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88–746 PDF 2014

S. HRG. 113–329

THE SEMIANNUAL MONETARY POLICY REPORT

TO THE CONGRESS

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

SECOND SESSION

ON

THE FEDERAL RESERVE SYSTEM’S SEMIANNUAL MONETARY POLICY 

REPORT TO THE CONGRESS

FEBRUARY 27, 2014

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

(

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


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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director

LAURA SWANSON, Deputy Staff Director 

GLEN SEARS, Deputy Policy Director 

BRETT HEWITT, Policy Analyst and Legislative Assistant

GREG DEAN, Republican Chief Counsel 

MIKE LEE, Republican Professional Staff Member

DAWN RATLIFF, Chief Clerk 

TAYLOR REED, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

(II)


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CONTENTS

THURSDAY, FEBRUARY 27, 2014

Page

Opening statement of Chairman Johnson ............................................................. 1

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 2

WITNESS 

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System ...... 3

Prepared statement .......................................................................................... 37

Responses to written questions of: 

Senator Hagan ........................................................................................... 41

Senator Vitter ............................................................................................ 42

Senator Toomey ......................................................................................... 43

Senator Coburn ......................................................................................... 46

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to Congress dated February 11, 2014 ........................... 49

(III)


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(1)

THE SEMIANNUAL MONETARY POLICY 

REPORT TO THE CONGRESS 

THURSDAY, FEBRUARY 27, 2014

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. We welcome Dr. 

Janet Yellen as Chair to deliver the Federal Reserve’s semiannual 

Monetary Policy Report. Chair Yellen, I would like to congratulate 

you on your nomination and confirmation. In fact, this month’s 

hearings are historic—the first time that a woman is delivering the 

Fed’s semiannual Report to Congress. 

Chair Yellen, you have a lot of important issues to focus on as 

Chair, including continued implementation of Wall Street Reform, 

establishing policies to improve financial stability and reduce systemic risk, and providing appropriate monetary policy to support 

our economy. Overall, I am encouraged by the recent improvements 

in the economy. It appears that economic growth is picking up, and 

many mainstream economists expect stronger growth this year. 

This is good news. 

However, I am concerned that the economic recovery is not being 

felt by every American. Too many cities and towns across America 

have not fully recovered from the Great Recession and continue to 

struggle. Long-term unemployment remains historically high, and 

we see recent college graduates, many of whom are burdened by 

high student loan debt, have a tough time finding work. Income inequality is becoming more severe, and more families are being 

squeezed out of the middle class. As such, and while inflation remains weak, I caution the Fed not to move too quickly to exit from 

its current policies until we are on solid footing and the recovery 

is more widespread. 

While the Fed’s policies have helped the recovery, the Fed can 

only do so much. Congress needs to act to ensure that the recovery 

is more widespread and that generations of Americans are not shut 

out of economic opportunity. We cannot solve our fiscal problems 

by imposing immediate and arbitrary cuts, and we need to invest 

in the economy today to ensure future prosperity. It is important 

we implement policies that work alongside monetary policy to help 

get more Americans back to work. 


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2

Chair Yellen, I look forward to hearing your thoughts on the decision to taper asset purchases, how recent Fed actions are affecting the economy, and where the economy is heading. 

I now turn to Ranking Member Crapo for his opening statement. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you, Mr. Chairman, and welcome also, 

Chair Yellen, on your first appearance before this Committee as 

the Chair of the Federal Reserve Board of Governors. 

Today’s hearing is an important opportunity to examine the current state of monetary policy. Since your confirmation hearing in 

November, the Fed has begun the process of tapering its quantitative easing purchases. The pace of quantitative easing purchases has come down by $20 billion. This is a welcome development for those of us who disagree with the Federal Reserve’s quantitative easing policy and prefer to see QE purchases end entirely 

later this year. 

By the time the Fed stops expanding its balance sheet, it will hold well over $4 trillion in Treasury and mortgage-backed securities. Former Chairman Bernanke and others have suggested that 

the Fed might maintain the expanded size of the balance sheet for 

some time rather than promptly reducing it. This would mean that 

the reserves created on the Bank’s balance sheets to purchase 

those assets would remain in the financial system. Richmond Fed 

President Jeffrey Lacker has called these high excess reserves ‘‘tinder on the books of the banking system.’’ The Fed will have to be 

vigilant to ensure that the tools they have identified to manage the 

wind-down are sufficient to prevent market disruptions. 

These unconventional monetary policy tools have, in my opinion, 

failed to produce the promised benefits as noted economists recently observed that over the last 4 years the share of adults who 

are working has not increased and GDP has fallen further behind 

potential as we would have defined it in the fall of 2009. All that 

is to say that, despite unprecedented amounts of monetary intervention and record low interest rates, businesses have not responded by hiring new workers. 

Dr. Yellen, in your confirmation hearing, you commented on the 

need to monitor the costs and risks to financial stability that current monetary policy creates. You also stated that you believe monetary policy is most effective when the public understands what the 

Fed is trying to do and how it plans to do it. 

I appreciate your commitment to openness and transparency. I 

look forward to your thoughts as to how the Fed will manage a return to normalized monetary policy and how you will communicate 

that transition to the public. 

I also look forward to learning more about your perspective on 

the implementation of the Dodd-Frank Act and how different rules 

interact with each other and their impact on the economy at large. 

Because of the size and complexity of these rules, it is paramount 

that the regulators strike the right balance without unduly harming the economy. This was evident most recently in December with 

the final Volcker rule and its unintended and disproportionate effect on community banks with respect to their holdings of trust 

preferred collateral debt obligations. 


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The economic impact of the recently finalized Fed rule that imposed heightened capital requirements on foreign banks doing business in the United States is yet to be seen. Earlier reports indicate 

that some foreign banks are moving their assets outside the United 

States, taking their market activities to friendlier jurisdictions. 

As you continue with the rulemaking process, I encourage you to 

do so without placing the U.S. markets at a competitive disadvantage or putting out of business smaller firms that are no threat to 

our financial security. I certainly hope that you will work with 

Congress to identify statutory ambiguities in Dodd-Frank that prevent the Fed from doing the right thing. 

And, lastly, we still have the Government conservatorship of 

Fannie Mae and Freddie Mac, which will create a long-term market distortion in this crucial segment of the U.S. economy. I look 

forward to hearing your thoughts on the need for this reform and 

bringing this 5-year ordeal to a close. 

Again, welcome, Chair Yellen, and I look forward to your testimony. 

Chairman JOHNSON. Thank you, Senator Crapo. 

To preserve time for questions, opening statements will be limited to the Chair and Ranking Member. 

I would like to remind my colleagues that the record will be open 

for the next 7 days for additional statements and other materials. 

I would like to welcome Chair Yellen. Dr. Yellen is serving her 

first term as Chair of the Board of Governors of the Federal Reserve System. She was sworn into office earlier this month. Before 

that, Dr. Yellen served as Vice Chair and Member of the Board of 

Governors of the Federal Reserve System. She was also previously 

Chair of the Council of Economic Advisers. 

Chair Yellen, please begin your testimony. 

STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. YELLEN. Chairman Johnson, Senator Crapo, 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 1⁄2 percent in 

the third and fourth quarters, up from a 1 3⁄4 percent pace in the 

first half. The pickup in economic activity has fueled further 

progress in the labor market. About 1–1⁄4 million jobs have been 

added to payrolls since the previous Monetary Policy Report last 

July, and 3 1⁄4 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 


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and 1 1⁄2 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 the 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 part-time 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 major components of GDP, household and business 

spending growth stepped up during the second half of last 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 improved sales prospects, greater confidence, and still favorable financing conditions. 

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 Federal Open Market Committee’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. 

Mr. Chairman, let me add as an aside that, since my appearance 

before the House Committee, a number of data releases have pointed to softer spending than many analysts had expected. Part of 

that softness may reflect adverse weather conditions, but at this 

point, it is difficult to discern exactly how much. In the weeks and 

months ahead, my colleagues and I will be attentive to signals that 

indicate whether the recovery is progressing in line with our earlier 

expectations. 

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 


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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 a context of price stability. In 

mid-2013, the Committee indicated that if progress toward 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 progress 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 toward its longer-run objective, the Committee will likely reduce the pace of asset purchases 

in further measured steps at future meetings. 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 these 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 1⁄2 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 January, the Committee said that its current expectations—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 1⁄2 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 inflaVerDate 0ct 09 2002 14:43 Dec 19, 2014 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\DOCS\88746.TXT SHERYL

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tion 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. In addition, we recently finalized the 

rules implementing enhanced prudential standards, mandated by 

Section 165 of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act. On the supervisory front, the next round of annual 

capital stress tests of the largest 30 bank holding companies is underway, 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. We 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 a 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. In addition, we are working to advance 

proposals on margins for noncleared derivatives, consistent with a 

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 the 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. 

Chairman JOHNSON. Thank you, Chair Yellen. 

As we begin questions, I will ask the clerk to put 5 minutes on 

the clock for each member. 

Chair Yellen, with inflation low and unemployment so high, does 

that give the Fed some room to continue promoting full employment? 

Ms. YELLEN. Chairman Johnson, yes, it certainly does give us 

room to continue promoting full employment, and we have committed to do so and have made clear that we see an accommodative 

monetary policy as remaining appropriate for quite some time. 

There is no conflict at all at the moment between the two goals 

that Congress has assigned to us of promoting maximum employment and price stability. Inflation is running well below our 2-percent target, and as you indicated, that gives us ample scope to conVerDate 0ct 09 2002 14:43 Dec 19, 2014 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\DOCS\88746.TXT SHERYL

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tinue to try to promote a return to full employment, and we are 

committed to doing that. 

Chairman JOHNSON. Chair Yellen, what approach is the Fed taking with respect to insurance companies under the new rules implementing Section 165 of Dodd-Frank? How would this interact 

with rules on capital requirements for insurance companies under 

the Collins amendment? 

Ms. YELLEN. Senator, we are looking very carefully to design an 

appropriate set of rules for companies with important involvement 

in insurance. We recognize that there are very significant differences between the business models of insurance companies and 

the banks that we supervise, and we are taking the time that is 

necessary to understand those differences and to attempt to craft 

a set of capital and liquidity requirements that will be appropriate 

to the business model of insurance companies. 

I would say, however, that the Collins amendment does restrict 

what is possible for the Federal Reserve in designing an appropriate set of rules. So it does pose some constraints on what we can 

do, and we will do our very best to craft an appropriate set of rules 

subject to that constraint. 

Chairman JOHNSON. In what ways could the FSOC make the 

SIFI designation process more transparent? 

Ms. YELLEN. So on this one, Senator, I would say that I think 

FSOC really has provided the public with a good deal of information about the criteria that it is using, the general criteria that it 

has established for attempting to determine whether or not an institution and organization should be designated as a SIFI. And in 

the cases of those organizations where it has made a designation, 

it has really provided a wealth of information about those organizations. 

There are also opportunities for companies that want to contest 

designation to have an appeals process, so there is really a wellworked-out process. 

Now, as the FSOC goes on to consider other possible firms for 

designation, if it decides to use a different set of criteria, I think 

it is completely appropriate that the FSOC should also make clear 

if new criteria are being used to govern designations. 

Chairman JOHNSON. How has the recovery impacted wages and 

income inequality? And if so, what can Congress do to address this 

major problem? 

Ms. YELLEN. Well, Senator, I think the issues of income inequality, of rising income inequality in this country really date back 

many decades, probably to the mid-1980s, when we began to see 

a very substantial widening of wage gaps between more skilled and 

less skilled workers, and this is a trend that, unfortunately, has 

continued almost unabated for the last 30 years. Economists have 

debated exactly what the causes are, but technological change and 

globalization play a role. 

However, I think it is clear that the recession has placed an extremely high toll particularly and special burdens on lower-income 

workers. Those workers and less educated workers have seen their 

unemployment rates rise disproportionately during the downturn, 

and so households and segments of our population that had already 


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been suffering stagnant or declining incomes for many years have 

seen the recession take a large toll. 

So there really has been a very large burden, and it is our objective to try to get the economy back to full employment to alleviate 

that portion of the burden. Things like education and training I 

think are on every economist’s list of actions that Congress could 

take. Early childhood education, training more generally, those 

things certainly, and others Congress could consider to address 

these important issues. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. And, Chair Yellen, 

again, welcome to the Committee. 

Ms. YELLEN. Thank you. 

Senator CRAPO. I appreciated your comments a couple weeks ago 

to the House Financial Services Committee when you discussed 

GSE reform. At that point you said that we still have a system that 

has systemic risk. Reforming Fannie and Freddie is a priority for 

this Committee, and I would like to ask you to just take a couple 

of brief moments to discuss the need to bring private capital back 

into the market. 

Ms. YELLEN. Well, Senator, I strongly support and would urge 

the Congress to address the issue of GSE reform. We have gotten 

a mortgage system that in a de facto sense remains very highly dependent on Government backing, and it fails to meet the very important objective of successful securitization without systemic risk. 

There are a number of different ways in which Congress could 

proceed with GSE reform, depending on your assessment of appropriate priorities, but in my personal view, it is simply very important for Congress to decide explicitly what the role of the Government should be in housing finance, and there are a lot of possible 

choices available. 

