Text: S.Hrg. 115-108 — FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2017
(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
FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2017
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU-
ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978
JULY 13, 2017
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PUBLISHING OFFICE
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
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
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
Memorandum to the CFPB Director from the Arbitration Agreements
Rulemaking Team................................................ 127
FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2017
THURSDAY, JULY 13, 2017
Committee on Banking, Housing, and Urban Affairs,
The Committee met, at 9:34 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. Good morning, and the Committee will come
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
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
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.
STATEMENT OF SENATOR SHERROD 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
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
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
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
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
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
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. 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. 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
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
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
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
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. 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. Thank you, Mr. Chairman. And, Madam
Chair, thank you for your service to the country. We greatly
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. 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
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
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
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
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
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
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
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. 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
Ms. Yellen. So I really do not want to wade in in detail
into trade policy, which is the responsibility of Congress and
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
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
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
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. 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
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
Ms. Yellen. So I know my staff consulted, and I assume that
they would have, but I am not certain just what those
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
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:]
PREPARED STATEMENT OF JANET L. YELLEN
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.
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.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
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.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
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.
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:
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
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
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
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\
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
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
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
\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
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
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
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.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
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
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
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
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
\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
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.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
FROM JANET L. YELLEN
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
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
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
Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER FROM KEITH A. NORIEKA, ACTING COMPTROLLER OF THE CURRENCY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER FROM RICHARD CORDRAY, DIRECTOR, CONSUMER FINANCIAL PROTECTION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
MEMORANDUM TO THE CFPB DIRECTOR FROM THE ARBITRATION AGREEMENTS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]