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THE FEDERAL RESERVE’S IMPACT ON 

MAIN STREET, RETIREES, AND SAVINGS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

JUNE 28, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–25 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

(III) 

SUBCOMMITTEE ON MONETARY POLICY AND TRADE

ANDY BARR, Kentucky, Chairman 

ROGER WILLIAMS, Texas, Vice Chairman 

FRANK D. LUCAS, Oklahoma 

BILL HUIZENGA, Michigan 

ROBERT PITTENGER, North Carolina 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

WARREN DAVIDSON, Ohio 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

GWEN MOORE, Wisconsin, Ranking Member 

GREGORY W. MEEKS, New York 

BILL FOSTER, Illinois 

BRAD SHERMAN, California 

AL GREEN, Texas 

DENNY HECK, Washington 

DANIEL T. KILDEE, Michigan 

JUAN VARGAS, California 

CHARLIE CRIST, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 28, 2017 .................................................................................................... 1 

Appendix: 

June 28, 2017 .................................................................................................... 41 

WITNESSES 

WEDNESDAY, JUNE 28, 2017 

Dynan, Karen, Nonresident Senior Fellow, Peterson Institute for International Economics .............................................................................................. 9 

Kupiec, Paul H., Resident Scholar, American Enterprise Institute .................... 7 

Michel, Norbert J., Senior Research Fellow, the Heritage Foundation .............. 5 

Pollock, Alex J., Distinguished Senior Fellow, R Street Institute ....................... 10 

APPENDIX 

Prepared statements: 

Dynan, Karen .................................................................................................... 42 

Kupiec, Paul H. ................................................................................................. 49 

Michel, Norbert J. ............................................................................................. 74 

Pollock, Alex J. ................................................................................................. 93 

(1) 

THE FEDERAL RESERVE’S IMPACT ON 

MAIN STREET, RETIREES, AND SAVINGS 

Wednesday, June 28, 2017 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MONETARY

POLICY AND TRADE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:06 a.m., in room 

2128, Rayburn House Office Building, Hon. Andy Barr [chairman 

of the subcommittee] presiding. 

Members present: Representatives Barr, Williams, Huizenga, 

Pittenger, Love, Hill, Emmer, Davidson, Tenney, Hollingworth; 

Moore, Foster, Sherman, Kildee, and Vargas. 

Chairman BARR. The Subcommittee on Monetary Policy and 

Trade will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. 

Today’s hearing is entitled, ‘‘The Federal Reserve’s Impact on 

Main Street, Retirees, and Savings.’’ 

Before I get any further, I would like to take a moment of moment of personal privilege to talk about the tragic shooting that 

happened at the Republican Congressional baseball practice exactly 

2 weeks ago today. Our thoughts and prayers remain with our 

friend and colleague, Steve Scalise, and his family, especially his 

wife Jennifer. Zach Barth, who is a good friend of Roger Williams’ 

aide, was shot in the calf and is recovering well. We are happy to 

report he will be throwing out the first pitch at the Houston Astro’s 

baseball game on July 4th, Independence Day, against the Yankees. I think Representative Williams had a lot to do with that. 

Matt Mika, the Tyson’s Foods employee, was shot multiple times. 

We are happy to say that he has been discharged from the hospital. 

And we commend the heroic actions of Crystal Griner, the Capitol 

Hill Police officer who was shot in the leg, and David Bailey, a special agent for the Capitol Police, who was also injured. And then 

our good friend, Roger Williams, the Vice Chair of this subcommittee, was injured. We are just so grateful for his recovery, 

and we are so glad to have him with us here today, 2 weeks after 

that incident. 

I will now recognize myself for 3 minutes to give an opening 

statement. 

Measured in terms of length, the Great Recession is hardly remarkable. At 18 months, it ties 5 others as our 8th longest recession. So what is remarkable about the Great Recession? In a word: 

severity. The Los Angeles Times documented how more than half 

2 

of adults lost a job or had a cut in pay or hours, and almost 

everybody’s wealth fell. 

Unfortunately, our recovery has not been great. Out of recession 

for 8 years, households and businesses continue to fall short of 

their potential. Every other postwar recession saw a considerably 

faster rebound. 

Our questions for today’s hearing are motivated by this disappointing economic performance. Why did the resilience of hardworking Americans go missing this time around? Did monetary 

policies contribute to or mitigate this disappointing recovery? And 

how did these policies affect our economy for savers, retirees, and 

Main Street? 

Monetary policy was, at best, late to react. The New York Times 

reported that, ‘‘Federal Reserve officials were unaware in January 

2008 that the economy had already entered a recession.’’ 

If monetary policy does not work, then our economy cannot work. 

This concern is more than academic. The Federal Reserve looked 

past monetary policy’s fundamental service to our economy, that is 

providing clear price signals so the goods and services can easily 

find their most promising opportunities. Instead of strengthening 

fundamentals to rebuild our economy from the ground up, the Fed 

engineered a financial reflation from the top down. But the promised Keynesian nirvana never came. Households and businesses 

saw through the Fed’s artificial economic sweeteners and focused, 

instead, on mitigating a new normal of rapidly mounting policy distortions. 

America’s hallmark confidence that tomorrow will be better than 

today went into retreat, cracking the very foundation of what was 

a reliably resilient economy. Households and businesses watched almost $14 trillion of potential income go down the drain since our recovery started in 2009. 

Had we enjoyed a more resilient recovery, American households could have earned $100,000 more income over the last 8 years. A 

decade of artificial monetary support put retirees at risk of seeing 

interest earnings fall short of expenses. And younger savers face 

the opposite problem of paying higher prices for their retirement 

savings. Returning to a monetary policy that simply eases the 

trade of goods and services wherever it shows promise would improve our economy for retirees, savers, and Main Street households 

and businesses. A better way is available, and we should act on it. 

At this time, the Chair recognizes the ranking member of the 

subcommittee, the gentlelady from Wisconsin, Gwen Moore, for 5 

minutes for an opening statement. 

Ms. MOORE. Thank you so much, Mr. Chairman. And I want to 

associate myself with your comments with regard to those injured 

2 weeks ago. I have used every opportunity to keep them in my 

thoughts and prayers. And it is good to be here. It is good to see 

our witnesses. 

I know that retirement security is an extremely important issue 

facing Americans. We have baby boomers who are retiring every 

day. Every day, 10,000 people turn 65, and it creates real challenges for the country. 

The Boomers, of course, are retiring with grossly insufficient savings. But you know what doesn’t keep my up all night? The impact 

3 

of the Fed’s crisis policy on retirement savings. I am not sure how 

it would have served retirees for the Fed to not have acted in the 

face of the Great Recession and to have allowed bread lines to come 

back or to further the Republican austerity agenda that all of our 

experience shows would have been disastrous for the economy. 

You know what retirees need? They need the fiduciary rule that 

helps them save by making advisers put their clients’ interests 

ahead of their own. 

