Text available as:

  • PDF   (PDF provides a complete and accurate display of this text.)

[Senate Hearing 115-108]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 115-108




                               before the

                              COMMITTEE ON
                          UNITED STATES SENATE


                             FIRST SESSION




                             JULY 13, 2017


  Printed for the use of the Committee on Banking, Housing, and Urban Affairs

                 Available at: http: //www.fdsys.gov /

 27-427 PDF                 WASHINGTON : 2017       
 For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
  Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001                      


                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Joe Carapiet, Senior Counsel

                Graham Steele, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

           Corey Frayer, Democratic Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                     Cameron Ricker, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor


                            C O N T E N T S


                        THURSDAY, JULY 13, 2017


Opening statement of Chairman Crapo..............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2


Janet L. Yellen, Chair, Board of Governors of the Federal Reserve 
    Prepared statement...........................................    35
    Responses to written questions of:
        Senator Brown............................................    38
        Senator Sasse............................................    39
        Senator Rounds...........................................    50
        Senator Tillis...........................................    52
        Senator Heitkamp.........................................    53

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated July 7, 2017........    60
Letter from Keith A. Norieka, Acting Comptroller of the Currency.   122
Letter from Richard Cordray, Director, Consumer Financial 
  Bureau.........................................................   124
Memorandum to the CFPB Director from the Arbitration Agreements 
  Rulemaking Team................................................   127




                        THURSDAY, JULY 13, 2017

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met, at 9:34 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.


    Chairman Crapo. Good morning, and the Committee will come 
to order.
    Today we will receive testimony from Federal Reserve Chair 
Janet Yellen regarding the Fed's semiannual report to Congress 
on monetary policy and the state of the economy. Welcome, Chair 
    Promoting economic growth remains a top priority for this 
Committee and for this Congress.
    I have been encouraged to see Federal agencies and 
stakeholders carefully and thoroughly evaluating current laws 
and regulations.
    Since the last Humphrey-Hawkins hearing in February, there 
have been numerous developments that will impact economic 
growth legislation. Senator Brown and I have solicited the 
public for economic growth proposals, and more than 100 
submissions from individuals and stakeholders have come in. 
They are listed on the Committee's website for those who may be 
interested, and we are working together now to put together 
legislation dealing with it.
    The Committee has held numerous hearings focused on 
economic growth with financial companies and regulators; 
Federal financial regulators issued their second EGRPRA report; 
and the Treasury Department issued its first report on Core 
Principles of Financial Regulation.
    In addition, Members on both sides of the aisle have 
expressed interest in finding ways to help our economy improve. 
Support for bipartisan legislation promoting economic growth 
continues to build.
    Particular interest has been focused on finding bipartisan 
solutions to tailor regulations, change the SIFI threshold, 
exempt certain firms from stress testing, fix the Volcker Rule, 
and simplify small bank capital rules. These are just a few of 
many issues raised to the Committee in recent months.
    Imposing enhanced standards designed for the most complex 
systemic firms on institutions that are not systemic has real-
world implications. I regularly hear from Idaho business men 
and women who are concerned about access to business loans that 
would create jobs and promote a healthy economy.
    The $50 billion SIFI threshold, particularly, is an area we 
should address. There are different ways enhanced standards 
could be applied, and all too many have questioned whether the 
$50 billion threshold is appropriate.
    Chair Yellen, Federal Reserve Governor Powell, Acting 
Comptroller Noreika, former Federal Reserve Governor Tarullo, 
and former Comptroller Curry have all expressed support for 
changing the $50 billion threshold.
    In addition to the $50 billion threshold, Federal Reserve 
Governor Powell recently shared specific areas where the Fed 
believes some laws and regulations can be changed to alleviate 
burden, including the Volcker Rule, stress tests, and 
resolution plans, among others. I look forward to working with 
the Fed on these issues and welcome any additional color that 
you, Chair Yellen, can provide on areas where the Fed and 
Congress may act together to further reduce burden.
    With respect to housing, reforming the housing finance 
system is one of my key priorities this Congress. I have 
repeatedly stated that the status quo is not a viable option. 
The current system is not in the best interest of consumers, 
taxpayers, investors, lenders, or the broader economy.
    I was encouraged that Federal Reserve Governor Powell gave 
a speech last week in which he said that the status quo it 
    He also noted that ``[a]s memories of the crisis fade, the 
next few years may present our last best chance to finish these 
critical reforms.''
    With respect to monetary policy, the Fed has now raised 
interest rates four times since 2008. Overall, the Fed 
maintains an accommodative monetary policy with a balance sheet 
that still stands at $4.5 trillion in assets.
    Last month, the Federal Open Market Committee issued an 
addendum to its Policy Normalization Principles and Plans 
detailing how the Fed will gradually reduce its assets. I 
welcome more comments from Chair Yellen about the state of the 
economy and the path of monetary policy.
    The Committee continues to work to find bipartisan fixes to 
address many of the issues outlined here today, and I look 
forward to working with Chair Yellen, the Federal Reserve, and 
the Members of this Committee.
    Senator Brown.


