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MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JULY 16, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–92 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 16, 2014 ..................................................................................................... 1 

Appendix: 

July 16, 2014 ..................................................................................................... 53 

WITNESSES 

WEDNESDAY, JULY 16, 2014 

Yellen, Hon. Janet L., Chair, Board of Governors of the Federal Reserve 

System ................................................................................................................... 7 

APPENDIX 

Prepared statements: 

Yellen, Hon. Janet L. ....................................................................................... 54 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Duffy, Hon. Sean: 

Letter to President Barack Obama, dated June 18, 2014 ............................. 60 

Lynch, Hon. Stephen: 

Letter from Americans for Financial Reform, dated July 10, 2014 .............. 66 

Yellen, Hon. Janet L.: 

Monetary Policy Report of the Board of Governors of the Federal Reserve 

System to the Congress, dated July 15, 2014 ............................................. 76 

Written responses to questions submitted by Representative McHenry ..... 134 

Written responses to questions submitted by Representative Neugebauer 136 

Written responses to questions submitted by Representative Luetkemeyer ............................................................................................................. 141 

Written responses to questions submitted by Representative Ross ............. 144 

Written responses to questions submitted by Representative Stutzman .... 146 

Written responses to questions submitted by Representative Miller ........... 149 

(1) 

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Wednesday, July 16, 2014 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Bachus, Royce, 

Garrett, Neugebauer, McHenry, Bachmann, Pearce, Posey, 

Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, 

Stivers, Fincher, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, 

Barr, Cotton, Rothfus, Messer; Waters, Maloney, Velazquez, Sherman, Meeks, Lynch, Scott, Green, Cleaver, Ellison, Perlmutter, 

Himes, Carney, Sewell, Foster, Kildee, Delaney, Sinema, Beatty, 

Heck, and Horsford. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

This hearing is for the purpose of receiving the semi-annual testimony of the Chair of the Board of Governors of the Federal Reserve System on monetary policy and the state of the economy. 

I now recognize myself for 5 minutes to give an opening statement. 

We welcome Chair Yellen for another semi-annual HumphreyHawkins appearance before our committee today. Her appearance 

performs a double duty, as today’s hearing represents the 11th 

hearing of our committee’s Federal Reserve Centennial Oversight 

Project. 

As all Members know, last week we held a legislative hearing on 

the first piece of legislation to arise from the Project, namely the 

Federal Reserve Accountability and Transparency Act (FRAT Act), 

co-authored by Mr. Huizenga and Mr. Garrett. 

Not surprisingly, its introduction was met with howling protests 

and apocalyptic visions from my Democratic colleagues. Regrettably, such a reaction has become commonplace on our committee. 

With few exceptions, my Democratic colleagues have proven they 

do not wish to legislate, nor do they wish to conduct oversight. 

It causes many to wonder why they ran for Congress in the first 

place. And the answer: they apparently wish to be defenders and 

apologists of the status quo. 

But with the real unemployment rate at 12.1 percent, 46 million 

Americans dependent on food stamps, and real median income havVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
2 

ing fallen every year of the Obama Administration, the status quo 

is unacceptable. 

Additionally, when the Federal Reserve helps precipitate the financial crisis with loose monetary policy, selectively intervenes in 

distinct credit markets, facilitates our unsustainable national debt, 

blurs the lines between fiscal and monetary policy, and has its 

power vastly expanded, the status quo is unacceptable. 

A dramatic increase in power calls for a corresponding increase 

in accountability and transparency, and that is precisely what the 

FRAT Act does. The overwhelming weight of evidence is that monetary policy is at its best in maintaining stable prices and maximum 

employment when it follows a clear, predictable monetary policy 

rule. 

I believe the period of the great moderation between 1987 and 

2002 attests to this proposition. Had a clear, predictable monetary 

policy rule like the Taylor Rule been in place throughout the last 

decade, it is likely the financial crisis would have been avoided in 

the first place, or at least downgraded to a garden variety recession. 

The FRAT Act in no way, shape, or form dictates monetary policy. Anybody who maintains otherwise either hasn’t read the Act, 

doesn’t understand the Act, or regrettably, they are trying to mislead others. 

After the passage of the FRAT Act, if the Fed wants to conduct 

monetary policy based upon viewer text messages from the ‘‘American Idol’’ television show, it will retain the unfettered discretion to 

do so. If the Fed wishes to conduct monetary policy based upon a 

rousing game of rock-paper-scissors on odd Tuesdays at the Federal 

Open Market Committee (FOMC), it will retain the unfettered discretion to do so. 

The Fed can set any rule it wishes. It can change the rule anytime it wishes. It can deviate from the rule any time it wishes. 

Under the FRAT Act, it simply has to report and explain this to 

the rest of us. That is what transparency and accountability are all 

about. 

For those who claim this somehow imposes upon the Fed’s independence, I note that the Fed Chair testifies before our committee 

and our Senate counterpart twice a year. The Fed Chair meets 

with the Treasury Secretary once a week. And dare I mention the 

continuing revolving door between Fed officials and Treasury officials. 

The threat to the Fed’s independence does not come from the 

Legislative Branch; it comes from the Executive Branch. 

And again, I reiterate, this has nothing to do with the FOMC deliberations or micromanagement of daily Federal Reserve operations. The Fed just wants to keep the curtains closed and keep 

any outside eyes from reviewing how well or how badly its biggest 

policies are implemented. 

Who knows whether the Fed’s engine needs a tune-up if no one 

will let the mechanic look under the hood? Oh, by the way, that 

is not my quote. It is from a former chairman of this committee, 

Henry B. Gonzalez, whose portrait sits to my right, and who very 

well may have been the single most liberal Democrat to ever Chair 

this committee. 

3 

My, how the times have changed. 

As our witness, Dr. Mark Calabria of the Cato Institute, testified 

last week, the reason it is important for the Fed to reveal its rule 

or operating model is, ‘‘so that it can be examined and tested by 

those outside the Fed. Only under such examination can we learn 

how the model captures the real world.’’ 

The Fed has yet to corner the market on Ph.D. economists or 

monetary policy experts. Quite simply, the Fed’s work should bear 

the scrutiny and critical examination of others. 

With respect to the other portions of the FRAT Act, it remains 

an open question whether the Fed should serve any role as a prudential regulator. But regardless of the answer to that question, 

the Fed should no longer be permitted to hide its prudential regulatory actions behind its monetary policy independence cloak. 

This is particularly true when we consider the Fed’s sweeping 

powers under the Dodd-Frank Act to control an ever-increasing 

share of the American economy. 

When it comes to prudential regulations, it is clearly time to hold 

the Fed to the same openness and transparency standards that we 

require of other Federal agencies. This includes mandatory costbenefit analysis, also known as common sense. 

Finally, many have wondered about the Fed’s view of the FRAT 

Act. I have not. During my congressional tenure I have yet to encounter one Federal agency that has requested less power, fewer 

resources, or more accountability. I doubt the Fed will be the first. 

I now yield to the ranking member for an opening statement. 

Ms. WATERS. Thank you, Mr. Chairman. 

And welcome back, Chair Yellen. 

Chair Yellen, it has been 5 months since you last appeared before this committee, and in that time, much has changed. Absent 

major changes in our economic outlook, the Federal Reserve’s program of large-scale asset purchases, known as quantitative easing, 

is set to end in October, and many are looking to see what the Fed 

will do once the program subsides. 

The challenges are significant. Although employment levels for 

many sectors have continued to rise, stable and consistent growth 

is uneven and is not a given. 

In a surprise turn, GDP dropped substantially in the first quarter. Unemployment remains unacceptably high, particularly for minority groups. African Americans face an unemployment rate of 

10.7 percent; 7.8 percent for Latinos. 

So let’s be clear. While we have made much progress, the longterm effects of the financial crisis, the worst since the Great Depression, can still be felt by working people and people still looking 

for work in every one of our communities across the country. 

Of course, the problem of unemployment has only been made 

worse by Republican intransigence on any number of measures, 

from refusing to invest in our country’s job-creating infrastructure, 

to cutting investments in education that will fuel the next generation of American leaders, to their refusal to extend benefits for our 

friends and neighbors suffering from long-term unemployment. 

And other important programs that create jobs and economic 

growth, such as the Export-Import Bank and the Terrorism Risk 

Insurance Act, remain needlessly tied up in a Republican ideologVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
4 

ical war, creating widespread uncertainty for our Nation’s job creators. 

In the wake of legislative uncertainty and fiscal recklessness, 

some of my colleagues on the other side of the aisle are likewise 

attempting to stop the Fed from taking action to jumpstart our 

economy and preserve economic stability. They have recently proposed harmful legislation that would take unprecedented steps to 

virtually eliminate the Federal Open Markets Committee’s role in 

shaping monetary policy. 

Instead, Republicans prefer to put decisions related to inflation 

and employment on autopilot, determined arbitrarily based upon a 

rigid set of factors. If enacted, this proposal would undercut the 

Fed’s ability to respond to emerging threats through rules and requirements designed to paralyze Fed rulemaking and to curtail 

monetary policy discretion. 

This would include concerns emanating from areas like social 

media, which the Fed noted just yesterday appears to be substantially stretched. Quite simply, the straitjacket approach taken in 

the Republican bill would leave the Fed with few options, powerless 

to deal with an emerging area of concern even if it were to pose 

a danger to our economy. 

Whether emerging threats to financial stability come from social 

media or elsewhere, this shortsighted legislation would be a recipe 

for disaster. 

Chair Yellen, I am eager to hear your views on how our economy 

would have fared during the crisis and would fare in the future 

with such a regime in place. 

Finally, I am very interested to hear about the Fed’s progress in 

meeting the heightened regulatory policy mandate entrusted to the 

institution under the Wall Street Reform Act. In particular, I want 

to urge the Fed to expeditiously implement the unfinished provisions of the Act and to faithfully enforce the provisions of the law— 

provisions like robust living wills and a strong Volcker Rule that 

provide the tools for preventing the next 2008 crisis. 

Thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Michigan, Mr. Huizenga, the vice chairman of our Monetary 

Policy Subcommittee, and co-author of the Federal Reserve Accountability and Transparency Act, for 3 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. And, as predicted, the 

apocalyptic view has emerged already here in regards to my particular bill. 

But I do have to say, Chair Yellen, that I give you credit. I 

watched some of your testimony last evening on TV of what you did 

in the Senate, and I give you credit for coming in front of this committee and giving us time; you have been very generous with that. 

But we both know that over the past several years the Federal 

Reserve has gained unprecedented power, influence, and control 

over the financial system, while remaining shrouded in mystery to 

the American people. 

This standard operating procedure, I believe, can’t continue. We 

must lift the veil of secrecy and ensure that the Fed is accountable 

to the people’s representatives. This is not about your independVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
5 

ence or the independence of the Federal Reserve, but about accountability and transparency. 

And at this point I won’t go on my oversight rant that I did back 

at our hearing on the bill, where I just don’t understand why many 

of my colleagues aren’t interested in embracing the responsibility 

of their job to go and exercise oversight, and have a lack of interest 

in doing that. 

But last week my colleague, Scott Garrett, and I introduced H.R. 

5018, and this legislation will start to pull back the curtain at the 

Fed to increase accountability and transparency. 

The Dodd-Frank Act bestowed massive new regulatory authority 

upon the Federal Reserve, yet the Fed is not required to conduct 

cost-benefit analysis when it considers new regulations, unlike all 

the other financial regulators, such as the SEC and the CFTC. 

Additionally, this legislation urges the Fed to adopt a rules-based 

approach, as the chairman had talked about, to the monetary policy, instead of the continued ad hoc strategy currently being employed. Should the Fed fail to adopt a rules-based approach, it 

would trigger an audit of the Fed’s books, and unlike the view that 

this is going to somehow chill this, I can tell you that many people 

believe this doesn’t go far enough. 

In fact, I support that as well, and I never thought that I would 

agree with the former chairman, Henry Gonzalez, about doing an 

audit of the Fed, but if it was good enough for him in 1993, I think 

it is probably good enough for us here at the centennial, as well. 

But additionally, this legislation urges the Fed to—sorry—economists across the ideological spectrum have called upon the Fed to 

set this kind of monetary policy according to a mathematical rule 

that uses economic data, such as the rates of inflation and unemployment and to share that rule with the public. 

We cannot have a power entity within the Federal Government 

without—just operating on a whim. 

This legislation codifies the common-sense principle of using a 

rules-based approach when determining monetary policy, and I believe it is time to bring the Federal Reserve out of the shadows and 

provide hardworking taxpayers with a more open and transparent 

government. 

My bill last week was labeled the ‘‘Spanish Inquisition,’’ and all 

kinds of other things were thrown around. But again, I believe it 

is our job, our constitutional duty, our constitutional responsibility, 

to work with you and to have oversight of the operations. 

And with that, Mr. Chairman, I yield back. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New York, Mr. 

Meeks, the ranking member of our Financial Institutions Subcommittee, for a minute and a half. 

Mr. MEEKS. Thank you, Mr. Chairman. 

And thank you, Madam Chair. 

Chair Yellen, it is with great pleasure that we welcome you here 

again this morning. And I want to extend my deep appreciation to 

you and your staff for the significant amount of time you have 

spent on the Hill and also for welcoming congressional staffers at 

the Federal Reserve. That is tremendously important. 

6 

I, too, was listening to some of your testimony yesterday before 

the Senate Banking Committee, and you mentioned that the 

United States labor markets are far from healthy. 

I applaud your remarks, and I think that you are absolutely 

right. 

The latest data from the Bureau of Economic Analysis show that 

Americans’ personal income is barely growing at a tepid rate of 

only 0.3 percent. In fact, other reports indicate that the American 

real wages are still lower than before the crisis. 

Members of this chamber are closest to the American people that 

we represent in Congress, and I can assure you that we hear loudly 

and clearly from them that they are not feeling this recovery. 

In fact, when preparing for this hearing I took to social media, 

just asking them what questions they would like me to ask you, 

and what were their current conditions. And they said—too many 

said, especially the younger Americans, that they are struggling to 

get jobs, and when they do get jobs, the wages are barely sufficient 

to make ends meet. Too many have been unemployed for more than 

2 years or 3 years or more, and they have exited the job market 

out of frustration. 

Too many are concerned about their job security and their ability 

to save or invest in their future. 

Thank you, and I wait to hear your testimony, Madam Chair. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Alabama, Ms. Sewell, for a minute and a half. 

Ms. SEWELL. Mr. Chairman and Ranking Member Waters, I 

want to add to the voice—add my voice to the choir of those welcoming Chair Yellen here today. Today’s hearing with Chair Yellen 

is critically important as we receive an update on the state of the 

economy and the Federal Reserve’s essential role in our economic 

recovery. 

I want to applaud Chair Yellen and the entire Federal Reserve 

for their diligent work towards fulfilling its congressional mandate 

of helping maximize employment, stabilize prices, and moderate 

long-term interest rates. Thanks in part to the Federal Reserve’s 

insight and pragmatic monetary policies, our economy continues to 

experience positive and steady economy growth. 

I also want to encourage the Federal Reserve to continue to work 

as quickly as possible to enact rules that fulfill the promise of 

strengthening our financial system and protecting our consumers. 

As this committee continues to engage in conversation with key 

individuals surrounding the state of our national economy, we must 

be ever vigilant in working to ensure that we avoid any and all 

self-inflicted economic setbacks. It is important that we hear from 

Chair Yellen and work to pass legislation that fosters a stronger 

and more resilient financial system, rather than enacting strict policy rules that would impair the Federal Reserve’s ability to do its 

job. 

We must develop and promote fair and balanced monetary economic policies that ensure the long-term growth and vitality of our 

economy. The American people deserve nothing less. 

Thank you. 

7 

Chairman HENSARLING. The gentlelady yields back. 

Before introducing our witness, I wish to make a scheduling announcement. Contrary to the Chair’s last appearance, where she 

stayed to answer all Member questions, she has requested to be excused at 1 p.m. for today’s hearing and for future hearings, so I 

wish to alert Members of that. I have neither the desire nor the 

ability to hold the Chair against her will, but I am disappointed in 

the change of heart. 

