicy/iiles/20 150715_mprfu!!report.pdf.
A
B.
Effective federal funds rate
Daily
Reverse repurchase agreement operations
Bas1spmnts
-
Target federal f1mds rate
Effective federal funds rate
75
120
110
!00
feon RRP
II ONRRP
-
Participants
360
320
280
240
200
160
!20
80
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l\OTE ON RRP IS overnight reverse repm.:hase agreement, 1crm RRP is
to."lm reverse repurclmse agn.:ement. Dat."' arc daily
Sm:RcE; Federal Reserve Bank of New York.
101
35
PART
3
SuMMARY oF EcoNOMIC PROJECTIONS
The following material appeared as an addendum to the minutes of the December 15-16,2015,
meeting of the Federal Open Market Committee.
FOMC participants generally expected that,
under appropriate monetary policy, real gross
domestic product (GOP) growth in 2016
and 2017 would be at or somewhat above
their individual estimates of the longer-run
growth rate and would converge toward
its longer-run rate in 2018 (table 1 and
figure !). All participants projected that the
unemployment rate would decline further
in 2016. Most participants expected that in
6. The president of the Federal Reserve Bank of
Minneapolis did not participate in this FOMC meeting,
nnd the incoming president is scheduled to assume office
on January I, 2016. James M. Lyon. First Vice President
of the Federal Reserve Bank of Minneapolis, submitted
economic projections.
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2018 the unemployment rate would remain
somewhat below their individual judgments
of its longer-run normal rate. Participants
projected that inflation, as measured by the
four-quarter change in the price index for
personal consumption expenditures (PCE),
would pick up in 2016 and 2017 from the very
low rate seen in 2015. Almost all participants
projected inflation in 2018 to be at or very near
the Committee's 2 percent objective.
As shown in figure 2, all but two participants
thought that it would be appropriate to raise
the target range for the federal funds rate
before the end of 2015. Most participants
expected that it would be appropriate to
raise the target range for the federal funds
rate gradually over the projection period as
headwinds to economic growth dissipate
slowly over time and as inflation rises toward
the Committee's goal of 2 percent. Consistent
with this outlook, most participants projected
that the appropriate level of the federal funds
rate wonld be below its longer-run level
through 2018.
Almost all participants viewed the levels of
uncertainty associated with their outlooks for
economic growth and the unemployment rate
as broadly similar to the norms of the previous
20 years. Nearly all also viewed the levels of
uncertainty associated with their inflation
forecasts as broadly similar to historical
norms. Most participants saw the risks to
their outlooks for real GOP growth and the
unemployment rate as broadly balanced.
A majority viewed the risks attending their
projections for both PCE and core PCE
inflation as broadly balanced, but many
saw these risks as weighted to the downside.
Among those who saw the risks to their
inflation outlook as tilted to the downside,
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23566.046
In conjunction with the Federal Open
Market Committee (FOMC) meeting held on
December 15-16,2015, meeting participants
submitted their projections of the most
likely outcomes lor real output growth, the
unemployment rate, inflation, and the federal
funds rate for each year from 2015 to 2018
and over the longer run 6 Each participant's
projection was based on information available
at the time of the meeting, together with his
or her assessment of appropriate monetary
policy and assumptions about the factors likely
to affect economic outcomes. The longerrun projections represent each participant's
assessment of the value to which each variable
would be expected to converge, over time,
under appropriate monetary policy and in the
absence of further shocks to the economy.
"Appropriate monetary policy" is defined as
the future path of policy that each participant
deems most likely to foster outcomes for
economic activity and inflation that best
satisfy his or her individual interpretation of
the Federal Reserve's objectives of maximum
employment and stable prices.
102
36
PART 3, SUMMARY OF ECONOMIC PROJECTIONS
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their
individual assessments of projected appropriate monetary policy, December 2015
Percent
Centra! tendcncy 2
Median 1
Range'
Variable
201s 1 2016 1 2011 1 201s
2.3
2.0
2.0
2.0
2.0
2.1
2.0--23
2.3-25
2.2-2.6
2.0--2.3
2.0-2.4
LS-2.2: 1.8--2.2 2.0-2.2
L8-2.2l LS-2.2 1.9--2.5
2.0-2.7
2.1-2.8
l.S-2.5
1.9-2.6
1.7-2.4
L6--2.4
1.8-23
1.8-2.7
4.7
4.8
4.7
4.8
4.7
4.8
4.9
4.9
5.0
5.0--SJ
4.Cr-4.8
4.7-4.9
4.6-4.8
4.7-4.9
4.6-..5.0 i 4.8-5.0
5.0
4.7-5.0 j 4.9-5.2 4.9-5.2
4.3-4.9
4.5-5.0
4.5--5.0
4.5-5.0
4.5-5.3
4.6--5.3
4.7-5.8
4. 7-5.8
0.4
0.4
1.6
L7
1.9
1.9
2.0
2.0
2.0
0_4
1.2--1.7
1.8-2.0
2.0
0.3-05
LS~I.8
1.8~2.0
1.9-2.0 ;
2.0 j
0.3·..0.5
Q.J.J.O
1.2-2.1
l.S-2.4
1.7-2.0
1.7-2.2
1.7-·2.1
1.8-2.1
2.0
2.0
1.5--1.7
1.7--2.0
1.8-2.0
1.9-2.0 :
1.9-2.0 l
1.2-1.4
1.4-2.1
1.6-2.0
1.7--2.1
L2-L7
1.5---2.4
1.7-2.2
1.8-2.1
1.9-3.0
2.1-·3.4
2.9-3.5:3.3-3.5 0.1-0.4 0.9-2.1
3.0--3.6; 3.3-·3.8 -0.1-0.9 -0.1-2.9
1.9-3.4
l.0-3.9
2.1-3.9
2.9-3.9
2.1
2.4
:u
Unemployment rate ....
September proj~Xtion ..
5.0
PC£ inflation ...
September projection ....
Core PCE inflation 4 ••
September projection ..
Longer
2.2
2.2
5.0
ChangeinrealGDP ...
September projection .. .
L3
1.6
1.9
2.0
L3
1.4
1.7
1.9
2.0
L3- 1.4
1.5~1.8
0.4
0.4
!.4
1.4
2.4
2.6
3.3
3.4
0.4
0.1-0.6
0.9~1.4
2.0
2.0
Memo: Projected
appropriate policy path
Federal funds rate ..
September projection .
!
1
3.5
3.5
l.i-2.1
J.G·-4.0
3.0-4.0
r.;oT£. PmJectlons of change m real gross domestiC product (GOP) and projections tor both measures ot mflauon arc percent changes trom the founh quarter ot the pn::vJ<::~us
y~r to the tOunh quarter <'I the year indicated. PCE inflation and core PC'E inflation are the percentage rates M change in, n:spectively, the price index for personal consumptwn
expenditures {PCE) and the price index: for PCE ex:dudmg food and energy ProJe<:llons for the unemployment rate are for the avNage civilmn unemployment rate in the JOurth quarter
of the year indicated. Each participant's projections are based on his or her assessment of appropriate monetary policy. Longer·ruo projecuom. represent each participant's asse;sment
of the rate to which each vanabk would be expec!ed to converge under 11ppropriate monetary policy and in thl." absence of further shocks to the economy The projections for the
federal fund'> rate are the value of the midpomt of the projected appropnate target range for the federal fllllds rate or the projected appropriate target level for the federal funds rate
at !hi." end of the specified calendar year or over the longer run. The September projections were made in conjunction with the meeting of the Federal Open Market Com mince nn
September 16-17,2015
I. For each period, the median is the middle projection when the projections are arranged from lowest to highl'St. When the number of projections is even, the median is the average
ofthctwomJddleproJeclions
""""" hi,hw'"""'" '"~"
The Outlook for Economic Activity
Participants generally projected that,
conditional on their individual assumptions
about appropriate monetary policy, real GDP
would increase in 2016 and 2017 at a pace
somewhat above their estimates of its longerrun rate. Real GDP growth would then slow
in 2018 to a rate at or near their individual
estimates of the longer-run normal rate.
Participants pointed to a number of factors
that they expect will contribute to moderate
output growth over the next few years,
including labor market conditions that are
supportive of economic expansion, household
and business balance sheets that had improved
significantly since the financial crisis, and a
stance of monetary policy that was expected to
remain accommodative.
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Compared with their contributions to the
Summary of Economic Projections (SEP)
in September, participants' projections of
real GDP growth from 2016 to 2018 were
generally little changed. The median value of
participants' projections for real GDP growth
in 2016 was revised up slightly to 2.4 percent;
some participants cited the Bipartisan Budget
Act of 2015, which was passed in late October,
as adding support to economic growth in the
near term. Very few participants changed their
for~-casts for real GDP growth in the longer
run, resulting in an unchanged median.
All participants projected that the
unemployment rate would be at or below their
individual judgments of its longer-run normal
level from 2016 through 2018. Compared
with the September SEP, most participants'
projected paths for the unemployment rate
were revised down a little over those three
years, with the median of the projections in
the fourth quarter of each year at 4.7 percent.
Many also revised down slightly their
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23566.047
several highlighted the continued strength
of the dollar and some recent indications
that inflation expectations had declined as
contributing to those risks.
103
37
MONETARY POLICY REPORT: FEBRUARY 2016
Figure I. Medians, central tendencies, and ranges of economic projections, 2015
~18
and over the longer run
Percent
Change in real GDP
-Median of projections
-
4
-
0
• Centra! tendency of projections
I Range of projections
~
;;;;;;;;e;
~
Actual
2010
2011
2012
2013
2014
2018
1
+
Longer
run
Percent
_
Unemployment rate
-10
~
2010
2011
2012
2013
2014
2015
2016
2017
-
~
2018
7
4
5
Longer
run
Percent
PCE inflation
-
-
~
20!0
2011
2012
2013
2014
2015
2016
2017
2018
3
l
Longer
run
Percent
Core PCE inflation
-
3
~
20!0
2011
2012
2013
2014
2015
2016
2017
2018
Longer
run
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NoTE: Definitions of variables are in the general note to table l. The data for the actual values of the variables are annuaL
104
38
PART 3: SUMMARY OF ECONOMIC PROJECTIONS
Figure 2. FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for
the federal funds rate
Percent
··-4.5
···>!~
·········t·
......................_
2.5
'
········- 1.5
'
•. ·--" .. ·- . . . " J .••
···-0.5
'
··············
2017
2016
2015
2018
Longer run
NorE: Each shaded circle indicates the value (rounded to the nearest 1h percentage point) of an individual participant's judgment
of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at
the end of the specified calendar year or over the longer run.
