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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 

FEBRUARY 11, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–64 

( 

(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 

MICHAEL G. GRIMM, New York 

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 

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 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

February 11, 2014 ............................................................................................ 1 

Appendix: 

February 11, 2014 ............................................................................................ 103 

WITNESSES 

TUESDAY, FEBRUARY 11, 2014 

Calabria, Mark A., Director, Financial Regulation Studies, the Cato Institute . 81 

Kohn, Donald, Senior Fellow, Economic Studies, the Brookings Institution ...... 85 

McCloskey, Abby, Program Director, Economic Policy, the American Enterprise Institute ....................................................................................................... 83 

Taylor, John B., Mary and Robert Raymond Professor of Economics, Stanford 

University ............................................................................................................. 80 

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

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

APPENDIX 

Prepared statements: 

Calabria, Mark A. ............................................................................................. 104 

Kohn, Donald .................................................................................................... 124 

McCloskey, Abby ............................................................................................... 130 

Taylor, John B. ................................................................................................. 141 

Yellen, Hon. Janet L. ....................................................................................... 147 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Yellen, Hon. Janet L: 

Monetary Policy Report to the Congress, dated February 11, 2014 ............. 154 

Written responses to questions submitted by Chairman Hensarling .......... 208 

Written responses to questions submitted by Representative Garrett ........ 217 

Written responses to questions submitted by Representative Luetkemeyer ............................................................................................................. 227 

Written responses to questions submitted by Representative Mulvaney .... 231 

Written responses to questions submitted by Representative Royce ........... 280 

Written responses to questions submitted by Representative Sinema ........ 282 

(1) 

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Tuesday, February 11, 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, 

Lucas, Miller, Capito, Garrett, Neugebauer, McHenry, Bachmann, 

Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, 

Duffy, Hurt, Grimm, Stivers, Fincher, Stutzman, Mulvaney, 

Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, Rothfus; Waters, 

Maloney, Velazquez, Sherman, Meeks, Capuano, Hinojosa, Clay, 

McCarthy of New York, Lynch, Scott, Green, Cleaver, Moore, Ellison, Perlmutter, Himes, Peters, Carney, Sewell, Foster, Kildee, 

Murphy, Sinema, Beatty, and Heck. 

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. 

Before we get started—I am not sure I would call this a point 

of personal privilege—I would like to point out to the committee 

that we are blessed again with the appearance of the gentlelady 

from New York, Carolyn McCarthy, and what a blessing it is to 

have her back with us. 

[applause] 

Chairman HENSARLING. The Chair will now recognize himself for 

6 minutes to give an opening statement. 

We welcome Chair Yellen for her first of many semi-annual 

Humphrey-Hawkins appearances before our committee. 

Chair Yellen, you may recall that just 2 months after Alan 

Greenspan became Fed Chairman in 1987, the stock market 

crashed. And at that time, Paul Volcker sent him a short note that 

read, ‘‘Congratulations. You are now a central banker.’’ 

Chair Yellen, you face the daunting prospect of unwinding a Fed 

balance sheet, the size and composition of which we have never 

seen before. All of this in the face of an economy that is underperforming at best. So allow me to paraphrase: Congratulations. You 

are now the Chair of a central bank. 

2 

Chair Yellen, we look forward to working with you to ensure that 

the Federal Reserve has the tools it needs to operate effectively 

into the next century. We also look forward to working with you 

closely as this committee embarks upon its year-long Federal Reserve Centennial Oversight project. 

Any agency or bureau of government that is 100 years old probably needs a good checkup, especially one as powerful as yours. 

And I remind everyone that independence and accountability are 

not mutually exclusive concepts. 

Perhaps the most critical issue we must examine is the limitations of monetary policy to actually promote a healthy economy. We 

have now witnessed both the greatest fiscal and the greatest monetary stimulus programs in our Nation’s history, and the results 

could not be more disappointing. 

Despite being almost 5 years into the so-called Obama recovery, 

we still see millions of our fellow citizens unemployed or underemployed, shrinking middle-income paychecks, and trillions of dollars of new unsustainable debt. 

Why is the non-recovery recovery producing only one-third of the 

growth of previous recoveries? By one estimate, the Obama Administration has imposed $494 billion in new regulatory cost upon our 

economy. 

From the 2.5 million net jobs the CBO has now announced 

Obamacare will cost us, to the incomprehensible Volcker Rule, 

business enterprises are simply drowning in regulatory red tape as 

they attempt to expand and create more jobs. Monetary policy cannot remedy this. 

What else is different from previous recoveries? The single larg- est tax increase in American history: More than $1.5 trillion in 

higher taxes from both the fiscal cliff agreement and Obamacare. 

And these taxes principally fall upon small businesses, entrepreneurs, and investors, again, as they try to bring about a 

healthier economy and create jobs. 

Monetary policy cannot remedy this either. 

What else is different? Fear, doubt, uncertainty, and pessimism 

that has arisen from the erosion of the rule of law. Never before 

in my lifetime has more unchecked, unbridled discretionary authority been given to relatively unaccountable government agencies. 

We are slipping from the rule of law to the rule of rulers. To 

punctuate this point, the President recently reminded us that he 

has a pen and a phone to essentially enact whatever policy he 

alone sees fit. 

Regrettably, he does not seem to have handy a copy of the Constitution. I suppose the Fed could send him one, and perhaps throw 

in a copy of Milton Friedman’s ‘‘Capitalism and Freedom,’’ although 

I doubt it would do much good. 

There are clearly limits to what monetary policy can achieve, but 

much it can risk. Thus, the roughly $3.5 trillion question remains 

whether QE3 will continue to taper slowly, whether it will end 

abruptly, or whether it will simply morph into QE-infinity. 

We look forward to hearing the Chair’s thoughts and intentions 

on the matter. 

As part of our Centennial Oversight project, QE will also cause 

our committee to thoroughly examine the Federal Reserve’s unprecVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
3 

edented role in credit allocation, a focus distinct from its traditional 

role in monetary policy. Should the Fed pick distinct credit markets 

to support while ignoring others? This clearly creates winners and 

losers, and under the Fed’s current policies, seniors on fixed incomes are clearly losers as we continue to witness the blurring of 

lines between fiscal and monetary policy. 

This committee will also examine the Federal Reserve’s role as 

a financier and facilitator of our President’s unprecedented deficit 

spending. Since the Monetary Accord of 1951 between the Federal 

Reserve and the Treasury, it has been clear that the Federal Reserve should be independent of the President’s fiscal policy. But, is 

it? 

We will also consider how the Federal Reserve has undertaken 

the expansive new banking regulatory powers it obtained under the 

Dodd-Frank Act and why it fails to conduct formal cost-benefit 

analysis. We will also consider whether Dodd-Frank has constrained the Fed’s Section 13(3) exigent powers properly, and precisely what its role of lender of last resort should be. 

We will closely examine an old debate in monetary policy between rules and discretion. During successful periods in the Federal Reserve’s history, like the great moderation of 1987 to 2003, 

the central bank appeared to follow a clear rule. 

Today, it seems to favor more amorphous forward guidance, 

shifting from calendar-based to tight thresholds to loose thresholds, 

which arguably leaves investors and consumers lost in a hazy mist 

as they attempt to plan their economic futures and create a 

healthier economy. 

Chair Yellen, I look forward to working with you as we examine 

these issues, and to ensuring that in the 21st Century, the Federal 

Reserve has a well-defined, specific mission that it has both the expertise and resources to effectively accomplish. 

The Chair now recognizes the ranking member of the committee, 

Ms. Waters, for 5 minutes for an opening statement. 

Ms. WATERS. Thank you, Mr. Chairman. 

I would like to take a moment of personal privilege to just say 

how proud, pleased, and honored I am to have our colleague, Mrs. 

McCarthy from New York, back with us today. 

[applause] 

Ms. WATERS. Thank you, Mr. Chairman. 

It is with great pleasure that I welcome you, Chair Yellen, to deliver your first ever Humphrey-Hawkins Act report and testimony. 

Chair Yellen, your presence here today is both historic and welldeserved. Your record of distinguished service in government, academia, and at the Federal Reserve make you uniquely qualified to 

navigate the considerable economic challenges that lie ahead. 

Your career in public service has been marked by high praise 

from economists and policymakers across the political spectrum. 

And in the face of an increasingly complex and interconnected global economy, your sound judgment on the risks to economic growth 

and stability has been validated time and time again. 

In the run-up to the 2008 financial crisis, you accurately identified the looming risks to the economy and spoke up, telling colleagues, ‘‘The possibilities of a credit crunch developing and of the 

economy slipping into recession seem all too real.’’ When the crisis 

4 

hit as you predicted, you pushed to challenge conventional thinking 

about the limits of monetary policy and appropriately encouraged 

the Fed to act forcefully to stabilize the economy. 

Today, as mixed economic data seems to suggest that the recovery is still fragile and millions of Americans continue to be unemployed, your willingness to think outside the box is more important 

than ever. 

Like many of my colleagues, I remain concerned that more needs 

to be done to address the long-term unemployment crisis. As you 

know, 3.6 million Americans have been out of work for 27 weeks 

or more. And I fear that any further delay in addressing the problem could permanently damage the labor force and slow the economy’s ability to grow over the long term. 

As you weigh the costs, benefits, and risk of further large-scale 

asset purchases, I hope you will press your colleagues on the Federal Open Market Committee (FOMC) to take into account the ongoing impact that this long-term unemployment crisis is having on 

millions of American families. 

Of course, the Republicans’ ideologically driven austerity agenda, 

protracted political debt ceiling brinksmanship, and failure to extend basic unemployment insurance benefits has only made this 

situation more dire. Ironically, Republican unwillingness to provide 

the short-term fiscal assistance that the economy needs has put 

more pressure on the Federal Reserve to continue the same stimulative policies that many in their party oppose. 

Although monetary policy is indeed a powerful tool, the responsibility for putting the economy on more stable footing cannot and 

should not fall exclusively on the Federal Reserve. Congress, too, 

must do its part. 

One issue on this front, which I hope the Congress can work on 

in concert with the Federal Reserve to address, is a growing issue 

of income inequality. As you know, the gains accrued during the 

economic recovery have disproportionately benefited the wealthiest 

in our society, leaving the middle class and most vulnerable behind. 

I believe that the income gap is one of the most pressing threats 

to our economic potential. I look forward to your views on how we 

can work together to close it. 

Finally, there are a number of pending issues related to the Fed’s 

role in implementing the Dodd-Frank Act. And although we won’t 

be able to discuss all of them today, I hope to learn more about the 

Fed’s role in identifying and reducing systemic risk across the financial system. 

This includes your proposed rules to enhance prudential standards for large U.S. and foreign banking firms, and your views on 

risks that continue to exist in the repo markets. 

As the 2008 financial crisis made all too clear, growth and prosperity are inextricably linked to financial stability. And therefore, 

your diligence on these matters is critically important. 

So I thank you, Chair Yellen. Thank you again for being with us 

today. 

And I will yield back the balance of my time. 

5 

Chairman HENSARLING. The Chair now recognizes the gentleman 

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

Policy Subcommittee, for 2 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

And Chair Yellen, congratulations on being confirmed as the first 

woman Chair of the Board of Governors of the Federal Reserve. 

And I think, as you see with this group of cameras ahead of you, 

buckle up and hang on. This is going to be an interesting ride, I 

am sure. 

As we were preparing for this, I sent out a Facebook and Twitter 

tweet about what I should ask you. A number of things came back: 

our U.S. competitiveness; auditing the Fed; and a number of other 

things. But I have a couple of other ideas, as well. 

Today, I am particularly eager to hear your insights on monetary 

policy and the state of the economy, specifically your views of the 

new, highly touted Volcker Rule. I am not the first to note that 

since the creation of the Fed in 1913, the Fed’s power has significantly expanded over the last 100 years. 

Ranking Member Waters just thanked you for ‘‘thinking outside 

the box.’’ Some of us are trying to determine what exactly the box 

is these days. And I think we all have a responsibility to explain 

that to the American people. 

While originally created to supervise and monitor the banking 

systems in the United States, the Fed’s role has continued to grow, 

seemingly unchecked, some of that through acts like the DoddFrank Act, and for other reasons. But certainly, its current position 

of being a lender of last resort to banking institutions that require 

additional credit to stay afloat is something that we need to continue to explore. 

Given the interconnectedness of the global financial system, 

there is no doubt that the Federal Reserve’s monetary policies have 

also significantly impacted the international markets and foreign 

economies, as was explored right at that table last week, when 

there was discussion of the fragile five countries out there, as well 

as our own country. And I look forward to hearing your comments 

on these topics. So thank you very much. 

And with that I yield back, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Missouri, Mr. Clay, the ranking member of our Monetary Policy and Trade Subcommittee, for 3 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. 

And welcome, Chair Yellen. As you report to this committee for 

the first time in your new position—and, Chair Yellen, I want you 

to know that like you, I believe that the actions of the Federal Reserve should always consider the impact and well-being of Main 

Street as well as Wall Street. 

That means actively pursuing the twin goals of full employment 

and controlling inflation, and it also means advancing the vital 

work of closing the income inequality gap, which is hurting so 

many working families and threatening America’s economic future. 

Like you, I believe in fundamental financial reform and real 

transparency to protect American consumers. That includes maintaining a Consumer Financial Protection Bureau (CFPB) with real 

teeth and the authority to act swiftly against financial abuses. 

6 

I strongly oppose the Majority’s efforts to cripple the Consumer 

Financial Protection Bureau, and it shocks and saddens me that 

the Majority is more concerned about bringing comfort and relief 

not to struggling consumers but to some of the same financial predators who caused the Great Recession. 

In 1977, Congress amended the Federal Reserve Act to promote 

price stability and full employment. The Consumer Price Index 

(CPI) rose 1.5 percent in 2013 after a 1.7 percent increase in 2012. 

And that is actually lower than the 2.4 percent average annual increase in CPI over the last 10 years. 

As a response to the financial emergency in 2008, the Federal 

Reserve Bank purchased commercial paper, made loans, and provided dollar funding through liquidity swaps with foreign central 

banks. This action significantly expanded the Federal Reserve’s 

balance sheet. 

The Fed has gradually tapered its asset purchases from an initial $85 billion per month to this month’s $65 billion purchase in Treasury and mortgage-backed securities. In terms of supporting full employment, let’s look at the data. 

And because of the positive leadership under former Chairman 

Bernanke, the unemployment rate in the United States is 6.6 percent, but the number of long-term unemployed is 3.7 million people. And that is even more compelling evidence why this Congress 

should extend emergency unemployment benefits without delay. 

My time has run out, Mr. Chairman, but I look forward to the 

Chair’s testimony. 

Chairman HENSARLING. The time of the gentleman has expired. 

Today, we welcome the testimony of the Honorable Janet Yellen, 

the Chair of the Board of Governors of the United States Federal 

Reserve, a position she was confirmed to by the Senate on January 

6th of this year. She took office on February 3rd, just last week. 

We congratulate Ms. Yellen for her confirmation—her historic 

confirmation—as the first female Chair of the Board of Governors. 

Prior to her accession to the Chair, Ms. Yellen served as the Vice 

Chair of the Board of Governors for 4 years, and from 2004 to 

2010, Ms. Yellen was the President and CEO of the Federal Reserve Bank of San Francisco. 

During the Clinton Administration, Ms. Yellen served as Chair 

of the President’s Council of Economic Advisers. She has taught at 

Harvard and the London School of Economics. She holds a Ph.D. 

in economics from Yale. 

Chair Yellen, I want to personally thank you for cooperating with 

us to ensure that every member of the committee has an opportunity to ask you questions as part of this hearing today. 

I hope the Members are paying careful attention. I would also 

say to the Members that the Chair, unsolicited, offered to stay all 

day. 

Madam Chair, you are in luck. We are not staying all day. This 

committee has a bill on the Floor later this afternoon. You will be 

spared that. 

I peeked at your testimony to where you pledged to be accountable. You are off to a very good start by agreeing to do this. 

Because of the anticipated length of the hearing, I wish to alert 

Members that the Chair does expect to call a couple of recesses 

7 

during Chair Yellen’s testimony. And indeed, the Chair will also 

wield a very strict gavel. 

Without objection, Chair Yellen’s written statement will be made 

a part of the record. 

Again, Madam Chair, welcome. You are now recognized for your 

oral presentation. 

STATEMENT OF HONORABLE JANET L. YELLEN, CHAIR, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mrs. YELLEN. Chairman Hensarling, Ranking Member Waters, 

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

Federal Reserve’s semiannual 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 an update on our continuing work on regulatory reform. 

First, let me acknowledge the important contributions of Chairman Bernanke. His leadership helped make our economy and financial system stronger and ensured that the Federal Reserve is 

transparent and accountable. I pledge to continue that work. 

The economic recovery gained greater traction in the second half 

of last year. Real gross domestic product is currently estimated to 

have risen at an average annual rate of more than 3.5 percent in 

the third and fourth quarters, up from a 1.75 percent pace in the 

first half. 

The pickup in economic activity has fueled further progress in 

the labor market. About 1.25 million jobs have been added to payrolls since the previous monetary policy report last July, and 3.25 

million have been added since August 2012, the month before the 

Federal Reserve began a new round of asset purchases to add momentum to the recovery. 

The unemployment rate has fallen nearly a percentage point 

since the middle of last year and 1.5 percentage points since the 

beginning of the current asset purchase program. 

Nevertheless, the recovery in the labor market is far from complete. The unemployment rate is still well above levels that Federal 

Open Market Committee participants estimate is consistent with 

maximum sustainable employment. Those out of a job for more 

than 6 months continue to make up an unusually large fraction of 

the unemployed. And the number of people who are working parttime but would prefer a full-time job remains very high. 

These observations underscore the importance of considering 

more than the unemployment rate when evaluating the condition 

of the U.S. labor market. 

Among the major components of GDP, household and business 

spending growth stepped up during the second half of the year. 

Early in 2013, growth in consumer spending was restrained by 

changes in fiscal policy. As this restraint abated during the second 

half of the year, household spending accelerated, supported by job 

gains and by rising home values and equity prices. 

Similarly, growth in business investment started off slowly last 

year but then picked up during the second half, reflecting improving sales prospects, greater confidence, and still favorable financing 

conditions. 

8 

In contrast, the recovery in the housing sector slowed in the 

wake of last year’s increase in mortgage rates. Inflation remained 

low as the economy picked up strength, with both the headline and 

core personal consumption expenditures, or PCE price indexes, rising only about 1 percent last year, well below the FOMC’s 2 percent objective for inflation over the longer run. 

Some of the recent softness reflects factors that seem likely to 

prove transitory, including falling prices for crude oil and declines 

in non-oil import prices. My colleagues on the FOMC and I anticipate that economic activity and employment will expand at a moderate pace this year and next; the unemployment rate will continue 

to decline toward its longer-run sustainable level; and inflation will 

move back toward 2 percent over coming years. 

We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage, these developments do not pose a substantial risk to the U.S. economic outlook. 

We will, of course, continue to monitor the situation. 

Turning to monetary policy, let me emphasize that I expect a 

great deal of continuity in the FOMC’s approach to monetary policy. I served on the committee as we formulated our current policy 

strategy and I strongly support that strategy, which is designed to 

fulfill the Federal Reserve’s statutory mandate of maximum employment and price stability. 

Prior to the financial crisis, the FOMC carried out monetary policy by adjusting its target for the Federal funds rate. With that 

rate near zero since late 2008, we have relied on two less traditional tools—asset purchases, and forward guidance—to help the 

economy move toward maximum employment and price stability. 

Both tools put downward pressure on longer-term interest rates 

and support asset prices. In turn, these more accommodative financial conditions support consumer spending, business investment, 

and housing construction, adding impetus to the recovery. 

Our current program of asset purchases began in September 

2012 amid signs that the recovery was weakening and progress in 

the labor market had slowed. The committee said that it would 

continue the program until there was a substantial improvement in 

the outlook for the labor market in the context of price stability. 

In mid-2013, the committee indicated that if progress towards its 

objectives continued as expected, a moderation in the monthly pace 

of purchases would likely become appropriate later in the year. 

In December, the committee judged that the cumulative process 

toward maximum employment and the improvement in the outlook 

for labor market conditions warranted a modest reduction in the 

pace of purchases, from $45 billion to $40 billion per month of 

longer-term Treasury securities, and from $40 billion to $35 billion 

per month of agency mortgage-backed securities. At its January 

meeting, the committee decided to make additional reductions of 

the same magnitude. 

If incoming information broadly supports the committee’s expectation of ongoing improvement in labor market conditions and inflation moving back towards its longer-run objective, the committee 

will likely reduce the pace of asset purchases in further measured 

steps at future meetings. 

9 

That said, purchases are not on a preset course and the committee’s decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment 

of the likely efficacy and costs of such purchases. 

The committee has emphasized that a highly accommodative policy will remain appropriate for a considerable time after asset purchases end. In addition, the committee has said since December 

2012 that it expects the current low-target range for the Federal 

funds rate to be appropriate at least as long as the unemployment 

rate remains above 6.5 percent, inflation is projected to be no more 

than a half percentage point above our 2 percent longer-run goal, 

and longer-term inflation expectations remain well-anchored. 

Crossing one of these thresholds will not automatically prompt 

an increase in the Federal funds rate, but will instead indicate only 

that it had become appropriate for the committee to consider 

whether the broader economic outlook would justify such an increase. 

In December of last year, and again this past January, the committee said that its current expectation, based on its assessment of 

a broad range of measures of labor market conditions, indicators of 

inflation pressures and inflation expectations, and readings on financial developments, is that it likely will be appropriate to maintain the current target range for the Federal funds rate well past 

the time that the unemployment rate declines below 6.5 percent, 

especially if projected inflation continues to run below the 2 percent 

goal. 

I am committed to achieving both parts of our dual mandate: 

helping the economy return to full employment; and returning inflation to 2 percent while ensuring that it does not run persistently 

above or below that level. 

I will finish with an update on progress on regulatory reforms 

and supervisory actions to strengthen the financial system. 

In October, the Federal Reserve Board proposed a rule to 

strengthen the liquidity positions of large and internationally active financial institutions. Together with other Federal agencies, 

the Board also issued a final rule implementing the Volcker Rule, 

which prohibits banking firms from engaging in short-term proprietary trading of certain financial instruments. 

On the supervisory front, the next round of annual capital stress 

tests of the largest 30 bank holding companies is under way, and 

we expect to report results in March. 

Regulatory and supervisory actions, including those that are 

leading to substantial increases in capital and liquidity in the 

banking sector, are making our financial system more resilient. 

Still, important tasks lie ahead. 

In the near term, we expect to finalize the rules implementing 

enhanced prudential standards mandated by Section 165 of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act. 

We also are working to finalize the proposed rule strengthening 

the leverage ratio standards for U.S.-based, systemically important 

global banks. We expect to issue proposals for risk-based capital 

surcharge for those banks as well as for a long-term debt requirement to help ensure that these organizations can be resolved. 

10 

In addition, we are working to advance proposals on margins for 

non-cleared derivatives consistent with the new global framework 

and are evaluating possible measures to address financial stability 

risks associated with short-term wholesale funding. We will continue to monitor for emerging risks, including watching carefully to 

see if regulatory reforms work as intended. 

Since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health 

and in strengthening the financial system. Still, there is more to 

do. Too many Americans remain unemployed, inflation remains 

below our longer-term objective, and the work of making the financial system more robust has not yet been completed. 

I look forward to working with my colleagues and many others 

to carry out the important mission you have given the Federal Reserve. 

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

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

147 of the appendix.] 

Chairman HENSARLING. The Chair will now recognize himself for 

5 minutes for questions. 

Chair Yellen, you just testified that, ‘‘I expect a great deal of continuity on the FOMC’s approach to monetary policy.’’ So I will ask 

the obvious question: In forward guidance, which has been somewhat anchored in the Evans Rule, it seemingly said monetary policy will not tighten until unemployment drops below 6.5 percent. 

Now Chairman Bernanke announced that—or he described this 

as a Taylor-like rule, although Professor Taylor, whom we will hear 

from later, may not agree. 

Be that as it may, we stand on that threshold. And so I also see 

in your testimony where you said, ‘‘Crossing one of these thresholds will not automatically prompt an increase in the Federal funds 

rate.’’ 

I guess to some extent the editorial writers in the Wall Street 

Journal anticipated this and opined 2 days ago, in respect to the 

Evans Rule, ‘‘Perhaps the Open Market Committee should have 

called it the Evans Suggestion.’’ ‘‘The mistake was telling markets 

there was a fixed rule when the only sure thing at the Fed is more 

improvisation.’’ 

So, who is right here? Is The Wall Street Journal correct that 

these thresholds are illusory, and we are seeing more improvisation, or do we have something that is rule-like? 

Mrs. YELLEN. After the Federal funds rate hit its effective lower 

bound— 

Chairman HENSARLING. I’m sorry, Chair Yellen, could you pull 

the microphone a little closer to you, please? Thank you. 

Mrs. YELLEN. After the Federal funds rate reached its effective 

lower bound, close to zero, at the end of 2008, the Federal Reserve 

was forced to provide additional accommodation through tools that 

were new and novel. And an important tool that had been used to 

some extent in the past but we have relied on quite heavily since 

that time is our forward guidance concerning the likely path of 

monetary policy. 

11 

Chairman HENSARLING. But, Madam Chair, if you reach a 

threshold and then you ignore that threshold, what good is the forward guidance? 

Mrs. YELLEN. What the Fed indicated in December of 2012 is 

that we did not think it would be appropriate to consider raising 

the Federal funds rate as long as unemployment was over 6.5 percent and inflation was projected to run under 2.5 percent, as long 

as inflation expectations were also well-anchored. 

So, we have followed that guidance. It has been very— 

Chairman HENSARLING. I would say this, if I could— 

Mrs. YELLEN. —useful to markets. 

Chairman HENSARLING. Madam Chair, the Fed may say one 

thing, but markets may hear another. 

My time is running out. I want to cover a little other ground as 

well, dealing with a rules-based monetary policy. 

I think if I have read some of your statements properly—and I 

don’t want to put words in your mouth—you consider times 5 years 

after the financial crisis still extraordinary, and it is not necessarily an appropriate time for a rules-based approach? Is that a 

fair assessment of your views? 

Mrs. YELLEN. I have always been in favor of a predictable monetary policy that responds in a systematic way to shifts in economic 

variables— 

Chairman HENSARLING. In fact, earlier in your career, in reference to the Taylor Rule, you said it is, ‘‘what sensible central 

banks do.’’ 

So that begs the question today, using your words, are you a sensible central banker? And if not, when will you become one? 

Mrs. YELLEN. Congressman, I believe that I am a sensible central banker, and these are very unusual times in which monetary 

policy for quite a long time has not even been able to do what a 

rule like the Taylor Rule would have prescribed. For several years 

that rule would have prescribed that the Federal funds rate should 

be in negative territory, which is impossible. 

So, the conditions facing the economy are extremely unusual. 

I have tried to argue and believe strongly that while a Taylor 

Rule—or something like it—provides a sensible approach in more 

normal times, like the great moderation, under current conditions, 

when this economy has severe headwinds from the financial crisis 

and has not been able to move the funds rate into the negative territory that rule would have prescribed, we need to follow a different 

approach. And we are attempting through our forward guidance to 

be as systematic and predictable as we can possibly be. 

Chairman HENSARLING. Madam Chair, my time has expired, and 

I am going to attempt to set a good example for the rest of the committee. 

The Chair now recognizes the ranking member of the committee 

for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Ms. Yellen, you alluded to continuing the policies that were initiated by the committee that you served on with Mr. Bernanke. 

Mrs. YELLEN. I can’t hear you. 

Ms. WATERS. I am a supporter of quantitative easing, and I 

would like to hear from you what you think quantitative easing did 

12 

to stabilize this economy. Can you tell us not only what you think 

happened with quantitative easing, but how, again, you intend to 

continue the policy on tapering as it is today? 

Mrs. YELLEN. Thank you, Congresswoman Waters. 

We have been buying longer-term Treasury securities and agency 

mortgage-backed securities. The objective has been to push down 

longer-term interest rates. And I believe we have succeeded in 

doing that. And also, to more broadly make financial conditions accommodative. 

The purpose is to spur spending in the economy and to achieve 

more rapid economic growth. And I believe we have been successful. Some examples would be that as mortgage rates fell to historically low levels, we certainly saw a pickup—a very meaningful 

pickup—in housing activity off the very low levels it had fallen to. 

We also have seen a very meaningful increase in house prices, 

and I think that has improved the security of a very large number 

of households. Many households have been underwater in their 

mortgages, and that fraction has diminished substantially, which 

means that those households are in a better position to spend and 

to borrow. 

In addition, low interest rates have also stimulated spending in 

other intrasensitive sectors like automobiles. We have seen a decided pickup in that sector as well. When spending and employment increase in those sectors, the availability of jobs increases, 

unemployment tends to come down, and growth picks up. 

And as I mentioned, since the beginning of this program we have 

seen the unemployment rate decline 1.5 percent, and I think this 

program has contributed to that. 

When the committee began this policy it did so at a time when 

it looked like the recovery and progress in the labor market was 

stalling. We began these asset purchases as a secondary tool, a 

supplementary tool to our forward guidance to add some momentum to the recovery, and we said we would continue those purchases until we had seen a substantial improvement in the outlook 

for the labor market in the context of price stability. 

As I noted, there have been a substantial number of jobs created 

and unemployment has come down, and in December the committee judged that enough progress had been made in the labor 

market to begin a measured pace of reductions in the pace of our 

asset purchases. 

We purposely decided to act in a measured and deliberate way 

to take measured steps so that we could watch to see what was 

happening in the economy, and we have indicated that if the outlook continues to be one in which we expect and are seeing continued improvement in the labor market that implies growth strong 

enough going forward to anticipate such improvement, and inflation, which is running below our objective, if we see evidence that 

will come back toward our objective over time, we are likely to continue reducing the pace of our purchases in measured steps. 

But we have also indicated that this program is not on a preset 

course, which means that if the committee judges there to be a 

change in the outlook, that it would reconsider what is appropriate 

with respect to the program. 

Ms. WATERS. Thank you very much. 

13 

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 and Trade Subcommittee. 

Mr. HUIZENGA. Thank you. 

Chair Yellen, did short-term proprietary trading cause the financial crisis? 

Mrs. YELLEN. I wouldn’t say that short-term proprietary trading 

was the main cause of the crisis. 

Mr. HUIZENGA. I’m sorry, it was not? 

Mrs. YELLEN. I would not see that as the main cause of the crisis. 

Mr. HUIZENGA. Okay. I think we would be in agreement on that. 

You have noted, I think on December 10th—just this past year— 

at the open meeting board, you had some concerns about the 

Volcker Rule, as well, and to quote you, you specifically asked for 

an ‘‘assessment of what impact do you—and I am assuming that 

is your own internal economists—think this will have on U.S. 

banks in terms of: Do they face potential competitive disadvantages 

vis-a-vis foreign banks in various global capital market activities?’’ 

I have some of those same concerns, and I am not sure, as we 

had the five regulators—the Fed, the SEC, the OCC, the FDIC and 

the CFTC—for those of you watching out there, that is the alphabet soup of regulators that look at all of this, the discussion of the 

Volcker Rule and the impact, Governor Tarullo seemed to indicate 

that the Fed was very concerned about that, that we were not 

going to somehow be at a disadvantage. And I am not sure we have 

made ourselves any safer. 

Do you mind chatting a little bit about that, please? 

Mrs. YELLEN. I think the impact of the rule is something that we 

will monitor over time as it goes into effect. The agencies have 

worked hard jointly to write a balanced rule that will permit banking organizations to continue to engage in critical market-making 

and hedging activities. 