I think in terms of bringing private capital back into the market, 

we now have a system where almost all mortgages that are being 

granted in this country have Government backing associated with 

it, and I think to see private capital return in meaningful amounts 

to the mortgage industry, clarifying the rules of the road, is important. So I would certainly urge Congress to proceed in this area. 

Senator CRAPO. Thank you. I agree with you and appreciate your 

observations at this point. 

As I stated in my opening statement, I am very concerned about 

Dodd-Frank implementation, and I certainly hope that you will 

clearly communicate with Congress if there are statutory ambiguities or obstacles that prevent the Fed from doing the right thing 

when promulgating regulations. And in that context, I would just 

like to ask if you agree. When Chairman Bernanke was before us 

last year, I think it was, I asked him this same question. But I 

would like to know if you agree with him that the areas of the end 

users, swaps pushouts, and reducing the regulatory burden on community banks are areas in which we need additional statutory attention to getting it right. 

Ms. YELLEN. So the three areas that you mentioned are ones that 

are high on our list of concerns, areas that we are looking at ourselves. And as we design the Dodd-Frank regulations, in all of 

these areas we are doing our very best to address in these areas 


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you have mentioned issues that have been raised and that we consider quite appropriate. It makes sense to me that Congress should 

consider these areas as well. I want to assure you that we will do 

our best in writing regulations in these areas, however, to address 

the concerns that have been raised. 

Senator CRAPO. Well, thank you, and I appreciate your attention 

to it. I also believe that you need additional clarification and 

strength in the statute to do it right, and I hope that we will be 

able to provide that from Congress. 

Next, in numerous hearings last year, it was revealed that we 

need better international coordination on cross-border issues to ensure that there are no undue interruptions in the financial system. 

Immediately after the Fed finalized its Section 165 proposal for foreign banking organizations last week, European Commissioner 

Michel Barnier’s office issued a statement that the Fed’s rule conflicts with the international standards on cross-border cooperation 

in bank resolution. 

What concrete steps are you taking to ensure effective coordination with your foreign counterparts to create a complementary regulatory regime? 

Ms. YELLEN. Well, cooperation with our counterparts globally has 

been a core part of our approach to strengthening the financial system and putting in place regulations under Dodd-Frank. So we are 

very actively engaged through the Financial Stability Board, 

through the Basel Committee, through the relations we have with 

insurance regulators, attempting to craft regulations in all areas 

that are consistent globally and that mesh together as a successful 

system. 

In the area of foreign banking organizations in our rule writing 

which we finalized, I guess the week before last, on Section 165, 

we faced important tradeoffs. The role of large foreign banking organizations in our capital markets has changed dramatically over 

the last 20 years. These organizations are among the largest and 

most systemically important organizations in the U.S. financial 

system, and we tried to write a set of rules that provide a level 

playing field for both U.S. organizations and foreign banking organizations doing business in the United States. And the rules that 

we put in place I believe are really quite similar to what our own 

banking organizations face when they do business abroad. 

So we have tried to construct a set of rules that preserve the opportunity for cross-border international global capital flows. 

Branches and agencies of foreign banking organizations can continue to operate without separate capital requirements in the 

United States. But it was important to put in place a set of rules 

directed to financial stability of our own markets. 

Senator CRAPO. Thank you very much. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman, and 

welcome, Madam Chair. 

The Open Market Committee has several times made the point 

that we seem to be operating a cross purposes. As the Federal Reserve is pursuing an expansive monetary policy, we are pursuing 

a very restricted fiscal policy. It would seem to me that if we were 

in harmony or complementary, it would be better for the overall 


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economy. There are several examples. Our current debate about 

unemployment compensation, most objective observers would suggest that could add anywhere from 180,000 to 200,000 jobs to our 

economy, and at the same time helping people who need help. 

We are in the throes of trying to figure out if we are going to 

actually fund our highway system after next September, which is, 

again, another example of how fiscal policy could aid your efforts. 

Can you comment on this apparent cross-purpose activity? 

Ms. YELLEN. So fiscal policy really has been quite tight and has 

imposed a substantial drag on spending in the U.S. economy over 

the last several years. The CBO estimated that last year the fiscal 

policy drag probably subtracted a percentage point and a half from 

growth. The drag is likely to lessen substantially during the current year, but nevertheless, there remains some drag. 

And, of course, it is true that because there has been fiscal policy 

drag, the burden on monetary policy has been larger. This is true 

not only in the United States but in a number of advanced countries in Europe and in Japan as well. 

My predecessor has always urged Congress recognizing that 

there are substantial long-term budget deficit issues and need for 

a sustainable fiscal path for the country to focus to the maximum 

extent possible on fiscal changes that would address the longer-run 

issues that will be associated with a rising debt-to-GDP ratio over 

decades and to try to avoid doing harm to the recovery. And I 

would take the same general position. 

Senator REED. But in the short run, there is a value of additional 

fiscal stimulation in the economy that will complement what you 

are already doing and also make it easier for you to begin to withdraw the quantitative easing. Is that a fair comment? 

Ms. YELLEN. Well, I do think the economy is beginning to recover, and we have made progress. And, you know, at a minimum 

I would hope that fiscal policy would do no harm. 

Senator REED. Just one other quick question. You have and your 

predecessors have looked at an unemployment rate of 6.5 percent 

as sort of a point of inflection, if you will. But one of the aspects 

of the current employment situation is that labor force participation is falling, and so that 6.5 percent might not actually capture 

sort of the reality of the current economy and be an adequate sort 

of measure when you should begin or how you should begin to undertake fiscal easing—quantitative easing, excuse me. 

So are you looking at other ways or looking beyond just the simple unemployment rate to gauge your actions? 

Ms. YELLEN. So, Senator, let me first say that 6.5 percent unemployment is not the Committee’s definition of what constitutes full 

employment. The range of views on that among Committee members is substantially lower. The central tendency is, you know, 

under 6 percent. So 6.5 was simply meant to be the Committee saying, look, if the unemployment rate is above that, we see absolutely 

no need to consider any possibility of raising rates. Below that, we 

begin to look more carefully. And as we do so, of course, the unemployment rate is not a sufficient statistic to measure the health of 

the labor market. An additional 5 percent, an unusually high fraction of our labor force, is working part-time for economic reasons, 

which means they are unable to get full-time work but want it. 


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That is an additional 7 million-plus Americans who were involuntarily employed part-time, and we have an unusually high fraction 

of Americans who were unemployed and have been for substantial 

amounts of time. 

So, you know, as we go to a fuller consideration of how is the 

labor market performing, we need to take all of those things into 

account. 

Senator REED. Thank you, Madam Chair. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you. Thank you, Chairman Yellen, for 

being here with us, and congratulations. 

I want to talk to you a little about the portfolio of the Fed that has been mentioned. I understand it is about $4 trillion at the moment. You have tapered off some, the Fed Board of Governors. You 

are still buying at the current rate, about 65 billion a month. So 

at that rate, if you do not taper substantially or stop, you will be 

getting up toward $5 trillion at the end of the year, or less. Is that 

correct? 

Ms. YELLEN. Well, we are as you say, we are around $4 trillion 

and continuing to buy——

Senator SHELBY. Now, but you are getting up to $5 trillion at the 

rate you are buying. 

Ms. YELLEN. If we do not continue to taper. 

Senator SHELBY. But even if you taper and you continue to buy, 

like if you taper down from 65 to 50, that is still substantial buying 

in the market, is it not? 

Ms. YELLEN. It is. I mean, we have indicated that if the economy 

progresses as we anticipate, we expect to continue reducing the 

pace of purchases in measured steps, which would mean ending 

completely the purchases winding down and ending some time next 

fall. 

Senator SHELBY. In your portfolio, are there mainly Treasurys 

and mortgage-backed securities? Is that what the portfolio consists 

of? 

Ms. YELLEN. Yes. 

Senator SHELBY. What is the relative ratio of that, one to the 

other? Relatively, just an educated guess. 

Ms. YELLEN. I believe we have a larger quantity of Treasurys 

than mortgage-backed securities. 

Senator SHELBY. Can you furnish that? Do you want to look at 

it or do you want to furnish that for the record. 

Ms. YELLEN. I will be happy to furnish the exact numbers to you 

for the record. 

Senator SHELBY. To unwind a portfolio of that size, which is unprecedented, Chairman Bernanke has told us before that it would 

be a big challenge. Do you agree with that? 

Ms. YELLEN. We do not need to and have no intention of quickly 

winding down that portfolio. 

Senator SHELBY. Will you—is it your plan to keep some of the 

mortgage-backed securities and Treasurys to maturity? 

Ms. YELLEN. So we have indicated that we have no intention of 

selling mortgage-backed securities. They will—I think when we 

begin the process of normalizing monetary policy, of wanting to 


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tighten monetary policy, we will have a look at permitting runoff 

out of our portfolio as these securities mature. And allowing runoff, 

we would bring down our portfolio over time. 

Senator SHELBY. Slowly. 

Ms. YELLEN. Slowly, even without sales. And I think my predecessor has emphasized, and I agree, there is no need to bring down 

the size of our portfolio in order to tighten monetary policy. We 

have a range of tools that we can use to raise the level of shortterm interest rates at the time that the Committee deems it appropriate to begin to tighten monetary policy conditions. Now, that is 

a way off, but we continue to develop tools to make sure that we 

have an arsenal of tools to be able to, as appropriate, tighten conditions and not have to do asset sales or manage our portfolio in any 

way that would be disruptive to financial markets. 

Senator SHELBY. If I can shift now to the regulatory side of your 

duties here as Chair of the Fed Board of Governors, Basel III is 

supposed to be in effect, is it not, in 2015? It is 2015? 

Ms. YELLEN. I believe——

Senator SHELBY. A lot of them have got to make those adjustments for capital, the flexibility of capital liquidity, so to speak. Is 

that correct? 

Ms. YELLEN. I believe so. 

Senator SHELBY. Now, Senator Crapo mentioned the foreign 

banks and so forth. Will you as a regulator make sure that the foreign banks comply with their capital standards just like our banks 

have to do if they are doing business in the United States of America? 

Ms. YELLEN. Yes, we have said that foreign banking organiza- tions that have over $50 billion in size will have to form intermediate holding companies and to organize their activities other 

than branch and agency activities in an intermediate holding company that will be subject to the same regulations as U.S.-based 

banking organizations. That is the essence of the proposal that we 

finalized 2 weeks ago. 

Senator SHELBY. Thank you. My time is up. 

Chairman JOHNSON. Senator Schumer. 

Senator SCHUMER. Thank you. And thank you, Chair Yellen. You 

are off to a great start as far as I am concerned. 

I just want to make one brief comment. I know that some of my 

colleagues on the other side of the aisle express amazement that 

the Fed would take extraordinary measures to boost growth. But 

if Congress had done more on the fiscal side to deal with the damage the economy suffered, the Fed would not have to do this, and 

yet some of the very same Senators and Congress Members who 

block all further needed investments in infrastructure and other 

things that used to have broad bipartisan support complain that 

the Fed is doing too much to help the economy, and it is sort of 

incredulous to me. You do not have to comment on that. But what 

do they expect you to do? Do they expect you to just stand here and 

let the economy get even worse, let job growth continue to slow? 

Fiscal is preferred, but it is not available because people have 

blocked it. 

My question, the first one, relates to tapering on the economy. 

I know you testified you were surprised—those were your words—


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by the data in the jobs reports in December and January, but indicated at the time the Fed had no intention of altering its tapering 

program, despite the fact that the economy may not be showing the 

growth you originally anticipated. In your analysis of the data 

since then, have you seen any trends or additional information that 

has led you to reconsider slowing or pausing the tapering of the 

Fed’s bond buying? 

Ms. YELLEN. Well, Senator as I mentioned in my opening remarks, we have seen quite a bit of soft data over the last month 

or 6 weeks. It was, you know, the employment report, relatively 

low, below expectation growth in payrolls, and some of the housing 

numbers and retail sales and industrial production. So it is really 

quite a range of data——

Senator SCHUMER. Right. 

Ms. YELLEN.——that has been soft recently. 

Now, I think it is clear that unseasonably cold weather has 

played some role in much of that. There are many ways in which 

weather would have affected these areas. What we need to do and 

will be doing in the weeks ahead is to try to get a firmer handle 

on exactly how much of that set of soft data can be explained by 

weather and what portion, if any, is due to a softer outlook than 

we would have——

Senator SCHUMER. And if it is not mostly weather, would you 

consider pausing or changing the rate of tapering? 

Ms. YELLEN. So as we have said in our statement—and I would 

agree—asset purchases are not on a preset course. So if there is a 

significant change in the outlook, certainly we would be open to reconsidering. But I would not want to jump to conclusions here. 

Senator SCHUMER. Understood. My next question talks about 

some of the qualitative versus quantitative guidance. Fed Reserve 

President Lockhart said recently, ‘‘For the next couple of years, forward guidance may be the lead policy tool, arguably the most potent method we have for influencing financial conditions and economic results.’’

I appreciate the Fed’s use of forward guidance as another tool to 

influence market conditions, but I would like to get your thoughts 

on how it can be most effective. 

Based on the minutes of the last meeting, it seems the FOMC 

had significant discussion about revising down the Fed’s forward 

guidance which originally stated it would consider raising interest 

rates once employment fell below the threshold of 6.5. In your testimony before the House, you indicated earlier this month that the 

6.5 threshold would not be the only factor that is taken into account. Policymakers would be looking at what you called a ‘‘broad 

range of data’’ on labor market, job creation, and other indications. 

