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S. HRG. 114–397 

FEDERAL RESERVE’S SECOND MONETARY POLICY 

REPORT FOR 2016 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

ON 

OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 

JUNE 21, 2016 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

DANA WADE, Deputy Staff Director 

JELENA MCWILLIAMS, Chief Counsel 

THOMAS HOGAN, Chief Economist 

SHELBY BEGANY, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, JUNE 21, 2016 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESS 

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System ...... 4 

Prepared statement .......................................................................................... 41 

Responses to written questions of: 

Chairman Shelby ....................................................................................... 44 

Senator Crapo ............................................................................................ 47 

Senator Toomey ......................................................................................... 49 

Senator Kirk .............................................................................................. 51 

Senator Heller ........................................................................................... 53 

Senator Sasse ............................................................................................ 57 

Senator Rounds ......................................................................................... 63 

Senator Menendez ..................................................................................... 64 

Senator Merkley ........................................................................................ 71 

Senator Heitkamp ..................................................................................... 74 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to the Congress dated June 21, 2016 ............................ 79 

(III)

(1) 

FEDERAL RESERVE’S SECOND MONETARY 

POLICY REPORT FOR 2016 

TUESDAY, JUNE 21, 2016 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Richard C. Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The Committee will come to order. 

Today we will receive testimony from Federal Reserve Chair 

Janet Yellen regarding the Fed’s semiannual report on monetary 

policy. And while Humphrey-Hawkins testimony is a key part of 

Congress’ oversight of our Nation’s central bank, it is not sufficient 

to provide Congress and the American public with a full picture of 

Fed policymaking. 

I have often remarked during these hearings about the importance of striking the right balance between transparency and independence. One of the Fed’s stated reasons for maintaining its independence is to avoid politicizing its decisions. 

I agree that politics have no place at the Federal Reserve. And 

while the line between politics and policy can be quite fine, it 

should, nonetheless, be clear and unambiguous. 

The Fed should act, I believe, in a manner consistent with its 

statutory mandate in the interest of the stability of the U.S. economy whether or not such policies align with the goals of Congress 

or the Administration. 

Our central bank is independent and should remain so. The desire to preserve the Fed’s independence should not preclude consideration of additional measures to increase the transparency of the 

Board’s actions. In fact, some have argued that better disclosure of 

monetary policy strategy could actually bolster independence. 

Earlier this year, a prominent group of economists, including 

three Nobel Prize winners, agreed in a statement that, and I will 

quote, ‘‘ . . . publicly reporting a strategy helps prevent policymakers from bending under pressure and sacrificing independence.’’ 

The Fed continues to resist calls by Congress to disclose monetary rules, even though it claims to use such rules regularly. In its 

public communications, the Fed has veered further away from 

data-driven analysis toward the exercise of even more discretion. 

2 

For example, rather than adhering precisely to its stated goals 

for inflation and employment, the Federal Open Market Committee 

appears to base certain decisions on factors such as ‘‘financial and 

international developments’’ that cannot be derived from quantitative analysis. 

Similarly, the Fed’s regulatory conduct has become increasingly 

opaque and complicated. This is demonstrated by the inherent complexity and overlap in its capital and liquidity rules, stress testing, 

and resolution and recovery planning. 

Two weeks ago, a panel of experts testified before this Committee 

that complex regulations might actually increase rather than decrease risk in the banking system. They also criticized the lack of 

analysis and transparency in the rulemaking process. This is especially true of Basel rules established by an international committee 

and imposed by domestic regulators on our institutions, without 

adequate tailoring. 

The Fed did not even do its own quantitative study for Basel III, 

as it did, Madam Chair, for Basel I and II. It instead relied on the 

Basel Committee’s analysis, which included data from only 13— 

only 13—U.S. banks out of the 249 banks that were studied. 

Such an approach is concerning. The Fed should perform, I believe, rigorous analysis, not only for each rule but also on the cumulative impact of capital and liquidity regulations. If our banking 

regulators are unable or unwilling to conduct such analysis, then 

we should consider mandating it. 

Even the European Commission analyzes these factors in its regulatory framework. In a recent Call for Evidence, it solicited feedback from the public to ‘‘ . . . evaluate the interaction between financial regulations and assess their cumulative impact.’’ We should 

expect no less from our own regulators. 

Chair Yellen, I look forward to your testimony today and your 

thoughts on these important issues. I think it is a very important 

hearing. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. And, Madam Chair, 

welcome back to the Committee. We are so glad you are here. 

Since your last appearance, the economy has made only modest 

gains. Inflation remains low. Job creation seems to have slowed. 

The economies of our trading partners struggle. Uncertainty, most 

notably with the possibility of Britain’s exit from the European, remains high. 

In the face of these headwinds, you would think that politicians 

here at home would do everything we could to promote our economy. Instead, many of them seem intent on doing just the opposite. 

My colleagues on the other side of the aisle are failing to invest 

in infrastructure, in public works, in research and development, in 

education, in training—the very building blocks of our economic 

success. If that were not enough, they are trying their level best 

to undermine the safeguards that dampened the economic crisis 

and were erected to prevent the next one. They would like to repeal 

Dodd-Frank and return our country to the casino capitalism that 

caused so much ruin for families and communities across our counVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
3 

try. And they are trying to politicize and undermine the Federal 

Reserve, despite the key actions that it has taken to help the recovery. 

Congress rated its reserves and reduced dividend payments in 

order to pay for a transportation bill. Many of my colleagues are 

trying to insert Congress into monetary policy decisions. This Committee has yet to even hold a hearing on the two nominees to the 

Board of Governors of the Federal Reserve, and bad legislative 

ideas continue to multiply. 

The presumptive nominee of the Republican Party is a factory of 

bad ideas. Moody’s Analytics recently released a report that states 

that, if adopted, his economic proposals would leave our economy 

‘‘significantly weaker.’’ He suggests that he would replace the current Fed Chair based on imagined partisan political considerations. 

That is a bad idea. You might argue that someone is failing to pursue the right course on monetary and regulatory policy, but partisan labels should never be part of that discourse. 

The presumptive nominee has suggested he would simply renegotiate or renege on our debt, comfortable in the belief that the 

United States can never default ‘‘because you print the money.’’ In 

his opinion, he understands debt ‘‘better than probably anybody.’’ 

His words. He also thinks, along with the runner-up for the Republican nomination, that this country should return to the gold standard. 

When Ron Paul was promoting this idea a few years ago, the 

Wall Street Journal reported on a poll of a panel of economists and 

whether a return to the gold standard would improve price stability and unemployment. The response was split between those 

who disagreed and those who strongly disagreed. Not one person 

thought it would help. So we do not know if it is just a bad idea 

or a really, really bad idea. 

But as one University of Chicago professor put it, ‘‘Love of the 

gold standard implies macroeconomic illiteracy.’’ If your own very 

good brain is your top consultant, I suppose the unanimous opinion 

of a diverse group of economists does not count for much. 

But for those of us in the evidence-based world, the prospect of 

this nominee trading imagined for real authority gives added significance to what we do in the Banking Committee and what we 

do in Congress. That is true in general. It is particularly true with 

maintaining the independence of the Federal Reserve and the other 

regulators of the financial services industry. 

Madam Chair, I think you have shown your commitment to an 

independent, data-driven Federal Reserve. I commend you for that. 

We are grateful for that. I hope we can work together to maintain 

it. 

Thank you. 

Chairman SHELBY. Madam Chair, your written testimony in its 

entirety will be made part of the hearing record. We welcome you 

here today again. You are no stranger to this Committee, and you 

proceed as you wish. 

4 

STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. YELLEN. Thank you. Chairman Shelby, Ranking Member 

Brown, and other Members of the Committee, I am pleased to 

present the Federal Reserve’s semiannual Monetary Policy Report 

to the Congress. In my remarks today, I will briefly discuss the 

current economic situation and outlook before turning to monetary 

policy. 

Since my last appearance before this Committee in February, the 

economy has made further progress toward the Federal Reserve’s 

objective of maximum employment. And while inflation has continued to run below our 2-percent objective, the Federal Open Market 

Committee expects inflation to rise to that level over the medium 

term. However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious 

approach to adjusting monetary policy remains appropriate. 

In the labor market, the cumulative increase in jobs since its 

trough in early 2010 has now topped 14 million, while the unemployment rate has fallen more than 5 percentage points from its 

peak. In addition, as we detail in the Monetary Policy Report, jobless rates have declined for all major demographic groups, including for African Americans and Hispanics. Despite these declines, 

however, it is troubling that unemployment rates for these minority groups remain higher than for the Nation overall, and that the 

annual income of the median African American household is still 

well below the median income of other U.S. households. 

During the first quarter of this year, job gains averaged 200,000 

per month, just a bit slower than last year’s pace. And while the 

unemployment rate held steady at 5 percent over this period, the 

labor force participation rate moved up noticeably. In April and 

May, however, the average pace of job gains slowed to only 80,000 

per month or about 100,000 per month after adjustment for the effects of a strike. The unemployment rate fell to 4.7 percent in May, 

but that decline mainly occurred because fewer people reported 

that they were actively seeking work. A broader measure of labor 

market slack that includes workers marginally attached to the 

workforce and those working part-time who would prefer full-time 

work was unchanged in May and remains above its level prior to 

the recession. 

Of course, it is important not to overreact to one or two reports, 

and several other timely indicators of labor market conditions still 

look favorable. One notable development is that there are some 

tentative signs that wage growth may finally be picking up. That 

said, we will be watching the job market carefully to see whether 

the recent slowing in employment growth is transitory, as we believe it is. 

Economic growth has been uneven over recent quarters. U.S. inflation-adjusted gross domestic product is currently estimated to 

have increased at an annual rate of only 3⁄4 percent in the first 

quarter of this year. Subdued foreign growth and the appreciation 

of the dollar weighed on exports, while the energy sector was hard 

hit by the steep drop in oil prices since mid-2014; in addition, business investment outside of the energy sector was surprisingly 

weak. However, the available indicators point to a noticeable stepVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
5 

up in GDP growth in the second quarter. In particular, consumer 

spending has picked up smartly in recent months, supported by 

solid growth in real disposable income and the ongoing effects of 

the increases in household wealth. And housing has continued to 

recover gradually, aided by income gains and the very low level of 

mortgage rates. 

The recent pickup in household spending, together with underlying conditions that are favorable for growth, lead me to be optimistic that we will see further improvements in the labor market 

and the economy more broadly over the next few years. Monetary 

policy remains accommodative; low oil prices and ongoing job gains 

should continue to support the growth of incomes and, therefore, 

consumer spending; fiscal policy is now a small positive for growth; 

and global economic growth should pick up over time, supported by 

accommodative monetary policies abroad. As a result, the FOMC 

expects that with gradual increases in the Federal funds rate, economic activity will continue to expand at a moderate pace and 

labor market indicators will strengthen further. 

Turning to inflation, overall consumer prices, as measured by the 

price index for personal consumption expenditures, increased just 

1 percent over the 12 months ending in April, up noticeably from 

its pace through much of last year but still well short of the Committee’s 2-percent objective. Much of this shortfall continues to reflect earlier declines in energy prices and lower prices for imports. 

Core inflation, which excludes energy and food prices, has been 

running close to 11⁄2 percent. As the transitory influences holding 

down inflation fade and the labor market strengthens further, the 

Committee expects inflation to rise to 2 percent over the medium 

term. Nonetheless, in considering future policy decisions, we will 

continue to carefully monitor actual and expected progress toward 

our inflation goal. 

Of course, considerable uncertainty about the economic outlook 

remains. The latest readings on the labor market and the weak 

pace of investment illustrate one downside risk—that domestic demand might falter. In addition, although I am optimistic about the 

longer-run prospects for the U.S. economy, we cannot rule out the 

possibility expressed by some prominent economists that the slow 

productivity growth seen in recent years will continue into the future. Vulnerabilities in the global economy also remain. Although 

concerns about slowing growth in China and falling commodity 

prices appear to have eased from earlier this year, China continues 

to face considerable challenges as it rebalances its economy toward 

domestic demand and consumption and away from export-led 

growth. More generally, in the current environment of sluggish 

growth, low inflation, and already very accommodative monetary 

policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly. One development that could 

shift investor sentiment is the upcoming referendum in the United 

Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions. For all of these reasons, the Committee is closely monitoring global economic and financial developments and their implications for domestic economic activity, labor 

markets, and inflation. 

6 

I will turn next to monetary policy. The FOMC seeks to promote 

maximum employment and price stability, as mandated by Congress. Given the economic situation I just described, monetary policy has remained accommodative over the first half of this year to 

support further improvements in the labor market and a return of 

inflation to our 2-percent objective. Specifically, the FOMC has 

maintained the target range for the Federal funds rate at 1⁄4 to 1⁄2

percent and has kept the Federal Reserve’s holdings of longer-term 

securities at an elevated level. 

The Committee’s actions reflect a careful assessment of the appropriate setting for monetary policy, taking into account continuing below-target inflation and the mixed readings on the labor 

market and economic growth seen this year. Proceeding cautiously 

in raising the Federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether 

growth is returning to a moderate pace, whether the labor market 

will strengthen further, and whether inflation will continue to 

make progress toward our 2-percent objective. 

Another factor that supports taking a cautious approach in raising the Federal funds rate is that the Federal funds rate is still 

near its effective lower bound. If inflation were to remain persistently low or the labor market were to weaken, the Committee 

would have only limited room to reduce the target range for the 

Federal funds rate. However, if the economy were to overheat and 

inflation seemed likely to move significantly or persistently above 

2 percent, the FOMC could readily increase the target range for the 

Federal funds rate. 

The FOMC continues to anticipate that economic conditions will 

improve further and that the economy will evolve in a manner that 

will warrant only gradual increases in the Federal funds rate. In 

addition, the Committee expects that the Federal funds rate is likely to remain, for some time, below the levels that are expected to 

prevail in the longer run because headwinds—which include restraint on U.S. economic activity from economic and financial developments abroad, subdued household formation, and meager productivity growth—mean that the interest rate needed to keep the 

economy operating near its potential is low by historical standards. 

If these headwinds slowly fade over time, as the Committee expects, then gradual increases in the Federal funds rate are likely 

to be needed. In line with that view, most FOMC participants, 

based on their projections prepared for the June meeting, anticipate that values for the Federal funds rate of less than 1 percent 

at the end of this year and less than 2 percent at the end of next 

year will be consistent with their assessment of appropriate monetary policy. 

Of course, the economic outlook is uncertain, so monetary policy 

is by no means on a preset course and FOMC participants’ projections for the Federal funds rate are not a predetermined plan for 

future policy. The actual path of the Federal funds rate will depend 

on economic and financial developments and their implications for 

the outlook and associated risks. Stronger growth or a more rapid 

increase in inflation than the Committee currently anticipates 

would likely make it appropriate to raise the Federal funds rate 

more quickly. Conversely, if the economy were to disappoint, a 

7 

lower path of the Federal funds rate would be appropriate. We are 

committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with their attainment over time. 

The Committee is continuing its policy of reinvesting proceeds 

from maturing Treasury securities and principal payments from 

agency debt and mortgage-backed securities. As highlighted in the 

statement released after the June FOMC meeting, we anticipate 

continuing this policy until normalization of the level of the Federal funds rate is well under way. Maintaining our sizable holdings 

of longer-term securities should help maintain accommodative financial conditions and should reduce the risk that we might have 

to lower the Federal funds rate to the effective lower bound in the 

event of a future large adverse shock. 

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

Chairman SHELBY. Madam Chair, in recent years the Fed has increasingly used forward guidance to shape market expectations. 

However, the Fed’s frequently incorrect predictions of interest rate 

increases have caused it to lose some credibility among some quarters. 

How would you rate the utility of your forward guidance over the 

past several months? 

Ms. YELLEN. So in the past several months, we have used forward guidance less than we did in the aftermath of the financial 

crisis when we named calendar dates or gave explicit economic conditions that we would not need to see prevailing in the economy before considering an increase in the Federal funds rate. We used 

that forward guidance in the aftermath of the crisis in order to 

help market participants understand how serious the crisis was 

and how long we thought we would need to maintain the Federal 

funds rate as its—— 

Chairman SHELBY. Are you saying you are not using forward 

guidance now or are you not relying on it as much as you were? 

Ms. YELLEN. We are not relying very much on forward guidance. 

We do publish every 3 months participants’ projections for the 

paths of the Federal funds rate that they believe will be appropriate in light of their expectations about the performance of the 

economy. And sometimes those paths which participants discuss in 

their remarks are thought to constitute forward guidance about 

policy. I do believe those projections are helpful to the public in understanding the path of the economy that participants think is likely and how, if those conditions prevail, they would see monetary 

policy as evolving. 

But as I always emphasize on every occasion, including in my 

prepared remarks, those paths, while I think they are helpful, are 

not a preset plan and not in any way a commitment. We are constantly trying to evaluate in light of incoming information the outlook and risks, and you see those paths change over time as we update our evaluation of the economic outlook. And I think that is a 

critical part of monetary policy. 

Chairman SHELBY. Has the slowing of the economy in certain 

areas caused you to kind of hold back a little bit at times information that you see there? 

8 

Ms. YELLEN. So for quite some time now, we have seen mixed developments in the economy—some sectors slowing because of the 

decline in energy prices, strong dollar foreign growth; others providing an offset. Throughout, until the last couple of months 

progress in the labor market has held up extremely well. 

Now, for the last few months, as I mentioned, job gains averaged 

100,000 on a strike-adjusted basis, which is a substantial slowdown 

from the first quarter and from last year. And it is important for 

us to see ongoing progress in the labor market, so that is something we want to carefully evaluate and is a focus of our attention. 

But economic growth has picked up from a weak pace, and if that 

slowdown is a reflection of weak growth earlier in the year, I am 

hopeful that we will see stronger job gains going forward. And 

while it is an important report, I would also emphasize that it is 

important never to overblow the significance of a single report or 

a small amount of data. Other information about the labor market 

suggests it continues to perform well. 

Chairman SHELBY. Do you see a clear path ahead as far as your 

trajectory going forward on the economy picking up? Or are you not 

sure yet? 

Ms. YELLEN. That is what you see in all of the projections that 

were provided in connection last week with our June FOMC meeting. But, of course, there is uncertainty about that, and given that 

inflation remains low, we have the ability to watch economic developments and try to make sure the economy is on a favorable path 

before raising rates. 

Chairman SHELBY. Madam Chair, the FOMC’s target for the Fed 

funds rate has been at one-half percent or lower since December 

2008. A report last year from the Bank of International Settlements found that the prolonged period of low interest rates may be 

damaging the U.S. economy, resulting in, and I will quote, ‘‘too 

much debt and too little growth.’’ In addition, the report states that 

low rates may in part have contributed to costly financial booms 

and busts. 

Do you agree that persistently low interest rates can have negative long-term effects on the U.S. economy? And could you explain? 

Ms. YELLEN. Well, I believe that the persistent low interest rates 

we have had have been essential to—— 

Chairman SHELBY. Can have—— 

Ms. YELLEN. ——achieving the progress. But, of course, low rates 

can induce households or banks or firms to reach for yield and can 

stoke financial instability. And we are very attentive to that possibility, and I would not at this time say that the threats from low 

rates to financial stability are elevated. I do not think they are elevated at this time. But it is, of course, something that we need to 

watch because it can have that impact. You mentioned debt. I do 

not think that we are seeing an undue buildup of debt throughout 

the economy. Leverage remains at moderate levels, well below 

where it was prior to the crisis. We are looking at credit growth 

which has picked up but is not at worrisome levels. So we are monitoring for potential impacts of low rates on financial stability, 

which I think is appropriate. 

Chairman SHELBY. Madam Chair, in an interview earlier this 

month, Governor Tarullo stated that the Fed is reviewing the apVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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plication of stress tests to regional banks, and he uses the word 

‘‘probably’’ will exempt regional banks from the qualitative portion 

of CCAR. 

Last December, the Fed announced it was tailoring CCAR, but 

the tailoring turned out to be just a restatement of existing policy. 

What assurances can you give that this current review is a 

meaningful effort to tailor CCAR in a way that recognizes the different risk profiles of banks? And if so, when do you expect to publish such changes for comment? 

Ms. YELLEN. So we are engaging in a 5-year very serious review 

that has been informed by consultation with both financial sector 

participants and outside economists, and I do think that you will 

see meaningful changes. The suggestion that Governor Tarullo 

made that banks between $50 and $250 billion that are subject to 

the stress test and CCAR might be left out of the qualitative portions of CCAR, still the stress test would be applied, but the whole 

qualitative part of CCAR that relates to capital planning, that they 

might be exempted from that, I think that is very likely. We will 

look at other changes as well that, as you said, are designed to appropriately tailor it so that its impact is most significant for the 

largest and most systemic firms. It will be a very meaningful review, and I believe we will be proceeding on it shortly. 

Chairman SHELBY. Well, my last observation has to do with you 

alluded to the fact that, come Thursday, there is a big referendum 

in the United Kingdom as to whether to stay in the European 

Union or start leaving. What is the real implication, or can you tell 

at this point, if the British were to leave the Common Market on 

us? There could be implications for the Common Market and for 

Britain. 

Ms. YELLEN. Well, it is a very important relationship. It would 

be significant for the United Kingdom and for Europe as a whole. 

I think it would usher in a period of uncertainty, and it is very 

hard to predict, but there could be a period of financial market volatility that would negatively affect financial conditions and the 

U.S. economic outlook that is by no means certain. But it is something that we will be carefully monitoring. 

Chairman SHELBY. Thank you. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Madam Chair, first, thank you for your work on the recent insurance rules. I am pleased that the Fed has put out an Advance Notice of Proposed Rulemaking to implement capital standards for the 

two large insurance companies, the two SIFIs, and the 12 insurance companies that are savings and loan holding companies. I appreciate how quickly you have moved on this and your constructive 

dialog with stakeholders. I think that your response to our efforts 

here made a huge difference in doing this right. 

This week, the Banking Committee will have a second hearing 

on capital and liquidity rules. Please discuss for us the Fed’s approach to capital and liquidity rules for the Nation’s largest banks. 

Specifically, have these new rules made our financial system 

stronger? 

Ms. YELLEN. So I do believe that the enhancements that we have 

put in place to capital and liquidity requirements that are tailored 

10 

by firms’ size and systemic importance have made an enormous difference to the safety and soundness of the U.S. financial system. 

The quantity of capital at the largest banking organizations has essentially doubled from before the crisis, and the quality of that capital is very much higher. 

In addition to imposing higher static risk-based capital and leverage requirements, our stress testing and capital planning exercises 

are very detailed, forward-looking exercises that are working to ensure that the largest firms in extremely stressful conditions would 

be able to go on supporting the credit needs of the U.S. economy, 

of households and businesses. And I think this has been a very significant exercise and has resulted in a far superior understanding 

by the firms themselves of the risks they face and improved management of those risks. 

Capital is not sufficient to assure financial stability. Often liquidity is what disappears in a financial crisis, and we have put in 

place, especially for the largest banking organizations, enhancements to liquidity through the liquidity coverage ratio and our proposed net stable funding ratio. And so I think this also works to 

enhance financial stability. So I think we have a much safer and 

sounder, less crisis prone system because of the enhancements that 

we have put in place. 

Senator BROWN. Thank you. We have talked in the past about 

how the current labor market data do not reflect what has happened to minorities whose rates of unemployment are still much 

higher than the average. In your testimony today, for the first 

time—and thank you for that—you talked about minority unemployment rates and have included a new section in the semiannual 

Monetary Policy Report with this data and a discussion of whether 

the gains of the economic expansion have been widely enough 

shared. 

Discuss why the Fed made this addition to the report. 

Ms. YELLEN. Well, the Federal Reserve’s job is to try to achieve 

maximum employment and broad gains in the labor market that 

are as widely distributed as possible. And I believe it is very important for us to monitor how different groups in the labor market are 

doing to see if what we perceive as broad-based labor market improvement is being widely shared. And there are very significant 

differences in success in the labor market across demographic 

groups, and I think it is important for us to be aware of those differences and to focus on them as we think about monetary policy 

and the broader work that the Federal Reserve does in the area of 

community development and trying to make sure that financial 

services are widely available to those that need it, including lowand moderate-income—— 

Senator BROWN. Well, that brings to mind a meeting I had just 

a few minutes ago with three people from my home town of Cleveland, three community leaders, about the lack of diversity in terms 

of gender and ethnicity and race and the lack of diversity in terms 

of ideas that are the Class C Directors in many of your Federal Reserves, your 12 Federal Reserves around the country, including in 

Cleveland. 