Figures 3.A and 3.B show the distribution
of participants' views regarding the likely
outcomes for real GDP growth and the
unemployment rate through 2018 and in
the longer run. The distributions of the
projections for real GDP growth over the next
several years and in the longer run narrowed
some since the September SEP. The diversity
of views across participants on the outlook
for GDP growth retlected, in part, differences
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in their individual assessments of the size
and persistence of the effects of lower energy
prices and a stronger dollar on real activity;
the time it would take for the headwinds
that have been restraining the pace of the
economic expansion, such as financial and
economic conditions abroad, to dissipate;
and the appropriate path of monetary policy.
With regard to the unemployment rate, the
distributions of projections over the next three
years shifted modestly to lower values since
September.
The Outlook for Inflation
Nearly all participants saw PCE price inflation
picking up in 2016, rising further in 2017,
and then reaching a rate in 2018 at or very
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estimates of the longer-run normal rate of
unemployment, although the median forecast
of 4.9 percent was unchanged since September.
Participants generally cited stronger-thanexpected labor market data in recent months
as a factor explaining the downward revisions
to their unemployment rate forecasts.
105
39
MONETARY POLICY REPORT: FEBRUARY 2016
Figure 3.A. Distribution of participants' projections for the change in real GDP, 2015-18 and over the longer run
Number of participants
2015
December projections
0
-18
-16
-14
-12
-10
8
September projt"Ctions
6
4
2
2.1
2.2"'
2.3
:!.82.9
2.5
Percent range
Number of participants
2016
-18
-16
-14
-12
-10
8
6
4
~~iil;i=--=~:...:..t..:J
1.7
1.9
2.1
2.5
2.3
2
2.9
2.7
Percent range
Number of participants
2017
-18
-16
-14
-12
-10
8
6
4
'
1.7
1.9
25
2.3
:t9
2.7
Percent range
Number of participants
20!8
-18
16
14
-12
-JO
8
6
4
2
1.9
21
2.42.5
23
2.82.9
2.7
Percent range
Number of participants
Longer run
-18
-16
-14
12
10
8
6
4
2
,..
2.8
2.7
2.9
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NoTE: Defmitions of variables are in the general note to table l.
106
40
PART 3: SUMMARY OF ECONOMIC PROJECTIONS
Figure 3.B. Distribution of participants' projections for the unemployment rate, 2015-18 and over the longer run
Number of participants
2015
0
-18
16
14
-12
-10
8
6
December projections
September projections
-
4
2
42·
4.3
4k
4.5
464.7
4.8-
5.~
49
5.3
54
55
5&
5.7
5.9
Percent range
Number of participants
2016
-18
-16
14
12
-10
8
6
4
2
s.z.
5.3
4.5
5.4
5.5
5.6-
5.&
5.7
5.9
Percent range
Number of participants
2017
18
-16
-)4
-12
10
8
6
4
L.
2
4.2-
4.4-
5.~
5.2-
43
45
51
53
5.4
5.5
5.&
5.7
5.&
5.9
Percent range
Number of participants
2018
-18
-16
-14
12
10
8
6
4
2
4.9
43
51
53
5.5
57
5.9
Percent range
Number of participants
Longer run
-18
16
14
-12
-10
8
6
4
2
4,2-
4.4-
43
45
5.4-5.5
4.&
4.7
5.&
57
5.&
59
Percent range
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NOTE: Definitions of variables are in the general note to table I.
107
MONETARY POLICY REPORT: FEBRUARY 2016
Figures 3.C and 3.D provide information on
the distribution of participants' views about
the outlook for inflation. The distribution
of participants' projections for PCE price
intlation in 2016 and 2017 shifted to the left
compared with the September SEP, while
the distributions of projections for 20 I 8 and
in the longer run were little changed. The
distributions of projections for core PCE
price inflation moved lower for 2016 and 2017
compared with September but did not change
for 2018.
Appropriate Monetary Policy
Figure 3.E provides the distribution of
participants' judgments regarding the
appropriate level of the target federal funds
rate at the end of each calendar year from 2015
to 2018 and over the longer run. Relative to
September, the projections of the appropriate
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levels of the federal funds rate over the next
three years generally shifted to lower values.
The median projection for next year was
unchanged, but the medians for 2017 and
2018 declined slightly. The median projection
now stands at 1.4 percent at the end of 2016,
2.4 percent at the end of 2017, and 3.3 percent
at the end of 2018. Given their expectations
that economic headwinds will persist and
that inflation will rise gradually to 2 percent
over the next three years, most participants
judged that it would be appropriate for
the federal funds rate to remain below its
longer-run normal level from 2016 to 2018.
Participants projected that a gradual rise in the
federal funds rate over that period would be
appropriate as some of those headwinds, such
as sluggish foreign economic growth, diminish
and the temporary factors holding down
inflation dissipate. Some participants noted
that a gradual increase in the federal funds rate
would be consistent with their expectation that
the neutral short-term real interest rate will rise
slowly over the next few years.
Both the median and the range of participants'
projections of the federal funds rate in the
longer run, at 3.5 percent and 3 to 4 percent,
respectively, were unchanged since September.
However, several participants revised their
projections for the longer-run federal funds
rate slightly lower. All participants judged
that inflation in the longer run would be equal
to the Committee's objective of 2 percent,
implying that their individual judgments
regarding the appropriate longer-run level of
the real federal funds rate, in the absence of
further shocks to the economy, ranged from
I to 2 percent, the same as in September.
Participants' views of the appropriate path
for monetary policy were informed by their
judgments about the state of the economy
and the outlook for labor markets and
inflation. One important consideration for
many participants was their estimate of
the extent of slack remaining in the labor
market, as informed by the incoming data
on various labor market indicators. Another
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TERI
23566.052
close to the Committee's 2 percent longer-run
objective. However, relative to the September
SEP, almost all participants marked down
their projections for PCE price inflation in
2016, observing that recent declines in energy
prices and the continued strength in the dollar
could exert additional downward pressure
on inflation in the near term. Revisions to
participants' inflation forecasts in 2017 were
more mixed, while the projections for inflation
in 2018 were little changed. Most participants
also marked down their projections for core
PCE price inflation in 2016, although almost
all still expected core inflation to rise gradually
over the projection period and to be at or very
close to 2 percent by 2018. Factors cited by
participants as contributing to their outlook
that inflation will rise over the medium term
included recent signs of a pickup in wage
growth, their expectation of tighter resource
utilization, their expectation that the effects of
recent appreciation in the dollar and declines
in oil prices on inflation will fade, their
anticipation that inflation expectations will
remain at levels consistent with the FOMC's
longer-run objective, and still-accommodative
monetary policy.
41
108
42
PART 3: SUMMARY OF ECONOMIC PROJECTIONS
Figure 3.C. Distribution of participants' projections for PCE inflation, 20 15~ 18 and over the longer run
Number of participants
2015
0
December projections
-IS
September projections
-10
1.1-
1.314
1.2
L5-
L7-
1.9-
1.6
1.8
2.0
21
22
2.3·
2.4
Percent range
Number of participants
2016
-
-- 04
0,6
0,8
1.0
lA
1.2
1.6
L8
-
I
2,0
2.2
lS
"
8
JQ
24
Percent range
Number of participants
2017
04
- "
0,6
LO
lA
2.0
1.6
212.2
2.32.4
Percent range
Number of participants
2018
12
10
Percent range
Number of participants
Longer run
0,3
04
0.5
06
0.9·1.0
1.3-
II
14
L2
1.5·
16
1.7-
1.9
18
20
2.122
2.32A
Percent range
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NOTE: Definitions of variables arc in the general note to table I.
109
43
MONETARY POLICY REPORT: FEBRUARY 2016
Figure 3.D. Distribution of participants' projections for core PCE inflation, 2015-18
Number of participants
2015
December projections
September projections
D
1.7-
1.9
2.0
2.324
2.1-
1.8
1112
2.2
Percent range
Number of participants
20!6
_,
-ll
1.9·-
2.1
2.3-
2.0
1.2
2.2
2.4
Percent range
Number of participants
20!7
- "
- 16
,.. -
L!L2
1.3-
- - -.
'
6
2.1-
1.5
"
-
Percent range
Number of participants
2018
-ll
1314
n
1.51.6
2.0
18
2.2
Percent range
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NoTE: Definitions of variables arc in the general note to table L
110
44
PART 3: SUMMARY OF ECONOMIC PROJECTIONS
Figure 3.E. Distribution of participants' judgments of the midpoint of the appropriate target range for the
federal funds rate or the appropriate target level for the federal funds rate, 2015- 18 and over the longer run
Number of participants
2015
a
December projections
September projections
"
16
14
12
10
8
6
4
2
Percent range
Number of participants
2016
-IS
16
14
12
10
8
6
4
2
3.133.37
3.383.62
H3·
3.87
3.88~
4.12
Number of participants
2017
18
-16
-14
-12
_JO
8
6
4
2
Percent range
Number of participants
2018
-IS
16
14
12
_]t)
8
6
4
2
Number of participants
Longer run
"
!6
-14
-12
-10
'
6
4
2
-0.37- -012·-0.13
0.12
0130.37
0.380.62
0.630.87
0.881.12
1.131.37
!.38!.62
J.6JL87
1.882.12
2.13237
2.382.62
2-632.87
Percent range
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NoTE: I'hc midpoint<; of the target ranges for the federal funds rate and the target levels for the federal funds rate arc
measured at the end of the spet.:iiicd calendar year or over the longer run.
111
MONETARY POLICY REPORT' FEBRUARY 2016
Uncertainty and Risks
As in the September SEP, nearly all
participants continued to judge the levels of
uncertainty around their projections for real
GDP growth and the unemployment rate as
broadly similar to the average level of the past
20 years (figure 4) 7 Most participants saw the
risks to their outlooks for real GDP growth
and unemployment as broadly balanced, as
the number of participants who viewed the
7. Table 2 provides estimates of the forecast
uncertainty for the change in real GDP~ the
unemployment rate, and total consumer price inflation
over the period from 1995 through 2014. At the end
of this summary, the box "Forecast Uncertainty"
discusses the sources and interpretation of uncertainty
in the economic forecasts and explains the approach
used to assess the uncertainty and risks attending the
participants' projections.