So it seems you are inclined to offer a more qualitative approach 

rather than the numerical threshold of 6.5. 

Given the stated importance of forward guidance, which it is 

these days more than ever, and the reality that, to be effective, the 

guidance must be trusted by the market, would you agree with 

President Bullard who said he would favor discarding numeral 

thresholds and much more work toward a more qualitative approach which would give you more flexibility and yet still give the 

markets guidance? 


BANKI-41578DSA with DISTILLER
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Ms. YELLEN. So there are many different views on our Committee about what the right way is to cast forward guidance, and 

this is something that we have been debating for a long time and 

will undoubtedly continue to discuss as the unemployment rate 

gets closer to this 6.5-percent threshold. 

I think we have already clearly indicated—and I emphasized in 

my testimony—that the unemployment rate is not a sufficient statistic for the state of the labor market. There is no hard and fast 

rule about what unemployment rate constitutes full employment, 

and we need to consider a broad range of indicators. Many members of the Committee have emphasized this point, and it is one I 

agree with. It moves in the direction of qualitative guidance. 

On the other hand, we do want to give markets as much of an 

indication of how we expect to conduct policy as we can. We did 

provide some additional information in December which we reiterated in January. What we said was that the Committee, based on 

its full assessment of all of the data on the labor market and inflation pressures and inflation expectations, financial developments, 

taking all of that into account, we believed that we could only begin 

to raise our target interest rate well past the time that the unemployment rate has declined below 6.5 percent, and we said that 

that was true especially if inflation remained low, because an important factor is that inflation is running well below our 2 percent 

target. So I guess this is qualitative guidance, but I feel that what 

we provided then was additional information. 

Senator SCHUMER. In a sense you moved away from a purely 

quantitative measure and are moving more toward the qualitative, 

which I think is a good thing. 

Thank you. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I was a little surprised at my friend from New York’s partisan comments. I can only 

assume he had too much coffee this morning. But it is good to see 

you. 

Senator SCHUMER. It is a statement of fact about the economy. 

It is not supposed to be partisan. 

Senator CORKER. So, Madam Chairman, since it is a the first, 

how would you like to be addressed? 

Ms. YELLEN. ‘‘Madam Chair’’ is fine or ‘‘Chairman’’ will——

Senator CORKER. OK, Madam Chair. Very good to have you here. 

Ms. YELLEN. Thank you. 

Senator CORKER. I have met some of the nominees for the Fed 

Board. You and I talked about that a little bit in the back room, 

and I want to say that I am impressed, especially I want to make 

reference to Stanley Fischer. I think you may have had something 

to do with him being nominated. I think the former Chairman may 

have had something to do with that. But very impressive person, 

and I think he is a very good complement to your background. So 

I am glad that he is being put forth and look forward to him being 

confirmed. 

You and I, when we were having the confirmation hearing, 

talked a little bit about financial instability in the hearing, and I 

know there has been a lot of discussion about inflation and conVerDate 0ct 09 2002 14:43 Dec 19, 2014 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\DOCS\88746.TXT SHERYL

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cerns, and I know Senator Shelby asked you some questions about 

quantitative easing. 

But we addressed in your confirmation process the concern about 

markets overheating and long-term zero interest rate policy. Maybe 

the threat on the front end is not inflation. Maybe it is instability 

in our financial markets, and I am wondering if you have seen any 

signs of that, if you have refined any thinking about how you might 

address that should that occur. 

Ms. YELLEN. Senator, I agree that an environment of low rates, 

low interest rates, especially when it prevails for a long time—and 

we have had a long period of low interest rates—can give rise to 

behavior that poses threats to financial stability. And, therefore, we 

need to be looking at that very carefully, and we are doing so in 

a very thorough way, I believe. 

There are a number of things that we are monitoring: measures 

of asset prices and whether or not they appear to be diverging from 

historical norms, namely, it is hard, but trying to spot any asset 

bubbles, price bubbles that might be emerging. 

We are looking at leverage, which buildup in leverage can be 

very dangerous to the financial system and pose stability risks. We 

are looking at trends in leverage. We are looking at credit growth 

to see whether or not that has potentially worrisome trends. 

In addition to that, we are looking, particularly through our 

stress tests, at financial institutions. In a low interest rate environment, we have to worry about whether or not they are appropriately dealing with interest rate risk. We have been looking at 

that, and, in fact, our current stress test includes a special portion 

related to interest rate risk. 

Senator CORKER. And as you are looking—I am going to run out 

of time, and our Chairman is very punctual—have you found anything yet that gives you concern? And do you have a tool with a 

zero interest rate policy to address that, if you do? 

Ms. YELLEN. I would say at this stage broadly I do not see concerns, but there are pockets, a few things that we have identified 

that do concern us. For example, underwriting standards and leveraged lending clearly appear to be deteriorating. We have addressed 

that with supervisory guidance and special exams, and we will continue to be very vigilant in that area. That is worrisome to us. 

There are a few areas within asset price valuations. Broadly 

speaking, I would not worry, but there are a few areas where I 

would be concerned. Many people have emphasized farmland is a 

concern, farmland prices. 

So there are a few areas. We have regulatory and supervisory 

tools. To me, they should be the first line of defense. But I do not 

rule out monetary policy. 

Senator CORKER. And just if I could—thank you very much for 

that detailed response. We were just in London meeting with regulators there, and I know there is a large concern about Balkanization of our markets, and I know there was some discussion about 

trying to address that with the EU–U.S. trade agreement. I think 

now that the Administration is not interested in that, but I just 

want to raise that as an issue that I think does need to be addressed, and I realize the Fed will take, with Tarullo, a major lead 

in that. 


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And let just—the final point. The orderly liquidation title in Title 

II that was put together, and I think a lot of us worked on it together, and I am proud of that Title II. It is not exactly the way 

any of us would like for it to be, but one of the things, even though 

it was orderly liquidation, I think the FDIC realized when they 

went through the process, these entities are so intertwined, there 

is really not a way to orderly liquidate. And so instead, they are 

coming in through single entry to the holding company. 

Ms. YELLEN. Yes. 

Senator CORKER. One of the things that I think all of us have 

concern about is making sure, if we are going to use that process—

and I think it is sound, personally—that we ensure there is enough 

debt at the holding company level; otherwise, there will be other 

kinds of distortions. Where is that right now? And when are we 

going to come up with a ruling that gives clarity so that we know 

absolutely we have things in place should a large institution fail? 

Ms. YELLEN. So I agree with you that this is extremely important. It is high on our list. We have been working globally with 

other regulators and looking ourselves at a requirement that holding companies have a minimum amount of long-term debt that 

would be loss absorbing, that would permit an orderly liquidation. 

We would need enough long-term debt both to absorb losses and 

also recapitalize a company in a Title II liquidation. And we are 

looking to come out with a rule that would require that. We are 

working with the FDIC on this. 

Senator CORKER. Thank you, Mr. Chairman. I hope it is a very 

large amount of debt held at the holding company level. OK. Thank 

you. 

Ms. YELLEN. I agree with you. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Madam Chairman, let me ask you, the number of long-term unemployed Americans has continued to go down, but it is still exceptionally high by historical standards, over 3.6 million. As you know, 

long-term unemployment could have serious consequences for individuals and their families and can permanently impair the growth 

prospects for our economy if workers are stuck on the sidelines for 

too long and their skills and networks become out of date. 

Do you feel that the Fed’s policies have been successful in helping to reduce the number of long-term unemployed Americans? Is 

there anything more that the Fed can do, or is there congressional 

action that you might believe is necessary in order to meet that 

challenge? And is boosting demand the best way to reduce longterm unemployment right now based on our current economic conditions? 

Ms. YELLEN. Well, Senator, we are very focused on and concerned about the high level of long-term unemployment. It is really 

unprecedented to see something like 37 percent of unemployed in 

long spells. 

What can we do? We can try to foster a stronger labor market 

generally. We do not have tools that are targeted at long-term unemployment. But in taking account of how much slack there is in 

the labor market and attempting to stimulate demand so that there 

is more spending, there is more production, and more jobs in the 


BANKI-41578DSA with DISTILLER
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economy, we have seen long-term unemployment edge down very 

slowly. It is taking a long time for those people to be reabsorbed 

into the labor force, but our approach is to foster a stronger recovery and try to get the economy back to full employment, and I 

think they will see gains. 

Senator MENENDEZ. So if increasing demand is part of it, is there 

anything else that you think that the Congress—maybe not the 

Fed—should do in order to achieve getting those numbers, historically high numbers down even quicker? 

Ms. YELLEN. Well, I think it is also appropriate for Congress to 

look at what some of the special needs of long-term unemployed 

are. These are spelled that are very damaging to families, put great 

burdens on families both in terms of income and even health burdens that—burdens on children and marriages, and so I think it 

certainly is something that Congress could look at along with us. 

Senator MENENDEZ. Is skill sets, helping individuals with their 

skills sets, something that we should be considering? 

Ms. YELLEN. Yes, sometimes the long-term unemployed do need 

to acquire different skills in order to be reabsorbed into the job 

market. 

Senator MENENDEZ. Now, I know Chairman Johnson asked you 

a question on income and wealth inequality, and I want to follow 

that up in terms of monetary policy decisions. Over the last 20 

years, the top 1 percent of earners has grown by more than 86 percent while incomes for the remaining 99 percent have grown by 

less than 7 percent. And even during our current recovery from the 

financial crisis, the top 1 percent have received 95 percent of the 

income gains over the last 3 years while real median income remains 9 percent below 1999 levels. 

So, of course, we all applaud those who achieve financial success, 

and we are thankful for that. But we are concerned that the vast 

majority of people in our country feel they are not sharing in the 

economic growth, and when widening income and wealth disparity 

make it harder for ordinary working families to move up the economic ladder, as studies have shown to be the case, it creates, I 

think, a greater challenge to our overall economic well-being. 

So my question is: How does the Fed account for income and 

wealth inequality in its monetary policy decisions? For example, 

the Fed is looking at broad statistics like GDP, but economic 

growth is only accruing to a small share of the population while the 

rest feel they are still in a recession. Is that something that the 

Fed would wait longer to tighten until broader-based growth takes 

place? Or is there a broader range of statistics, including measures 

of income and wealth, that the Fed should be considering? 

Ms. YELLEN. Well, I think that the trends that you have described in detail are extremely disturbing trends with very significant implications for our country, and I am personally and the Fed 

is very worried about these trends. The major thing that we can 

do is, as we try to assess the state of the labor market and appropriate policy, to look at a very broad range of statistics and metrics 

concerning the labor market, not just the unemployment rate but, 

in particular, other measures that suggest that the labor market is 

not functioning properly. The fact that we have seen very slow 

growth in wages, for example, I take as one of many pieces of inforVerDate 0ct 09 2002 14:43 Dec 19, 2014 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\DOCS\88746.TXT SHERYL

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mation suggesting that the labor market has not returned to normal and has quite a ways to go. And it is something that is appropriate for us to look at as we consider appropriate monetary policy. 

Senator MENENDEZ. So you are looking at a broad—you will look 

at a broad range of factors as you are making your decisions? 

Ms. YELLEN. Absolutely. 

Senator MENENDEZ. All right. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman, and thank you, 

Madam Chair, for being here and for your work. 

As you know, many of us, certainly including Senator Brown and 

I, are concerned about capital requirements at the biggest banks. 

Can you confirm that U.S. regulators are close to finalizing the 

supplementary leverage ratio that would impact that? And if so, 

when do you expect that final action to be taken? 

Ms. YELLEN. So this is high on our regulatory agenda for this 

coming year. We have out an initial proposal on this, and while I 

cannot give you an exact time, we will certainly be working with 

the other agencies to finalize this. 

Senator VITTER. Can you give us an exact timeframe, a general 

timeframe, when you would expect the Fed to act? 

Ms. YELLEN. In the not too distant future, I would say. 

Senator VITTER. OK. According to the Wall Street Journal, Vice 

Chairman Hoenig said that regulators are unlikely to change the 

draft proposal with regard to a 5-percent capital buffer against all 

large bank assets and a similar 6-percent buffer at their insured 

deposit-taking subsidiaries. In contrast to that, there has been concern that you might follow Europe’s lead in watering down some 

other provisions from the initial draft concerning things like a 

weaker treatment of derivatives and valuation of repurchase agreements. 

Can you give us any insight into where those things stand in 

your discussions? 

Ms. YELLEN. So, I mean, let me see if I understand what you 

mean here. When we came out with the proposal for the 5- and 6-

percent the holding companies——

Senator VITTER. Correct. Do you think there is any chance that 

will change in the final action? 

Ms. YELLEN. I mean, this is something we have been quite supportive of, and I am not envisioning——

Senator VITTER. OK. And then deeper in the weeds, if you will, 

there has been some suggestion that you could back off some other 

elements of the draft, for instance, on issues like the treatment of 

derivatives and valuation of repurchase agreements. Do you think 

that is any possibility? I would hope not. I think there are others 

on the panel who would hope not. I would encourage you to not 

weaken any elements of your draft. But is that under discussion? 