    Senator Brown. Thank you, Mr. Chairman, for holding this 
hearing. Chair Yellen, welcome back. It is wonderful to have 
you here and to see you again. Thank you, and thank you so much 
for your service.
    Since your last appearance before this Committee, the Fed 
has increased the Federal funds rate twice, employers continue 
to create jobs--although at a slightly slower pace than last 
year--and wages have increased modestly.
    The Fed continues to lay out its plans to sell off the 
securities that it purchased during the crisis. The biggest 
banks are making record profits. Important to remember that. 
The biggest banks are making record profits and just passed the 
Fed's 2017 stress tests.
    At the same time, too many Americans continue to struggle 
to make ends meet. They worry their children will not have the 
economic security that they once had. Life expectancy in many 
parts of the country is falling--something more or less 
unprecedented in recent history--and that tells us something 
about our economy.
    So I am troubled by what I am hearing from the 
Administration, from some Republicans, and from some in the 
banking industry. Even though a fifth of homeowners with a 
mortgage are still seriously underwater in cities across Ohio--
you and my colleagues have heard me say on this Committee that 
the Zip Code my wife and I live in in the city of Cleveland, 
Zip Code 44105, had 10 years ago more foreclosures the first 
half of that year than any Zip Code in the United States of 
America. I see the difficulty that people in my neighborhood 
and my Zip Code have in rebuilding their lives. Even though the 
wealth gap between white and black families has widened, the 
Administration seems to want to let Wall Street gamble with the 
financial futures of working families once again.
    Gutting protections for working Americans is back in style 
in parts of Washington--from the Treasury Department's report, 
to the Financial CHOICE Act, to the House's financial 
appropriations bill. We face a slate of nominees for watchdog 
politicians who are, with great apology to President Lincoln, 
of Wall Street, by Wall Street, and for Wall Street.
    Ten years ago, Chairman Bernanke sat in the seat that you 
occupy. After describing the economic conditions in the housing 
and business sectors, he told our Committee--he spoke about 
concerns about subprime mortgages, global economic trends, and 
consumption and labor data. But he concluded--this was 10 years 
ago--``Overall, the U.S. economy appears likely to expand at a 
moderate pace over the second half of 2007, with growth then 
strengthening a bit in 2008 . . . ''.
    We must not forget what actually happened next: a 
devastating financial crisis. Working families in Ohio and 
Nevada and Maryland and Arkansas and all over, working families 
across this country cannot forget that. They are still digging 
out. Nor can we forget it, collective amnesia on this panel 
    I mention this not as a criticism of Chairman Bernanke. He 
had plenty of company in missing the signs of an impending 
crisis and an impending collapse. But when it happened, he took 
aggressive action, all of you did, to confront that crisis. He 
learned the lessons that came at such a high cost.
    After the crisis, we put rules in place that strengthened 
the capital positions of banks, that provided more stable 
liquidity, and that improved protections for consumers and for 
    Lobbyists are using the success of these reforms as proof 
that they should now be gutted. They are arguing that the 
results of the Fed's stress tests prove that we can now relax 
the rules. Having passed the test once, they want to make the 
test easier.
    I am sure every college student you taught in your long, 
distinguished academic career, Madam Chair, I am sure every 
college student you taught who struggled in class would have 
wanted the same thing. But they, unlike our Nation's biggest 
banks, would have been too embarrassed to ask their professor.
    The financial crisis was caused in part by watchdogs who 
were busy focusing on bank profits instead of ensuring that 
banks were treating their consumers fairly and had enough 
capital to weather a downturn.
    Everyone on this dais can agree that there are parts of 
Wall Street Reform that could be improved. Of course there are. 
But our focus should be on growing a stronger economy for 
everyone, in every part of the country--from Idaho to Ohio and 
beyond--and particularly in communities too often forgotten in 
this town.
    That means protecting consumers. It means improving the 
economic security of communities of color. It means 
strengthening the working- and middle-class families who felt 
the devastation the most, the devastation of 2008's financial 
    It means lowering the cost of health care. It means 
investing in infrastructure. It means expanding educational 
opportunities and job training. That is how you spur long-term 
economic growth that lifts up all Americans.
    Instead, weakening safeguards to boost bank profits and 
crossing our fingers that Wall Street will invest some of those 
profits in the real economy--we hope, we hope, we hope--instead 
just passing it along to their shareholders will not prevent 
another crisis. It will only hasten the next one.
    Madam Chair, I look forward to hearing your answers to our 
questions. Thank you.
    Chairman Crapo. Thank you, Senator Brown.
    Chair Yellen, again, welcome here. We appreciate you being 
here with us today. My understanding is that because today's 
testimony is the same as the testimony you gave yesterday at 
the House, you have requested to waive the reading of your 
testimony. Senator Brown and I have conferred, and we agree 
with that, and so we will proceed directly to the questions.
    Ms. Yellen. Very good.
    Chairman Crapo. And with regard to the questions, I again 
remind the Members of the Committee that we have 5 minutes each 
for questions, and we will try our very best--we have got a lot 
of time pressures today, and we will try our very best to help 
you keep on course with your 5-minute question period.
    I will begin. First, Chair Yellen, in a speech that 
Governor Powell gave last week, he outlined a few principles 
for housing finance reform. As part of the discussion, he 
explained that it was important to do three things: to do 
whatever we can to make the possibility of future housing 
bailouts as remote as possible, to change the system to attract 
large amounts of private capital, and to identify and buildupon 
areas of bipartisan agreement.
    Do you agree with these principles?
    Ms. Yellen. Yes, I do, Chair Crapo. I would support the 
principles that Governor Powell put forward and think it is 
something that I hope the Congress will move to in the near 
    Chairman Crapo. And I know the answer to this, but I would 
like to have you say it. Do you agree with the urgency that he 
expressed and that many of us have expressed about the need for 
us to act?
    Ms. Yellen. Yes. I mean, it has been almost a decade since 
Fannie and Freddie were moved into receivership, and the role 
of the Government and the associated systemic risk remains. And 
I think it is important to move forward with reforms.
    Chairman Crapo. Thank you.
    There appears to be growing consensus that Congress should 
consider changing the $50 billion SIFI threshold, also changing 
the Volcker Rule exempting certain institutions from company-
run stress-testing requirements, and reducing the burdens on 
community banks and credit unions.
    Do you agree that it would be appropriate for Congress to 
act in each of those areas?
    Ms. Yellen. I do.
    Chairman Crapo. Thank you. And could you please give the 
Committee after this hearing--I do not want to use up my time 
on this right now--some additional suggestions of ideas or 
legislation the Committee could consider to reduce the burdens 
in these areas?
    Ms. Yellen. Yes, we would be happy to do so.
    Chairman Crapo. Thank you very much.
    Next, at our hearing last month, Governor Powell said the 
Federal Reserve is reviewing the Volcker Rule. He noted that 
there is room for eliminating or relaxing aspects of 
implementation regulation that do not directly bear on the 
Volcker Rule's main policy goals.
    Can you elaborate on the Fed's review of the Volcker Rule?
    Ms. Yellen. Well, we look forward to working with the other 
agencies that have a role in rule writing. It is a very complex 
rule, partly reflecting the legislation, but I think we could 
find ways to reduce the burden, and it should be a multiagency 
    Chairman Crapo. And many of us are aware that the 
multiagency effort has been slowed down simply, many of us 
believe, because of the complexity of getting four or five 
    Ms. Yellen. I think that is true.
    Chairman Crapo. ----to all agree on the same thing.
    Ms. Yellen. Yes.
    Chairman Crapo. What do you think about the idea of having 
a designated lead agency on this issue?
    Ms. Yellen. Well, I think that is something that Congress 
could certainly consider. If one agency has a larger regulatory 
role with respect to those institutions, it might be natural 
for it to take the lead.
    Chairman Crapo. All right. Thank you. And at our last 
hearing, you told me, ``We would like our balance sheet to 
again be primarily Treasury securities; whereas, we have 
substantial holdings of mortgage-backed securities.'' However, 
the FOMC's plans to reduce the balance sheet include initially 
not reinvesting $6 billion of maturing Treasury securities and 
$4 billion of agency securities per month, suggesting that the 
Fed may wind down its Treasury portfolio more quickly than its 
mortgage-backed securities portfolio. Is that accurate?
    Ms. Yellen. Well, ultimately when the caps are fully phased 
in, my guess is that they will not be binding and that we will 
be running down mortgage-backed securities at the rate that 
principal is received on them. It will be a long process, I 
should say, to go back to an old Treasurys portfolio. Even 
after we have come to the point where our balance sheet has 
been reduced to as low a level as we expect to take it, we will 
still have substantial holdings of mortgage-backed securities. 
So beyond that, we will be further running down mortgage-backed 
securities and replacing them with Treasurys. So it will be a 
lengthy process, but the FOMC is committed to a primary 
Treasury-only portfolio in the longer run.
    Chairman Crapo. All right. I appreciate that, and with 
that, I will yield back 18 of my seconds and go to you, Senator 
    Senator Brown. Setting a high standard. Thank you, Mr. 
    History teaches us that when Congress does big things, 
labor law reform and Social Security with Franklin Roosevelt, 
in 1965 Lyndon Johnson with Medicare, the Congress 2 or 3 years 
later goes back to those issues bipartisanly and makes modest 
changes to fix them, something we have been asking for several 
years, asking Republicans to do with the Affordable Care Act. 
They have not chosen to work with us bipartisanly to make minor 
    The same with Dodd-Frank. Instead, we have seen 
particularly a House Financial Services Committee that wants 
wholesale destruction. Of course, we will work bipartisanly on 
making the kinds of changes that will do what certainly Chair 
Yellen has spoken about in making those reforms. So I just 
wanted to preface with that.
    Madam Chair, you recently stated you do not expect another 
financial crisis in our lifetimes. Setting aside the delicate 
question of your and my and all of our life expectancies, is 
that predicated on maintaining the strength of the current 
regulatory structure?
    Ms. Yellen. Well, let me state what I think I should have 
stated originally when I made that comment. I believe we have 
done a great deal since the financial crisis to strengthen the 
financial system and to make it more resilient. I think we can 
never be confident that there will not be another financial 
crisis, but we have acted, in the aftermath of that crisis, to 
put in place much stronger capital and liquidity requirements 
for systemic banking organizations and the banking system more 
generally. I think our stress-testing regime is forcing banks 
to greatly improve their risk management and capital planning. 
It is giving us assurance that even if there is a very 
significant downturn in the economy, they will be able to 
function and provide for the credit needs of the economy. And 
we have greatly increased our monitoring of the financial 
system for a broader range of risks.
    But let me say we can never be confident that there will 
not be another financial crisis, but it is important that we 
maintain the improvements that have been put in place that 
mitigate the risk and the potential----
    Senator Brown. Thank you. I just want people listening not 
to read your answers to the Chairman about moving on reform and 
moving--that there is some urgency to that, and we do want 
changes. We want them to be modest. But let me sort of further 
paint that picture with this question. In light of your 
comments to me that you may not expect another financial crisis 
in our lifetimes, but the importance of a good regulatory 
    Ms. Yellen. Absolutely.
    Senator Brown. ----diminishes the chances dramatically. 
Well, if so, if the recommendations of the Treasury report that 
you are familiar with that, obviously, the way it was written 
you did not seem to have a lot of input in, the recommendations 
of the Treasury report that weaken regulations on the largest 
banks, including lower capital requirements and fewer consumer 
protections, if those were adopted, which you continue to have 
that same level of confidence that you just repeated and have 
said earlier?
    Ms. Yellen. So I would not be in favor of reducing capital 
for the most systemic banks.
    Senator Brown. And consumer protections?
    Ms. Yellen. I think those are important as well. There are 
a lot of things in the Treasury report that we agree with that 
mirror things that we are doing on our own to appropriately 
tailor regulations----
    Senator Brown. And I apologize----
    Ms. Yellen. ----but for those banks, it is critically 
important to maintain the capital standards----
    Senator Brown. So if we were to adopt--I am sorry to 
interrupt. If we were to adopt the Treasury report 
recommendations, it would more likely result in a potential 
financial crisis?
    Ms. Yellen. Well, some of them, yes.
    Senator Brown. OK, OK. The last question I wanted to ask. I 
want to return to a topic I discussed several weeks ago with 
your colleague Governor Powell. Last year, the Fed proposed 
adding capital surcharges into the large bank stress test. 
Former Governor Tarullo recently said the biggest banks' 
capital requirements ``are still somewhat below where they 
should be,'' and that incorporating the surcharges into CCAR 
will protect against contagion from one of these banks 
spreading to the rest of the financial system.
    Madam Chair, is the Fed on track to finishing these 
    Ms. Yellen. We are working very hard on those. We are 
awaiting further work by our staff. We hope to include those 
surcharges and make other adjustments, and to better integrate 
the capital requirements relating to the stress tests and 
toward a normal capital----
    Senator Brown. But you are assuming, then--can you give us 
with assurance--and, Mr. Chair, this will be the last, and this 
is an easy one. Can you assure us that those changes will be in 
place for next year's stress tests?
    Ms. Yellen. It depends on the timing. We will need to go 
out with the proposal, and I cannot guarantee that it will be 
in place that quickly.
    Senator Brown. But you do not see the Fed heading in the 
direction of the Treasury report recommendations instead?
    Ms. Yellen. The Treasury report is supportive of 
integrating a capital buffer relating to the stress tests into 
our regular risk-based capital requirements, but probably is 
not supportive of including the G-SIB surcharges.
    Senator Brown. Yeah, more than probably. Thank you, Madam 
    Chairman Crapo. Thank you.
    Senator Shelby.
    Senator Shelby. Thank you. Welcome again, Chairman Yellen.
    In the area of inflation calculations, which you have to 
deal with, and price stability, which is very important to all 
central banks and to us, current Fed calculations show that 
inflation has fallen to 1.4 percent, I believe. This statistic 
is puzzling to some economists as interest rates were recently 
raised in June.
    Some have suggested--you are aware of this--that the Fed 
should not continue the practice of gradually raising interest 
rates because inflation has not kept pace with some of the 
things that you had talked about earlier. You said in recent 
testimony, and I will quote, ``It appears that the recent lower 
readings on inflation are partly the result of a few unusual 
reductions in certain categories of prices.'' Your words.
    Ms. Yellen. Yes.
    Senator Shelby. In addition to these few unusual reductions 
here, is it possible that certain aspects of foreign economies, 
such as slow growth and soft prices in China, are artificially 
lowering or influencing inflation in this country? Or what is 
it? What is going on here? Do you know? And if you know, what 
do you believe?
    Ms. Yellen. Well, with respect to the global economy, we 
have been through a period in which there has been a 
substantial appreciation of the dollar, and that depressed for 
quite some time import prices. But that trend has now come to 
an end, and import prices are rising at a modest rate. So I do 
not see the global economy as at this point mainly responsible 
for the low inflation readings.
    You know, as I indicated in the quote that you mentioned, I 
do think there are some special one-time transitory factors, 
these unusual changes reflecting the move to unlimited data 
plans for cell phones, and large declines in some prescription 
drug prices. There may be more going on, and we are watching 
inflation very carefully in light of low readings.
    I think it is premature to conclude that the underlying 
inflation trend is falling well short of 2 percent. I have not 
reached such a conclusion. We are watching data very carefully, 
and I would say I regard the risk as being two-sided with 
respect to inflation. On the one hand, we are seeing low 
inflation numbers for several months. On the other hand, we 
have quite a tight labor market, and it continues to 
strengthen. And experience suggests that ultimately, although 
with a lag, we are not seeing very substantial upward pressure 
on wages, but we may begin to see pressures on wages and prices 
as slack in the economy diminishes.
    So I see the risk with respect to inflation as being two-
sided, and with respect to how that bears on policy, most of my 
colleagues and I, when we looked at this matter in June, even 
recognizing that we have had several months of low inflation 
readings and that we are focused on trying to understand it, 
have felt that it probably remains prudent to continue on a 
gradual path of rate increases. But it is something we will 
watch very carefully, and I want to emphasize that monetary 
policy is not something that is set in stone. And if our 
evaluation changes with respect to inflation, that will make a 
    Senator Shelby. This economy has been in an expansionist 
mood for quite some time. A lot of economists say this is a 
mature economy. Would you disagree with that? Do you believe 
this economy has got a lot more zip in it?
    Ms. Yellen. Well, we have had a long expansion, and the 
unemployment rate is now at really quite low levels in the 
historic sense. But I do not believe that expansions die of old 
age. There are shocks that impact the economy, and a negative 
shock could end the expansion. But I do not see anything 
inherent in the nature of the expansion that suggests that it 
will come to an end anytime soon.
    Senator Shelby. My time is about gone. What significance is 
the continuing lower price of oil and gas in our economy? I 
know you exclude some of this from your basic monthly 
calculations. But it does have something to say and do about 
our economy because so many things go into oil and gas.
    Ms. Yellen. Well, the low prices of oil and gas have 
translated into gains to households. It has boosted their 
ability to buy other goods and services.
    Senator Shelby. Very positive, is it not?
    Ms. Yellen. Excuse me?
    Senator Shelby. Overall, very positive in the country?
    Ms. Yellen. I think on balance it is a positive.
    Senator Shelby. Sure.
    Ms. Yellen. Now, oil prices have rebounded off their very 
lows, and that has meant that drilling activity has picked back 
up again, and that is something that is supporting investment 
spending and demand in the economy.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. And, Madam 
Chair, thank you for your service.
    When you were here last in February, we discussed the 
economic impact of loss of access to health insurance. You said 
then that large-scale loss of access to health insurance could 
have a significant impact on household spending for goods and 
services that could also impact job mobility, making it more 
difficult for people to leave jobs for new positions or to 
start a new business because they would be risking their access 
to health insurance.
    Is that a view you still hold today? And if so, could you 
explain why?
    Ms. Yellen. So I really cannot quantify any of those 
effects, but, clearly, spending on health care is an important 
aspect of household budgets, and changes there could have an 
effect on spending on a wide range of goods and services in the 
economy. And access to health care is important. I think 
research suggests that a certain amount of so-called job lock 
reflects a desire of workers to hang onto employer-provided 
health care. I cannot tell you quantitatively, however, how 
important that is.
    Senator Menendez. In your testimony you mentioned that 
possible changes in fiscal policy and other governmental 
policies in the United States represent a source of economic 
    Ms. Yellen. Right.
    Senator Menendez. Would you include potential changes to 
our health care system as one of the factors causing 
uncertainty in the economic outlook?
    Ms. Yellen. Yes, I think fiscal policy, policies generally, 
are associated. The level of policy uncertainty is quite high 
at the moment.
    Senator Menendez. So I certainly believe that if a 
potential 22 million more Americans are uninsured by 2026 and 
cause premiums to skyrocket for middle-class families and those 
nearing retirement, that is going to have an impact on the 
economy. New Jersey alone would see 1 million more uninsured 
under the Republican proposals, a 47-percent increase in 
uncompensated care, $8.5 billion lost in Federal funding, the 
elimination of nearly 100,000 jobs. I think that has an impact 
in the economy.
    Let me move to a different topic. What would be the 
consequences of weakening or eliminating, as some have 
suggested, the Federal Reserve's full-employment mandate, 
particularly for those workers, many of them minorities, that 
have been left behind in the recovery and continue to face 
barriers in the job market?
    Ms. Yellen. Well, I believe that the strengthening of the 
job market that we have seen over the last several years has 
been particularly beneficial to minorities. Our Monetary Policy 
Report points out--and this is not the first time we have done 
this--that even in a so-called full-employment economy, 
unfortunately African Americans and Hispanics typically have 
higher unemployment rates, substantially so, than other groups.
    Senator Menendez. If I may, my specific question is: What 
would the elimination or weakening of your full-employment 
mandate mean to those communities? If the Federal Reserve 
either by some suggestion eliminates the full-employment 
mandate that the Fed has or weakens that as one of your core 
missions, what would be the consequences of that?
    Ms. Yellen. Well, I do believe it is an important mandate 
that keeps us focused on the labor market and wanting to ensure 
strong performance, and we have been very focused on it.
    Of course, we also have a price stability mandate. Now, 
inflation has been running below our 2-percent objective now 
for many years, and so there has not been a conflict between 
our price stability and employment mandates that we have----
    Senator Menendez. And I am not suggesting that. But I am 
simply suggesting that if you were to eliminate or weaken that, 
wouldn't that have negative consequences?
    Ms. Yellen. It most likely would.
    Senator Menendez. OK. Then let me ask you finally, how 
does--we see high, rising levels of household debt, widening 
inequality, a neutral interest rate at historically low levels, 
and to me it is critical that the Fed have the ability to 
respond in the event of another economic decline. How does 
below-target inflation impact household debt? And what signs do 
you see of inflation coming close to the Fed's 2-percent target 
let alone exceeding it by dangerous amounts?
    Ms. Yellen. So as I said, I think the risks with respect to 
inflation are two-sided, but we are very aware of the fact that 
inflation has been running below our 2-percent objective now 
for many years, and we are very focused on trying to bring 
inflation up to our 2-percent objective. That is a symmetric 
objective and not a ceiling.
    We know from periods in which we have had deflation, which, 
of course, we do not have in this country, but that is 
something that has a very adverse effect on debtors and can 
leave debtors drowned in debt.
    Now, we do not have a situation nearly that serious, but it 
is important when we have a 2-percent inflation objective to 
make sure that we achieve it, and we are focused on doing that.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Thank you, Chair 
Yellen, for being here this morning. Good to see you again. 
Thank you for your accessibility as well. We have had a number 
of conversations. We are not always on the same page, but your 
accessibility is much appreciated.
    Ms. Yellen. Thank you.
    Senator Scott. You know, the last time we chatted, we 
talked a lot about the unwinding of the Fed portfolio, which I 
think today is about $4.5 trillion or so. I think at the 
beginning of the crisis it was under $1 trillion. Can you just 
talk for a few minutes on the timing of the unwinding? And if 
you have a target number at the end, when would you see us 
getting there?
    I think my question is germane to the impact that your 
objective will have on South Carolinians who are looking for 
ways to improve their quality of life, and that coupled with 
the interest rate environment may have a negative impact on 
first-time homebuyers as well as those retirees that have much 
if not all of their money in the market.
    So your comments I would like to apply to those two 
specific groups as you discuss this for a few minutes.
    Ms. Yellen. OK. So let me see if I can be responsive to 
that. Our intention is to shrink our balance sheet and the 
quantity of reserves in the banking system in a slow, gradual, 
predictable way. And we have set out a concrete and detailed 
plan for how to do that, and it involves reducing the extent to 
which we reinvest principal payments that we receive on our 
holdings of Treasury and mortgage-backed securities.
    So when we set the plan into effect, we will set caps on 
the amount of reinvestment that we allow to occur. The caps 
will gradually rise over time, and our balance sheet will 
gradually run off as a consequence of reduced reinvestment.
    We want to make sure that we manage this in a way that is 
not disruptive to financial markets, and in part for that 
reason, we have tried to set out increasingly clearly and in 
great detail how we intend to proceed. So once we trigger this 
process, I expect it to run in the background, not something 
that we will be talking about a lot from meeting to meeting. It 
will be a predictable process.
    Now, we think that our purchases of assets did have some 
positive effect in depressing longer-term interest rates, and 
so over many years, as our balance sheet shrinks, we would 
expect to see some increase in longer-term interest rates 
relative to short-term interest rates. But, of course, we will 
take that into effect, namely, a steepening of the yield curve, 
in how we set the Federal funds rate, which will become, is 
now, and I hope will remain our primary tool for adjusting the 
stance of monetary policy. And we will set that, as always, 
with a view toward trying to achieve maximum employment and 
price stability.
    Now, finally, you mentioned that our balance sheet was 
around $1 trillion prior to the crisis, and that is true. But 
it is important to recognize that although our balance sheet 
will shrink appreciably during this process, as will the 
quantity of reserves, I have no expectation of going back to a 
balance sheet that small.
    One of the factors influencing the size of our balance 
    Senator Scott. I have about a minute left, so I am going 
to--I hate to cut you off, but I want to go to insurance.
    Ms. Yellen. OK.
    Senator Scott. But let me just say this: As we talked about 
the depressing of interest rates, which can be very positive 
for first-time homebuyers, it is very negative for those 
retirees who are depending on the return on their investments 
to produce their livable income, so to speak.
    On the insurance side, we talked as well on the importance 
of having insurance expertise on the FSOC. As we have all 
mentioned, I think Mr. Woodall's term expires September 21st or 
thereabout. Today the way that we have it structured, we could 
be absent of any insurance expertise on the FSOC. Would you 
support legislation to--I know that you do not necessarily get 
involved in politics, but would you support legislation that 
would head in the direction of making sure that the insurance 
expertise stays on FSOC?
    Ms. Yellen. So I do think it is important for FSOC to have 
insurance expertise, and exactly how you go about accomplishing 
that, I do not have a specific recommendation.
    Senator Scott. Thank you, ma'am. My time is about up. I do 
want to encourage our Chairman Crapo and Ranking Member Brown 
to continue their work on making sure that the FSOC has that 
continuous insurance representation. Thank you.
    Chairman Crapo. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. Chair Yellen, it 
is great to see you again, and let me just say at the outset it 
is great to be asking somebody a question that does not have to 
deal with Russia.
    You know, Chair Yellen, recently I know the Fed moved 
proactively to scale back the qualitative portion of the CCAR 
test, and I know former Member Tarullo before he left also 
discussed potential further reforms on CCAR, and many of those 
I support in terms of maybe folding CCAR into the annual--more 
of the traditional annual review so it is not dual-hatted.
    I do think, though, that CCAR for the largest institutions 
is important, and in a sense not broadcasting the methodology 
you are going to use before you do the test is important. I 
would like to get your views on that and how you see either 
that continuing reform, which I know you have already gone 
ahead and moved proactively for banks under $250 billion. Do 
you see more reform? And is there some value for continuing to 
keep CCAR in place for the largest institutions?
    Ms. Yellen. So I do believe our stress tests and CCAR have 
very substantially strengthened especially the largest banking 
firms, and I think we have in the process gained assurance that 
these firms have enough capital to be able to survive a very 
adverse, stressful scenario while continuing to provide for the 
credit needs of American households and businesses.
    We have looked carefully at CCAR and how we conduct the 
stress tests, and we are continuing to do so, are open to 
making changes, but let me say that conducting these stress 
tests in a rigorous way and making sure that firms have the 
capacity to be able to meet our capital planning expectations 
which CCAR has facilitated is critically important to having a 
sound financial system.
    I cannot really see our putting the models into the public 
domain. We have been making public the results of the stress 
tests. I think that is an important part of transparency that 
has strengthened market participants' understanding of the 
strengths and weaknesses of particular banking organizations. 
And I think it is something that has helped to provide market 
    We have tried to make it less burdensome, as you noted, for 
the under $250 billion institutions. It is conceivable that 1 
day if the largest institutions were to show on a regular basis 
that they have in place very strong capital planning standards 
that meet our expectations, that perhaps we could change the 
qualitative portion of the review for some of them, as long as 
we had that assurance. But that remains an open question, and 