Notwithstanding my disappointment, Madam Chair, you are 

nonetheless welcome. We welcome your testimony today. 

Chair Yellen has previously testified before our committee, so I 

believe she needs no further introduction. Without objection, Chair 

Yellen’s written statement will be made a part of the record. 

Chair Yellen, you are now recognized for your oral presentation 

of your testimony. 

STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mrs. YELLEN. Chairman Hensarling, Ranking Member Waters, 

and members of the committee, I am pleased to present the Federal 

Reserve’s semi-annual monetary policy report to the Congress. 

In my remarks today I will discuss the current economic situation and outlook before turning to monetary policy. I will conclude 

with a few words about financial stability. 

The economy is continuing to make progress toward the Federal 

Reserve’s objectives of maximum employment and price stability. 

In the labor market, gains in total nonfarm payroll employment 

averaged about 230,000 per month over the first half of this year, 

a somewhat stronger pace than in 2013, and enough to bring the 

total increase in jobs during the economic recovery thus far to more 

than 9 million. 

The unemployment rate has fallen nearly 1.5 percentage points 

over the past year, and stood at 6.1 percent in June, down about 

4 percentage points from its peak. Broader measures of labor utilization have also registered notable improvements over the past 

year. 

Real gross domestic product is estimated to have declined sharply in the first quarter. The decline appears to have resulted mostly 

from transitory factors, and a number of recent indicators of production and spending suggest that growth rebounded in the second 

quarter, but this bears close watching. 

The housing sector, however, has shown little recent progress. 

While this sector has recovered notably from its earlier trough, 

housing activity leveled off in the wake of last year’s increase in 

mortgage rates, and readings this year have, overall, continued to 

be disappointing. 

Although the economy continues to improve, the recovery is not 

yet complete. Even with the recent declines, the unemployment 

rate remains above Federal Open Market Committee participants’ 

estimates of its longer-run normal level. Labor force participation 

appears weaker than one would expect based on the aging of the 

population and the level of unemployment. 

8 

These and other indications that significant slack remains in 

labor markets are corroborated by the continued slow pace of 

growth in most measures of hourly compensation. 

Inflation has moved up in recent months but remains below the 

FOMC’s 2 percent objective for inflation over the longer run. The 

personal consumption expenditures, or PCE price index, increased 

1.8 percent over the 12 months through May. Pressures on food 

and energy prices account for some of the increase in PCE price inflation. 

Core inflation, which excludes food and energy prices, rose 1.5 

percent. Most committee participants project that both total and 

core inflation will be between 1.5 and 1.75 percent for this year as 

a whole. 

Although the decline in GDP in the first quarter led to some 

downgrading of our growth projections for this year, I and other 

FOMC participants continue to anticipate that economic activity 

will expand at a moderate pace over the next several years, supported by accommodative monetary policy, a waning drag from fiscal policy, the lagged effects of higher home prices and equity values, and strengthening foreign growth. 

The committee sees the projected pace of economic growth as sufficient to support ongoing improvement in the labor market with 

further job gains. And the unemployment rate is anticipated to decline toward its longer-run, sustainable level. 

Consistent with the anticipated further recovery in the labor 

market, and given that longer-term inflation expectations appear to 

be well-anchored, we expect inflation to move back toward our 2 

percent objective over coming years. As always, considerable uncertainty surrounds our projections for economic growth, unemployment, and inflation. FOMC participants currently judge these risks 

to be nearly balanced, but to warrant monitoring in the months 

ahead. 

I will now turn to monetary policy. The FOMC is committed to 

policies that promote maximum employment and price stability, 

consistent with our dual mandate from Congress. Given the economic situation that I just described, we judge that a high degree 

of monetary policy accommodation remains appropriate. 

Consistent with that assessment, we have maintained the target 

range for the Federal funds rate at 0 to 1/4 percent and have continued to rely on large-scale asset purchases and forward guidance 

about the future path of the Federal funds rate to provide the appropriate level of support for the economy. 

In light of the cumulative progress toward maximum employment that has occurred since the inception of the Federal Reserve’s 

asset purchase program in September 2012, and the FOMC’s assessment that labor market conditions would continue to improve, 

the committee has made measured reductions in the monthly pace 

of our asset purchases at each of our regular meetings this year. 

If incoming data continue to support our expectation of ongoing 

improvement in labor market conditions and inflation moving back 

toward 2 percent, the committee likely will make further measured 

reductions in the pace of asset purchases at upcoming meetings, 

with purchases concluding after the October meeting. Even after 

the committee ends these purchases, the Federal Reserve’s sizable 

9 

holdings of longer-term securities will help maintain accommodative financial conditions, thus supporting further progress in returning employment and inflation to mandate-consistent levels. 

The committee is also fostering accommodative financial conditions through forward guidance that provides greater clarity about 

our policy outlook and expectations for the future path of the Federal funds rate. Since March, our post-meeting statements have included a description of the framework that is guiding our monetary 

policy decisions. 

Specifically, our decisions are and will be based on an assessment of the progress, both realized and expected, toward our objectives of maximum employment and 2 percent inflation. Our evaluation will not hinge on one or two factors, but rather, will take into 

account a wide range of information, including measures of labor 

market conditions, indicators of inflation, and long-term inflation 

expectations, and readings on financial developments. 

Based on its assessment of these factors, in June the committee 

reiterated its expectation that the current target range for the Federal funds rate likely will be appropriate for a considerable period 

after the asset purchase program ends, especially if projected inflation continues to run below the committee’s 2 percent longer-run 

goal, and provided that inflation expectations remain well-anchored. 

In addition, we currently anticipate that even after employment 

and inflation are near mandate-consistent levels, economic conditions may for some time warrant keeping the Federal funds rate 

below levels that the committee views as normal in the longer run. 

Of course, the outlook for the economy and financial markets is 

never certain, and now is no exception. Therefore, the committee’s 

decisions about the path of the Federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. 

If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward 

our dual objectives, then increases in the Federal funds rate target 

likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then 

the future path of interest rates likely would be more accommodative than currently anticipated. 

The committee remains confident that it has the tools it needs 

to raise short-term interest rates when the time is right and to 

achieve the desired level of short-term interest rates thereafter, 

even with the Federal Reserve’s elevated balance sheet. At our 

meetings this spring, we have been constructively working through 

the many issues associated with the eventual normalization of the 

stance and conduct of monetary policy. 

These ongoing discussions are a matter of prudent planning and 

do not imply any imminent change in the stance of monetary policy. The committee will continue its discussions in upcoming meetings, and we expect to provide additional information later this 

year. 

The committee recognizes that low interest rates may provide incentives for some investors to reach for yield, and those actions 

could increase vulnerabilities in the financial system to adverse 

10 

events. While prices of real estate, equities, and corporate bonds 

have risen appreciably and valuation metrics have increased, they 

remain generally in line with historical norms. 

In some sectors, such as lower-rated corporate debt, valuations 

appear stretched and issuance has been brisk. Accordingly, we are 

closely monitoring developments in the leveraged-loan market and 

are working to enhance the effectiveness of our supervisory guidance. 

More broadly, the financial sector has continued to become more 

resilient as banks have continued to boost their capital and liquidity positions and growth in wholesale short-term funding in financial markets has been modest. 

In sum, since the February monetary policy report, further important progress has been made in restoring the economy to health 

and in strengthening the financial system. Yet too many Americans 

remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have 

been completed. 

The Federal Reserve remains committed to employing all of its 

resources and tools to achieve its macroeconomic objectives and to 

foster a stronger and more resilient financial system. 

Thank you. I would be pleased to take your questions. 

[The prepared statement of Chair Yellen can be found on page 

54 of the appendix.] 

Chairman HENSARLING. The Chair now recognizes himself for 

questions. 

Chair Yellen, my first question has to do with Mr. Huizenga’s 

and Mr. Garrett’s legislation. On the one hand, it has only been in 

the public domain for a little over a week; on the other hand, it 

is only 31 pages long. But have you had a chance to read and review this legislation? 

Mrs. YELLEN. I have had the chance to review the legislation, 

yes. 

Chairman HENSARLING. Yesterday, before the Senate Banking 

Committee, you opined that under this legislation the Fed would 

not have had the flexibility it needed to take the actions that it 

took during the financial crisis. 

I would commend for your review Section 2(e), on page 7 of the 

legislation, entitled, ‘‘Changing Market Conditions,’’ which reads in 

part, ‘‘Nothing in this Act shall be construed to require that the 

plans with respect to the systematic quantitative adjustment of the 

Policy Instrument Target described under Subsection (c)(2) be implemented if the Federal Open Market Committee determines that 

such plans cannot or should not be achieved due to changing market conditions.’’ 

I personally don’t believe the language could have been any 

clearer. It is not the intent of the legislation—and I would certainly 

welcome any policy feedback from your experts to assure that it 

achieves that purpose. But I believe the language is about as clear 

as the language could possibly be. 

Chair Yellen, let’s talk a little bit about independence. Larry 

Summers, in a famous paper in the Journal on Money, Credit & 

Banking on central bank independence, measures independence as, 

‘‘The institutional relationship between the central bank and the 

11 

executive, the procedure to nominate and dismiss the head of the 

central bank, the role of government officials on the central bank 

board, and the frequency of contacts between the executive and the 

bank.’’ 

Do you agree or disagree with his characterization of Federal Reserve independence? 

Mrs. YELLEN. I see Federal Reserve independence—of course, we 

are a creature of Congress. We have a responsibility to report to 

Congress. And you use the term ‘‘Executive Branch,’’ I think, in the 

material— 

Chairman HENSARLING. Well, I used the term that Larry Summers used in his paper, yes. 

Mrs. YELLEN. I see us as needing to report regularly to Congress 

about our conduct of monetary policy in the economy. 

Chairman HENSARLING. Let me ask you this question, Chair 

Yellen. I think it is well-established—I am under the impression, 

again, that you are required to appear before our committee and 

the Senate Banking Committee on a semi-annual basis. Is it true 

that there is a weekly meeting between you and the Secretary of 

the Treasury? 

Mrs. YELLEN. Many weeks. It is not every single— 

Chairman HENSARLING. Most weeks. 

Mrs. YELLEN. —week. Many weeks we get together and confer 

about matters of mutual concern. But we are completely independent from the Executive Branch in the conduct of— 

Chairman HENSARLING. Speaking of matters of mutual concern 

and independence, I am certainly not interested in a transcript of 

a private luncheon, but would you be willing to report to this committee on the matters of mutual concern that were discussed in 

any agreements reached between Treasury and the Federal Reserve? 

Mrs. YELLEN. I am not willing to report on a regular basis on private conversations that I have, but any agreements that were 

reached certainly would be in the public domain. But our conversations do not result— 

Chairman HENSARLING. How would they get into the public domain? 

Mrs. YELLEN. If there were an agreement— 

Chairman HENSARLING. If you don’t report them, how do they get 

into the public domain—agreements between the Federal Reserve 

and Treasury? 

Mrs. YELLEN. There was, for example, during the financial crisis, 

a question as to what is the appropriate role of the Federal Reserve 

in lending programs and when does the Treasury need to be involved? When is there a fiscal component? 

And those discussions led to a formal agreement between the 

Treasury and the Federal Reserve— 

Chairman HENSARLING. My time is starting to wind down. 

If I could address another matter, on page three of your testimony, it reads, ‘‘Even after the Committee ends these purchases,’’ 

so we are speaking of tapering, ‘‘the Federal Reserve’s sizable holdings of longer-term securities will help maintain accommodative financial conditions, thus supporting further progress in returning 

employment and inflation to mandate-consistent levels.’’ 

12 

Is there any current plan or any current commitment to reduce 

the Fed’s balance sheets to historic levels? And I am not speaking 

of what you may want to do or what you might do, but is there 

any current commitment or plan to reduce the Fed’s balance sheet 

to historic levels? 

Mrs. YELLEN. As the FOMC stated in 2012, I believe, we issued 

a set of exit principles in which one of the principles was that over 

time we sought to normalize the size of our balance sheet and to 

bring it down to the smallest level consistent with the efficient and 

effective conduct of monetary policy. 

Chairman HENSARLING. Chair Yellen, would you characterize 

that, then, as a current plan or current commitment to reduce the 

Fed’s balance sheet to historic levels? 

Mrs. YELLEN. I would characterize it as a current plan. We are 

discussing our principles for the normalization of policy. And as I 

indicated in my testimony, I expect we will be able to give more 

complete guidance later this year when those discussions are complete. 

And I fully expect that we would reiterate an intention over time 

to reduce the size of our balance sheet. 

Chairman HENSARLING. Thank you. 

The Chair now recognizes the ranking member. 

Ms. WATERS. Thank you very much. 

Legislation that was offered by the Republicans on our committee 

last week would require the Federal Reserve’s Federal Open Market Committee to issue a rule to dictate the course of monetary policy. 

In your view, how feasible would it be to design a rule that 

would act as an appropriate substitute for independent judgment 

and discretion in the determination of monetary policy? And do you 

expect that such a rule could adequately respond to the range of 

economic data that affect the economy on any given day? 

Mrs. YELLEN. I feel, Congresswoman, that it would be a grave 

mistake for the Fed to commit to conduct monetary policy according to a mathematical rule. No central bank does that. 

I believe that although under the legislation we could depart 

from that rule, the level of short-term scrutiny that would be 

brought on the Fed in real-time reviews of our policy decisions 

would essentially undermine central bank independence in the conduct of monetary policy. 

And I believe that global experience has shown that we have better macroeconomic performance when central banks are removed 

from short-term political pressures and given the independence to, 

within a framework in which their goals are clear—and in our case 

those are specified by Congress—given operational independence to 

decide how to conduct monetary policy. 

The Federal Reserve is the most transparent central bank, to my 

knowledge, in the world. We have made clear how we interpret our 

mandate and our objectives and provide extensive commentary and 

guidance on how we go about making monetary policy decisions. 

We do, I should say, routinely consult the recommendations of a 

whole variety of rules in thinking about monetary policy. And I 

have indicated previously in speeches I have made that these can 

be useful starting places or guides to policy. So I am not 100 perVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
13 

cent negative on using rules in thinking through what we should 

do. 

But I think it is very important to understand that had we followed, in the aftermath of the financial crisis, the recommendations 

of any of the simple rules that are widely discussed, the outcomes 

would have been even more disappointing than what we experienced. Even with the Federal Reserve’s conduct of policy departing 

very substantially from what those rules would have recommended, 

we have had a long, slow grind to get this economy recovering. 

We actually could not have followed the recommendations of the 

simple rule. Almost every rule would have called, during, for example, 2011 and 2012, for negative interest rates, something that is 

impossible. 

And that is one reason that we began asset purchases. We needed a further tool. 

Given the fact that we have had unusual headwinds constraining 

this recovery, I believe it is utterly necessary for us to provide more 

monetary policy accommodation than those simple rules would 

have suggested. 

And I think history would show that following any of those simple rules would have given us very much worse performance. So I 

feel it would be a mistake. 

Although those rules sometimes do have merit in normal times, 

during the great moderation when there were relatively few 

shocks, and the Federal Reserve’s behavior was very rule-like; it 

corresponded to some of those rules. They can work well, but not 

always. 

We can’t be mathematically bound to a simple formula. 

Ms. WATERS. I would like to thank you for that explanation. You 

could not be clearer. 

And you could not have explained better to this committee why 

you certainly could not operate with some cookie-cutter rule when 

in fact, as you explained, the headwinds that you were confronted 

with or that the Feds were confronted with required discretion. It 

absolutely required that you had the flexibility to deal with unforeseen circumstances in having to make your decisions. And I want 

to thank you very much. 

I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Michigan, Mr. Huizenga, vice chairman of our Monetary Policy Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

I have a quick question, Chair Yellen. Have you read my bill— 

the Garrett-Huizenga bill? 

Mrs. YELLEN. I have looked at the bill. 

