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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 FIFTEENTH CONGRESS
FIRST SESSION
JULY 12, 2017
Printed for the use of the Committee on Financial Services
Serial No. 115–27
(
U.S. GOVERNMENT PUBLISHING OFFICE
WASHINGTON
28–746 PDF
:
2018
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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
STEVAN PEARCE, New Mexico
BILL POSEY, Florida
BLAINE LUETKEMEYER, Missouri
BILL HUIZENGA, Michigan
SEAN P. DUFFY, Wisconsin
STEVE STIVERS, Ohio
RANDY HULTGREN, Illinois
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
LEE M. ZELDIN, New York
DAVID A. TROTT, Michigan
BARRY LOUDERMILK, Georgia
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
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
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
BILL FOSTER, Illinois
DANIEL T. KILDEE, Michigan
JOHN K. DELANEY, Maryland
KYRSTEN SINEMA, Arizona
JOYCE BEATTY, Ohio
DENNY HECK, Washington
JUAN VARGAS, California
JOSH GOTTHEIMER, New Jersey
VICENTE GONZALEZ, Texas
CHARLIE CRIST, Florida
RUBEN KIHUEN, Nevada
KIRSTEN SUTTON MORK, Staff Director
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CONTENTS
Page
Hearing held on:
July 12, 2017 .....................................................................................................
Appendix:
July 12, 2017 .....................................................................................................
1
55
WITNESSES
WEDNESDAY, JULY 12, 2017
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 July 7, 2017 .........................................................................
Written responses to questions for the record submitted by Representative Beatty .....................................................................................................
Written responses to questions for the record submitted by Representative Loudermilk .............................................................................................
Written responses to questions for the record submitted by Representative Ross .........................................................................................................
Written responses to questions for the record submitted by Representative Rothfus ...................................................................................................
Written responses to questions for the record submitted by Representative Royce .......................................................................................................
Written responses to questions for the record submitted by Representative Tipton .....................................................................................................
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MONETARY POLICY AND
THE STATE OF THE ECONOMY
Wednesday, July 12, 2017
U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Jeb Hensarling [chairman of
the committee] presiding.
Members present: Representatives Hensarling, Lucas, Pearce,
Posey, Luetkemeyer, Huizenga, Duffy, Hultgren, Ross, Pittenger,
Wagner, Barr, Rothfus, Messer, Tipton, Williams, Poliquin, Love,
Hill, Emmer, Zeldin, Trott, Loudermilk, Mooney, MacArthur, Davidson, Budd, Kustoff, Tenney, Hollingsworth; Waters, Maloney,
Velazquez, Sherman, Capuano, Clay, Scott, Green, Moore, Ellison,
Perlmutter, Himes, Foster, Kildee, Delaney, Sinema, Beatty, Heck,
Vargas, Gottheimer, Gonzalez, Crist, and Kihuen.
Chairman HENSARLING. The Committee on Financial Services
will come to order.
Without objection, the Chair is authorized to declare a recess of
the committee at any time.
This hearing is for the purpose of receiving the semi-annual testimony of the Chair of the Board of Governors of the Federal Reserve System on monetary policy and the state of the economy.
I now recognize myself for 3 minutes to give an opening statement.
Since we last convened to take Chair Yellen’s testimony on monetary policy, there have been some very encouraging economic headlines. Confidence is up, headline unemployment remains low, as
does inflation, but the headline unemployment rate still rests too
much on an incredibly low labor participation rate and, regrettably,
high disability payment participation rates.
Both paychecks and savings for working Americans still have
considerable room to grow after 8 years of distortionary economic
policy under the previous Administration.
Fortunately, on the fiscal front, help is on the way. House Republicans have passed both the American Health Care Act, to lift the
burden of ObamaCare from our economy, and the Financial
CHOICE Act, to end bank bailouts to unleash trillions of dollars of
capital sitting on the economic sidelines due to the Dodd-Frank
Act. These are landmark pieces of legislation. In the months to
come, the House will vote on a fairer, flatter, more competitive Tax
Code that will undoubtedly bring us a far healthier and dynamic
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economy, and the Trump Administration is busy rolling back rules
that harm our economy as well.
Monetary policy must, of course, do its part as well. I am highly
encouraged that Chair Yellen and her colleagues seem to be on
track toward some type of monetary policy normalization. Keeping
interest rates artificially low for too long was a key contributing
factor to the last crisis. Let’s hope it does not prove to be a key contributing factor to the next.
What is most desirable for long-term economic growth is for the
Fed to set out an easily discernible and transparent policy strategy
to achieve its mandate and, but for highly exigent circumstances,
to stick to it. Forays by the Fed into fiscal policy, specifically credit
allocation, cannot and should not be permitted. Assuming press reports are accurate and the Fed will soon commence an orderly wind
down of its balance sheet, this is more good news. Both the size
and composition of the balance sheet remain alarming.
Intervention into distinct credit markets like mortgage-backed
securities is inherently fiscal policy, not monetary policy. Already,
there is talk of having the Fed bail out student loans and public
pension funds. I again maintain, if we are not careful, we may
wake up one day to find our central bankers have instead become
our central planners. What has allowed the Fed’s foray into the
credit allocation is the policy of paying interest on excess reserves
and, today, paying a premium over market.
Interest on required reserves was meant to counteract an implicit tax. Interest on excess reserves should not become a permanent tool of monetary policy. Normalization would suggest, after
setting a level of reserves, and short-term interest rates be set by
market forces. But today they are set from the top down by an administered rate paid on excess reserves which, again, is a premium
rate resting on uncertain legal authority.
Forays into credit allocation in fiscal policy threaten the Fed’s
independence and economic future. So let’s hope the normalization
has truly begun.
And I now recognize the ranking member for 4 minutes.
Ms. WATERS. Thank you, Mr. Chairman.
And thank you, Chair Yellen. It is a pleasure to have you with
us today.
Since day one, the story of the Trump Administration has been
one of chaos and turmoil. This creates uncertainty that threatens
the progress of our economy and the opportunities available to all
American households. Trump made many big promises to hardworking Americans about ushering in a new level of economic prosperity in America. Yet, despite all of his bluster, let’s look at what
Trump has actually done when it comes to our economy.
None of it is good. He reversed a planned cut to Federal Housing
Administration mortgage insurance premiums that would have
saved homeowners $500 a year. He issued executive actions to
begin to dismantle Wall Street reforms and embrace the wrong
choice act, the chairman’s bill to gut the Dodd-Frank Wall Street
Reform and Consumer Protection Act and hobble the Fed.
There are actions that endanger the economic progress we have
made since the Great Recession. In passing the wrong choice act,
House Republicans, once again, are trying to weaken the independ-
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ence of the Fed and chain the Fed’s policy decisions to a mathematical formula that would diminish its ability to support the economy and fulfill its mandate to promote full employment.
The Republicans’ bill would also subject Federal financial regulators, including the Fed, to the politicized annual appropriations
process.
All of this wasn’t bad enough. President Trump will soon have
the opportunity to reshape the makeup of the Board of Governors,
thereby tilting policy in the direction of Wall Street.
For example, earlier this week, the White House announced the
President’s intent to nominate Randal Quarles to serve as the Fed’s
Vice Chair for Supervision and in part a post responsible for overseeing the Fed’s implementation of Wall Street reform.
This is troubling, given Quarles’ public opposition to key aspects
of the Dodd-Frank Act and support for measures that would curtail
the Fed’s independence.
While our economy has made substantial progress since the
height of the financial crisis and we continue to see positive trends
in the labor market as a result of the policies put in place by the
Fed, Congressional Democrats, and President Obama, key aspects
of our economy have yet to fully recover.
Since your last testimony before this committee, wage growth
continues to lag and troubling economic disparities continue to
exist among racial and ethnic lines. So I hope that policymakers
will keep these trends in mind and the fact that inflation expectations have fallen as they evaluate the stance of monetary policy.
So, Chair Yellen, I commend you for your steady leadership and
look forward to your testimony.
And, with that, Mr. Chairman, I yield back the balance of my
time.
Chairman HENSARLING. The gentlelady yields back.
The Chair recognizes the gentlemen from Kentucky, Mr. Barr,
the chairman of our Monetary Policy and Trade Subcommittee, for
2 minutes.
Mr. BARR. Chair Yellen, welcome back to the committee. And despite nearly 9 years of the most accommodative and unconventional
monetary policy in U.S. history and despite some recent positive
economic news, labor force participation remains at a disappointing
40-year low, wages are stagnant, and economic growth has yet to
eclipse 3 percent.
Making matters worse, just like the farm bill used to pay farmers not to plant, the Federal Reserve, by paying interest on excess
reserves, is effectively paying banks not to lend.
Former Fed Chairman Ben Bernanke said as much in 2013 when
he stated, ‘‘Banks are not going to lend out the reserves at a rate
lower than they can earn at the Fed.’’
The Fed has adopted this interest on excess reserves policy to
fund its enormous $4.5 trillion balance sheet. By guaranteeing the
largest banks in America this low-risk, above-market rate of return
on deposits, the Fed is discouraging lending into the real economy,
effectively taking money out of the communities across America
and leaving less capital for Main Street households and businesses
to prosper.
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I was glad to read about the Fed’s intentions to start shrinking
its oversized portfolio. I share the view of St. Louis Fed President
James Bullard and others that this decision is long overdue. What
concerns me, however, is that, once again, the Fed seems to be improvising instead of following a well-grounded strategy.
Earlier this year, some officials pointed to another Fed funds rate
increase in September with a move to start reducing the balance
sheet beginning in December. Now we are hearing that the FOMC
might start the portfolio reduction plan in September and put off
until December any further interest rate increase.
Again, I welcome initiating the process to reduce the size of the
balance sheet sooner rather than later, but I look forward to your
testimony and hopefully an explanation of whether the Fed is once
again changing its strategy and, if so, why.
Thank you for coming today, and I look forward to your testimony about these and other topics.
I yield back.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore, the ranking member of our Monetary Policy and Trade Subcommittee, for 1 minute.
Ms. MOORE. Thank you so much, Mr. Chairman.
And thank you, Madam Chairwoman, for appearing here for the
annual Humphrey-Hawkins report.
I want to start out by thanking you for your very thorough and
thoughtful reply to our Congressional letter regarding disparities in
labor markets for African Americans and other minorities. Thank
you. It did not have a lot of solutions, but it was very thoughtful
pointing out projects that seek to find the answers.
This disparity is really clear among minorities, but I am concerned that it is also increasing in all populations of working Americans. And it seems pretty clear from the research, that the challenge moving forward will be able to use fiscal policy to address income and wealth inequality in a way that the blunt instrument of
monetary policy can’t, especially as the Fed moves forward to raise
rates.
I understand you have to do it, but there is an asymmetric recovery that is troubling. Given that the poor and working class have
not felt the benefits of the booming stock market, and that inflation
is under control, I think that Congress can and should use the
power of the purse to shore up those segments of the population
that are still hurting from the recession. And I look forward to
hearing your testimony.
I yield back.
Chairman HENSARLING. The time of the gentlelady has expired.
Today, we welcome the testimony of the Honorable Janet Yellen.
Chair Yellen has testified before this committee on numerous occasions, so I feel she needs no further introduction.
Without objection, the witness’ written statement will be made a
part of the record.
Chair Yellen, you are now recognized for 5 minutes to give an
oral presentation of your testimony. Thank you for being here.
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STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mrs. YELLEN. Thank you. Chairman Hensarling, Ranking Member Waters, and other members of the committee, I am pleased to
present the Federal Reserve’s semi-annual Monetary Policy Report
to the Congress.
In my remarks today, I will briefly discuss the current economic
situation and outlook before turning to monetary policy.
Since my appearance before this committee in February, the
labor market has continued to strengthen. Job gains have averaged
180,000 per month so far this year, down only slightly from the average in 2016 and still well above the pace we estimate would be
sufficient on average to provide jobs for new entrants to the labor
force.
Indeed, the unemployment rate has fallen about a quarter percentage point since the start of the year and, at 4.4 percent in
June, is 51⁄2 percentage points below its peak in 2010 and modestly
below the median of Federal Open Market Committee participants’
assessments of its longer run normal level. The labor force participation rate has changed little on net this year, another indication
of improving conditions in the jobs market given the demographically driven downward trend in this series. A broader measure of
labor market slack that includes workers marginally attached to
the labor force and those working part time who would prefer fulltime work has also fallen this year and is now nearly as low as it
was just before the recession.
It is also encouraging that jobless rates have continued to decline
for most major demographic groups, including for African Americans and Hispanics. However, as before the recession, unemployment rates for these minority groups remain higher than for the
Nation overall.
Meanwhile, the economy appears to have grown at a moderate
pace on average so far this year. Although inflation adjusted gross
domestic product is currently estimated to have increased at an annual rate of only 11⁄2 percent in the first quarter, more recent indicators suggest the growth rebounded in the second quarter.
In particular, growth in household spending, which was weak
earlier in the year, has picked up in recent months and continues
to be supported by job gains, rising household wealth, and favorable consumer sentiment.
In addition, business fixed investment has turned up this year
after having been soft last year. And the strengthening in economic
growth abroad has provided important support for U.S. manufacturing production and exports.
The housing market has continued to gradually recover, aided by
the ongoing improvement in the labor market and mortgage rates
that, although up somewhat from a year ago, remain at relatively
low levels.
With regard to inflation, overall consumer prices, as measured by
the price index for personal consumption expenditures, increased
1.4 percent over the 12 months ending in May, up from 1 percent
a year ago but a little lower than earlier in the year.
Core inflation, which excludes energy and food prices, has also
edged down in recent months and was 1.4 percent in May, a couple
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of tenths below the year-earlier reading. It appears that the recent
lower readings on inflation are partly the result of a few unusual
reductions in certain categories of prices. These reductions will
hold 12-month inflation down until they drop out of the calculation.
Nevertheless, with inflation continuing to run below the Committee’s 2 percent longer run objective, the FOMC indicated in its
June statement that it intends to carefully monitor actual and expected progress toward our symmetric inflation goal. Looking
ahead, my colleagues on the FOMC and I expect with further gradual adjustments in the stance of monetary policy, the economy will
continue to expand at a moderate pace over the next couple of
years with a job market strengthening somewhat further and inflation rising to 2 percent. This judgment reflects our view that monetary policy remains accommodative.
Ongoing job gains should continue to support the growth of incomes and therefore consumer spending.
Global economic growth should support further gains in U.S. exports. And favorable financial conditions coupled with the prospect
of continued gains in domestic and foreign spending and the ongoing recovery in drilling activity should continue to support business
investment. These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage
and price increases. Of course, considerable uncertainty always attends the economic outlook.
There is, for example, uncertainty about when and how much inflation will respond to tightening resource utilization. Possible
changes in fiscal and other government policies here in the United
States represent another source of uncertainty.
In addition, although the prospects for the global economy appear to have improved somewhat this year, a number of our trading partners continue to confront economic challenges. At present,
I see roughly equal odds that the U.S. economy’s performance will
be somewhat stronger or somewhat less strong than we currently
project.
I will now turn to monetary policy. The FOMC seeks to foster
maximum employment and price stability as required by law. Over
the first half of 2017, the Committee continued to gradually reduce
the amount of monetary policy accommodation. Specifically, the
FOMC raised the target range for the Federal funds rate by onequarter percentage point at both its March and June meetings,
bringing the target to a range of 1 to 11⁄4 percent. In doing so, the
Committee recognized the considerable progress the economy had
made and is expected to continue to make toward our mandated
objectives.
The Committee continues to expect that the evolution of the
economy will warrant gradual increases in the Federal funds rate
over time to achieve and maintain maximum employment and stable prices. That expectation is based on our view that the Federal
funds rate remains somewhat below its neutral level. That is the
level of the Federal funds rate that is neither expansionary nor
contractionary and keeps the economy operating on an even keel.
Because the neutral rate is currently quite low by historical standards, the Federal funds rate would not have to rise all that much
further to get to a neutral policy stance. But because we also an-
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ticipate that the factors that are currently holding down neutral
rate will diminish somewhat over time, additional gradual rate
hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent
goal. Even so, the Committee continues to anticipate that the
longer run neutral level of the Federal funds rate is likely to remain below levels that prevailed in previous decades.
As I noted earlier, the economic outlook is always subject to considerable uncertainty, and monetary policy is not on a preset
course. FOMC participants will adjust their assessments of the appropriate path of the Federal funds rate in response to changes to
their economic outlooks and to their judgments of the associated
risks as informed by incoming data.
In this regard, as we noted in the FOMC statement last month,
inflation continues to run below our 2 percent objective and has declined recently. The Committee will be monitoring inflation developments closely in the months ahead.
In evaluating the stance of monetary policy, the FOMC routinely
consults monetary policy rules that connect prescriptions for the
policy rate with variables associated with our mandated objectives.
However, such prescriptions cannot be applied in a mechanical
way. Their use requires careful judgments about the choice and
measurement of the inputs into these rules as well as the implications of the many considerations these rules do not take into account.
I would like to note the discussion of simple monetary policy
rules and their role in the Federal Reserve’s policy process that appears in our current Monetary Policy Report.
Let me now turn to our balance sheet. Last month, the FOMC
augmented its policy normalization principles and plans by providing additional details on the process that we will follow in normalizing the size of our balance sheet.
The Committee intends to gradually reduce the Federal Reserve’s
security holdings by decreasing its reinvestment of the principal
payments it receives from the securities held in the System Open
Market Account. Specifically, such payments will be reinvested
only to the extent that they exceed gradually rising caps.
Initially, these caps will be set at relatively low levels to limit
the volume of securities that private investors will have to absorb.
The Committee currently expects that, provided the economy
evolves broadly as anticipated, it will likely begin to implement the
program this year.
Once we start to reduce our reinvestments, our securities holdings will gradually decline, as will the supply of reserve balances
in the banking system.
The longer run normal level of reserve balances will depend on
a number of as-yet-unknown factors, including the banking system’s future demand for reserves and the Committee’s future decisions about how to implement monetary policy most efficiently and
effectively. The Committee currently anticipates reducing the quantity of reserve balances to a level that is appreciably below recent
levels but larger than before the financial crisis.
Finally, the Committee affirmed in June that changing the target
range for the Federal funds rate is our primary means of adjusting
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the stance of monetary policy. In other words, we do not intend to
use the balance sheet as an active tool for monetary policy in normal times.
However, the Committee would be prepared to resume reinvestments if a material deterioration in the economic outlook were to
warrant a sizable reduction in the Federal funds rate. More generally, the Committee will be prepared to use its full range of tools,
including altering the size and composition of its balance sheet, if
future economic conditions were to warrant a more accommodative
monetary policy than can be achieved solely by reducing the Federal funds rate.
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. The Chair now recognizes himself for 5
minutes for questions.
Chair Yellen, the first question I have is with respect to the 2
percent inflation target that was adopted several years ago. I must
admit as an aside, a back-of-the-envelope calculation tells me that
nominal prices will double every generation. I am still trying to figure out how that is commensurate with price stability, but that is
not my question.
In a recent press conference, some interpreted comments that
you made to indicate that you were open to an increase in the inflation target. Are you pursuing an increase in the inflation target?
Are other members of the FOMC? Is this a matter of discussion
within the FOMC to increase the 2 percent inflation target?
Mrs. YELLEN. It is not. We reaffirmed our 2 percent inflation target in January. We are very focused on trying to achieve our 2 percent inflation target, and it is not a subject of discussion.
Chairman HENSARLING. Thank you. I will take ‘‘no’’ for an answer.
As you heard in my opening statement, I remain concerned, as
do other Members, about a blurring between the lines of monetary
policy and fiscal policy, specifically credit allocation. We feel that
ultimately this could impede upon the Fed’s independence. Professor Marvin Goodfriend of Carnegie Mellon,, whom I think you
may be familiar with, gave what I thought was an instructive distinction between monetary and fiscal policy. And he said, ‘‘Monetary policy does not favor one sector of the economy over another,
and monetary policy does not involve taking credit risk onto the
Fed’s balance sheet.’’
By contrast, he went on to say: ‘‘Credit policy works by interposing the government’s creditworthiness, the power to borrow
credibly against future taxes between private borrowers and lenders to facilitate credit flows to distressed borrowers. Fed credit policy involves lending to private institutions or acquiring non-Treasury securities with freshly created bank reserves or proceeds from
the sale of Treasuries from the Fed portfolio.’’
I guess my question is, Chair Yellen, do you agree with this distinction? And if you don’t agree with this distinction, do you feel
that credit policy is commensurate with your Congressional mandate?
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Mrs. YELLEN. The FOMC, in its principles for normalization of
monetary policy, has clearly indicated that it intends to return over
time to a primarily Treasury-only portfolio, and that is in order not
to influence the allocation of credit in the economy.
That said, our purchases of mortgage-backed securities took
place after a financial crisis when the market for mortgage-backed
securities was not working at all well, and I believe it was appropriate. But we have endorsed the principle—
Chairman HENSARLING. I understand that.
Mrs. YELLEN. —of returning to a Treasury portfolio.
Chairman HENSARLING. So do you or do you not associate yourself with Professor Goodfriend’s comments? Is that a useful distinction to you as he articulated?
Mrs. YELLEN. I think it is a useful distinction.
Chairman HENSARLING. Okay. Thank you.
It is my understanding that the Fed can legally purchase student
debt guaranteed by the Federal Government, and municipal debt
that matures in less than 6 months. Is that your understanding as
well?
Mrs. YELLEN. I am not sure about student debt. We are able to
purchase Treasury and agency securities.
Chairman HENSARLING. Has the FOMC ever discussed the possibility of purchasing either student debt or municipal debt?
Mrs. YELLEN. Not to the best of my knowledge.
Chairman HENSARLING. Finally, in this part of the questioning,
am I led to believe, then, that your balance sheet reduction will
allow you to return the Fed funds rate as a primary policy instrument instead of interest on reserves? Is that my understanding
from your testimony?
Mrs. YELLEN. We are reliant on interest on excess reserves as
our key tool for setting the Federal funds rate. So that is a key instrument of monetary policy. But what I said is that we intend to
rely on adjustments through interest on reserves through our Fed
funds rate target as a means of regulating—
Chairman HENSARLING. My time is rapidly winding down. I was
very heartened to see in your report a comparison of Fed policy
with a number of policy rules. I think this is very helpful, Chair
Yellen. I would say, though, that, in some respects, your report
says how the FOMC differed from these policy rules, but it does not
say why. In order to give the broadest amount of information to the
markets so that people can plan their lives, I would simply encourage you to perhaps go even further and discuss why the actual
FOMC policy differed from these policy rules. I think that would
be very encouraging, if you would have a brief comment on that.
Mrs. YELLEN. Let me just say that I am very pleased that you,
the committee, found the material on rules useful, and we look forward to working with you to provide further information that
would be useful to the committee.
Chairman HENSARLING. Thank you.
I now recognize the ranking member for 5 minutes.
Ms. WATERS. Thank you, Mr. Chairman.
As part of the Federal Open Market Committee’s, ‘‘Statement on
Longer-Run Goals and Monetary Policy Strategy,’’ the Committee
states that it would be concerned if inflation were running persist-
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ently above or below its 2 percent objective. Given that core inflation has been below the Fed’s 2 percent target for more than 5
years and is currently at 1.4 percent, what is the Fed’s rationale
for further raising rates at this time? If the 2 percent market truly
is symmetric, shouldn’t the Federal Open Market Committee be
willing to allow inflation to begin rising closer to its 2 percent target before it is able to justify additional rate increases?
Mrs. YELLEN. Let me say that we are very committed to achieving our 2 percent inflation objective and are well aware that, for
a number of years, we have been running under that and recognize
that there are dangers that would be associated with persistent
undershoots of our inflation objective, and it is a symmetric inflation objective; 2 percent is not a ceiling. It is a symmetric objective.
Now, I would say with respect to the inflation outlook, although
inflation has been running below 2 percent, earlier this year, on a
12-month basis, core inflation had reached 1.8 percent and headline inflation came close to 2 percent.
We have seen increasing strength in the labor market that continues, and although there are lags in this process, I believe that
is something that over time will put upward pressure on both
wages and prices.
Now, for several months running, we have seen unusually low inflation readings. As I mentioned, there appear to be some special
factors that partly account for that. For example, quality-adjusted
prices of cell phone plans plunged several months ago, and prescription drug prices also plunged.
Some temporary factors appear to be at work. Nevertheless, our
12-month inflation rates will remain low until those factors drop
out. But I would say it is premature to reach the judgment that
we are not on the path to 2 percent inflation over the next couple
of years.
As we indicate in our statement, it is something that we are
watching very closely, considering risks around the inflation outlook. To my mind, a prudent course is to make some adjustments
as long as our forecast is that we are heading back to 2 percent.
But monetary policy is not on a preset course. We are watching
this very closely and stand ready to adjust our policy if it appears
that the inflation undershoot will be persistent.
Ms. WATERS. Thank you very much.
I would like to move on to ask you a question about Deutsche
Bank. First, I would like to commend you and your colleagues at
the Federal Reserve for recently fining Deutsche Bank, a top creditor of the President and his immediate family, for its failure to
comply with anti-money-laundering requirements. I would like to
learn a bit more about what you may have discovered in the course
of your investigation of Deutsche Bank. Were you able to verify
that Deutsche Bank had completed its own internal review of a
Russian mirror trading scheme that took place from 2011 to 2015?
And, separately, as part of the Fed’s supervision of Deutsche
Bank’s anti-money-laundering compliance, can you comment on the
due diligence that the bank conducted on the accounts of President
Trump and his immediate family members, given the high-profile
nature of their accounts?
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Mrs. YELLEN. We issued an enforcement action against Deutsche
Bank for violations of Bank Secrecy Act anti-money-laundering procedures in the United States, and that was based on our own investigations.
The mirror trades that you referred to occurred outside the
United States. Recently, the U.K. FCA took an action against Deutsche Bank for those trades. Those are not ones that we are involved in looking at, and we haven’t, of course, in the course of our
investigations, looked into individual transactions with the President.
Ms. WATERS. That was one of two reviews that was done on
Deutsche Bank, the mirror trading and the high-profile politicians
or elected officials review. Are you familiar with that?
Mrs. YELLEN. I am not familiar with the details. Our focus has
been on the safety and soundness of the operations of Deutsche in
the United States.
Ms. WATERS. Thank you.
I yield back.
Chairman HENSARLING. The gentlelady yields back.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, chairman of our Monetary Policy and Trade Subcommittee.
Mr. BARR. Thank you, Mr. Chairman.
And, again, welcome back, Chair Yellen, welcome back. And we
welcome the decision, the announced intentions of the Fed to begin
the process of reducing the size of its oversized portfolio. But in
terms of the plan and in terms of portfolio composition and balance
sheet normalization, why does your plan contemplate rolling off
Treasury securities at a faster pace than mortgage bonds?
Mrs. YELLEN. The differences are relatively slight. My expectation is, although one can’t be certain of what the prepayments of
principal will be on mortgage-backed securities, that ultimately our
caps on reinvestment of mortgage-backed securities will not be
binding, that they will only come into play in exceptional circumstances.
So, once we have phased in those caps, I don’t expect them to be
binding. The Treasury market is very deep and liquid. It is a huge
market. Our intention in gradually phasing up these caps is to
avoid disruption, and we are comfortable—
Mr. BARR. Thank you for that.
And this kind of gets to the question of credit allocation. Let me
move on quickly to the issue of the Fed’s use of interest on excess
reserves as a monetary policy tool.
The Fed is now paying banks 11⁄4 percent on their reserve balances, and if the Fed follows through with its normalization plans,
the Fed will be paying banks a higher interest rate on their reserves sometime later this year. These interest rates, as I said in
my opening statement, provide banks with a government subsidy
to not lend out their reserves.
Does the Fed have any evidence that banks are passing on these
higher interest on excess reserves rates to their customers in the
form of higher interest rates on customer deposits?
Mrs. YELLEN. My impression is that, on larger deposits, on CDs,
we are beginning to see some upward movement in the rates that
are available to customers, but not on retail deposit accounts.
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My expectation is, although there will be a lag, that, as the general level of short-term interest rates rise, that competition among
banking organizations will begin to put some upward pressure on
those rates, and—
Mr. BARR. And we looked at what some of the big banks pay on
customer deposits: one basis point for many of them, multiple institutions paying only one basis point on customer deposits. And the
Fed is paying 125 basis points. And so it doesn’t appear as though
any of this pass-through is happening to customer accounts, and
that might compel the Fed to reconsider the merits of its IOER policy.
Wouldn’t it be better for growth if banks were encouraged to deploy more capital in the real economy instead of just parking it at
the Fed in exchange for IOER?
Mrs. YELLEN. I don’t see banks as parking it at the Fed and not
lending. My discussions with bankers and the information that we
regularly collect suggests that banks are looking to make loans.
There was a period of very slow loan growth at the beginning of
the year, but our survey suggests that it was more a matter of demand than supply.
So, remember, our interest on reserves is at a very low level—
Mr. BARR. Yes, ma’am. I would just interject an editorial comment, which is that the dilemma that the Fed now appears to face
is that lowering interest on excess reserves, of course, would decrease the Fed funds rate, but normalization would also entail moving back to the conventional open market operations.
Let me, finally, in my limited time left, talk to you a little bit
about the limits of monetary policy. Of course, we know we have
been struggling overall with slow growth and low labor participation, even though unemployment has come down. And you talk a
lot about substandard productivity. What many employers say to
me is that they simply can’t compete with the government for labor
and that the government is paying people to not work.
And as you know, we are in the middle of this big debate in
Washington about ObamaCare and whether or not we should reform Medicaid. Here is what Alan Greenspan, who calls you a firstrate economist, said, ‘‘You can’t get growth going so long as entitlement expansion is anywhere near what it has been recently. It is
eating up the sources of investment and the sources of growth, and
you can’t have it both ways. You cannot fund all of the entitlements everybody wants and expect that you are going to get a GDP
out of that of 3 percent of more than the annual rate. The arithmetic just doesn’t work.’’
Wouldn’t you agree that the structure of our welfare programs,
including ObamaCare, contain disincentives for work?
Chairman HENSARLING. A brief answer, please.
Mrs. YELLEN. To my mind, the major factor here is an aging population that is putting downward pressure on labor force participation. There are other factors that affect labor force participation as
well, but the slow growth that we have and anticipate reflects in
part an aging population and slow productivity growth.
Chairman HENSARLING. The time of the gentleman has expired.
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The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore, the ranking member of our Monetary Policy and Trade Subcommittee.
Ms. MOORE. Thank you so much, Mr. Chairman.
Let me sort of pursue the question, Madam Chair, that Mr. Barr
was raising with you with regard to paying people not to work, and
he gave as an example Medicaid.
I just want to mention that two-thirds of the people who use
Medicaid are in nursing homes and they are unable to work. I just
want to point that out.
I also want to pursue some questions from you that the chairman
seemed to be interested in some rules-based policy that the FOMC
had put out there. And I want to note that, a couple of weeks ago,
you were very critical of the Taylor Rule, one of the rules that
seems to be favored by the leadership on this committee.
I was wondering if you could spend just a little time talking to
us about your reservations about the Taylor Rule and the appropriate application of it?
Mrs. YELLEN. I don’t believe that the FOMC should mechanically
follow any single simple rule. But as we point out in the Monetary
Policy Report, policy rules do embody some principles of sound
monetary policy that should inform our policy decisions. And we
have for several decades now looked at the recommendations of the
Taylor Rule and a number of other different rules in deciding on
the appropriate stance of policy.
As we try to point out in the report, there are many different
rules. There is no clear way to decide which one is better than the
others. They lead to a range of recommendations. So there is no
single recommendation that comes out of a rules-based approach.
And they require judgment in order to implement about measuring
things like the GDP or output gap and particularly the neutral real
level of interest rates, something that we have been struggling
with, as has the professional economics community, now for many
years, so—
Ms. MOORE. Thank you, Chair Yellen.
So the CHOICE Act is a bill that we pushed out of this committee, and it proposes sort of a rules-based monetary policy, and
I want to know what your thoughts specifically are about that piece
of legislation?
Mrs. YELLEN. I have said on many occasions that I am opposed
to the requirements in the CHOICE Act.
Ms. MOORE. Okay. What about subjecting the Fed to the appropriations process?
Mrs. YELLEN. I would be very concerned about subjecting the Fed
to appropriations. We, of course, want to start with saying that we
are, obviously, operating in all that we do under Congressional
mandates and laws. We seek to be transparent, to be accountable
to Congress, and to communicate as clearly as we can the basis for
our actions in monetary policy and also in supervision. But I do
think our independence in setting our own appropriations—
Ms. MOORE. Thank you for that, Madam Chair.
Mrs. YELLEN. —are safeguarded.
Ms. MOORE. I want to go back to the limitations that the FOMC
has with regard to closing the disparity and the gap of recovery for
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African Americans, and lower-income Whites. There is only so
much you can do. So I was wondering if you would agree that some
of the austerity measures that Congress accounts—we place—saying we are paying people not to work when, actually, people who
receive food stamps are old people, disabled people, children, people
on Medicaid. Would you say that Congress needs to step up on the
appropriations side doing things for lower-income people to subsidize wages, that that is a better tool than what the Fed has to
offer in closing those gaps?
Mrs. YELLEN. As you indicated in your opening statement, monetary policy is a blunt tool, and it is not something that we can use
to achieve distributional objectives. Although, as we point out in
the report, a strong labor market does benefit all groups, and particularly minority groups, although the experience is worse for
them.