And we will be very careful in how they supervise institutions to 

make sure— 

Mr. HUIZENGA. I am sure you are aware that we are the only sort 

of major economy, major government that has put anything like 

this into effect. You are comfortable saying—I think the quote 

was—‘‘monitor over time to see its effect.’’ 

How long are you comfortable waiting to see what will happen? 

Is that 3 months? Six months? A year? 

How long will we see liquidity leave the United States and us 

lose that market share? 

Mrs. YELLEN. I think that banks will be able to go on as we implement this rule to engage in those activities, particularly marketmaking and hedging, that are really vital to a well-functioning financial system. 

Mr. HUIZENGA. But is there a length of time? That is what I am 

looking for. 

How long are you interested in waiting to see its effectiveness? 

It is 932 pages, 297,000 words. There is a lot to wade through and 

a lot of interpretation. 

14 

Mrs. YELLEN. We will be involved with the OCC and the SEC 

and other agencies in using supervision to make sure that firms do 

comply with the rule. 

Mr. HUIZENGA. So, but an undetermined amount of time to see 

its effectiveness? 

Mrs. YELLEN. It will certainly take time to see the effects of the 

rule. 

Mr. HUIZENGA. Okay. I will follow up with a letter because I 

would like you to put a little thought into exactly how much time. 

How long are we going to be at a competitive disadvantage, is what 

I am concerned about. 

All right. We are going to have to move along, because I have 

just over a minute left. 

In response to quantitative easing, foreign governments have 

adopted measures that have closed foreign markets to U.S. investors and companies in many ways. And it is what was talked about 

at that very table, the fragile five. Indonesia, India, South Africa, 

Turkey, as well as Brazil have been affected by our monetary policy, and now it is just sort of the reversing of our easing, I guess, 

as you would say, as we are not purchasing as many. 

Do you have any concerns that poorly managed tapering that we 

are trying to do, or exit of QE, might cause capital flight in some 

of these other economies as well? And what would that mean for 

investors and firms here in the United States? 

I am concerned that it—not to mention our diplomatic and trade 

relations, we are in an interconnected world economy, so— 

Mrs. YELLEN. Certainly, capital markets are global, and the monetary policies of any country affect other countries in such a world. 

But we have been very clear at the outset that we initiated our 

program of asset purchases and an accommodative monetary policy 

more generally to pursue the goals that Congress has assigned to 

the Federal Reserve, namely supporting economic growth and employment in the context of price stability. 

We have tried to be as clear as we possibly can about how we 

would conduct this policy. And it has been quite clear at the outset 

that as our recovery advanced, we would wind down or reduce the 

pace of our asset purchases, and as growth picks up and inflation 

comes back toward our objective over time, eventually we will normalize our policy stance. 

Chairman HENSARLING. The time of the gentleman has long 

since expired and the— 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Chairman HENSARLING. —Chair would advise all Members perhaps to ask that last question with at least 30 seconds to go on the 

clock. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Clay, the ranking member of our Monetary Policy and Trade Subcommittee. 

Mr. CLAY. Thank you, Mr. Chairman. I will be cognizant of time. 

Madam Chair, the U.S. unemployment rate is 6.6 percent. For 

African-Americans, it stands at 12.1 percent; for Hispanics, it is 8 

percent; and for Asians, it is a little over 4 percent. And for young 

adults, it is 20 percent. 

15 

What can this Congress do, working in conjunction with the Federal Reserve, to lower unemployment rates for African-Americans, 

for young people, for the Latino community? Any suggestions? 

Mrs. YELLEN. For our part, we are trying to do what we can with 

monetary policy to stimulate a faster economic recovery to bring 

unemployment down nationally. And because high unemployment 

disproportionately affects many of the groups that you mentioned, 

if we are successful it will have a great benefit to the groups that 

you mentioned. 

Of course, monetary policy is not a panacea, and I think it is absolutely appropriate for Congress to consider other measures that 

you might take in order to foster the same goals. 

Some of those groups have been adversely affected as well by 

longer-term trends in the economy that have led to very stagnant 

wage growth for those at the middle and bottom of the income 

spectrum; we have seen rising inequality. 

Certainly, all economists that I know of think that improving the 

skills of the workforce is one important step that we should be taking to address those issues. 

Mr. CLAY. So Congress could also assist by taking a look at, say, 

infrastructure and starting a jobs program in that area where we 

rebuild our roads, bridges, and other infrastructure and put Americans back to work? 

Mrs. YELLEN. These are certainly programs that Congress could 

consider and debate. 

Mr. CLAY. Thank you for that response. 

In a speech you gave to the AFL-CIO last year, you stated that 

the evidence you had seen showed that the increase in unemployment since the onset of the Great Recession has been largely cyclical and not structural. You cited the fact that job losses were widespread across industry and occupation groups and went on to say 

construction, manufacturing, and other cyclically sensitive industries were hard hit as well. 

Do you continue to believe that a significant component of our 

unemployment situation continues to be the result of cyclical factors? 

Mrs. YELLEN. I do continue to hold that view. I think most of the 

increase we have seen and the decline we have seen—while a small 

portion of it may be related to structural issues and there may be 

some reduction in structural mismatch, better matching as the recovery has proceeded—mainly we have seen a decline in cyclical 

unemployment. 

Every 3 months, members of the committee offer their personal 

views as to what a longer-run normal unemployment rate end is, 

and the range of opinion in the FOMC in December ranged from 

5 percent to 6 percent. So at 6.6 percent, we remain well above 

that. 

And I guess I would point out, too, some broader measures of the 

labor market—we shouldn’t only focus on the unemployment rate. 

The degree of involuntary part-time employment remains exceptionally high, at 5 percent of the labor force. So broader measures 

of unemployment are even more elevated relative to normal than 

our standard unemployment rate. 

16 

In addition, there is an unusually high incidence of long-duration 

spells of unemployment. 

So by a number of measures, our economy is not back. The labor 

market is not back to normal in terms of our maximum employment goals. 

Mr. CLAY. Thank you for your responses. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Alabama, our 

chairman emeritus, Mr. Bachus, for 5 minutes. 

Mr. BACHUS. Thank you. Chair Yellen, last week Governor 

Tarullo appeared before the committee and he said that the CLO 

ownership issue was at the top of the agenda for the interagency 

working group, which is the Fed and four other members, I believe. 

What additional information do you need to resolve the CLO 

issue and clarify how legacy securities will be treated under the 

Volcker Rule? 

Mrs. YELLEN. This is something that a number of banking organizations have asked the regulators to look at. The regulators recently issued a ruling concerning TruPS, and this is something 

they are jointly engaged in looking at, and I will hopefully have 

something on that reasonably soon. 

Mr. BACHUS. Okay. I was going to ask you how soon do you think 

we can expect you to issue some guidance, but— 

Mrs. YELLEN. I don’t have a definite— 

Mr. BACHUS. But you are saying maybe soon? 

Mrs. YELLEN. Hopefully. 

Mr. BACHUS. Okay. 

Do you know what remedy the group is suggesting? 

Mrs. YELLEN. I don’t. This is something they are going to have 

to look at. 

Mr. BACHUS. Do you agree with me that this is something that 

needs to be addressed with some sense of urgency? 

Mrs. YELLEN. It is certainly something that the regulators will 

look at and should look at. 

Mr. BACHUS. All right. 

The Fed has long suggested—and I know Mr. Clay and your response to him mentioned this—and has held the view that a large 

portion of the recent decline in the labor force participation rate 

has been attributable to cyclical factors, which would become structural if unaddressed, and therefore, because you considered it cyclical, part of the reason for aggressive quantitative easing. 

And let me put this up: That is the Philadelphia Fed’s recent employment study. If you look at that you can see, number one, there 

is evidence that there may be a smaller gap between full employment and current employment than we previously expected. 

And let me just read two of the—they said almost 80 percent of 

the decline in participation since the first quarter of 2012 is accounted for by an increase in nonparticipation due to retirement. 

This implies that the decline in the unemployment rate since 2012 

is not due to more discouraged workers dropping out of the labor 

force. 

And the likelihood of those who have left the labor force due to 

retirement and disability rejoining the labor force is small and has 

17 

been largely insensitive to business cycle conditions in the past, 

suggesting, at least to me, that the decision to leave the labor force 

for those two reasons is more or less permanent. 

If you look at that line, participation has really been coming 

down for 10 years—10 or 12 years. And let me put a second chart 

up, which is very consistent with that. That is the Bureau of Labor 

Statistics, and you can see that—I think since maybe 1998, yes, 

1998 on the Fed and 2001, we have a consistent dropping of participation. 

Does that maybe modify or amend your view on the structural 

versus cyclical debate that we have been having? 

Mrs. YELLEN. I would like to make clear that I think a significant part of the decline in labor force participation, as you have 

mentioned, is structural and not cyclical. The baby boomers are 

moving into older ages where there is a dramatic drop-off in labor 

force participation, and in aging populations, we should expect to 

see a decline in labor force participation. And as you noted, that 

has been going on for some time. 

So there is no doubt in my mind that an important portion of 

this labor force participation decline is structural. 

That said, there may also be—and I am inclined to believe this 

myself, based on the evidence—cyclical factors at work. So that decline has a structural component and also a cyclical component. 

There is no surefire way to separate that decline into those two 

components, but it is important to realize that we are seeing declining participation also among prime-age workers and among 

younger people. And it seems to me, based on the evidence that I 

have seen, that some portion of that does reflect discouragement 

about job opportunities. But there is no clear scientific way, at this 

point, to say exactly what fraction of that decline is cyclical. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you. Thank you, Mr. Chairman. 

I would like to begin by congratulating you, Chair Yellen. In the 

100-year history of the Federal Reserve—it has existed for 100 

years—there have been only 15 Fed Chairs. You are the first 

woman to lead the Fed or any major central bank. We are so proud 

of you. 

Mrs. YELLEN. Thank you. 

Mrs. MALONEY. And in your long and distinguished career, you 

have excelled at every single point of your career. And I just want 

to note that your appointment is a tremendously important historic 

achievement in the women’s movement. Congratulations. 

Mrs. YELLEN. Thank you. Thank you, Congresswoman. 

Mrs. MALONEY. I would like to ask you about your reaction to the 

unexpectedly weak job report last week, which showed that the 

economy only created 113,000 jobs in January. Some in the markets are now calling for a pause in the Fed’s tapering strategy. 

Has the weak jobs report caused you to consider slowing the pace 

of the Fed’s tapering? 

Mrs. YELLEN. I was surprised that in the jobs reports in December and January, the pace of job creation was running under what 

18 

I had anticipated. But we have to be very careful not to jump to 

conclusions in interpreting what those reports mean. 

We have had unseasonably cold temperatures that may be affecting economic activity in the job market and elsewhere. 

The committee will meet in March. We will have a broad range 

of data on the economy to look at, including an additional employment report, and I think it is important for us to take our time to 

assess just what the significance of this is. 

I think the committee has said— 

Mrs. MALONEY. Can you describe what would cause you to consider a tapering pause? What would cause it? Many months of bad 

data reporting? What would cause you to consider pausing? 

Mrs. YELLEN. I think what would cause the committee to consider a pause is a notable change in the outlook. The committee, 

when it decided to begin this process of tapering in measured steps, 

believed that the outlook was one where we would see continued 

improvement in the labor market and inflation moving back up toward a 2-percent target. 

And if incoming data were to cause the committee, looking broadly at all of the evidence— 

Mrs. MALONEY. What kind of data? 

Mrs. YELLEN. —question that— 

Mrs. MALONEY. Jobs data? What kind of data? 

Mrs. YELLEN. We would be looking at a broad range of data on 

the labor market, including unemployment, job creation, and many 

other indicators of labor market performance. 

We would also be looking at indicators of spending and growth 

in the economy because we do need to see growth at an above-trend 

pace in order to project continued improvement in the labor market. And we note that inflation is running well below our objective, 

and we want to be sure that is moving back toward our objective. 

Mrs. MALONEY. What would it take for the Fed to consider increasing its asset purchases again instead of just slowing down its 

reductions? What would it take? 

Mrs. YELLEN. I think a significant deterioration in the outlook, 

either for the job market or very serious concerns that inflation 

would not be moving back up over time. But the committee has emphasized that purchases are not on a preset course and we will continue to evaluate the evidence. 

Mrs. MALONEY. So far, the Fed has been reducing its total bond 

purchases by $10 billion a month, with reductions split evenly between Treasuries and mortgage-backed securities. Why did the Fed 

choose to split it between mortgage-backed securities and Treasuries? 

Mrs. YELLEN. Both kinds of purchases have similar effects on 

longer-term interest rates. 

Mrs. MALONEY. Now, if the housing market starts to slow down, 

would the Fed consider maintaining the purchases of mortgagebacked securities and only tapering Treasury purchases? 

Mrs. YELLEN. I think that both kinds of purchases affect interest 

rates broadly. Our purchases of Treasuries tend to push down 

mortgage rates as well. Some evidence suggests a differential impact, but it is very hard to think of these being discreet. 

Mrs. MALONEY. My time has expired. 

19 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentlelady from West Virginia, 

Mrs. Capito, the Chair of our Financial Institutions Subcommittee. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I would like to add my voice to the chorus of congratulations to 

the Chair on her appointment. 

I would also like to tell you that I have been on the committee 

for many, many years, and I have understood more of what you 

said today than I have probably from the last two folks who were 

in front of us, so thank you for that. 

Mrs. YELLEN. Thank you. 

Mrs. CAPITO. I represent West Virginia, an energy State. In your 

report, you note the growth in the oil and gas development businesses, which I think has great promise for the country economically. But it is also noted in notes from the Richmond Fed that the 

coal industry is suffering low coal prices, regulation, and a decrease 

in employment. 

Energy has a great promise to bring jobs to this country and 

keep them here. What do you think about an all-of-the-above energy policy? And what effect would that have on our economic 

growth? 

Mrs. YELLEN. I think energy has been a great contributor to 

growth. And we have seen a huge shift in the U.S. position in 

terms of our net imports of oil and natural gas. And, energy policy 

certainly plays an important role there. 

Mrs. CAPITO. Okay, thank you. 

Another question: Again, coming from a State that has a large 

senior population, one of the concerns I have had is low interest 

rates and what impact this has on savers, particularly older savers 

who are trying to retire when they are relying on fixed-income assets like bonds or CDs and savings account. This has been difficult 

for them to plan for their senior years post-retirement. 

What kind of thinking do you have as you are weighing the interest rate structure on the savings that is occurring in the country, 

particularly for the older saver? 

Mrs. YELLEN. Certainly, a low-interest rate environment is a 

tough one for retirees who are looking to earn income in safe investments like CDs or bank deposits. But I think it is important 

to recognize that interest rates are low for a fundamental reason, 

and that is because in the United States and in the global economy 

as a whole, there is an excess of saving relative to the demand for 

those savings for investment purposes. 

So the rates of return that savers can expect really depend on 

the health of the economy, and with a weak economy where there 

is a lot of saving and less demand for those savings, that is a fundamental drag on growth and on what savers can expect. 

Our objective in keeping interest rates low is to promote a 

stronger recovery. And in a stronger economy, savers will be able 

to earn a higher return because the economy will be able to generate it. 

So I recognize that this is difficult for savers. It is also important 

to recognize that any household, even if it is retired, in addition to 

saving, people care about their work opportunities; they care about 

the opportunities of their kids. And lots of people have exposure to 

20 

the stock market as well, even if it is through a 401(k) or the 

health of a retirement plan. And so, this shouldn’t be a one-dimensional assessment. 

Mrs. CAPITO. Right. Thank you. 

Folks are working longer, too, and I think that is a concern for 

those who thought they had planned well and they are finding it 

is not quite turning out for them. 

Another question: You already mentioned that 5 percent of the 

labor force is exceptionally high for the part-time—an exceptionally 

large portion for the part-time. We have learned with the President’s Affordable Care Act that anybody who is working over 29 

hours is considered full-time. 

Is that consistent with your assessments of what a full-time job 

is when you are looking at your calculations? And when you say 

an exceptionally large portion is part-time, is that anybody working 

under 29 hours? Is that how you define that? 

Mrs. YELLEN. I am talking about part-time for economic reasons. 

People who were working— 

Mrs. CAPITO. What is the definition of a part-time job? How 

many hours a week? 

How many hours a week would you consider a part-time job? 

When most people consider a full-time job 40 hours a week, is a 

part-time job—the President has defined it as 29 hours and above. 

How do you define a part-time job? 

Mrs. YELLEN. This is a definition that is used by the Bureau of 

Labor Statistics, not ours. 

Mrs. CAPITO. Do you happen to know what it is? Or can you get 

back to me on that? 

Mrs. YELLEN. Under 35 hours. 

Mrs. CAPITO. Thirty-five. All right, thank you. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Ms. Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chair Yellen, as you know, the median U.S. wage has failed to 

keep pace with a booming stock market, and record corporate profits. Is it possible that stagnant wage growth for American workers 

and not overly accommodative monetary policy, as some have suggested, is causing a slower recovery and decreased job creation? 

Mrs. YELLEN. Certainly, for much of the workforce, real wages 

have been stagnant in recent years, but also, unfortunately, going 

back many years as far as the mid-to late 1980s. 

I am not sure we know for sure, but there has been some speculation that trend for so many households of weak labor market income growth did contribute to the troubles in the economy. The 

idea there would be that wealthier families—higher-income families spent less of their additional income than lower-income families, and so that shift in the distribution of income may have created a drag on growth. 

I don’t know that we have any hard evidence on that, but that 

is certainly a hypothesis that has received some attention. 

Ms. VELAZQUEZ. The housing sector has continued to see improvement with robust construction activity and higher home 

prices. How will continued reductions in QE affect the housing 

market? 

21 

Mrs. YELLEN. I think that quantitative easing, or purchases of 

securities, did serve to push down mortgage rates and other longerterm interest rates quite substantially and was a factor underlying 

the strength of the housing market, and also promoted a recovery 

in house prices that has been good for so many families. 

We did see a backup in interest rates in the spring and into the 

summer. In part, I think that was associated with a reevaluation 

of the strength of economic growth and the likely cause of monetary policy. Although mortgage rates are still very low, we certainly 

have seen a slowing in the housing sector since mortgage rates 

have backed up. 

I am hopeful housing will continue to support the recovery. There 

are good fundamentals there, but that provided clear evidence of 

the impact that mortgage rates do have on the strength of housing. 

Ms. VELAZQUEZ. Thank you. 

According to the ADP National Employment Report, small businesses created four of five new jobs in January. In your opinion, 

why are small businesses adding more jobs than their larger counterparts? 

Mrs. YELLEN. I think we have seen over a longer time, not just 

the month, increases in jobs in most sectors of the economy. I think 

both small and large businesses have by and large contributed to 

that. So of course there is a good deal of month-to-month variation. 

But there has been, I think, broad improvement in the labor market. 

Ms. VELAZQUEZ. Is it possible that the Volcker Rule could further 

boost small business lending as banks seek out revenue in traditional financial products due to the general prohibition on risky 

and lucrative proprietary trading? 

What we saw during the financial crisis was a fact. We saw anecdotal stories about small businesses having problems accessing capital. 

Yet, it is changing. Do you think that the Volcker Rule has anything to do with that? 

Mrs. YELLEN. I suppose I wouldn’t tie trends in credit availability for small businesses so much to the Volcker Rule, but certainly during the downturn, during the Great Recession, lots of 

small businesses have had difficulty in accessing credit. Business 

conditions haven’t been very good for many small businesses during that period. 

In fact, the demand for credit by many small businesses, given 

their prospects, hasn’t been that high. And of course, equity in 

one’s home for small businesses is an important source of financing 

and the decline in home prices, I think, has also taken a toll there. 

Ms. VELAZQUEZ. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

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

Mr. NEUGEBAUER. Chair Yellen, again, congratulations to you 

and thank you for being here today. Would you say that the deficit 

that we have been experiencing over the last few years has had a 

negative impact on the future growth of our economy? 

Mrs. YELLEN. I would say that long-run deficits that are projected to rise in an unsustainable way is a trend that has a negaVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
22 

tive effect on the economy. The larger deficits that we have had in 

recent years in part reflect the weakness of the economy. 

Mr. NEUGEBAUER. But you would agree that long-term—these 

kind of deficits, in the pathway we are on, is not a positive thing 

for the economy? 

Mrs. YELLEN. I think if we look at long-term projections, for example, of the Congressional Budget Office, we see as we go out 20, 

30 years that the debt-to-GDP ratio will be rising over time in a 

way that looks unsustainable— 

Mr. NEUGEBAUER. I am going to take that as a yes, you think 

it is— 

Mrs. YELLEN. —and that is a negative for the economy. 

Mr. NEUGEBAUER. Yes. 

So here is a question: It looks like last year in 2013, the Fed 

bought what would be the equivalent of about 62 percent of the 

Treasuries issued in 2013, and that you currently hold about 18 

percent of the outstanding Treasuries. And what a lot of people 

don’t realize is that you kind of bought down the yield curve for 

the Treasury. 

And I am sure Mr. Lew will put you on his turkey list come 

Christmas time because you are doing him a huge favor by buying 

down that yield curve, and so have transferred $77 billion from the 

Fed to the Treasury, obviously reducing the interest borrowing 

cost. 

So in my view, if these deficits are negative, the Fed has almost 

become a deficit enabler in that you are making it very easy to 

really mask the real cost of these deficits. Speaking of the CBO, 

they said in a recent release that 74 percent of the budget deficit 

for the next 10 years will be on interest alone. 

And so is this QE, quantitative easing, and this huge position 

that the Fed has taken, I question—I think it has almost become 

a deficit enabler. I would be interested to hear your response on 

that. 

Mrs. YELLEN. We are very focused on achieving the objectives 

that Congress has assigned to the Federal Reserve, and that is 

maximum sustainable employment and price stability. 

We have had an economy with unemployment that is well above 

normal levels and inflation is running well below our 2 percent objective, and the Federal Reserve is focused on putting in place a 

monetary policy that is designed to achieve those very important 

objectives that Congress has assigned to us. 

Because we have a weak economy with, in some sense, plentiful 

savings relative to investment, the fundamentals call for interest 

rates to be low and we are allowing them to be low and fostering 

a low-interest rate environment to achieve those important goals 

that Congress has assigned to us. 

I don’t think it would be helpful, either in terms of achieving the 

objectives that Congress assigned to us or in terms of Congress’ 

deficit reduction efforts, for us to purposely raise interest rates in 

order to weaken the economy. The likely impact of that in a weaker 

economy would be larger deficits. 

Mr. NEUGEBAUER. I hear what you are saying about the things 

that Congress has challenged you with and the employment and 

23 

mandatory—and monetary policy. But Congress didn’t pass a bill 

for quantitative easing; that was a choice that the Fed made. 

And that very choice has really impacted the markets, but more 

importantly, I think it really, I believe, is enabling these deficits to 

continue and for the real cost to be masked in the fact that you are 

make making huge transfers, and that as we go out and as you 

talk about interest rates going up, as those interest rates are going 

up, the deficit, as a percentage of what interest applies to that, is 

going to be much, much larger. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman, for 5 minutes. 

Mr. SHERMAN. Chair Yellen, you have a very busy job and a lot 

of things you can’t do, and I am sure one of your great regrets is 

you don’t get enough time to hang out with accountants. 

That being the case, you probably haven’t focused on the FASB 

proposal to basically force the capitalization of all leases. This 

would add $2 trillion to the balance sheets of America’s businesses, 

adding $2 trillion of assets, $2 trillion of liabilities. 

You would think that would balance out, but in fact it destroys 

the debt ratios, violates their borrowing covenants. It is estimated 

that this will cost anywhere from 190,000 jobs up to millions of jobs 

as corporations try to cut back and regain their debt-to-equity 

ratio. And as less of us refuse to sign long-term leases, and then 

as those wanting to do real estate development without an anchored tenant with a long-term lease, you can’t build a project. 

So I won’t ask a question here except to ask you to take a look 

at this, and perhaps even it will affect your economic projections 

on the downside, and then, in your role as bank regulator, realize 

that there are going to be hundreds of thousands of companies 

who, through no fault of their own, are in violation of the covenants they have signed with their banks and the pressure will be 

from your bureaucrats to call the loans because they are in violation. 

Perhaps you could, both looking at the macroeconomic side and 

bank regulatory side, focus on that. 

You say that savings exceeds demand for investments—capital. 

And I disagree with you a little bit on that. It exceeds effective demand. 

We here all deal with small businesses. They can’t necessarily 

knock on your door. They are going to knock on our door whether 

we want them to or not. 

And American small businesses can’t get bank loans. Part of the 

problem is bank executives, because no one ever got a huge bonus 

for making a bunch of quarter million dollar loans. They all want 

to invest in the Whale—or like the Whale, until the Whale ate all 

the money in London. 

But another part of the problem is the bank regulators. I hear 

from bankers, ‘‘If we invest in sovereign debt—Turkey—heck, if we 

invest in Zimbabwe sovereign debt we are not going to get dinged 

by the bank regulators near as much as if we make loans to people 

whose character we know, who have been with our bank for years, 

who are part of the community.’’ 

24 

And these loans shouldn’t necessarily be made at prime. One out 

of 100 of these businesses going under. Not every new restaurant 

is a good restaurant. 

What can you do so that banks are making prime-plus-five, 

prime-plus-seven loans and having only modest increases in the demand for capital, and that the pressure is on them to stop investing in high-flying securities and instead make local loans? We need 

Jimmy Stewart banking back again. 

Mrs. YELLEN. I think it is very important for banks to make 

loans in their communities. And in our role as bank supervisors, 

we have tried to be very cognizant of the possibility that overzealous supervision could diminish the willingness of banks to 

make loans to creditworthy borrowers, so for— 

Mr. SHERMAN. That may be your policy at the top, but down at 

the field level, that is not what is happening. 

Mrs. YELLEN. This has been an important issue that we have 

been aware of now for a number of years, and we have worked 

carefully with our supervisors to make sure that they are not taking on policies that would discourage lending to small businesses. 

Mr. SHERMAN. You are going to have to work much harder to get 

your bureaucrats online on that, and the proof of it is that banks 

don’t make prime-plus-five loans. 

One last thing: Dodd-Frank gave you and the other systemic regulators the authority to break up those who were too-big-to-fail. 

Any chance you are going to use that authority? 

Mrs. YELLEN. We have a broad program that is designed to deal 

with too-big-to-fail. It is the Dodd-Frank program, and we are actively completing our work there. And I am very hopeful that is 

going to effectively deal with it. We will monitor as we go forward 

if more needs to be done. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now declares a 5-minute recess. 

[recess] 

Chairman HENSARLING. The committee will come to order. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Westmoreland, for 5 minutes. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. 

And thank you, Madam Chair, for being here. 

We have heard from the other side of the aisle that the President’s policies are not having any ill effect on the economy. Yet, 

Chair Yellen, we have just recently all seen the report from the 

CBO that the Obamacare Affordable Care Act is estimated to cost 

2.5 million jobs over the next decade. 

Do you believe that regulation or overregulation has an impact 

on our economic growth and job creation? 

Chairman HENSARLING. Chair Yellen, I don’t think your microphone is on. Can you see if it is on? And if it is, please pull it closer 

to you. 

Mrs. YELLEN. I apologize. 

I think certainly regulation has an impact on the economy, on 

economic growth. And there are many economic studies that have 

tried to document what it is. I think in the case of the Affordable 

Care Act, CBO has done an important analysis and probably will 

continue to look at it. 

25 

I think they have recognized the impact of the Act is likely to be 

complex. I think they are still attempting to figure out what all of 

the different channels are by which it will affect the economy. And 

we will look at that and try to look at their assessments going forward. 

Mr. WESTMORELAND. We had to pass that to find out what was 

in it, and so now that is all coming together. 

Has the Fed done any estimates on how many jobs the implementation of Dodd-Frank and the culmanative effect of the Obama 

Administration’s regulatory policies are expected to cost the economy? Or is it that the Fed is not interested in that question? Because we feel that Dodd-Frank is going to have just as much impact on the jobs market as what the Affordable Care Act did. 

Mrs. YELLEN. We lived through a significant financial crisis that 

has taken a huge toll on the economy, including creating a period 

with very high unemployment. And most of the studies that have 

been done, for example, the Basel Committee, and the United 

States participated in assessments, which is only one piece of 

Dodd-Frank, but in deciding to raise capital standards on financial 

institutions, and tried to assess what would be the net effect on the 

economy. 

And while there may be some impact in terms of raising the cost 

of capital, the overall impact that these studies found is that reducing the odds of a financial crisis would be the most important benefit. And when we see what a negative effect that has on jobs for 

such a prolonged period of time, to my mind, the regulatory agenda 

of trying to strengthen the financial system, which we are trying 

to put into place to make it more resilient and reduce systemic 

risk, will bring important long-term benefits to the economy. 

Mr. WESTMORELAND. When you say long-term, what are we talking about? Because we always hear long-term. What is long-term? 

And when does long-term start? Because we have been supposedly in a recovery now for a period of time, and we keep hearing 

that Dodd-Frank and some of these other things that have gone in 

will have long-term pluses. 

When does long-term start? Is 4 years not long-term? When are 

we planning on this kicking in? Five years, 10 years, 20 years? 

Mrs. YELLEN. I think it is kicking in, in the sense that we are 

building a more resilient financial system and substantially mitigating the odds of another financial crisis that will take this kind 

of toll on households in the economy. 

Mr. WESTMORELAND. Okay. 

And one other question, just quickly: Do you feel like there is 

enough separation between the Federal Reserve and this Administration in the fact that I know you meet with the Secretary of the 

Treasury, what, once a week, once a month? 

Mrs. YELLEN. It has been the tradition, I think, to meet almost 

once a week. There are many overlapping areas of interest between 

the Federal Reserve and the Treasury that I think makes it desirable to have ongoing communication. But— 

Chairman HENSARLING. The time of the gentleman has expired. 

Mrs. YELLEN. —the Federal Reserve is completely independent in 

conducting monetary policy. 

Chairman HENSARLING. The time of the gentleman has expired. 

26 

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

Meeks, for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

It is with great pleasure that I welcome you this morning, 

Madam Chair. Your historic ascension to the position speaks volume, I believe, for our Nation and the continued progress our Nation is making in the inclusion of women and minorities to positions of leadership and will be another source of inspiration for 

young women, like my three daughters, and especially those who 

are looking for careers in the finance and banking industry. 

And let me just say that I am pleased you have the job not because you are a woman, because you are the right person for the 

job and you have done it the old-fashioned way—you have earned 

it. 

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

Mr. MEEKS. Let me ask—and I think the ranking member 

touched on this, and I know Mr. Clay touched on this—about the 

wealth gap. And when you look at what the—that 95 percent of the 

income gains since the recovery have gone to the top 1 percent, 

there has always been a big question about the relationship between Main Street and Wall Street. And for me it has been difficult, especially sitting on this committee, to try to explain Wall 

Street to Main Street when you have this kind of inequality. 

Today, for example, on average there is—the African-American 

household is 20 times less than the White household. The median 

net income of White households stands at about $110,000 versus 

$6,000 for blacks and $7,000 for Hispanics, largely because most 

people’s wealth was in their homes. And when you have the crises, 

most—because people were steered, in minority communities, they 

lost a large part of that wealth when it was closing. Now, it has 

gone to a tremendous level. 

So, given that we know that there were no-doc loans and there 

was steering into these communities and it has caused this kind of 

disparity in wealth, is there anything that the Fed can do, and/or 

is doing, that will help the middle class in general, but even more 

specifically, these individuals who were impacted to a great extent 

because of the inequality of what was going on in the system? 

Is there something that we can do to help them get back on their 

feet? 