They need Medicaid, because they might find themselves in a 

nursing home. The massive Medicaid cuts that the Republican 

House, passed and the Republican Senate has right now under 

their jurisdiction, will absolutely devastate retirees. That is what 

keeps me up at night, not what the Fed did. 

Savers need a robust CFPB making sure financial hucksters and 

fraudsters are not draining the hard-earned money of consumers. 

Savers need a strong Dodd-Frank Act that safeguards the financial 

market. The growth is not despite Dodd-Frank, it is because we 

have not had booms and busts, and markets are free from fraud. 

I am 100 percent confident that my Democratic colleagues and I 

are 100 percent on the side of savers. 

I want to yield the balance of my time to Representative Foster. 

Mr. FOSTER. Thank you, Mr. Chairman, and Ranking Member 

Moore. 

I think one of the reasons that we have a lot of—both parties 

talking past each other in a lot of these things and often coming 

up with imaginary scenarios of what might have happen. It is one 

of the realities of politics that you don’t get controlled experiments 

the way you do in science. 

You can’t restart and set up a parallel universe and find out 

what would have happened without the aggressive monetary actions by the Fed during a crisis. It would be a very interesting experiment. We don’t have it, so we are stuck with imagined alternate scenarios. 

But I think when I look at the debate over monetary policy, the 

big problem is that we are not looking enough at the distributional 

consequences of this. There was what was, to me, a very influential 

paper on MIP actually from the Federal Reserve entitled, ‘‘Doves 

for the Rich, Hawks for the Poor, Distributional Consequences of 

Monetary Policy,’’ that came out in 2016. And it makes the point 

that, over the course of a business cycle, if you decide which one 

of the two elements of the dual mandate you are going to emphasize, it has real distributional consequences. 

And the other side of the coin is that even if you are focusing 

only on aggregate numbers like total GDP growth or household net 

worth, the distributional elements of that are very important in 

how fast our economy grows. 

To put it sort of bluntly, the reaction of our economy in a macro 

sense is very different if you give additional dollars to someone 

with higher net worth than someone who is part of a working family, that the working family is much more likely to let the money 

circulate in the local economy; the high net worth person is much 

likely to turn the money over to their funds manager and send a 

big fraction of it offshore under the standard advice of diversifying 

and risk. 

4 

And so I think that we have to more and more in our debate look 

at distributional effects. I would very much like to see the Federal 

Reserve every quarter come out with not just the aggregate household net worth but by quintiles or even percentiles, because I think 

that would very much illuminate the debate and, I think, yield a 

higher level of understanding of what the real constraints are on 

economic growth in this country. 

Thank you. I look forward to the hearing. 

I yield back. 

Chairman BARR. The gentleman yields back. And the gentlelady 

yields back. 

And as I said before, we are so grateful for the well-being and 

recovery of our good friend, Roger Williams, the Vice Chair of the 

subcommittee. And the Chair now recognizes the gentleman from 

Texas, Roger Williams himself, a Main Street businessman who 

suggested the topic of this hearing, for 2 minutes for an opening 

statement. 

Mr. WILLIAMS. Thank you, Chairman Barr, and Ranking Member 

Moore. 

As a point of privilege, I would like to echo the remarks you 

made about the tragic events that unfolded 2 weeks ago. I would 

also like to thank Chairman Hensarling, and the members of this 

committee and their staff, for the support my office has received 

during these difficult times. 

As I have said many times, events like this might slow us down, 

but we cannot let them deter us from doing the important work our 

constituents sent us here to do. So I want to, again, say thank you, 

Mr. Chairman, for your kind words. 

The economy of the United States is the largest in the world. At $18 trillion, it represents a quarter share of the global economy. 

Since 1854, Americans have seen their economy fall under recession 33 times. And as Chairman Barr noted earlier, the most recent recovery has been slow with sluggish growth and policies that 

have hurt Main Street America. 

Consequently, one of those policies requires the Federal Reserve 

to pay higher rates to banks that have excess reserves. Required 

reserves alone provide $110 billion in funding, less than 3 percent 

of the current $4.5 trillion Federal balance sheet. The troubling 

spike in excess reserves held at the bank has ballooned to over $2 

trillion. According to former Fed Chairman Bernanke, banks are 

not going to lend out the reserves at a rate lower than they could 

earn at the Fed. Essentially, Mr. Bernanke is admitting that the 

Fed is paying above market interest. 

The excess money being held in reserve is just sitting there, not 

being let out, not serving an economic purpose. Clearly, the Fed 

has stepped far outside of the bounds of a conventional balance 

sheet in terms of both funding sources and size. 

So, Mr. Chairman, I look forward to discussing this further with 

the witnesses today, and I yield back the balance of my time. 

Chairman BARR. The gentleman yields back. 

Today, we welcome the testimony of Dr. Norbert Michel, a research fellow at the Heritage Foundation. His research focuses on 

financial markets, financial regulations, and monetary policy. He 

previously taught finance, economics, and statistics at Nicholls 

5 

State University’s College of Business. Dr. Michel earned his bachelor’s degree from Loyola University, and his Ph.D. in economics 

from the University of New Orleans. 

Dr. Paul Kupiec is a resident scholar at the American Enterprise 

Institute, where he specializes in systemic risk management, and 

regulation of banks and financial markets. Previously, he was the 

Director of the Center for Financial Research at the FDIC and has 

also worked at the International Monetary Fund, Freddie Mac, 

JPMorgan, and the Board of Governors of the Federal Reserve System. Dr. Kupiec earned his bachelor’s degree from George Washington University, and a doctorate in economics from the University of Pennsylvania. 

Dr. Karen Dynan is currently a nonresident senior fellow at the 

Peterson Institute for International Economics. Her research focuses on fiscal and other types of macroeconomic policy, consumer 

behavior, and household finances. 

She previously served as Assistant Secretary for Economic Policy 

and Chief Economist at the U.S. Department of the Treasury. She 

also will be a professor of economics at Harvard starting in July. 

Dr. Dynan received her Ph.D. in economics from Harvard, and her 

bachelor’s degree from Brown. 

Alex Pollock is a distinguished senior fellow at the R Street Institute, where he specializes in financial systems and central banking, 

economic cycles, financial crises, and the politics of finance. He previously was a resident fellow at the American Enterprise Institute, 

and was also President and CEO of the Federal Home Loan Bank 

of Chicago. Mr. Pollock earned his bachelor’s degree from Williams 

College, his master’s of philosophy from the University of Chicago, 

and his master’s of public administration from Princeton University. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, each of your 

written statements will be made a part of the record. 

Dr. Michel, you are now recognized for 5 minutes. 

STATEMENT OF NORBERT J. MICHEL, SENIOR RESEARCH 

FELLOW, THE HERITAGE FOUNDATION 

Mr. MICHEL. Chairman Barr, Ranking Member Moore, and members of the subcommittee, thank you for the opportunity to testify 

today. 