Ms. YELLEN. So I am not aware if it is under discussion. I would 

have to look into that. But my objective would be to come out with 

a strong proposal. We have increased greatly risk-based capital requirements. In light of that increase, I see leverage in risk-based 

capital is sort of belt and suspenders. It is definitely, in my view, 

appropriate to increase leverage requirements more or less in line 

with risk-based capital requirements. And——


BANKI-41578DSA with DISTILLER
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Senator VITTER. Well, I would just encourage a strong final set 

of proposed—or set of rules as strong or stronger than the draft. 

So I would just encourage that. 

Let me move to one other topic I wanted to hit, and this is actually related to this too-big-to-fail issue which capital requirements 

are also about. A lot of us have a concern about the squeeze that 

community banks are getting in the financial sector. That has been 

a historic long-term trend. It has gotten even a lot worse since the 

2007–08 crisis and since—and I would argue in some cases because 

of Dodd-Frank. So it is going from bad to worse in terms of a trend. 

If you look at Federal Reserve Board membership, there is also 

a trend, and it is away from representation of any community 

banking or community bank supervision experience. 

Let me just put a chart up. A chart is up, and this shows—it is 

a little busy. It is color-coded. This shows sort of the makeup of 

Federal Reserve Board members over time, and any community 

bank and community bank supervision experience, which is the yellow, is limited, and there has been a huge growth over time in 

terms of folks with a pure economics and academic background. 

In particular, right now there is one person with that sort of 

community bank or community bank supervision experience, and 

she is leaving. So soon there will be none. 

What would your thoughts be about a requirement to have at 

least one person in the future with that type of community bank 

or community bank supervision experience? 

Ms. YELLEN. So I have had the privilege of working with Governor Raskin and previously Governor Duke, and I can certainly 

say that they made huge contributions in the community banking 

area, and the background that they were able to bring was extremely helpful to us in crafting regulations and approaching our 

supervision responsibilities with sensitivity to the special issues 

that community banks face. I hope the Administration would consider an appointment of someone with that kind of experience, and 

I can certainly attest that it is very helpful to us in doing our work. 

Senator VITTER. Great. Thank you. Thank you, Madam Chair. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Madam Chair, welcome. 

Ms. YELLEN. Thank you. 

Senator BROWN. We are thrilled that you are here, and thank 

you for your public service up to this moment——

Ms. YELLEN. Thank you. 

Senator BROWN.——and your continued service. Thank you for—

I thank Senator Vitter for his comments and questions about capital standards and urge you—I appreciated your answer and urge 

you as quickly as possible, with OCC and FDIC, to move as quickly 

as possible. 

Thank you for your response to me about the real economy in 

your confirmation hearing. Last Friday, as the Board released transcripts of the 2008 FOMC meetings, the reading was interesting for 

those of us that find this stuff interesting. As you know, the Fed 

has a dual mission: fighting inflation, maximizing employment. But 

according to the New York Times, the September—the crucial, 


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probably most important of those, the September meeting on the 

eve of the Lehman bankruptcy, FOMC members mentioned, according to the minutes, inflation 129 times and recession 5 times. You 

speak forcefully, and have for some time, about the potential 

threats to the broader economy. This statistic implies that the institution overlooked what was happening on Main Street during 

this critical time. Now that you are Chair, convince us that we will 

not see meetings like that where the emphasis is so much more on 

inflation than full employment because—and that the focus will be 

more on ordinary Americans that bear the brunt of this economy. 

Ms. YELLEN. Well, I think as you know, I take the Fed’s dual 

mandate very seriously and believe we should be focused both on 

inflation and on unemployment. But to just try myself to put the 

2008 situation in context, if you think about what happened within 

months of that September meeting, where perhaps people did not 

realize just how serious the deterioration in both the financial markets and the economy was about to get, you know, within days or 

months of that meeting, the most incredible array of programs had 

been rolled out by the Federal Reserve to address deteriorating economic conditions, an alphabet soup of programs to support credit, 

the availability and extension of credit throughout the economy, to 

provide liquidity not only to banking organizations but to markets 

that were really finding themselves deprived of it. And by December of 2008, even with all the mentions of inflation that you noted, 

the FOMC had certainly changed its focus and in December lowered the Federal funds rate to zero. 

So I think I was one of those who was urging more, faster, we 

need to get on this, but within 3 months, a great deal had been 

done, and since then we have been trying to do it. So in some 

sense, I think the Fed has responded. 

Senator BROWN. And to your credit, you looked better in those 

minutes than some of your colleagues did, but that is the past, and 

you look to the future. 

I want to follow up on some of the too-big-to-fail questions. In 

November, you said address too big to fail is among the most important goals of the post-crisis period. You mentioned capital requirements. You mentioned SIFI capital surcharges, resolution authority, long-term debt requirements, supplemental leverage ratio. 

You also have living wills and the authority to break up institutions if they pose a grave threat to the financial system. Despite 

all that, the Nation’s foremost expert on banking regulation, your 

once fellow Governor, Dan Tarullo, said on Tuesday that we are 

‘‘not even close’’ to ending too-big-to-fail. It has been 5 years since 

the crisis. When are we going to be—you have the tools as the new 

Fed Chair. Why is it taking so long? And when is this going to be 

resolved? When can the financial—when will America’s financial 

community and the American people know that too-big-to-fail has 

actually ended? 

Ms. YELLEN. Well, I am slightly surprised that he said we are 

nowhere close, because I personally think we have made quite a lot 

of progress in putting in place regulations that will make a huge 

difference to this. Even in orderly resolution, I think it is important—we were just discussing the long-term debt requirement. 

There are thorny obstacles to resolving a failing firm having to do, 


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for example, with cross-border resolution issues, how to deal with 

the fact that laws in foreign countries could make it impossible—

you know, could precipitate the ending of contracts that would 

cause a disorderly failure of a firm. But we are working very closely with our foreign counterparts to try to resolve these issues, and 

you gave a list of all the things—or some of the things that we 

have on the drawing board that we are hoping to finalize within 

months or during this year. Beyond that, we are working on shadow banking, our stress test capital in the banking system, the highest quality capital has doubled since the crisis. And I personally 

think we are making strides, and I am continuing—I am completely committed to seeing this agenda to fruition, and I am more 

encouraged about the progress that we are making. And I am committed to completing this. 

Senator BROWN. Thank you. One last comment, Mr. Chair. I 

apologize. I think that a quick—accelerating the rules that you and 

FDIC and OCC, without diluting those rules, is a really important 

not just substantive thing to do, but really important message to 

the financial community and to the public that you really do mean 

it and you mean business on this and you really do want to end 

too-big-to-fail. So thank you. 

Ms. YELLEN. Absolutely. I agree with you. 

Chairman JOHNSON. Senator Heller. 

Senator HELLER. Thank you very much, Mr. Chairman. Dr. 

Yellen, thank you for being here. Thanks for listening, being patient, and taking our questions. 

I know that as a former Chair of the San Francisco Federal Reserve, you have a pretty good understanding of the State of Nevada 

and its current economic conditions. It has been over 5 years now 

since we have had this economic collapse, and I want to take a 

quote from the president of the St. Louis Federal Reserve who recently said that we are a lot closer to a normal economy than we 

have been in a long time. And I would stress that I can tell you 

right now Nevada is nowhere close to a normal economy. While 

maybe some parts of this country are experiencing some recovery, 

Nevada is still at 8.8 unemployment, second highest in the Nation, 

and many homeowners are still underwater. 

So I guess the question is: Do you feel that the struggle that Nevadans are currently experiencing, is this a new normal, according 

to the president of the St. Louis Federal Reserve, or a new economic reality? 

Ms. YELLEN. Well, I mean, as you know, Senator, Nevada was 

one of the hardest hit. It had one of the biggest booms in housing, 

and about——

Senator HELLER. In 20 years, yes. 

Ms. YELLEN.——the biggest bust of any market in this country, 

and I am well aware that an unusually large share of homeowners 

is underwater. You know, their prices have come up, and they are 

coming up in a way most rapidly in some of the areas like Las 

Vegas where they fell the most. But it is still going to be a long 

slog before things are back to normal in the housing market in Nevada and some of those hard-hit areas. Prices are moving back up. 

We see investors coming in and, you know, buying homes and converting them to rental housing. But credit is really hard for many 


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families to get, the ability to have home equity loans when it has 

been wiped out, and, unfortunately, Nevada is one of the States 

that has been most badly affected. 

Senator HELLER. Right. Any timeframe for a new normal or a 

normal economy? 

Ms. YELLEN. Some years, I think. 

Senator HELLER. Several years? Can you give me what your definition of ‘‘full employment’’ is? 

Ms. YELLEN. To me, it is a state of the job market in which people are able to find in a reasonable period of time jobs for which 

they are qualified, and there is no single metric, I would say, that 

would enable me to tell you when we have reached that. I would 

look at a broad range of indicators of the labor market. If I had to 

choose one metric, the unemployment rate is probably the best, and 

members of our Committee are not certain exactly what constitutes 

full employment but generally see a range of 5 to 6 percent or a 

little bit—in that area to be a state of full employment in the economy, but also looking at part-time employment, job flows, what is 

happening with wages, and a broader set of metrics I think is necessary. 

Senator HELLER. What is real unemployment today? 

Ms. YELLEN. Well, I am not sure exactly—some of the broadest 

measures of unemployment, like U6, which includes marginally attached workers and those who are part-time for economic reasons, 

namely, they cannot find full-time work, are around 13 percent. 

Senator HELLER. Around 13 percent. The Congressional Budget 

Office recently reported that President Obama’s proposal to raise 

the minimum wage would eliminate a half a million jobs. Some believe they are low-balling this figure. And I know that it is your 

job at the Fed to maximize employment. I would like to hear your 

thoughts on this soft economy and the impact of raising the minimum wage. 

Ms. YELLEN. Well, I think almost all economists think that the 

minimum wage has two main effects: one is to give higher wages 

to those who continue to have jobs and were earning the minimum 

wage; and then, second, that there would be some amount of negative impact on employment as a consequence. And there is considerable debates about just what the employment impact of it would 

be. CBO is as qualified as anyone to evaluate that literature, and 

I would not argue with their assessment. I mean, there are a range 

of studies, and they cited them, but, you know, I would not want 

to argue. They are good at this kind of evaluation and have opined 

on this. I think they also—I cannot remember the numbers involved, but indicated that a large number of individuals would see 

their incomes raised as a consequence. I think that is the tradeoff. 

Senator HELLER. Doctor, thank you. My time has run out. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. I want to welcome 

Chair Yellen. Thank you for putting yourself forward for this job, 

and congratulations on a historic confirmation. 

Ms. YELLEN. Thank you. 

Senator TESTER. We were able to visit about a number of issues, 

and we are going to visit about them again. End users are one of 


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those issues that we discussed, clarifying the end-user exemption 

from the margin that was included in Dodd-Frank, given the minimal risks that they pose to the system. 

As you know—we have visited—Chairman Bernanke, your predecessor, and Governor Tarullo have both indicated comfort with the 

intent of the exemption given the lack of systemic risk posed by 

nonfinancial entity end users, but concern about the ability of the 

Fed to achieve that intent. Since the proposed rule issued back in 

2011, there has been a number of additional developments, including most notably the finalization of the IOSCO framework in September setting forth globally agreed to margin standards. 

Can you share with us where the Fed’s thinking stands on this 

issue in light of those developments? 

Ms. YELLEN. So the Fed continues to think that end users do not 

pose systemic risks, and we will come back and will be crafting a 

rule in light of the international negotiations, and I believe that we 

will do our very best to make sure that there are no undue burdens 

imposed on end users who do not pose systemic risk. 

Senator TESTER. I thank you for that. And I know your plate is 

full and there are many issues that you are dealing with every day, 

and people are always asking you when is it going to come out, so 

I will do it. When is the timing on that front? 

Ms. YELLEN. I cannot give you a date certain, but——

Senator TESTER. Before the end of the year? 

Ms. YELLEN. I believe so. 

Senator TESTER. OK. The Chairman talked about banks and insurers’ regulatory policies. In the final rule released last week, Section 165 of Dodd-Frank, the Fed declined to apply the rule to 

nonbank financial companies at this time and indicated a desire to 

basically tailor this rule for insured SIFIs. Can you tell me more 

about what the Fed has in mind with respect to the tailoring? 

Ms. YELLEN. So we understand that the business models of insurance companies are quite different than those of banks. There 

are a number of ways, the asset liability matching separate accounts and so forth, that require tailored design of capital and liquidity requirements so they are appropriate to those business 

models. And we are trying to take the time that is necessary to understand in detail the businesses of these companies and what is 

appropriate. 

I would say again, though, that we do have some constraints in 

what we are able to do because of the Collins amendment. 

Senator TESTER. OK. So could you give me some insight into 

what extent might the tailoring with respect to this rule provide 

a road map for how the Fed might seek to tailor other 

rulemakings? 

Ms. YELLEN. I mean, I believe we in general tried to tailor our 

rulemakings; I am not sure what area in particular you have in 

mind. 

Senator TESTER. Well, with insurers particularly, but others, too, 

if you might. 

Ms. YELLEN. Well, I mean, generally we try to tailor our rules 

so that they do not pose undue burdens on companies that do not 

pose risks to the system. I would say, for example, in the case of 

community banks, while I know community banks are under many 


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burdens and it is not easy to run a community bank, for our part 

we are trying to avoid burdening community banks with the same 

level of regulatory complexity that we would impose on a systemically important institution. And the same is true in other areas 

where we have the ability to tailor rules to make them appropriate. 