Mr. HUIZENGA. You have looked at it? Okay. Well, that is good 

news. I will, then, I guess, just refresh your memory and address 

my colleague from California. 

We anticipated that might be a concern of yours, so on page 8 

of the bill, under subsection 2, the GAO approval of an update— 

and we are not going to get into whether there should or shouldn’t 

be the rule or does the rule go far enough, et cetera, et cetera. 

However, it does say, ‘‘Upon determining that plans described in 

paragraph (1) cannot or should not be achieved, the Federal Open 

14 

Market Committee shall submit an explanation for that determination and an updated version of the Directive Policy Rule to the 

Comptroller General of the United States and the appropriate congressional committees not later than 48 hours after making the determination.’’ 

It goes on to say that if they determine that you are not in compliance with the new rule, then you get audited. It does not say 

that you cannot change the rule. What it says is you have to notify 

us and notify them. 

I am a history buff, so I went back and did a little history. We 

got to where we are today because of the Employment Act of 1946, 

where Congress felt it needed to lay out what Fed policy was. 

In the 1970s they felt—Congress, my colleagues, felt it was too 

vague and therefore created a bill that would strengthen and clarify the 1946 Act. It actually had three goals, not two. It is not a 

dual mandate, it is actually a tri-mandate by Congress: stable 

prices; maximized employment; and moderate long-term interest 

rates. 

So on page three of your testimony you are talking about—and 

I am going to quote, it is the second paragraph down—‘‘Even after 

the Committee ends these purchases, the Federal Reserve’s sizable 

holdings of longer-term securities will help maintain accommodative financial conditions, thus supporting further progress in returning employment and inflation to mandate-consistent levels.’’ 

Where in the Humphrey-Hawkins Act—which was signed, oh, by 

the way, I’m sorry, my colleagues, by Jimmy Carter in 1978 after 

Democrats in the House and the Senate passed the bill—do we lay 

out a 2 percent inflation rate? Do we do that? 

Mrs. YELLEN. You do not make specific in the legislation— 

Mr. HUIZENGA. Do we lay out exactly what employment rates or 

unemployment rates should be? 

Mrs. YELLEN. The FOMC has— 

Mr. HUIZENGA. No, no, I’m sorry, Congress—the bill that was 

passed by Democrats in the House and the Senate and signed by 

Jimmy Carter, does that mandate what the employment rate 

should be? 

Mrs. YELLEN. The bill uses the terms, as you said, ‘‘maximum 

employment’’ and ‘‘price stability.’’ 

Mr. HUIZENGA. Okay, so we don’t prescriptively say it is going to 

be a 2 percent inflation rate target and 5 or 6 percent employment 

rate. 

Mrs. YELLEN. It is obviously language of the type that is in the 

legislation. We need to interpret— 

Mr. HUIZENGA. Do we lay it out? 

Mrs. YELLEN. You do not, but we have tried to— 

Mr. HUIZENGA. Okay. All right. There we go. 

So I am curious how us requesting a rule—a simple step in most 

people’s view—a simple rules-based policy, how is that different 

than the mandate—the tri-mandate that was laid out in Humphrey-Hawkins and defended every single day by others in this 

committee? 

How, when we are asking for what the rule is—not telling you 

what the rule is, not being prescriptive or even descriptive, but just 

saying, ‘‘Set a rule and then let us know so that we can have overVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
15 

sight.’’ I here will reference my rant on oversight to my colleagues 

who can go back and watch it on YouTube if they weren’t in the 

committee room. 

So if we can get as detailed as the Humphrey-Hawkins Act, or 

lack of detail, why can’t we have a rule and have you all at the 

Fed accept that? And if you are not willing to accept it because you 

are concerned about your independence—is that one of your reasons? I don’t want to put words in your mouth. Is that one of your 

reasons why you don’t want to sign on to the Garrett-Huizenga 

bill? 

Mrs. YELLEN. I am not aware of any literature which establishes 

that a central bank, whether it makes it public or not, adopting a 

rule is the most desirable way to run monetary policy. And I would 

say that many— 

Mr. HUIZENGA. You might want to talk to the Europeans about 

that and a lot of other economists, as well. 

Mrs. YELLEN. What the Europeans do is the ECB has been given 

a great freedom and they have defined a price stability objective, 

and they certainly do not— 

Mr. HUIZENGA. Here is my last request: If the Garrett-Huizenga 

bill isn’t good enough, I would like to know when the Fed is going 

to call for a rescission of the Humphrey-Hawkins Act because it impedes your independence. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, ranking member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Thank you. 

And welcome, Madam Chair. 

I would like to ask you about the Fed’s exit from its monetary 

stimulus. As you testified, the Fed is currently on pace to wind 

down its QE3 purchases by the end of October. But right now the 

market isn’t expecting the Fed to start raising interest rates until 

the third quarter of 2015. 

So between October of this year and the third quarter of 2015, 

what are the main tools that the Fed anticipates using to exit from 

its monetary stimulus? 

Mrs. YELLEN. Well, thank you. 

As I indicated, if the committee continues to see improvement in 

the labor market and continues to forecast ongoing progress in the 

labor market over time, and inflation moving back toward 2 percent, it is our intention to wind down our asset purchases, to conclude them after the October meeting. 

Beyond that, we would maintain the zero to quarter percent 

range for the Federal funds rate that we have maintained now for 

many years. And eventually, as the economy makes further 

progress, we would begin to raise our target for short-term interest 

rates. 

And while we have not laid out a specific timeline for doing that, 

we have given a general principle, which is we will be assessing 

what is our actual progress and then our expected future progress 

toward obtaining the two objectives of maximum employment and 

price stability. So we will be looking at how far we are from our 

objectives and how rapidly those gaps are closing. 

16 

Now that is a matter that we can’t be certain about. We make 

forecasts, but incoming data causes us, over time, to change those 

forecasts. So I can’t be specific about what the timing of an ultimate increase in our target for short-term interest rates would be, 

but we will be assessing incoming information. 

Now, we do give participants in the FOMC—these are not FOMC 

policy statements, but we have provided in the monetary policy report and we provide every 3 months—information about each 

FOMC participant’s assessment of both the economic outlook and 

their views on the likely path of monetary policy. So again, this is 

each individual’s view walking in to our June meeting. 

As a committee we have to transform that into a single policy, 

but it gives some indication, I think. And given their expectations 

for progress in the labor market and inflation, at the beginning of 

our June meeting, FOMC participants, almost all of them, saw it 

appropriate to begin raising our target for the Federal funds rate 

sometime during 2015. The median participant saw the Federal 

funds rate by the end of that year standing around 1 percent. 

So while there is no exact timing, obviously, in 2015, it is in 

some sense roughly consistent with what you said. But market expectations are—but again, I want to emphasize that the actual 

progress we see in the labor market and inflation and our general 

assessment of the labor market could change that over time, so 

there is no mechanical formula and no clear date. 

Mrs. MALONEY. Will the Fed start changing the interest rate on 

excess reserves held at the Fed during this time? 

Mrs. YELLEN. When we decide to raise our target for short-term 

interest rates a key tool will be to raise the interest rate we pay 

on excess reserves. So we would only raise the interest rate on excess reserves when we have determined that the time has come to 

begin raising short-term interest rates more generally. That will be 

a key tool that we will use. 

Mrs. MALONEY. Last week Federal Reserve Vice Chairman Stanley Fischer gave a speech in which he suggested that adding a financial stability mandate to the overall mandates of all the U.S. 

financial regulators could help improve financial stability. Can you 

comment on the effects of adding an explicit financial—I guess I 

will get that response in writing. My time has expired. Thank you. 

Thank you— 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Alabama, Mr. 

Bachus, the chairman emeritus of our committee. 

Mr. BACHUS. Thank you. 

Chair Yellen, let me begin by saying that this will be my final 

Federal monetary policy hearing that I will participate in as a 

Member of Congress because I am retiring at the end of this year. 

During my 22 years of service on this committee, including my 

6-year term as ranking member and then chairman, I have heard 

testimony from Federal Reserve Chairs Alan Greenspan, Ben 

Bernanke, and now, of course, yourself. My observation during 

these times of both prosperity and during times of financial crisis 

is that we have leaders and a professional staff at the Fed who 

have conducted themselves with honor and who have been true 

public servants. 

17 

So let me thank you and your professional staff, as well as your 

predecessors, for serving the people of America in this most important and tremendously demanding position. 

Mrs. YELLEN. Thank you, Congressman. I appreciate that. 

Mr. BACHUS. Thank you. 

We have seen that FSOC, where the Fed is obviously a key player, exercise the authority granted by Dodd-Frank to designate institutions as systemically important financial institutions (SIFIs). 

This has included asset managers and insurance companies, which 

has been somewhat controversial. 

My experience is that there is often a greater resistance to a designation or a ruling when the parties feel they haven’t been consulted or the process is not transparent enough. So one of the approaches that is attracting some interest is to require that companies being considered for a SIFI designation be provided with specific reasons why and also a description of steps they could take so 

they might not be named as SIFIs. And this would be between the 

particular company and the Fed; it wouldn’t be a public discussion. 

Do you agree or would you consider that as a reasonable approach? It would bring greater transparency to the SIFI designation process. And I think laying out a clear methodology actually 

leads to more certainty and confidence in the process, and I think 

would be accepted more readily. 

Mrs. YELLEN. This is clearly a very important thing that happens 

to a company when it is designated, and I believe it utterly has to 

be given every opportunity to understand the logic of why the 

FSOC is thinking that it poses systemic risk and every opportunity 

to present its own analysis of the issues and to interact with the 

staff and having a very good and frank dialogue and back and 

forth. 

I believe that is part of the process. And the firms are given 

every opportunity to intensively interact with the committee and 

its staff before any organization is designated as a SIFI. That is 

completely appropriate. 

Now, in that process there is a great deal of confidential information, so I don’t feel it is appropriate for that to take place in the 

public domain. 

Mr. BACHUS. And I would agree with you. I am talking about a 

give and take between the parties. 

Mrs. YELLEN. I think that is absolutely appropriate. And to the 

best of my knowledge—I have not served on FSOC when any institution has been designated—when the institution gets into the latter stages of the process, there is a great deal of back and forth. 

Mr. BACHUS. Thank you. 

Let me talk about some demographic influences on labor force 

participation, because I know that concerns you; it concerns all of 

us. 

Part of it is the rise in the service sector employment, where we 

have gone to a lot of part-time employment. Some good reasons by 

choice, some not. But also, many analysts think that it is being 

driven in part by an aging U.S. population, particularly as retirees 

exit the workforce. 

18 

Does the Fed take that into consideration when they talk—if 

labor force participation doesn’t pick up and growth does, how does 

that affect your decision to keep rates low? 

Chairman HENSARLING. A very brief answer, please. 

Mrs. YELLEN. I fully agree with your point. Demographics and an 

aging population are driving and should be expected to drive the 

labor force participation rate down. 

So the question is, has labor force participation fallen more than 

would be expected based on demographics? And my personal judgment is yes, it has fallen somewhat more than that, but aging is 

a very important downward force, and that is what I expect going 

forward. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Madam Chair, with the prospect of 0 percent interest rates coming to an end, some have warned that this could unduly hamper 

economic growth. Yet artificially low interest rates pose a real 

threat of creating asset bubbles. 

What has the Fed seen in the market concerning asset prices, 

and does the threat of a bubble outweigh any slowdown in economic growth? 

Mrs. YELLEN. The Federal Reserve has been increasingly and intensely focused on financial stability, and we understand that 

maintaining interest rates at low levels for a long time can incent 

reach for yield or asset bubbles. So we are monitoring this very 

closely, and that is, in part, why I referenced some of these trends 

in my opening testimony. 

My general assessment at this point is that threats to financial 

stability are at a moderate level and not a very high level. Some 

of the things that I would look at in assessing threats to financial 

stability to see if they are broad-based: broad measures of asset 

prices—of equities, of real estate, of debt—do they seem to be out 

of line with historical norms? 

And I think there the answer is no. Some things may be on the 

high side and there may be some pockets where we see valuations 

becoming very stretched, but not generally. 

Ms. VELAZQUEZ. Thank you. 

Mrs. YELLEN. The use of leverage is not broad-based. It hasn’t increased, and credit growth is not at alarming levels by any means. 

Ms. VELAZQUEZ. Thank you. 

Although the economy is recovering at an accelerated pace, many 

experts have warned of the disconnect between stock market gains 

and overall economic growth. What impact are the Fed’s current 

monetary policies having on this phenomenon? 

Mrs. YELLEN. An environment of low interest rates is one factor 

that affects asset prices generally, including equities. And so a low 

interest rate policy I think partially accounts for why housing 

prices have rebounded and also is an influence on equity prices, but 

it is not the only influence. 

The economy is recovering and earnings have been— 

Ms. VELAZQUEZ. But do you find this an issue to be concerning 

to you? Is it concerning to you? 

19 

Mrs. YELLEN. The issue being that monetary policy affects asset 

prices? 

Ms. VELAZQUEZ. Yes. 

Mrs. YELLEN. That is one of the— 

Ms. VELAZQUEZ. The disconnect between stock market gains and 

overall economic growth? 

Mrs. YELLEN. I don’t have a view—the Federal Reserve doesn’t 

take a view as to what the right level of equity or asset prices 

should be, but we do try to monitor to see if they are rising outside 

of levels consistent with historic norms. 

And as I indicated, in spite of the fact that equity prices’ broad 

indices have risen substantially, price equity ratios and other 

measures are not outside of historical norms. And I don’t know 

what the right level of prices is, but in that sense I am not seeing— 

Ms. VELAZQUEZ. Thank you. 

Mrs. YELLEN. —alarming warning signals. 

Ms. VELAZQUEZ. As we all know, the economy has been creating 

jobs at an accelerating pace recently, despite fears that tapering 

the Fed’s qualitative easing could slow the recovery. 

In your opinion, is this strong evidence that the economy has 

turned the corner and now is healthy enough to self-sustain the recovery? 

Mrs. YELLEN. I am optimistic about the economy, and that is reflected in the forecasts that are included in the monetary policy report. We had a very surprising negative growth in the first quarter, 

which is a number that in a way doesn’t seem consistent with the 

underlying momentum in the economy and many indicators of 

spending and production. 

I do think the economy is recovering and that growth is picking 

up and that we have sufficient growth to support continued improvement in the labor market. And we have seen, maybe not 

progress over many years at the pace that would be ideal, but real 

progress that will continue. 

Ms. VELAZQUEZ. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, chairman of our Capital Markets Subcommittee. 

Mr. GARRETT. Thank you, Mr. Chairman. 

I have a couple of questions, Madam Chair. 

Finally, after many, many months, we got responses to the questions that we put to you months ago. One of the questions came 

about because one of the Fed Governors has stated that they believe that a failure of a large broker-dealer would be destabalizing 

to the economy. 

So we asked you, do you support expanding the Fed’s discount 

window access to broker-dealers and other nonbanks during turbulent economic times to expand your regulator. You said no. You 

said, ‘‘I do not favor expanding the Fed’s discount window to 

broker-dealers and nonbanks.’’ 

Instead, you say you support the application of stringent capital 

standards and liquidity requirements, and you also said that you 

support the development of resolution regimes. I get that. 

If those regulations and the resolution regimes do not work, do 

you then rule out access to broker-dealers and other nonfinancial 

20 

institutions to the discount window? Is that what you are saying, 

that you rule that out? 

Mrs. YELLEN. Under the terms of the Dodd-Frank Act, the Federal Reserve is barred from extending discount window lending to 

an individual firm— 

Mr. GARRETT. Right. 

Mrs. YELLEN. —and we are confined to broad-based facilities. 

Mr. GARRETT. Right. So would you rule out, then, extending Section 13(3) as well? 

Mrs. YELLEN. If there were general financial disruption and we 

were in the situation of systemic risk, similar to what we saw during the financial crisis, where we have a general panic— 

Mr. GARRETT. Then you would use 13(3) to allow broker-dealers 

to have access to either 13(3) potentiality or access to the brokerdealer—to the discount window is what you are saying, under those 

circumstances? 