this is a core part of our supervision that is essential.
    Senator Warner. And I commend in terms of moving up to 250, 
and I even say there may be regional banks that would be even 
slightly higher that might be afforded some relief. And I would 
argue that it is less about kind of annual basis and would be 
more triggered by on the qualitative piece if they change their 
line of business or they introduce a series of new products.
    Obviously, the SIFIs I think need this, and I agree with 
you that broadcasting the methodology on the front end might 
not be the best way to go.
    Can you speak for a minute--you know, one of the ways we 
saw in the crisis was, as a lot of financial transactions moved 
into the shadow banking system, in a sense--and I think we 
managed to try to scoop a lot of those back in back in 2008.
    Ms. Yellen. Yes, we did.
    Senator Warner. But capital moves fairly quickly. Where do 
you see in kind of the shadow banking system in 2017 where 
there may be vulnerabilities or areas that we ought to 
    Ms. Yellen. Well, so we are constantly looking for 
vulnerabilities and recognize that risk can move outside the 
regulatory perimeter. I do not have something specifically to 
highlight. I would note that, with respect to shadow banking, 
the changes that we have made with respect to money market 
mutual funds have reduced what was a very important and 
destabilizing risk. We have made a number of changes with 
respect to the tri-party repo market that have reduced risks 
    So I do see changes that have been made with respect to 
shadow banking that have diminished risks, but we are on the 
lookout for areas where new risks may be emerging.
    Senator Warner. Thank you, Mr. Chairman.
    Senator Shelby [presiding]. Senator Cotton.
    Senator Cotton. Thank you. Welcome back, Madam Chair.
    Ms. Yellen. Thank you.
    Senator Cotton. Much has been made about the slow pace of 
the recovery over the last 8 years. One aspect of the recovery 
that does not get quite as much coverage is the geographically 
distributed nature of the recovery. It has been concentrated 
primarily in larger metropolitan areas. In fact, if you look at 
small business creation, just 20 counties in this country 
accounted for over half of all small business creation. This is 
in contrast to 25 years ago. In metropolitan counties with more 
than 1 million people, growth in new businesses was only 3.9 
percent. In counties with fewer than 100,000 residents, it was 
8.4 percent. Whereas, in this recovery small business creation 
in metropolitan counties of more than 1 million is 4.8 percent. 
Unfortunately, in small counties of fewer than 100, it is 
negative 1.2 percent. In Arkansas, we call counties with fewer 
than 100,000 people ``counties'' because there is only about--
there are only 7 out of 75 that have 100,000 counties--or 
100,000 people.
    On page 19 of the most recent report, the Fed states that 
measures of small business credit demand have remained weak 
amid stable supply. I understand that banks' small business 
lending is weak and it has never really recovered to pre-crisis 
levels. In your testimony you also attribute the outcome to 
weak small business demand for credit, and you say that the 
supply of small business credit is stable. But how do we know 
that the weak lending demand is the cause of this weakness in 
small business lending and that at least to a degree a 
contributing factor is not the supply of small business loans 
being caused by the decline in the number of community banks in 
places like rural Arkansas?
    Ms. Yellen. So we have a number of surveys, including our 
regular survey on lending standards in banking organizations 
that helps us try to distinguish between demand factors that 
may be affecting the growth of credit and supply factors. And 
the statement that demand is weak is partially based on that 
    We do have surveys like the National Federation of 
Independent Business that regularly queries smaller businesses 
and asks them about the problems that they face. And a very 
small number cite inability to gain access to credit as a 
significant factor that is affecting their businesses. But 
community banks are important sources of supply of credit, 
especially in rural areas, to small business, and we are very 
committed to working to reduce the burdens that these firms 
face from regulations so that they can thrive and they can meet 
the needs of consumers and small businesses in their 
    Senator Cotton. Does your study and analysis show what 
small businesses do in places like Cleveland County and Dallas 
County, Arkansas, when their small community banks close or 
maybe are acquired and then their presence is reduced to an ATM 
location? So if you are a small business there and used to rely 
on your small bank in Cleveland or Dallas County, that bank is 
no longer there, what is the most common avenue for them to try 
to seek financing?
    Ms. Yellen. I am not aware of data that bears on that. 
There may be something. If there is, I will get back to you on 
    Senator Cotton. OK. Thank you very much for your testimony.
    Thank you, Mr. Chairman.
    Senator Shelby. Senator Van Hollen.
    Senator Van Hollen. Thank you. Thank you, Senator Shelby. 
And, Madam Chair, thank you for your leadership. It is great to 
have you here.
    The last time you were here, we talked about some of the 
economic--you know, the situation in the country specifically 
as it related to wage growth. And even as we have seen fairly 
steady job growth, we continue to see very sticky, stagnant 
wage growth. And you indicated that that is partly a result of 
low productivity, even though over decades, even when we had 
higher productivity, we saw very unevenly distributed wage 
    And you mentioned that we need to do more in the way of 
investing in education, job training, whether it is things like 
apprenticeships, 2-year community colleges, 4 years. And I know 
you have made comments about that recently, and I hope as we 
look at the budget here in the U.S. Senate, we keep that in 
mind. And, additionally, the need to focus on modernizing our 
national infrastructure, which is another area of productivity 
growth where I think we could make some progress. And I wish, 
in fact, we had started here in the Congress working with the 
White House on that kind of bipartisan initiative. So I may 
follow up with you on that.
    My questions do relate to some of the comments made by the 
Ranking Member. Senator Brown reminded us that on the eve of 
the financial crisis, most people were predicting sunny skies 
and clear sailing, did not see the storm clouds ahead. And that 
is why we put in place some of these safeguards, these 
guardrails to try to make sure the economy could grow but 
without undue risk in the system.
    Ms. Yellen. Yes.
    Senator Van Hollen. And that obviously is the subject of 
ongoing debate now. So I just have a couple questions relating 
to the guardrails, the safety procedures we put in place.
    Orderly liquidation authority that was part of Dodd-Frank, 
do you believe it is important to maintain and preserve that 
    Ms. Yellen. I believe it is essential to maintain orderly 
liquidation. We saw during the crisis the absence of a way to 
resolve a nondepository institution, a systemic financial 
institution in an orderly way led to a massive intensification 
of the crisis.
    Now, I agree that bankruptcy should be the preferred route 
for resolving a firm that is in difficulty, and Congress in 
Dodd-Frank mandated living wills, and that we should work on 
the ability to resolve these firms under the Bankruptcy Code. I 
believe we have made a great deal of progress in getting firms 
not only to file these living wills, but also to think 
systematically in the course of their regular business how they 
need to be organized to make them resolvable in the event of 
    We have put in place rules to ensure the most systemic 
firms have sufficient gone-concern loss absorbency that they 
could be recapitalized by bailing in debt holders in a 
situation where they encounter substantial losses. But while 
bankruptcy should be the preferred route to resolve such a 
firm, Title II is a very important safeguard. We cannot know 
exactly what the circumstances would be at the time that a firm 
encounters distress, and that is a very workable approach that 
I believe we absolutely need.
    Senator Van Hollen. Thank you. One other question relating 
to some of the safeguards that were put in place, because some 
have proposed eliminating either the leverage ratio or the 
capital buffer. Former Governor Tarullo said not that long ago 
that applying a simple leverage ratio to banks in exchange for 
allowing them to escape Dodd-Frank's capital standards would 
allow banks to ditch safe assets in favor of riskier ones to 
boost profits. In other words, he and many others have said it 
is important to maintain both of these measures in order to 
prevent undue risk in the system. What is your view?
    Ms. Yellen. So I agree with that. A simple leverage ratio 
basically imposes a capital charge on a junk bond that is 
identical to the charge that is imposed on holding a Treasury 
bill, and that type of system can result in banks taking on a 
great deal of risk. So I believe risk-based capital should be 
the most important form of capital regulation, that that is 
what should be binding. And I see a leverage ratio as a back-up 
catch-all that is there in a belt-and-suspenders approach. But 
it should not be what drives decisionmaking in firms.
    So we have strong risk-based capital. We now have an 
enhanced supplementary leverage ratio that applies to the most 
systemic banks. These two things do need to be calibrated 
appropriately so that the risk-based capital is what is 
binding. And we are looking at the calibration of that 
supplementary leverage ratio because it may be that it is high, 
for example, it affects the custody banks and maybe having some 
unintended adverse consequences. But both need to be in place, 
and they need to be appropriately calibrated.
    Senator Van Hollen. Thank you.
    Senator Shelby. Senator Perdue.
    Senator Perdue. Madam Chair, good to see you again. Thank 
you for being here and for your service.
    I just have two quick questions, but the first one, I am 
very concerned about global debt. The Institute of 
International Finance recently reported that their estimate of 
total global debt is $217 trillion or more than 300 percent of 
global GDP. Do you agree with that directionally?
    Ms. Yellen. So I have not heard that number. That could be. 
I do not have that number at my----
    Senator Perdue. Well, of that, $60 trillion is estimated to 
be sovereign debt. We have about $20 trillion of the $60 
trillion. With that as background, the four large central banks 
also have their largest historic balance sheets, as you have 
said before. Japan, China, EU, and U.S. have collectively close 
to, approaching $20 trillion now of balance sheet size.
    As you talk about reducing the size of the Fed's balance 
sheet, are you coordinating with these other central banks and 
looking at emerging market debt, particularly the $300 billion 
that is coming due by the end of 2018, relative to the size of 
your balance sheet here in the United States?
    Ms. Yellen. Well, I would not say ``coordinate.'' We 
certainly consult with one another and try to make sure we meet 
regularly and discuss our policy approaches, make sure that 
other central banks understand how we are looking at our 
economies and policy options. So I think the major central 
banks understand the approach that others are taking, but 
trying to ask in an aggregate sense how much debt is 
outstanding is something that we are not doing. Our economies 
are in rather different situations. While we all encountered 
weaknesses that were sufficiently severe that Japan, the ECB, 
the Bank of England, the United States, we all resorted to 
purchases of longer-term assets to support growth, I would say 
the United States is further along in the process of 
normalizing monetary policy--well, at least in the Bank of 
Japan and the ECB.
    Senator Perdue. Are you concerned about the emerging market 
debt with so much of that denominated in dollars today?
    Ms. Yellen. Well, it is a risk. A significant amount of 
that is in China, but that is not the only country where there 
is substantial corporate dollar-denominated debts. And 
certainly that is a risk that we have considered that affects 
the global economy.
    Senator Perdue. With regard to the Fed's balance sheet, it 
is currently about $4.5 trillion. Senator Scott just asked 
earlier and I did not quite get the answer: Is there a 
directional limit or a target that you have set at this point 
for the size of that balance sheet? You did say that you did 
not see a $1 trillion balance sheet again. But is there a 
target and a time period that you could discuss publicly about 
the size of that balance sheet?
    Ms. Yellen. So we do not have a target for the ultimate 
size of our balance sheet. What we have said is that we expect 
the quantity of reserves in the banking system, which is now a 
little bit over $2 trillion, to shrink considerably. How small 
reserve balances will become when we are done this process is 
something we do not know.
    A lot has happened over the last decade to affect the 
demand for reserves, and as this process occurs, we expect to 
learn more about how the demand by banking organizations for 
reserves has changed. But I do want to point out that the 
overall size of our balance sheet depends not only on the 
quantity of reserves but on other non-reserve liabilities, 
importantly including currency.
    Back in 2007, the stock of currency outstanding was around 
$700 billion, and it now stands at closer to $1.5 trillion. And 
so even if reserves were to shrink to zero, our balance sheet 
would not go below $1.5 trillion.
    Senator Perdue. I am almost out of time. I have one last 
question. This is a long recovery. It has been very weak, but 
it has been very long, almost 9 years, and the typical recovery 
in U.S. history is about 58 months, about 5 years. So the 
question I have is: With consumer confidence right now being at 
a 13-year high and yet consumer debt, as you just mentioned, 
has risen again in the last couple of years back to approaching 
100 percent of household income, what are your concerns 
relative to the strength of this market and the fiscal policy 
that is coming out of Washington over the last couple years, 
and even this year, relative to a potential correction in this 
longstanding recovery, the weak recovery? And does the economy 
have energy to pop and recover from this extended period of 
weak economic growth?
    Ms. Yellen. So I do have a reasonable level of confidence 
that the expansion can continue, and we are trying to put in 
place a monetary policy that will facilitate that. Often 
previous downturns following expansions have reflected 
inflation rising to levels that are unacceptable, forcing a 
tightening in monetary policy. And we have a very different 
situation now with inflation running below our target rather 
than above it.
    Of course, as I said, we are attentive not only to downside 
but also to upside inflationary risks, and we are focused on 
    With respect to consumer debt, I think households are 
generally in a stronger position. Mortgage debt has declined 
significantly relative to household income. Student debt has 
risen enormously. But a lot of the expansion of debt is among 
higher-income households with strong creditworthiness, and the 
burden of debt payments relative to household income is low. 
So, of course, there are risks in some areas there, but overall 
I would not point to household debt as something that is 
flashing red on a financial stability concern.
    Senator Perdue. Thank you.
    Thank you, Chair.
    Chairman Crapo [presiding]. Thank you.
    Senator Warren.
    Senator Warren. Thank you, Mr. Chair. It is good to see you 
again, Chair Yellen.
    I want to follow up on the letter I sent you last month 
urging the Fed to remove the Wells Fargo board members who 
served during the bank's fake accounts scandal. And I 
appreciate the response you sent me earlier this week, which 
acknowledges that you have legal authority to remove these 
board members and that confirms that you are willing to use 
that authority if it is warranted. And that is a question I 
want to get at today.
    How could removal of these board members not be warranted 
given the facts that we already know? You know, the 2008 
financial crisis showed that the big banks had completely 
inadequate risk management systems, and after the crash, the 
Fed established tough new rules for risk management. Those 
rules imposed higher risk management standards on bigger and 
more complex institutions, which means that Wells Fargo by law 
had to meet a very high standard.
    So let us lay this out. The Wells Fargo board of directors 
is ultimately responsible for risk management at the bank. Is 
that right, Chair Yellen?
    Ms. Yellen. That is a responsibility.
    Senator Warren. Good. So the board is responsible, and here 
is what they are responsible for under the Fed's own 
regulations: making sure that there are ``processes and systems 
to integrate risk management with management goals and its 
compensation structure,'' and making sure there are ``processes 
and systems for ensuring effective and timely implementation of 
actions to address emerging risks.''
    Now, Wells Fargo did not come close to meeting those 
requirements. They established impossible cross-selling goals 
and set up a compensation structure that put enormous pressure 
on employees to open new accounts for existing customers. And 
despite a mountain of evidence that these incentives were 
leading to the creation of fake accounts, the board did nothing 
for years. The result was thousands of employees opening more 
than 2 million fake accounts.
    So can you explain to me how the Wells board can possibly 
have satisfied its obligations under the Fed's risk management 
    Ms. Yellen. So I am not prepared to discuss in detail what 
is a confidential supervisory matter. I will say that the 
behavior that we saw was egregious and unacceptable, and it is 
our job to understand what the root causes were of those 
failures. And as I have agreed, we do have the power, if it 
proves appropriate, to remove directors. A number of actions 
have already been taken, and we need to conduct a thorough 
investigation to look at the full record to understand the root 
causes of the problems, and we are certainly prepared to take 
enforcement actions if those prove to be appropriate.
    Senator Warren. Well, I appreciate that, Chair Yellen, 
because we already know a lot that is just in the public record 
and that Wells itself has already admitted to, and that, in 
fact, Wells Fargo's own board commissioned an investigation by 
the law firm Shearman & Sterling and found that the board was 
far too deferential to Wells' executives on risk management 
issues and ignored several red flags about the scope of the 
fake accounts scandal. So there is already a lot out there in 
    And here is what worries me: Time after time, big banks 
cheat their customers, and no actual human beings are held 
accountable. Instead, there is a fine, which ultimately is paid 
for by shareholders, not by executives, and certainly not by 
directors of the board. And nothing is going to change at these 
big banks if that does not change.
    You know how I know that for a fact? It is because in 2011 
the Fed fined Wells Fargo $85 million for illegally steering 
mortgage borrowers into costlier loans, and the Fed 
specifically said those illegal practices were caused by 
``incentive compensation and sales quota programs, and the lack 
of adequate controls to manage the risks resulting from these 
programs.'' So the Fed fined Wells in 2011 for failing to 
manage the risks resulting from bad incentive compensation 
practices. And what did Wells do? For the next 4 years, 
immediately after that fine, the board signed off on incentive 
compensation practices that led to the creation of 2 million 
fake accounts. Fines are not working with these giant financial 
    If bank directors who preside over the firing of thousands 
of employees for creating millions of fake accounts can keep 
their jobs, then I think every bank director in this country 
knows that they are bulletproof. And that poses a danger to the 
rest of us every single day.
    You have the power to change the culture on Wall Street. I 
know you care about this issue. I hope you will use that power.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Rounds--oh, excuse me. Senator Sasse.
    Senator Sasse. Thank you. Madam Chair, thanks for being 
    I am very concerned about the most recently available data 
on job openings and job hires. As you probably know, there are 
6 million open jobs in America right now, and yet job hire 
numbers are falling. I hear about this from Nebraska businesses 
every week when I am home, the difficulty they have in finding 
and retaining talent.
    What do you think the most prominent causes are of the 
mismatch between job openings and job seekers right now?
    Ms. Yellen. So it is commonly the case that with an 
unemployment rate as low as we have now that many employers 
would have vacancies and regard them and report that they are 
hard to fill. In fact, the fraction of firms reporting that 
jobs are hard to fill is in a way an alternative to the 
unemployment rate as a measure of labor market slack. So with a 
4.4 percent unemployment rate, you should expect that there 
would be many firms that would find this.
    That said, I agree that there is job mismatch, that there 
are kinds of jobs that firms have had a good deal of difficulty 
in filling. I often, when I am asked about productivity growth 
and problems in the labor market, talk about the importance of 
worker training programs, education. We routinely hear that 
there are jobs, for example, in manufacturing, but ones that 
require skills that those who are losing jobs do not have. And 
I often, when I travel, look at programs that have been devised 
in different parts of the country to try to enable workers who 
are having a tough time finding jobs fill the jobs that are 
available. And I have seen examples of nonprofits partnering 
with State and local government and with local businesses, 
community colleges, to put in place programs that are linked to 
job opportunities that fill that gap. With a tight labor 
market, I hear many more firms telling me that they are doing 
their own training, putting in place and expanding training 
programs to try to fill these vacancies.
    Senator Sasse. Thank you for that. I am trying to get my 
hands around, though, whether or not we think this is a new 
normal and somehow economic growth is going to solve this 
problem, or whether or not we have a set of cultural issues or 
institutional issues around mid-career job retraining in 
    Nick Eberstadt at American Enterprise Institute has data 
that shows that prime-age male labor force participation rates 
have been declining for over 40 years. We have gone from 25- to 
55-year-old males nonparticipating in a seemingly quasi-
voluntary way from about 4 percent 40 years to pushing 15 
percent today, I believe. Do you think this is a new normal?
    Ms. Yellen. Well, we have had many decades of declining 
labor force participation by prime-age men, and I think this 
reflects a whole variety of adverse trends related particularly 
to technological change that has eliminated many middle-income 
jobs, those that can be replaced by technology, combined with 
global outsourcing and production. And the individuals that 
have lost those jobs have found it difficult to acquire the 
skills necessary to be reintegrated into the labor market. And 
many individuals with less education are finding it difficult 
to be placed in jobs that are middle-income jobs. And so this 
perhaps intensified during the recession, but it is a much 
longer-lasting trend, and, you know, we have seen now, 
unfortunately, this is likely tied to the opioid crisis. It is 
tied to the problems that many communities have. You know, we 
have even seen an increase in death rates due to deaths of 
despair, suicide, drugs----
    Senator Sasse. Pardon me jumping in----
    Ms. Yellen. ----among these communities, and so this is a 
very serious matter.
    Senator Sasse. I think there are social maladies all around 
this that will be valuable to unpack with your input. If we had 
longer rounds, I would also ask you some questions about the 
new multicareer economy that we are inevitably headed toward 
and the fact that this institution is not at all nimble or 
prepared to think about what mid-career job retraining 
institutionalization looks like. But before I am out of time, I 
want to ask you just one question on trade.
    Corn exports from the U.S. to Mexico have fallen 7 percent 
just in the last 5 months. Obviously, Mexico has been exploring 
other trading partners. There is an attempt on Mexico's part to 
turn from the U.S. toward Brazil for certain grains and other 
    Do you think that the U.S. rhetoric around increasingly 
protectionist tone is having a direct effect now on people 
trying to pre-negotiate other trading partners? And do you have 
historical examples of moments like this where we are not yet 
in a trade war but we seem to be speaking in a way that implies 
we might go there and we are already seeing effects on certain 
agricultural commodities and exports?
    Ms. Yellen. I am going to pass, if you do not mind, on this 
question. I think this is----
    Senator Sasse. I mind a little bit.
    Ms. Yellen. You know, this is a matter that is well outside 
the domain of monetary policy and really is a matter for 
Congress and the Administration.
    Chairman Crapo. Well, I was going to ask you to keep your 
response short, anyway.
    Chairman Crapo. Thank you, Chair Yellen.
    Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. And, Madam 
Chair, thank you for your service to the country. We greatly 
appreciate it.
    Ms. Yellen. Thank you, Senator.
    Senator Donnelly. This is a subject that my colleague 
Senator Sasse touched on a little bit and then you mentioned, 
and that is, my State, like many others, is in the midst of a 
severe opioid abuse epidemic. Hoosiers of all ages and 
backgrounds have been impacted--families, friends, personal 
addictions. And it not only impacts health outcomes but has a 
real consequence on economic and employment opportunities.
    The national unemployment rate is at 4.4 percent, but the 
labor participation rate has gone down. People talk about the 
aging population, this and that. How much of a factor do you 
think the opioid abuse situation has been?
    Ms. Yellen. So I do think it is related to the decline in 
labor force participation among prime-age workers. I do not 
know if it is causal or it is a symptom of long-running 
economic maladies that have affected these communities and 
particularly affected workers who have seen their job 
opportunities decline. This is something that has been going on 
for many decades. Surveys suggest that many prime-age men who 
are not actively participating in the labor market are involved 
in prescription drug use, not always opioids. But, you know, we 
are seeing, as I mentioned, an increase in death rates which is 
extremely unusual. I think the United States is the only 
advanced nation that I know of where in these communities we 
are actually seeing, especially among less educated men, an 
increase in death rates partly reflecting opioid use. And it is 
obviously a very serious and heartbreaking problem.
    Senator Donnelly. I have felt for a long time that, you 
know, if we--the job opportunities are there if we could have 
somehow trained these individuals and gotten them to avoid 
this. And I am not asking you to be a social scientist, but I 
think you already mentioned this. There seems to be a clear 
indication or a clear connection between this and the 
opportunity to go to a job, to get employed, to have success, 
and to, in effect, have hope and dignity and purpose, it would 
seem to me.
    Ms. Yellen. I would agree with you, and I feel that all of 
those things are bound up in this opioid crisis and are 
interacting in ways that are really quite devastating for these 
individuals and their communities.
    Senator Donnelly. A little bit different topic but one that 
I think is going to become more and more in the front of our 
windshield, because I think that, you know, if we look and 
interest rates start to go up, one of my top concerns is the 
national debt. I think the debt already has an impact on future 
generations as the cost of borrowing is increasing. I think it 
is going to get more expensive very soon. It is $260 billion 
plus a year. And you look at that, and we have discussions here 
about how do we fund the National Institutes for Health which 
is going to cure cancer, cure diabetes, cure multiple 
sclerosis, and all those funds that we sit and try to figure 
out how do we get enough of, we are spending $260 billion a 
year just paying interest on our debt.
    Is there a tipping point coming up or is there a point that 
you look at and you go this is really--as the interest rates go 
up and the amount of it goes up, that you look and you go this 
is going to have a very, very significant impact?
    Ms. Yellen. So fiscal policy, we have long known, under 
current policy is on an unsustainable course. And as the 
population continues to age, especially if health care costs 
rise, as they have historically, more rapidly than the general 
price level, we are going to see the debt-to-GDP ratio rise 
from its current level of about 75 percent, which is not 
frightening but also not low, to unsustainable levels. And the 
increase in interest on the debt will be a factor contributing 
to its unsustainability. You routinely see projections by the 
Congressional Budget Office. They make assumptions about the 
path of short- and long-term interest rates. They project--I do 
not have the exact numbers, but short-term interest rates 
    My colleagues publish our estimates of longer-run normal 
short-term interest rates, which we see is about 3 percent. 
Now, that estimate might change, but CBO also sees short-term 
interest rates rising toward something like that level with 
long-term interest rates moving up. And so that is going to be 
increasingly a factor driving debt dynamics.
    Senator Donnelly. Thank you. And thank you for your 
service, and 1 week from today, on July 20th, 330 workers, 
those Carrier workers that we have talked about so many times, 
start to lose their jobs. So, please, keep them in mind about 
how we make sure that their chances for success are ahead and 
that we have trade laws that stand up for all our workers.
    Thank you very much.
    Chairman Crapo. Thank you.
    Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman. Madam Chair, 
welcome once again. We always appreciate the opportunity to 
visit with you.
    I was very pleased to hear your expression of concern 
regarding the enhanced SLRs and, in particular, the impact it 
would have on a series of not a lot of banks but on some banks 
that are the custody banks.
    Ms. Yellen. Yes.
    Senator Rounds. I am interested because for mutual fund 
holders the costs for those banks is passed on directly to the 
mutual funds. I am just curious. I think it is an issue that 
should be addressed, and I am just wondering if you have got a 
timeframe or a concept in terms of how to address the increased 
costs that they have, even though they are holding, as you have 
indicated, one of the safest assets out there or instruments 
out there in terms of their use of central bank instruments. 
Can you talk a little bit about what your thoughts are?
    Ms. Yellen. So I would agree with you. We have been in 
touch and are aware of the issues faced by the custody banks. 
It is one of the reasons that we are looking at the issue of 
the appropriate calibration of the enhanced supplementary 
leverage ratio for those banks. Perhaps it is too high relative 
to risk-based capital requirements. I am comfortable with the 
level of risk-based capital requirements, but this is something 
that needs to be looked into. Different countries have taken 
different approaches. One approach is to exempt certain items 
like central bank reserves from the ratio. Another alternative 
is to recalibrate the ratio.
    I cannot give you a definite timetable for our 
reconsideration of this, but it is something where perhaps our 
regulations had an unintended consequence, and we are looking 
at that carefully.
    Senator Rounds. Do you feel you have the resources or the 
capabilities to handle this? Or will it require legislation?
    Ms. Yellen. My guess is that we would not need legislation. 
I will get back to you if that is not the case.
    Senator Rounds. That is fine. I would appreciate----
    Ms. Yellen. We believe it is something that we could change 