So, yes, I think it is absolutely appropriate for Congress to consider appropriate fiscal policy and how it might be used to advance
those objectives.
Ms. MOORE. Thank you so much.
And my time has expired.
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, chairman of our Terrorism and Illicit Finance Subcommittee.
Mr. PEARCE. Thank you, Mr. Chairman.
And thank you to the Chair for being here. We always appreciate
your visits.
Now, I note in your comments today you are talking about the
labor force participation rate, and in the past, I think you and I
have had an opportunity to discuss that, and it was not something
I have seen to be a concentration on the part of the Feds before
now—and it is now.
What changed that it has become a bigger concentration for you
all?
Mrs. YELLEN. It is important for us to try to determine how
much slack there is in labor markets, how much potential—
Mr. PEARCE. Sure. I understand that, but that was important before, and there didn’t seem to be any comments from you. And, in
fact, in 2016, it was just a number that didn’t come readily to your
mind when you were in front of the committee here. I just wondered what has changed since January that you would now be concentrating on that?
Mrs. YELLEN. I think I was discussing this last year, because it
is a source of uncertainty after a very long and deep recession. We
want to understand what potential there is for people to come back.
And as I mentioned in my testimony, labor force participation rate
has been—
Mr. PEARCE. No. I appreciate that. If I could grab back my time
now. I am going through the Monetary Policy Report here, and I
am going through your comments, and I almost don’t see anything
about that number on the screen behind you that is just constantly
rolling there, and it is a debt, and maybe it doesn’t mean anything,
and maybe it does. Do you all ever talk about that in your Committee? Do you ever contemplate that in your position?
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Mrs. YELLEN. I have discussed this previously with this committee and others.
Mr. PEARCE. I understand, but we didn’t note it in the report
today as one of the driving factors and something we ought to be
thinking about.
So how did it affect you all when Illinois was downgraded—their
bond rating was downgraded the 1st of the year, and they are paying what one analyst said is the highest differential in our history?
Now, the reason they are having to pay more and the bonds are
being downgraded is because they can’t afford to pay the bills, basically. And if you hold their bonds, you may not get paid.
If you went back to Detroit when it filed bankruptcy, bondholders
only got 74 percent on the dollar. And it all feeds back toward this
number here and the fact that it doesn’t even make the print, not
even the fine print that I can find. Maybe I missed it, but I did
see the one sentence about Illinois being downgraded, and there
was a brief discussion of Puerto Rico.
But the idea that we as a country are not discussing our ability
to pay our bills is something that, I think, there is a downside effect to the problem, but the fact that your report doesn’t bring it
up is a little concerning to me.
And the way that really played out was a couple of weeks ago
when Chicago schools tried to issue a bond rating and they didn’t
get any bidders at all, none. So they ended up driving the rate up
to 7, 71⁄2, 73⁄4 or something. But it seems like the people in charge
of the financial stability of the country, the value of our dollar, the
value of our promises to pay, it just seems like it would have a little bit more importance in the document here.
I would expect, frankly, maybe a whole chapter, because there
are estimates that we can’t pay our bills in this country, and so we
continue to operate as if—as if it is not going to matter if our ratings are downgraded. If our interest rate goes up—we are already
running deficits, which means we have to print the money every
year in which to operate, and it seems like that the people in
charge of the system would be talking about it and postulating and
telling us: Hey, this is kind of serious. Why don’t we all work together and start figuring out what we can do to live within our
means, to just make sure that we are not paying triple and quadruple what other people are paying for debt? I don’t know. I would
love to hear your comments.
Mrs. YELLEN. Let me state it in the strongest possible terms that
I agree that what you are showing here represents a trend that,
given current spending and taxation decisions, is going to lead to
an unsustainable debt situation with rising interest rates and declining investment in the United States that will further harm our
productivity growth and living standards.
I believe a key thing that Congress should be taking into account
in designing fiscal policy is the need to achieve sustainability of
this debt path over time. This is something I am not just saying
today but have been emphasizing for some time in my testimony.
Mr. PEARCE. Thank you very much.
I yield back, Mr. Chairman.
Chairman HENSARLING. The time of the gentleman has expired.
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The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets Subcommittee.
Mrs. MALONEY. Chair Yellen, as you mentioned earlier, inflation
has not been moving up as quickly as the Fed had been expecting.
And given that the labor market has continued to tighten and inflation still hasn’t increased to the Fed’s target of 2 percent, do you
think the Fed should wait to see some improvement in the inflation
outlook before it starts the process of balance sheet normalization
by phasing out the Fed’s reinvestment policy, or, in other words,
are your plans for the timing of balance sheet normalization unchanged?
Mrs. YELLEN. We have been trying to very carefully lay out our
plans to normalize the size of our balance sheet in a gradual and
predictable way. And my colleagues made the judgment in June
when we laid out the final details that, if the economy continues
to evolve in line with our expectations, that it is something that we
should begin to do this year and, to my mind, I would say relatively soon.
The exact timing of this I don’t think matters a great deal. It is
something we have long been preparing to undertake.
As I mentioned earlier, we are watching inflation very carefully.
I do believe that part of the weakness in inflation represents transitory factors but will recognize inflation has been running under
our 2 percent objective, that there could be more going on there.
It is something that we will watch very carefully and will be a factor in our future decisions about rate increases.
Mrs. MALONEY. Thank you.
As you know, your term as Fed Chair ends in 2018. And there
is a long history of Presidents renominating Fed Chairs that their
predecessors had originally named. Ronald Reagan renominated
Paul Volcker. Bill Clinton renominated Alan Greenspan. And President Obama renominated Ben Bernanke.
So my question is, are you open to serving another 4 years as
Fed Chair if President Trump decides that he wants to renominate
you?
Mrs. YELLEN. What I previously said is that I absolutely intend
to serve out my term. I am very focused on trying to achieve our
Congressionally mandated objectives, and I really haven’t had to
give further thought at this point to this question.
Mrs. MALONEY. When the Fed does start the process of balance
sheet normalization, are you less likely to raise interest rates at
the same time, or do you view these two actions as being on separate tracks?
Mrs. YELLEN. The path for the Federal funds rate is a decision
for the Committee, and they have made no decision about whether
or not both things could occur at the same time.
I would note that in June, at our most recent meeting, we produced the, ‘‘Summary of Economic Projections,’’ which appears in
the Monetary Policy Report. Most of my colleagues or at least the
median anticipated that one further increase in the Federal funds
rate would likely be appropriate this year, but as I say, we constantly watch the economy, the evolution of inflation, and the labor
market, and we will make decisions on the basis of our evaluation
of that information.
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Mrs. MALONEY. The Fed has suggested that the stock market is
currently overvalued. Are there other markets that you consider or
see as overvalued as well, and do you think a correction in any of
these markets would cause problems for financial stability?
Mrs. YELLEN. In looking at asset prices and valuations, we try
not to opine on whether they are correct or they are not correct.
But on—as you asked what the potential spillovers or impacts on
financial stability could be of asset price revaluations, my assessment of that is that, as asset prices have moved up, we have not
seen a substantial increase in borrowing based on those asset price
movements. We have a financial system, a banking system that is
well-capitalized and strong, and I believe it is resilient.
Mrs. MALONEY. Okay. Thank you.
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, chairman of our Financial Institutions Subcommittee.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
And thank you, Madam Chair, for being here today.
As chairman of the Financial Institutions Subcommittee, one of
my jobs and my greatest concerns is the regulatory oversight by
the various financial services agencies.
Chair Yellen, when it comes to the Fed’s supervisory role, I want
to renew my call and the calls of so many of my colleagues that
the Fed take a more measured approach and withhold any new
regulation until the nominee for Vice Chair for Supervision has
been confirmed by the Senate.
I do appreciate some of your comments and the comments of your
colleagues, particularly Governor Powell, on issues such as the
treatment of margin on the supplemental leverage ratio and on
CCAR testing. Issues like these have a very real impact on the
economy. I think it is wise that the Fed ease the associated burdens. You recall I sent you a letter on CCAR. Your response to me
indicated that, while you understood my concerns, the Fed wasn’t
necessarily looking to curtail some of its stress-test-related activity.
So, now that the Vice Chair of Supervision has been named, I
will again ask that the Fed hold off on imposing any new supervisory burdens before the individual is in place, and I would just
ask for a response to these statements and concerns.
Mrs. YELLEN. We have a relatively light regulatory agenda at
this point. I am pleased to see a nomination. Clearly, we will look
very carefully at the whole set of issues around regulatory burden.
Mr. LUETKEMEYER. Okay.
Mrs. YELLEN. And I look forward to having the input of that individual if he is confirmed.
Mr. LUETKEMEYER. Okay. Thank you.
To that end, I also want to mention that I am very supportive
of many provisions included in the recent Treasury report. I hope
that the Federal Reserve is taking some recommendations seriously. Have you read the report yet? Are you aware of it?
Mrs. YELLEN. Yes, I have read the report, and there are many
very useful and productive suggestions that mirror things that we
have been thinking and doing ourselves with respect to tailoring of
our regulations, reducing burdens on community banks. I think the
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recommendations pertaining to the Volcker Rule and looking for
ways to reduce burdens are all very useful.
There are a few points where we have a different view and a lot
in it that is very useful.
Mr. LUETKEMEYER. I look forward to working with you on that
because, while our Legislative Branch of the Government is a check
on the Executive Branch and agencies, we want to work with you
to try and improve the ability of our banks to be able to do the job
of helping their communities grow.
And I am glad you mentioned community banks because I have
a quick story here for you, and I would like your response to it. I
have shared this story with the committee in the past with regard
to Mid America Bank & Trust. It’s a small bank in my district that
has been caught in Federal Reserve purgatory for the last 5 years.
Your agency has blocked the merger and acquisition of this institution because of concerns over certain products, the same products
that have actually been encouraged by the FDIC and the State of
Missouri’s Division of Finance.
Your staff has forced this bank through the years to produce document after document, which they have done. And the bank has
made now several offers to remediate, but the Fed has rejected
them. Mid America has spent more than $2 million in legal fees.
And this is a small bank; they really can’t afford to do this. And
this process has to stop. The Federal Reserve, after 5 years, owes
this institution a determination of whether they can get this done.
So my first question is, are you aware of this case?
Mrs. YELLEN. I am aware of this case.
Mr. LUETKEMEYER. Okay. What can be our expectation of the
resolution of this?
Mrs. YELLEN. I am not prepared today to comment in detail on
what is a confidential supervisory matter, but there have been a
set of complicated issues pertaining to consumer—
Mr. LUETKEMEYER. Madam Chair, with all due respect, I understand where you are coming from. The bank on my side is very
open about what their problems are, their concerns are. We have
an elderly individual who has medical problems who wants to divest themselves of this bank. They have a very viable, well-structured, well-financed, well-capitalized bank that wants to take them
over. And basically what is happening here is a very punitive way
of going about punishing this bank for a product that was something that the Fed didn’t like, quite frankly.
And so the 5 years this has gone on is enough, and the opaque
rules and the unwillingness of the Fed to work cooperatively with
the banks and their attorneys and the regulators is not something
we can continue to go and support. And this is why I asked the
question when we started back with the Treasury report. The
Treasury report has, I think, some solutions to some of the problems that regulatorily we have. And that is the punitive nature of
some of the actions taken by some of the agencies, including yours.
And so I think it has to stop. We want to work with you to find
ways to increase the ability of these community banks to be able
to improve their communities and help their economies grow, and
we look forward to that.
And, with that, I yield back. Thank you, Mr. Chairman.
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Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison.
Mr. ELLISON. Good morning, Chair Yellen.
Thank you for being here today. Let me start out by saying I am
really happy about the appointment of Raphael Bostic as president
of the Federal Reserve Bank of Atlanta. He meets the legal mandates, and he has great expertise, and also, he increased the number of African-American bank presidents from none to one, which
I think is important. And so thank you for that.
Mrs. YELLEN. Yes.
Mr. ELLISON. We debate around here a lot of the cause of slower
growth over the last several years. You have already been exposed
to some people’s theories as to why we have slower growth, but I
was intrigued by this book I read recently called, ‘‘Makers and Takers.’’ I don’t know if you are familiar with this particular book, but
it is a book that really talks about the financialization of the economy.
And I guess I would like to just get your take on it. The author
of the book notes that one reason for lower productivity and lower
wages is the outsized profits earned by some in the financial services sector—banking, real estate, insurance, hedge funds, Wall
Street. And, in fact, the author, whose name is Rana Foroohar, and
she has the stat up there on the screen that I would like you to
just take a look at. She says that while the financial sector is a little less than 7 percent of the economy, it provides about 4 percent
of the jobs but earns a whopping 25 percent of corporate profits.
Twenty-five percent of corporate profits is a lot of money. And so,
as a result, you see money flowing into those sectors rather than
plant and equipment and the other sectors of the economy that
might lend themselves to greater employment.
Do you have any take on that? Do you have any impressions
about that particular theory?
Mrs. YELLEN. The financial sector has grown in importance relative to the U.S. economy, but my sense is that if we look at the
plight with respect to wages and jobs of middle-class families who
have seen diminishing opportunities and downward pressure on
their wages, that we have to take account of factors, such as technological change that have eliminated many middle-income jobs,
and globalization that has reinforced the impact of technological
change, and that those things have to be an important piece of understanding what has happened.
Mr. ELLISON. I am sure that technology does play some role, but
we have always had technology, haven’t we? When we went from
horse-drawn carriages to cars, people who made horseshoes had to
find something new to do. So I am always a little skeptical when
I hear people say technology. We have always had technology. We
have also had more employment.
But we have had kind of this slow growth period, and we have
had some people say: Well, it is because people don’t want to supply labor because they are living too good on welfare.
Also, is it possible that the financial services sector is sort of
channeling investment into financial activity and not into agricultural and manufacturing services to actually employ people?
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So I will give you an example. If you look at Sears Department
Store, it is closing about 250 stores this year. That means thousands of Sears and Kmart employees are going to lose their jobs,
and hundreds of communities will lose retail access. Of course, you
could point to technology. I am sure that is part of the explanation,
but can you share some ideas or point to some analysis to explain
why the retail sector is being hit so hard? You could say Amazon,
but I am doubtful that explains the whole problem. Do you have
any specific information on the role that finance might be playing
in part of these decisions? And that investors demand outsized returns that demanded companies like Sears fire workers, sell real
estate so that you can have better returns on financial equities.
Mrs. YELLEN. I don’t have anything specifically for you on that.
I would be happy to take a look. I would point out that, for many
years, many American companies have been sitting on a lot of cash.
Mr. ELLISON. Yes.
Mrs. YELLEN. —and have been unwilling to undertake investment in plant and equipment of the scale that we would ideally
like to see. So I think there are a number of different things going
on.
Mr. ELLISON. Thank you very much.
I yield back my time.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, chairman of our Capital Markets Subcommittee.
Mr. HUIZENGA. Thanks, Chair Yellen. It is good to have you here.
I appreciate the opportunity. And I was not expecting to do this,
but I want to touch briefly on something that Chairman Barr had
talked about, the labor workforce participation. These are U.S. Bureau of Labor Statistics civilian labor force participation rates. This
was a study released by the St. Louis Fed. I am sure you are familiar with it: fred.stlouisfed.org. That was June 17th, and it clearly
shows that what I heard you say is sort of these disappointing levels of labor force participation are unavoidable because of an aging
demographic, and I wish I had the chart that I was able to put up,
but it seems to me what is most concerning is this drop in participation really comes from youngest Americans, and, in fact, that
chart, again released by the Fed of St. Louis, shows the highest
levels we have seen since the 1960s for Americans aged 55 and
older. And it seems to me this argument that our economy hasn’t
responded the way that it has, we talked about this actually the
last time you were here, and I think I labeled it flim-flam, not in
a disrespectful way, but it was clearly not what some of those statistics are showing.
What I want to talk about, though, quickly is that, during your
semiannual testimony before this committee in 2015, you were
asked about concerns regarding the lack of liquidity in certain
fixed-income markets, and you stated that, ‘‘It is not clear what is
happening in these markets and what is causing what.’’ You continued that, ‘‘We don’t see a problem,’’’ but that it was something
that you needed to study further.
So my question is, has there been additional study and followup by the Fed on that particular issue?
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Mrs. YELLEN. That is something that we continue to look at. We
provide this committee with regular reports, particularly pertaining
to corporate bonds. There have been a number of studies inside the
Fed and also outside of it that show no clear pattern, some suggestions that regulations may be negatively impacting liquidity but
other studies reaching different conclusions.
Mr. HUIZENGA. So you don’t believe there are problems in the
fixed-income markets?
Mrs. YELLEN. The inventories of bonds held by some of the largest banks and market makers have declined. On the other hand,
bid-ask spreads are low. Corporate bond issuance has been healthy.
The market has done well.
Mr. HUIZENGA. But isn’t it true we don’t know whether those bidask spreads are really there because there is a lack of transparency?
Mrs. YELLEN. It is hard to draw conclusions purely based on
that.
Mr. HUIZENGA. We are going to actually be exploring this in my
Capital Markets Subcommittee on Friday. We have a hearing on
fixed-income markets really just trying to find out what is going on.
So maybe we can help you with some of that analysis with some
testimony from here, but we need to have that investigative effort
by the Fed on this, as well.
I quickly want to move on. Former Fed Governor Tarullo suggested in a speech that, ‘‘A new regulatory paradigm is needed to
expand fiduciary duties of directors of banking institutions.’’
He posed the question whether existing modes of financial regulation could be further supplemented by modifying, ‘‘the fiduciary
duties of the boards of regulated financial firms to reflect what I
have characterized as regulatory objectives.’’ Specifically, Mr.
Tarullo believed that, ‘‘Special corporate governance measures are
needed as part of an effective prudential regulatory system.’’ And
he argues that traditional fiduciary duties focused on shareholders
are inadequate for banking institutions. So we are not talking
about DOL or any of the other fiduciary side of this. This is for
banking institutions. Do you agree with his recommendations?
Mrs. YELLEN. Those are his personal recommendations.
Mr. HUIZENGA. So, is that a ‘‘no?’’
Mrs. YELLEN. I am not prepared to say that I agree with all of
those recommendations. We are focused on trying to clarify expectations for boards of directors to distinguish what the important
role that they have in the banking organization and what is the job
of senior management versus a board of directors.
Mr. HUIZENGA. That would be a concern that I have here is, what
expertise the Fed has on corporate governance issues like fiduciary
duties of corporate boards, and, frankly, under what legal authority
does the Federal Reserve seek to preempt State corporate governance requirements, as well as a number of things?
I appreciate your answer, and thank you for being here.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Colorado, Mr. Perlmutter, ranking member of our Terrorism and Illicit Finance Subcommittee.
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Mr. PERLMUTTER. Good morning, Madam Chair, and thank you
for being here, and thank you for being a steady hand at the Federal Reserve.
Mrs. YELLEN. Thank you.
Mr. PERLMUTTER. And you must be doing an okay job because I
have listened to my friends, my Republican friends, who generally
have very crisp, sharp, piercing, probing, and accusatory questions.
They don’t have those today because things are going pretty well.
In Colorado, I want to thank you. We were in the real dumps 8
years ago—10 percent unemployment, housing crashing with foreclosures through the roof. In my district, we are at 2.1 percent unemployment; the State, generally, 2.3 percent. And I know that is
not the same for some of the parts of my State a little tougher, and
I know across the Nation, but generally things have been steady,
and I want to thank you and the policies of the Fed for helping us
get out of what was a very bad situation.
Mrs. YELLEN. Thank you for that.
Mr. PERLMUTTER. I have a a couple of questions. First, there is
a guy who has been pretty dogged in telling me that we need to
shrink the Fed’s accommodative policies, and he is in the audience
today. So explain to me—he is right directly behind you a couple
of rows. And he has been very firm over these years in wanting me
to press you on this. So would you explain to me how you plan to
shrink the accommodative policies that we took back in 2008, 2009,
and 2010?
Mrs. YELLEN. The Federal Reserve was dealing for many years
with an economy with very high unemployment and inflation running below our 2 percent objective. We did everything that we possibly could to try to achieve the goals that we have been assigned
by Congress, namely maximum employment and price stability. We
were constrained in our ability to use short-term interest rates as
a tool, and so we used our balance sheet and undertook other
measures to try to stimulate the economy. And I believe we have
been succeeding. While inflation is still running below our 2 percent objective, the labor market, as you pointed out, is much
healthier. The unemployment rate is now even running a little bit
under levels that we regard as sustainable in the longer run. I
think that is entirely appropriate, given that inflation is running
below our objective.
So, as the economy improves and we come closer to achieving our
objectives, we see it as appropriate to begin to gradually remove accommodation and move to a neutral stance. As I have said on
many occasions, the new normal with respect to what level of interest rates is neutral appears to be rather low. So we have raised the
Federal funds rate target. I believe policy remains accommodative,
but given how low estimates of the neutral Federal funds rate are
now, namely levels of the funds rate that would just be consistent
with sustaining the strong labor market over time, we perhaps
have some further moves that we envision making. If the economy
proceeds along the path it is on, we anticipate that neutral may
move up some, although remaining at low levels, and that generates a view that, over time, we may want to increase the funds
rate a bit more, but that all really depends on how things evolve.
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Mr. PERLMUTTER. Let me change the subject really quick. And on
page 12 of the report, there are two words that I have never seen
in any of your reports, and it is ‘‘abysmal performance,’’ and it is
as to productivity developments in the advanced economics. That is
the section. And the combination of technology and advances in
science and everything else coupled with labor, we are seeing something—so it is in the second column: A number of potential explanations have been put forth for the abysmal performance of TFP,
that there is a waning—oh, well, I am out of time. I thank you for
your service. You are doing a heck of a job. Thank you very much.
Mrs. YELLEN. Thank you very much.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, the chairman of our Housing and Insurance—
Mr. DUFFY. Thank you.
Chairman HENSARLING. —Subcommittee.
Mr. DUFFY. Welcome, Madam Chair.
My friends across the aisle seem to be relatively excited about
lower unemployment, an economy that is picking up. Excited that
the stock market and people’s 401(k)’s are improving. And they
want to give you a lot of high fives and back slapping. You get all
the credit. What changes have you made since November 8th to
kick-start this economy and make it grow that you weren’t doing
before November 8th?
Mrs. YELLEN. What changes have we made to kick-start the
economy?
Mr. DUFFY. Yes.
Mrs. YELLEN. We have continued on the course that we have
been on of normalizing the path of monetary policy as the economy
continues to recovery—
Mr. DUFFY. You haven’t changed anything really since November
8th. The real change has been we have a new President in the
White House. I just make that point to my friends across the aisle
to not get too excited on who should get credit for an improving
economy.
But I do want to follow up on what my friend Mr. Huizenga was
asking about, the gentleman from Michigan, in regard to the role
that the Fed is playing in corporate board rooms in our financial
institutions. You acknowledge you do have a role at the Fed in
these board rooms. What role do you have? What are you doing?
Mrs. YELLEN. It is our job to make sure that banking organizations are operating in a safe and sound manner and have policies
in place that ensure both their safe and sound management and
compliance with Federal laws and regulations, and corporate
boards play a critical role in ensuring the performance of financial
institutions.
Mr. DUFFY. Isn’t it fair to say though that virtually anything
could fall under the umbrella of safety and soundness? Who is
hired and who is fired and who is disciplined within a financial institution could fall under safety and soundness, right?
Mrs. YELLEN. I think it is important to—and we are going to try
to do this.
Mr. DUFFY. That could fall under safety and soundness, right?
Mrs. YELLEN. Yes, it could.
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Mr. DUFFY. And how capital flows, who a financial institution
lends to could fall under the auspices of safety and soundness,
right?
Mrs. YELLEN. Yes, it could.
Mr. DUFFY. In essence, the Fed, under the auspices of safety and
soundness, could replace the board of directors who have a fiduciary duty to shareholders and actually take over boards all under
the premise of safety and soundness.
Mrs. YELLEN. We believe the corporate boards play critical roles
in ensuring—
Mr. DUFFY. A critical role, okay. What falls outside the scope of
safety and soundness in a financial institution? Exactly.
Mrs. YELLEN. Probably anything that you mentioned would have
some.
Mr. DUFFY. You can’t give me an answer because everything falls
under that scope, and that is a concern.
The Fed doesn’t have a fiduciary duty to shareholders, and actually board members have potential civil and criminal liability in
their service on a board. Does the Fed have any civil or criminal
liability should things go wrong on a corporate board? Board members are liable, how about the Fed?
Mrs. YELLEN. We have supervisory responsibilities.
Mr. DUFFY. No, you do, but are those Fed members who are sitting in on board meetings potentially criminally or civilly liable for
the decisions they push a board to make?
Mrs. YELLEN. Not to the best of my knowledge.
Mr. DUFFY. Mine either. That is concerning for us, and I am
pushing you on this because you do have a supervisory role, and
I want you to do a good job, but from the feedback that we get, the
involvement that the Fed has in our corporate boardrooms has far
surpassed I think the vision that any of us had in this room. And
it concerns us.
Mrs. YELLEN. Let me say that we have talked to many corporate
board members and understand that there has been an accumulation of a large number of items. We have indicated that board
members along with senior management should be responsible
for—
Mr. DUFFY. I don’t believe you have the authority, Madam Chair.
Mrs. YELLEN. —and believe we should clarify—
Mr. DUFFY. I don’t think you have the authority to make hiring
and firing decisions, and that is the feedback that we have had
from members.
My time has almost expired. If I could ask you one last question,
do you anticipate that this will be your last time testifying before
this committee?
Mrs. YELLEN. My term expires in February, and so—
Mr. DUFFY. That is a roundabout way of asking you—
Mrs. YELLEN. It may well be.
Mr. DUFFY. —are you seeking another term?
Mrs. YELLEN. I have not said anything about that. I intend to
serve out my term and not—
Mr. DUFFY. I know we push you hard. I want to thank you for
your service.
And I yield back. My time has expired.
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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, and, Chair Yellen, for
your service.
In the past I have sent letters to you and other Federal regulators and asked you in hearings before about the requirement that
custody banks hold supplementary leverage ratio against deposits
and at the Federal Reserve presumably because of worries that, in
some future universe, the Fed deposits may become less safe and
available than cash, which is a universe I don’t enjoy contemplating.
I believe that the Federal Reserve deposits are exactly the sort
of safe place for these large immediately callable cash positions
that we should actually be encouraging because of the strength and
reliability of the Federal Reserve as a counterparty.
Now, as you may be aware, we now have bipartisan legislation
to require that prudential regulators provide relief for institutions
that place cash with the Fed at the same time as providing significant flexibility for the regulators to deal with unusual circumstances.
So do you see any safety and soundness difficulties if this legislation were to go forward?
Mrs. YELLEN. I am not going to comment on the legislation, but
we are looking at the supplementary leverage ratio because of the
impacts that you mention. A leverage ratio was meant to be a
backup, a backup supervisory device calibrated appropriately relative to risk-based capital requirements. And while, in general, I
think risk-based capital requirements, especially for the largest
and most systemic institutions, are at levels that I think are appropriate and I am comfortable with, it may be that the supplementary leverage ratio needs to be recalibrated relative to that,
and I am very much aware of the problems you are mentioning,
and we are considering how to address them.
Mr. FOSTER. Thank you.
And I would like to use a little of my time to just comment briefly in defense of my home State of Illinois in response to some of
the remarks from my colleague from New Mexico. Every year, the
citizens of Illinois write a check for approximately $40 billion to
States largely in the Sun Belt and rural areas because, for every
dollar of tax money, Illinois receives back only 75 cents of Federal
spending.
In contrast, New Mexico receives $2.40 back for every dollar of
tax money.
And so this check that we write for $40 billion a year, had it
been put into a rainy day fund instead of redistributed to other
States in the Union, would have resulted in a balance in that rainy
day fund in excess of $1.5 trillion today.
And so that I think that, when people discuss the fiscal problems
of Illinois, the starting point should be there.
Now, I would like as my—finally, I would like to—I co-Chair a
Future of Work Task Force for the New Democrat Coalition, and
we are looking at the effects of technological and other changes
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that might occur in our workforce in the coming years and what
policies we should adopt to remediate the bad side of those effects.
There is a lot of discussion now about why inflation is not increasing as you would have guessed in the past, particularly wage
inflation. In the past, when the gap, the gap closed up in the job
market, that very rapidly employers would start bidding up wages.
That doesn’t appear to be happening the way it used to, and one
of the explanations that is suggested for that is that employers
have the opportunity, instead of just bidding up wages, to simply
invest in technology that replaces jobs.
I was wondering if you think there is a reasonable chance that
you are going to have to change your macroeconomic models to reflect the loosening of the link between the closeness of the—the
tightness in the job market and the increase in wages.
Mrs. YELLEN. We are seeing attenuated links, I think, between
the labor market and wages, but even to a greater extent prices
and inflation. The relationship between those two things has become more attenuated than we have been accustomed to historically and—
Mr. FOSTER. In general, when the robots show up, they show up
as low prices. If you ask the average farmer what forced them to
consolidate, they don’t say it is the machines; they say it is low
grain prices. And that goes on in many ways. Retailers are struggling with price competition from Amazon. They don’t often name,
well, we are not as efficient as the robots in Amazon distribution
centers and so on. And so I think that really we have to look at
this in a macroeconomic sense because its effects will not be small,
and I encourage you to think about that.
Mrs. YELLEN. Thank you.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Missouri, Mrs.
Wagner, chairwoman of our Oversight and Investigations Subcommittee.
Mrs. WAGNER. Thank you, Mr. Chairman.
And Chair Yellen, our committee has been concerned for some
time about confidential FOMC information being shared with favored constituents. In March, Vice Chair Fischer delivered the keynote for a Brookings Institution dinner and reportedly delivered remarks and took questions on interest rate policy. I say ‘‘reportedly’’
because the dinner was closed to the public and the press but open
to Wall Street and other financial interests.
In addition, Vice Chair Fischer’s prepared comments have not
been made available, and the fact the speech took place, frankly,
at all was not widely known. This keynote flies in the face of the
FOMC’s policy on external communications of Committee participants, which states that, and I am going to read this right out of
the policy, ‘‘Committee participants will strive to ensure that their
contacts with members of the public do not provide any profit-making person or organization with the prestige advantage over its
competitors. They will consider this principle carefully and rigorously in scheduling meetings with anyone who might benefit financially from apparently exclusive contacts with Federal Reserve officials and in considering invitations to speak at meetings that are
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sponsored by profit-making organizations or that are closed to the
public and the media.’’
Chair Yellen, we all want transparency and accountability for
our monetary policy so that it remains insulated from political and
profit-making interests. The Vice Chair’s speech does not help with
that at all and in fact, flagrantly flies in the face of policy.
The speech occurred just days before another Fed official, Jeffrey
Lacker, abruptly resigned as Richmond Fed President after admitting to playing a role in the 2012 FOMC leak, where market-sensitive details of the central bank’s internal deliberations were
leaked to a private consultant that then shared the details with clients who stood to net millions in profits by trading ahead of the
release of the news. However, the true leaker still remains at large
apparently as former President Lacker appears to have only incidentally confirmed insider information that Medley had already received. This is something that I, certainly as Chair of the Oversight
and Investigations Subcommittee, will continue to look into. Chair
Yellen, how could this speech have been allowed to happen, given
everything that had occurred with the 2012 FOMC leak?
Mrs. YELLEN. Okay. So let me start by saying that the very beginning of our policy on FOMC external communications states the
two-way communications between members of the Committee and
members of the public are very important both to communicate
with the public and also to gain information, and that these will
occur in a variety of ways, including in some closed-door meetings.
So there is no requirement that FOMC members cannot meet in
closed-door sessions. The Brookings Institution is not a for-profit
institution. It is a nonprofit. And we have a clear set of guidelines
governing what can and cannot happen in such—
Mrs. WAGNER. Will the remarks be released to the public?
Mrs. YELLEN. The clear rules are that no FOMC confidential information can be divulged ever, including in a closed-door setting,
and that FOMC officials may not discuss even their own views on
policy, except to the extent that they have already been presented
in a public forum.
Mrs. WAGNER. So Wall Street—
Mrs. YELLEN. The Vice Chair’s remarks did not pertain to monetary policy. They pertained to financial—
Mrs. WAGNER. Reclaiming my time, Chair Yellen, the difficulty
with this is that we don’t know that. And in the interest of transparency and accountability, perhaps it would be good to show the
light of day on whatever his remarks were to Wall Street bankers
that were invited to a speech at the Brookings Institution. And I
have to say, Madam Chair, it is very clear that these should not
be closed to the public or the media. So I am very concerned about
this going forward, and I am also concerned about the resolution
with the Board due to the internal governance that happened on
the FOMC leak. So I would like to submit that in writing and get
your information on that.
Thank you, Mr. Chairman. I am sorry to have gone over my
time.
Mrs. YELLEN. I want to say that we have cooperated fully with
our inspector general and law enforcement agencies, that they have
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had access to all information that is relevant to this matter and
that they announced simultaneously with President Lacker.
Mrs. WAGNER. The Board must improve the standards and keep
to its standard, Madam Chair. Thank you.
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, ranking member of our Financial Institutions Subcommittee.
Mr. CLAY. Thank you, Mr. Chairman.
Thank you, Chair Yellen, for being here.