Mrs. YELLEN. I believe a broad-based scheme in the situation of 

systemic risk is a possibility, but it is something that would have 

to be very seriously considered. 

Mr. GARRETT. Right. So we would be actually extending the 

American public backstop to broker-dealers under your Administration, potentially, under the right circumstances, is what you just 

said? That is what I heard. 

Mrs. YELLEN. It depends on the circumstances. But, again, I 

want to emphasize— 

Mr. GARRETT. That is quite astounding, that broker-dealers and 

other nonbanks are on notice that they may have, under the right 

circumstances, 13(3)— 

Mrs. YELLEN. It would have to be unusual and exigent and it 

would have to— 

Mr. GARRETT. Understood. But now we know. 

Secondly, Secretary Lew recently testified about the FSB, and 

after much questioning and answering we asked him, ‘‘What is the 

process?’’ And he said, ‘‘The FSB does not act—acts in a consensus 

manner. 

And we asked, ‘‘Did you, Secretary Lew, consent to the designation of specific globally systemic firms?’’ And he said, ‘‘Yes, I did 

consent to them.’’ 

So my question to you is very simply, did you agree with Secretary Lew? Did you also consent to those designations of globally 

systemic firms, or did you take a contrary view? Did you object? 

Mrs. YELLEN. I have to say I was not at the time involved in any 

way with the FSB— 

Mr. GARRETT. Okay. 

Mrs. YELLEN. —and I am not at this time either. 

Mr. GARRETT. Okay. You do not take part in any discussions 

with FSB as far as the determination of globally systemic— 

Mrs. YELLEN. I have personally not been involved in those discussions. Governor Tarullo is our representative to the FSB, and he 

has been— 

Mr. GARRETT. Governor Tarullo is our representative and not 

you. Has he consented, as far as you know? 

Mrs. YELLEN. He may well have been involved in those discussions and consented. You would have to pose that question to him. 

21 

Mr. GARRETT. Okay. He doesn’t come up to testify. That was one 

of the provisions of our bill, to see whether we could get him to 

start coming up here to testify on that section, but okay. 

Do you believe that with regard to FSOC, the head of the New 

York Fed, Mr. Dudley, is an active participant? Is that correct, with 

respect to FSOC? 

Mrs. YELLEN. I believe he has the status of observer. 

Mr. GARRETT. My understanding is that you have given him active participation status. Is that correct, or is he just an observer? 

Mrs. YELLEN. I am not in a position to make any rules about who 

can or cannot attend FSOC. Those are done by the leadership, 

which is— 

Mr. GARRETT. Well, you allow him to attend, and—would you 

allow members of this committee to attend? 

Mrs. YELLEN. It was not my decision. 

Mr. GARRETT. To allow him to attend? 

Chairman HENSARLING. The time of the gentleman has— 

Mr. GARRETT. Can I just get an answer whether or not it was 

her decision that he should attend? Who allowed him to attend 

these meetings? 

Chairman HENSARLING. Brief answer, please. 

Mrs. YELLEN. I believe the Treasury Secretary. 

Mr. GARRETT. Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from California, Mr. Sherman. 

Mr. SHERMAN. Chair Yellen, we learn a lot from you. Thanks for 

being here. 

Mrs. YELLEN. Thank you. 

Mr. SHERMAN. You also have a chance to learn from us, not because we have any great economic theories worthy of your consideration, but because we represent 60-plus districts from coast to 

coast. We are intensely aware of what is going on in our districts, 

and we prove that biannually. 

And the reports you get from Members in this room as to what 

is happening in their districts are uniform even though our economic theories are disparate and, in many cases, unworthy of your 

attention. 

The economy is worse than your statement indicates. There isn’t 

a person in this room who has waxed eloquently about how everything is going spectacularly in their district. And many, many 

Members have told me and spoken about how in a very large percentage of this country we are still in a recession. 

A second reason for you to push toward more quantitative easing 

and a continuation of low interest rates is that you have very few 

tools left if we slip back into recession, and you have all the inflation-fighting tools still available to you. I think you understand 

that. 

There is a second area where I think you can learn from us, and 

that is not in the monetary policy area, but you are a top bank regulator. We had an exchange back in February in which you described how important it was to loan money in local communities. 

And I explained to you, and I have talked to my colleagues here, 

but your regulators haven’t gotten the memo. You can send them 

a copy of the remarks you made in response to my question in FebVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
22 

ruary. Many, many small businesses can’t get loans even with an 

appropriate risk premium. 

In fact, if you are trying to borrow money at prime plus 5, oh, 

my God. You are terrible. We can’t talk to you. 

Rather than the idea that you are going to make a hundred loans 

and one of them is going to go under default, it is, ‘‘You are going 

to buy a hundred government bonds.’’ And that is not a way that 

a bank can contribute to the economy. 

You may remember back in February we talked about the Financial Accounting Standards Board lease-accounting project, which 

would capitalize all leases and add $2 trillion to the liabilities of 

balance sheets of American business. And at that time you indicated that you would have your staff look at this both in terms as 

to whether you would want to comment on something that other 

economists have said will cost $400 billion to our GDP as companies try to rebalance their balance sheets, and because nobody can 

build a big building without a long-term tenant, and if you penalize 

companies for signing long-term leases you are not going to have 

long-term tenants. 

I wonder if you could at least recommit to having your staff look 

at that, and perhaps be willing to comment on it? Because those 

folks at the Financial Accounting Standards Board, the slightest 

hint from you or your staff would be very instructive to them. 

And if they won’t listen to you, at least you could price into your 

economic projections economic risk that only an accountant would 

bring to your attention. I wonder if you can comment on the lease 

accounting? 

Mrs. YELLEN. We will have a look at that and get back to you. 

Mr. SHERMAN. Okay. As to designating the SIFIs, I hope that you 

would focus not on the size of an entity’s assets but the size of their 

liabilities. It was Lehman Brothers’ inability to pay its liabilities 

that was the final straw that broke the economy. 

If you had some blue-chip name that everybody loved and so they 

were able to issue trillions of dollars of credit-default swaps, I 

would say they would be a SIFI, and they would be particularly a 

SIFI if they didn’t have a lot of assets because their failure would 

have a substantial effect on our economy. 

So I hope that you would look at the liabilities and contingent 

liabilities of an entity, not their assets. And that would argue for 

not designating as a SIFI an unleveraged mutual fund since they 

don’t have liabilities. 

Mrs. YELLEN. FSOC is, in its analysis, just as you said, trying 

to identify whether there are specific and well-defined channels by 

which the failure of a particular organization would have spillovers 

to the rest of the financial system that would be severe. And it is 

not just a question of size and not just a question of the assets they 

hold. 

But for example, if there are liabilities, and if they are highly 

runnable, and they are a highly-interconnected firm, that would 

point in the direction of systemic risk, as you indicate. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Housing and Insurance Subcommittee. 

Mr. NEUGEBAUER. Thank you, Chairman Hensarling. 

23 

Chair Yellen, thank you for being here. 

I want to go back to something you said in 1995. You said, ‘‘This 

policy, which fits the behavior of this committee, is an example of 

the type of hybrid rule that would be preferable, in my view, if we 

wanted a rule. I think the Greenspan Fed has done very well by 

following such a rule and I think this is sensible for central banks 

to do.’’ 

But earlier you said, ‘‘I am not aware of any literature that establishes that a central bank adopting a rule, whether it makes it 

public or not, is the most desirable way to run monetary policy.’’ 

So were you for it in 1995 and now you are against it in 2014? 

I am having trouble reconciling that. 

Mrs. YELLEN. As I said also this morning, I think simple rules 

can be a helpful guide and starting point in thinking about the appropriate stance of monetary policy. I said that then and I continue 

to think that now. And I will say that before every FOMC meeting, 

I review the recommendations of a number of sensible, simple 

rules. And so as an input, I regard this as valuable. 

Now during the time period that I was referencing in that 1995 

statement, that was the so-called great moderation and there actually had been quite a lot of literature looking at the different ways 

to run monetary policy that established that simple rules, like the 

Taylor Rule, really could do quite a good job—maybe not the best 

possible, but quite a good job of delivering good economic performance. 

And behavior during that time was not bound by a rule, but I 

think it was good policy. It had the characteristic that pretty systematically, as the labor market tightened, the stance of policy became tighter; and as inflation rose, policy became tighter, and 

tighter enough that real interest rates—the nominal interest rates, 

were raised more than inflation. 

These are sensible ways to conduct monetary policy. Policy 

wasn’t bound by a formula. It didn’t adhere exactly to a mathematical formula. There were sometimes other factors that were important and factored in. But it was sensible. 

But now in the more recent period—and I remain—I continue to 

think it is useful to look at simple rules and think about their recommendations. What I oppose is tying monetary policy to a rigid 

mathematical formula to any rule. 

And we have now lived through a period where those rules would 

have performed just miserably. And if we had followed them we 

would have had even more dreadful macroeconomic performance 

than the disappointing recovery we have enjoyed. 

I think that if the kinds of analysis that had been performed earlier that showed that these rules worked well, if you rerun this, 

that type of analysis through the period of the last 6 or 7 years, 

you would find that they would not have performed well. Even so, 

I hope that as the economy becomes more normal and as interest 

rates get back to more normal levels, that the world will be less 

volatile. I continue to think that the recommendations of such rules 

are worthwhile to look at. 

I have given a number of speeches in recent years in which I 

have discussed those rules and their recommendations explicitly, 

and it is something I wouldn’t do if I thought there wasn’t some 

24 

value in it. On the other hand, I have tried to explain in a number 

of speeches why I think they would not have worked and would not 

have been appropriate in the circumstances we have been living— 

Mr. NEUGEBAUER. I don’t mean to be rude here, but—so what I 

hear you saying is that the rule structure is not totally unacceptable in the Fed scheme here, but you have some— 

Mrs. YELLEN. Not rigidly tying our hands to something, but it is 

useful input. We have models. We have forecasts. We have a number of inputs into the policy process. And a rule is—rules, a collection of them, do provide useful input and we do take it into account. But I just would not go further than that. 

Mr. NEUGEBAUER. Thank you. 

And I guess my time has expired, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. Mr. Chairman, I want to 

ask unanimous consent to submit a report for the record from 

Americans for Financial Reform, dated July 10, 2014, which I will 

refer to in my remarks. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Welcome, Madam Chair. Thank you for your willingness to participate here, and thank you for your patience. 

Last month Federal Governor Tarullo gave a speech in Boston 

and he described the stress test for the major banks as the cornerstone of the regulatory response to the recent financial crisis. Do 

you tend to agree with that? 

Mrs. YELLEN. I think they have been very important in strengthening supervision. 

Mr. LYNCH. Right. The idea of the stress tests, as I understand 

them, is that, well, the value in that annual stress test is that we 

inspect the capital reserves, we inspect the risk management policies within the banks, and when they pass—ideally, when they 

pass the stress tests, there is actually value in passing that stress 

test because they have a stamp of approval. Is that the idea behind 

this? 

Mrs. YELLEN. I think it is really something more than what you 

just said, that we are using our own models and judgments to take 

a very detailed look at all of the asset holdings and transactions 

and exposures of a large financial firm and we are attempting to 

assess, in a well-specified, highly adverse stress scenario, an economic scenario that is extremely difficult—we are making our own 

very detailed assessment of whether or not that bank would have 

sufficient capital to continue to meet the lending needs of the economy and to continue to function. 

And on top of that, we are insisting that the firm demonstrate 

to us that they have the ability to do that kind of analysis themselves and in that way— 

Mr. LYNCH. Okay. 

Mrs. YELLEN. —judging their risk management capabilities. 

Mr. LYNCH. You put it much better than I could, but I agree with 

everything you just said. 

25 

So the legislation that was offered, called the Federal Reserve 

Accountability and Transparency Act, would require the Fed—in 

section four, would require the Fed to publish—to give the information to the major banks that are being tested, all of your methodologies, all of the—I will read it here—the hypothetical—excuse 

me—all of the alternatives that are—and public notice and comment rulemaking in advance of any stress test that detail the exact 

models, the methodologies, and assumptions to be used in the 

stress test. 

So you would have to give that under this new bill. You would 

have to give that to the banks. 

You would also have to allow them to comment and to help design the test that you are going to give them. 

Now in my mind, if you are going to give the people the answers 

to the test, if you are going to let them design the test, won’t there 

be an assumption that they can now game this test? 

Mrs. YELLEN. Precisely. And that is exactly why we don’t give 

them the models. We want them to, in a sense, show us their work 

and show us that they have the capacity in their organizations to 

make well-reasoned judgments about the risks that they face. 

We absolutely don’t want to give them the answers. And when 

you give the answers then you don’t get to see the work that demonstrates that the student has learned the material and can apply 

that kind of logic in the unique circumstances that will face that 

firm, as opposed to just the scenarios that we have laid out. 

Those firms need to be able to analyze their own unique and specific risks that they face. We set out a couple of scenarios and we 

do detailed analysis, but what are the unique stresses that could 

afflict a particular firm with particular characteristics? 

We want to make sure they have models that will serve to analyze those situations. And they can’t just use our models for that. 

They need to show us that they understand what the unique 

stresses are that could hit those firms as well. 

Mr. LYNCH. I thank you, and I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Georgia, Mr. Westmoreland, for 5 minutes. 

Mr. WESTMORELAND. Thank you, Chair Yellen, for being here. 

I want to follow up just on one of the things that Mr. Garrett— 

one of your answers. You said that Mr. Tarullo is the Federal Reserve representative to the Financial Stability Board. You are his 

boss and you are the Chair of the Federal Reserve. Are we to really 

believe that the gentleman acts on his own without any direction 

or oversight from you? 

Mrs. YELLEN. I think Congressman Garrett referred to decisions 

that were made about naming global systemically important banks, 

and that occurred before I was Chair. I am sure that he consulted 

with Chairman Bernanke. 

Mr. WESTMORELAND. Okay. So he is not independent? 

Mrs. YELLEN. Well, no. The Chairman obviously has responsibility. 

Mr. WESTMORELAND. Okay. And just to go back to the independent part of the Federal Reserve from the Executive Branch, I 

am sure you are aware that of the 15 Chairmen in the Fed’s history, 10 of them have either served at Treasury or the White 

26 

House. And it seems to be a revolving door-type policy between the 

Federal Reserve and the Treasury Department, and that it actually 

continues today. 

And the Fed staff has gone back and forth into the Treasury Department, including in the current Administration. So do you believe that this revolving door poses any risk whatsoever to the 

Fed’s independence? 

Mrs. YELLEN. I think the Fed’s independence is extremely important and I have never in my many years in the Fed seen anything 

occur that led me to believe that it had at any time been threatened. And while I understand the point you are making, it is essential that the Federal Reserve remain independent. 

Mr. WESTMORELAND. Okay. And that kind of leads me— 

Mrs. YELLEN. I perceive that— 

Mr. WESTMORELAND. And I appreciate it. And that kind of leads 

me to the next question. 

We here in Congress have been having a vigorous political debate 

about infrastructure spending and unemployment benefits to continue. And in your Senate testimony, you dived into this political 

debate, expressing your support for more infrastructure spending 

in response to questions from Senator Menendez. 

In a recent letter to Representative Sinema, who is a member of 

this committee, you expressed the virtues of extending unemployment benefits. We will continue to debate the merits of this, but 

do you have any reservations that carrying the water for the Democrats on this fundamentally political issue risks the Fed’s independence, impartiality, and indeed, its credibility? 

Mrs. YELLEN. I don’t think it is appropriate for me to weigh in 

on these issues and I don’t— 

Mr. WESTMORELAND. Why did you? 

Mrs. YELLEN. —interpret—I do not interpret what I said about 

infrastructure to have been telling Congress what I think it should 

do. I commented, as I recall, to Senator Menendez on the stance 

of fiscal policy and the way it had been affecting the economy. 

Mr. WESTMORELAND. So you don’t think we need to spend on infrastructure? 