by the banking regulators.
    Senator Rounds. I think it does two things. Number one, I 
think it makes our banks within the United States less 
competitive with some other competitors elsewhere that do not 
have the higher rate or the higher requirement. And, second of 
all, I think that cost is ultimately passed on to mutual fund 
holders, and I think that just simply means one more fee that 
takes away from their net return. And in either event, I think 
we should at least examine it, and I think there is room to be 
able to reduce some of that cost which is passed on to mutual 
fund holders.
    Ms. Yellen. OK. We are going to have a careful look.
    Senator Rounds. Thank you.
    Second of all, I am just curious. There has been 
considerable debate in the Banking Committee this year about 
reforming Dodd-Frank and the right-sizing of some of the 
regulations and thresholds that Dodd-Frank established. I have 
heard a number of concerns from financial institutions that 
arbitrary thresholds set in Dodd-Frank make it difficult for 
them to do business. The Chairperson also mentioned concerns in 
his opening statement.
    Congressman Barney Frank himself admitted the pitfalls of 
these thresholds. In a radio interview last November, the 
former Congressman said, and I am going to quote him verbatim: 
``We put in there that banks got the extra supervision if they 
were $50 billion in assets. That was a mistake. We should have 
made it much higher, $125 billion or more, and we should have 
indexed it.''
    I am thinking perhaps even looked at other alternatives as 
opposed to a dollar threshold, perhaps the business model and 
what the business activities are of the individual institution.
    With this in mind, and even the fact that one of the 
architects of Dodd-Frank openly admitted that the current 
supervisory threshold are inappropriate, could you state here 
and now that the thresholds either should be raised or we 
should be looking at perhaps even changing to a business model 
approach? We did the TAILOR Act or we provided the TAILOR Act 
as an alternative for smaller banks, and that would model the 
types of regulations based upon the business activity. Could 
you give us your thoughts? And is it time now to start taking a 
hard look at changing that?
    Ms. Yellen. So we have already said that we would favor 
some increase, if Congress sticks with a dollar threshold, that 
we would support some increase in the threshold. An approach 
based on a business model or factors is also a workable 
approach from our point of view. Conceivably, some of the 
enhanced standards should apply to more firms with lower levels 
of assets and others with higher levels. So I think either type 
of approach is something that we could work with and would be 
supportive of.
    Senator Rounds. Madam Chair, first of all, thanks for being 
here. We appreciate it, and I appreciate the information that 
you have provided.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you, Mr. Chairman. Welcome, 
Chairwoman Yellen. It is always good to see you, and thank you 
for your service.
    Ms. Yellen. Thank you.
    Senator Cortez Masto. I appreciate your comments with 
respect to the opioid epidemic, because in Nevada that is 
having an impact. We see it. And every time I go home, we are 
having difficulty in hiring, but there is so much going on with 
respect to our economy because of it.
    There is another area I would like to have discussion with 
you, and that is housing. In both northern and southern Nevada, 
I also frequently hear concerns about the housing market from 
my constituents.
    In northern Nevada, home prices have been rising sharply, 
and there is a lack of available inventory, particularly for 
people seeking to become first-time homebuyers, and the rental 
vacancy rates are extremely low.
    In southern Nevada, we still have the worst rates of 
homeowners being underwater on their mortgages, and that is 
even nearly a decade after the recession. And recent data 
suggests that Las Vegas has the worst rental affordability 
crisis for lower-income households of any major city in the 
    Can you opine or just discuss the role that housing 
affordability plays in the overall health of the U.S. economy? 
And can we count on home ownership to be the primary source of 
wealth building for our younger generation like it used to be 
at one point in time?
    Ms. Yellen. Well, housing plays an important role in the 
economy. Although housing construction, residential 
construction, is not an enormous sector, housing has very 
important influence on economic performance and on the health 
of consumers. For such a large share of Americans, a house is 
their most important asset, and housing prices affect well-
being, their wealth, and availability of credit and access to 
ability to borrow. So the health of the housing market is 
extremely important.
    Senator Cortez Masto. So talk about it when it comes to the 
younger generation, because the younger generation that I talk 
to grew up through the housing crisis, and at one point in time 
owning a home was the best investment that you could make. I do 
not know if they think that anymore. And do you think that is 
something that is going to be of concern for our future and for 
the younger generation when it comes to owning a home?
    Ms. Yellen. So there has always been a big debate about 
whether or not it is correct that housing is the best 
investment that one can possibly make. And I agree with you 
that in the aftermath of the crisis, views on that are 
changing. I am not going to opine on a personal view as to 
whether or not that is true. But, you know, for all but those 
individuals with very strong credit, it is extremely difficult 
now to gain access to mortgage credit. And we do have overall, 
I would say, a shortage of housing, whether it is owner-
occupied housing or rental housing, relative to what you would 
think would be a normal pace of household formation in this 
country. As you have said, inventories are low. We have seen a 
significant pickup, though, in production of rental housing.
    Senator Cortez Masto. Thank you.
    Let me jump back to another issue that I hear from my 
constituents. As you well know, the FOMC has raised interest 
rates four times since 2015. This generally, my understanding, 
helps banks' revenue since they can charge more to lend money. 
But what I hear from constituents, particularly savers, is they 
do not see any benefit or interest rate increases that help 
them when they want to save their money. And so when do you 
anticipate that the impact of the Fed's rate hikes will be felt 
by savers in this country?
    Ms. Yellen. So, unfortunately, there is a lag in terms of 
when retail depositors see an increase in their rates. We are 
beginning to see for those who hold large CDs, for example, 
that it is possible to obtain somewhat higher rates. But 
especially with rates having been so low for so long, I think 
it will take some time before competition among banking 
organizations begins to drive up the rates that smaller retail 
depositors see. I think that will occur, but it will take a 
while to show up.
    Senator Cortez Masto. OK. Thank you so much. I appreciate 
your service.
    Ms. Yellen. Thank you.
    Chairman Crapo. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. Madam Chairman, 
thank you for being here. I am glad to see some of the moves 
that you are making and contemplating at the Fed.
    I know there has been a lot of discussion about 
productivity, and that has been going on for some time. And for 
many, many years, the only game in town as it related to 
dealing with the economy was the Federal Reserve. Congress was 
in a place where likely no actions were going to be taken, and 
so everybody really, with your predecessor and even much of 
your term, has relied upon the Fed to be doing things to 
hopefully stimulate the economy and move things ahead, which is 
too much of a burden for the Fed. I mean, we should be taking 
actions ourselves. We are finally in a place where maybe--it is 
not for sure, of course--we will be dealing with some things as 
Congress, to deal with fiscal issues, other issues that relate 
to the economy. One of those coming up could be tax reform 
    So we have been in a situation with low inflation, really 
below where you would like for it to be, low productivity, 
below where you would like for it to be. And these are not 
questions to, you know, lead in a particular direction, but is 
tax reform one of those things that, should Congress pursue it 
in a productive manner, could be really helpful as collateral 
to move the economy ahead in a much more rapid way?
    Ms. Yellen. Well, I would certainly agree that 
appropriately designed tax reform could have a favorable effect 
on productivity. Of course, it obviously depends on the details 
of what you do.
    Senator Corker. Got it.
    Ms. Yellen. And I do not have numbers to give you, but 
certainly there are distortions in the Tax Code that I believe 
are negatively impacting productivity. And so I think there is 
scope there to have a favorable impact on long-term economic 
    Senator Corker. So one of the things that we are going to 
be debating on both sides of the aisle, we have got, you know, 
huge fiscal issues as a Nation. Obviously, constraining 
spending is one of the ways we all, I am sure in appropriate 
manners, want to look at to keep our deficits down. But growth 
is really the easiest way to move away from the issues that we 
    Mr. Mulvaney was in my office this week. You know, tax 
reform is beginning to be something of a discussion, and I know 
that the current Administration wants to see growth get into 
the 3-percent range to move beyond where we have been for some 
time. And is tax reform from your perspective something that, 
again, if done properly, has the ability to move us into a much 
higher growth rate here in the United States?
    Ms. Yellen. So as I said, I think it is something that 
could have a favorable impact if appropriately done. You know, 
productivity growth is something--it is very hard to move, and 
if you put in place a policy that predictably raises 
productivity growth a few tenths, you would probably regard 
that as a very good payoff. So the numbers typically that 
studies show when you do have a positive impact on 
productivity, they are not a percent, they are not a percent-
and-a-half. It is hard to raise productivity growth. So I think 
it moves in the right direction, but it is challenging given 
the last 5 years' productivity growth has averaged a half 
percent; the last decade, something like 1.1 percent. So 
overall growth for the economy is productivity growth plus 
growth of the labor force. Labor force growth is declining. It 
is quite low.
    It is challenging to move productivity growth up that much, 
but I hope that Congress and the Administration will focus on 
changes that will succeed in accomplishing that.
    Senator Corker. And how much would productivity growth need 
to be to achieve, you know, a stable economic growth of 3 
percent, GDP growth?
    Ms. Yellen. So I do not have the precise number for you, 
but it would probably have to rise to something over 2.
    Senator Corker. Productivity over 2 to get economic growth 
to 3.
    Ms. Yellen. Right, given the labor force----
    Senator Corker. And just based on--again, these are not 
leading questions, because we are going to have a significant 
debate about that, about this soon. Do you think it is 
achievable for us based on all the things that you see right 
now to even achieve 3 percent growth in the near term, in the 
next 5-year period?
    Ms. Yellen. So I think it is something that would be 
wonderful if you can accomplish it. I would love to see it. I 
think it is challenging.
    Senator Corker. You think that would be very difficult?
    Ms. Yellen. I think it would be quite challenging.
    Senator Corker. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Heitkamp.
    Senator Heitkamp. Thank you. And Senator Corker gave you--
    Ms. Yellen. Thank you.
    Senator Heitkamp. I will start there. He gave you a 5-year 
window. How likely is it that we are going to see 3 percent 
growth in the next 2 years?
    Ms. Yellen. Well, I think that would be----
    Senator Heitkamp. Quite challenging.
    Ms. Yellen. ----difficult.
    Senator Heitkamp. Yeah, we heard that. So, I mean, I think 
there are strategies we should all pursue because I think it 
has got to be one of the goals in fiscal and monetary policy to 
look at what we can do to get out of the flat growth rate of 2 
percent. And I think there are a lot of people now basically 
saying we are in a perpetual 2 percent growth, too mature, the 
economy is too mature, the economy is too sluggish to ever get 
there. And so I think it is critically important that we 
examine strategies together, very real strategies, not make-
believe, which just--you know, asking for productivity so you 
could mask a political agenda. So I will just leave it there.
    What percent of export growth in the last 2 years do you 
think has been related to commodities and agriculture?
    Ms. Yellen. I am sorry. I do not have that number in front 
of me. I can get back to you on it, but I do not----
    Senator Heitkamp. That would be great, because I think what 
you are going to find is that when you look at export growth, 
one of the great stories has really been an increase in exports 
of oil, an increase in exports of energy, and certainly 
agricultural exports are always a great story when we are 
talking about balance of trade.
    Unfortunately, right now, as you know, commodities are 
getting particularly hard hit. North Dakota is a commodity-
dependent State in a lot of ways, and the dollar values being 
high never help us, in my opinion. But we are challenged with 
bad weather, but we are also challenged with a lot of 
uncertainty in the trade sector. Are we going to continue to 
have the trade regime that we currently have in NAFTA? Are we 
going to be able to do things within a bilateral context in the 
Asia Pacific Rim that will replace, in fact, the promise of 
TPP? These are all great challenges.
    How do you see the trade disruption, trade policy 
disruption having an impact on agricultural exports and 
commodity prices?
    Ms. Yellen. So I really do not want to wade in in detail 
into trade policy, which is the responsibility of Congress and 
the Administration.
    Senator Heitkamp. But you would agree that it is part of--
trade policy is part of our opportunity for economic growth, 
part of our overall economic--a critical component to our 
economic growth, you would agree?
    Ms. Yellen. It certainly has been.
    Senator Heitkamp. OK. I think we all understand the benefit 
of low commodity prices in terms of bringing down cost of 
production for companies, and it has increased the disposable 
income for consumers. But at the same time, we have not seen 
the type of boost to the economic growth in GDP that you would 
suggest, you know, just even taking a look at what has happened 
with gasoline prices, what has happened with natural gas 
prices, as either an input in the chemical industry or as a 
major component of manufacturing costs.
    How are you weighing this tension as you consider further 
reduction in the Fed's balance sheet along with possible hikes 
to interest rates?
    Ms. Yellen. So we are considering the overall economic 
outlook relative to our objectives of maximum employment and 
price stability. And commodity prices, energy and oil prices 
certainly feed into our view of the outlook. For example, the 
huge decline we saw in oil prices is certainly something that 
substantially depressed investment spending in the United 
States, although it was a plus for consumers. We are now seeing 
a pickup in drilling activity which is supporting spending on 
plant and equipment. But we need to look overall at all sectors 
of the economy, and I guess I would summarize that by saying 
although there are varied trends in different sectors, this 
year we have had 180,000 jobs a month; last year, slightly 
more, about 190,000. This has been going on for a long time. It 
has been--you know, we cannot really control the distribution 
of jobs across sectors that are created, but it has been 
driving a stronger and stronger labor market with unemployment 
rates that are now at, you know, close to historically low 
    Senator Heitkamp. Just to lay down a marker, I would 
suggest that the reduction in commodity prices, the challenges 
of the commodity industry, whether it is agriculture or whether 
it is energy, when you look at job growth in those very 
difficult times after 2008, a large percentage of that job 
growth was equated to energy job growth. And so it is 
critically important that we not just look at one side of the 
    Ms. Yellen. Sure, absolutely.
    Senator Heitkamp. That is the point that I want to make, 
and any analysis on commodity prices in the context of the 
greater national economy and productivity, and maybe any little 
statement you can make on trade, we will follow up with 
    Thank you so much, Chairwoman.
    Ms. Yellen. Thank you, Senator.
    Chairman Crapo. Senator Tillis.
    Senator Tillis. Thank you, Mr. Chair. And I want to thank 
Senator Cortez Masto for consistently and in the right 
committees bringing up the concern of affordable housing, both 
home ownership and affordable rental housing. I share virtually 
all the sentiment I have heard in every committee that she has 
spoken on it.
    I want to get back to--I was not planning on it, but 
Senator Corker brought up something that I am very interested 
in, because we do have to increase productivity. And at least 
in North Carolina, when we were in a financial crisis, and a 
fourth quartile State performer, we figured out a way to do 
that which had to do with the Tax Code and regulations.
    Now, I want to go back to regulations first. I think 
probably since Dodd-Frank, when I met with Chair Greenspan a 
year-and-a-half or so ago, he mentioned that up to that point 
since Dodd-Frank, some 350,000 jobs had been created that are 
called ``regulatory compliance,'' in the category of 
``regulatory compliance.'' In your judgment, is that a job that 
improves productivity?
    Ms. Yellen. Well, look, we put in place regulations to 
serve important economic----
    Senator Tillis. I understand that, but I am just saying, in 
your professional judgment, does a job that relates to 
regulatory compliance contribute to productivity?
    Ms. Yellen. Well, it is a cost of doing business.
    Senator Tillis. OK. So----
    Ms. Yellen. And it is imposed, but for reasons that produce 
presumably benefits.
    Senator Tillis. I understand. If we take a look at--there 
are various ways that we are going to stimulate growth. One of 
them will be--and I want to get on the Tax Code. One of them 
will be by incenting capital investment, improving 
productivity, the things that you can do by maybe clearing up 
or eliminating some of the distortions in the Tax Code.
    But we also have to be mindful, to the extent that the 
regulatory burden exceeds what we think is minimally necessary 
to ensure compliance with areas that represent risk, then that 
is also capital--or that is potential capital that could be 
deployed to productivity rather than to maybe overly burdensome 
regulations. Would you agree with that?
    Ms. Yellen. Yeah, I think all regulators should be 
attentive to burdens and seek ways to minimize them.
    Senator Tillis. And if I have time, I am going to go back 
to some--you have been very generous with your time, by the 
way. I should thank you for taking the time to meet with my 
office and responding to questions that we have submitted after 
Committee meetings. I appreciate it. I have enjoyed the 
discussions very much.
    But could you drill--tax reform is something that we spent 
a lot of time on, not in our first 2 years in North Carolina, 
because we sought to relieve regulatory burdens first to 
produce economic activity that would ultimately fund real tax 
reform. But here we are going to move to tax reform, I hope 
fairly soon.
    You mentioned that there are certain distortions in the Tax 
Code, if they were dealt with properly, would probably have a 
positive impact on productivity or economic activity. At a high 
level--I am not asking you to do our job by creating an agenda 
for tax reform, but at a high level, could you give me some 
insights into the areas that you think are probably worthy of 
the most scrutiny as we go forward with tax reform?
    Ms. Yellen. So, again, this is an area I really want to be 
careful not to wade into and give you any type of detailed 
advice. But I would say that there is general agreement that 
there are distortions in the corporate Tax Code and 
opportunities for improvement.
    Senator Tillis. Now, I want to go back in my remaining 
time. This is something that Senator Rounds touched on and I 
think probably other Members did before I came here. I had two 
competing committees, so I am sorry I was not here for your 
full testimony. But if you imagine that, you know, all the 
tools that you currently enjoy post-Dodd-Frank, so stress 
tests, enhanced prudential standards, living wills for banks, 
for the largest banks, if they had been in place before the 
crisis, do you think that the crisis that we have experienced 
would have been substantially--that the scale of the crisis 
would have been substantially reduced?
    Ms. Yellen. So that is a difficult judgment to render, but 
I do think we have much stronger capital, much stronger 
liquidity. I think it is important to recognize prior to the 
crisis we had many significant, large, stand-alone investment 
banks that were very highly leveraged. Now they are part of----
    Senator Tillis. Yeah, and now, because I try to develop a 
reputation for being close to on time, I want to close because 
I got a great response in the meeting, in our personal meeting, 
so I will not ask you to repeat it. But what I would like to 
see are right-sized applications of these regulations. I would 
like to see rational thought placed in how these regimes are 
applied to institutions, not based on some arbitrary number of, 
say, $50 billion today or $250 billion, whatever the number. It 
seems to me that that should only be a data point, and the 
nature of the businesses and the risks that they represent 
should be the driving factor in going forward and right-sizing 
these regulations, some of which I think are absolutely 
essential. Do you agree?
    Ms. Yellen. I do agree with that, and as I said in response 
to an earlier question, one way that Congress could approach 
this is to increase these dollar cutoffs----
    Senator Tillis. Yeah, but----
    Ms. Yellen. An alternative is to look at individual 
organizations and the factors that determine their riskiness--
    Senator Tillis. I would like to get----
    Ms. Yellen. ----and to take a different----
    Senator Tillis. I think one of the things we will do is 
probably maybe put more meaning to that, because I think 
everybody agrees in the abstract, but we really need to get to 
a point to where you regulate based on the risk of the 
specifics of a targeted business, instead of us feeling like we 
index--let us say we raise the number from $50 billion to 
whatever, and then index it over time, we could pretend that we 
are done. But I think we are missing the opportunity to make 
sure your resources are focused on the areas that represent the 
most risk and away from the businesses that do not.
    Thank you, Mr. Chair. Sorry I went over.
    Chairman Crapo. Thank you.
    Senator Kennedy.
    Senator Kennedy. Thank you for your service, Madam Chair.
    Ms. Yellen. Thank you.
    Senator Kennedy. I think I read the last couple of days 
that first-quarter growth had been readjusted to 1.4 percent. 
Does that sound right?
    Ms. Yellen. Yes.
    Senator Kennedy. If you had unfettered discretion, what 
would you do to improve on that?
    Ms. Yellen. Well, growth is variable from quarter to 
quarter, and we expect significantly stronger growth in the 
second quarter. So I would certainly, in looking at the 
performance of the economy, smooth through the volatility. But 
doing that, we have an economy that has grown over the last 
number of years by about 2 percent per year, and 2 percent has 
been sufficient to create a very large number of jobs and a 
tighter labor market.
    Of course, it is good to have more jobs and a tighter labor 
market, but the fact that that could be accomplished with 2 
percent economic growth points to what is very disappointing, 
namely, the potential of the U.S. economy to grow is very low. 
I believe CBO and our committee estimates that the economy's 
longer-run potential to grow is currently under 2 percent, 
    Senator Kennedy. OK. But my question, Madam Chair--I 
apologize for interrupting. My question is: If you had 
unfettered discretion and were averaging 2 percent growth, and 
you wanted to get as close to 3 percent as you could, which 
would be considered normal before 2008, if you had unfettered 
discretion, what would you do?
    Ms. Yellen. Well, this is really not a job for the Federal 
Reserve. It is a job for Congress and the Administration.
    Senator Kennedy. I am asking for your advice.
    Ms. Yellen. My advice would be to focus on all of those 
factors that determine productivity growth, and that pertains 
to tax reform and the efficiency with which the economy 
operates. I would focus on training, on education, the quality 
of human capital in this economy. I would focus on investment, 
both public and private. I would focus on policies that impact 
the pace of technological change and research and development. 
And there are a wide range of policies that bear on everything 
in my list. And so it is that set of channels that I think is 
important in boosting the economy's potential to grow.
    Senator Kennedy. OK. Did we make a mistake moving away from 
    Ms. Yellen. I do not believe that Glass-Steagall was 
responsible for the financial crisis, so I do not see that as a 
major issue that was responsible for the financial 
    Senator Kennedy. Did our move away from it contribute at 
all, or was it just irrelevant, in your judgment?
    Ms. Yellen. Well, look, the largest distress was suffered 
at stand-alone investment banks like Bear Stearns and Lehman. 
You know, it was a product of Glass-Steagall. The fact that 
those investment banks are now--all major investment banks are 
part of bank holding companies and subject to stronger capital 
regulation is an important safeguard.
    Senator Kennedy. OK. Has the Volcker Rule worked?
    Ms. Yellen. The Volcker Rule was designed to stop 
proprietary trading in banking organizations. That is a goal 
with which I agree, and it was intended to permit market 
making. The implementation of it has been very complex and 
burdensome. We have suggested that community banks be exempt 
from it entirely, and----
    Senator Kennedy. Should we get rid of it?
    Ms. Yellen. I would not get rid of it, and I believe the 
Treasury report suggests maintaining the restriction on 
proprietary trading in depository institutions. So I would not 
get rid of it, but I would look for ways to simplify it.
    Senator Kennedy. OK. Last question, quickly. Would you 
accept a reappointment?
    Ms. Yellen. Excuse me?
    Senator Kennedy. Would you accept a reappointment as Chair?
    Ms. Yellen. So it is something that I really do not have 
anything to say about at this time. I am really focused on 
carrying out the responsibilities that Congress has assigned to 
us and have not really decided that issue.
    Senator Kennedy. Thank you for your service, Madam Chair.
    Ms. Yellen. Thank you.
    Senator Kennedy. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you. And, Chair Yellen, we are 
approaching 11:30, which was the stop time I had hoped we would 
be able to meet. Senator Brown has asked for one more question.
    Ms. Yellen. OK.
    Chairman Crapo. And he certainly is welcome to do so.
    Senator Brown. Thank you. And while this was not my intent, 
the first part, if you are reappointed, I would be happy to 
join Senator Kennedy in supporting your reappointment.
    Ms. Yellen. Thank you, Senator.
    Senator Brown. I am not sure that he said that, but I think 
he did. Thank you. And I am very mindful of the Chairman's 
11:30 meeting that the Republican conference has, and I am 
grateful for his giving me this one series of last questions, 
which will not take the whole 5 minutes.
    Dodd-Frank required the CFPB to study forced arbitration, 
as you know, and to make a rule protecting consumers from the 
practice of doing so would be in the public interest. In 2015 
CFPB publicly released a comprehensive study of the impact of 
forced arbitration agreements on consumers. The Bureau released 
a proposed rule limiting the use of forced arbitration in 
consumer contracts. As you know, on Monday it released the 
final rule.
    During that time CFPB surveyed, consulted with experts at 
prudential regulators like you. If any of your--a couple of 
questions and then one brief comment. If any of your staff had 
safety and soundness concerns about this rule, do you think 
they would have raised those concerns with the CFPB during the 
rulemaking process?
    Ms. Yellen. So I know my staff consulted, and I assume that 
they would have, but I am not certain just what those 
consultations were.
    Senator Brown. OK. And one more question. If the rule were 
likely to impact the safety of the U.S. banking system, do you 
think it would be unusual that no staff of any of the 
prudential regulators would raise concerns about the rulemaking 
    Ms. Yellen. I assume that they might well have.
    Senator Brown. OK. That is why I thought it was unusual, 
and I was surprised to see Acting Comptroller Noreika, 
understanding his short time there and short horizon to stay 
there, that he raised issues with this rule so late in a 2-
year-long process and mentioned safety and soundness. And I 
think the Director, Director Cordray, clearly explained the 
efforts that CFPB has made to consider input from safety and 
soundness regulators.
    So, Mr. Chairman, I would just close with asking unanimous 
consent to enter Mr. Noreika's letter and Mr. Cordray's letter 
on this issue into the record.
    Chairman Crapo. Without objection.
    Senator Brown. Thank you.
    Chairman Crapo. And if I had known you were going to go 
into the arbitration rule, I might have rethought going back 
into that issue.
    Senator Brown. And the CRA, right?
    Chairman Crapo. That is right. We will discuss it further 
    Chair Yellen, thank you again for being here with us today, 
and we always appreciate the opportunity we have to discuss 
these issues with you.
    For Senators who wish to submit questions for the record, 
Thursday, July 20th, is the due date, and I encourage you, 
Chair Yellen, if you receive questions, to please respond 
    And, with that, this hearing is adjourned.
    Ms. Yellen. Thank you, Chair Crapo.
    Chairman Crapo. Thank you.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
        Chair, Board of Governors of the Federal Reserve System
                             July 13, 2017
    Chairman Crapo, Ranking Member Brown, and other Members of the 
Committee, I am pleased to present the Federal Reserve's semiannual 
Monetary Policy Report to the Congress. In my remarks today I will 
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 \1/4\ 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 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 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 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 1\1/2\ percent in the first quarter, more-recent indicators 
suggest that 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 a strengthening in economic growth abroad has 
provided important support for U.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 but a little lower than earlier this 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 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 
    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 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 
    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.
Monetary Policy
    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 \1/4\ percentage point 
at both its March and June meetings, bringing the target to a range of 
1 to 1\1/4\ 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 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 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 for 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.
Balance Sheet Normalization
    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 securities 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 
    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 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 would 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.
                      FROM JANET L. YELLEN