Mrs. YELLEN. I think, Congressman, the most important thing to 

do, which has been absolutely our focus, is to promote a stronger 

recovery. These same households that were hit so hard by what 

happened in the housing sector and by the subprime debacle, we 

want to see those households get jobs so that they can rebuild 

wealth and have the income that they need to support their families. 

Mr. MEEKS. The problem, though, that we are having is that 

many have referred to this recovery as a jobless recovery. 

And when you look at technology today and you see that technology is—a lot of business folks are using it and saying it is for 

efficiency, et cetera, and thereby a lot of jobs that would have gone 

to people—are losing some of the common person. 

I look at New York City. If you were a teller in a bank, ATMs 

have replaced you; bridge tolls, you have EZ-Pass. All of these jobs 

27 

that used to be manual labor now are replaced because of technology. 

Now, I am a big believer in international trade because that 

should create jobs. My question to you is, though, can we identify 

the jobs that will be created so that we can then pinpoint where 

we should be training individuals so that they can get the jobs that 

are going to be created and not just randomly creating jobs, but 

creating jobs and then we can go back into the communities and 

train people specifically for the jobs that we feel will be created as 

a result of the current economy? 

Mrs. YELLEN. A stronger economy is going to create jobs in virtually every sector of the economy. But a longer-term trend that 

ties in with the concerns that you have expressed is a growing 

skills gap, a growing wage inequality between more- and less-educated workers, technological trends that have reduced what used to 

be an important class of good, high-paying jobs. Those jobs are 

being competed away because of technological change and, to some 

extent, shifts in global competition. 

I think every economist that I know believes that we need to address that skill gap in order to make sure that we reduce inequality. 

Mr. MEEKS. But is there anything the Fed can do specifically to 

help in that regard? 

Mrs. YELLEN. What we can do is to try to promote stronger demand, a stronger job market generally. We have seen that lowerincome individuals have been disproportionately harmed by the 

downturn, and as the economy recovers—I am by no means saying 

that this is a panacea, not by any stretch of the imagination for inequality—but I think we will see gains broadly shared throughout 

the economy. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. McHenry, the Chair of our Oversight and Investigations Subcommittee. 

Mr. MCHENRY. Chair Yellen, congratulations on your appointment and being an important mark in the history books, as well. 

Mrs. YELLEN. Thank you. 

Mr. MCHENRY. I have a question: In 2010, you said that banks 

may be required in their debt stack, in their capital, to use a convertible instrument that in good times has a debt nature and in 

bad times converts to equity. You said that they may be required 

to do this. Is it your intention to use this instrument? 

Mrs. YELLEN. I think when I gave the speech at that time, I was 

broadly considering possible regulations or shifts in the focus of supervision that might be helpful. I think there still is focus on something like that. 

I think to improve the resolvability of a large banking organization, something that the Federal Reserve and other regulators are 

contemplating is a requirement that bank holding companies hold 

a sufficient amount of long-term debt. It would play a role similar 

to the contingent capital instruments you have described. 

Mr. MCHENRY. You mentioned that in your opening statement, 

about this requirement on long-term debt. Would it be your intenVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
28 

tion to have this contingent convertible capital as a part of that 

long-term debt requirement? 

Mrs. YELLEN. I think this type of debt would bear some similarities. It is not exactly the same but it bears some similarities to 

contingent debt in that it is a source of gone concern of value that 

would be there if an organization got in trouble that would serve 

to recapitalize it. And the existence of such a class of debt, I think, 

would give proper incentives to monitor risk-taking in these organizations. 

Mr. MCHENRY. So are you still broadly favorable towards these 

contingent convertibles? 

Mrs. YELLEN. There are a number of issues associated with that 

kind of debt, what would trigger it, and so forth, but I think it remains an interesting possibility in this proposal— 

Mr. MCHENRY. An interesting possibility. That is a fair admission from a Chair of the Federal Reserve. So, I will take that as 

somewhat favorable, if I may. 

I was reading yesterday in the Financial Times—we have this 

discussion about the Volcker Rule and the exception the Volcker 

Rule provides for sovereign debt, vis-a-vis, corporate debt in the 

United States. And I read in the Financial Times yesterday that 

Daniele Nouy, who is the head of the Bank Supervisory Agency in 

the European Union, she said that they are really going in a different direction in the E.U. 

And in light of their recent crises with sovereign debt, she said 

one of the biggest lessons of the current crisis is that there are no 

risk-free assets. So, sovereigns are not risk-free assets. That has 

been demonstrated, so we now have to react. 

In essence, the E.U. is going in a different direction when it 

comes to sovereign debt than we are in the United States. How 

would you react to that? 

Mrs. YELLEN. I believe the exemption for U.S. debt markets was 

built into Dodd-Frank. That was explicit in Dodd-Frank. 

Mr. MCHENRY. Okay. But what is your reaction to that? We are 

policymakers. We could remedy that if you think that is a flaw. 

Mrs. YELLEN. We have tried to write a rule that is consistent 

with Dodd-Frank as it was legislated. 

Mr. MCHENRY. Would you look favorably upon us saying that 

sovereign debt should not be exempt or should comparable to corporate debt? 

Mrs. YELLEN. That is something that I would have to look at 

more carefully. 

Mr. MCHENRY. But did you not look more carefully at this subject matter when you wrote the Volcker Rule? 

Mrs. YELLEN. We put into effect the allowance that Congress included in Dodd-Frank to exempt Treasury securities. 

Mr. MCHENRY. Yes. Well no, that is Treasury securities. I am 

asking about sovereign debt, which was excluded from the Volcker 

Rule. 

Written into the language of Dodd-Frank is exclusion of U.S. sovereign debt, not the exclusion of other sovereign debt. I would call 

this a lack of enthusiasm from you, I would surmise. 

Chairman HENSARLING. The time of the gentleman has expired. 

29 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano, for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Thank you, Madam Chair, for being with us today. Madam 

Chair, I have a couple of different areas I would like to pursue. I 

don’t know how far we will be able to get. 

But in your confirmation hearing, you made a comment—at least 

it is reported that you made a comment: ‘‘Addressing too-big-to-fail 

has become among the most important goals of the post-crisis period,’’ which on some levels I would agree with, although I happen 

to think we did address a fair amount of it. I also accept what 

Chairman Bernanke once said, which is, ‘‘Reality is in perception, 

and the perception is we haven’t done enough. So therefore, we 

have to do more.’’ 

And I am just wondering if you have any thoughts on how to do 

that, particularly with relation to either reinstituting some form of 

Glass-Steagall or instituting some sort of a market-driven attempt 

to reduce the size of some of these too-big-to-fail programs. 

Mrs. YELLEN. I think we have a broad agenda that is intended 

to address too-big-to-fail and we are putting it into effect and I 

think have made meaningful progress. We have— 

Mr. CAPUANO. Do you think it would be worth us considering reinstituting some form of Glass-Steagall? 

Mrs. YELLEN. I think that if we continue on the path that we are 

on of completing the Dodd-Frank rulemakings, beyond that of putting in place a rule that would enable a resolution through orderly 

liquidation by requiring— 

Mr. CAPUANO. So you think we won’t need it when you are all 

done? 

Mrs. YELLEN. I think we have to keep watching whether or not 

we have succeeded in addressing this, but I believe we have— 

Mr. CAPUANO. Fair enough. I would ask you to also take a look 

at H.R. 2266, which is a market-driven attempt to reduce the size 

of some of these institutions. 

I also want to talk about an editorial that I read in the American 

Banker last week that basically, in my opinion, coined a new 

phrase, but one that is accurate, ‘‘too-big-to-jail.’’ And it was about 

the concern that not enough of these people who have foisted their 

inappropriate activities on us in 2008 have paid a penalty on a personal basis. Some of the biggest corporations simply wrote a check 

to stay out of jail free because it is not even their money; it is corporate money. 

And when I read it in the American Banker, it kind of puts a 

big underscore to me, and I am just wondering, do you have any 

concerns about the lack of personal accountability in some of the 

largest institutions in this world when it comes to some of the activities they participated in, not just before 2008 but after 2008 as 

well? 

Mrs. YELLEN. I do have concerns about those activities, and the 

Federal Reserve cooperates with the Department of Justice as appropriate when they take actions that are criminal in nature. The 

Federal Reserve’s focus is on safety and soundness. We are supervisors of these organizations— 

30 

Mr. CAPUANO. But isn’t the safety and soundness of the entire 

economy based on trust and good activity? 

Mrs. YELLEN. It certainly is. 

Mr. CAPUANO. And my concern, to be perfectly honest, is if people 

are not held personally accountable when they are allowed to write 

corporate checks—not personal checks—to just push away their illgotten gains, and they get to keep that money and continue on and 

actually get raises and bonuses from those institutions, that the 

moral hazard says to the next guy coming down the street, the people that you have to regulate, ‘‘It is okay. Don’t worry about it. Do 

anything you want, and all we have to do is, the corporation—not 

you—will pay a few hundred million dollars of shareholder money, 

by the way, not your money.’’ 

You don’t have a concern with that with the Federal Reserve, by 

not having—not you, but by not having other entities hold them to 

personal account that it will make your job tougher going forward? 

Mrs. YELLEN. I agree with you that there certainly should be accountability within these organizations. 

Mr. CAPUANO. Thank you. I appreciate that. 

And the last point, since we only have a minute, is I want to talk 

about Fannie Mae and Freddie Mac. I personally have always 

wanted to amend and reform them. However, I have also thought 

it is wrong. Fannie and Freddie have now pretty much paid back 

the money that they have borrowed from the taxpayer. I don’t 

know if they are exactly there, but they are close to it and on their 

way. 

And yet, at the moment, they have not been allowed by our own 

laws to pay one penny towards the payment of that principal. 

There are lawsuits going on, as I am sure you are aware, and I am 

just curious, do you think that it is fair or wise or equitable to keep 

any entity in a de facto bankruptcy state once they have paid back 

their debt? 

Mrs. YELLEN. I think with respect to the GSEs, it is really very 

important for Congress to put in place a new system to address 

GSE reform. I think we still have a system that has systemic risk, 

that government funding remains critical to the mortgage sector. 

And I think to really get housing back on its feet, it is important 

for Congress to put in place a new system and to explicitly decide 

what the role of the government should be in helping the housing 

sector. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Garrett, the chairman of our Capital Markets Subcommittee. 

Mr. GARRETT. I thank the Chair. 

And I thank Chair Yellen. Congratulations on your position, and 

welcome to the committee. 

Thank you also—I understand the rules here that you are 

waiving a little bit and you are staying a little longer since there 

is a whole host of Members of Congress on both sides who would 

really like to dig in to some of these questions. So, we do very much 

appreciate that. 

I am going to step aside from some of the monetary, some discussions some people have made and otherwise get into, to start off 

with your prudential supervision role, which of course, under DoddVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
31 

Frank and others, has been expanded greatly. And I am not going 

to run through the list of all the expansions; you know very well 

what they are. 

But let me just begin to go back. I will reference a letter you may 

or may not—from a report back in November 2011. The GAO came 

up with a report on Dodd-Frank regulation and implementation of 

cost-benefit and analysis. 

And in that report, just to brief you, the Fed Reserve General 

Counsel responded to it with a letter. That was Scott Alvarez and 

Senior Adviser James Lyon responding to that. And what they 

said, what the Fed response was, that the Federal Reserve will consider appropriate ways to incorporate these recommendations into 

the rulemaking procedure. 

And I have the letter. I will put it in the record later. 

They even go in further to—where is it—seek to follow the spirit 

of cost-benefit analysis. 

So my first question to you is, what progress is the Fed making— 

and this is 2 years ago since that letter was written—on actually 

completing and complying with this cost-benefit analysis and rulemaking? 

Mrs. YELLEN. The Federal Reserve strongly supports analyzing 

the costs and benefits of rules that it puts into effect, and we have 

done a great deal of that. An example I could give you is in connection with our Basel re-capital rulemaking, where we participated in 

extensive cost-benefit analysis— 

Mr. GARRETT. Would you— 

Mrs. YELLEN. —hopefully with other regulators. 

Mr. GARRETT. Would you say you are satisfied with how it came 

out with Volcker? Because we had no indication that a cost-benefit 

analysis was done, and I asked Governor Tarullo, when he was 

here, where it is, because we have not seen it. So 2 years later, it 

seems like on something that is important as that, it was not done. 

Do you believe it was done in that situation? 

Mrs. YELLEN. I think what is important in the case of Volcker 

is what Dodd-Frank required of the Federal Reserve. In essence, 

the decision about the costs and benefits of putting those restrictions in place were decided by Congress, taking account of what the 

likely cost and benefit would be. 

And our job has been to implement it. We have certainly taken 

into account—issued a proposed rule, received a wide range— 

Mr. GARRETT. Right. 

Mrs. YELLEN. —thousands and thousands of comments. 

Mr. GARRETT. I appreciate that. My time is very limited, and so 

I would encourage that a true cost-benefit analysis be submitted to 

Congress, which, I think in anyone’s estimation, was not done fully 

in Volcker. 

Speaking of Governor Tarullo, the President has not appointed 

anyone to fill the position of Supervisory Division Vice Chair. 

Mrs. YELLEN. Vice Chair. 

Mr. GARRETT. Would you say that Governor Tarullo is effectively 

holding that position until that is completed, until the appointment 

is made? 

Mrs. YELLEN. We operate at the Board through a committee system. 

32 

Mr. GARRETT. Yes. 

Mrs. YELLEN. I usually have three Governors and a Chair. 

Mr. GARRETT. Right. 

Mrs. YELLEN. And Governor Tarullo heads the Board’s banking 

supervision committee. So in that sense, he certainly takes the 

lead. 

Mr. GARRETT. So would you— 

Mrs. YELLEN. But all of us are involved and all of us are responsible. 

Mr. GARRETT. But in light of your comment, would you commit, 

then, to have Governor Tarullo come and testify on Federal rulemaking before this committee, since he seems to be filling that role 

until the President makes the— 

Mrs. YELLEN. He has done a great deal of testifying on these topics. 

Mr. GARRETT. Just on that topic, can we ask him? 

Mrs. YELLEN. On all topics, he has done— 

Mr. GARRETT. I understand. I guess I am asking for a commitment that we can have him come back in that role and testify before the committee on rulemaking. 

Mrs. YELLEN. I don’t want to commit as to what he is going to 

do, but he has certainly— 

Mr. GARRETT. I guess that is what I was hoping for— 

Mrs. YELLEN. —taken the lead role in testifying on these topics. 

Mr. GARRETT. Sure. 

With regard to international agreements that you negotiate, you 

have probably seen some ideas that are floating out there that 

market participants should have a better ability to chime in or 

comment on them prior to in the process of making those agreements. Would you commit today to allow market participants to engage in that process while you are making those international 

agreements? 

Mrs. YELLEN. When we turn to putting rules into effect for the 

United States, which is what affects those firms, we always have 

consultation and take comments in a rigorous process of evaluating 

comments. 

Mr. GARRETT. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Hinojosa, for 5 minutes. 

Mr. HINOJOSA. Thank you. 

Thank you, Chair Yellen, for sharing your testimony and for your 

time with us today. 

Since the height of the 2008 financial crisis and the deep recession that followed it, the U.S. economy has made significant 

progress, as you and I know. The unemployment rate declined from 

a high of 10 percent in 2009 to the current rate of 6.6 percent. 

In the most recent quarter, GDP grew at an annual rate of 3.2 

percent. And furthermore, despite some recent volatility, equity 

markets have seen substantial gains with the S&P index increasing by 30 percent last year, 2013. 

Many economists and policymakers fear that the nature of the 

recent recovery may indicate that the U.S. economy could be a 

major inflection point where the ability of the private sector to creVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
33 

ate wealth is now outstripping its ability to create jobs. I have seen 

that in the region that I represent in deep South Texas. 

For most of the postwar period, U.S. policymakers assumed that 

growth and employment went hand in hand, and the U.S. economy’s performance had largely confirmed that assumption. But the 

structural evolution of the global economy and its effects on the 

U.S. economy today could mean that growth and employment in 

the United States are starting to diverge. 

Chair Yellen, can you discuss with us why we appear to be undergoing what many have referred to as a jobless recovery? What 

explains the disparity between fairly weak employment growth in 

recent months and the fact that equities and corporate earnings 

are at an all-time high? 

Mrs. YELLEN. Congressman, it certainly has been a slow recovery, by the standards of U.S. history, from downturns, but 7.8 million jobs have been created since the drop in employment, I believe, 

in the beginning of 2010. And while we still have a ways to go, and 

the job market is not by any means back to full strength, we are 

not back to maximum employment, there has been substantial job 

creation. So, I think we have made progress. 

Clearly, we have further to go. We are trying to promote a faster 

recovery and a fuller recovery, but I do see—and not only in terms 

of the number of jobs, but across a broad range of labor market indicators, I do think there is progress even though certainly there 

is a significant way to go. 

Mr. HINOJOSA. In past speeches, you have indicated a concern 

about rising inequality. Many members on this committee are concerned due to moral beliefs. Additionally, many economists have 

expressed worry that it will impact the recovery. 

Do you believe that rising inequality might affect the stability of 

the economy? 

Mrs. YELLEN. I am very concerned. I share your concern about 

rising inequality. I think it is one of the most important issues and 

one of the most disturbing trends facing the Nation at the present 

time. 

There has been some discussion about the possibility that inequality is holding back the recovery because the gains have been 

so unequally distributed. I think we don’t have certainty about 

that. But certainly, rising inequality is partly a matter of a weak 

job market that we are trying to address. 

But there are deep and disturbing longer-term, structural trends 

rising—a rising disparity between the wages earned by more- and 

less-skilled workers, shifts in global competition that have diminished jobs for less-educated people. 

Mr. HINOJOSA. I am very concerned about the percentages of unemployment in our 18- to 29-year-olds, not only in our country but 

in other countries in Europe, as examples. 

What can we do so that we can bring those rates down to a single digit? 

Mrs. YELLEN. We are working hard. The purpose of our monetary 

policy is to promote a stronger recovery that will see young people 

who are in school come out into a stronger job market that can affect their entire future career. It is a key goal of the Federal ReVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
34 

serve, and I think Congress could also consider ways of helping as 

well. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Miller, for 5 minutes. 

Mr. MILLER. Thank you, Mr. Chairman. 

Chair Yellen, it is good to have you here today. 

Mrs. YELLEN. Thank you. 

Mr. MILLER. Congratulations on your confirmation. 

Mrs. YELLEN. Thank you. 

Mr. MILLER. I enjoyed your testimony. There has been a considerable amount of discussion regarding the problems that were a result of bankcentric standards which were applied to insurance companies. 

And I was pleased that at your confirmation hearing, you indicated your agreement that insurance has unique features that 

make it different from banks, and that a tailored regulatory approach for insurances would be inappropriate. 

And I think it would be devastating to apply the same standards 

to an insurance company that we did to a bank. So what are you 

going to do to make certain that insurance companies are not subject to inappropriate bankcentric rules? 

Mrs. YELLEN. We explicitly decided, when we put in effect our 

capital rules, to defer their application to savings and loan holding 

companies with substantial insurance activities and to the other 

nonbank SIFIs that were designated. We wanted to have a chance 

to study what an appropriate regime would be, recognizing that 

there are important differences between the insurance business 

and banking. 

We understand that the risk profiles of insurance companies 

really are materially different and we are trying our best to craft 

a set of capital and liquidity standards that will be tailored to an 

appropriate—to the risk profiles of insurance companies. 

I would say that we do face constraints in our ability to do that 

because the Collins Amendment requires us to establish consolidated minimum risk-based leveraging capital requirements for 

these entities that are no lower than those that apply to depository 

institutions. Within that constraint, we are working as best we can 

to tailor an appropriate regime. 

Mr. MILLER. I am concerned about the asset designation and how 

the Fed looks at assets of banks versus assets of insurance companies. 

Governor Tarullo said, ‘‘The liability structure of a financial institution affects the amount of capital it needs. It doesn’t affect how 

risky a particular asset is. It doesn’t matter who holds it; an asset 

is an asset.’’ 

I guess my concern I would like you to take into consideration 

is, banks hold assets different than insurance companies do. Insurance companies generally buy assets for the long-term. Banks will 

buy assets for the short-term. 

So to me, there is a difference in the way institutions hold assets 

and the difference in the reasons institutions buy assets. So I hope 

at some point in time you will take that into consideration when 

35 

you are reviewing the asset held by a bank versus an insurance 

company. 

But last fall, the Treasury Office of Financial Research (OFR) 

published a report on asset management, and financial stability, at 

the direction of the Financial Stability Oversight Council (FSOC). 

The report recognized that asset managers, as opposed to other financial institutions, act as an agent on behalf of their clients, 

whereas investment gains and losses are solely the client’s, and do 

not flow through to the asset manager. 

And I am concerned that the asset management firms might be 

designated as SIFIs and put under bankcentric regulations. I think 

it would be harmful to the financial sector if that happened. 

Do you agree with the study that asset management and banks 

are different? 

Mrs. YELLEN. I think, of course, they are different. Designation 

is something that is very important to any company and deserves 

a very thorough review. If FSOC considers these entities, I think 

it will be appropriate to do very careful analysis of whether they 

do pose systemic risk. 

Mr. MILLER. And as it applies to the regulations imposed on 

asset managers, should it be tailored to take into account the fundamental difference between the business of the asset and the 

management and banking? Do you agree with that also? 

Mrs. YELLEN. I definitely believe that our supervision and regulation should be tailored to the unique features of any entity that 

we regulate. 

Mr. MILLER. Okay. I would hope that the Fed, in the future, can 

try to make it—to create more of a comfortable environment for insurance companies. Because there has been considerable unease in 

the industry, as you know, in the past year, over what their future 

might be. Some have sold off assets, such as they might have held 

a small bank for courtesy to their clients, because they thought 

they were going to be dragged into the regulation of the banks. 

I hope that we can be more clear. I know in your position it is 

very difficult to be clear sometimes because the market misreads 

that clarity, but there needs to be some clarity, I believe, for insurance companies, so they are not concerned in the future with what 

their future might be as far as it applies to assets. 

I yield back. Thank you, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

And, Madam Chair, I want to just start off by welcoming you and 

congratulating you. And I wish you every success in your—for us— 

new position. 

I do have a couple of questions. Recently, a fair amount of attention has been paid to the commodities activities of some of our 

bank holding companies. For many years, American law and regulatory framework have recognized that there should be a healthy 

separation between banking and commerce to ensure that we have 

the safety and soundness of banks, to ensure fair and equitable 

credit flows to economically beneficial activity, and also to prevent 

excessive concentration of power and wealth in the financial sector. 

36 

However, over the last 15 years this wall between banking and 

commerce has begun to crumble with serious negative consequences. 

In July of last year, the global risk manager for MillerCoors testified before the Senate Banking Committee that the commodity activities of banks cost that company tens of millions of dollars and 

more than $10 billion for all aluminum buyers globally in 2012. 

Similarly, JPMorgan Chase, Deutsche Bank, and Barclays recently paid fines to the Federal Energy Regulatory Commission 

(FERC), which has won more than $800 million in civil penalties 

from banks since 2005, for manipulating electricity and natural gas 

markets. 

And then recently, the New York Times documented aluminum 

warehouses owned by Goldman Sachs that used obscure exchange 

rules to drum up hefty fees while contributing very little tangible 

benefit to the economy. 

What all of this shows is that there is a move away from the traditional business of banking by banks and into more risky and potentially more lucrative, but certainly more dangerous, activities 

that seem to produce very little economic benefit while these banks 

are chasing profits and exposing themselves to steep fines and 

swings in commodity prices. 

So the bottom line for me is, do you support pulling back and 

getting the banks back into traditional banking business? Do you 

support restricting or prohibiting altogether these expanded commodities activities by banks? And what does the Federal Reserve 

plan to do to curb these abuses? 

Mrs. YELLEN. We are thoroughly reviewing our supervision in 

these areas. We have recently put out an advanced notice of proposed rulemaking in this area highlighting a number of different 

issues that we want to consider. 

We will carefully look at the comments and I expect that we will 

be reviewing and likely making changes in these areas to address 

some of these concerns. 

I would say, though, that the Federal Reserve’s main focus in our 

supervision of these areas is to make sure that banks operate in 

the commodities activities in a safe and sound manner. You referred in your remarks to allegations of market manipulation, and 

I would point out that it is the responsibility of market regulators—the CFTC, the SEC, and, in some cases, the FERC—to pursue actions with respect to market manipulation. 

We would, of course, cooperate in any investigation, but they do 

have primary responsibility. But yes, we are thoroughly reviewing 

our policies in this area. 

Mr. LYNCH. All right. That is great to hear. 

One other quick question: Section 956 of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act requires that the Federal financial regulators issue a rule requiring big banks to disclose 

the incentive-based compensation agreements for employees who 

can expose the banks to excessive losses. In other words, an article, 

I believe, by Gretchen Morgenson in the Times a couple of weeks 

ago. 

37 

Where are we on that? I know you are in the rulemaking process. 

Do you agree with that approach? And where are we on the rulemaking process? 

Mrs. YELLEN. We did put into effect supervisory guidance with 

respect to compensation in the banking organizations that we supervise. We have engaged in horizontal reviews and I believe there 

have been improvements in the incentive compensation practices of 

the organizations that we supervise, and we intend to be active in 

that area. 

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, it is good to have you here. Congratulations— 

Mrs. YELLEN. Thank you. 

Mr. ROYCE. —on your appointment. 

I was going to ask you about a speech you gave as President of 

the San Francisco Fed some years ago. As Chairman of the Federal 

Reserve there, you made some observations as sort of a warning, 

a wakeup call to the situation as it relates to the Federal budget 

deficits not being sustainable. 

And your words were, ‘‘We began to look at numbers that are 

truly staggering, frightening.’’ And you were talking about entitlements. You said, ‘‘I am concerned that the people take it as a given 

that they have Social Security and Medicare and support from 

Medicaid to pay for nursing home care.’’ 

And you explained, ‘‘Then it was 8 percent of GDP.’’ I think it 

was in about 2006 that you gave that speech—maybe 2005. You 

said that looking forward, the numbers showed that it would double that. It would be 16 percent of our entire GDP that would go 

to pay for entitlements. Now, I guess we are at 12 today, they tell 

me. 

And I was going to ask you about this, because it is a very similar thing that we have heard after former Federal Reserve Chairman Ben Bernanke retired. He made some comments about this. 

And also, former Fed Chairman Alan Greenspan. Your thoughts 

today on this? 

Mrs. YELLEN. I agree with my predecessors that when you look 

at these long-run trends—at that time we were looking, I think, 

over the next 30 to 40 years at, with unchanged programs, an 

aging population, and at that time health care costs that were rising more rapidly than the general price level. 

You would see a very, very substantial—I believe I said roughly 

a doubling of the share of GDP that would go to those three programs without revenues rising in tandem. And of course, that is 

the key dynamic that underlies CBO’s long-term budget projections 

that show the United States to be on an unsustainable budget 

path. And this is something we have known about for decades 

and— 

Mr. ROYCE. But this is a question I have, because I am not sure 

everybody has gotten the message. I heard the leader in the Senate 

say we have a generation before we have to deal with this. 

And I guess my question to you is, if we don’t deal with it now 

in order to bend this curve, what will be the result for young AmerVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
38 

icans coming into the workforce a generation from now? What will 

they face? 

Mrs. YELLEN. We will face a situation in which rising budget 

deficits begin to crowd out private investment and begin to lead to 

an environment of higher interest rates and slower growth, and 

crowd out productive private investment. And so— 

Mr. ROYCE. Economists agree with this. Regardless of whether 

economists are left or right or center, they are all warning us of 

the same consequence. 

So the question I have is, is there a way for you basically to sell 

the American public—because I don’t believe that the public really 

understands the magnitude of it—in order to bring the pressure to 

bear to get an agreement that will address entitlement reform? 

How could you do that? How could you take your job as Chair 

of the Federal Reserve and go out and explain the consequences of 

inaction in order to get Washington moving and doing the right 

thing? 

Mrs. YELLEN. My predecessors, Chairman Greenspan and Chairman Bernanke, have consistently testified that these long-run 

budget trends— 

Mr. ROYCE. But I am sharing with you— 

Mrs. YELLEN. —are highly problematic. 

Mr. ROYCE. I know. We have heard the testimony here. 

What I am sharing with you is that it is not doing the trick. 

Somehow, we have to figure out a way to get you, as Chair, out 

among the public to build support, and maybe with the support of 

former Fed Chairmen who are saying today what you are saying 

today, in order to galvanize the political action necessary, because 

describing the consequences of inaction here isn’t doing it. 

Mrs. YELLEN. I believe that this is something that is essential for 

Congress to address, and I anticipate consistently sending this 

message that this is a critical issue facing— 

Mr. ROYCE. Anything you can do to figure out a way to turn up 

the heat and get the facts out to the public on the consequences— 

people used to live to be 65. It is going to be 85 and they are having two children instead of four. This has to be addressed in terms 

of reforms. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott, for 5 minutes. 

Mr. SCOTT. Chair Yellen, welcome. I am over here. 

Let me just ask you, because I need to ask you if you will be 

bold. We need bold leadership here. 

You have a dual mission: fighting price stability, inflation, but 

employment. That part of the dual mission has always been like a 

stepchild for the Fed. It has been like a second-class citizen. 

And we have a national crisis on unemployment. This is riveting. 

The 6.6 percent figure is misleading. 

College graduates right now getting out of college is 22 percent. 

Young veterans is 24 percent, not to count young males at 30 percent. One-third of all the working-age women have already slid into 

poverty. 

39 

We need you to be bold. We need you to take us not around the 

docks with the little boats. We need to you to us out where the big 

ships go on this issue. 

And I want to ask you, will you do that? Will you lift this up and 

make the employment part of your mandate on an equal plateau 

with fighting inflation? 

Mrs. YELLEN. Congressman, I strongly support both parts of the 

Federal Reserve’s dual mandate: price stability; and maximum employment. I have led the committee to produce a statement concerning its longer-term policy strategies and goals that puts both 

of these on an equal footing. And in terms of bold policy, with the 

economy seemingly stuck looking— 

Mr. SCOTT. Ms. Yellen, my time is short. I want a yes-or-no answer. 

Mrs. YELLEN. Yes, I will. 

Mr. SCOTT. Will you lift employment up? This Nation is in trouble. We have 50-year-old men who are being laid off in desperate 

situations. We have jobs being shipped overseas. 

In other words, what I am saying is we need more than just zero 

rate interest rates. Your agency is the only one that has the mandate of dealing with unemployment. That is a dual mandate and 

it has never been dealt with, with the level of importance that it 

should be. 

And let me ask you this just to give you an idea: Right now, did 

you know that legislation has been introduced in this Congress to 

eliminate your employment mandate away from that? Are you 

aware of that? 

Mrs. YELLEN. Yes, I am. I strongly support the Federal Reserve’s 

dual mandate. Both parts of it, both price stability and— 

Mr. SCOTT. But why— 

Mrs. YELLEN. —the employment mandate matter enormously to 

American households. 

I think it serves this country well. And there is no conflict—most 

of the time and especially now—between pursuing both pieces of 

this. We have acted boldly in order to promote a stronger recovery. 

Mr. SCOTT. What do you say to Congress? Why would Congress, 

at this most critical time, when the future of this country is at 

stake—this is a national crisis—the depth of unemployment when 

you look at it structurally. And here in this Congress they are trying to take away a part of your dual mandate, to eliminate your 

employment mandate at this critical time. 

What do you have to say to Congress about that? 

Mrs. YELLEN. I feel very strongly that the Fed’s dual mandate to 

focus on both employment and price stability has served this country well. We are committed to pursuing both parts of that mandate 

and we are doing so. 

Mr. SCOTT. Chair Yellen, would you make it a part of the Fed’s 

policy and objectives to fight this legislation, to speak out against 

this legislation? 