Mrs. YELLEN. I— 

Mr. WESTMORELAND. And that wasn’t what you meant by your 

comment? 

Mrs. YELLEN. I believe it is entirely appropriate for Congress to 

debate and decide that. 

Mr. WESTMORELAND. Okay. Was it appropriate just to even talk 

about it? Didn’t you answer Senator Menendez that, ‘‘it is up to you 

all, it is not up to me?’’ 

Mrs. YELLEN. I believe that was the spirit, although I did comment on the fact that fiscal policy had posed a significant drag to 

economic growth over the last several years. 

Mr. WESTMORELAND. Okay, quickly, the chairman’s staff and the 

committee staff discussed the Federal Reserve’s role in operating a 

payment system for the Treasury Department with the New York 

Fed staff. 

Mrs. YELLEN. I’m sorry, what system? What type of system? 

Mr. WESTMORELAND. The role in operating a payment system for 

the Treasury Department. 

27 

Mrs. YELLEN. A payment—okay. 

Mr. WESTMORELAND. And they discussed it with the New York 

Fed staff who operate that system, and the staff of the New York 

Fed described the Fed’s role there as Treasury’s agent and described the Treasury Department as the Fed’s client. 

Is that a good characterization—just a yes or no—of your relationship? 

Mrs. YELLEN. The Federal Reserve is the fiscal agent of the government, and in that sense, it is correct. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

I am over here in the corner, Mrs. Yellen. 

I would like to just take us briefly in another direction, because 

we don’t operate in a vacuum in the United States. To what extent 

are the developments in various parts of the world that are taking 

place now, in Ukraine, in Iraq, possible caliphate there, the IsraeliPalestinian situation, Syria. The world is aflame, and I am wondering what effect this would have on our global economic growth 

and especially the United States economic outlook. 

But something that is going a little bit unnoticed is another situation, and that situation is Iran. 

By Sunday, as the deadline, and their decision and agreement is 

supposed to come out. And in collaboration with all of these other 

hot spots that are happening around the world, what would be the 

global impact in terms of economic growth, and where would the 

United States be? I know you and Treasury talk in concert on this, 

and particularly Treasury, which is basically enforcer of our sanctions, which is based largely on, quite honestly, the well-being of 

the United States economy. 

What would happen Sunday if they don’t come up with an agreement and ask for an expansion, or they do come up with an agreement that has nothing to do with dismantling and Israel will not 

accept it? 

So Sunday presents a very timely issue and I thought we might 

benefit from your thoughts on that, including the other things that 

are happening in Iraq, Syria, Israel and so forth. 

Mrs. YELLEN. Certainly, the developments that you are talking 

about present risk to the United States through any number of different channels. In trying to focus simply on the potential economic 

impact of these developments on the United States, I would be 

thinking particularly about energy markets, that we have seen 

some disruptions in energy supplies, and obviously there could be 

much larger disruptions in energy supplies. Such developments 

clearly would have an impact on the United States and on the global economy more broadly. 

We also look at whether or not there are significant direct financial exposures, for example, of our banking system to particular regions that are troubled. In the case of the set of countries you mentioned, my assessment would be that the direct financial implications for our banking system would not be large, but in times of 

global unrest it is very normal to see disruptions in risk aversion 

rise in financial markets generally, and that would certainly, were 

28 

that to occur, have spillovers to the United States and to our outlook. 

Mr. SCOTT. Okay. Thank you. 

Now let me ask a question on your asset purchase program, 

which I think has done a good job in two important areas. I think 

it has made a very major contribution to lowering the unemployment, creating jobs, and very significantly in the housing market 

in terms of reducing mortgage rates. 

Is that true? Is that pretty much— 

Mrs. YELLEN. I believe it has made a positive contribution— 

Mr. SCOTT. Okay. 

Mrs. YELLEN. —in the ways that you have mentioned, yes. 

Mr. SCOTT. Okay. I understand that you are going to end that 

program within a couple of months. So the issue is, would that 

have a downturn impact on the progress we have made in both unemployment and housing with this program? 

Mrs. YELLEN. We are continuing to purchase assets, so in that 

sense we are continuing to add stimulus. And even if we stop our 

purchases, our large holdings will be supporting lower long-term 

interest rates and, I think, keeping mortgage rates lower, and will 

continue to provide a positive for the housing market. 

If we lacked confidence that the labor market and the economy 

will continue to improve, we probably would not have been comfortable winding down the asset purchase program, but I do think 

the economy is improving, the labor market has improved, and will 

continue to do so. 

Mr. NEUGEBAUER [presiding]. The time of the gentleman has expired. 

Mr. SCOTT. Thank you very much, Chair Yellen. 

Mr. NEUGEBAUER. I now yield to the chairman of our Oversight 

and Investigations Subcommittee, Mr. McHenry. 

Mr. MCHENRY. I thank the chairman. 

Chair Yellen, thank you for being here. 

Mrs. YELLEN. Thank you. 

Mr. MCHENRY. I know these days are long, but I wanted to ask 

you about something that I care about, which is Section 113 part 

D of Dodd-Frank. And what this in essence says is that you will 

have an annual review of the SIFI designation, right, that there is 

a mandate under Dodd-Frank that no less than annually there will 

be an undertaking by FSOC to review those SIFI designations for 

non-bank financial institutions. You, as well as Secretary Lew, 

have both pledged that you are committed to that process, and I 

assume that remains the case. 

The question I have is what metrics are you going to use for that 

annual review? 

Mrs. YELLEN. I have not been involved in that. It hasn’t come to 

FSOC yet and I am not certain of exactly what they will look at. 

I would assume that they would look at some of the same metrics 

and whether or not those have changed, that they used in deciding 

to designate those firms— 

Mr. MCHENRY. I would appreciate it if you would follow up with 

me on this to give us an understanding of what that is. 

29 

The 4-year anniversary of Dodd-Frank is next week, and for us 

to not have an annual review process set up on the SIFI designation is concerning. 

Related to that, you also have, under Section 165, the opportunity for remedies under the—after the CCAR process and the living will process, to seek remedies from firms. Both Governor 

Tarullo and former Governor Stein have told us that the CCAR 

process is moving from a wartime setting to more of a peacetime 

setting and there is a bit of tension between customization and 

standardization under the CCAR metrics. 

So once you go through the CCAR process, once you get the review of this stuff, at the end I am sure you and your staff pore over 

the way to improve it for the next time. Are there some key 

takeaways that we can understand from the CCAR process? 

Mrs. YELLEN. I’m sorry, you are talking about CCAR? You mentioned living wills as well. 

Mr. MCHENRY. I’m sorry. My next question is about living wills, 

so I—yes, I put those two together. 

Mrs. YELLEN. You are talking about the CCAR process? 

Mr. MCHENRY. My question is about the CCAR process. My next 

question, to give you a heads up, is on living wills. 

Mrs. YELLEN. Okay. 

I think we have learned a lot from the CCAR process and we 

have refined our own modeling techniques and I think worked with 

the firms to clarify over time what our expectations are for their 

risk management modeling capabilities, and I think we have had 

good back and forth that is leading to improvements in how we 

conduct this. 

Mr. MCHENRY. Okay. 

About living wills, you said yesterday in front of the Senate—I 

know one Senator asked you this question rather directly and apparently wasn’t satisfied with your answer about living wills—that 

you continue to work to improve living wills. Can you give us greater clarity on that? Because you judge whether or not living wills 

are credible, right? And if you are continuing to work with firms 

on their living wills, does that mean that they are currently not 

credible? 

Mrs. YELLEN. Well, we do not make some annual determination 

as to whether or not they are credible. We may make a determination. We are not required by the statute, but the FDIC and the Fed 

can make a determination at some point that the living will is not 

credible, of a particular firm, or that it would not facilitate resolution. 

My own understanding of the process is that this is a difficult 

and new responsibility for the banking organizations and for us, 

and that we would have iterations back and forth with the firms 

in trying to set out a set of expectations, look at what they are provided, give feedback, and set out a set of expectations we want to 

see. 

Mr. MCHENRY. So if the living wills are accepted, then therefore 

they are credible. 

Mrs. YELLEN. Accepted does not necessarily mean they are credible. We can determine under Dodd-Frank— 

30 

Mr. MCHENRY. That is disconcerting because if living wills are 

intended for that purpose, to help unwind these firms and be a 

road map for unwinding these firms in the advent of a cataclysmic 

event, then they should be credible. 

Mrs. YELLEN. We will work with the FDIC to give these firms 

feedback on what we want to see them do to facilitate resolution. 

And of course, that is the objective. But although we are close, we 

have not even finalized feedback to the firms on their second round 

submissions. 

Chairman HENSARLING. The time of the gentlemen has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

ranking member of our Oversight and Investigations Subcommittee. 

Mr. GREEN. Thank you, Mr. Chairman. 

Good morning, Madam Chair, and welcome again to the committee. I have three questions, each of which could easily consume 

5 minutes of your time. And I do not believe that I will get through 

all three but I will ask, if possible, that you give a laconic answer 

to each. 

The first, you have used the term ‘‘unusual headwinds,’’ and I 

have noted that the term ‘‘fiscal policies’’ has been associated with 

this. Would you, as tersely as possible, explain some of the unusual 

headwinds that we have faced or are facing? 

Mrs. YELLEN. Tight fiscal policy is one of them. Although there 

was a stimulus for a number of years, in more recent years fiscal 

policy, in addressing deficits and attempting to reduce deficits, has 

created drag on economic growth. And that is unusual in times like 

these. 

In addition, the system of housing finance and the willingness of 

residential mortgage lenders to provide credit, the standards 

should have escalated, they have escalated, but it has now become 

the case that any borrower without a pretty pristine credit rating 

finds it awfully hard to get a mortgage. And I think that there are 

a number of reasons for it coming out of the crisis, but I think that 

is a headwind. 

So credit availability for some purposes, I think is diminished 

relative to historical norms. 

Coming out of this crisis, we also see that households have unusually depressed expectations about their own future income 

gains, and I think that weighs on their feelings about their own 

household finances and is holding back consumer spending. 

So those are some of the things that I would see as headwinds 

from the crisis. In addition, productivity growth has really been 

quite slow for a number of years. 

Mr. GREEN. I am going to abandon my other two questions because I now have a follow-up to this one. 

Mrs. YELLEN. Okay. 

Mr. GREEN. You indicated that these fiscal policies are unusual 

for times such as these. What would you expect usual fiscal policies 

to be for times such as these? 

Mrs. YELLEN. I think historically, when the economy has been 

weak, fiscal policy has, at least on average, provided greater stimulus than it has over the last several years. 

31 

And I understand there are reasons that Congress has chosen 

this course. But simply what I would see as a factual matter, the 

degree of drag from fiscal policy in a high unemployment situation 

has been unusual. 

Mr. GREEN. And could you kindly give an example or two of the 

kinds of fiscal policies that historically have been employed in 

times such as these? 

Mrs. YELLEN. Typically, there would be tax cuts and increases in 

spending that would allow automatic stabilizers to go into effect in 

circumstances where unemployment was high. 

It has been very rare—we haven’t, in the post-war period, had 

really a recession that has been as long and as deep as this one, 

so it has been an unusual period. 

Mr. GREEN. Thank you. 

I will take one more question and just ask you about indicators. 

We have leading indicators, lagging indicators, and, of course, we 

have coincidental indicators. 

I try to follow these, but what I would like from you is just as 

you look at them in general, could you give me just an assessment 

of where these indicators seem to indicate we are going? 

Mrs. YELLEN. I see most indicators that I look at in the economy 

as suggesting improvement. I look at things like industrial production, the labor market, auto sales. What is happening in the housing sector, that may be an exception that we don’t see a lot of improvement there. 

But most measures of spending in the economy, consumer and 

business attitudes, through all of those I think we see positive 

signs. 

Mr. GREEN. Thank you very much. 

Thank you, Mr. Chairman, I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Wisconsin, Mr. Duffy, vice chairman of our Financial Institutions Subcommittee. 

Mr. DUFFY. Thank you, Mr. Chairman. 

And, Madam Chair, thank you for being here. I want to commend you for the last time you were here, staying for as much time 

as we would need to have everyone on the committee ask you questions. I thought that was fantastic. I was hoping that was going to 

be a continual policy, but maybe it was not as pleasurable for you 

as it was for us. 

But I appreciate you being here today. 

On June 18th Representative Perlmutter and I, along with 84 of 

our colleagues, wrote a letter to the President asking that he appoint someone to the Federal Reserve with banking experience. I 

would ask that that letter be included in the record. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. DUFFY. And I know yesterday Senator Vitter asked you 

about this very issue, and I think you indicated your support that 

we—you would support having someone with banking experience, 

community banking experience, on the Fed Board. Is that correct? 

Mrs. YELLEN. Yes, I would. 

Mr. DUFFY. And it is fair to say that your role has expanded. 

Traditionally you were dealing with monetary policy, but through 

32 

Dodd-Frank and the Fed’s own action you have had an increased 

role on the regulatory side, correct? 

Mrs. YELLEN. Yes. 

Mr. DUFFY. And, we are familiar with your dual mandate of maximum employment and price stability. Is it almost fair to say there 

is an unwritten third mandate that would bring us to protecting 

the country from systemic risk? 

Mrs. YELLEN. I think that is fair to say for the Federal Reserve, 

although it is not something that applies specifically to monetary 

policy, but we have a number of different tools, and I interpret that 

as an unwritten third mandate for the Federal Reserve. 

Mr. DUFFY. Right. And kind of talking about that, right, there 

is—you have the monetary policy side and you also have the regulatory side. And just on the good government side for us, we get 

concerned, not about your blackout period during the FOMC meetings; we agree that you should have the blackout period. 

We do get concerned in Congress when you take the blackout period that applies to monetary policy and when we ask you to come 

in and talk about the regulatory side, you use the argument on 

monetary policy and the blackout and use if for— 

Mrs. YELLEN. We have no blackout period that applies to anything other than monetary policy in the economy. There is no 

blackout period with respect to supervision and regulation. And, it 

is conceivable that you asked someone to testify and they had a 

problem—I don’t know what specifically you have in mind here, but 

a— 

Mr. DUFFY. Yes. I— 

Mrs. YELLEN. —blackout period does not apply to supervision 

and regulation. 

Mr. DUFFY. Thank you, and I would agree with you. It does not 

apply. 

But I would just reference, we had a December 2012 meeting— 

and there are a number of examples, but in December 2012 we 

wanted to have a hearing on Volcker and we didn’t get a witness 

because the blackout period was cited. 

So just if you would take a look at that, we want to make sure 

that there is a blackout period that does not apply to the regulatory side. 

Mrs. YELLEN. It does not apply. 

Mr. DUFFY. Okay. 

If you haven’t noticed, this side of the aisle gets very concerned 

about the debt. I think that is why the chairman at our hearings 

will put up the fact that we have an almost $17.6 trillion debt. And 

by way of your accommodative policy, quantitative easing, we have 

had historically low interest rates, you would agree. 

Today I think to the Budget Committee we will pay $227 billion 

a year to service our debt. And you would agree we pay historic low 

interest rates on that debt, correct? 

Mrs. YELLEN. Yes. 

Mr. DUFFY. Have you taken a look at what it would cost to service the debt if interest rates go to historic norms? 

Mrs. YELLEN. I don’t have those calculations in front of me, but 

certainly the Congress should be thinking about the fact that over 

33 

time, as the economy recovers, interest rates will move back up to 

more normal levels. 

Mr. DUFFY. And the cost to service that debt does not stay at 

$230 billion. Even if we were able to stop that clock from turning 

and we were able to hold it at $17.6 trillion, the cost to service that 

debt is going to increase dramatically when interest rates go up, 

correct? 

Mrs. YELLEN. It will certainly increase. 

Mr. DUFFY. So, there is not a correlation— 

Mrs. YELLEN. Yes. Higher interest rates will increase the cost of 

servicing that debt. 

Mr. DUFFY. Right. 