Senator TESTER. OK. Thank you. And in regard to international 

insurance regulation, I just want to say how much I appreciate the 

Fed moving in the direction that you spoke of earlier, and I very 

much look forward to working with you to ensure that we do not 

force insurers into a bank-centric regulatory model. 

I also want to note how critically important that this sentiment 

and the direction that the Fed is heading in terms of tailoring regulations for insurers is fully reflected in any international negotiations regarding capital standards that you may be a part of in your 

capacity as a member of the Financial Stability Board. I just want 

to thank you for your good work. I, as many others on this Committee have already expressed, am very impressed with your work 

and look forward to working with you as we go down into the future. 

Ms. YELLEN. Thank you very much, Senator. I appreciate that. 

Chairman JOHNSON. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman, and Madam Chairman, thank you very much for being here. Welcome on your first 

visit in your new role. 

Ms. YELLEN. Thank you. 

Senator TOOMEY. You know, I have been very concerned about 

this monetary policy for some time, and I wonder if you could for 

the Committee give us a sense of how you would quantify the benefits that the economy has enjoyed, assuming you believe there are 

benefits, from this unprecedented experiment that we have been 

engaged in. A lot of very reputable economists look at traditionally 

understood transmission mechanisms to be asset price reflation 

translate into more spending, and the quantification of that gives 

some very, very modest numbers, but I wonder how you quantify 

the benefits from the quantitative easing we have had. 

Ms. YELLEN. So I do not have a quantitative estimate that I can 

present to you today. There are a range of estimates in the literature. You know, we hit the so-called zero bound in December of 

2008. We lowered the Fed’s overnight interest rate target to zero. 

Standard rules like the Taylor rule would have called for substantially more accommodation. Rules like that would have said that 

we should go to minus 400 or 500 basis points if we could, and we 

could not. And so we looked for other ways to provide the accommodation that the economy seemed to need. So asset purchases and 

forward guidance, I think they have served to push down longerterm interest rates. 

We have seen some significant recovery in housing. The backup 

in rates we have seen last spring and summer clearly seems to 

have had a negative impact on housing. And so I think it is fair 

to say that we were successful in pushing down longer-term rates 

through these policies. We did see a positive response in housing. 

I think in the area of vehicle sales, interest-sensitive spending has 

responded. 


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Senator TOOMEY. I do not mean to—I have just got such limited 

time. I have got a few—so I am aware of the changing in economic 

statistics. But the point is you do not have a quantification for how 

much of that is attributable to the quantitative easing. 

I guess the second question I have——

Ms. YELLEN. Well, there are estimates that——

Senator TOOMEY. But there is not one that is——

Ms. YELLEN.——a number of people have had. 

Senator TOOMEY. That you have endorsed or that you subscribe 

to. 

Ms. YELLEN. I have cited some, and I will——

Senator TOOMEY. OK. 

Ms. YELLEN.——provide you details on some that I have cited. 

Senator TOOMEY. On the risk side of this equation, I know you 

did mention some of the things you are looking for. Many people 

believe that last decade the unusual monetary policy, including 

maintaining negative real interest rates for an extended period of 

time, at the short end of the curve anyway, contributed significantly to the housing bubble that later burst, of course. Do you 

agree that that was a contributing factor? And, second, among the 

risks that you look at, as we hopefully move to normalcy, which 

ones concern you the most? And then I have got one last really 

short question. 

Ms. YELLEN. So I think it will take awhile for scholars to decide 

exactly what role easing monetary policy had in contributing to the 

financial crisis. I would not argue with the idea that a long period 

of low interest rates does contribute to the buildup of leverage and 

may have touched off a housing bubble. But I think on the regulatory side and the supervision side, there were also failings that 

contributed importantly to the crisis. 

We are watching very carefully for the development of any such 

excesses. We are very focused on not allowing such a thing to happen again. And while there might be a few areas where I have concerns such as deteriorating underwriting standards and leveraged 

lending, farmland prices, a few things, I do not see those excesses 

having developed at this point. 

With respect to housing prices, they have rebounded significantly, but remain not back to their peak levels by any means, and 

price/rent ratios in housing certainly remain in normal ranges. So 

I do not think we have promoted those kinds of excesses, certainly 

not at this stage. 

Senator TOOMEY. Thank you. My last question. You have 

stressed a couple of times the importance that you attach to fulfilling the congressional legislative mandate to maximize employment as well as the other portions of the mandate. My question is: 

Would the behavior of the Fed, with the actions and the policies 

of the Fed, be any different at all if the Fed had only a single mandate and that were price stability? 

Ms. YELLEN. So over these last several years, I think the answer 

is no, because at the moment——

Senator TOOMEY. Well, how about today? 

Ms. YELLEN. Well, inflation is running well below our objective, 

and the economy has fallen short of full employment. So both of 


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these—both pieces of the mandate are giving us the identical signal, namely, we need an accommodative policy. 

Now, there can be situations where there could be conflicts between the objectives, and in that sense, it would make a difference, 

it might make a difference to have a dual mandate rather than a 

single mandate. At the moment there is no such conflict. But my 

personal view is that this mandate has served us quite well, and 

most central banks, even if they have an inflation target, also have 

a mandate to take account of economic growth and stability. 

Senator TOOMEY. Although the ECB does not, right? 

Ms. YELLEN. That is true. 

Senator TOOMEY. Thank you very much, Mr. Chairman. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman. And, Chairman 

Yellen, welcome to the Committee. I was so pleased at the beginning of the hearing to hear Chairman Johnson’s introduction and 

welcome to you as the first woman to head up the Federal Reserve, 

so welcome. 

Ms. YELLEN. Thank you so much. 

Senator HAGAN. My questions—my first one is: During the January 2014 Federal Open Market Committee meeting, the Committee 

authorized the Federal Reserve Bank of New York to conduct a series of fixed-rate, overnight, reverse repurchase operations involving U.S. Government securities and securities that are guaranteed 

by agencies of the United States. The authorization runs through 

January 30th of next year, of 2015, and specifies an offering rate 

of zero to five basis points that you have the authority to waive. 

The program, which has been steadily extended and expanded, is 

being considered for use in supporting the implementation of monetary policy. So I want to ask you some questions about this. 

Can you begin by describing this program, its scale, and then 

your vision for its expanded use? And also, if you can talk about 

the dollar volume of these operations. 

Ms. YELLEN. So this fixed-rate, overnight, reverse repurchase facility is one where we are essentially borrowing from entities other 

than banking organizations. We are offering to pay a low fixed rate 

and are offering our counterparties, in return for their loans to us, 

collateral which comes in the form either of Treasury or agency 

mortgage-backed securities. And we are engaging in this program—as you mentioned, this is something technical, but we want 

to be able to firmly control short-term money market rates. When 

the time ultimately comes, which it is not—it is probably a long 

way off, but when the time comes that we do want to tighten monetary policy and raise our target for short-term interest rates, we 

would like to be able to execute that in a very smooth way so that 

we have good control over the level of short-term interest rates. 

And paying interest on reserves, that is something—that is one tool 

we will be using to boost when the time comes the level of shortterm rates, but using this new facility can also help us gain better 

control, I think, than we could through interest on reserves alone. 

So at the moment, we have been experimenting with developing 

this facility, making sure we can smoothly execute these transactions with a range of potential lenders. We have put limits both 

on the magnitude of loans that we will be willing to take on and 


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what we are paying, as you mentioned, the limit so far has been 

five basis points. We are pleased by what we are seeing about our 

ability to carry out these exercises, and it is part of prudent planning that the Fed has been doing for quite some time. 

Senator HAGAN. And what about the dollar volume? 

Ms. YELLEN. It varies from day to day, depending on how much 

interest there is in the markets. It is up to the markets to decide. 

We have typically had limits on the amount that any one firm can 

lend to us overnight. 

Senator HAGAN. It was 3 billion, now it is up to 5 billion? 

Ms. YELLEN. Yeah. I think there were some days at the end of 

the year, given the pressures that existed toward the end of the 

year, when I believe the volume rose to 30 or 40 billion, but I can 

get you some—I can get you exact details on the quantities, if you 

would like further information. 

Senator HAGAN. What are the monetary policy effects of raising 

this offer rate beyond the range set in the FOMC’s resolution? 

Ms. YELLEN. Well, these are very, very low rates. 

Senator HAGAN. Right. 

Ms. YELLEN. And so we are not raising rates by doing this. We 

are only going up to five basis points. We are paying 25 basis 

points on interest on reserves, and there is really only any takeup 

at times when there would be, you know, pressure for unusual reasons for rates to fall below that. But we are not pushing up the 

general level of short-term rates with this facility at this time. 

Senator HAGAN. My time has run out. Thank you very much. 

Chairman JOHNSON. Senator Manchin. 

Senator MANCHIN. Thank you very much. And congratulations, 

Madam Chairman, and I am so pleased that I was able to vote for 

you on final confirmation. 

Ms. YELLEN. Much appreciated. 

Senator MANCHIN. And that was a lot—and you and I had nice 

conversations concerning the quantitative easing. 

Ms. YELLEN. Yes, thank you. 

Senator MANCHIN. And I appreciate the job you are doing. 

Ms. YELLEN. Thank you. 

Senator MANCHIN. Let me just say that I sent you, along with 

five other regulators, a letter yesterday expressing my concerns 

with Bitcoin, and I fundamentally believe it is being used primarily 

for illegal activities. It allows scam artists and hackers to steal 

money from hard-working Americans, and it is a bad form of currency because it has a deflation problem. Most recently the major 

exchange for Bitcoin unexpectedly went dark, which led to $400 

million in Bitcoins evaporation overnight. I am concerned—other 

countries are ahead of the curve by already issuing regulations to 

protect their citizens, which might leave Americans truly holding 

the bag. And I would like to know your view on the Bitcoin. And 

what actions does the Fed have planned on regulating this unstable currency? 

Ms. YELLEN. Senator, I think it is important to understand that 

this is payment innovation that is taking place entirely outside the 

banking industry, and to the best of my knowledge, there is no 

intersection at all in any way between Bitcoin and banks that the 

Federal Reserve has the ability to supervise and regulate. So the 


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Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way. 

I think my understanding is that FinCEN and the Department 

of Justice have—I mean, one concern here with Bitcoin is the potential for money laundering. I think that they have indicated that 

their money-laundering statutes are adequate to meet their own 

enforcement needs. So the Fed does not have authority with respect to Bitcoin, but it certainly would be appropriate, I think, for 

Congress to ask questions about what the right legal structure 

would be for, you know, virtual currencies that involve nontraditional players that are not regulated by——

Senator MANCHIN. Let me just say—and I am so sorry, because 

our time—you know how our time runs here. 

Ms. YELLEN. Sure. 

Senator MANCHIN. If there is going to be a new American exchange for the Bitcoins, they are going to be using banks. If this 

exchange is using banks, you all will have——

Ms. YELLEN. If they use banks, but my understanding is that 

Bitcoin does not touch banks. It is not settled or cleared 

through——

Senator MANCHIN. Why did other governments—why did other 

countries believe they had to get involved? 

Ms. YELLEN. Well, you could get involved, if Congress wants to 

get involved and set up a supervisory regime. 

Senator MANCHIN. OK. 

Ms. YELLEN. I think it is not so easy to regulate Bitcoin because 

there is no central issuer or network operator to regulate. This is 

a decentralized——

Senator MANCHIN. OK. What we will do—what we will do is I 

think probably, if we can, further explore this and get some recommendations and see what our ramifications would be. We would 

really appreciate that. 

Ms. YELLEN. Sure. And we would be happy to work with you. 

Senator MANCHIN. OK. 

Ms. YELLEN. We are looking at this. 

Senator MANCHIN. We will do it. 

Ms. YELLEN. And we would be glad to talk to you about it. 

Senator MANCHIN. OK. My other question is going to be on community banks. I know we have spoken about community banks. 

But a new study just released this morning by the Mercatus Center 

showed that Dodd-Frank is having a negative impact on community banks. It just came out this morning. Most community banks 

have had to hire at least one additional compliance officer, and 

many have had to hire two. It does not seem like much, but former 

Fed Governor Elizabeth Duke, who I know you know very well, has 

said hiring one additional employee would reduce the return on assets by 23 basis points for many small banks. In other words, 13 

percent of banks with assets of less than $50 million would go from 

profitable to unprofitable, which is very concerning. In my great 

State of West Virginia, you know, community banks are our lifeblood, and it has really caused a problem here. 

So based on the new study, 13 percent of banks may be unprofitable simply because they had to hire a new compliance officer to 

deal with the burdensome Dodd-Frank. 


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What can the Feds do to protect these banks other than just asking us to do our job? 

Ms. YELLEN. So we have tried in all of our rulemakings to tailor 

regulations so that changes that are really meant to reduce systemic risk that these banks do not contribute to, that we are not 

burdening them. I mean, we have thought it appropriate that even 

community banks have appropriate capital and appropriate quality 

of capital, and so there have been some new standards that have 

applied to community banks. But what I can pledge is that we will 

in all of our rulemakings do our very best to minimize burden on 

community banks, and we will listen very carefully through our 

contacts with——

Senator MANCHIN. You can see the burden that——

Ms. YELLEN.——the community banks to understand what the 

burdens are and to minimize them where we possibly can. 