Perhaps we should replace some of the fantasy that we have
heard today on the other side with the reality. I hear my colleagues
over there say that, within 6 months of this new Administration,
we have improved the economy, we have improved employment opportunities for Americans. I guess they are pointing to the Carrier
deal in Indiana where they were promised over 1,000 jobs to stay
in this country, and about 750, we hear, are moving to Mexico. But
we will give the President credit for that deal.
And really I know that the reason why the economy has turned
around is the sustained job growth of the previous Administration
over more than 6 years.
So here’s my question to you, Chair Yellen: In May, the overall
unemployment rate of 4.3 percent hit a 16-year low. Although the
unemployment rate rose one-tenth of a percent in June, this reflected the positive news that more workers who had dropped out
of the labor force have returned to look for work. With the overall
rate of employment now down at historically low levels, would you
say that the economy has reached full employment, or do you believe that this headline rate masked weaknesses is in the labor
market where additional progress must be made?
Mrs. YELLEN. Not all groups in the labor market are faring
equally well, and we remain concerned about, particularly for African Americans and Hispanics, weaker job market outcomes, but
monetary policy is a blunt tool.
As you point out, the unemployment rate and overall state of the
labor market is strong with many job openings and opportunities
for workers. The unemployment rate has even fallen slightly below
levels that my colleagues would regard as sustainable in the longer
run. We have seen a steady rate for several years now, a constant
rate more or less of labor force participation, which, with an aging
population tending to push it down, suggests that groups that have
been sidelined are finding opportunities and entering the labor
force and gaining employment. So that is a strong performance.
And this has now been going on, as you said, for a number of years
and has continued—is continued this year.
Mr. CLAY. And thank you for that response because progress
doesn’t happen in 6 months, especially when you have to recover
from a devastating recession. And so for the other side to give credit to someone who is not even focused on our economy is ridiculous.
One more question: What in your view have been the key drivers
of the job gains since your last testimony before this committee 6
months ago? Have job gains been driven by longer term trends
from a growing economy, or have they largely resulted from new
policies adopted in recent months?
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Mrs. YELLEN. The global economy has recovered. It was a source
of weakness earlier. That has been a source of support. And we
have had ongoing job gains and increases in, for example, housing
prices that are boosting the wealth and consumer sentiment of
Americans, and that is driving consumption spending that is strong
enough to create ongoing job gains that exceed what is needed for
an expanding labor force. So the job market continues to strengthen, and unemployment continues to move down.
Mr. CLAY. And thank you for that response. I hope this is not
your last visit to this committee, but I am sure it won’t be the last
time we visit.
Thank you, and I yield back.
Chairman HENSARLING. The gentleman yields back.
The Chair now recognizes the gentleman from Mr. Florida, Mr.
Posey.
Mr. POSEY. Thank you, Mr. Chairman.
I hate to get into the cat fight or dog fight of who shot John and
whose policies are doing what, and I heard the remark that the
economic analysis cannot show any significant short-term results
or something to that effect, and I would just like to remind the
other side that I saw dramatic overnight change in the stock market from the election to the inauguration. And I think we will go
on.
Chair Yellen, it’s good to see you again. Since I arrived in Congress, the most cosponsored bipartisan significant piece of legislation has been Dr. Paul’s original legislation to audit the Fed. We
passed it. But it goes nowhere at the other end of the building. Are
you afraid of getting that passed?
Mrs. YELLEN. I am strongly opposed to audit the Fed. What
audit? The Fed is audited in every way that normal Americans
would regard an audit. Our financial accounts and holdings are—
Mr. POSEY. It is not audited like all other agencies. You are
aware, as well as I am, of the list of exemptions to the Fed.
Mrs. YELLEN. Audit the Fed removes exactly one exemption that
the Federal Reserve enjoys, which is real-time policy reviews by the
GAO of our monetary policy decisions, and that is the essence of
Federal Reserve independence and trying to keep politics out of decisions that should be technical, professional, and nonpartisan.
Mr. POSEY. I would agree if I thought there was a lot of truth
to that statement, but auditing something after the fact has nothing to do with influencing the decision, I wouldn’t think. I would
consider it a matter—an important matter, actually, of transparency, and I, for the life of me, cannot understand what the Fed
fears.
Can you give me an example that would justify the lack of transparency?
Mrs. YELLEN. We don’t have a lack of transparency.
Mr. POSEY. You do if you can’t audit it. It is a lack of transparency. To most people I know, it is lack of transparency. To some
people, it may not be, but I don’t understand that. That is the reason I am questioning you about it.
Mrs. YELLEN. I regard the Federal Reserve as one of the most
transparent central banks in the world.
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Mr. POSEY. That is a statement. What do you fear about the
audit? Give me a real-time example.
Mrs. YELLEN. I think the FOMC needs a space in which it can
have honest conversations and deliberate in real time about the decisions that we make without having political influence brought to
bear and second-guessing decisions that we have made and opining
on them possibly with the idea of revisiting them.
Mr. POSEY. We can discuss things in public that are sensitive,
talk about national security. The Supreme Court does the same
thing. They don’t worry about the transparency influencing them.
Just give me an example. Give me an example of how transparency
could hurt the Fed? Just give me one example how it could hurt
the Fed being transparent.
Mrs. YELLEN. Because what you are talking about with the GAO
are policy reviews—
Mr. POSEY. No, give me an example, not a general swipe of review. Just say: Take for example this. If somebody said this, it
would be horrible; it would be the end of the world for the Fed.
Give me an example like that.
Mrs. YELLEN. I would envision a situation where the GAO at the
request of Members of Congress might come in and say, at our
meeting a week ago, they have taken the transcripts and reviewed
what we said; they believe that the decision we made was the
wrong one at that particular meeting. And I would say that is an
extreme interference and politicization of our ability to make independent monetary policy decisions.
Mr. POSEY. So you are telling me we shouldn’t be transparent for
the fear of being second-guessed or somebody criticizing you because they thought you were wrong. Do I get it?
Mrs. YELLEN. What we are talking about is political interference
in decision-making by the Committee.
Mr. POSEY. I don’t see that. If it is after the fact, I don’t see the
interference in decision-making.
Mrs. YELLEN. Well, I do, so I—
Mr. POSEY. Give me an example.
Mrs. YELLEN. I gave you an example.
Mr. POSEY. Give me one example why they shouldn’t have that
transparency.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. SCOTT. Thank you very much, Mr. Chairman.
Chair Yellen, welcome. It’s good to have you here again. Chair
Yellen, I, first of all, want to thank you and the Federal Reserve.
Under the leadership of our ranking member, Ms. Waters, and the
ranking member of Judiciary, John Conyers, and myself and others, we were hopeful that, for the first time in history, American
history, that the Federal Reserve would appoint and hire the very
first African American ever to hold the position as a regional president of the Fed, and you all did that. And we want to say thank
you so much. We deeply appreciate that. That means a lot, not just
to the African-American community, but to all Americans. That is
what this great country is about.
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Now let me go to one other thing. Chair Yellen, you and I have
had ongoings about, of course, the high unemployment rate of African Americans, and I always remember fondly when you referred
to that as a blunt instrument. As I said, that is what M said to
James Bond to describe him. In other words, he couldn’t go through
it. So you said that Congress had to come up with some legislation.
We did that, House Resolutions 51 and 52, of which we sent a copy
to you, which would tie the staggering unemployment rate of African-American young men in the inner city to apprenticeship training programs attached to rebuilding the crumbling infrastructure.
That has been introduced, and, of course, each 5 years, we have to
by law fund the 1890s, African-American colleges. So we put $95
million in the appropriations hopefully that we will be able to
spread over for 5 years at $5 million for each of these universities
over that period.
Now I have read your past reports that you have given and you
have talked about housing. And we would like to move to that next,
and in your past three reports, you made a point to dedicate full
sections of the report to specific topics related to the disparity that
the Federal Reserve is seeing in the data for the African-American
community. So I want to call your attention specifically to those
sections from the three most recent reports to Congress. The titles
of these—and you referred to them as boxes, if you recall, boxes.
That is what the Fed calls them. And one box was, have the gains
of the economic expansion been widely shared? Box No. 3, homeownership by race, ethnicity. And box No. 3, does education determine who climbs the economic ladder? And in that discussion of
those problems you highlighted—included socioeconomic differences
between Whites and Blacks, poor credit scores due to income disparities, and continued discrimination. That lays it bare.
So, Chair Yellen, let me just ask you, of all of these factors in
your boxes, which of these factors is most pressing and what recommendations on substantive solutions can we in Congress work
on to help address the homeownership problem hurting African
Americans, much as you suggested that we develop this legislation
that is moving forward on the unemployment of African Americans?
Mrs. YELLEN. I don’t want to try to give you detailed suggestions
for what legislation you can put forward. Our job is to try to do the
best we can to provide information and background that will be
helpful to you as you decide what is appropriate. And I do believe
this is squarely in the domain of Congress and the President, and
we are trying to provide useful information.
Mr. SCOTT. Absolutely. And we will pursue that. I commend you
for bringing that up, and I would love for you to stay on in your
position as Chair of the Fed.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes—
Mr. SCOTT. If I have a chance to speak to Mr. Trump, I will mention that.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
MacArthur.
Mr. MACARTHUR. Thank you. Chair Yellen, welcome.
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I want to thank you for your service to our country, and I appreciate you being here today. Your testimony has been helpful to me.
I had two areas I wanted to explore. One is nonbank SIFIs. My
State, New Jersey, in 2014 authorized by legislation our Department of Banking and Insurance to do group supervision of insurers
that were involved in the international marketplace. And I know
that FSOC, under Dodd-Frank, when it reevaluates SIFI designations annually is required to consult with State regulators, and I
wanted to get a sense from you of whether—how you would view
now a State insurance department doing regulatory work of a
group insurer, does that impact, in your view, how FSOC might
look at the SIFI designation of an insurer?
Mrs. YELLEN. This is a matter for FSOC to decide. We have met
with State regulators in New Jersey, and I am aware of this development, which is a heartening one. I would say that the FSOC’s
focus in designation is the systemic risk that the failure of a given
entity could pose to the broader financial system. To the best of my
knowledge, most State regulators focus in supervision on protection
of policyholders, which is, of course, a very important objective, but
not on the systemic risk that the activities of a company could pose
to the broader financial system. And so, in considering this matter,
FSOC would, I think, have to take account of what the focus of
that holding company supervision would be.
Mr. MACARTHUR. I appreciate that, although I would add as just
somebody who spent a lifetime in insurance, I think State regulation has proven to be, when you regulate individual companies
within a group, you create a safer company, and I think our system
is better than the European system, which focuses on the group,
not the company. But that is another matter.
The other area I wanted to explore with you was the labor participation rate. You have mentioned it twice today, and each time,
you have said that our aging population is pushing it down. And
I guess, on the one hand, that makes a certain amount of intuitive
sense. We have a Baby Boomer bubble working its way through,
but I did want to ask you about a few particulars with that. Do
you use—does the Fed use the Bureau of Labor Statistics’ data on
labor participation?
Mrs. YELLEN. I believe that is the core data we have on—
Mr. MACARTHUR. That is the core data. So I have the Bureau of
Labor Statistics’ employment data on my iPad. I am looking at it.
Unfortunately, I didn’t do it ahead of time, so I can’t put it on the
screen. But when I look at the actual data, all people over 16 years
old—so basically everyone who is of working age—that has gone—
labor participation rate has gone from 66.6 percent in 1994 to 62.9
percent in 2014. So it is a 3.7 percentage point decline in labor participation. And you have suggested that is because people are getting older, and they are dropping out of the workforce. But that is
not what this chart says. What it says is that 65 and older has actually increased from 12.4 percent in 1994 to 18.6 percent. That is
a 6.2-percent increase in that 20-year period—let me just finish the
question—for that group, and then for 55 and older, which is
broader and includes those of normal retirement age, that number
has gone up by 10 percentage points. The one that has gone down,
the group that has gone down is the 25- to 50-year-old. They have
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declined from 83.4 percent participation to 80.9 percent participation. That group, the 25- to 54-year-old group peak earning years
has declined by 2.5 percent; 2.5 percent times 324 million population is 8.1 million unemployed people in peak earning years. It
doesn’t seem to square with your assertion earlier twice.
Mrs. YELLEN. So, very quickly, it is true that people in the retirement years 65 and older are working more now than they used to,
but the level of labor force participation of that group is dramatically lower than of prime age workers, and an increasing share of
the population is now moving into those years with low labor force
participation. So there is no conflict between the number that you
cited and my statement that an aging labor force—
Mr. MACARTHUR. My time has expired.
Mrs. YELLEN. It is also true—
Chairman HENSARLING. The time of the gentleman has expired.
Mrs. YELLEN. —that participation of prime age workers has declined.
Chairman HENSARLING. The Chair now recognizes the gentleman
from California, Mr. Sherman.
Mr. SHERMAN. Thank you, Madam Chair, for coming here.
Every few months I remind you that you have not yet used your
authority to break up the too-big-to-fail institutions. And I will
spend the next minute reminding you. They are too-big-to-fail. If
the entity, just one entity, goes down, it could take our whole economy down with them. They are too-big-to-compete-against because
economic studies say that they—that investors and the markets assume that they will be bailed out. They have seen that Congress
will pass new legislation to bail out if that is thought necessary to
save the economy, and that, therefore, they are able to get a cost
of funds that may be as much as 80 basis points less than they
would otherwise. They are too-big-to-jail, as former attorney generals have said they wouldn’t criminally prosecute because it might
take down the whole economy. If the same thing was done by a medium-sized bank, no economic problem, go ahead and prosecute.
And then, with the Wells Fargo debacle, we have a difference between Republicans and Democrats. Democrats tend to blame the
management of Wells Fargo and say that that proves they were too
big to manage, and Republicans tend to blame you, the regulators,
which just proves that they were too-big-to-regulate. So too-big-tofail, too-big-to-compete-against, too-big-to-jail, too-big-to-manage,
too-big-to-regulate. When a protozoa gets too big, it is able to split
into two healthy cells, and I would think that the geniuses on Wall
Street would have at least the same level of intelligence as the average one-celled aquatic animal.
Every time you come here, you are attacked by those who criticize the low interest rates that we have had in our economy. Now
with low interest rates, you get more economic growth, but you
might also get more inflation.
Over the last 5 years, has rampant inflation been a disastrous
difficulty for the American economy?
Mrs. YELLEN. Inflation has been running under our 2 percent objective for the last 5 years and continues to do so.
Mr. SHERMAN. And I won’t even ask you this question, because
it is so obvious. Has economic growth been too robust? Go ahead.
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Mrs. YELLEN. It has not been particularly robust, but it has been
sufficiently robust to create a lot of jobs and drive down the unemployment rate.
Mr. SHERMAN. But every day, every time you come here, you are
told that the interest rates are too low, but you are also criticized
because the economic growth has not been robust enough.
Now, behind you, at the request of the Majority, is the National
Debt Clock. The Majority always comes and tells you that you
should shrink your balance sheet, that you should sell off your assets. Of course, you in effect are lending money for longer terms
and borrowing money for shorter terms or just printing it, one way
or the other, and you create a tremendous profit for the Federal
Government by having a big balance sheet. So people want you to
have a small balance sheet when your big balance sheet is creating
a lot of profits for the Federal Government.
Have any of the advocates for a smaller balance sheet proposed
to you the taxes they want to increase in order to replace the profits that you are earning on the balance sheet that they are telling
you to shrink?
Mrs. YELLEN. It is certainly true that our large balance sheet has
resulted in very substantial transfers to the Treasury and to the
Federal budget. Let me say our objective is not to make a profit
and to maximize those transfers, but rather to do what is right in
the pursuit of our objectives, but it is true.
Mr. SHERMAN. I would say that the millions of Americans who
want us to run the Federal Government more like a business would
say that perhaps profit should be thought of as an important objective. And I will take your answer as that you have not heard any
proponent of a smaller balance sheet put forward a tax increase
proposal designed to replace those revenues or to keep that clock
behind you from turning more quickly.
Finally, we want businesses to do things that require longer-term
capital. You tend to focus on short-term interest rates. What has
your big balance sheet done to decrease the gap between short- and
long-term interest rates, the yield curve?
Mrs. YELLEN. We purchase those assets to drive down long-term
interest rates relative to short or to flatten the yield curve and
lower longer-term borrowing rates.
Mr. SHERMAN. And so the proposals are to make it more difficult
to borrow money long term.
Mrs. YELLEN. That is correct.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Tennessee, Mr.
Kustoff.
Mr. KUSTOFF. Thank you, Mr. Chairman.
Thank you, Madam Chair, for appearing this morning.
In the next hour or so when this hearing ends, if you were to receive a call from the President telling you that he intended to
nominate you for another term, would you accept?
Mrs. YELLEN. It is something that hasn’t been an issue so far.
It has not been something that has come up. But it is certainly
something that I would discuss with the President, obviously.
Mr. KUSTOFF. Thank you.
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And yesterday, when I asked you about comments that Jamie
Dimon made as it relates to assets coming off your books, you have
stated here today and you have stated in previous reports that the
Fed does intend to reduce its asset, the balance sheet, assets off the
balance sheet.
I would like to ask you first, before I ask you about Mr. Dimon,
if you could address the timing of when those assets will come off
the books, the amounts, and procedurally, how that will be done?
Mrs. YELLEN. Yes. We have tried to set out a relatively complete
plan. Our assets currently total close to $4.5 trillion, consisting of
roughly $2.5 trillion of Treasuries and $1.7 trillion of mortgagebacked securities.
We have said that we intend to shrink our balance sheet and
particularly the outstanding quantity of reserves in the banking
system, which are now around $2.2 trillion, in a gradual and predictable way. And we have said that what we intend to do is, once
we begin this, as we receive principal payments on Treasuries and
the agency securities and our portfolio, currently, we are reinvesting all of those principal payments, we will begin to diminish
our reinvestments and only reinvest to the extent that our monthly
receipt of principal exceeds a cap.
The cap will initially start at low levels, $6 billion a month for
Treasuries and $4 billion a month for mortgage-backed securities,
and over the space of a year will ramp up to $20 billion for mortgage-backed securities and $30 billion for Treasuries. So after a
year of this process running, the caps will remain in place but bind
only infrequently when there are unusually large redemptions of
principal that take place.
And we have not decided yet on what our longer-run monetary
policy framework will be and what quantity of reserves that will
entail our supplying to the banking system. We expect it to be substantially larger than pre-crisis but substantially less than we have
now. And I would say this process will play out probably to around
2022 when our balance sheet would probably somewhere in that
range shrink to normal levels.
Now, since the crisis, currency has more than doubled in quantity from about $700 billion to $1.5 trillion now. So our balance
sheet will end up substantially larger than it was before the crisis
but appreciably lower than it is now. And then over time when this
process is complete, if currency and circulation continues to grow,
our balance sheet would likely grow in line with the overall economy.
Mr. KUSTOFF. I think you probably saw the comments yesterday
from Jamie Dimon, chairman of JPMorgan Chase, about his concerns about assets being moved off the balance sheet. Do you share
those concerns?
Mrs. YELLEN. We have tried to be very methodical about informing the public and the markets about how we are going to do this.
We have provided essentially complete information. We have not
heard significant concerns or seen a significant market reaction.
So we have indicated we expect to begin this if the economy stays
on track this year. I expect and certainly hope that this will go
smoothly and it will be a gradual and orderly process, one that we
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will not be revisiting on a regular basis. It is something that we
will run. It will be understood and play out over time.
So, obviously, we will watch what the market impacts of this are
when we put it into effect, but I expect this to play out smoothly.
It is certainly my hope and expectation.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr. Kildee, the vice ranking member of the committee.
Mr. KILDEE. Thank you, Mr. Chairman.
And thank you, Chair Yellen. It is good to see you. Glad to have
you back.
As you may recall, and I am sure some committee members will
recall from previous discussions, I sort of consistently raise this
issue of older industrial cities, the condition of older communities,
a subset of American cities that are continuing to struggle.
In fact, I am launching an effort actually beginning today with
a discussion at 2:00, entitled, ‘‘The Future of America’s Cities and
Towns,’’ specifically to raise more attention around this question.
And we have talked in the past about the role that regional
banks might play in working with these particular cities that face
both economic challenges, but specifically the cities that face fiscal
stress.
The thing that I am concerned about is that when we look at aggregate data, even with relatively slow growth in the economy, the
assumption is that even a slowly rising tide raises all boats. Well,
it does not, and we know that.
And so the question I have that I would like you to comment on
is what policies might the Fed engage in? And to the extent that
your mandate regarding employment is also affected by policy that
we make, what are the sorts of initiatives that you think should
be engaged, both by the Fed and by Congress, to help deal with
this real disparity which continues to grow?
And I will just underscore this point by saying, there is a whole
set of American cities that are really struggling, both in terms of
the growing unemployment, increased poverty, lack of opportunity,
low educational attainment, aging infrastructure, fiscal stress in
these cities where we are going to see bankruptcies, or at least insolvency. If the States won’t allow those communities to go into
bankruptcy, they are still insolvent.
These are communities that have high concentrations of minority
populations, and you note in your testimony the disparity that
those particular communities face. And this is not some sort of accident where just by bad luck a bunch of communities are struggling. It is a result of policy.
And I wonder if you just might comment on what you think the
Fed can do and what Congress can do to help achieve not only
growth in terms of employment and wages, but greater equity in
terms of how those areas of growth might be shared.
Mrs. YELLEN. So the Federal Reserve, and particularly the Reserve Banks around the country, play an important role in doing
research on community development and try to understand and
publicize what kinds of strategies seem to work. Of course, we play
a role in the Community Reinvestment Act, which financial institu-
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tions are looking to ways—for effective ways of promoting development.
A number of Reserve Banks have looked specifically at older industrial cities and tried to study, and we have volumes that have
been published on this. The Boston Fed in particular has been very
active in trying to understand what strategies have been effective
in older industrial cities in regenerating activity in dealing with
these problems.
And of course they are complex, but there are workforce development programs and collaborations between governments, local governments, State governments, nonprofits, businesses, that have
been singled out as ones that appear to be promising. But of course
these are very difficult issues, and Congress and policymakers as
well as the Fed may have a role. Ours is mainly research and trying to disseminate findings that we have.
Mr. KILDEE. I appreciate that. And I have in my past work
worked with the Philadelphia Fed, and Cleveland, on these issues.
I wonder if you might just in the final 2 seconds that we have
comment on policy that Congress might enact, basically around
budgetary policies that we have in place. I am really concerned
that is an area where we may undermine not only your mandate
but also our own work, in the 1 second remaining.
Mrs. YELLEN. I am not going to give you detailed advice on fiscal
policy. I think focusing on policies that promote productivity
growth and stronger economic growth should be near the top of
your list.
Mr. KILDEE. Thank you, and I appreciate you coming back again.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Tenney.
Ms. TENNEY. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being here today, and also for
your service to our country.
I want to touch on exactly the same issues that my colleague just
touched on, and it sounds like our districts are very similar. I come
from upstate New York, a very highly agricultural area, but a place
that has seen better days in terms of our economy. We once had
many, many community banks. And I might quote a very interesting comment that was made by President Trump in his inaugural address in describing our manufacturing landscape. And he
described it as, ‘‘rusted-out factories scattered like tombstones
across the landscape.’’
And you can look at our community banks much the same way.
You can go to just about any corner in any suburban or small city
area in my district and find community banks closed and overgrown with grass and not operating and empty where they once
were providing great resource to our community, our small-business community.
Fifty percent of the small-business loans are made by community
banks, 77 percent of agricultural loans are made by small community banks and credit unions in our community, and agriculture is
still the number one industry in New York State, believe it or not.
And what I see, and very similar, I think this mirrors what has
been going on in the business community as well as the banking
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community, as you provided in your prior comments to my predecessor speaker, that you think that a lot of government programs
can help this and taxpayer money may be spent for work revitalization, but I am suggesting possibly the free market, since in New
York State we spend 4 times more using taxpayer money in socalled ‘‘cronyism’’ on producing jobs and have the worst job production record in the Nation, the highest out-migration of jobs and the
highest out-migration of people because of our regulatory burden.
And I thank you for indicating earlier that you do think that
there are some ways that we can reduce regulations on some of
these banks, especially the smaller ones who can’t compete because
of their compliance requirements. We now have the growing cybersecurity issue, where that is becoming very costly and burdensome.
Obviously, lending to mortgages and to personal loans are very difficult.
You indicated earlier that you would support the Treasury’s release that certain regulatory relief is in order. Could you tell me
a couple of those recommendations that you would support in reducing regulations to help our small community banks and credit
unions?
Mrs. YELLEN. I am very supportive of trying to reduce the burdens on community banks. We have suggested that there are
things that Congress could do to help reduce burdens, for example,
Volcker Rule and incentive compensation.
Ms. TENNEY. Are you saying you would eliminate the Volcker
Rule for small community banks?
Mrs. YELLEN. I wouldn’t apply it to community banks.
Ms. TENNEY. And where would you make that cutoff? Would it
be something you would be interested in using overall eliminating
the Volcker Rule or just—where would you make that arbitrary decision on what makes a small bank?
Mrs. YELLEN. We could discuss that. I don’t have—
Ms. TENNEY. So you don’t have an idea in mind where we could
actually do that? I would love to know. Honestly, I am asking
your—
Mrs. YELLEN. I would prefer to get back to you with a suggestion
on that.
Ms. TENNEY. Okay. So we don’t have a specific cutoff?
Mrs. YELLEN. But I think there is a lot that the banking regulators can do on their own. We have finished an EGRPRA review.
The banking regulators are committed to addressing concerns of
community banks about the complexity of capital regulations to
come out with a simplified capital regime. We have recently cut reporting requirements for community banks. We are trying to extend exam cycles and to tailor the work that we do so more of it
is done offsite in ways that are less burdensome to community
banks and to risk focus our supervision so that we are focusing in
our exams on the areas that are really of greatest risk. So we have
a long list of suggestions coming out of the EGRPRA review that
we will be working on.
Ms. TENNEY. Could you tell me what—so you indicated that
there were some—earlier, you testified that these are some of the
ones that you would support. Which ones wouldn’t you support that
are recommended by Treasury, as you indicated?
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Mrs. YELLEN. I don’t have that list before me. Let me say in general that is an area of the report that we are quite supportive of.
Ms. TENNEY. But definitely the Volcker Rule, at some point you
would like to eliminate that especially regarding community
banks?
Mrs. YELLEN. Yes.
Ms. TENNEY. Can you give me an estimate about where the capitalization requirement would be eliminated?
Mrs. YELLEN. What we would try to do is simplify requirements
for things like commercial real estate, high volatility commercial
real estate that banks have—community banks have found very
complex or tax-deferred assets or whether capital instruments that
have resulted in complexity.
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty.
Mrs. BEATTY. Thank you, Mr. Chairman and Ranking Member
Waters.
And thank you, Chair Yellen. Let me just first take a point of
privilege to thank you for all of your work and tell you what an
honor it is for me to have been in Congress at the time that I could
sit here and ask questions of you.
And secondly, you will hear throughout all of our hearings colleagues oftentimes referencing that letters were written and 30
days have gone by, or months, or they did not receive an answer.
I want, Mr. Chairman and Ranking Member Waters, to state for
the record that every single letter I addressed to you, I got a response. And not only did I get a response, I got a note or something
attached with it from a staff person, and one I believe was actually
your thanks.
So I think it is important because so often we criticize those. And
I support colleagues on either side when someone does not respond
to us. So I wanted to say thank you.
I am going to be consistent, but I am going to use some words
I had not intended to use, but after my colleague from New York,
Congresswoman Tenney, used the words, ‘‘finding common ground.’’
I want to thank her for that, and I am going to start with common
ground.
I think it is important when you represent a subset or you have
a background, which we hear from real estate to small business to
legal to housing or bankers, that you should use that expertise.
Well, what I have is something that is oftentimes not included in
the subset. While, yes, I am a small-business owner, I understand
finance, I have been on a bank board, what is important to me is
when we have inequalities when we are talking about economic development and monetary growth and we don’t count ethnicity and
race because it is a subset.
And while I appreciate your comments on page 1 of your testimony when you talk about the jobless rates have decreased, but because we know there is still so much disparity when we get to unemployment with people who look like me. So I have to be that
voice for Black people and for minorities who get caught in the gap.
So with that, I am very afraid, because I know when we look at
the economy and growth, if 22 million people are going to lose their
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healthcare, if we are going to cut programs where people then will
have to or won’t have the money to pay for them, I am nervous.
Now, with that said, I serve on the Financial and Economic Literacy Caucus. It is a Democrat and Republican. And as we are
speaking now, I am being appointed to the Congressional Black
Caucus Economic Development and Wealth Creation task force as
co-chair.
You have stated that income equality is a long-term risk to our
economy. We cannot talk about income equality without looking at
the disparities and the discrepancies in household wealth among
African Americans and minorities.
So I would like to say that recessions like the one we have just
had—and there is a chart on the board, and I think it speaks for
itself—that led to African Americans losing 52 percent of their
wealth while White households only lost about 16 percent of their
wealth, I am concerned that rising income equality will further exacerbate the problems for minorities with historically lower household wealth and higher unemployment.
Can you explain to this committee why income inequality is a
long-term threat to the United States economy and who has the
power to help us fix this?
Mrs. YELLEN. I am very concerned about inequality in income
and wealth. I think Americans need to feel that this system, our
economic system, is one where rewards come to those who work
hard and play by the rules. And when some groups do disproportionately well and others seem to be lagging behind, as has been
the case, there is a sense of its being a very unfair system.
Worse, to the extent that resources are important in assuring intergenerational mobility, that parents want to make sure that their
children have access to the opportunities and ability to gain education—
Mrs. BEATTY. Thank you. I going to interrupt you to yield my
time back on opportunities. Thank you, because we introduced the
Beatty rule after the Rooney rule, and now we have a Black man
for the first time, Chairman Bostic out of Atlanta, who is on the
National Federal Reserve Board.
Thank you, and I yield back.
Chairman HENSARLING. The time of the gentlelady has expired.
The Chair now recognizes the gentleman from Indiana, Mr. Hollingsworth.
Mr. HOLLINGSWORTH. It is time to take a deep breath. You have
reached the bottom of the rank on our side of the aisle, a mere private and freshman.
So I wanted to touch on something that my colleague Ms. Tenney
had talked about in the Treasury report and kind of better understand some of those recommendations that you might agree with
and disagree with as well.
I went through the report and kind of pulled out some of the
ones that I think are most pertinent to your role in the Federal Reserve generally, either from a regulatory standpoint or with regard
to monetary policy, and just thought I would ask very specifically,
kind of agree, disagree. And I know there may be some follow-up
after that, but you have to remember, I got probably a C-minus
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and probably deserved worse in economics, so mainly focus on the
agree and disagree.
Do you agree or disagree that there should be expanded treatment of certain qualifying instruments as HQLA, including highgrade municipal bonds as level 2B liquid assets, and improvements
to the degree of conservatism and cash flow assumptions incorporated into the LCR to more fully reflect banks’ historical experience with calculation methodologies? That is a long-winded one.
Take a deep breath.
Mrs. YELLEN. So let me see. On the first part of it, I think the
Fed has gone further than the other regulators in including the
more liquid municipal securities as level 2B assets, and so we are
supportive of that.
Mr. HOLLINGSWORTH. Marvelous.
Second one, do you agree or disagree that U.S. rules implementing international standards should be revisited, including the
G-SIB risk-based surcharge, including the short-term wholesale
funding component?
Mrs. YELLEN. We recently finalized that rule, and I participated
in that review and I regard that as appropriate. And I think the
G-SIB surcharges are at a level that I think is justifiable given
the—
Mr. HOLLINGSWORTH. What about the mandatory minimum debt
ratio, including the Fed’s TLAC minimum debt rule?
Mrs. YELLEN. I believe that is important as well to ensure that
systemically important firms can be resolved.
Mr. HOLLINGSWORTH. Disagree with revisiting that.
And the calibration of the eSLR for G-SIBS?
Mrs. YELLEN. We discussed that earlier in connection with custody banks, and it is something I think we should look at. It may
be having an unintended consequence.
Mr. HOLLINGSWORTH. So that we might agree with.
Do you agree or disagree with the efforts to finalize remaining
elements of the international reforms of the Basel Committee, including establishing a global risk-based capital for it to promote a
more level playing field for U.S. firms competing internationally?
Mrs. YELLEN. I would like to see Basel III finalized. Our banking
organizations are operating with very high capital standards.
Mr. HOLLINGSWORTH. Correct.
Mrs. YELLEN. And this is mainly a matter of ensuring that other
countries put into place appropriate capital regulation so that we
have a level playing field. So, yes, I would like to see that happen.
Mr. HOLLINGSWORTH. Perfect. So agree with that.
In the final implementation-slash-finalization of the Basel III
standard, would you exempt community banks from this? Would
you exempt them from the risk-based capital regime that is promoted by Basel III?
Mrs. YELLEN. I am supportive of developing a simplified capital
regime.
Mr. HOLLINGSWORTH. For community banks specifically?
Mrs. YELLEN. But to the extent that community banks were affected by Basel III, I am supportive of that.
Mr. HOLLINGSWORTH. Okay. Would you agree or disagree with
raising the asset threshold of the Fed small bank holding company
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and savings and loan holding company policy to $2 billion from the
current $1 billion?
Mrs. YELLEN. I think that is something we could look at.
Mr. HOLLINGSWORTH. Great.