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Table 2. Average historical projection error ranges
Percentage points
Variable
2018
2015
Change in real GDP1 ••.•
±0.9
±1.8
±2.1
±2.1
Unemployment rate 1 ••••
±0.1
±0.8
±1.4
±1.8
TOtal consumer prices2 ••
+0.2
+t.O
±LO
+J.O
NO"l~
Error ranges shown are mea.~u:red a.~ plus or minus the root mean squared
error of projections for !995 through2014 that were released in the winter by
various pnvate and government forecasten;. A~ described in the bo;~; "Forecast
IJnccrtaimy,"" und.:r certain assumptions. there is about a 70 pt.'Tttrlt prohabihty
that actual outcomes for real GDP, unemployment, and consumer pn<:es will be
in ranges implied by the average size of projectJon errors made in the past. For
more information, see David Reifschneider and Peter Tulip (2007). '"Gauging the
Uncertainty of the EconomK Outlook from Historical Forecastmg Errors.'" Finance
and Economics Discussion Senes 2007-60 (Washington: Board of Governot:S of
the Federal Reserve System. November), avallable at www.fcdcralreservc.gov/pubsJ
fedsi2007/200760!200760abs.html; and Board of Governors of the Federal Reserve
System. Division of ReseaKh and Statistics (2014), "Updated HJstorica\ fOrecast
Errors." memorandum, April9, www.federalreserve._gov/J(Halti!eJ20140409-historicalforecast-errors.pdf.
I. Definitionsofvariablesareinthegeneralnotetotabk !.
2. Measure is the overall consumer price index. the price measure that has been
moM WJdely used m government and private economic forecasts. Projection is
pen:;ent change. fourth quarter of the previous year to the fourth quarter of the year
indicated.
risks to economic growth as weighted to the
downside and the risks to the unemployment
rate as weighted to the upside fell appreciably
since September. Diminished risks to domestic
economic activity from developments abroad
and the strength of recent labor market data
were among the reasons noted for the more
upbeat assessment of risks.
As in the September SEP, participants
generally agreed that the levels of uncertainty
associated with their inflation forecasts were
broadly similar to the average level over the
past 20 years. The number of participants who
viewed the risks to their inflation forecasts as
weighted to the downside declined slightly
since September, and a majority now viewed
the risks to both PCE and core PCE inflation
as broadly balanced. Among those who saw
risks to inflation as tilted to the downside,
several highlighted the continued strength
of the dollar and some recent indications
that inflation expectations had declined as
contributing to their perception of those risks.
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was prospects for inflation to return to
the Committee's objective of 2 percent;
in making such assessments, participants
considered a range of factors, including
measures of inflation compensation and
longer-run inflation expectations as well as
the likely persistence and size of the effects
from low energy prices and the strong dollar.
Participants also emphasized the potential for
international developments to continue to have
important implications for domestic economic
activity and inflation and thus for appropriate
monetary policy. Several participants
discussed potential interactions between policy
normalization and risks to financial stability.
In addition, given the continued proximity of
short-term interest rates to their effective lower
bound, asymmetric risks around the outlook
for employment and inflation were noted as
one reason why a gradual approach to raising
the federal funds rate may be appropriate.
45
112
46
PART 3: SUMMARY OF ECONOMIC PROJECTIONS
Figure 4. Uncertainty and risks in economic projections
Number of participants
Uncertainty about GDP growth
[] December projections
"' "' September pm_iections
September projections
Lower
Number of participants
Risks to GDP growth
C December projections
Higher
Broadly
similar
Broadly
balanced
Weighted to
downside
Number of participants
Uncertainty about the unemployment rate
Weighted to
upside
Number of participants
Risks to the unemployment rate
-18
-16
-14
-12
-10
-
8
0
4
2
Lower
Higher
Broadly
similar
Weighted to
downside
Broadly
balanced
Number of participants
Uncertainty about PCE inflation
Weighted to
upside
Number of participants
Risks to PCE inflation
-18
-16
-14
-12
-IS
-16
-14
-12
-10
-IO
-
Lower
8
-
-
6
4
-
Higher
Broadly
similar
Weighted to
downside
Broadly
balanced
Number of participants
Uncertainty about core PCE inllation
8
0
4
2
Weighted to
upside
Number of participants
Risks to eMe PCE inflation
-18
16
-14
-18
-16
-14
-12
-10
-
8
6
4
L_____~~~_E~~~2
Lower
Broadly
Higher
similar
Weighted to
downside
Broadly
balanced
Weighted to
upside
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Non:; For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty.'' Definitions of
variables are in the general note to table 1.
113
MONETARY POLICY REPORTo FEBRUARY 2016
47
Forecast Uncertainty
The economic projections provided by the members
of the Board of Governors and the presidents of
the Federal Reserve Banks inform discussions of
monetary policy among policymakers and can aid
public understanding of the basis for policy actions.
Considerable uncertainty attends these projections,
however. The economic and statistical models and
relationships used to help produce economic forecasts
are necessarily imperfect descriptions of the real world,
and the future path of the economy can be affected
by myriad unforeseen developments and events. Thus,
in setting the stance of monetary policy, participants
consider not only what appears to be the most likely
economic outcome as embodied in their projections,
but also the range of alternative possibilities, the
likelihood of their occurring, and the potential costs to
the economy should they occur.
Table 2 summarizes the average historical accuracy
of a range of forecasts, including those reported in
past Monetary Policy Reports and those prepared
by the Federal Reserve Board's staff in advance of
meetings of the Federal Open Market Committee.
The projection error ranges shown in the table
illustrate the considerable uncertainty associated
with economic forecasts. for example, suppose a
participant projects that real gross domestic product
(GOP) and total consumer prices will rise steadily at
annual rates of, respectively, 3 percent and 2 percent.
If the uncertainty attending those projections is similar
to that experienced in the past and the risks around
the projections are broadly balanced, the numbers
reported in table 2 would imply a probability of about
70 percent that actual COP would expand within a
4.8 percent in the second year, and 0.9 to 5.1 percent
in the third and fourth years. The corresponding 70 percent confidence intervals for overall inflation would
be 1.8 to 2.2 percent in the current year, and 1.0 to
3.0 percent in the second, third, and fourth years.
Because current conditions may differ from those
tllat prevailed, on average, over history, participants
provide judgments as to whether the uncertainty
attached to their projections of each variable is greater
than. smaller than, or broadly similar to typical levels
of forecast uncertainty in the past, as shown in table 2.
Participants also provide judgments as to whether the
risks to their projections are weighted to the upside,
are weighted to the downside, or are broadly balanced.
That is, participants judge whether each variable is
more likely to be above or below their projections
of the most likely outcome. These judgments
about the uncertainty and tile risks attending each
participant's projections are distinct from tile diversity
of participants' views about the most likely outcomes.
Forecast uncertainty is concerned with the risks
associated with a particular projection rather than with
divergences across a number of different projections.
As with real activity and inflation, the outlook
for the future path of the federal funds rate is subject
to considerable uncertainty. This uncertainty arises
primarily because eacll participant's assessment of
the appropriate stance of monetary policy depends
importantly on the evolution of real activity and
inflation over time. If economic conditions evolve
in an unexpected manner, then assessments of the
appropriate setting of the federal funds rate would
change from that point forward.
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range of 2.1 to 3.9 percent in the current year, 1.2 to
114
49
ABBREVIATIONS
BHC
bank holding company
CDS
credit default swap
CMBS
commercial mortgage-backed securities
CRE
commercial real estate
EME
emerging market economy
FOMC
Federal Open Market Committee; also, the Committee
GOP
gross domestic product
MBS
mortgage-backed securities
ONRRP
overnight reverse repurchase agreement
OPEC
Organization of the Petroleum Exporting Countries
PBOC
People's Bank of China
PCE
personal consumption expenditures
SEP
Summary of Economic Projections
SLOOS
Senior Loan Officer Opinion Survey on Bank Lending Practices
SOMA
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advanced foreign economy
System Open Market Account
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AFE
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115
116
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Fincher:
1. The Basel Committee just finalized new trading book capital rules in January. I
understand these rules were never intended to increase or decrease capital requirements,
yet the fmal rule you endorsed last month will result in a 40% increase in capital
requirements. I understand the Basel Committee conducted a number of impact studies,
but can you commit that the Fed will conduct its own impact study with cost-benefit
analysis and share the results with this committee prior to implementing it in the United
States? Will the Fed consider recalibrating or deviating from this international agreement
in any way if your own results demonstrate the rule's costs exceeds any incremental benefit
it provides to financial stability or the safety and soundness of individual institutions?
Given large trading losses some banks sustained during the fmancial crisis, the Basel Committee
issued revised standards in 2009 to raise capital requirements for market risks. These revised
standards, supplemented in 2010, roughly tripled the capital of banks that used internal models
held against market risk, but did not change the basic framework of the market risk capital rules.
The Basel Committee on Banking Supervision (BCBS) began the Fundamental Review of the
Trading Book (FRTB) in 2011 to address some of the shortcomings in the structure of the market
risk capital rules. Last year the industry commented about the calibration of certain aspects of
the revised market risk capital rules. The BCBS addressed outstanding issues on calibration
before publication of the final rule in January. The BCBS will be monitoring any undesired
increase in capital that could impact market liquidity during the implementation period.
The 40 percent figure cited is the weighted average increase in total capital across all banks
under the revised market risk rule. The final decisions on the calibration, however, were not
based on this figure. Rather they were based on an estimated increase in these capital
requirements of20 percent for the median large global trading bank. The overall increase in
capital for U.S. banks was estimated to be considerably less than the weighted average increase.
Estimating the impact of the new standards entailed an extensive data collection from banks on a
voluntary basis that tested proposed standards set forth in a consultative document. The data
quality varied considerably among the banks' submissions and there were clear outliers. For this
reason, the median was viewed as a more appropriate metric than the weighted average.
Moreover, given the data quality issues, supervisors felt some increase in capital was appropriate
to ensure the new standards were calibrated to a prudential level. In addition, the new standards
for modeled market risk require that a bank's measure of risk exposure against which capital is
held includes risk factors that a bank does not model well. In most countries, current standards
do not require such a formal inclusion, but rather a supervisory assessment. The requirement for
a formal inclusion under the new standard played a significant role in the increase of capital
requirements for a number of banks.