Senator MANCHIN. That report just came out, and my time is up, 

but I have more questions that I will submit for the record. But 

one thing I would like to say and hope you would consider, just yesterday the Wall Street Journal reported that China’s central bank 

engineered—and I repeat, engineered—the recent decline of its 

country’s currency, which is yet another clear example of currency 

manipulation. And we are so concerned about that, ma’am. 

So I will submit these for you. 

Ms. YELLEN. OK. 

Senator MANCHIN. Thank you. 

Chairman JOHNSON. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman, and welcome, Chair 

Yellen. It is good to see you here. 

Ms. YELLEN. Thank you. 

Senator WARREN. So back at your confirmation hearing, you said 

you thought the Fed’s supervisory and regulatory responsibilities 

were as important as the monetary policy responsibilities, and I 

agree. But I think current Fed practices do not reflect those values. 

So while the Fed’s Board of Governors votes on every important 

monetary policy decision, the Board rarely votes on issues like 

whether to settle enforcement actions. 

Last year, the Fed reached its largest settlement in its history— $9.3 billion—with mortgage servicers, affecting more than 4 million 

families. But it was the Fed’s staff that worked out that arrangement, and the Fed Board did not even vote on it. 

So 2 weeks ago, Congressman Cummings and I sent a letter to 

you recommending that the Fed change its rules so that the Board 

would have to vote before any major settlement. Do you support 

such a change? 

Ms. YELLEN. Senator, I think that you have raised very important questions about this, and I do think it is appropriate for us 

to make changes, and I fully expect that we will. 

Senator WARREN. And, in principle, support what we have asked 

for in this letter, that is, clear and concrete evidence that the 

Board is involved in supervisory and regulatory policy. 

Ms. YELLEN. It is completely appropriate for the Board to be fully 

involved in important decisions, and I——

Senator WARREN. And voting is a good way to do that. 

Ms. YELLEN. I fully intend to make sure that we are. 


BANKI-41578DSA with DISTILLER
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Senator WARREN. Thank you. Thank you. 

Now, I want to ask about another aspect of the mortgage settlement. When the deal was struck, the Fed had a big press release 

to announce a $9.3 billion settlement. But it turned out that of that 

$9.3 billion, $5.7 billion was in the form of credits for what the Fed 

described in its press release as ‘‘assistance to borrowers such as 

loan modifications and forgiveness of deficiency judgments.’’

What the press release did not say is how the credits would be 

calculated, and later it came to light that under the agreement, 

mortgage companies could get away with actually paying only a 

fraction of that $5.7 billion. Now, the fine print in this settlement 

could potentially reduce the direct relief to borrowers by literally 

billions of dollars. 

So Senator Coburn and I recently introduced a bill, Truth in Settlements Act, which would require every agency to publicly disclose 

the key details of their settlement agreements, including the method of calculating those agreements, whether it is tax deductible and 

so on. And the disclosure would be required up front at the time 

the settlement is announced. 

Now, the Fed does not have to wait for Congress to do that. You 

could voluntarily adopt that public disclosure now. Will you do 

that? 

Ms. YELLEN. So I agree with you it is important for us to disclose 

more and to disclose as much as we can, and we will look at that 

very carefully and try to provide more information. 

Senator WARREN. So, in principle, we are talking about more disclosure here. 

Ms. YELLEN. Correct. 

Senator WARREN. I think this is really important because this is 

about accountability. We want to be able to hold our financial institutions accountable, but it also means accountability for our regulatory institutions. 

Ms. YELLEN. Agreed. It is a principle I endorse. 

Senator WARREN. Good. Thank you. And I want to just follow up 

quickly, if I can, on Senator Brown’s question about too-big-to-fail. 

You said that we have made significant progress but much work 

remains to be done, and I agree. But I would note that since the 

financial crisis in 2008, the five largest financial institutions are 38 

percent larger than they were back then. 

So my question is: What evidence would you need to see before 

you could declare with confidence that too-big-to-fail has ended? 

Ms. YELLEN. So I am not positive that we can declare with confidence that too-big-to-fail has ended until it is tested in some way. 

I mean, I do believe that there are demonstrable improvements in 

terms of the amount of capital and liquidity that we have put in 

place, both through stress testing and Dodd-Frank regulations. 

There is more to come in the form of SIFI surcharges and likely 

a supplemental leverage ratio. You know, there is a whole agenda 

here of minimum debt requirements. 

I think it is important to feel that we have solved too-big-to-fail 

that we have the confidence that if an institution were to get in 

trouble, that we could actually resolve that institution. 

Senator WARREN. And I am over time, so I really will quit, Mr. 

Chairman. He is strict with us, but I just want to draw in on this 


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a little bit. So long as the markets believe that too-big-to-fail has 

not ended, and they demonstrate that by reducing capital costs for 

the banks that are perceived to be those that the Government 

would rescue, do we still have a too-big-to-fail problem? 

Ms. YELLEN. Well, the markets may think that we will rescue 

such an institution and may not end up believing us until we put 

it through resolution. So we cannot guarantee that they have an 

appropriate view of how we are going to handle such a situation, 

but I do think it is appropriate to look at estimates of subsidies and 

so forth in judging what progress we are making. I do not think 

it is definitive, but it is certainly appropriate to keep track of those 

markets metrics. And, I mean, we see that rating agencies are 

changing their methodology, diminishing the amount of their estimates of the amount of support that would be forthcoming. And I 

think as we, you know, complete our work on orderly liquidation, 

putting in place minimum debt requirements and working with foreign supervisors to feel we really could effect an orderly liquidation 

if it came to it, that that estimate of market subsidy should certainly come down. 

Senator WARREN. Well, thank you very much, and I will look forward to our continuing to track those data. 

Ms. YELLEN. Very good. 

Senator WARREN. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. Madam Chairman, 

you are on the home stretch. 

Ms. YELLEN. Thank you. 

Senator WARNER. Since my friend Senator Warren raised the 

point that I know Senator Brown has raised repeatedly, you know, 

I came at this from a different perspective, and I think this is a 

very valid debate. One of the things, as you go through the tools 

that Dodd-Frank gave you, that I think that might help make the 

case is in your, in effect, blessing of the resolution plans, as you 

are, I know, well aware, you have the ability if there is an institution that has such a behemoth that it has its tentacles everywhere, 

that through resolution could not be orderly put through resolution, 

you have your ability to use that power to disentangle or take away 

part of that institution, which might be a great signal, because I 

do think there are—I do not want to say this with Sherrod not in 

the room, but, you know, he continues to make a point that it 

would be bad for us to have to wait until we have the moment of 

crisis to fully feel whether we have fully got it right. I think showing strong evidence along the path, because I do think you have—

rather than—I have been concerned about arbitrary asset caps 

being the right test, that you have some of those tools, and using 

some of those tools in advance of a crisis might be—might make 

some of more assured. One editorial comment. 

Second editorial comment, following up on Senator Manchin’s 

comments about community banks and smaller institutions, I think 

there were a number of us who felt very strongly as we went 

through Dodd-Frank that we tried to put—by putting that $10 billion cap in terms of some of the regulations that did not fall below 

on those smaller institutions, I think it was good in theory. The 

challenge has been, as best practices get kind of built into the reguVerDate 0ct 09 2002 14:43 Dec 19, 2014 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 S:\DOCS\88746.TXT SHERYL

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lators’ mind-set, even though there may not be a legal requirement 

for these additional regulatory obligations, for these smaller institutions, I think it has become kind of best practice model. 

So I know earlier on when Sheila Bair was head of the FDIC, 

there were, in effect, jawboning efforts and others. I would encourage you and your colleagues at FDIC and other regulators, because 

this is a—you know, when compliance is the fastest growing area 

in the finance industry, that should be of some concern. In some 

institutions, it needs to be, but in some of our smaller institutions, 

it—we are, I think, affecting the market in a way, at least from 

this Senator’s standpoint, was not what we hoped to do in putting 

our smaller banks at such a disadvantage. There may be ways 

through guidance or other things that you can nudge our regulators. Part of this I think is just a mind-set that you could come 

back to. 

My time is going quickly. Let me just ask two questions totally 

unrelated so I can get them out before the Chairman gavels me 

out. 

One is—and I know you have been hit on almost every subject, 

and these two are going to be completely out of—maybe not total 

left field. One, although an area again that Senator Warren has 

raised a lot, student debt now at $1 trillion north of our credit card 

debt. I feel this may be kind of the next looming financial crisis, 

lots of different ideas on how we get about it. Part of that has been, 

as we all know—at least I believe is because of decreasing direct 

Federal and State assistance to higher education. And we have 

kind of said—made this addiction to debt amongst our students. I 

would like a comment on that. 

And then also I would like a comment on an issue that I have 

raised before, and I know you have not—you felt I perhaps overstated it, but, you know, with our financial institutions now having 

$2.4 trillion in excess reserves deposited at the Fed, and I know 

that 25-basis-point interest rate you pay you feel is not that much, 

I would simply say that, you know, when you have got other central banks like the Bank of Denmark, which is actually made negative, that has pushed their institutions to get more of that money 

lent out, which actually then might assuage Senator Shelby because you might not have to do as many asset purchases if some 

of these banks were doing more to stimulate and get that capital 

back out into the marketplace. So I really do believe the excess reserves—I hope you will comment on that as well. 

Thank you, Mr. Chairman. I got that all done at 12 seconds left. 

Ms. YELLEN. So with respect to student debt, I mean, clearly the 

outstanding volume of Government-supplied student debt has escalated. On the one hand, I think it is a good thing because there are 

these huge differentials between what more and less educated people earn, and we want people to have access to education to be able 

to improve their skills. But on the other hand, it may be that sometimes they do not quite know what they are buying and what the 

education that they may be acquiring, you know, it is important for 

them to understand what are the placement rates and job experiences of the schools that they are paying to go to. It is not obvious 

that that is always readily available. And then, again, because student debt is something that you cannot get rid of in bankruptcy, 


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individuals who take it on can really be faced with very substantial 

burdens if they encounter financial difficulties, and, you know, that 

is really of some concern. 

On the interest on reserves, I recognize the argument that you 

are making. I think that lowering that rate would have very limited—it goes in the right direction, but would have a very limited 

effect on bank lending. 

We have worried about what impact it would have on money 

markets that we operate in, and not wanting to disrupt, completely 

disrupt money market activities, it is something we have considered and could consider going forward. But there are conflicting 

things that are going on there. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. And thank 

you for your testimony before our Committee. 

I want to focus on a report that was released yesterday by Senators Carl Levin and John McCain, a bipartisan report that chronicled how Credit Suisse helped thousands of wealthy Americans 

evade U.S. taxes by stashing their money in Swiss banks. It highlighted flagrant abuses where employees of the bank came to the 

United States to seek wealthy new recruits at golf tournaments 

and bank-sponsored events, but telling U.S. officials they were simply here for tourism. They even set up special meeting rooms at 

airports and destroyed account statements that had been reviewed. 

Billions of dollars of U.S. taxes were dodged in the course of this 

with the help of the bank, and it is doing business in the United 

States under the supervision of the Federal Reserve Board. 

Now, this report, very thoroughly researched, is critical of our 

own Department of Justice for failing to prosecute or use the leverage at its disposal of a bank operating in the United States. Senator Levin rightly pointed out if the Swiss bank does not want to 

or cannot comply with U.S. law, maybe it should not do business 

in the United States. 

This case has reminders or echoes of the HSBC case we saw just 

a year ago, flagrant violations through transactions carefully structured to keep U.S. officials out of the loop, and once discovered, an 

unwillingness by the Bernanke regulators and DOJ to use their authorities to hold anyone accountable. 

As Senators Levin and McCain asked the CEO to admit yesterday, and he did admit to, not one person was fired for flagrant, 

willful violations of U.S. law from the CEO on down. It is the same 

story for HSBC and, frankly, for any other number of other banks 

that were involved in predatory transactions that hurt American 

citizens. 

So I guess my question is this: We have a situation where the 

Government refused—and this is the Government of Switzerland—

and blocked the identification of the folks who were stashing their 

money in Switzerland. We are talking about 22,000 U.S. customers 

with Swiss accounts, of which less than—or about 1 percent, the 

names were shared with the United States. If they are not going 

to share the names for these illegal activities, should the Federal 

Reserve Board be using its regulatory power to basically say if you 

cannot play by the rules, you cannot bank in the United States? 


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Ms. YELLEN. Well, you know, certainly in our work with institutions, it is incumbent on us to make sure that they comply with 

the law, and when there are violations of the law, we will refer—

have referred it and will refer it to the Department of Justice if 

there is criminal behavior that is involved. And the Department of 

Justice should be pursuing that, and I think the behavior that Senator Levin uncovered with respect to this institution is both illegal 

and highly unacceptable, and it should be pursued. 

Senator MERKLEY. So certainly a criminal action being referred 

to the Department of Justice is appropriate, but you also have powers. You have powers for how banks operate in the United States 

that are separate and independent of the Department of Justice. 

Should the Federal Reserve be using these powers in reaction to 

this type of criminal behavior? 

Ms. YELLEN. Well, so our obligation has to do with safety and 

soundness, and to the extent that these practices are illegal and we 

have an institution that is discovered not to be complying with the 

law, we have an obligation to act to make sure that it comes into 

compliance. And if we detect behavior that is criminal, it is our obligation to refer that to the Justice Department for prosecution. 