Q.1. I believe the full employment part of the dual mandate has 
served the economy well, including reducing disparities in 
labor market data.
    Can you talk about why the full employment mandate is so 
important and what would be the impact on groups that have 
traditionally been disadvantaged in the labor market if the 
mandate were eliminated or altered?

A.1. Congress set forth the mandate for monetary policy in the 
Federal Reserve Act, which directs the Federal Reserve Board 
(Board) to conduct monetary policy so as to promote maximum 
employment and stable prices. My colleagues and I on the 
Federal Open Market Committee (FOMC) are fully committed to 
pursuing the goals that Congress has given us. Both objectives 
of the dual mandate are important in promoting the economic 
well-being of the United States. Furthermore, the dual mandate 
has served the country well. For the past quarter century or 
so, inflation has been generally low and stable, and while the 
Great Recession severely impacted households and businesses, 
the Board had a clear mandate to counteract the profound 
economic weakness of that time and exercised that mandate 
forcefully. As a result of policies implemented by the Board, 
unemployment has declined substantially and deflation has been 
    When the economy softens, all major demographic groups tend 
to experience higher rates of unemployment. However, a marked 
characteristic of recent business cycles is that groups that 
have traditionally been disadvantaged in the labor market have 
tended to experience a higher-amplitude version of the 
unemployment experience of whites. For example, during the 
period around the Great Recession, the unemployment rate for 
whites increased from about 4 percent to about 9 percent. At 
roughly the same time, the unemployment rate for blacks or 
African Americans increased from about 8 percent to a little 
over 16 percent, a larger increase that started from a higher 
level. Similarly, the unemployment rate for Hispanics or 
Latinos increased from about 5 percent to nearly 13 percent. 
From the worst time of the Great Recession, all three groups 
have enjoyed substantial improvements in their respective 
unemployment rates. Most recently, these rates have been in the 
neighborhood of 3\3/4\ percent for whites, 7\1/2\ percent for 
blacks, and 5 percent for Hispanics. It is important to note 
that all three rates have come down substantially, and that the 
rates for blacks and Hispanics have declined by more than the 
rate for whites in recent years. However, it is also important 
to point out that the rates for blacks and Hispanics remain 
well above the rate for whites. Overall, the relative labor 
market experience of these groups has not improved in recent 
years, and that is a matter of considerable concern. Still, an 
important consequence of success in achieving the maximum 
employment objective of the dual mandate is that the benefits 
of a strong economy are shared widely across the individuals 
and households that make up our Nation.