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It is important to bear in mind that an increase in weighted average capital requirements does not
translate into an increase for any particular bank. Some banks showed an increase in capital
requirements, while others showed a decrease. The variability in outcomes underscores the lack
117
-2-
of precision of the capital change estimates collected in Basel quantitative impact studies arising
in part from differences in the capability of various banks' systems to capture the necessary data.
Before adopting a standard for revised trading book capital requirements, the Federal Reserve,
Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation will
issue a domestic Notice of Proposed Rulemaking for public comment. That notice will describe
the costs and benefits of the proposed rules and identifY areas where these considerations may
not be balanced for U.S. banks.
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We recognize that bank holdings of capital market instruments can be very sensitive to
regulatory capital requirements and that it is important to maintain market liquidity as we
promote financial stability. We are committed to ensuring that the new framework will not
unduly disrupt smooth functioning of the capital markets. And we would not adopt any changes
to the Fed's rules on market risk capital requirements without going through the U.S. comment
process.
118
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Hill:
1. In your testimony, you referenced "a range of persistent economic headwinds-such as
limited access to credit for some borrowers, weak growth abroad, and a significant
appreciation of the dollar." Further, we have had seven years of unprecedented low
interest rates and exceptional monetary accommodation. The benefits of this "zero interest
rate" environment have run their course. The long-term negative consequences are clear:
wealth inequality increasing, asset prices driven up, misallocation of resources, Jack of a
dependable market risk indicator, punishing of families trying to live on modest savings
and social security.
In short, we have sustained poor growth. Recently Dr. William Poole, former President of
the Federal Reserve Bank of St. Louis, wrote a thoughtful piece in The Wall Street Journal,
and his premise echoed the questions in this hearing in exploring the topic "persistent
economic headwinds." In my view, the U.S. economy is facing substantial, non-monetary
structural impediments to accelerated economic growth. Dr. Poole makes the suggestion
that these non-monetary policy, structural impediments should be studied by the Federal
Reserve stafi.
Has the Federal Reserve formally studied these non-monetary policy structural
impediments? If not, could you commit to such a study that considers such factors
including the level of federal debt (to GDP and the current and potential impact of
"crowding out"), tax policy, the level of federal intervention in the capital markets (impacts
of Dodd-Frank provisions, Basel Ill regulations, and the Volcker Rule), the level of federal
intervention in the labor markets (impacts of the Department of Labor rulings on
compensation, benefits, overtime, etc. and Affordable Care Act mandates)?
The United States has come much further in recovering from the Great Recession than have
many other countries, and the evidence overwhelmingly indicates that the Federal Reserve's
accommodative monetary policy during the past several years has been an essential force
supporting this recovery. Today, the unemployment rate in the United States, at 4.9 percent, is
roughly half of what it was during the worst of the Great Recession. For sure, some sectors of
the economy and regions of the country have yet to fully recuperate, and many families still have
not felt the benefits of a strong recovery. But the Congress has charged the Federal Reserve with
promoting the overall macroeconomic health of the U.S. economy, and our monetary policy
since the fmancial crisis has been effective in promoting a stronger labor market that is
benefiting all population groups.
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Structural impediments to growth are relevant for the long-term performance of the economy,
and they may play a role in explaining why the growth of gross domestic product has been as
sluggish as it has been since the onset of the financial crisis. In addition, we do consider many of
the factors you listed in judging the longer run sustainable growth rate of the economy through
their effects on labor market perfom1ance, productivity and business investment. But our
monetary policy mandate, as given to us by the Congress, is to pursue maximun1 employment
and price stability. The labor market is much closer now to fulfilling the condition of maximum
employment than it has been in years. The Federal Open Market Committee (FOMC) has
119
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interpreted "price stability" as corresponding to 2 percent inflation as measured by the price
index for personal consumption expenditures. As I mentioned in my testimony, inflation has.
fallen short of the Federal Reserve's 2 percent objective, on average, in recent years; but the
FOMC judged, in December 201 S when it frrst raised the federal funds rate above from the range
that it had occupied for several years, that the Committee was "reasonably confident that
inflation will rise, over the medium term, to its 2 percent objective." Essentially by definition,
structural impediments to growth are most relevant to the secular or trend growth of the economy
over longer periods of time. In conducting monetary policy, the job of the Federal Reserve is to
focus, frrst and foremost, on the cyclical fluctuations in economic output around its trend, and on
the fluctuations in inflation around its 2 percent objective. That strategy is proven quite
successful in helping to promote the economic recovery in a context of price stability.
120
Questions for The Honorable .Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Hultgren:
1. I have expressed concern with the supplementary leverage ratio's treatment of federal
reserve deposits. You have described it as a "back-up" ratio in your testimony before the
House Financial Services Committee, but that does not appear to be how the rule functions
in the real world.
You committed to both Congressman Rothfus and I that our concerns at minimum deserve
further consideration by the Federal Reserve. During a February 10,2016, hearing of the
House Financial Services Committee you stated, "We have heard of the problem and I will
address it," and "You know, it's something we can look at, but it was considered."
While you have described the Supplementary Leverage Ratio as the "back-up ratio", this
and the standardized leverage ratio have or are becoming binding capital constraints for
custody banks, due to their highly liquid, low risk balance sheets that support client needs.
In light of your commitment to address these concerns, will the Federal Reserve Board
consider adjusting the capital requirements for excess cash deposits held with the Federal
Reserve? What opportunity will there be for input from the public?
The supplementary leverage ratio rule (SLR rule) adopted by the Federal Reserve, the Offiee of
the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the Agencies),
requires internationally-active banking organizations to hold at least 3 percent of total leverage
exposure in tier 1 capital. The rule calculates total leverage exposure as the sum of certain offbalance sheet items and all on-balance sheet assets. 1 The on-balance sheet portion does not take
into account the level of risk of each type of exposure and includes cash. As designed, the SLR
rule requires a banking organization to hold a minimum amount of capital against on-balance
sheet assets and off-balance sheet exposures, regardless of the risk associated with the individual
exposures. This leverage requirement is designed to recognize that the risk a banking
organization poses to the fmancial system is a factor of its size as well as the composition of its
assets. Excluding select categories of on-balance sheet assets, such as cash, from totallevcrage
exposure would generally be inconsistent with this principle.
The Agencies understand the concern that certain custody banks, which act as intermediaries in
high-volume, low-risk, low-return financial activities, may experience increases in assets as a
result of macroeconomic factors and monetary policy decisions, particularly during periods of
financial market stress 2 Because the SLR rule is not a risk-based measure, it is possible banking
organizations' costs of holding low-risk, low-return assets, such as deposits, could increase if
such ratio were to become the binding regulatory capital constraint. However, when choosing an
appropriate asset profile, banking organizations consider many factors in addition to regulatory
capital requirements, such as yields available relative to the overall cost of funds, the need to
2
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See 79 Fed. Reg. 57725 (September 26, 2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-0926/pdfi'2014- 220&3.pdf.
The agencies have reserved authority under the capital rule to require a banking organization to use a different
asset amount for an exposure included in the SLR to address extraordinary situations. See 12 CFR 3.l(d)(4)
(OCC); 12 CFR 217.l(d)(4) (Federal Reserve); 12 CFR 324.l(d)(4) (FDIC).
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1
121
-2
preserve financial flexibility and liquidity, revenue generation, the maintenance of market share
and business relationships, and the likelihood that principal will be repaid.
Regulatory requirements established by the Federal Reserve since the financial crisis are meant
to address risks to which banking organizations are exposed, including the risks associated with
funding in the form of cash deposits. The requirements are designed to increase the resiliency of
banking organizations, enabling them to continue serving as fmancial intermediaries for the U.S.
fmancial system and as sources of credit to household and businesses during times of stress. The
SLR requirement and the enhanced SLR standards do not become effective until January 1,
2018. According to public disclosures of firms subject to these requirements, the custody banks
and other global systemically important banks have made significant progress in complying with
the enhanced SLR requirements.
Federal Reserve Board (Board) staff have held meetings with and reviewed materials prepared
by the custody banks in connection with the implementation of the SLR rule. The Board
continuously considers potential improvements to its regulations based on feedback from
affected parties and the general public, but is not actively considering making any modifications
to the SLR rule at this time. Any future changes to the Board's regulations would take public
comments into account in a marmer consistent with U.S. law and the administrative rulemaking
process.
2. I understand the Federal Reserve already applies existing Customer Identification
Program (CIP) requirements to all subsidiaries of the banks they supervise, including
premium finance companies. Would a more nuanced approach for application ofthese
requirements be appropriate for subsidiaries that pose little risk for money laundering or
terrorism financing? What risk is posed, if any, by bank-owned premium finance
companies?
Will the Federal Reserve confirm that it will not apply further CIP requirements (if such
rules become final) to the insurance premium finance industry until the Federal Reserve
and the Financial Crimes Enforcement Network (FinCEN) demonstrate they will prevent
terrorism financing and money laundering? Absent such confirmation, please explain the
rational, if any, for application of incremental CIP requirements to bank-owned insurance
premium finance companies.
We understand the concerns that have been raised by some in the insurance premium fmance
industry regarding the requirement to collect customer identification information under the Bank
Secrecy Act (BSA). In 2003, the Financial Crimes Enforcement Network (FinCEN) and the
federal banking agencies issued an interagency Customer Identification Program (CIP) rule
implementing section 326 of the USA PATRIOT Act. The CIP rule requires banks and other
financial institutions to form a reasonable belief regarding a customer's identity when opening an
account. 3 The CIP rule applies to any "formal banking relationship established to provide or
engage in services, dealings, or other financial transactions including a deposit account, a
transaction or asset account, a credit account, or other extension of credit."4 Importantly, the CIP
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31 CFR §1020.100(c), (a).