I would like to see and I think many of us on this panel would 

like to see a more diverse Federal Reserve System, including the 

11 

Governors, the reserve bank Presidents in the 12 regions, the 

Boards of Directors, the advisory committees, and employees. 

Discuss what you have done as Chair of the Fed, what more you 

can do to better address the financial needs of all Americans as you 

reach into the community better. And I know you have had a goal 

of doing that. You said that at maybe our first hearing, certainly 

one of our first meetings, particularly serving those unserved and 

underserved by the financial system. 

Ms. YELLEN. So I am personally committed and the Federal Reserve as an organization is committed to achieving diversity within 

our workforce and within our leadership at absolutely all levels. I 

believe we have made progress. I am committed to seeing us make 

further progress, and in order to make sure that we are taking all 

of the steps that we possibly can to promote a diversity in economic 

inclusion, I have launched an interdisciplinary effort within the 

Federal Reserve to focus on all of our diversity initiatives, both in 

terms of our own hiring, hiring throughout the Federal Reserve 

System, our work in community development to promote access to 

credit, our work in the payment system to foster better and faster 

payments that can promote financial inclusion. 

I do believe we are making some progress, but I want us to make 

greater progress. At the Board, minorities currently represent 18 

percent and women represent 37 percent of senior leadership. That 

is relatively common. Throughout the Federal Reserve System you 

would see similar numbers. And we have worked very hard to increase diversity among the reserve bank Directors, and Directors 

on the branch Boards have made quite a lot of progress. At this 

point minority representation stands at about 24 percent of reserve 

bank and branch Board Directors. About 30 percent are women. It 

is a matter that the Board focuses on annually in its oversight of 

the reserve banks that we regularly track our progress in increasing diversity in the Boards of Directors, and it is something we will 

continue to focus on. Diversity is an extremely important goal, and 

I will do everything I can to further advance it. 

Senator BROWN. Thank you. And I want to—my last question, 

but I want you to share with us in a continual way the progress 

you are making there, especially in the Class C Directors that they 

more represent the community, not just in diversity of look and 

background but diversity of ideas and all that. 

Last question. There currently are a record number of job openings, almost 6 million, but the May jobs data show that workers 

are not being hired for these jobs. What do we do to get Americans 

who want to work into these available jobs? What do we need to 

do better? 

Ms. YELLEN. So there are an enormous number of job openings, 

and there is a certain degree of mismatch of workers who are looking for work with the job openings that are available within the 

Federal Reserve, and I personally have been looking at workforce 

development programs, job training programs, some of which I 

think are doing a very good job of trying to build the skills and that 

are needed to fill available jobs and work to match workers with 

jobs. 

I was recently in Philadelphia and visited a very impressive program that is placing workers who have had trouble in the job marVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
12 

ket into real jobs that can lead to upward mobility and a career in 

some of the Philadelphia hospitals. I have seen such programs 

around the country that I think have been effective, but obviously, 

our job at the Fed is to make sure we have a strong job market, 

that there are enough jobs that are being created. But helping that 

matching process, looking at training programs and educational opportunities, I think that is a piece of the puzzle as well. 

Senator BROWN. As you have from time to time mentioned—‘‘exhorted’’ is maybe too strong a word—that Congress needs to do a 

better job in terms of investment in public works and infrastructure, also you have made comments from time to time about job 

training. Can you give us more instruction—in my last minute or 

so, could you give us more instruction on what we should do here? 

Ms. YELLEN. Well, I am not going to give you detailed instruction. I think this is up to Congress to decide. But when one looks 

at either inclusion or inequality or more broadly the fact we are 

suffering as a country from very low productivity growth, disappointingly low productivity growth, and we think about what the 

factors are that over time influence productivity growth, the things 

that have long been identified as important are investments, both 

private and public, private investment really since the financial crisis has been very weak, but private and public investments, education and workforce development, and the pace of technological 

progress, which is influenced by the environment that contributes 

to innovation, the startup of new firms, and research and development and other basic support. So I think all of those areas should 

be on Congress’ list to focus on. 

Senator BROWN. Thank you. 

Chairman SHELBY. Senator Corker. 

Senator CORKER. Madam Chairman, we thank you for being 

here. Thank you for your service. I had numbers of conversations 

in this setting and others with your predecessor about QE2 and 

QE3, and I know the Fed announced in 2014 the normalization 

process. And both your predecessor and this normalization process 

that was announced in 2014 stated that the securities that we had 

built up on the balance sheet would be held to maturity, and then 

they would run off the balance sheet. 

You have basically announced today that we are embarking on 

QE4 by reinvesting the proceeds, have you not, in new securities, 

which is a major policy change, is it not, from where the Fed has 

been in allowing these securities to run off and allowing—maybe I 

am misunderstanding what you are saying, but I thought I heard 

you say that the Fed is now, when we reach maturity on these securities, going to reinvest them, which is a pretty big policy change, 

is it not? 

Ms. YELLEN. It is not a policy change. That has long been our 

policy ever since when QE3 ended, we made clear that we would 

continue to reinvest maturing proceeds. We have been doing that 

ever since. We did say that as the economy recovers and the Fed 

funds rate rises to a somewhat higher level than it is at present, 

that a day would come when, based on economic and financial conditions, the Committee would begin the process you just described 

of gradually allowing securities to run off our balance sheet so that 

we reduce our holdings to a more normal level. And we fully intend 

13 

to do that, but I cannot give you a precise timetable for when that 

policy will begin. It is going to depend on how the economy evolves. 

But a long time ago, we put out a set of normalization principles 

where we made clear that that was how we would proceed, namely, 

continue reinvestment until after we had begun the process of raising the Federal funds rate and achieved sufficient progress there. 

That remains our intention. 

Senator CORKER. Well, thank you for clearing that up. I appreciate that. I know last time you were here, you alluded, we alluded 

to negative rates, and I know that is what has happened in Japan 

and the EU. And you were looking into the legality of whether— 

your staff was looking into whether you felt that you had the legal 

basis to pursue negative rates. Have you come to a conclusion relative to that? 

Ms. YELLEN. I believe we do have the legal basis to pursue negative rates, but I want to emphasize it is not something that we are 

considering. This is not a matter that we are actively looking at, 

considering. When we have looked at it or looked at that in the 

past, we have identified significant shortcomings of that type of approach. I do not think we are going to have to provide accommodation, and if we do, that is not something that is on our list. But 

I do think we have the legal authority. 

Senator CORKER. Very good, and I really appreciate you clearing 

that up. Obviously, Japan and the EU have not had good benefit 

from that, or at least it is not benefit that we can see has been 

good for them. So I appreciate you clearing that up. That is very 

good. 

We look at the Taylor rule from time to time, and I know that 

the Fed has not adopted the Taylor rule. But if you look at it, 

Bloomberg has a chart that tracks it, and basically, you know, Fed 

rates and the Taylor rule have been within a range. 

Recently, there is the biggest dichotomy that we have seen in 

years and years between the Fed funds rate and what they would 

be if the Taylor rule was being employed. Today it is at 25 to 50 

basis points. Under the Taylor rule, we would be at 3.7 percent. 

That would be a target Fed rate today. A big range difference. Is 

that because of the headwinds that you have been alluding to and 

just what you are generally seeing in the market? 

Ms. YELLEN. Yes, I believe it is because of the headwinds. One 

of the numbers in the Taylor rule reflects Professor Taylor’s estimate of what we sometimes refer to as the neutral level of the Fed 

funds rate. It is a level of the Fed funds rate that is consistent with 

the economy operating at full employment. And that is something 

that by our estimate has been very depressed in the aftermath of 

the financial crisis. And discussions about secular stagnation are 

very much about what is the level of interest rates that is consistent with the economy operating at full employment. 

I am hopeful that rate will rise over time, although I am uncertain, but at the moment most of the divergence between our settings and what would be the higher levels that would be called for 

really reflect the headwinds that have been facing the economy 

since the financial crisis. 

Senator CORKER. The labor—I have only got a little bit of time, 

but the employment rate really is misleading, is it not, relative to 

14 

where we are in the labor market today, meaning that there is still 

a lot of excess capacity, and I know Ranking Member Brown was 

alluding to that anew. So that equation is a little bit off. Just because you are not really feeling the employment levels, even 

though the rates that we show are there, the involvement by the 

labor market is not what we would like for it to be. 

Let me just ask one last thing briefly on living wills. I know that 

under Section 165 of Dodd-Frank the larger institutions are supposed to present living wills, and you all are supposed to ensure 

that they can be resolved in bankruptcy. And I know we are going 

through hopefully the final iteration in the next several months. 

But I was confused in that Governor Powell recently mentioned 

that if the Fed just keeps raising capital levels, these institutions 

will on their own downsize or become less complex. And I am just 

confused by that. 

Is the Federal Reserve, if these institutions cannot be resolved in 

bankruptcy, going to do what Section 165 of Dodd-Frank tells them 

to do? Or are you going to rely on raising capital to cause the 

banks to do it themselves? 

Ms. YELLEN. Well, we are insisting that the firms address in 

some cases deficiencies and in other cases shortcomings that we 

have found enumerated in the living wills in the last submission, 

and there is a timetable for doing that. If the firms fail to address 

the deficiencies or if later on by the summer of 2017 they fail to 

address the shortcomings we have identified and then we find them 

deficient, Dodd-Frank does say that the FDIC and the Fed can impose higher capital requirements, liquidity requirements, or ultimately structural changes. Do not expect to have to go there, but 

we are insisting that the firms address the deficiencies and shortcomings that we have carefully identified. 

Senator CORKER. Thank you, Madam Chairman and Mr. Chairman. 

Chairman SHELBY. Senator Reed. 

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

thank you, Madam Chair. 

It strikes me that over the last several years you have had a very 

difficult challenge, we all have, but we have been operating in some 

respects with one hand tied behind our back, which is that you 

have been pursuing a very expansionary policy to stimulate the 

economy, cutting rates and reluctant to raise rates, while we have 

not had a complementary fiscal policy that invests in infrastructure 

and other things and allows you the room to raise rates if necessary or to complement your activity with what we are doing. And 

the point you just made in response to Senator Brown is that this 

productivity gap, which is very troubling, some of that is just related to decrepit infrastructure. If it takes 2 hours to get someplace, that is 2 lost hours for someone delivering a package. If it 

takes 10 minutes on a superhighway, that is a productivity increase. 

So you are in a position, I think, that you are doing all you can, 

but it is not enough, and we have to step up. Is that something 

that you tend to sympathize with? 

Ms. YELLEN. Well, I think in the United States and in many 

other advanced Nations where interest rates are at very low levels, 

15 

it is common to say that it is monetary policy, central banks that 

have been carrying the load. In many parts of the world, fiscal policy has, because of concern about large debt or deficits, not played 

a supportive role. 

I think we have achieved a lot in the United States. We have created over 14 million jobs. The unemployment rate has come down 

to 4.7 percent. Inflation is still under 2 percent, but I believe moving up. So I think we are making good progress, but if there were 

to be a negative shock to the economy—and I mentioned this in my 

testimony—starting with very low levels of interest rates, we do 

not have a lot of room using our traditional tried and true method 

to respond. If fiscal policy were more expansionary, this neutral 

level of interest rates that is one of the factors, the stance of policy, 

that affects what level of interest rates is neutral for the economy, 

keeps it on an even keel, and the level would be higher with a different stance of fiscal policy. 

Senator REED. We have made progress, I agree, but I think the 

sense is that not only could we have made more progress, but we 

are at a point now where you have exhausted most of your leverage 

in a nonfinancial sense, and if there was a shock, then you have 

very little to respond with. 

Ms. YELLEN. Well, we have the same tools that we used earlier, 

namely, asset purchases, forward guidance, the maturity distribution, duration of our portfolios, and those are the tools we would 

rely on. 

Senator REED. And just very quickly, the other part of this dilemma is the sense in some places that because interest rates have 

been so low, there is the possibility of creating a bubble, for example, driving people into equities because there is no return, and the 

price is driven up not because of the underlying quality of the equity but simply because that is where they can get some money 

fast. Are you concerned about that? 

Ms. YELLEN. Well, yes, as I said earlier, I do not see signs of extreme threats to financial stability at this time. This is something 

we monitor very closely. But it is something that can happen in a 

low interest rate environment, so I do not think that I see any 

broad-based evidence of those financial stability concerns, but it is 

something that is possible. 

Senator REED. And I have less than a minute, but let me just 

add—with respect to cybersecurity—that we had a discussion last 

time you were here. It is an increasing problem—in fact, at the 

Federal Reserve. Public reports say you have been breached in 

some respects. But just getting to the point, do you have the authority to require your regulated companies to put people on their 

boards that have cybersecurity expertise, and also to publicly disclose what their cybersecurity general parameters are, or something to indicate to the public that they are taking this seriously? 

Ms. YELLEN. Well, it is a focus of our supervision. We do have 

standards that we expect financial institutions to meet, and just 

what is expected depends on the complexity and importance of the 

firm. So we do regard this as a very significant threat. 

On your question about Boards of Directors, I do not know that 

we have looked at that. I would need to get back to you on that. 

Senator REED. Thank you. 

16 

Ms. YELLEN. But we are certainly supervising financial institutions’ ability to address cyberthreats. 

Senator REED. Thank you, Madam Chair. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Vitter. 

Senator VITTER. Thank you, Madam Chair, for being here and for 

your service. 

Ms. YELLEN. Thank you. 

Senator VITTER. Madam Chair, in April, the Fed finally released 

the results of the 2015 resolution plans of eight systemically important domestic banking institutions, and five of the Nation’s largest 

banks failed that exercise, including JPMorgan Chase and Bank of 

America. I have three questions related to that. 

First, the New York Times in April described this Fed release as 

stating, ‘‘That suggests that if there were another crisis today, the 

Government would need to prop up the largest banks if it wanted 

to avoid financial chaos.’’ So Question 1 is: Do you agree with that? 

Question 2 is: What do these five banks need to do by October 

1st to fully remediate their deficiencies? 

And Question 3 is: If they do not by October 1st, will the Fed 

take more systemic action like raising capital levels? 

Ms. YELLEN. So those banks have, over the span of the last several years in which they have been preparing living wills, greatly 

increased their ability to be resolved in the event of trouble by 

bankruptcy or, alternatively, Title II is available. I could not guarantee at this point. It depends just what the circumstances are in 

which a bank fails that bankruptcy would work at this point as a 

means to resolve one of these firms. We have identified for five of 

the firms deficiencies. We have been extremely careful in spelling 

out in detail what those deficiencies are that we want to see remedied by October 1st. And, in addition, we have listed, jointly with 

the FDIC, a large number of specific shortcomings that the firms 

have until the summer of 2017 to remedy. And we will be monitoring very carefully and evaluating whether that is done. And as 

I said, if the deficiencies are not remedied or, later, if the shortcomings are not remedied, they could turn into deficiencies that 

would lead us to impose higher capital standards or other remedies 

on these firms if that is not done. 

But I think we have learned a lot in the course of the years we 

have been evaluating these living wills about what it takes to actually resolve a firm in bankruptcy. The firms have learned in this 

process, and I do think we have made substantial advances in 

terms of being able to do—— 

Senator VITTER. Let me go back to my question—three questions. 

First, in terms of the New York Times quote, needing to prop up 

the largest banks, you would not categorically refute that possibility? 

Ms. YELLEN. Well, I would not say at this point that all of them 

are prepared for resolution under bankruptcy. 

Senator VITTER. And, again, if they do not get there for October 

1st, would you very soon thereafter consider something more systemic like higher capital requirements or not? 

Ms. YELLEN. Yes. 

17 

Senator VITTER. OK. And, Madam Chair, my second and last 

question is about the Puerto Rican crisis. You have said you do not 

think the Fed should be involved, and I appreciate that and agree 

with that. However, my concern is the Fed has authority to be involved. Do you think the Fed has authority to issue as a last resort 

emergency loans to Puerto Rican institutions or not? 

Ms. YELLEN. I think our authority is extremely limited, and it 

would not be appropriate for us to give loans to Puerto Rico. We 

have very limited authority to buy municipal debt, and the authority we have, if we were to buy eligible debt, I do not think it would 

be helpful to Puerto Rico. And beyond that, we have no ability to 

make emergency loans. We could not use 13(3) or emergency powers of that type to extend a loan to Puerto Rico. This is inherently 

a matter for Congress and is not something that is appropriate for 

the Federal Reserve. 

Senator VITTER. OK. Thank you, Madam Chair. 

Chairman SHELBY. Senator Menendez. 

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

Madam Chair, for your service and your insights. I always appreciate it. 

Recently, in the national public discourse, there are those who 

propose reducing the national debt by persuading creditors to take 

a haircut on their investments. And in my opinion, policies like 

that would drive our economy off a cliff and endanger working families in our country. And I really do not know of anyone more qualified to answer this question than you. In your opinion, what would 

be the consequences if the President of the United States were to 

propose that holders of U.S. Treasury bonds accept less than the 

face value of their investments? 

Ms. YELLEN. So this is a topic that I have spoken on many times 

when Congress says we have faced debt ceiling-type situations. I 

feel the consequences for the United States and the global economy 

of defaulting on Treasury debt would be very severe. U.S. Treasury 

securities are the safest and most liquid benchmark security in the 

global financial system. They play a critical role in financial markets, and the consequences of such a default, while they are uncertain, I think there can be no doubt that it would be long-run harmful to U.S. interests and at a minimum result in much higher borrowing costs for American households and businesses. 

Senator MENENDEZ. And saying that you should take a haircut, 

does it actually mean—it means a default because you are not paying the full amount that you are obligated to on the security. And 

just for clarification purposes, am I right, my understanding that 

U.S. citizens and American entities, such as State and local governments, pension funds, mutual funds, and the Federal Reserve, own 

the vast majority of U.S. debt estimated at approximately 67.5 percent? 

Ms. YELLEN. U.S. entities and foreign entities. 

Senator MENENDEZ. U.S. entities and foreign entities. OK. My 

understanding is—and I would like to get it for the record. My understanding is that just U.S. citizens and American entities, State 

and local governments, pension funds, mutual funds, 401(k)s, Federal Reserve, own the majority of U.S. debt, and that would be 

18 

about 67.5 percent. But for the record, if you could submit that, I 

would appreciate it. 

Ms. YELLEN. Certainly. 

Senator MENENDEZ. Which means the overwhelming majority 

would be taking a haircut that, as proposed by Mr. Trump, would 

ultimately mean U.S. citizens, State and local governments, and 

that is pretty outrageous. 

Let me ask you this: In the nearly 8 years since the start of the 

financial crisis, our economy has indeed shown signs of growth and 

progress, yet many data points indicate that we are far from a full 

recovery in the labor market. In the past, you have advocated for 

the Federal Reserve’s use of a metric called the ‘‘Labor Market 

Conditions Index.’’ That index, which pulls data from 19 different 

labor market sources, including labor force participation, workers 

that are classified as part-time for economic reasons, hires, quits, 

and so forth, has fallen nearly 15 points over the last 5 months. 

In fact, the index has fallen to its lowest level since 2010. 

My understanding is that every other time the index has turned 

negative for 5 months or longer over the last 25 years, the Fed has 

moved to ease monetary policy, not tighten it. So I am concerned 

that given the path the Fed has laid out for potential rate increases 

later this year and next, the Fed will neither have the ability nor 

the will to temper the impacts of this slowdown in the labor market. Shouldn’t the Fed wait to consider additional rate hikes until 

we see indications of growth in the labor market? 

Ms. YELLEN. So the numbers that are released on the Labor Market Conditions Index do not refer to the level of the index but, rather, the change. And the move that you have mentioned in that 

index suggests not that the labor market is not operating—the 

labor market is operating at a good level according to the level of 

that index, which we do not publish, but there is a loss of momentum. That is what those negative numbers show, and we see the 

same thing in recent job reports that I referred to in my testimony. 

So without a doubt, for the last several months, a number of different metrics suggest a loss of momentum, not a deterioration in 

the labor market but a loss of momentum in terms of the pace of 

improvement. And that is an important consideration, as I mentioned. We believe that will turn around, expect it to turn around, 

but we are taking a cautious approach and watching very carefully 

to make sure that that expectation is borne out before we proceed 

to raise interest rates further. 

Senator MENENDEZ. Madam Chair, one final point, not even a 

question. I want to echo what Senator Brown has said, and in the 

letter that I, Senator Warner, Senator Merkley, and 124 Members 

of Congress sent to you with reference to improving the representation at regional banks, 83 percent of Federal Reserve Board members are white; 92 percent of regional bank Presidents are white. 

There is not a single President who is either African American or 

someone like me, Latino. That is fundamentally wrong, and I 

would hope that you would chair some diversity effort, because 

leadership on this issue always comes from the top, regardless of 

the institution. And with your own experiences as a woman—and 

in that regard, we seem to be doing a lot better in the system, but 

19 

we are not doing that much better with people of color. And I hope 

that you will seriously consider such an effort. 

Ms. YELLEN. I agree with you that it is extremely important, and 

I will do everything I can to see that our performance improves on 

that dimension. 

Chairman SHELBY. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. And thank you, 

Chair Yellen. 

Chair Yellen, your predecessor, Chairman Bernanke, both before 

this Committee and in columns that he has written, discussed 

some of the limits of monetary policy, what monetary policy is capable of and what it is not capable of. And one of the things that 

he said—I am paraphrasing, but I think he has said this on numerous occasions—that accommodative monetary policy has the limit 

of being only stimulative in the sense that it brings economic activity forward in time. It does not create new wealth, goods, or services, but it shifts the timing of economic activity. 

Do you agree with Chairman Bernanke in that respect? 

Ms. YELLEN. Well, it sometimes does shift the timing of economic 

activity, brings forward a decision that might have been made 

later. But I think the stance of policy also has repercussions that 

have a more longer lasting impact on the state of demand. It is not 

only a matter of shifting purchases early by having more accommodative financial conditions. There are repercussions that can be 

longer lasting than that. 

Senator TOOMEY. You may disagree. My sense of the academic 

consensus is that the main effect of accommodative monetary policy 

is to induce economic activity that was going to occur later at an 

earlier time, and that that is the principal activity, or the principal—but you are acknowledging there is some of that phenomenon. 

Ms. YELLEN. There is some of that phenomenon. It is not the 

only thing. 

Senator TOOMEY. So to what extent is this unprecedented accommodative monetary policy for these many years now part of the 

reason that we have had relatively anemic growth today? Isn’t it 

very likely the case that some of the economic activity that would 

be occurring today was dragged forward in years gone by and it 

has already occurred in the past? 

Ms. YELLEN. So it is very hard to know how large that effect is, 

but I continue to think that our accommodative stance of policy— 

for example, low mortgage rates—is continuing to boost activity in 

the housing sector. It has not only pulled activity forward to suppress it now. I believe it has—— 

Senator TOOMEY. The housing sector has still not recovered its 

previous highs. 

Ms. YELLEN. Well, it has undergone very substantial shocks. 

Senator TOOMEY. Have you attempted to quantify how much of 

the economic growth that would be occurring in 2017 and 2018 and 

2019 is happening now because of this ongoing activity of having 

these extremely low, unnaturally low interest rates? 

Ms. YELLEN. We have not tried to determine that. We have in 

the past looked at whether or not low rates have had less impact 

on spurring economic activity than in the past, namely, whether or 

20 

not there might be some attenuation in the impact of policy. But 

in the past, our analysis suggested that it is not only a matter of 

shifting the timing of economic activity, but also stimulating investment and spending decisions on a longer lasting basis. 

Senator TOOMEY. Even if that is so, my guess is that the principal effect is shifting the timing, and you may disagree with that. 

I got the impression from your predecessor that his view was that 

the principal effect was shifting the timing. It is certainly an effect, 

and I would think it is something that the Fed ought to be looking 

at, because to the extent that that is a significant effect, what you 

are doing today is damaging economic growth going forward, to 

some extent. 

Let me touch on another concern. It seems from what you and 

others have said there has been a great focus on the demand side 

of the effect of monetary policy and not so much on the supply side. 

