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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 JUNE 22, 2016 Printed for the use of the Committee on Financial Services Serial No. 114–93 ( U.S. GOVERNMENT PUBLISHING OFFICE WASHINGTON 25–848 PDF : 2018 For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\25848.TXT 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. VELÁZQUEZ, New York BRAD SHERMAN, California GREGORY W. MEEKS, New York MICHAEL E. CAPUANO, Massachusetts RUBÉN 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) VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\25848.TXT TERI CONTENTS Page Hearing held on: June 22, 2016 .................................................................................................... Appendix: June 22, 2016 .................................................................................................... 1 55 WITNESSES WEDNESDAY, JUNE 22, 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 June 21, 1016 ....................................................................... Written responses to questions for the record submitted by Chairman Hensarling ..................................................................................................... Written responses to questions for the record submitted by Representative Barr ........................................................................................................ Written responses to questions for the record submitted by Representative Beatty ..................................................................................................... Written responses to questions for the record submitted by Representative Hinojosa .................................................................................................. Written responses to questions for the record submitted by Representative Luetkemeyer .......................................................................................... Written responses to questions for the record submitted by Representative Messer .................................................................................................... Written responses to questions for the record submitted by Representative Murphy ................................................................................................... Written responses to questions for the record submitted by Representative Tipton ..................................................................................................... (III) VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 56 K:\DOCS\25848.TXT TERI 63 104 112 113 118 125 129 132 134 VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\25848.TXT TERI MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, June 22, 2016 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10:04 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, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Messer, Schweikert, Guinta, Tipton, Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez, Sherman, Clay, Lynch, Scott, Cleaver, Moore, Ellison, Perlmutter, Himes, Carney, Sewell, Foster, Murphy, Delaney, Sinema, and Heck. 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 to give an opening statement. I have been struck by some of the headlines I have reviewed recently. For example, ‘‘Economy barely grew in first 3 months of the year,’’ Associated Press. ‘‘U.S. added on 38,000 jobs in May, weakest performance since September 2010,’’ The Wall Street Journal. ‘‘Will we ever get higher wages?’’, CNN. And, ‘‘Labor force shrinks,’’ Reuters. What is clear and verifiable is that this weak economy doesn’t work for millions of working Americans. The true unemployment rate stands at almost 10 percent. Paychecks are stagnant, and the national debt clock spins out of control. After almost 8 years of the President’s economic policies, he is on track to be the only President in U.S. history not to deliver a single year of at least 3 percent economic growth. This will give him the fourth-worst economy record of any President in U.S. history. The Fed cannot escape its share of responsibility in being complicit in ‘‘Obamanomics’’ because it has lost much of its independence from the Administration. To wit, every Member of the Board of Governors has been appointed by this President. (1) VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 2 There is a noticeable revolving door between the White House, Treasury, and the Fed. The Fed Chair meets almost weekly with the Secretary of the Treasury to discuss policy. Furthermore, the Fed has been a facilitator and accommodator of the Administration’s disastrous national debt policy and has regrettably lent its shrinking credibility to advancing the Administration’s social agenda. There is a better way forward, which includes renormalizing monetary policy and reforming key aspects of the Federal Reserve to better comport with its mandate—as my House Republicans passed the FORM Act last year and are introducing the Financial CHOICE Act this year, which offers economic growth for all and bank bailouts for none. The Fed’s so-called ‘‘data-dependent’’ monetary policy strategy says nothing about which data matter, let alone how they matter. This severely compromises the kind of policy transparency and predictability that is necessary for households and businesses to grow our economy. The Fed’s so-called ‘‘forward guidance’’ continues to provide little or no guidance to the rest of us. The FORM Act, which has been endorsed by nationally renowned economists, including three Nobel laureates, would help reestablish the Fed’s independence and promote economic growth by ensuring a systemic monetary policy framework that is truly data-dependent, consistent, and predictable. Another drag on our economy is the blurring of fiscal and monetary policy by the Fed. By paying interest on excess reserves at above-market rates, the Fed has swollen its balance sheet by which it now directs credit to favored markets. Stanford economics professor John Taylor rightfully calls this, ‘‘mondustrial policy,’’ for the combination of monetary and industrial policy it represents. By inviting distributional interests to crowd out the market discipline of credit, this policy favors a few at the expense of many and weakens economic growth for working Americans. Left unabated, the central bank will soon become our central planner. This cannot be allowed to happen. It is way past time for the Fed to commit to a credible, verifiable monetary policy rule, systematically shrink its balance sheet, and get out of the business of picking winners and losers in credit markets. I now yield 3 minutes to the ranking member for an opening statement. Ms. WATERS. Thank you, Mr. Chairman. And I thank Chair Yellen for joining us today. Under your leadership, we have seen a Federal Reserve that cares about American workers and families and has made tremendous progress on their behalf. While the Fed’s work may seem abstract to many people, in fact it does have a profound impact on our day-to-day lives, from determining the rates we pay on loans to ensuring that Wall Street never again puts taxpayers at risk. Thanks to actions taken by the Fed, the Obama Administration, and Democrats in Congress, we have come a long way since the financial crisis wiped out trillions of dollars in household wealth. We VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 3 can see this in the longest-ever streak of private sector job growth, rising home prices and overall gains in household wealth. Yet, I remain concerned that despite these gains, our recovery remains incomplete, and our progress has been uneven, particularly as it affects our middle-class workers, low-income families, and minority communities. When you look at wages, broader measures of unemployment and the most recent jobs numbers, it is clear that too many Americans have been left behind. That is why I am pleased that you have taken a cautious approach to raising rates and have dedicated significant personal energy to increasing economic inclusion. It shows that you are indeed listening to the needs of everyone, not just the well-connected. And I would encourage you to continue down this path. Of course, Congress must take responsibility for these disparities as well. Too many years of fiscal austerity have robbed our economy of its full potential. And now we are seeing the culmination of Republican efforts to kill the Dodd-Frank Act, putting our economy back at risk of another crisis. In addition to the chairman’s wrong Choice Act, Republicans have filed over 30 amendments to the financial services appropriations bill that would undermine financial reform. So before closing, I would like to highlight tomorrow’s vote in Britain, which serves as the latest reminder of why we must preserve the Fed’s independence and ability to set monetary policy on a forward-looking basis. No rule or formula could adequately account for such unpredictability, which is why foolish proposals that seek to put monetary policy on autopilot must be rejected. I look forward to your testimony. And I yield back the balance of my time. Chairman HENSARLING. The Chair now recognizes the gentleman from Michigan, Mr. Huizenga, chairman of our Monetary Policy and Trade Subcommittee, for 2 minutes. Mr. HUIZENGA. Thank you, Mr. Chairman. I am back here, Chair Yellen. So in response to the financial crisis, the Emergency Economic Stabilization Act accelerated its authority that had been granted to start paying interest on reserves from 2011 back to October 1, 2008. And according to the New York District Bank, the Fed expected to set interest on reserves well-below the Fed’s target policy rate, that is the Federal funds rate. Had the Fed created such a ‘‘rate floor’’ it would have complied with the letter of the law. Section 201 of the Financial Services Regulatory Relief Act of 2006 explicitly states that interest on reserves ‘‘cannot exceed the general level of short-term interest rates.’’ However, as we learned in last month’s Monetary Policy and Trade Subcommittee hearing, interest on reserves is above the Fed funds rate. This above-market rate not only appears to have gone outside the bounds of the authorizing statute, it may also be discouraging a more free flow of credit in an economy that can and should be flourishing. Speeding up the authority to pay interest on reserves equipped the Fed to expand its balance sheet to previously unimaginable heights. Due to various rounds of unconventional monetary policy, such as quantitative easing, the Fed’s balance sheet VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 4 has grown exponentially, and today it stands at a staggering $4.5 trillion, with a ‘‘T,’’ which is about 25 percent of the United States’ GDP. At the same time, the average maturity of Treasury securities held by the Fed increased from about 5 years to over 10 years, which considerably increases the balance sheet’s exposure to interest rate duration risk. It all leads me to wonder if the Fed has not become the ultimate global systemically important bank, or G-SIB. Almost 7 years old, the Fed’s colossal and distortionary balance sheet shows no signs of shrinking anytime soon. To be sure, the Fed appears to have only started thinking about an exit, as described in its late 2014 policy normalization principles and plans, but the word ‘‘principles’’ is nowhere really to be found in this described plan. Moreover, the ‘‘plan’’ simply mimics the same opaque data-dependent strategy that has been talked about for monetary policy that has left market participants scratching their heads for years, unsure of what exact data will inform the Fed’s decision-making and how the FOMC will react to that data. Unfortunately, monetary policy has clearly stepped outside this bound and shows little, if any, sign of returning and it threatens the durability of the monetary policy independence itself, in my opinion. With that, I yield back. Chairman HENSARLING. The Chair 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. I know it must be very frustrating to you every time you come here, there is some cloud over our economy and people want to point fingers directly at you. But I want you to know that I have recognized that in the time immediately following the financial crisis, I think the Obama Administration and Congress reacted very forcefully with smart reforms and stimulus to make sure that the U.S. economy, and with the help of the Fed, that we became the envy of the world, compared to Europe and China and Russia. And in the United States, I would like to see a lot more of this recovery touch the working class and poor Americans. But that failure, Madam Chairwoman, is Congress’ failure, not your failure. The last time you were here, we asked you about the Chinese economy. And of course, we are all here sitting on the edge of our seats to hear what you might have to say about the so-called Brexit. And I worry that in our worrying and becoming more anxious, that we are just going to worry ourselves into doing more counterproductive things, counterproductive policies, like austerity and like the Brexit. We have some extreme policies that are floating out here in our body politic, orderly default on U.S. debt, negotiated default, and I think we just have to stop derailing ourselves with nonsense. I think we have a bright future and I know that we can get through this deep frustration with people like you at the helm of the Fed. And so, thank you so much for joining us today. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 5 And with that, Mr. Chairman, I yield back the balance of my time. Chairman HENSARLING. The gentlelady yields back. Today, we welcome the testimony of the Honorable Janet Yellen. Chair Yellen has previously testified before this committee on a number of occasions, so I believe she needs no further introduction. Without objection, Chair Yellen, your written statement will be made a part of the record, and you are now recognized for 5 minutes to give an oral presentation of your testimony. STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mrs. YELLEN. Chairman Hensarling, Ranking Member Waters, and other members of the committee, I am pleased to present the Federal Reserve’s monetary policy report to the Congress. In my remarks today, I will briefly discuss the current economic situation and outlook before turning to monetary policy. Since my last appearance before this committee in February, the economy has made further progress toward the Federal Reserve’s objective of maximum employment. And while inflation has continued to run below our 2 percent objective, the FOMC expects inflation to rise to that level over the medium term. However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate. In the labor market, the cumulative increase in jobs since its trough in early 2010 has now topped 14 million, while the unemployment rate has fallen more than 5 percentage points from its peak. In addition, as we detail in the monetary policy report, jobless rates have declined for all major demographic groups, including for African Americans and Hispanics. Despite these declines, however, it is troubling that unemployment rates for these minority groups remain higher than for the Nation overall and that the annual income of the median AfricanAmerican household is still well below the median income of other U.S. households. During the first quarter of this year, job gains averaged 200,000 per month, just a bit slower than last year’s pace. While the unemployment rate held steady at 5 percent over this period, the labor force participation rate moved up noticeably. In April and May, however, the average pace of job gains slowed to only 80,000 per month or about 100,000 per month after adjustment for the effects of a strike. The unemployment rate fell to 4.7 percent in May, but that decline mainly occurred because fewer people reported they were actively seeking work. A broader measure of labor market slack that includes workers marginally attached to the workforce and those working part time who would prefer full-time work was unchanged in May and remains above its level prior to the recession. Of course, it is important not to overreact to one or two reports, and several other timely indicators of labor market conditions still look favorable. One notable development is that there is some tentative signs that wage growth may finally be picking up. That said, we will be watching the job market carefully to see whether the re- VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 6 cent slowing in employment growth is transitory, as we believe it is. Economic growth has been uneven over recent quarters. U.S. inflation-adjusted GDP is currently estimated to have increased at an annual rate of only 3/4 percent in the first quarter of this year. Subdued foreign growth and the appreciation of the dollar weighed on exports, while the energy sector was hard hit by the steep drop in oil prices since mid-2014. In addition, business investment outside of the energy sector was surprisingly weak. However, the available indicators point to a noticeable step-up in GDP growth in this second quarter. In particular, consumer spending has picked up smartly in recent months, supported by solid growth in real disposable income and the ongoing effects of the increases in household wealth. And housing has continued to recover gradually, aided by income gains in the very low level of mortgage rates. The recent pickup in household spending together with underlying conditions that are favorable for growth lead me to be optimistic that we will see further improvements in the labor market and the economy more broadly over the next few years. Monetary policy remains accommodative. Low oil prices and ongoing job gains should continue to support the growth of incomes and, therefore, consumer spending. Fiscal policy is now a small positive for growth. And global economic growth should pick up over time, supported by accommodative monetary policies abroad. As a result, the FOMC expects with gradual increases in the Federal funds rate, economic activity will continue to expand at a moderate pace and labor market indicators will strengthen further. Turning to inflation, overall, consumer prices as measured by the price index for personal consumption expenditures increased just 1 percent over the 12 months ending in April, up noticeably from its pace through much of last year, but still well-short of the committee’s 2 percent objective. Much of this shortfall continues to reflect earlier declines in energy prices and lower prices for imports. Core inflation, which excludes energy and food prices, has been running close to 11⁄2 percent. As the transitory influences holding down inflation fade and the labor market strengthens further, the committee expects inflation to rise to 2 percent over the medium term. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal. Of course, considerable uncertainty about the economic outlook remains. The latest readings on the labor market and the weak pace of investment illustrate one downside risk, that domestic demand might falter. In addition, although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future. Vulnerabilities in the global economy also remain. Although concerns about slowing growth in China and falling commodity prices appear to have eased from earlier this year, China continues to face considerable challenges as it rebalances its economy toward VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 7 domestic demand and consumption and away from export-led growth. More generally, in the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. The U.K. vote to exit the European Union could have significant economic repercussions. For all of these reasons, the committee is closely monitoring global economic financial developments and their implications for domestic activity, labor markets, and inflation. I will turn next to monetary policy. The FOMC seeks to promote maximum employment and price stability as mandated by the Congress. Given the economic situation I just described, monetary policy has remained accommodative over the first half of this year to support further improvement in the labor market and a return of inflation to our 2 percent objective. Specifically, the FOMC has maintained the target range for the Federal funds rate at 1/4 to 1/2 percent, and this kept the Federal Reserve’s holdings of longer-term securities at an elevated level. The committee’s actions reflect a careful assessment of the appropriate setting for monetary policy, taking into account continuing below-target inflation and the mixed readings on the labor market and the economic growth seen this year. Proceeding cautiously in raising the Federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, and whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective. Another factor that supports taking a cautious approach in raising Federal funds rate is that the Federal funds rate is still near its effective lower bound. If inflation were to remain persistently low or if the labor market were to weaken, the committee would have only limited room to reduce the target range for the Federal funds rate. However, if the economy were to overheat and inflation seemed likely to move significantly or persistently above 2 percent, the FOMC could readily increase the target range for the Federal funds rate. The FOMC continues to anticipate that economic conditions will improve further and that the economy 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 because headwinds, which include restraint on U.S. economy activity from economic and financial developments abroad, subdued household formation and meager productivity growth, mean that the interest rate needed to keep the economy operating near its potential is low by historical standards. If these headwinds slowly fade over time as the committee expects, then gradual increases in the Federal funds rate are likely to be need. In line with that view, most FOMC participants, based on their projections prepared for the June meeting, anticipate that values VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 8 for the Federal funds rate of less than 1 percent at the end of this year and less than 2 percent at the end of next year, will be consistent with their assessment of appropriate monetary policy. Of course, the economic outlook is uncertain, so monetary policy is by no means on a preset course, and FOMC participants’ projections for the Federal funds rate are not a predetermined plan for future policy. The actual path of the Federal funds rate will depend on economic and financial developments, and their implications for the outlook and associated risks. Stronger growth or a more rapid increase in inflation than the committee currently anticipates would likely make it appropriate to raise the Federal funds rate more quickly. 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. 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 statement released after the June FOMC meeting, we anticipate continuing this policy until normalization of the level of the funds rate is well underway. Maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and should reduce the risk that we might have to lower the Federal funds rate to the effective lower bound in the event of a future large, adverse shock. Thank you. I would be pleased to take your questions. [The prepared statement of Chair Yellen can be found on page 56 of the appendix.] Chairman HENSARLING. Thank you. The Chair now yields himself for 5 minutes for questions. Chair Yellen, I wish to spend a little time exploring interest on reserves. In 2006, you were the President of the San Francisco Fed. Is that correct? Mrs. YELLEN. Yes. Chairman HENSARLING. Yes, and I was a junior member of this committee, and I carried the Financial Services Regulatory Relief Act in the House, which did not contain IOR. I have since gone back to review the legislative history, and all the legislative history I can find is that the Fed wanted IOR in order to have, number one, member bank retention—they were concerned about that—and number two, to establish a rate floor for the Fed’s fund rate. So I don’t know if you would have had an occasion to review the legislative history yourself, or do you have any memory of why the Fed asked for IOR in 2006? Have you reviewed the legislative history? Mrs. YELLEN. I have some recollection of it, although perhaps not perfect. Chairman HENSARLING. Did any Fed official at that time, to the best of your knowledge, say that IOR would supplant open market operations as the main tool of monetary policy? Mrs. YELLEN. I don’t recall exactly what was said, but we were faced with the problem. I remember former Vice Chair Donald VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 9 Kohn testified on this, and I believe there were a number of testimonies over many years. Chairman HENSARLING. I agree. I just wanted to know if you had a memory of them. Mrs. YELLEN. I think that the Fed felt that there were difficulties in managing short-term interest rates using our standard— Chairman HENSARLING. Yes, but do you have any memory of the Fed saying anything else besides a rate floor? Because if you don’t, my point is this: I believe Congress granted IOR for one purpose, and it appears that the Fed is using it for another purpose. My 12-year-old son could ask me for a Louisville slugger to improve his batting practice, but that doesn’t mean I approve it for the use of chasing his sister around the house. I am not sure that anybody in Congress foresaw the tool being used in such a way. And as I think you know, Section 201 of the Financial Services Regulatory Relief Act says that payments on reserves, ‘‘cannot exceed the general level of short-term interest rates.’’ Today, you are paying 50 basis points on interest on excess reserves. The Fed funds rate yesterday, I believe, was 38 basis points. Is that correct? Mrs. YELLEN. That’s probably correct. Chairman HENSARLING. So, you are paying about, back-of-the-envelope calculation, a 35 percent premium on excess reserves. You are paying a premium to some of the largest banks in America, is that correct? Mrs. YELLEN. I consider a 12 basis point difference to be really quite small and in line with the general level of interest rates. Chairman HENSARLING. Okay. So, you believe you have the legal authority to do this, otherwise you wouldn’t do it, is that correct? Mrs. YELLEN. I do believe we have the legal authority to do it. Chairman HENSARLING. Madam Chair, would it be legal for you to pay a 50 percent premium? You are paying a 35 percent premium today. Would it be legal to pay a 100 percent premium? Mrs. YELLEN. I believe it is a small difference. And interest on excess reserves did not succeed as expected in setting a firm floor— Chairman HENSARLING. And would it be legal— Mrs. YELLEN. —on the level short-term interest rates. Chairman HENSARLING. Would it be legal under the statute for you to pay twice the Fed’s fund rate as a premium on interest on reserves? Mrs. YELLEN. I believe that the way we are setting it is legal and consistent with the Act. Chairman HENSARLING. No, that is not my question. Mrs. YELLEN. Yes, it is. It is— Chairman HENSARLING. What is the legal limit? What is the legal limit on which you can pay? What does the phrase ‘‘exceed the general level of short-term interest’’ mean? You are saying that 12 basis points does not trigger the statute. At what point is the statute triggered? Mrs. YELLEN. It depends on exactly what short-term interest rate you are looking at. There are a whole variety of different rates and— Chairman HENSARLING. Okay. Do you have an opinion on whether or not it would be legal to pay a 100 percent premium? VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 10 Mrs. YELLEN. Whatever level we set, the interest on reserves at— Chairman HENSARLING. Madam Chair, please, it is a simple question. Mrs. YELLEN. —funds going to trade below that level. Chairman HENSARLING. Madam Chair, please, it is a simple question. Would it be legal under the statute to pay a 100 percent premium? If you don’t know the answer to the question, you don’t know the answer to the question. Mrs. YELLEN. My interpretation is that it is legal. Chairman HENSARLING. It would be legal to pay twice the market rate? That would not exceed the general level of short-term interest? Mrs. YELLEN. There is likely to be for quite some time a small number of basis points gap between interest on reserves and the Fed funds rate, and that is something that— Chairman HENSARLING. I would simply advise discussing that with the legal counsel, because I think that frankly offends common sense. Last question: You mentioned as part of your policy of paying interest on reserves, part of the rationale is that you have sent roughly $600 billion back to Congress, to the taxpayer, to Treasury. It is only possible because of a larger stock of reserves. Are you aware that the GAO has opined, ‘‘While a reserve bank transfer to Treasury is recorded as a receipt to the government, such transfers do not produce new resources for the Federal Government?’’ And are you aware that the Congressional Budget Office has opined that, ‘‘transferring excess earnings from the Federal Reserve to the Treasury has no import for the fiscal status of the Federal Government?’’ Are you aware of either of those opinions of the GAO or the CBO? Mrs. YELLEN. I am, but I believe those opinions were rendered in connection with a highway bill which tapped Federal Reserve surplus in order to pay for the highway bill and what the opinion meant was that Congress was not generating additional revenues in transferring Federal Reserve’s surplus to the Congress, that this was essentially an accounting— Chairman HENSARLING. My time has expired, and I think the language is plain. The Chair now recognizes the ranking member for 5 minutes. Ms. WATERS. Thank you very much. Last month’s jobs report included an unusually steep decline in labor force participation, with 664,000 workers reporting that they had stopped looking for work altogether. You said recently that it is too soon to tell whether this drop was an aberration or the sign of a larger trend and cautioned in your testimony in the Senate not to place too much emphasis on a single jobs report. That said, the drop was quite substantial. So, I would like to better understand your current thinking on what could have caused such a deep decline in labor force participation. Moreover, how are you reconciling the consistently positive job gains over the past 75 months with the steep labor force decline? And to what extent has VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 11 the decline in labor force participation affected your thinking regarding the timing and pace of further rate increases? Mrs. YELLEN. Taking a slightly longer time perspective than just the last 2 months, labor force participation has been declining and is likely to continue declining in the coming years because we have an aging population. And as people move into the retirement years and their fractions in our population are increasing, they work less, even though more recent cohorts participate more. But there is a sharp drop-off in participation in the labor force, so that will continue. But we have also felt, or at least I have felt, that labor force participation among other groups has been somewhat depressed by the fact that we have had a weak labor market. And a sign of a strengthening labor market is to see people who were discouraged brought back into the labor force. Now, over the last year, the labor force participation rate has been essentially flat. It had increased for a bit, it has come down somewhat, over the last year it has been flat. Now, with the declining trend due to an aging population, I take the flatness in the labor force participation rate over the last year as an indication that in fact we have seen some cyclical gains, that people who were discouraged have come back into the labor force. If we just look at the last labor market report, the last month, I would caution these numbers are quite volatile and I don’t think we should attach too much significance to a single month. But as I indicated in my prepared remarks, when we have a month in which job gains are very low and we see a decline in labor force participation, that reflects an increase in the number of people who had actively been looking for work and in the previous month had been categorized as unemployed, ceased looking hard enough so they now move into the category of out of the labor force because instead of actively searching they are no longer actively searching. That is not a good sign. So, we are watching that very closely. But I think we shouldn’t over-blow the significance of a single report. I continue to believe this is likely to be a transitory phenomenon. The economy slowed toward the end of last year and in the first quarter of this year. When GDP growth slowed, the labor market, nevertheless, continued to perform well with 200,000 jobs per month in the first quarter. Now, this more recent decline in job growth may be a reflection of that earlier weakness in spending. And as I pointed out, we are seeing, I believe, a pickup in growth. There has been a sharp increase in consumer spending. I think if that turns out to be the case, and I see the fundamentals as remaining essentially strong there, I am very hopeful that we will see a pickup in job growth, and we will be watching for that as we assess the economy. Ms. WATERS. Thank you very much. Let me just say, you noted in your testimony that a U.K. vote to exit the European Union would have significant economic repercussions for economic activity, labor markets and inflation here in the United States, and have previously indicated that the uncertainty posed by the referendum was a factor in the Fed’s most recent decision to hold off on raising rates. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 12 My Republican colleagues have called for tying monetary policy decisions to a strict mathematical formula. And I wanted to just get your take on whether there is any such preset formula that you are aware of that takes into account the uncertainty associated with the chance that a member country could drop out of the European Union. Can you quickly comment on that? Mrs. YELLEN. Mechanical rules take none of that into account. They base changes in the stance of policy on just two variables: the rate of inflation and GDP or the unemployment rate. And I do think, especially given how low interest rates are and how long it has taken the U.S. economy to recover, that it is important to look at the risks and to bring in risk management considerations, as we are doing. I don’t know that a Brexit vote would have significant consequences for us, but it could. And I think it is important to take that into account. Ms. WATERS. Thank you. I yield back. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from Michigan, Mr. Huizenga, chairman of our Monetary Policy and Trade Subcommittee. Mr. HUIZENGA. Thank you, Mr. Chairman. I have a lot to cover, but really quickly, I do want to clarify the quote that the chairman had read from the GAO: ‘‘Such transfers do not produce new resources for the Federal Government as a whole.’’ That had nothing to do with the Highway Trust Fund. That was a quote from the GAO in 2002 on page 16 of their report. So I wanted to clarify that. I was hoping to cover two other issues:one, the Fed balance sheet and risk situation, and whether the Fed has basically become a GSIB; and two, the independence of monetary policy versus the regulatory accountability. Senator Dodd, when this was originally going through— I wasn’t here—was talking about breaking those out. But on page six of your testimony here, ‘‘Maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and should reduce the risk that we might have to lower the Federal funds rate to the effective lower bound in the event of future large adverse shock.’’ I know yesterday in the Senate, you said that you do have the ability to go to negative rates. I am assuming that is what you were talking about in your sentence. Mrs. YELLEN. No, I said that we are not looking— Mr. HUIZENGA. I know that. But in your written testimony, I am just trying to say, is that what you are referring to? I don’t know where else we go other than into negative interest rates. And I am curious by what authority do you have to go negative? Mrs. YELLEN. I am not thinking, and I was not referring to the possibility of going to negative interest rates. What I meant was that the higher the level of the Federal funds rate we are able to achieve, as tightening becomes appropriate to this economy, the more ability we will have to respond to some future negative shock by cutting the Fed funds rate. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 13 Mr. HUIZENGA. I am glad you could clarify that. I want to move on. A former Federal Reserve officer has highlighted the Fed’s exposure to the very type of carry trade, borrow short, lend long that had increased financial fragility before the financial panic of 2008. You have previously expressed your support for stress testing banks using extreme worst-case scenarios. You just, in reference to the ranking member’s question about Brexit, talked about risk management that the Fed is having to go through. Given your belief in the value of stress testing, would you agree that it would also be appropriate to stress test the Fed’s balance sheet with a $4.5 trillion portfolio, to make sure that the risk to the Fed, the Treasury, and the economy as a whole, if the Fed decides in the future that it is best to shrink its balance sheet faster than it is currently expected? Should you stress test? Mrs. YELLEN. It is very important to understand that the Fed is not like a commercial bank. Our balance sheet is very different and our liabilities are not runable. So capital plays a very different role for a central bank. Mr. HUIZENGA. You have a huge effect. Mrs. YELLEN. I do not think stress testing our balance sheet is something that is necessary. But nevertheless, we have done so and we have reported publicly the outcome of such stress tests. Mr. HUIZENGA. So, if you didn’t think you needed to, why did you? Mrs. YELLEN. Because there is public interest in what would happen under such a scenario. And it is an exercise worth undertaking to understand. Mr. HUIZENGA. Do you believe that the Fed is exposed with this $4.5 trillion balance sheet to considerable interest rate duration risk leading to loss of income as you unwind? Mrs. YELLEN. Our income is very, very much higher, about 5 times higher now because of that large balance sheet, then around $100 billion a year— Mr. HUIZENGA. So, when you start unwinding, you will lose money. Correct? Mrs. YELLEN. It is very unlikely that the Fed would end up with negative income. It is conceivable. Mr. HUIZENGA. Not everybody believes that. There are a lot of people who believe that it is inevitable that the Fed is going to end up with negative income because of the amount of unwinding that needs to be done. Mrs. YELLEN. It is certainly not inevitable. But there is a scenario in which the U.S. economy grows very strongly, and in order to avoid overheating, the Fed needs to raise short-term interest rates at a much steeper pace than we consider likely to be appropriate. And in that scenario, it is conceivable that we would end up paying more for reserves than we earn on our assets. It is very unlikely. Mr. HUIZENGA. I think many people believe that is inevitable. Mrs. YELLEN. And let me say this would be a very nice situation for the United States to find itself in because this would be a scenario with strong growth and large tax— Mr. HUIZENGA. Madam Chair, my time has expired. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 14 Mrs. YELLEN. —proceeds coming into the U.S. Treasury. Mr. HUIZENGA. Ultimately, my question is, is the Fed solvent? And I am not sure that has solidly been answered. 