Q.2. I think the Federal Reserve Board and the Federal Reserve 
Bank of Atlanta made a great choice earlier this year of 
Raphael Bostic as the new President of the Atlanta Fed. The 
Richmond Fed is currently undergoing a search for their 
President. Are you satisfied with the search process currently 
underway and confident that it will result in a diverse pool of 
candidates for consideration by the Richmond Federal Reserve 
Bank Board of Directors and the Federal Reserve Board of 

A.2. As you know, I have repeatedly expressed my personal 
commitment, and our institutional commitment, to advancing the 
objectives of diversity and inclusion throughout our 
organization, including at the level of presidents and other 
senior leadership. Our searches for candidates for Reserve Bank 
presidents are planned and conducted with a particular emphasis 
placed on identifying highly qualified candidates from diverse 
personal, academic, and professional backgrounds.
    As you noted, the search for the next president of the 
Federal Reserve Bank of Richmond (Richmond) is currently 
underway. The Reserve Bank's search committee, which is 
comprised of directors who are not affiliated with commercial 
banks or other entities supervised by the Board, has engaged a 
highly regarded, national executive search firm with a strong 
track record in identifying highly qualified and diverse 
candidate pools for executive positions to assist in the search 
    As we did during the Federal Reserve Bank of Atlanta 
search, and consistent with the Board of Governors' 
responsibilities under the Federal Reserve Act, my colleagues, 
typically represented by the Chair of the Board's Committee on 
Federal Reserve Bank Affairs, are following the Richmond search 
process closely at every stage. We have emphasized to the 
executive search firm and the search committee the importance 
that the Board attaches to the identification of as large a 
pool as possible of highly qualified candidates from diverse 
personal, academic, and professional backgrounds.
    Indeed I am confident in the strength of these processes, 
and in the commitment of my colleagues here at the Board and in 
Richmond to our shared objectives for the search.

                      FROM JANET L. YELLEN

Q.1. Our financial system has become increasingly consolidated 
as community banks and credit unions either close their doors 
or merge with larger institutions.
    Are you concerned about this pattern? Why?
    What services can these smaller institutions provide that 
larger institutions cannot provide?

A.1. The Federal Reserve Board (Board) recognizes the vital 
role community banks play in local economies and closely 
monitors consolidation trends at community banks. The banking 
industry has been consolidating at a relatively steady pace for 
more than 30 years. \1\ Despite this, community banks (defined 
as banks with assets totaling less than $10 billion) have 
continued to play a vital role in local economies and serve as 
a key source of financing to small businesses and small farms. 
While community banks accounted for 20 percent of all insured 
depository institution assets at year-end 2016, they accounted 
for nearly 50 percent of all dollars lent to small businesses 
by insured depositories and 88 percent of all dollars lent to 
small farms. The Board believes it is important to maintain a 
diversified and competitive banking industry that comprises 
banking organizations of many sizes and specializations, 
including a healthy community banking segment.
     \1\ https://www.federalreserve.gov/pubs/feds/2008/200860/
    Research conducted over many years has concluded that 
community banks provide several distinct advantages to their 
customers compared to larger banks. For example, given their 
smaller size and less complex organizational structure, 
community banks are often able to respond with greater agility 
to lending requests than their large national competitors. In 
addition, reflecting their close ties to the communities they 
serve and their detailed knowledge of their customers, 
community banks are able to provide customization and 
flexibility to meet the needs of their local communities and 
small business/farm customers that larger banks are less likely 
to provide. Community banks are particularly important for 
rural communities, where the closing of a bank can be 
associated with a material decline in local economic activity.

Q.2. As you know, the CFPB may be moving forward on a 
rulemaking for Section 1071 of Dodd-Frank, which grants the 
CFPB the authority to collect small business loan data. I've 
heard some concerns that implementing Section 1071 could impose 
substantial costs on small financial institutions and even 
constrict small business lending.
    Are you concerned that a Section 1071 rulemaking could hurt 
small business access to credit?

A.2. Section 1071 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) amended the Equal 
Credit Opportunity Act to require that lenders collect 
information on credit applications and outcomes for small 
businesses, and women-owned and minority-owned businesses. The 
purpose is to facilitate enforcement of the fair lending laws, 
and allow communities, governmental entities, and creditors to 
identify business and community development needs and 
    Although the Consumer Financial Protection Bureau (CFPB) 
must issue rules to implement section 1071 for most creditors, 
the Board is responsible for issuing rules for certain motor 
vehicle dealers that use installment contracts to finance 
vehicle purchases by small businesses.
    Because the CFPB is still considering how to implement the 
law and has not yet issued a proposed rule, the scope of the 
rule in terms of the type of creditors, transactions, or data 
that will be covered has not been established. We expect the 
rulemaking process to include consideration of the relative 
costs and benefits of the proposed rule to assess its impact.
    CFPB and Board staff have recently started to coordinate 
efforts to conduct additional outreach and gather information 
to assist in developing their regulatory proposals. In May, 
2017, the CFPB published a ``Request for Information'' 
outlining the major issues on which the CFPB is seeking data 
and information from stakeholders that will be affected by the 
rules. The CFPB is also required to conduct a small business 
review panel pursuant to the Small Business Regulatory 
Enforcement Fairness Act. The panel would meet with 
representatives of small businesses that can provide feedback 
on the impact of the proposed regulations and on regulatory 
options and alternatives that might minimize the impact.

Q.3. Has the Federal Reserve coordinated with the CFPB to 
ensure that implementing these requirements does not constrict 
small business access to credit?

A.3. The CFPB has primary rule-writing authority and must issue 
rules to implement section 1071 for most creditors. The Board 
is responsible for issuing rules that would apply to certain 
motor vehicle dealers that originate installment contracts to 
finance vehicle purchases by small businesses, and routinely 
sell or assign the contracts to a third party.
    The Board believes that the two agencies should jointly 
develop rules that use consistent definitions and standards to 
ensure data are collected and reported uniformly, whether the 
loans are made by depository institutions, motor vehicle 
dealers, or another type of creditor. The Board will also 
participate in the CFPB consultation process, along with the 
other prudential regulators, that is mandated for all CFPB 
rulemakings under section 1022 of the Dodd-Frank Act. The CFPB 
has yet to commence its rulemaking consultation process.
    In May 2017, the CFPB held a public field hearing in Los 
Angeles on small business lending and published a ``Request for 
Information'' outlining the major issues on which the CFPB 
seeks data and information from stakeholders that will be 
affected by the rules. This information is expected to assist 
the CFPB and the Board as they consider the scope of their 
proposed rules. In addition, CFPB and Board staff have recently 
started to coordinate efforts on planning joint outreach 
efforts to gather additional information.

Q.4. I am very disturbed by the most recently available data on 
job openings and hires. As you know there were a record number 
of job openings, 6 million, while job hires fell to 5.1 
million. This problem manifests itself in Nebraska as many 
businesses tell me that they have extreme difficulties finding 
and retaining talent.
    Does this mismatch between job openings and job hires 
represent a new normal? Or will economic growth eventually 
reduce this mismatch over time, without any major structural 
changes to our economy?

A.4. Data from the Job Openings and Labor Turnover Survey \2\ 
show that the ratio of job openings to hires has moved up since 
the end of Great Recession and has surpassed its pre-recession 
level. There are likely several factors that are responsible 
for the increase in job openings relative to hiring:
     \2\ https://www.bls.gov/news.release/jolts.htm

    Most of the increase likely reflects typical 
        cyclical behavior of the labor market, that is, the 
        ratio of vacancies to hires goes up when the economy 
        improves and down when the economy slows. In other 
        words, in tightening labor markets there is an 
        increasing scarcity of job seekers overall, which may 
        eventually impede firms' ability to fill job openings.

    Another possibility is that there have been changes 
        in the ways that firms post job vacancies and search 
        for workers. For example, online recruitment and job 
        search have become increasingly popular, making it 
        cheaper for firms to post job vacancies and possibly 
        resulting in an elevated level of vacancies relative to 
        earlier times.

    A third possibility is the mismatch between the 
        skills that job seekers have and the skills that 
        employers want. For example, such mismatch might arise 
        because firms are less willing to hire those who have 
        suffered long spells of non-employment during and after 
        the Great Recession because firms perceive that these 
        potential workers have lost job-related skills (or 
        their skills have become otherwise obsolete). 
        Alternatively, there may be a mismatch between low-
        skill workers and high-skill jobs, or a mismatch 
        between locations where unemployed job seekers reside 
        and where workers are in greatest demand.

    If this third type of mismatch were a significant concern 
for the broader labor market, we would eventually expect to 
observe a substantial rise in wages as firms compete to hire 
workers with scarce skills. To date, however, we have not seen 
wage acceleration in the aggregate that exceeds what might be 
expected given the historical relationship between wage growth 
and other economic conditions. That said, in the Federal 
Reserve's Beige Book a number of respondents noted worker 
shortages at all skill levels and a couple Districts reported 
that labor shortages were beginning to push up wages.
    Significant mismatch, if it exists, may be alleviated 
somewhat if aggregate labor market conditions remain favorable. 
For example, it may induce some workers who left the labor 
force out of discouragement to re-enter, some of whom may have 
skills matching those sought by firms. It may also encourage 
firms to consider less qualified applicants, perhaps by 
offering such workers additional training or education on the 

Q.5. What are the most prominent causes of this mismatch?

A.5. As described above, an elevated level ratio of vacancies 
to hires does not necessarily indicate the emergence of 
significant mismatch, since factors such as advances in 
recruiting technology and usual cyclical improvement in the 
labor market may have also led to the increase. Nonetheless, it 
may also reflect specific factors, such as the increased use of 
information technology in many industries and jobs, leading to 
mismatch between the skills and attributes demanded by firms 
and the available job seekers.

Q.6. In what industries is this mismatch most prominent?

A.6. The ratio of vacancies to hires varies substantially 
across industries, although this need not indicate varying 
degrees of mismatch and may instead reflect industry 
differences in hiring conventions. (For example, for a given 
level of vacancies, firms hire fewer workers in the health and 
education sector on average than they do in the construction 
sector.) Even taking these differences into account, the ratio 
of vacancies to hires appears to have continued to increase in 
industries such as health care and education, professional and 
business services, and trade, transportation, and utilities. 
Consistent with this observation, some firms responding to the 
most recent Labor Shortage Index survey from The Conference 
Board \3\ reported anticipating there would not be a 
sufficiently qualified supply of workers in ``management, 
business, and financial service occupations'' or ``professional 
and related services occupations.'' That said, we have not seen 
significant wage growth in most of these sectors relative to 
other sectors, suggesting that factors other than mismatch may 
be boosting the ratio of vacancies to hires in these 
     \3\ https://www.conference-board.org/labor-shortages2016/

Q.7. What demographic groups are most hurt by this mismatch?

A.7. It is difficult to assess with any precision which 
demographic groups are disproportionately affected by mismatch 
due to data limitations. That said, there are some groups whose 
employment rates have declined substantially relative to other 
groups, which may represent weak labor demand relative to other 
groups and possibly owe, in part, to mismatch. For example, the 
employment rate for prime-age males (especially less-educated 
prime-age males) has declined more steeply than other groups, 
which could be partially because manufacturing (which 
disproportionately employed prime-age men) has contracted, 
while newly created jobs have been in occupations with 
different skills requirements or in different areas of the 

Q.8. Today, many workers, including those late in their career, 
are forced to retool their skills to find a job in new fields. 
Can our economy's current ecosystem of education and job 
remaining programs adequately respond to this challenge? If 
not, what changes could better address this issue?

A.8. Some job retraining and education programs, such as 
WorkAdvance and Apprenticeship Carolina, have had success 
lately, though these types of programs are especially helpful 
for workers earlier in their career whose skills can more 
easily be matched to growing labor demand. In general, an 
expansion of career and technical education programs and 
apprenticeships may be effective in helping workers gain 
valuable skills and obtain a foothold in a labor market that 
increasingly requires technical proficiency. In addition, 
promoting entrepreneurship through programs that equip people 
with the management skills and knowledge they need to start and 
operate a successful small business could also be a fruitful 
approach for some workers.

Q.9. I am concerned about the impact of our recent trade 
disputes on our economy, particularly with agriculture.
    How dependent is the agricultural economy on exports with 
other countries?

A.9. As reported by the U.S. Department of Agriculture, the 
export share of U.S. agricultural production has averaged about 
20 percent in recent history. However, some specific 
agricultural products have had higher export shares. For 
example, cotton and tree nuts have historically had export 
shares around 75 percent, while rice, wheat, and soybeans have 
had export shares around 50 percent. \4\
     \4\ https://www.ers.usda.gov/data-products/chart-gallery/gallery/

Q.10. U.S. corn exports to Mexico from January through May of 
this year are down by 7 percent compared to last year. 
Unfortunately, this may be due to reported efforts by Mexico to 
reduce corn imports from the United States, including by 
opening up trade with Brazil or Argentina. Are there historic 
examples of countries exploring other import markets in 
response to trade disputes?

A.10. Although there has been much reporting of efforts to 
diversify Mexico's supply, actual Government policy actions 
have not been implemented. In addition, U.S. corn exports to 
Mexico, after being weak earlier in the year, have stepped up 
in recent months. Corn exports to Mexico are now down only 1 
percent relative to 2016.
    That being said, Brazil and Argentina are major corn 
exporters, who compete worldwide with U.S. exporters for market 
share. Because of transportation cost advantages, Mexico 
currently buys most of its imported corn from the United 
States. If Mexico were to increase trade barriers, such as 
tariffs, trade diversion would likely occur. For example, when 
the United States has historically imposed tariffs on imports 
from one country, U.S. imports from other countries have 
increased (see Prusa 1996). \5\ However, U.S. exporters would 
likely find other international markets, albeit less profitable 
for their corn.
     \5\ Prusa, Thomas J., ``The Trade Effects of U.S. Anti-Dumping 
Actions'', NBER Working Paper No. 5440, January 1996.

Q.11. How significant is the risk that NAFTA renegotiations 
will drive other countries to explore import markets, including 
with agriculture?

A.11. Because there are fixed costs in establishing trading 
relationships, existing trade relationships are likely to 
continue even if North American Free Trade Agreement 
renegotiations cause increased uncertainty; However, the 
uncertainty could lead foreigners to consider diversifying 
their sources of imports. As such, U.S. producers will likely 
continue to export to Mexico and Canada, but U.S. producers may 
lose some sales as foreigners diversify their sources. In the 
short run, U.S. producers may find it hard to make up lost 
sales elsewhere, because it takes time to find new customers. 
However, in the long run, U.S. producers would find other 
foreign customers to buy their products, although the costs of 
transporting products to these markets would likely be higher 
and the prices received may be lower.

Q.12. The Trump administration is considering imposing new 
trade barriers on steel imports. Some have argued that other 
countries typically target retaliatory trade measures at the 
agricultural sector. Are there historical instances where this 
has occurred? If so, how strong were these measures?