One of the concerns that I have is the danger that, first of all, you 

have been missing the estimates on the supply side as well as economic growth overall, right? I mean, we are now, I think, 12 consecutive years in which the Fed has systematically overestimated 

economic growth. It has been overly optimistic about the supply 

side phenomena, such as workers returning to the workforce, improving productivity level, that have not been happening to the extent that the Fed has hoped. 

One of my concerns is that the inducement to expand capacity, 

the unnatural excess capacity that comes from unnaturally low interest rates, could get the Fed into a kind of vicious cycle where 

all that excess capacity creates excess commodities, downward 

pressure on prices, makes it that much harder to hit your 2-percent 

inflation goal, and creates this dilemma that is hard to get out of. 

Is there a danger that the ultra-low interest rates are contributing 

to that? 

Ms. YELLEN. Well, I think investment has been running at a very 

slow pace. We have really not had the creation of a lot of excess 

capacity. One of the reasons—— 

Senator TOOMEY. Globally, we have. 

Ms. YELLEN. ——that productivity growth has been so slow, and 

it has been disappointingly slow, is that we have had very weak 

investment in the aftermath of the crisis, and more recently in recent months, it has turned negative and is extremely low even outside of energy where we have a substantial cutback in drilling activity. So I do not think an impact of low interest rates has been 

to stimulate an investment boom or a boom in capacity—— 

Senator TOOMEY. No, there is—I think that is largely true in the 

United States, but globally, where this experiment has been going 

on since everybody is in this business of ultra-low interest rates, 

it seems, certainly if you talk to people in the steel industry, they 

would suggest that there is massive overcapacity in not just steel 

but in other commodities as well. And I do worry that we have encouraged companies to take on massive amounts of debt to create 

this overcapacity, and it is just one of the many distortions. But I 

thank you for your time. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. 

21 

Chair Yellen, thank you for being here. I have got a couple questions that I have asked before and, quite frankly, will do it again. 

Senator Crapo and myself sent a letter on the EGRPRA process 

and how that is moving forward. I am continually concerned about 

community banks and the level regulation to match the risk that 

they pose to the economy and to their depositors and borrowers. 

We are seeing consolidation in Montana. We are probably seeing 

consolidation across the country with small banks. And that is not 

good for capitalism, and I do not think it is good for rural America 

as we see small banks combining with bigger banks combining with 

bigger banks. 

So my question is: Do you see any problem with the process right 

now of regulation on our small banks? And if so, what are we doing 

about it? 

Ms. YELLEN. We are very heavily focused on trying to find ways 

to relieve community banks of undue burden, and tailoring our regulatory system and supervision system to suit the risks that an entity entails is a core principle for us of proper supervision. So we 

have made very meaningful efforts to reduce the burdens of our examinations on community banks, to reduce the complexity of the 

capital requirements that they face. The EGRPRA process we are 

taking very seriously, and I believe we will come out with meaningful proposals for relief. And we are looking at something that might 

be a significant simplification of the capital regime for those community banks. 

Senator TESTER. I think simplification is important. Are you 

happy where the Fed is right now as it regards the community 

banks? 

Ms. YELLEN. I think we have made progress, but we will continue to focus on it. 

Senator TESTER. OK. Do you believe that consolidation in the 

banking industry, in particular as it applies to—well, across the 

board, does not matter—is not a good thing? And do you think that 

the regulatory issues have contributed to the consolidation? 

Ms. YELLEN. I think there have been a number of factors that 

have contributed to it. This is a challenging environment for banks, 

a low interest rate environment, and profitability has been important. 

Senator TESTER. Right. And in some cases, some of these small 

banks are putting out literally millions—and these are small 

banks—millions of dollars to meet the regulatory issues that are 

brought up. I just want to get your commitment you are going to 

continue to work—— 

Ms. YELLEN. Absolutely. 

Senator TESTER. The consolidation piece is something that really 

bothers me big time, especially as it applies to States like Montana, 

because that forces us to the big buys, and I do not necessarily 

think that is good for the consumer coming down the line. I think 

it should be their choice if they want to go that direction. 

On international insurance rules, the Fed has proposed rules for 

two nonbank SIFIs, AIG and Prudential, and I am pleased the Fed 

is moving forward with the international insurance rules. Could 

you give me an idea when you think these might be complete? 

22 

Ms. YELLEN. Well, I think there are some ways to go in terms 

of the international work that is ongoing. We put out a few weeks 

ago an Advance Notice of Proposed Rulemaking for the framework 

that we intend to take here in the United States. You know, we 

are in discussions internationally in advancing these ideas, but I 

think we are ahead of that process here in the United States. 

Senator TESTER. OK. So I will take one more run at it because 

I may not have worded it correctly. Do you have any idea when 

they will be done? 

Ms. YELLEN. No. 

Senator TESTER. Will it be done in this Administration? 

Ms. YELLEN. I will have to get back to you. I do not know what 

the timetable is. You are talking about the international efforts? 

Senator TESTER. Yes, right, and how those are going to impact, 

for instance, GE, for example, who is a nonbank SIFI. I am just 

curious to figure out how that is going to come down the pipe. 

Ms. YELLEN. Well, so GE, we already published—— 

Senator TESTER. It is a SIFI, right? 

Ms. YELLEN. ——a rule. 

Senator TESTER. Right. 

Ms. YELLEN. It is not insurance. 

Senator TESTER. It is not an insurance company. What happens 

to those guys? Does this insurance rule have no impact on them? 

What happens to those guys moving forward? 

Ms. YELLEN. Well, they are not an insurance company. 

Senator TESTER. No, I know, but they are SIFI, and they have 

divested their financial—their banking part of their business. So 

what happens to them moving forward? 

Ms. YELLEN. That will be something that the FSOC—— 

Senator TESTER. Will take up. 

Ms. YELLEN. Will take up. 

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

Chairman SHELBY. Senator Kirk. 

Senator KIRK. Madam Chair, I want to take you what you were 

just talking about, the Advance Notice of Proposed Rulemaking for 

the insurance industry. I am speaking on behalf of large Illinois 

employers like State Farm and Allstate. I would say that Senator 

Collins and I have been working very hard to make sure the Fed 

recognizes the great difference between the business of banking 

and insurance, and I would say the ANPRM, the Advance Notice 

of Proposed Rulemaking, heads in the right direction there. I would 

ask you that, as we look forward to this, as I look at the essence 

of the ANPRM, it seemed like the key stress test was a 90-day window of liquidity that, if I look at the details, I would say a 90-day— 

if you look at someone like State Farm that affects 80 million 

American families, you would say the stress would be given the 

2008 drop in various sales of various products, do you have enough 

money over 90 days to sustain the enterprise? I wanted to explore 

this with you, a commonsense way of letting people know, because 

this is the way we should go. I would urge you to follow in the direction of Senator Collins and me, making sure the normal Fed culture of bank regulation does not impinge on the insurance industry. 

23 

Ms. YELLEN. Well, we have tried to do that very much in developing this proposal. We have put forward some conceptual frameworks and are going to be looking very carefully at comments before we proceed with more detailed rules, and the Collins fix was 

very helpful to us in having the flexibility to design something that 

is appropriate for insurance and not bank centric. 

Senator KIRK. Thank you, because I think we have got 60 days 

to comment now coming up. 

Ms. YELLEN. Yes. 

Senator KIRK. And I will be approaching Members of this Committee to also provide their comments on that. I want to make sure 

that we have a robust and strong insurance sector. 

Ms. YELLEN. Yes, and we will look at those very carefully. We 

are trying to proceed in a very thoughtful and careful way based 

on a great deal of consultation with other regulators, State regulators, the NAIC, the industry. We have taken a lot of comment 

and look forward to more. 

Senator KIRK. From what we have heard, the ANPRM has been 

pretty well received, reflecting the Collins fix nicely. 

Ms. YELLEN. Great. 

Senator KIRK. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Warner. 

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

it is great to see you. I am going to try to get three questions in 

and respect the 5-minute rule, which has not been respected this 

morning, to make sure that all our colleagues get a chance to ask 

questions. 

I want to go back to Senator Reed’s point about cyber. Senator 

Gardner and I have started the Cyber Caucus. I think this is increasingly going to be a challenge for every institution. Senator 

Reed raised the question about whether under prudential regulations we can make sure that bank boards and others have 

cyberexpertise. I would hope you would move forward with that. 

I want to move slightly on my question to the issue around what 

happened at the New York Fed with the Bangladeshi incursion 

that was through the SWIFT system. Obviously, the SWIFT system, as evidenced by this cyberattack, has some challenges, enormously important to international banking regimes. Does the New 

York Fed or the overall Fed, do you feel like you have enough ability to work with SWIFT to increase their cyberprotections? 

Ms. YELLEN. We are part of an oversight group for SWIFT. It is 

led by the National Bank of Belgium, and many supervisors from 

different countries participate in that group. And we also participated in that group. SWIFT and the New York Fed are working 

with the Bank of Bangladesh to try to understand what happened. 

Senator WARNER. I would just urge you that this is going to be 

an area that is going to exponentially grow in importance, both in 

terms of the Fed’s internal expertise and ensuring that we are 

working more closely with the overall banking industry to up their 

game, I think is critically important. 

Ms. YELLEN. We certainly agree with that. 

Senator WARNER. Let me make sure I get to the others. A number of us have talked about how we can generate additional job 

growth. One of the concerns that I have is that, particularly inside 

24 

the public markets, we have seen an enormous rush over the last 

decade plus starting in the 1990s, but really over the last decade 

and the last few years even more particularly, toward shorttermism in terms of views versus long-term value creation, and 

that in many ways this is undermining basic tenets of American 

capitalism as more and more people choose and more and more institutions, financial institutions, choose to invest in financial instruments rather than investing in lending to business institutions. 

As a matter of fact, I have seen some data that says as low as 15 

percent of financial institutions’ activities are actually geared toward supporting businesses making investments in communities. 

We have clearly seen amongst public companies a shift from 80 

percent in the 1980s, where 50 percent of profits were reinvested 

back into plant and equipment and employees and R&D; now we 

are seeing 95 percent of corporate profits used for stock buybacks 

and dividends. We have seen some of America’s largest iconic tech 

firms with huge balance sheets still go into the markets, borrow 

billions of dollars to use not for R&D but to use share buybacks. 

I think there is an increasing consensus among CEOs and I 

think even some more sophisticated investors that this is long-term 

destructive to real value creation in business and, consequently, to 

job growth. Has the Fed and do you individually have any views 

on this challenge about short-termism? Is it a challenge? And some 

of this movement, particularly amongst public companies, away 

from investing back in their businesses, back toward stock buyback 

and dividends prognosis here? 

Ms. YELLEN. Well, we have looked very closely at investment 

spending and tried to understand why it has been so very depressed in the aftermath of the crisis. You know, I think one reason for it is simply that the economy has been growing slowly. 

Sales growth has been slow, and many firms have found they actually do not need to invest very much in order to satisfy the demand 

growth that they are seeing. 

The workforce has been expanding less quickly than it had been. 

When you have a rapidly expanding workforce, firms need—they 

are hiring those people, and they need to invest to equip new entrants with the tools to be productive that others already in the 

workforce have. A slowing workforce has also played a role. But beyond that, I would agree with you that there has been—— 

Senator WARNER. I would simply add that there has been some 

level of activist investors who come in and say the first thing you 

shut down are your worker training programs, your investment in 

infrastructure, and I believe that is a negative long term. I will adhere to my—— 

Ms. YELLEN. I would agree with—— 

Senator WARNER. ——5-minute request, although I would ask for 

the public record that you come back—I am concerned on Section 

165 and the living wills. We have got to move this process along. 

I am concerned about the level of disagreement between the Fed 

and the FDIC, but I will take that for the record so that other 

members can get their questions in. 

Chairman SHELBY. Thank you, Senator Warner. 

Senator Heller. 

25 

Senator HELLER. Mr. Chairman, thank you. And, Madam Chairwoman, thank you for being here today, and thanks for taking time 

out. I find this to be very informative. 

I want to go back to Brexit for just a minute. The Chairman 

brought Brexit up, and you also mentioned it in your opening comments. You said that a U.K. vote to exit the European would have 

significant economic repercussions. Can you go more into detail of 

what that means and perhaps what the plan of attack by the Feds 

are if, in fact, it were to pass 2 days from now? 

Ms. YELLEN. So I said it could. I do not know that it would, but 

I think it could have significant economic consequences by launching a period of uncertainty, both for the United Kingdom and possibly the future of European economic integration. Most analyses 

suggest it would have negative economic consequences for the U.K. 

and spillovers to Europe more broadly speaking. 

I think the financial market reaction to the uncertainties that 

would be unleashed by that decision could result in a kind of risk/ 

risk off sentiment that we would see impacts on financial markets 

that we might see flight to safety flows that could push up the dollar or other so-called safe haven currencies. And I do not want to 

overblow the likely impacts, but we are aware of them. We will 

watch them and consider those impacts as we make future decisions on monetary policy. 

Senator HELLER. Is there any reason to believe that if Brexit 

were to pass, it would have an effect on the U.S. economy to the 

point that we would go back into a recession? 

Ms. YELLEN. I do not think that is the most likely case, but we 

just do not really know what will happen, and we will have to 

watch very carefully. 

Senator HELLER. What is the chance of the U.S. economy being 

in a recession by the end of the year? 

Ms. YELLEN. I think it is quite low. I think the U.S. economy is 

doing well, and although I have indicated that we are watching 

this recent slowdown in the job market carefully, my expectation 

is that the U.S. economy will continue to grow. We have seen a 

pickup, a strong pickup in consumer spending and growth in the 

economy. If the weakness in the labor market for the last couple 

of months was a reaction to an earlier slowdown in growth, that 

looks to be reversing. I remain quite optimistic in the kinds of conditions that have been associated in the past with U.S. recession. 

Often that occurs when inflation is—when an economy is overheated, inflation has been quite high, the Fed has had to tighten 

monetary policy. We do not have any such conditions in play now. 

Households are in much improved shape, and while there are negative influences in the economy, particularly on manufacturing, 

stemming from slow growth abroad, the strong dollar, lower commodity prices, very seriously depressing hiring, causing job loss in 

the energy sector, and slowing investment in drilling and mining. 

Still, overall the U.S. economy has been progressing even with 

those negatives, and I think the odds of a recession are low. It is 

certainly not what I expect. 

Senator HELLER. Chairman, thanks for your answer. 

A week ago Friday, I think the 10-year yield on Japanese bonds 

and also German bonds were negative. What impact does that have 

26 

on our Treasury yields with these investors obviously looking for 

any kind of return coming in, buying up our Treasury bonds, what 

kind of impact is that going to have on our yields? 

Ms. YELLEN. So it does tend to induce capital inflows into the 

United States, which pushed down our Treasury yields, so ours are 

considerably higher. But in absolute terms, they are really quite 

low. And differentials in the stance of monetary policy also put impacts on the value of the dollar. The dollar has gone up around 20 

percent against a broad basket of currencies since mid-2014, and 

that has had a negative effect on our trade with the rest of the 

world and put downward pressure on corporate profits and hiring 

in manufacturing. 

Senator HELLER. Are you concerned that if Feds raise rates, bond 

traders will ignore that, in fact, reversing exactly what you are trying to achieve by raising rates? 

Ms. YELLEN. Well, I think one of the factors that does influence 

bond pricing, if this is what you are referring to, is the anticipated 

path of rates. And there are some further increases built into market expectations, and often the response of bond markets to what 

we do depends on how our actual actions compare with those expectations. 

Senator HELLER. Chairwoman, thank you. 

Chairman SHELBY. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. It is good to see you 

again, Chair Yellen. 

I want to follow up on questions raised by Senator Corker and 

Senator Vitter. As you know, Dodd-Frank requires giant financial 

institutions to submit living wills, documents that describe how 

these giants could be liquidated in an orderly and rapid way in 

bankruptcy without either bringing down the economy or requiring 

a taxpayer bailout. 

Now, a few months ago, the Fed and the FDIC jointly determined that the living wills submitted by five of the biggest banks 

in the country were not credible, and those banks must resolve the 

problems identified in their living wills by October 1st. That is 14 

weeks from now. If the banks fail to do that, the Fed and the FDIC 

have the power to reduce the risks posed by these giant banks by, 

for example, raising higher capital standards or stricter leverage 

ratios. 

These changes are critically important to avoiding another 2008 

crisis, but the banks are unlikely to make them unless they believe 

that the Fed and the FDIC are serious about enforcing DoddFrank. 

Now, I know by law you must consider increasing capital and 

higher leverage ratios. What I want today is to ask: Can you commit that if any of these giant banks fail to resolve the problems in 

their living wills by October 1st that the Fed will use the tools that 

Congress gave you to reduce the risks posed by these too-big-to-fail 

banks? 

Ms. YELLEN. We have been very serious in this review of the living wills, and we have clearly stated a set of well-identified 

changes that we want to see—— 

Senator WARREN. I appreciate that. 

Ms. YELLEN. ——by October 1st. 

27 

Now, the decision about what we do if those deadlines are not 

met, those are decisions that my colleagues and I will need to look 

at very carefully, what is the appropriate sanction for doing that. 

But, clearly, we are very serious about wanting to see these deficiencies remedied and well aware that we have at our disposal the 

tools that you listed. 

So I cannot precommit today to tell you precisely what our response will be, and we will work closely with the FDIC, as we have 

been all along. But we are extremely serious about wanting to see 

progress and certainly will consider using those tools. 

Senator WARREN. Well, like I said, you are required by law to 

consider them. What I am asking for is a commitment here, and 

I have to say I do not fully understand why you would not make 

that commitment. These banks have known this is coming since 

Dodd-Frank was passed in 2010. That is 6 years ago. And they 

have been submitting living wills since 2013. There is no provision 

in the law for all of the extensions that you have given them so 

far. If any of these banks fail the credibility test on their fifth try, 

they need to face some real consequences. Otherwise, why would 

they ever make changes if there are no consequences? 

Ms. YELLEN. Well, there will be consequences. 

Senator WARREN. Well, I very much hope so. 

You know, when you found that these five banks had submitted 

living wills that were not credible, you were saying quite explicitly 

that each of these banks remains too big to fail, and that if any 

one of them crashed, they would risk taking down the whole economy unless they got a Government bailout. The entire goal of the 

living wills process is to push the biggest banks to fix this fundamental problem, and I am glad that the Fed finally—finally—determined that some of these living wills were not credible. But it is 

not going to mean anything if you are not willing to use the tools 

that Congress gave you to force these banks to reduce the risks 

that they are pushing off onto the taxpayers. 

I have a second issue that I just want to cover here if I can briefly, and that is, I want to follow up on Senator Brown’s and Senator 

Menendez’s questions about diversity. I think diversity is very important. There is a growing body of research showing, for example, 

that gender diversity and leadership makes for stronger institutions. Perhaps it is not a coincidence, then, that there is a stunning 

lack of diversity at our biggest financial institutions. Not a single 

one is led by a woman. And while the Fed’s leadership is somewhat 

more diverse, it is not a whole lot better. Of the 12 regional Fed 

Presidents, 10 are men. 

Now, as you know, Congressman Conyers and I, along with 120 

of our colleagues, sent you a letter a few weeks ago about the lack 

of diversity among the Fed’s leadership, and I appreciate the response that you sent us last week in which you acknowledged that 

greater diversity can help improve the Fed’s decision making and 

that there is still work to be done to improve diversity among the 

Fed’s leadership. 

So let me just start by asking, does the lack of diversity among 

the regional Fed Presidents concern you? 

Ms. YELLEN. Yes. I believe it is important to have a diverse 

group of policymakers who can bring different perspectives to bear. 

28 

I think, as you know, it is the responsibility of the regional banks’ 

Class B and C Directors to conduct a search and to identify candidates. The Board reviews those candidates, and we insist that 

this search be national and that every attempt be made to identify 

a diverse pool of candidates. And we monitor those searches while 

they are ongoing to make sure that has been done. It is unfortunate—— 

Senator WARREN. But then let me just ask you about the outcome here, because just as you say, under the law, when a new regional Fed President is selected by the regional Fed Board, that 

person must be approved by you and the others on the Board of 

Governors before taking office. The Fed Board recently reappointed 

each and every one of these Presidents without any public debate 

or any public discussion about it. 

So the question I have is: If you are concerned about this diversity issue, why didn’t you use either of these opportunities to say, 

‘‘Enough is enough. Let us go back and see if we can find qualified 

regional Presidents who also contribute to the overall diversity of 

the Fed’s leadership’’? 

Ms. YELLEN. Well, we did undertake a thorough review of the reappointments of the performance of the Presidents. The Board of 

Governors has oversight of the reserve banks. There are annual 

meetings between the Board’s Bank Affairs Committee and the 

leadership of those banks to review the performance of the Presidents. And there were thorough reviews of the performance—— 

Senator WARREN. But you are telling me diversity is important, 

and yet you just signed off on all these folks without any public discussion about it. 

You know, I appreciate your commitment to diversity, and I have 

no doubt about it. I do not question it. It just shows me that the 

selection process for regional Fed Presidents is broken, because the 

current process has not allowed you and the rest of the Board to 

address the persistent lack of diversity among the regional Fed 

Presidents. 

I think that Congress should take a hard look at reforming the 

regional Fed selection process so that we can all benefit from a Fed 

leadership that reflects a broader array of both backgrounds and 

interests. 

Thank you, Madam Chair. 

Chairman SHELBY. Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Chair Yellen, thank 

you for being here today, and I thank you for your hard work on 

behalf of all of America. 

Ms. YELLEN. Thank you. 

Senator SCOTT. Frankly, you have a difficult task and one that 

will not get any easier before the year is out, from my perspective. 

I did find it quite interesting, the opening comments of my good 

friend, the Ranking Member, Senator Brown from Ohio, as he 

seemed to suggest that perhaps the failure of the economy somehow rests on the shoulders of my party. I thought to myself that 

the American people are not really looking to assign blame for why 

the economy is so anemic and the so-called recovery has not truly 

reached into those folks living paycheck to paycheck. But it would 

be easy for them to remember that at the beginning of the so-called 

29 

recovery, the Democrats, my good friends to the left, controlled the 

White House, the Senate, and the House until early January 2011. 

And what did they do with that trifecta? Actually, they created the 

most onerous regulatory State in the history of our country, and it 

continued until even last year when the Administration proposed 

80,000-plus pages of new regulations, according to the Competitive 

Enterprise Institute, with an economic impact or cost to the economy of $1.85 trillion. Said differently, that this anemic recovery 

perhaps is anemic because of the regulatory burden created during 

those first couple of years. 

And I would suggest to you that people in my home State of 

South Carolina who are working paycheck to paycheck do not believe that we are actually having a strong recovery, and the numbers seem to bear that out. First-time home buyers, down for the 

third consecutive year, and that disproportionately impacts African 

Americans who have homeownership of around 45 percent. So the 

challenge seems to continue. 

Our economy grew the first quarter by 1.1 percent. We saw real 

incomes since 2007 decline by 6.5 percent. Americans eligible for 

food stamps is up 40 percent. Americans using food stamps are up 

over 20 percent. 

Last month, we saw 38,000 jobs created, and our labor force participation rate: in 2007, 66.4 percent; 2010—bless you—64.8 percent. I have got to stop and bless a woman for sneezing. 

[Laughter.] 

Senator SCOTT. Is that OK with you, sir? Thank you, sir. And in 

2014—we are having fun up here because this is not a fun topic. 

In 2014, it was 62.9 percent. In May of this year, 62.6 percent. 

I would suggest that the numbers themselves bear out the fact 

that perhaps the anemic recovery is not a recovery for those folks 

working paycheck to paycheck. I do not know who is to blame, but 

I can tell you that the American people want solutions more than 

blame. 

My question to you is: As you look for the rest of this year, do 

you anticipate more months where the job creation number is 

38,000 and in the same months where we see job creation at 

38,000, we celebrate a 4.7-percent unemployment rate only because 

458,000 people stopped looking for work? So when you take a real 

unemployment number, based on the 2007 labor force participation 

rate, would it be at 9 percent? 

Ms. YELLEN. So we do expect further improvement in the coming 

year. The unemployment rate fell substantially over the last year, 

and there were jobs created in 2015 at about 225,000 or 230,000 

a month. Perhaps we will not see job creation now that the economy is getting closer to estimates of normal longer-run rate of unemployment. But I expect continued improvement bringing down 

broader measures of unemployment, which, as you noted, are much 

higher. Some include involuntary part-time employment. I expect 

further improvement if the labor market continues to strengthen. 