I am a senior research fellow in financial regulations and monetary policy at the Heritage Foundation, but the views that I express in this testimony are my own, and they should not be construed as representing any official position of the Heritage Foundation. 

The Federal Reserve has a much better reputation among economists than with the general public. And even though I am an economist, I have to side with the public on this one. Monetary policy 

is not working for Main Street America. And my remarks will provide four specific examples of why Americans need Congress to fix 

monetary policy. 

First, the Fed has not tamed the business cycle. When the Fed 

is no longer given a free pass on the Great Depression, and the entire Fed era is compared to the entire pre-Fed era, neither the freVerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI
6 

quency nor severity of recessions has decreased. Even when the period between the two World Wars is excluded, updated data suggests that the average length of recessions, as well as the average 

time to recover from recessions, has been slightly longer during the 

postwar period than during the pre-Fed period. In many cases, the 

apparent decline in postwar volatility is literally a figment of the 

data. 

Second, the Fed has not tamed inflation unless one defines price 

stability in a way that is extremely favorable to what the Fed has 

done. For instance, the variability in inflation has declined in the 

postwar period, but the average rate of inflation is much higher 

than it was before the Fed was founded. 

Estimates of the annual CPI show that the average inflation rate 

prior to the Fed was only about 0.2 percent, whereas the average 

rate since the Fed has been more than 3 percent, and the variability has only dropped one percentage point. Perhaps more importantly, the Fed has been actively trying to stamp out the good type 

of deflation that a growing productive economy normally produces. 

The Fed simply doesn’t want to let prices fall, even when they 

should. 

Main Street Americans understands that when the Fed constantly fights the Walmart business model, it makes it harder for 

them to earn a living. 

Third, an inflated opinion of the Fed’s ability to control every aspect of the economy is what contributed to our recent housing boom 

and the consequent bust, likely worsening massive job losses, millions of home foreclosures, and billions of dollars in lost wealth. 

In the early 2000s, the Fed actively and openly tried to keep its 

Fed funds target rate below what it viewed as the natural Fed 

funds rate. The Fed thought that it could use the higher productivity to further boost employment without increasing inflation, so 

that is what it tried to do. And residential construction grew from 

supporting about 51⁄2 million jobs at the end of the 1990s to almost 

71⁄2 million jobs at the peak of the cycle in 2005. 

When the crash hit, housing-related employment fell substantially down to 41⁄2 million by 2008. This means that roughly 75 percent of the drop in total U.S. employment was housing related, and 

the Fed simply shares some of this blame. 

Several measures suggest that the Fed’s policy stance was excessively tight at exactly the wrong period, thus worsening the downturn. And the Fed openly admits that starting in 2008, it sterilized 

emergency lending and large-scale asset purchases with the explicit 

intent of ensuring that those purchases would not spill over into 

increased private lending, and did so out of concern for its Fed 

funds target and inflation target, but it should have been worried 

about preventing aggregate demand from collapsing, and it completely failed on this front. 

Fourth, as a result of the Fed’s extraordinary efforts, taxpayers 

are left shouldering the risk of more than $4 trillion in long-term 

securities sitting on the Fed’s balance sheet with very little to show 

for it, all while a select group of financial firms received more than 

$16 trillion in credit at subsidized rates. The Fed’s policies have 

helped drive demand for safe assets through the roof, thus contribVerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI
7 

uting to historically low interest rates. They have also crowded out 

private investment and contributed to less affordable housing. 

And I have left out of my oral remarks any critique of the Fed’s 

regulatory failures, particularly those that blessed Fannie Mae and 

Freddie Mac mortgage-backed securities with a preferred position 

in bank’s required capital framework. 

Congress would not be fulfilling its responsibility if it allows the 

Fed to continue operating under its existing ill-defined mandates 

where it has essentially become a broker, allocating credit to preferred sectors of the economy. 

And I look forward to answering your questions. 

[The prepared statement of Dr. Michel can be found on page 74 

of the appendix.] 

Chairman BARR. Dr. Kupiec, you are now recognized for 5 minutes. 

STATEMENT OF PAUL H. KUPIEC, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. KUPIEC. Chairman Barr, Ranking Member Moore, and distinguished members of the subcommittee, thank you for convening 

today’s hearing. It is an honor for me to testify before the committee today. 

I am a resident scholar at the American Enterprise Institute, but 

this testimony represents my personal views. There is little doubt 

that the Federal Reserve is the most powerful agency in government. The Fed’s decisions have important impacts on the lives of 

every American, and yet, the Fed’s decisions are made by unelected 

officials with only limited oversight by Congress. 

Few Members of Congress are deeply schooled in the arcane details of monetary theory, and those who are schooled face a fulltime job just keeping abreast of the ever-changing fashions in central banking. Economists and central bank officials are continually 

refining the thinking that guides their policy prescriptions. 

In addition, Congressional Members who dare to question the 

propriety of the Fed’s monetary policy decisions know full well that 

they will be charged with the mythical crime of attacking the Fed’s 

independence. 

Countercyclical monetary policy is, at its core, a redistribution 

mechanism. To stimulate the economy, the Fed lowers interest 

rates, thereby reducing the income of savers with the hope of encouraging other groups to borrow and increase their spending. The 

monetary policy works as planned. It generates growth benefits 

that more than offset the redistribution. But in the current recovery, the theory did not work out as planned. 

The economy has continually performed below Fed growth targets. Moreover, the income and wealth redistributions caused by 

the Fed’s post-crisis monetary policies have been exceptionally 

large and unusually prolonged. 

There is little doubt that unconventional monetary policies like 

near zero interest rates, interest on bank reserves, and 

quantitating operations have had important impacts on the distribution of income and wealth in America. 

My written testimony includes analysis that shows that those on 

the less well-heeled side of Main Street, of which there are many 

8 

in America, have seen fewer gains and a weaker recovery compared 

to the benefits that policies have generated for a wealthy minority 

of Americans. 

Under post-crisis monetary policies, households near the top of 

the income distribution have received most of the wage gains as 

well as the QE-generated gains in stock and home values. At the 

same time, households outside of the top income bracket saw their 

wages stagnate, and those living off fixed income retirement savings saw their incomes decline. 

Households trying to save have had to accept near zero returns 

on prudent investments or gamble by investing in equity markets 

inflated by Fed QE programs. Fed policies benefited banks by 

sharply reducing their funding costs. At the same time, bank customers saw the markup they pay on bank loans and services increase. And few seem to realize that the largest banks are now 

more reliant on cheap, taxpayer-guaranteed deposit funding than 

they were at the start of the crisis. 