31 CFR § 103.12l(a)(i).
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3
4
122
-3rule does not exempt accounts established for the purpose of insurance premium financing. The
CIP rule applies equally to banks and their subsidiaries when opening an account within the
meaning of the rule. 5
The requirements of the CIP rule are typically satisfied by adopting risk-based procedures at
account opening that enable the bank to verify the customer's identity to the extent reasonable
and practicable. First, a bank's CIP must obtain a name, date of birth, address, and identification
number from a customer who is an individual. 6 Second, the bank must adopt identity
verification procedures that describe when and how the bank will verify the customer's identity
using documentary or non-documentary methods. 7 Finally, the CIP rule has specific account
recordkeeping and notice requirements. 8 The procedures used by the Federal Reserve and other
banking agencies to examine a bank's compliance with the CIP rule are identified in the
BSA/Anti-Money Laundering (AML) manual published by the Federal Financial Institutions
Examination Council (FFIEC) member agencies. 9
In 2014, separate from the CIP rule, FinCEN issued a proposed rule that establishes customer
due diligence (CDD) requirements for banks and other financial institutions with obligations
under the BSA. As proposed, the CDD rule requires banks to identify the beneficial owner(s) of
any legal entity customer who opens an "account" within the meaning of the CIP rule. Although
the proposed CDD rule exempts certain customers, these exemptions do not extend to customers
who establish an insurance premium financing relationship with a bank or its subsidiary. The
Federal Reserve does not have the authority to exempt insurance premium finance companies
from any increased costs associated with FinCEN's proposed CDD rule. The Federal Reserve's
responsibility is limited to examining banks under its supervision for compliance with the CDD
rule once FinCEN reaches its fmal determination. Indeed, only FinCEN retains the authority to
determine whether the final CDD rule will apply to the insurance premium financing industry.
3. On November 5, 2015, FDIC Vice Chairman Thomas Hoenig provided remarks to the
18th Annual International Banking Conference at the Federal Reserve Bank of Chicago.
During his prepared remarks, entitled "Post-Crisis Risks and Bank Equity Capital," Mr.
Hoenig stated, regarding the Federal Reserve's proposal to increase minimum debt
requirements, "A question we must ask, then, is whether the effect of such a requirement
that is designed to make a firm more resolvable once that firm has failed, could -- prior to
failure-- increase the firm's leverage and thereby its likelihood to default. Our goal to
prevent failure should be every bit as important as resolving failed firms."
Taking into account Mr. Hoenig's statement as well as the long term debt requirements
under the Federal Reserve's recently proposed Total Loss Absorbing Capacity rules, do
6
7
8
9
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Interagency Interpretive Guidance on Customer Identification Program Requirements under section 326 of the
USA PATRIOT Act, F AQs Final CIP Rule (April28, 2005).
31 CFR § 1020.220(a)(2)(i).
31 CFR § 1020.220(a)(2)(ii).
31 CFR § 1020.220(a)(3) and (a)(5).
See generally, FFIEC, BSA/AML Examination Manual (2014) (available at:
https://www.ffiec.gov/bsa_aml_infobase/pages_manual/manual_online.htm). The FFIEC member agencies
include the Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the
Comptroller of the Currency, and the Consumer Financial Protection Bureau, as well as the Federal Reserve
Board.
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123
4you believe that the Fed has overlooked the "prevention of failure" as described by Mr.
Hoenig and is instead placing unnecessary stress on financial institutions that could in fact
lead to failure itself? Can you let the committee know what steps the FRB is taking in light
of Mr. Hoenig's concerns?
The Federal Reserve is committed to improving the resolvability and resiliency of global
systemically important banks (GSIBs) and to limiting the systemic damage that would result if a
large financial institution were to faiL GSIBs are central intermediaries in the U.S. financial
market, and their failure or distress would thus likely cause the most harm to the financial
system. The preamble to the Federal Reserve's Total Loss-Absorbing Capacity (TLAC)
proposal acknowledges the importance of each of these two complementary objectives to the
Dodd-Frank Wall Street Reform and Consumer Protection Act's broader goal of protecting U.S.
financial stability and ending "too big to faiL" See 80 FR 74926, 74926-74928.
The TLAC proposal's long-term debt requirement should not increase the likelihood that a
banking organization that is subject to the proposed rule would fail. First, the Federal Reserve
expects that the GSIBs would generally come into compliance with the long-term debt
requirement without increasing their leverage or the size of their balance sheets, mostly by
moving long-term debt that is currently outstanding from the GSIBs' bank subsidiaries to their
holding companies, and by extending the maturity of existing debt. Second, the Federal Reserve
has in place robust risk-based and leverage capital requirements, including a risk-based capital
surcharge for the U.S. GSIBs, that are intended to keep the likelihood that a GSIB will fail at a
very low leveL 10 The TLAC proposal would not weaken or override any of these important
capital requirement~.
Indeed, the TLAC proposal's long-term debt requirement should increase the resilience of the
covered firms and thus decrease the likelihood that one of them would fail. Each covered firm
would be required to maintain outstanding a substantial amount of eligible long-term debt, and
the holders of that debt--rather than the short-term unsecured creditors of the covered firm's
operating subsidiaries--would absorb the banking organization's losses in resolution. This
requirement would give the entities that invest in a firm's eligible long-term debt strong
incentives to impose market discipline on the firm, deterring it from taking excessive risks that
could lead to failure. The requirement would also reduce the risk that the covered firm would
experience a destabilizing run, because the holders of the long-term debt (which is not runnable)
would absorb losses ahead of the operating subsidiaries' runnable short-term creditors, meaning
that those short-term creditors would have diminished incentives to run in the first place. Thus,
the TLAC proposal advances the goal of improving the resolvability and resiliency of GSIBs as
well as the goal of reducing the harm that a GSIB failure would do to U.S. financial stability.
The periodJor public comment on the TLAC proposal has now closed, and the Federal Reserve
is carefully considering all of the conunents that have been submitted. As the Federal Reserve
considers these comments and determines how to move forward with the proposal, it will
continue to place great weight on ensuring the safety and soundness of the U.S. financial system.
VerDate Nov 24 2008
17:34 Jun 29, 2017
See 80 FR49082; Board of Governors of the Federal Reserve System, "Calibrating the GSIB Surcharge" (July
20, 2015), available at www.federalreserve.gov/aboutthefed/boardmeetingslgsib-methodology-paper20150720.pdf.
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124
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Luetkemeyer:
1. The Fed's criteria for applying the Basel Advanced Approaches Capital requirements
and the Liquidity Coverage Ratio (LCR) is $250 billion or more in assets or $10 billion or
more in foreign exposures. These criteria were devised as part of Basel II in 2005, more
than 10 years ago. As a result, the Advanced Approaches and the LCR apply to an entirely
different group of institutions than the criteria originally captured. Has the Fed
undertaken any assessment to determine if the $250 billion and $10 billion criteria are
appropriate for the Advanced Approaches and the LCR, either on an individual firm basis
or revising the thresholds entirely?
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The Federal Reserve Board (Board) is committed to ensuring that our regulations are
appropriately tailored to the size and risk profile of regulated institutions. The Board has
assessed the thresholds used to determine the scope of applicability of its regulations, including
the advanced approaches capital requirements and the Liquidity Coverage Ratio (LCR) rule, to
be appropriate for the idiosyncratic and systemic risks those regulations are meant to
address. The thresholds of $250 billion or more in total consolidated assets or $10 billion or
more in on-balance sheet foreign exposure capture those banking organizations that are the
largest and most complex in the U.S. fmancial system and thus, those that pose the most
systemic risk. The fact that the thresholds capture different firms than in 2005 reflects changes
in the profiles of those firms. The Board continues to monitor the scope of applicability of the
advanced approaches capital requirements, LCR rule, and its other regulations.
125
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Luetkemeyer:
2. With respect to the Basel Advanced Approaches Capital requirements, would you
support the Fed providing exempt relief for companies where their cost of compliance
greatly exceeds their benefits? If so, how would you make that determination?
Under the regulatory capital rules, promulgated by the Federal Reserve, the Office of the
Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the Agencies),
internationally active banking organizations (specifically, those with total consolidated assets of
$250 billion or more, or with consolidated total on-balance-sheet foreign exposure of $10 billion
or more) must calculate risk-based capital using the advanced approaches risk-based capital rules
(the advanced approaches rule) in addition to the standardized approach. Section IOO(b)(2) of
the regulatory capital rules provides that a banking organization subject to the advanced
approaches rule shall remain subject to that rule until the primary federal regulator determines
that application of the advanced approaches rule is not appropriate in light of the banking
organization's size, level of complexity, risk profile, or scope of operations. In making such a
determination, the primary federal regulator must apply notice and response procedures. 1 The
primary federal regulator may also set conditions on the granting of the waiver as appropriate,
and any waiver granted must be consistent with safety and soundness. The capital adequacy of a
banking organization that meets the thresholds described above, but has received a waiver from
application of the advanced approaches rules would be addressed by standardized risk-based
capital rules, leverage rules, and capital planning and supervisory stress-testing requirements.
3. While the Federal Reserve Board has described the Supplementary Leverage Ratio as
the "back-up ratio", this and the standardized leverage ratio have or are becoming binding
capital constraints for custody banks, due to their highly liquid, low risk balance sheets
that support client needs. In light of this concern, will the Federal Reserve Board consider
adjusting the capital requirements for excess cash deposits held with the Federal Reserve?
The supplementary leverage ratio rule (SLR rule) adopted by the Agencies, requires
internationally-active banking organizations to hold at least 3 percent of total leverage exposure
in tier 1 capital. The rule calculates total leverage exposure as the sum of certain off-balance
sheet items and all on-balance sheet assets.z The on-balance sheet portion does not take into
account the level of risk of each type of exposure and includes cash. As designed, the SLR rule
requires a banking organization to hold a minimum amount of capital against on-balance sheet
assets and off-balance sheet exposures, regardless of the risk associated with the individual
exposures. This leverage requirement is designed to recognize that the risk a banking
organization poses to the financial system is a factor of its size as well as the composition of its
assets. Excluding select categories of on-balance sheet assets, such as cash, from total leverage
exposure would generally be inconsistent with this principle.
2
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17:34 Jun 29, 2017
12 CFR 3.404 (Office of the Comptroller of the Currency), 12 CFR 263.202 (Federal Reserve), and 12 CFR 324.5
(Federal Deposit Insurance Corporation).
See 79 Fed. Reg, 57725 (September26, 2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-0926/pd1J2014- 22083.pdf.