All I am saying here is that you have a great opportunity here. 

This country needs leadership on fighting this unemployment—this 

structured unemployment and every factor. It is a shame that our 

young people have this rate of unemployment. 

40 

Many are giving up. They don’t even calculate that into the 

workforce where they have given up. 

And Ms. Yellen, I am so proud of you but I am going to be even 

more proud if you become that Chair of the Fed to right the wrong 

and take us— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Minnesota, Mrs. 

Bachmann, for 5 minutes. 

Mrs. BACHMANN. Thank you, Mr. Chairman. 

I also want to thank and welcome to this committee the new 

Chair of the Federal Reserve. We are extremely grateful for you 

being here and also good luck on your service— 

Mrs. YELLEN. Thank you very much. 

Mrs. BACHMANN. —as the head of the Federal Reserve. We want 

you to be successful. 

Mrs. YELLEN. Thank you. 

Mrs. BACHMANN. We asked our constituents what their number 

one question would be today. This is an historic opportunity to 

have a new Federal Reserve Chair and we had a plethora of responses from constituents with questions. 

But it was interesting that there was a commonality of the questions that came forth. One was really from our financial institutions and businesses, and the first was from individual constituents. 

And so I would like to give you, first of all, the question that we 

received most from our individual constituents, and it was this: It 

was you and other opponents of the Audit the Fed legislation who 

said that it threatens the independence of the Federal Reserve. 

Could you please point to a specific section of the bill that allows 

Congress to interfere with the ability of the Federal Reserve to determine monetary policy? 

My constituents absolutely can’t understand why the Federal Reserve would push back against having the Federal Reserve audited. 

Mrs. YELLEN. I strongly believe that the Federal Reserve should 

be audited; it should be open; it should be transparent. We are audited. We are audited by the GAO in almost every aspect of our financial affairs and the programs that we run. 

We have outside independent accounting firms that audit the 

Fed. We publish our balance sheet weekly. All of this is completely 

appropriate. 

What I don’t agree with and would strongly oppose is interfering 

with the independence of monetary policy by bringing political 

pressures to bear on the committee’s judgment about what is the 

appropriate way to implement monetary policy. 

We are given objectives by Congress. That is completely appropriate. We report to Congress. You should hold us accountable and 

ask us to explain how our policies advance the goals that you have 

assigned to us. 

But if you pass a bill that would have the GAO come and take 

documents, second-guess every decision that we make, or permit 

them to do that within a short time of our making those decisions 

and bring political pressures to bear—Congress wisely made the 

Fed independent in the implementation of policy because it was understood that we sometimes have to make difficult decisions that 

41 

would be hard for the Congress to make in the best long-run interests of the country, and enabling us to make those decisions free 

of short-term political pressure is critical to maintaining our independence. 

Mrs. BACHMANN. Thank you. And I hear what your response is. 

Our former colleague, Ron Paul, who had introduced the legislation 

to audit the Fed, contained within the language of that bill there 

is no section that deals with giving Congress the right to determine 

monetary policy. 

If the House and the Senate were to pass the Audit the Fed legislation, if the President of the United States would pass that legislation—this is very strong bipartisan legislation—if that happened, 

would we hear from all of you at the Federal Reserve opposition 

to that bill that enjoys very strong support from the American public? 

Mrs. YELLEN. You would hear opposition to that bill because 

Congress has for many, many years—for decades—exempted from 

GAO audits our monetary policy decisions, and it is really critical 

that our monetary policy decision-makings, not other aspects of 

Federal Reserve operations, remain free of GAO audits. 

Mrs. BACHMANN. And I think that is part of the reason why we 

are here in this hearing today, because the American people are 

feeling less and less empowered to be able to hold the Federal Reserve responsible and accountable, because they are seeing the 

Federal Reserve’s balance sheet escalate to a level never before 

seen in American history. And the people know that eventually 

they will be the ones called upon to meet the bills and payments 

that are accumulated by the Federal Reserve. 

What means do the American people have to hold the Federal 

Reserve accountable? 

Mrs. YELLEN. In hearings like this, it is entirely appropriate for 

you to demand accountability from me and from my colleagues, and 

that is— 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank the ranking member as well. 

Ms. Yellen, if you will look over this way—yes, here I am—we 

are over here. Thank you. And welcome to the committee. 

Mrs. YELLEN. Thank you. 

Mr. GREEN. You have acquitted yourself well today. I am sure 

this will be one of many visits that you will have with us and I 

look forward to continuing this relationship. We are in our genesis 

today, but there is much we can do together. 

I want to ask just two—go into two areas. The first has to do 

with how much of the 2008 crisis was cyclical as opposed to structural. Because if you apply cyclical remedies to a structural problem, you don’t get the desired results. 

So have you been able to quantify the amount of it that was cyclical as opposed to structural? 

Mrs. YELLEN. When you say that, we had serious problems in the 

financial sector of the economy. We are certainly trying to put in 

42 

place changes that will make the financial system structurally 

sounder. 

But the crisis that resulted from those weaknesses produced a 

marked downturn in spending in the economy and raised unemployment, lowered employment. And much of that shortfall is cyclical in the sense that it represents a shortfall of our economy producing well below what it is capable of. 

And we have been trying, through our own policies, to boost 

spending in the economy to create jobs and get the economy back 

to operating closer at its potential, at its capacity. 

Mr. GREEN. The theory of expansionary fiscal contraction is one 

that many of my colleagues have bought into, and it is the notion 

that if you cut government spending that will stimulate the private 

sector and create more jobs, more businesses will come into being. 

Where do you stand on this theory of expansionary fiscal contraction? 

Mrs. YELLEN. I think the stance of government in the economy 

and its role in the economy in the long term influences growth. It 

influences capital formation. Dealing with budget deficits can have 

a favorable effect on economic growth in the long run. 

But in the short run, particularly in a weak economy, when government cuts spending or raises taxes, it almost invariably has the 

impact of lowering growth and raising unemployment, and I believe 

that is what has been going on. 

Mr. GREEN. Do you think we have reached a point where cutting 

a loan is not going to give us the desired results? 

Mrs. YELLEN. My predecessor, Chairman Bernanke, routinely advised Congress to address long-term budget deficit issues, thought 

it was critical, as I do, to the long-run well-being and functioning 

of this economy, but to avoid cuts in spending or increases in taxation that would diminish the ability of the economy to recover. So, 

there are ways of addressing long-term budget deficits that 

wouldn’t weaken the recovery, and I share his view. 

Mr. GREEN. Thank you very much, Mr. Chairman. I yield back. 

Chairman HENSARLING. The gentleman yields back. 

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

Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here, and congratulations 

not only on your nomination but the confirmation, so— 

Mrs. YELLEN. Thank you. 

Mr. PEARCE. One of the articles refers to you as the champion 

of Main Street, and I think it is Senator Brown of Ohio who says, 

‘‘She will be a Fed Chair who gets out and sees the real economy 

more and talks to people.’’ 

I had submitted a request for Mr. Bernanke to come to the district and we would host a town hall together and I am still waiting 

on pins and needles for him to answer. And maybe I am giving up 

that eternal hope now, but I would reissue that invitation to you. 

Mrs. YELLEN. Thank you. It is much appreciated. I will try to do 

that. 

[laughter] 

Mr. PEARCE. I will start waiting on pins and needles for you. 

Thank you. 

43 

Okay. And the reason that I would make that offer is that in this 

hearing room there have been references by people sitting at that 

desk as the seniors as being collateral damage, that the low interest rate is acceptable collateral damage. And I would like someone 

who sits on that side of the table to come out and explain that to 

the seniors who show up at my town hall meetings who say that, 

‘‘We lived our life correctly. We saved. We paid for our homes. And 

now we are caught in policies that reduce our ability to live on our 

savings,’’ and they are eating up their principal just trying to get 

by. 

And that does not seem acceptable, because many of them don’t 

have the capability to go back to work. 

In a previous testimony somewhere, you have said that there are 

other instruments available. But those instruments bring a higher 

risk, and the last thing an 85-year-old wants is more risk. They are 

just looking for that 2 percent or 3 percent coupon that does not 

exist anymore, and that explanation to them of why, that they 

should understand that this is for the greater good, sort of runs a 

little bit thin as they try to pay for increasing costs of food and gasoline, which don’t show up in our inflation rates because we don’t 

include them anymore, but the price of both are squeezing the poor 

and the seniors more than anything else, giving us a de facto war 

on the poor coming from Washington right now. And that is probably the recurring theme that I see there. 

Now, I would like to discuss just a little bit of the logic. You said 

at one point that interest rates are lower because of too much savings. And yet, you have a policy—the Fed has a policy of paying 

interest on excess reserves, which would be a de facto way of encouraging more savings. So has any discussion ever come up in the 

Fed about why are we doing this, why are we paying this if we 

think there is too much savings? 

Mrs. YELLEN. The Fed is paying an extremely low rate on interest on reserves— 

Mr. PEARCE. It is higher than zero, though, because zero is 

what—one quarter of 1 percent is what seniors are getting right 

now, and so banks can make more than seniors. So again, they see 

the advantage going to the rich, not to the poor. And again, I just 

repeat that there is sometimes the appearance of a war on the 

poor. 

My district is also very low income. Manufactured housing is a 

big deal; 50 percent of the homes in my district are manufactured 

housing. And yet, the QM policy has really made it very difficult 

for banks to lend on that. 

I suspect that your staff has made known to you that these pressures exist. Have you all discussed that in any greater detail that 

we would need to look out for the people on the low end of the income spectrum? 

Mrs. YELLEN. Well, QM was a policy adopted by the Consumer 

Financial Protection Bureau. I think they are trying to address a 

set of practices that resulted in unsafe and unsound— 

Mr. PEARCE. Okay. Thank you. 

Mrs. YELLEN. —lending. But it is very important to monitor their 

impact on credit availability. 

44 

Mr. PEARCE. One of the reasons that we have been able to get 

by with the QE is that we are the world’s reserve currency. Has 

the Fed thought at all about what is going to happen when more 

nations are expressing discontent that we are printing money and 

that we are devaluing what they are holding, and so we have seen 

countries trade with other currencies this past year? Any thoughts 

about what happens if the world says, ‘‘You are not the world’s reserve currency anymore?’’ 

Mrs. YELLEN. The dollar plays a critical role in the global economy and it is the Federal Reserve’s job to make sure that inflation 

remains under control so that the dollar remains a safe and sound 

currency and can continue to play that role. 

Mr. PEARCE. Thank you. I have— 

Chairman HENSARLING. The time of the gentleman— 

Mr. PEARCE. —the other countries. 

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

Chairman HENSARLING. Okay. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, for 5 minutes. 

Mr. CLEAVER. Madam Chair, thank you for being here. I want to 

talk consumer spending and jobs. 

Five percent of our population is doing about 35 percent of the 

consumer spending. And if you exclude food and energy, consumer 

spending would rise 1 percent, 2 percent, 3 percent, something in 

that area? 

Mrs. YELLEN. The distribution of spending across households is 

very unequal. 

Mr. CLEAVER. Yes. So my concern is, so how do we increase consumer spending, raise GDP, unless we are able to get a larger 

share of the population spending? 

And for them to spend, they need to have some form of income. 

So what is the impact, or what would be the predictable impact if 

we had unemployment benefits and a number of other programs 

that we are—we have backed away from in Congress? 

Mrs. YELLEN. With respect to unemployment benefits, they certainly were serving to support the spending of individuals who had 

long unemployment spells and ending those will have some negative effect on spending in the economy and on growth. 

Mr. CLEAVER. Because they will spend everything they receive? 

Mrs. YELLEN. More or less— 

Mr. CLEAVER. Yes. 

Mrs. YELLEN. —that is true. That is right. 

Mr. CLEAVER. Yes. 

Several people have talked about the structural unemployment 

situation here in the country, but what do you think—6.6 percent, 

I guess, is unemployment and that is not necessarily good but it 

is better than what it has been, but I am interested in real unemployment, the U6 rate. 

What do you think it is? Do you have a good estimate? 

Mrs. YELLEN. The U6 rate includes discouraged— 

Mr. CLEAVER. Yes. 

Mrs. YELLEN. —workers and those on part-time. It is substantially higher. 

45 

Mr. CLEAVER. More than double the— 

Mrs. YELLEN. It is close to 13 percent, and that is a much broader measure of shortfall in our economy from what we would like 

to see. 

Certainly, there are discouraged workers, those who are marginally attached. We have 5 percent of the workforce that is part-time. 

For economic reasons, they are not able to find full-time work and 

so that is a measure that is disproportionately elevated in comparison with the 6.6 percent or U3 unemployment rate. 

Mr. CLEAVER. So are there jobs available and people just won’t 

take the jobs? 

Mrs. YELLEN. I think there is a shortfall of jobs and hiring in the 

economy. The rate of hiring remains well below normal levels and 

there is a shortage of demand in the economy that propels businesses to see that their sales are rising sufficiently to want to take 

on enough additional workers in order to lower unemployment back 

to normal levels. And that is what we are trying to address. 

Mr. CLEAVER. I drove down to the Bootheel of Missouri—I am 

from Missouri—to speak at an event, and on the way back I 

stopped at a Chili’s restaurant and there were no waiters or waitresses coming over to the table. They had a little box on the table 

and you speak in the box to order your food and then somebody 

will bring it out, and they give you a certain number of minutes 

before it is brought out. 

The point I am making is, we are taking jobs away, and then we 

are criticizing people for not taking the jobs that don’t exist. 

Thank you. 

Chairman HENSARLING. The Chair wishes to alert all Members 

that I intend to recognize two more Members, after which the 

Chair intends to call a 30-minute recess. 

The Chair now recognizes the gentleman from Florida, Mr. 

Posey, for 5 minutes. 

Mr. POSEY. Thank you, Mr. Chairman. 

I originally—and I do want to ask about the volatile three pigs, 

but the questions by Mrs. Bachmann, I think, deserve a little bit 

more response. 

As you well know, Dr. Paul’s legislation to audit the Fed was the 

most cosponsored bill in the 112th Congress, very bipartisan, 

passed by an overwhelmingly bipartisan vote, and it did not talk 

about interfering with the day-to-day management and decisionmaking of the Fed. It was post-decision-making audits. 

And seeing where all government and official agencies under our 

dominion are subject to audit, it just seems very strange that the 

Fed would object to having the logic behind their decisions and the 

many other of the litany of items you are exempted from being audited for deemed to be reasonable. 

Mrs. YELLEN. I think if Members of Congress can ask the GAO 

to come into the Federal Reserve shortly after a meeting where we 

have made a difficult decision and to perhaps review transcripts 

and look at the debate that took place around a particular decision, 

we release transcripts. We release minutes of our meetings. 

But to come in, review materials and say, ‘‘No, we don’t agree 

with a decision that was made at the last meeting,’’ will stifle debate in meetings and bring to bear short-term political pressures 

46 

in the decision-making in the Federal Open Market Committee, 

and I do believe that independence of the Federal Reserve in making monetary policy means that we need some scope for deliberation and exercising our best judgment and then explaining to Congress and the public what the logic of that was. 

And the purpose, as I have understood it, of my appearing at a 

hearing like this, is to give Members of Congress exactly that opportunity. 

Mr. POSEY. I understand that. Some of us believe in the old 

adage, ‘‘trust but verify,’’ and that is what an audit would do. And 

so, would it be reasonable to assume you would not object to an 

audit if it was post-30-days or 60-days? Is there a time limit when 

you would be totally unafraid to be audited in retrospect? 

Mrs. YELLEN. An audit is different than second-guessing policy 

judgments that were made by— 

Mr. POSEY. I am not talking about guessing—we do that as it is 

now. We don’t agree with all of the decisions you make now. I 

think that is clear from at least one side of this aisle. 

But I would just like to think that at some point, the Fed could 

be audited, like all official Federal agencies, much less one that is 

not a government agency but has the run of our entire economy. 

Mrs. YELLEN. This is an exemption that has been granted the 

Federal Reserve that is central to our independence for decades by 

Congress and I think— 

Mr. POSEY. We have changed a lot of policies trying to make it 

more transparent and accountable. I like to think that government 

gets less corrupt every day, not more corrupt, and— 

Mrs. YELLEN. I don’t believe that the Federal Reserve is in any 

way corrupt, and I believe that the confidence of markets in the 

Federal Reserve and in our monetary policymaking would not be 

enhanced by that type of audit. 

Mr. POSEY. By historically being able to audit things that every 

other agency is subject to review for but you should not be—let me 

get over to Basel III. 

Starting in 2015, Basel III’s liquidity coverage ratio will require 

enough banks to hold enough high-quality liquid assets to cover net 

cash outflows for 30 days. The problem is that Basel III’s definition 

of high-quality liquid assets includes the sovereign debt of vulnerable countries like Portugal, Ireland, Italy, Greece, and Spain. 

Don’t you think that is a little bit like leading sheep to slaughter? 

Mrs. YELLEN. We have designed a rule in the United States that 

would have stricter definitions. It is a minimum. 

Mr. POSEY. So you think that is not the same as rating agencies 

with high-risk mortgages as AAAs, which triggered the 2008 crisis? 

Mrs. YELLEN. What we want is for our banking organizations— 

we have proposed this in our rule—to hold assets that can be 

quickly converted into cash. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Colorado, sans his 

Broncos cap, Mr. Perlmutter, for 5 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. And I will wear my 

Broncos cap next week. 

47 

Madam Chair, thank you for your testimony today. I had the 

pleasure to hear Mr. Bernanke testify a number of times at these 

very same hearings, and I really appreciated three things about 

him: one, he is very smart; two, he is very steady; and three, he 

is not very exciting. And I want to say, you are following in his 

footsteps. 

Mrs. YELLEN. Thank you. I appreciate that. 

Mr. PERLMUTTER. What I would like to talk to you about a little 

bit is the FSOC and what is happening just in terms of numbers 

of meetings. Generally, are you concerned about bubbles? Have you 

seen anything that would cause you some concern? 

We hear that student loans are awfully high and that may be a 

difficult issue coming up. And so, can you tell us a little bit about 

what you see as the role of the FSOC, and how often you all meet? 

Mrs. YELLEN. I have to say that I am new to FSOC. I have only 

been in office for 11 days, and I have not attended FSOC meetings 

previously, but there will be one this week and FSOC does meet 

regularly. There are deputies and staff who meet very frequently. 

Clearly, a major focus is to address potential threats to financial 

stability, to identify those threats, and to assess them. 

This is something the Federal Reserve is very focused on. We 

have built very substantially our capacity to assess threats to the 

financial system. We bring that expertise to FSOC. We also use it 

in thinking about monetary policy and in supervising the largest 

institutions. 

We recognize that in an environment of low interest rates, like 

we have had in the United States now for quite some time, there 

may be an incentive to reach for yield, and that we do have the 

potential to develop asset bubbles or a buildup in leverage or rapid 

credit growth or other threats to financial stability. 

So, especially given that our monetary policy is so accommodative, we are highly focused on trying to identify those threats. We 

could potentially take them into account in monetary policy, but 

certainly in our supervision and regulation, we would try to address those threats. 

Broadly speaking, we haven’t seen leverage credit growth asset 

prices build to the point where generally I would say that they 

were at worrisome levels. 

The stock market broadly has increased in value very substantially over the last year. And our ability to detect bubbles is not 

perfect, but looking at a range of traditional valuation measures 

doesn’t suggest that asset prices, broadly speaking, are in bubble 

territory or outside of normal historical ranges. There are a few 

areas where we do have concerns, but nothing broadly speaking. 

So student loans, again, you mentioned the growth there has 

been very, very large. That is mainly government-backed student 

loans rather than private. And I would say the concern there is 

this is debt that will be with students for a very long time. If they 

get into financial difficulties, that debt stays with them. 

It is important that they be getting a good return for the borrowing that they are doing, and it is important that they understand what the burdens will be on them when they take out those 

loans. 

48 

Of course, it is very important. Education is critically important. 

We want to see that. 

But the burdens are very high, and it is important that the education that students are getting pay a return and that they understand what it is they are getting for the debt that they are taking 

on. 

Mr. PERLMUTTER. Thank you. 

And then, I will just finish where I started. So Mr. Bernanke— 

very smart, very steady, not very exciting. The markets must agree 

because the markets are up today. 

We appreciate your testimony. Thank you for taking on this job. 

It is still a difficult economy out there even though it is getting better, and we thank you for being at the helm. 

Mrs. YELLEN. Thank you, Congressman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now declares the committee to be in recess for half an 

hour. 

[recess] 

Chairman HENSARLING. The committee will come to order. 

The Chair now recognizes the gentleman from Virginia, Mr. 

Hurt, for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

And, Chair Yellen, thank you very much for appearing before our 

committee. Welcome, and I look forward to your tenure. 

Obviously, we recognize in Virginia’s 5th District how important 

your task is, and we appreciate your commitment to that task. 

To tell you a little bit about our district, it is a very rural district 

in central south side Virginia. It is a district that historically was 

dependent upon textiles, furniture, and tobacco. It still is a very 

large agricultural producer in our State and in our Nation. 

But we have seen hard times with the changes in—especially in 

manufacturing. And I know as an economist you are well aware of 

the terrible effects that has had in many parts of our country, and 

south side Virginia is no exception. 

We have had over the years—in the last 10 years, we have had 

unemployment in parts of our district as high as 25 percent, so you 

can imagine what we really want are jobs, and what we want is 

a booming economy. 

And so I guess one thing that strikes me as—and I think we hear 

it on the other side—we have heard it a few times this morning, 

and in fact, I think you have even used this word of—the word of 

inequality, talking about, I think, income inequality, and is that 

something that we need to focus on? Is that something the Federal 

Reserve needs to specifically focus on? 

I would suggest to you that obviously my view is that we need 

to focus on economic opportunity for all people, for everybody. We 

want to see that prosperity. 

And I would suggest that at least what contributes in part to 

that inequality are one-size-fits-all, top-down policies that come out 

of Washington that make it more difficult for people in rural and 

south side Virginia to make it, whether it be an energy policy—on 

Keystone, for instance, one that is—has—the Keystone policy that 

has come out of this Administration has been one that has been an 

obstacle to jobs, not promoted jobs. 

49 

If you look at the President’s health care law, again, we see more 

people in our district who are losing full-time jobs, going to parttime work. Obviously, it is very, very, very difficult for my constituents as a consequence. 

And I guess what I would ask is, as you take on this new, very 

important responsibility, can you talk a little bit about your view 

of the rulemaking that comes from the Federal Reserve? If you look 

at the Volcker Rule, for instance, and you see that is—was a rule 

that certainly in the beginning was designed to get at the biggest 

banks, but because of the TruPS issue, inadvertently perhaps, it 

ended up affecting a lot of smaller banks. 

Can you talk about this—the one-size-fits-all mentality that I feel 

pervades Washington and how that affects our community banks 

all across Main Streets in Virginia’s 5th district and leads to the 

inequality, let’s say, of the access to credit from our community 

banks? 

Mrs. YELLEN. As a general philosophy, I don’t agree with onesize-fits-all. I think we ought to be designing regulation that is appropriate for each institution we regulate, and community banks 

clearly do not pose the kind of systemic risks to financial stability 

that the larger banking organizations do. And the kind of supervision and regulation that is appropriate for those systemically important banking institutions, I think we really want to do our very 

best to make sure that community banks aren’t burdened with all 

that regulation. 

And I know we meet regularly with community bankers, and we 

have felt it particularly important to do so coming out of the financial crisis. We supervise them. We know they are different. We 

want to listen to their concerns and understand them, and we are 

doing our very best to listen and try to tailor an appropriate set 

of capital requirements and other regulations. 

Mr. HURT. And from the standpoint of the supervisory role that 

you play, likewise, we hear from our community banks from time 

to time that sometimes it feels like there isn’t the responsiveness 

that is needed; there is micromanagement that prevents them from 

being able to find a meeting of the minds with them and the customer, and that is caused by the supervisory relationship. 

And so I hope, as my time expires here, that you all will continue 

to make that a top priority— 

Mrs. YELLEN. I pledge to do so. 

Mr. HURT. —at the Federal Reserve. Thank you. 

Mrs. YELLEN. I pledge to do so. Absolutely. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, for 5 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And welcome, Madam Chair. It is so wonderful to be able to say 

‘‘Madam Chair.’’ 

And thank you for your indulgence in really sitting through a lot 

of questions. I don’t remember the former Chair indulging us this 

way. Maybe things will change after you are here for a time or two. 

I have some questions. Let me start out with a macroeconomic 

question. There is a lot of criticism about quantitative easing and 

the positions that the Fed has taken with that policy, and on the 

50 

other end of the street here, Congress has been engaging in more 

and more and more fiscal austerity. 

Is it fair to say that we are kind of working at cross purposes 

here? On one end, we are forcing really austere cuts, the economy 

is slowing while you are doing quantitative easing. My friend here 

coming in the door, it is my thought that we might be able to slow 

down on quantitative easing if we weren’t forcing such austerity on 

the economy. Your thoughts? 

Mrs. YELLEN. I agree. I basically agree with your point. 

Chairman HENSARLING. Madam Chair, I don’t think your microphone is on or you need to pull it closer, please. 

Mrs. YELLEN. Is that better? 

Chairman HENSARLING. Yes. 

Mrs. YELLEN. As an example, over the last year—I’m sorry, during 2013—the CBO estimated that fiscal drag depressed growth by 

about a percentage point and a half, which is really a pretty significant drag on growth. And our policies have been trying to offset 

that to boost the recovery. So yes, in that sense we have been 

working at cross purposes. 

Ms. MOORE. Thank you, Madam Chair. 

One of the things is that we would like to think that the current 

high unemployment is just cyclical. Can you tell us, have we 

reached the tipping point? Are we getting to a tipping point where 

this could be structural? 

Mrs. YELLEN. I’m sorry, where it could be structural? 

Ms. MOORE. Yes. 

Mrs. YELLEN. We are very much worried about the possibility 

that it could become structural. Something on the order of 36 percent of all unemployment is in long-term spells of 26 weeks or 

greater, and we know when people are unemployed for that long, 

they surely must get discouraged. They begin to lose their networks that enable them to find jobs, they may decide to drop out 

of the labor force permanently, they may begin to lose the skills 

that are necessary to find new jobs or, as we can see, employers 

tend not to want to hire people who are long-term unemployed. 

And so the notion that something that should be temporary can 

become a source of permanent job loss is a huge problem for the 

economy and, of course, for the households. 

Ms. MOORE. Thank you, Madam Chair. 

Just quickly, inequality, another thing that is very controversial—people think that inequality is just something that should be 

left to market forces, but would you—is it fair to say that inequality is really very harmful to our future economic growth and job 

creation, and what tools in the toolkit does the Fed have to address 

this threat? 

Mrs. YELLEN. Our toolkit, I am afraid, is more limited than I 

think what is necessary to deal with these trends. 

The major contribution that we can make is to try to promote a 

strong recovery. Many of the unemployed, particularly those with 

the most serious spells, are lower-income people, and if we can get 

a good, strong recovery going, not only will they get jobs, firms will 

probably promote people faster and be more willing to engage in 

training— 

Ms. MOORE. Thank you, Madam Chair. 

51 

Just very quickly, I am very concerned about the Fed continuing 

to work with the cross-border solutions on the orderly liquidation 

facilities, and I am—we have worked on this on my subcommittee 

and I hope that is a priority of the Fed. 

Mrs. YELLEN. We are working very closely with foreign supervisors to try to be able to affect a cross-border resolution—those are 

if, God forbid, it should come to that, but these are challenging 

issues, but we are very focused on them. 

Ms. MOORE. Thank you so much. 

My time— 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Oklahoma, Mr. 

Lucas, chairman of the House Agriculture Committee. 

Mr. LUCAS. Thank you, Mr. Chairman. 

And, Chair Yellen, it is a pleasure to be with you today to visit 

a little bit about the pressing issues out there. 

Sitting on the Agriculture Committee and having worked on 

what were the 2012 and 2013 and 2014 farm bills, now signed into 

law, there are several things that we look at in the committee, and 

some of them are directly or indirectly related to the activities of 

the Fed. 

For instance—and not so much an Agriculture-related issue—but 

the observation from some of my constituents that after the financial problems in 2008, the dramatic downturn in the stock market, 

and now over the course of the last 5 years, going from losing half 

its value, basically, back to where it was and a little bit on the 

positive side—not just that but, for instance, in farmland prices we 

watched over the course of the last 5 years a rather dramatic appreciation in the value of farmland. 

Now, some might say that part of the rebound in the stock market reflected the simple fact that the equities should not have collapsed that far in value 5 years ago, but—and some would also say 

that a big part of the takeoff in farmland values reflected the renewable fuel standard, a new government mandate consuming 40 

percent of the crop, driving a demand in price responses that 

hadn’t been there before. 

But in both cases it would seem, as an observer—and your opinion of course on this, Madam Chair—that once these effects occurred, it would seem that both land prices and maybe stock market values have continued on in a trend that would reflect more 

than the initial effect of either a rebounding stock market or the 

effect of the renewable fuel standard. 

In your opinion, how much effect has quantitative easing, the effort, of course, to try and address the housing market and the Federal financial obligations—how much of that extra money, that liquidity, has bled over into these other areas? Is part of the rise in 

land price values attributable to things like the quantitative easing? 

Mrs. YELLEN. I will not profess to be an expert on land prices, 

but— 

Mr. LUCAS. And nobody is, but you are exactly right. 

Mrs. YELLEN. —I think land prices have been going up at a remarkable rate even before the stock market began to recover, and 

certainly have caught our attention as an area where we would be 

52 

concerned about valuations. We have been watching that very 

closely. 

Mr. LUCAS. But if resources becoming so plentiful spread out into 

the other parts of the economy away from housing, if it distorts the 

decision-making process—in the farm bill this time we did away 

with the old direct payment program, basically taking $4 billion a 

year out of the farm economy in an effort part of which to address 

that issue, but if all of this money is churning and once these rates 

of return that appear to be so dramatically greater than anything 

else you can invest in—whether it is farmland or the appreciation 

of stock—I guess what I am asking you is: one, of course, as you 

noted, the Fed watches all of these things, but when we undo quantitative easing, what is the effect going to be on things like farmland prices or stock market prices, for that matter—equities? 

Mrs. YELLEN. I would agree that one of the channels by which 

monetary policy works is asset prices, and we have been trying to 

push down interest rates, particularly longer-term interest rates. 

Those rates do matter to the valuation of all assets—stocks, 

houses, and land prices—and so I think it is fair to say that our 

monetary policy has had an effect of boosting asset prices. 

We have tried to look carefully at whether or not broad classes 

of asset prices suggest bubble-like activity. I have not seen that in 

stocks, generally speaking. Land prices, I would say, suggest a 

greater degree of overvaluation. 

Mr. LUCAS. Because from the perspective of a number of us, 

Madam Chair, the concern about the old analogy about the—put 

your finger in the balloon and it pops out somewhere else are concerns that we would potentially, unintentionally of course, create a 

bubble similar to what we went through in housing a decade ago, 

either in farmland prices or somewhere else, and then the consequences of that would just be most unnerving. 

Your predecessor once, in response to a question from me when 

I asked, ‘‘When will you know to undo the quantitative easing,’’ his 

response was, ‘‘We will know.’’ 

And my question then was, ‘‘Well, if you didn’t know when the 

problem was coming, how are you going to know when the problem 

is fixed, to undo?’’ 

So, I appreciate the challenges you face. I certainly wouldn’t 

want your job. But then it took us 21⁄2 years to do a farm bill too. 

Mrs. YELLEN. We will watch asset prices very closely and recognize they can be a sign of excesses that are developing. 

Mr. LUCAS. Thank you, Madam Chair. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Connecticut, Mr. 