And then the last one of these that I had was, do you agree or
disagree that the Fed should carefully consider the implications on
U.S. credit intermediation and systemic risk from implementation
in the United States of a revised standardized approach to credit
risk under Basel III capital framework?
Mrs. YELLEN. That was a mouthful.
Mr. HOLLINGSWORTH. Indeed.
Mrs. YELLEN. Excuse me?
Mr. HOLLINGSWORTH. Indeed, yes.
Mrs. YELLEN. I need to get back to you on that.
Mr. HOLLINGSWORTH. Okay. Thank you so much. I really appreciate you taking some time and coming to see us again. I really enjoyed your first testimony and this one as well.
Mrs. YELLEN. Thank you.
Mr. HOLLINGSWORTH. With that, I yield back, Mr. Chairman.
Chairman HENSARLING. The gentleman yields back.
The Chair now recognizes the gentleman from Washington, Mr.
Heck.
Mr. HECK. Thank you, Mr. Chairman and Ranking Member
Waters.
Chair Yellen, a couple of years ago at the Humphrey-Hawkins
hearing I asked you, when does America get a raise? I asserted
America deserves a raise, fueled in part on my behalf, because we
have been through 30 years of fairly stagnant wage growth with
the exception of some warmth, as it were, in the late 1990s.
I respect you because of your prowess as an economist. I admire
you because of what I perceive to be your commitment to some values, including a concern for how the Fed’s policies actually impact
Americans, and that includes in this area of wage growth.
I believed it 2 years ago, I believe it now, 2.5 percent nominal
growth, while better than a few years ago, does not render Americans feeling as though they are getting ahead, let alone staying
even.
So given your commitment or my perception of your commitment
to the average American, if such a thing exists, I read with great
interest in the Monetary Policy Report the table on page 42, which
essentially indicates that you project a definition of full employment over the long term of between 4.5 and 4.8 percent if you get
monetary policy right, 4.5 to 4.8 percent, and yet, an indication
that 2 years hence, the unemployment rate will be 3.8 to 4.5 percent.
It was a little hard for me to read that as other than your trying
to or willing to let the economy run a little warm, presumably because maybe we can get wage growth above 2.5 percent and maybe
closer to historic recovery rates of 4.0 percent.
Mrs. YELLEN. Inflation is running over the last 12 months at 1.4
percent below our 2 percent objective. And we have had 5 years or
more of inflation running under our 2 percent objective. That is a
commitment that we have, and it is a symmetric objective. And I
think allowing the labor market, allowing unemployment to decline
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to the kinds of levels that you cited looks to be consistent with
achieving our inflation objective.
Mr. HECK. And would yield higher wage growth than 2.5 percent,
you would expect?
Mrs. YELLEN. I think wage growth seems somewhat low given
our 2 percent objective, but it is very important to remember that
one of the things that is holding down wage growth in real terms
is very low productivity growth over the last—
Mr. HECK. I don’t want to go down that rabbit hole. We did that
last time.
Mrs. YELLEN. Without that changing, that really limits the long
run prospects for workers.
Mr. HECK. I get that. And I get the controversy surrounding our
measure of productivity of late. The fact remains, America needs
a pay raise.
I take a fairly straightforward view of this. It seems to me—the
economy—if we fall into a recession, the Fed cuts interest rates,
and that increases availability and demand for loans, for the purchase of homes, for the purchase of automobiles, which has a stimulative effect on the economy.
It didn’t happen this time with respect to housing, necessarily.
It didn’t respond. It did in autos, in fact, fairly robust until recently. And now auto sales are going down. There are layoffs, literally, in the industry.
You have described the monetary policy approach you are taking
as still accommodative or stimulative, but that is not occurring in
autos, especially given what I said earlier about I genuinely believe
you care about how average Americans are impacted.
Homes and autos are the two biggest purchases that most Americans ever make. It didn’t work at all through the recession in
homes, we are stuck back at 1994 construction levels, and it is now
not working on autos. Are you concerned?
Mrs. YELLEN. Mortgage rates are a little bit off their lows, although they are down from last year.
Look, I think you have to look at the bottom line, which is this
year we have had 180,000 jobs created a month, only slightly lower
than last year, 190,000 or so. The unemployment rate continues to
decline. The labor market continues to strengthen.
And that means that even if auto sales are off their highs, that
we have strong enough demand through consumer spending, a recovering global economy, a pickup in spending on plant and equipment, that it is supporting continued job creation at rates greater
than the labor force growth.
Mr. HECK. Thank you.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Oklahoma, Mr.
Lucas.
Mr. LUCAS. Thank you, Mr. Chairman.
Chair Yellen, before asking you anything, I would like to express
concerns about the treatment of centrally cleared customer margin
under the supplemental leverage ratio. I am concerned, as others
are, that including this margin in the denominator of the ratio is
artificially reducing the number of clearing options available to customers.
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As you may be aware, lots of end users in my district use clearinghouses to hedge against risk in both agriculture and energy
markets. But I am encouraged by the recent Treasury report on
rate reform suggesting that this margin no longer should be a part
of the ratio calculation.
In addition, your colleague, Governor Powell, told the Senate recently that the Fed is reviewing the leverage ratio. And I would
agree with him that fixing this is critical for the health of the markets, and I look forward to the outcome of this review.
Madam Chair, I would like to discuss the 2013 leveraged lending
guidance. In my district, the energy sector is one of the largest employers. As you and everyone else is aware, the energy industry is
going through a bit of a tough time these days. And now for the
purposes of leveraged lending guidance, the recent energy downturn means many, if not most, energy companies are qualified as
distressed industries, meaning the guidance limits the ability of
those companies to get credit and the loans they need to stay in
operation and to employ my constituents.
The guidance also concerns me a bit because of the manner in
which it was rolled out. The guidance in 2013 and in a series of
FAQs in 2014—that is not exactly the most clear process—has
forced institutions to review every loan they made to ensure compliance. The Administration also appears to share my concerns,
recommending in their recent Treasury report that the guidance be
revisited.
Chair Yellen, have you considered retracting the guidance? And
along with that thought, also have you met with any industries
that are considered distressed to hear about their difficulties in obtaining credit?
Mrs. YELLEN. We have put in place the leverage lending guidance I think for a very good reason, which is we were concerned
about underwriting practices for those kinds of loans and want to
make sure that lending is safe and sound.
We had shared national credit exams that resulted in disturbing
findings about the quality of underwriting of those loans, and I
think it was appropriate to put such guidance in place.
If they are having unintended consequences, I will discuss with
my colleagues looking at that, but believe it was important to have
put that in place.
Mr. LUCAS. I very much appreciate that, because the energy sector is not just important to the Third District of Oklahoma, but it
is important to the entire national economy. And with the technological advances they have adopted where we have now gone from
in many regions of the country no longer being importers of, for instance, crude oil and natural gas, but exporters, the effect that they
are having on our overall balance of payments, the potential opportunities there are just incredible.
And these guidances from 2013 and the FAQs from 2014 seem
to be causing some real stress out there as they are being interpreted, and your commitment to look at those to try and make sure
we don’t create unintended consequences—because the number of
barrels of oil are still in the ground in those proven reserves, the
number of BCF of natural gas is still there, the technologies that
have been enhanced and reduce the cost of our production are still
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in place. It is just we have to work our way through a tough time,
and bearing that in mind, by the Fed and yourself, I very much appreciate that, Chair Yellen.
And with that, Mr. Chairman, I yield back.
Chairman HENSARLING. The gentleman yields back.
The Chair will now recognize the gentleman from Maryland, Mr.
Delaney.
Mr. DELANEY. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for your incomparable leadership
at the Federal Reserve. It is always nice to have you here. And we
are getting towards the end, so I thought I would ask a question
and kind of tap into your knowledge as a macro economist and
think about some of the long-term trends of employment.
There has been a lot of talk recently about what will happen to
the future of work and jobs based on technological innovation, automation, machine learning, artificial intelligence, whatever the category may be. And while, historically, innovation has created more
jobs than it has displaced, it generally does come with a lot of fear
as to what will happen to the labor market. And maybe that is because we can see the jobs that will be displaced, but we don’t really
have a good ability to really imagine the jobs that will be created
by this innovation.
And this has caused many people to start talking about things
like universal basic income, where they are kind of talking about
how there will be no jobs in the future and robots and machine
learning will displace all the jobs and we are going to have to figure out ways of supporting people.
To me, that is premature for obvious reasons. Unemployment is
very low. There are a lot of jobs in society that are being done that
no one gets paid for, and we should certainly try to figure out how
to pay those people for what they are doing before we start paying
people to do nothing. And again, historically, more jobs have been
created.
But what are your thoughts on this topic as someone who spends
a lot of time not only thinking about the macro, but obviously
someone who cares deeply about employment and its importance to
people’s dignity and ability to raise their family and earn a living?
So how is this going to play out, in your opinion?
Mrs. YELLEN. I don’t have a crystal ball and these are very difficult issues.
Mr. DELANEY. None of us do. I know. But you are very smart and
you look at a lot of data, so—
Mrs. YELLEN. I know technological change has been a tremendously important source of growth and improvement in living
standards in the United States and around the world, and so it is
something that we should want to see and foster. But it is disruptive and it can cause considerable harm to groups whose livelihood
is disrupted by technological change that renders their skills less
valuable or not at all valuable in the market.
And I would expect that the kinds of technological changes that
you describe will continue to change the nature of work, the kinds
of jobs that will be available, and the skills that will be needed to
fill those jobs. And to my mind, a very important focus for all of
us should be on—
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Mr. DELANEY. So what should be the three things we should do
to prepare? Because I agree with you, it is going to change the nature of work, it will create jobs, it will displace jobs, and people
need different skills. What would the two or three things you would
do to best prepare the future to be able to succeed now?
Mrs. YELLEN. To my mind, education and training are absolutely
central to the ability of workers to fill the new kinds of jobs that
will be available and to have the skills.
When I talk to businesses that are adopting new technologies,
they tell me it is also creating new kinds of jobs, that they find that
younger workers, even those with less education, have nevertheless
been exposed to the kind of training that will enable them to fill
the kinds of technical jobs that have been created with appropriate
training. But it is a tremendous challenge for older workers who
don’t have that kind of training to make adjustments.
I would look both to ensure that we have appropriate training,
education, apprenticeship programs, and other things for younger
people, and also to see what we can do to relieve the burdens on
older workers who are displaced.
Mr. DELANEY. So if I could kind of summarize what I think I just
heard you say, you are not necessarily bearish on the future of jobs
and work?
Mrs. YELLEN. Correct.
Mr. DELANEY. You agree that new jobs will get created to offset
displaced, probably a net positive?
Mrs. YELLEN. I believe so.
Mr. DELANEY. But you are worried that we are not doing enough
or you think we should do more in reforming education, training,
apprenticeship programs, et cetera, because the challenges are
going to be very significant.
Mrs. YELLEN. That is certainly a key focus for me.
Mr. DELANEY. Great. Thank you again, Chair Yellen.
Mrs. YELLEN. Thank you.
Chairman HENSARLING. The gentleman yields back.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren.
Mr. HULTGREN. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being here.
Chair Yellen, the financial sector’s commitment to cybersecurity
is perhaps better than any other. Unfortunately, many have recently raised concerns that while well intentioned, many regulators
are starting to require duplicative, conflicting, and improperly calibrated requirements. We want to keep everyone, regulators and industry, moving in the same direction, and that is to achieve stronger cybersecurity.
Do you believe the efforts by the Treasury Department to coordinate regulatory harmonization of rules and requirements with respect to cybersecurity, do you support those efforts?
Mrs. YELLEN. I am supportive of those efforts. And we have certainly heard in our own outreach on cybersecurity the importance
of having uniform standards so that firms are not facing different
regulatory demands that may be technologically conflicting, and I
think that is an important goal.
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Mr. HULTGREN. You maybe have answered this enough, but just
to dig in a little bit more specifically, in its recently released report
in response to the President’s Executive Order on financial regulation, the Treasury Department called for Federal banking regulators to harmonize cybersecurity regulations using a common lexicon. I wondered if the Federal Reserve is committed to achieving
this goal?
Mrs. YELLEN. Yes.
Mr. HULTGREN. Great.
During the last appearance that you had before this committee,
I expressed my concern about the treatment of centrally cleared
customer margin under the supplemental leverage ratio. The regulatory treatment of customer margin diminishes clearing options
for customers while forcing them to pay more for these services.
I applaud the Treasury Department’s recommendation in its core
principles report to grant an offset for a centrally cleared customer
margin under the leveraged ratio. An offset would have a relatively
insignificant impact on bank capital while driving down costs for
clearing services.
I understand British regulators have already granted an offset
for client margins in the U.K., and the EU is expected to offer European banks an offset as well for the sake of clearing customers
in the United States. I hope the Federal Reserve will follow suit
and work with its fellow regulators to adopt an offset for U.S.
firms.
Mrs. YELLEN. I think the supplementary leverage ratio may be
having an unintended consequences, and it is something that we
should look at very carefully, and I am committed to doing that.
Mr. HULTGREN. Thank you.
Chair Yellen, on a similar note, on June 22nd, Federal Reserve
Governor Powell testified before the Senate Banking Committee
that, ‘‘We believe that the leverage ratio is an important backstop
to the risk-based capital framework, but that it is important to get
the relative calibration of the leverage ratio and the risk-based capital requirements right. Doing so is critical to mitigating any perverse incentives and preventing distortions in money markets and
other safe asset markets. Changes along these lines could also address concerns of custody banks that their business model is disproportionately affected by the leverage ratio.’’
And on April 4th, former Governor Tarullo gave a speech where
he stated, ‘‘As to the impact of the 2 percent enhanced supplementary leverage ratio, our experience leads me to believe that it
may be worth changing to account for the quite different business
operations of the G-SIBS, particularly those in custody business.’’
He further said, ‘‘In practical terms, the asymmetry is most significant for the two banks that are dominantly custodial and transactional in nature rather than lending and trading firms. These
banks have had the lowest risk-based surcharges of the eight GSIBS, currently 1.5 percent, but their leverage surcharge is 2 percent. This is especially problematic for their operations, since they
prudently reinvest customer deposits into safe and liquid assets.’’
Furthermore, the Treasury Department’s June 2017 report
states, ‘‘Exceptions from the denominator of total exposure should
include cash on deposit with central banks.’’
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I wonder, do you agree with this assessment, and when could we
expect the Fed to take action to address these concerns?
Mrs. YELLEN. I agree with the comments of my colleagues that
the supplementary leverage ratio may be creating this set of problems that you addressed. You discussed that there are different
ways of dealing with it. I am committed to looking at it and trying
to recalibrate it so that it avoids these adverse consequences.
Mr. HULTGREN. I know it is going to be difficult to say, but do
you expect that the Fed will take action before January 2018 when
the new enhanced supplementary leverage ratio goes into effect?
Mrs. YELLEN. Let me get back to you on the timetable.
Mr. HULTGREN. Great. Thanks again, Chair Yellen. I appreciate
your work, and I appreciate you being here today.
I yield back.
Chairman HENSARLING. The gentleman yields back.
The Chair wishes to advise all Members that the Chair intends
to release the witness at 1:00, and anticipates clearing four more
Members from the queue.
The Chair now recognizes the gentleman from Texas, Mr. Green.
Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking
member as well.
And, Chair Yellen, I thank you for appearing today.
I am looking at currently an article from The Washington Post
dated May 17, 2017. It is styled, ‘‘The Nation’s Biggest Banks Have
a Common Gripe. They Have Too Much Money.’’ I would just like
to read some of the relevant portions.
Banks are sitting on a $131 billion in excess capital, according
to a March research report by Goldman Sachs. If capital requirements are lowered, banks can return the money to shareholders in
the form of dividends, boosting the payouts perhaps by 45 percent
in 2018. This is according to the Goldman Sachs report.
Hampering the industry’s arguments has been record profits. Despite higher capital requirements, the country’s banking industry
reported more than $171 billion in profit last year, and the volume
of bank loans has increased significantly since the financial crisis.
So the question I have, Madam Chair, is this: Should we change
the capital requirements simply because we can have the opportunity to return more dividends, boost more payouts? Is that a good
reason to change capital requirements?
Mrs. YELLEN. I strongly believe that we should have strong capital requirements for the safety and soundness of the banking system and the financial sector more broadly.
I am comfortable with the level of risk-based capital requirements that are in place at this point, and especially the most systemic firms should have the largest capital buffers.
So once those capital buffers are in place, the Federal Reserve
has no objection to firms distributing profits as dividends to shareholders or in the form of share repurchases.
This year in our stress tests we approved the plans of almost all
of the firms involved to return capital of their shareholders, but
that is because we are comfortable that they have built the capital
buffers that are necessary for a safe and sound banking system and
comfortable that they can go on, even under severe stress, meeting
the credit needs of the U.S. economy.
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Mr. GREEN. Thank you.
Let me move to another topic, because this is quite important
and I don’t want to neglect it.
Thank you for your response to the letter that I and some 36 colleagues sent you concerning the African Americans, Latinos, and
the fact that the unemployment rate for African Americans and
Latinos always seem to lag behind Anglos.
I am mentioning this to you now because in your letter you do
cite some things that may be beneficial in terms of some studies
that will take place. But I do want to call one thing to your attention, and it has to do with something that these studies probably
won’t address, and it is just the issue of race itself, just race itself,
plain old invidious discrimination.
We have a difficult time legitimizing invidious discrimination as
a cause for unemployment being higher among certain groups. We
know that it exists, but we can’t get the actual empirical evidence
to legitimize the existence.
Can the Fed, aside from these additional things that you will be
doing, and I salute and applaud you for doing them, but can the
Fed endeavor to engage in some sort of process that will allow us
to acquire this empirical evidence? Because until we can present
that, we still have persons who are in denial. Your response,
please?
Mrs. YELLEN. It is certainly something that we can try to get at,
although perhaps not definitively in studies that we do. There are
studies that I am aware of, experimental-type studies, that do pretty clearly document what you are talking about, that economists
have produced.
Mr. GREEN. Could we explore the possibility of allowing testing
to take place within banks? That is something that we have difficulty acquiring, testing empirical evidence?
Mrs. YELLEN. I need to look into that. I am not—
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.
Good afternoon, Chair Yellen.
Chair Yellen, do you subscribe to the theory that monetary policy
can work better if it is independent of politics?
Mrs. YELLEN. Yes, I do.
Mr. PITTENGER. In that light, does your opinion about monetary
policy independence also extend to independence from distributional politics?
Mrs. YELLEN. Distributional politics? I think the Fed should be
nonpolitical.
Mr. PITTENGER. Yes, ma’am.
I have reviewed some of your speeches since last March. I didn’t
see a lot relative to monetary policy. I did see one speech where
you appeared before a community development research conference, and it was a conference on creating ‘‘a just economy.’’ And
the conference that you also spoke at on women at Brown University, the monetary policy was mentioned only one time in that
speech, and that reference was in context of explaining why mone-
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50
tary policy is poorly equipped to address ‘‘pockets of persistently
high unemployment.’’
It just appears that these speeches represent efforts to address
social issues in a way that establishes the limits of sound monetary
policy.
Do you also worry that these in the same way it exposes monetary policy to increased risk from distributional politics?
Mrs. YELLEN. Let me say that it is my core responsibility to
speak to the American people in a wide range of forums about the
conduct of monetary policy in the economy, and I would disagree
with your characterization of my presentations.
In March, I gave an important speech in Chicago on monetary
policy. I have had two press conferences after the March and June
meetings. I recently gave remarks in London bearing on the U.S.
economy and monetary policy. And if you go back a little longer to
January, you will see many speeches to many different audiences
at many levels as well as testimony pertaining to monetary—
Mr. PITTENGER. Yes, ma’am, I was just looking at the topics of
those—to the two speeches, at Brown University and at this—
Mrs. YELLEN. Let me just say that the Federal Reserve has other
responsibilities, and in particular we have—
Mr. PITTENGER. Well, you understand my—
Mrs. YELLEN. —extensive programs in community development
that are related to what CRA—
Mr. PITTENGER. It was just the appearance that they were political.
Mrs. YELLEN. I spoke at a conference—
Mr. PITTENGER. Can I go on?
Mrs. YELLEN. —relating to community development that was run
by the Board of Governors, which is entirely appropriate.
Mr. PITTENGER. Reclaiming my time, if you don’t mind. I think
I made my point that those particular ones were political.
Paul Kupiec, a resident scholar at the American Enterprise Institute, stated that, ‘‘Supervision and regulation are now so intrusive
that it is not a stretch to say that the largest financial institutions
are being run by the Fed.’’
Do you agree with that assessment?
Mrs. YELLEN. No, I don’t.
Mr. PITTENGER. Well, do you believe it is appropriate for the Federal Reserve to engage in specific firm risk management by influencing corporate governance structures across any industry?
Mrs. YELLEN. I do believe it is appropriate—
Mr. PITTENGER. So why—then why do you—
Mrs. YELLEN. —for the Fed to ensure that there is sound corporate governance in major financial institutions. And we saw what
happens when that is not the case. That was part of how we ended
up with the financial crisis.
Mr. PITTENGER. So you believe that we needed more government
intrusion and more government management and that would have
salvaged the problem?
Mrs. YELLEN. I believe that we should ensure that—
Mr. PITTENGER. You don’t believe that the government itself
played a direct role in the financial collapse that we had in terms
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51
of forcing financial institutions to make loans to people who weren’t
even creditworthy?
Mrs. YELLEN. I don’t believe that was the main cause of the financial crisis.
Mr. PITTENGER. Many of us disagree with that.
Chair Yellen, do you believe that the Federal Reserve has the
ability and the authority to usurp or preempt State corporate law?
Mrs. YELLEN. I am not sure what you have in mind there, and
I am not going to give a simple yes-or-no answer to the question—
Mr. PITTENGER. Are you aware that companies that are incorporated in each State are subject to that State’s corporate law requirements, including the fiduciary duties and obligations imposed
upon the directors of a company’s board?
Mrs. YELLEN. Okay.
Mr. PITTENGER. Do you believe that you have the ability, then,
to usurp the laws?
Mrs. YELLEN. We are not usurping the laws. We are making sure
that companies operate in a safe and sound fashion and that their
boards of directors—
Mr. PITTENGER. If the State has laws relative to those corporate
boards, do you believe that you have the authority to usurp those
laws?
Mrs. YELLEN. Congress has passed laws that place obligations on
us to supervise these financial institutions.
Mr. PITTENGER. My time has expired. Thank you.
Chairman HENSARLING. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Arkansas, Mr.
Hill.
Mr. HILL. I thank the chairman.
And, Chair Yellen, it is nice to see you here and looking fit and
rested from all your travels.
Mrs. YELLEN. Thank you.
Mr. HILL. Thanks for your perseverance in front of us.
We have talked before about monetary policy, and I haven’t been
a fan as a banker before I was in Congress of going beyond the
Fed’s initial interest rate policies. I felt like QE1, 2, and 3 didn’t
produce the GDP effects or the job increases that perhaps Fed policymakers at the time thought. And I have also been concerned
that, as we go back and look backwards now since 2008, that Fed
officials really not have—have always been a little reluctant to talk
about some of the unintended consequences of that, such as distorting the price mechanism in our economy, depressing cap rates
for commercial real estate, or running up equity prices, which I
think are a result when you have that—we have flooded from QE2
into our economy affecting price earnings, multiples, et cetera.
But, today, I haven’t heard any discussion about—we talked
about the balance sheet. We talked about setting interest rates, but
I want to talk a little bit about the money multiplier aspect in your
toolbox. We have flooded the system with reserves, but we have a
money multiplier that is down at Eccles rates, 1930s type rates.
And I guess my view is, shouldn’t you lower the rate of interest
paid on banks on excess reserves as you are raising rates and planning this very thoughtful, careful shrinkage of the Fed’s balance
sheet?
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Mrs. YELLEN. The interest we pay on excess reserves is our key
tool to adjust the general level of short-term interest rates in the
economy, and the Committee has deemed it appropriate to gradually raise the level of short-term rates as the labor market has
strengthened and we have come closer to achieving our objectives.
So, no, I wouldn’t agree that we shouldn’t be using that tool to normalize the general level of short rates in the economy.
Mr. HILL. The rates on excess reserves.
Mrs. YELLEN. That is our key tool that we use to encourage the—
Mr. HILL. How do we get the money multiplier to increase then?
Mrs. YELLEN. I guess I don’t look at the impact of monetary policy on the economy through the money multiplier. I think the complex—
Mr. HILL. What do you think accounts for it being at 1930s levels
when we have advanced reserves into the system as mightily as we
have over the last 8 years?
Mrs. YELLEN. We had a highly depressed economy where interest
rates fell close to zero and banks were willing to hold onto excess
reserves given the shortage.
Mr. HILL. But my colleagues on the other side say that the lending business is booming and the economy is growing successfully,
so why has the multiplier not changed? Why is the velocity still low
like that, in your view? That is something we measure—that is
how we measure successful Fed policy by looking at that, so I’m
just curious.
Mrs. YELLEN. I wouldn’t agree at all that we measure the success
of Fed policy by looking at the money multiplier. I think the quantity of money and its relationship to GDP has been extremely unstable and not a good way of running monetary policy. I am not
aware of any central bank that would any longer approach it that
way.
Mr. HILL. And why is that? Why is it, though, that it was, between World War II and 2008, something that people looked at and
it was talked about as a way that shows that we have a healthy
investment and lending market and growing economy, but in the
1930s and since 2008, we are just satisfied with it that it is low
and we don’t say it is important anymore? Can you put some perspective on that?
Mrs. YELLEN. Both in the Great Depression and in our more recent Great Recession we have had a situation where short-term
rates fell essentially to zero percent, and pushing out additional reserves was essentially what they said during the Depression was
like pushing on a string, and we encountered—or a so-called liquidity trap, and the relationship then between the quantity of reserves
and nominal income begins to break down in those situations. And
we faced a similar situation as to what we had during the Great
Depression.
Mr. HILL. My time has expired, Mr. Chairman.
Chairman HENSARLING. The time of the gentleman has expired.
The next Member will be the last Member we call upon. I now
recognize the gentleman from Ohio, Mr. Davidson for 5 minutes.
Mr. DAVIDSON. Thank you, Mr. Chairman.
Chair Yellen, thank you for being here today.
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I really appreciate your testimony, and thanks for the work you
and the team at the Federal Reserve do to get our monetary policy
right.
Mrs. YELLEN. Thank you.
Mr. DAVIDSON. I want to understand that a little bit. You talked
about your policy is neutral to accommodative, but what you have
started to do is at least talk about applying the brakes. You have
raised rates. You’re talking about how to frankly do—you talked
just briefly about the supply of money being a little unstable. Well,
$4 trillion of it, we know where it went, but it did create some velocity in the money supply that is nontypical. So is what you are
doing now essentially gently applying the brakes if you feel like the
economy is doing it—
Mrs. YELLEN. Yes, I think that is a fair characterization. We
have had our foot on the gas. We have been in an accommodative
stance, and as we have come closer to achieving our objectives, we
have taken our foot off the gas to some extent so that we can sustain a strong recovery, but we are moving towards something closer
to let’s call it a neutral stance that keeps the economy operating
on an even keel.
Mr. DAVIDSON. Historically, applying the brakes gently or at the
right time has been a challenge, just like it has been a challenge
to hit the gas. I guess everyone always feels optimistic about their
course of action at the time. Generally, people say bubbles have
been one of the things that have caused this miscalculation. What
bubbles do you see out there in the macro economy right now?
Mrs. YELLEN. I try not to opine on the level of asset prices, although our report notes that valuations generally are toward the
top of their historical ranges. What I try to think about is, if there
are adjustments in asset prices, what consequences would they
have on our financial system and our economy, and in that context,
look for evidence that surging asset prices might be leading to imprudent borrowing, a buildup in leverage in the economy that
would be dangerous if the prices were to unwind. And we are not
seeing that. So we sort of judge financial stability risks at this
point as moderate.
Mr. DAVIDSON. So you have laid out a good plan, and I don’t really want to go over the whole thing. You have talked a lot about it,
but I am particularly concerned about the role that you kind of allude to here, as we start to see instability, you kind of shift hats
from monetary policy to regulator. And in the regulation you talked
about really a pretty heavy hand in the sense of steering companies
on policies. The Financial Times has highlighted cases where you
have even, as regulator, addressed HR practices up to the point of
advising terminating or replacing certain employees in companies.
And at that point, I guess, how critical is it that our agent of monetary policy also serve as a regulator? I am not saying that regulation doesn’t need to be done. How important is it that our central
banker does that?
Mrs. YELLEN. I would say, especially in the aftermath of the financial crisis, we have found that our understanding of the economy, of the financial system, and of appropriate monetary policy
has been greatly informed by the role we play in supervision. It has
helped us understand risks to financial stability, pressures in par-
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54
ticular portions of credit markets, and there has been a close integration between what we learn in bank supervision, financial stability, and monetary policy.
Mr. DAVIDSON. And most closely on the mortgage-backed securities markets, where the Fed developed a strong affinity for them
and accumulated quite a lot of them, which gets to the monetary
supply.
So, at this point, you are looking at some of the asset purchases
that you have made, really directly interacting with a key part of
the market, putting those on your balance sheet, unwinding them.
You have talked about a plan to do it. You have talked about a
change of plan to do it. What do you see as the risk to the monetary supply? And you talk about, not to say it is a bubble, but
clearly there is going to be an effect on asset prices as you try get
that right.
Mrs. YELLEN. We do believe that our asset purchase programs
were effective in pushing down longer-term rates and the so-called
term premium embodied in longer-term rates, and very gradually
over time, as we shrink our balance sheet, I would expect some
modest but, over a number of years, upward pressure on longer
term rates. It is not something very substantial, but it is something
that we have taken into account in deciding on what is the appropriate path for the Federal funds rate.
Mr. DAVIDSON. Thank you, Chair Yellen.
Thank you, Mr. Chairman. I yield back.
Chairman HENSARLING. The time of the gentleman has expired.
And I want to thank our witness, Chair Yellen, for her testimony
today.
The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness
and to place her responses in the record. Also, without objection,
Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record.
This hearing stands adjourned.
[Whereupon, at 1:11 p.m., the hearing was adjourned.]
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APPENDIX
July 12, 2017
(55)
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56
For release at
8:30a.m. EDT
July 12.2017
Statement by
Janet L Yellen
Chair
Board of Govemors ofthe Federal Reserve System
before the
Committee on Financial Services
U.S. House of Representatives
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July 12. 2017
57
Chainnan Hensarling, Ranking Member Waters, and other members of the Committee, l
am pleased to present the Federal Reserve's semiannuallvfonelary Policy Report to the Congress.
In my remarks today l will briefly discuss the current economic situation and outlook before
turning to monetary policy.
Current Economic Situation and Outlook
Since my appearance before this committee in February, the labor market has continued
to strengthen. Job gains have averaged 180,000 per month so far this year, down only slightly
from the average in 2016 and still well above the pace we estimate would be sufficient, on
average, to provide jobs for new entrants to the labor force. Indeed, the unemployment rate has
fallen about l/4 percentage point since the start of the year, and, at 4.4 percent in June, is
5-1/2 percentage points below its peak in 2010 and modestly below the median of Federal Open
Market Committee (FOMC) participants' assessments of its longer-run norrnalleveL The labor
force participation rate has changed little, on net, this year--another indication of improving
conditions in the jobs market, given the demographically driven dmvmvard trend in this series.
A broader measure of labor market slack that includes workers marginally attached to the labor
force and those working part time who would
full-time work has also fallen this year and
is now nearly as low as it was just before the recession. It is also encouraging that jobless rates
have continued to decline for most major demographic groups, including for African Americans
and Hispanics. However, as he fore the recession, unemployment rates for these minority groups
remain higher than for the nation overall.
Meanwhile, the economy appears to have grown at a moderate pace, on average. so far
this year. Although inflation-adjusted gross domestic product is currently estimated to have
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increased at an annual rate of only l-l /2 percent in the first quarter, more-recent indicators
58
- 2-
suggest that growth rebounded in the second quarter. In particular, growth in household
spending, which was weak earlier in the year, has
up in recent months and continues to be
supported by job gains, rising household wealth, and favorable consumer sentiment. In addition,
business fixed investment has turned up this year after having been soft last year. And a
stren1,rthening in economic growth abroad has provided important support for 1J.S. manufacturing
production and exports. The housing market has continued to recover gradually, aided by the
ongoing improvement in the labor market and mortgage rates that, although up somewhat from a
year ago. remain at relatively low levels.
With regard to inflation. overall consumer prices, as measured by the price index for
personal consumption expenditures, increased 1.4 percent over the 12 months ending in May, up
from about 1 percent a year ago bnt a little lower than earlier this year. Core inflation. which
excludes energy and food prices, has also edged down in recent months and was !.4 percent in
May, a couple of tenths below the year-earlier reading. It appears that the recent lower readings
on inflation arc partly the result of a few unusual reductions in certain categories of prices; these
reductions will hold 12-month inflation down until they drop out of the calculation.
Nevertheless, with inflation continuing to nm below the Committee's 2 percent longer-run
objective. the FOMC indicated in its June statement that it intends to carefully monitor actual
and expected progress toward our symmetric inflation goal.