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126
-2The Agencies understand the concern that certain custody banks, which act as intermediaries in
high-volume, low-risk, low-return financial activities, may experience increases in assets as a
result of macroeconomic factors and monetary policy decisions, particularly during periods of
fmancial market stress. 3 Because the SLR rule is not a risk-based measure, it is possible banking
organizations' costs of holding low-risk, low-return assets, such as deposits, could increase if
such ratio were to become the binding regulatory capital constraint. However, when choosing an
appropriate asset profile, banking organizations consider many factors in addition to regulatory
capital requirements, such as yields available relative to the overall cost of funds, the need to
preserve financial flexibility and liquidity, revenue generation, the maintenance of market share
and business relationships, and the likelihood that principal will be repaid.
Regulatory requirements established by the Federal Reserve since the fmancial crisis are meant
to address risks to which banking organizations are exposed, including the risks associated with
funding in the form of cash deposits. The requirements are designed to ·increase the resiliency of
banking organizations, enabling them to continue serving as financial intermediaries for the U.S.
financial system and as sources of credit to household and businesses during times of stress. The
SLR requirement and the enhanced SLR standards do not become effective until
January 1, 2018. According to public disclosures of firms subject to these requirements, the
custody banks and other global systemically important banks have made significant progress in
complying with the enhanced SLR requirements.
Federal Reserve Board (Board) staff have held meetings with and reviewed materials prepared
by the custody banks in connection with the implementation of the SLR rule. The Board
continuously considers potential improvements to its regulations based on feedback from
affected parties and the general public, but is not actively considering making any modifications
to the SLR rule at this time. Any future changes to the Board's regulations would take public
comments into account in a manner consistent with U.S. law and the administrative rulemaking
process.
4. In a recent written response to Congress on the insurance capital issue, you wrote that
the Federal Reserve Board will consider a congressional suggestion regarding a baseline
approach that would rely in part on the state risk-based capital framework. You also
wrote that the Board now has the authority to exclude insurance operations from its
consolidated capital requirements pursuant to the Collins Amendment. Will you please be
more specific about your plans to rely on the state risk-based capital framework for
insurance companies? How fully will you rely on the state regime for the insurance
operations of federally supervised insurers?
You are correct to note that, in developing our domestic insurance regulatory capital
requirements, the Board has greater flexibility to tailor these requirements to the business of
insurance through the Insurance Capital Standards Clarification Act of2014, which gave the
Board the authority to exclude regulated insurance companies when establishing minimum
consolidated risk-based capital requirements for supervised insurance savings and loan holding
companies and nonbank financial companies.
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The Agencies have reserved authority under the capital rule to require a banking organization to use a different
asset amount for an exposure included in the SLR to address extraordinary situations. See 12 CPR 3.1(d)(4)
(OCC); 12 CFR 217J(d)(4)(Pederal Reserve); 12 CFR 324J(d)(4) (FDIC).
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We leverage the work of state insurance regulators where possible. The Federal Reserve's
consolidated supervision supplements existing state based legal-entity supervision, which
focuses on policyholder protection, with a perspective that considers the risks across the entire
firm.
It would be premature for me to comment on how we will treat the unique risks of certain
insurance lines, mix of business and the like, before the Board has fully considered its potential
options for consolidated capital frameworks, and we are in the process of doing just that through
careful deliberations. To that end, in our consolidated supervision of insurance firms, the Board
remains committed to tailoring our supervisory approach, including a domestic regulatory capital
framework and other insurance prudential standards, to the business of insurance, reflecting
insurers' different business models and systemic importance compared to other frrms supervised
by the Board. Moreover, we are committed to a formal rulemaking process in the development
of insurance capital requirements.
5. You have indicated that you were not positive as to whether or not one capital rnle
would apply to all insurance companies subject to supervision by the Federal Reserve
Board. You suggested that firm-specific rules might apply to those insurers designated as
nonbank SIFis. Please clarify the Federal Reserve Board's plan in this regard. What sort
of firm-specific rules will nonbank SIFI insurers face and how will those rules be applied?
Without going into specifics as to the Board's plans for each firm, what issues will the rules
address, e.g., capital and/or stress testing? Will any firm-specific rules be imposed by
order exposed for public comment rather than traditional rulemaking?
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As I have noted, it would be premature for me to comment on how we will treat insurers' unique
risks, in the development of consolidated capital requirements for supervised insurance nonbank
financial companies, before the Board has fully considered its potential options. The Board's
consolidated supervision supplements existing legal-entity supervision with a perspective that
considers the risks across the entire firm. The Board's role in monitoring and mitigating risks to
financial stability seeks to ensure, as appropriate, that supervised insurance firms remain solvent
as going concerns, maintain their positions as financial intermediaries even in times of stress, and
are resolvable in a manner that is not destabilizing to the financial system if resolution is
required. Together with the capital framework that the Board determines for supervised
insurance nonbank financial companies, the Board intends to conduct stress tests, as prescribed
under the Dodd-Frank Wall Street·Reforrn and Consumer Protection Act (Dodd-Frank Act),
which will be appropriately tailored to the business of insurance and the insurance companies'
solvency under stress conditions. These will be designed in coordination with the Federal
Insurance Office as specified under the Dodd-Frank Act. As we develop the stress testing
framework, we will determine the appropriate treatment of circumstances concerning the
individual company and the financial system. Moreover, with regard to the insurance capital
rules that the Board develops and applies, we are committed to a formal rulemaking process.
128
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Lynch:
1. As you know, last year I, along with Congressman Capuano and most of the
Massachusetts Delegation, wrote to the Fed, the OCC and the FDIC on the regulation that
requires custody banks to maintain a 6 percent enhanced supplemental leverage ratio to be
considered well capitalized, even on custody cash funds deposited with the Federal Reserve
banks. In your response letter dated December 21, 2015, The Fed and the other two
agencies said: "The agencies understand the concern that certain custody banks, which act
as intermediaries in certain high-volume, low-risk, low-return financial activities may
experience increases in assets as a result of macroeconomic factors and monetary policy
decisions, particularly during times of financial market stress. Because the SLR is not a
risk-based measure, it is possible that banking organizations' cost of holding low-risk lowreturn assets such as deposits could increase if this ratio were to become the binding
regulatory capital constraint". The custody banks are telling me the leverage ratio has
become the binding capital constraint for custody banks, due to their highly liquid, low risk
balance sheets. Can you assure me the Fed will work with the other regulatory bodies and
the custody banks to alleviate this concern? I don't think anyone wants to experience a
crisis scenario where custody banks cannot accept their clients cash deposits, cash that
would be deposited in the federal reserve system.
The supplementary leverage ratio rule (SLR rule) adopted by the Federal Reserve, the Office of
the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the Agencies),
requires internationally-active banking organizations to hold at least 3 percent oftotalleverage
exposure in tier 1 capitaL The rule calculates total leverage exposure as the sum of certain offbalance sheet items and all on-balance sheet assets. 1 The on-balance sheet portion does not take
into account the level of risk of each type of exposure and includes cash. As designed, the SLR
rule requires a banking organization to hold a minimum amount of capital against on-balance
sheet assets and off-balance sheet exposures, regardless of the risk associated with the individual
exposures. This leverage requirement is designed to recognize that the risk a banking
organization poses to the financial system is a factor of its size as well as the composition of its
assets. Excluding select categories of on-balance sheet assets, such as cash, from total leverage
exposure would generally be inconsistent with this principle.
The Agencies understand the concern that certain custody banks, which act as intermediaries in
high-volume, low-risk, low-return financial activities, may experience increases in assets as a
result of macroeconomic factors and monetary policy decisions, particularly during periods of
financial market stress. 2 Because the SLR rule is not a risk-based measure, it is possible banking
organizations' costs of holding low-risk, low-retum assets, such as deposits, could increase if
such ratio were to become the binding regulatory capital constraint. However, when choosing an
appropriate asset profile, banking organizations consider many factors in addition to regulatory
capital requirements, such as yields available relative to the overall cost of funds, the need to
2
VerDate Nov 24 2008
17:34 Jun 29, 2017
See 79 Fed. Reg. 57725 (September 26, 2014), available at http://www.gpo.gov/fdsys/pkg!FR-2014-0926/pd£'2014- 22083.pdf.
The agencies have reserved authority under the capital rule to require a banking organization to use a different
asset amount for an exposure included in the SLR to address extraordinary situations. See 12 CFR 3.l(d)(4)(0CC);
12 CFR 217.l(d)(4) (Federal Reserve); 12 CFR 324.1(d)(4) (FDIC).
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129
2preserve financial flexibility and liquidity, revenue generation, the maintenance of market share
and business relationships, and the likelihood that principal will be repaid.
Regulatory requirements established by the Federal Reserve since the financial crisis are meant
to address risks to which banking organizations are exposed, including the risks associated with
funding in the form of cash deposits. The requirements are designed to increase the resiliency of
banking organizations, enabling them to continue serving as financial intermediaries for the U.S.
financial system and as sources of credit to household and businesses during times of stress. The
SLR requirement and the enhanced SLR standards do not become effective until January 1,
2018. According to public disclosures of firms subject to these requirements, the custody banks
and other global systemically important banks have made significant progress in complying with
the enhanced SLR requirements.
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Federal Reserve Board (Board) staff have held meetings with and reviewed materials prepared
by the custody banks in connection with the implementation of the SLR rule. The Board
continuously considers potential improvements to its regulations based on feedback from
affected parties and the general public, but is not actively considering making any modifications
to the SLR rule at this time. Any future changes to the Board's regulations would take public
comments into account in a manner consistent with U.S. law and the administrative rulemaking
process.
130
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Messer:
1. Chair Yellen, In November, you claimed before this committee that the Fed is studying
the consequences of all the new regulations on the economy "very closely" including the
impact on market liquidity. Now European regulators are actually doing a formal review.
Given that many of our own rules have gone farther than international standards, isn't it
time for a formal review of the cumulative impact of the new rules here in the United
States?
The Federal Reserve conducts a variety of economic analyses and assessments to support the
rulemaking process. For instance, the Federal Reserve included economic cost and impact
assessments in its margin trading and Total Loss-Absorbing Capacity proposals. As these
proposals relate to a specific regulation or requirement, the impact analyses naturally focus on
the impact of the specific regulation in question, though impact and cost estimates can generally
be aggregated across different regulatory initiatives. More broadly, the Federal Reserve engages
in a regular quantitative impact assessment and monitoring program that is coordinated with
other global regulators through the Basel Committee on Banking Supervision (BCBS) to assess
the overall impact of prudential capital and liquidity requirements. This impact assessment has
been conducted and made public regularly since 2012, and it continues to inform the
Federal Reserve's understanding of the cost and impact of capital and liquidity regulation.