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, for 5 minutes. Ms. MOORE. Thank you so much, Mr. Chairman. I have some questions for you, Madam Chairwoman. I want to get to a couple of questions about the living wills and the orderly liquidation. As you know, the chairman of this committee and our speaker have called for an end to it. So, I definitely want you to explain how the orderly liquidation authority would work, confirm for us that it would be paid for with an assessment on remaining firms and not on taxpayers. There seems to be some sort of notion that this would be a revenue raiser for us if we were to end it. But inside of that answer, I also want you to talk about the firms that had failed. And of course, Wells Fargo, who had passed the last time, failed this time. So, can you just review for us that once a bank passes the stress tests and the living wills test, do they need to keep updating their wills? How will they stay fruitful? Mrs. YELLEN. Dodd-Frank contends for the largest banking organizations to structure themselves and to have in place processes that would enable them to be resolved if they were to fail under the bankruptcy code with Title II or the orderly liquidation authority that would be used by the FDIC being a backstop that would be available if it were impossible to resolve these firms under the bankruptcy code. So, we are insisting that firms put in place structural changes, governance mechanisms, make sure that they have adequate capital, gone concern, loss absorbency, liquidity in the right places, everything that we think would maximize the odds of success in resolving such a firm under the bankruptcy code, and the living wills that have evolved over time as the banks understand better what is needed, and we do as well, set out their expectations for how they could be resolved under the bankruptcy code. In the event they encountered trouble, these are very helpful documents to have available. Now, you mentioned that Wells Fargo, the FDIC, and the Fed did not find their initial living will a year ago to be non-credible. We did, nevertheless, identify a set of shortcomings that we wanted to see remedied and in the last submission that we evaluated and we have put all this information out publicly in the letters to the firms. Ms. MOORE. My time is running short, so I just really do want to get to the point. There is a call for ending it. What would be the consequences of that? Mrs. YELLEN. For ending orderly liquidation? Ms. MOORE. Yes. Mrs. YELLEN. I believe that is a very important backup authority for the FDIC to have. Ms. MOORE. What will happen if we don’t have it? VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 15 Mrs. YELLEN. If you don’t have it and a firm were to fail, and we don’t know what the circumstances would be, they might be such that it were difficult to resolve under the bankruptcy code. Ms. MOORE. Would that be a bailout for the taxpayers if we— Mrs. YELLEN. If the orderly liquidation provided— Ms. MOORE. If we didn’t have that? Mrs. YELLEN. The taxpayers would be in a difficult situation. Ms. MOORE. That is what I would like to know. On the regulatory capital, there are pros and cons to just simple leverage, but there is also risk weighting like Basel. Could you provide your thoughts on what the right amount of banking capital would be if we went to simple leverages without other prudential protections? Mrs. YELLEN. I think it would be a very bad idea to only have a leverage ratio that would encourage banking organizations to take on risks by loading up their balance sheets with riskier assets. That happened prior to the financial crisis. It is why we went to risk weighting. So, I think it is useful to have such a ratio as a backup measure, but not sufficient. And I also think for systemic firms that stress testing, which is a different and forward-looking capital exercise, is also necessary. Ms. MOORE. Thank you so much, Mr. Chairman. Chairman HENSARLING. The time of the gentlelady has expired. The Chair recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee, for 5 minutes. Mr. NEUGEBAUER. Thank you, Mr. Chairman. Chair Yellen, you and I have had several discussions about the need for U.S. bank regulators to do a kind of comprehensive study of post-crisis regulation, similar to what the EU is currently doing. I really continue to be disappointed that we are in a mode right now where we implement first and study later. And to continue that discussion, I wanted to have a little bit of a dialogue with you. Now, is it correct that the total loss absorbing capacity or the TLAC rule was designated to strengthen the ability of the largest domestic banks to resolve without government support? Mrs. YELLEN. Yes. That is true. It is to provide gone concern loss absorbency that could be used in a Title II resolution, or alternatively, most of the large banking organizations indicated in their living wills— Mr. NEUGEBAUER. So, it is designed to reduce the systemic footprint of the U.S. G-SIBs right? Mrs. YELLEN. It is designed to aid an orderly resolution. Mr. NEUGEBAUER. And is it correct of the Federal Reserve proposal to impose single counterparty limits on U.S. banks is a rule that would reduce the systemic footprint of U.S. G-SIBs? Mrs. YELLEN. It is designed to do that, yes. Mr. NEUGEBAUER. So, in the G-SIBs surcharge rule then, the Federal Reserve states that it is designed to reduce G-SIBs, now I am going to quote, says it is designed to reduce ‘‘GSIBs probability to default, such as G-SIBs suspected systemic impact and approximately equal to that of a large non-systemic holding company.’’ So does the G-SIBs’ surcharge methodology and calibration VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 16 structure take into account these other steps that you have taken to reduce systemic risk? Mrs. YELLEN. I think it does. The idea here is that a G-SIBs failure would have systemic repercussions and result in cost to the economy, even if it could be resolved. And therefore, it is appropriate and Dodd-Frank was very clear on this, it is appropriate for those firms to be more resilient and less likely to fail. And by insisting that they hold more capital, that is a way of making them more resilient. And the capital surcharges take account of not only their size, but measures of interconnectedness with other parts of the financial system. Mr. NEUGEBAUER. It just appears to me, Chair Yellen, that we are pancaking here. We say, well, this is designed to reduce systemic risk, and then we say, well, but this is designed to reduce systemic risk, well, maybe we didn’t go far enough and this is designed to, and we are really not looking back. Or maybe you have. Have you done an analysis of what the impact of some of these other ones that we discussed earlier are going to have and what? Before you said, let us look at a surcharge on top of that, did you do an analysis of the impact and basically a cost/benefit analysis? Because I think what I look at is it is kind of like going through a buffet. I think the Fed is going through a buffet. I don’t know about you, but when I go through a buffet I have a big problem. I take a little of this, oh, that looks good, I will take a little of that, then I take a little of this. And when I get to the end of the checkout, I have more food than I probably should eat. I am concerned here, and I think that is what the EU is saying right now is, before we layer more and more regulations and prohibitions on the financial sector, maybe we ought to look and see what the impact is on it. Are you all having those conversations? Mrs. YELLEN. At various points, we have looked pretty carefully at what the impact is of these rules on the costs and benefits to society as a whole. And the overwhelming conclusion that comes from those studies is that a financial crisis is immensely costly, takes an immensely costly toll on American households, workers, and businesses— Mr. NEUGEBAUER. So is the goal here to make these institutions fail-proof or just to make sure that the American taxpayers don’t have to bail them out in the event that they do fail? Mrs. YELLEN. I think we are trying to reduce the odds that they get into trouble and take a toll on the U.S. economy. Mr. NEUGEBAUER. The question is, are you trying? I think the Fed is trying to make these entities fail-proof. And I think it is kind of spilling over the entire financial community. So basically, I think what we have now is we have trying to run banks. I am not sure that when we look at the anemic growth, you are trying to paint a rosy picture, but the economic data out there is not all that rosy. Mrs. YELLEN. I guess I would respond by saying that credit has been growing at a healthy rate. If you look at surveys, for example, the National Federation of Independent Business, small and medium-sized businesses are not reporting that lack of access to credit is among their most significant problems. We have had great improvement in the U.S. econ- VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 17 omy. And most banks, even though it is a challenging, low-interestrate environment, remain profitable and we have a safer financial system. Chairman HENSARLING. The time of the gentleman from Texas has expired. The Chair now recognizes the gentleman from Connecticut, Mr. Himes. Mr. HIMES. Thank you, Mr. Chairman. And welcome, Chair Yellen. I want to make a quick statement. As you hear the scrutiny and criticism of the other side, I want to say that a lot of us subscribe to a point of view held by much of the economic profession, which is that this place, the Congress, abdicated its economic role in 2010 in favor of austerity, giving up an opportunity to do a massive investment in infrastructure and any number of other things that I think would have actually helped the economy in favor of austerity, which while it reduced the deficit fairly dramatically, has been a drag on our economic growth, leading the Federal Reserve to stand on its own with monetary policy, not an ideal situation. But many of us appreciate the position that the Fed was put into, and many of us will go to the mat to defend the Fed against the many ideas that would damage the monetary policy independence of the Fed. My question really pertains to something that you just closed on. There is a narrative developing that while credit markets as a whole are robust and the facts show that, whether it is the highyield market or the IPO market, you name it, credit markets are strong for corporate America, but that is not true for small and medium-sized enterprises. The narrative, as it has developed, is that is true, and that is a question to you. You seem to believe that it is not. Number two, the second part of the narrative is that the reason for that is bank regulation. I will just quote from one Wall Street research report that says, ‘‘New banking regulations have made bank credit more expensive and less available. This affects small firms disproportionately.’’ So, my question is, are we in fact seeing a supply problem in terms of credit to smaller businesses, and is there any evidence that this is attributable to new bank regulations? Mrs. YELLEN. Small businesses often find it more difficult to get access to credit. We know that frequently small businesses or startup businesses, the owners will use their credit cards and personal credit worthiness in order to take out loans. They may have less access to capital than established businesses, but I don’t— Mr. HIMES. Pardon me, that has always been true. But has that changed? Mrs. YELLEN. That has always been true. I wouldn’t say I have seen any data suggesting there is a significant change. I know the decline we had in house prices made it more difficult for a while for small businesses, for example, to use a home equity loan to finance a business. But that is not a small-business loan. I think every indication I have seen suggests that the supply of credit remains healthy to VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 18 small businesses, that it doesn’t rank among the top of their concerns, that the demand, we meet with many banking organizations to discuss this issue, and they say the demand for credit by small businesses and medium-sized businesses remains somewhat depressed. But I think the supply and availability of credit are there. We have not seen negative changes that I am aware of. Mr. HIMES. And is this true throughout the Fed’s many regions? Mrs. YELLEN. I believe so. I am not aware of evidence to the contrary. Mr. HIMES. Okay. So to part two of my question, again, you have said that is not a reality, or at least not a material reality. So part two of the question is a little more challenging, which is, is it attributable to new banking regulations on small providers of credit? Are we seeing, are you, is the Fed observing dislocations in the credit market to small and medium-sized enterprises that might be attributable to new regulations? Mrs. YELLEN. We know that there are community banks that are struggling under regulatory burdens, and we are doing everything that we possibly can to address that. The fact that we are in a low-interest-rate environment also tends to put downward pressure on net interest margins that harms bank profitability. So it is a difficult environment for community banks. And as I said, there have always been in rural areas and for some small businesses difficulties in gaining access to credit. But I have not seen a change that would be attributable to the financial regulations we have in place. Mr. HIMES. Thank you. In my last 30 seconds, you said the Fed is doing everything they can to alleviate the burden on community banks. Can you just elaborate for 20 or 30 seconds on what the Fed is doing there? Mrs. YELLEN. We have significantly increased the exemption under our small bank holding company policy rules so that now all holding companies under $1 billion are not subject to our consolidated capital rules. We have changed our exam processes to do more work off-site to make our exams more tailored. Through the EGRPRA process we are looking to reduce our regulatory burden. And we are contemplating a simplified capital rule for well-capitalized banks that would— Chairman HENSARLING. The time of the gentleman from Connecticut 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. Chair Yellen, at a conference in June 2011, your predecessor, Chairman Bernanke, was asked a simple question in reference to the thousands of pages of Dodd-Frank and the tens of thousands of pages of implementing regulations. He was asked, ‘‘Has anyone bothered to study the cumulative effect of these things? Is all this holding back the economy at this point?’’ VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 19 And Chairman Bernanke responded, ‘‘Has anybody done a comprehensive analysis of the impact? I can’t pretend anybody really has. It is just too complicated. We don’t really have the quantitative tools to do that.’’ So following up on Chairman Neugebauer’s line of questioning here, you were asked, does the Fed study any of this? So I guess the question is, has an analysis been done of the cumulative effect of Dodd-Frank regulations as well as Basel III on broader economic variables such as credit availability, economy growth, capital formation, and job creation? Have you done any studies on that? Mrs. YELLEN. Perhaps the kind of comprehensive analysis of everything that you are looking for hasn’t been undertaken, and I guess I would agree with Chairman Bernanke’s remarks. But Congress set out pretty clearly a road map for the regulators in terms of ways they wanted to see financial regulations— Mr. LUETKEMEYER. If you don’t have the tools, the ability to study this, how can you make regulations that pinpoint what you can do to improve the economy or know the effect of those rules? Mrs. YELLEN. Every time we put out a rule, we do an internal study of how to minimize burden under that rule. And we take public comments and ask for alternatives that could achieve the same goals with reduced burden. And so we are taking costs into account and trying to minimize those costs, while achieving— Mr. LUETKEMEYER. Okay. If you are doing it, Madam Chair, why, in the last 5 years, have there been almost no new bank charters issued? Why? What is your reasoning for that? Is it regulation? Or is it low interest rates? Mrs. YELLEN. The work that I have seen suggests that the challenging economic environment, a low-interest-rate environment and a sluggish economy— Mr. LUETKEMEYER. So regulation doesn’t have anything to do with this? Mrs. YELLEN. I am not aware of any studies that suggest that regulations are responsible for that. Mr. LUETKEMEYER. In your testimony you talk about how housing has continued to recover gradually. And if you look at the home building market, there are actually fewer home mortgage loans now than there were a year or two or three ago. And I go home and I talk to my local community banks, and there are some that got completely out of the home mortgage lending business. And so they go back and they point to rules and regulations as the reason for not doing this. They can’t comply. They can’t hold things in portfolio without being qualified, which infers there is an extra risk with their loans. They just said, we are not going to deal with the risk. And so now you have community banks no longer serving their communities, which is disastrous, in my mind. So the question is, these banks are telling me it is rules and regulations that are keeping this from happening. And the CFPB is kind of the main culprit here, with the QM rule and TRID. Do you coordinate at all with other agencies, whether it is the CFPB, the Treasury, other agencies when these rules are promulgated to see if there is a cumulative effect that could be negative out there that everybody should be watching for? VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 20 Mrs. YELLEN. We coordinate, many of our rules are joint with the other banking agencies. Mr. LUETKEMEYER. Did you coordinate with the CFPB? Mrs. YELLEN. In the case of the CFPB, they are required to consult with us and we often offer comments to— Mr. LUETKEMEYER. So, did they accept your comments? Or did they ignore them? Mrs. YELLEN. There are a number of them. I would agree with you when it comes to mortgage credit that the new rules that we have, which are designed to end the abuses we saw in subprime lending and in the housing crisis— Mr. LUETKEMEYER. This all goes back— Mrs. YELLEN. They have made credit more difficult to obtain for individuals— Mr. LUETKEMEYER. This all goes back to monetary policy from the standpoint that rules and regulations are strangling our economy so that people can’t participate in the economy. And that goes back to, whether you are adjusting interest rates and trying to play with unemployment, that all goes back to the fact that you are dealing with lives every day, with the rules and regulations that you are messing with. And I think we need to understand the importance of that. And when you see the impact, fewer mortgage loans, banks not being formed. And a while ago you talked about the small-business folks, we had fewer small businesses, fewer businesses created in the last 5 or 6 years than we lost. Mrs. YELLEN. True. Mr. LUETKEMEYER. That is the wrong direction. Small businesses are where you generate the jobs. And if we are not allowing those folks to be created, we are hurting ourselves. And it goes back to rules and regulations and monetary policy. Please do the research. Thank you. I yield back. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Delaware, Mr. Carney. Mr. CARNEY. Thank you, Mr. Chairman. Thank you, Chair Yellen, for coming in today. You are here for your twice-a-year report on Humphrey-Hawkins. And I haven’t been able to read all of your monetary policy report or your opening statement, but I have gotten through some of it. And I just have really a couple of questions that maybe you could address. You say early on that inflation has continued to run below our 2 percent objective. The Federal Open Market Committee expects inflation to rise to that level over the medium term. So you are meeting your target there. However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that your cautious approach to adjusting monetary policy remains appropriate. What other things in the economy suggest that it may be slowing down? We are pretty far out in this economic expansion. Are there other things in your report that you could point to? Mrs. YELLEN. There are mixed developments in the economy. One thing we do note is that investment spending has been unusu- VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 21 ally weak in recent months. And the combination of particularly weak investment spending and, of course, investment spending has been very weak because of the decline in drilling and drilling and mining activity. The rig counts are way down because of the decline in energy prices. But we have seen weakness also outside of that. And the combination— Mr. CARNEY. Is that an overall plus or minus for the economy, the lower prices? Mrs. YELLEN. It is not a plus for the economy because, first of all, it is a part of spending that supports growth, but it is highly relevant to productivity growth. Mr. CARNEY. Right. Mrs. YELLEN. And productivity growth has also slowed. So we are watching that carefully. We have a drag from slow growth in the rest of the world and a strong dollar that is negatively impacting trade-exposed sectors including— Mr. CARNEY. So, there are some pretty significant headwinds. Mrs. YELLEN. There are some headwinds. But on the other hand, we do have strengths. Consumer spending is particularly strong. And balancing everything out, we have an economy that is, for the last four quarters, growing about 2 percent. Growth was quite slow in the first quarter at the end of last year. It looks to be picking up. So, while we are watching things, I don’t want to send a message of pessimism about the economy and where we are going. Mr. CARNEY. So there is some pessimism underneath the unemployment numbers, which suggests that certain subgroups, African Americans and Hispanics, have higher unemployment rates, and you note that in your report. Mrs. YELLEN. Yes. Mr. CARNEY. Is there anything significant there that you can point to with respect to that issue? Mrs. YELLEN. I think we should be very concerned about the fact that there are subgroups of the population who experience lower income and more distress in the labor market. And think about what we can do to address the problems of those groups. They have seen improvement. Mr. CARNEY. What about the quality of the jobs in that job group? I was talking to some folks the other day in my State of Delaware, and one of the guys in the conversation said,‘‘We need new old jobs.’’ And I knew exactly what he was talking about. We need the old kind of manufacturing jobs that we had at Chrysler and General Motors in our State, manufacturing jobs that paid a good income. Can you comment on that, the quality of the jobs that are being created? Mrs. YELLEN. So probably the quality of the jobs that are being created, we have created a lot of high-end jobs. So, it is not only— Mr. CARNEY. High-end jobs? Mrs. YELLEN. High-end jobs for skilled workers. Mr. CARNEY. Highly educated, skilled workers. Mrs. YELLEN. Right. And a lot of the kinds of jobs that you are referring to and middle-income jobs they disappeared. They declined and were hard hit in the downturn. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 22 But over a longer period of time, probably since the mid 1980s, there have been a combination of pressures that have made those jobs fewer and far between. Mr. CARNEY. So I don’t know that you have monetary policy tools that you can use to address that. But on our side, on fiscal policy, we should be thinking about those kinds of tools that we might deploy. Mrs. YELLEN. I think so. We are talking about secular trends relating to the nature of technical change and how it has raised the demand for skilled labor, trends relating to globalization. And then, what are we doing in terms of education, workforce development investment in your domain? Mr. CARNEY. Thank you very much. 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. It is good to see you. I listened intently to your testimony and your commentary on the headwinds to our economy that I think all of us follow very closely, since it has a direct impact on all of our constituents. But I didn’t hear you comment on a couple of issues that concern me. Last year, there were 81,000 pages of new regulation. Between 2009 and 2015, there were 550,000 new pages of regulation. Would you consider that a headwind for economic growth? Mrs. YELLEN. You are referring to our regulations? Mr. DUFFY. No, no. I am talking about government regulations across the spectrum. I hope you don’t have 550,000 new pages of regulation at the Fed. Mrs. YELLEN. I don’t think we do. Mr. DUFFY. No, I don’t think you do, either. You have a lot. Mrs. YELLEN. We have additional regulations, we certainly do. The regulations that have been put in effect generally are intended to address problems. Mr. DUFFY. That is not my question. Are these headwinds to the economy or not? Mrs. YELLEN. It is very hard to quantify the extent to which regulation is a headwind. Mr. DUFFY. But it would be a headwind? Mrs. YELLEN. Businesses certainly cite regulation as a factor affecting their decision-making. Mr. DUFFY. Then why don’t you cite it? If the businesses that you talk to cite this as a headwind, why don’t you cite it as a headwind? Mrs. YELLEN. I actually don’t think it is the most important headwind. It may be a headwind. Mr. DUFFY. Okay. And the U.S. corporate tax rate, 31.9 percent, the OECD average of corporate tax rate is 24.1 percent. We pay 15 percent more in corporate taxes. That is 15 percent less money that goes into wages and economic development, research and development. Do you see that as a headwind? Mrs. YELLEN. I think it is widely agreed that there could be constructive changes to the corporate tax system. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 23 Mr. DUFFY. I have an individual in Wisconsin, that is where I am from, who has a manufacturing facility. He manufactures in Wisconsin and has facilities all over the country. And most manufacturers in his industry have all left America, they have all gone overseas. He is one of the few that are left. And he talks about how he spends $15,000 a year per employee on insurance, and $20,000 per employee on regulatory compliance. So $35,000 goes out the door per employee before he pays them one red cent in salary. Do you see that as a headwind? Mrs. YELLEN. These tax arrangements do have impacts on the profitability of various business activities. Mr. DUFFY. So, you would agree that would be a headwind? Or is that a benefit? Does that help him out? Does that help him grow jobs and salaries in his company, that $20,000 in regulatory compliance cost? Mrs. YELLEN. Different countries have different systems for dealing with health care and financing it. And the impacts are complicated. Mr. DUFFY. I will accept that as a non-answer. I want to change course a little bit. Looking back at the 2008 crisis—you have been at the fed For a while—were there any banks that failed that had a leverage ratio of 10 percent or higher that you are aware of? Mrs. YELLEN. I don’t— Mr. DUFFY. If so, give me their names, if you would. Mrs. YELLEN. I don’t know. But I can tell you that a lot of banks that failed were considered to be well-capitalized at the time that they failed. Mr. DUFFY. That is not my question, though. There are different definitions of well-capitalized. Do you know of any one bank that had a leverage ratio of 10 percent or higher failed? Mrs. YELLEN. I do not know. Mr. DUFFY. Because I have looked and I haven’t found one in the 2008 crisis that failed with a leverage ratio of 10 percent or higher. And so I think you are aware that this committee is talking about a reform to Dodd-Frank, and I know that you are aware that many banks complain about the cost of compliance and what that does for them to make loans that would be good loans and traditional loans that they could usually make, but now they can’t because of new regulation which has an impact on our economy, economic growth, job creation. Do you oppose the idea that if you have a high leverage ratio, you hold good capital, that you can get out of some of the costly regulations that come from the Fed and other regulators? Mrs. YELLEN. I do think that for community banks it would be worthwhile to put in place a simplified capital regime. And the details, I am not certain of, but we are looking at this as well. Mr. DUFFY. Do you agree there is a correlation, though, between more capital and less regulation? Can you buy into that concept? Mrs. YELLEN. I think for community banks, yes. Mr. DUFFY. Because we are safer, right? We hold more capital, there is less risk to the economy. Mrs. YELLEN. For community banks, I think a simplified regime where there is less regulatory burden— VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 24 Mr. DUFFY. For larger banks, the answer is no? Mrs. YELLEN. I said for community banks. Mr. DUFFY. So, is the answer no for larger banks? Mrs. YELLEN. For systemically important banks, the answer is no. Mr. DUFFY. My time has expired. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Illinois, Mr. Foster. Mr. FOSTER. Thank you, Mr. Chairman. I have a quick two questions for the record. The first, you had indicated earlier in your questioning that there was a situation of super strong economic growth where the Fed may have a period of negative income. And I was wondering if you could just provide a brief write-up of what that scenario would look like, in particular looking at the consolidated balance sheet of the government and acknowledge the fact that this super strong economic growth would be accompanied by a very large increase in tax revenues. And yes, would it be possible for you to make just a brief writeup? Or if you have a more detailed one, that would be great, too. Mrs. YELLEN. Yes, I think we could certainly do that. Mr. FOSTER. Thank you. Secondly, earlier this week, Moody’s Analytics published a macroeconomic analysis of the policy proposals of one of the presidential candidates and they are in the process of doing a similar analysis for both presidential candidates. It is my understanding that you have a similar macroeconomic model that you run. I was wondering, would it be possible for you to run in your models the assumptions and see if you reproduce their results? Because they were rather impressive, there was trillions of dollars of loss to economic activity due to at least one set of these policy proposals. Mrs. YELLEN. Congressman Foster, we are a nonpartisan organization and I don’t want us, either me as the leader or our organization, to be involved in analyzing partisan issues. Mr. FOSTER. This is simply verifying the math, this is a mathematical question, a modeling question. I am not asking you to question or evaluate the assumptions. I am just saying under these assumptions, do you reproduce their numbers? Because you know, obviously, policymakers are at the mercy of the details of these very complex macro models. It would be reassuring to understand that there is some agreement between macroeconomics that you are talking in similar terms. Anyway, if you could— Mrs. YELLEN. I would say that our model, one of our workhorse models is in the public domain. We publish it on our website. If someone wanted to do it, they could download our model and feed in those assumptions. Mr. FOSTER. And reproduce those results? Do you find in general that there are not big differences? You are familiar with the Moody’s modeling and so on? Or do most of these models produce comparable results? Mrs. YELLEN. I am not deeply familiar with the Moody’s model. My guess is it is similar in many ways to ours. But again, I am VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 25 not certain about the details, but our model is available to perform that kind of analysis. Mr. FOSTER. Sounds like a good job for a think tank, I guess. Okay, another sort of detailed, technical question. There have been reports that the European Commission is considering delaying the going live of margin requirements for unclear derivative trades. I believe that we are on schedule to have them go live in September, the beginning of September, and that there is some footdragging, at least reports of it. Is that something you are willing to engage the EC that they not do this, not delay these? Mrs. YELLEN. We have worked very hard to put these in place. It is important that we put it in place here, and my understanding is that the delay will be very short. Mr. FOSTER. Thank you. Another technical issue. Right now, the supplemental leverage ratio rule requires custody banks to hold capital against their deposits on the Federal Reserve. This is presumably a worry about some future scenario where the Federal Reserve will not be a reliable counterparty in some sort of financial panic. I was wondering if you would comment on the logic of this requirement to hold capital against deposits at the Fed? Mrs. YELLEN. So, a leverage ratio is typically not in a capital regime, it is not the binding requirement. It is a backup, simple measure that assesses capital against an entire balance sheet based on its size without differentiating the different riskiness of different assets. And it has always been imposed in this way. Mr. FOSTER. Custody banks are in a sort of unique position, as they have potentially very large and transient deposits of the Federal Reserves. I think for very good reasons, that is a behavior you want to encourage. And I just—it is a concern that I and other Members have expressed. And I think you should continue to look at that. Mrs. YELLEN. We will do so. Mr. FOSTER. Okay. Let’s see, the last thing that I guess is relevant to those who are wearing the green shirts in the audience here. The Federal Reserve recently published an international finance discussion paper called, ‘‘Doves for the Rich and Hawks for the Poor,’’ which made the point that the real distributional consequences of whether in response to a monetary shock you try to maintain constant employment or constant pricing. And I was wondering, is that sort of thinking leaking into your consciousness? Mrs. YELLEN. We are certainly very focused on maximum employment and wanting to promote stronger job markets with gains to all groups. Chairman HENSARLING. The time of the gentleman from Illinois has expired. The Chair now recognizes the gentleman from New Hampshire, Mr. Guinta. Mr. GUINTA. Thank you, Mr. Chairman. Good morning, Chair Yellen. Thank you for being here today. Since the Federal Reserve was created in 1913, we have seen the Great Depression, the stagflation of the 1970s, the Great Recession, and currently one of the slowest economic recoveries in quite some VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 26 time. When the Federal Reserve makes artificial decisions, setting interest rates, or fails to properly communicate on its monetary policy, it creates market volatility in my opinion, which weakens the effectiveness of the markets, making it harder for economic opportunities for all Americans. As you know, there has been considerable pushback to the Fed’s current approach to stress testing financial institutions from those who believe that the process has become increasingly arbitrary and unpredictable. The committee has heard concerns from regional banks that are subject to the stress tests that the exercise is not tailored to their size and complexity, which results in significant costs that outweigh any potential benefit from a safety and soundness perspective. To increase the transparency of the stress test process and ensure that Congress can hold the Fed accountable for its role in administering the tests, I would like to ask you, would you support legislation to require the Federal Reserve to issue regulations subject to public notice and comment spelling out in detail the scenarios it would rely upon in conducting those stress tests? Mrs. YELLEN. I wouldn’t support such legislation. I think it is very important that the scenarios be current and reflect risks that we assess to be important and relevant at a particular time that we are conducting those stress tests. And the delay that would be caused by putting out for comment particular scenarios would result in the test being stale. We put out a great deal of information about the stress tests. Our approach has been put out for public comment. We have model symposia, we have put out a great deal of information. And I don’t think that would result in a stronger process. Mr. GUINTA. How often do those environments change on an annual basis? Mrs. YELLEN. We have new scenarios every year that we give to the firms and it is important that they— Mr. GUINTA. So, annually? Mrs. YELLEN. We put out a different set of scenarios annually. Mr. GUINTA. Why couldn’t that legislation be updated annually? Mrs. YELLEN. Because the delay in having public comment and revising things based on public comment would mean that we would have to start very much earlier, and wouldn’t have the advantage of developments that had taken place Mr. GUINTA. But it is possible to do that—don’t you think we could complete that in a 12-month period? Mrs. YELLEN. I don’t think that it would add anything to the process and I think that it would make the scenario stale. Mr. GUINTA. I think it is important for accountability and I think it is also important for transparency. I think if we had this kind of requirement on an annual basis, we would probably have both. But I want to move on to a different issue. Dodd-Frank established the CFPB as a bureau within the Federal Reserve System. Can you tell me which of Richard Cordray’s decisions must be submitted to you for your approval? Mrs. YELLEN. We don’t approve decisions. The CFPB has to consult with us in the course of drawing up proposals. And I believe VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 27 that they have done so when we have tried to provide feedback and useful input. Mr. GUINTA. How often does Richard Cordray consult with you personally? Mrs. YELLEN. I have not consulted with him personally. Mr. GUINTA. So who are they consulting with then? Mrs. YELLEN. With our staff. Mr. GUINTA. Do you review and approve the CFPB’s budget? Mrs. YELLEN. No, we don’t approve their budget. Mr. GUINTA. Can you by law? Mrs. YELLEN. I believe the answer is no. Mr. GUINTA. I am told that the CFPB gets its funding simply by sending a letter each quarter requesting, in most cases, in excess of $100 million. Do you know if that is accurate? Mrs. YELLEN. I don’t know the details of their budget, but we follow the law in— Mr. GUINTA. You personally don’t review the requests? Mrs. YELLEN. I don’t think so. No. No, we do not. Mr. GUINTA. Wouldn’t you want to, as the head of the Federal Reserve, since they are created under your purview? Mrs. YELLEN. Congress set up a system in which we fund them, but don’t decide what their budget should be. Mr. GUINTA. Do you have any idea what their last budget request was? Mrs. YELLEN. I don’t recall. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Washington, Mr. Heck. Mr. HECK. Thank you, Mr. Chairman, very much. Chair Yellen, I think almost unarguably, there is no person more responsible for the state of the economy than you are. And in my humble opinion, you have a pretty good track record in that regard. Car sales are up. Home sales are up. A constant steady drumbeat of private sector job creation has accumulated. And yet, I cannot shake the feeling that it is way too premature to put out the ‘‘mission accomplished’’ banner on the aircraft carrier and I think most Americans agree. I also think that the reason for that is because of an absence of wage growth. I think we are ticking upward now at about 21⁄2 percent. I know you will cite that, so I will do it first. Put frankly, Chair Yellen, that is fairly de minimis compared to the last recovery when it was 4 percent. My question is very straightforward, when does America get a pay raise? Mrs. YELLEN. I think we are beginning to see slightly faster wage growth based on average hourly earnings. Wage growth is, over the last 12 months now, about 21⁄2 percent and that is up from the very low level it was. Readings on compensation, hourly compensation are very noisy, so it is hard to know, but it looks like we are seeing somewhat faster wage growth. I hope that it will be permanent. And other measures, other wage indicators, like the Atlanta Fed’s Wage Tracker, do show an improvement in wage growth. And I do believe that as the labor market continues to improve, and I certainly expect, and it will be our policy to continue to see further improvement, that will move up. But I would say one factor that VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 28 is a negative with respect to wage growth that we didn’t have, for example, in the second half of the 1990s, is that productivity growth has been very slow. So, if you ask what is a sustainable level of wage growth, given our 2 percent inflation target, kind of a rough measure, and of course this applies over long periods, not a quarter or even a year, that wages can grow at the rate of productivity growth plus the rate of inflation. So, with a 2 percent inflation target, you would expect wage growth of 2 percent plus productivity growth, trend productivity growth. Now, I believe since 2010 productivity growth has been running at a meager 1/2 percent per year. Mr. HECK. May I interrupt and ask if you think we are still accurately measuring productivity growth? Because I note a growing body of literature and scholarship around that question, that we may not be accurately measuring it anymore, do you believe that we are accurately measuring it? Mrs. YELLEN. I think there is mismeasurement and the work has shown that there is— Mr. HECK. Can I ask you a question? Mrs. YELLEN. And definitely declines due to an increase in mismeasurement. Mr. HECK. I would like to ask you a question, however, about the relationship between employment and wage growth. We are at the Fed’s historic definition of full employment at 4.7 percent, but we are still significantly above, that is U-3, we are still significantly above on U-6. If they could put that slide up, I would appreciate it. I think the latest number was 9.7 percent. The gap between U6 and U-3 is greater than it was pre-recession. So, Chair Yellen, what does U-6 have to be at to constitute what you would deem to be full employment? And what would be the relationship of that measure of full employment? Because we still have 10 percent of the employment base which either isn’t employed and wants to be, is discouraged, or working part time and wants to work full time. What is the relationship? What is the point at which U-6 is ‘‘full employment,’’ and then what would be the effect on wage increases? Because I think at the end of the day, most Americans and even everybody on this panel, these and ours, would like to see America get a pay raise. Mrs. YELLEN. I agree with what you just said, that U-6 is not back to pre-recession levels to, say 2007 levels, U-3 is. Involuntary part-time employment which is in U-6 is very high relative to prerecession levels. Mr. HECK. I have 4 seconds, can you give me a number, Chair Yellen? What is full employment under U-6? Mrs. YELLEN. I am not sure of the number but it does show a margin of slack. Mr. HECK. A range? Mrs. YELLEN. Adding part-time employment to an unemployed person is a difficult thing to do. Mr. HECK. Thank you. Just let me conclude by saying I am not sure why you take your foot off the pedal before we— Chairman HENSARLING. The time of the gentleman from Washington has expired. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 29 The Chair now recognizes the gentleman from Oklahoma, Mr. Lucas. Mr. LUCAS. Thank you Mr. Chairman. Chair Yellen, as you know, I also sit on the House Agriculture Committee, and I have a particular interest in the creation and implementation of rules governing our derivatives market and ensuring that a level playing field exists for U.S. companies. I would first like to commend the Fed’s efforts in working to set global standards within these markets. I think can all agree that it is certainly in the best interest of U.S. competitiveness that as global standards are developed there is consistency in the rules and their effective dates throughout various jurisdictions. I would therefore like to discuss the European Commission’s recent announcement that it will delay implementation of the margin rules for uncleared over-the-counter derivatives until mid-2017. The United States currently plans to move forward with an agreedupon implementation date of September 1, 2016. And while the United States is ready to move forward, I am very concerned about the impact that this variation in effective dates will have on U.S. companies. Given this likely variation date on the implementation dates, what can be done to mitigate fragmentation and to ensure that a level playing field exists for U.S. firms? Mrs. YELLEN. We have worked very hard to get ready to implement these rules. The firms are ready to put them into effect. And my understanding is that the delay from the EU is going to be short. And we will continue to monitor that. These are markets where it is important to have a level playing field, I agree with that. Mr. LUCAS. But even in the briefest of times, assuming that it is a year or less, September of 2016 to sometime in mid-2017, should we be concerned that market participants will limit their trading with U.S. counterparties during this period of time? Will we change their habits and patterns while they look for standards or opportunities that might be slightly more advantageous assuming the new rules will be more restrictive than the existing system? Should we be concerned that people will do business outside of the United States during this period? Mrs. YELLEN. Hopefully, it will be a very short period. Mr. LUCAS. I guess ultimately where I am going, Chair Yellen, is I represent constituencies in Oklahoma in agriculture and energy that use these products, both in the production of, the processing of, and the ultimate retail sales of. They are products that I am told that their bankers insist upon using, that both banking regulators at state and Federal level insist that they be used. My concern is that if we move forward ahead of the Europeans, we will create a situation for months or a year that will disadvantage not only the consumers of these derivative products, but the market makers, too. And once patterns are established, will we be able to overcome that sometime in 2017 or later? So ultimately, I am asking you, suggesting to you that it might well be in the Fed’s and the economy’s best interest to continue to try to coordinate our effective dates with the Europeans. And if they are not going in VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 30 2016, maybe we shouldn’t go either. Do you see where I am coming from on this point? Mrs. YELLEN. I do. It is an issue we need to watch carefully. If there is a delay in Europe, we need to consider what impact it will have and to work closely with the Europeans to make sure this is a— Mr. LUCAS. As you know, and as our colleagues on this committee know, we are talking about a tremendous amount of dollars in business. We are talking about establishing patterns, relationships. I just worry that this will create an undue burden on my constituents and on the market makers in this country, and that we won’t be able to recover. Whether it is an accident that the Europeans are delaying or it is a good business tactic, I don’t know. We need to be coordinated in whatever we do, there is too much at stake. Thank you for acknowledging that, Chair Yellen. With that, on the behalf of my farmers and ranchers, I yield back, Mr. Chairman. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentleman from California, Mr. Sherman. Mr. SHERMAN. Thank you. The gentleman from Wisconsin talked to you about the number of pages of regulations. I practiced tax law, and advised a lot of small businesses. And this idea of number of pages of regulations is a great sound bite, but has nothing to do with actually making it easier for businesses to transact business. If you look at tax law, thank God we have long pages of regulations so we can find out what the answer is. In the area of antitrust law, the regulations are basically nonexistent. And so, you go to a law library and you read hundreds of pages of court decisions and you still don’t know what the answer is. So, the idea that more pages of business regulations means more problems for business is a great political sound bite, but it is actually government agencies clarifying what the law means. As to the tax rate, I would point out that we don’t have a valueadded tax in this country, which all those comparative countries do. There is no one who has put forth the plan to replace the revenue from the decline in the corporate income tax. And the one thing the majority party has suggested is eliminating the earned income tax credit to really sock it to families trying to make it on $20,000 and $25,000 a year. There is, of course, a loss of manufacturing jobs. That is not because we have regulations that clarify what congressional statutes mean, that is because we got really bad trade deals that Congress has ratified or approved. And I will point out that Congress is now geared up to use the chicanery of a lame-duck session to approve a TPP deal that is terrible for America, so terrible that you can’t find a presidential candidate who is willing to support it. Chair Yellen, you are going to be told, you have been told in this room by many that your rates are too low, your balance sheet is too big. People who say that are wrong. America is under-performing. Our inflation rate is lower than your target. And our labor participation rate is lower than everyone’s target. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 31 As to the size of your balance sheet, I know that you focus on the effect it has on the economy as a whole. But there is also the tens of billions of dollars that you turn over to the Treasury. Do you and your fellow FMOC members ever spend any time wondering whether Congress is going to have the money to provide a school lunch program, a school breakfast program? When you factor in how big your balance sheet should be, do you envision hungry kids here in America and how the money you turn over to this Congress could be used to feed them? Mrs. YELLEN. We are very focused on the dual mandate that Congress has given us, namely full employment and price stability. And the size of our balance sheet and the stance of monetary policy is all designed to promote those objectives rather than trying to make a profit. Mr. SHERMAN. I would just say that earning— Mrs. YELLEN. But we are pleased to be able to turn over $100 billion checks, but that is not what draws policy. But we’re glad to be able— Mr. SHERMAN. Speaking on behalf of the Congress that would otherwise have to cut cancer research or cut school lunches, thank you for the $100 billion checks and please do factor that in. Mrs. YELLEN. You are welcome. Mr. SHERMAN. The world is focused on Brexit. And it may be good or bad long term for the world. We don’t know. That is a decision for Britain to make. There are some at the extreme who are painting this as some immediate world calamity. I just want to ask a question about your schedule. Have you scheduled some sort of emergency meeting on Friday because you envision some great calamity happening to the world on Thursday, or is the British vote just one of the many things that you will consider at the next regularly scheduled meeting? Mrs. YELLEN. It is a risk that we are monitoring. I have said that, we will be watching closely to see what the vote is and what possible repercussions it might have. Mr. SHERMAN. But you haven’t blocked off Friday and Saturday on your personal schedule for emergency meetings as if the hurricane is coming to envelope the entire world? Mrs. YELLEN. No, I haven’t. Mr. SHERMAN. Thank you. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from California, Mr. Royce, chairman of the House Foreign Affairs Committee. Mr. ROYCE. Chair Yellen, welcome. I am worried that the Federal Reserve has created a third pillar of monetary policy, that of a stable and rising stock market. And I say that because then-Chairman Bernanke, when he appeared here, stated repeatedly that the goal of QE was to increase asset prices like the stock market to create a wealth effect. So it seemed as though that was the goal. It would stand to reason then that in deciding to raise rates and reduce the Fed’s QE balance sheet standing at a still-record $41⁄2 trillion, one would have to be prepared to accept the opposite re- VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 32 sult, a declining stock market and a slight deflation of the asset bubble that QE created. Yet, every time in the past 3 years when there has been a hint of raising rates and the stock market has declined accordingly, the Fed has cited stock market volatility as one of the reasons to stay the course and hold rates at zero. So indeed, the Fed has backed away so many times from rate normalization that, and I think this is a conceptual problem here, that the market now expects stock market volatility to diminish the odds of a rate increase. So, Madam Chair, is having a stable and rising stock market a third pillar of the Federal Reserve’s monetary policy, if I go back to what I originally heard Ben Bernanke articulate? Mrs. YELLEN. It is not a third pillar of monetary policy. Mr. ROYCE. Right. Mrs. YELLEN. We do not target the level of stock prices. That is not an appropriate thing for us to do. Mr. ROYCE. I thought you would say that. So, the question I have as a follow up is, does that mean that you are prepared to accept stock market volatility or a slight deflating of the asset bubbles as the Fed proceeds toward normalization? Mrs. YELLEN. We are going to look at what the trajectory is for the economy, for the goals Congress has assigned us, namely inflation and maximum employment, and take policies we think are appropriate to foster them. Now, as the economy recovers, we have said we anticipate raising rates. What implications that may have for stock prices, one shouldn’t assume that it will necessarily be a negative scenario for stock prices. Mr. ROYCE. Right. Mrs. YELLEN. Higher rates to some extent are already built into longer-term interest rates. Longer-term interest rates are anticipating a path of rising short-term rates. They do matter to stock market valuations, but so do earnings in a strong growth economy. We are not targeting equity prices, we are trying to achieve outcomes for the economy. Mr. ROYCE. And then there is another aspect of this that I wanted to ask you. This is my last question. In September of 2015, you were asked whether you were worried that given the global interconnectedness, the low inflation globally— Mrs. YELLEN. The low inflation what? Mr. ROYCE. —globally that we were seeing, were you worried that you may never escape from this zero lower bound situation? And you answered at the time that while you couldn’t completely rule it out, that is not the way that you see the outlook or the way the committee sees the outlook. Since that time, in February, Governor Brenner suggested that financial tightening associated with cross-border spillovers may be limiting the extent to which U.S. policy diverges from major economies. New York Fed President Bill Dudley has said that global consequences can impact the monetary policy transmission mechanism in the United States and influence the effectiveness of our monetary policy in achieving our objectives. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 33 So my question then is restating the question from last year, not will we never escape, but will we escape any time soon? And maybe to put it more clearly, does the Fed have the capacity to defy the global pattern of zero or negative rates, if it that is the global reality? Mrs. YELLEN. We do have the capacity to have different rates than the rest of the world, but we have to recognize that differentials in our stance of policy impact, for example, the value of the dollar and that is a linkage back to the U.S. economy. So, those linkages, as my colleague said, are important, but the bottom line is what happens in the rest of the world and their stance of policy it does matter, but it doesn’t mean we can never— Chairman HENSARLING. The time of the gentleman from California has expired. The Chair now recognizes the gentlelady from New York, Ms. Velazquez. Ms. VELAZQUEZ. Thank you, Mr. Chairman. Madam Chair, the current wealth gap between upper-income households and the rest of the country is the widest it has been in the last 30 years. The Great Recession exacerbated this troubling gap and had profound effects along racial lines. On average, African Americans lost 52 percent of their wealth. Latinos lost 66 percent, but Whites only lost 16 percent. What type of ramifications will this type of racial wealth gap have on our country’s long-term economic growth? Mrs. YELLEN. I think the trends that you discussed, and we discussed some related data in this monetary policy report, are extremely disturbing. There has been some research that has tried to look at the links between inequality and growth and they are frankly complex and I don’t think we fully understand them. But one linkage is that higher-income individuals may spend less of their income than lower-income individuals. So, rising inequality may suppress the growth rate of consumer spending and harm our growth in that way. There may be linkages in terms of ability and desire and opportunity for education and training that can have a long-run negative impact on growth. I think we are just beginning to understand these complicated linkages, but it is certainly a very disturbing phenomenon. Ms. VELAZQUEZ. So there is a correlation in terms of the type of public policy that we enact to address those disparities. It will have long-term consequences. Mrs. YELLEN. I believe they can have, yes, can have long-term consequences. Ms. VELAZQUEZ. So as the economy continues to gain strength and we move back to normalized monetary policy, Fed decisions will have an impact on credit markets. And this has a number of businesses concerned about the availability and cost of capital. Is there any indication that the last rate increase had an impact on credit availability for small businesses? Mrs. YELLEN. We raised rates by 25 basis points. That is a very small amount. And I am not aware of any significant repercussions that has had for the cost of consumer credit. We have said that we expect the path of rate increases to be gradual and that we will be very cautious about raising rates. We will only do so in the context VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 34 of an economy that is performing well with the strong job market that is growing at a good pace where people’s incomes are rising. And we would do that to make sure that we achieve price stability, which is our congressional objective. Ms. VELAZQUEZ. Okay. So we discussed the current wealth gap between Whites, Blacks, and Latinos. I would like to rise another issue and that is the cost of student loans. Student loan debt now stands at more than $1.35 trillion, a figure that has nearly tripled over the past decade. Some experts have reported that the average student loan debt for the class of 2016 is $37,000 per borrower. What type of consequences for lifetime wealth creation do these levels of debt present for young people? Mrs. YELLEN. First of all, the importance of gaining an education and the advantages that come with that and the higher income make it critically important that funds be available to students to gain that education. So let me start there. But if a student takes on that debt and then, as happens all too often, doesn’t end up completing a degree or goes to an institution that doesn’t provide training that enabled them to get that higherwage job, that can be a very, very serious burden and I think for many minorities, this is a huge burden. And so we actually plan to hold a conference at the Fed on this topic next November. We are going to look at this issue and focus particularly on minority communities and the impact. Chairman HENSARLING. The time of the gentlelady has expired. The Chair now recognizes the gentleman from New Mexico, Mr. Pearce. Mr. PEARCE. Thank you, Mr. Chairman. Chair Yellen, thanks for being here today. Let me wrap up some of the old business here. So, my good friend from Washington asked, when does America get a pay rise? And you sort of in your answer hinted that if the global market continues to improve—is that what I heard you say? If the global market continues to improve, then we can expect better wage growth? Mrs. YELLEN. I think if the labor market continues to improve, we will see some pickup in wage growth. But I did want to indicate that we have at the moment low productivity growth, very low, that wage growth will be greater over time if productivity growth picks up. If it doesn’t— Mr. PEARCE. Right. I guess my main point is that there are many who see the global market as not improving at all. So, kind of the inference that it is moving in the right direction, or if it would just do a little bit more of it, it is going to okay, is one there are differing opinions on. For instance, just in very recent days, a significant article came out talking about how business spending is down, exports are down, consumers are very cautious, and many of the foreign countries are having difficulty. That is a little bit in contrast to your report. You talk about the 14 million jobs created. That is one of your objectives. And you also referred to the unemployment rate being below 5 percent. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 35 So those all would indicate a fairly good opinion from the Federal Reserve about the condition of the economy. Am I interpreting that right? Mrs. YELLEN. Yes. I think the labor market is in a pretty healthy condition. Mr. PEARCE. Okay, but, yes, my question is the recovery. Mrs. YELLEN. There are a lot of jobs available. Mr. PEARCE. The recovery is pretty well in place that it is moving along. Mrs. YELLEN. We have achieved a lot. We have gotten to a much better place. Mr. PEARCE. Okay. But my question really is that in February of 2014, you stated that, I know this is difficult for seniors, in other words, a zero interest rate because they typically do very liquid things and they don’t like risk. When we have accomplished recovery, rates of return will come back. And so I wonder when the seniors are going to see those rates come back? When are they going to see that? Because the seniors are the ones who have paid the bill through this entire thing. When we drive the rates of interest down, that penalizes their savings. And they tell me, I lived my life correctly, I paid for my house, and you all messed up the housing market, and I saved money and you all make it where my money is worth nothing in the bank. So, when can they expect to see an increase in their rate of return? Mrs. YELLEN. I can’t give any guarantee on that, but if the economy progresses along the lines I expect, I think it will be appropriate to gradually increase rates further. Mr. PEARCE. Okay. But you have previously answered my question that you felt like we have made a lot of progress. Yet, seniors haven’t seen any progress. So, I think that is one of the continuing problems that we have. I also want to ask, now, you mentioned and it is well known that the Federal Reserve’s objective is maximum employment. Do you have kind of a handbook that you have put out on how to achieve maximum employment? Something that political candidates, like maybe a candidate for President, might say that she is going to get rid of all the coal mining jobs? Do you have a handbook that says, if you do that, you are going to put pressure on the economy over here? Do you put out anything at all? I know you don’t want to be very political, but do you put out anything at all? Because when I look at the things that the government does, I draw a different conclusion than what my friend Mr. Sherman draws. I see regulations that say, the haze regulation for instance, that is being implemented in the West, you can’t see the difference in the haze in the air, you actually have to have a computer to measure it. But using that regulation, coal miners being sent to the house in New Mexico make $60,000 a year, and they are going to then be on subsistence-level of government support checks. And that is an actual regulation that is penalizing the job markets. So I see those penalties, but do you put out a fact sheet that says, look, if you increase minimum wage, Burger King is going to go and announce they are going to put kiosks in. And so, the poor VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 36 people are never going to get into the labor market, and so the gap between the rich and the poor is going to increase because we have outsourced, we have sent those jobs out of America that are on the low end of the scale that allow people to get into the workforce. And so I wonder if you all do that, because if you are in charge of a trillions-of-dollars economy, it seems like you would put out some sort of a fact sheet so people sitting on this side of the desk could actually have some idea of what effect their policies would have. And I guess the answer is no, you don’t put out a fact sheet. Mrs. YELLEN. I think not one of the type that you were describing. Mr. PEARCE. It is funny that we have trillions of dollars at risk, but we don’t have the best practices. Chairman HENSARLING. The time of the gentleman has expired. The Chair recognizes the gentlelady from Alabama, Ms. Sewell. Ms. SEWELL. Thank you. Chair Yellen, I apologize if you have answered this question. But as you know, 127 Members of Congress, both Senators and House Members, and I was one of them, sent a letter last month highlighting the fact that the Federal Reserve Act mandates that the presidents and the board of directors at the 12 regional Federal Reserve banks ‘‘represent the public.’’ Despite this mandate, there is only one non-White regional bank president and he is also the only non-White member of the FOMC; 83 percent of Federal Reserve board members are White and men make up nearly three-fourths of those directorships. One-third of the 12 regional Federal Reserve presidents are either former executives or trustees at Goldman Sachs. In response to the letter, you said that, ‘‘45 percent of the directors are either women or minorities, meaning 55 percent are White males.’’ Does your response indicate that you believe the leadership at the Federal Reserve bank is fulfilling its mandate to ‘‘present the public with due consideration,’’given the enormous economic interests of our diverse Nation? Mrs. YELLEN. Let me start by saying that I believe that diversity is extremely important in all parts of the Federal Reserve, but I do want to distinguish two different things. There are, if we were at full strength, 19 members of the FOMC, that is 12 presidents, and we are now at 5 board members, there are supposed to be seven. And then a completely separate category of leadership are the directors of the Federal Reserve banks, there are nine at each bank and then there are branch boards that also have their own boards of directors. I do believe we have made substantial progress in achieving diversity and improving our performance among directors at the reserve banks in the branch boards. I believe the figure that you cited, the 45 percent, refers to those directors. At this point, 24 percent of those directors are minorities, an additional 30 percent are women, and in total women and minorities come to the number that you cited. Now, among the reserve bank presidents, we are looking at 12 presidents, as you said, one is a minority and then there are two women reserve bank presidents. I would very much like to see VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 37 greater diversity at that level, too. And it is a goal that I hope we will make progress on in the coming years. The procedures for appointing those presidents are set out in the Federal Reserve Act. The board has to approve the appointments of presidents that are recommended by the Class B and C directors of the reserve banks. We insist and make sure that the searches for those presidencies are national, that the candidate pool is diverse, and that due consideration is given to diversity as an important goal. We welcome and have been recently taking public suggestions from the public about possible candidates and when these searches are launched, we will make sure that candidates who are suggested gain full consideration. Ms. SEWELL. Now, I know it has been considered or suggested that the Board of Governors fill the Class C directors on each regional bank’s board with at least one individual from an academic background, one from a consumer or community-based organization, and one representative from a labor organization. What does the Fed think about this recommendation, and does the Board of Governors have a strategy for increasing the diversity of its leadership so that candidates are considered who have a variety of backgrounds, not just solely that of Wall Street? Mrs. YELLEN. We track diversity, not only in terms of gender and race, but also in terms of experience. And I believe we have made considerable progress in achieving the kind of diversity you are discussing. I believe in every reserve bank branch there is an individual, might be an academic or someone who represents communities and nonprofits, and we are constantly trying to add to our ranks of people who represent labor. Chairman HENSARLING. The time of the gentlelady has expired. The Chair recognizes the gentleman from Georgia, Mr. Westmoreland. Mr. WESTMORELAND. Thank you, Mr. Chairman. Chair Yellen, first of all, I want to thank you for the inspector general going through your cybersecurity policies. I want to encourage you to listen to what he has to say because you are on the frontline really of our affairs when it comes to cybersecurity. So, I just wanted to thank you for that. The other thing I wanted to do is make some comments between the tit and tat kind of thing, between the gentleman from Wisconsin and the gentleman from California, as far as the new regulations. There were approximately 3,000 new regulations last year with 81,000 pages of it. The gentleman from California said this was to explain, these pages, he was thankful for them because they were there to explain the regulation. Ma’am, where I am from, if it takes you 27 pages to explain something you are trying to tell somebody, something is way too complicated. And that is the point of some of the other questions that have been here before, is the complex regulations are requiring all types of compliance officers. Banks are being taken down with this. Sometimes they have more compliance officers than they do loan officers. So I guess my question to you regarding these overly burdensome regulations that are on our small banks is, is it a priority of the Federal Reserve and for other members really of the Federal VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 38 financial institutions, examination councils, is it your priority to get these regulations off? Mrs. YELLEN. It is our priority to do everything that we possibly can to reduce regulatory burden. I think we have already taken some significant steps. We are completing the EGRPRA review. I believe we will take more steps in light of that review. And we are looking carefully at a very simplified capital regime that could apply to these community banks if they are well-capitalized and managed. Mr. WESTMORELAND. I feel like I have been asking this same question now since 2008. My district probably had more community bank failures than any other district in the United States. And we keep hearing this over and over about, we are looking at regulations and so forth. So, is there any way that you could give me some type of timeline as to when something may come out about this? Mrs. YELLEN. We have already put quite a few things in place. So, it is not that everything is in the future. We have raised our thresholds to a billion dollars for capital requirements to apply to small holding companies. We have changed our examination process so that our examiners spend much less time in bank premises. We have made our examinations more risk-based so that we focus on those risks that really are relevant to banks. We have taken a number of steps. We meet regularly, twice a year with a group called CDAC which is community banks to hear their perspectives and take their suggestions when we can. We have a special committee of the board that focuses on community banks and assesses different ways to reduce burden. Mr. WESTMORELAND. I thank you and I hope that you have been communicating with the community banks, too, about what you can do to actually help them. One other thing just to follow up, as I mentioned, in my district in Georgia, we know what it is like to lose a bank. While the Federal Government is focusing on economic policies for large banks, designating banks and non-banks as SIFIs, conducting stress tests, all the while these policies are still creating that notion that large banks are too-big-to-fail. And so I guess my point is that somehow there has to be a more distinct classification between banks and the size of banks. Mrs. YELLEN. I agree with that. We want to tailor our regulations so that they are appropriate to the risks. And we are likely to make changes to the stress testing regime that would reduce burden on some of the smaller banking organizations that are subject to that process. Mr. WESTMORELAND. Thank you. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Georgia, Mr. Scott. Mr. SCOTT. Thank you, Mr. Chairman. Chair Yellen, when you visited here the last time, I raised the issue about the high rate of unemployment among African Americans. It is absolutely staggering. In some of our communities, particularly with African-American males between the ages of 18 and 37, it is over 22 percent, and in some communities it is as high as VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 39 50 percent, which leads to all kinds of problems, the crime problem, but more importantly the breakdown in the African-American family, because these young men who are age 18 to 37, that is the childbearing age. So, we have to look at this as a national crisis. And I ask you to do that. And you told me, you said that, Mr. Scott, I don’t have the tools to do what you are asking. But I say to you, Mrs. Yellen, you do have the tools. You have your voice. You have your position. You have a dual mandate to curb inflation, but also to deal with unemployment. And we need you to use that voice to holler loud and clear that this is a national crisis. It is the number-one domestic problem that we have in this country because of the devastation and the impact in the AfricanAmerican community. But here is what really concerns me. Since you say you don’t have the tools, why are you so eager to change course on monetary policy and raise interest rates yourself when the unemployment level in the African-American community is so high? Now, you said it yourself, you said here that your future rate increases depending on the data you have. Well, to me, Chair Yellen, the data is telling a pretty clear story: one, we are well-below the 2 percent inflation target; and two, growth abroad in places like China is anemic. And most importantly, the dollar remains strong. So tell me, Chair Yellen, what harm do you see in holding the interest rate at its current level until we can get our hands around this problem and get some improvement in the African-American unemployment rate? Mrs. YELLEN. Congressman, I do want to call attention to the material that we included in this monetary policy report and intend to continue including that discusses the situation, the labor market situation of African Americans and other minority groups. And it does document, as you said, the high unemployment rates of African Americans. Mr. SCOTT. Yes, I know it, but— Mrs. YELLEN. But there has been improvement. Mr. SCOTT. What is so frustrating to me is that you are in the position to say something, to do something. This is intolerable. You are the only agency with this dual mandate. Mrs. YELLEN. Congressman, we are doing something. Mr. SCOTT. What is that? Mrs. YELLEN. We are doing something extremely important, which is putting in place a monetary policy that has brought down unemployment rates and improved the labor market for all groups in American society and trying to do that in the context of our price stability mandate. And as serious as the suffering is in the African-American community, and it is, there has been improvement and there will continue to be improvement and our policies are designed to make sure that we continue to have improvements in the labor market that will benefit the African-American community and others as well. And I have used my voice and I will continue to do so. And in the work that we do in community development, we will continue to use the tools at our disposal to try to identify interventions— VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 40 Mr. SCOTT. Let me try to identify something right here. We are in the midst, legislatively, of doing things like building the Keystone Pipeline. Why can’t we target that so these young people can get jobs or they can learn the basic skills as they work? Earn as you learn, get them involved with labor unions that have skill programs. We just passed a bill to be able to lift the embargo on crude oil. That is going to spread out 200,000 jobs. We have to look at our economy and point out areas where we can get African-American young men into the wheel to learn these skills. Mrs. YELLEN. This is for Congress to consider. Mr. SCOTT. We have done that. And we have done our job— Chairman HENSARLING. The time of the gentleman has expired. Mr. SCOTT. We need some leadership from you and this Administration. Chairman HENSARLING. The time of the gentleman has expired. The Chair recognizes the gentleman from New Jersey, Mr. Garrett, chairman of our Capital Markets Subcommittee. Mr. GARRETT. Thank you. And let me follow up on the question that the gentleman was just talking about, about the negative, disastrous impact that the Fed has had on the African-American community and the poor in this country. Last year you gave a speech on income inequality and you said that the income gap between the rich and the poor has long been of interest to you and the Federal Reserve, and you expressed concern about that and basically your comments were eerily similar to what the Administration has been saying. You lamented the problem, but failed to admit to acknowledge in your comments that it is your actions and the Fed and the government policies that can have a dramatic impact on expansion of the gap between rich and the poor. In fact, we are often reminded by the Federal Reserve and our President how low-income families have fallen behind during this Administration’s last 8 years. We have seen the greatest monetary expansion and regulatory assault in history, and I think there is no coincidence. So let us look at your predecessor, what he said. Chair Bernanke acknowledged on more than one occasion that monetary policy has the effect of raising asset prices, in particular the stock market, I am sure you agree with him. The question then we have is, who does that really benefit? Who does your policy benefit? Let me give you a number. According to Gallup, the survey, 90 percent of households with incomes over $75,000 own stock; only 21 percent of households under $30,000 own stock. So, if your policies, as Ben Bernanke indicated it does and you are nodding your head as well, benefits the stock market, raises asset prices, who are you benefiting? The rich. Who are you hurting? The poor. So, the stock market has boomed. The biggest beneficiaries have been households with income well above the national median and particularly those at the very top where the wealth in the stock market is concentrated. So, that is what the gentleman is pointing out, your policies. He is looking for leadership, but leadership to lead in the other direction, not always helping the rich, but hurting the poor. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 41 And another area that we see where you take the pattern of helping the rich and not the poor is, where does the average poor person making under $30,000 put their money? In the stock market? No, they put it into savings accounts. Now, according to the FDIC, the average rate of return in America is 6 basis points. At the same time, you are paying Wall Street banks 50 basis points to park their money over there. So the question is, why do you see the need to benefit the Goldman Sachs CEOs of the world and pay them more than the small, local banks on Main Street where my constituents have to invest their money? Do you see a need to benefit the rich continuously to the disadvantage of the poor? Why is that? Mrs. YELLEN. I’m sorry, we are not trying to benefit the rich at the expense of the poor. Mr. GARRETT. Okay. So your statement is your intention is not to benefit the rich, but the facts of Ben Bernanke and others, what you are nodding your head, is your actions are benefiting the rich over the poor because of your monetary policy. Is that correct? Mrs. YELLEN. It is not correct. Mr. GARRETT. Which part is not? Is it not the fact—is Gallup wrong when they say the rich are more likely to invest in the stock markets than the poor? Is that not correct? Mrs. YELLEN. That is true. Mr. GARRETT. That is true. Is it not true that your quantitative easing according to Ben Bernanke also benefits asset purchases? Mrs. YELLEN. 