Looking ahead, my colleagues on the FOMC and I expect that, with further gradual
adjustments in the stance of monetary policy, the economy will continue to expand at a moderate
pace over the next couple of years, with the job market strengthening somewhat further and
inflation rising to 2 percent. This judgment rellects our view that monetary policy remains
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accommodative. Ongoingjob gains should continue to support the growth of incomes and,
59
therefore, consumer spending: global economic growth should support further gains in U.S.
exports; and favorable financial conditions, coupled with the prospect of continued gains in
domestic and foreign spending and the ongoing recovery in drilling activity, should continue to
suppott business investment. These developments should increase resource utilization somewhat
further. thereby fostering a stronger pace of wage and price increases.
Of course, considerable uncertainty always attends the economic outlook. There is, for
example. uncertainty about when--and how much--inflation will respond to tightening resource
utilization. Possible changes in fiscal and other government policies here in the United States
represent another source of uncertainty. In addition, although the prospects for the global
economy appear to have improved somewhat this year. a number of our trading partners continue
to confront economic challenges. At present, l see roughly equal odds that the U.S. economy's
pcrfonnance will be somewhat stronger or somewhat less strong than we cmTently project.
Monetary l'oliey
! will now turn to monetary policy. The FOMC seeks to foster maximum employment
and price stability, as required by law. Over the tlrst half of 2017, the Committee continued to
gradually reduce the amount of monetary policy accommodation.
the FOMC raised
the target range for the federal funds rate by l/4 percentage point at both its March and June
meetings, bringing the target to a range of I to 1-l/4 percent. ln doing so, the Committee
recognized the considerable progress the economy had made--and is expected to continue to
make--toward our mandated objectives.
The Committee continues to expect that the evolution of the economy will warrant
gradual increases in the federal funds rate over time to achieve and maintain maximum
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employment and stable prices. That expectation is based on our view that the federal funds rate
60
-4-
remains somewhat below its neutral level--that is, the level of the federal funds rate that is
neither expansionary nor contractionary and keeps the economy operating on an even keel.
Because the neutral rate is currently quite low by historical standards, the federal funds rate
would not have to rise all that much further to get to a neutral policy stance. But because we also
anticipate that the factors that are currently holding down the neutral rate will diminish
somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few
years to sustain the economic expansion and return inflation to our 2 percent goal. Even so, the
Committee continues to anticipate that the longer-run neutral level of the federal funds rate is
likely to remain below levels that prevailed in previous decades.
As l noted earlier, the economic outlook is always suhject to considerah!e uncertainty.
and monetary policy is not on a preset course. FOMC participants will adjust their assessments
of the appropriate path tor the federal funds rate in response to changes to their economic
outlooks and to their judgments of the associated risks as informed by incoming data. In this
regard, as we noted in the FOMC statement last month, inHation continues to nm below our
2 percent objective and has declined recently; the Committee will be monitoring int1ation
developments closely in the months ahead.
In evaluating the stance of monetary policy, the FOMC routinely consults monetary
policy rules that connect prescriptions fc>r the policy rate with variables associated with our
mandated objectives. However, such prescriptions cannot be applied in a mechanical way; their
usc requires careful judgments about the choice and measurement of the inputs into these rules,
as well as the implications ofthc many considerations these rules do not take into account. !
would like to note the discussion of simple monetary policy rules and their role in the Federal
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Reserve's policy process that appears in our current MonefarJ' Policy Report.
61
-5-
Balance Sheet Normalization
Let me now tum to our balance sheet. Last month the FOMC augmented its Policy
Normalization Principles and Plans by providing additional details on the process that we will
follow in nonnalizing the size of our balance sheet. The Committee intends to gradually reduce
payments it receives from the securities held in the System Open Market Account Specifically.
such payments will be reinvested only to the extent that they exceed gradually rising caps.
Tnitia!ly, these caps will be set at relatively low levels to limit the volume of securities that
private investors will have to absorb. The Committee currently expects that, provided the
economy evolves broadly as anticipated, it will likely begin to implement the program this year.
Once we start to reduce our reinvestments, our securities holdings will gradually decline,
as will the supply of reserve balances in the banking system. The longer-run normal level of
reserve balances will depend on a number
as··vet-utnknown factors, including the banking
system's future demand for reserves and the Committee's future decisions about how to
implement monetary policy most efficiently and effectively. The Committee currently
the quantity of reserve balances to a level that is appreciably below recent
levels but larger than before the financial crisis.
Finally, the Committee affinned in June that changing the target range for the federal
funds rate is our primary means ofadjnsting the stance of monetary policy. ln other words, we
do not intend to use the balance sheet as an active tool for monetary policy in normal times.
However, the Committee wonld be prepared to resume reinvestments if a material deterioration
in the economic outlook were to warrant a sizable reduction in the federal funds rate. More
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generally. the Committee would he prepared to use its full range of tools, including altering the
62
- 6-
size and composition of its balance sheet, if fbture economic conditions were to warrant a more
accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
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Thank you. I would be pleased to take your questions.
63
for us~ at 11:00 a.m., EDT
july 7, 2017
July 7, 2017
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Board of Governors of the Federal Reserve System
64
BOARD OF GOVERNORS OF THE
fEDERAL RESERVE SYSTEM
Washington, D.C., July 7. 20! 7
Trm PRESIDENT OF TilE SENATE
THE SPEAKER OF THE HOUSE OF REPRESENTATIVES
The Board of Governors is pleased to submit its Monetary Pofiq Report pursuant to
section 2B of the Federal Reserve Act.
r
Sincerely,
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Janel L. Yellen. Chair
65
The federal
Market Committee (FOMC) is firmly committed to fulfllling its statutory
mandate from
Congress of promoting maximum
stable
and moderate
long-term interest rates. The Committee seeks to
decisions to the public
as clearly as possible. Such clarity facilitates
by households and
businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary
policy, and enhances transparency and accountability. which arc essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and
fmancial disturbances. Moreover, monetary policy actions tend to influence economic activity and
prices with a lag. Therefore, the Committee's policy decisions reflect its longer-rnn goals, its mediumterm outlook, and its asscssmcms of the balance of risks, including risks lo the financial system that
could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the
Committee has the ability to specify a longer-run goal for ini1ation. The Committee reailirms its
judgment that inflation at the rate of 2
as measnrcd by the annnal change in the price
is most consistent over the longer run with the
index for personal consumption
Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running
persistently above or below this objective. Communicating this symmetric inflation goal clearly to the
firmly anchored, thereby fostering price stability
public helps keep longer-term inflation
and moderate long-term interest rates
enhancing the Committee's ability to promote maximum
employment in the face of significant economic disturbances. The maximum level of employment
is largely determined by nonmonetary factors that a!fcct the structure and dynamics of the labor
market. These factors may change over time and may not be directly measurable. Conseqnently,
it would not be
to specify a fixed goal for employment; rather. the Committee's policy
decisions mnst informed by assessments of the maximum level of employment. recognizing that
such assessments are
uncertain and subject to revision. The Committee considers a
these assessments. Information abont Committee narti,cir>ar't''
wide range of indicators in
and nnemployment is
estimates of the longer-run normal rates of output
times per year in the FOMC's Snmmary of
For example,
recent projections, the median of FOMC participants'
of the longer-run normal rate of
unemployment was 4.8 percent.
!n setting monetary
the Committee seeks to mitigate deviations of inflation from its
longer-run goal and
of employment from the Committee's assessments of its maximnm
level. These objectives arc
However, under circumstances in which the
Committee judges that the
are not
it follows a balanced
in
promoting them, taking into account the magnitude of the deviations and the
different
time horizons over which employment and inflation are projected to rctnrn to levels judged
consistent with its mandate.
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The Committee intends to reaflirm these principles and to make adjustments as appropriate at its
annual organizational meeting each January.
66
.............. 1
Summary ......................... .
Economic and Financial Developments
Monetary Policy ..
Special Topics ....
Part 1: Recent Economic and Financial
Domestic Deve!opn1ents. . . . . . . . . . . . . . .
. .. , . . . . . . . . .
. ......... 5
Financial Developments. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 21
International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... 29
Part 2: Monetary Policy ....................................... 33
Part 3: Summary of Economic
........................ 41
The Outlook for Economic Activity. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . ......... 44
The Outlook for Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . ...... 45
............................ 45
............... 51
Abbreviations .............................................. 59
list of Boxes
Does Education Determine Who Climbs the Economic Ladder?
...... 8
Productivity Developments in the Advanced Economies. . . . . . . . . . . . . . . . .......... 12
Developments Related to Financial Stability. . . . . . . . . . . . . . . . . . . . .............. 24
Recent Developments in Corporate Bond Market liquidity. . . . . . . . . . .
. ........ 2(,
Monetary Policy Rules and Their Role in the Federal Reserve's Policy Process ............ 36
Addendum to the Policy Normalization Principles and Plans . . . .
. ................. 40
Forecast Uncertainty. .
..........
. . . . . . . . . . . . ..
Nor.: This report reflects information that was publicly available as of noon EDT on July 6, 2017.
Unless otherwise stated, the time series in the
.June 201 and, for
d~1ta,
. ln
its final quarter frorn
extend through, for
noted,
data.
change
2m 7; for monthly data,
a given period is measured to
For figur(•;; 14 and 34. not0 th,lt the S&P 5.00 lnd('x and the Dow jon<'S Hank 1nrlt:"x em: products of S&P Oow jones lndi(es ! 1 C and/or it" aft'ili,ltPS ,wd
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have b0cn 1ic1•ns;:d fO! usP by \he Board
Red1qributlon, reprocluction,
67
Labor markets. The labor market has
strengthened further so far this year. Over the
Jirst tlve months of 2017, payroll employment
increased 162,000 per month. on average,
somewhat slower than the average monthly
increase for 2016 but still more than enough
to absorb new entrants into the labor force.
The unemployment rate fell from 4. 7 percent
in December to 4.3
in May---modestly
FOMC n"'r!!c·n><ln
below the median
estimates of its longer-run normal
Other measures of labor utilization arc also
consistent with a relatively tight labor market.
However. despite the broad-based strength
in measures of employment, wage growth has
been only modest.
held down by
the weak pace of
growth in
recent years.
Inflation. Consumer price inflation, as
measnred by the 12-month change in the price
index for personal consumption expenditures.
brielly reached the FOMC"s 2
objective earlier this year. but more recently
has softened. The latest reading, for May,
was 1.4 percent---still up from a year earlier
when falling energy prices restrained overall
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consumer prices. The 12-month measure of
intlation that excludes food and energy items
(so-called core intlation ), which
has
been a beller indicator than the headline
of where overall inflation will be in the fnturc.
was also 1.4 percent over the year ending in
May; this reading was a bit lower than it had
been one year earlier. Measures of
run intlation expectations have been
stable, on balance, though some measures
remain low by historical standards.
Economic growth. Real gross domestic
product (GOP) is reported to have risen at
an annual rate of about l Y, percent in the
tlrst quarter of 20!7, but more recent data
suggest
stepped back up in the second
v'""'""·'~' spending was sluggish
of the year but appears to
rPh,nnnrlr•d recently, supported by job
gains, rising household wealth, and favorable
consumer sentiment. Business investment
has turned up this year after having been
weak for mnch of 2016, and indicators of
business sentiment have been
The
recovery.
housing market continues its
Economic growth has also been supported by
recent strength in foreign activity.
Financial conditions. On balance, domestic
financial conditions for businesses and
households have continued to support
economic growth. Long-term nominal
Treasury yields and mortgage rates have
yields
decreased so llu in 2017.
remain somewhat above levels
prevailed
last summer. Broad measures of equity prices
increased further during the first half of the
year. Spreads of yields on corporate bonds
over comparable-maturity Treasury securities
decreased. Most
of consumer loans
remained widely
while mortgage
credit stayed readily available for households
with solid credit profiles but was still difficult
to access lor households with low credit
scores or harder-to-document incomes.
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Economic activity increased at a moderate
pace over the first half of the year, and the jobs
market continued to strengthen. Measured on
12-month basis. intlation has softened some
in the past few months. The Federal
Market Committee (FOMC) judged
on
balance. current and prospective economic
conditions called for a further
removal
of policy accommodation. At most recent
meeting iu June, the Committee boosted
the target range for the federal funds rate to
l to 1'/. percent The Committee also issued
additional information regarding its plans
for reducing the size of its balance sheet in a
gradual and predictable manner.
68
SUMMARY
In foreign financial markets, equity prices
increased and risk spreads decreased amid
generally firming economic growth and robust
corporate earnings. The broad US. dollar
index depreciated modestly against foreign
currencies.
Financial stability. Vulnerabilities in the
U.S. financial system remained, on balance,
moderate. Contributing to the financial
system's improved resilience, US. banks have
substantial amounts of capital and liquidity.
Valuation pressures across a range of assets
and several indicators of investor risk appetite
have increased further since mid-February.
However, these developments in asset markets
have not been accompanied by increased
leverage in the financial sector, according to
available metrics, or increased borrowing in
the nonfinancial sector. Household debt as a
share of GDP continues to be subdued, and
debt owed by nonfinancial businesses, although
elevated, has been either Bat or falling in the
past two years. (See the box "Developments
Related to Financial Stability" in Part 1.)
VerDate Nov 24 2008
objective over the medium term. The federal
funds rate is likely to remain, for some time,
below levels that are expected to prevail in
the longer run. Consistent with this outlook,
in the most recent Summary of Economic
Projections (SEP), compiled at the time of
the June FOMC meeting, most participants
that the appropriate level of the
funds rate would be below its longernm level through 2018. (The June SEP is
presented in Part 3 of this report.) However,
as the Committee has continued to emphasize,
monetary
is not on a preset course;
the federal funds rate will
the actual path
depend on the evolution of the economic
outlook as informed by incoming data. In
the Committee is monitoring
developments closely.
Interest rate policy. Over the first half of 2017,
the FOMC continued to gradually reduce the
amount of monetary policy accommodation.
Specifically, the Committee decided to raise the
target range for the federal funds rate in March
and in June, bringing it to the current range of
1 to 1~~ percent Even with these rate increases,
the stance of monetary policy remains
accommodative, supporting some further
strengthening in labor market conditions and a
sustained return to 2 percent int1alion.
BahuK-e sheet policy. To help maintain
accommodative financial conditions, the
Committee has continued its existing policy
of reinvesting principal payments from
its holdings of agency debt and agency
mortgage-backed securities in agency
mortgage-backed securities and rolling over
Treasury securities at auction. In
FOMC issued an Addendum to the
June,
Policy Normalization Principles and Plans
that provides additional details regarding
the
the FOMC intends to follow
to
the Federal Reserve's holdings of
Treasury and agency securities in a gradual
and predictable manner. The Committee
currently expects to begin implementing the
balance sheet normalization program this year
provided that the economy evolves broadly as
anticipated. (See the box "Addendum to the
Policy Normalization Principles and Plans"
in Part 2.)
The FOMC continues to expect that, with
gradual adjustments in the stance of monetary
policy, economic activity will expand at a
moderate pace and labor market conditions
will strengthen somewhat further. Inflation
on a 12-month basis is expected to remain
somewhat below 2 percent in the near term bUl
to stabilize around the Committee's 2 percent
Education and climbing the economic ladder.
Education, particularly a college degree, is
often seen as a path to improved economic
opportunities. However, despite the fact that
young blacks and Hispanics have increased
their educational attainment over the past
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2
69
VerDate Nov 24 2008
3
quarter-century, their representation in the
lop 25 percent of the income distribution for
young people has not materially increased.
ln part, this outcome has occurred because
educational attainment has increased for
young non-Hispanic whites and Asians as welL
While education continues to be an important
determinant of whether one can climb
the economic ladder, sizable ditiercnccs in
economic outcomes across race and ethnicity
remain even after controlling for educational
attainment. (See the box "Does Education
Determine Who Climbs the Economic
Ladder?" in Part !.)
in the corporate bond market. A series
including regulatory reforms,
Financial Crisis have likely
altered t!nancial institutions' incentives to
provide
Many market participants
are
concerned with liquidity in
markets for corporate bonds. However, the
available evidence snggcsls that iinancial
markets have performed well in recent years,
with minimal impairment in liquidity, either
in the market for corporate bonds or in
markets for other assets. (See the box "Recent
Developments in
Bond Market
Liquidity" in Part
The global productivity slowdown. Over the
past decade, labor productivity growth both
in the United States and in other advanced
economies has slowed markedly. This
slowdown may rct1cct a waning of the cficcts
from advances in information technology in
the l 990s and early 2000s. Prodnctivity growth
may also be low because of the severity of
the Global Financial Crisis, in
because
spending for research and dc·vcJ,()DJ.ncnt
was muted. Some of the factors restraining
productivity growth may eventually fade,
but it is difficult to ascertain whether the
recent subdued pcrli:mnance of nrr"ir1rtiv'
represents a new normaL (Sec
"Productivity Developments in the Advanced
Economies" in Part 1.)
Monetary policy rules. Monetary policymakcrs
consider a wide range of information on
current economic conditions and the outlook
before deciding on a policy stance they deem
most likely to foster the FO M C's statutory
mandate of maximnm employment and stable
prices. They also routinely consult monetary
policy rules that connect prescriptions for the
policy interest rate with variables associated
with the dual mandate. The use of such rules
requires careful judgments about the choice
and measurement of the inputs into these
rules as well as the implications of the many
considerations these rules do not take into
account. (See the box "Monetary Policy Rules
and Their Role in the Federal Reserve's Policy
Process" in Part 2.)
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MONHARY POLICY REPORT: JULY 2017
70
5
Labor market conditions continued to
strengthen in the lirst live months of this
year. On average, payrolls expanded 162.000
per month between January and May,
a little slower than the average monthly
employment t,'llin in 2016 but still more than
enough to absorb new entrants to the labor
force and therefore consistent with a further
tightening of the labor market (ligure 1).
The unemployment rate has declined
0.4 percentage point since December 2016,
and in May it stood at4.3 pcrccn t, its lowest
level since late 2000 and modestly below the
median of Federal Open Market Committee
(FOMC) participants' estimates of its longerrun normal level.
The labor force participation rate (LFPR)--that is, the share of adults either working or
actively looking lor work-~was 62.7 percent in
May and is little changed, on net, since early
20 J4 (fignrc 2). Along with other factors, the
aging of the population implies a downward
trend in
so the llaltcning out
of the LFPR
the past few years is
consistent with an overall
of improving
labor market conditions.
employmentto-population ratio· that is, the share of the
population that is working--- was 60
in May and has been increasing for
couple of years, reflecting the
of the declining unemployment rate and the
fiat LFPR.
elevated in the first part of the year, while the
rate of layoffs remained low; both are signs
that firms' demand for labor is still solid, In
addition, the rate of quits stayed high, an
indication that workers are confident in their
ability to obtain a new job. Another measure,
the share of workers who are working part
time but would prefer to be employed full
time~~which is part of the U-6 measure of
underutilization from the Bureau of Labor
Stalistics---~fell noticeably further in the first
live months of 2017 (figure 3).
Although the
unemployment
low in May, there are
rate was at a
substantial disparities across demographic
(figure 4). Notably, the unemployment
rate
whites averaged 4 percent during
the first five months of the year, and the rate
for Asians was about 3'h percent. However,
the unemployment rates for Hispanics
(5.4 percent) and African Americans
(7.8 percent) were substantially higher. The
differences in the unemployment rates across
racial and ethnic groups are long-standing,
and they also vary over the business cycle.
1.
Net change iHfh'l.yro!l employment
400
200
200
The strengthening condition of the labor
market is evident in other measures as welL
The number of people filing initial claims for
unemployment insurance has fallen to the
lowest level in decades. In addition. as reported
in the Job Openings and Labor Turnover
Survey, the rate of job openings remained
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800
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VerDate Nov 24 2008
400
71
6
PART 1' RECfNT ECONOMIC AND FINANCIAl. DEVELOPMENTS
68
66
rates for blacks
and Hispanics
rose considerably more
than the rates for whites and Asians during
the Great Recession, and their subsequent
declines have been more rapid. On balance,
however, the differences in unemployment rates
across the
have not narrowed relative
to the
period. (For additional
uJ,,c,u""'u" on differences in economic
outcomes by race and ethnicity, see the box
"Does Education Determine Who Climbs the
Economic Ladder?")
of
Indicators of hourly compensation suggest
has remained modest.
compensation per hour in the
business sector---a broad-based measure of
wages, salaries, and benefits·-····has slowed in
recent quarters and was 2'!4 percent over the
four quarters ending in 2017:Ql (figure 5).'
l. The
a decline ln
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Measures Dflabor undcruti!Jzation
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3.
72
M0Nf1ARY POLICY REPORT: )LiLY 2017
Sm:r:cE: Department of Labor, Bureau ofLab..-,r Statistics.
This measure can be quite volatile even at
annual frequencies (and a smoothed version
is shown in lignrc 5 for that reason). The
employment cost index---which also measures
both wages and the cost to employers of
providing hcnelits- ··also was up
percent in
the 11rst quarter relative to its year-ago level,
about •;, percentage point faster than its gain
of a year earlier. Among measures limited to
wages. average hourly earnings growth---at
percent through May····was little changed
from a year
and a compensation measure
computed by
Federal Reserve Bank of
Atlanta that tracks median 12-month wage
to the Current
growth of individuals
Population Survey was
3V, percent in
May. also similar to its reading from a year
earlier.
!vic<~sures
of cl1ange in hourly compensation
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TERI
28746.017
2017 in anticipation of a possible cut
personal income tax rates. If that is the case, the current
estimate
growth in the first quarter
might be
up once full data become available later
this summer.
73
8
PART 1: RI::CENT ECONOMIC AND FINANCIAL DEVtlOPMtNTS
Does Education Determine Who Climbs the Economic ladder?
allows us to betler isolate the effect of education
from the influence of other variables,
Education,
a college degree, is often
seen as a path to improved economic
Past research has shown that human
form of edue.Hion and
one-third of the variation
experience. Furthermore, research has shown
!eve! of wages received early in an individual's career
persists over time rtnd lnfluC'nces that individual's
for
to come. 2 The
shows
that has
the top
as a whole. The
to he an important
However, while education
determinant of whether one can climb the economic
!adder, sizable differences in economic outcomes
across race and ethnicity remain even after controlling
for educational attainment
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1111!11111111-U
74
MONETARY POLICY REPORT JULY 2017
II
-!!lilt
!Ill
Overall, the representation of black and
work~rs
9
~lispanic
continues to lag
occurs
in the
in the later
e<JiJC<iiUOfldl attainment~the
--that blacks and
both blacks
bilchelor's
economic
However, even
representation is substantially
cm1ege-eow:atE'll white and /\sian people
1992 2:016
more likely to achieve the top quartile of income
than their black or African American and Hispanic or
Latino peers.
Here the int<>roret:lficm
of changes over time is
because the overall increase
adults implies
the average
quartile of income
the top
h<1s increased between generations.
perc.ent
Taken
B.
these observations show that
eatJCauonar attainment can help
Percent of young adults with a bachelor's degree or
higher
their !ifPtirne
70
adults
potentiaL
!t•ve!s of
attainment across all groups have
of
created greater competition for positions at the
the economic ladder. fvE>n among those with
differences remain in renres,ent.aticm
60
50
40
received and the spt~cific schools
among
other factors,-- n1ay matter much more than previously
thought.'
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20:03 May 04, 2018
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lLS.
75
6.
PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS
Change in business-sector output per hour
7.
These modest rates of compensation gain
likely reflect the olrsctting influences of a
tightening labor market and
weak productivity growth.
labor productivity has increased only about
1 percent per year, on average, well below the
average pace from 1996 through 2007 and
also below the gains in the 1974·95 period
(figure 6). For most of the period since
201 L labor productivity growth has been
particularly weak, although it has turned
The longer-term softness
nn'"''"''v''v growth may be partly attributable
to the sharp pullback in capital investment
during the most recent recession and the
relatively modest rebound that fo1Jowed. But
there
be other explanations, too, and
COJ1Si<derable dehate remains about the reasons
for the general slowdown in nn)dl!CliiVltv
growth. (For a more cmnprehen:;ive
of productivity, see the
"Productivity
Developments in the Advanced Economies.")
in the price index for personal consumption
cxpcB<Titures
Momhly
_lO
2.0
!.5
1.0
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20:03 May 04, 2018
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Jn the early months of 2017, consumer price
inflation, as measured by the 12-momh change
in the
index for personal consumption
H'"'"""' ""''" (PCE), continued its climb from
very low levels that
in 2015 and
down by falling
early 20 !6 when it was
oil and import prices. Indeed, consumer price
inflation brielly reached the FOMC's 2 percent
objective earlier this year before falling
back to 1.4 percent in May (figure 7). Core
inflation, which
provides a better
indication than
headline measure of where
overall inflation will be in the future. also was
1.4 percent over the 12 months ending in May,
a slightly slower rate than a year earlier. As is
the case with headline inflation, the 12-month
measure of core inflation had been higher
earlier this year, reaching l.R percent. Both
measures of inflation have recently been held
down by steep and likely idiosyncratic price
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] ()
76
MONfTARY POI.ICY RfPORTo JULY 2017
declines for a few specific categories, including
wireless telephone services and nn•<r.nr•ll<m
drugs, which do not appear to
the overall trends in consumer prices. The
!2-month change in the trimmed mean PCE
price index- --an alternative indicator of
underlying inilation produced by the Federal
Reserve Bank of Dallas--slowed by less than
overall or core PCE price inflation over the
past several months.
8.
11
Brent spot and futures prices
130
120
jj!)
lO()
After rebounding from their early 2016lows,
oil prices leveled off early this year
8).
Since then they have declined ''""''w '""·
despite OPEC's decision in late May to renew
its November 2016 agreement to reduce its oil
production, thereby extending the November
production cuts through early 2018. Reflecting
lower crude oil prices as well as smaller retail
margins, seasonally adjusted retail gasoline
prices have also declined since the --- 0 .... , ... ,
of the year. Nevertheless,
of both
oil and retail gasoline
above their early
2016lows, and futures prices
that
market participants expect oil
to rise
gradually in coming years.
9()
80
70
60
50
40
JO
20
Nonfuel impm1 prices and U.S. dollar exchange rate
wn
IO(l
and declines in
commodity
(figure 9). Nonfuel import
last
year and have risen since
stopped appreciating and supply disruptions
boosted world prices of some nonfuel
commodities, especially industrial supplies
and metals. In recent months, depreciation
of the dollar has further pushed up non-oil
import prices, which are now slightly higher
than in mid-2016.
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115
120
llO
110
!05
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9.
77
PART 1: RECENT ECONOMIC AND FINANCIAl OLVELOPMFNTS
Productivity Developments in
Advanced Economies
The slow
atiracled
attention
on whether the slowdown
but
effect of the
(GFC) or
the start of an era of prolonged lower
discussion reviews recent
nrrxlrrctivitv rio'""''''n.nm>k in the United States and the
economies has stagnatNl in the pJst decade against
historical
A number
growth of about 1/4 percent.
hJve been put
.w.fmmornrc
ofT FE Some
Labor productiYity grow1h
!99{).-20{)4
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2005-20!6
78
MONElARY POliCY REPORT: IULY 2017
13
p
Other explanations blame the weak TFP growth
long-run neutral interest rate 1 making the policy rate
to reach its effective lower bound and thus
on the unusual severity of the GFC. Some empirical
evidence
in which
ability of monetary
that the "<;rh"'"'"'''e•·i"
to
even in the presence
recessions.
impaired since
CFC/ In addition, measures of innovation such
as research and
(R&D)
fell
C.
World trade as a share of gross domestic product
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32
79
10.
ll,
PART 1: RECLNT ECONOMIC AND FINANCIAl DEVELOPMENTS
Expectations of inflation likely influence
actual inflation by affecting wage- and pricesetting decisions. Survey-based measures of
inflation expectations at medium- and longerterm horizons have remained relatively stable
so far in 2017. In the second-quarter Survey
of Professional forecasters conducted by
the Federal Reserve Bank of Philadelphia,
the median expectation for the annual rate
of increase in the PCE price index over the
next !0 years was 2.1 percent, the same
as in the first quarter and little changed
from the readings during 2016 (figure
In the University of Michigan Surveys
Consumers, the median value for inflation
expectations over the next 5 to lO years~
which has been drifting downward for the past
few years-has held about flat at a low level
since late last year.
Median inflation expectations
5-to-10-ycar-forward int1ation compensation
~-
2{)
LO
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Inflation expectations can also be ganged
by market-based measures of inflation
compensation, though the inference is
not straightforward because inflation
can be importantly affected
nrc,miunlS associated with
Measures of longer-term
inflation compcnsation~~dcrivcd either from
clillcrcnccs between yields on nominal Treasury
securities and those on comparable Treasury
Inflation-Protected Securities (TIPS) or from
inflation swaps---have fallen back somewhat
this year after having moved up in late 2016
(figure ll ). 2 The TIPS-based measure of
2. Inflation compensation implied by the TIPS
hreakeven inflation rate is based on the difference, at
comparable maturities, between yields on nominal
Treasury securities and yields on TJPS, which are indexed
index (CPI)< inflation
to the
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14
80
MONETA!<Y POliCY REPORT: JULY 2017
15
5-to-!0-ycar-forward inflation compensation
is now l% percent, and the analogous measure
of inflation swaps is now about 2 percent Both
measures arc well below tht:
to 3 percent
range that persisted for most of the I 0 years
before 2014.
Change in real gross domestic product and gross
domestic income
After having moved up at an annual rate of
2% percent in the second half of 2016, real
gross domestic product (GDP) is reported to
have increased about 1y, percent in the first
of this year (figure 12). 3 The step-down
first -quarter growth was largely attributable
to soft inventory investment and a lull in the
growth of consumer spending; in contrast, net
exports increased a bit, residential investment
grew robustly, and spending by businesses
surged. Indeed, bnsiness investment was
strong enough that overall
domestic
purchases by
ilnal purchases----that is,
US. households and businesses, which tend to
carry more signal !or future GDP growth than
most other components of overall spcnding~-
movcd up at an annual rate of about 3 percent
in the first
For more recent months,
indicators
spending by consumers and
businesses have been strong and suggest !hat
growth of economic activity rebounded in the
second quarter; thus, overall activity appears
to have expanded moderately, on average, over
the lirsl half of the year.
Sol RCf.:
Oepartm~·nt
of Commerce. Bureau of h·onomic Analysis
some horin.m. Focusing on inflation cornpensatinn 5 to
10 years ahead is useful, partkularly for monetary policy,
be-cause such fOrward measures encompass market
participa11ts' views ahout where inl1ation \viii settle in the
long term after developments influencing inflation in 1he
short term have run their course.
3. Real
domestic income (GDl), which is
same as GDP but is constructed from
different source data, had heen rising at n>ughly the sam;:
rate as rca} GOP for most of 2016. However. real GDI
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TERI
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prove to have been transitory.
81
16
PART 1' RECENT ECONOMIC AND FINANCIAl DlVELUPMLNTS
The economic expansion continues to be
supported by accommodative financial
conditions, including the low cost of
borrowing and easy access to credit for many
households and businesses, continuing job
gains, rising household wealth, and favorable
consumer and business sentiment.
l4<
15.
After increasing strongly in the second half of
2016, consumer spending in the first quarter
of this year was tepid. Unseasonably warm
weather depressed spending on
services,
and purchases of motor vehicles
from
an unusually high pace late last year. However,
household spending seems to have picked up
in more recent months, as purchases of
services returned to seasonal norms and
sales firmed. All told, consumer spending
increased at an annual rate of 2 percent
over the first live months of this year, only
a bit slower than in the past couple of years
(figure 13).
Prices of existing single-family houses
Beyond spending, other indicators of
consumers' economic well-being have
been strong in the aggregate. The ongoing
improvement in the lahor market has
supported further gains in real disposable
income (DPl), a measure of income
accounting for taxes and adjt1sting for
inflation. Real DPI increased at a solid annual
rate of 3 percent over the first live months of
this year.
Nominal house prices and priC{.."-fent rmlo
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Gains in the stock market and in house prices
over the first half of the year have hoosted
household net wealth. Broad measures of U.S.
equity prices have continued to increase in
recent months after moving up considerably
late last year and in the first quarter. House
prices have also continued to climb, adding
to the balance sheet strength of homeowners
(llgurc 14). Indeed, nominal house price
indexes are close to their peaks of the mid2000s. However, while the ratio of house
to rents has edged higher, it remains well
its previous peak (figure 15). As a result of the
82
17
MONFTc\RY POLICY REPOH JULY 2017
increases in home and equity prices, aggregate
household net worth has risen appreciably. In
fact, al the end of the Jirst quarter of 2017,
household net worth was more than six time,:
the value of disposable income, the highestever reading for that ratio (figure 16).
has also been snpportcd
from debt service payments.
household debt service burden-the ratio
of required principal and interest
on outstanding household debt to
income, measured for the household sector
as a whole-has remained at a very low level
by historical standards. As interest rates rise,
the debt burden will move up only gradually,
as most household debt is in fixed-interest
products.
Consumer credit has continued to
this year but more moderately than
2016 (figure 17). Financing conditions are
generally favorable, with auto and student
loans remaining widely available and
outstanding balances continuing to expand
at a robust, albeit somewhat reduced, pace.
Even though delinquency rates on most types
of consumer debt have remained low by
historical standards, credit card and auto loan
delinquencies among
borrowers have
drifted up some.
deteriorating credit
tightened standards
credit cards and auto
lending. Mortgage credit has remained readily
available for households with solid credit
but it was still ditlicult to access for
h~nc.c•h··•lrl< with low credit scores or harder-to·
document incomes.
16.