Additionally, the Federal Reserve participates in a global effort through its participation on the
Financial Stability Board and the BCBS's Macroeconomic Assessment Group. The
Macroeconomic Assessment Group published a study in 2010 that assessed the overall
macroeconomic impact of stronger capital and liquidity requirements.
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The Federal Reserve seriously considers the overall cost and benefit of all of the regulations it
promulgates. The overarching goal of the Federal Reserve's regulatory program is to enhance
financial stability while at the same time not creating any undue costs or burdens for the rest of
the economy. The Federal Reserve is committed to engaging in an ongoing assessment program
to better understand how post-crisis reform is influencing financial stability as well as the
potential economic costs of enhanced regulation.
131
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Mulvaney:
1. I would like to follow up on our discussion concerning rules-based monetary policy and
economic normalization. During the hearing, you testified that "the economy is in many
ways close to normal," that unemployment rates are at a point "most of my colleagues
believe are consistent with full employment in the longer rnn," and that you had good
reason to believe inflation "will move up over time." In fact, you testified, "in a sense,
things are normal." While you mentioned some concerns with the neutral level of the
Federal Funds Rate and some other headwinds, you testified that the Taylor Rule wouldn't
be appropriate due to its underlying assumptions. You testified that the Federal Reserve
follows systematic policy, but not in the form of a rule. However, at the end of our
conversation, I was still left wondering what the world would have to look like before the
Federal Reserve would be willing to employ a rules based system? I recognize that the
Federal Reserve can still deviate from a rule to consider large sets of indicators about the
economy's performance, and that employing a rule isn't mechanic, but I do expect to know
what would be required before the Federal Reserve will consent to using rule based policy.
It is essential that Congress and the public understand the methods employed by the Fed
when making monetary policy decisions, and have some ability to predict future economic
outcomes based on economic conditions (recognizing these change in extraordinary
circumstances). A rule based policy provides us both the oversight and understanding that
is essential during normal economic times.
Chair Yellen, I'd like to provide you another opportunity to answer this question, directly:
What must the world look like before the Federal Reserve will employ and follow a rules
based system of monetary policy?
What must the employment rate be?
What must the inflation rate be?
What must the Federal Funds rate be?
What other factors must change from the state of the economy today before you will follow
a monetary policy rule- any rule, not just the Taylor rule- of your choosing?
Please answer each question specifically, including with specific rates and levels.
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My judgment, based on my reading of the research literature on policy rules and my experience
as a policymaker, is that simple policy rules are a useful input into monetary policy decisions but
that it is unlikely to ever be appropriate to follow the prescriptions of any simple policy rule.
The economic research literature on monetary policy rules indicates that it is possible to identify
optimal policy rules within the context of specific models of the structure and dynamics of an
economy, but that the optimal rule is not the same in all models. The actual U.S. economy is
much more complex than any of the extant models of the economy that economists have
developed, so we cannot say that any particular rule is the right rule. The research literature also
indicates that the optimal rule changes as the structure or dynamics of the economy changes. We
know that the structure of the U.S. economy changes over time, but we cannot track those
changes with any mathematical precision in real time. Moreover, even in the context of a given
model of the U.S. economy, a rule that produces good outcomes on average does not do so in
132
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response to all shocks to the economy. For those reasons, my Federal Reserve colleagues and I
monitor the prescriptions of a range of policy rules and use them as inputs to our deliberations
but do not necessarily implement the prescriptions of any rule.
To the extent that the factors restraining growth in U.S. economic activity (headwinds) are
stronger now than during the historical period over which any particular policy rule has been
estimated to work well, the implication is that the federal funds rate needs to be lower, while
those headwinds persist, than prescribed by the rule. I would note that the economy has
continued to make gradual progress toward maximum employment over the past couple of years,
and inflation has been low (even after adjusting for the effects of falling oil prices on reported
inflation), even as the Federal Open Market Committee (FOMC) kept the federal funds rate near
zero rather than raising it to the appreciably higher levels suggested by the Taylor rule. Those
economic outcomes indicate that monetary policy was not too easy even though it was more
accommodative than the prescriptions of the Taylor rule. Nonetheless, I would not rule out the
possibility that, as headwinds diminish over time, it could prove appropriate for the FOMC to
gradually raise the federal funds rate to the level prescribed by the Taylor rule.
I agree that it is essential that Congress and the public understand the methods employed by the
Fed when making monetary policy decisions, and that they have some ability to predict future
monetary policy decisions based on economic conditions. That is what I mean by a "systematic
policy." A systematic policy is one that responds in a predictable and consistent manner to
changes in economic conditions and the economic outlook. In practice, market expectations
about future monetary policy, as indicated by market prices of federal funds futures contracts and
some other financial instruments, do move in response to economic data that turns out to be
stronger or weaker than expected; these movements offer evidence that investors understand how
monetary policy will respond to an accumulation of data that indicates a need for a higher or
lower path of the federal funds rate to foster maximum employment and price stability. That
said, market participants, like policymakers, do not always agree about the implications of
incoming data for the economic outlook, so they do not always agree about the implications of
incoming data for future monetary policy. That would be true even if policymakers
mechanically followed a particular rule: to predict future policy actions, investors would need to
be able to predict the future values of the economic variables that enter the rule.
2. When making monetary policy decisions, what weight do you place on equity market
movements in your decision making?
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Of asset prices, stocks are one of the most closely watched and highly sensitive to economic
conditions. With respect to monetary policy decisions, it should be the case that anticipated
changes in policy are already discounted by market investors and are unlikely to affect
equity prices when announced. However, any time a monetary policy decision is not
aligned with market expectations, it would flow that there would be a greater impact on the
markets. Have yon found that to be the case as well? Do you find equity market prices to
transmit the effects of monetary policy, or are monetary policy decisions made in response
to equity market activities? Are these two factors countercyclical? Do you see a greater
impact in some types of funds, like exchange traded funds, compared to others, and what
weight to you give those fluctuations compared to the overall market when making
monetary policy decisions?
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Research clearly indicates that widely expected news, whether about monetary policy or fiscal
policy or economic data releases, has smaller effects on asset prices than does unexpected news.
The reason, of course, is that a widely anticipated policy decision or data release had its effect on
asset prices when investors came to anticipate the decision or data. It is worth noting, however,
that investors are unlikely to all share the same expectation about any policy decision, so it is
rare for there to be absolutely no market response to the FOMC's decisions.
The effects of monetary policy actions on equity prices, like the effects of monetary policy
actions on interest rates and exchange rates, are part of the transmission mechanism through
which monetary policy affects the economy. For example, when the economy slows and
unemployment rises, the FOMC typically reduces its target for the federal funds rate. That
action, plus expectations of further such actions, tends to result in higher equity prices and thus
higher net worth- and lower interest rates for households and businesses (relative to what they
would be otherwise). Higher net worth and lower interest rates both tend to foster additional
consumer spending and business investment spending; that additional spending, in tum, gives
firms an incentive to increase production and employment. While equity prices and other asset
prices help transmit the effects of changes in monetary policy to the economy, the
Federal Reserve does not target any particular level of equity prices or other asset prices.
Neither does it target a particular level of interest rates other than the federal funds rate. Asset
prices and interest rates vary in response to many factors other than monetary policy; the
Federal Reserve does not seek to prevent such variations. However, because asset prices and
interest rates affect household and business decisions about how much to spend and save, the
FOMC necessarily takes asset prices and interest rates other than the federal funds rate into
account when it considers how the economy is likely to evolve and what adjustments in
monetary policy may be appropriate to foster maximum employment and price stability.
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In a rough sense, broad equity price indexes tend to move with the business cycle, rising during
economic expansions and declining during economic contractions. But there also appears to be a
good deal of variation in equity prices- even in broad equity price indexes·- that is not
associated with the business cycle. Accordingly, the FOMC does not focus on day-to day ups
and downs in equity prices or other asset prices. I am not aware of evidence that there is a
systematic difference in the covariation between various types of equity funds and economic
conditions that would warrant using prices of exchange-traded funds rather than broad equity
price indexes as an input into an assessment of fmancial conditions and their implications for the
economic outlook.
134
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the
Federal Reserve System from Representative Murphy:
1. While we've started to see signs of positive growth recently, do you agree that the
lack of meaningful and sustained wage growth is an indication that our economy has
not yet reached an acceptable deimition of full employment? What type of progress
on rising wages for working families do you see as a pre-requisite of any further rate
increases?
We consider a number of indicators when evaluating whether we are on a path to meeting
our dual mandate such as changes in the labor market, spending growth, and inflation.
Hence, no single indicator provides a comprehensive view of whether we are on a path to
meet our dual mandate. That said, wage growth does provide a signal of both the outlook
for inflation and how much slack there is in the labor market, and so it is an indicator that
we follow closely. It is our assessment that there remains at least a small amount of slack
in the economy and that there is scope for wage growth to strengthen consistent with
achieving our 2 percent inflation objective.
2. What efforts are you making to weigh the impact of further rate increases on the
most vnlnerable populations? How in your view will raising interest rates impact
working families, including in traditionally underserved and minority communities?
I appreciate that the U.S. economic recovery, which has been substantial overall, has
been uneven across communities, including some low- and moderate-income (LMI)
communities, and I am troubled that some LMI communities have experienced long-term
declines in economic opportunity. The Federal Reserve is limited in the extent to which
its macroeconomic tools can specifically target those communities where further progress
is needed. That said, our efforts to promote a strong economy, robust labor market, and
stable financial institutions particularly benefit LMI communities, who tend to be harder
hit when the economy falters.
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Given that monetary policy is blunt tool, the best way that we can promote the economic
health ofLMI communities is to promote a sound economy. Monetary policy is currently
accommodative, and in my view, assuming that labor markets continue to tighten and we
are reasonably assured that inflation will return to our target, we will be most able to
engender a sustainable expansion with a gradual removal of monetary accommodation.
That said, as our decision not to raise rates in March shows, the path of monetary policy
is dependent on the evolution of the economy.
135
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Sherman:
1. What are the Federal Open Market Committee's (FOMC) plans in in the event of
another economic downturn? Specifically, has the FOMC determined whether it has legal
authority to implement the following tools:
Negative interest rates;
Assistance to states, municipalities, and territories in fiscal distress (e.g., Chicago's Public
School System, the city of Detroit, and Puerto Rico);
An emergency lending program using the Federal Reserve Act Section 14 (12 U.S.C. § 355)
authority to make short-term public investments;
Under what contingencies would the FQMC consider utilizing the tools listed above?