And some of the projections I have seen, if the debt stays the 

same it brings us to around $500 billion, $550 billion a year, an 

additional $300 billion that doesn’t go to whether we are building 

our defense, whether we are using that money for food stamps, the 

social good of the country. 

And I think it is important that the country understand that 

there is a consequence for the spending binge that this town has 

gone on and that we will pay it as rates go up and it will have a 

significant impact on our budget in our out years, which might 

start, as you have indicated, next year. 

Thank you for your testimony. Thank you for your honesty in actually answering our questions. I appreciate that. It is very nice 

and refreshing. 

With that, I yield back. 

Mrs. YELLEN. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Madam Chair, thank you for being here. 

I want to talk about unemployment because that continues to be 

a major concern of mine and, frankly, a major concern in the district that I represent. Obviously, the macroeconomic situation is 

thriving, but when it comes to unemployment, particularly for minorities, it is still almost in recession levels. 

And I am wondering if you think that is some kind of a structural unemployment issue, or do you believe in the, as it is called, 

Luddite, is that how you— 

Mrs. YELLEN. Luddite? 

Mr. CLEAVER. Yes. 

Mrs. YELLEN. I think the labor market is afflicted both by weakness in the overall economy, and so things should broadly improve 

as the economy strengthens and the unemployment rate and other 

broader indicators come down. But on top of that, there are also 

structural factors that are currently, and have for a long time been, 

creating problems for many, many American families. 

Luddite tends to refer to technology, and we have seen a widening of the income distribution, the wage distribution in the 

United States, going back to the mid-1980s. Economists have been 

debating the causes, and they do see technological changes that 

have favored skilled workers as being one of the causes of a widVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
34 

ening income distribution. To some extent, globalization probably 

also plays a role and there may be other factors. 

But I think when we think about all of the pressures that 

middle- and lower-income families in the United States are facing, 

some of them come from the generally weak economy, and I think 

that is the part the Federal Reserve can contribute to. But there 

are deeper adverse trends at work on top of that, and perhaps they 

have even been exacerbated during this downturn. 

Mr. CLEAVER. Some economists seem to believe that as technology expands, it will create more jobs than it will destroy. Do you 

embrace that economic theory? 

Mrs. YELLEN. I think the total number of jobs in the economy is 

not just determined by technology; it is determined by macroeconomic policy. I wouldn’t believe people have for centuries worried that advancing technology, for example, would destroy jobs 

and people would become unemployed just because technology enables more to be produced with fewer workers. 

Time and time again, we have seen that is not the case, that 

even with productivity growth and improving technology we can 

have jobs with appropriate policy for people who want to work. So 

I don’t endorse that. 

But patterns of technological change can favor some groups in 

the labor market and disfavor other groups in the labor market. 

And many economists have been writing about the fact that socalled skill-biased technical change—in part, the use of computers 

and new information technologies—has raised the productivity in 

the income-earning capacity of more-skilled workers and has 

worked to the disadvantage of less-skilled workers. 

So technological changes can produce winners and losers, at least 

in a relative sense. 

Mr. CLEAVER. Yes. The latter—in restaurants, for example, I 

have seen that. I have said here in the committee before, I went 

to a restaurant in Cape Girardeau, Missouri—I am from Missouri—where you order your meal from the table through a computer, which means that there is no waitress or waiter with that 

job now. 

That still doesn’t answer, for me at least, the question about a 

cure for the unemployment levels that are so high in urban centers, 

even if you are a college graduate. If you are an African-American 

or a Latino college graduate you are still going to have a difficult 

time getting a job. 

Now, there may be some sociological—thank you, Mr. Chairman. 

Mrs. YELLEN. I hope that will improve in a stronger economy. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Indiana, Mr. 

Stutzman. 

Mr. STUTZMAN. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here today and for your 

testimony. I would like to talk a little bit about the dual mandate. 

And your comments and your testimony are that you are making 

progress towards the Federal Reserve’s objectives of maximum employment and price stability. 

One of the things that we are starting to see in northeast Indiana is there is demand for labor, and even some wage increase. 

35 

One of the concerns that I have is in the long term, how do you— 

I believe that the dual mandate is conflicting and would like to 

hear some of your thoughts on how do you decide when is the right 

time to increase interest rates? How do we grow the economy but 

keep inflation in check? 

One of the things that I do believe is that the dollar is a unit 

of measure. It is something that we use to measure a current 

value. Shouldn’t it be stable just like any other measurement, 

whether it is a foot, hour, pound? Shouldn’t it be stable like those 

measurements? 

Mrs. YELLEN. Almost every central bank that has an explicit inflation target has chosen a low positive number as their objective 

for inflation rather than zero, and there are a number of reasons 

for that. 

One reason is that if zero is the target, one is bound to have episodes of deflation, which can be associated with very highly adverse 

outcomes, which almost every country wants to avoid. 

Mr. STUTZMAN. So let me get to inflation. The Fed’s favorite 

measurement of inflation is the PCE deflator. Is that right? 

Mrs. YELLEN. Yes. 

Mr. STUTZMAN. Okay. Is that a leading coincident or is it a lagging indicator? 

Mrs. YELLEN. I am not sure I quite understand what that means. 

Mr. STUTZMAN. How do you gather information? What information are you gathering to then declare that we are seeing inflationary pressures? 

Mrs. YELLEN. The PCE price index is issued. Data on it comes 

out every single month that is produced by the Bureau of Economic 

Analysis. So we have monthly data on it. 

We are measuring, and the Bureau of Labor statistics is going 

out and collecting data on a wide range of goods and services that 

they incorporate into the consumer price index. So we have pretty 

good real-time data on prices in the economy. 

Mr. STUTZMAN. Is wage growth that part of the calculation? 

Mrs. YELLEN. It is not explicitly part of inflation, but in trying 

to forecast inflationary pressures, one question is, what is the price 

level or inflation now? Another question is, what is its likely trajectory over time? 

And in trying to understand and forecast where is inflation 

going— 

Mr. STUTZMAN. How much are wage increases calculated into inflation? 

Mrs. YELLEN. It doesn’t directly enter into inflation, but the 

prices of some goods, and particularly services, depend very heavily 

on the cost of labor. So it is an important— 

Mr. STUTZMAN. So would the cost of— 

Mrs. YELLEN. —influence on the rate of inflation. 

Mr. STUTZMAN. So we are trying to get wage increases. Is that 

correct? 

Mrs. YELLEN. We are trying to hold stable, or to have 2 percent 

growth in an index of consumer— 

Mr. STUTZMAN. But why wouldn’t we want unlimited wage increases? Why wouldn’t we let the market drive wage increases? 

Mrs. YELLEN. We are letting the market drive wage increases. 

36 

Mr. STUTZMAN. But if we— 

Mrs. YELLEN. We don’t have a target for wage increases. We 

have to target for increases in the prices— 

Mr. STUTZMAN. Am I not understanding that wage increases 

would then factor into inflationary pressure, and then you would 

take that into calculation for interest rates? 

Mrs. YELLEN. We have an objective for a price index that is a 

broad measure of the cost of a basket of consumer goods to the typical American consumer, and we are trying to achieve a longerterm objective of 2 percent for that. Looking at wage behavior, we 

don’t have a target for wage increases, but wage increases can be 

a determinant of inflation of goods and services and have predictive 

power for inflation in the future. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. I thank the chairman and the ranking member. 

Good morning, ma’am. It is good to see you again. 

Just with regard to this issue of wage increases and the implication that they could be a driver of inflation, could you speak on the 

relationship between increases in wages and productivity? And if 

you have an increase in work productivity, you could also have increases in wages that are not inflationary. Could you comment on 

that? 

Mrs. YELLEN. That is certainly true. And often, instead of looking 

at just wages, we would look at a different measure called ‘‘unit 

labor costs,’’ which compounds together both productivity or output 

per hour and wage or compensation costs. 

And that is a broader measure—taking account of productivity of 

what does it cost or how is the cost changing over time, of what 

firms need to pay basically to produce a certain amount of output. 

So certainly productivity is a key factor and not only wages. 

Over the last several years, what we have seen is that real 

wages, or wages in real terms, are not growing as fast as productivity. 

Mr. ELLISON. Thank you for making that point. I was going to 

ask you, but you anticipated my question, which is that we have 

room for wage increases, given our rate of productivity in this economy. And I would argue that wages are depressed and sometimes 

you need government to intervene in labor markets through—in 

minimum wage in order to catch up because there is no equality 

of bargaining power, given the decline of union representation in 

our country. 

Anyway, I have to ask you a question on behalf of my constituents. I represent a very large percentage of people whose roots are 

in Somalia, and I am very proud to represent that community. 

One of the problems we have been having is that because of certain regulations like the PATRIOT Act, the Bank Secrecy Act, and 

others, that the regulatory—I hate to use the term ‘‘regulatory burden’’ because that sounds so Republican, but the regulatory burden, 

okay—it is my move on bipartisanship today—is such that a lot of 

the banks that facilitate these money-wiring transfers are opting 

out of that market. 

37 

Usually we are not talking about them remitting a lot of money, 

and the banks tell me they do it but it is just expensive and the 

liability associated with making a mistake is pretty high when it 

comes to having to do all the documentation of knowing your customer. 

What can be done? Because we have hardworking people who are 

trying to send money back home to their families, and our government correctly is trying to stop terrorism financing, which I completely support. But in so doing, a lot of folks are very hard-pressed 

to get money back home. Can you speak to this issue? 

Mrs. YELLEN. This is an issue that the Federal Reserve has been 

aware of and it has been discussed, I know, on an interagency basis 

for a number of years. It is certainly a legitimate need to make remittances to Somalia, and I think part of the issue is with the need 

to also manage money-laundering and terrorist-financing risks. 

This is a hard issue. I would say the Federal Reserve—I think 

it is important to understand, the Federal Reserve absolutely does 

not prohibit businesses from providing remittances to Somalia. To 

the extent that the banks we supervise are involved with customers who are in this business, we would supervise to make sure 

that they are abiding with BSA/AML requirements. But we are not 

prohibiting banks from serving the needs of these customers. 

Now, it is a decision that they make whether or not they want 

to take these risks. And, I know—and this is not the only area 

where this comes up—some firms may be reluctant to undertake 

those risks. 

Mr. ELLISON. Forgive me, Madam Chair, because my time is running short, but I think that one of the ways to solve this problem 

is for some developed governments like ours to engage with the Somali government, which seems to be getting its feet on the ground, 

and help them stand up their central banking system so that it can 

meet international standards. I think this would be money well 

spent to help them get their processes in order because every 

penny that Somali Americans send to their families is a penny we 

don’t have to send in foreign aid. But we are not going to stand 

by and let people starve, so we will step in when we need to, and 

remittances take a lot of pressure off. 

Thank you very much. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

And the Chair would note for the record that I am aware of many 

accusations against my friend from Minnesota, but sounding like a 

Republican is not one of them. 

The Chair now recognizes the gentlelady from Minnesota, Mrs. 

Bachmann, for 5 minutes. 

Mrs. BACHMANN. Thank you, Mr. Chairman. 

Continuing on with the Minnesota line of questioning here in the 

Financial Services Committee, my questions for you—and thank 

you again for coming before this committee, Chair Yellen, today— 

as of July 9, 2014, my understanding is that the bank reserves at 

the Federal Reserve are something close to $2.8 trillion, and I am 

wondering if you could explain to the committee why is this number so high, the amount of reserves that are on hand at the Federal 

Reserve? 

38 

Does this show that businesses are leery of investing in the U.S. 

economy? And if these reserves enter the economy too quickly, 

what is your assessment on the impact of inflation if this $2.8 trillion adds to our money supply too quickly? And what, if anything, 

would the Federal Reserve do to stop this inflation? 

Mrs. YELLEN. The reason that bank reserves are so high is because we are creating those reserves when we purchased longerterm assets. So we have been involved in a program of purchasing 

longer-term treasury and mortgage agency mortgage-backed securities in order to provide financial conditions that are appropriate to 

stimulate the recovery, and when we purchased those assets we 

create those reserves. Any individual bank can decide what they 

want their deposits to be with the Federal Reserve, but in the aggregate that total is determined by the Federal Reserve and not 

the banking system. 

Now, as the economy recovers and we come closer to our goals 

of maximum employment and our 2 percent longer-run objective, it 

will be appropriate for the Fed to tighten monetary policy to avoid 

inflation picking up to undesirable levels. And we can do that with 

a balance sheet that is as large as we have with reserves at these 

high levels, and we have been discussing the exact procedures we 

will use when the time comes to normalize policy. 

We have had a number of discussions in recent meetings, and 

the minutes of our last meeting, as I referred to in my testimony, 

give some details of our thinking. We hope to set it out in detail 

before the end of the year. 

But we will move to raise short-term interest rates when the 

time is appropriate. We will use tools like our ability to pay interest on excess reserves and a host of subsidiary tools that we can 

use to move up the general level of short-term interest rates, and 

that is how we will tighten monetary policy. 

Eventually the committee sees it as appropriate to operate with 

a much smaller balance sheet and smaller reserves than we have 

now. Looking into the distant future, I think it is quite reasonable 

to predict that our balance sheet will eventually shrink in size, but 

only much later in the process of normalizing policy. 

Mrs. BACHMANN. You had touched on the issue of recovery. We 

have been in recovery for approximately 6 years. That seems like 

historically a very long period of time, an unusually long period of 

time for the United States economy to be in a so-called period of 

recovery. 

Normally, when we have a recession or if we have a backtracking 

in our economy, usually we see almost like a bungee cord effect. We 

see the economy grow at a rapid pace. We haven’t seen that for the 

last 6 years. 

Can you tell this committee why haven’t we seen the—what— 

historically we would see robust recoveries, but we do not see them 

now. Why, in your opinion, has that happened? 

Mrs. YELLEN. I think because this downturn was caused by a financial crisis, and the study of financial crises around the world 

suggests that when they occur, the downturns that follow them and 

the recoveries take a very long time and they have a pronounced 

effect on the economy. The typical post-war recession— 

39 

Mrs. BACHMANN. But so much of the recoveries—isn’t it true that 

so many of the recoveries, usually the further down you go you see 

a quicker move up in recovery? Why aren’t we seeing that? 

Mrs. YELLEN. I think that is when it is not caused by a financial 

crisis. For example— 

Mrs. BACHMANN. What makes it different? 

Mrs. YELLEN. For example in 1981 we had a tightening of monetary policy because inflation had risen to unacceptably high levels. 

When inflation came down, there was the ability to then step on 

the gas with respect to monetary policy, and intra-sensitive sectors 

like housing that had been suppressed, immediately began to grow 

and bring the economy back. And of course, this is a very different 

episode. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck. 

Mr. HECK. Thank you, Mr. Chairman. 

Chair Yellen, thanks very much for your presence today. I want 

to follow up on a question that Congresswoman Velazquez asked 

you about what you highlighted in your own testimony, your increasing concern about reach for yield activity. I effectively have 

concluded you placed it kind of on your watch list and your amber 

light is on. 

The follow up question is this: Can you, without speaking to 

broad policy, nonetheless give an example of what it would look 

like in order for you to take that from your amber light to your red 

light? And secondly, an example—again, not the broad policy— 

about what kind of an action step you might take to deal with it. 

Is that clear? 

Mrs. YELLEN. Yes. 

I would look at broad measures of leverage and the extent of maturity transformation and credit growth and asset prices generally—broad measures—if I saw a leverage growing rapidly in the 

economy, asset prices rising to levels that were— 

Mr. HECK. Got it. 

Mrs. YELLEN. —outside of historic valuations. 

Mr. HECK. And what is an example of what you might then do? 

Mrs. YELLEN. An important thing that we have done is to take 

steps to make the financial system stronger. All the steps coming 

out of Dodd-Frank to increase the quantity and quality of capital, 

to put in place tougher leverage standards—all the different 

things—liquidity rules—I won’t go through the full list of them, but 

let me just say these do two things. 

First of all, if we were to have an unwinding of imbalances that 

occurred, it means that financial institutions and the financial sector would be in a much stronger position to withstand the shocks 

and to go on meeting the credit needs of the economy than they 

were in the run-up to this crisis. 