Himes, for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. 

And welcome, Madam Chair. 

Mrs. YELLEN. Thank you. 

Mr. HIMES. It is a pleasure to say that. As a guy who grew up 

with a mom and two sisters, and now lives with a wife and two 

daughters, it is a real privilege for me to see it here when, after 

100 years, the Federal Reserve is chaired by a woman. It is a— 

Mrs. YELLEN. Thank you very much. It is much appreciated. 

53 

Mr. HIMES. I want to follow up on a line of questioning by my 

friend from Wisconsin and just read you a portion of this—of your 

report here, which reads, ‘‘Fiscal policy was a notable headwind in 

2013 relative to prior recoveries. Fiscal policy in recent years has 

been unusually restrictive and the drag on GDP growth in 2013 

was particularly large.’’ 

I think you quantified that at 1.5 percent. So my questions are— 

and I—maybe keep it to a minute or so—unusually restrictive. I 

wonder what you mean by that. 

And number two, 1.5 percent of GDP growth given up to unusually restrictive fiscal policy. Can you quantify that for me in terms 

of number of jobs? 

Mrs. YELLEN. I guess it is—we are a little reluctant to try to 

quantify it, but a percentage and a half less GDP growth would, 

probably over the course of a year, raise the unemployment by several tenths of a percent. So it is significant. 

The economy succeeded in growing in 2013 at a reasonable rate, 

nevertheless, in creating jobs. But presumably, it would have 

grown faster without that drag. 

And when you say it is unusually restrictive, I think if you look 

back historically in periods like this, where we are recovering from 

a deep downturn and unemployment as as high as it is, the typical 

stance for a contribution of fiscal policy to growth would be substantially larger, and that is what it means to say it is an unusual 

drag. It is not only absolutely a large negative number, but it is 

unusual, given the economic conditions. 

Mr. HIMES. Thank you. So you did say that several tenths of a 

percentage point added to the unemployment rate. It is not unreasonable, I think, if I am doing the math right, to assume that 

would equate to something on the order of magnitude of hundreds 

of thousands of jobs. Is that unreasonable to assume, based on several— 

Mrs. YELLEN. I haven’t done the math, but it is probably— 

Mr. HIMES. Okay, so several hundred thousands worth of jobs 

that are attributed by the Federal Reserve to the unusually restrictive fiscal policies, which, of course, are generated in this institution. I appreciate you clarifying that. I have been through—not 

carefully, but I have been through all 51 pages of this report, and 

I don’t see mention of something that our chairman identified as 

a huge drag on the economy—I think he said, ‘‘regulatory costs and 

regulatory red tape.’’ 

Am I misreading this, or is there a reason why regulatory costs 

and regulatory red tape are not identified as a drag on the economy? 

Mrs. YELLEN. That probably is a drag on the economy. There are 

certainly studies that suggest that regulation sometimes does depress economic growth, and it is hard to quantify but it depends 

on exactly what we are talking about. 

Mr. HIMES. But in excluding that from this report, did the Federal Reserve make a judgment of materiality perhaps? Or why was 

the judgment made to, if in fact it does depress employment, not 

include it in the report? 

Mrs. YELLEN. We are mainly focusing on macroeconomic factors. 

Mr. HIMES. Okay. Thank you. 

54 

I just had the opportunity to spend a little bit of time with Mark 

Zandi of Moody’s Analytics, and he suggested or said that he 

thought you might estimate the employment effects of the monetary policy carried out by your predecessor at roughly a million jobs 

that exist in the face of that monetary policy. Is that a number 

with which you would agree? 

Mrs. YELLEN. There are a number of different studies and it is 

hard to quantify exactly what the effects are, but that is a significant study. 

Mr. HIMES. Okay. Thank you. 

Just in my remaining time, we had the opportunity to speak with 

the regulators on the topic of the Volcker Rule, which is a rule that 

I think is a very good idea. It is obviously a very complex rule and 

I asked, and I will forward my question to you, that I think the 

success of the implementation of the Volcker Rule will reside largely in the ability of the regulators to give timely interpretive guidance on what you know is a very complicated internal adjustment 

they will have to make. 

So I am hopeful that this interagency group that has been 

formed will put in place a system to provide rapid interpretive 

guidance to financial institutions around that very complicated 

rule, and I will say, again, thank you. It is a privilege to have you 

here. 

And I yield back the balance of my time. 

Mrs. YELLEN. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney, for 5 minutes. 

Apparently, the Chair doesn’t. The Chair recognizes the gentleman from Wisconsin, Mr. Duffy, for 5 minutes. 

Mr. DUFFY. You were throwing us for a loop here. Thank you, 

Mr. Chairman. 

And, Madam Chair, thank you for your testimony today and I appreciate your generosity with your time. All of us are grateful for 

that, especially those of us who are low on the dais. 

During his last testimony before our hearing—it was in July of 

2013—Chairman Bernanke testified that in about 5 years we can 

expect a spike in our debt-to-GDP ratio, arising mostly from longterm entitlement programs and a bunch of other things, including 

interest payments on our debt. President Obama has also acknowledged that the major driver of our long-term liabilities—and he 

said everybody knows this—is Medicare and Medicaid and our 

health spending, and ‘‘nothing else comes close,’’ I think was his 

quote. 

So I guess to you, Chair Yellen, do you agree that there are serious economic consequences and risks associated with the failure to 

address our Nation’s fiscal imbalances? And do you agree with the 

President and your predecessor that the principal driver of our 

unsustainable national debt is our long-term entitlements? Do you 

agree with that? 

Mrs. YELLEN. I do. 

Mr. DUFFY. Great. We are on the same page. It is wonderful. 

55 

And we also agree that we are not here to address this 5 years 

from now, or 1 year from now. The real time to address these entitlement issues really starts today, doesn’t it? 

Mrs. YELLEN. It is often difficult to make adjustments in these 

programs and retirement programs that people count on and require if their adjustments require planning over their lives, and so, 

yes, it is important to address them earlier. 

Mr. DUFFY. Right. And address them fairly for those who are in 

their retirement or near retirement. 

Mrs. YELLEN. Of course. 

Mr. DUFFY. But we should, as a body, start to address them. And 

you would also agree that it is pretty hard, from your position, to 

address these imbalances through monetary policy. We really have 

to do them through the legislative process, right? 

Mrs. YELLEN. Yes. 

Mr. DUFFY. Now, if you look at long-term entitlement spending, 

and the CBO’s report that just came out saying that the Affordable 

Care Act, or Obamacare, is going to cost another trillion dollars 

over the next 10 years, you have to agree, then, that the Affordable 

Care Act isn’t bringing us closer to balances in regard to our entitlement system; it is actually taking us further away from balance, 

right? 

Mrs. YELLEN. CBO was really the agency that has done the 

greatest, most careful assessment of the fiscal consequences, and I 

don’t have anything to add to what they have said about the likely 

fiscal— 

Mr. DUFFY. So you don’t dispute it but you are not necessarily 

agreeing with it either. Is that your position? 

Mrs. YELLEN. That is really their domain of expertise and not 

ours. 

Mr. DUFFY. And if we are going to spend an extra trillion dollars 

on the Affordable Care Act, I would have to imagine that entitlement is going to take us further away from balance, but let me 

move on. 

One of the concerns I have is the high rate of unemployment, 

and oftentimes after a downturn we will see pretty aggressive 

growth and recovery, and we haven’t really seen that in this recovery. I think all of us on both sides of the aisle can agree that we 

wish the economy would grow faster and more jobs would be created. 

Our concern also goes to labor participation. It is at a pretty low 

rate. We wish more people were participating in the labor market. 

I know we will disagree on this across the aisle, but we are concerned that the President’s Affordable Care Act has full-time work 

defined as 30 hours, and the CBO came out and said it is going 

to cost 2.3 million jobs—all a concern for us. 

But specifically, my concern goes to the young in America, the 

youth, ages 16 to 24. They have an unemployment rate—I think 

the number is 24 percent, which is really high. 

And it is this time in a young person’s life when they learn skills 

to show up on time, how to follow directives of your boss—all life 

skills that we use to probably move up the economic ladder. I don’t 

know. I had to bag groceries at the IGA. I don’t know if you had 

a minimum wage job. I did. 

56 

My question is, if we increase the minimum wage for these young workers maybe from $7.25, if we got them up to $12, $13, $15 an 

hour, would that help create jobs for them in your opinion? 

Mrs. YELLEN. I think standard economic theory suggests that 

changing the minimum wage has two effects. It raises the incomes 

of those people who get the higher wage and have jobs, and it may 

to some extent discourage job creation. And there are a variety of 

different studies on how large that effect is, some of them suggesting that it is small, but others taking a different view. 

Mr. DUFFY. So those who keep the jobs get a little better wage, 

but it is not creating jobs; it may cost jobs. Is that right? 

Mrs. YELLEN. That is what a range of studies suggest, but differ 

on the magnitude. 

Mr. DUFFY. Thank you, Madam Chair. I appreciate it. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Peters, for 5 minutes. 

Mr. PETERS. Thank you, Mr. Chairman. 

And, Chair Yellen, first I would like to congratulate you on your 

historic nomination and your confirmation as the Fed Chair and 

thank you for appearing with us here today and being so generous 

with your time. It is not easy to be in the so-called hot seat for as 

long as you are, so thank you for doing that. We appreciate it. 

Mrs. YELLEN. Thank you. 

Mr. PETERS. Just last week, as you know, new data came out 

showing that 2 years after the Korea-U.S. Free Trade Agreement 

was passed, we now have a record trade deficit with Korea. In fact, 

our trade deficit with Korea has increased 56 percent since 2011, 

which was the year before the trade agreement took effect. And 

without question, this certainly hurts American manufacturers and 

American workers. 

Congress, I believe, can’t ignore the impact of trade pacts on our 

middle class. I voted against the Korea Free Trade Agreement and 

I now oppose fast track authority for the Trans Pacific Partnership 

(TPP) unless that agreement includes some very strong, enforceable mechanisms to address currency manipulation. 

I have serious concerns that Japan has been included in the TPP, 

while maintaining the world’s most closed auto market and having 

a history of currency manipulation. The yen recently had a 5-year 

low against the dollar, and today’s monetary policy report notes 

that the dollar has appreciated sharply against the Japanese yen 

since October. 

It is estimated that the recent fall in the yen puts roughly a 

$2,000 per export vehicle into the pockets of Japan’s automakers, 

a significant disadvantage for our local companies. 

Now, I don’t need to tell you that every country certainly has a 

right to conduct sound monetary policy, but in this increasingly 

interconnected global economy, monetary policy facilitating the direct manipulation of currency, I believe, simply cannot be tolerated. 

And while it can be argued that Japan’s Abenomics policies are not 

direct intervention, I believe it is unsustainable. When Japan can 

no longer continue the policies, I think that they will—you will see, 

inevitably, a revision to direct currency interventions, a policy that 

they have used as late as 2011. 

57 

So, Madam Chair, it certainly—I think it can be argued that the 

Fed’s quantitative easing program helped American manufacturers, 

it has helped boost exports and our ability to compete abroad. However, I am curious to know if you believe that Japanese monetary 

policy has potentially weakened the beneficial effects of the Fed’s 

quantitative easing program for the American manufacturing sector and for middle-class families? 

Mrs. YELLEN. I would say that this is a topic that the G-7 has 

considered and generally come to the conclusion—one that I agree 

with—that countries should be allowed to use monetary policy to 

pursue domestic aims—certainly not to target the value of a currency or to attempt some improvement in their competitive situation, but to address broad macroeconomic concerns. 

Japan has had almost 20 years of deflation—mild, but chronic 

and debilitating deflation. And I think it is natural and logical that 

after such a long period of deflation, the government and the Bank 

of Japan should want to put in place a set of policies to end that. 

As you said, in a global economy, economies are interconnected. 

Monetary policy does have exchange rate impacts. I see the Bank 

of Japan’s policy is intended, and at least it looks favorable for 

now—seems to be moving inflation out of deflation territory and toward their 2 percent objective. 

To the extent that the policy is designed to stimulate domestic 

demand—and it looks like it has raised growth in the Japanese 

economy—of course, they have continuing problems and the need 

to put in place policies to address their high debt and budget deficits—but to the extent that they are successful and Japan grows 

more quickly, I think that will be something that will re-down to 

the benefit of Japan’s neighbors. 

If Japan has stronger domestic spending growth, there will be 

benefits throughout the global economy. But there are exchange 

rate implications of those policies, as well. 

Mr. PETERS. Certainly, if they have closed markets, even if you 

have stronger domestic markets but you are not allowing American 

autos, for example, to be sold in Japan, it really has a detrimental 

impact. So my question was on the detrimental impact to the 

United States. It may be good for Japan, but it is bad for the 

United States. 

Mr. DUFFY [presiding]. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Chair Yellen, it appears that the FOMC has had at least two 

special hearings over the course of the last several years regarding 

the debt ceiling. We have the minutes of the October 16th meeting, 

and I will read part of them to you. 

It says, ‘‘The staff provided an update on legislative developments bearing on the debt ceiling and the funding of the Federal 

Government, recent conditions in financial markets, and technical 

aspects of the processing of Federal payments.’’ 

That falls on a similar meeting in August of 2011 where the 

notes reflect the following: ‘‘The staff provided an update on the 

debt limit status, conditions in financial markets, and plans that 

58 

the Federal Reserve and the Treasury had developed regarding the 

processing of Federal payments.’’ 

Both of the minutes that we have from those meetings contain 

similar language then on the conclusions that the committee received from the staff and amongst themselves regarding the debt 

ceiling status at this time, and I will read you the minutes from 

2013: ‘‘Meeting participants saw no legal or operational need to 

make changes to the conduct or procedures employed in currently 

authorized desk operations such as open market operations, largescale asset purchases, or securities lending, or the operation of the 

discount window. They also generally agreed that the Federal Reserve would continue to employ prevailing market values of securities in all of its transactions and operations under the usual 

terms.’’ 

So in light of the fact there have been at least two hearings 

where the technical aspects or the plans regarding the processing 

of Federal payments have been raised, and the conclusions in both 

of those that it would not materially impact the conduct or procedures of the Fed, I will ask you a simple question: Is there a contingency plan in place regarding the making of Federal payments 

in the event the debt ceiling is not raised? 

Mrs. YELLEN. Not to the best of my knowledge. 

Mr. MULVANEY. Then I will ask you, Ms. Yellen—thank you for 

that—in the 2011 minutes, which read, ‘‘The staff provided an update on the debt limit status, conditions in the financial markets, 

and, most importantly, plans that the Federal Reserve and the 

Treasury had developed regarding the process of Federal payments.’’ What were those plans that had already been developed as 

of at least August 2011? 

Mrs. YELLEN. We were discussing very technical issues connected 

with the payment system. For example, would the Treasury put 

through in the morning ACH payments that they might not have 

sufficient balances in their account to pay? 

Mr. MULVANEY. And what would happen in such a circumstance? 

Mrs. YELLEN. In such circumstances, if they did that banks 

would receive instructions in the morning to pay customers 

amounts that the Treasury wouldn’t have in their checking account 

to make good on, and so their checks would bounce, leaving those 

institutions in a very difficult situation— 

Mr. MULVANEY. Are the plans that are referenced in the 2011 

hearing in writing? 

Mrs. YELLEN. There are briefings that staff made to the Federal 

Open Market Committee when we met about what our plans would 

be in terms of the responsibilities we have in dealing with financial— 

Mr. MULVANEY. I understand that, but are the briefings based 

upon a written document? Are they based on some verbal history 

at the Fed or the Treasury? Or is there a written plan on these 

payments? 

Mrs. YELLEN. To the best of my knowledge, there is no written 

plan on— 

Mr. MULVANEY. Given the fact that coming up with a contingency plan would have a great deal of impact on calming the markets in the face of a debt ceiling difficulty, do you think it is a good 

59 

idea to develop a contingency plan for prioritization of Federal payments in the event the debt ceiling is not raised? 

Mrs. YELLEN. That is a matter that is entirely up to the Treasury. That is not the domain of the Federal Reserve. 

Mr. MULVANEY. But you perform the functions for the Treasury 

through the New York Fed, don’t you? 

Mrs. YELLEN. We are the Treasury’s fiscal agent. 

Mr. MULVANEY. If they asked you to do it, could you? 

Mrs. YELLEN. It is not up to us to develop a plan concerning 

what bills would be paid. 

Mr. MULVANEY. If the Treasury asked you to create a 

prioritization program to put into place through the New York Fed, 

could you do it? 

Mrs. YELLEN. I don’t know that we could do that. 

Mr. MULVANEY. Do you think it would be a good idea to do that? 

Mrs. YELLEN. Treasury submits to us every day a set of payments to make, and we can either make them or not make them. 

Mr. MULVANEY. I understand. 

Let me finish with this, Ms. Yellen. I appreciate that. 

We have asked for the records from the Fed, from specifics related—identified in the meeting from the New York Fed. The New 

York Fed has told us we cannot have them until they get permission to give them to us from the Treasury. In light of your earlier 

comments to Mrs. Bachmann and Mr. Posey regarding Fed independence, are you concerned about having to ask the Treasury for 

permission to give information to Congress? 

Mrs. YELLEN. The Federal Reserve acts as the Treasury’s fiscal 

agent, and in that case we take instructions from the Treasury and 

are merely acting as their agent. That is one of our roles, to serve 

as the fiscal agent of the Treasury. 

Mr. DUFFY. The gentleman’s time— 

Mrs. YELLEN. It is not a monetary policy role. 

Mr. MULVANEY. Thank you, ma’am. 

Mr. DUFFY. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Delaware, Mr. Carney, 

for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. Thank you for the opportunity to ask some questions of the new Chair of the Fed. 

Welcome, Chair Yellen. Thank you for coming. I know it has 

been a very long day. 

We do appreciate your coming twice a year as part of the Humphrey-Hawkins Act testimony, and we appreciate your report. I 

have found these meetings very useful with your predecessor, 

Chairman Bernanke, and I have asked him each time this question, which I will ask you, which is, what is the most important 

thing we can do—we talk a lot here as Members of Congress about 

our focus on creating an environment where businesses can be successful and create jobs. What is the most important thing we can 

do within our purview to help there? 

We have this debt ceiling clock that—well, it is not running right 

now, but it has been looming over us. Are there a couple of things 

in your mind that Congress should be doing or could be doing? 

60 

Mrs. YELLEN. It is Congress’ job to put in place legislation that 

best advances the economic development of the country. There are 

a broad array of— 

Mr. CARNEY. So what are those kinds of things? One of the 

things that frustrates me is the fact that we have been unable to 

reach agreement across the aisle on a meaningful fiscal plan that 

gets our longer-term liabilities under control and makes the kind 

of investments in the short term that are important for future economic growth. Do you have any comments there? 

Mrs. YELLEN. I would agree with that. I think that is one of Congress’ most important responsibilities, and my predecessors and I 

have all emphasized the importance of putting in place budgets 

that are responsible, not only from a short-term but particularly 

from a long-term perspective. When we look at the CBO’s 75-year 

projections and see an unsustainable debt path, that is a great concern. 

Mr. CARNEY. That is the one thing your predecessor used to—he 

was kind of unwilling to give us policy advice, which I think is 

probably appropriate, but he would always say that the focus 

maybe ought to be on doing the things, frankly, that are a little bit 

harder, in terms of getting particularly health care liabilities over 

the long term, given the demographics and aging of our population. 

Your thoughts on that? 

Mrs. YELLEN. I completely agree with that. I think the combination of demographics are aging and a health care trend and cost 

trend that has been outstripping other prices in the economy is 

what leads to long-term deficits and debt that is unsustainable, 

and so wouldn’t want to give advice on how to deal with that, but 

this is something— 

Mr. CARNEY. Deal with it, right? 

Mrs. YELLEN. —you have known about for decades, and I think 

it is important to do so—to deal with that. 

Mr. CARNEY. One of the Fed Governors, Mr. Tarullo, was in here 

last week, and talked about systemic risk. And one of the pieces 

of unfinished business from the near financial collapse is what we 

have or haven’t done with respect to Fannie Mae and Freddie Mac 

and housing mortgage finance reform. You are buying $85 billion 

a month of MBS. 

Do you have any advice to us as to what we should do there with 

respect to housing finance reform? Obviously, it is a very important 

part of the economy and— 

Mrs. YELLEN. I think the time has come. I hope that you will 

deal with reform of the GSEs. And there are a variety of different 

ways to do it, but I think the government should make its role and 

intended role explicit— 

Mr. CARNEY. More explicit. 

Mrs. YELLEN. —and make sure that whatever entities are set up 

to deal with housing finance don’t create systemic risk to the financial system. 

Mr. CARNEY. Right. 

Mrs. YELLEN. The mortgage market is highly dependent on 

Fannie and Freddie at this point to provide credit, and there are 

uncertainties about what will happen with them. I think some resVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
61 

olution of that is necessary to get private capital back in the sector 

and— 

Mr. CARNEY. So is it your view that a more explicit Federal guarantee is important for liquidity and for the mortgage markets? 

Mrs. YELLEN. I think there are a variety of possible approaches 

that you can take depending on what you think the role of the Federal Government will be in hard times in the housing market, and 

it is simply important for Congress to decide what you want to do 

here and to do it in a way that doesn’t create systemic risk. 

Mr. CARNEY. My time is running out. Again, I want to congratulate you for your new position. I wish you well, and thank you for 

coming, again. 

Mrs. YELLEN. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross, 

for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, not only for being here but also for 

your endurance and for agreeing to be here to take questions from 

all of us. 

I don’t envy your job because it is quite a balance. Your monetary policy has to make sure that we not only allow for enough liquidity in the markets at an affordable rate, but we also have to 

make sure that there are those who are reliant upon investment 

income, seniors predominantly, whose savings accounts can survive 

in this environment. 

And when your predecessor was here before, Chairman 

Bernanke, he talked about the effect on the seniors who have fixed 

incomes and aren’t concerned about home appreciation; they are 

more concerned about CD rates, savings accounts, because that is 

their livelihood, that is their income. 

Can you comment at all as to any hope or suggestion for those 

seniors of mine back home who are on a fixed income, who are dependent upon not a zero interest rate but at least some return on 

their investment as being able to allow them to live an affordable 

life? 

Mrs. YELLEN. I know that this is a difficult situation for seniors 

in that position, and I would simply say that our objective is to get 

the economy moving and into a state of full recovery as rapidly as 

we can. And when we have accomplished that, rates of return will 

come back to more normal levels— 

Mr. ROSS. Do you feel that— 

Mrs. YELLEN. —and they will see higher returns. 

Mr. ROSS. —the reduction in the asset buying, do you think that 

may have a positive impact on some of these fixed-income accounts? 

Mrs. YELLEN. I would say the reduction in our asset purchases 

in part reflect—importantly, reflect a stronger economy. We see an 

economy that is now meaningfully recovering, the labor market improving, and as that process plays itself out, I think seniors can 

look forward to higher interest rates; that is our objective. 

Mr. ROSS. Let me quote you something. There is a commentary 

that was in The Wall Street Journal just recently by Mr. E.S. 

Browning, an investment adviser, and he states that, ‘‘If you don’t 

62 

invest in U.S. stocks, the thinking goes, where else are you going 

to invest? Developing country markets have turned unstable. Europe is struggling. Cash and high-grade bonds offer the tiniest of 

yields. Many experts consider junk bonds overpriced. Hedge funds 

are struggling. The Fed is determined to get people investing again 

by keeping rates down and forcing them to take risks. Anyone who 

refuses to buy stocks, in other words, is fighting the Fed.’’ 

So I guess my question is, it seems that the Fed policy is not only 

affecting my seniors but all investors, and I guess, should we be 

concerned about families trying to save for college education, because now they are going to be risking—or investing in more risky 

options? Is that what we see to come? 

Mrs. YELLEN. Interest rates are low, and they are low not just 

because the Fed arbitrarily decided to set them at a low rate but 

because the fundamentals of the economy are generating low interest rates that—normally we think of interest rates as reflecting the 

balance—a balance between savings and investment, the strength 

of those forces in the economy. 

And in the aftermath of the downturn, the desire to borrow 

money for private investment is weak and a reflection of that is low 

rates. 

If we were to try to keep interest rates above the levels called 

for by fundamentals we would have a yet weaker economy, it would 

be harder to get a job, and the children and grandchildren— 

Mr. ROSS. But aren’t we already limiting— 

Mrs. YELLEN. —of those retirees would be coming home even 

more than they already are to live with their parents and grandparents because they would find it even more difficult to get jobs— 

Mr. ROSS. But haven’t we already limited the investment opportunities? 

Mrs. YELLEN. —and that wouldn’t be good for those seniors. 

Mr. ROSS. Hasn’t Fed policy already limited investment opportunities for many out there, other than leaving for high-risk investments? 

Mrs. YELLEN. In an environment of low interest rates, there is 

an incentive to move to higher-yielding investments, and it is important for the recovery of the economy that people be willing to 

take some moderate risks. 

Mr. ROSS. Let me ask you really quickly about the SIFIs, because 

you have talked about this in your opening and on other questions. 

There seems to be confusion regarding the process involved and 

what constitutes or designates an SIFI, but there must be some 

methodology involved. So if a firm is, hypothetically speaking, designated an SIFI, is there some action that they can take to be removed to that designation? 

Mrs. YELLEN. They have absolutely. It is an important—important for them, and they have the opportunity to have very serious 

consideration or—before the FSOC and to protest the status and 

have it reconsidered. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster, for 5 minutes. 

Mr. FOSTER. Thank you, Mr. Chairman. 

And congratulations, again— 

63 

Mrs. YELLEN. Thank you. 

Mr. FOSTER. —Chair Yellen. 

I would like to speak for a moment and ask you a couple of questions about the crosstalk between wealth distribution and offshore 

capital flows. This is something that is not usually captured in the 

macroeconomic models that you get a lot of your guidance from, but 

I believe it is a very important and overlooked effect. 

It is well-known and appreciated that the middle class has a 

much lower propensity to consume than high-net-worth individuals, so policies that exacerbate the concentration of wealth at the 

top reduce consumption. And since we are in a demand-limited 

point in our economy, that is a very relevant fact. 

But less appreciated is what I believe is the increased propensity 

of high-net-worth individuals to move their money offshore. You 

can see this is, for example, hurting China, where the top 1 percent 

who owns a big fraction of that country is frantically moving their 

money to safer locations, but I believe it is also true, from what I 

have been able to dig up, that high-net-worth individuals in North 

America move their money offshore with a—roughly a third of their 

investments actually go offshore. 

This, for example, may be an important explanation for why, for 

example, the Bush tax cuts created no jobs, that they affected the 

wealth distribution, but instead of reinvesting that money onshore, 

it was reinvested offshore. 

And so I was just wondering, first, do you, when you look at 

macro models for guidance, look at the wealth distribution and its 

effects both on consumption and on offshore capital flows? 

Mrs. YELLEN. Consumption is very important in terms of our 

forecasting, and so we are constantly trying to understand what 

the forces are that determine consumption and its growth over 

time. 

We have looked to see—research has been done in the Fed and 

outside the Fed to try to see if we can identify differences—systematic differences—in marginal propensities to consume across different income groups, and I would say the evidence on that—I am 

certainly aware of the hypothesis that you put forward. I would say 

the evidence is not crystal clear, but certainly— 

Mr. FOSTER. In the case of consumption— 

Mrs. YELLEN. —some prominent people have made the argument 

that you expressed, that shifting distribution of income has reduced 

consumption and made it harder for the economy to grow. 

Mr. FOSTER. I would like to have you look—in addition to continuing to look into that, which I believe is fairly widely accepted, 

maybe not universally—look at the effect of offshore capital flows, 

because I think this is also a large effect. And I think both parties 

tend to have a one-country model in their minds when they talk 

about changes in things like tax policy, and it is more complicated 

than that. 

Second, you had mentioned earlier in your testimony a secular 

shift in the labor market. And I was wondering if you think or have 

been considering what we may be seeing as a secular shift in the 

housing market. 

And I would also like to congratulate you on your increasing attention paid to the housing market in your report, which is—I 

64 

think we all learned that the housing market was a very big dog 

in this fight. 

But what I hear from REALTORS® more and more is that 

younger kids—or, well, what I think of as kids now—are less interested in—they grew up looking at TV screens; they no longer want 

a riding lawn mower and a big house in the suburbs. And so, the 

fraction of our investments that will be made in housing may be 

going down over time, and when you see the big—what looks to me 

like a secular shift—I guess it is on page 16, plot 27, the big shift 

in the housing starts—that it—we may be actually seeing a secular 

shift in that. 

And I was wondering if that is a sort of thing you track, because 

it has big implications if that is the way things are evolving in the 

country. 

Mrs. YELLEN. We are looking at that. Household formation has 

been very low in part because of the weak economy, but to the extent that this shift that you have described exists, we are certainly 

seeing robust activity in the multifamily sector that if people want 

to live more in apartments, what may not be single family housing 

so much, but if they don’t want to own homes and there is a shift 

in that direction, it may give rise to a greater growth in rental 

properties than in single family housing. And we are certainly seeing that pattern in the recovery. 

Mr. FOSTER. I would just like to encourage you, despite your history in the banking business, to pay a lot of attention to the real 

estate markets and their health. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair advises all Members that there are votes currently 

taking place on the Floor. The Chair will recognize two more Members, and then recess the hearing. 

The Chair recognizes the gentleman from North Carolina, Mr. 

Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And, Chair Yellen, congratulations to you. I have three daughters and I am encouraged by your success, as I am by theirs. 

Chair Yellen, I would make reference to your testimony where 

you stated that the growth in consumer spending was restrained 

by changes in fiscal policy. Given that a broad tax increase was 

part of that change in fiscal policy, it seems that reversing some 

of those tax increases would spur growth and consumer spending. 

Would you agree with that? 

Mrs. YELLEN. The payroll tax— 

Mr. PITTENGER. Yes. 

Mrs. YELLEN. —cut was ended at the beginning of the year and 

taxes went up on higher-income households. 

Mr. PITTENGER. That is right. 

Mrs. YELLEN. And so, that cut into the growth of consumer 

spending. That is what we were trying to say there. 

Mr. PITTENGER. Exactly right. So then, do you believe that if we 

were to reverse some of those tax increases, that would spur the 

growth in consumer spending? 

Mrs. YELLEN. That if you were to reverse them, that would spur 

growth? 

Mr. PITTENGER. Yes, reverse the tax increases. 

65 

Mrs. YELLEN. Certainly. 

Mr. PITTENGER. Thank you. 

Madam Chair, the Fed proposed a rule for comment in December 

to implement the Dodd-Frank Act limitations and the Fed’s 13(b) 

emergency lending authority. Chairman Hensarling wrote to Chairman Bernanke last month to express this concern, and I just want 

to ask today for your commitment to give this letter your personal 

attention and to provide a substantive response to that letter before the rulemaking comment period closes out, and to also provide 

an opportunity for the other Members of the Board to similarly provide their individual views of this letter. Would you do that on our 

behalf? 

Mrs. YELLEN. We have put out a proposed—I want to make sure 

I understand what you are saying. We have put out a proposed rule 

to implement what is in Dodd-Frank on 13(3)— 

Mr. PITTENGER. 13(3) the— 

Mrs. YELLEN. —and we very much welcome comments on that 

and we will take them into account when we come out with a revised proposal—hopefully, a final proposal. 

Mr. PITTENGER. Chairman Hensarling wrote a letter to Chairman Bernanke, and in the letter he wanted to give a commitment 

in that for—just a substantive response to that letter. Would you 

take a look at that letter of Chairman Hensarling’s and kind of respond to that? 