Wealth-to-income ratio
R,1UO
~-c----------------·------------
7.0
2005
Nor~::
The
seri\~S
2009
is tli<', ratm oflmusdl(l!d
20!3
m~t
worth to disposabk r•~I~)!).aj
1,000
800
600
400
200
"0
2{){)
400
600
l X.
Indexes of consumer sentiment and income expectations
lndcx
---------~------
-----------------·-
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Consumers have remained optimistic about
their financial situation. As measured by the
Michigan survey, consumer sentiment was
solid through most of 2016, likely reflecting
rising income and job gains. Sentiment moved
up appreciably after the presidential election
last November and has remained at a high
level so l~rr this year ((lgure 18). Furthermore,
83
18
19.
20.
21.
PAR 11' RfctNl ECONOMIC AND fiNANCIAL lliVELOPMENIS
New and existing home sales:
the share of households expecting real income
or two has gone up
to rise over the next
markedly in the past
months and is now in
line with its pre-recession level.
Several indicators of housing activity have
continued to strengthen gradually this year.
Sales of existing homes have gained, on net,
while house prices have continued to rise
and mortgage rates have remained low, even
though they are up from last year (ligures 19
and 20). In addition, single-family housing
starts registered a slight increase, on average,
in the first five months of the year. although
multifamily housing starts have slipped
(figure 21 ). Despite the modest increase in
construction activity, the months' supply of
homes for sale has remained near the low
levels seen in 20 !6, and the aggregate vacancy
rate has fallen hack to levels observed in the
mid-2000s. Lean inventories are likely to
support further gains in homebuilding activity
going forward.
Mortgage rates and housing atTordability
Private housing starts and permits
20
Led by a surge in spending on
mining structures, real outlays for
investment--- that is, private nonresidential
at the
llxcd investment-rose
been about
beginning of the year after
fiat for 2016 as a whole (figure 22). The sharp
gains in drilling and mining in the first quarter
mark a turnaround tor the sector; energysector investment had declined noticeably
f(lllowing the drop in oil prices that began
in mid-2014 and ran through early 2016.
More recently, rapid increases in the number
of drilling rigs in operation
that
investment in this area
second quarter of this year.
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Moreover, business
on em11iron1<,nt
and intangibles
as research
ae·vel<~ptnent) advanced solidly at the
ocgawJng of the year after having been
84
MONETARY POliCY REPORT: jULY 2017
roughly fiat in 2016. Furthermore, indicators
of business spending are
upbeat:
Orders and shipments
capital
have
posted net gains in recent
and indexes
of business sentiment and activity remain
elevated after having improved significantly
late last year.
Aggregate flows of credit lo large nonfinancial
firms have remained solid, supported in part
by continued low interest rates (figure 23).
The gross issuance of corporate bonds was
robust during the first half of 2017. and yields
on both speculative- and investment-grade
corporate bonds remained low by historical
standards (figure 24). Gross
issuance by
on average, as
nonfinancial iirms stayed
seasoned equity offerings continued at a robust
offerings
pace and the pace of initial
picked up from the low
seen in 2016.
19
Change in real private uomcsidcntial fixed investment
Stntc!urcs
Equipment and intangible capital
Q!
25
23. Selected
Commacia! paper
80
Bond.~
Bank loam:
Sum
Ql
60
{0
Despite the
in business investment,
demand for
loans was subdued
early this year, and outstanding commercial
and industrial (C&I) loans on hanks' books
contracted in the first quarter. ln the April
Senior Loan Otiiccr Opinion Survey on Bank
Lending Practices (SLOOS ). banks reported a
broad-based decline in demand for C&lloans
during the first quarter of 2017 even as lending
standards on such loans were reported to be
basically
Banks also
weaker demand
20
20
Corporate hond yields, hy securities rating
to large nonfinancialilrms appeared to be
strengthening somewhat during the second
quarter. Meanwhile, measures of small
business credit demand remained weak amid
stable supply.
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4. The SLOOS is available on lhc Board's wcbsilc al
https://www.fedcralrcscrvc.gov/data/sloos/sioos.htm.
85
20
PART 1' RECENTECONOMIC AND FINANCIAl DEVELOPMENTS
25. Change in real impmis and exports of goods
and services
a
lmpor!S
Exports
20!2
2013
20!4
2015
20!6
2017
Department ofCommcrct:, Bureau of Economic Analysis
U.S. trade and current account balances
Quart~rly
pace
In the first quarter of 2017, U.S. real exports
increased briskly and broadly following
moderate growth in the second half of last
year that was driven by a surge in agricultural
exports (figure 25). At the same time, real
import growth declined somewhat from its
strong pace in the second half of last year. As
a result, real net exports contributed slightly
to 1..1.S. rcaJ GOP growth in the first quarter.
Available trade data through May suggest that
the growth of real exports slowed to a modest
pace in the second quarter. Nevertheless, the
growth appears to have
average pace of
stepped up in the
half of 2017 compared
reflecting stronger growth
with last year,
abroad and a
drag from earlier
dollar
All told, the available
first half of this year suggest that
data for
net exports added a touch to US. real GOP
growth and that the nominal trade deficit
widened slightly relative to GDP (figure 26).
Federal purchases moved sideways in 2016,
and policy actions had little effect on federal
taxes or transfers (llgnrc 27). Under currently
enacted legislation, federal fiscal policy will
likely again have a roughly neutral influence on
the growth in real GDP this year.
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After narrowing significantly for several
years, the federal unified deficit has widened
from about 2Y,. percent of GOP in fiscal
year 20!5 to 3Y.; percent currently. Although
expenditures as a share of GOP have been
relatively stable over this period at a little
receipts moved lower in 2016
under 21
and have
down further so far this year
to roughly 17'/2 percent of GOP (figure 28).
The ratio of federal debt held hy the public
to nominal GOP is quite elevated relative
to historical norms. Nevertheless. the dclieit
remains small enough to roughly stabilize
this ratio in the neighborhood of 75 percent
(figure 29).
Change in real
consmnption
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27.
86
MONETARY POLICY RlPORT: IUlY 2017
21
28. Federal receipts and expenditures
f'~rc~J\\
;l,n;nm!
The fiscal position of most state and local
governments is stable, although there is a range
of experiences across these
Many
state governments are
lackluster
revenue growth, as income tax
have
been only edging up, on
quarters, In contrast, house
gains have
continued to push up property tax revenues at
the local leveL Employment growth in the state
aud local government sector has been anemic
of hiring in
so far this year following a
2016 that was the strongest
2008, Outlays
for construction by these governments have
been declining (figure 30).
Df!WOJU!al GDl'
26
18
··- 16
14
29.
Federal govcnuncnt debt hdd by the public
The path for the expected federal funds rate
implied by market quotes on interest rate
derivatives has llattcncd, on net, since the
end of December, moving higher for 2017
but slightly lower further out (figure 31 ).
The expected policy path moved
at the
beginning of the year, reportedly
investor perceptions that expansionary !!seal
policy would likely be forthcoming over the
near term, but subsequently fell amid some
waning of these expectations as well as FOMC
communications that were interpreted as
signaling a somewhat slower pace of
rate increases than had been
80
70
50
40
30
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Survey-based measures of the expected path
of
also moved up for 2017. Most
of
respondents to the Federal Reserve
Bank of New York's Survey of Primary
Dealers and Survey of Market Participants-which were conducted just before the June
FOMC mceting~projected an additional
25 basis point increase in the FOMC's target
range for the federal funds rate, relative to
what they projected in surveys conducted
before the December FOMC meeting,
as the most likely outcome for this yeaL
87
PART l: RECENT ECONOMlC ANO FINANCIAL OfVfl OPMfNTS
State and local employment and structures investment
HiilmnsolcllaiOcdt:'(l(lil)do!iars.?.nnu~!rak
Analysis.
31.
Market-implied federal funds rate
Dec.:"\0,21.-Ho:'>
~
2.0
l.O
32.
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After rising significantly during the second
half of 2016, yields ou medium- and longerterm nominal
securities have
decreased 5 to 25
points, on net, so far
in 2017 (figure 32). The decrease in longerterm nominal yields since the beginning of
the year largely reflects declines in inflation
to soft incoming
compensation due in
data on inflation,
real yields little
changed on net. Consistent with the changes
in Treasury yields, yields on 30-year agency
mortgage-backed securities (MBS)--- -an
important determinant of mortgage interest
rates-decreased slightly over the first half of
the year (ilgure ~3). Treasury and M BS yields
up somewhat in late June, driven in part
increases in government yields overseas.
However, yields remain quite low by historical
standards.
Broad U.S. equity indexes continued to
(figure 34). Equity
were
supported by lower
rates and increased optimism that
corporate
will continue to strengthen
this year. Stock
of companies in the
technology sector increased notably on net.
After rising significantly toward the end of
last year, stock
of banks performed
about in line
the broader market during
the first half of 2017. The implied volatility
of the S&P 500 index one month ahead---the
V!X---decreased, on net, ending the period
close to the bottom of its historical range. (For
a discussion of financial stability issues, sec
the box "Developments Related to Financial
Stability.")
Yields on nominal Treasury securities
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Expectations lor the number of rate hikes in
2018 were about unchanged. Market-based
measures of uncertainty about the policy
rate approximately one to two years ahead
decreased slightly, on balance, from their yearend levels.
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30.
88
MONETARY POLICY REPORT: jUI.Y 1017
:u.
Yield and spread on agency mortgage~backcJ securities
Bond
for investment- and speculativegrade
decreased, and spreads for
speculative-grade firms now stand ncar the
bottom of their historical ranges.
Available indicators of Treasury market
functioning remained stable over the
first half of 2017. A variety of liquidity
metrics~including bid-ask spreads, bid
sizes, and estimates of transaction costS-··
either improved or remained unchanged
over the period, displaying no notable signs
of liquidity pressures. The agency MBS
market also continued to function well. (l:'or
bond
a detailed discussion of
market functioning, see the
"Recent
Developments in Corporate Bond Market
Liquidity.")
23
400
34.
Equity prices
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Conditions in domestic short-term funding
markets have remained stable so far in 2017.
Yields on a broad set of money market
instruments moved higher in
to the
FOMC's
actions in
aud June.
The
federal funds rate generally
traded near the middle of the target range
and was closely tracked by the overnight
Eurodollar rate. The spread between the
three-month LIBOR (London interbank
offered rate) and the OIS (overnight index
swap) rate has returned to historical norms
over the first half of 2017, declining from the
elevated levels that prevailed at the end of
last year around the implementation of the
Securities and Exchange Commission money
market fund reform.
89
24
PART 1: RE:CfNT FCONOM!C AND FINANCIAL l)[VELOPMl-NTS
Developments Related to
Stability
A.
Vulnerabilities in the U5.
Sdccted funding for large banks
moderate on balance.
most
highs,
U.S. banks
reiidnce on short-term wholesale funding at
these institutions has cunlinued to decline. Valuation
of assets and several indicators
HlLB advann·s
30{)
250
200
150
100
50
has remoincd subdued,
driven primMily by
and new
households with strong credit histories.
·n1e strong capital
of the financial sP.ctor
has contributed to the
fin;mcia! system.
ratios at most bank
holding companies
to be
high, mainly as a r~?suh of the higher regulatory
recruHerrrencs. At the same time, measures of
have increased modestly on a year-on-year
capital ratios Jt insurance companies
standards.
source of funding for the banks, which hdd
2016, has fa !len
in
A\. The MMf
Commission
h;:we led to
Valuation pressures h<:~ve increased further across a
rangp of assets,
corporate bonds, and cornn1en:ial
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increase if investors shift out of MMFs into more
90
MONETARY POLICY RtPOH IULY 2017
I
J
r
1
1 l!flllllllll
Term premiums on Treasury securities continue to be in
the lower pa1i of their historical distribution. A sudden
to more norma! levels post's a
lon2-rnatur~'lvTreasury prices, which
prices of other assets. Forward
""'"''-tn-•P.<rnmo' ratios rose a bit further and ,are
levels since the
2000s, whi!e
25
IJIIJIIJI
long-term
households
!ow leveL
nev
borrowing is
among borrowers with
credit scores. ln contrast, the
of nor>~rn<>nr-ut
corporations continues to be
is concentrJted among
and the total out:stano,tng
B.
Ptivatc nontinancial sector crediHo-GDP ratio
l.R
!.6
hy December
resolution plans are
operations,
and
issued to these organi?.alions reflects lhf'
restructuring they have undertaken to form
intt>rmediary holding companies.
14
1.0
bcreg20170J24a.htm.
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~--
91
26
PART l; RECENT ECONOMIC AND FINANCIAL DEVELOP,'V1ENTS
Bond Market liquidity
Recent Developments
In addition, financial markets have
pPrfonned well during recent
stre-ss. 1 Fven in instances in
in cerlain rnarkets
effects have been
market
re-turns
by invf'stors to
assets.;
consequences. tn the
it therefore decreases the cost of valuable economic
and so contributes to the efficient allocation of
conditions that are resilient
of this discussion! we
with emphasis on the market for
arc
hJS
other markets. Hovvever,
a
of liquidity indicate that
corporate bond markets have been
in
periods of market stress. However,
evidence does not point to any substantial impairment
in liquidity in major financial markets in recent
A. Mean bid-ask spread and market effect f(w corporate bonds
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28746.036
tlliilll
92
MONfTARY POliCY REPORT: )UIY 2017
shows that the estimated mean effective bid-ask spread
for U.S. corporate bonds has remained low in recent
years. Before the financial cri,;;is, bid-ask
averaged about 1 percent of the price
This measure of trading costs '"'""'kPlPrl
financial crisis but has
to the
before the crisis. Measures of the effect
on
.and h,we been fairly
stable in recent
addition, other mt"Jsures
related to factors associated with mJ.rkel liquidity,
27
in tighter bid-ask sp1eads,' Indeed,
DOI'\ICIOants have expressed concern
inventories rnay reflect in
reduced willingness or capacity of the
to make markets, which mdy in turn
liquidity.
Figure B shows that
of
bonds
such as trends in average trade
and turnover, also
market Hquidit)~ conditions are benign.'
said 1 some ren>nt work suggests that these
traditional measurf's of transaction costs might
the dpgrce of
in part because
have
incr~:•asingly
principals to acting
H.
as
agents to reduce
risk
(continued on next page)
Broker-dealer holdings of WJ110ta!c and foreign honds
BtliHiUS{lfdollars
-
480
40<1
~
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S01 1R( 2: Fcdt'ral
80
93
28
PART I: RECENT ECONOMIC AND FINANCIAL OEVHOPMENTS
Recent Developments in Corporate Bond Market liquidity
regulations-such as the Vo!ckPr rule and 1he
C.
rconunued!
CDS (cn:dit default swap)-hond basis
ratio, which aimed to make
system
and sounder--and changes
have contributed to the continued
200
200
400
,600
800
environrnent"There are indk'Jtions that m<Jrket
structure has changed in rt.>cent yPars, and trades in
certain situations and market segments might have been
n1ore costly at times. But markPts have also
and some measures of dislocdtion have
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&AUWMPN
94
MONETARY POliCY REPORT: )UEY 2017
35.
Aggregate credit provided by commercial
banks continued to increase through the
Jlrst quarter of 2017, though at a slower
pace than in 2016, leaving the ratio of total
commercial bank credit to nominal GDP
slightly lower (i1gure 35). The expansion of
core loans slowed during 2017, consistent
with banks' reports in the April SLOOS of
weakened demand for most loan categories
and tighter lending standards for commercial
real estate loans. However, the growth of core
loans appeared to be picking up somewhat
during the second quarter. Measures of bank
profitability have continued to improve so far
this year but remained below their historical
averages (Jlgure 36 ).
29
Ratio of total commercial hank credit to nmninal gross
domestic product
Qnart<::rly
7S
70
60
36.
Profitability of hank holding companies
Pe::cent,arumalrat"
30
20
have generally remained
since year-end.
Over that period, yield spreads on 20-year
general obligation municipal bonds over
comparable-matnrity Treasury securities were
littic changed on balance. Puerto Rico filed to
enter a
process to restructure
its debt after it
to reach an agreement
with bondholders, and several credit rating
agencies downgraded the bond ratings of the
state of !llinois. However, these events have
had no noticeable effect on broader municipal
bond markets.
JO
JO
20
2.0
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Financial market conditions in both the
advanced foreign economies (Af"Es) and the
emerging market economics (EMEs) have
generally eased since January. Better-thanexpected data releases, robust corporate
earnings, and the passage of risk events--such as national elections in some European
countries---boosted investor conlldcncc. Broad
95
30
37.
PART 1: RECENTECONOMIC AND fiNANCIAL llLVELOPMENfS
Equity indexes for selected foreign eCDnomies
Advanced fnretgn econo:nnt'S
120
1!5
llO
105
lOil
95
90
38.
Emerging market mutual fund flows and spreads
indexes in advanced and emerging
economies rose further (figure 37).
In addition, spreads of emerging market
sovereign bonds over US. Treasury securities
narrowed, and capital flows into emerging
market mutual funds picked up (figure 38).
Govemment bond yields in the AFEs generally
remained very low,
reflecting investor
''""N·tocttnn< that
monetary
accommodation would be required
some time (ilgure 39). In the United
Kingdom. softer macroeconomic data and
uncertainty about future policies and growth
the process of exiting
as the country
the European
also weighed on yields.
However, AFE government bond yields picked
up somewhat in late June, partly reflecting
investors' focus on remarks by officials from
some AFE central banks suggesting possible
shifts toward less accommodative policy
stances. In the euro area, hank supervisors
intervened to prevent the disorderly failure of
a few small to medium-sized lenders in Italy
and Spain; business disruptions were minimal,
and spillovers to other European banks were
limited.
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Since the start of the year, the broad dollar
index-a measure of the trade-weighted value
of the dollar against foreign currencies ... has
rtc,nrectott'c about 5 percent, on balance, after
more than 20
between mid20!4 and late 2016
40). The weakening
since the start of the year partly reflected
growing uncertainty about prospects lor more
expansionary U.S. fiscal policy as well as
n1ounting confidence in the foreign cconotnic
outlook. The enro rose against the dollar
following the French presidential election, and
the Mexican peso appreciated substantially as
the Mexican centra! bank tightened monetary
policy and as investor concerns about the
potential for substantial disruptions of
U.S.-- Mexico trade appeared to ease.
96
MONETARY POliCY REPORT: JULY 2017
40.
Economic
JI
U.S. dollar exchange rate indexc:;
pace
ln the first quarter, real GDP grew at a solid
pace in Canada, the euro area, and Japan,
partly reflecting robust growth in fixed
investment in all three economies (tlgurc 41 ).
In contrast. economic growth slowed to a
pace in the United Kingdom, reflecting
consumption growth and a decline in exports.
!n most AFEs, economic survey indicators,
such as purchasing manager
generally
remained consistent with
economic
growth at a solid pace during the second
quarter.
In late 2016, consumer price inflation
(measured as a 12-month percent change) rose
substantially in most AFEs, partly reflecting
increases in energy prices (ligurc 42). Since
then, inflation has leveled off in Japan and
dedi ned somewhat in the euro area as upward
pressure from energy prices eased, core
inflation stayed low, and wage growth was
subdued even as unemployment rates declined
further in both economics. In comrast, in the
United Kingdom, headline inflation rose wdl
above the Bank of England's (BOE) 2 percent
target, largely reflecting upward pressure from
the substantial sterling depreciation since the
Brcxit referendum in June 20 ln.
170
41.
Real gross domestic product growth in selected
advanced foreign economics
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AFE central banks kept their policy rates at
historically low levels, and the Bank of Japan
kept its target range for J0-year government
bond yields near zero. The European Central
Bank (ECB) maintained its asset
program, though it slightly
the
of purchases, and the BOE completed
bond purchase program it announced last
August. However, the Bank of Canada,
BOE, and ECB have recently suggested
that if growth continues to reduce resource
slack, some policy accommodation could be
withdrawn. The ECB remarked that the forces
97
32
PART J: RECENT ECONOMJC AND FJNANCJAL DEVELOPMENTS
holding down inllation could be temporary.
The BOE indicated that some monetary
accommodation might need to be removed if
the tradeoff between supporting employment
and expediting the return of inflation to its
target is reduced.
Chinese economic activity was robust in
the first quarter of 20 !7 as a result of solid
domestic and external demand
43).
More recent indicators suggest
growth
moderated in the second quarter as Chinese
authorities tightened financial conditions
and as
growth slowed. In some other
emerging
economies, growth picked up
in early 2017 as a result of stronger external
demand and manufacturing activity. However,
growth of the region's exports, especially to
China, slowed so far in the second quarter.
American economies
recovery
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ln Mexico, growth decelerated a touch in
the first quarter of 2017, partly reflecting a
slowdown in private consumption following
sharp hikes in domestic fuel prices. These price
hikes, together with the ctfccts of earlier peso
depredation on import prices, contributed
to a sharp rise in Mexican inllation, which
prompted the Bank of Mexico to further
tighten monetary policy. Following a
prolonged period of contraction. the Brazilian
economy posted solid growth in the first
of 2017, partly reflecting a surge
exports and a strong harvest. However,
domestic demand has remained very weak
amid high unemployment and herglltened
political tensions, and indicators economic
activity have
down recently. ln Brazil
and some other
American economies.
declining inllation has led central banks to
reduce their policy interest rates.
98
33
Over the past year and a half, the Federal
Open Market Committee (FOMC) has been
gradnallv increasing its target range for the
federal f~nds rate as the economy continued
to make
toward the Committee's
objectives maximum employment and price
stability. After having raised the target range
for the federal funds rate last December, the
Committee decided to raise the
range
again in March and in June,
it to
1 to l ~~percent (figure 44) 5 The FOMC's
decisions reflected the progress the economy
has made, and is
to make. toward the
Committee's obicc:th,es.
When the Committee met in March, it decided
to raise the target range for the federal funds
rate to% to l percent Available information
suggested that the labor market had continued
See Board of Govemors of the Federal
Reserve System (201 7), ''Y..C:Jcral Resc-D/C Issues
FOMC Statement,'' press release, March
and
of Governors of
the Federal Reserve System (2017), "f'cdcral Reserve
lssues FOMC Statement,'' press release. June 14, https://
w\vw.fedcralreservc.gov/newscvcnts/prcssrclcascs/
monctary20170614a.htm_
VerDate Nov 24 2008
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The data available at the time of the June
FOMC meeting suggested a rebound in
economic activity in the second quarter,
leaving the projected average pace of growth
over the first half of the year at a moderate
leveL The labor market had continued to
strengthen, with the unemployment rate falling
nearly 'h percentage point since the beginning
of the year to 4.3 percent in May, a low level
by historical standards and modestly below
the median of FOMC participants' estimates
of its longer-run normal leveL Inflation
measured on a 12-month basis had declined
few months but was still
since last summer. Like the
int1ation measure, core inJlation was
running somewhat below 2 percent. With
~
to remain near its
miiXt!mum sustan.tauH: level, the Committee
continued to expect !hat inJlation wonld move
up and stabilize around 2 percent over the next
couple of years, in line with the Committee's
Selected interest rates
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44.
to strengthen even as growth in economic
activity slowed during the first quarter.
Inflation measured on a 12-month basis had
moved up appreciably and was close to the
Committee's 2 percent longer-run objective.
Core inJlation_ which excludes volatile energy
and food prices, continued to nm somewhat
below 2 percent.
99
PARt 2: MONETARY i,\)IICY
longer-run objective. In view of realized
and expected labor market conditions and
inflation, the Committee decided to raise
target another '4 percentage point to a range
of l to l '4 percent.
Even with the gradual reductions in the
amount of policy accommodation to date, the
Committee judges that the stance of monetary
policy remains accommodative,
supporting some further strengthening labor
market conditions and a sustained return to
2 percent inflation. In particular, the federal
to remain somewhat below
funds rate
is, the level of the federal
its neutral
funds rate that is neither expansionary nor
contractionary.
In evaluating the stance of monetary
policymakers routinely consult pn;scnj:•lJCms
can
from a variety of policy rnles,
serve as useful benchmarks. However, the
use and interpretation of such prescriptions
require careful judgments about the choice
and measurement of the inputs to these
rules as well as the implications of the many
considerations these rules do not take into
account (see the box "Monetary Policy Rules
and Their Role in the Federal Reserve's
Policy Process").
The FOMC has continued to 0mnh""''P
size of
that, in determining the timing
future adjustments to the target range for
the federal funds rate, it will assess realized
and expected economic conditions relative to
its objectives of maximum employment and
2 percent inflation. This assessment will take
into account a wide range of information,
including measures of labor market
conditions, indicators of inflation pressures
and inflation expectations, and readings on
financial and international developments. The
Committee will carefully monitor actual and
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expected inflation developments relative to its
symmetric inflation goal.
The Committee currently expects that the
strength in the economy will warrant
in the federal funds rate,
gradual
and that the federal funds rate will likely
remain, for some time, below the levels that
the Committee expects to prevail in the longer
run. Consistent with this outlook, in the most
recent Summary of Economic Projections.
which was compiled at the time of the June
FOMC meeting, most FOMC participants
that the appropriate level of the
funds rate would be below its longerrun level through 2018 6
payments
securities in
and agency
securities and rolling
agency
over maturing Treasury securities at auction.
Consequently, the Federal Reserve's total
assets have held steady at around $4.5 trillion,
with holdings of U.S. Treasury securities at
$2.5 trillion and holdings of agency debt
mortgage-backed securities at
and
nm'·oxim:ltellv $1.8 trillion (figure 45). Total
on the Federal Reserve's halance
sheet were also mostly unchanged over the first
half of 2017.
ln June. policymakers augmented the
Committee's Policy Normalization Principles
and Plans issued in September 2014 by
providing additional details regarding the
approach the FOMC intends to use to reduce
6. Sec the June 2017 Summary of Economic
as an addendum to the
Projections, \vhtch
2017, meeting of the Federal
minutes of the June
Market Committee and is included as Part 3 of
report
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34
100
MONETARY POLICY RfPORT: jUlY 2017
Federal Reserve assets and liabilities
the Federal Reserve's holdings of Treasury
and agency securities once normalization ,
of the federal funds rate is well under way.'
The Committee intends to
reduce
the Federal Reserve's
by
decreasing its reinvestment of the
D8LYnlleJn' it receives from the
in
System Open Market Account Speciilcally,
such payments will be reinvested only to the
caps.
extent that they exceed
..
Initially, these caps
set at
low levels to limit the volume of secunttes
that private investors will have to absorb. The
Committee currently expects that,
the economy evolves broadly as """"'l""~·u,
it would likely begin to ""'l"'d"""
this year. In
that changing the target range lor
the federal funds rate remains its primary
means of adjusting the stance of
policy (see the box "Addendum to the
Normalization Principles and Plans").
Sec Board of Governors of the Federal Reserve
System (2017), "FOMC Issues Addendum to the Policy
Normali:.w.tion
and Plans,'' press release.
June 14. httns:l'lw\vw.!Cdera.
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The Federal Reserve successfully raised the
eifective federal funds rate in March and June
of 2017
increasing the interest rate paid
on reserve
along with the interest
rate offered on overnight reverse repurchase
aarccmcnts (ON RRPs). Specifically, the
F~deral Reserve increased the interest rate
paid on required and excess reserve balances
to I .00 percent in March and 1.25 percent m
June while increasing the ON RRP oflcring
rate to 0.75 percent in March and LOO percent
in June. ln addition, the Board of Governors
approved '4 percentage point increases in
the discount rate (the primary credit rate) in
March and June. In both March and June, the
cJfcctive federal funds rate rose ncar the middle
of its new target range amid orderly trading
conditions in money markets, closely tracked
by most other overnight money market rates.
Usage of the ON RRP facility, which had
increased late last year as a result of higher
demand by aovernment money market funds
in the wake ~f last October's money fund
reform, has declined some, on average, in
recent months. However, usage has remained
somewhat above its levels of one year ago.
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45.
35
101
36
PART 2: MONETARY POLICY
Monetary Policy Rules and
Policy Process
Role in the Federal Reserve's
What are monetary policy rules?
rate of unemployment in the
run (ll") and 1he
current unemployrnent rate. 3
other rules,
the first-difference rule ronsiders the change in the
policy rules are formulas that prescribe
a srnal! number of ec:onornic
the
rather thJn its leveL
between actual
and t<lrget
slack in the Prr.nnmv--..o
rate, such as the
funds rate. 1
rules can provide helpful guidancp
their interpretation
careful
the measurement
inputs to these rules and the
implications of the many considerations these rules do
not take into account.
Po!icv rules c:m incorporate
One key
'
recovers.
The sman number of variables involved in
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rules n1ak0s them easy to use. However, the
102
MONETARY POLICY REPORT: JULY 2017
PIP
I
1 11
r
T
pgwz
MT
37
17
A Monetary policy rules
Taylor (1993) rule
Balanced-approach rule
Taylor (I 993) rule,
Change rule
First-difference rule
NoTE: R{13, Rf'\
Taylor (1993), baliaoced-ar>pn:>ac:h,
change, and first-difference rules, respectively.
denotes the actual nominal federal funds rate for quarter t, n:t
for quarter t, and
unemployment rate in quarter 1, rlR is the level of the neutral real federal
rate in the longer run that,
on
to he consistcni with sustaining maximum
and infiatlon at its 2 percent longerof
run
in the longer run. Zt the cumulative sum
the
Taylor (1993) rule when that rule prescribes
funds rate below zero.
The Taylor ( 1993) rule and other policy
full
level. In these
ploymcnt
longer run and
ruks in tenus of the FOMC's
been highly correlated. Footnote
B.
Inflation measures
lln,omnlovm"'nt rate is an
market, it often
rle11e1<mrnertts and does not provide a
complete measure
or tightness. !n practice,
federal Open Market Committee (fOMCJ
examine a great deal of infmmJtion about
market to gauge its hea!th; this informdt!on includes
broader measures of labor underutilization, the labor
force
hours worked,
and
numerical indexes. 5
Another issue related to the implementation of rules
involves the mPasurement of the variables that drive the
the rules. For example, there
prescriptions ge-nerated
and
do not always
are many measures of
move together or by the same dmmmt.
broadest
measure of inf!Jtion, shown by the
in the
dorneslic product price
differences fmm rneasur0s th<lt gauge
in consumer prices (figure B). Even measures
rcontinued on next page)
-
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discussion of tht'se and other
see He:;s ChunK. Bruce fallick.
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S.
103
33
PART 2: MONfTARY POliCY
Monetary Policy Rules and Their Role in the federal Reserve's Policy Process I continued!
Total inflation versus core inflation
SotJRCt: f3urcau ofb:onomic Analysis
D.
Real-time ¢stlmatcs of the neutral real interest
rate and the unemployment rate in the longer nm
I 111111
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II!F
104
MONETARY POLICY REPORT: JULY 201 7
39
J 1
highPr rates than prescribed by
How does the FOMC use monetary policy
rules?
in
estimates of the
real interest rate in the longer run and of the rate of
unemployment in the
run--data and estimates
that were avail<~ble to
policymakers at the
time.) Moreover1 the rules sometimes prescribe setting
short-term interest rates well below zero~1 setting
that is not feasible. With the exception of the adjusted
Taylor (1993) rule, which
a lower limit of
all of the rules shown
figure E called for the
federal funds rate 10 turn
in 2009 and to
rules have called for higher values
rate in recPnt years, the
prescribe has varied
rules for the- level of the
quarter of 2017
rule) to
[Ii:-:torical fe-deral funds rate rwescdptions tlwn simple policy rules
111111111
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E.
105
40
PA~T 2: MONETARY l~)l!CY
that the caps
reach their
respective
so
Federal
Reserve's securities holdings will continue to
decline in a gradual and predictable manner
untilrhe Committee judges that the Federal
no more securities than
monetary policy
its reinvestment of the
receives from securities
Markel Account Specifically, such
be reinvested only to the extent that
gradually rising caps.
o for payments
Reserve receives
and
to !f>arn more about the
reaches $30 billion per rnonth.
underlying
o For payments
that the Federal
Reserve receives
debt and mcrrtgagc'-bJiCk<,C
Committee
thJt thr
be $4 billion per month initially
increase in
of $4 billion at three-month
intervals over
months until it reaches
$20 billion
month.
for reserves during the process
of balance sheet normalization.
Committee .affirms that
range for the federal funds rate is
the target
primary
means of adjusting the stance of monetary
However, the Committee would be
received on securities
economic
outlook \Vere to warrant a sizable reduction in
the Committee's target for the federal funds rJte.
Moreover, the Committee would be
to
use its full range of
including
the
and
balance sheet,
economic
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ll
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II
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II
106
41
OF
an addendum to the minutes of the june 13-14, 2017, meeting
8. l-Our members of the Board of Governors. one
fewer than in March 2017, \vcrc in office at the time
nf the June 2017 meeting and submitted ccnnomic
projections. The office of the president of the Federal
Reserve Bank of Richmond
vacant at the time
of this FOMC meeting: First Vice President Mark L
no projections were
revised following the release of economic data on the
14.
not submit longer-run
growth, the unemployment
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who submitted longer-run
that, under appropriate
growth in real gross domestic
product
this year would run somewhat
above their individnal estimates of its longerrun rate. Over half of these participants
that economic growth would slow a
2018, and almost all of them expected
that in 20 !9 economic growth would run at or
near its longer-run leveL All participants who
submitted longer-run projections expected that
the unemployment rate would run below their
estimates of its longer-run normal level in 20! 7
and remain below that level through 2019.