But second of all, all of those—the collection of rules we have put 

into effect and are now completing, we have to work our way 

through them, will work to restrain the build-up of these imbalances. For example, we will expect to put in place, are likely to put 

in place, measures that will require extra capital holdings against 

40 

short-term wholesale financing. That discourages the build-up of leverage and overnight borrow that creates these risks. 

Mr. HECK. I got it. Thank you. Financial institutions should be 

put on notice as of now. 

I want to ask a question about the output gap, the difference between actual economic activity and that which would be sustaining 

at maximum employment and peak industrial output. 

The IMF puts America’s output gap at $720 billion a year. The 

CBO puts it at a trillion. What is your personal opinion of about 

what it is? 

Mrs. YELLEN. We don’t have any official— 

Mr. HECK. I know. I asked your personal opinion, Madam Chair. 

Mrs. YELLEN. Okay. So can I put it in a slightly different metric? 

Mr. HECK. You will anyway, so please go ahead. 

Mrs. YELLEN. The unemployment rate is 6.1 percent. Members of 

our participants in the FOMC would see a normal, longer-term unemployment rate in the range of 5.2 to 5.5 percent. So, taking the 

lower end of that range is say a .9 percent gap in terms of the unemployment rate. 

A simple historical relationship that has fit pretty well—this is 

just back of the envelope; it is not precise—called Okun’s Law, 

would say that— 

Mr. HECK. Okun’s? 

Mrs. YELLEN. Okun’s law, after Arthur Okun, would say that the 

output gap tends to be on the order of two or 21⁄2 times that in 

terms of a percentage of GDP, so I think that gets us in the range 

of something like 2 or a little bit over 2 percent in terms of an output gap. But I want to emphasize, that is a back of the envelope 

calculation I am trying at your request rather than any official. But 

that is probably in line with what you said, but I am not sure. 

Mr. HECK. Thank you, Madam Chair. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney. 

Mr. MULVANEY. Thank you. 

Madam Chair, last time you were here you and I talked briefly 

about some discussions between Treasury and the Fed in the fall 

of 2013 regarding the debt ceiling, the possible prioritization of 

payments. I sent you several questions for the record in follow up 

to that and I received a response last week, which I appreciate. 

And I have to ask, just for the record, ma’am, do you actually 

read those or are they done by staff and you just sign them? 

Mrs. YELLEN. I absolutely read them. 

Mr. MULVANEY. Thank you. You didn’t answer a lot of my questions. I had asked for names of specific folks who were involved in 

those discussions. 

I asked—for example, you had invoked a certain privilege. You 

said you couldn’t tell Congress what you had talked about because 

you have an agency relationship with the New York Fed and you 

couldn’t tell us what you talked to them about. 

And I asked you for a specific legal justification for that privilege 

and you didn’t answer that. So without wasting a lot of the time 

to actually get the answers, which I will do in a follow-up QFR 

41 

today, do you think it is appropriate not to answer congressional 

inquiries on QFRs? 

Mrs. YELLEN. I think we have answered to the best of our ability 

the questions you posed. 

Mr. MULVANEY. Good. And I will give you a chance in the followup to point out, in the answers you gave, where you are actually 

answering those questions. 

Let’s get to the substance of the answers, because you gave me 

a very interesting answer, one that I have heard from members of 

the Administration several times, where you distinguish between a 

default on debt and a default on obligations. It is a term that has 

changed over the course of the discussion regarding the debt ceiling. 

It used to be that not raising the debt ceiling would supposedly 

lead to a default on the debt and the members of the Administration changed that language to use the term default on our obligations. 

And you continued that verbiage in your response where you 

said, ‘‘A failure to pay Social Security benefits, contractors, or 

Armed Forces, et cetera, and other obligations as they come due 

will, in fact, be and will be viewed publicly as a default by the 

United States on its obligations.’’ 

And I won’t go in now to Social Security benefits, contractors, 

Armed Forces. I will ask you this: We spent $1.9 million last year 

on lifestyle training for Senate staffers. Would not doing that be 

deemed a default by the United States on its obligations? 

Mrs. YELLEN. I really can’t comment on a specific like that. I 

would simply say that the government has a wide range of obligations to contractors, to Social Security recipients— 

Mr. MULVANEY. They do. Would you agree with me that some are 

more important than others? 

Mrs. YELLEN. That is not my judgment to make. That is up to 

Treasury and to the Congress to decide, not me. 

Mr. MULVANEY. But I guess if you are taking the position that 

not paying any of the obligations is a default, then not paying the 

$300,000 we spent to encourage Americans to eat caviar last year 

would be a default? 

Mrs. YELLEN. When the government has purchased goods and 

services and is presented with a bill that has come due for those 

goods and services and it fails to pay bills when they come due— 

Mr. MULVANEY. Fair enough. But not paying things that haven’t 

yet incurred and become due would not be a default, then, in your 

definition. So if we have an expense that we are going to incur next 

month but we do not, and therefore it does not come due, it is not 

a default, using your definition. 

Mrs. YELLEN. The Treasury is making payments— 

Mr. MULVANEY. Treasury. 

Let’s move on to the other topic I want to talk about, because we 

received a letter last week or late last month from Sheila Bair, 

former head of the FDIC, regarding the new reverse repo facility 

at the Fed. She had raised some concerns about it. I know I think 

the President of the New York Fed and also the Boston Fed raised 

some questions about it in a recent Wall Street Journal blog. 

42 

Two questions, as quickly as I can. Number one, why did you not 

come to Congress to seek authority to create that facility? 

Mrs. YELLEN. This is a repurchase agreement, which is a standard tool that we use in open market operations. It has long been— 

we have long had— 

Mr. MULVANEY. True, but this is a dramatic expansion, which is 

why you are doing it, I think correctly, on a test basis, correct? This 

is a new facility for you. It may be a reinvention of something that 

you have used or a re-characterization, but it is a new facility. 

So I guess the answer is you didn’t think you needed authority 

to come to Congress? 

Mrs. YELLEN. We do have authority under the Federal Reserve 

Act to purchase and sell securities in the open market and in conduct of monetary policy, and I believe it falls under standing authority that the Federal Reserve has and we will use this facility 

only for the purpose of implementing monetary policy. 

Mr. MULVANEY. Fair enough. And let me ask you this: Do you 

share Ms. Bair’s concern and that expressed by the Presidents of 

the New York and Boston Fed that perhaps this facility needs to 

be limited in its size and application? 

Mrs. YELLEN. We have discussed and are aware of the potential—if it is available on very large scale and can be expanded and 

contracted very quickly—to create financial stability risks. And we 

absolutely intend to make sure that we address those risks. 

Mr. MULVANEY. Thank you, ma’am. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Nevada, Mr. 

Horsford. 

Mr. HORSFORD. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

And thank you, Chair Yellen, for being here today. It has been 

a very informative session on the state of the U.S. economy. 

An area that I wanted to explore from the monetary policy report 

is the issue of the slow recovery of housing and the housing market. I am from Nevada. We have the most unstable housing market 

in the country. About a third of our homeowners are upside-down, 

negative equity, some of them as high as 50 percent or more. 

And so in the report, it indicates that while there was a slight 

increase in values and an uptick in the housing market, we are beginning to see a decline or a slowdown in that. And so I wanted 

to ask, what forces are contributing to this lackluster housing recovery? 

Mrs. YELLEN. Housing did seem to be recovering throughout 

most of the recovery, and it looked like it was on a reasonably solid 

course, recovering from a very low level. And then we saw essentially a cessation of progress when mortgage rates rose significantly 

last year. 

I think my expectation was that would be a temporary setback 

for housing, and with mortgage rates higher but still at very low 

levels, and with a period of very weak household formation, I expected that we would see a rebound by now, a pickup in the housing sector. 

And frankly, it continues to be sluggish. I can’t give you a precise 

reason why that has occurred. We are certainly aware of the fact 

43 

that mortgage credit remains very, very tight, as I have said several times this morning, for a wide range of borrowers. And that 

may be part of it. 

We also hear about some supply constraints that builders face. 

Perhaps that is contributing. But I have to say that I am somewhat 

surprised. 

Mr. HORSFORD. So what more do you think the Fed can do to 

help stimulate recovery in the housing sector, both for those homeowners who are upside-down in the values, as well as to help new 

entrants be able to qualify for homes? 

Mrs. YELLEN. Housing prices are continuing to increase, and they 

have increased substantially, and I think particularly in the markets that saw the worst booms and busts. 

I know particularly in Nevada, there is a very large fraction of 

homeowners who are underwater, but I think if you look at the aggregate numbers, just the increase in house prices we have seen— 

and I think that is in part reflecting our accommodative monetary 

policy—many fewer borrowers are underwater. The numbers have 

diminished substantially. 

And, I know the Las Vegas area particularly is one of the most 

hard-hit and still has about the highest numbers on this. But I 

really think that our policy is helping, and I think eventually we 

will see greater progress in the housing market. 

But, there are many impediments that servicers face in the aftermath of the problems and the foreclosure problems we have had 

during the crisis and things have not yet settled out there. 

Mr. HORSFORD. Definitely. 

At yesterday’s Senate Banking Committee hearing, you stated 

that, ‘‘Too many Americans remain unemployed, inflation remains 

below our longer-run objective, and not all of the necessary financial reform initiatives have been completed.’’ 

What benchmarks are you looking at when determining if a full 

recovery has taken place? And what does a full recovery look like, 

from your perspective? 

Mrs. YELLEN. We have emphasized that at this stage we are not 

looking at just one or two statistics and assessing the labor market. 

We are taking into account many different measures of performance. 

Probably the unemployment rate is the single best indicator, and 

it has come down to 6.1 percent, which is really notable progress, 

and broader indicators that include marginally attached workers, 

discouraged workers, and those with involuntary unemployment, 

part-time employment, those have come down as well. But that is 

not at levels that most members of our committee would consider 

full employment. 

We are looking at the extent of long-term unemployment. We are 

looking to see if there are groups that have dropped out of the 

labor force that may indicate why labor force participation has declined so much. I am hopeful that some of that will reverse as the 

economy strengthens. 

We are looking at measures of hiring and quits that remain 

below normal and suggest not a normal labor market at this point. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross. 

44 

Mr. ROSS. Thank you, Mr. Chairman. 

Chair Yellen, thank you very much for being here. In your role, 

you are balancing the metaphorical gold standard of our currency, 

and I know that can be very difficult. 

In your opening statement, with regard to the monetary policy, 

it says that the committee seeks to explain its monetary policy decisions to the public as clearly as possible. In trying to keep it as 

clear as possible for my constituency back home, especially those 

who are on fixed incomes, what hope or what prognosis can you 

give, as clearly as possible, to those on fixed incomes? 

Is this a positive? Is there an opportunity that they are going to 

see greater returns on their investments, or are they going to have 

to see eating into principal? Fixed-income people in central Florida—there are a lot of them. 

Mrs. YELLEN. I know it has been a really hard time for savers 

who are trying to exist on the returns you would earn on a safe 

investment, like a savings account. And that has been a heavy toll 

for those households. 

Mr. ROSS. It has led to abbreviated retirements and return to the 

workforce. That might be one of the reasons why unemployment 

has gone down. 

Mrs. YELLEN. But they can be hopeful that as the economy recovers, and interest rates in a sense, they are not just set arbitrarily; 

they reflect fundamental economic forces. And the fundamental— 

Mr. ROSS. That you control, fortunately—or unfortunately, depending on who you are talking to. But yes, you are right. 

Mrs. YELLEN. It is a lot to save, and there is not much demand 

for those savings in the form of investment. And that means that— 

Mr. ROSS. As you discontinue the buyback, I think that should 

hopefully put some more pressure on upward rates for savings. 

Wouldn’t you agree? 

Mrs. YELLEN. As the economy recovers and we begin to normalize policy, eventually interest rates will go up. So if the recovery continues, I would envision rising interest rates over time. And 

we have tried to spell out what we envision. 

Mr. ROSS. Thank you. 

Let’s talk briefly about SIFIs, because the last time you were 

here we discussed this. And specifically, I think you would agree 

that the fewer systemically important financial institutions that we 

have, the better off we are. 

And in fact, we have now have some insurance companies that 

are being designated SIFIs. My big concern is that they should be 

designated as a SIFI as a last resort, when nothing else is out 

there to help them. I think you would agree with that. 

Mrs. YELLEN. Well, sure. I think there has to be clear evidence 

that— 

Mr. ROSS. But when they are at that level, shouldn’t we allow 

for some opportunity for self-correction, or an opportunity so that 

they can keep from being designated as a SIFI? In other words, 

these entities don’t know they are a SIFI until it is too late. 

Wouldn’t you agree that there should be more transparency, 

more involvement, whether it be some role for the Fed to come in 

there and keep them from being a SIFI? And wouldn’t that send 

45 

a message to keep others from also ever being designated as that, 

taking appropriate action? 

Mrs. YELLEN. I think the FSOC has tried to make clear what the 

criteria are,— 

Mr. ROSS. I would differ with you on that— 

Mrs. YELLEN. —that they will take into account, and I don’t really think it was any surprise to these institutions that they are on 

the list. And of course, after they are designated, if they wanted 

to change their structure substantially enough, that situation could 

potentially change. 

Mr. ROSS. Quickly, I see that you have just commissioned Tom 

Sullivan to assist in capital standards, and I think that is a very 

good move. I want to make sure that we are adequately representing this industry, this insurance industry, especially with regard to international capital standards. 

And that has me concerned because I think you have testified 

yesterday that maybe if—even if there are international standards, 

that we may not abide by them. And that— 

Mrs. YELLEN. What I said was that if international standards are 

agreed to, nothing becomes— 

Mr. ROSS. We are not compelled to do it. 

Mrs. YELLEN. —nothing happens in the United States unless we 

go through a full range of— 

Mr. ROSS. We are still going to be at the table, though, with regard to the negotiation of those standards, correct? 

Mrs. YELLEN. We are sitting at the table, and state insurance 

commissioners are there with us. We— 

Mr. ROSS. Good. 

Mrs. YELLEN. —consult with the Federal Insurance Office. And 

as you noted, we are adding— 

Mr. ROSS. I just have one little quick question, one last question. 

Just recently this month the President was speaking and he said, 

‘‘Right now, if you are one of the big banks, profit center is the 

trading desk, and you can generate a huge amount of bonuses by 

making some big bets. You will be rewarded on the upside. That 

is going to require some further reforms,’’ the President said. ‘‘That 

is going to require us taking additional—looking at additional steps 

that we can take.’’ 

Have you talked to the President about further reforms? 

Mrs. YELLEN. No. 

Mr. ROSS. Okay. Do you think that Dodd-Frank is appropriate in 

terms of its reforms that have been imposed on the market so far? 

Mrs. YELLEN. I am not certain what he is referring to there. 

Mr. ROSS. Okay. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, chairman of the House Foreign Affairs Committee. 

Mr. ROYCE. Chair Yellen, how are you? 

Mrs. YELLEN. Good, thank you. 

Mr. ROYCE. I am glad you are with us again. I want to encourage 

you on a theme that you spoke to recently, and that is this question of the unsustainable path, as you mentioned, of entitlement 

spending that we have known about for decades. 

46 

There is a new Congressional Budget Office report that just came 

out and it releases new numbers. It says that the long-term debt 

will equal 100 percent of the overall economy within 25 years. 

I think this goes to your point that, in your words, this is a critical issue facing the country. I talked to Ben Bernanke about this 

and his predecessor, Alan Greenspan. Isn’t there a way to ring that 

bell a little louder so that people understand what this means for 

the next generation? And I will ask you that and give you the floor 

here to amplify that message if you would like. 

Mrs. YELLEN. I believe this is a critical problem that Congress 

should really try very hard to address in the Administration. It is 

one we have known about for decades. There is nothing fundamentally new here. We have just come closer to the problem without 

taking the necessary steps. 