Mrs. YELLEN. We certainly will, but as I understand it, it is a 

letter that was submitted as part of the set of comments on and 

during the comment period on 13(3), and we will collect all of the 

comments and then consider— 

Chairman HENSARLING. Would the gentleman yield to the chairman— 

Mr. PITTENGER. Yes. 

Chairman HENSARLING. —since the chairman’s name is being 

used here? 

Madam Chair, I sent a letter to your predecessor. We have concerns about the 13(3) rulemaking. We have waited for 3 years and 

what we see now is a rule that largely parrots the language of the 

statute illuminating essentially very little. 

And so, the letter goes into much greater detail about our concerns. Given that I sent it to your predecessor, I would be happy 

to send it to you, as well. If not, if you could give it your personal 

attention, I would be most appreciative. 

I thank the gentleman for North Carolina for yielding to the 

Chair. 

Mrs. YELLEN. I will do so. 

Mr. PITTENGER. Madam Chair, in just the minute or so we have 

left, regarding the Volcker Rule, there are five agencies involved. 

We have talked some about this already. But in this rule there are 

different positions taken by these agencies that provide for a different perspective, and right now the rule that they have adopted, 

that they have a consistent point of view. What formal or public 

coordination can you commit to in the future where they would not 

agree? 

Mrs. YELLEN. We tend to coordinate, and plan to do so very closely with the other financial regulatory agencies. We are accustomed 

66 

to working very closely with them, and I think more broadly, we 

will try to cooperate and ensure that there is a similar approach 

to implementing this rule with the SEC and the CFTC as well. 

Mr. PITTENGER. It is a burdensome challenge, I am sure. 

We did see a recent report from CBO that we have lost 2.5 million jobs through Obamacare. Has the Fed done any estimates of 

job loss as a result of Dodd-Frank in our economy? And could you 

give us a response if you would anticipate that—looking into that? 

Mrs. YELLEN. I think it is very difficult to estimate in total what 

the implementation of Dodd-Frank will mean. On balance, I feel 

that Dodd-Frank was passed to make the financial system safer 

and sounder and to avoid— 

Mr. PITTENGER. Do you think it would be worth that review to 

see what job losses occurred? 

Mrs. YELLEN. Well— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. Kildee, for 5 minutes. 

Mr. KILDEE. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here, and I know others 

have said this, but having a daughter and a granddaughter who 

will now grow up in world where the president of General Motors 

is a woman, and the Chair of the Fed is a woman, it is something 

to celebrate. And I just want— 

Mrs. YELLEN. Thank you very much. 

Mr. KILDEE. —to thank you. 

Mrs. YELLEN. I appreciate that. 

Mr. KILDEE. I wonder if you would comment briefly—later today, 

presumably, the House will vote to extend for another year the Nation’s debt limit to ensure that we meet the obligations that we 

have already made, and I wonder if you might comment on what 

effect, if any, you think positive action by Congress on the debt 

limit might be? And I know your staff loves it when you speculate, 

but if you might speculate on what the effect of the failure of Congress to take that action before the February 27th deadline or date 

set by the Treasury Secretary might have on domestic and global 

markets, if you could just comment on that subject? 

Mrs. YELLEN. I think fiscal policymakers should never put our 

Nation in this situation where there is a risk of defaulting on the 

Federal debt. It would be an extremely destructive thing to do from 

the point of view of our economy, of our financial markets, of global 

financial markets, and even in the run-up to the last debt ceiling 

crisis we could see the beginnings of market participants beginning 

to worry and protect themselves and to take steps even in advance 

of that limit coming into place that could cause us problems in the 

financial system. 

So I believe, frankly, it would be catastrophic to not raise the 

debt limit. 

Mr. KILDEE. Thank you for that. That is good guidance and I 

hope that Members of Congress on both sides of the aisle will listen 

closely to your thoughts on that. 

I wonder if I might take a different tack for a moment and ask 

you, in the report that you supplied you do make reference to labor 

markets, particularly in the context of the dual mandate of the 

67 

Federal Reserve, and I wonder if you would comment on two 

points: one, you make reference in the document to the length of 

time that those who have been out of work—basically the long-term 

unemployed—have had on the economy; and two, you make reference also to the fact that while productivity over the long period 

has increased, recent gains in wages—in real wages—have not kept 

up with productivity, despite the fact that we may have not seen 

productivity gains recently, but over the long term we have certainly seen productivity gains far in excess of what we have seen 

in real wages. 

Why are those two factors important in terms of the mandate of 

the Federal Reserve? 

Mrs. YELLEN. The fact that we have very long spells of unemployment—that almost 36 percent of those unemployed who are in 

very long spells of 26 weeks or more—really suggests that the job 

market is not strong enough to be able to provide people with jobs 

who want to work, which is roughly another way of stating what 

our employment goal is, and so it is a mark that there is a great 

deal of slack in the labor markets still that we need to work to 

eliminate. 

The fact that wages have not kept up with productivity, for the 

last number of years we have seen a shift in the distribution of income more away from what is called labor share and more towards 

capital share. And I think it is not fully understood what accounts 

for that trend, but it is a disturbing trend because it suggests that 

workers aren’t—even though they are being more productive, their 

wages in real terms aren’t keeping up with that. And so, it is a 

very worrisome trend from the point of view of living standards. 

Mr. KILDEE. I think both are important, and I am glad you included them. Certainly what Congress and what other policymakers have to consider is the effect of long-term unemployment, 

especially on those who are unemployed and are losing unemployment benefits and the effect on wages not keeping up with productivity and having a minimum wage in this country that puts a family below the poverty wage is something that is not sustainable. 

And I wonder, just before I close, if I could follow up with you 

at some point in time—I pursued this line of questioning with your 

predecessor. The effect of fiscal insolvency in America’s municipalities, I think, is a significant issue and I think that it is one that 

poses a real threat to our overall economy, and I would certainly 

like to engage the Fed in the question. I think it is something that 

we are going to have to take on. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair will now declare a recess pending the conclusion of 

Floor votes. The committee stands in recess. 

[recess] 

Chairman HENSARLING. The committee will come to order. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

And let me echo the congratulations to you, Chair Yellen, and 

thank you for coming today and spending your day with us. 

Chair Yellen, we have seen the Fed take a leadership role at the 

FSOC in exercise of its authority to designate systemically signifiVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
68 

cant financial firms. What we have unfortunately not seen is any 

transparency on how the SIFI designation process works. 

During your confirmation hearing, you committed to Senators 

Tester and Warner that you would provide more transparency in 

this area. What have you done to make that process more transparent? And will you commit to demanding that the FSOC provide 

guidance to firms being considered for SIFI designation with a 

clear indication of what they could do to ensure that they will not 

be so designated? 

Mrs. YELLEN. Let me first say that my first FSOC meeting is on 

Thursday, so I haven’t been very involved to this point. But the 

FSOC, as I understand it, has come out with this set of criteria— 

metrics that they are using when they consider designation. When 

they have designated firms I think they have provided—their Web 

site is full of information on those firms and the analysis that was 

done in connection with designation. 

Certainly, if FSOC decides on additional criteria or uses other 

criteria or develops other metrics I think it is completely appropriate that they should be made public so that the public understands what the criteria are that are being used. And in that sense, 

I certainly will support having FSOC provide the public with adequate analysis both of the criteria that they are using for designation and the analysis that they have done that supports the decision to designate particular firms. 

And I should say that those firms have many opportunities to 

have hearings before FSOC. It is obviously very important to 

them—designation—and they are given extensive opportunities to 

appear before FSOC groups and question analysis and— 

Mr. ROTHFUS. Thank you. 

I want to talk a little bit about stress testing. You have previously expressed your support for stress testing banks using extreme worst-case scenarios, such as those seen in recessions occurring decades ago which are highly unlikely to recur. 

Wouldn’t it also be appropriate to stress test the Fed’s exit strategy for QE to estimate the exit strategy’s effect on the Fed’s ability 

to fulfill its mandate as well as the Fed’s balance sheet, the upper 

ranges of interest on excess reserves the Fed might be required to 

pay, and how increases in the Federal funds rate might impact the 

relationship between the government’s interest payments on Treasury obligations and the deficit? So again, I am looking for a commitment to stress testing what is going on with the Fed and the 

withdrawal from a QE 

Mrs. YELLEN. We of course do extensive analysis of our balance 

sheet under alternative scenarios, both about what exit would look 

like and under alternative interest rates scenarios. And an update 

of a paper by a Fed staffer by the name of Seth Carpenter and his 

colleagues, which came out in September, provides a great deal of 

that analysis. 

It shows, for example, what would happen if there were an increase in interest rates of a couple hundred basis points higher 

than what markets are assuming to be most likely. And that, of 

course, is important analysis and we have purposely put it in the 

public domain. 

69 

But I must say that our ability—you refer to our ability to 

achieve our dual mandate. I see no reason why our ability to 

achieve our dual mandate or to conduct monetary policy— 

Mr. ROTHFUS. One of my concerns is, I consider it a distorting 

effect that QE has had, for example, on the bond market. Have you 

considered the value of the securities held by the Fed, what would 

happen in the event of an interest rate spike, for example, what if 

the securities held by the Fed dropped by 2 percent—the value of 

them dropped because of interest rates going up? 

Mrs. YELLEN. That is exactly what we have looked at, and I 

would urge you to have a look at the Carpenter paper, where we 

analyze what the impact would be on our balance sheet and our remittances. 

Mr. ROTHFUS. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Ohio, Mr. Stivers, 

for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. 

Chair Yellen, thank you for being here. Congratulations on your 

sort of record-breaking appointment to be the Chair of the Fed. 

I want to thank you very much for your time today. You have 

given us an extended amount of time. 

I also want to thank you for your candor. I think your answers 

have been very honest and you haven’t tried to pull any political 

punches. You have just told it like it was, and I appreciate that. 

Mrs. YELLEN. Thank you. 

Mr. STIVERS. I want to ask you a couple of questions, one about 

sort of the business of insurance. As you know, since the 

McCarran-Ferguson Act in the 1940s, the States have really regulated the business of insurance and the Federal Government has 

had a very, very limited role in insurance. 

And now that we have Dodd-Frank and some big insurance companies are—could be and are being demonstrated as systemically 

important financial institutions, they come under the Fed’s purview. And because of the limited amount of insurance expertise at 

the Fed, it gives me some cause for concern. 

And I guess I am curious, I want to make sure you don’t impose 

sort of bankcentric capital standards on insurance company SIFIs, 

because frankly, they have a different role. Their investments are 

for a purpose. They focus on the maturities based on their needs. 

So, I am really worried about the capital standards you might 

impose, and I am curious, first, what your timetable for making 

any ruling on insurance company capital standards might be; and 

second, if you will work with industry experts and the State-based 

regulators to get their input, because they know the industry better 

than folks at the Fed? I have lots of respect for folks at the Fed 

and your experience in the financial markets, but because of the 

limited exposure on insurance, I am curious if you will work with 

those State regulators and some insurance experts and try to defer 

to some of their opinions, including Mr. McRaith, with the Federal 

Office of Insurance? 

Mrs. YELLEN. We have consulted with others with greater insurance expertise. And of course, we are building our own expertise 

as is appropriate. 

70 

But we absolutely recognize that it is important to tailor rules 

to the specific and different business model of insurance companies. 

They are not the same as banking organizations. We recognize a 

number of special issues, including the long-term nature of most insurance company liabilities, the fact that they have asset liability 

matching practices, risks associated with separate accounts, and so 

forth. 

Mr. STIVERS. Can you update me on what you think your 

timeline will be there? Or do you know yet? 

Mrs. YELLEN. I am not certain exactly. I— 

Mr. STIVERS. Okay. Maybe you can get back to me when you 

know or— 

Mrs. YELLEN. —can get back to you on what our timeline is. 

Mr. STIVERS. That would be great. 

Mrs. YELLEN. But I do want to say, though, that in spite of the 

fact that we understand they are special, and we want to tailor an 

appropriate regime, there are some limits to what we can do. The 

Collins Amendment requires us to establish a consolidated minimum risk-based capital and leverage requirements for these holding companies that are no lower than those that apply to insured 

depository institutions, and— 

Mr. STIVERS. Sure, and I understand that. And if we can move 

on, because I have limited amount of time. 

Mrs. YELLEN. Sure. 

Mr. STIVERS. You referred earlier to employment and your concern that there are changes in employment going on—some people 

are moving more to part-time. There have been a lot of people who 

have given up. Unemployment stayed steady at 6.6 percent. 

But I am worried you are using the wrong look at unemployment, the traditional view. Because of all the changes going on, 

shouldn’t you look at U6 for your view of what full employment is, 

because it takes into account the underemployed and people who 

have given up? 

Mrs. YELLEN. We are absolutely looking at U6. We see that, for 

example, the extent of part-time employment for economic reasons 

is unusually elevated. You see that— 

Mr. STIVERS. And it is going to increase, so I hope you will take 

a look at what is appropriate and— 

Mrs. YELLEN. Absolutely. 

Mr. STIVERS. —consider that. 

And I am running out of time, but the last thing I want to ask 

you about is—and you may not be able to say this because I don’t— 

you may not want anybody to think you are trying to grab power, 

but if we were going to redo our regulatory framework—we had another chance to re-look at it—wouldn’t it make sense, whether it 

is the Fed or somebody else, to have one systemic regulator and 

then functional regulation regardless of who you are, regulate you 

based on what you do, and then one systemic regulator that sort 

of de-conflicts things? 

We had six regulators in here last week about the Volcker Rule 

and it is very confusing where there could be contradictory things 

that different enforcers of the same rule say. Don’t you think that 

would be a better way to regulate? 

71 

Mrs. YELLEN. There are pros and cons and Congress has considered this. We certainly have a complex system and I would agree 

that sometimes coordination is quite challenging. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Murphy, for 5 minutes. 

Mr. MURPHY. Thank you, Mr. Chairman. 

And, Chair Yellen, thank you for your time. It has been a long 

day for you. Thank you for sticking it out for us. 

The collapse of the housing bubble and resulting financial crisis devastated the global economy and cost Americans $17 trillion 

worth of wealth. Many have assigned responsibility for low interest 

rates and lax capital and leverage standards to the Federal Reserve and then Chairman Greenspan. While I do not believe the 

Fed caused the crisis, its policies certainly helped fuel the bubble. 

In June 2009, you said that higher short-term interest rates 

might have slowed the unsustainable increase in housing prices. 

With the benefit of hindsight, would measures to slow the housing 

bubble have been appropriate? 

Mrs. YELLEN. Certainly, the collapse of housing in the bubble 

was devastating and at the heart of the financial crisis, so of 

course, yes, with the benefit of hindsight, policies to have addressed the factors that led to that bubble would certainly have 

been desirable. I think a major failure there was in regulation and 

in supervision, and not just in monetary policy. 

So I would say going forward, while I certainly recognize, as do 

my colleagues, that an environment of low interest rates can incent 

the development of bubbles and we can’t take monetary policy off 

table as a tool to use to address it, it is a blunt tool. And macroprudential policies—many countries do things like impose limits on 

loan-to-value ratios, not because of safety and soundness of individual institutions but because they see a housing bubble form and 

they want to protect the economy from it. 

We can consider tools like that, and certainly supervision and 

regulation should play a role and their more targeted policies. 

Mr. MURPHY. The reason I ask is, would you be willing and open 

to pushing for policies to prevent another catastrophe if it means 

slowing or deflating an asset bubble? And as a sort of follow-up to 

that, are you seeing any bubbles out there now or anything you are 

concerned about? 

Mrs. YELLEN. Nothing is more important than avoiding another 

financial crisis like the one that we just lived through, so it is immensely high priority for the Federal Reserve to do what we can 

to identify threats to financial stability. 

One approach that we are putting in place, in part through our 

Dodd-Frank rulemakings, is simply to build a financial system that 

is much more resilient to shocks. The amount of capital in the largest banking organizations has doubled. We do have a safer and 

sounder system, and that is important. 

But detecting threats to financial stability—we are looking for 

those threats. I would say my general assessment at this point is 

that I can’t see threats to financial stability that have built to the 

point of flashing orange or red. 

Mr. MURPHY. Okay. 

72 

Mrs. YELLEN. We don’t see a broad-based buildup, for example, 

in leverage or very rapid credit growth. Asset prices generally do 

not appear to be out of line with traditional metrics. But this is 

something we are looking at very, very carefully. 

Mr. MURPHY. Okay. I have about a minute left. 

Wall Street reform designated bank holding companies with combined assets above $50 billion as SIFIs and therefore enhanced supervision. Is asset size alone the best way to measure a bank’s systematic importance? 

Mrs. YELLEN. No. We have a whole variety of different metrics. 

And we strive to differentiate within that category of $50 billion 

and above and the largest banking organizations. 

For example, we have singled out the eight largest bank holding 

companies for higher capital requirements, supplementary leverage 

ratios. Those things do not apply to the $50 billion banking organization. We are trying to tailor our regulations even within that $50 

billion and above category and certainly below it. 

Mr. MURPHY. Could you just touch briefly on some of your efforts 

regarding examination processes that you are doing with some of 

the smaller community banks to ensure that you get the right information, but that you are not burdening some of the community 

banks—some of your efforts? 

Mrs. YELLEN. First of all, we have formed a new organization 

called the Council of Community Banks (CDIAC), that we meet 

with 4 times a year to understand their concerns, and we have a 

special new committee of the Board to focus on issues with community bank supervision. So we are listening and we are trying to be 

very sensitive and attentive to those concerns. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

And thank you, Madam Chair. Congratulations on your appointment. And again, thank you for your generosity with your time, 

particularly for us who are at the end of the line of questioners. 

Madam Chair, you have stressed in your written and in your 

verbal testimony here today the Fed’s statutory mandate of maximum employment. Should the objective of U.S. fiscal policy also be 

to maximize employment? 

Mrs. YELLEN. Fiscal policy has many different objectives. It affects the economy in a whole variety of different ways. And so, I 

wouldn’t have stated that is the main goal of fiscal policy, but it 

is a goal that fiscal policy should take into account. 

Mr. BARR. Last week, as you know, the Congressional Budget Office issued this report, and that report projected that the President’s health care law—Obamacare—will reduce the size of the 

U.S. labor force by 2.5 million full-time equivalent workers over the 

next decade. That is about triple what the CBO originally projected 

after the Congress passed Obamacare 3 years ago or 4 years ago. 

In commenting on that report, CBO Director Elmendorf testified 

that the Act creates a disincentive for people to work, and it does 

this against a backdrop where the labor force participation rate is 

already the lowest it has been in 35 years. 

73 

The White House responded to this bad news by claiming that 

2.5 million Americans leaving the workforce was actually a good 

thing, saying that these people would no longer be ‘‘trapped in a 

job.’’ 

My question to you is, I think, a pretty straightforward one: Is 

a shrinking workforce a positive or a negative development for the 

economy? 

Mrs. YELLEN. It has different effects. I don’t think there is a simple answer to that question. In the CBO analysis, they focused on 

this not being a matter of creating unemployment, but of people 

withdrawing from the labor force. And there are some good and 

bad aspects to that. 

Mr. BARR. Let me ask you the question this way: It is the statutory mandate of the Fed to maximize employment, so why would 

it be a complex question? Why shouldn’t the goal of U.S. fiscal policy be equally dedicated to maximizing employment, and shouldn’t 

this concern all of us? 

Mrs. YELLEN. I think the CBO recognized when they produced 

this analysis that the effects of this Act are extremely complex, and 

while it has effects on labor supply, the Act also may have an effect, for example, on the growth of health care costs, and a number 

of different impacts on the growth of economy over time that go in 

different directions. 

Mr. BARR. And, Madam Chair, will a declining labor force—how 

would that impact deficits? 

Mrs. YELLEN. I am not sure. It is not— 

Mr. BARR. Okay. 

Let me move on to a different subject. Just as an economist and 

also as Fed Chair, as you assess the fiscal health of the Nation, 

which is a more meaningful statistic for you, the total debt figure 

or the ratio of debt-to-gross domestic product? And why would you 

choose one or the other? 

Mrs. YELLEN. I would look at the debt-to-GDP ratio both currently and its projected path over time under assumptions that current policies continue. I think you can’t assess the debt of an economy in how if you were looking at the debt of a household you 

would need to assess it to know what the household’s income is, 

what is a bearable or serviceable level of debt, given the income of 

the household or the economy. 

What is important here is that according to any projection, particularly the CBO’s over a longer horizon, the U.S. debt is 

unsustainable relative to GDP. 

Mr. BARR. I appreciate your comment and your testimony there. 

I have introduced legislation that would replace the existing debt 

ceiling law with a new debt ceiling that ties the new ceiling to a 

declining debt-to-GDP ratio, so I appreciate the testimony. 

One final question: I often hear the argument that quantitative 

easing effectively enables our fiscal deficits by lowering the cost of 

borrowing for the government and by artificially fueling the market 

for U.S. Treasuries. Is there a reason to be concerned that QE 

crosses the line from monetary to fiscal policy because it implicitly 

finances government? 

Mrs. YELLEN. Not in my opinion. I believe the Fed is focused on 

its mandate that was given to it by Congress, namely maximum 

74 

sustainable employment and price stability, and I think you should 

hold us accountable to meeting those goals. 

Mr. BARR. Thank you. I yield back the balance of my time. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty, 

for 5 minutes. 

Mrs. BEATTY. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

First, let me say to Chair Yellen that I certainly join my colleagues in congratulating you, and to also say it is quite an honor 

on this historic day for me to have the opportunity to pose questions to you. 

My first question is somewhat similar to Congressmen Meeks 

and Clay as they talked about diversity and minority participation. 

Certainly, as you and your staff will know, in the 2013 GAO report it talked about the decline of diversity representation. But on 

a very good note, when you look at what Dodd-Frank did to create 

the Office of Minority and Women Inclusion (OMWI), which is an 

avenue that will allow women and minorities to be more included 

not only in supplier development, but also in policy making. 

Thanks to Congresswoman Waters, she has allowed me the opportunity to meet with the OMWI directors throughout your area. 

So my question as it relates to that is, how will you help to promote and to elevate OMWI within all of the divisions? 

Mrs. YELLEN. The divisions at the Federal Reserve? 

Mrs. BEATTY. Yes. 

Mrs. YELLEN. So we have a very active program intended to promote diversity and bring in minority-owned businesses and womenowned businesses as suppliers. We have incorporated supplier diversity language into all of our contracts. We are now requiring 

that contractors confirm their commitment to equal opportunity in 

employment and contracting, fair inclusion of minorities and 

women in the workforce. 

We are engaged, both at the Board and in the Federal Reserve 

Banks, in a number of different programs to attract an increase in 

employment of minorities and women, and we are tracking our success. 

In the Board, at the officer level, we have increased our staff. I 

believe the last year for which we have full data in 2012, there are 

seven new officer positions and six of them were minorities. And 

female representation in the manager and officer ranks has also increased. 

We are taking many of the steps, including affiliations with recruiting organizations that are heavily minority-based, in order to 

improve our networks from which we can hire. And we are trying 

to understand what best practices are in this area and to move forward vigorously. 

Mrs. BEATTY. Okay, thank you. 

Let me try to quickly shift gears. In your confirmation hearing, 

you indicated your agreement that the insurance industry has 

unique features that make it different from banking, and you 

agreed that a tailored regulatory approach for insurers would be 

appropriate. 

75 

One of the things that my constituents are asking is, how could 

the Federal Reserve develop a timetable for rulemaking for insurance companies subject to Federal Reserve supervision, and how 

would you ensure that the Federal Reserve works with the industry and other insurance experts to develop an insurance-based capital framework? 

Mrs. YELLEN. We have been working very hard to understand 

the special characteristics of insurance. We are personally taking 

our time to develop standards so they can be tailored to the needs 

of the industry. 

We are consulting with experts in the insurance industry and 

building our own expertise. And we are committed to devising an 

appropriate regime that is different than that we apply to banks 

and that recognizes their special features. 

I will say again, though, that the Collins Amendment is constraining in terms of what we can do in terms of capital and liquidity requirements. 

Mrs. BEATTY. Thank you very much. 

And let me just end by again thanking you for being so generous 

with your time today and for having such stellar answers. I am a 

big fan of when women succeed, America succeeds, and you are certainly setting the light for women across this Nation. 

Mrs. YELLEN. Thank you, Congresswoman Beatty. 

Mrs. BEATTY. Thank you. 

Chairman HENSARLING. The time of the gentlelady hasn’t— 

Mrs. BEATTY. I yield back. 

Chairman HENSARLING. —quite expired, but it has now. 

The Chair now recognizes the gentleman from Arkansas, Mr. 

Cotton. 

Mr. COTTON. Ms. Yellen, thank you very much for staying all day 

with us today, and congratulations on your recent confirmation. 

Mrs. YELLEN. Thank you. 

Mr. COTTON. At a hearing with your predecessor, Mr. Bernanke, 

my mother sent me an e-mail in the middle of the hearing. My 

mother is a retired school teacher and my dad is a Vietnam veteran 

and a farmer. And my mom said, ‘‘Tell Mr. Bernanke that we 

would like some more interest on our savings.’’ 

And this is something I hear from my constituents a lot in my 

rural Arkansas district in places like Hot Springs Village, on one 

of the biggest plan retirement communities in the country of largely middle-income retirees who are prudently investing in things 

like CDs and money market accounts and other fixed-income interests and falling behind because of the low interest rates of the last 

5 or 6 years, and feel that it would be unwise to invest in riskier 

assets that are more suitable for younger people. 

So I had some questions about that but I think maybe the best 

way to raise them is through this video that retired Navy Commander Joe Fahmy has made expressing some of the same concerns, so if we could roll the video? 

[Begin video clip.] 

‘‘Mr. FAHMY. My name is Joe Fahmy. I served in the Navy from 

1960 to 1983, with 3 combat tours to Vietnam in 1968, 1969, and 

1972, and the Arab-Israeli War in 1973. Then in civilian work, I 

developed defense electronic systems for 25 years. 

76 

Now, semiretired, I use my experience to help other companies 

grow and to supplement my retirement income. We have three children, plus a foster daughter from Vietnam, and nine grandchildren. 

In retirement, our financial obligations include ourselves as well 

as our son, age 52, with Downs Syndrome, living with us in Arlington, and our daughter and our high-school-aged granddaughter in 

another State, as our daughter lost her job and her apartment in 

2007. 

I am still working at age 76 because our family savings were ravaged in the stock market collapses of 2000 and 2006. Now, having 

recovered much of our losses from the previous two downturns, 

there is talk of another successive bear market, as many big money 

investors have recently taken their profits. 

At age 76, it is very stressful to endure the Fed’s easy money 

policies. On the Fed’s current course, our retirement savings will 

not be restored until I am age 83, assuming I can continue contributing to our retirement accounts. Perhaps then, I can retire. 

Chair Yellen, many seniors who are living on fixed incomes from 

CDs and money market funds are suffering. When Chairman 

Bernanke was asked about these concerns, he always changed the 

subject to talk about younger workers or home prices. 

What will you do to address our concerns? And will you commit 

today to attend a town hall meeting of retired seniors later this 

year to hear from folks who share these concerns?’’ 

[End video clip.] 

Mr. COTTON. I can’t ask it any better. 

Mrs. YELLEN. The concerns are very well-expressed, and of 

course they are very valid concerns, and I would like to see retirees 

earn more on their safe investments. 

I believe that if we get the economy back on track—after all, interest comes from earning returns on investments even in a bank. 

The bank tends to pay more for deposits and pay higher interest 

when its investments are faring better, and in a stronger economy 

that will be more possible. So I would very much like to see interest rates go up. 

He did note, however, that he has a daughter who lost her job, 

and I think it is also important to remember that an individual 

who is a retiree also has children and grandchildren. His daughter 

lost her job. We are trying to make it possible for his daughter to 

regain employment and for the grandchildren, when they graduate 

from school, to enter a healthy job market 

He also noticed— 

Mr. COTTON. Can I reclaim my time, which is running out? 

In the meantime, though, focusing specifically on these seniors 

who do depend on these fixed-income instruments, is the harm 

caused to them just a necessary byproduct of the Federal Reserve’s 

current monetary policy? 

Mrs. YELLEN. Congress has assigned to us the objectives of maximum employment and price stability. We are not at maximum employment. Inflation is running below our 2 percent longer-run objective. So I would say that those conditions dictate an accommodative policy. 

77 

Mr. COTTON. Thank you. And to follow up on the town hall invitation, they would love to have you in Hot Springs Village in Arkansas and I would love to host you. 

Mrs. YELLEN. Thanks for the invitation. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck. 

Mr. HECK. Thank you, Mr. Chairman. 

Chair Yellen, thank you so much for being here. 

Mrs. YELLEN. My pleasure. 

Mr. HECK. I have heard several adjectives attached to you today: 

intelligent; articulate; plain-speaking; and, not very flatteringly, 

unexciting— 

Mrs. YELLEN. That is good. 

Mr. HECK. —to which I would like to add, possessing an extraordinary amount of stamina. 

Mrs. YELLEN. Thank you. 

Mr. HECK. No, the gratitude is all ours. 

Mrs. YELLEN. Thank you. 

Mr. HECK. As has been noted, your current policy is to purchase 

both Treasuries and mortgage-backed securities. And that has been 

going on for a while. In your report I note that you even call out 

the fact that mortgage rates are probably lower than they would 

have otherwise been as a result of this policy. 

Mrs. YELLEN. Yes, I think so. 

Mr. HECK. So are you considering targeting other sectors of our 

economy? 

Mrs. YELLEN. I wouldn’t say that we are targeting housing as a 

sector of the economy. It is an important sector. In the past it has 

contributed a good deal to recoveries, and it would be nice to see 

housing get back on its feet. It would contribute to the recovery. 

But generally I would say our policies are designed to lower 

longer-term interest rates on a broad range of private assets. Mortgages, yes— 

Mr. HECK. So, Chair— 

Mrs. YELLEN. —corporate borrowing— 

Mr. HECK. —that begs a couple of observations and questions. 

First, why would you call it out in your report if you weren’t targeting it? Second, are you saying that it would not have been possible to lower overall interest rates by just lowering the—or just by 

purchasing Treasuries? 

Mrs. YELLEN. I would say that by purchasing Treasuries, we 

would bring down interest rates throughout the economy, not only 

on Treasuries, on mortgages as well. 

Mr. HECK. Okay, then— 

Mrs. YELLEN. Probably we have a slightly bigger impact on mortgage rates by buying mortgage-backed securities. 

Mr. HECK. Then, with all due respect, if it walks like a duck and 

quacks like a duck, it seems to me that there is some targeting 

going on. 

Here is where I am going. 

Mrs. YELLEN. Okay. 

Mr. HECK. I have long wondered why it is the Fed couldn’t target 

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78 

vestment in infrastructure. In fact, in the 1970s, as has been noted 

in this committee, the Fed purchased the bonds that helped build 

the DC Metro, so I know that there is a precedent for that having 

occurred. And I know, looking around for help—true statement, 

Madam Chair. 

And the fact of the matter is the evidence about our infrastructure deficit, the evidence about what kinds of increase in both 

short-term and long-term jobs would be created, it seems to me is 

at least as strong a case as it is for targeting mortgage-backed securities and the resultant salutary effect on housing industry. 

What would you need in order for the Fed to positively consider 

doing this again, as occurred in the 1970s? 

Mrs. YELLEN. Our desire is to stimulate interest-sensitive sectors 

of the economy; pushing down interest rates does that. Our authority that the best of my knowledge for the Federal Reserve is to buy 

government- and agency-backed debt and nothing else. 

Mr. HECK. So if we have— 

Mrs. YELLEN. I am not aware of any authority that we would 

have to buy—for example, I am not sure what kind of bonds you 

are talking about, but we buy government and agency debt in the 

open market and we are not allowed to buy a broader range of assets, to the best of my knowledge. 