Now, the last jobs report and the last couple of months of labor 

market performance were quite disappointing. My hope and expectation is that that is something that is temporary, and we will see 

that turn around in the coming months. Clearly, it is something we 

30 

will be watching very carefully. My expectation is that we will see 

improvement, but we will watch it very carefully. 

Senator SCOTT. My last question, as my time is running out, has 

to do with full employment and how to reach that wonderful goal 

of full employment. When I look at the numbers that are coming 

out of the need for skilled workers as well as STEM workers, it appears that by 2020 we could have a shortfall of 3 million or 4 million folks in the skilled labor force and about 5 million in the 

STEM labor force. My solution has a lot to do with the German 

model of apprenticeship programs. I would love to hear if you have 

any solutions that you are going to be recommending as we look 

at the labor force participation rate, the number of skilled jobs that 

will be available, and the need to get our workforce trained in that 

direction. 

Ms. YELLEN. So going back probably to the mid-1980s, we have 

seen a persistent shift in employment patterns from unskilled and 

people with middle skills but doing jobs that can be offshored, 

outsourced, to demand for skilled labor. 

Senator SCOTT. Yes, ma’am. 

Ms. YELLEN. And the consequence of that has been rising inequality, a high return to education, and downward pressure on 

the wages of those who are less skilled and middle income. And I 

completely agree with you that education and training, perhaps apprenticeships of the type that are used in some European and other 

countries, these are ideas that really have to be considered if we 

are going to address what comes out of that, which is that even 

when you have enough jobs, you have downward pressure on the 

wages and incomes of people in the middle and the bottom of the 

skill distribution. 

Senator SCOTT. Thank you, Chair Yellen. 

Mr. Chairman, I would just suggest that at some point we are 

going to have to have a national conversation about the quality of 

education in our country and the necessity of a dual track. Back 

in my days, we had shop, which was an important part of our education apparatus, and perhaps we need to have that conversation 

again. 

Thank you, Chair Yellen. 

Ms. YELLEN. I agree with you. 

Chairman SHELBY. Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. And thank you, 

Chair Yellen. 

When you were here in February, we talked about corporate 

offshoring and the devastating impact it has had on families in my 

home State of Indiana and the manufacturing towns across the 

country. The frustration remains. 

The decline in manufacturing employment is one of the factors 

that has led to a shrinking middle class. We have two economies 

in this country. The overall economy might be doing well enough, 

and the wealthier are richer than ever. But middle- and workingclass families are not feeling the recovery. Wages have been stagnant for years. A recent Pew report said that since 1971, each decade has ended with a smaller share of adults living in middle-income households than at the beginning of the decade. 

What is the state of the economy for working families? 

31 

Ms. YELLEN. Well, I would agree with you that for decades now, 

as we were just discussing there has been downward pressure on 

the incomes of less skilled individuals, and the kinds of jobs that 

once upon a time were pretty readily available, say, for a high 

school-educated man in manufacturing have gradually diminished. 

There has been a long-term trend. Part of it is due to just the technological change that has consistently raised the demands for 

skilled workers and reduced the demands for less skilled workers. 

And I think globalization has also played some role. 

More recently, slow growth in foreign economies, the strength of 

the dollar, which really is reflective of the U.S. doing better on balance than other countries, and—— 

Senator DONNELLY. I understand all these reasons, but, I mean, 

these are real people, as you well know. 

Ms. YELLEN. I know. 

Senator DONNELLY. There was an article not too long ago in the 

paper here about a fellow who was making about $17 an hour at 

the plant. He got fired because they shipped his job to Mexico for 

$3 an hour. But the ongoing ripple of that was that his daughter, 

who had applied to Indiana University, IU, got accepted. She found 

out that her dad was going to lose his job, and she said, ‘‘I do not 

think the family can afford for me to go to college like this.’’ 

That is devastating. That is the future of America. That is what 

the real impact of all of this stuff is, just in the past few months, 

and these are not because the companies are not doing well. They 

are doing really well. But, you know, in the town next to my home 

town, Elkhart, 200 jobs, shipped overseas; 700 jobs, Huntington, 

Indiana, not the biggest county in the, shipped to Mexico for $3- 

an-hour wages; 1,400 out of Indianapolis. Very profitable companies. And these folks are making, you know, $13, $14, $17 an hour. 

So as long as we have the mousetrap like this, how do we ever 

try to get the middle class up if even $13 an hour is too much in 

these companies’ minds? 

Ms. YELLEN. So these are very sad situations for workers—— 

Senator DONNELLY. They are wrong situations, is what they are. 

Ms. YELLEN. The kind of thing you are describing imposes terrible burdens on all too many American families. 

Senator DONNELLY. So how do we make America work for them? 

Ms. YELLEN. Part of it is trying to make jobs. We cannot stop all 

shifts occurring across sectors of the economy. I think we have to 

make sure that there are opportunities—— 

Senator DONNELLY. But let me ask you this: Do you consider that 

a shift when a company is doing really well and somebody is making 13 bucks an hour, not much above minimum wage, but lose 

their job because our laws allow them to ship them to Mexico for 

$3 an hour? Is that a shift? That is not really a shift in technology 

or anything. That is just a cold-blooded decision that Americans do 

not count as much as their profits. 

Ms. YELLEN. Well, those forces have been in play for quite some 

time, and, for our part at the Fed, we are trying to create a job 

market where there are enough vacancies and opportunities that 

people who lose jobs in one sector are able to find them in the sectors of our economy that are expanding. And sometimes to make 

that transition is difficult and may require retraining or other 

32 

forms of help to connect with available job opportunities. And 

sometimes we know that kind of job loss does cost long-lasting impact on wages. 

Senator DONNELLY. I will just leave it with this: It seems like 

gaming the system to want to make your product somewhere else 

in the hope that you can sell them back to here, to the United 

States, because you are hoping that other people will be happy to 

pay the $13-an-hour, $14-an-hour wages so you will have enough 

customers, you are just going to game it so that you can pay the 

3 bucks and then get your products back in here. And it is like you 

get it on one end, and you get it on the other end. And that just 

seems incredibly responsible to me. 

Thank you, Madam Chair. 

Chairman SHELBY. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

Madam Chair, welcome. As I listened to your Monetary Policy 

Report, it strikes me that the—as the Ranking Member had indicated earlier, we talk about productivity growth and the need for 

both public and private investment. That requires that the dollars 

come from some place. And I would like your thoughts on this just 

in terms of—on the basis of what the Joint Economic Committee 

had reported earlier this year. And they laid it out in some pretty 

stark terms. 

They indicated that 99—well, let me put it this way: Ten years 

from now, in the year 2026—which, by the way, is the 250th birthday of our country—we can look forward to, under current conditions, 99 percent of all the revenue coming into the Federal Government—highway taxes, corporate taxes, personal taxes, personal 

income taxes—99 percent of it is going to go back out in two categories: interest on the Federal debt and mandatory payments on 

entitlements. That does not leave a lot for public investment and 

clearly it does not drive private investment. 

You are working on short-term activity right now and you are 

monitoring very closely—you are actually, on a day-to-day basis, 

following an economy right now, which, as you have suggested, is 

doing very well. And yet I think a lot of us would disagree, that 

three-quarters of 1 percent growth in a quarter hardly seems appropriate. And I know that you are optimistic about the second 

being better, but even if it is double or even triple, we are not going 

to grow our way out of this crisis which is coming upon us. 

I would like your thoughts, because right now we are looking at 

areas in which, if we want those jobs to come back and if we want 

individuals or wages to rise, we are going to have to be in a position to where we actually grow this economy once again—tax policy, regulatory reform, actually managing our entitlements, all of 

which seem critical and yet today we have not talked about that 

at all. We do not seem to really have a place where we can. 

Can you, as an impartial individual in this process who watches 

our economy grow or falter on a daily basis, can you talk to us 

about the need to do something now to avoid the crisis in 10 years? 

Ms. YELLEN. Well, I think we all know, and we have known for 

a long time, that with an aging population and with health care 

costs that have, by and large, risen more rapidly than inflation, 

that we faced a situation where we would have an unsustainable 

33 

debt path and that this would require reforms. As you say, Medicare, Medicaid, Social Security, those three programs will, under 

the current rules—— 

Senator ROUNDS. So you are talking—just to begin with, you are 

saying the Affordable Care Act needs to be reformed—— 

Ms. YELLEN. Well, I did not—— 

Senator ROUNDS. ——as part one. 

Ms. YELLEN. Well, I did not say anything about the Affordable 

Care Act. 

Senator ROUNDS. OK. 

Ms. YELLEN. I am saying that the entitlement programs need to 

be considered how to put those on a sustainable basis. 

Senator ROUNDS. Would it be fair to say they need to be managed? 

Ms. YELLEN. Well, they need to have Congress look at both revenues and the structure of expenditures to ensure that those programs remain sustainable in the overall Federal budget and debt 

associated with that remain on a sustainable course, because as 

you go out further with an aging population, as you said, the debtto-GDP ratio is rising simply unsustainably, and that does require 

changes. 

Senator ROUNDS. Is it fair to say that right now, if—over the 

long-term basis, every time the interest rate that we have to pay 

at the Federal level goes up by a quarter point, it is estimated that 

approximately a $50 billion a year additional increase in our costs 

being paid out. It looks to me like simply addressing and beginning 

the process of slowing down the increasing Federal debt and recognizing that we cannot just simply say, over a 1-day period of time 

or a 2-day period of time, that we have got all the answers, but 

most certainly we are going to have to grow our way out of this 

as well as reducing some of the ongoing expenditures. Fair to say? 

Ms. YELLEN. It certainly would be desirable if the U.S. economy 

were growing at a faster rate. You cited a very depressed number 

for first-quarter growth. Over the last four quarters the average 

growth has been about 2 percent, and over eight quarters it has 

been about 2.5 percent. So sort of smoothing through the ups and 

downs, we have been experiencing growth of 2 or 2.5 percent. 

Senator ROUNDS. And we are not going to grow our way out 

based upon that number, are we? 

Ms. YELLEN. We would certainly have to do better than that, and 

that is a matter of productivity growth essentially being quite depressed relative, for example, to the levels that we enjoyed in the 

second half of the ’90s. 

So it is not certain what is responsible for that but, you know, 

many factors come into play. We have had depressed levels of investment. We seem to have a depressed rate of business formation. 

Technological change, as it shows up in output gains, seems to 

have fallen relative to those better times. And there were a range 

of policies we could consider to address it, but—— 

Senator ROUNDS. Madam Chair, my time is up, but it looks to 

me like what you are giving us is a wake up call about a crisis that 

is not 10 years from now; it is right now. 

Ms. YELLEN. Well, it is a very serious matter that productivity 

growth is so slow, yes. I want to highlight that. 

34 

Senator ROUNDS. Thank you, Madam Chair. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Merkley. 

Senator MERKLEY. Chair Yellen, thank you. 

Senator Donnelly was raising concern about manufacturing jobs 

in America. And indeed, our trade policy has given full access to 

our market to goods manufactured by companies in countries that 

do not have to abide by the same labor laws, the same wage rules, 

the same environmental rules, or the same enforcement. 

This is a very unlevel playing field for American manufacturers 

and has a devastating impact. The loss is extensive. And is that 

really fair to the American worker to have American companies 

having to compete against companies that are allowed a completely 

different set of standards that lower their costs dramatically? 

Ms. YELLEN. Well, I guess I would just say that, in the view of 

most economists, more open trade creates net benefits, but that 

does not mean benefits for everyone. And there are gainers but 

there are also losers, and that is certainly part of it—— 

Senator MERKLEY. The losers are the manufacturing workers. 

Again, is that fair to the manufacturing workers? 

Ms. YELLEN. Well, it is important to have policies that address 

the losses. 

Senator MERKLEY. Since the mid-1970s, 1975 through now, we 

have had four decades in which virtually zero—well, let me put it 

different—virtually 100 percent of the new income has gone to the 

top 10 percent of Americans, leaving basically 9 out of 10 Americans in our economy out in the cold. This is substantially a reflection of the shift to manufacturing overseas. 

We have had a series of geostrategic decisions. We wanted to 

nurture the recovery of Japan. We wanted to pull China out of the 

Sino–Soviet bloc. Now we want to pull the rest of Asia away from 

China. Is there an understanding within the Fed how—the costs of 

these geostrategic decisions upon the welfare of American families 

and through living-wage jobs—the loss of living-wage jobs? 

Ms. YELLEN. Well, we have certainly looked at this question of 

wage inequality, income inequality. We collect data. Our Survey of 

Consumer Finances is one of the key datasets that gives us insight 

into what is happening. 

Academic work on this topic, while it has focused to some extent 

on trade more broadly, also looks at the importance of a phenomenon called skill-biased technical change, that the nature of 

technological change in recent decades has continually shifted demand away—— 

Senator MERKLEY. So let’s take—— 

Ms. YELLEN. ——from less-skilled workers toward more 

skilled—— 

Senator MERKLEY. So let’s take that as an additional factor. 

Technological change has occurred. However, a lot of the shift overseas has been due to lower wages, not to technological change. In 

fact, they have been rooting up our factory machines and shipping 

them overseas. So it is the same factories producing the same 

goods in a place that pays less. That is not technological change. 

That is an issue of trade policy. 

35 

Technological change does have an impact. So in a situation 

where, as you point out, there is more higher-skilled demand, demand for higher-skilled jobs, education becomes very important. 

Ms. YELLEN. That is right. 

Senator MERKLEY. But as compared to other developed economies, higher education—be it higher skill training or college—is far 

more expensive. It is the single factor, more than health care, that 

has gone up faster than inflation in our economy, and such that not 

only is it daunting to our students who, in blue-collar communities 

like the one I live in, are getting the message that there is not an 

affordable path to fulfill their goals in life—and statistically we see 

our students who do pursue that education burdened with debt 

that is having a profound impact both on delaying marriage and on 

delaying home ownership, which is the major—has been a major 

engine of wealth for the middle class. 

So we see this high cost of college, and that seems to me like the 

type of structural concern in our economy that the Fed should be 

using its economic expertise to highlight the long-term devastating 

impacts of failing to provide the opportunity for the skills needed 

for the economy of the future, but I do not hear the Fed talking 

about that. 

Ms. YELLEN. Well, we are looking at trends in student debt, and 

I believe we will be hosting a conference this fall on student debt 

and looking particularly at what it means for low- and moderateincome households. 

Senator MERKLEY. You know, I cannot—over these last few years 

I have asked so many questions in which the response is always: 

That is something we are looking at. It would be nice to have a 

muscular representation of the big challenges to our economy because the Fed has the expertise to put its hands around that and 

be able to project that into the policy debate. 

And I will just close, since my time is expiring, by saying one of 

those issues that I have raised multiple times is the Fed’s power 

of the conflict of interest in commodities, the ability of large financial institutions to own pipelines, to own ships full of oil, to own 

energy-generation stations, to own warehouses of aluminum. And 

each time I hear ‘‘we are looking at that,’’ are we still looking at 

that or are we actually going to do something about that? 

Ms. YELLEN. We will come out with a proposal on that, but some 

of it reflects decisions that Congress made and not Fed policy. 

Senator MERKLEY. That is true, there are some restrictions, but 

there is still considerable power resting with the Fed. 

Thank you. 

Chairman SHELBY. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you very much. 

Madam Chairwoman, thank you for joining us this morning. I 

would tell you that, in my conversations with Kansans, very few— 

I do not know if I have had a conversation with a Kansan who sees 

their economic future brighter. They see it—they are more disillusioned. 

No one feels more secure in their job. No one feels like their children are going to have a brighter future. Parents are concerned 

about their children’s opportunities when they graduate from 

school—the ability to pay back student loans—worried about savVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
36 

ing for their own retirement. People are worried about having 

enough income and savings to pay for health care emergencies. So 

the sense of an economic recovery is far from being felt universally 

with Kansans that I visit with across our State. 

I wanted to just raise two questions. One, in part that circumstance is related to significantly lower agricultural commodity 

prices, significantly lower prices in oil production, natural gas production. And part of that is a consequence of, I assume, the value 

of our dollar in comparison to other currencies and our ability to 

promote exports, both of those—certainly of agriculture commodities, although the law now allows for the export of oil as well. 

But where are we in the value of our dollar? What is the intermediate expectations for us to be able to jumpstart the sale of 

wheat, cattle, corn and other products, airplanes that are manufactured in our State that seemingly are not able to access those markets, in part because of the value of our currency? 

Ms. YELLEN. So the value of the dollar has increased significantly since, say, mid-2014. Partly that reflects the fact that the 

U.S. has enjoyed a stronger recovery than many other advanced 

Nations. And that has created an expectation that in the U.S., interest rates will rise at a more rapid pace than in other parts of 

the world, and that has induced inflows into our assets that have 

pushed up the dollar. 

But more broadly, the trends you have seen in commodity prices 

I think reflect a larger set of global forces. In some cases we have 

seen significant increases in the supply of commodities. In the case 

of oil, the rapid growth of U.S. ability to supply oil markets has 

been a factor. And then there has been a slowdown in global 

growth, and particularly in China, which has been an important 

consumer of so many commodities. China is on a path—and it is 

understood this will continue—a path of slowing growth. And—you 

have seen for many commodity prices plummet just because of 

basic supply-and-demand considerations. The dollar makes some 

difference to that as well. 

Senator MORAN. We often talk about, when we talk about exports, trade agreements. Has the Fed weighed in, or have you expressed an opinion previously about other countries and their ability to manipulate currencies to our disadvantage of exports? 

Ms. YELLEN. The responsibility for currency policy rests with—— 

Senator MORAN. With the Treasury Department. 

Ms. YELLEN. ——the Secretary of the Treasury, and we do not 

weigh in on that. 

Senator MORAN. Madam Chairwoman, let me ask you about 

something in your testimony. You indicate that business investment outside the energy sector was surprisingly weak. Would you 

indicate to me—elaborate on the factors that lead you to that statement? And when you exclude the energy sector, is that just because 

of definition or is something happening in the energy sector that 

indicates investment? 

Ms. YELLEN. Well, drilling activity has been very important and 

it is counted as part of investment activities. So with the huge 

plunge in oil prices, even though there has been some recovery, we 

have seen the number of rigs in operation just plummet. And that 

is part of why aggregate investment spending has been so weak. 

37 

And we understand that and expect it because it reflects the decline in oil prices. 

But even when we go outside the energy sector or other sectors 

that are directly related to energy and supplying inputs to it, investment spending recently—and this is just a report on the data; 

I do not have a story to offer you on why this has happened—it has 

been surprisingly weak over the last several months. 

It has not been very strong investment spending generally—we 

talked about this earlier—during the recovery, but it has been— 

and we think we understand some reasons why it has generally 

been weak, namely slow growth and less rapid increase in the labor 

force. But it has been surprisingly weak in recent months and it 

is something we are watching, and I cannot tell you just what that 

is due to. 

Senator MORAN. I would not expect you to say this but, in my 

view, in part that lack of investment or that reduction in investment is related to a wide array of circumstances. One of them 

would be the debt and deficit, the uncertainty of our economy, lack 

of economic growth generally. The economic indicators are downtrending, not up-trending a sufficient number of times to instill a 

sense of confidence. The next regulation that may come their way 

as a businessperson, just decisions to make investments, people are 

deciding it is more risky to invest than to not. 

Ms. YELLEN. Well, those things are certainly mentioned by 

businesspeople. In recent quarters, corporate earnings have also 

been under downward pressure for a variety of reasons. 

Senator MORAN. Well, I would conclude my remarks by indicating that one of the places we ought to focus our attention is on 

innovation, startup businesses, new entrepreneurs, and the uncertainty that they face is even more of a dramatic—has more dramatic consequence than a larger business that can better internalize and handle that uncertainty. 

Mr. Chairman, thank you very much. Thank you, Chairwoman. 

Chairman SHELBY. Senator Cotton. 

Senator COTTON. Thank you. 

And thank you, Chair, for being a force again. I know these are 

always two highlights of every year for you. 

I want to return to some of the earlier discussion of the so-called 

Brexit, the referendum that will occur in the United Kingdom on 

Thursday, on whether Great Britain should remain or leave the 

EU. Your testimony on page 4 says, ‘‘One development that could 

shift investor sentiment is the upcoming referendum in the United 

Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions’’—‘‘could,’’ which you stressed to 

Senator Heller in his comments. That sounds to me like the usual 

prudence and caution you use in all of your public statements. 

You also stated to Senator Heller, ‘‘I don’t want to overblow the 

likely impacts.’’ That reminds me of Yogi Berra’s old sage advice 

that predictions are hard, especially about the future. 

Ms. YELLEN. That is absolutely true. I could not agree with that 

more. 

[Laughter.] 

38 

Senator COTTON. Yet, in the last few minutes, here is how the 

Guardian of London reports your testimony to the Committee: 

‘‘Yellen warns on Brexit.’’ Not exactly what you said, is it? 

Ms. YELLEN. I said that we were monitoring it and that it could 

have consequences with the United States. 

Senator COTTON. You would not characterize your testimony as 

a warning on the Brexit? 

Ms. YELLEN. If that means that I am warning U.K. residents, I 

am not attempting to take a stand. They are going to go to the 

polls. They have had an active debate on the issues and I am not 

providing advice in that sense. 

Senator COTTON. Good. Thank you. I sympathize when headlines 

do not exactly capture the exact meaning of what one says. And to 

be fair to the Guardian, they are not the only outlet that has reported your testimony along those lines. The BBC, Reuters, CNBC, 

and Fortune have, as well. 

So to be crystal clear, you take no position on whether U.K. citizens should vote to remain or leave the EU, and the Federal Reserve takes no position. 

Ms. YELLEN. That is correct. It is for them to decide. I am simply 

saying the decision could have economic consequences that would 

be relevant to the U.S. economic outlook that we need to monitor 

carefully. 

Senator COTTON. Thank you for that, because I certainly think 

that we all in America, and particularly in positions of leadership 

in our Government, should respect the British people’s sovereign 

right to govern their own affairs. 

One point you made in your earlier comments about Brexit, 

about the potential source of these economic repercussions, is ‘‘a period of uncertainty.’’ That is something I hear frequently in commentary about the Brexit. Is there any time when the global economy or the U.S. economy does not operate in a condition of uncertainty? 

Ms. YELLEN. Well, there is uncertainty, but this is a unique 

event that has no close parallel. It is hard to know what the consequences would be. Of course there is always uncertainty domestically and globally. We operate in an uncertain environment. 

Senator COTTON. Many of your counterparts in the Continent, 

many of my elected counterparts in the Continent, have not treated 

the matter so even-handedly. They have opined on what British 

citizens should do. They have also been responsible for other things 

that have caused uncertainties in recent years, like the Greek debt 

crisis or other debt crises in Europe, or the suspension of the 

Schengen zone privileges because of the flow of migrants into Europe, and terrorists now infiltrating that flow and launching attacks in Paris and just a few blocks away from the heart of the European Union. 

Those would also potentially cause periods of uncertainty in the 

European and the global economy, wouldn’t they? 

Ms. YELLEN. Absolutely. 

Senator COTTON. Is there a risk that some of the dire predictions 

about Brexit could become—or the reaction to the Brexit could become a self-fulfilling prophecy in the economy? Some British politicians have promised—or perhaps I should say threatened—immeVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
39 

diate tax increases or budget cuts if the U.K. citizens vote to leave. 

Some continental leaders have threatened punitive and retaliatory 

action if the U.K. votes to leave. Our own President has said that 

the United Kingdom would have to go to ‘‘the back of the queue’’ 

for any new trade agreement. 

Do these statements have the potential to create a self-fulfilling 

prophecy that would lead to increased uncertainty, whatever the 

outcome on Thursday? 

Ms. YELLEN. You know, I do not want to comment on what various participants in this debate have said or the advice they have 

given the British people. There is an active debate. It is not inappropriate, with a decision of this sort, for many parties to weigh in 

about the consequences. As I said, I am not trying to offer advice 

myself to the U.K. residents about to go to the polls. 

Senator COTTON. Thank you; nor am I. 

One final point. Your counterpart at the ECB has said that the 

ECB is ‘‘ready for all contingencies following the U.K.’s EU referendum.’’ Can you say the same thing about the Federal Reserve? 

You are ready for all contingencies following the vote on Thursday? 

Ms. YELLEN. Well, in the sense that we will closely monitor what 

the economic consequences would be and are prepared to act in 

light of that assessment. 