I think it relates to trends in health care costs, combined with 

an aging population. That is certainly not news. There are many 

organizations that have been trying to explain, I believe, to the 

American people how serious this problem is. 

Mr. ROYCE. I want to encourage you to continue to do what you 

are doing on that front. If I might recommend opening every speech 

with trying to get people’s attention, both in Congress and around 

the country, about this problem and what it will mean for future 

generations. 

I also have a fiscal policy question for you, and it is on an issue 

on which I find myself in agreement with our current Treasury 

Secretary. We must do more to discourage these inversion transactions, and that is the use of mergers and a change of the P.O. 

box to avoid paying higher taxes here in the United States. 

And in 1997 in your confirmation hearing, you said that the tax 

structure impacts decisions about work and investment. Other 

things being equal, lower taxes are better than higher taxes. 

I am wondering, on the corporate tax part of this, if you have 

looked at this issue of inversion or if you have been involved in any 

conversations about the impact of our current tax system and relatively high marginal corporate tax rates, on job loss? And is this 

something you have discussed with Secretary Lew? 

And on comprehensive tax reform, including a reduction of U.S. 

corporate tax rates, that is one possible solution to this problem. 

I wish we had—as you say, I wish we had more than a letter from 

the Treasury Secretary calling for—the words here that he used 

were, ‘‘a new sense of economic patriotism.’’ 

We are going to need more than that new sense of economic patriotism. We need real leadership. And we need leadership out of 

the White House and we need leadership all around to pass a comprehensive tax reform. 

Only President Reagan made it possible in 1986, in my view, and 

he did that in engagement with Tip O’Neill, right? And only an engaged President will make it possible today. 

But could you speak to this inversion issue on what we might be 

able to do? 

Mrs. YELLEN. I am sorry to say this is an issue that, while I am 

aware of it, I am not an expert on it. And it is a complex set of 

issues, and I think it is entirely appropriate for the Congress and 

the Administration to frame policy to deal with it. 

47 

But I don’t think it is appropriate for me to give specific advice 

about how— 

Mr. ROYCE. I understand that. But we are going to continue to 

lose ground in terms of economic productivity that you have spoken 

to in the country. If companies continue to change their domicile, 

we are going to lose receipts, we are going to lose jobs. 

All of that is going to compound that problem that we spoke to 

earlier, which is now the long-term debt equals 100 percent of the 

overall economy 25 years from now under current trajectory. So if 

we want to change the trajectory, we have to do something, in my 

view, about this problem as well. 

Mrs. YELLEN. I think it is entirely appropriate to try to frame appropriate policies to deal with this issue. 

Mr. ROYCE. Thank you, Chair Yellen. 

And thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair wishes to announce that we have three Members left 

in the queue. It is the Chair’s intention to clear these three Members and excuse our witness, so if there are Members monitoring 

the hearing in their offices wanting to hasten over here to ask 

questions, do not bother. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being with us again today. 

Mrs. YELLEN. Thank you. 

Mr. PITTENGER. Chair Yellen, Alice Rivlin, who was President 

Clinton’s appointee to be Vice Chair of the Fed, endorsed the costbenefit analysis requirement of the FRAT Act. Do you agree with 

her? 

Mrs. YELLEN. I’m sorry, what did she endorse? 

Mr. PITTENGER. She endorsed the cost-benefit analysis of the 

FRAT Act, the bill that we have been discussing today with Mr. 

Huizenga. Do you agree with her? 

Mrs. YELLEN. I believe the Federal Reserve does do cost-benefit 

analysis where it is appropriate. When we— 

Mr. PITTENGER. Do you believe it is appropriate in this case? 

Mrs. YELLEN. I don’t endorse the version of what is required in 

the FRAT Act. But I think we do appropriate and detailed and 

careful analysis of alternative ways to implement a regulation that 

implements a law that is passed by Congress. Rules— 

Mr. PITTENGER. I appreciate what you are saying, Chair Yellen, 

but—so the bottom line is that you would not agree with Ms. Rivlin 

on this? 

Mrs. YELLEN. I didn’t have a chance to review her remarks, but 

I wouldn’t endorse what is in the FRAT Act. 

Mr. PITTENGER. Chair Yellen, we saw a recent report from the 

CBO that Obamacare is estimated to cost 2.5 million jobs over the 

next decade. Has the Fed done any estimates of how many jobs the 

implementation of Dodd-Frank is expected to cost the economy? Or 

is the Fed even interested in that? 

Mrs. YELLEN. In evaluating a number of different regulations, we 

have attempted to do cost-benefit analysis. The overall conclusion 

we came to, for example, when we looked at our capital rules, was 

48 

that the reduced probability of a financial crisis, which takes an 

enormous toll on jobs—and we have just lived through that so we 

can see how large that can be—that the reduction in the odds we 

would live through a period like this again resulted in benefits that 

exceeded the cost of implementing higher capital standards. 

Mr. PITTENGER. We sure are seeing it in North Carolina. In my 

district alone, the building permits aren’t even up to 50 percent of 

what they were in 2008. That is a lot of lost jobs. 

The same is true with community banks, the consolidations. 

There has been a lot of impact. And I would think that a measurable effect of Dodd-Frank would certainly be warranted. 

Chair Yellen, with the lackluster growth we have had, though, 

there have been some bright spots. One in particular is in the energy sector. The Dakotas, Texas, Oklahoma, and other energy-producing States have presented—have had great job growth, particularly as it relates to the energy revolution that has come from the 

fracturing and other production of fossil fuels. 

Chair Yellen, what effect would opening up other resources, the 

OCS, expanded drilling areas on land, ANWR, across the United 

States, have on the GDP, and what type of impact would that have 

on job growth? 

Mrs. YELLEN. I would agree that we have seen a remarkable 

growth in the energy industry and a transformation of energy, our 

dependence on the rest of the world for energy. 

We don’t do calculations in the Federal Reserve of the type that 

you have asked about, what impact it would have on GDP— 

Mr. PITTENGER. But it is common sense. You would agree that 

if we opened it up to the OCS and the other lands and ANWR that 

it could make an even greater, measurable difference? 

Mrs. YELLEN. As you know, there are complicated policy issues 

and a number of different factors that come into play. And I think 

that is not in the domain of the Federal Reserve to opine on what 

is the right public policy in this area. 

Mr. PITTENGER. Given the right political atmosphere, it would 

create jobs. 

Chair Yellen, the Federal Reserve is now in the business of regulating insurance companies and currently supervises two insurance 

companies which have been designated as SIFIs, AIG and Prudential, and nearly a dozen insurance companies that have owned depository institutions, the likes of Nationwide Insurance, State 

Farm, and TIAA–CREF, to name a few. 

Chair Yellen, other than one appointee who is now on that 

Board, a recently hired senior adviser with extensive background 

in insurance, how many full-time employees has the Fed hired with 

insurance expertise in the last year? And did the hires possess a 

particular insurance expertise? 

Mrs. YELLEN. I can’t give you a number, but I can tell you that 

we have worked hard both at the Board and in the Reserve Banks 

to increase our expertise. We are working closely with the Federal 

Insurance Office, with State regulators, and are trying to tailor supervision— 

Mr. PITTENGER. Thank you. We are out of time. It does make 

sense, though, doesn’t it? 

Thank you. 

49 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being with us today. 

I would like to talk a little bit about the Federal Reserve Accountability and Transparency Act, which has been the topic of 

some discussion today. And what I am hearing from across the 

aisle with our colleagues, I have heard talk of a straitjacket. And 

then I think I heard you testifying about a ‘‘rigid rule’’ that you described in the proposed legislation. 

Is it your testimony that this bill requires the Fed to follow a 

rigid rule for monetary policy? 

Mrs. YELLEN. It requires us, as I understand it, to specify a rule, 

and when we don’t follow it, to explain exactly what the logic is or 

how we have changed the rule, and then calls for very rapid GAO 

involvement in overseeing the conduct of monetary policy if for any 

reason we were to deviate from the rule and— 

Mr. ROTHFUS. I look at the Act and I see two rules described: a 

directive policy rule; and a reference policy rule. Now, the reference 

policy rule does set forth parameters for calculating a Fed funds 

rate. But there is no requirement in this Act that would require the 

FOMC to follow the reference policy rule, correct? 

Mrs. YELLEN. That is what I see in the legislation, but— 

Mr. ROTHFUS. So then we have a directive policy rule that simply 

requires the Fed to identify an interest rate. That is what the Fed 

is already doing when it announces a policy. It identifies an interest rate—and an explanation of what the FOMC doing. 

If we were to boil down the directive policy rule, that is essentially saying it is—we are going to say there is going to be an interest rate and an explanation of what the Fed—FOMC is doing. Is 

that right? 

Mrs. YELLEN. I think we regard it as incumbent upon ourselves 

to explain why we have adopted the policy we have, and— 

Mr. ROTHFUS. And so that is what—basically that is what we are 

talking about here— 

Mrs. YELLEN. Well, no— 

Mr. ROTHFUS. —and the added requirement that you would explain or educate the Members of Congress and the American people 

on why you would deviate from a standard that was in place, similar to what was happening during the great moderation. 

Mrs. YELLEN. It requires the specification of a mathematical rule 

and models and forecasts, which goes much, much, much further 

in straitjacketing how we would set monetary policy than setting 

an interest rate and providing Congress and the public with a explanation of the rationale for our policy decision, and then would 

bring to bear on Federal Reserve decision-making very quickly, in 

real time, oversight from the GAO and from Congress, and I believe fully bring into the process of Federal Reserve decision-making essentially short-term political influences. 

I don’t believe it is— 

Mr. ROTHFUS. I would like to talk a little bit about the independence of the Fed—again, another focus of our hearing today. Does 

50 

this apply to the Fed’s regulatory responsibilities as well as its 

monetary policy? 

Mrs. YELLEN. It is an exception that Congress made for monetary 

policy. 

Mr. ROTHFUS. Okay. When we talk about writing a cost-benefit 

analysis requirement into law to ensure that the benefits of the 

Fed’s regulations are greater than their costs, the same requirement that currently applies to the SEC and CFTC, we hear that 

judicial review under such a statute would compromise the Fed’s 

independence. 

Does the Fed’s independence require that the Fed be exempt 

from review of its rules by the courts? 

Mrs. YELLEN. The term, to me, ‘‘Fed independence,’’ applies to 

monetary policy. I feel the cost-benefit analysis that we do is adequate, but that is a separate matter. 

Mr. ROTHFUS. Okay. I want to follow up on Congressman 

Pittenger’s line of questioning about the designation of insurance 

companies as SIFIs. 

Other than hiring Thomas Sullivan as a senior adviser, what 

steps have you taken to ensure that the Federal Reserve has the 

requisite expertise to regulate insurance companies? 

Mrs. YELLEN. We have hired individuals with that expertise, especially when we have taken on the oversight and supervision of 

savings and loan holding companies, some of which have heavy insurance involvement, including the ones that the Congressman 

mentioned. We have really greatly built our expertise and understanding of the insurance industry and its unique characteristics. 

We have explicitly, when we came out with our 165 rules, refrained from putting in effect capital rules that would apply to 

heavily insurance-based companies in order to make sure that we 

thoroughly understand their unique characteristics. 

Mr. ROTHFUS. I thank the chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

Last but not least, another gentleman from Pennsylvania, Mr. 

Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Chairman Hensarling. 

I also want to thank Chair Yellen for the investment of time you 

have made here. I think you have been very generous with your 

time, which I know we all appreciate. 

The number one issue in my district back in Bucks County, 

Pennsylvania, is jobs and the economy. And there has been much 

said about what appears to be a government rate of improving unemployment rate and what that says about our economy. And you 

have talked about that both in your policy report and your written 

statement here today. 

In your oral statement, Chair Yellen, you said the unemployment 

rate has fallen nearly 1.5 percentage points over the past year. It 

stood at 6.1 percent in June, which is down 4 points— 

Chairman HENSARLING. The gentleman will suspend. The clerk 

is having a little trouble hearing the gentleman. If you could speak 

a little closer to the microphone? 

Mr. FITZPATRICK. Much has been said about the unemployment 

rate falling 4 points from the height. My concern is that these govVerDate Nov 24 2008 16:53 May 15, 2015 Jkt 091156 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\91156.TXT TERRI
51 

ernment numbers don’t seem to distinguish between full-time employment and part-time employment— 

Chairman HENSARLING. I’m sorry. If the gentleman would suspend one more time. For whatever reason, the clerk still can’t hear 

the gentleman. Would you mind using the microphone adjacent to 

you and let’s see if that corrects the problem? 

Mr. FITZPATRICK. Is that better? 

Chairman HENSARLING. Perhaps the microphone for Mr. Westmoreland might work? 

I apologize. Let’s try this. 

Mr. FITZPATRICK. Okay. 

Chair Yellen, in March you gave a speech about what the Fed 

is going to tackle the unemployment rate, and you made this observation—this is a quote: ‘‘The existence of such a large pool of partly 

unemployed workers is a sign that labor conditions are worse than 

indicated by the unemployment rate.’’ That was the National Interagency Community Reinvestment Conference in Chicago. That was 

back in March. 

Do you believe that the unemployment rate, as currently reported by the Bureau of Labor Statistics, is an accurate snapshot 

of the labor market? 

Mrs. YELLEN. It is one particular measure but it is obviously not 

complete. The Bureau of Labor Statistics reports on the number of 

individuals who are part-time employed and involuntarily so would 

like more work, and that figure has been running about 5 percent 

of the labor force, which is an unusually high level. 

The Labor Department computes some broader statistics pertaining to unemployment. One of them is called U–6, and it is the 

standard civilian unemployment rate with those involuntary parttime employees added in, and also those who were discouraged or 

marginally attached to the labor force, and that is a number that 

is much higher. It is running around 12 percent; it has come down 

significantly, along with the narrower measure of unemployment. 

But clearly what is called the U–3, or the 6.1 percent unemployment rate, is not a complete measure of what is happening in the 

labor market. 

That is why we have said, the Federal Reserve, the FOMC has 

said, we are looking at a broad measure of indicators, including 

many indicators of the labor market, to assess where it stands. 

Mr. FITZPATRICK. Because many here on the legislative side look 

at the unemployment rate, I guess it is the U–3, which is 6.1 percent, and looking at that to drive policy decisions on spending, on 

programs, and the like. 

So which do you think is the better reflection of the true employment picture of our Nation? Because my constituents are not buying the 6.1 percent. It doesn’t feel right. They know it is not right. 

It is not an accurate reflection of what is really going on in the 

economy in real towns across America. 

Mrs. YELLEN. That is why I believe you have to look at many 

measures of the labor market, and there obviously is more distress 

than is captured in that 6.1 percent number, and the 12 percent, 

for example, or roughly the U–6 measure is capturing a broader 

range of distress. 

52 

But there are many metrics. We can’t judge something as complicated as the labor market by one number— 

Mr. FITZPATRICK. Is there anything in particular that the Bureau 

of Labor Statistics can do to create a more accurate picture of the 

economy? 

Mrs. YELLEN. I think we shouldn’t try to look for one single number to assess what is a complicated phenomenon. If I had to choose 

one and only one number to look at, I would choose the 6.1 percent 

U–3 number. But I don’t think that is adequate and I think we 

should want a broad range of measurements of different aspects of 

the labor market and to keep them all in mind. 

Mr. FITZPATRICK. I remain concerned by these monthly reports 

that say the unemployment rate is coming down not counting individuals who are—distinguishing between those who work part-time 

and those who work full-time, not counting individuals who are not 

actively engaged in a search, who have given up on the search. 

People are desperately looking for work. They are not reflected in 

the numbers of the government that is supposed to care about that. 

Mrs. YELLEN. I agree, and I mentioned my own concern with 

some who are simply measured as out of the labor force who might 

rejoin and want work if it were available. 

Mr. FITZPATRICK. Madam Chair, thanks for your service. I appreciate it. 

Mrs. YELLEN. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

I would like to thank Chair Yellen for her testimony today. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place her responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:03 p.m., the hearing was adjourned.] 

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