Senator MERKLEY. So one of the powers you have directly is to 

remove executives of banks when they misbehave. Is it your intention to pursue this issue in any way to explore whether that type 

of action is appropriate in this situation? 

Ms. YELLEN. I will discuss with my colleagues what is appropriate. I do not have a definitive answer for you. 

Senator MERKLEY. Thank you very much for pursuing that. I will 

certainly want to follow up with you, because when we are talking 

over $1 billion of tax evasion and of 22,000 Americans engaged, we 

cannot even get more than 1 percent of the names of folks, and yet 

it is up to our regulatory agencies to decide whether and how a 

bank participates in the U.S. economy. And if we are holding U.S. 

banks to one standard and letting foreign banks operates by a completely different standard, that is a fundamental unfairness. And 

it is also an unfairness to ordinary Americans. If ordinary Americans are engaged in tax evasion, they can serve a lot of years in 

jail. In this case, we are talking massive facilitation of tax evasion 

by a bank, now well documented by McCain and Levin, and it 

seems like there should be some accountability. And I know folks 

in my town halls ask this all the time: Why does there seem to be 

a different standard? With HSBC, their money laundering was well 

documented over a 10-year period. They facilitated terrorist networks. They facilitated drug networks. They facilitated the evasion 

of U.S. sanctions, very important to us, for example, the sanctions 

to try to prevent Iran from obtaining a nuclear weapon. And yet 

not one bank official was held accountable. 

So this is another chapter and a new opportunity to change this 

story of fundamental just and fairness, and I would just ask that 

you take a very serious look at it. 

Ms. YELLEN. I will. Thank you. 

Senator MERKLEY. Thank you. 

Chairman JOHNSON. Senator Shelby has a brief point to make. 

Senator SHELBY. Thank you. 


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Madam Chair, thank you very much for sticking around with us. 

I would pose this: Is the Fed inconsistent? Let me explain. On one 

hand, the Federal Reserve holds GSE securities on its balance 

sheet at face value. And on the other hand, it is asking under Basel’s regulation, it is asking financial institutions—that is, our 

banks—that hold the same GSE-backed securities that the Fed has 

basically to take a 15-percent haircut when risk weighting such assets for the purpose of Basel III calculations. That is my understanding of what is going on. 

How is the market to interpret this discrepancy in the approach 

by the Fed to its own portfolio as opposed to the portfolio of the 

banks that it regulates? It looks like on monetary policy you have 

got one thing, your own stuff, and then the banks, who hold about 

40 percent of GSEs, prudential regulations look at it in a different 

way? 

Ms. YELLEN. Well, Senator, you mean they have capital requirements——

Senator SHELBY. That is right. That is exactly right. Liquidity. 

Whether they call it ‘‘new liquidity coverage ratio’’ under the Basel 

III deal. 

Ms. YELLEN. Oh, OK. But why would the Fed have a liquidity—

I mean, we——

Senator SHELBY. The banks—go ahead. 

Ms. YELLEN. You mentioned that we carry these on our balance 

sheet at face value. That is an accounting convention that we use 

in Fed accounting. We also report when there are price fluctuations 

for these securities, we report that in our financial accounts, so the 

market value of these securities is——

Senator SHELBY. I understand that. But at the same time, aren’t 

you on one hand treating as a regulator your banks, say they have 

to take a 15-percent haircut on GSE holdings, and the Fed is different. I know you do different things. 

Ms. YELLEN. I mean, we want to——

Senator SHELBY. The approach should be consistent. Or should 

it not? 

Ms. YELLEN. We want to make sure in the liquidity coverage 

ratio that banks have adequate liquid assets to be able to meet potential withdrawals that they can face over a period of about a 

month. 

Senator SHELBY. Sure. 

Ms. YELLEN. And while mortgage-backed securities are assets 

that can be sold, they are somewhat less liquid than Treasurys, 

and the most liquid in cash. And so in computing this, we put in 

place a 15-percent haircut. But to say that the same requirement 

should apply to the Fed, I am confused about that because we do 

not have the possibility of having runs on the Federal Reserve——

Senator SHELBY. Ma’am, I was raising the inconsistency in the 

approach. Is there an in consistent approach? Or do you say one 

is good for the banks and the Fed does not need that? Is that what 

you are saying? 

Ms. YELLEN. I believe that the Fed does not need that, and we 

are not in this area of liquidity in the need to maintain liquidity 

that the Federal Reserve is really quite different than an ordinary 


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commercial bank. We are not subject to liquidity runs, and to me 

it is different. 

Senator SHELBY. But, the same, you are treating securities differently—I mean you are treating the GSE-backed securities in a 

different way. You are basically weighting, weighing the haircut of 

15 percent discount in a way of the value of those securities. Is 

that correct? 

Ms. YELLEN. Well, because we think——

Senator SHELBY. Under Basel III. 

Ms. YELLEN. We think they are somewhat less liquid than, say, 

Treasurys, and because they are somewhat less liquid, the markets 

in which they trade, there needs to be some haircut that they are 

not quite as good as cash or Treasurys in terms of meeting potential runs on a bank or liquidity drains. And to me that is an appropriate recognition of the difference in liquidity between mortgagebacked securities and Treasurys or cash. 

Senator SHELBY. Fifteen percent is a pretty good number, 

though, isn’t it? 

Ms. YELLEN. It is something. 

Senator SHELBY. Does it seem like a high number? Is that an arbitrary number that has been brought forth to risk weight something at a discount of 15 percent? 

Ms. YELLEN. There are judgments that have been made throughout about what the appropriate rates of discount——

Senator SHELBY. Well, a lot of the banks—a lot of the smaller 

banks are concerned about this because they have bought a lot of 

GSE securities, and if they are going to be risk weighted adversely 

in their portfolio, it could cause them a problem, as you well know. 

Ms. YELLEN. So we put this proposal out for comment, and, you 

know, we will certainly look at all the comments that——

Senator SHELBY. Well, look at it closely, is all I——

Ms. YELLEN. We will look at all the comments that come in and 

try to take that into account as we craft a final proposal. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Chair Yellen, I want to thank you for your 

excellent testimony. 

This hearing is adjourned. 

[Whereupon, at 12:17 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow]: 


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PREPARED STATEMENT OF JANET L. YELLEN

CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEBRUARY 27, 2014

Chairman Johnson, Senator Crapo 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. 

Current Economic Situation and Outlook 

The economic recovery gained greater traction in the second half of last year. Real 

gross domestic product (GDP) is currently estimated to have risen at an average annual rate of more than 3 1⁄2 percent in the third and fourth quarters, up from a 1 3⁄4

percent pace in the first half. The pickup in economic activity has fueled further 

progress in the labor market. About 1 1⁄4 million jobs have been added to payrolls 

since the previous Monetary Policy Report last July, and 3 1⁄4 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 1⁄2 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 (FOMC) 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 part time 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 last 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. 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. 

Monetary Policy 

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. 


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1See Board of Governors of the Federal Reserve System (2013), ‘‘Federal Reserve Board Proposes Rule to Strengthen Liquidity Positions of Large Financial Institutions,’’ press release, October 24, www.federalreserve.gov/newsevents/press/bcreg/20131024a.htm. 2See Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and 

Securities and Exchange Commission (2013), ‘‘Agencies Issue Final Rules Implementing the 

Volcker Rule,’’ joint press release, December 10, www.federalreserve.gov/newsevents/press/

bcreg/20131210a.htm.

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 a context of price stability. In mid2013, the Committee indicated that if progress toward 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 

progress 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 

toward its longer-run objective, the Committee will likely reduce the pace of asset 

purchases in further measured steps at future meetings. 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 1⁄2 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 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 1⁄2

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. 

Strengthening the Financial System 

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.1 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.2

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 a risk-based capital surcharge for those banks as well as for a longterm debt requirement to help ensure that these organizations can be resolved. In 

addition, we are working to advance proposals on margins for noncleared derivatives, consistent with a new global framework, and are evaluating possible measures 

to address financial stability risks associated with short-term wholesale funding. We 


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will continue to monitor for emerging risks, including watching carefully to see if 

the 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-run 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. 


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RESPONSE TO WRITTEN QUESTION OF SENATOR HAGAN 

FROM JANET L. YELLEN 

Q.1. One concern I’ve heard is the uncertainty surrounding potential designation as a systemically important financial institutions—

in particular, how the Federal Reserve will regulate nonbank firms 

that are designated. 

Will the Federal Reserve establish a framework for measuring 

the impact of designation on individual companies, their customers 

and the financial markets before moving forward with further designation for nonbank financial firms? Will there be opportunities 

for firms to adjust their business model so they can remedy systemic concerns?

A.1. Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or the Act) directs the Board 

of Governors of the Federal Reserve System (Board) to establish 

prudential standards for bank holding companies with total consolidated assets of $50 billion or more and for nonbank financial companies that the Financial Stability Oversight Council (Council) has 

determined will be supervised by the Board (nonbank financial 

companies supervised by the Board) in order to prevent or mitigate 

risks to U.S. financial stability that could arise from the material 

financial distress or failure, or ongoing activities of, large, interconnected financial institutions. 

The Council considers the potential impact of its actions on financial markets, firms, and financial stability. For example, in considering whether to subject a nonbank financial company to Federal Reserve supervision under section 113 of the Dodd-Frank Act, 

the Council is required to consider 10 factors specifically determined by Congress and set forth in the statute related to the company’s vulnerability to financial distress and its potential to transmit financial distress to other firms and markets. In this process, 

the Council engages in company-specific evaluations and discussions with the firm. The Council also annually reviews whether 

designated nonbank financial companies should continue to be subject to enhanced prudential standards. As part of that annual review, the Council considers any changes in the business activities 

of designated firms that would reduce the potential impact of material financial distress or failure of the firm on U.S. financial stability. 

The Board recognizes that the companies designated by the 

Council may have a range of businesses, structures, and activities, 

and that the types of risks to financial stability posed by nonbank 

financial companies will likely vary. Following designation of a 

nonbank financial company for supervision by the Board, the Board 

intends to assess the business model, capital structure, and risk 

profile of the designated company to determine how the proposed 

enhanced prudential standards should apply, and if appropriate, 


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would tailor application of the standards by order or regulation to 

that nonbank financial company or to a category of nonbank financial companies. In applying the standards to a nonbank financial 

company, the Board will take into account differences among 

nonbank financial companies supervised by the Board and bank 

holding companies with total consolidated assets of $50 billion or 

more. For those nonbank financial companies that are similar in 

activities and risk profile to bank holding companies, the Board expects to apply enhanced prudential standards that are similar to 

those that apply to bank holding companies. For those that differ 

from bank holding companies in their activities, balance sheet 

structure, risk profile, and functional regulation, the Board expects 

to apply more tailored standards. The Board’s ability to tailor capital requirements for companies designated by the Council is, however, limited substantially by section 171 of the Dodd-Frank Act, 

which requires the Board to subject such companies to capital requirements that are at least as stringent as those applicable to 

banks. The Board will ensure that nonbank financial companies receive notice and opportunity to comment prior to determination of 

their enhanced prudential standards. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JANET L. YELLEN 

Q.1. Chairwoman Yellen, since the financial crisis, the implantation of Dodd-Frank, and industry consolidation, community banks 

are still facing many challenges that impend the continued success 

of this relationship-based lending model. Because independent research is so crucial in helping lawmakers and regulators understand and effectively shape laws and regulation affecting community banks, the fact that the Federal Reserve and Conference of 

State Bank Supervisors hosted a national community banking research and policy conference last year is laudable. I am glad that 

a similar event is planned for this year, and hope that, under your 

leadership the Federal Reserve will continue this partnership. 

Do you support this effort encouraging community banking research, and do you believe that continued research in this area is 

beneficial and can better inform public policy?

A.1. I strongly support continued research to assist policymakers in 

understanding how successful community banks can contribute to 

the health of the U.S. economy. Better research on community 

banking issues should allow policymakers to make more effective 

supervisory and regulatory decisions that are appropriate to the 

unique characteristics of community banks. The inaugural research 

conference on Community Banking in the 21st Century that the 

Federal Reserve and Conference of State Bank Supervisors sponsored at the Federal Reserve Bank of St. Louis in October 2013 

provided a unique opportunity for community bankers, academics, 

policymakers, and bank supervisors to discuss research findings 

and practical experience. I am pleased that planning is well under 

way for a similar conference in 2014, and my hope is that events 

such as these will serve as a catalyst for additional high-quality research that can inform effective policymaking with regard to community banks.


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Q.2. What other ways can the Federal Reserve support and encourage independent research on the role community banks play in our 

economy?