Senator COTTON. And should the U.K. vote to leave the EU, the 

United States Government as a whole, and the Federal Reserve in 

particular, will handle that contingency in the spirit of magnanimity, generosity, and friendship among Nations? 

Ms. YELLEN. Well, it would certainly be my inclination to do so. 

Senator COTTON. Thank you for that. 

Chairman SHELBY. Thank you. 

Madam Chair, I want to shift the conversation a little bit to custody banks, which are very important. I think that would be banks 

like State Street and New York Mellon and, I am sure, others. 

It has been reported that custody banks have turned away deposits or are charging fees on deposits because of the Enhanced Supplementary Leverage Ratio. You received public comments stating 

that the rule could limit the ability of custody banks to accept deposits, particularly during periods of stress. 

Is the Fed currently examining how this rule is impacting custody banks’ ability to accept deposits, one? Two, could this rule increase systemic risk during times of stress? And three, just for the 

audience—they probably know—what is a custody bank as opposed 

to the ordinary retail bank, for example? 

Ms. YELLEN. So a custody bank is one that handles transactions 

for other customers, like asset managers. 

Chairman SHELBY. Very important, isn’t it? A custody bank is 

important to the banking system, is it not? 

Ms. YELLEN. Yes, they are. 

Chairman SHELBY. OK. 

Ms. YELLEN. And we certainly are aware that they are concerned 

about the Supplementary Leverage Ratio impacting their profitability. Leverage ratios are normally intended to be a backup form 

of capital regulation. They are not oriented toward the risk of particular assets in the balance sheet but impose a minimum amount 

of capital that applies to the entire balance sheet, all assets. And 

40 

so, for safe assets in banks that hold large quantities of safe assets, 

it can be a burden. And it is something that we will monitor, but 

this is the way leverage ratios have always been imposed against 

all of the assets of the overall size of the organization. 

Chairman SHELBY. Thank you. 

Senator Brown, do you have anything else? 

Senator BROWN. Nope, that is it. Thank you. 

Chairman SHELBY. Madam Chair, thank you for your participation. I know it has been long, but I thank you for appearing before 

the Committee again. 

Ms. YELLEN. Thank you. 

Chairman SHELBY. The Committee is adjourned. 

[Whereupon, at 12:27 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

41 

PREPARED STATEMENT OF JANET L. YELLEN 

CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JUNE 21, 2016 

Chairman Shelby, Ranking Member Brown, and other Members of the Committee, 

I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report 

to the Congress. In my remarks today, I will briefly discuss the current economic 

situation and outlook before turning to monetary policy. 

Current Economic Situation and Outlook 

Since my last appearance before this Committee in February, the economy has 

made further progress toward the Federal Reserve’s objective of maximum employment. And while inflation has continued to run below our 2-percent objective, the 

Federal Open Market Committee (FOMC) expects inflation to rise to that level over 

the medium term. However, the pace of improvement in the labor market appears 

to have slowed more recently, suggesting that our cautious approach to adjusting 

monetary policy remains appropriate. 

In the labor market, the cumulative increase in jobs since its trough in early 2010 

has now topped 14 million, while the unemployment rate has fallen more than 5 

percentage points from its peak. In addition, as we detail in the Monetary Policy 

Report, jobless rates have declined for all major demographic groups, including for 

African Americans and Hispanics. Despite these declines, however, it is troubling 

that unemployment rates for these minority groups remain higher than for the Nation overall, and that the annual income of the median African American household 

is still well below the median income of other U.S. households. 

During the first quarter of this year, job gains averaged 200,000 per month, just 

a bit slower than last year’s pace. And while the unemployment rate held steady 

at 5 percent over this period, the labor force participation rate moved up noticeably. 

In April and May, however, the average pace of job gains slowed to only 80,000 per 

month or about 100,000 per month after adjustment for the effects of a strike. The 

unemployment rate fell to 4.7 percent in May, but that decline mainly occurred because fewer people reported that they were actively seeking work. A broader measure of labor market slack that includes workers marginally attached to the workforce and those working part-time who would prefer full-time work was unchanged 

in May and remains above its level prior to the recession. Of course, it is important 

not to overreact to one or two reports, and several other timely indicators of labor 

market conditions still look favorable. One notable development is that there are 

some tentative signs that wage growth may finally be picking up. That said, we will 

be watching the job market carefully to see whether the recent slowing in employment growth is transitory, as we believe it is. 

Economic growth has been uneven over recent quarters. U.S. inflation-adjusted 

gross domestic product (GDP) is currently estimated to have increased at an annual 

rate of only 3⁄4 percent in the first quarter of this year. Subdued foreign growth and 

the appreciation of the dollar weighed on exports, while the energy sector was hard 

hit by the steep drop in oil prices since mid-2014; in addition, business investment 

outside of the energy sector was surprisingly weak. However, the available indicators point to a noticeable step-up in GDP growth in the second quarter. In particular, consumer spending has picked up smartly in recent months, supported by 

solid growth in real disposable income and the ongoing effects of the increases in 

household wealth. And housing has continued to recover gradually, aided by income 

gains and the very low level of mortgage rates. 

The recent pickup in household spending, together with underlying conditions 

that are favorable for growth, lead me to be optimistic that we will see further improvements in the labor market and the economy more broadly over the next few 

years. Monetary policy remains accommodative; low oil prices and ongoing job gains 

should continue to support the growth of incomes and therefore consumer spending; 

fiscal policy is now a small positive for growth; and global economic growth should 

pick up over time, supported by accommodative monetary policies abroad. As a result, the FOMC expects that with gradual increases in the Federal funds rate, economic activity will continue to expand at a moderate pace and labor market indicators will strengthen further. 

Turning to inflation, overall consumer prices, as measured by the price index for 

personal consumption expenditures, increased just 1 percent over the 12 months 

ending in April, up noticeably from its pace through much of last year but still well 

short of the Committee’s 2-percent objective. Much of this shortfall continues to reflect earlier declines in energy prices and lower prices for imports. Core inflation, 

which excludes energy and food prices, has been running close to 11⁄2 percent. As 

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42 

ens further, the Committee expects inflation to rise to 2 percent over the medium 

term. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal. 

Of course, considerable uncertainty about the economic outlook remains. The latest readings on the labor market and the weak pace of investment illustrate one 

downside risk—that domestic demand might falter. In addition, although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the 

possibility expressed by some prominent economists that the slow productivity 

growth seen in recent years will continue into the future. Vulnerabilities in the global economy also remain. Although concerns about slowing growth in China and falling commodity prices appear to have eased from earlier this year, China continues 

to face considerable challenges as it rebalances its economy toward domestic demand and consumption and away from export-led growth. More generally, in the 

current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A U.K. vote to exit the 

European Union could have significant economic repercussions. For all of these reasons, the Committee is closely monitoring global economic and financial developments and their implications for domestic economic activity, labor markets, and inflation. 

Monetary Policy 

I will turn next to monetary policy. The FOMC seeks to promote maximum employment and price stability, as mandated by the Congress. Given the economic situation I just described, monetary policy has remained accommodative over the first 

half of this year to support further improvement in the labor market and a return 

of inflation to our 2-percent objective. Specifically, the FOMC has maintained the 

target range for the Federal funds rate at 1⁄4 to 1⁄2 percent and has kept the Federal 

Reserve’s holdings of longer-term securities at an elevated level. 

The Committee’s actions reflect a careful assessment of the appropriate setting for 

monetary policy, taking into account continuing below-target inflation and the 

mixed readings on the labor market and economic growth seen this year. Proceeding 

cautiously in raising the Federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to 

a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2-percent objective. Another factor 

that supports taking a cautious approach in raising the Federal funds rate is that 

the Federal funds rate is still near its effective lower bound. If inflation were to remain persistently low or the labor market were to weaken, the Committee would 

have only limited room to reduce the target range for the Federal funds rate. However, if the economy were to overheat and inflation seemed likely to move significantly or persistently above 2 percent, the FOMC could readily increase the target 

range for the Federal funds rate. 

The FOMC continues to anticipate that economic conditions will improve further 

and that the economy will evolve in a manner that will warrant only gradual increases in the Federal funds rate. In addition, the Committee expects that the Federal funds rate is likely to remain, for some time, below the levels that are expected 

to prevail in the longer run because headwinds—which include restraint on U.S. 

economic activity from economic and financial developments abroad, subdued household formation, and meager productivity growth—mean that the interest rate needed to keep the economy operating near its potential is low by historical standards. 

If these headwinds slowly fade over time, as the Committee expects, then gradual 

increases in the Federal funds rate are likely to be needed. In line with that view, 

most FOMC participants, based on their projections prepared for the June meeting, 

anticipate that values for the Federal funds rate of less than 1 percent at the end 

of this year and less than 2 percent at the end of next year will be consistent with 

their assessment of appropriate monetary policy. 

Of course, the economic outlook is uncertain, so monetary policy is by no means 

on a preset course and FOMC participants’ projections for the Federal funds rate 

are not a predetermined plan for future policy. The actual path of the Federal funds 

rate will depend on economic and financial developments and their implications for 

the outlook and associated risks. Stronger growth or a more rapid increase in inflation than the Committee currently anticipates would likely make it appropriate to 

raise the Federal funds rate more quickly. Conversely, if the economy were to disappoint, a lower path of the Federal funds rate would be appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with their attainment over time. 

43 

The Committee is continuing its policy of reinvesting proceeds from maturing 

Treasury securities and principal payments from agency debt and mortgage-backed 

securities. As highlighted in the statement released after the June FOMC meeting, 

we anticipate continuing this policy until normalization of the level of the Federal 

funds rate is well under way. Maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and should reduce 

the risk that we might have to lower the Federal funds rate to the effective lower 

bound in the event of a future large adverse shock. 

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

44 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM JANET L. YELLEN 

Q.1. In connection with the release of the proposed rule on singlecounterparty credit limits, the Board released a white paper with 

a quantitative credit risk model and calibrated that model to determine the appropriate credit limits. Will you commit to using similar quantitative analyses on all future capital and liquidity 

rulemakings, and will you make such analyses public? 

A.1. The Federal Reserve Board (Board) carefully considers the cost 

and benefits of all regulations that it proposes. The nature and 

scope of the analysis depends in large part on the nature of the 

rule, the underlying statutory framework for the rule, and the extent to which the potential costs and benefits of the rule lend themselves to rigorous quantification. 

The Board typically publishes its assessment of the costs, benefits, and impact of a rule as part of the rule itself, but has occasionally issued such an assessment in a separate white paper. In each 

case, the Board chooses a publication format for its assessment 

that is best suited for the public communication of the particular 

analysis and results. The Board has chosen to publish white papers 

on occasions where the level of detail needed to communicate its 

assessment has been greater than what would typically appear in 

the preamble to a proposed or final rule. 

It is important to point out that the calibration of a rule can 

rarely be fully reduced to the output of a single mathematical formula with a set of parameters that are known with certainty. 

Therefore, the Board is careful not to ascribe a false level of precision to its analyses. Typically, the Board’s goal in publishing an 

analysis such as the Calibrating the Single-Counterparty Credit 

Limit between Systemically Important Financial Institutions white 

paper is not to derive an exact calibration for a regulatory threshold, but rather to demonstrate that under a range of plausible assumptions and parameter values, the calibration of the regulatory 

threshold in question is defensible. In the case of proposed 

rulemakings, the publication of the analysis may also point out 

where further data from the industry could be helpful, and may encourage the industry to provide such data during the comment period. 

In the future, the Board will continue to perform appropriate 

quantitative analyses for proposed and final rules, and will strive 

to publish such analyses in the most suitable form to solicit public 

input on, and enhance public understanding of, our rules. 

Q.2. Is it possible that the [Enhanced Supplementary Leverage 

Ratio] rule could increase systemic risk due to its impact on the 

ability of custody banks to accept deposits during times of stress? 

What type of analysis has the Board performed to examine this 

issue? 

A.2. The Federal Reserve Board (Board) and the other Federal 

banking agencies (the Office of the Comptroller of the Currency 

and the Federal Deposit Insurance Corporation) adopted enhanced 

supplementary leverage ratio (SLR) standards for the largest, global systemically important bank holding companies and their insured depository subsidiaries, effective January 1, 2018 (5 percent 

45 

1See 79 FR 24528 (May 1, 2014). 2See 12 CFR 3.1(d)(4) (OCC); 12 CFR 217.1(d)(4) (Federal Reserve); 12 CFR 324.1(d)(4) 

(FDIC). 3See: http://www.federalreserve.gov/newsevents/press/monetary/20081125b.htm. 

and 6 percent SLR, respectively). 1 The enhanced SLR is one part 

of the enhanced prudential standards adopted by the Board that, 

taken together, improve the resiliency of individual companies and 

strengthen financial stability. For example, companies subject to 

the enhanced SLR standards are also subject to risk-based capital 

surcharges that are scaled to their systemic risk profiles, liquidity 

risk management and risk measurement requirements, 

supervisory- and company-run stress testing and capital planning 

requirements, and resolution planning standards. 

Depending on a banking organization’s business structure and 

mix of assets, banking organizations will be affected by the SLR 

differently. Custody banks, which engage in a variety of activities 

may experience increases in assets based on economic events, particularly during periods of financial market stress. The SLR does 

not impose any specific restrictions on any particular asset profile, 

including the asset profile of custody banks. Rather, the SLR requires that banking organizations hold a certain amount of capital 

to support their total assets. In this regard, the SLR final rule requires banks to use daily average balance-sheet assets to calculate 

the amount of their assets each quarter. This approach helps to 

mitigate the impact of spikes in deposits that banking organizations, such as custody banks, may experience. The agencies also 

have reserved authority under their respective capital rules to require a banking organization to use a different asset amount for an 

exposure included in the SLR to address extraordinary situations. 2

As part of several rulemakings that are applicable to global systemically important banking organizations, which includes the 

largest U.S. custodial banking organizations, the Board estimated 

the impact that such rulemakings would have on these firms’ regulatory capital ratios, including on the leverage ratio. Prior to finalizing the enhanced SLR standards, the staff of the Federal banking 

agencies, including Board, analyzed regulatory and confidential supervisory data to determine the quantitative impact of these rules 

on subject firms. According to their public disclosures, global systemically important bank holding companies and their insured depository institutions have made significant progress in complying 

with the enhanced SLR standards that take effect January 1, 2018. 

Board staff continuously evaluates the capital planning processes 

and capital adequacy of the largest U.S.-based bank holding companies through its Comprehensive Capital Analysis and Review 

(CCAR), which will incorporate the SLR requirements under 

stressed conditions beginning with the 2017 exercise. 

Q.3. One of the stated goals of the Federal Reserve’s Quantitative 

Easing (QE) programs was to put downward pressure on long-term 

interest rates and thereby ‘‘reduce the cost and increase the availability of credit for the purchase of houses, which in turn should 

support housing markets and foster improved conditions in financial markets more generally.’’ 3 Nonetheless, studies by Soebel and 

46 

4Stroebel, Johannes, and John B. Taylor (2012), ‘‘Estimated Impact of the Federal Reserve’s 

Mortgage-Backed Securities Purchase Program’’, International Journal of Central Banking 

8(2):1–42. 5 Belke, Ansgar, Daniel Gros, and Thomas Osowski (2016), ‘‘Did Quantitative Easing Affect 

Interest Rates Outside the U.S.? New Evidence Based on Interest Rate Differentials’’, CEPS 

Working Paper No. 416. 

Taylor (2012) 4 and Belke, Gros, and Osowski (2016), 5 among others, have found that QE was not effective at reducing long-term 

rates. To what degree can currently low long-term interest rates be 

attributed to a decades-long trend of decline versus the effects of 

QE? 

A.3. The Federal Reserve and many other central banks have used 

purchases of longer-term assets as a tool to provide additional policy accommodation once the level of short-term interest rates 

reached the effective lower bound. The effectiveness of large-scale 

asset purchases (LSAPs) as a tool for providing additional policy 

accommodation—at both conceptual and empirical levels—has been 

a topic of active discussion and research among economists and 

others. On balance, the results of recent research support the view 

that LSAPs are an important and effective tool that central banks 

can use to put downward pressure on longer-term rates and make 

overall financial conditions more accommodative. These changes in 

financial conditions, in turn, help to support the level of economic 

activity and guard against disinflationary pressures. 

Regarding the conceptual framework for the effects of LSAPs, 

many authors have pointed to a range of channels through which 

large scale asset purchases may affect financial markets and the 

economy. A particularly important channel for the influence of 

LSAPs operates through basic supply and demand factors. By purchasing large volumes of longer-term Treasury and agency securities in its large scale asset purchase programs, the Federal Reserve 

reduced the quantity of those assets held by private investors. 

Given strong private sector demand for those longer-term Treasury 

and agency securities, the reduction in the available private supply 

of those assets tended to push up their prices and push down their 

yields. Investors holding lower-yielding Treasury and agency securities then tend to bid up the prices and push down the yields on 

other assets that are reasonably close substitutes such as corporate 

bonds and many other fixed-income investments. Lower levels of 

private yields generally boost the prices for a range of assets including equities, home values, and many other types of investments. These changes in financial conditions, on net, contribute to 

lower borrowing costs for households and businesses and generally 

more accommodative financial conditions. 

Regarding the empirical basis for the effectiveness of LSAPs, 

while the studies that you cite conclude that LSAPs have not been 

effective, many other studies to date find that these programs have 

been successful in providing additional policy accommodation. Indeed, some studies suggest that yields on longer-term Treasury securities could be 50 to 100 basis points lower at present than would 

otherwise be the case in the absence of the Federal Reserve’s asset 

purchases. Moreover, these estimates typically focus on only the direct effects of LSAPs on yields operating through basic supply effects and thus may understate the effects of asset purchases that 

47 

6 Vayanos, Dmitri, and Jean-Luc Vila (2009), ‘‘A Preferred Habitat Model of the Term Structure of Interest Rates’’, NBER Working Paper, 15487. 7Li, Canlin, and Min Wei (2013), ‘‘Term Structure Modelling With Supply Factors and the 

Federal Reserve’s Large Scale Asset Purchase Programs’’, International Journal of Central 

Banking, 9(1), pp.3–39. 8 Hamilton, James, and Cynthia Wu (2011), ‘‘The Effectiveness of Alternative Monetary Policy 

Tools in a Zero Lower Bound Environment’’, NBER Working Paper 16956. 9D’Amico, Stefania, William English, David Lopez-Salido, and Edward Nelson (2012), ‘‘The 

Federal Reserve’s Large-Scale Asset Purchase Programs: Rationale and Effects’’, FEDS Working 

Paper series, 2012-85. 10 Chung, Hess, Jean-Philippe Laforte, David Reifschneider, and John Williams (2012), ‘‘Have 

We Underestimated the Likelihood and Severity of Zero Lower Bound Events?’’ Journal of 

Money, Credit and Banking, vol. 44(S1), 47–82. 11 Engen, Eric M., Thomas Laubach, and David Reifschnieder (2015), ‘‘The Macroeconomic Effects of the Federal Reserve’s Unconventional Policies’’, FEDS Working Paper, 2015-005. 

can stem from other channels. For example, large scale asset purchase programs may help to reinforce central bank communications 

about the future path of the Federal funds rate—the so-called signaling channel. In addition, large scale asset purchases may have 

significant effects in financial markets at times when markets are 

under severe stress by enhancing market liquidity and bolstering 

market confidence. By boosting asset prices and lowering borrowing 

costs, these changes in asset prices provide support for spending 

and guard against downward pressures on inflation. 

See Vayanos and Vila (2009) 6 and Li and Wei (2013 ) 7 for a discussion of the effects of LSAPs on interest rates in a modern models of the term structure of interest rates. See Li and Wei (2013), 

Hamilton and Wu (2011) 8, and D’Amico, English, Lopez-Salido, 

and Nelson (2012) 9 for a discussion of empirical estimates of the 

effects of LSAPs; see Chung, Laforte, Reifschneider, and Williams 

(2012) 10 and Engen, Laubach, and Reifschneider (2015) 11 for a discussion of the effects of LSAPs in providing macroeconomic stimulus. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JANET L. YELLEN 

Q.1. In previous hearings I have encouraged our banking regulators to make the 10-year regulatory review meaningful and provide specific ways to reduce the regulatory burden on financial institutions while at the same time ensuring the safety and soundness of the financial system. Last week Senator Tester and I sent 

you a letter highlighting feedback from the EGRPRA outreach 

meetings questioning the need for four capital minimum requirements, a capital conservation buffer, and the complexity in the definition of tier 1 capital for community banks. 

Do you agree that our banking regulators should simplify and 

tailor the capital framework for community banks? 

A.1. Federal Reserve Board (Board) staff are currently exploring 

ways to simplify and tailor the regulatory capital requirements for 

community banking organizations in a manner that will be consistent with the safety and soundness aims of prudential regulation 

and with statutory requirements. As part of these efforts, Board 

staff are considering simplifications to certain aspects of the current capital framework, including those suggested in your letter, 

and associated reporting forms and instructions. 

48 

Q.2. On June 9th, the European Commission announced that it 

would delay its start date from September 1 to mid-2017 on the implementation of the margin requirements. I assume this announcement surprised you and your fellow regulators since for the last 3 

years all the international regulators have been working to ensure 

global consistency in application of margin requirements in various 

jurisdictions around the world and established a phased-in schedule. 

What steps can the U.S. regulators take to address this timing 

issue and avoid fragmentation and competitive disadvantages and 

achieve global consistency? 

A.2. On June 9, 2016, U.S. regulators were informed by staff of the 

European Commission that the Basel Committee on Banking Supervision–International Organization of Securities Commissions’ 

(BCBS–IOSCO) margin framework for over-the-counter derivatives 

would not be enacted in the European Union in time for the upcoming September 2016 implementation deadline. 

Under the BCBS–IOSCO framework, large swap market participants with over $3 trillion in noncleared swaps exposures are to 

begin complying with margin requirements on September 1, 2016, 

for their noncleared swaps with other large market participants. 

This agreed-upon implementation schedule is reflected in the final 

swap margin rules adopted in October 2015 and November 2015 by 

the U.S. prudential regulators and the Commodity Futures Trading 

Commission (CFTC), respectively. 

Minimum margin requirements for noncleared swaps are among 

the most important postfinancial crisis reforms to reduce uncertainty around possible exposures arising from noncleared swaps by 

requiring firms to have financial resources commensurate with the 

risks of the swaps into which they have entered. Sections 731 and 

764 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandate that the U.S. regulators write 

rules for initial margin and variation margin for noncleared swaps. 

We intend to move forward with implementation of the prudential regulator final swap margin rule on September 1, 2016, as 

agreed to under the BCBS–IOSCO framework and as required by 

the Dodd-Frank Act. We have consulted with colleagues at the 

CFTC, and we understand they also plan to move forward with implementation on September 1, 2016. 

We are in close communication with our European Union counterparts and are urging them to move forward with implementation 

as soon as possible to avoid fragmentation and competitive disadvantages and achieve global consistency. 

Q.3. I have heard concerns from clearinghouses and end users of 

the derivatives markets related to the treatment of customer margin under the Basel leverage ratio. The posting of margin is required for end user customers who use the futures market to manage their business risks. As was widely espoused during development of the Dodd-Frank Act, margin posted to a clearing member 

bank both protects the customer from counterparty risk and offsets 

the clearing member bank’s exposure to the clearinghouse. 

49 

1 79 FR 57725, 57728, and 57735, September 26, 2014. 

Why then does the leverage ratio not recognize this offset rather 

than penalize bank affiliated clearing members who accept customer margin? 

A.3. The Board and the other Federal banking agencies (the Office 

of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) adopted a supplementary leverage ratio (SLR) 

rule that applies to internationally active banking organizations. 1

As designed, the SLR rule requires a banking organization to hold 

a minimum amount of capital against on-balance sheet assets and 

off-balance exposures, regardless of the riskiness of the individual 

exposure. This leverage ratio requirement is designed to recognize 

that the risk a banking organization poses to the financial system 

is a factor of its size as well as the composition of its assets. The 

denominator of the SLR, total leverage exposure, generally includes 

all on-balance sheet assets as determined by United States generally accepted accounting principles, as well as certain off balance 

sheet items. If a banking organization records clients’ cash initial 

margin on its balance sheet, such margin is included in the banking organization’s total leverage exposure. Whether cash initial 

margin is recorded on the balance sheet depends on the details of 

each specific margin agreement. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM JANET L. YELLEN 

Q.1. The Financial Stability Board (FSB), of which the Federal Reserve is a member, has designated several American companies as 

global systemically important insurers (G-SIIs). The U.S., however, 

has its own designation process for nonbank systemically important 

financial institution (SIFI) managed by the Financial Stability 

Oversight Council (FSOC). Though the FSB and FSOC share some 

members, not all American G-SIIs are currently SIFIs. This disparity in designations appears to undermine the credibility of both 

regulatory bodies. Should the U.S. representatives to the FSB support the rescission of the G-SII designation for American companies 

that are not U.S. designated SIFIs? 