A.12. When the U.S. Government levied tariffs on steel imports 
in 2002, the European Union initiated steps to retaliate on 
$2.2 billion of U.S. exports of products such as vegetables, 
fruits, nuts, motorcycles, textiles, paper products, and 
furniture. The United States withdrew these steel tariffs in 
2003 before the European Union went through with its 
retaliatory tariffs.
    As another example, in 2009, Mexico retaliated against the 
United States for the cancellation of the cross-border long-
haul trucking program. Mexico raised tariffs on around 90 
products, including agricultural products, with affected 
exports valued at around $2 billion. In 2011, retaliatory 
duties were removed after the United States agreed to allow 
Mexican trucks to operate in the U.S. as part of a pilot 

Q.13. If there have been retaliatory measures in the past, how 
did these measures hurt the agricultural economy?

A.13. As estimated in Zahniser et al. (2016), \6\ the Mexican 
tariffs reduced U.S. sales of targeted agricultural products by 
22 percent, a value of $984 million. Although they do not find 
that reduced exports to Mexico were offset by increased sales 
of these same goods to other countries, they look over only a 
2-year horizon, which may be too short a time to establish new 
trading relationships.
     \6\ Zahniser, Steven, Tom Hertz, and Monica Argoti, ``Quantify the 
Effects of Mexico's Retaliatory Tariffs on Selected U.S. Agricultural 
Exports'', Applied Economic Perspectives and Policy, Vol. 38, No. 1, 
2016, pp. 93-112.

Q.14. Assume that similar agricultural retaliatory trade 
measures are imposed in response to new steel trade barriers. 
How would these measures impact the agricultural economy?

A.14. Similar to question (c), there may be lost agricultural 
sales in the short run. Eventually, U.S. agricultural producers 
likely would find other customers.

Q.15. Many economists point to weak productivity growth as one 
of the major contributors to slower economic growth overall.
    Do you agree with this assessment?

A.15. Yes. Economic growth reflects contributions from both 
changes in output per hour, or productivity, and changes in the 
total number of hours worked in the economy. The step-down in 
business sector productivity growth in recent years has been 
substantial: productivity growth averaged 1\1/2\ percent in the 
10-year period ending in 2016; over the previous 10 years, its 
average was 2\1/2\ percent. That being said, a secular decline 
in the growth of hours worked has reduced economic growth as 

Q.16. Do you believe productivity measurements accurately 
account for new technology?

A.16. Most of the challenge in measuring productivity, 
especially with regard to new technology, is in measuring 
prices. For example, when ``big box'' retailers became 
prevalent in the 1980s and 1990s, they offered many items at 
lower prices than conventional stores. These lower prices were 
due in part to improvements in the technology used by retailers 
to manage their supply chain, but arguably also reflected 
changes in quality of service. Official statistics struggled 
with the challenge of how much of the big-box discount to 
attribute to a different shopping experience and how much to 
treat as a productivity improvement.
    However, properly measuring the effects of new technology 
has always been a significant challenge. More recently, the 
same price measurement challenge mentioned above has emerged 
with the shift in the retail sector toward e-commerce. More 
generally, economists have not found that measurement problems 
have gotten worse, or that economic activity has shifted to 
more poorly measured sectors in a way that would suggest that 
recent readings on productivity are less credible than those in 
the past. Thus, there is no compelling evidence that the recent 
productivity slowdown is simply an artifact of problems 
measuring new technology. However, this is an area of active 
research, and substantial uncertainty remains.

Q.17. How does current policy impede productivity growth?

A.17. Contributors to productivity growth include (1) 
technological innovation, (2) human capital, (3) business 
capital, and (4) reallocation (matching labor and capital 
resources to their best employment). Government policy can 
affect productivity through all four of these channels.
    It would be inappropriate for the Federal Reserve to 
criticize or endorse specific Government policies for their 
effect on productivity, but the most constructive policy 
interventions address failures of the market system to guide 
resources to their best use. For example, practical 
technological innovation can depend on the performance of basic 
research (oftentimes undertaken many years earlier) with no 
known commercial application, and private sector research and 
development will tend to under-emphasize such things; so, 
policies that encourage basic research indirectly promote 
productivity growth. With regard to the labor force, Government 
support for education is justified because the cost to society 
when young adults fail to prepare for the job market exceeds 
the private cost to the individual.
    Policy uncertainty is an important consideration as well. 
To the degree that risk-averse firms adopt a more cautious 
approach to investment when the future path of Government 
policy is unclear, such uncertainty can retard productivity 

Q.18. How can the United States improve productivity?

A.18. There may be opportunities to influence productivity 
through the channels discussed above. For example, although 
private research and development (R&D) has recovered since the 
Great Recession, Government R&D remains low by historical 
standards, raising the possibility that we are sowing fewer 
seeds that may yield future practical innovations. With regard 
to human capital, recent research has highlighted the lifelong 
impact of early childhood education for poor students who would 
not otherwise have been in a stimulating environment. And 
regarding business investment, as noted above, a stable and 
predictable policy regime may encourage capital spending. Also, 
the stock of capital employed by the private sector includes 
roads, bridges, and so forth that are provided by the 
Government, and such investment has slowed in recent years. 
Finally, Government policies should be evaluated critically 
with respect to their effects on the free flow of labor and 

Q.19. According to research compiled by AEI scholar, Nicholas 
Eberstadt, in his book ``Men Without Work'', the proportion of 
prime-age men out of the labor force more than tripled in the 
past 50 years, from only 3.4 percent in 1965 to 11.8 percent in 
2015. In addition, eight times as many prime-age men were 
economically inactive and not pursuing education in 2014 than 
in 1965.
    What priority should we give this measurement in our 
broader economic calculus?

A.19. One important indicator of the health of the labor market 
is the labor force participation rate (LFPR), defined as the 
fraction of the working-age (16 years and older) population 
that is working or looking for work. The LFPR increased from 
less than 60 percent in the early 1960s to about 67 percent by 
the late 1990s, with much of the rise reflecting an increase in 
women's labor force attachment. Since then, the LFPR has fallen 
to about 63 percent. Although much of this decline is 
attributable to population aging as members of the baby boom 
cohort (born 1946 to 1964) have begun to reach retirement age, 
some of the decline in the overall LFPR is also attributable to 
the continued decline in LFPR for prime-age (25-54 year old) 
    The decline in LFPR for prime-age men is especially notable 
because they have historically had high levels of labor force 
participation. Moreover, this decline has been particularly 
steep relative to trends in the LFPR for other demographic 
groups, and has been especially steep for prime-age men with no 
more than a high school education. Understanding why the LFPR 
for prime-age men has fallen, and how responsive the LFPR for 
this group may be to further economic expansion, is important 
for determining whether the LFPR for prime-age men can reverse 
some of its longer-run decline, and how much additional 
improvement in labor force participation overall is possible if 
broader economic conditions remain favorable. Of particular 
interest to monetary policymakers is assessing where the labor 
market stands in the aggregate relative to the full-employment 

Q.20. To what do you attribute this decline in labor force 

A.20. One possibility is that there has been a change in the 
composition of the types of available jobs, which may have 
disproportionately reduced employment opportunities for prime-
age men (especially men with no more than a high school 
degree). Researchers have highlighted at least two potentially 
significant changes in the labor market that may have led to 
diminished job availability for these men. The first is the 
increased use of automation in the production process and 
computers in the workplace more generally, which has likely 
resulted in the elimination of some jobs over the past few 
decades that are now more efficiently performed by machines. 
The second is increased globalization, which is likely 
reinforcing the effects of automation. Though trade is 
generally beneficial, increased competition from lower-priced 
imports in some industries, according to some researchers, may 
be contributing to the decline in manufacturing employment. 
Both of these changes may have contributed to the decline in 
jobs that were particularly common for prime-age men, 
especially in manufacturing, and some of the workers who have 
been displaced by these changes may have opted to drop out of 
the labor force.
    Another possibility is that prime-age men's ability to work 
or desire to work given available employment opportunities has 
diminished. For example, evidence suggests that significant 
health limitations may inhibit many individuals from 
participating in the labor force, and opioid use may also be an 
increasingly important barrier to employment for some 
individuals. Also, the severity and length of the Great 
Recession, and the sluggishness of the recovery, may have 
degraded somewhat the skills of individuals who experienced 
long spells of non-employment, or caused some employers to 
believe that such individuals' skills have decayed. 
Consequently, some individuals who lost their jobs during or 
after the Great Recession may have come to believe that they 
were unlikely to find suitable employment, and responded by 
dropping out of the labor force.

Q.21. What types of policies could be effective in improving 
labor force participation among prime-age men?

A.21. Most broadly, it seems likely that policies supportive of 
continued economic expansion would improve job opportunities 
and encourage labor force attachment among all workers, 
including prime-age men.
    Designing policies that aim to improve the labor force 
attachment for prime-age men can be challenging but should 
probably focus on some of the previously mentioned issues. For 
example, workforce development programs targeted to individuals 
displaced from jobs in shrinking industries and occupations 
could provide information on the current needs of local 
employers, provide re-training or additional education to meet 
those demands, and perhaps offer relocation assistance for 
moving to areas where job opportunities are most abundant. 
These programs may be particularly effective for younger 
workers (who are more geographically mobile and have more of 
their career remaining to benefit from the new skills provided 
by re-training), and may be most productively targeted at areas 
of the country where the decline in job opportunities has been 
most significant (such as locations that specialized in certain 
manufacturing industries). Another potentially fruitful 
approach may be promoting entrepreneurship as a path to a 
productive career, by offering education in the management and 
business skills necessary for operating a successful small 

Q.22. According to research from the Economic Innovation Group, 
the new startup rate is near record lows, dropping by ``half 
since the late 1970s.'' The total number of firms in the U.S. 
dropped by around 182,000 from 2007-2014.
    Are you concerned about this decline in new startups and 
broader economic consolidation?

A.22. The decline in new startups has been attracting a lot of 
attention, including within the Federal Reserve System, partly 
out of concern that some of the more recent decline might have 
played a role in the slow recovery after the Great Recession.
    The startup rate (defined as the share of firms that are 
new in a given year) fell from 12.5 percent in 1980 to 8.0 
percent in 2014 (the latest year for which data are available). 
The decline in startup activity is worth studying for several 
reasons. Research has shown that new firm entry is a 
significant driver of aggregate job gains and of productivity 
growth. Moreover, changes in employment at new and young films 
tend to account for a large share of job growth during 
    Economists have found that the decline in startup activity 
since 2000 looks somewhat different from the decline between 
1980 and 2000. Two factors can account for much of the decline 
in the startup rate prior to 2000, neither of which is believed 
to have reduced American living standards broadly.

    Due to demographic changes, particularly birth rate 
        patterns during the late-20th century, the U.S. labor 
        force has grown more slowly in recent decades than 
        previously. This slowing is believed to have reduced 
        firm entry rates because new firm formation is 
        typically highly responsive to labor force growth.

    Substantial consolidation to the retail trade 
        sector in the 1980s and the 1990s, which was a slow 
        growth sector that had historically been characterized 
        by high rates of entrepreneurship.

    While the demographic and industrial patterns described 
above have continued to affect startup rates after 2000, the 
sources of the decline in startup activity appear to have 
expanded and may be cause for concern.

    The decline in activity of young and startup firms 
        spread to the information and high tech sectors after 
        2000, and across most industries rapid growth in 
        employment, revenue, and value among young firms became 
        less common. Falling startup activity in highly 
        innovative sectors, along with the decline in high-
        growth outcomes among startups more broadly, may have 
        negative implications for productivity and, therefore, 
        American living standards.

    Reduced competition from high-performing new 
        entrants may also be contributing to increased 
        concentration in many industries in the U.S. Whether 
        rising concentration reflects a consumer-harming 
        decline in the intensity of competition is still au 
        open question, and the causes of the post-2000 decline 
        in high-growth startup activity remain unknown. 
        Researchers in the Federal Reserve System and elsewhere 
        are actively investigating this topic.

Q.23. What, if any, policy solutions should be explored in 
order to respond to these challenges?

A.23. The underlying causes of the post-2000 decline in high-
growth entrepreneurship are still not well understood, so 
identifying policy remedies for these patterns is difficult. 
However, there is a large body of research on the policy 
determinants of entrepreneurship generally. It would be 
inappropriate for the Federal Reserve to criticize or endorse 
specific Government policies in this area, but a number of 
academic studies have explored these issues and can be 
summarized here.
    In some cases, lack of access to financing can inhibit the 
formation and growth of new firms. In the wake of the financial 
crisis, credit markets were severely impaired, though 
functioning has largely recovered. Research suggests that 
entrepreneurship may also be supported by efforts to: reduce 
barriers to starting a firm more broadly (including policies 
that implicitly subsidize wage-earning work over self-
employment); maintain a robust education system to ensure 
potential entrepreneurs (particularly women and minorities, a 
partially untapped pool of potential entrepreneurs) and their 
potential employees can acquire crucial technical skills; 
ensure an equal playing field between incumbents and potential 
entrants; and preserve competition and the mobility of labor.

Q.24. In 2007 you stated that the Phillips curve, the inverse 
relationship between unemployment and inflation, ``is a core 
component of every realistic macroeconomic model.'' Is this 
still true? If so, how does the current trend of low inflation 
and low unemployment fit into this model? If not, what new 
models are in place to give the American people confidence in 
the Federal Reserve's ability to manage inflation?

A.24. The evidence does suggest that labor market conditions 
(as summarized by the unemployment rate for example) influence 
inflation, and in my view this Phillips curve relationship is 
an important component of macroeconomic models. However, the 
magnitude of this influence seems to be modest, and especially 
over short periods of time, the effect can easily be 
overshadowed by other factors influencing inflation. For 
example, the drop in oil prices and the strengthening exchange 
value of the dollar that began around mid-2014 held down 
inflation appreciably over the following couple of years, and 
those influences far outweighed the effect of a tightening 
labor market.
    Moreover, given the limits of our knowledge and noise in 
the data, those ``other factors'' are not always readily 
identifiable. As l said in my recent testimony, the softening 
of inflation this past spring appeared to reflect unusual 
reductions in certain categories of prices, and I would expect 
those not to be repeated. In the Summary of Economic 
Projections from June, the median inflation projection from 
Federal Open Market Committee (FOMC) policymakers calls for 
inflation to reach 2 percent over the next 2 years, as recent 
softness is not repeated and as the labor market strengthens 
further. Policymakers certainly recognize the risks around 
their projections, and with inflation having run below the 
FOMC's 2 percent objective for most of the period since the 
last recession, the FOMC has emphasized that we are carefully 
monitoring progress toward our symmetric inflation goal.

                      FROM JANET L. YELLEN

Q.1. During your appearance before the Banking Committee in 
February, you mentioned that commercial and industrial or C and 
I lending has grown by over 75 percent since the end of 2010. 
This statistic was also mentioned in a hearing our colleagues 
in the House Financial Services Committee held in April when 
Mr. Peter Wallison from the American Enterprise Institute 
explained that the 75 percent increase in C and I lending is 
somewhat misleading. According to Mr. Wallison, the banking 
sector as a whole has yet to reach the lending level it was at 
in 2008 aside from a few of the very largest banks.
    In addition, Mr. Wallison's written testimony cited two Fed 
researchers--Dean Amel and Traci Mach--who have found that 
there is a significant difference between the volume of loans 
made for amounts under 1 million dollars, which is oftentimes a 
proxy for lending from small institutions, and loans made for 
amounts over 1 million.
    Can you please comment on the degree to which our banking 
sector, and our small banks in particular, have yet to make up 
the ground in C and I lending post-crisis? And what's your take 
on the research from Dr. Amel and Dr. Mach?