Had unorthodoxed generated the income growth that was anticipated, the Fed’s policy experiments would have been suspended 

years ago without generating the public dismay that has sparked 

today’s audit-the-Fed movement. To be clear, the Fed’s mandate to 

maintain price stability and maximum sustainable employment 

does not include any explicit obligation to consider wealth or income redistribution when formulating policy. And the current mandate is probably sensible given the fact that monetary policy is 

truly a blunt instrument. But the Fed is mistaken if it assumes 

that it will be insulated from Congressional intervention when a 

large share of the electorate becomes disillusioned with the Fed’s 

performance. 

The need for a more comprehensive Congressional discussion on 

the impacts of the Fed’s monetary policy decisions is long overdue. 

But thus far, Congress has been unable to catalyze this discussion. 

The modest size of Congressional staff provides Members with limited resources to gauge the Fed on technical discussions on monetary policy, nor is it clear that proposed legislation such as the Federal Reserve Transparency Act of 2017 will adequately address 

these issues. When engaged to investigate controversial financial 

issues, GAO studies are rarely conclusive. Congress needs a new 

approach. 

My recommendation is that Congress consider a simple procedural change that could, without any new legislation, help to level 

the playing field. After the Fed delivers its written HumphreyHawkins testimony, but before scheduling the Fed Chair’s testimony, the Congress could hold hearings in which outside experts 

evaluate the Fed’s written testimony. 

After such hearings, they would allow the Congress additional 

time and expert resources to prepare oversight questions for the 

Fed Chair subsequent to the Humphrey-Hawkins hearing. My 

guess is there is at least an even chance that once the Fed’s written testimony is subjected to expert opinion and outside review before the Fed Chair testifies, that the Fed will find it preferable to 

anticipate and address controversial issues in its written testimony. Especially if the Congress encourages nonaligned experts to 

focus on issues with which they are concerned. 

9 

Thank you for the opportunity to testify today, and I look forward to your questions. 

Thank you. 

[The prepared statement of Dr. Kupiec can be found on page 49 

of the appendix.] 

Chairman BARR. Thank you. . 

Dr. Dynan is now recognized for 5 minutes. 

STATEMENT OF KAREN DYNAN, NONRESIDENT SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Ms. DYNAN. Thank you. 

Mr. Chairman, Ranking Member Moore, and members of the 

subcommittee, thank you for the opportunity to testify today. I will 

make five points on how the Federal Reserve’s policies have affected Main Street retirees and savers. 

First, accommodative monetary policy since the recession has 

produced a strong economic recovery in the United States. The 

lower interest rates resulting in the Fed’s actions reduced borrowing costs for households and businesses. They also enabled 

homeowners to refinance their mortgages, leaving them with more 

money for other things. This spurred additional spending, leading 

to yet more hiring and more income. 

Real GDP is now 17 percent above its recession low point, and 

the unemployment rate is at its lowest level since 2001. Indeed, as 

noted in a recent OECD report, our economic recovery has been 

stronger than in most other countries, with the report attributing 

our better performance partly to the best monetary policy support. 

My second point is that while the employment effects of the Fed’s 

actions have differed across people, everyone has benefited from 

more job growth. Someone who found a new job after being laid off 

during the recession undoubtedly benefited more from the Fed’s efforts to restore a healthy labor market than a neighbor who had 

a stable job. 

That said, the effects of a stronger labor market were not limited 

to unemployed people who found jobs. Employed people were more 

likely to see wage increases and to find better opportunities with 

other firms. The additional income generated by new and better 

jobs boosted household spending, helping businesses do more hiring 

and expand in other ways. 

I want to particularly emphasize the importance of restoring a 

healthy labor market to small businesses, because they account for 

so much employment, and they were hit hard during the recession. 

I think small businesses would have faced far greater struggles in 

recent years if demands for their products had been weaker because monetary policy was not sufficiently supportive. 

Third, the effects of monetary policy on savers have differed 

across people. Lower interest rates have hurt some savers by reducing their interest income, but have helped some savers by boosting stock and home prices. 

Increases in stock and home prices in recent years have added 

tens of trillions of dollars to household wealth. 

Overall, a relatively small amount of wealth, around 5 percent, 

is in interest-paying accounts, but there are differences across the 

10 

income distribution. For retirement-age households, middle- and 

upper-middle income income households are the most exposed to 

interest income losses. While we should not minimize the hardship 

suffered by some in this group, research has shown that the financial losses of the group from 2007 to 2011 amounted to less than 

10 percent of its income. 

In addition, many savers, among them many retirees, are also 

borrowers, which meant they benefited directly from lower interest 

rates. 

Furthermore, the strong labor market fostered by monetary policy enhanced retirement security by reducing forced early retirements. 

My fourth point is that while the Federal Reserve should be accountable to Congress for its actions, some of the provisions in the 

CHOICE Act would impair its ability to support a strong economy 

and low and stable inflation. Studies have demonstrated that 

economies perform best when monetary policies are insulated from 

short-term political pressures. But regular GAO audits of monetary 

policy might discourage the FOMC from taking the actions needed 

to create maximum employment and stable prices particularly on 

unpopular actions. 

Furthermore, closely tying the FOMC’s actions to strict predetermined rules would hinder its ability to appropriately react to adverse developments given the complexity of our economy. 

My fifth and final point is that too many Americans have not 

saved enough for retirement, and various aspects of Federal policy 

apart from monetary policy should be used to enhance financial security. 

One way to raise retirement saving is to increase access to taxdeferred workplace retirement savings accounts. For example, Congress could adopt a proposal developed by the Brookings Institution 

and the Heritage Foundation under which firms would automatically enroll workers without a plan in an individual retirement account with an option, of course, to opt out of that plan. 

We should also protect the Labor Department’s new fiduciary 

rule to help savers, large and small, get a fair shake in financial 

markets. It is common sense to require financial advice to be in the 

best interest of savers. 

And we need to protect savers from investment fraud, including 

older households who seem particularly vulnerable to such abuses. 

To do so, among other things, we should preserve the powers of the 

Consumer Financial Protection Bureau. 

Thank you very much, and I look forward to your questions. 

[The prepared statement of Dr. Dynan can be found on page 42 

of the appendix.] 

Chairman BARR. Thank you. And now, Mr. Pollock, you are recognized for 5 minutes. 

STATEMENT OF ALEX J. POLLOCK, DISTINGUISHED SENIOR 

FELLOW, R STREET INSTITUTE 

Mr. POLLOCK. Thank you, Mr. Chairman, Ranking Member 

Moore, and members of the subcommittee. 

I couldn’t agree more with Dr. Dynan that the Fed needs to be 

accountable to the Congress. I am going to discuss one particular 

11 

way in which that accountability should take place: relative to savings. 

There is no doubt at all that among the important effects of the 

Federal Reserve’s actions since 2008, up to now, has been expropriation of American savers, and that makes things especially difficult for many retirees. This, of course, has been done through the 

imposition of negative real interest rates on savings through a remarkably long period of 9 years. Negative interest rates would be 

expected from the central bank in the crisis mode. This morning, 

we talked a lot about the crisis, but the crisis ended 8 years ago. 