Mr. HECK. But if your dual mandate, which I support wholeheartedly—in fact, I am not going to have time to ask the question 

what the world would look like if they took away the keep unemployment down mandate, which I find, frankly, unfathomable—but 

if your mandate is to reduce unemployment and the evidence is so 

empirically overwhelmingly strong in favor of the rule of improved 

infrastructure, both short-term and long-term, why wouldn’t you 

put some of these large numbers of people to work at—what would 

we have to do in order to be able to purchase bonds? 

Would it require a national infrastructure bank? Could you just 

work with banks in some kind of direct way, where you backed 

their purchase of infrastructure bonds? 

Mrs. YELLEN. I am not aware of any authority that we would 

have under existing law have to pursue that avenue, but if Congress is interested in doing that, that is something you could certainly think about. But I am not aware of any authority that we 

have. 

Mr. HECK. Thank you. 

Chairman HENSARLING. The time of the gentlemen has expired. 

If there are any Members who are not presently in the hearing 

room who are listening, notwithstanding the Chair’s generous offer 

to stay, it has been quite some time after votes on the Floor. It is 

my intention to excuse the Chair of the Fed at 4 o’clock. 

The gentleman from Minnesota got in under the wire, and perhaps one other. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison, for 5 minutes. 

Mr. ELLISON. Chair Yellen, thank you so much, and congratulations. 

Mrs. YELLEN. Thank you. 

Mr. ELLISON. I only have one question for you, and the question 

is this: You have made the point that there are limitations to what 

79 

monetary policy can do to help put Americans back to work and improve the economy, but if you had a magic wand and you could prescribe what we should do to lower the unemployment rate, to put 

our economy on a healthy trajectory, what would it be? 

Mrs. YELLEN. You are asking me what more broadly could be 

done? 

Mr. ELLISON. Yes. 

Mrs. YELLEN. I think Congress can certainly consider any number of measures that— 

Mr. ELLISON. Like what? 

Mrs. YELLEN. Training measures, job creation measures, a number of measures to deal with the skills gap and other factors that 

are related to stagnant real wages, especially in the lower part of 

the income distribution. 

Mr. ELLISON. What about public investment? 

Mrs. YELLEN. It is a possibility Congress could consider as well. 

Mr. ELLISON. Yes. Would that help stimulate the economy in a 

way that maybe monetary policy can’t reach? 

Mrs. YELLEN. Certainly, we have a set of tools. They are limited, 

and there is much more that Congress can do depending on what 

Congress’ priorities are. 

Mr. ELLISON. Thank you. 

Chairman HENSARLING. The gentlemen yields back his time. 

I want to thank Chair Yellen for her cooperation—her generous 

cooperation with this committee today. 

And we also thank you for your stamina. You may have to use 

it on Thursday as well, as I understand that you will be appearing 

before the other body. 

Again, we thank you for your testimony. We will excuse you at 

this time. 

The Chair will declare a 5-minute recess pending the seating of 

the next panel. 

The committee stands in recess. 

[recess] 

Chairman HENSARLING. The committee will now come to order, 

and we will turn to our second panel of witnessess. 

Dr. John Taylor is the Mary and Robert Raymond Professor of 

Economics at Stanford University. In a 1993 paper, Dr. Taylor proposed what is now commonly referred to as the ‘‘Taylor Rule,’’ a 

rules-based approach to determining nominal interest rates. Dr. 

Taylor holds a Ph.D. from Stanford in economics. 

Dr. Mark Calabria is the director of financial regulation studies 

at the Cato Institute. Prior to his tenure at CATO, Dr. Calabria 

spent 6 years as professional staff on the Senate Banking Committee, which is, regrettably, not as prestigious as the House Financial Services Committee. Dr. Calabria holds a Ph.D. in economics from George Mason. 

Abby McCloskey is the program director of economic policy at the 

American Enterprise Institute (AEI). Before joining AEI, Ms. 

McCloskey was the director of research for the Financial Services 

Roundtable. She, too, did a tour of duty on the Hill, regrettably, yet 

again, on the other side of the Capitol. She received her bachelor’s 

degree from Wheaton College. 

80 

Last but not least, Dr. Donald Kohn is a senior fellow in economic studies at the Brookings Institution. Dr. Kohn also serves on 

the advisory committee of the Office of Financial Research. He previously served as the Vice Chair of the Fed’s Board of Governors 

from 2006 to 2010. And we are beginning to wonder if all former 

Chairmen and Vice Chairmen of the Fed end up at Brookings. Dr. 

Kohn holds a Ph.D. in economics from the University of Michigan. 

Without objection, each of your written statements will be made 

a part of the record. Each of you, I believe, has testified before, so 

you are familiar with our system. Please bring your microphone 

close to you. And you know about the green, yellow, and red lighting system. I would ask each of you to observe the 5-minute rule. 

Dr. Taylor, you are now recognized. 

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY 

Mr. TAYLOR. Thank you, Mr. Chairman. Thanks for inviting me 

to this hearing. 

I would like to use my opening remarks to refer back to the initial set of questions and answers to Chair Yellen with which you 

began. They have to do with the role of policy rules in formulating 

monetary policy. 

It seems to me that the case could be made that monetary policy 

would have been far better in the last few years had it been based 

on a predictable set of policy rules. Moreover, I think if policy 

moved in that direction, we would more quickly move to a more 

sustainable higher growth rate. 

There has been a tremendous amount of research, historical 

work on policy rules. There continues to be interest in what you 

refer to as the Taylor Rule, based on research of many people over 

many years, not just me. This research has indicated that when the 

Fed has followed rules close to that, performance has been very 

good. The historian Allan Meltzer in particular notes the period 

from 1985 to 2003 as one where the performance of the U.S. economy was extraordinarily good in historical comparison, and that 

was a period when the Fed adhered pretty closely to one of these 

rules. 

I think if in the last 10 years, policy had been guided this way, 

the performance would have been much better. If during 2003, 

2004, and 2005, the Fed had followed a rule like this, we would not 

have had the excess risk-taking, we would not have had the search 

for yield, we would not have had as much of a housing boom as we 

had, and therefore, the financial crisis and the Great Recession 

would have been much less severe. 

If during the period since the financial crisis, the Fed had adhered to this kind of a policy rule, we would not have had to have 

the quantitative easing that has been so questionable. We would 

not have had to have the forward guidance that has been so debatable in its effects. And the predictability of the economy, I think, 

would have been much better and, therefore, economic growth 

would have been better in those circumstances. 

And I want to emphasize that such a rule would certainly not 

preclude the very important actions the Fed took during the panic 

81 

of 2008, its classic lender of last resort role, which helped stabilize 

the financial markets. 

It is because of the success of policy rules that I recommend that 

legislation be put in place to require the Fed to report on its policy 

rule. It would be a rule of its own choosing. That is the responsibility of the Fed. But if it deviated in an emergency or for other 

reasons, the Fed, through the Chair, would be required to report 

to this committee and to the Senate Banking Committee about the 

reasons why. 

We are not close to that right now. Some argue that could be 

done in a procedural way rather than through legislation. But I 

think there are some promising signs that we could be going in 

that direction. Number one, the Fed recently adopted a 2 percent 

inflation target. That is exactly what the Taylor Rule recommended 

20 years ago. Moreover, the European Central Bank, the Bank of 

England, and the Bank of Japan have also adopted that target. 

There is an international congruence which adds durability to that. 

Number two, the forecast of the current FOMC, long-term forecast for the interest rate is 4 percent. Combine that with the 2 percent inflation target, and you have a 2 percent real interest rate, 

which is exactly what that rule recommended 20 years ago. 

Number three, there is a consensus now that the reaction of the 

central banks, and the Fed in particular, should be greater than 

one when inflation picks up. There is debate about what the reaction should be in the case of a recession. Some argue it should be 

larger, some smaller. And that is a difference of opinion. 

But the fourth reason why I think we are in a position to move 

in this direction more so in the past is statements of Chair Yellen 

herself. She has indicated that policy rules like this are sensible, 

they are good, and they work well. She emphasizes that is in normal times. She would also argue these are not yet normal times. 

There is debate about when we will get back to normal or whether we are already back to normal. It seems to me, therefore, the 

debate is not over whether we should follow a policy rule like this. 

It is about when. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Taylor can be found on page 141 

of the appendix.] 

Chairman HENSARLING. Dr. Calabria, you are now recognized. 

STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL 

REGULATION STUDIES, THE CATO INSTITUTE 

Mr. CALABRIA. Chairman Hensarling, distinguished members of 

the committee, I want to thank you for the invention to appear at 

today’s important hearing. 

Before I begin, let me first commend the Chair on the establishment of the Federal Reserve Centennial Oversight Project. Certainly, the opinion that every government program should be reviewed regularly and subject to vigorous oversight—the American 

people deserve nothing less. Quite frankly, I can think of no part 

of the Federal Government more deserving of oversight right now 

than the Federal Reserve. 

Had vigorous oversight of the Federal Reserve been conducted in 

the past, we may very well have been able to avoid the creation of 

82 

a massive housing bubble. I will not repeat Chair Yellen’s assessment of the economy, as I agree with much of it, but will highlight 

a few issues, touch upon the conduct of monetary policy, and wrap 

up with a few comments on regulatory policy. 

The release last week of January’s establishment survey revealed 

continued weakness in the job market. The 113,000 job estimate 

was considerably below expectations. For instance, the Dow Jones 

consensus was 189,000. It was also considerably below the monthly 

average for 2003 of 149,000. The unemployment rate, however, 

dipped slightly to 6.6 percent. 

Despite these trends, there are very bright spots in January’s 

labor market. The labor force participation rate rose to 63 percent. 

The unemployment population ratio increased to 58.8 percent. We 

also witnessed, importantly, a decline in the long-term unemployed 

by 232,000. The marginally attached to the labor force, including 

discouraged workers, remained essentially flat. So the point I 

would emphasize with these numbers is, while the improvement in 

the labor market was modest, it was quite real. We did not see 

these improvements driven by people leaving the labor market. 

So I do want to emphasize a broad agreement with the emphasis 

on the job situation. However, where I will depart with some of the 

remarks of Chair Yellen and others is that I think our current 

monetary, fiscal, and regulatory policies have not been conducive to 

job creation. In fact, I would go as far to say that those policies 

have retarded job creation, and that the unemployment growth we 

have seen has been in spite of policies coming out of Washington, 

not because of them. 

For example, the Federal Reserve’s low interest rate policies 

have driven up asset prices without adding significantly to job creation. They have also transferred from savers to borrowers. Perversely enough, extremely low interest rates may have increased 

the incentive for firms to replace labor with capital. Low rates also 

reduced the penalty for holding cash balances, which reduces the 

velocity of money, weakening the impact of the Fed’s own provision 

of liquidity. 

In sum, I think the Fed’s policies over the last few years have 

delivered little in terms of improving our labor market and broader 

economy. This would be bad enough had not these policies also 

placed the Federal Reserve in a very precarious position. In my 

opinion, its exit strategy lacks credibility. Once we start to see an 

increase in interest rates, I think we are going to see a reversal in 

the inflation and asset prices that has distributed. 

I think there were a number of distortions in our financial markets we have yet to see that will only become clear once we remove 

these policies. I usually try to go by a good rule of thumb, which 

is that if you have long periods of time where you pay people to 

take money—that is, you have a negative interest rate—I think it 

is fairly certain they are going to do some dumb things with it, and 

that will come back to haunt us at some point. 

Turning to regulatory policy, I believe there was probably no bigger force pushing the passage of the Dodd-Frank Act than the 

public’s anger with the financial bailouts. I believe much of the current distrust toward the Federal Reserve among the public is drivVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
83 

en by the public’s surprise that the Federal Reserve could essentially rescue anyone almost—on almost any terms it deemed. 

Title 11 of the Dodd-Frank Act attempts to address these concerns by eliminating the Federal Reserve’s ability to engage in arbitrary bailouts. While I believe the correct solution is an altogether repeal of paragraph 13 through the Federal Reserve Act, 

Dodd-Frank’s Title 11 does offer a modest avenue for limiting bailouts. 

The Federal Reserve was late in promulgating a rule to implement these provisions. As Chair Yellen is aware, a notice of proposed rulemaking was released just days before Christmas last 

year. 

Let me briefly mention a couple of issues that I have with the 

rule. Probably the foremost is the determination of insolvency. I 

find that the rule’s definition of insolvency is exceedingly narrow 

and actually does nothing to limit the Federal Reserve’s discretion 

beyond what is already included in Title II of Dodd-Frank. The notion that a firm is only insolvent once it is already in bankruptcy 

resolution or receivership contradicts both common sense and historical practice. 

I think we also need to be concerned about the Fed’s ability to 

provide assistance to insolvent firms by passing that assistance via 

solvent firms, as was the purchase of Bear Stearns by JPMorgan. 

The final issue I have with the rule, the final top-level issue I 

have with the rule—there were a number of other minor issues, I 

would say—is also the definition of ‘‘broad-based.’’ While I am personally against any bailouts, whether they are individual firm or 

broad-based, I believe the intent of Dodd-Frank is pretty clear that 

you are only supposed to assist classes of firms, not individual 

firms. I believe the language in the Fed’s proposal falls short of 

that. 

I will say, however, it is a notice of proposed rulemaking. The 

Fed has offered to take comment. And so I, at this point, will be 

optimistic that hopefully these issues will be addressed in the rulemaking process. 

Thank you. 

[The prepared statement of Dr. Calabria can be found on page 

104 of the appendix.] 

Chairman HENSARLING. Ms. McCloskey, you are now recognized 

for 5 minutes. 

STATEMENT OF ABBY MCCLOSKEY, PROGRAM DIRECTOR, 

ECONOMIC POLICY, THE AMERICAN ENTERPRISE INSTITUTE 

Ms. MCCLOSKEY. Chairman Hensarling, members of the committee, thank you for the opportunity to testify today. 

I will lead with my conclusion: The Dodd-Frank Act substantially 

increased the regulatory authority of the Federal Reserve. As such, 

it has never been more important for the Fed to be transparent and 

accountable in its rule-writing. 

The Federal Reserve is one of the primary implementers of DoddFrank. It is involved in over 50 rulemakings, such as the Volcker 

Rule and the Durbin Amendment. The Federal Reserve houses and 

funds the newly created Consumer Financial Protection Bureau 

84 

and has taken a prominent place in the Financial Stability Oversight Council. 

Perhaps most significantly, the Fed is charged with regulation 

and supervision of some of the largest banks and nonbanks in the 

country. The new rules promulgated by the Federal Reserve will no 

doubt have an impact on the economy and businesses and consumers. Yet the Fed has no requirement to disclose cost-benefit 

analysis on its rules, nor are the Fed’s rules subject to challenge 

on the basis of their economic impact. 

Former Chairman Bernanke, and today Chair Yellen, have promised that the Fed considers the economic cost of its regulation, but 

the GAO and the Board’s Inspector General have found otherwise. 

In 2011, they reported that economic analysis is not standard or 

routine at the Federal Reserve. The need for such analysis is especially poignant when examining the impact of recent rules on lowincome Americans. I detailed the literature and empirical evidence 

for this in my written testimony, but I will go over it briefly now. 

Since the Dodd-Frank Act was passed, the cost of a basic bank 

account has increased considerably, as banks offset decreased revenue and increased costs. Bank fees reached record highs in 2012, 

and the proportion of bank accounts qualifying for free checking declined from 76 percent in 2009 to 39 percent in 2012. 

Credit cards have become more difficult and expensive to access. 

Forty percent of low- and middle-income Americans reported tighter credit conditions over the last 3 years. And hundreds of community banks, which are often the most convenient banking option for 

low-income rural consumers, have closed their doors in part due to 

growing compliance costs. 

As a result, many low- and middle-income families have been 

shut out of mainstream banking or have turned to alternative financial products, such as payday loans or check cashers, which can 

be more expensive. 

Now, these trends are clearly an unintended consequence of the 

Dodd-Frank Act, which set out to protect consumers. So the question is, what can we do about it? Some may propose capping fees, 

which is what the CFPB appears to want to do with overdraft and 

payday loans. Others may want to subsidize credit for low-income 

households. 

But history shows us these options may end up doing more harm 

than good by raising fees elsewhere or by saddling households with 

debt they can’t repay, as we witnessed during the 2008 housing 

crash. I propose considering the impact on consumers during the 

rulemaking process and adjusting the final rule accordingly to 

maximize consumer choice and opportunity. This could be accomplished through a statutory requirement for cost-benefit analysis at 

the Federal Reserve. The analysis, among other things, should examine if a rule disproportionately impacts a traditionally underserved population such as low-income consumers. I also propose a 

retrospective evaluation for major rules. 

People may raise any number of concerns with economic analysis, that it is rarely done well or it may slow down the regulatory 

process. But cost-benefit analysis is routine in most other parts of 

the Federal Government. Federal agencies have been required to 

disclose cost-benefit analysis for more than 30 years under execuVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
85 

tive orders. And the OMB has developed detailed guidance on what 

good regulatory analysis entails. 

Cost-benefit analysis is also an effective check on regulatory 

overreach. The D.C. Court of Appeals struck down the SEC’s first 

rule promulgated under Dodd-Frank because the SEC failed to 

thoroughly consider economic consequences. The risk of not requiring a cost-benefit assessment is that the impact of the Federal Reserve’s new rules on the economy and consumers will go unaccounted for. And this is especially troubling for low-income households who traditionally have borne the brunt of credit regulation 

and appear to be doing so again. 

To conclude, I am reminded of the saying, ‘‘To whom much is 

given, much will be expected.’’ The Federal Reserve’s regulatory authority grew tremendously under the Dodd-Frank Act, and this has 

increased the need for statutory cost-benefit analysis. 

Thank you for your time. 

[The prepared statement of Ms. McCloskey can be found on page 

130 of the appendix.] 

Chairman HENSARLING. Dr. Kohn, you are now recognized for 5 

minutes. 

STATEMENT OF DONALD KOHN, SENIOR FELLOW, ECONOMIC 

STUDIES, THE BROOKINGS INSTITUTION 

Mr. KOHN. Thank you, Mr. Chairman. Although economic growth 

has picked up, Federal fiscal policy will be much less of a drag on 

growth next year. The U.S. economy is still very far from where it 

can and should be. The unemployment rate is a little over 6.5 percent. That is still well above the 5.5 percent level that many economists estimate to be its sustainable level. Utilization in U.S. industries is a percentage point below its long-term average. 

Unemployed labor and capital are wasted resources that can be 

utilized to raise standards of living, especially, but not only for the 

workers and business owners involved. Slack in labor and capital 

use has resulted in very competitive conditions for businesses and 

workers, and this has been reflected in very low inflation rates, 

well below the 2-percent target set by the Federal Reserve. We are 

in a risky zone for inflation. Expectations start to decline, real 

short-term interest rates will rise, hurting growth, and a downward 

surprise in demand could push us into or close to a destructive 

zone of deflation. 

With unemployment of labor and capital too high and inflation 

too low, a highly accommodative stance of monetary policy would 

seem to be called for, for some time to come. The Federal Reserve 

has decided it can dial back its security purchases, but it has chosen also to strengthen its articulation of its intent to keep shortterm rates close to zero until the unemployment rate and inflation 

are closer to their objectives. This seems about the right policy mix 

to me. 

The Fed faces considerable challenges in the execution of monetary policy over the coming years. The most important challenge 

will be deciding when to begin raising interest rates and at what 

pace they should rise. Unfortunately, there are no reliable formulas 

for making this decision. We are in uncharted waters with respect 

to economic circumstances and policy responses. 

86 

When the economy behaves in unprecedented ways, policy must 

respond in unprecedented ways. And the financial crisis, resulting 

Great Recession, and sluggish recovery were unprecedented in 

postwar U.S. economic history. In these circumstances, there is no 

substitute for judgment and flexibility in the conduct of policy. 

The most important way the Federal Reserve can reduce uncertainty is by achieving its congressional mandates for employment 

and prices. Households and businesses, in planning for the future, 

care far more about their prospective income sales and the rate of 

inflation than they do about the size of the Fed’s portfolio or the 

level of interest rates. The Fed should be as predictable as possible, 

but it and we as outside observers should recognize the limits of 

predictability under current circumstances. 

And that brings me to the second challenge, which is communication about policy. The short-term rates at the zero lower bound influencing expectations about future rates and future inflation in 

economic activity are among the few ways the Federal Reserve has 

to accomplish its objectives, but communication must recognize the 

inherent uncertainty in policymaking, and, in my view, it didn’t do 

this last summer. It tried to give too much certainty. 

In its interest rate guidance, the Federal Reserve needs to explain what it will be looking at to judge when to raise rates after 

the unemployment rate falls through 6.5 percent. Our economy is 

a complex mechanism. State is not readily summarized in one or 

two variables, and policy needs to react to the whole array of indicators pointing to the evolution of economic activity and prices. 

This complexity presents challenges for communication and guidance about interest rates, but it is a reality. 

The third challenge is associated in part with monetary policy, 

maintaining financial stability. Unconventional policy by driving 

down yields on safe assets does encourage people to take more risk 

than they might otherwise have done. The issue is, what problems 

might ensue as security purchases come to an end and interest 

rates were subsequently raised? 

The Fed is clearly monitoring these risks, as we heard this morning, and close monitoring—closely using a variety of methods and 

regulation supervision of discovering and dealing with this potential source of instability, and I agree with this approach to safeguarding financial stability under the current circumstances. I 

think it is superior to one in which interest rates are raised, because raising interest rates might discourage some kinds of risktaking, but they would also keep unemployment high and elevate 

the risk of deflation. 

The final challenge, and it is really for this committee, as well 

as the Federal Reserve, is preserving the short-run operational 

independence for monetary policy. Congress has set the overall 

goals, and should hold the Fed accountable for achieving these 

goals, should be required to explain who its policy actions will lead 

to achieving those objectives, and if they don’t, why they haven’t. 

And this committee’s intention to revisit whether the Congress 

had set the appropriate goals for the Federal Reserve, whether the 

structure of the Fed is best suited for meeting those goals is appropriate and welcome. But we need to be very careful to safeguard 

87 

the arm’s-length relationship of the Federal Reserve to the political 

process when it comes to setting the instruments of policy. 

Much evidence over time and across countries strongly indicates 

that leaving the setting of policy to technical experts with some 

separation from day-to-day political pressures produces much better outcomes than when elected officials whose focus is on the next 

election cycle can influence how policy is conducted in the pursuit 

of the agreed goals. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Kohn can be found on page 124 

of the appendix.] 

Chairman HENSARLING. Thank you. I thank all the panelists. 

The Chair now recognizes himself for 5 minutes for questions. 

Dr. Taylor, among other things we heard from Chair Yellen 

today was her concern over the unsustainable level of entitlement 

spending. I have heard the President say he was concerned. Most 

economists are concerned. I just can’t find anybody really to say we 

should begin to reform it today. 

So I hear her also say, in some respects, she supports the Taylor 

Rule, but these are extraordinary times. So when is the right time 

to employ the Taylor Rule? I am reminded—I think there was a 

C&W song, everybody wants to go to Heaven, just nobody wants to 

go today. So what is the day that we take up the Taylor Rule? I 

believe I saw an exchange with you and Chairman Greenspan not 

long ago where he said that the Taylor Rule, I think, would have 

gone negative after the crisis. I think I heard Chair Yellen say 

something similar. 

So would it have been appropriate then? Is it appropriate now? 

Please elaborate on your views. 

Mr. TAYLOR. The first part of your question, I think that if we 

had stuck to—the Fed had stuck to—a rule like that, as it was following pretty closely for a long period, that we would have had a 

much better performance. And so my view is, we should have stuck 

with this long ago. I indicated that in my opening remarks and in 

my written testimony. 

With respect to going negative, that refers to a situation where 

a policy rule like that would suggest a negative interest rate. And 

it certainly doesn’t suggest that now. It would be closer to 1.25 percent. And so you can’t really rationalize all of this extraordinary 

other activity of the Fed based on that. 

Would it ever have gone negative during this period? Perhaps, 

depending on how you measure it. A little bit in 2009, I think by 

a small amount. But certainly not by enough to justify this extraordinary action that went beyond 2009, 2010, 2011, 2012, 2013, and 

2014. 

Moreover, it is not like all this research I referred to on policy 

rules never considered a negative rate. All of the work considered 

that for many, many years. And the main recommendation, when 

that happened, was to keep money growth steady. Do the kind of 

things that economists had recommended for a long time, rather 

than these extraordinary interventions, unprecedented, that we 

have never seen before. 

Chairman HENSARLING. I assume all of you listened to Chair 

Yellen’s testimony, perhaps the first few hours of it. But I asked 

88 

her to comment in my own question to her concerning the current 

state of forward guidance. I quoted the recent piece from The Wall 

Street Journal, and I would like to quote it to you again: ‘‘Perhaps 

the Open Market Committee should have called it the Evans suggestion.’’ The mistake was telling markets there was a fixed rule, 

when the only sure thing at the Fed is more improvisation. 

Now that you have heard Chair Yellen’s response, Dr. Taylor, 

what side do you come down on? Do we have more improvisation 

or, as Chairman Bernanke said, current forward guidance is Taylor 

Rule-like? 

Mr. TAYLOR. The current forward guidance and the forward guidance that has been used thus far has the problem that it keeps 

changing. Originally, it was somewhat vague. In fact, it began, 

really, in 2003, 2004, and 2005, when the Fed talked about ‘‘measurable pace’’ and ‘‘a prolonged period’’ as forward guidance. And 

then in more recent periods, it was a fixed date, like 2012. And 

then there was an unemployment rate, 6.5 percent, and now kind 

of—well, a little bit more than 6.5 percent. We will have to wait 

a little longer. 

So I think the problem with this has been the changes back-andforth. It is hard to do forward guidance. I think anyone recognizes 

that. Even the people who support it recognize that. 

And what you have seen here—and I think it was demonstrated 

again today—is it is a moving concept. It is not a rule, in the sense 

you stick to it as best you can. Of course, you are always going to 

have to change and adapt, but this one seems to me particularly 

erratic, if you like. 

Chairman HENSARLING. In the time I have remaining, Dr. 

Calabria, you have advocated jettisoning the Fed’s 13(3) exigent 

powers. So how would you define—or if you had our jobs and could 

write the law, what—how should the lender of last resort function 

for the Fed? What would you see as its purpose? 

Mr. CALABRIA. Let me preface my answer with, I am also skeptical of even having a lender-of-last-resort function, but if you are 

going to have one, I would limit it to discount window lending to 

commercial bank members of the Federal Reserve System based on 

good collateral with penalty rate, sufficient haircut— 

Chairman HENSARLING. Classic Walter Bagehot. 

Mr. CALABRIA. Absolutely. And the I think deviations from that 

have been the problem. 

Mr. KOHN. May I comment, Mr. Chairman? 

Chairman HENSARLING. Yes, Dr. Kohn? 

Mr. KOHN. I think when Bagehot wrote about this in the late 

19th Century, he viewed lending not only to commercial banks, but 

all elements in the money market and financial markets. When 

people thought about commercial banking as far back as the 19th 

Century, Bagehot himself said that lending should be to this man 

and that man, not just to commercial banks, but to all the key elements in the money market, because at that time in the U.K., it 

wasn’t just banks that were key elements to the money market. 

There were many other brokers and things like that. 

So I think as the U.S. financial market has developed, and these 

other elements of our market—it is a strength of our market that 

it is not just commercial bank-dependent, the way the European 

89 

banks are. But as these other elements become more integral into 

the market, it is important that a central bank be able to support 

their liquidity in emergency circumstances. 

So I would be very reticent to—I would be opposed to suspending 

13(3). I think it is right that it needs—the Fed needs to think 

about how it is going to implement it. Maybe these rules aren’t sufficient. They should work on them. But I think they have to be part 

of preventing a run at liquidity, a panic in the financial markets 

from bringing down the financial system. 

Chairman HENSARLING. I have long since exhausted my own 

time. The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, the vice chairman of our Monetary Policy Subcommittee. 

Mr. HUIZENGA. Mr. Chairman, I will just point out that it is good 

to have the gavel and give yourself as much time as you would like. 

So—yes. 

And to the witnesses, I appreciate your time and patience, as 

well, today. I know it has been a long day for everybody. But, Dr. 

Taylor—I guess kind of for everybody—we talked about the Taylor 

Rule. I am kind of curious about the $10 million—or sorry, $10 billion. Sorry, I forgot I was in Washington, not back in Lansing when 

I was in the state legislature—$10 billion per month taper that has 

been proposed. It appears that the FOMC is going to be continuing 

that based, at least as I was reading the tea leaves with Chair 

Yellen today—seems a little too neat and tied up with a bow to me. 

It is kind of like betting that the next Powerball winner is going 

to be 1-2-3-4-5-6. Do you know what I mean? To have them be able 

to predict that this is just going to be taken down in $10 billion 

increments as we are moving forward—I wonder if anybody wants 

to comment on that? And then I would like to get Ms. McCloskey— 

I would like to talk a little bit about the impact on low- and moderate-income, and, Dr. Calabria, if we can get onto a couple of other 

issues, so quickly. 

Mr. TAYLOR. That is their strategy. And I think it is good to have 

a strategy. You saw what happened last May and June when there 

wasn’t really much of a strategy for the tapering. You could quarrel 

whether that is too specific, but I congratulate them on moving 

ahead with some kind of strategy, and I— 

Mr. HUIZENGA. But you would rather have—basically, you would 

rather have a strategy laid out like that than having what had 

happened before? Great. 

Mr. TAYLOR. Yes, I think it is much better for the markets—you 

have seen a better reaction than last May and June, absolutely. 

Mr. HUIZENGA. Okay. Would anybody else care to comment 

quickly? 

Mr. CALABRIA. Let me also echo that. I would prefer to see tapering at a faster rate, but I think that the fact that they have laid 

out a series and you have expectations of how much tapering you 

are going to get, is very helpful. So the fact that this is less ad hoc 

than it would be otherwise I think is the appropriate direction. 

Mr. KOHN. I agree. I think a gradual taper withdraws that 

extra—caps that portfolio very slowly, gives the markets something 

to anticipate, gets already built in, and gives the Fed a chance— 

Mr. HUIZENGA. Well, the markets seemed surprised. 

90 

Mr. KOHN. I think they were a little surprised in December when 

it was announced, but not that surprised. And then in January, 

when the next tranche came, there was no surprise. So, I think Dr. 

Taylor is right. 

Mr. HUIZENGA. Certainly, people have been trying to tie it to 

that, as we have seen some dips in the market. But I am not convinced, either. 

Mr. KOHN. I think the emerging markets— 

Mr. HUIZENGA. If they are not paying attention, our friends in 

New York, pay attention. 

Mr. KOHN. I think those emerging market economies face lots of 

challenges, and the taper is a small part of their problem. 

Mr. HUIZENGA. Okay. Ms. McCloskey, let’s talk a little bit about 

the impact on low- and moderate-income households. I wish there 

was a single colleague over on the other side of the aisle who was 

here right now. They could participate in this conversation, as well. 

This is something that my side of the aisle often gets accused of 

not caring about, but I can tell you, representing one of the 10 

poorest counties in the Nation, Lake County, Michigan, this is very 

high on my list. And I am very concerned—having a background 

in real estate and developing myself, I am very concerned about 

what is happening to those hard-working, working-class families 

who feel like they are just getting the short end of the stick time 

and time and time again, and here they go. 

Community banks are getting harder and harder to work with. 

The big guys don’t, frankly, want to deal with them. Now they are 

turning to their credit unions and, frankly, now other alternatives. 

So if you can talk a little bit about that? 