Under what circumstances would the FOMC initiate a fourth round of quantitative easing?
Under what circumstances would the FOMC formulate a target (e.g., 1.0%) for the fiveyear Treasury rate?
The Federal Reserve's response to economic conditions, including any future financial crisis,
very much depends on the circumstances. It is important to note that there have been many
periods of economic downturn coupled with severe strains in fmancial markets that did not
require the use of emergency lending programs, innovative monetary policy tools, or other
extraordinary tools. Indeed, prior to the fmancial crisis in 2007-2009, the Federal Reserve had
not utilized its emergency lending authorities since the Great Depression.
It simply is not possible to predict the circumstances in which it might be appropriate to
implement particular policies, such as conducting additional quantitative easing or formulating
targets for longer-term rates. As the FOMC has noted in recent statements, we expect that the
economy will continue to strengthen and that inflation will return to our 2 percent goal over time.
Consistent with that outlook, the FOMC has noted that it believes the economic outlook will
evolve in way that will warrant a gradual increase in the target federal funds rate. Of course, if
the economic outlook evolves in an unexpected way, the Federal Reserve will adjust the stance
ofpoliey- appropriately to foster progress toward-its long-run goals of maximum employment and
stable prices.
The policy tools available to the Federal Reserve are provided by statute. The Federal Reserve's
authority to purchase obligations issued by municipalities is limited to very specific types of
obligations and may be done only in the open market. The Federal Reserve's authority to
provide emergency credit to non-depository institutions is limited to programs with broad-based
eligibility aimed at supporting the flow of credit to households and businesses; under these
provisions, the Federal Reserve does not have the legal authority to lend to a specific borrower,
including a municipality, that is failing or seeking to avoid resolution. More generally, providing
assistance to municipalities inherently involves political judgments. As a result, as the Federal
Reserve has noted previously, any program designed to provide assistance to municipal
governments is a matter for tl1e Congress and the Administration to address.
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Negative interest rates are a tool employed by countries in Europe and elsewhere. By some
accounts, these policies appear to have provided additional policy accommodation. As I have
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noted previously, we certainly are trying to learn as much as we can from the experience of other
countries. That said, while I would not completely rule out the use of negative interest rates in
some future very adverse scenario, policymakers would need to consider a wide range of issues
before employing this tool in the United States, including the potential for unintended
consequences.
137
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Representative Tipton:
1. Chair Yellen, I appreciate the recent discussion from regulators acknowledging that
regulation can be over burdensome. For instance, last month FDIC Vice Chair Thomas
Hoenig expressed concern that the Fed's TLAC proposal, meant to strengthen supervision
of systemically important fmancial institutions in the U.S., may not be tailored enough. As
you are likely aware, the Committee has several pieces of legislation pending, including my
bill H.R. 2896, that would call ou regulators to be more tailored in their approach to
prudential regulation. With regard to the TLAC rule, what criteria does the Fed use to
determine its calibration for applying TLAC? There is a concern that it is not sensitive
enough to the relative risk posed by individual institutions and I'd like to know what more
can be done to ensure the level of regulation appropriately matches the risk posed by
individual firms to the broader US Financial System.
The Federal Reserve Board (Board) designed its total loss-absorbing capacity (TLAC) proposal
to be closely tailored to the risks to financial stability posed by each covered entity. This
tailoring can be seen both in the selection of the firms to which the proposed TLAC and
long-term debt requirements would apply and in the calibration of those requirements, which
would vary from finn to firm based on the Board's assessment of each covered firm's systemic
footprint.
First, the proposed TLAC and long-term debt requirements would apply only to the eight United
States bank holding companies that meet the Board's criteria for "global systemically important
banking organizations" (GSIBs), and to the U.S. intermediate holding companies of foreign
GSIBs. As the preamble to the TLAC proposal discusses in greater detail, the criteria used to
identify GSIBs are tailored to select those banking organizations that pose elevated risks to the
financial system, and the criteria used to determine which foreign banking organizations must
form U.S. intermediate holding companies are tailored to identifY the foreign banking
organizations with substantial operations in the U.S.
Second, the proposed external TLAC requirements include an "external TLAC buffer" whose
size is scaled based on the systemic footprint of each U.S. GSIB. This scaling results from the
fact that the external TLAC buffer for each U.S. GSIB includes the surcharge applicable to that
firm under the first method of the Board's rule imposing risk-based capital surcharges on GSIBs
(GSIB surcharge rule). See 80 FR, at 74933-74934. The materials issued along with the
Board's GSIB surcharge rule discuss in detail how the GSIB surcharge applicable to each U.S.
GSIB was calibrated on the basis of that firm's systemic footprint--that is, the damage that the
firm's failure would be expected to do to the financial stability of the United States.
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Third, the proposed external long-term debt requirements also incorporate each U.S. GSIB's
GSIB surcharge, in that the risk-weighted assets component of each U.S. GSIB's external longterm debt requirement would be 6 percent of risk-weighted assets plus the surcharge applicable
to that firm under the GSIB surcharge rule. Again, the GSIB surcharges are scaled based on the
systemic footprint of each U.S. GSIB.
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Finally, under the TLAC proposal, each covered fum's TLAC and long-term debt requirements
would include a risk-weighted assets component, which sets the dollar amount of the
requirement on the basis of the level of risk posed by the assets on each individual finn's balance
sheet. This component tailors the requirements to each firm's probability offailnre, and
therefore to a key indicator of the risk that the firm poses to the financial stability of the United
States. Thus, if two firms have balance sheets of the same absolute size but one of them is
invested more heavily in relatively risky assets, then the firm with the riskier assets would be
subject to higher requirements under the risk-weighted assets components of the proposed TLAC
and long-term debt requirements.
139
Questions for The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System from Ranking Member Waters:
1. It's estimated that more than $500 billion in checks are cashed annually, as opposed to
deposited, and it's largely because of the time it takes for an average check to "clear."
Would you agree that faster or same-day payments would reduce the need to cash checks?
2. An FDIC study showed that 60% of people who already have an account with either a
bank or a credit union want instant access to their money, so much so that they are willing
to pay exorbitant fees in check-cashing or small dollar loans. What specifically is the
Federal Reserve doing to address this?
3. Are you aware that roughly 69% of first-time users of short-term loans said they used
the loans to cover a recurring expense, such as paying rent or their electric bill? Do you
agree that same day payments in the U.S. would help meet these daily cash-flow problems
that so many families and young adults face?
Response to questions 1 through 3:
Several of the Federal Reserve's strategies in the payments system realm could help to make
banking services more responsive to consumers including the unbanked and underbanked
population. The Federal Reserve has undertaken a variety of actions to speed the clearing of
payments and the availability of funds. These payments system improvements should help lowincome Americans who face challenges managing their daily cash flow.
With regards to check clearing, the Federal Reserve has led the effort to make the nation's check
clearing system faster and more efficient, beginning with the initial development of the Check
Clearing for the 21st Century Act (Check 21), which took effect in 2004, and the provision of
new services that leverage the Check 21 statutory authorities. Instead of physically moving
paper checks from one bank to another, Check 21 has enabled banks to collect checks
electronically. As a result of Check 21 and other check-system improvements, checks are almost
always delivered to the paying bank within one business day of being deposited in the banking
system. Also, given the Federal Reserve's restructuring of its check collection service, banks
generally must make the proceeds of checks available for withdrawal no later than two business
days following deposit, giving consumers faster guaranteed availability of funds than previously
was the case.
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The Federal Reserve has offered a voluntary same-day Automated Clearing House (ACH)
service for several years. This experience has demonstrated that a same-day ACH service can
only succeed if it is mandatory (that is, require all receiving banks to post same-day ACH
transactions in a timely manner and make the funds available to the recipient on the day the
transaction is received). Consistent with actions recently taken by the National Automated
Clearing House Association or NACHA, the Federal Reserve Banks will introduce an enhanced,
mandatory same-day ACH service later this year. This service will enable employers to pay their
hourly workers via direct deposit, rather than by check, which is commonplace today.
Employers will have more time to accurately determine the amount each hourly employee is due
and create the ACH file in time to meet the processing deadlines for the current next-day ACH
140
-2service. The service will also enable banks to provide individuals an easy option to pay bills on
a same-day basis. The Reserve Banks will encourage the banking industry to use same-day ACH
for these and other potential use cases.
Additionally, the Federal Reserve has been leading an effort, together with a broad group of
interested stakeholders, to evaluate designs for new safe, ubiquitous, faster payment capabilities
in the United States. With such capabilities, payments could be made in seconds or minutes,
with the recipient of the payment having prompt access to the funds. This system could help
consumers manage their money in near real time. We believe that more than a quarter of current
check payments could migrate to faster payments capabilities. More information on this effort
can be found at https://fedpaymentsimprovement.org/. Among the criteria that will be used to
evaluate the various potential faster payments system designs are the speed in which transactions
would be cleared, how fast funds would be made available to the payee, and importantly, how
effectively the solution addresses the needs ofthe unbanked or underbanked to affordably send
or receive payments.
4. To what extent is lmancial inclusion of nnderserved communities a focus of the Federal
Reserve's Faster Payments Taskforce?
The Federal Reserve recognizes that faster payment capabilities have the potential to draw more
of the unbanked and underbanked population into the financial mainstream. As noted above, one
of the faster payments effectiveness criteria developed by the Faster Payments Task Force is how
effectively a faster payments solution addresses the needs of the unbanked or underbanked to
affordably send or receive payments (for example, by supporting the ability to make payments to
and/or from a regulated nonbank provider and/or explicitly promoting financial inclusion in the
payments solution).
An important aspect of the Faster Payments Task Force's work is bringing together organizations
with a wide range of views so that these views can be discussed and analyzed. To that end, the
Federal Reserve has encouraged the Consumer Financial Protection Bureau (CFPB) and other
consumer organizations to actively participate in the Faster Payments Task Force. Presently,
representatives from Consumers Union and The Pew Charitable Trusts sit on the Faster
Payments Task Force Steering Committee as well as a representative from the CFPB.
Additionally, several other consmner advocacy organizations participate on the Faster Payments
Task Foree.
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0
@FedFRASER