After that, the Fed wanted to inflate asset prices to achieve a socalled wealth effect. 

Well, house prices bottomed 5 years ago, and they are back up 

over their bubble peak. The stock market is at all-time highs. So 

what is the Fed doing, still forcing negative interest rates on savers 

at this point? The Fed should be required to explain that to Congress. 

I recommend that Congress require a formal savers impact analysis from the Federal Reserve at each discussion of its policies and 

plans with the committees of jurisdiction. 

Under the CHOICE Act, this would be quarterly. This analysis 

would discuss, quantify, and talk about the plans of the Fed as 

they relate to savings and savers so that these can be balanced 

with other relevant factors. 

The Fed endlessly announces to the world its intention to create 

perpetual inflation at 2 percent, which is equivalent to a plan to 

depreciate savings at the rate of 2 percent a year. 

Against that plan, what are savers getting? The FDIC’s June 

2017 report shows the average interest rate on savings accounts is 

0.06 percent. The average Money Market deposit account rate is 

0.12 percent, and in no case can savers get their real yield anywhere near zero, that is to say, near the inflation rate. 

In other words, thrift, prudence, and self-reliance, which is what 

we should be encouraging, instead are being strongly discouraged. 

As Congressman Foster said a minute ago, we have to think 

about distributional consequences of the Fed’s actions—I agree 

with that. Overall, speaking of distribution, the Fed has been taking money from savers in order to give it to borrowers. This benefits borrowers in general, but in particular, it benefits highly leveraged speculators in financial markets and speculators in real estate. 

More importantly, it benefits the biggest borrower of all, the government itself. Expropriating savers through the Federal Reserve 

is a way of achieving unlegislated taxation. One term for this is financial repression, and financial repression is what we have. 

By my estimate, the Federal Reserve has taken since 2008 about 

$2.4 trillion from savers. The specific calculation is shown in the 

table, which is included in my written testimony, which compares 

normal, based on the 50-year average of real interest rates, to 

those that we have had since 2008. We multiply by the savings 

base, and to repeat the answer, it is $2.4 trillion. 

Now, there can be no doubt that taking $2.4 trillion from some 

people and giving it to other people is a political act. As a political 

act, it should be openly and clearly discussed with the elected RepVerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI
12 

resentatives of the People who have the constitutional responsibility for the nature of money. 

In this context, it is an obvious fact that the Fed is just as bad 

at economic and financial forecasting as everybody else. It has no 

special insight into the future, and since it can’t see the future, it 

must be rely on theories. 

Dr. Kupiec said they are refining their thinking on theories. I say 

they keep changing the theories. Grown-up substantive discussions 

with the Congress about which theories the Fed is supplying, what 

the alternatives are, who the winners and losers may be, and what 

the implications for political economy and political finance are, just 

as the CHOICE Act suggests, would be a big step forward in the 

accountability of the Federal Reserve. And a key part of these discussions, I again suggest, should be a formal savers’ impact analysis. 

Thank you very much for the chance to share these views. 

[The prepared statement of Mr. Pollock can be found on page 93 

of the appendix.] 

Chairman BARR. Thank you, Mr. Pollock, and your time has expired. 

And the Chair now recognizes himself for 5 minutes. 

Mr. Pollock, your testimony that Federal Reserve policies, and 

near zero interest rate policy since 2008 have deprived the American people savings to the tune of $2.4 trillion is certainly a depressing analysis of the failure of Fed policies post-recession. And 

I think even Dr. Dynan acknowledged that Fed policies have punished at least certain savers or certain Americans in the economy. 

But I want to focus on, for a moment, the comments from my colleague, Mr. Williams, who talked about interest on excess reserves 

and the policy of the Fed paying interest on excess reserves. 

As you know, the FOMC’s primary monetary policy tools are now 

interest on excess reserves and reverse repos, not open market operations. 

Interestingly, in 2013, former Fed Chairman Ben Bernanke said, 

‘‘Banks are not going to lend out the reserves at a rate lower than 

they could earn at the Fed.’’ So essentially, in effect, Mr. Bernanke 

is admitting that the Fed is paying above market rates through interest on excess reserves (IOER). 

Do you agree with Chairman Bernanke that paying IOER is effectively paying banks to not deploy capital into the real economy? 

And if so, what are the consequences for Main Street Americans? 

We will start with Dr. Michel. 

Mr. MICHEL. Thank you. I do agree. You have a large pile of 

money sitting there, and anyone who has a large pile of money has 

choices in what to do with it. So if you have given them an abovemarket rate, they are going to probably go to that spot. Right? And 

that is all that is going on here. 

You have essentially diverted money from the real economy for 

a very small number of very large banks, and that does not help 

Main Street America. It does not help anybody but those large 

banks. 

Chairman BARR. Dr. Kupiec, in my discussions with the members of FOMC, both Governors and district bank presidents, some 

have defended Fed policies by arguing that IOER is not diverting 

13 

access to capital in the real economy in a material way. What 

would you say in response to that? 

Mr. KUPIEC. It is not just excess reserves. It is all bank reserves 

they pay interest on, which is problematic. It is problematic because without paying interest on excess reserves, the Federal fund 

rate, which is the rate that banks trade excess reserves at, would 

be zero. And it would be zero for the foreseeable future, because 

there are so many excess reserves that the Fed has generated 

through QE operations. 

So until excess reserves come down to a level far, far smaller 

than they are, the Fed has to do something to control the shortterm interest rate. And how it does that is it puts a floor over it 

by setting the IOER, which is now at 1 percent. It is not 25 basis 

points anymore. It is a real number. 

Those benefits do not pass on to depositors and banks, because 

banks have excess liquidity in deposits. They don’t have to pay to 

raise new deposits. So deposit rates haven’t risen, and they are unlikely to rise for a long time. This whole mechanism distorts the 

way the market works. 

The Federal funds market is not working the way it worked before the crisis, and the Fed is still targeting the Federal funds rate 

to set monetary policy. So there is kind of a disconnect here in how 

the whole system is operating. 

Chairman BARR. Mr. Pollock, in addition to the zero low interest 

rate policies punishing savers, do you concur with the argument 

that the Fed policy of paying interest on reserves, paying interest 

on excess reserves, is diverting capital away from the real economy? 

Mr. POLLOCK. I do, Mr. Chairman. I think we have to look at the 

classic theory of reserves, which is they were supposed to, by definition, be zero interest bearing and, therefore, banks tried to get 

out of holding them by lending out their money. That is the classic 

theory of the bank multiplier through high-powered money. 

Chairman Bernanke, in a brilliant political move, got the act 

changed to be able to pay interest rates on reserves. 