A.1. Since the financial crisis, U.S. authorities and foreign regulators have been working to identify institutions whose failure or 

distress may pose a threat to financial stability, including nonbank 

financial companies like insurance firms. The leaders of the Group 

of 20 Nations, including the United States, charged the Financial 

Stability Board (FSB) with identifying firms whose distress would 

threaten the global economy. The Financial Stability Oversight 

Council (FSOC) undertakes a process for designating nonbank 

firms as systemically important that assesses the potential harm 

that a firm’s distress or failure could cause to the economy of the 

United States. The fact that both groups have examined the same 

firms, at times in close proximity, is to be expected given the limited number of firms that would reasonably be large and interconnected enough to be considered systemically important. 

However, the specific designation frameworks and standards at 

the FSB and FSOC are distinctive. The FSB’s process for identiVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
50 

fying global systemically important insurers (G-SIIs) is completely 

independent from the FSOCs designation process. Indeed, a designation by the FSB that an insurer is systemically important 

would not logically require a similar finding by the FSOC, even if 

the FSB and the FSOC agreed on the underlying facts. The methodology for identifying G-SIIs is developed by the International Association of Insurance Supervisors (IAIS) and has been updated 

this year. The FSOC’s analysis is based on a broad range of quantitative and qualitative information available to the FSOC through 

existing public and regulatory sources and as submitted to the 

FSOC by the firms under consideration. The analysis is tailored, as 

appropriate, to address company-specific risk factors, including, but 

not limited to, the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the firms. In addition, 

any standards adopted by the FSB, including any designation of an 

entity as a G-SII, are not binding on the Federal Reserve, the 

FSOC, or any other agency of the U.S. Government, or any U.S. 

companies. Thus, FSB designation of an entity as a G-SII does not 

result in the Federal Reserve becoming the entity’ s prudential regulator. Under the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act), the FSOC is responsible for deciding whether a nonbank financial company should be regulated and 

supervised by the Federal Reserve Board, based on the FSOC’s assessment of the extent to which the failure, material distress, or 

ongoing activities of that entity could pose a risk to the U.S. financial system. 

As a member of the FSB, the Federal Reserve, together with 

other U.S. agencies, participates in the FSB’s work, including G-SII 

designations, and provides input that considers implications for 

U.S. domiciled firms that the Federal Reserve supervises as well as 

global financial stability. A decision to rescind the designation of 

any G-SII requires a careful evaluation of the firm and its global 

systemic footprint in accordance with the methodology developed 

by the IAIS. The Federal Reserve, the U.S. Securities and Exchange Commission, and the U.S. Department of Treasury are all 

members of the FSB and engage in the FSB’s global financial stability work. Moreover, the Federal Reserve is participating as a 

member of the IAIS alongside the Federal Insurance Office (FIO), 

the National Association of Insurance Commissioners (NAIC), and 

State insurance regulators in the development of international insurance standards that best meet the needs of the U.S. insurance 

market and consumers. The Federal Reserve, along with other 

members of the U.S. delegation at the FIO and NAIC, actively engage U.S. interested parties on issues being considered by the IAIS. 

Q.2. Will the FSB review its list of G-SIIs in 2016, and will that 

review include the possibility for the rescission of current G-SII 

designations? What analysis will the Fed review or develop to support its positions on 2016 G-SII designations? 

A.2. As noted by the FSB in its 2015 update of the list of G-SIIs, 

‘‘the group of G-SIIs would be updated annually based on new data 

published by the FSB each November,’’ where changes to the list 

may ‘‘reflect changes in the level and/or type of activity undertaken 

by the relevant institutions, combined with supervisory judgVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
51 

1FSB, 2015 Update of List of Global Systemically Important Insurers (G-SIIs) dated Nov. 3, 

2015, available at http://www.fsb.org/wp-content/uploads/FSB-communication-G-SIIs-Finalversion.pdf. 

ment.’’ 1 The 2016 review will cover the presently identified G-SIIs, 

which may result in changes to the institutions included in the list, 

and will use the G-SII assessment methodology as updated by the 

IAIS on June 16, 2016, among other things. Federal Reserve staff 

will review documents associated with the development of the 

methodology and will continue to confer with other U.S. members 

of the FSB and IAIS. 

Q.3. The systemically important designation, by both international 

and American regulators, has proven to have a profound impact on 

designated American companies, their employees, and their customers. Nevertheless, transparency in these designation processes 

remains lacking. As a participant at the FSB, what steps will you 

take to increase transparency into activities at the FSB? 

A.3. The Federal Reserve strongly supports transparency in the 

methods and processes that the IAIS and FSB use to identify GSIIs. On November 25, 2015, the IAIS issued a public consultation 

document on the methodology used to identify and analyze potential G-SIIs. The Federal Reserve participated in the review of comments received from stakeholders in the U.S. and around the 

world. The revised methodology was released as a public paper on 

June 16, 2016, and has been implemented. The revisions to the GSII identification process increased the involvement of the insurance companies and their relevant supervisors in the process 

through its five phases: (1) the collection of data, (2) quality control 

on the data, initial scoring of the company, and grouping relative 

to a quantitative threshold for the score, (3) additional information 

collection and methodical assessment of companies that cross the 

quantitative threshold, (4) information exchange between the company, relevant authorities, and the IAIS, and (5) recommendation 

by the IAIS to the FSB, which then deliberates on a confidential 

basis to protect the confidentiality of company data. The updated 

assessment methodology contemplates transparency that was not 

part of the prior assessment methodology, including transparency 

with companies that are subject to phases 1 through 4 and other 

transparent engagement with companies subject to only phases 1 

and 2, as well as certain public disclosure of aggregate and methodology information after the G-SII identification process is complete. 

Moreover, the JAIS has committed to further developing public disclosure. 

It is important to note that neither the FSB, nor the IAIS, has 

the ability to impose requirements in any national jurisdiction. The 

FSOC makes its own independent decisions on designating 

nonbank financial companies, using the statutory standards set 

forth in the Dodd-Frank Act. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM JANET L. YELLEN 

Q.1. As you know, the financial regulators, including the Federal 

Reserve Board, recently put forward a joint proposed rule on execuVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00055 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
52 

1Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve 

System (Board); Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); National Credit Union Administration (NCUA); and U.S. Securities and Exchange 

Commission (SEC). 2 81 FR 37670 (July 10, 2016). 3Section 956 of the Dodd-Frank Act defines ‘‘covered financial institution’’ to include any of the following types of institutions that have $1 billion or more in assets: (A) a depository institution or depository institution holding company, as such terms are defined in section 3 of the 

Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1813); (B) a broker-dealer registered under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 780); (C) a credit union, as described 

in section 19(b)(1)(A)(iv) of the Federal Reserve Act; (D) an investment adviser, as such term 

is defined in section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); 

(E) the Federal National Mortgage Association (Fannie Mae); (F) the Federal Home Loan Mortgage Corporation (Freddie Mac); and (G) any other financial institution that the appropriate 

Federal regulators, jointly, by rule, determine should be treated as a covered financial institution for these purposes. 

tive compensation pursuant to section 956 of the Dodd-Frank Act. 

The rules, which are intended to reduce systemic risk, would represent a sweeping change to executive compensation arrangements 

for many financial institutions, and would apply to a subset of insurance companies—those that own thrifts. There is concern that 

the rules are very bank-centric and not in any way tailored to insurance companies subject to the rule. As the Fed noted in its release of proposed capital rules for insurers, thrift insurers do not 

pose systemic risk, and generally have a very distinct business 

model from the banks that are the central target of the Fed’s proposed executive compensation rule. The one-size-fits-all approach 

by the Fed in the executive compensation rule is counter to the 

agency’s own statements on thrift insurers, and counter to the 

Fed’s insurance-specific approach for capital rules for thrift insurers. Furthermore, the Federal Reserve’s analysis underlying the 

rule, including the horizontal review, was focused solely on banks. 

Are you willing to conduct an analysis of insurance executive 

compensation practices and insurance risks before finalizing the 

rule for thrift insurers, and will you treat insurers distinctly from 

banks in the final rule, consistent with the treatment of thrift insurers for capital purposes? 

A.1. Pursuant to section 956 of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank Act), the Agencies 1

joint notice of proposed rulemaking 2 covers all depository institution holding companies, including all savings and loan holding companies. 3 As described in the preamble, the proposed rule does not 

establish a rigid, one-size-fits-all approach. Rather, the Agencies 

have tailored the requirements of the proposed rule to the size and 

complexity of covered institutions. In addition, the proposed rule 

would allow firms to tailor the incentive based compensation arrangements to the nature of a particular institution’s business and 

the risks, as long as those incentive-based compensation arrangements appropriately balance risk and reward. The methods by 

which such balance is achieved would be permitted to differ by institution and across business lines and operating units. The preamble invited comment on the impact of the proposed rule on all 

covered institutions. The Agencies have included numerous questions, touching all aspects of the proposed rule, including the tailoring of institutions by asset size and the definitions of significant 

risk takers. We will consider your comments and all comments we 

receive in the final rulemaking process. 

53 

1Dodd-Frank Act section 113(a)(1), 12 U.S.C. § 5323(a)(1). 2The Council may also consider any other risk-related factors that it deems appropriate. 

Dodd-Frank Act section 113(a)(2), 12 U.S.C. §5323(a)(2). 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM JANET L. YELLEN 

Q.1. What are the precise criteria and metrics that Financial Stability Oversight Council (FSOC) uses to determine whether to designate an intuition as a Systemically Important Financial Institution? 

A.1. The Financial Stability Oversight Council (Council) may determine that a nonbank financial company should be supervised by 

the Federal Reserve Board (Board) and be subject to prudential 

standards ‘‘if the Council determines that material financial distress at the U.S. nonbank financial company, or the nature, scope, 

size, scale, concentration, interconnectedness, or mix of the activities of the U.S. nonbank financial company, could pose a threat to 

the financial stability of the United States.’’ 1

In considering whether a nonbank financial company should be 

supervised by the Board and subject to prudential standards, the 

Council considers the following statutory factors: 2

1. The extent of the leverage of the company; 

2. the extent and nature of the off-balance-sheet exposures of the 

company; 

3. the extent and nature of the transactions and relationships of 

the company with other significant nonbank financial companies and significant bank holding companies; 

4. the importance of the company as a source of credit for households, businesses, and State and local governments and as a 

source of liquidity for the United States financial system; 

5. the importance of the company as a source of credit for lowincome, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities; 

6. the extent to which assets are managed rather than owned by 

the company, and the extent to which ownership of assets 

under management is diffuse; 

7. the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company; 

8. the degree to which the company is already regulated by one 

or more primary financial regulatory agencies; 

9. the amount and nature of the financial assets of the company; 

and 

10. the amount and types of the liabilities of the company, including the degree of reliance on short-term funding. 

In 2012, the Council adopted a rule and interpretive guidance 

that describe the manner in which the Council applies the statutory standards and considerations, and the processes and procedures that the Council follows, in making determinations under 

section 113 of the Dodd-Frank Wall Street Reform and Consumer 

54 

3 12 CFR part 1310, app. A. 

4See ‘‘Supplemental Procedures Relating to Nonbank Financial Company Determinations’’, 

Feb. 4, 2015. 

Protection Act (Dodd-Frank Act). 3 In 2015, the Council revised certain of its practices related to evaluation of nonbank financial companies and adopted supplemental procedures to bolster engagement 

with companies during evaluations for potential determinations 

and annual reevaluations, as well as transparency to the public. 4

The Council’s assessment of whether a nonbank financial company meets the statutory standard is based on an evaluation of 

each of the statutory factors, taking into account facts and circumstances relevant to the company. Quantitative metrics, together with qualitative analysis, informs the judgment of the Council when it is evaluating whether a nonbank financial company 

should be supervised by the Board and be subject to prudential 

standards. Because the impact of a firm’s material distress or activities on financial stability is firm-specific, the Council conducts 

its analysis on a company-by-company basis in order to take into 

account the potential risks and mitigating factors that are unique 

to each company. 

Q.2. Do you think there is room for improvement in the FSOC’s annual review and derisking process, and what would you suggest? 

A.2. At the time the Council determines that a nonbank financial 

company should be supervised by the Board and subject to prudential standards, the nonbank financial company is given a detailed 

basis for the determination. A company can use that information, 

as well as the factors the Council is required to consider under the 

Dodd-Frank Act, to guide its effort to reduce its systemic footprint. 

The Dodd-Frank Act requires the Council to reevaluate the determinations at least annually. The Council’s reevaluation process 

considers whether the nonbank financial company continues to 

meet the standards under the Dodd-Frank Act. As explained in its 

final rule and interpretive guidance, the Council may also consider 

a request from a nonbank financial company for a reevaluation before the next required annual reevaluation in the case of an extraordinary change that materially decreases the threat a nonbank 

financial company could pose to U.S. financial stability. 

As part of the annual reevaluation process, each company is provided an opportunity to meet with Council staff to discuss the scope 

and process for the review and to present information regarding 

any change that may be relevant to the threat the company could 

pose to U.S. financial stability, including a company restructuring, 

regulatory developments, market changes, or other factors. lf a 

company requests that the Council rescind the determination, the 

Council has noted that it intends to vote on whether to rescind the 

determination and provide the company, its primary financial regulatory agency, and the primary financial regulatory agency of its 

significant subsidiaries with a notice explaining the primary basis 

for any decision not to rescind the designation. The notice will address the material factors raised by the company during the annual 

reevaluation. In addition, the FSOC will provide each designated 

nonbank financial company an opportunity for an oral hearing before the Council once every 5 years. 

55 

As discussed below, using the foregoing process, the Council has 

recently voted to rescind its determination concerning GE Capital. 

Q.3. Would you consider making a clear exit or off-ramp for designated firms? 

A.3. Because the impact of a firm’s material distress or activities 

on financial stability is firm specific, the Council conducts its analysis on a company-by-company basis in order to take into account 

the potential risks and mitigating factors that are unique to each 

company. At the time the Council determines that a nonbank financial company should be supervised by the Board and subject to 

prudential standards, the nonbank financial company is given a detailed basis for the determination. A company can use that information, as well as other information relating to the factors the 

Council is required to consider under the Dodd-Frank Act, to guide 

its efforts to reduce its systemic footprint. 

As you may be aware, on June 28, 2016, the Council voted to rescind the determination that GE Capital should be subject to supervision by the Board and prudential standards. The Council determined that GE Capital had fundamentally changed its business 

and become a much less significant participant in financial markets and the U.S. economy through a series of divestitures, a transformation of its funding model, and a corporate reorganization. GE 

Capital had decreased its total assets by over 50 percent, shifted 

away from short-term funding, and reduced its interconnectedness 

with large financial institutions. The Council’s decision to rescind 

its final determination was based on extensive quantitative and 

qualitative analyses regarding GE Capital. Upon review of the statutory factors and all the facts of record, the Council determined 

that GE Capital no longer met the standards for determination 

under section 113 of the Dodd-Frank Act and rescinded its determination that GE Capital should be supervised by the Board and 

subject to prudential standards. 

Q.4. The Federal Reserve plays a major role on the Financial Stability Board and chairs the supervisory and regulatory cooperation 

committee. The Federal Reserve is uniquely involved in setting 

international regulatory and supervisory policies that ultimately 

must be implemented by U.S. regulators. 

Would you support having transcripts made at international 

groups the Federal Reserve is a member of so the American public 

knows what is being advocated for and discussed? 

A.4. The Federal Reserve is committed to transparency in the 

international groups of which it is a part. The Financial Stability 

Board (FSB) monitors and assesses vulnerabilities affecting the 

global financial system and recommends actions needed to address 

them. In addition, it monitors and advises on market and systemic 

developments, and their implications for regulatory policy. Before 

the FSB recommends a particular policy action, the FSB typically 

goes through a public notice-and-comment process similar to that 

which would accompany rulemaking in the United States. In addition, it is important to note that none of the policy actions recommended by the FSB would take effect in the U.S. without being 

adopted by U.S. authorities through a notice and comment process. 

56 

5See http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160413a2.pdf. 6See http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160413a1.pdf. 

With respect to the possibility of public transcripts of meetings 

of international groups, there are competing factors that must be 

considered. The benefits of increased transparency must be 

weighed against concerns about exposing confidential or sensitive 

information about firms and markets and concerns about the impact on discussion within the international group, which could 

make the group less effective at achieving its stated goals. 

Q.5. Would you be willing to brief Members of the Senate Banking, 

Housing, and Urban Affairs Committee on what is happening in 

international discussions prior to any new international rules being 

proposed? 

A.5. My staff and I are always available to brief Members of the 

Committee on the status of international regulatory policy discussions. 

Q.6. Does the Financial Stability Board influence the decisions that 

the Federal Stability Oversight Council makes regarding Systemically Important Financial Institution designations? 

A.6. The U.S. Financial Stability Oversight Council (FSOC) determines whether to designate nonbank financial firms as systemically important based on the factors identified in the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (Dodd-Frank 

Act), as interpreted by the FSOC through rulemaking. Whether an 

entity has been designated by the FSB is not a consideration. 

Q.7. Recently the living wills submitted by several banks were rejected by the Federal Reserve and the Federal Deposit Insurance 

Corporation (FDIC). The Federal Reserve and the FDIC came to 

different conclusions regarding two firms. 

How is the criteria used by the Federal Reserve when evaluating 

living wills different than the FDIC’s criteria which is creating 

these split decisions? 

Do you believe providing more clear criteria of what you expect 

to see or fix in living wills would help prevent split decisions between the Federal Reserve and FDIC? 

A.7. In April 2016, the Federal Reserve and the Federal Deposit Insurance Corporation (together, the Agencies) published a joint assessment framework and an explanation of the determinations they 

had made on the firms’ 2015 resolution plans. 5 Specifically, the 

Agencies evaluated the preferred strategy presented by each firm, 

the executability of the firm’s resolution plan, and whether the firm 

had made demonstrable progress to improve its resolvability. In assessing each of the 2015 resolution plans, the Agencies focused on 

seven key elements: capital, liquidity, governance mechanisms, 

operational capabilities, legal entity rationalization, derivatives and 

trading activities, and responsiveness. The Agencies also issued 

joint guidance for the next full resolution plans that are due in 

July 2017. 6

Under Section 165(d) of the Dodd-Frank Act, the Agencies are required to make independent findings. Nonetheless, the Agencies 

closely coordinate to ensure consistency of treatment in the review 

process and reconcile factual findings and identified issues. The 

57 

Agencies reached consensus and agreement repeatedly throughout 

the process, including on the weaknesses identified at particular 

firms and guidance being issued for the next resolution plans. In 

the instances where the agencies differed, they have found agreement on facts and remediations. 

Q.8. Do you believe that the Federal Reserve should study the 

costs and benefits of existing and recent financial regulations before layering on new regulations? 

Do you have concerns about the cumulative impact that all these 

regulations are having on average Americans access to credit or 

main street businesses? 

A.8. The Federal Reserve conducts a variety of economic analyses 

and assessments to support the rulemaking process, and regularly 

publishes these analyses either as part of the proposed or final rule 

itself or as a separate white paper accompanying the rule. In such 

cases, the impact analyses naturally focus on the impact of the specific regulation in question, but the Federal Reserve also gives 

careful consideration to the potential positive and negative interactions among rules. 

More broadly, the Federal Reserve engages in a regular quantitative impact assessment and monitoring program that is coordinated with other global regulators through the Basel Committee on 

Banking Supervision (BCBS). This program, the results of which 

are made public, is designed to assess the overall impact of the new 

postcrisis bank capital and liquidity requirements on the global 

banking system. The Federal Reserve has been participating in this 

impact assessment program since 2012, and it continues to inform 

the Federal Reserve’s understanding of the cost and benefits of 

bank capital and liquidity regulation. 

The Federal Reserve has also participated in several other global 

efforts to assess the costs and benefits of postcrisis financial regulatory reforms through its participation in the FSB and the BCBS. 

The BCBS published a study in 2010 that demonstrated the substantial net economic benefits of stronger bank capital and liquidity 

requirements. The FSB published an updated study in 2015 that 

demonstrated the substantial additional net economic benefits of 

imposing total loss absorbing capacity requirements on the most 

systemic global banks. 

The Federal Reserve carefully considers the overall costs and 

benefits of all of the regulations it promulgates. The overarching 

goal of the Federal Reserve’s regulatory program is to enhance 

bank safety and soundness and financial stability at the least cost 

to economic growth and credit availability. The Federal Reserve is 

committed to conducting an ongoing review to understand how 

postcrisis reform is influencing financial stability and the economy. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM JANET L. YELLEN 

Q.1. I’d like to continue our discussion of the concentration of job 

creation and economic growth in higher-skilled fields. You said in 

recent correspondence that unemployment rates for ‘‘lower skilled 

workers and workers in goods producing industries’’ are around 

58 

1Farber, Henry S. ‘‘Employment Security: The Decline in Worker-Firm Attachment in the 

United States’’, CEPS Working Paper No. 172, January 2008. 2Whether this share has been rising is not clear. See, for example, Moscarini, Giuseppe, and 

Kaj Thomsson, ‘‘Occupational and Job Mobility in the U.S.’’, Scandinavian Journal of Economics 

109(4), 807–836, 2007; and Kambourov, Gueorgui, and Iourii Manovskii, ‘‘Rising Occupational 

and Industry Mobility in the United States: 1968–1997’’, International Economic Review 49(1), 

41–79, 2008. 

twice as high as those for highly skilled workers such as managers 

and professions. 

As I said in our correspondence, this disparity is important because our economy faces a crisis in the nature of work. If we think 

about the history of economics, we had the ‘‘old economy,’’ which 

evolved from hunter gatherers, to settled farmers and big tool manufacturing economies. Now we’re entering into a ‘‘new economy,’’ 

which exists within a global economy and a fast, technology-based, 

information age. 

Could you elaborate on the causes of this uneven growth? In our 

correspondence, you briefly mentioned the ‘‘business cycle and transitory-specific factors,’’ including the housing market collapse and 

the decline in oil prices. 

A.1. In addition to the cyclical and transitory factors, it is the case 

that these disparities in unemployment rates and the shift in employment shares that I cited in my letter of May 25, 2016, are related to longer term developments transforming our economy such 

as globalization and technical change, which I mentioned in my 

February 11, 2016, testimony and which you describe as being related to our economy’s transition from an ‘‘old economy’’ based on 

manufacturing to a new economy. 

Q.2. As I understand it, we have moved from having the average 

duration at a firm for a worker being 26 years in the late 70s, to 

being around 3.8 years now, and dropping. How is this turnover affecting our economy? For example, how many workers must now 

change fields altogether in order to find a new job? 

A.2. Based on data from U.S. Census Bureau and work by Farber, 

it appears that firm tenure has actually not changed much because 

an increase in the age of the population (older people have longer 

tenure) and greater attachment to the labor market among women 

has offset a decline in tenure among men. But tenure has gone 

down for men, especially those over 50. 1 I have not seen statistics 

on how many workers must change fields in order to find a new 

job and whether that has changed over time. The U.S. labor market is very fluid, and a regular feature is that individuals change 

occupations and industries fairly frequently—some studies have estimated that about 20 percent of workers change industry or occupation each year. 2 However, it seems likely that many of these 

transitions are voluntary. 

Q.3. Is this increasing job turnover behind some of the disparity in 

job creation between highly skilled workers and lower skilled workers? 

A.3. It is the case that lower skilled workers experience higher 

turnover and have higher unemployment rates than highly skilled 

workers. In part this may reflect the fact that lower skilled workers 

gain fewer firm-specific skills on the job, or the skills they gain are 

easily taught, and thus it is less costly for firms to replace them. 