A.2. Our newly instituted annual community banking research conference, which we co-sponsor with the Conference of State Bank 

Supervisors, is the primary way that the Federal Reserve can encourage independent research on the role community banks play in 

our economy. These conferences provide a unique opportunity for 

academics who are interested in community banking to present 

their research to a diverse audience, including not only other researchers, but also community bankers and bank regulators. The 

conferences facilitate conversations among these three groups that 

might not otherwise take place. These conversations can lead to future collaborations that benefit all parties involved. In addition, the 

annual conferences provide a known venue for presenting community banking research, and send a strong signal to academics that 

such research is highly valued by bankers and bank regulators. Beyond the conferences, the Federal Reserve can encourage research 

on community banking topics by providing opportunities for community banking researchers to present their work in seminars held 

at the Board of Governors or at Reserve Banks and to interact with 

Federal Reserve System staff. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM JANET L. YELLEN 

Q.1. There have been a lot of unintended consequences coming out 

of the Volcker Rule. I am concerned about one that hasn’t gotten 

a lot of attention but could force institutions to take losses, have 

a harmful effect on the economy, and drive more assets to the 

shadow banking system. Congress included a special extended 

transition period in the Volcker Rule that was intended to allow 

preexisting ‘‘illiquid’’ private equity investments to run off naturally, without the need for forced fire-sales. I am concerned that 

the Federal Reserve may have defined an illiquid fund in such a 

way as to make it virtually impossible for organizations to take advantage of this transition period. I understand the Federal Reserve 

did not ‘‘re-finalize’’ its conformance period rule (which includes the 

illiquid fund definition) when the rest of the Volcker regulations 

were finalized. What is the Federal Reserve doing to take comments on this issue into account and to prevent institutions from 

being forced to sell these investments at a loss? Are you worried 

about these assets moving into the unregulated shadow banking 

system?

A.1. Congress determined that section 13 of the Bank Holding 

Company Act (‘‘BHC Act’’) was necessary to promote and enhance 

the safety and soundness of banking entities and the financial stability of the United States by prohibiting banking entities from engaging in short-term proprietary trading of financial instruments 

and making certain types of investments in private equity funds 

and hedge funds, subject to certain exemptions. 

By statute, the requirements of section 13 are subject to a conformance period that ended on July 21, 2014, absent action to extend the period by the Federal Reserve. The conformance period for 


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1See Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private 

Equity Fund or Hedge Fund Activities, 76 FR 8265 (Feb. 14, 2011). 2See Board Order Approving Extension of the Conformance Period (Dec. 10, 2013). On April 

7, 2014, the Federal Reserve issued a statement that it intends to grant two additional 1-year 

extensions of the conformance period under section 13 of the BHC Act that would allow banking 

entities additional time to conform to the statute ownership interests in and sponsorship of 

collateralized loan obligations (‘‘CLOs’’) in place as of December 31, 2013, that do not qualify 

for the exclusion in the final rule implementing section 13 of the BHC Act for loan 

securitizations. This would permit banking entities to retain ownership interests in and sponsorship of CLOs held as of that date until July 21, 2017. 

section 13 may be extended for up to three additional 1-year periods if, in the judgment of the Federal Reserve, an extension is consistent with the purposes of section 13 and would not be detrimental to the public interest. Additionally, the Federal Reserve 

may, upon application of a banking entity, extend for up to an additional 5 years the period during which a banking entity, to the 

extent necessary to fulfill a contractual obligation that was in effect 

on May 1, 2010, may take or retain its ownership interest in, or 

otherwise provide additional capital to, an illiquid fund. 

On February 9, 2011, the Federal Reserve issued its final conformance rule as required under section 13(c)(6) of the BHC Act,1

and stated that the Federal Reserve expected to review the final 

conformance rule after completion of the final rule implementing 

section 13 of the BHC Act, to determine whether modifications or 

adjustments to the rule are appropriate in light of the final rules 

adopted under that section. In October 2011, as part of proposing 

implementing rules for 13, the Federal Reserve requested comment 

on whether any of the conformance provisions in that rule should 

be revised. 

Consistent with the statute and in order to give markets and 

firms an opportunity to adjust to the prohibitions and requirements 

of any implementing rules, the Federal Reserve in December 2013, 

exercised its statutory authority to extend the general conformance 

period under section 13 of the BHC Act until July 21, 2015, on the 

same date that the final implementing rules for section 13 were 

issued.2

Staff of the Federal Reserve has met with representatives of interested parties and is currently reviewing comments submitted on 

the conformance rule and definition of illiquid fund. These commenters have requested that the Federal Reserve broaden the definition of illiquid assets in the conformance rule and the meaning 

of what is ‘‘necessary to fulfill a contractual obligation’’ of the banking entity. The Federal Reserve is considering these comments in 

light of the final rule implementing section 13 to determine whether to revisit the conformance rule. To the extent that the Federal 

Reserve’s conformance rule has unintended impacts, the Federal 

Reserve would evaluate and address those impacts within the parameters of the statute if possible, and otherwise to inform Congress.

Q.2.a. You may already be in receipt of a bi-partisan letter to 

which I am a signatory that raises concerns about new global capital standards being contemplated by the Financial Stability Board 

(FSB) for ‘‘internationally active insurance groups.’’

In the United States, unlike in Europe, policy holders are protected by State guaranty funds. Furthermore, U.S. insurance companies already comply with the capital standards requirements in 


BANKI-41578DSA with DISTILLER
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European countries. The FSB’s effort may be a solution in search 

of a problem.

A.2.a. In its July 2013 press release announcing the policy measures that would apply to the designated global systemically important insurers (GSIIs), the International Association of Insurance 

Supervisors (IAIS) stated that it considered a sound capital and supervisory framework for the global insurance sector more broadly 

to be essential for supporting financial stability, and that it 

planned to develop a comprehensive, group-wide supervisory and 

regulatory framework for internationally active insurance groups 

(IAIGs), including an international capital standard (ICS). The 

business of insurance has become increasingly global in the past 

few decades. The decision of the IAIS to develop an ICS for IAIGs 

reflects that trend, and has a parallel in the development of capital 

standards for internationally active banks by the Basel Committee 

on Banking Supervision (BCBS). The BCBS has been promulgating 

capital requirements for internationally active banks since the 

1980s. The U.S. Federal banking agencies, which are members of 

the BCBS, have long contributed to and supported the work to develop common baseline prudential standards for global banks. 

The Financial Stability Board (FSB) endorsed the proposed 

measures announced by the IAIS. That endorsement was consistent with the mission of the FSB to coordinate at the international level the work of national financial authorities and international standard setting bodies, including the IAIS, and to develop 

and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial 

stability. State insurance supervisors, the National Association of 

Insurance Commissioners, the Federal Insurance Office, and more 

recently, the Federal Reserve, are members of the IAIS.

Q.2.b. I am not aware of any legal authority for the FSB to pursue 

the creation and adoption of capital standards for ‘‘internationally 

active insurance groups’’ in the United States. Will you commit to 

resisting efforts by others on the FSB to establish and impose new 

global capital standards that are at odds with the current regulatory and structural framework of U.S. insurers or would put U.S. 

insurers at a competitive disadvantage?

A.2.b. The Federal Reserve is fully committed to transparency and 

due process in the development and promulgation of regulatory 

standards. We support the practice of the IAIS to release for public 

comment its proposals for the basic capital requirements for globally systemically important insurers and expect that the IAIS will 

follow a similar process in the development of the ICS. It is important to note that neither the FSB nor the IAIS has the ability to 

implement requirements in any jurisdiction. Implementation in the 

United States would have to be consistent with U.S. law and comply with the administrative rulemaking process, including an opportunity for public comment. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN 

FROM JANET L. YELLEN 

Q.1.a. During your testimony, you indicated the FOMC will try to 

get a ‘‘firmer handle’’ on what is causing the recent soft economic 

reports and that the FOMC is open to reconsidering adjusting the 

pace of asset purchases accordingly. 

In your estimate, how much lag time exists between Fed monetary policy adjustments and their impact on the real economy?

A.1.a. Estimates from standard econometric models of the U.S. 

economy suggest that monetary policy adjustments begin to affect 

growth of output and employment after a lag of about one quarter, 

and that the effects build for a few quarters thereafter. Standard 

estimates are that inflation responds with a longer lag. These estimates are derived from studies of the economy’s responses to adjustments in the Federal Open Market Committee’s (‘‘Committee’’) 

target for the Federal funds rate in normal times. We have less evidence with which to estimate the lags in the effects of changes in 

asset purchases on the economy, but the lags seem unlikely to be 

shorter.

Q.1.b. Do you believe that the Fed’s December announcement to 

begin the slow taper of asset purchases could have impacted employment data in January?

A.1.b. No. The reported sluggishness in job growth early this year 

appears to reflect unusually severe weather, at least in part. After 

assessing a wide range of indicators of economic activity and labor 

market conditions, the Committee judged that there is sufficient 

underlying strength in the U.S. economy to support a pickup in job 

growth and ongoing improvement in labor market conditions. Moreover, even with the reduction in the pace of its asset purchases, the 

Federal Reserve continues to add to its securities holdings, thereby 

putting downward pressure on longer-term interest rates and providing stimulus to the economy.

Q.1.c. If the FOMC decided to discontinue or even reverse the 

taper based on weak economic data, how long would you expect it 

to take for the decision to impact employment and economic 

growth?

A.1.c. I would expect such a decision to affect interest rates quickly; indeed interest rates likely would begin to decline in response 

to surprisingly weak economic data before the Committee even released its decision. Employment and output growth, in turn, likely 

would begin to respond to lower interest rates in a quarter or two.

Q.2. In your testimony, you mention that the reduction of largescale asset purchases would depend on inflation and employment 

data along with the likely efficacy and costs of such purchases. 

Can you explain what the Board’s current view is on the efficacy 

and costs of additional LSAPs?

A.2. Based on research conducted by economists at the Federal Reserve and by many outside experts, our judgment is that LSAPs 

have put downward pressure on longer-term interest rates and 

helped to make financial conditions more accommodative. These 

changes in financial conditions, in turn, have had a meaningful effect in supporting the economic recovery and have helped keep inVerDate 0ct 09 2002 14:43 Dec 19, 2014 Jkt 000000 PO 00000 Frm 00050 Fmt 6601 Sfmt 6601 S:\DOCS\88746.TXT SHERYL

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flation nearer the Committee’s 2 percent goal. As we have noted 

many times, LSAPs and monetary policy generally are not a panacea for all of the Nation’s economic difficulties. But our judgment 

is that our policy actions have helped to foster progress toward our 

statutory mandate of maximum employment and price stability. 

The Committee has discussed the potential costs of LSAPs at 

length. Among the possible costs of LSAPs, policymakers have 

pointed to potential risks to financial stability; possible complications for the Federal Reserve’s strategy for removing policy accommodation at the appropriate time, which could contribute to inflation pressures; and the possible implications of LSAPs for Federal 

Reserve net income in some scenarios. To date, all of these risks 

appear manageable. We are monitoring financial markets very 

carefully, but there is little evidence at this point of excessive risktaking or broad-based reliance on leverage. We are confident that 

we have the tools necessary to remove policy accommodation at the 

appropriate time and inflation has been running below the Committee’s 2 percent goal for some time and is expected to move up 

only gradually over time. Finally, we have examined the likely 

path of Federal Reserve net income in many alternative scenarios. 

In all but the most extreme cases, Federal Reserve income is expected to remain positive in coming years. Moreover, cumulative 

Federal Reserve net income over the entire period from 2008–2025 

is virtually certain to be very large, and much larger than would 

have been the case in the absence of asset purchases. That said, 

the Federal Reserve takes all these possible risks of LSAPs very seriously and, as our statements suggest, an increase in our assessment of the likely costs of asset purchases would certainly be taken 

into account in judging the appropriate pace of such purchases.

Q.3.a. You have indicated your commitment to using forward guidance to inform market observers about Fed intentions in order to 

maintain a stimulative monetary footing. You and your predecessor 

have also repeatedly stated that any adjustments to the pace of 

asset purchases would be wholly dependent on the data. 

Do you believe there is a contradiction between the Fed adamantly stating that any changes in quantitative easing will be data 

dependent while simultaneously stating that in the future the Fed 

will keep rates lower for longer than economic conditions would 

otherwise necessitate?

A.3.a. Both the Committee’s forward guidance and its asset purchases have been designed to provide stimulus while being data dependent. The Committee has provided three types of forward guidance: qualitative guidance (extended period), date-based guidance, 

and guidance using economic thresholds. All have been designed to 

provide stimulus by conveying the Committee’s expectation that 

the Federal funds rate target would be lower for longer than may 

otherwise have been expected without the guidance. However, the 

guidance has consistently been expressed as the Committee’s current assessment of the policy it expects to be appropriate in the future given future economic conditions. Indeed the threshold-based 

guidance was explicitly data-dependent. Thus, the Committee always reserved the option to raise interest rates sooner or keep 

them unchanged for longer than indicated in the guidance. Asset 


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purchases have been designed to provide economic stimulus by putting downward pressure on longer-term interest rates, and have 

also been explicitly data dependent, especially the current flowbased asset purchase program, which the Committee has indicated 

will continue until there has been a substantial improvement in 

the outlook for the market, conditional on an ongoing review of 

their efficacy and costs.

Q.3.b. Does the Fed run the risk of losing credibility if you do not 

stick to your forward guidance in the coming years? Or, does the 

Fed run the danger of exercising monetary policy that is no longer 

appropriate for the economic conditions in the future in order to 

maintain the commitments a previous Board has already made?

A.3.b. The Committee’s forward guidance is intended to provide the 

public with a better understanding of how it will conduct monetary 

policy in the future, but the guidance has consistently been expressed in terms of what policy would be appropriate in the future 

given the Committee’s current outlook for future economic conditions. Indeed, the threshold-based forward guidance was explicitly 

data-contingent. If the Committee were to conduct policy in the future in a manner that was inconsistent with its past statements, 

that could harm its credibility. But those past statements do not 

constrain the Committee to conduct policy in the future in a fixed 

manner, regardless of the future prevailing economic conditions.


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