My interpretation is that is because the Fed itself wanted to act 

as the financial intermediary where it could draw the resources 

into itself and allocate the credit, which it did, to mortgages and 

to financing the government. 

Chairman BARR. Dr. Kupiec, really quickly, we know that the 

balance sheet is now $4.5 trillion. Do the American people have 

anything to be concerned about, with this oversized balance sheet? 

Mr. KUPIEC. The Fed has to decide what to do with its balance 

sheet. One of the reasons it has to control the Federal funds rate 

is that it doesn’t want to sell off Treasury securities. If that were 

to spook the long-term rate, then the long-term rates would jump, 

the stock market could risk calamity, and that kind of policy decision really isn’t in their playbook right now. 

So they are stuck looking at long-term interest rates. As long as 

they do that, they are going to have to pay banks to keep the interest rates up. Banks are going to be low to pass these benefits on 

to savers. And so I think it is a problem. 

Chairman BARR. My time has expired. 

14 

And the Chair now recognizes the distinguished ranking member, Congresswoman Moore, for 5 minutes. 

Ms. MOORE. And thank you so much, Mr. Chairman. 

Again, these are always extraordinary opportunities for the committee to hear from the best and brightest in the financial services 

industry, and I appreciate your appearance here today. 

I would like to direct my question to you, Dr. Dynan. This committee is often very critical of the Fed for its dual mandate, and 

there is a constant cry for us to eliminate the mandate that talks 

about increasing employment. 

So I am wondering if you can elaborate a little bit on the accommodative monetary policy of lowering those interest rates in order 

to avoid the employment versus the Fed doing nothing or doing 

something else. 

Ms. DYNAN. Thank you, Congresswoman Moore. 

With regard to the dual mandate, I think the two sides of the 

mandate really go hand in hand. The soft employment conditions 

that we have had in recent years are mirrored by disinflationary 

or deflationary forces, which contribute to the softer economy. 

In general, if you expect prices to fall in the future, you are going 

to defer spending today. So ignoring these forces is not the way to 

address an economy where a demand is falling short of where it 

should be. 

I should say, in this particular case, low inflation has been a particular problem, because we had a debt crisis where people were 

overleveraged. Traditionally, one way in which debt burdens are reduced is that inflation erodes them because they are usually defined in nominal terms. 

So I think the Fed’s efforts to both support employment, produce 

maximum employment, and to raise inflation to their targeted 2 

percent— 

Ms. MOORE. Ms. Dynan, I am really specifically interested in the 

comments you made in your written testimony about the 86 consecutive months of private sector job growth, and is that a worthwhile tradeoff with regard to whatever interests, income may have 

been enjoyed by savings? 

Ms. DYNAN. As I noted in my testimony, you don’t want to minimize the hardship of anyone who has suffered as a result of lower 

interest income. But I will say that the Fed needs to act in the interest of the economy as a whole, and the effects of strong job creation have been really enormous for the American public as a 

whole. And as I explained in my testimony, really, that strong job 

growth benefits everyone in the economy. 

Ms. MOORE. Thank you so much. 

The name of this hearing talks about the suffering the seniors 

have felt with regard to monetary policy of the Fed. 

I am wondering if you can comment, or elaborate a little bit more 

on the fiduciary rule and the impact that may have on protecting 

seniors? 

You mentioned in your testimony that $17 billion has been lost 

as a result of—and the advice not being given appropriately to seniors. And you also mentioned provisions of the CHOICE Act that 

you think would materially impair the Fed’s ability to support a 

strong economy and stable inflation. Would you comment on that? 

15 

Ms. DYNAN. Yes. I worked on the fiduciary rule when I was in 

the Administration. I think it is very important to make sure that 

savers both large and small get a fair shake in financial markets. 

It is just common sense that we should require financial advice 

to be in the best interest of the saver. There are some very big opportunities for abuses, particularly when someone is coming out of 

a job and they have a 401(k), and they have been given advice 

under one standard in which the financial advisers need to adhere 

to stringent rules and, suddenly, they are being approached by people who want them to roll this money over to IRAs, and those people have conflicts of interests. And that is where, really, the $17 

billion number comes from. 

So I think it is very important that we protect the fiduciary rule, 

and it is very important that we fight off attempts to weaken it, 

because I think it would harm savers. 

With regard to the CHOICE Act, as I mentioned in my testimony, the main concerns I have are about the provisions that require regular GAO audits of the Fed as well as the provision that 

ties monetary policy decisions closely to a pre-determined Taylor 

Rule. I think that both would undermine the Fed’s ability to support a strong economy. 

Ms. MOORE. Thank you so much. My time has expired. 

Chairman BARR. The gentlelady’s time has expired. 

The Chair now recognizes the Vice Chair of the subcommittee, 

Mr. Williams from Texas. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

I want to thank all of you for your testimony today. I appreciate 

that. 

I am a Main Street guy, a small business owner back in Texas. 

I go so far back, that I borrowed money at 20 percent interest. And 

I can tell you, today, it is tough on Main Street. 

Dr. Michel, on page 14 of your testimony, you talk about how the 

central bank’s policy stance was excessively tight at exactly the 

wrong time. You go on to say that the Fed’s policies prolonged the 

recession. You said, paying interest on excess reserves is bizarre. 

And can you go into more detail on why the 2008 policy was wrong 

then and why it is still wrong today? 

Mr. MICHEL. Sure. It was wrong then, because the whole idea behind expanding monetary policy during the crisis is that there 

would be more lending and more economic activity. The Fed acknowledged that they were using interest on excess reserves to prevent that money from getting out there. I’m not making this up. 

They have told us this. That doesn’t make any sense. 

If you have a crisis and you want to expand the economy, and 

you want to stop a downturn, you don’t do anything to stop that 

money from getting out there. You do everything you can to get it 

out there. So that was exactly the wrong time to do that. 

As far as now, what you have is, essentially, $2 trillion in excess 

reserves by the largest banks, and we have nothing to show for 

what we have done, but we have that money sitting there. And we 

are paying—the Fed projects that they will pay almost $30 billion 

of interest this year to those banks, and that will rise up to, under 

their projections, almost $50 billion, $50 billion by 2019. 

16 

That is not community banks getting that money. That is not 

Main Street Americans and average wage workers getting that 

money. That is money that is not being productively used. It is almost an overt bailout. And if it was the Treasury doling that 

money out, it would be an overt bailout. 

Mr. WILLIAMS. Let me follow through on that. You just said the Fed projects that it would pay $27 billion in interest on these excess reserves reaching nearly $50 billion by 2019, mostly going to 

large domestic and foreign banks. So now that the balance sheet 

has grown from the $900 billion pre-crisis to $4.5 trillion today, we 

see this money basically being diverted from the private sector to 

the Federal Government. 

So how does this hurt Main Street America, when someone 

wants to start a new business or get a loan? Because, frankly, 

when you combine these Fed policies with the heightened new regulatory standards under Dodd-Frank, I can see why we haven’t had 

sustained economic growth of 3 percent. 