59 

3Discouraged workers, as defined by the Bureau of Labor Statistics, are workers who separated from a job in the past year and did some job search but stopped searching because they 

think there is no work available for them. 4 Bureau of Labor Statistics, Household Data, Annual Averages, Table 35. http:// 

www.bls.gov/cps/cpsaat35.pdf. 5Displaced workers are defined as ‘‘persons 20 years of age and older who lost or left jobs 

because their plant or company closed or moved, there was insufficient work for them to do, 

or their position or shift was abolished.’’ ‘‘Worker Displacement: 2011–2013’’, News Release, 

USDL-14-1605, Bureau of Labor Statistics, Department of Labor, August 26, 2014. 

Q.4. What portion of currently unemployed, underemployed, and 

discouraged workers will have to retool their skillset to enter a new 

sector of the economy to become fully employed? 

A.4. It is very difficult to say what proportion of the unemployed 

are structurally unemployed, in the sense that they lack the skills 

to perform the available jobs, and I have not seen the specific estimates you are asking for. One could estimate an upper bound limit 

of about 8 million workers who are either unemployed or discouraged. 3 If we assume that all discouraged workers and all long-term 

unemployed workers (unemployed more than 27 weeks) are structurally unemployed, then the portion of unemployed and discouraged workers who are structurally unemployed and therefore at 

risk of having to retool would be closer to 30 percent. However, this 

latter number is certainly an overstatement. Some discouraged 

workers stop searching due to what they perceive as overall weak 

demand or other factors, not lack of skills, and not all workers who 

are unemployed more than 27 weeks must retool to find jobs. Of 

course this number does not include workers who choose to reskill 

after only a short period of unemployment or who improve or 

change their skillset while working, because they see more opportunity in another field. 

Q.5. Will this percentage of unemployed, underemployed, and discouraged workers that must enter a new sector increase in the future? 

A.5. It is difficult to say with certainty. The answer to this question 

depends on many factors including whether future technical change 

and globalization are more or less disruptive to labor markets as 

have been the changes we have undergone in recent decades. 

Q.6. What is the average age of an unemployed or underemployed 

worker that decides to leave the workforce altogether instead of 

seeking to retool their skillset and enter a new sector? 

A.6. Consider again the data on discouraged workers. In 2015, 

about half of discouraged workers were in the 25 to 54 age group, 

although as noted previously, not all discouraged workers leave the 

labor force because they think they do not have the right skills. 4

Another way to answer this question is to look at data from the 

Bureau of Labor Statistics on displaced workers. 5 Of all workers 

who were displaced from a job in 2014, those who were 65 and 

older were the most likely to leave the labor force—over half did. 

About one-fifth of workers ages 55 to 64 left the labor force as did 

12 percent of workers ages 25 to 54. However, because most displaced workers fall into this latter age category, about half of the 

workers who left the labor force after a displacement were between 

the ages of 24 and 54. 

60 

Q.7. What risk, if any, does the increasing automation of routine 

work tasks pose to the economy over the long-term? 

A.7. Typically automation has boosted productivity growth. Moreover, history suggests that while automation does reduce employment in the affected occupations, demand and workers shift to new 

occupations, some of which may not even exist today. However, 

such processes can take a long time to play out, and there is some 

debate today among economists and others who think about the 

role of automation in the workplace as to whether the technical 

change underway now may upend this historical pattern, resulting 

in greater displacement of workers from the labor market than has 

historically been the case. Beyond that, automation could affect the 

distribution of income and wealth in the economy, which could 

have spillovers to other parts of the economy. 

Q.8. How long will it take for these risks to come to significant fruition? 

A.8. It is unclear how automation will evolve and its impact on the 

economy going forward is highly unclear. As such, we cannot speculate as to the timing of any particular outcomes. 

Q.9. What sectors of the economy will benefit the most from automation? 

A.9. The jobs that are most susceptible to automation are those 

that involve routine tasks, either physical or cognitive. The sectors 

where automation has proceeded the furthest include manufacturing, and where automation substitutes for routine physical labor 

and some services, where automation can substitute for routine 

cognitive skills (such as banking—for example, ATMs). To the extent that automation makes it less expensive to perform these 

tasks, end users of those products (whether they be businesses that 

use them as inputs or consumers) will benefit. 

Q.10. What sectors of the economy will benefit the least from automation? 

A.10. With our current technology, tasks that require nonroutine 

skills, either physical or cognitive, are the least susceptible to automation. This includes a wide range of occupations that include both 

lower skilled work, such as laborers and personal care providers, 

to higher skilled work such as software developers and managers. 

Sectors of the economy and consumers that rely on these types of 

work are less likely to see cost savings. However, as technology 

changes, it may be that more and more occupations are susceptible 

in part to automation. Already we have seen that technology has 

improved productivity in these occupations even if the jobs themselves are not automated (for instance, improved information technology does not completely substitute for doctors, but it can provide 

them access to better information, which improves outcomes). 

Q.11. I’d like to ask about the recent Brexit. 

What economic and political factors are the Federal Reserve consulting in evaluating the national and international economic risk 

associated with the Brexit? 

How would the economically worst-case Brexit scenario unfold? 

How would the economically best-case Brexit scenario unfold? 

61 

6Office of the Comptroller of the Currency (OCC); Board of Governors of the Federal Reserve 

System; Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency 

(FHFA); National Credit Union Administration (NCUA); and U.S. Securities and Exchange 

Commission (SEC). 7 81 FR 37670 (July 10, 2016). 8Section 956 of the Dodd-Frank Act defines ‘‘covered financial institution’’ to include any of the following types of institutions that have $1 billion or more in assets: (A) a depository institution or depository institution holding company, as such terms are defined in section 3 of the 

Continued 

Will the value of the dollar will significantly appreciate over the 

long-term, including as compared to the pound sterling, due to the 

Brexit? 

If so, what will the impact of such appreciation be on U.S. exports? 

What are the most economically significant legal questions that 

the U.K. and the EU must resolve, in order to fully evaluate the 

practical economic consequences of the Brexit? 

A.11. The United Kingdom (U.K.) vote to leave the European 

Union (EU) has increased uncertainty about the future trading relationship between the U.K. and the EU. That increased uncertainty appears to be weighing on U.K. investment and hiring decisions, and early indicators following the June 23 referendum point 

to a slowdown in U.K. economic growth. The broader effect on the 

global economy, however, is likely to be limited, as many postvote 

declines in global asset prices have since been reversed. For instance, U.S. stock price indexes are now higher than before the referendum. 

The economic impact of the referendum result on the U.K., the 

rest of Europe, and the global economy is likely to depend on how 

uncertainty is resolved over time, which in turn will depend on the 

progress of negotiations between U.K. and EU authorities over 

their future trading relationship. Given the importance of London 

as a global financial center, some of the most important legal questions involve the trading of financial services between the U.K. and 

the EU. 

Since the June 23 referendum, the dollar has appreciated significantly against the British pound, but the dollar is only modestly 

stronger on net against a broad basket of foreign currencies, and 

thus the impact on the demand for U.S. exports is likely to be modest. 

Q.12. I’d like to ask about the Federal Reserve Board’s joint proposed rule on executive compensation under section 956 of DoddFrank. 

As you know, these rules would apply to those insurance companies that own thrifts. Does the Federal Reserve plan on treating insurance companies different than banks in the application of this 

rule, as it has with capital standards? 

What has the Federal Reserve done or will do to ensure that 

these rules are not bankcentric and are instead tailored to the insurance industry? 

A.12. Pursuant to section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Agencies’ 6 joint notice of proposed rulemaking 7 covers all depository institution holding companies, including all savings and loan holding 

companies. 8 As described in the preamble, the proposed rule does 

62 

Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1813); (B) a broker-dealer registered under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 780); (C) a credit union, as described 

in section 19(b)(1)(A)(iv) of the Federal Reserve Act; (D) an investment adviser, as such term 

is defined in section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); 

(E) the Federal National Mortgage Association (Fannie Mae); (F) the Federal Home Loan Mortgage Corporation (Freddie Mac); and (G) any other financial institution that the appropriate 

Federal regulators, jointly, by rule, determine should be treated as a covered financial institution for these purposes. 9See http://www.federalreserve.gov/apps/foia/ViewComments.aspx?doclid=R-1536& 

doclver1. 

not establish a rigid, one-size-fits-all approach. Rather, the Agencies have tailored the requirements of the proposed rule to the size 

and complexity of covered institutions. In addition, the proposed 

rule would allow firms to tailor the incentive based compensation 

arrangements to the nature of a particular institution’s business 

and the risks, as long as those incentive-based compensation arrangements appropriately balance risk and reward. The methods 

by which such balance is achieved would be permitted to differ by 

institution and across business lines and operating units. The preamble invited comment on the impact of the proposed rule on all 

covered institutions. The Agencies have included numerous questions, touching all aspects of the proposed rule, including the tailoring of institutions by asset size and the definitions of significant 

risk-takers. We will consider your comments and all comments we 

receive in the final rulemaking process. 

Q.13. Has or will the Federal Reserve conduct specific analysis of 

insurance executive compensation practices and risks and how the 

rule will impact insurance companies? If so, please provide a copy 

of the analysis. 

A.13. The Federal Reserve Board has not conducted specific analysis of insurance executive compensation practice. However, the 

Agencies have encouraged institutions to provide feedback on the 

potential impact of the proposed rule on covered institutions 

throughout the comment period process, and through this notice 

and comment process help us analyze specifically insurance compensation practice. 9 In addition, the preamble solicits input on the 

impact of the rule on all covered financial institutions through a 

number of questions posed in this area. For instance, question 2.8 

seeks commenters’ views on situations where it might be appropriate and why to modify the requirements of the proposed rule 

where there are multiple covered institution subsidiaries within a 

single parent organization based upon the relative size, complexity, 

risk profile, or business model, and use of incentive-based compensation of the covered institution subsidiaries within the consolidated organization. In a similar vein, question 2.12 asks whether 

the determination of average total consolidated assets should be 

further tailored for certain types of investment advisers, such as 

charitable advisers, non-U.S.-domiciled advisers, or insurance companies and, if so, why and in what manner. 

Q.14. As you know, the rule provides that a firm’s ‘‘significant risktakers’’ are subject to the compensation rule. Some have expressed 

concern that determining whether an employee is a ‘‘significant 

risk-taker’’—specifically calculating whether an employee is among 

the top 5 percent of compensated employees—could be costly to implement, given technical difficulties in accurately discerning salary 

63 

10See questions 2.30, 2.31, and 2.32. 81 FR 37670 at 37699. 

levels across a firm. Could there be merit in implementing a salary 

threshold test instead, which would instead define (in part) ‘‘significant risk-takers’’ as any employee earning more than a particular 

salary threshold? 

A.14. While drafting the proposal, the Agencies were conscious of 

potential burden on covered institutions and have attempted to appropriately reduce burden throughout the proposal. We are evaluating the merit of a proposal such as salary thresholds. To that 

end, the Agencies have posed specific questions 10 on the alternative of using a dollar threshold test under which the designation 

of significant risk-takers would be based in part on whether a covered person receives annual base salary and incentive-based compensation in excess of a specific dollar threshold. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM JANET L. YELLEN 

Q.1. The Federal Reserve (along with the Department of the Treasury and the Security and Exchange Commission) participates at 

the Financial Stability Board (FSB), but there is little to no transparency into the Fed’s actions at the FSB. What steps can the Fed 

take to increase transparency into its activities at the FSB? 

A.1. Like the U.S. Treasury Department and the Securities and Exchange Commission, the Federal Reserve is a member of the Financial Stability Board (FSB). The FSB monitors and assesses 

vulnerabilities affecting the global financial system and recommends actions needed to address them. In addition, it monitors 

and advises on market and systemic developments, and their implications for regulatory policy. Before the FSB recommends a particular policy action, the FSB typically goes through a public notice 

and comment process similar to that which would accompany rulemaking in the United States. In addition, it is important to note 

that none of the policy actions recommended by the FSB would 

take effect in the U.S. without being adopted by U.S. authorities 

through a public notice and comment process. Thus, the Federal 

Reserve would not implement any FSB standards in the U.S. without going through the same process as we do for our other 

rulemakings. 

Q.2. As you know, the FSB is an international body charged with 

designating global systemically important nonbank financial companies. To date, the three American insurers that the FSB designated have all been designated by the Financial Stability Oversight Council (FSOC). 

Given that the FSB is not subject to the requirements of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act, and 

several members of FSOC serve on the FSB and have been involved in the separate designation process for global systemically 

important financial institutions (SIFI), how much does FSOC rely 

on or consider the FSB’s designations in conducting its own assessment of SIFI prospects? 

64 

A.2. The U.S. Financial Stability Oversight Council (FSOC) determines whether to designate nonbank financial firms as systemically important based on the factors identified in the Dodd-Frank 

Wall Street Reform and Consumer Protection Act, as interpreted by 

the FSOC through rulemaking. Whether an entity has been designated by the FSB is not a consideration. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM JANET L. YELLEN 

Q.1. After years of rapid and consistent economic growth due to 

large-scale market reforms beginning in the late 1970s, the Chinese economy has slowed significantly in recent years. The slowdown has led the Chinese government to fall back on fiscal and 

monetary stimulus measures to buoy its faltering economy. And 

while these efforts have had varying levels of success, further intervention has served to raise core concerns about the Chinese government’s ability and willingness to open up its economy to greater 

competition and its financial system to cross-border capital flows— 

elements most economists agree are necessary to facilitate sustained economic health in China. 

Taking into account China’s surging debt levels resulting from an 

aggressive lending campaign by financial institutions and banks, 

imbalanced and slowing economic growth, and an unpredictable regime, can you speak to what impact China’s continuing economic 

decline will have on the U.S. economy? 

A.1. Chinese economic growth has been on a general downward 

trend over the past several years, but we would not characterize 

the Chinese economy as being in decline. It is still growing at a sizable pace and, to some degree, the slowing that has occurred is a 

result of several structural factors—slower labor force growth, reduced investment as the economy rebalances toward consumption, 

and a moderation in growth typical of maturing economies. Even 

with growth declining it should be noted that China’s contribution 

to global growth remains strong. This contribution depends on both 

China’s growth rate and its weight in the world economy—since 

China still grows faster than many other economies, its share in 

the global economy has been rising. Also, if China manages to rebalance its economy successfully, its economic growth will be more 

sustainable even if it is lower, and it will increasingly import more 

consumption-type goods, thus becoming more of an independent engine of global growth as it draws more imports from the rest of the 

world, including from the United States (U.S.). 

But you are right to note that there is a risk that Chinese 

growth could slow more sharply given the run-up in corporate debt, 

adjustments going on in industries with excess capacity, and some 

uncertainty about the economic policies being followed. We do not 

view this to be the most likely scenario, as the authorities still 

have room to provide more policy stimulus were the economy to 

slow sharply and also have ample resources to stave off a crisis if 

necessary. But unexpected developments can occur, and, should the 

Chinese economy slow much more abruptly and severely, there 

would clearly be an adverse impact on the global economy, including in the U.S. The U.S. economy would be hit from its direct trade 

65 

1 Reifschneider, Dave, William Wascher, and David Wilcox (2015), ‘‘Aggregate Supply in the 

United States: Recent Developments and Implications for the Conduct of Monetary Policy’’, IMF 

Economic Review, vol. 63, no. 1, pp.71–109. 2Fernald, John G. (2014), ‘‘Productivity and Potential Output Before, During, and After the 

Great Recession’’, NBER Macroeconomics Annual 29(1), pp.1–51. 3 It has also been argued that mismeasurement of real output could have contributed to the 

weakness in measured productivity growth. However, recent research by Byrne, Fernald, and 

Reinsdorf (2016) casts doubt on the ability of this hypothesis to explain the recent slowdown. 

Byrne, David M., J. Fernald, and Marshall Reinsdorf (2016), ‘‘Does the United States Have a 

Productivity Slowdown or a Measurement Problem?’’ Brookings Papers on Economic Activity, Spring. 

links to China (China accounted for nearly 8 percent of U.S. goods 

exports in 2015), its indirect links to China through trade with 

other countries affected by China’s slowing, and possibly by reverberations to global financial markets. 

Q.2. To what extent has this been a factor in monetary policy decisions? 

A.2. Our monetary policy is motivated by the dual mandate set for 

us by the U.S. Congress, which calls for achieving stable prices and 

maximum sustainable employment. In this globally interconnected 

world, economic and financial developments in the U.S. have a significant impact on the rest of the world and, by the same token, 

developments in the rest of the world have significant effects on 

our own economy. We, therefore, closely monitor developments 

abroad, including importantly those in China, for their implications 

for the outlook and risks to the U.S. economy and adjust our policies accordingly in order to achieve our dual mandate. 

Q.3. From 2010 to 2015, labor productivity rose just 0.6 percent per 

year on average, in comparison to an average of nearly 2 percent 

growth in the previous 6 years. And perhaps just as concerning, 

productivity fell at a 0.6 percent annual rate in the first quarter 

of this year. However you slice it, all signs point to the fact that 

U.S. worker productivity is no longer on the same trajectory that 

it had been on in the past. 

In your speech on June 6, you said that productivity growth has 

been ‘‘unusually weak in recent years.’’ This has undoubtedly hampered wage growth and limited economic expansion. As many have 

acknowledged, business investment, research and development, 

and business creation have all been slow to recover from the recession. 

In your opinion, what are the major factors accounting for this 

slowdown? 

A.3. Part of the weakness in labor productivity growth seen in recent years likely reflects the enduring effects of the Great Recession. For example, there is some evidence that the recession led to 

a long-lasting reduction in business investment, research, and development spending, and new business formation, and that these 

factors have lowered productivity growth. 1 That said, productivity 

growth began to slow even before the Great Recession, and some 

research has suggested that the earlier deceleration was the result 

of the economic effects of the 1990s IT revolution having largely 

run their course by the mid-2000s.2 3

Q.4. Earlier this month, you also said that you are cautiously optimistic about productivity growth. What indications do you have 

that we will begin to see an upswing in productivity? 

66 

A.4. Up to this point, we have not yet seen clear indications of a 

pickup in productivity growth in the economic data. However, some 

of the factors that have dragged down productivity growth in recent 

years—especially factors related to the last recession—are likely to 

diminish going forward. For example, we expect that continued 

gains in economic activity will lead to a faster pace of investment 

growth and more spending on research and development, contributing to a stronger pace of productivity growth in coming years. 

Moreover, we see no obvious slowdown in the pace, or the potential 

benefits, of innovation in America—for example, stunning gains 

continue to be made in computing power, data storage, robotics, 3D 

printing, and cloud computing, to name just a few areas of technological progress. Such innovations may bear fruit more readily in 

a stronger economy. 

Q.5. There is widespread agreement that we face a considerable 

shortfall of public investment in transportation, education, 

broadband, and research and development. With interest rates still 

low, and gains to be made in the labor market, isn’t now the time 

to make sustained public investments that would lead to job creation, productivity gains, and broad-based economic growth? 

A.5. I agree with the view that the American people would be well 

served by investments—both public and private—that support 

longer-run growth in productivity. Well-designed investments in 

the areas you mention—transportation, education, broadband, and 

research and development—have the potential to lead to stronger 

productivity gains in the future. Furthermore, I would add that 

any such investments are more likely to be effective if they are accompanied by Government policies that encourage entrepreneurship and innovation, and that foster the flexible allocation of labor 

and capital to their most productive uses. 

Q.6. Chair Yellen, in your recent speech on June 6, you laid out 

the grim reality that many African Americans and Latinos face in 

our job market. Although conditions have improved, we still see 

that compared to the overall unemployment rate, minorities still 

face a much tougher job market. 

In January, the unemployment rate for African American’s with 

Associate’s Degrees finally fell equal to the unemployment rate for 

white adults who did not complete high school. 

If we’re nearing full employment, shouldn’t we expect the unemployment rates of African Americans with Associate’s Degrees to be 

much closer to the unemployment rate of whites with Associate’s 

Degrees and not those who’ve dropped out of high school? 

A.6. Unemployment rates have long been persistently higher for 

both African Americans and Hispanics, on average, than for whites. 

And, those differentials are not purely the result of whites having 

more education. Unemployment rates are lower for those with more 

education, but for any given level of educational attainment, African Americans in particular tend to experience higher unemployment than whites. One illustration of this fact, as you note, is that 

the unemployment rate for African Americans who have an associate degree is comparable to the unemployment rate for whites 

who have not completed high school. These patterns have been evident since at least the early 1990s. 

67 

Despite overall improvements in the U.S. economy in recent 

years, there are still significant disparities in labor market outcomes and a continuation in the trend toward widening wealth and 

income inequality. These trends are troubling. In carrying out its 

mandate, the Federal Reserve pays close attention to issues of economic inclusion. We follow unemployment rates by race and ethnicity and examine whether particular groups are discouraged from 

participating in the labor force. More broadly, through our data collection efforts, such as the Survey of Consumer Finances and the 

Survey of Household Economics and Decision Making, the Federal 

Reserve has gathered and disseminated information that is critical 

for understanding the economic situation of disadvantaged groups. 

Q.7. Former Minneapolis Fed President Narayana Kocherlakota 

said earlier this year, ‘‘there is one key source of economic difference in American life that is likely underemphasized in FOMC 

deliberations: race.’’ After a search of transcripts of FOMC meetings from 2010, when African American unemployment stood at 

15.5 percent or higher, to the most recent meetings, Kocherlakota 

found that there was not a single reference in the meetings to labor 

market conditions among African Americans. 

It is absolutely critical that the leadership of the Federal Reserve 

reflect the composition of our diverse Nation. Monetary policy is inextricably linked with the experiences of hardworking families, 

white, African American, Latino, and Asian, across the Nation, and 

leadership positions at the Federal Reserve should be held by those 

that reflect the interests of all of our communities. 

Recently, I along with Sens. Warren and Merkley, and many 

other members of Congress sent letter urging you to improve representation at the regional Banks’ boards of directors. The Federal 

Reserve Act requires that the presidents and Boards of Directors 

at the 12 regional Federal Reserve Banks ‘‘represent the public.’’ 

Yet 83 percent of Federal Reserve Board members are white, and 

92 percent of regional Bank presidents are white, and not a single 

president is either African American or Latino. When you were 

here in February, you testified that the Board of Governors was 

constantly attentive to the issue of diversity on the boards, and 

that 45 percent of directors are either women or minorities. Do you 

believe that this is sufficient? Does the Board of Governors have a 

plan for increasing the representation of diverse candidates? 

A.7. As I have stated previously, I am personally committed and 

the Federal Reserve as an organization is committed to achieving 

diversity within our workforce and within our leadership at all levels. We have made progress, but there is more work to be done. Diversity is an extremely important goal and I will do everything I 

can to further it. 

It is important to have a diversified group of policy makers who 

can bring different perspectives. The Federal Reserve recognizes 

the value of sustaining a diverse workforce at all levels of the organization. An interdisciplinary effort that I discussed at my June 21 

hearing before the Senate Banking, Housing, and Urban Affairs 

Committee is focusing on all of our diversity initiatives, both in 

terms of our own hiring al the Federal Reserve Board (Board) and 

68 

throughout the Federal Reserve System, as well as our efforts to 

promote diversity in economic inclusion. 

Our efforts to achieve our objectives for more diversified leadership include both shorter-term and longer-term goals. In the shortterm, we are committed to broad, open, transparent, and proactive 

search processes. We are actively soliciting and then considering 

input from a wide range of sources in our efforts to identify qualified candidates who expand on one or more dimensions of the diversity of our senior leadership. We have, for example, benefited 

from input with respect to Reserve Bank directors from several 

community groups. We have also incorporated into our search process for our most senior executives outreach via social media, intended to both better explain the nature of the positions to a broader audience and invite suggestions regarding suitable candidates. 

Building on those efforts, we have also initiated a longer-term 

program of seeking to identify and foster promising candidates 

from a variety of backgrounds and with a variety of experiences for 

a range of roles while at a stage in their careers when they may 

not yet fully be prepared to assume the responsibilities of our most 

senior leadership. We intend to leverage the full range of the System’s existing outreach programs, including in the areas of economic education, community outreach, and academic partnership. 

Q.8. Along with other financial agencies, the Federal Reserve is 

mandated to assess and increase its contracting and procurement 

with minority-owned and women-owned businesses. This practice, 

known as supplier diversity, is a powerful form of economic development. Contracts create economic ripples throughout communities 

and create quality jobs, something desperately needed in communities of color. In 2015, the Board of Governors spent $214 million 

on goods and services, but less than 9 percent of that money went 

to minority-owned businesses. That’s less than half of what the average financial agency spends. 