14 million jobs— Mr. GARRETT. Is that a fact? Mrs. YELLEN. —is what our policy— Mr. GARRETT. Excuse me. I have the floor. I am trying to find out which fact is wrong. The fact of the matter is is that the rich own stock, you said yes. The fact of the matter is that quantitative easing increases asset purchases, you said yes, asset prices, you said yes. The fact of the matter is that you are indicating yes, that is increasing the valuation of stock, you are indicating yes. And the fact of the matter is, is that for the average poor person, they are not in the stock market, they are in banks. You are saying yes. So all those facts are correct. Mrs. YELLEN. Houses are widely held by most families and low interest rates have also— Mr. GARRETT. But as far as where most people have their investments. Mrs. YELLEN. —have also benefited from rising house prices. Mr. GARRETT. Part of the problem is that although you admit here today that it is not your intention to help the rich over the poor, that when you are nodding yes on every point I raise, is that the monetary policy of the Federal Reserve over the last several years of your tenure benefits the rich over the poor and creates a greater expansion of income inequality. Mrs. YELLEN. I am sorry— Mr. GARRETT. Let me go on to the next question. I only have a minute here. With regard to your balance sheet, I can’t get into the details as far as the significant increase over time and the increase in the VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 42 risk in the market. I understand the question was already raised on whether you do a stress test on yourself and the answer was no? Mrs. YELLEN. Yes, we have. Mr. GARRETT. Oh, you do do stress tests like you do on the banks on yourself? Mrs. YELLEN. We have performed that exercise. Mr. GARRETT. And do you believe then that interest rate risks and credit risks of your portfolio in this position now is at greater risk than it was before when it was— Mrs. YELLEN. We have no credit risk in your portfolio. We only hold government and agency— Mr. GARRETT. You are immune to credit rate risk? Mrs. YELLEN. I think U.S. Treasury bonds are a pretty safe investment. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Minnesota, Mr. Ellison. Mr. ELLISON. Hello, Chair Yellen. I appreciate you being here, and I appreciate all the work that you do. I would like to commend the Fed for its decision to keep interest rates low. I believe keeping interest rates low helps calm and strengthen our economy. I also wish Congress had chosen to act as assertively and creatively as the Federal Reserve did. The truth is that without the Federal Reserve working, the fact is we have had absolutely no fiscal assistance around here at all. And I think if you looked at the historic amount of obstruction that we have seen, it is really quite remarkable that anybody in Congress would be shaking a finger at the Fed given how little we have done to try to stimulate the economy and to help low-income Americans. If Congress had funded an infrastructure bank for example and rebuilt schools, bridges, roads, and transit, we would have lower unemployment and a stronger economy. Lord knows we need it. Lord knows that our infrastructure is crumbling all around us. Interest rates are at historic lows, we could really rebuild this economy if we would have taken fiscal action. I would like to ask you this, Chair Yellen, if the Congress approved money for infrastructure development, would that have a positive effect on employment? How would it impact wages? How would it impact our productivity if we had better, more improved infrastructure? Mrs. YELLEN. I can’t give you a detailed assessment, but I certainly would agree that productivity growth has been very weak. We have had a shortage of investment, private investment has been very weak. That is one reason I think that productivity growth has been so meager and generally having a stronger rate of investment. There are other things as well, education and training make a difference here and supporting research and development. But those things would contribute, I believe, to stronger productivity growth and ultimately faster wage growth. Mr. ELLISON. If you look historically at the amount of fiscal investment, how does the era that we have been in for the last, say, VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 43 5, 6 years compare with other periods of fiscal investment in our Nation’s history? Mrs. YELLEN. I don’t have the numbers at my fingertips. Mr. ELLISON. I am not going to sue you. Mrs. YELLEN. But I think the answer is low. Mr. ELLISON. Okay. And so you are supposed to fix the economy, but we don’t suppose to do anything. Mrs. YELLEN. We can use some help, thank you. Mr. ELLISON. Yes, okay. When you were here in February, you and I had an exchange on what the Federal Reserve could do to increase employment for African Americans. And I wonder if you had any update for me. Has the Federal Reserve been able to think about a traditional policy toolkit to specifically consider investments and action that might impact African Americans, Latinos, Native Americans, and low-income people? In addition to keeping interest rates low, are there more targeted tools that the Federal Reserve is considering or might recommend? Mrs. YELLEN. In terms of our general stance on monetary policy, we have seen a lot of improvement. And it has benefited African Americans in spite of the fact that there remains so much distress among African Americans and in the labor market that concerns us. Nevertheless, there have been improvements. We don’t have tools in monetary policy to target particular groups. We want to make sure we have continued general improvement in the labor market in the context of price stability. In the community development work that we do inside the Fed, we are quite focused on what we can do to aid low- and moderate-income communities and trying to identify and promote programs that seem to work. In my travels, I have visited a number of workforce development programs that I think are helpful in trying to match unemployed African-American and other minorities with available jobs. Job openings are at a record level and often programs that link-up workers and jobs and sometimes there is a need for workforce training. We have done work and tried to promote best practices in this area and credit availability more generally to low- and moderateincome— Chairman HENSARLING. The time of the gentleman from Minnesota has expired. The Chair recognizes the gentleman from Ohio, Mr. Stivers. Mr. STIVERS. Thank you, Mr. Chairman. And thank you, Chair Yellen, for being here today. I appreciate that you have a hard job, and I wanted to ask you a couple of questions. You just said to the gentleman from Minnesota that private investment is lacking. And it is clear that you have reduced the interest rates in the economy, which is one factor when people choose to make an investment. But at the same time it appears that the increasing regulatory requirements that are passed on to consumers through banks, including a capital surcharge on bigger financial firms that is nearly double the international average, it is 4.5 percent versus 21⁄2 percent, a supplemental leverage ratio that is double, 6 percent versus 3 percent, a liquidity-coverage ratio that is more restrictive and VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 44 punishes certain asset classes and a total loss-absorbing capital requirement that doesn’t consider things like market making to get capital in the economy. It just seems like even though you have reduced interest rates with your monetary policy, your regulatory policies are increasing costs and therefore decreasing folks’ ability to make private investment and also doing it at such a level higher than the rest of the world, it just makes America a less attractive place to place jobs, financial service jobs and other jobs. And I know you have commented that you want to try to take a look at all that and I really appreciate your willingness to take a look at it. I know the European Commission just did a call for evidence to review the ways that their financial regulations are actually working and recalibrate the rules to support both liquidity and markets, economic growth and lending. Do you have any plans to do something similar, given that our regulations are so far out of whack with rest of the international community? Mrs. YELLEN. I won’t comment on tax policy, but our regulations with respect to banking organizations are not really out of line with international standards. We have worked jointly with other countries to try to maintain a level playing field and to raise standards in tandem. We have really improved the safety and soundness of the banking system. We have a banking system that is extending lots of credit. Credit is readily available to most corporations. Loans have been growing and banks are eager to make loans. They are priced at low interest rates given this environment, so— Mr. STIVERS. But clearly they are not borrowing, so interest rates aren’t doing enough. That is kind of to my point. I guess you didn’t answer my question. Are you going to be opening up the regulations for comments the way the European regulators have or not, because you have said you will, but I have not seen anything on it. Will that happen, or not? Mrs. YELLEN. We are currently going through the EGRPRA process and looking at our regulations. Mr. STIVERS. Okay. I do want to compliment Governor Tarullo for his comments in The Wall Street Journal recently that acknowledged that small and medium-sized banks do not present the same systemic risk and therefore he is going to try and reduce their compliance cost. Those are the kind of things I am talking about and they are great to see in The Wall Street Journal, I would love to see them happen. So, I want to compliment him on his willingness to say he is going to do that and I just want to encourage you to encourage that to happen. Because the Office of Financial Research, which is charged with doing the research on systemic risk, did a study a year ago that showed the systemic risk of all the institutions. The six largest institutions have an overwhelming majority of the risk in the entire financial system, and I think we should concentrate our previous regulatory capital on those that generate the biggest risk for our system and relieve the folks who don’t generate risk from things that don’t want sense. And so I was really pleased to see Governor Tarullo’s comments, but I would urge you to actually implement those. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 45 Mrs. YELLEN. I am very supportive of the things that he said. We are focused on it. I agree that we want to do everything we can to eliminate burden for those community banks. Mr. STIVERS. Thank you. And my time has almost expired, but I would urge you, and I know that this is our monetary policy hearing, and we have a regulatory hearing every 6 months as well, and I would urge you, and I know that Governor Tarullo is an acting regulatory supervisor, he has not been confirmed by the Senate, but I would hope you would bring him with you during that hearing, which is coming up. Thank you. I yield back the balance of my time. Chairman HENSARLING. The time of the gentleman has expired, but to ensure that the gentleman does not engage in an act of political negligence, by unanimous consent he will be granted an additional 10 seconds if he wishes to recognize Cleveland’s NBA championship. [laughter] Mr. STIVERS. Thank you, Mr. Chairman. Go, Cavs! I yield back. Chairman HENSARLING. The gentleman yields back. The Chair now recognizes the gentleman from South Carolina, Mr. Mulvaney. Mr. MULVANEY. I thank the chairman. Chair Yellen, thank you very much for being here. In your opening testimony, you said the following, ‘‘Another factor that supports taking a cautious approach in raising the Federal funds is that the Federal funds rate is still near its effective lower bound.’’ What is the effect of lower bound? Mrs. YELLEN. Well, I meant zero. Mr. MULVANEY. So no, we can put that to bed, correct? No negative rates in the Fed’s future, correct? Mrs. YELLEN. It is not something we are contemplating. Mr. MULVANEY. Thank you very much. I have a couple of questions that deal with, while we are not going negative, still deal with rates staying at or near zero for a long time. Other countries have seen their rates go negative, and obviously that has an impact on the value of the dollar, driving it up. You have taken a position previously that you thought that a strong dollar was ‘‘something of a drag or could be something of a drag on the economy.’’ So my question for you is this: As you make your decisions regarding rates, or even as you make your decisions regarding your guidance, what weight do you put on the fact that other countries are going negative, or are approaching zero? How does that factor into your decision-making? Mrs. YELLEN. The situation of other countries is important in our decision-making. To the extent their rates decline or lower than ours, it does tend to put upward pressure on the dollar, which is a drag. But to the extent that their policies are successful in promoting stronger growth in those countries, then that boosts the demand for exports, so we need to take both aspects of it into account. And generally, it may differ from situation to situation, but when countries take steps, including monetary policy steps to support de- VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 46 mand, domestic demands in their own countries, it has these mixed effects on our outlook. Mr. MULVANEY. Thank you. Mrs. YELLEN. Nevertheless, we assess it and take it into account in setting our own policy. Mr. MULVANEY. Another issue regarding long-term at or nearzero rates, in 2011 this body estimated that our interest payments this year, actually next year, would be about $600 billion. The real number next year will about $300 billion, even though the actual debt today is greater than we thought it would have been 5 or 6 years ago. What weight, what consideration, what pressure do you feel, if any, to maintain low interest rates in order to keep the government’s borrowing costs low? We all know what could happen if interest rates were to spike, the interest cost to the Nation would go up dramatically, possibly causing a fiscal crisis. Do you factor that into your decision-making on setting your rates or setting your guidance? Mrs. YELLEN. We do not factor that into our decision-making. That is an important reason why most countries have chosen to have their central banks have independence in making monetary policy, because when financing the government becomes the focus of monetary policy, inflation can rise to highly undesirable levels. The Congress told us to focus on maximum employment and price stability and that is what we are doing and will continue to do. Mr. MULVANEY. So it is fair to say, and I am sorry to cut you off, but you know how we deal with time, it is fair to say that if your dual mandate required you otherwise to raise rates, you would do that, even if it were to create difficulties on a fiscal standpoint in terms of paying our Nation’s debt? Mrs. YELLEN. That is correct. That is Congress’ to consider. The CBO does projections for Congress that assume an outlook with rising short-term interest rates and long-term interest rates and that factors into the information that you get in deciding on specifics of politics— Mr. MULVANEY. Speaking of rising rates, Mr. Huizenga a while ago asked you a question about a rising interest rate environment and the impact that might have on your remittances to the Treasury and you had said that while it was certainly contemplatable that a rising interest rate environment could lead to net negative earnings at the Fed, that that, and I think your exact words were, ‘‘could be a very nice situation because it would be indicative of strong growth.’’ The last time I remember in my lifetime having extraordinary high interest rates, the problem was it was no growth, which was in the late 1970s, that is accurate, right? We have had periods in this country’s recent history of high interest rates and low growth. And that would not be a very good situation to be in. Mrs. YELLEN. That would be a much less desirable situation. I did indicate that it is highly unlikely and would require a very unlikely set of circumstances. Mr. MULVANEY. But it is possible that a set of circumstances would arise where your net earnings would go zero or negative? VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 47 Mrs. YELLEN. It is possible. Mr. MULVANEY. Thank you, ma’am. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from North Carolina, Mr. Pittenger. Mr. PITTENGER. Thank you, Mr. Chairman. Chair Yellen, I would like to make a comment initially, a reference to my friend Mr. Heck from Washington, he stated that you played a most important key role in terms of our economy and the increasing of jobs. And after that you mentioned that we are allotting 14 million jobs through a very accommodating monetary policy. That comes out to about 160,000 jobs a month over an average around 90 months during this Administration. The contrast I would bring to you is that we had, in the 1970s, 20 percent interest rates, high inflation, high unemployment, and gas lines, as you recall. And the regulatory burden was significantly reduced, the tax burden was reduced, and in 2 years we were creating 300,000 and 400,000 and 500,000 jobs a month, 1 month a million jobs. Don’t you see that the clear contrast in terms of the regulatory burden that has been put on in our economy today and how that has not achieved the desired impact that these good folks have come to want? And there was a concern, I see their green shirts, I see their expressions of hope. And yet, the fact that the very policies that have been initiated seems to be counterproductive. That is my comment. Now, my question is related to, as you know, the comprehensive capital analysis and review known as CCAR is the Federal Reserves supervisory stress test for U.S. financial institutions. This month, Governor Tarullo announced the Fed will likely add the G-SIB surcharge as a component of future CCAR exercises. I am concerned that the Fed has failed to adequately consider if there is any benefit in adding this as a component. The CCAR currently contains two components that are unique to U.S. G-SIBs. First, only U.S. G-SIBs are required to assume a counterparty failure scenario. Secondly, the U.S. G-SIBs are required to assume an instantaneous global market shock. According to a clearinghouse analysis, both of these existing components already make up a significant portion the G-SIB surcharge calculation, including on issues of interconnectedness, complexity and cross-jurisdictional activity. Chair Yellen, doesn’t inclusion of the G-SIB surcharge on top of the current G-SIB-only components result in regulatory redundancy? Do you believe that this is in essence a double tax on these risks? Mrs. YELLEN. I think Congress intended for systemically important firms to be more resilient than other firms and recognize that it is important that even in very adverse circumstances, those firms can go on serving the credit needs of the country, continue to lend. And in all the static requirements, the leverage ratio, static capital requirements, we have added an extra level, higher requirements for those firms. And I believe it is appropriate— VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 48 Mr. PITTENGER. Let me ask you this. What then is the net added benefit of adding the G-SIB surcharge as part of the CCAR exercise? Where do you see the benefit to that? Mrs. YELLEN. It is a forward-looking exercise in which we look at how these firms would perform and survive in a highly adverse circumstance— Mr. PITTENGER. You don’t see it as an unnecessary added burden to these firms? Mrs. YELLEN. I think it is important that these firms be resilient. But let me just say that we are doing a 5-year review of the stress test in CCAR and will probably make other changes as well that could be partially offsetting in terms of capital levels. Mr. PITTENGER. One comment, there has been much said about community banks, the Federal Reserve Bank Minneapolis President Neel Kashkari made comments regarding his contact with the community bank in seeking to get a loan. And his comment was that he saw through that an extraordinary painful process. This was his own personal experience. He went on to say that these community banks suffer under the new regulatory regime. He added that the notion of let us solve too big to fail and relax regulations on those who are not systemically risk, that he supports that philosophy. I just want to emphasize again and some of this has already been said today, the real issue of addressing these community banks— I served on a community bank board for a decade and to date there are no additional community banks that are being formed because they don’t see that market capability, they don’t see their ability to support the requirements of the regulatory burden, but I would just emphasize that need to you. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentlelady from New York, Mrs. Maloney, the ranking member of our Capital Markets Subcommittee. Mrs. MALONEY. Thank you very much, Mr. Chairman. Chair Yellen, when you were here in February, I asked you whether the decline in inflation expectations to historically low levels had caused you to rethink the inflation projections. And you said that it is something that you are, and I quote, ‘‘evaluating closely.’’ Since February, however, inflation expectations have fallen even further. Why do you think inflation expectations have continued to decline? Mrs. YELLEN. Some measures have declined and others have not. Survey measures like the Michigan survey of households have declined. In professional forecaster surveys, we don’t see a decline. I’m not sure why, we are focused on that, but the decline we have seen in energy prices going back some time may be influencing household’s perceptions. We have also seen declines since I was here last, in what is called inflation compensation, which is market-based measures of the extra yield that investors require to hold longer-dated Treasury nominal securities over tips. And that is not a pure measure of inflation expectations. I think perceptions of inflation risk and the value given the global risks that investors attach to Treasuries as a safe haven may be playing VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 49 a role. We watch this carefully because it can feed into actual price setting, but core inflation is now running about 1.6 percent over the last 12 months. It has moved up some. Headline inflation is moving up as oil prices have come up some and stabilized and as the dollar has stabilized, and of course, we need to keep track of this. It is a risk. But inflation is behaving largely as I would have anticipated. Mrs. MALONEY. How long do we have to go without an increase in inflation expectations for you to reconsider your plan to gradually increase interest rates? Mrs. YELLEN. We are watching inflation and inflation expectations. As I said, in spite of some of these measures declining further, actual inflation is moving up and roughly in the manner we expected and we are also watching the labor market as the labor market tightens and we see pressures develop there. We certainly are contemplating some further increases in shortterm rates if things continue as we expect. We want to make sure, we want to get inflation back to 2 percent, that is our objective, we are committed to that, but we want to make sure that inflation doesn’t rise to the point where we compromise price stability either. Mrs. MALONEY. Okay. I am very concerned about the recent cybersecurity breaches involving SWIFT in which hackers successfully stole foreign banks’ SWIFT credentials and then initiated fraudulent fund transfers from these foreign banks. And as you know, I sent you, the Fed, and the OCC a letter last month asking what your agencies are planning to do in response to these truly unprecedented attacks. Can you give us an update on the banking regulators’ response to these attacks? Are you concerned that these cyberattacks could undermine confidence in the international payments system? And even though the hackers have not successfully stolen the SWIFT credentials of a U.S. bank, what effect could these attacks have on the U.S. banking system? It certainly rattled me that this happened. And as you know, the Federal Reserve is one of the 10 central banks that collectively oversees SWIFT. What has the Fed done in its capacity as a regulator of SWIFT to respond to these attacks? I must tell you, if I go to a foreign country that I am not expected to be in, my bank stops my transaction until I tell them it is okay. It is, to me, quite unbelievable that such a large amount of millions of dollars could be transferred to sites, including a casino in the Philippines. I think this is a threat to the U.S. banking system. Mrs. YELLEN. So, let me just say, the New York Fed systems weren’t compromised, but they are looking at their processes, looking at what is best practices, looking at the possibility of enhanced monitoring for certain kinds of transactions. We expect the institutions we supervise to make sure that they comply with procedures to control access to critical payment services and to review and ensure that they are meeting security requirements. We do participate in an oversight arrangement for SWIFT run by the— Chairman HENSARLING. The time of the gentlelady from New York has expired. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 50 The Chair wishes to advise Members that in order to accommodate the witness’ schedule, the Chair intends to recognize three more Members. Currently, the queue would be Mr. Barr, Mr. Rothfus, and Mr. Williams. The gentleman from Kentucky, Mr. Barr is recognized. Mr. BARR. Thank you, Mr. Chairman. Welcome back to the committee, Chair Yellen. New York Fed Bank President William Dudley recently acknowledged a link between post-crisis regulations and liquidity problems in Treasuries, corporate bonds, and asset-backed securities. Specifically, he stated that capital liquidity requirements for the largest securities dealers, which have been raised significantly since the financial crisis, have adversely impacted market liquidity. These regulatory changes have affected the profitability of dealer intermediation activities and consequently the provision of market liquidity. Do you agree that market liquidity has declined since the implementation of these post-crisis regulations? Mrs. YELLEN. It is really difficult to tell because by many measures, market liquidity remains quite adequate and hasn’t deteriorated, but we certainly hear and have seen some evidence that under stress, the liquidity may disappear. And there are a bunch of different factors that we are looking at that may be relevant to that. Regulations are on the list. I am not precluding a role there, but there are changes in business models. High-frequency trading has become very dominant in the Treasury market. Mr. BARR. Let me just interject right there. Do you agree with your colleague, Mr. Dudley, that Volcker, risk retention, TLAC, some of the supplemental ratio and some of these other requirements have decreased trade sizes, have resulted in fewer active trading participant participants, there is a transfer of market making activities out of highly regulated banks and into the less regulated shadow banking sector which has less capacity to act as a liquidity provider? Mrs. YELLEN. I didn’t know that he said that. That’s a long list. Mr. BARR. I got a little more specific than he did. Mrs. YELLEN. Okay. Mr. BARR. But that is really what is happening according to a lot of the market participants. Mrs. YELLEN. You put a lot of things on the list that I am not aware of any research suggests are in any way relevant to this phenomenon. I am not aware of research that documents what the role is of any specific regulation, but it is something we will look at. We are looking at— Mr. BARR. Let me follow up on a question, a specific question about this issue that I asked you in February. I asked you how the Fed was reviewing and tailoring the fundamental review of the trading book for the domestic market. That is a rule that increases capital held against securitization exposures in the bank trading book by up to 5 times the amount already required under Basel III. And one industry study suggests that the trading of U.S. asset-backed securities would become uneconomical if the rule is not tailored to the U.S. marketplace. VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 51 That is a really big deal, Chair Yellen, because 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, and if banks pull out of the ABS marketplace, that is a $1.6 billion source of consumer lending. That is 30 percent of all lending to U.S. consumers. So how is that going? You indicated to me 4 months ago that you were taking a look at that. How is that going? Mrs. YELLEN. I need to get back to you with further details, and I will do that. Mr. BARR. Thank you for doing that. We need you to take a look at it. Tailoring is very important. And kind of to conclude, in your prepared remarks, you indicated that business investment was surprisingly weak. Maybe the reason why the Fed is surprised and continued to miss on forecasts, and the Fed, as The Wall Street Journal pointed out estimated 2.4 percent growth in December, that had fallen to 2.2 percent by March, this month it was down to 2 percent, and it follows the Federal Reserve’s consistent record of forecasting error from a standpoint of predicting stronger growth than is actually occurring. Maybe the reason why the Fed is missing out on these forecasts is that you continue to view fiscal policy as a ‘‘small positive’’ when it is obvious to everybody in the private economy that over-regulation is producing illiquidity. It is drying up access to capital. You are very cognizant of keeping interest rates low, you are putting off raising rates, it seems to me contradictory to the lack of attention that the Fed seems to be giving to over-regulation as an impediment to economic recovery. I would like you to comment on that. Mrs. YELLEN. Growth has been disappointing. I am not sure of the reason. But our forecasts of the unemployment rate and progress in the labor market have been pretty close. And we have seen a lot of job creation, firms that are doing relatively little investing are doing a lot of hiring. Chairman HENSARLING. The time of the gentleman has expired. The Chair now recognizes the gentleman from Pennsylvania, Mr. Rothfus. Mr. ROTHFUS. Thank you, Mr. Chairman. Chair Yellen, my colleague Mr. Foster touched on the issue with custody banks. I just want to follow up a little bit. I asked you previously about custody banks and their ability to accept deposits because of the supplementary leverage ratio rule. I would like to follow up by asking, is the Fed studying or analyzing how the supplementary leverage rule is impacting the custody banks’ ability to accept deposits? Mrs. YELLEN. We will look at that. I am aware of concerns around that. Mr. ROTHFUS. There is no current study that you are going to do, or you are planning on doing, but you are not studying it today? Mrs. YELLEN. We don’t have a study underway, but you are talking about a handful of banks and the impact this has on them. And we are aware of the concerns around this, and we will look at it. Mr. ROTHFUS. If a bank is charging for deposits, that is the equivalent of a negative interest rate, would you agree with that? VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 52 Mrs. YELLEN. For that bank for that class. Mr. ROTHFUS. If custody banks are unwilling or unable to take client cash, where would the cash go? Any idea where a customer might park that cash? Mrs. YELLEN. They might put it in other banks that are less constrained or in money market funds. Mr. ROTHFUS. Purchase Treasuries? Mrs. YELLEN. Or do other things, yes. Mr. ROTHFUS. As you know, both the proposed net stable funding ratio rule and the liquidity coverage ratio rule use the same thresholds to determine whether and to what extent those rules apply to financial institutions. Specifically, any institution with more than $250 billion in assets is subject to the full version of the rules. In prior testimony, though, you indicated that the full version of these rules should apply to only those that are internationally active. Yet, in defining the term, you indicated that institution could be considered as such merely if it has more than $250 billion in total assets, even if it has no or limited foreign activities. Could you explain why a bank should be considered internationally active even if it has no or very limited foreign activities? Mrs. YELLEN. I am not sure exactly what firms you are referring to. I don’t have enough detail on that to be able to tell you, to answer that. I will get back to you on it. Mr. ROTHFUS. Yes, I would appreciate it. We will follow up with you. Again, any firm with more than $250 billion being somehow deemed to be internationally active, that is what we would be curious to learn. You talked about headwinds the last time you were here, headwinds to the economy, headwinds today. The Fed is not operating in a vacuum. There has been discussion about any number of issues that are going out there. You would agree that low interest rates themselves are not a headwind, right? Mrs. YELLEN. No. Mr. ROTHFUS. And in fact, with low interest rates, you would expect much more robust economic growth. Mrs. YELLEN. That is correct. Mr. ROTHFUS. You testified you expect the headwinds to ‘‘slowly fade over time.’’ I contend those headwinds, like I did last time, are regulatory and we had a discussion here today about some of the regulatory impact. A number of Members have raised this issue because we are hearing it from our constituents back home, small businesses. So I contend again it is the regulatory and fiscal policies that this Administration has pursued, which is not the vacuum, again, the Fed is not operating in a vacuum. We have higher taxes, the Affordable Care Act, EPA, Dodd-Frank regulations that I contend are missing the mark because Dodd-Frank itself missed the mark. Would you consider any of these regulations or fiscal policies to be headwinds to the economy? Mrs. YELLEN. I would say that productivity growth and growth in the economy’s capacity to supply goods and services has been pretty meager. And we are really not sure what the cause is. I VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 53 would point out that it is a global phenomenon. We are seeing this in many parts of the world. Mr. ROTHFUS. But you also see other countries imposing other regulations on their economies as well. Mrs. YELLEN. The reasons may not all be the same in different countries. I don’t think we really have a very good handle on it. Mr. ROTHFUS. I am concerned because you talk about the headwinds, yet you are not diagnosing the full scope of what the headwinds are. And as we look at the performance of this economy, which is sputtering, and looking at the constituents I talk to have not seen raises and the small businesses who are not accessing capital. I think we have to take a comprehensive look at what those headwinds truly are. I would encourage you to do that. I yield back. Chairman HENSARLING. The gentleman yields back. The Chair is going to recognize now the last Member, the gentleman from Texas, Mr. Williams, who is recognized for 5 minutes. Mr. WILLIAMS. Thank you, Mr. Chairman. And Chair Yellen, thank you for being here. I am from Texas. I am a small-business owner, and I have been for 44 years. I appreciate your testimony. Last July, we had a chance to chat about community-based financial institutions. I further asked you, when I go back home, what should I tell the community bankers, the credit unions who feel they are being penalized, even targeted, for the financial collapse of our economy? What you said was that you are trying to do everything you can to relieve burdens on community banks that have been through very difficult times. Now, Madam Chair, 1 year later, community-based financial institutions are still feeling the pain, I can tell you, and most of them don’t see any relief in sight. Recent research from the Mercatus Center shows that the DoddFrank Act creates more regulatory restrictions than do all other regulations of the current Administration combined, over 27,000 restrictions for all laws passed through 2014. So clearly, someone is not getting the message. So, in your experience, is it more difficult for a small institution to comply with new regulatory mandates than it is for a larger institution? Mrs. YELLEN. Well, very small institutions, certainly we would recognize there are burdens involved. But we have also tried to tailor our regulations so that there is less burden and many fewer rules apply to smaller institutions. There has been an increase in the capital standards that apply to those institutions, but most of the things we have discussed today, stress tests, TLAC, other things, liquidity regulations, don’t apply to those institutions at all. And as I said, we have tried to make many efforts and will continue looking for ways to simplify the regulatory regime and the capital regime for those institutions. Mr. WILLIAMS. Has the number of regulatory changes negatively affected the community financial institutions’ ability, do you think, VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI 54 to offer products and services to consumers more than it has affected larger institutions? Mrs. YELLEN. I don’t know that it has affected smaller institutions more than larger institutions. Mr. WILLIAMS. I would submit that it has. I wish you would take a look at it, because to be honest I don’t really know how you start a business—like I said, I am a business person—in this economic environment. I don’t know how people would get started. I don’t know how a new business even secures capital or is able to remain profitable. One thing you said earlier was that corporations can secure credit. They can secure capital. But I am a Main Street person, and I can tell you I don’t see that opportunity being able to get capital and start a business right now with Main Street. So let me just close by saying this, Madam Chair. I ask these questions because the Federal Reserve is responsible for the regulatory oversight of about 5,000 bank holding companies, 850 depository institutions that are State-chartered members of the Fed. I personally have heard from banks in my district that the disproportionate impact of the ever-mounting regulatory burden is contributing to increased industry consolidation. So, my question would be, would you please explain the negative consequences that result from consolidation and the effects of consolidation on the local and national economy? Mrs. YELLEN. Community banks are very important in supplying the kinds of services to their communities that may not be readily available from larger institutions. And I certainly agree that it is important that they remain healthy and vibrant and able to thrive and contribute to the growth of their communities. Mr. WILLIAMS. Reducing regulations would help that. So, please take a look at it. Main Street America is hurting. There is a difference between Main Street and Wall Street. Mr. Chairman, I yield back. Chairman HENSARLING. The gentleman yields back. I wish to thank Chair Yellen for her testimony today. The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witnesses and to place her responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. This hearing stands adjourned. [Whereupon, at 1:07 p.m., the hearing was adjourned.] VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\25848.TXT TERI APPENDIX June 22, 2016 (55) VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00059 Fmt 6601 Sfmt 6601 K:\DOCS\25848.TXT TERI VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00060 Fmt 6601 Sfmt 6601 K:\DOCS\25848.TXT TERI 25848.001 56 VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00061 Fmt 6601 Sfmt 6601 K:\DOCS\25848.TXT TERI 25848.002 57 VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00062 Fmt 6601 Sfmt 6601 K:\DOCS\25848.TXT TERI 25848.003 58 VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00063 Fmt 6601 Sfmt 6601 K:\DOCS\25848.TXT TERI 25848.004 59 VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00064 Fmt 6601 Sfmt 6601 K:\DOCS\25848.TXT TERI 25848.005 60 VerDate Nov 24 2008 19:36 Feb 09, 2018 Jkt 025848 PO 00000 Frm 00065 Fmt 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@FedFRASER