Mr. MICHEL. No, this represents credit that has been allocated 

to someone outside of the productive sector of the economy. So it 

represents an opportunity lost. It represents money that they don’t 

have to start their new businesses or to finance their existing businesses. 

It is very hard to quantify the exact number of jobs and things 

like that, but what we know that it is a diversion from the real sector of the economy. 

Mr. WILLIAMS. The American Dream, and who gets hurt, at the 

end, is the consumer. 

Mr. Kupiec, as the Fed raises target interest rates, it must make 

increasingly large interest payments to banks, correct? 

Mr. KUPIEC. That is correct. 

Mr. WILLIAMS. So can you go into more depth quickly on how 

dealing with the excess reserves has the potential to increase our 

national debt? 

Mr. KUPIEC. Yes. As long as excess reserves are large and the 

Fed needs to raise short-term interest rates, the only way they can 

do it—they could do it in two ways. 

They could raise rates by selling off the Treasuries they have in 

their $4.5 trillion portfolio, but that would be such a change to financial markets that it would spook long-term rates in the stock 

market, and it would risk causing another financial problem there, 

another crisis. 

So they are kind of stuck with that and letting that roll off slowly, which means the reserves stay in the banking system. Banks 

are willing to keep the reserves in the system and not lend them 

out as long as they are being paid on that money. And the higher 

the interest the Fed wants to set the short-term Federal funds rate, 

the higher the rate it has to pay banks on their reserves. It is just 

as simple as that. 

So as they go through the cycle and raise rates, what is going 

to happen is they are going to pay banks more and more money, 

and it is going to impact the Federal Government deficit. Because 

the money that the Fed earns on its Treasury portfolio, it uses for 

operations. Part of the expense of the operations is now paying 

banks interest on their reserves. And so the Fed will give back to 

17 

the Treasury smaller and smaller surpluses until it would directly 

impact the Federal deficit. 

And as the Fed raises rates, if excess reserves don’t decline, it 

is going to have a bigger and bigger impact on the deficit. And we 

are going to be talking about it in this committee, but you are 

going to be talking about it in the Budget Committees too. It is 

going to be an issue. It is there. 

Mr. WILLIAMS. Thank you for your testimony. 

I yield back. 

Chairman BARR. The gentleman yields back. 

The Chair now recognizes the gentleman from Michigan, Mr. Kildee, for 5 minutes. 

Mr. KILDEE. Thank you, Mr. Chairman. And thanks for holding 

this hearing, and to the ranking member as well for helping to lead 

this. 

And thank you to the members of the panel. It is a very important discussion. 

Dr. Kupiec, I want to return to a point that you made in your 

opening testimony that had, I think, addressed in part what Ranking Member Moore was raising, and that is this issue of what is 

happening in the employment sector relating directly to the Fed’s 

dual mandate. 

And I think it was your testimony that while there has been 

positive job growth, most of the wage gains, in terms of household 

income, have been concentrated by people at the upper end of the 

economic spectrum. And I wonder if you might explore for a moment how Fed policy would impact that particular aspect of income 

distribution? 

Mr. KUPIEC. Yes. First of all, let me say, I don’t think any of the 

distributional effects of the monetary policy that have come about 

have ever been intended. I think the Fed did what it thought it had 

to do to spark a recovery. And I think the income distributional impacts are all unintended consequences. And again, they probably 

wouldn’t have shown up if monetary policy worked and sparked 

growth quickly. 

The problem is it didn’t work the way they thought it might. The 

recession was way worse, and these policies have continued on for 

many, many years now. And so they have had big and noticeable 

effects on income distribution. 

The wage gains come from the Fed’s own 2013 survey of consumer finance, which shows that the household income of the very 

highest deciles of the income distribution are the ones that receive 

the biggest gains. 

And through 2013, the middle of the distribution actually had 5 

percent losses in household income. 

Mr. KILDEE. Yes. And I think we—obviously, the data speaks for 

itself, and we clearly would agree on that. 

I guess the question that I have is, because this discussion has 

to do specifically with Fed policy, to what extent is that phenomena 

attributable—and I ask the other panelists to maybe weigh in on 

this as well—to Fed policy as opposed to other drivers: 

globalization; technology; the relatively low rate of unionization in 

private sector employment— 

18 

Mr. KUPIEC. You can attribute it to lots of things, but what you 

need to add on top of that is it is not just what happened to wages. 

It is what happened to the—when the Fed started QE policies to 

actually bid up asset and home prices, and those benefits also go 

to the highest income earners, because they are the ones that have 

the houses and the financial assets. 

And, again, I don’t think any of this was designed to help the 

wealthy, but I am saying, if you look back over the last 9 years, 

it is pretty clear in the data that the wealthy did a lot better from 

these policies than the poor, or even the very middle-class, the vast 

majority. 

Mr. KILDEE. Maybe if the others could answer and then fold into 

that question about the extent to which low- and moderate-income 

households benefit from interest-based income or asset sources as 

opposed to other assets, other income sources? 

Dr. Dynan, if we could start with you? 

Ms. DYNAN. Thank you very much. I want to build on what Dr. 

Kupiec was saying. His analysis of the 2013 survey of consumer finances is correct, but it has been 4 years since that survey data 

was collected. 

If you look at more recent data on the distribution of wages, you 

can see that wage gains are now concentrated at the lower end of 

the distribution as would be expected given that we are at the tail 

end of an economic recovery. 

I also want to say, first of all, with regard to asset holdings, 

housing is a really important part of the nest egg of middle-class 

households. So they did, in fact, benefit tremendously from the $7 

trillion of wealth, of housing wealth, that has been created since 

house prices hit their low point during the recession. 

I also want to say that recent research on the effects of expansionary monetary policy on the income distribution coming out of 

the Brookings Institution has shown that it does not raise inequality. That, in fact, the effects through job creation are really dominant and that offsets some of the other aspects that Dr. Kupiec was 

talking about. 

Mr. KUPIEC. I want to make a factual point. The U.S. Census Bureau says that the income distribution got more unequal in 2014, 

2015, the last one out. According to the U.S. Census Bureau, there 

was no reversal in the income distribution. 

Ms. DYNAN. If I can just make a point on that point. 

Income inequality—the wealthier households were hit harder 

during the recession, because they held so many assets. 

Mr. KILDEE. My time has expired. 

Ms. DYNAN. So just as a rebound from that. 

Mr. KILDEE. I certainly appreciate any documentation you might 

supply to support your arguments. Thank you. 

Chairman BARR. The gentlemen’s time has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. And I thank each of 

you for being with us today, for your great expert witness and 

counsel to us in Congress as we walk through the many ways that 

we can help address these issues. 