A.1. Total commercial and industrial (C&I) loans outstanding 
have grown since the end of 2010 for all commercial banking 
organizations--including for large commercial banking 
organizations as a group and for small commercial banking 
organizations as a group. Although growth has been more rapid 
for the group comprised of larger banking organizations, 
smaller banks, in aggregate, have also experienced significant 
growth in C&I lending during this time period. For example, 
total C&I loan balances at banking organizations with less than 
$10 billion in consolidated assets (a commonly used threshold 
for defining community banks) grew by more than 20 percent from 
2010 to 2016, and the aggregate volume of C&I loans at these 
smaller banks was greater at year-end 2016 than at year-end 
2007 or year-end 2008. The lower rate of growth in lending for 
the group comprised of smaller banks is, in part, attributable 
the fact that the number of banks in this size category has 
declined, while the number of banks with more than $10 billion 
in assets has increased. This shift in the size distribution of 
banks is due to the combined effects of the acquisition of some 
community banks by larger banks and the growth of some 
community banks beyond the $10 billion threshold by 2016.
    The research by Dr. Amel and Dr. Mach, \1\ which is 
referenced in Mr. Wallison's testimony, notes that business 
loans under $1 million at origination are often used as a proxy 
for small business lending, not as a proxy for lending by 
community banks. Bank Call Reports filed by all commercial 
banks and thrift institutions provide data on their small loans 
to businesses. However, the Call Reports do not provide 
information on the size of the business obtaining the Joan.
     \1\ Dean Amel and Traci Mach (2017), ``The Impact of the Small 
Business Lending Fund on Community Bank Lending to Small Businesses'', 
Economic Notes, vol. 46, no. 2, pp. 307-328.
    Amel and Mach (2017) look specifically at small business 
lending by community banks. They note in their paper that 
following the financial crisis, total outstanding loans to 
businesses at commercial banks declined sharply. As of the 
third quarter of 2010, larger loans to businesses had begun to 
recover, but smaller loans to businesses were still in decline. 
The lack of recovery in smaller loans to businesses was a 
primary reason for the creation of the Small Business Lending 
Fund (SBLF) in 2010. Amel and Mach's work finds that the SBLF 
had little effect on small business lending by community banks. 
Although SBLF-participating community banks did increase their 
small business lending by a greater percentage than did 
nonparticipating community banks, this higher rate of growth in 
lending was already evident prior to the implementation of the 
SBLF, and did not change following the introduction of the 

                      FROM JANET L. YELLEN

Q.1. I am very concerned about the method the Board has 
implemented to make determinations about the systemic risk 
profile of bank holding companies. As noted in the final rule 
issued July 20, 2015, the Board developed an ``expected 
impact'' framework, which is a consideration of each firm's 
expected impact on the financial system, determined as a 
function of the harm it would cause to the financial system 
were it to fail multiplied by the probability that it will 
    To determine this potential harm, which Board staff deemed 
the ``systemic footprint'' of a particular firm, a 
multifactored assessment methodology was developed. This test 
uses five equally weighted categories that the Board asserts 
are ''correlated with systemic importance''--size, 
interconnectedness, cross-jurisdictional activity, 
substitutability, and complexity. Covered firms are then 
``scored'' using these factors and firms with the highest 
scores are deemed to present systemic risks.
    I believe that tracking and addressing systemic risks to 
the financial system is one of the most important 
responsibilities delegated to the Board of Governors. Due to 
the considerable significance, it is essential for the Board to 
use thoughtful, robust, and ultimately predicative tests/
criteria/methods in its efforts.
    Please indicate why you believe the five factor test that 
is currently being used is the best manner to determine the 
systemic impact of firms. Additionally, I respectfully request 
that you share the background materials/information/analyses 
that lead you (and or the Board) to draw this conclusion.

A.1. 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 five-factor test for determining the systemic footprint 
of global systemically important banks (G-SIBs) is used by the 
Federal Reserve Board (Board) to determine which banking firms 
are G-SIBs and to determine the capital surcharge for each G-
SIB. The Board believes that the five factor measure is a 
meaningful, but approximate, measure of a banking firm's 
systemic importance. The Board realizes that any such measure 
should evolve over time. As a result, the methodology is 
regularly reviewed, and is in the process of being reviewed 
now. \1\
     \1\ See Basel Committee on Banking Supervision, ``Consultative 
Document: Globally-Systemically Important Banks--revised assessment 
framework''. Issued for comment by June 30, 2017. March 2017.
    The five-factor measure reflects substantial research 
efforts by both the international community and the Federal 
Reserve System. The analytical background for the Board's 
approach to G-SIB capital surcharges is spelled-out in a Board 
white paper, \2\ along with the discussion in the Federal 
Register notice of the final rule. \3\ The Basel Committee also 
has provided an explanation of its five-factor measure. \4\ An 
in-depth study of the Basel Committee's G-SIB capital surcharge 
system found that the weights used by its systemic indicator 
system produced results that were consistent with other 
approaches to creating a G-SIB index. \5\ Moreover, the 
surcharges that were assigned under the five-factor measure are 
consistent with a range of alternative parameterizations of key 
variables in the formula.
     \2\ ``Calibrating the G-SIB Surcharge'', Board of Governors of the 
Federal Reserve System, July 20, 2015.
     \3\ 80 FR 49088 (August 14, 2015).
     \4\ Basel Committee on Banking Supervision, ``Global Systemically 
Important Banks Assessment Methodology and Higher Loss Absorbency 
Requirement'', July 2013.
     \5\ Wayne Passmore and Alex H. von Hafften, ``Are Basel's Capital 
Surcharges for Global Systemically Important Banks Too Small?'' Finance 
and Economics Discussion Series, Working Paper 2017-021, Appendix 1.
    The selected indicators in the Board's G-SIB capital 
surcharge framework were chosen to reflect the different 
aspects of how G-SIBs generate negative externalities when they 
are in financial trouble, and the different aspects of what 
makes a G-SIB critical for the stability of the financial 
system. The Board recognizes that there is no perfect measure 
of systemic importance and, as a result, the G-SIB measure 
focuses on indicators where there is substantial supervisory 
agreement about their link to systemic importance.
    Additionally, while not directly asked in your question, an 
important topic related to this is ensuring that the Board 
continually assess its approaches to regulation to ensure that 
rules are tailored as much as possible to the actual risk of a 
regulated entity.
    The Board has been making efforts to do this in many areas, 
such as our recent changes to our Comprehensive Capitol 
Analysis and Review qualitative analysis. However, as my 
colleague Governor Powell and I have noted, the Board has 
limited authority in tailoring certain provisions, such as the 
thresholds applied in section 165 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act. Further tailoring in areas 
such as these would require congressional action.

                      FROM JANET L. YELLEN

Macroeconomic Policy

Q.1. Today we have the strongest labor market in a decade, a 
4.4 percent unemployment rate, yet wages are rising barely 
faster than inflation. Many economists have pointed to low 
productivity growth as the driving factor for why Americans 
haven't seen significant growth in real wages.
    Do you believe productivity is the biggest factor holding 
back wage growth?
    Is slow productivity growth in part the result of 
businesses that have failed to pass on the gains from a growing 
economy by training and investing in their workers?
    What can we do to help turn the tide on productivity growth 
and boost wages for American workers?

A.1. It is true that wage gains have been disappointing, and 
while this is not the only factor, sluggish productivity growth 
has been an important reason that wage growth has not been 
higher. Productivity in the business sector has increased only 
1\1/4\ percent per year since 2006, compared with its average 
of 2\1/2\ percent from 1949 to 2005. And over the past years, 
productivity rose less than \3/4\ percent per year, on average. 
Over time, sustained increases in productivity are necessary to 
support rising household incomes and living standards.
    Economists do not fully understand the exact causes of the 
slowdown in productivity growth. To some extent, the slowdown 
may reflect the aftermath of the global financial crisis and 
recession. For example, research and development spending, an 
important source of innovation, fell sharply during the 
recession. To the extent such factors are at play, we may 
expect productivity growth to improve as the economy 
strengthens further. However, some analyses emphasize factors 
that predate the financial crisis and recession. For example, 
evidence suggests that the effects of the information 
technology revolution were fading by the early 2000s. Moreover, 
some see recent technological advances, including in 
information technology (IT), as less revolutionary than earlier 
technologies like electricity and the internal combustion 
engine. These more structural explanations might portent a 
longer period of slow productivity growth; though it certainly 
is possible that IT-related innovations, such as robotics and 
genomics, will eventually produce significant advances.
    While there is disagreement about what policies would most 
effectively boost productivity, a variety of policy initiatives 
would likely contribute. More investment, both through improved 
public infrastructure and more encouragement for private 
investment, would likely play a meaningful role. More effective 
regulation likely could contribute as well. And better 
education, at all grade levels and including adult education, 
could both promote productivity growth and contribute to higher 
incomes not just on average, but throughout our society.

Q.2. How proactive are you going to be able to be during the 
unprecedented unwinding of the Fed's portfolio, should the 
impact of balance normalization deteriorate financial 
conditions to a point where the real economy is adversely 

A.2. Provided that the economy evolves broadly as anticipated, 
the Federal Open Market Committee (FOMC) expects to begin 
implementing a balance sheet normalization program this year. 
Consistent with the Policy Normalization Principles and Plans 
released in 2014, this program would gradually decrease 
reinvestments and initiate a gradual and largely predictable 
decline in the Federal Reserve's securities holdings.
    For both Treasury and agency securities, we will reinvest 
proceeds from our holdings only to the extent that they exceed 
gradually rising caps on the reductions in our securities 
holdings. Initially, these caps will be set at relatively low 
levels--$6 billion per month for Treasuries and $4 billion per 
month for agency securities. Any proceeds exceeding those 
amounts would be reinvested. These caps will gradually rise 
over the course of a year to maximums of $30 billion per month 
for Treasuries and $20 billion per month for agency securities, 
and will remain in place through the normalization process. By 
limiting the volume of securities that private investors will 
have to absorb as we reduce our holdings, the caps should guard 
against outsized moves in interest rates and other potential 
market strains. The FOMC announced the details of this plan in 
advance so that when it goes into effect, no one is taken by 
surprise and market participants understand how it will work.
    The FOMC expects this plan for reducing the Federal 
Reserve's securities holdings will run quietly in the 
background. Of course, the FOMC will be monitoring the process 
of balance sheet normalization over time and its effects in 
financial markets. The FOMC has noted that it 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 FOMC would 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.

Asset Thresholds for Systemically Important Financial Institutions

Q.3. On several occasions before this Committee Governor 
Tarullo stated that the dollar asset thresholds in Dodd-Frank 
such as the $50 billion threshold for SIFI designation, is far 
too high.
    Do you believe regulators could effectively address 
systemic risk if the threshold were raised above $50 billion?
    Are there specific provisions in Dodd-Frank which you 
believe are particularly costly or unnecessary for a certain 
subset of banks above the $50 billion threshold?
    Are there specific provisions in Dodd-Frank which you 
believe are necessary for all banks above $50 billion in assets 
that should be retained in order to mitigate systemic risk?
    What concerns do you have with having a purely qualitative 
test for identifying systemic risk?

A.3. 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 Board 
(Board) 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. 
economy. The recent financial crisis demonstrated that 
excessive risk-taking at large banks makes the U.S. economy 
vulnerable. The crisis led to a deep recession and the loss of 
nearly nine million jobs. Our regulatory framework must reduce 
the risk that bank failures or distress will have such a 
harmful impact on economic growth in the future.
    The 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 (G-SIBs), whose failure could 
pose a significant risk to the financial stability of the 
United States. \1\ The ``systemic footprint'' measure that 
determines whether a large firm is identified as a G-SIB 
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 funding.
     \1\ Board of Governors of the Federal Reserve System (2015), 
``Regulatory Capital Rules: Implementation of Risk-Based Capital 
Surcharges for Global Systemically Important Bank Holding Companies'', 
final rule, FR 80 (August 14), pp. 49082-49116.
    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 (large regional banks). Some level of tailored enhanced 
regulation is appropriate for these large regional banks. The 
failure or distress of a large regional bank could harm the 
U.S. economy in several ways: by disrupting the flow 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. Economic research has documented that a disruption 
in the flow of credit through banks or a disruption to 
financial market functioning can affect economic growth. \2\
     \2\ 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. 11: Iss. 1 (Contributions), 
Article 35. For evidence on the link between financial market 
functioning and economic growth, see Simon Gilchrist and Egon Zakrajsek 
(2012), ``Credit Spreads and Business Cycle Fluctuations'', American 
Economic Review, Vol. 102(4): 1692-1720.
    The application of tailored enhanced regulation should 
consider the size, complexity, and business models of large 
regional banks. The impact on economic growth of a large 
regional bank's failure will depend on factors such as the size 
of the bank's customer base and how many borrowers 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 assets to measure 
size and complexity, respectively. \3\ In 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 harm to the U.S. economy.
     \3\ Board of Governors of the Federal Reserve System (2017), 
``Amendments to the Capital Plan and Stress Test Rules; Regulations Y 
and YY'', final rule, FR 82 (February 3), pp. 9308-9330.
    The Board currently has only limited authority to tailor 
the enhanced prudential standards included in section 165 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act). In particular, Congress required that certain 
enhanced prudential standards must apply to firms with $10 
billion in total assets, with other standards beginning to 
apply at $50 billion in total assets.
    You asked whether regulators could effectively address 
systemic risk if these statutory thresholds were raised. The 
Board has supported increasing these thresholds. We believe 
that the risks to financial stability from large banks, as 
noted above, can be addressed with tailored enhanced 
regulation, including higher thresholds.
    You also asked about the specific provisions in section 165 
of the Dodd-Frank Act. The Board has not taken a position on 
the relative merits of these provisions. As noted above, some 
level of tailored enhanced regulation is appropriate for large 
banks, taking into account how a particular regulatory standard 
affects a bank's size, complexity, and business model. Among 
these many provisions, the Board believes that supervisory 
stress testing is one of the most valuable, providing a 
forward-looking assessment of the largest firms' ability to 
continue providing credit to the real economy in the event of a 
significant macroeconomic and financial stress.
    You asked whether I have concerns about using a qualitative 
test in place of the existing quantitative thresholds. As my 
answer above noted, I believe that it would be logical to use a 
wider range of factors than asset size to determine the 
application of tailored enhanced regulation for large regional 
banks. Such factors should include quantitative metrics.
    Congress could usefully decide to pursue either raising 
dollar thresholds or giving authority to the Board to decide 
which firms are subject to enhanced prudential standards. The 
Board stands ready to work with Members on the design of either 

Liquidity Coverage Ratio

Q.4. As watchdogs of the financial system, we know that the 
Fed, OCC, and FDIC focus on promoting safety and soundness, and 
support transparency. To that end, firms are required to 
disclose extensive information on their financial health to the 
    Like all things, balance is important and in drafting rules 
and regulations, the agencies consider what is useful 
information versus what can be misleading and inadvertently 
hurt the markets. We've seen the Federal Reserve be thoughtful 
about that--for example, the Fed does not disclose to the 
public who accesses its discount window for at least 2 years, 
balancing transparency with risk of public misconception. The 
Fed has recognized in that case that immediate information 
could actually lead to a market stress.
    In December, the Federal Reserve finalized a rule requiring 
banks to publicly disclose--within 45 days of the end of 
quarter--the details of a complex liquidity metric called the 
Liquidity Coverage Ratio.
    Why does the Fed allow a 2-year disclosure period for the 
discount window and only 45 days for this complex metric when 
the risks of public misconception are the same?
    How is the Fed promoting safety and soundness by asking 
banks to disclose complicated liquidity information that could 
lead to a financial stress?
    Since the Fed is already monitoring firms' liquidity data 
every day, why do we need this additional disclosure 
    Would the Fed find it beneficial to conduct further study 
on the rule before requiring disclosures?

A.4. The different timelines required for discount window and 
Liquidity Coverage Ratio (LCR) disclosures reflect the 
different purposes of the disclosures.
    The Dodd-Frank Act specified the content of the discount 
window disclosures as well as the 2-year disclosure period. The 
primary purpose of the discount window disclosure is to provide 
transparency and accountability to the public regarding the 
Board's lending activities. Eligible borrowers may choose to 
borrow from the discount window both under normal conditions 
and when they are experiencing a liquidity stress. The discount 
window disclosures require all borrowing institutions to 
disclose transaction-specific information about a bank's 
business decision to borrow at the window, including the 
amounts borrowed and the collateral provided to secure each 
loan. A key reason for the 2-year lag in disclosing this 
information is to preserve the willingness of solvent 
institutions to use the discount window, ensuring the 
effectiveness of the discount window as a backstop liquidity 
facility and systemic liquidity shock absorber for solvent 
institutions. In passing the Dodd-Frank Act, the Congress 
weighed the need for greater transparency about the Board's 
lending operations and the need to maintain the discount window 
as an effective liquidity backstop, and concluded that a 2-year 
lag in disclosing transaction-level information on discount 
window borrowing appropriately balanced these two policy 
    In contrast, the primary purpose of the LCR public 
disclosure requirements is to promote safety and soundness by 
providing market participants high-level information about the 
liquidity risk profile of large banking organizations to 
support the ability of market participants to understand and 
constrain bank risk-taking. This sort of market discipline can 
usefully complement the Board's supervisory practices and 
policies. During times of stress, public disclosures can also 
enhance stability by providing relevant and sufficiently timely 
information that assures counterparties and other market 
participants regarding the resilience of covered companies. 
Without information about the liquidity strength of their 
counterparties, market participants may assume the worst 
regarding banking institutions and draw back from the entire 
market, exacerbating the problem.
    The LCR public disclosures must be sufficiently informative 
and timely to serve their intended purpose. In order to 
mitigate potential financial stability and firm-specific risks 
related to disclosing real-time liquidity information, the LCR 
public disclosure rule requires covered companies to disclose 
average values of broad categories of liquidity sources and 
uses over a quarter, with a 45-day lag after the end of the 
quarter. Unlike event-driven discount window disclosures, the 
LCR public disclosure rule requires a set of firms to make 
regular periodic disclosures and does not require disclosure of 
transaction-specific information. They are more analogous to 
the Board's quarterly capital public disclosure requirements, 
which also focus on a firms' financial condition and risk 
management practices.
    Given the fundamentally different purposes of the discount 
window and LCR disclosures, the Board did not provide for a 
common timeframe for the disclosures. While I do not believe it 
is necessary to conduct further study on the LCR public 
disclosure rule at this time, the Board will carefully monitor 
the implementation of these requirements going forward. If 
warranted, I would be willing to revisit aspects of the LCR 
disclosures that result in significant undesirable or 
unintended consequences.
              Additional Material Supplied for the Record