The
of
also lowered
their
the longer-run normal rate
of unemployment by 0.1 to 0.2 percentage
point All
projected that inflation,
as
by the !our-quarter percentage
change in the price index lor personal
consumption expenditures (PCE), would run
below 2 percent in 2017 and then step up in
the next two years; over half of them projected
that inflation would be at the Committee's
2
objective in 2019, and all judged that
would be within a couple of tenths of
a percentage
of the objective in that year.
Table 1 and
1 provide summary statistics
for the projections.
As shown in fignrc 2, participants generally
expected that evolving economic conditions
would likely warrant further gradual increases
in the federal funds rate to achieve and sustain
maximum employment and 2 percent inflation.
Although some participants raised or lowered
their federal fnnds rate projections since
March, the median projections for the federal
funds rate in 2017 and 2018 were essentially
unchanged. ;md the median projection in
2019 was slightly lower; the median projection
for the longer-run federal fnnds rate was
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In conjunction with the Federal
Market Committee (FOMC)
held
on June 13-14, 2017, meeting participants
submitted their projections of the most
likely outcomes for real output growth, the
unemployment rate, and inflation for each
year from 20 !7 to 2019 and over the longer
run 8 Each
projection was based
at the lime of the
meeting, together with his or her assessment
of appropriate monetary policy, including a
path for the federal funds rate and its longernm value, and assumptions about other
factors likely to alfect economic outcomes9
The longer-run projections represent each
participant's assessment of the value to which
each variable would be expected to converge,
over time, under appropriate monetary
policy and in the absence of further shocks
to the economy. 10 "Appropriate monetary
policy" is delined the future path of policy
that each
deems most likely to
foster outcomes
economic activity and
inflation that best satisfy his or her individual
rmeq:1rercanon of the Federal Reserve's
of maximum employment and stable
prices.
107
42
PART 3: SUMMARY Of ECONOMIC PROifCTIONS
Table I. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their
individual assessments of projected appropriate monetary policy, June 2017
Th~
rnnge fN a vanuble m a gwen ye~1r mdud\'S all partlupants' pwjcctmns. from ln\>.e,>110 h1ghe~t for that \1Jri1ble m that yur.
Ll\!J)"!:tr-nm pMjecupns l<>r .;,we l'CL mtlanon :J.JC not ~olk...:t<:d
unchanged. However. the economic outlook
is uncertain. and participants noted that their
economic projections and assessments of
appropriate monetary policy could change in
response to incoming information.
In general.
viewed the uncertainty
attached to
projections as broadly
similar to the average of the past 20 years.
although a couple of participants saw the
uncertainty associated with their real GOP
growth forecasts as higher than average.
Most participants judged the risks around
their projections for economic growth. the
unemployment rate. and intlation broadly
halanced.
Figures 4.A through 4.C for real GOP
growth, the unemployment rate, and intlation,
respectively. present "fan charts,. as well as
charts of participants' current assessments
of the uncertainty and risks surrounding
the economic projections. The fan charts
(the panels at the top of these three figures}
show the median projections surrounded by
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confidence intervals that are computed from
the forecast errors of various private and
government projections made over the past
20 years. The width of the confidence interval
for each variable at a given point is a measure
of forecast uncertainty at that horizon. For
all three macroeconomic variables. these
charts illustrate that forecast uncertainty is
substantial and generally increases as the
forecast horizon lengthens. Reflecting. in part,
the uncertainty about the future evolution
of GOP growth, the unemployment rate.
and in flat ion, participants' assessments of
appropriate monetary policy are also
to considerable uncertainty. To illustrate
path for
uncertainty regarding the
monetary policy. tigure 5
a comparable
fan chart around the median projections
for the federal funds rate." As with the
II. The fan chart fOr the federal funds rate
the
about the future path of
monetary
and is closely connected
uncertainty about the future value of economic variables.
ln contrast, the dot plot shown in Ggurc 2 displays the
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3
4
108
MONETARY POLICY REPORT: jULY 20T7
43
Figure l. Medians, central tendencies. and ranges of economic projections., 2017- 19 and over the longer run
Pert'ent
Change in real GDP
Actual
-
'
'
' - - ' - - - - ' - - - - ' - - - - - ' - - - - - - ' ' - - - - - - L - - _ L ____ j__ _ _:_ _____
20!7
J
LJ
2019
Unemployment rate
Percent
PCE inftati0n
--·
:_:\
LL_____l______t_____j _ _ _l ____ _
2012
201)
20t4
2015
2016
2014
2015
2016
Core PCE inflation
LL
20!2
21113
2017
2{)18
2019
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and other cxplanatinns are in the nntcs to tahle J. The data for 1hc actual values of the
109
44
PART
SUMMARY
m
ECONOMIC PROjECTIONS
appropriate monetary policy: Midpoint of target range or target
Pncent
4.5
. . . . -. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i . .
.............................................. ~...
. .............. ······- 1.5
1.0
.................................... ····t·· ························ · · · · -
0.5
'
2019
20!8
macroeconomic variables, forecast uncertainty
for the federal funds rate is substantial and
increases at longer horizons.
The median of participants' projections tor
the growth rate of real GDP, conditional
on their individual assumptions about
appropriate monetary policy, was 2.2 percent
in 2017,2.1 percent in 2018, and 1.9 percent
in 2019; the median of projections for the
longer-run normal rate of real GDP growth
dispersion of views across individual n"'''"'m""" about
the appropriate level of the federal
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Longernm
was LS percent Compared with the March
Summary of Economic Projections (SEP), the
medians of the torecasts for real GDP growth
over the
from 2017 to 2019, as well
as the
assessment of the longer-run
growth rate, were mostly unchanged. Fewer
than half of the
incorporated
expectations of
stimulus into their
projections, and a couple indicated that they
had marked down the magnitude of expected
liscal stimulus relative lo March.
All participants revised down their projections
lor the
rate in the fourth
quarter of
and of 2018, and almost all
also revised down their projections for the
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20!7
110
MONETARY POLICY REPORT: JULY 2017
Figures 3.A and 3.B show the distribntions of
participants' projections for real GDP growth
and the unemployment rate from 2017 to 20!9
and in the longer run. The distribution of
individual projections for real GDP growth for
this year shifted up, with some norhr·m'"'
now expecting real GDP
2.4 and 2.5 percent and none seeing it below
real
2 percent The distributions of
GDP growth in 2018, 2019, and
run were broadly similar to the distributions
The distributions of
of the March
for the unemployment
individual
rate shifted down noticeably for 2017
an
and 2018. Most
percent at the
or
unemployment rate
end of this year. and the majority aHu~•va•cu
an unemployment rate between 4.0
allbc end of 2018. Participants'
4.3
nn)lPo"f"m' also shifted down in 2019 but
were more dispersed than the distributions of
rates in the two
their projected
of '"'"J"'''"'"'"
The
earlier
for the
year was 1.6 percent,
price infiation
down 0.3 percentage point from March. As
in March, median projected inflation was
2.0 percent in 2018 and 2019. About half of
the participants anticipated that in11ation
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wonld continue to run a bit below 2 percent
in 2018, while only one participant expected
inllalion above 2 percent in that ycar~-and,
in that case, just modestly so. More than
half projected that in11ation would he equal
to the Committee's objective in 2019. A few
participants projected that in11ation would
nm slightly below 1 percent in that year, while
several projected that it would run a little
above 2 percent The median of projections
for core PCE price inflation was L 7 percent
in 2017, a decline of 0.2 percentage
2018
from March; the median projection
and 20 J 9 was 2.0 percent, as in the March
projections.
Figures lC and 3.D provide information on
views about
the distributions of
distributions of
the outlook for
projections for headline PCE price inflation
and for core PCE price in11ation iu 2017
shifted down noticeably from March, while the
distributions for both measures of in11ation in
Many participants
2018 shifted down
low readings on
cited recent
inflation as a factor contributing to the
revisions in their inflation forecasts.
Figure 3.E provides the distribution of
participants' judgments regarding the
or midpoint of the
funds rate at the
the
range
of each year from 201 7 to 2019 and over
the longer run-" The distribution for 2017
was less dispersed than that in March, while
the distribution for 20 l 8 was slightly less
12. One participant's projections fOr the federal
rate,
the
funds rate, real
there are
by tht:
and inilation
multiple possible medium-term regimes for the U.S.
and that the
economy. that these regimes
economy shifts between regimes
forecast. Under this view, the economy currently is in
characterized
low productivity
interest rate, but longer-term outcomes for variables
other than inflation cannot be usefully projected.
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unemployment rate in the fourth quarter of
2019. Many who did so cited recent lowerthan-expected readings on unemployment
The median of the projections for the
unemployment rate was 4.3 percent in 2017
and 4.2 percent in each of 2018 and 2019,
0.2 percentage point and 0.3 percentage
point lower than in the March projections,
also
respectively. The majority of
revised down their estimates
run normal rate of unemployment
0.2 percentage point, and the median
nm level was 4.6 percent, down 0.1 pcrcemage
point from March.
45
111
46
PART 3: SUMMARY OF ECONOMIC PROJECTIONS
Figure 3.A. Distribution of participants' projections for the change in real GDP, 2017 19 and over the longer run
Number of participant~
2017
0
14
Numher of participant;;
20!8
-!8
'"
"
10
8
Pcn:..·,ent range
Numher ()f participants
2019
lE
16
14
Numher of participants
Longer run
18
16
-14
Pcrccoi
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NoTE: Definitions nf variabk'\ and Mhcr explanation.;, arc in the notes to tahl-c L
112
MONETARY POliCY REPORT: IUlY 2017
2017- !9 and over the
forthc
47
run
Number of participant~
20!7
t:l
-!R
16
14
lll
-s
_,
0
:ts3.9
20!8
Pt?rceut range
Number ofpartieipants
20!9
Longer nm
Pcrc{'m range
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the notes to tahlc t.
113
48
PART
SUMMARY OF ECONOMIC PRO)FCTIONS
for PCE inflation, 2017 ~ 19 and overlhe
run
Number of partit·ipants
20!7
0
-18
16
-14
lll
-g
-4
_,
L
Percent range
Number ,,f partkipants
2018
1S
16
-14
10
'
-6
-4
Number o..lfpartkipants
2019
1S
-16
14
12
lG
Perc~~ut
range
Number of participants
Longer run
16
Pcn:eni range
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t(1
table l.
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NoTE: Definitions of variable<>. and other cxplanatlnns arc, ill the notes
114
MONETARY POLICY REPORT: JULY 2017
49
20!7-19
Number nf participants
2017
0
-1g
16
-14
-10
-4
Percent range
Number of participants
2018
IS
-16
14
12
-4
!-
Percent range
Number of participants
2019
'"
16
14
1.6
Pcn.-x::nt range
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NmT: Definitions of variables and other explanations arc ill
115
5()
PART 3c SUMMARY Of ECONOMIC PROjfCTIONS
20{7
18
16
14
Percent range
2018
18
16
14
---12
Hl
8
Percent range
Numbt'r of panicipants
20!9
18
16
14
Nmnberofparncipant~
Longer run
16
~14
10
8
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Percent range
116
MONETARY POLICY REPORT: JULY 2017
In discussing their June projections, many
participants continued to express the view
that the appropriate upward trajectory of
the federal funds rate over the next few years
would
be gradual. That ~nticipated pace
rellcctcd a
factors, such as a neutral real
interest rate that was
low and was
expected to move up only
as well as a
gradual return of inflation to the Committee's
2 percent objective. Several participants judged
that a slightly more accommodative
of monetary policy than in their
projections would likely be appropriate, citing
an apparently slower rate of
toward
the Committee's 2 percent
objective.
In their discussions of appropriate monetary
policy, half of the participants commented
on the Committee's reinvestment policy; all
of those who did so expected a change in
reinvestment policy before the end of this year.
Projections of economic variables arc subject
to considerable uncertainty. In assessing the
of monetary policy that, in their view,
likely to be most appropriate, FOMC
take account of the range of
outcomes, the likelihood of those
outcomes, and the potential bcnctits and costs
to the economy should they occur. Table 2
provides one measure of forecast uncertainty
lor the change in real GDP, the unemployment
rate, and total consumer price inflation-~·thc
root mean squared error (RMSE) lor forecasts
made over the past 20 years. This measure of
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Table
Average historical projection error ranges
forecast uncertainty is incorporated graphically
in the
of figures 4.A, 4. B, and
4.C,
fan charts plotting the
median SEP projections for the three variables
surrounded by symmetric confidence intervals
derived from the RMSEs presented in table 2.
lf the degree of uncertainly attending these
nnJie·ctil)nS is similar to the typical magnitude
past forecast errors and if the risks around
the projections arc broadly balanced, future
outcomes of these variables would have
about a 70 percent
of occurring
within these
intervals. For all three
variables, this measure of forecast uncertainty
is substantial and generally increases as the
forecast horizon lengthens.
width
fignrcs 4.A through 4.C does not adequately
their current assessments of the degree
uncertainty that surrounds their economic
projections. Participants' assessments of the
current level of uncertainty surrounding their
economic projections are shown in the bottomleft panels of figures 4.A, 4.B, and 4.C. All or
all participants viewed the uncertainty
to their economic projections as
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28746.061
dispersed. The distributions in 2019 and in
the longer run were broadly similar to those
in March. The median projections of the
federal funds rate con tinned to show gradual
increases, with the median assessment lor
2017 standing at l.3R percent, consistent
with three 25 basis point increases this year.
Thereafter, the medians of the nn1ie<cli<1ns
were 2.13 perccn t at the end
and
2.94 percent althc end of 2019; the median of
the longer-run projections of the federal funds
rate was 3.00 percent.
5l
117
PART 3: SUMMARY OF ECONOMIC PROirCTIONS
broadly similar to the average of the past
20 years, with three fewer participants than in
March seeing uncertainty about GDP growth,
the unemployment rate, and inflation as higher
than its historical average, u In their discussion
of the uncertainty attached to their current
projections, most participants again expressed
the view that, at this point uncertainty
surrounding prospective changes in fiscal and
other government policies is
large or that
there is not yet enough
to make
reasonable assumptions about the timing,
nature, and magnitude of the changes.
The fan charts-which are constructed so as to
be symmetric around the median projections--·
also may not fully reflect participants'
current assessments of the balance of risks
to their economic projections. Participants'
assessments of the balance of risks to their
economic projections are shown in the bottomright panels of figures 4.A, 4J3, and 4.C. As
in March, most participants judged the risks
the
to their projections of real GDP
unemployment rate, headline
core inflation as broadly balanced--in other
words, as broadly consistent with a symmetric
fan chart. Three participants judged the risks
to the unemployment rate as weighted to the
downside, and one participant judged the risks
to the
(as shown in the
panel
4.B). In addition,
the balance of risks to participants' inflation
projections shifted down slightly from March
of figure 4.C),
(shown in the lower-right
the risks to
as two fewer
inflation to be
and
to the
downside.
13. At the end of this summary, the box
discusses the sources and
rmccrtanl!v in the economic forecasts
assessments of the fntnre
path
with appropriate policy are also subject to
considerable uncertainty, reflecting in part
uncertainty about the evolution of GDP
growth, the unemployment rate, and inflation
over lime. The final line in table 2 shows the
RMSEs for forecasts of short-term interest
rates. These RMSEs are not strictly consistent
with the SEP
for the federal limds
rate, in part
the SEP projections are
not forecasts of the likeliest ontcomes but
rather reflect each participant's individual
assessment of appropriate monetary policy.
However, the associated confidence intervals
provide a sense of the likely uncertainty
around the future path of the federal funds
rate generated by the uncertainty about the
macroeconomic variables and additional
adjustments to monetary policy that may be
appropriate to offset the efl"ects of shocks to
the economy.
Figure 5 shows a fan chart plotting the median
SEP projections for the appropriate path of the
federal fnnds rate surrounded by conftdcncc
intervals derived from the results presented in
table 2. As with the macroeconomic variables,
forecast
is substantial and
l4
14.
at some point in the future the coniidcncc
interval around the federal funds rate were to extend
below zero, it would be truncated at zero for purposes
of the chart shown in
5; zero is the bottom of
federal funds rate that
This
rate
chart would be merely a convention and woul{l not
have any
fOr possible future policy decisions
regarding
negative interest rates to
additional monetary policy accommodation
were appropriate.
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28746.062
52
118
MONETARY POLICY REPORT: jULY 2017
53
Figure 4.A. Uncertainty and risks in projections or GDP growth
Median projection and confidence interval based on historical forecast errors
Actual
-n
2012
2013
2fll4
2015
20!9
FOMC participants' assessments of uncertainty and risks around their economic projections
Uncertainty about GDP grnwth
[::J
-IS
lh
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similar
119
54
PART 3: SUMMARY OF ECONOMIC PROJECTIONS
Median projection and confidence interval based
historical forecast errors
10
-s
-5
:!012
2015
2014
2013
2016
20l7
2018
2019
FOMC participants' assessments of uncertainty and risks around their economic projections
Numhe.rofpart!C!pant.~
th~
0
Lnwcr
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Ntnnhe:r of paru..:ipant'\
unemplnymcut rate
Broadly
similar
PO 00000
IS
In
14
12
12
10
j{)
IS
Ifip:hcr
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1JIK£rtainty about
120
MONtTARY POLICY REPORTc JULY 1017
55
of PCE inflation
Median projection and confidence interval based on historical forecast errors
-0
20!2
2014
2013
2015
2010
20!8
2017
2019
FOMC participants' assessment$ of uncertainty and risks around their economic projections
~tunl'<.:r
of panicipants
Risks to PC'E inflation
Uncertainty about PCE inflation
0
!S
0
-IS:
!6
!6
- !4
1.?
14
10
8
Higher
Broadly
similar
Uncertainty ahout wrc PC'E infhnir•n
0
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Risks tn cnrc
PCl~
inflation
0
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LCl\VCf
121
56
PAKI
SLUvllv\ARY Of ECONOMIC PROJECTIONS
!;igure 5, Uncertainty in projections of the federal funds rate
Medirll1 projection and wnfidcnc,c interval based (lfl historical
errors
Percent
federal funds. rate
-4
-2
Actual
20!2
2013
20!4
20!5
2016
20!7
2018
20!9
proj(:ctions.
* The cunfidence interval is derived
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VerDate Nov 24 2008
rates in the fourth quarter of the
table 2. The shaded area encompasses less than a 70 percent
122
MONETARY POLICY REPORT IULY 2017
57
Forecast Uncertainty
however. The economic
and relationships used to'"'~ P'"""cc
economic forecasts are necessarily
of the rea! wodd, and the future path
economy
can be affected by myriad unforeseen developments and
events. Thus, in setting the stance of monetary
consider not only
to
activity
economic conditions evolve in an
then assessments of the
staff in advance of meetings of the
Federal Open Market Committee
error ranges shown in the table iHustrate the COilSi(krilble
uncertainty associatE>d with economic forecasts. For
example,
domestic
real gross
consumer prices will
•eouec~uv•e•v. ,1 percent
and
funds rrtte would change
final line in table 2 shows the error
short-term interest rates. They
confidence intervals associated
fc0eral funds rate are quite wide. lt
be noted,
however, that these confidence intervals are not strictly
consistent with the projections for the federal funds '
are not forecasts of the most
rate, as these
likely
cxpJnd within a range
are symmetric and centPr<'d on
!he medians of FOMC participants'
for GDP
growth, the unemployment rate,
However,
in ~ome in~tanu~s, the risks around the projections may
not be
!n
the unemployment rate
the risks around a
be tilted to either the upside or
CJSP the
in
would be asymmetrically positioned around
fan chart
medi<1n
current condilions may differ from I hose that
prpvai!ed, on
projections of e~1ch economic
than, smaller than, or broadly similar to
of forecast uncertainty seen in the past 20
of the
presented in table and reflected in
confidence intervals shown in the top panels of
4.A through
J::>articipants' current assessments of the
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the macroeconomic
variables as well
<Kfditlonal adjustments to
that would be appropriate to offset the effects
to the
in
future the confidence interval
around
i! would be
funds rate were to extend below zero,
trunc~1ted
at zero for purposes of the fan chart
shown in
zero is the bottom of the
for
federal funds r,1te that has been
by
Cornmittee in the
This
construction of the
funds
chan would be
m<.~re!y a convention; it would not have anv im~nlic·,,i,nn'
for possible future policy decisions
'
interest rdtes to
accommodation
were ao,oronoo,le
situations, the Committee could
tools, including forvvard guidance and asset
provide additional accommodation.
While figures 4.A through 4.( provide information on
the uncertainty Jround the economic projections,
1
provides information on the range of views across
A
of figure 1 with figures 4.A
of the projections
_
than the average
1on.'cast E>rrors over the past 20 )'f'ars.
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in the current year, 1.0 to 5.0
ye<Jr, and 0.8 to 5.2 p('rcent in
70
confidence inte-rvzds
1.2 to 2.8
in the
123
VerDate Nov 24 2008
AFE
advanced foreign economy
BOE
Bank of England
C&J
commercial and industrial
DP!
disposable personal income
ECB
European Central Bank
EME
emerging market economy
FOMC
Federal Open Market Committee; also, the Committee
GDP
gross domestic product
LFPR
labor force participation rate
LIBOR
London interbank offered rate
MBS
mortgage-backed securities
Michigan survey
University of Michigan Surveys of Consumers
OJS
overnight index swap
ONRRP
overnight reverse repmchase agreement
OPEC
Organization of the Petroleum Exporting Countries
PCE
personal consumption expenditures
SEP
Summary of Economic Projections
SLOOS
Senior Loan Olficcr Opinion Survey on Bank Lending Practices
S&P
Standard & Poor's
TIPS
Treasury lntlation-Protcctcd Securities
20:03 May 04, 2018
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59
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124
125
~l!Jr
!~<>serve
The Honorable ·!aMI L Yellc.!b.._(~hair, !!!J.:ti:.tl..Jl!:J~JJ~:!Ll!.'!rs of the Feqer'!.!
Svslcm from Rcprcscnla!ivc Bcaity:
recession since the Great
recovery. For instance,
the overall unemployment numbers have come down clmsidcnd)ly since the depths of
the Financial Crisis in 2008, wage gn1wth has only recently begun In grow. While the cost
of l!ealthcare, housing, ami everyday constmler products has increased, Americans wages
have not kept pace. After the March FOMC mc~ting, yon stated that "one of the things thai
has been holding down
im~reases is
slow productivity growth." You also have
slated in the past that slow productivity gmwih,
widening income gap, arc
long-term risks facing our economy, that
polirymakers
address.
L While I he economy has bal!lcrl its way
Uem·css:iml. many Americans still have
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Why the U.:S. facing slow productivity growth ami hnw
policymakcrs combat this
pn1hiem, ill at we can sec wage growth for !he average American'?
126
2. As you may know, thousands of my constituents work for several regional banks with
significant operations in the Third Congressional District of Ohio and the Greater
Columbus Metropolitan area. In April, former Governor Tarullo gave a departing speech
at the Woodrow Wilson School at Princeton University where he discussed the post-crisis
regulatory response. Within that speech, be offered some areas of bank regulation that he
thought made sense to right-size, spedfically, the $50 billion S!FI threshold, the $10 billion
stress test threshold, and implementation of the Volcker rule.
Obviously, these are decisions for policymakers to make, but I wanted to give you the
opportunity to address these remarks by your former colleague and offer any comments or
thoughts you may have on some ofthe issnes he addressed. Specifically, what is the
appropriate asset threshold for SIFI designation, if there is one?
In all of our efforts, our goal is to establish a regulatory framework that helps ensure the
resiliency of our financial system, the availability of credit, economic growth, and financial
market efficiency. The Federal Reserve has been working for many years to make sure that our
regulation and supervision is tailored to the size and risk posed by individual institutions.
The failure or distress of a large bank can harm the U.S. eeonomy. The recent financial crisis
demonstrated that excessive risk-taking at
banks makes the U.S. economy vulnerable. The
crisis led to a deep recession and the loss of nearly nine million jobs. Onr regulatory framework
must reduce the risk that banlc failures or distress will have such a hannful impact on economic
groVlth in the future.
The Federal Reserve Board (Board) has already implemented, via a regulation that was proposed
and adopted following a period of public notice and comment, a methodology to identify global
systemically important banking organizations (GS!Bs), whose failure could pose a significant
risk to the financial stability of the United States. 1 The "systemic footprint" measure, which
detennines whether a large firm is identified as a GSIB, includes attributes that serve as proxies
for the firm's systemic importance across a number of categories: size, interconnectedness,
complexity, cross-jurisdictional activity, substitutability, and reliance on short-term wholesale
fimding.
There are many large financial finns whose failure would pose a less significant risk to U.S.
financial stability, but whose distress could nonetheless cause notable harm to the U.S. economy
(i.e., large regional banks). The failure or distress of a large regional bank could harm the U.S.
economy in several ways: by disrupting the J:low of credit to households and businesses, by
disrupting the functioning of financial markets, or by interrupting the provision of critical
financial services, including payments, clearing, and settlement. Eeonomic research has
documented that a disruption in the flow of credit through banks or a disruption to financial
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28746.071
' Board of Governors of the Federal Reserve
Based Capital Surcharges for Global Sy~;tertlie<llly
Register, vol80 (August 14), pp.
127
- 2-
market functioning can affect economic
Some level of tailoced enhanced regulation is
therefore appropriate for these large re&':ional banks.
The application of tailored enhanced regulation should consider the size, complexity, and
business models of large regional banks. The
on economic growth of a large regional
and geographic distribution of the bank's
bank's failure will depend on factors such as the
customer base and the types and number of borrowers that depend on the bank for credit Asset
size is a simple way to proxy for these impacts, although other measures may also be
appropriate. For large regional banks with more complex business models, more sophisticated
supervisory and regulatory tools may be appropriate. For example, the Board recently tailored
our Comprehensive Capital Analysis and Review qualitative assessment to exclude some smaller
and less complex large regional banks, using asset size and nonbank asset~ to measure size and
complexity, respectively. 3 ln other contexts, foreign activity or short-term wholesale funding
may be another dimension of complexity to consider. Any characteristics or measures that are
used to tailor enhanced regulation for large regional banks should be supported with clear
analysis that links them with the potential for the bank's failure or distress to cause notable harrn
to the U.S. economy.
The Board currently has only limited anthority to tailor the enhanced prudential standards
included in sectionl65 of the Dodd-Frank Act. In particular, Congress required that certain
enhanced prudential standards must apply to firrns with $10 billion in total assets, with other
standards begirming to apply at $50 billion in total assets. I understand that Congress is currently
considering whether and how to raise these stamtory thresholds. The Board has supported
increasing these thresholds. As an alternative to simply raising the thresholds, I believe that it
would be logical to use a wider range of factors th<m asset size to determine fhe application of
tailored enhanced regulation for large regional banks. Congress could usefully decide to pursue
either raising the dollar thresholds and/or
authority to the Board to decide which fim1s are
subject to enhanced prudential standards. TI1e Board is committed to continuing to work with
Members of Congress on this issue.
3
VerDate Nov 24 2008
20:03 May 04, 2018
For evidence on the link between bank distress and economic growth, see Mark A. Carlson, Thomas King, and
Kurt Lewis (2011) "Distress in the Financial Sector and Economic Activity," The B.E. Journal of Economic
Analysis & Policy: Vol. I l: lss. I (Contrihntiom), Article 35. For evidence on the link between financial market
(20 12), "Credit Spreads and Business
functioning and economic growth, see Simon Gilchrist
Cycle Fluctuations," American Economic Review, Vol.
Board of Governors of the Federal Reserve
·Anlen,dm<ontsto the Capital Plan and Stress Test
Rules; Regulations Y and YY," final nde.
vo! 82 (February 3), pp. 9308-93:10.
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128
1. As you know, pursuant to Executive Order 13772, the Department of the Treasury
released a report titled "A Financial System that Creates l~conomic Opportunities: Banks
and Credit Unions" on June 12, 2017. This report contains numerous recommendations for
regulatory relief for financial institutions, aod I appreciate that you have indicated that you
generally support these recommendations.
a. Specifically, the report recommends that the $50 billion threshold for application of
enhanced prudential standards to institutions be more appropriately tailored to the risk
profile of bank holding companies. Further, the report recommends that Federal Reserve
update the threshold for
CCAR stress tests and living wills to match tbat revised
threshold. Do you agree with this recommendation?
b. The report also recommends that the Federal Reserve consider putting CCAR stress
and living wills under a two-year cycle. Do you agree with this recommendation?
test~
In all of our efforts, our goal is to establish
framework that helps ensure the
resiliency of our financial system, the
of credit, economic growth, and financial
market efficiency. The Federal Reserve has been working for many years to tailor our regulation
and supervision to the size and risk posed by individual institutions.
111e failure or distress of a large bank can harm the U.S. economy. The recent financial crisis
demonstrated that excessive risk-taking at large banks can threaten the U.S. economy. The crisis
led to a deep recession and the loss of nearly nine million jobs. Our regulatory and supervisory
framework must aim to reduce the risk that bank failures or distress will have such a harmful
impact on economic growth in the future.
The Federal Reserve Roard (Board) has already implemented, via a regulation that was proposed
and adopted following a period of public notice and comment, a methodology to identity global
systemically important banking organi?~tions (GSIBs), whose failure could pose a significant
risk to the financial stability of the United States. 1 This "systemic footprint" measure, which
detennines whether a large firm is identified as a GSIB, includes attributes that serve as proxies
for the firm's systemic importance across a number of categories: size, interconnectedness,
complexity. cross-jurisdictional activity, substitutability, and reliance on short-tenn wholesale
funding.
There are many large financial firms whose failure would pose a less significant risk to U.S.
financial stability, but whose distress could nonetheless cause notable harm to the U.S. economy.
The failure or distress of a bank of this nature could harm the U.S. economy in several ways: by
dismpting the flow of credit to households and businesses, by
the functioning of
financial markets, or by interrupting the provision of critical
services, including
payments, clearing, and settlement. Economic research has doeumented tlmt a disruption in the
VerDate Nov 24 2008
Board of Governors of the Federal Reserve
Based Capital Surcharges for Global Svo:teuilicilllY
Register, vol80 (August14), pp.
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129
-2
flow of credit through banks or a disruption to financial market functioning can affect economic
growth? Some level of enhanced, but
tailored, standards are therefore appropriate
for certain large, non-GSIB banks.
Any application of enhanced, but tailored standards to large, non-GSIB banks should consider
their size,
and business models. The
on economic growth of a bank's failure
will depend on
such as the size and
distribution of the bank's customer base
and the types and number of borrowers tbat depend on the bank for credit Asset size is a simple
to proxy for these impacts, although other measures may also be appropriate. For banks
more complex business models, more sophisticated supervisory and regulatory tools may be
appropriate. For example, the Board recently tailored our Comprehensive Capital Analysis and
Review (CCAR) qualitative assessment to exclude some smaller and less complex large regional
banks, using asset size and nonbank assets to measure size and complexity, respectively. 3 In
other contexts, foreign activity or short-tenn wholesale funding may be another dimension of
complexity to consider. Any characteristics or measures that are used to tailor enhanced
standards for large, non-GSIB banks should be
with clear analysis that links them to
the potential for the bank's failure or distress to cause notable harm to the U.S, economy.
The Board currently has only limited authority to tailor the enlmnced prudential standards
Wall Street Reform and Consumer Protection Act. In
included in section 165 of the
particular, Congress required that certain enhanced prudential standards apply to firms with
$10 billion or more in total assets, with different standards beginning to apply at $50 billion or
more in total assets.
I understand that Congress is currently considering whether and how to raise these statutory
thresholds. The Board has supported increasing these thresholds and is committed to continuing
to work with Members of Congress on this issue,
With regard to the proposal to extend the timing of the CCAR assessment from annually to every
two years, large banks continue to innovate and adapt their businesses, which is a normal
practice for profit-making institutions. CCAR is designed to evaluate capital planning and
positions relative to those changes, as well as any changes -in a bank's balance sheet, and test for
salient risks across the entire financial system. Given the dynamic nature of banks and the risks
that they face, capital planning practices are most effective when they address the relevant risks
of the firm, and therefore om current supervisory practice includes annual quantitative and
qualitative assessments.4
With regard to resolution planning, the Government Accountability Office has recommended
lengthening the current one-year resolution plan filing cycle to provide sufficient time for
regulators to complete their plan reviews and feedback, and for fmns to address and incorporate
2
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For evidence on the link between bank distress and economic growth, see Mark A. Carlson, Timmas King, and
Kurt Lewis (2011) "Distress in the Financial Sector tmd Economic Activity," The B.E. Journal of Economic
Analysis & Policy: Vol. ll: Iss. 1
Atticle 35. For evidence on the link between fmancial market
fimctioning and economic growth, see
~'Credit Spreads and Business
Cycle Fluctuations," American Ecooomic Review, Vol.
' Board of Governors of the Federal Reserve
"AmeJ,dn~en,tq to the Capital Plan and Stress Test
Rules; Regulations Y and YY," final rule,
vol 82 (Febmary 3), pp. 930&-9330.