What are the Fed’s plan to rectify this disparity? 

A.8. As reported in the Board’s Report to the Congress on the Office of Minority and Women Inclusion for calendar-year 2015, the 

Board awarded contracts for goods and services (including contracts for the Board’s Office of Inspector General as well as the 

Board’s currency program) in the amount of $214,867,580, of which 

11.23 percent went to minority-owned businesses. This represents 

the total obligated amount of the contracts rather than the ‘‘spend’’ 

or actual amounts paid to contractors. The amount of funds that 

the Board paid out to contractors for goods and services during 

2015 was $154,264,257, of which 8.32 percent went to minorityowned businesses. Both the amounts contracted and the amounts 

paid represented a significant increase from the prior year. 

The Board has an active supplier diversity program that combines outreach and training for vendors with internal programs 

aimed at educating our staff about the importance of diversity and 

how to increase diverse vendor participation in the Board’s procurement activities. 

To enhance its supplier diversity program, Board Procurement 

staff plans to review its Acquisition Policies and Procedures to 

identify any unintentional barriers to minority participation and to 

69 

build additional strategies to increase contracts awarded to minority vendors. To help these companies compete, the Board will consider changes in the design of its solicitations that may facilitate 

or encourage participation by these companies. For example, 

lengthening delivery schedules or the time period for the submission of offers or bids or dividing proposed acquisitions to permit offers in quantities Jess than the total requirement could create 

greater opportunities for minority-owned business to compete. 

In looking for opportunities to further increase its spend with 

small and disadvantaged businesses, the Procurement staff is reviewing its approach to setting aside an acquisition or a class of acquisitions for covered companies. A ‘‘set-aside’’ is a preference 

where the procurement is limited to participation by small and disadvantaged businesses only. An award will be made only if the proposal is fair and reasonable. We will continue to look for additional 

opportunities to use this program. 

In 2017, the Board plans to host a ‘‘vendor outreach fair.’’ The 

event is an opportunity for us to share upcoming procurement opportunities with a wide range of potential suppliers, including minority-owned firms. Because staff from across the organization participate, vendors have an opportunity to get to know the individuals overseeing contractual work, and staff have an opportunity to 

learn about vendors’ products and capabilities. The outreach fair 

will also include training sessions designed to better position prospective vendors to compete for procurement opportunities. Our 

previous outreach event held in June 2015 attracted over 400 individuals representing 300 companies. 

The Board will continue to utilize national and local organizations advocating for minority companies as a method to connect directly with qualified minority-owned companies. Memberships in 

these types of organizations will provide direct access to these suppliers who demonstrate the ability to provide high-quality goods 

and services. Among these organizations are the National Minority 

Supplier Development Council, U.S. Hispanic Chamber of Commerce, Greater Washington Hispanic Chamber of Commerce, and 

the National Black Chamber of Commerce. The outreach events 

hosted by these organizations provide a platform for the Board’s 

staff to discuss the procurement process with potential vendors 

while also providing information on future procurement opportunities to potential vendors. The Board is aware of the many challenges facing minority firms, and continued collaboration with advocacy groups representing these firms will help the Board better 

understand the challenges these businesses face and help the firms 

better navigate the Board’s acquisition process. 

Lastly, to increase Board staffs awareness and understanding of 

the requirements of section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Board’s Procurement office 

will continue to host a series of training sessions and forums to 

educate staff—agency wide—on the importance of supplier diversity. The Procurement office has also established a reporting tool 

to monitor the success of the supplier diversity program. The tool, 

which is available to all Board divisions, provides dashboards, 

product data, and supplier classification information, allowing diviVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00073 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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sions to track and monitor their diversity spend and to make improvements to help achieve desired results. 

Q.9. Over the years, the Federal Reserve has struggled to increase 

the diversity of its senior leadership. Multiple entities, including 

the Government Accountability Office, have repeatedly cited leadership commitment as a driver to change. Agency heads and top officials at the CFPB, FDIC, SEC, and NCUA actively participate in 

Diversity Councils. 

With your unique insights as a woman, how are you specifically 

working to drive diversity at the Fed? Will the Federal Reserve 

commit to forming a Diversity Council led by a Governor? 

A.9. I am personally committed and the Federal Reserve as an organization is committed to achieving diversity within our workforce 

and within our leadership. The Federal Reserve recognizes the 

value of sustaining a diverse workforce at all levels of the organization. When I joined the Board staff, I was one of relatively few 

women economists. Since then, there have been significant gains in 

diversity at the Board and throughout the Federal Reserve System 

(System). Currently, minorities represent 18 percent and women 37 

percent of senior leadership at the Board. Throughout the System, 

minorities make up 18 percent of officer-level staff, which is an increase of 22 percent over the past 4 years. Furthermore, among directors on Reserve Bank and Branch boards, minority representation stands at about 24 percent, and representation of women is approximately 30 percent. I recognize there is still work to be done 

and workforce diversity remains a strategic priority for the Federal 

Reserve. 

The selection and reappointment of Federal Reserve Bank presidents is a process set forth by the Federal Reserve Act, including 

the specific responsibilities of the Reserve Bank’s board of directors 

and the Board of Governors. Within this statutory framework, the 

System has operationalized the process to be expansive and 

proactive in the identification of candidates, including persons who 

may not routinely have contact with the Federal Reserve, the economics profession, or the financial services sector. 

I am committed to seeing us make further progress and to making sure that we are taking all of the steps that we possibly can 

to promote diversity and economic inclusion. To further support 

this commitment, as mentioned previously, I recently launched and 

lead an interdisciplinary effort within the Federal Reserve that is 

focused on all of our diversity initiatives, both in terms of hiring 

at the Board and throughout the Federal Reserve System, and our 

efforts to promote diversity and economic inclusion. My colleagues 

and I meet quarterly with this group to discuss initiatives and 

progress. 

The Federal Reserve is committed to achieving further progress, 

and to better understanding the challenges to improving diversity, 

as well as promoting diversity of ideas and backgrounds. I believe 

that diversity makes the Federal Reserve more effective in carrying 

out its mission. 

Q.10. I appreciate the Federal Reserve’s willingness to engage and 

recognize that this issue doesn’t exist at the agency alone—it’s pervasive throughout the entire financial sector. The Federal Reserve 

71 

should use its leadership to promote this same transparency among 

its regulated entities. Your Office of Minority and Women Inclusion 

made the submission of diversity data voluntary. 

How will you use your position to increase diversity in the private sector? 

A.10. The Federal Reserve, in conjunction with the Federal Deposit 

Insurance Corporation and the Office of the Comptroller of the 

Currency, issued a joint press release on August 2, 2016, providing 

information on how regulated institutions may begin to submit selfassessments of their diversity policies and practices to their primary Federal financial regulator per the approval granted by the 

Office of Management and Budget on July 13, 2016, to collect voluntary self-assessment information. The notice also strongly encouraged the regulated entities to post their diversity policies and 

practices, as well as information related to their self-assessments 

on their public Web sites. 

The Office of Minority and Women Inclusion Directors of the 

banking agencies worked to establish uniform standards applicable 

to all regulated entities and in view of the particular statutory language of section 342 of the Dodd-Frank Act, the banking agencies 

determined to make compliance with the standards voluntary. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM JANET L. YELLEN 

Q.1. It’s been 3 years since the Volcker Rule was finalized and a 

little over a year since it went into effect. As of last year, banks 

can no longer engage in some of the risky trading behavior that 

nearly wrecked on our economy. 

Both the public and Congress need to understand and deserve to 

know how the Volcker Rule is being enforced by regulators and if 

banks are complying with it. If we learned anything from 2008, it’s 

that Congress must shine a spotlight on how regulators are implementing the Nation’s laws. 

The final version of the Volcker Rule included a standard for regulators to measure whether banks went beyond market-making 

and into the now prohibited proprietary trading. But, this standard 

did not include specific metrics for how the Volcker Rule should be 

enforced or how to measure its success. 

There’s a lack of clear guidance on what metrics regulators are 

using, the thresholds determining if proprietary trading is happening, or even what regulators are supposed to do if a financial 

institution is found to be in violation. 

In the absence of clearer guidance, how can the American people 

and Congress be sure that the regulators are doing their job and 

ensuring that the Volcker Rule is being properly implemented by 

regulators? 

Does the Federal Reserve have a plan to ensure that Congress 

and the public is more informed and understand how the Fed is 

working with other regulators on enforcement and compliance of 

the Volcker Rule? 

A.1. I appreciate your desire to understand how the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit 

Insurance Corporation, U.S. Securities and Exchange Commission, 

72 

1 12 U.S.C. §1851. 

and U.S. Commodity Futures Trading Commission (the Agencies) 

are implementing and enforcing compliance with section 619 of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (the 

statutory provision known as the Volcker rule). 1 As you know, the 

Agencies have jointly issued public rules that detail and implement 

the statutory requirements mandated by the Volcker rule. The implementing rules also require each firm engaged in activities covered by the Volcker rule to have in place a compliance program 

that is consistent in detail and breadth with the size, type, and 

complexity of the banking entity and the activities the entity conducts that are subject to the Volcker rule. The implementing rules 

establish minimum requirements for those compliance programs 

with increased requirements and detail for the largest banking entities engaged in activities covered by the Volcker rule. Among 

these requirements is a provision requiring the chief executive officer of each banking entity engaged in activities covered by the 

Volcker rule, on an annual basis, to attest that the entity has in 

place processes to establish, maintain, enforce, review, test, and 

modify the compliance program in a manner reasonably designed 

to achieve compliance with the Volcker rule. 

In addition, the Federal Reserve conducts examinations of the 

compliance programs and activities subject to the Volcker rule of 

banking entities for which the Federal Reserve is the appropriate 

supervisor under the Volcker rule. To aid designing and conducting 

these supervisory efforts, the implementing rules of the Agencies 

require banking entities with significant trading activities subject 

to the Volcker rule to report a variety of metrics regarding these 

activities. These metrics include risk and position limits and usage, 

risk factor sensitivities, value-at-risk (VaR) and stress VaR, comprehensive profit and loss attribution, inventory turnover, inventory aging, and customer facing trade ratio. 

As described in the preamble to the final rule, the Federal Reserve uses these metrics as a tool to help identify instances that 

may warrant further investigation to determine whether a violation has occurred or whether the activity is within a permitted exception, such as market making or hedging. This additional review 

typically includes review of other metrics and information collected 

from the firm and information about events that have occurred in 

the market. As indicated in the preamble to the final rule, the Federal Reserve and the other Agencies are evaluating the data collected through September 30, 2015, and may revise the metric definitions and collection requirement, as appropriate, based on their 

review of the data. 

Implementation of the Volcker rule is coordinated among the 

Agencies as part of an ongoing effort to facilitate consistent application of its requirements. Staffs of the Agencies regularly meet to 

address key implementation and supervisory issues as they arise. 

The Agencies collaborate, for example, to jointly issue to the public 

responses to frequently asked questions and other forms of external 

guidance as appropriate. Public responses to frequently asked questions published to date have clarified particular provisions of the 

final rule, including the submission of metrics, expectations during 

73 

2See http://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm. 

the conformance period, the application of certain covered funds restrictions and clarification regarding the annual chief executive officer attestation. 2 Staffs of the Agencies expect to continue to coordinate responding to matters that are of common interest in public statements, including through public responses to frequently 

asked questions and in public guidance. 

Q.2. Currently, some type of marijuana use is legal in 27 jurisdictions in the United States, or more than half the country. But a 

conflict between State and Federal law remains. 

This conflict is making it very difficult for marijuana-related 

businesses in these States to access to the banking system forcing 

them to operate in all cash. Financial institutions that provide 

banking services to legitimate marijuana-related businesses are 

currently vulnerable to criminal prosecution under Federal law. 

As you’re probably aware, few banks and credit unions are willing to risk providing services to marijuana-related businesses, leaving many of these legal businesses cut off by financial institutions. 

That means even marijuana-related businesses like landlords and 

security companies have lost their accounts at banks and credit 

unions. These businesses can no longer accept credit cards, or deposit revenues, or write checks to meet their payroll or pay their 

taxes. 

In Oregon alone, it is estimated that the marijuana market could 

bring in close to half a billion dollars during its first 14 months of 

legal sales. Just last month, I accompanied an Oregon businessman 

who runs a marijuana dispensary to Salem to pay his taxes. He 

had to stuff $70,000 dollars in cash into a backpack in order to pay 

the State what he owed in taxes and drive it over an hour away 

in his car. 

Businessmen and women, who are operating legally under Oregon State law and elsewhere, are forced to shuttle around gym 

bags full of cash and it is just an invitation to crime and malfeasance. The Federal Government is effectively forcing legal marijuana businesses to carry gym bags full of cash to pay their taxes, 

employees and bills. 

This is an invitation to robberies, money laundering, and organized crime. Earlier this month, a 24-year-old U.S. Marine who 

was working as a security guard at a Colorado dispensary was shot 

and killed in an attempted robbery. The death of a husband and 

father of a three children under 4 is tragic. Sadly, it is not surprising given the dangers faced by businesses operating all-cash. 

What is the Federal Reserve’s position on ensuring that marijuana-related businesses operating legally at the State level have 

access to banking and other financial services? 

A.2. The decision to open, close, or decline a particular account or 

customer relationship is made by a depository institution without 

involvement by its Federal banking regulator. This decision may be 

based on the bank’s particular business objectives, its evaluation of 

the risks associated with particular products, services, or customers 

as well as the institution’s capacity and systems to effectively manage those risks. Among the factors a banking firm will typically 

consider in establishing a business relationship with a customer is 

74 

whether the activity of the customer is being conducted in accordance with Federal and State law. Federal law and State law are 

in conflict concerning certain types of use and distribution of marijuana. Federal law makes it a Federal crime to possess, grow, or 

distribute marijuana and prohibits knowingly engaging in monetary transactions with proceeds from an unlawful activity. Because 

of this conflict, marijuana-related businesses in those States that 

have legalized certain types of marijuana use and distribution 

under State law have had difficulty obtaining financial services. 

The Department of Justice and the Financial Crimes Enforcement Network (FinCEN) have both issued guidance that recognize 

that the use and distribution of marijuana in general continues to 

be illegal under Federal law and describe the resources and priority those agencies expect to place on enforcement of those Federal 

laws governing marijuana. As a Federal agency, the Federal Reserve incorporates guidance issued by FinCEN concerning the 

Bank Secrecy Act into our supervisory process, including references 

to FinCEN’s marijuana guidance. Nonetheless, the conflict between 

Federal law and State law creates risk and uncertainty for banking 

institutions. Only Congress can determine whether it is appropriate to amend Federal law in this area. 

Q.3. Do you believe the Federal Reserve has the authority to act 

and give banks the certainty they need to offer services to legal 

marijuana related businesses or does Congress need to act? 

A.3. The Federal Reserve does not have the authority to change 

laws and regulations regarding the legality of possession, sale, or 

distribution of marijuana. Only Congress has the authority to act 

to determine whether it is appropriate to amend Federal law governing marijuana possession, sales, and distribution. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP 

FROM JANET L. YELLEN 

Q.1. Many American workers face significant economic uncertainty 

as they approach retirement. According to a 2015 Government Accountability Office (GAO) report, about half of households age 55 

and older have no retirement savings (such as in a 401(k) plan or 

an IRA). After reviewing several independent studies, the GAO also 

concluded that generally about one-third to two-thirds of workers 

are at risk of falling short of maintaining their preretirement 

standard of living in retirement. 

How is the Federal Reserve monitoring this issue? 

What metrics does the Federal Reserve use to quantify retirement needs? 

Does it view the lack of retirement savings in the U.S. as a systemic risk? 

Are there any steps the Fed has considered taking that would 

help address the retirement savings gap? 

A.1. Through its Survey of Consumer Finances, the Federal Reserve Board collects some of the key data that provide the foundation on which researchers form judgments about retirement income 

adequacy. However, important as it is, retirement income adequacy 

does not directly implicate the stability of the financial system. If 

75 

households enter retirement without adequate financial preparation, their spending power will suffer, with potentially serious implications for their own well being over their remaining lifetime, 

but the stability of the financial system is not likely to be threatened. 

As part of our effort to calibrate the stance of monetary policy 

so as to promote the dual mandate given to us by the Congress— 

price stability and maximum sustainable employment—we attempt 

to gauge the strength of aggregate demand over the next few years. 

The issue of retirement income security is of greater relevance over 

a considerably longer time horizon: Are today’s working generations adequately preparing themselves for retirement a decade or 

more into the future? That question is surely important, even it extends well beyond the reach of monetary policy. 

The one main contribution that the Federal Reserve can and does 

make to the attainment of a financially secure retirement is to pursue our core monetary policy and financial stability responsibilities. 

By pursuing the dual mandate, we aim to establish the best possible backdrop for individuals seeking to provide for their retirement security by having a better chance at steady employment, 

and knowing that their retirement savings will not be eroded by a 

bout of unanticipated inflation. By helping to build a financial system that is robust, households will have a greater assurance that 

their retirement-oriented savings will be there, as planned. 

Thus, the Federal Reserve agrees that retirement income adequacy is an important issue; we provide key information that can 

be used to form judgments about it; and we recognize that the actions we take under our monetary policy and financial stability responsibilities have indirect implications for the ability of households to attain financial security in retirement. 

Q.2. In the past, you have remarked that regulators should work 

to help ease unnecessary regulatory burdens on our community 

banks. In North Dakota, and rural America more generally, community banks are many times the only access to capital families 

and businesses have. Yet more than ever they are faced with layers 

of regulatory and accounting rules that I worry are stifling new 

bank charters, banking innovation, and customer access to important credit and deposit relationships and products. 

Given your concerns about the regulatory pressures on community banks, what is the Fed actively doing to address this issue? 

A.2. A major goal of the Federal Reserve is to eliminate unnecessary regulatory burden on all banks, especially community banks. 

In that vein, the Federal Reserve has been carefully considering 

the comments received as part of the 2014 review conducted pursuant to the Economic Growth and Regulatory Paperwork Reduction 

Act of 1996 (EGRPRA). This decennial review, which is a joint effort between the Federal Reserve, the Office of the Comptroller of 

the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies), generated nearly 270 public 

comments submitted in response to four issued Federal Register notices. Additional comments were also received from bankers as well 

as consumer and community groups through the six outreach meetVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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1 81 FR 10063 (February 29, 2016). 2See: http://wwww.gpo.gov/fdsys/pkg/FR-2015-04-15/pdf/2015-08513.pdf. 3 80 FR 56539 (September 18, 2015). 4See: http://www.federalreserve.gov/newsevents/press/bcreg/20160304a.htm. 5OCC Bulletin 2016-8; FRB SR letter 16-5; FDIC FIL-16-2016. 

6SR Letter 16-12. 

ings held in 2014 and 2015 with over 1,030 participants in Los Angeles, Dallas, Boston, Kansas City, Chicago, and Washington, DC. 

Although the Federal Reserve is still evaluating these comments, 

we have already taken action on certain issues. For example, the 

Federal Reserve immediately raised the threshold from $500 million to $1 billion for banks that qualified for an 18 month versus 

a 12 month examination cycle when the Fixing America’s Surface 

Transportation Act became effective on December 4, 2015. An interim final rule later followed in February 2016. 1 In April 2016, 

the Federal Reserve published a final rule to expand the applicability of its Small Bank Holding Company Policy Statement by 

raising the asset threshold of the policy statement from $500 million to $1 billion in total consolidated assets. The policy statement 

was also expanded to apply to certain savings and loan holding 

companies. As a result of this action, 89 percent of all bank holding 

companies and 81 percent of all savings and loan holding companies are excluded from certain consolidated regulatory capital requirements. In addition to reducing capital burden, the action significantly reduced the reporting burden associated with capital requirements. In addition, raising the asset threshold allowed more 

bank holding companies to take advantage of expedited applications processing procedures. 2

Under the auspices of the Federal Financial Institutions Examination Council (FFIEC), the Agencies issued a public notice on 

September 8, 2015, to establish a multistep process for streamlining Call Report requirements. 3 The notice announced an accelerated start of a required review of the Call Report and included proposals to eliminate or revise several Call Report data items. It also 

included a proposed assessment of the feasibility of creating a 

streamlined community bank Call Report. The Agencies also 

reached out to the banking industry to better understand significant sources of Call Report burden. On March 4, 2016, the Agencies also issued an ‘‘Interagency Advisory on Use of Evaluations in 

Real Estate-Related Financial Transactions.’’ 4 This advisory describes existing supervisory expectations, guidance, and industry 

practice for using evaluations instead of appraisals when estimating the market value of real property securing real estate-related financial transactions, and directly responds to issues raised 

by EGRPRA commenters regarding the use of evaluations. 5 In 

June of 2016, the Agencies also issued supervisory views on the 

new accounting standard for credit losses issued by the Financial 

Accounting Standards Board indicating that the new standard will 

be scaled to the size of the institution, that allowances for credit 

losses may be determined using various methods and that smaller 

and less complex institutions are not expected to implement complex modeling techniques. 6

Outside of the EGRPRA review, the Federal Reserve has also 

taken a number of steps to ease the burden associated with comVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00080 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
77 

7SR Letter 16-8. 

munity bank examinations, including improving examination efficiency by: 

• Using existing bank financial data to identify high-risk activities, which would allow us to focus our supervisory efforts and 

reduce regulatory burden on banking organizations with less 

risk; 

• leveraging technology to conduct more examination work offsite; 7

• simplifying and tailoring preexamination requests for documentation; 

• helping community bankers easily identify new regulations or 

proposals that are applicable to their organizations; and 

• conducting extensive training for examiners and performing internal reviews and studies to ensure that rules and guidance 

are properly interpreted and applied appropriately to community banks. 

Further, in order to reduce the burden of on-site examinations 

the Federal Reserve continues to coordinate with other regulators 

on the majority of on-site examination work. For example, since 

1981, the Federal Reserve and the State regulators have examined 

community banks that are free of problems on an alternative 

schedule, with the Federal Reserve examining one year and the 

State the next. The Federal Reserve and the State regulators also 

conduct joint examinations or participate in each other’s examinations. 

Q.3. How has the Fed coordinated with other regulatory agencies 

to appropriately tailor rules for community banks? Do you see 

areas for improvement in this regard? 

A.3. The Federal Reserve collaborates with the other regulatory 

agencies in most major aspects of bank supervision such as the development of supervisory rules and guidance and on-site examinations. For example, a large portion of the guidance issued that impacts community banks are developed on an interagency basis 

through the FFIEC. Through the FFIEC, the Federal Reserve has 

and continues to work with other regulators to help ensure that 

our rules are properly tailored so that smaller institutions are not 

subject to the same set of requirements as larger institutions. 

When permitted by law, the Federal Reserve and the other regulatory agencies work together to tailor supervisory rules and guidance based on the bank’s risk, size, and complexity so that the 

most stringent requirements are applicable to the largest, most 

complex banking organizations that pose the greatest risk to the 

U.S. financial system. For example, the enhanced prudential standards and expectations implemented through the Dodd-Frank Wall 

Street Reform and Consumer Protection Act set forth a number of 

requirements that do not apply to community banks such as capital 

plans, stress testing, and liquidity and risk management requirements. Many of the requirements of the capital rule that were 

issued in 2013 such as the countercyclical capital buffer, supplementary leverage ratio, and capital requirements for credit valuVerDate Nov 24 2008 09:50 Dec 21, 2016 Jkt 046629 PO 00000 Frm 00081 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-21 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
78 

ation also do not apply to community banks. Also, to assist community banks in understanding how new complex rules could possibly 

affect their business operations, the Federal banking agencies have 

issued supplemental guides that focus on rule requirements that 

are most applicable to community banks. For example, the Federal 

banking agencies issued supplemental guides for the 2013 capital 

rule, as well as the Volcker rule issued in December 2013. 

As to the identification of areas for improvement, the Federal Reserve and the other Federal banking agencies are currently in the 

midst of completing the EGRPRA review. The Federal Reserve 

views this review as a timely opportunity to step back and look for 

ways to reduce regulatory burden, particularly for smaller or less 

complex banks that pose less risk to the U.S. financial system. By 

the end of this year, the Federal banking agencies will submit a 

report to Congress summarizing any significant issues raised by 

the commenters and the relative merits of such issues, as well as 

recommendations and actions taken by the Federal banking agencies to reduce regulatory burden. 

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