Ms. MCCLOSKEY. Sure. There has been a lot of discussion in 

Washington about income inequality and economic mobility. And 

we know that access to savings and credit opportunities are really 

important for economic advancement for families. And what concerns me is that, as an unintended consequence of new rules that 

we have put into place, albeit with perhaps good intentions following the financial crisis, is that those opportunities are becoming 

more expensive or more rare for low-income families. And this 

could end up exacerbating the inequality and the lack of mobility 

that we are seeing. 

And so I think having some sort of economic analysis at the Federal Reserve, some requirement to take these impacts into consideration would be a good first step in improving mobility. 

Mr. HUIZENGA. What would you identify as the most egregious? 

Ms. MCCLOSKEY. Certainly, the Durbin Amendment, which limits debit interchange fees. There is a very clear correlation between 

that and reduced free checking and higher bank fees. The University of Chicago has suggested the Durbin Amendment alone has resulted in $25 billion in higher fees and reduced services for consumers. 

But I think the danger with just pulling out one or two rules is 

that we miss the broader impact of 400 new rules on companies 

and on consumers and we can’t overlook the impact that is going 

to have in decreasing credit and savings opportunities. 

91 

Mr. HUIZENGA. Two wrongs don’t make a right. Or maybe in this 

case, 400 wrongs don’t make a right on trying to get this put together. 

Ms. MCCLOSKEY. Exactly. 

Mr. HUIZENGA. I see my time has expired, Mr. Chairman. Thank 

you. 

Chairman HENSARLING. At the moment, we have a little bit of a 

supply of time, but at this time, the Chair now recognizes the gentleman from Indiana, Mr. Stutzman. 

Mr. STUTZMAN. Thank you, Mr. Chairman. 

And thank you to the panel for being here. Dr. Taylor, I would 

like to follow up just a little bit. You have mentioned the comment 

that caught my ear today from Chair Yellen, and that was, what 

we are facing today is very unusual. I think that the economy goes 

through changes, and we could all say they are unusual. I guess 

my question is, what are normal times? Looking at what we have 

today, I am not sure that the economy is necessarily abnormal as 

much as Washington is abnormal. 

You look at Obamacare, Dodd-Frank, the Durbin Amendment, 

QE, easy monetary policy, regulations upon regulations. Would you 

like to comment on that? Are we overreacting and causing more 

problems than we are fixing problems? 

Mr. TAYLOR. I very much agree that a major problem in the U.S. 

economy is policy. We have talked about monetary policy here, and 

I have indicated that. I think for fiscal policy, the Chair mentioned 

getting entitlements under control. Regulatory policy, a great deal 

of uncertainty and increase in intervention. 

If I look at all those things, it is quite remarkable how many 

there are, and I think they are a significant drag on the economy. 

I think that is really why we have had this weak recovery. And in 

that sense, it doesn’t need to be normal. We can change it. If the 

policy is the problem, we can change policy. And that is what I believe. 

And so, the idea that the economy itself is not normal doesn’t 

add up to me. First of all, the financial crisis is in the past quite 

a bit now. It was a problem, a serious problem. But we are going 

away from that. We can’t argue forever that the economy is not 

ready for a good kind of normal policy. So I very much think we 

are ready to go with improved policy, and I hope we can do that. 

Mr. STUTZMAN. Yes, with almost $2 trillion on balance sheets in 

the private sector, people are just waiting. I have talked to small 

businesses in northeast Indiana, and they are waiting to know 

what the rules are, letting the dust settle a little bit before they 

can move forward. 

I would like to talk a little bit about the dual mandate. How does 

the Fed respond to the current conditions that we are facing with 

the dual mandate? We see unemployment numbers dropping, but 

I tell you, when you get outside of the Beltway, we are hurting. We 

are seeing more people out of the workforce. What should the Fed 

do? 

And, Dr. Calabria, maybe you would like to respond and, Ms. 

McCloskey or Dr. Kohn, if any of the three of you would like to respond to that. 

92 

Mr. CALABRIA. Let me first emphasize something asked in the 

earlier question, which I do think policy has been a tremendous 

drag. Chair Yellen mentioned earlier the tax increases, whether— 

and you recall we have seen that in the fiscal cliff. 

Mr. STUTZMAN. Yes. 

Mr. CALABRIA. And so I do think it is important to keep in mind, 

all the talk about austerity, almost all of the deficit reduction has 

come from revenue raisers, not spending cuts. It has been quite 

modest, and I think that has been a mistake. 

Certainly on the regulatory side, I also think that has been a 

mistake, as well. So I think we need to fix policy that is outside 

of the realm of the Fed, and we need to recognize that you can only 

do so much. As you alluded to, there is a tremendous amount of 

cash on corporate balance sheets, $2 trillion. There is almost $2 

trillion, about $1.7 trillion in cash on bank balance sheets. So it is 

not a deficit of liquidity in the financial system or in the corporate 

system. It is costs facing the labor markets, costs facing the regulatory markets. 

I will repeat something that Chair Yellen said earlier, which is 

that monetary policy is not a panacea. And I think that is what we 

need to recognize and believe that it can’t fix a number of things. 

So to go back to your question of, what would I have the Fed do, 

I would have the Fed follow something like the Taylor Rule, where 

our short-term Federal funds rate was something like 1.25 points, 

somewhere around that. I don’t think anybody is suggesting that 

we go to 3 percent or 4 percent or 5 percent Federal funds rate. 

So even at 1.25 percent would still be, in my opinion, highly accommodative, certainly would not be tight by any stretch of the imagination, and to begin to taper in a much quicker way. 

Mr. STUTZMAN. Ms. McCloskey, I have 30 seconds. Would you 

like to comment? 

Ms. MCCLOSKEY. Sure. I do think there is a burden on Congress 

to address the 11 million people who are unemployed, 4 million of 

whom who have been unemployed for over 6 months. Aside from 

providing some level of stability, we have seen that the Fed is very 

limited in its ability to encourage businesses to hire. 

And so I am in favor of more creative solutions from Congress, 

such as relocation vouchers or cash bonuses for people who get a 

job. I think programs like this are our best hope of moving the 

long-term unemployed back to work. 

Mr. KOHN. I believe this current very accommodative policy of 

the Federal Reserve is appropriate and will be appropriate at least 

for a little while longer. Among the policy issues has been not only 

the increase in taxes, but the decline in Federal spending, which 

took about 1.5 points off of growth last year. 

I ask myself, what would the economy look like or what would 

our financial markets look like if the fed funds rate was 1.25 points 

instead of essentially zero right now? And I have to think that the 

stock market would be lower, that housing starts would be slower, 

because interest rates would be higher. We saw the results of a 

modest increase in interest rates, a percentage point, from 1.7 percent to 2.7 percent this summer, and it slowed the recovery in the 

housing market. Automobile sales would be less, because the abilVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
93 

ity to borrow very inexpensively to buy a car must be encouraging 

sales. 

So I think higher interest rates would have produced an even 

slower economic recovery. This is a very difficult discussion about 

the counterfactual. The Federal Reserve is saying, we are not satisfied. We haven’t been satisfied with the recovery. We think it 

would have been worse without it. Other people say, no, if you had 

had higher interest rates, it would have been better. 

I am just myself convinced that by and large, higher interest 

rates are associated with less demand, not more demand. And that 

is a pretty robust empirical finding. 

Mr. CALABRIA. If I could make a point, because, first, I want to 

agree. I think there are a lot of points here that we don’t know. 

I think there are a lot of uncertainties. What I would say—take the 

housing market, for instance. Housing starts are about a third of 

what they were at the peak, so it seems to me that the data suggests that most of the boom for the buck we have gotten in the 

housing market has been refinancing, and it has been higher 

prices. 

But refinancing—which I have done, and I am glad to have taken 

care of that—doesn’t put any construction workers back to work. It 

is great for mortgage lenders, but not necessarily really good for 

the overall economy. 

So we have yet, in my opinion, to see the actual construction 

market turn around in a very big way from that. I do think it is 

important to keep in mind that lending doesn’t seem to be getting 

out there. And ultimately, having that move is far more important, 

in my opinion, than just pushing housing prices up. 

Mr. STUTZMAN. Thank you. I guess I would just say, as we see 

families across the country with dollars being taken away from— 

to put towards insurance, health insurance, cost of banking, they 

just have less money to spend to be buying new cars and new 

homes. 

So thank you, Mr. Chairman. I will yield back. 

Chairman HENSARLING. The Chair would like to alert the Members in the hearing room and those who may be listening in their 

offices that votes are expected on the Floor any time within the 

next 15 minutes. It is the Chair’s intention to continue this round 

of questioning until we need to go to the Floor to vote. At that 

time, we would excuse the panel and adjourn the hearing. 

Now I would like to recognize the gentleman from South Carolina, Mr. Mulvaney. 

Mr. MULVANEY. Thank you. And let’s stay right there on a couple 

of different topics. Following up on what Mr. Stutzman said, Dr. 

Kohn, I hear what you are saying about how, if interest rates were 

higher, if we were at 1.25 percent, as the Taylor Rule might call 

for right now, that we would be selling fewer cars and selling fewer 

houses. 

But doesn’t that imply, sir, that the recovery that we have is, to 

a certain extent, illusory anyway? Isn’t the Fed artificially depressing the price of interest—the cost of money right now anyway? 

Mr. KOHN. It is certainly keeping it lower than anyone thinks it 

will be over the long run. 

94 

Mr. MULVANEY. It is lower than the equilibrium, right. We 

would— 

Mr. KOHN. Yes, that is the deliberate policy. 

Mr. MULVANEY. The equilibrium rate right now for the cost of 

money is higher than what the market is charging. 

Mr. KOHN. If by equilibrium rate, do you mean what might prevail over 15 to 20 years? 

Mr. MULVANEY. No, I am talking about what might prevail without the active intervention of quantitative easing. 

Mr. KOHN. The Federal Reserve has to set the short-term rate 

and has to establish in this— 

Mr. MULVANEY. Right, and it has set it at zero, and that didn’t 

have the desired impact— 

Mr. KOHN. It set it at zero. 

Mr. MULVANEY. —so it added to that, printing money, what we 

call quantitative easing. 

Mr. KOHN. Right. It could set it at 1, 2, 3, 4, 5, whatever it wanted to set it at, so it is not—there isn’t a mechanism here, given the 

central bank and the kind of money facility we have. We are not 

on a gold standard. There isn’t a natural way to establish a natural 

rate. 

Mr. MULVANEY. Let me ask you this way: If tomorrow Janet 

Yellen says that quantitative easing is going to zero, what would 

the prevailing rate of interest be on the 10-year Treasury? 

Mr. KOHN. It would go up, I don’t know, 50, 100 basis points. 

Mr. MULVANEY. And we have heard in this committee between 

150 and maybe as many 300 basis points. I think it is subject obviously to a bunch of different interpretations. But that is my point 

when I say that the equilibrium rate, the natural rate—call it organic, I don’t care what you call it—if the Fed was not actively intervening in the markets, interest rates would be higher. And that 

means to me that the equilibrium rate of car sales is being—would 

be lower than it is today, that housing sales is lower than it is 

today. 

And I am worried, sir, I guess the long way of saying this is that 

we are creating asset bubbles, in housing, in stocks, in automobiles. 

Would you agree with that or not? 

Mr. KOHN. I think it is something to be watchful and careful 

about, but I don’t see evidence of it. I think we are leaning against 

some other forces that are holding back the economy. Last year, it 

was increases in taxes and decreases in spending and problems in 

Europe and other places. 

Some of it we don’t understand. Mark was absolutely correct. 

Our understanding of the economy is rudimentary. We keep trying—things like the Taylor Rule keep pushing back the frontier, 

but it is a long way to go. 

Mr. MULVANEY. Let me go to another line of questioning that Mr. 

Stutzman had asked about—and I apologize for cutting you off— 

which is the dual mandate, because one of the things that I heard 

today, and I was a little bit surprised to hear from Chair Yellen 

was her vociferous support for the dual mandate. 

I think that was different than what we heard out of her predecessor. I had a chance to ask him about the dual mandate 3 or 4 

times in the last several years. And while he certainly played lip 

95 

service to it, every single time I asked him about it, he asked—he 

also said, but I acknowledge that in the long run, monetary policy 

cannot influence the long-term unemployment rate. 

So I guess my question is, Dr. Kohn, if that is economic orthodoxy right now, why are you and Mrs. Yellen paying such—putting 

such a dramatic faith in the dual mandate, if it is orthodoxy that 

we cannot influence the labor markets in the long run with monetary policy? 

Mr. KOHN. I agree about the long run. That is influenced by the 

structure of labor markets, competitive conditions in labor markets, 

matching skills to jobs, et cetera. But in the short to intermediate 

run, monetary policy can influence the labor market. And— 

Mr. MULVANEY. Has it? 

Mr. KOHN. And— 

Mr. MULVANEY. Has it? 

Mr. KOHN. —the Federal Reserve recognizes this. And the policy 

statement they put out in January of every year recognizes that 

they don’t have control over the longer run, but they do have influence over the short run. 

Mr. MULVANEY. Okay. Now, you talk about counterfactual. Let 

me ask you this. We have been doing this now for 5 years. Has the 

zero interest rate policy, has quantitative easing added jobs in the 

short term? 

Mr. KOHN. Yes. 

Mr. MULVANEY. You wouldn’t agree with me that most, if not all 

of the decline in the unemployment rate we have seen is by people 

leaving the job market, not by new jobs being created? 

Mr. KOHN. I think we have had some of both. And it depends on 

which survey you look at, et cetera, but certainly on the survey of 

businesses, they have added many more jobs, 200,000 a month— 

Mr. MULVANEY. No, no, no. As far as 200,000 jobs a month, I 

think we have done that maybe 5 or 6 times in the last 4 or 5 

years. 

Mr. KOHN. Over the last year, it has been, what, about 175,000, 

something like that. 

Mr. MULVANEY. It was 130,000 last month and 75,000 on adjusted basis the month before that. 

Mr. KOHN. Right. So it is the last 2 months. But I—no, I think 

the—we have added to employment, so as she noted, I think 7.5 

million or 8 million jobs since the bottom of the recession. But 

still— 

Mr. MULVANEY. And in fairness to her— 

Mr. KOHN. —the unemployment is still very high, I agree. And 

the Federal Reserve itself is disappointed. It wouldn’t have engaged in several rounds of QE and guidance if it had been satisfy 

with the outcome. 

Mr. MULVANEY. No. And in fairness to her and to Dr. 

Bernanke—and he said this several times—that even if he had a 

single mandate, his policies probably would not have been demonstrably different over the course of the last several years, because 

you could take the same policies towards fighting deflation, so I appreciate that. 

I am sitting there looking at my time, waiting for my chairman 

to bang down on the gavel. I did want to ask one—oh, goodness me. 

96 

Chairman HENSARLING. You brought that up. 

Mr. MULVANEY. And since several of my colleagues have come in, 

now I won’t get a chance to ask any— 

Chairman HENSARLING. The gentleman from South Carolina 

asked for it; the gentleman from South Carolina got it. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

And thank you to our panel for being with us this afternoon. I 

would like to go to Dr. Calabria. Chair Yellen appeared comfortable 

with the Fed’s staff study in regards to stress testing. Do you have 

an opinion on that staff study and whether it was adequate to do 

a stress test of what the Fed has been doing? 

Mr. CALABRIA. I have not fully looked at it, so I don’t want to 

pass judgment on it. I will say I have been skeptical of some of the 

rounds of stress testing, both here and in the E.U. I think much 

of them have not been all that stressful, but, again, I will emphasize that I have not read them— 

Mr. ROTHFUS. What would you look for in a stress test? What 

kind of variables would you— 

Mr. CALABRIA. For instance, one of the things that I am most 

concerned about is I think we are all in agreement that rates are 

going to go up at some point, and so I do worry that as the yield 

curve steepens, which is necessary to encourage lending, but that 

you are encouraging an amount of maturity mismatch within the 

banking system that I worry about. And so, we do need to keep an 

eye on that when rates go up. After all, that is what really drove 

the savings and loan crisis, so I think at that degree of mismatch 

in assets and liabilities needs to be observed quite closely. 

I also think we need to be a bit more stressful about sovereign 

risk. Certainly, it is more of a case in the E.U., but the treatment 

here—I guess it is worth noting that there still is no Federal statutory guarantee of Fannie and Freddie. And so the treatment of 

bank regulators of Fannie and Freddie debt, in my opinion, has 

been far too generous, and it certainly has embedded that risk in 

the system. And I think we also need to look at the treatment of 

municipal debt on banks’ balance sheets, as well. So I think there 

is some credit risk, I think there is interest rate risk across the 

board that we really need to take very seriously. 

Mr. ROTHFUS. What would your consideration be, for example, if 

interest rates did go up 100 basis points, 150 basis points, and 

what that would do with the value of the securities that the Fed 

is holding right now? 

Mr. CALABRIA. We certainly know that increases in interest rates 

will lower the value of long-dated assets on both bank balance 

sheets and the Federal Reserve’s balance sheet. I think that is a 

very real concern for me in terms of monetary policy. 

The entire exit strategy seems to assume that you will not have 

to conduct open market operations where you would sell the longdated assets off. The Federal Reserve’s position so far has been we 

will let those assets mature, and I think that is a feasible strategy 

if we don’t see any inflation. The fallback to that is, of course, the 

desire to raise interest on reserves, and this is where I am a little 

97 

more skeptical, not in a mechanical sense, because you certainly 

can raise interest on reserves and constrain lending. 

What I am skeptical is that, my back-of-the-envelope is on the $2.4 trillion or so in reserves, we are probably paying somewhere 

around $6 billion a year to the banks via the Federal Reserve. In 

an inflationary environment, I could easily see that approach $30 

billion, $40 billion, and it just strikes me as politically 

unsustainable for the Federal Reserve to cut a $30 billion to $40 

billion check to the banking industry. 

So I do worry that open market operations might be on the 

table—off the table, because you can’t sell the assets at par, and 

I might—and I might be worried that the level of interest reserves 

you have to pay is just simply not politically feasible. 

Mr. ROTHFUS. Would you consider broader impacts, for example, 

interest rate spikes on the stock market? We just had this experience about a month ago when we saw a correction in the market 

after—whether it was related at all to pulling back on QE. Any 

thoughts there? 

Mr. CALABRIA. I certainly think we are going to start to see rates 

go up. The earlier numbers we talked about, 100, 150 basis points. 

So certainly, as the tapering continues, we are going to start to see 

long-term rates go up, and I think we will also start to see the 

yield curve steepen, which is an important aspect of this, as well. 

I think it is going to moderate the stock market. I think it is also 

going to moderate prices in the real estate market, all else being 

equal. So, of course, we do hope that you start to have economic 

recovery so that the fundamentals start to drive those markets, 

rather than liquidity. 

Mr. ROTHFUS. Is there any historical precedent for what the Fed 

has done over the last 4 years, the way it has expanded its balance 

sheet, and then to have an environment where you could just do 

a proper stress test? 

Mr. CALABRIA. I don’t want to push the comparison too much, because I don’t think QE plays into this, but I do worry that we are 

in a sort of 2003–2004-style situation. We saw a tremendous 

amount of refinancing bank fees in 2003. As that went away, when 

interest rates started to go up, and you started to see a reduction 

in credit quality, in—so, again, I worry that we are going to start 

to see that cycle play out again. 

And, of course, it is also worth remembering that when you look 

back at the 1980s, we had a boom and bust in the housing market 

at the beginning and at the end of the 1980s. So I do think that 

we are in a situation where the housing market represents some 

risk, again. Certainly, 2 to 3 years out, I think that is something 

that needs to be taken quite seriously. 

Mr. ROTHFUS. Thank you. If I can just quickly go to Ms. McCloskey, we all heard Chair Yellen suggest that there has been a costbenefit analysis done with respect to the Volcker Rule. Do you have 

an opinion with respect to any cost-benefit analysis that the Fed 

may have done with respect to the Volcker Rule, the preamble of 

the Volcker Rule? 

Ms. MCCLOSKEY. There is no economic analysis disclosed by the 

Fed on the Volcker Rule, which is grievous, considering the impact 

that the Volcker Rule could have on the economy and on busiVerDate Nov 24 2008 16:19 Oct 31, 2014 Jkt 088526 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 K:\DOCS\88526.TXT TERRI
98 

nesses. So I think Volcker is actually a great example as to why 

having a requirement of statutory cost-benefit analysis would be an 

important step forward for the Fed. 

Mr. ROTHFUS. Thank you. Thank you, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from North Carolina, Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Thank you all for being here today. How do you believe the 

Volcker Rule will affect mainstream America? And is there anything that the regulators can do to calm the fears that we are hearing in the financial industry? 

Mr. Calabria, we can start with you, if you would like. 

Mr. CALABRIA. Sure. One of the issues that I don’t think gets discussed enough in the Volcker Rule is the exemptions for Treasuries, agencies and municipals. And so I do worry that you combine 

that with the liquidity coverage requirements and the new capital 

rules that we are seeing under Basel, I do worry that we are putting our thumb highly on the scale toward essentially government 

debt versus the private sector. I think one of the things we need 

to do is actually quite interesting. If you took bank balance sheets 

and you graphed lending to business versus lending to government, 

they almost kind of mirror each other. 

So the fact is, banks haven’t stopped lending. They have just 

changed who they are lending to. And in my opinion, they are lending to the least productive sectors of society. So I do think that we 

need to keep that in mind in terms of long-term growth that we 

don’t want to push the financial system away from lending to the 

private sector. We have not had financial crises caused by smallbusiness lending. We have had financial crises globally caused by 

lending to governments. 

Mr. PITTENGER. Does anybody else want to comment on that? 

Ms. MCCLOSKEY. I haven’t seen any studies that specifically look 

at the consumer impact of the Volcker Rule, but theory would suggest that banks could seek higher yields elsewhere and actually invest in riskier assets, which might make the system more unstable, 

or that they may offset reduced revenue from Volcker by raising 

the cost of credit on consumers. 

So while there was no economic analysis before Volcker was 

passed, this also raises the need for retrospective analysis 2, 3, 5 

years out to consider how it is really impacting the economy. 

Mr. PITTENGER. With the unemployment rate trending downward, do you believe that this is an indication of a strong economy? 

Or do you believe this rate is indicative of people just leaving the 

labor force? Would any of you like to comment on that? 

Mr. CALABRIA. I will note that the January number has really 

been driven not by people leaving the labor force. It is a weak number, so I wouldn’t use the word strong, but it is a real number, and 

I think it is a modest improvement. You have certainly seen in previous months where declines in the unemployment rate have been 

driven by departures from the labor market. So the point I would 

emphasize is, I think we are in a recovery. I just don’t believe we 

are in a strong recovery. 

Mr. PITTENGER. Yes, sir? 

99 

Mr. TAYLOR. Yes, I think a significant part of the unemployment 

reduction is labor force participation declining. One way to think 

about that is to look at projections of labor force participation before this recession. And they are much higher than what has 

turned out, so the demographics really can’t explain a lot of the decline, some, of course, but a major part of it must be the recession 

itself and people dropping out of the labor force. And if you adjust 

for that, the actual unemployment rate would be higher than what 

is reported. 

Mr. CALABRIA. One thing I will note, we saw the declines in unemployment rate pretty much broad categories, December to January, with one glaring exception to me, which is teenagers. The unemployment rate significantly increased for African-American teenagers, to an almost 40 percent unemployment rate in January, 

which to me is quite shocking. 

I think one of the really, really bad policy mistakes we made 

going into this recession, and it is worth certainly recognizing that 

this happened under President Bush, we put in place a series of 

minimum wage increases that I think have hurt the teenaged labor 

market in a very serious manner, and that certainly should be considered in the current debates. 

Mr. PITTENGER. And they are trying to do that again today. 

Yes? 

Ms. MCCLOSKEY. Pardon. I didn’t hear your question. 

Mr. PITTENGER. No, I said—I just made the comment that they 

have the same proclivity to continue in that venture today, to make 

it more difficult for teenagers to get jobs, by raising the minimum 

wage. Looking at Fed policies over the past few years, I would just 

like to get your opinion on how this has affected the current fiscal 

issues facing our country. 

Mr. KOHN. Current fiscal issues? Yes, so I think the—as has 

been said before on this panel and was discussed by Chair Yellen, 

the country still faces some very, very serious long-term fiscal 

issues, in terms of the demographics interacting with the promises 

that past Congresses and Presidents have made and enacted into 

law— 

Mr. PITTENGER. But do you think Fed policies have exacerbated 

that problem? Do you think that they have— 

Mr. KOHN. No, I don’t think Fed policy has exacerbated that 

problem. I think that problem results from acts of Congress— 

Mr. PITTENGER. What is your take? Let’s just go down the line— 

Mr. KOHN. —and— 

Mr. PITTENGER. We have 20 seconds. Just go down the line. Do 

you think Fed policies have been a help or a hindrance? 

Ms. MCCLOSKEY. The Federal Reserve policies have made it easier for the government to borrow money at a cheaper rate, but I do 

think that politicians have shown a proclivity to pass spending bills 

regardless of the price of borrowing. 

Mr. PITTENGER. Thank you. Ten seconds. Keep going. 

Mr. CALABRIA. While the primary cause is, of course, fiscal policy, 

not the Fed, I do think the Fed has facilitated. 

Mr. TAYLOR. Yes, I agree. 

Mr. PITTENGER. Thank you very much. I yield back the balance 

of my time. 

100 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Kentucky, Mr. Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. And thanks to the panel. 

I appreciate your testimony. 

Just to follow up on Mr. Pittenger’s last question, and this was 

a subject that I was exploring with Chair Yellen a little bit, but I 

would like your thoughts on this. 

Obviously, as the Fed begins to taper or continues to taper the 

asset purchase program, and as interest rates begin to normalize 

and elevate, the cost of borrowing to the government is going to 

rise. What counsel do you have to Congress in terms of the urgency 

and the time sensitivity of getting our fiscal house in order, in light 

of Fed monetary policy and tapering and the impact that will have 

on government costs of borrowing? 

Mr. KOHN. I think this is more a medium- to longer-term problem, but it is important to act soon, because this is a problem having to do with what people are going to count on, in terms of support for their health care, support for their income, when they retire. So in order to deal with a problem that is coming in 10, 15, 

20 years, if you are going to reduce the trajectory of that support, 

you have to do it now. It is not fair to do it to people who are going 

to retire in 5 years. 

Ms. MCCLOSKEY. I would add, I think there is a tendency to kick 

the can down the road on the debt, especially because some of the 

most astounding numbers, when GDP is 100 percent of—or Federal 

debt is 100 percent of GDP don’t come for 25 years based on current projections by the CBO. But there is substantial economic literature, including by the IMF, that says countries with levels of 

debt-to-GDP that the United States currently has right now experienced slower growth, they experienced less job creation, there is a 

crowding out of investment. And so when you look at it through 

that lens, I think it is an urgent requirement for Congress to fix 

the debt. 

Mr. CALABRIA. I would emphasize, as well, that I agree with— 

basically with both what Don and Abby had said, and I will emphasize, as well, we can address long-term fiscal issues now without 

having any impact—without having any negative impact on any 

short-term stabilization goals. 

And while I am skeptical on our ability to stabilize in the short 

run, dealing with our long-term entitlement problem will be a positive in that return, not a negative. 

Mr. TAYLOR. I think it would be a positive to address it sooner 

rather than later. It is part of the uncertainty about the debt and 

how it is going to get resolved. It is still lingering around. CBO’s 

projections of long-term debt are as pessimistic as they were 4 or 

5 years ago. So the sooner this can be addressed—it is mainly looking down the road—I think the economy will respond positively. 

Mr. BARR. Ms. McCloskey, I was reading with interest your written testimony about the impact that financial regulation has on 

low-income Americans. And there have been some voices in Washington that have been pretty vociferous and aggressive recently in 

advocating an increase in the minimum wage. 

I would be interested to hear—and I was—I noted your testimony about how the consolidation in banking is forcing low-income 

101 

consumers to be underbanked or unbanked and moving into alternative outlets. And while at the same time they are being forced 

into alternative services like payday lenders or check-cashers, at 

the same time, we are anticipating the Consumer Financial Protection Bureau clamping down on that industry, as well, leaving a lot 

of these low-income folks with no other alternatives to access to 

credit. 

Can you speak to the negative impact that has relative to a $7 

minimum wage? 

Ms. MCCLOSKEY. Sure. I will take your questions, actually, one 

at a time. First, there is a lot of debate about the disemployment 

effects for the minimum wage, but what we do know is that the 

minimum wage is—even if it worked perfectly—a really ineffective 

way to lift the poor out of poverty. This is because most people who 

are impoverished don’t have a job at all, and the proportion of people who are low-income, very few of them actually are in the minimum wage. Minimum wage is predominantly given to part-time 

workers, younger workers, and workers 3 or 4 times above the poverty line. So the minimum wage, I don’t think, is the best answer 

we could have for the challenges facing low-income people. 

Per new rules on alternative credit products, such as payday 

loans, if the CFPB goes forward with that, I think that the goal of 

the CFPB should be to maximize options for low-income consumers, 

not to limit them, and that would be a great guiding principle for 

them going forward. 

Mr. BARR. Thank you. 

Ms. MCCLOSKEY. Thank you. 

Chairman HENSARLING. I yield back. 

The Chair is going to take the privilege of asking the last question. We do have votes on the Floor now. And, Dr. Taylor, I am 

under the impression you have traveled the greatest distance, so 

like it or not, you are getting the last question. 

I think at least one of the things I have heard from Chair Yellen 

and this entire panel, at least there is consensus that there are 

limits to what monetary policy can achieve in our economy. And so 

we know that banks are sitting on $1.6 trillion, $1.7 trillion of excess reserves. So I am trying to figure out what further rounds of 

quantitative easing can achieve for us today? What is $2 trillion in 

excess reserves going to do for us that $1.7 trillion hasn’t done? 

And, Dr. Taylor, what there hasn’t been is a discussion today 

about what is it going to take to unwind this balance sheet? And 

even if we taper each and every month—I am not leaving this 

hearing today with a clear understanding of where Chair Yellen intends to take us. Maybe there will be further tapering, and maybe 

not. But even if there is, we are still adding to the balance sheet. 

I know that you and my mentor, Senator Phil Gramm, have written about this subject in the past, but what are the risks associated 

if she and the other Members of the FOMC choose not to taper, 

and what are the risks associated with unwinding this balance 

sheet? And if you had the job, how would you go about it? 

Mr. TAYLOR. I have been warning about the unwinding since the 

winding up began. It is one of the big concerns I have had about 

it. So the only thing I can say is, the unwinding has to be done 

as strategically, as predictably as possible. 

102 

I don’t think it should be postponed. I don’t think the purchases 

are doing much good. Look at QE3 as a program. When it began, 

the 10-year bond rate was 1.7 percent. It is now 2.7 percent. How 

can you say that program worked? If you can say, oh, it was the 

problem of unwinding. There was always the problem of 

unwinding. 

I think it would be a mistake never to unwind, because ultimately that is going to be inflationary. That is the two-edged sword 

we have always worried about. It could be risk on the downside, 

the fear of tapering too much, or just the fear of tapering. We have 

experienced that downside, I think, already. That is one of the reasons the economy has grown more slowly. But there is always the 

other side. 

And so, it has to unwind at some point. The strategy is probably 

going to involve, for a while, paying higher interest on reserves. 

Mark is quite right. That is going to be hard for the Fed itself. And 

there is the question of capital losses, how that is going to be treated, but ultimately, as I answered to Mr. Huizenga, you have to get 

on with it. And at least, they are getting on with it. That is a positive. 

Chairman HENSARLING. I want to thank each of our witnesses for 

testifying today. 

The Chair notes that some Members may have additional questions for this panel, 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 these witnesses and to place their 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 5:09 p.m., the hearing was adjourned.] 

(103) 

A P P E N D I X 

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