130
3-
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regulators' feedback in subsequent plan filings. The Board and Federal Deposit Insurance
Corporation continue to explore ways to improve the resolution planning process and believe it
1ur living will submissions from ammally
would be worthwhile to consider extending the
to once every two years. Doing so would require amending the agencies' respective
annual plan submissions. In the meantime, I
Impte:m<mtmg regulations, which currently
in recent years to simplifY the
would note that the agencies have taken a
plan submission deadline in a
resolution plan filing process, tor
for foreign banking
content
number of instances, and by reducing
States. Also, resolution plan
orf~anizatio:ns with a relatively Slllall footprint in the
provided to firms other than those that are largest and most systemically important has
business models.
been tailored to reflect iheir smaller size and
131
1. Since the Federal Reserve Board (FRB) is a significant participant in the International
Association of Insurance Supervisors (IAIS), which is attempting to develop a global group
capital standard, can you provide any insight into the status of the Insurance Capital
Standard (ICS) work at the IAIS and do you believe the 2019 deadline for WS adoption of
ICS 2.0, the first version that member jurisdictions are expected to implement, will be
kept? Will the FRB advocate that any version of the ICS should include recognition of U.S.
state based capital standards and the capital standard currently under development by the
FRB as at least one alternative for compliance?
The Insurance Capital Standard (ICS) aims to be the :first international, group-wide capital
standard broadly applicable to internationally active insurance groups. The Inten:tational
began work on the ICS in 2013, issued an initial
Association ofinsurance Supervisors
consultative proposal in late 2014, and
consultative proposal on an ICS
on an ICS version 2.0 is currently
version LOin July 2016. A revised
outcome oftbe consultation, stakeholder
contemplated for the middle of2018. Depending on
input, and data collection. as well as IAIS member review, appropriate subsequent steps will be
detern1ined. The ICS is scheduled to be adopted by the TAIS in late 2019. However, it is
possible that ongoing discussions
the inclusion of other methods in the ICS, including
possible aggregation appwaches, resnlt in
postponement ofthe IAIS' adoption. Importantly,
or binding on the U.S. unless adopted by
standards developed at the IAIS are not
the appropriate lawmakers or regulators in the U.S. in accordance with applicable domestic laws
and rulemaking procedures.
Together with the National Association ofinsurance Commissioners (NAIC) and Federal
Insurance Office, the Federal Reserve advocates for the development of international standards
at tbe IAIS that would be appropriate for the U.S., including an implementable ICS. The
Federal Reserve, along with its other U.S. colleagues, is advocating the ICS's inclusion of
aggregation methods such as the NAlC's group capital calculation and the Federal Reserve's
building block approach.
2. It appears that the "Building Hlocl' Approach" the FRB is developing as a capital
standard for savings & loan holding
that include insurers is similar iu some
basic respects to the "RBC (Risk-Based
Aggregation Approach" being developed
by the National Association of Insurance Commissioners (NAIC). If any capital standard
proposed by the FRB differs from the NAIC's state-based standards, will the costs versus
benefits ofthose differences be publicly assessed with regard to their effect on U.S.
consumers and U.S. markets? How win that be done, with Congressional, state and
stakeholder input?
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The Federal Reserve Board (Board) remains mindful of the
importance of the
states' primary supervision of the insurance industry, which the Board's consolidated supervision
complements and supplements. As stated in its advance notice of proposed rulemaking (ANPR)
published in June 2016, a goal of the Board's proposed building block approach (Bl3A) is to
132
efficiently use existing legal-entity-level regulatory capital frameworks, including those under
state laws.
In its comment letter to the ANPR, the NATC expressed its desire to work with the Board in its
development of the BBA. The Board welcomes this interest, consistent with the Board's
commitment to transparency and
with interested parties. Input from the NAIC
would enhance the identification
and ways to minimize inconsistency and
burden upon the Board's supervised insurance firms. The proposed BBA is pursuant to the
Board's statutory authority to set out capital standards for supervised insurance institutions as
consolidated supervisor. It is not yet clear what fom1 the NAIC's group capitaJ calculation will
take, though we note that the NAIC frequently produces model laws and regulations for states to
evaJuate and, if agreeable, adopt, potentiaJiy with tailoring. This differentiates the two capital
frameworks strncturally, and it is premature to say whether this will affect the content of the
frameworks.
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To the extent that technical or other considerations result in areas that reasonably may not be
addressed identically between the two frameworks, the Board remains committed to transparency
in its rulemak:ing
engagement with congressional, state, and any other interested pruties,
and evaluation
benefits, and economic impacts. In developing its proposed rules, the
Board routinely considers a variety of alternatives and an initial balancing of costs and benefits
of a proposaL As part of its rulemaking
the Board seeks comment from the public on
the burdens and benefits of our
approach in a rule as well as on alternative approaches.
With respect to its insurance
and aJl other
the Board follows the
Administrative Procedures Act and· other applicable
laws and practices tl1at
govern the various aspects of rulemakings, including the consideration of costs and benefits.
133
Questions for The Honorable Janet L. Yellen, Chair, Hoard of Governors of the Federal
Reserve System from Representative Rothfus;
l. The Financial Stability Board (FSB) and International Association of Insurance
Supervisors (IAIS) conduct most oftheir activities behind closed doors, to the detriment of
stakeholders ami consumers affected by their activities. While the IAIS has made some
improvements lately, its procedures still require significant improvement Will you agree to
additional transparency and accountability and more consultation with Congress before
taking positions in international insurance regulatory discussions? If not, why not? And
will you agree to use your influence at the IAIS and the FSB to improve their openness and
accountability? If not, why not?
The Federal Reserve Board (Board) remains committed to transparency and accountability in the
de,vel<Jprnerlt of international insurance standards at the Financ.ial Stability Board (FSB) and
lnterrtational Association oflnsurance Supervisors (IAlS). We support building on the enhanced
transparency at the FSB and IAIS with further steps to improve access and stakeholder
engagement at these institutions. For instance, before the FSB rec<Jmmends a particular policy
action, the FSB typically goes through a
notice and comment process similar to that which
would accompany rulemak:ing in the
States. At the JAIS, the Federal Reserve supports
the continued publication for public comment of consultation doc'Ulllents with proposed
approaches and frameworks for the
of internationally active insurance groups. The
Board, along with our partners,
Association of Insurance Supervisors (NAIC) and
Federal Insurance Office (FlO), will also continue to actively seek out and engage U.S. insurance
Indeed, the U.S. delegation
stakeholders to ensure an tmderstanding of their
routinely hosts meetings with U.S. insurance
for open dialogue and active working
sessions regarding policy matters
before the JAIS, a level of engagement that will
continue. We remain open to additional suggestions on how to
transparency at the IAIS
and FSB through our participation.
!n addition, it is important to note that none of the policy actions recommended by the FSB
would take effect in the U.S. without being adopted by U.S. authorities through a public notice
and comment process. Thus, the Federal Reserve would not implement any FSB or JA!S
the same process as we do for our m!emakings.
standards in the U.S. without going
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The Federal Reserve continues to work with other U.S. participants in international insurance
standard-setting processes--including slate insurance regulators, the NAIC, and FIO--to develop
international insurance standards that are consistent with supervisory objectives lmder applicable
tederal and state laws, regulations, and policies. Excessive delays in the ability of U.S.
participants to advocate positions in international standards negotiations could seriously diminish
the ability ofthe U.S. to influence outcomes and ensure that international standards work for
U.S. firms, U.S. consumers, and the U.S. financial markets.
134
1. Today, the Fed's $4.5 trillion portfolio is made up of roughly 55% Treasury securities
and 45% agency MBS. You and the F-0-M-C (Federal Open Market Committee) have
announced your intentions to begin unwinding this historic portfolio. As that portfolio
normalizes, do you expect the ratio of Agency MBS to Treasuries to remain the same over
time'!
Following its June meeting, the Federal Open Market Committee (FOMC) provided additional
details regarding its plans for normalizing the size and composition of the Federal Reserve's
securities portfolio over time. 1 Under this plan. the Federal Reserve will reduce its securities
holdings in a gradual and predictable process by reducing the reinvestment of principal payments
by the Federal Reserve Bank of New York
on existing securities holdings. Projections
in July indicate that, under a baseline
this gradual, passive runoff of securities holdings
will result in the nonnalization of the size of the Federal Reserve's balance sheet by the end of
2021 2
Under these projections, the share of Treasury securities in the Federal Reserve System's
securities holdings will decline slightly over the next few years because the runoff of Treasury
securities is somewhat faster than the nmoff of agency mortgage-backed securities (MBSs ).
However, as noted in the FOMC's Policy Normalization Principles and Plans document
published in September 2014, the FOMC has indicated that in the longer run it expects to hold a
portfolio that consists "primarily of Treasury securities, thereby minimizing the effect of the
Federal Reserve's securities holdings on the allocation of credit across sectors of the economy."
2. As you know, many have criticized the Fed for placing their "thumb on the scale" for
one sector of our economy, currently holding 29'Yo of the total outstanding Agency MBS.
There are others who want you to go even further and invest in infrastructure and
municipal securities, etc. As this extraordinary ej)isodc in the Fed's history comes to an end
-and we are also looking towards housing finance reform- do you think it makes sense to
reassess whether or not the Fed should be in a position to support certain sectors over
others'?
The Federal Reserve conducts monetary policy to achieve tbe dual mandate objectives of
maximum employment and stable prices. At the end of 2008, the federal fnnds rate had already
been cut to near zero, and the economy was in dire circumstances with unemployment moving
sharply higher and deflationary pressures mounting. Additional policy accommodation was
clearly required to support the economy and keep inflation from moving much lower. Against
this backdrop, the Federal Reserve conducted large scale purchases oflonger-tenn Treasury and
agency MBSs as a tool to put downward pressure on longer-term interest rates and to make
financial conditions more accommodative. Purchases of agency MBSs helped to support the
mortgage and housing markets. These markets were under severe stress during the crisis and the
VerDate Nov 24 2008
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135
2strains in these markets posed significant downside risks to the U.S. economy. These policies
were effective in helping to stabilize the economy and foster progress toward the
Federal Reserve's goals of maximum employment and stable prices.
The conduct of monetary policy is focused on promoting maximum employment and stable
prices and does not seek to support one sector over another. A joint statement of the Treasury
and the Federal Reserve in 2009 noted that "Actions taken by the Federal Reserve should also
aim to improve financial or credit condition broadly, not to allocate credit to narrowly-defined
sectors or classes of bonowers. Government decisions to inlluence the allocation of credit are
the province of the fiscal authorities.''
It is important to note that the range of assets that the Federal Reserve can purchase is quite
limited. The most important classes of assets by far that the Federal Reserve can purchase are
Treasury and agency MBSs. The Federal Reserve's authority to purchase municipal securities is
extremely limited and of little practical value as a policy tool. The Federal Reserve has no
authority to purchase securities issued by the private sector.
3. In your submitted testimony you state that 'the longer-run normal level of reserve
balances will depend on a number of as-yet-unknown factors ...' But conclude that you
'anticipate' keeping the reserve balances at a level 'larger than before the financial crisis.'
What is the reasoning behind keeping the portfolio above past 'normal' levels?
These issues are discussed at length in projections published by the Federal Reserve Bank of
New York in an update to the Annual Report of the System Open Market Account. 3 The size of
the portfolio over time is largely detelTl1ined by two factors--the level of currency and other
non-reserve liabilities and the level of reserve balances held by depository institutions. The level
of currency and non-reserve liabilities is largely unrelated to the stance of monetary policy, and
these liabilities tend to grow over time. The Federal Reserve generally increases its securities
holdings slowly over time to match the growth of these liabilities. For example, the level of
currency outstanding at the end of 2007 was about $800 billion and has risen to a level of about
$1.6 trillion today. So even if the Federal Reserve had not engaged in large scale asset
purchases, the size of the port!blio would have doubled in size since 2007 based on the
expansion of currency alone.
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The other key factor affecting the size of the balance sheet is the level of reserve balances held
by depository institutions. This factor reflects the stance of monetary policy and the
Federal Reserve's policy implementation framework. Just prior to the crisis, the level of reserve
balances was quite small, on the order of$5 to $10 billion. Today, largely reflecting the
expansion of the portfolio through asset purchase progran1s, reserve balances exceed $2 trillion.
As the size ofthe Federal Reserve's balance sheet is nolT!1alized, the level of reserve balances
will decline substantially. However, reserve balances may not decline to the very low levels that
prevailed in the pre-crisis period because the level of reserve balances consistent with effective
policy implementation may be higher than in past. For example, banks may demand
signi:t1cantly higher levels of reserve balances than in the past due to new liquidity regulations.
Moreover, the scale transactions among banks has expanded over time, and this trend could lead
136
3banks to hold large precautionary levels of reserves. Although the level of reserve balances may
ultimately be higher thau in the pre-crisis period, as noted in the FOMC's Policy Normalization
with the smallest balauce sheet consistent
Principles and Plans, the FOMC intends to
policy.
with efficient and effective implementation
4. Last week the G20 Leaders highlighted the importance of improving efforts on antimoney laundering and countering the financing ofterrorism. As you know, this has been a
focus of mine for some time. Rep. Velazquez and I sent a letter to Treasury Secretary last
week on this issue, As we look at the effectiveness of our AML regime over time, it seems a
'compliance for the sake of compliance" approach has moved us away from the original
intent of these rules. There have been a number of suggestions to both more effectively
target bad actors and simplify the compliance regime.
Do you agree our AML regulatory regime deserves a fresh look?
Elements of the Bank Secrecy Act/anti-money laundering (BSA/AML) regulatory requirements
are several decades old. The Federal Reserve is constantly looking for ways to improve and
maintain the effectiveness of the BSA and U.S. anti-money laaudering (AML) regime as
appropriate. In this regard, the Federal Reserve is an active member of the Bauk Secrecy Act
Advisory Group (BSAAG), a body established by Congress consisting of representatives from
lcderal regulatory and law enf(lrcement agencies, financial institutions, and trade groups, and
participates in BSAAG's e!Torts to enhance the BSA.
f understand that Congress has recently enacted the "Countering America's Adversaries through
Sanctions Act," which requires the President, acting through the Secretary of the Treasury to
assess the effectiveness ot: aud ways in which, the United States is currently addressing the
highest levels of risk of various forms of illicit finance. The Federal Reserve is committed to
working with the Secretary of the Treasury in this regard.
Have you personally spoken with the Treasury Secretary about the need for reform of
the AML regulatory requirements?
The Federal Reserve is committed to continuing tl1e close working relationships already in place
with the Treasury Department, Financial Crimes Enforcement Network (FinCEN), law
enforcement, and the other supervisory agencies to develop ways to improve the efficiency and
e1Tectiveness of the BSA/AML
We look forward to working on these matters with
Treasury Undersecretary of Terrorism and Financial
the Treasury Secretary as well as
Intelligence.
Is it time for FinCEN to reclaim its exam authority for AML compliance, at least for
the most complex, internationally active institutions?
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The Federal Reserve takes seriously its responsibility to provide
enhanced supervision
of the largest, most complex banking org<mizations. Our
and evaluations of a
banking organization's risk mauagement and compliance practices related to anti-money
laundering laws are an important part of our overall approach to ensuring the safety and
soundness of the institutions we supervise. A more exclusive BSA exau1ination role for FinCEN
137
-4-
would be a fw1damental re-alignment in how the federal government supervises for BSA
compliance at large, complex banks and could potentially result in duplication of effort, lead to
gaps between the supervision of small and large banks, and reduce flexibility for the federal
banking agencies when addressing compliance issues that are relevant to safety and soundness.
5. In their Declaration, the G20 leaders raised the importance of "effective implementation
ofthe international standards on transparency and beneficial ownership of legal persons
and legal arrangements, including the availability of information in the domestic and crossborder context." I recently cosponsored legislation with Reps. Maloney and King, which
would effectively ensure the beneficial owner of a corporation is known and readily
verifiable. Given your role iu AML supervision, from a "Know Your Customer"
standpoint, do you think this would be a worthwhile step?
While the Federal Reserve does not have an official position on H.R. 3089, "Corporate
Transparency Act of2017," in general, it has supported past etTorts to promote transparent
incorporation practices and enhance inforn1ation available to law enforcement. In addition, this
step may complement the legal entity customer information that banks and other financial
institutions are required to collect trader FinCEN's Customer Due Diligence and Beneficial
Ownership Final Rules.
6, Clearly one problem we faee in this country that is difficult for us to address at the
federal level alone is local zoning laws and ordinances whieh may unintentionally be a
barrier to increasing our housing supply and notably a supply of affordable housing for
mainstream Americans. Would you agree that having this Administration create a new
council consisting of federal reserve officials, federal home loan banks, US mayors and
other local officials, affordable housing advocates, academics and the private sector would
be an important step towards a necessary dialogue on creating a housing market for all
Americans?
Efficient regulation in all areas is an extremely important issue for the Congress and the
Administration to address, and housing-related regulation is no exception. However, zoning
laws and ordinances lie outside the purview of the Federal Reserve Board (Board).
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7. As you know housing finance reform remains the biggest piece of unfinished business
left from the financial crisis. In the past the Fed has played a constructive role in housing
finanee reform. I was pleased to see last week Governor Powell highlighted the role
housing played in the crisis and the flaws within the existing system, which is still
dominated by the duopoly of Fannie and Freddie. This duopoly is shouldering much of the
risk in the market despite interest from the private sector. As you know the recent
Treasury report highlighted the need to reassess the way mortgages are treated -from
assignee liability being placed on investors who do not have control over the origination
process to the risk-weighting and stress-testing of mortgage products vis-a-vis other asset
classes. As we begin to contemplate GSE reform, is the Fed willing to take another look at
these rules and the extent to which we are propping up this duopoly through potentially
overly punitive measures on private markets'!
138
5
Capital rules require banks to hold a percentage of their assets as capital to act as a financial
cushion to absorb unexpected losses. Riskier assets require higher capital cushions and less risky
assets require smaller capital cushions. For example, banks are required to have Jess capital
when they hold mortgage-backed securities that have explicit government backing (e.g., Ginnie
Mae securities), than when they hold securities that protect a government-sponsored enterprise
(GSE) against credit losses that could occur during stressful macroeconomic conditions (e.g.,
subordinated securities that are included in so-called credit risk transfer transactions). Collateral
matters as well, so mortgages held in bank portfolios are typically weighted favorably compared
to other asset classes; therefore. no further reductions in risk-weights for such loans is likely
necessary.
Analogously, stress test rules are designed to ensure that banks have effective capital planning
processes and suft!cient capital to absorb losses during stressful conditions, while meeting
obligations to creditors and counterparties and continuing to serve as credit intermediaries. At
the same time, liquidity stress tests are designed so that banks can meet their near-term payment
obligations in the presence of contractual outf1ows and counterparty runs. ln prescribing more
stringent prudential standards, including stress test and liquidity requirements, the Board may
differentiate among bank holding companies on an individual basis or by category, taking into
consideration their capital structure, riskiness, complexity, financial activities (including the
financial activities of their subsidiaries), size, and any other risk-related factors that the Board
deems appropriate.
Because capital and stress test rules are risk-dependent, it is likely such rules will change as a
result of GSE reform. On the one hand, if Congress decides to provide an explicit, transparent,
guarantee to certain mortgage-backed securities. then less capital will need to be held when
banks hold such securities than otherwise. On the other hand, if there is no govemment-backing
for certain mortgage-backed securities, then banks will need to assess pntential unexpected
losses associated with the underlying mortgages for such securities and then hold sufticient
capital to absorb losses in stressful conditions. This would also be the case when a bank holds
mortgages, rather than mortgage-backed securities, on its balance sheet.
As Governor Powell noted in his July 6, 2017 remarks, a government guarantee should apply to
securities, not to institutions. GSE reform should not leave us with any institutions that are so
important as to be candidates for too-big-to-tail.
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8. Ouring prior statements you previously discussed in some detail fixed income liquidity.
And while the Fed continues to say that the corporate debt and Treasury markets are
robust in the wake of profound regulatory changes, we observe that uot all markets are
assessed equally. Asset-backed securities do not eujoy the same robust liquidity
principally due to regulatory pressures snch as the Volckcr Rule and others. You have
previously eluded that the Volcker Rule could be well-suited to revisions. Just weeks ago,
Governor Powell indicated these efforts are undenvay. Would you please tell our office
what the Fed is doing to make sure the remedy fits the symptom? And, are you talking with
stakeholder groups such as broker/dealers and large investors? Lastly, when might these
efforts produce a revised product?
139
- 6-
To help monitor fixed-income market liquidity, staff of the Board, Of1ice of the Comptroller of
the Currency, Federal Deposit Insurance Corporation, Secmities and Exchm1ge Commission, and
quarterly reports regarding liquidity
Commodity Futures Trading Commission (agencies)
4
Board's public website. A number of
in the corporate bond market, which are available on
other researchers have also perfonned analyses of fixed-income market liquidity. Although
some studies have found evidence of somewhat reduced liquidity in a few pockets of the
financial markets, most studies have concluded that market liquidity broadly is in good condition
across the U.S. financial markets. Many factors simultaneously affect fixed-income market
liquidity. including current financial market conditions, making it extremely dif1icult to
separately identify the impact of the Volcker Rule with any degree of precision. The Board will
continue to monitor m1d report on developments.
aspects of the Volcker Rule. The agencies m·e
Regardless, there may be benefits to
m1d tailor regulations implementing the Volcker
currently exploring possibilities to
Rule, while fully implementing the statutory provisions. While it is difficult to predict the timing
of any potential revisions with certainty, the Board is open to meeting with all relevm1t
stakeholders and considering all input received throughout the revision process.
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140
1. Last month the Treasury released their first report ou the state of financial regulation
and included in that report was a recommendation for regulators to expand coordination
of their examination and data collection efforts. I recently sent a bipartisan letter to
Secretary Mnuchin, with 31 other Financial Services Committee colleagues, on this very
topic. In a press conference, you made remarks agreeing that there are burdens that can be
simplified and reduced in the financial system. Do you support greater exam coordination
and data collection efforts among regulators?
The Federal Reserve Board (Board) supports continuing and enhancing eftorts to coordinate the
agencies' examination and data collection activities. As the Treasury Department's report notes,
the Board and other agencies already coordinate many of these activities through their
participation on the Federal Financial Institutions Examination Council (FFIEC). Notable recent
coordination eflorts by the FFIEC have aimed to streamline the data collected from financial
institutions on the quarterly Call Report, improve the consistency and coordination of agency
efforts to assess the cybersecurity readiness of supervised banks, and identify and initiate
changes to rules and regulations in order to eliminate unnecessary burdens on conununity banks,
such as simplifying certain requirements of the agencies regulatory capital rules. Moreover, the
FF!EC member agencies are currently engaged in an examination modernization project. This
project is reviewing community bank examination processes used by the FFIEC members and is
expected to result in recommendations for procedural changes that would make examinations
more efficient and less burdensome to banks.
In addition to these efforts, the Board has consistently coordinated with and relied on the work of
other bank regulators, to the greatest extent possible, in supervising bank and savings and loan
holding companies. At community and regional bank holding companies where the Board is not
the primary insured depository institution regulator (lDIR) and the majority of the consolidated
assets are at the bank level, the Board's policy is to rely substantially on the work conducted hy
the primary lDIRs. These efforts include using existing examination reports and other
supervisory information submitted to other regulatory agencies to reduce the scope and
frequency of holding company inspections and closely coordinating with other agencies to avoid
duplication of supervisory activities. reporting requirements. and infom1ation requests. Periodic
reviews are conducted by the Board staff to ensure that Reserve Banks are coordinating with and
appropriately relying on the work of primary regulatory agencies.
2. A recent survey conducted by Morning Consult found that 89% ofthe general public
believes that it is important to tbe U.S. economy to have banks of all sizes. Tailoring of
regulations, as it's commonly used, means adjusting regulations and supervision to fit and
accommodate the variety of sizes, risk profiles, and business models in the banking
industry. Without tailoring, financial institutions are driven to consolidate and adopt the
same business model, homogenizing the industry. What is the Federal Reserve doing to
promote variety in the banking industry'!
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The Board recognizes the importance of having a diversified and competitive banking industry
that is comprised of banking organizations of many sizes and specializations. To promote this.
141
2
the Board has, and continues to, tailor its regulations and supervisory program based on the risk
profile, size and complexity of the organizations we supervise. Doing so allows the Board to
achieve its goal of promoting a strong b<mking system and preventing or mitigating against the
risk of bank Htilures, while minimizing a bank's regulatory compliance costs and
accommodating the variety of sizes, risk profiles, and business models in the banking industry.
This tailored approach is reflected in our rulemaking, supervisory guidance, reporting
requirements, and in the execution of supervision. Banking organizations with $50 billion or
more in assets arc subject lo enhanced prudential requirements--including capital and capital
planning, stress testing, and liquidity requirements----that increase in stringency, based on the
size, complexity, and risk profile of the finn. The largest, most systemically important tirms are
subject to the Large Institution Supervision Coordinating Committee tramcwork, which is a
supervisory program designed to materially increase the financial and operational resiliency of
systemically important financial institutions to reduce the probability of, and cost associated
with, their material financial distress or failure.
In contrast, the Board has taken many steps to reduce regulatory burdens for the small and
regional banking organizations. These include issuing guidance to encourage examiners to
review loans off-site ft)r banks with less than $50 billion in total assets, thereby reducing the
number of examiners physically on-site: reducing the regulatory filing requirements for banks
with less than $1 billion in consolidated assets by eliminating about 40 percent of the items in the
required quarterly financial reporting fcnn1 knmvn as the Call Report; and improving
examination planning efforts so that well-managed, lower risk banks receive less supervisory
scrutiny.
To help further ease regulatory burdens for small banks, we routinely review our guidance and
examination processes to insure they are appropriate. To that extent, we are looking at ways to
develop a simplified regulatory capital regime for small banks, turther simplify regulatory filing
requirements for small banks, and have initiated efforts to ease the conditions under which an
appraisal is required to support a commercial loan. We have also recommended that Congress
consider exempting community banks from two sets of Dodd-Frank Wall Street Reform and
Consumer Protection Act requirements--the Volcker Rule and the incentive compensation limits
in section 956.
3. Under current interest rate policies, banks will receive from the ,Federal Reserve interest
payments for the funds that banks have on deposit at the Fed. Former Fed Governor Don
Kohn, discussing the importance of paying interest on these reserves, wrote that "the Fed
will need to make good economic arguments to explain why paying interest to banks is
necessary." What are the Federal Reserve's "good economic arguments" for this practice?
The payment of interest on excess reserves contributes to effective implementation of monetary
policy by helping to manage the level of the federal funds rate and other short-term interest rates.
Most major central banks have the authority to pay interest on excess reserves and have used this
authority to help manage the level of short-term interest rates.
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In the current circumstances, interest on excess reserves is essential to the Board's ability to
manage the level of short-tem1 interest rates even with a very elevated level of reserve balances
142
in the system. Absent this tool, the Board would not have been able to raise the level of shortterm interest rates until it had dramatically reduced its holdings of!onger-term securities. As
demonstrated in the so-called "taper tantrum'' in the summer of 2013, markets can be very
sensitive to information bearing on the Board's holdings oflonger-tenn securities. lt seems
likely then that a program of rapid large scale sales of assets to reduce the level of reserve
balances in the system would have been very dismptive to markets and counterproductive in
fostering continued economic recovery and a return of inflation to 2 percent
4. The Volcker Rule was written under the justification that banks should not be using
insured deposits to fund inappropriate securities activities, To what degree is authority
under Section 23A of the Federal Reserve Act not enough to keep banks from using insured
deposits to engage in the securities activities that are the target ofthe Volcker Rule?
Section 13 of the Bank Holding Company Act, also known as the Volcker Rule, prohibits
banking entities from engaging in proprietary trading of financial instruments or from acquiring
or retaining an ownership interest in, sponsoring, or having certain relationships with private
equity funds or hedge funds (covered funds), subject to certain exceptions. Section23A of the
Federal Reserve Act limits the ability of a depository institution to engage in certain transactions
with an affiliate, such as loans or extensions of credit to the afilliate. 1
The Volcker Rule's activity restrictions generally apply to banking entities, which the statute
defines to include insured depository institutions 1md their subsidiaries and affiliates, with
limited exceptions. 2 Section23A does not limit the proprietary trading and covered fund
activities of a bank itself. Rather, it limits the ability of a bank to fund activities of an affiliate
through loans to or transactions with the affiliate. As such, section 23A may limit the direct
exposure of a bank to risks associated with an aftlliate's activities, as well as the direct transfer
of any funding subsidy effects relating to deposit insurance and access to the Board's discount
window. Other measures such as capital, liquidity. and risk management requirements
applicable to the bank. affiliate, or consolidated firm may also serve as potential limitations.
Any decision to remove the Volcker Rule's restrictions and rely on other measures such as these
would be a matter for Congress.
5. Former Fed Chairman Paul Volcker, when recently asked about proposed revisions to
the Volcker Rule, responded by saying, "Everybody wants to see it more simple.,, [and] if
they can do it in a more efficient way, God bless them." Do you share the views of
Chairman Volckcr, that there is value in making implementation of the Volcker Rule
simpler and more efficient? If so, what changes would you consider?
The statutory requirements of the Volcker Rule are very complex- the statute includes many
detailed restrictions that have broad effect throughout a firm. Even without a statutory change,
1
VerDate Nov 24 2008
By its tenus. section 23A of the Federal Reserve Act
to all Federal Reserve member banks.
12 U.S.C. 371c. Other statutes
the coverage
23A to apply to aU insured depository
and !2 U.S. C.
institutions. See. e.g., 12 U.S.C.
Section !3 defines "banking
institution. any company that controls an
insured depository institution
is treated as a bank
for purposes of section 8 of the
lntemational Banking Act of 1978, and any affiliate or subsidiary of any such entity, with limited exceptions.
12 U.S.C. J851(h)(J).
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143
- 4there may be ways to streamline, simplify, and tailor the interagency Volcker Rule regulation to
reduce costs while continuing to ensure the statutory requirements are fully implemented. The
Board is assessing opportunities for changes in coordination with the other agencies also
responsible for the Volcker Rule's implementation under the statute.
6. The leverage capital ratio requires banks to hold capital against any and all assets,
regardless of the risk of the assets. Recognizing the value of the leverage ratio as a backstop
where risks can change, arc hard to calculate, or where the risks are unknown, what is the
purpose of holding leverage capital for riskless assets, snell as Treasury securities and
funds on deposit, at the Federal Reserve? Would there be economic or supervisory value in
excluding these riskless assets from leverage ratio calculations?
The leverage ratio provides a backstop to risk-based capital requirements pursuant to which a
firm must hold capital in accordance with the riskiness of its exposures. Risk-based measures
generally rely on either a standardized set of risk weights that are applied to exposure categories
or on models. In either case, there are opportunities for potential arbitrage. Standardized risk
weights reflect the risk of a class of exposures rather than each particular exposure, and models
are reliant on historical data and thus may understate risk. In contrast, a leverage ratio, by its
nature, lacks this potential for arbitrage because it does not differentiate the level of capital
required by exposure type. Excluding select categories of assets from the leverage ratio would
be inconsistent with the leverage ratio's purpose as a risk-insensitive measure that simply
measures how much a finn's assets are supported by leverage and with its goal of addressing the
risk that a banking organization will fund itself with too much debt. In the Federal Reserve
Board's experience, a banking organization can be vulnerable if its total leverage is high during
stress periods because high leverage decreases the amount of equity a banking organization has
available to absorb losses.
7. It is important with regard to governance and other matters that a bank's board of
directors remains active and informed as well as set tone and policies for the bank.
However, the accumulation of recent rules and regulations seems to be dragging boards
into actual bank management and distracting them from tbe business plan and overall
strategic policy-setting function of boards. Governor Powell has already talked about
looking at restoring balance to the role of boards of directors. What is the Fed looking at in
that regard, and what are the principles guiding your review?
The Board strongly agrees thnt boards of directors need to play an active, informed oversight role
that is distinct from the role of senior management.
ln that regard, on August 3, the Board announced that it is seeking public comment on a
corporate governance proposal designed to enhance the effectiveness of boards of directors.
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The Board's proposed guidance was infonned by a multi-year review of the factors that make
boards effective, the challenges that boards face, and how boards influence the safety and
soundness of their firms and promote compliance with laws and regulations. The proposed
guidance is intended to address three primary findings from the review:
144
5
"
"
•
Many existing supervisory expectations do not clearly distinguish the roles and
responsibilities of boards of directors from the roles and responsibilities of senior
management.
Boards often devote significant time satisfying supervisory expectations that do not
directly relate to the board's core oversight responsibilities.
Boards face significant information challenges that require active management of
information flow.
The Board's proposed guidance consists of three parts:
" The Board Effectiveness Guidance (BE Guidance) that identifies the key attributes of
effective boards of directors for the largest domestic bank and savings and loan holding
companies and non-bank systemically important financial institutions. This proposed
guidance is intended to better distinguish supervisory expectations for boards from that of
senior management, and shift the supervisory focus to the board's core responsibilities.
In particular, the proposal would emphasize a board's responsibilities to set clear, aligned
and consistent direction, and to hold senior management accountable for, among other
things, adhering to the firm's strategy and risk tolerance, and remediating material or
persistent deficiencies in risk management and control practices.
• A proposal to eliminate or revise unnecessary, outdated, or redundant supervisory
expectations for boards of directors included in certain existing Board Supervision and
Regulation letters. This should allow board of directors to focus more of their time and
resources on fulfilling their core responsibilities.
• A proposal to clarify expectations regarding the communication of supervisory findings
by the Board to boards and senior management (revised SR 13-13/CA 13-1 0).
The Board's corporate governance proposal is cmTently out lor public comment for a 60-day
period ending October 10.
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@FedFRASER