19 

We have been out of this recession now for the last 8 years. We 

certainly have not seen the rebound for households, for small businesses. They have clearly fallen short of their potential. Every 

other post-war recession has certainly seen a greater and faster rebound. I would like to take a look at why this has occurred, particularly related to compliance issues and regulations and how they 

have had an effect in these policies and impacted Main Street, impacted the access to capital. It impacted the access to the capability 

of growth. 

Dr. Michel, we will start with you and go down the row. 

Dr. MICHEL. Sure. Regulatory? On the regulatory side? 

Mr. PITTENGER. Yes, sir. 

Dr. MICHEL. If you look at the timing of Dodd-Frank and Basel 

III, it couldn’t have been any worse. You have an economy trying 

to recover and a banking sector trying to recover, and you impose 

stricter liquidity requirements, stricter capital requirements. You 

require them to hold onto more money as opposed to using it. 

There is only one way that is going to go when you look at the 

macro effect, and it is not up. 

Mr. PITTENGER. Yes, sir Dr. Kupiec, would you like to comment? 

Dr. KUPIEC. When you look at the data, and it is in my written 

testimony, as are the sources for the income and equality, there are 

cited there too, the data pretty clearly show that small business 

lending by banks is down. It is not up, it is down. It hadn’t recovered at all. 

Now, there is always an issue if whether that means that small 

businesses have no demand for loans, they just don’t want money 

anymore, or is it a supply issue. Are the banks constrained? And, 

quite frankly, economists, no matter how we go—we could be at 

Harvard, we could be at Brookings, we could be at Heritage, we 

can’t really figure out totally whether it is supply or demand. But 

I bet your hunch that regulation is playing a part is probably true. 

Was there a time when small businesses weren’t very optimistic 

and conditions weren’t good and they didn’t have a strong demand 

for money, that was probably true at stages of the cycle too. 

But you would think, in 9 years by now, small business lending 

at banks would have recovered and exceeded its levels prior to the 

crisis. And so that is a pretty good sign that something unhealthy 

is going on here in the financial system. 

Mr. PITTENGER. In North Carolina, since 2010, we have lost 50 

percent of our banks. And just in the last 2 months, we have had 

3 additional banks which have had to merge because of the compliance and regulatory requirements. And certainly that has a direct 

effect on the access to capital and credit in the market. Mr. Pollock, 

would you like to comment? 

Mr. POLLOCK. Thank you, Congressman. I think you are right 

about the regulatory burden. We know that expansions in regulatory bureaucracy always fall disproportionally hard on smaller organizations and on smaller banks. 

We mentioned who benefited in terms of labor. We know some 

labor segments it benefited: its examiners who check on compliance 

officers who check on external auditors who check on internal auditors, all of whom are checking on somebody who is actually doing 

some work. 

20 

In the meantime, in the Federal Reserve’s own balance sheet, we 

have a huge, very conscious, very intended by the Fed, huge resource allocation to take the funds and divert them to making 

house prices go up, securities prices go up, and to financing the 

government expenditures. That takes money away from the kinds 

of productive enterprises of which you are speaking. 

Mr. PITTENGER. Yes, sir. To that end, extrapolate some more on 

what the Fed could be doing in its role in all of this, how it could 

effect a positive change? 

Mr. POLLOCK. Congressman, in my opinion, the Fed has gotten 

itself in a tough situation with its big investment portfolios. It consciously set out to move the market up by creating huge market 

moving positions and now it wants to sell without putting the market down, and they can’t do it. So they have a dilemma. But in my 

judgment, what they ought to be doing now, 8 years after the end 

of the recession, 5 years after the bottom of housing, is trying to 

get back to actual functioning of a market economy in the financial 

sector with market-set interest rates. 

Mr. PITTENGER. Thank you. My time has expired. I appreciate 

your comments. 

Chairman BARR. The gentleman’s time has expired. And the 

Chair now recognizes the gentleman from California, Mr. Sherman, 

for 5 minutes. 

Mr. SHERMAN. Take a minute to deal with the supposed war on 

savers, the war on seniors. First, most Americans have a lot more 

debt than they have invested in interest. So for most Americans, 

low interest rates work out pretty well. Seniors get only get 10 percent of their income from interest income. They get a lot more in 

terms of wealth increases when the stock market goes up, when 

real housing and other real estate prices go up. 

So, in fact, the policies of the Fed have been beneficial to seniors, 

but there is a harkening for the good old days. Make American interest rates great again. I remember the good old days. You had 

6 percent interest. If you had a million bucks in the bank, you were 

getting $60,000, you felt good, you weren’t invading your principal, 

and you were spending $60,000, we had a 5 percent inflation rate, 

you were invading your principal. But it was hidden. 

So the good old days basically were a way for people to feel good 

even while they were invading their principal by saying, well, you 

are only doing that in real terms. Nominally, you are keeping your 

nest egg intact. So the idea that taking out $60,000 in interest and 

seeing the value of your nest egg decline by $50,000 is somehow 

better than making $10,000 in income and then having to invade 

your nest egg by $40,000 or $50,000 in order to support your standard of living is psychologically true but not economically true. 

But what we have here—the mandate of the Fed is not to bring 

psychological benefits to savers. The mandate of the Fed is full employment and stable prices. Full employment means economic 

growth. And I would point out that, for example, the S&P Global 

found that, without—and this is just the third round of quantitative easing—1.9 million fewer jobs would have been created, implying an unemployment rate 1.3 percent higher. That is real economic growth just from that round. 

21 

But I am concerned about the interest on excess balances, because I don’t want to encourage excess balances. Why should banks 

put their money in the Fed when there are so many deserving business in the 30th Congressional district. Dr. Dynan, we are paying 

banks 11⁄4 percent absolutely risk free for excess reserves. What do 

we do to get them to loan that money to deserving businesses, in 

the 30 seconds I have left? 

Dr. DYNAN. Thank you. I appreciate your comments. And I will 

say I very much appreciate what you said at the beginning of your 

comments about perceptions. I think behavioral economists are 

looking into that and also about the fact that so many seniors do 

benefit directly from lower rates. 

On the excess reserves, I think there are good questions to be 

asking about why banks aren’t passing on those savings to the depositors. 

Mr. SHERMAN. Why don’t we tell them to we are not going to pay 

them interest on their excess balances, make them take that money 

and invest it in the private sector economy? 

Dr. DYNAN. I am not enough of an expert on the technical issues 

involving excess reserves and interest on excess reserves to be able 

to explain why the Fed needs— 

Mr. SHERMAN. I will go with the doctor sitting next to you on 

your right. 

Dr. KUPIEC. I can tell you exactly why. Because if they stop paying any interest on excess reserves, banks would pay absolutely 

nothing and raise their rates on their deposits, charge for deposits, 

because they would have to make it the income source. Everybody 

would take deposits out of banks and put them in money market 

mutual funds, and the banking system would collapse. They have 

to keep the reserves in the banking system, because if the rate outside the bank—if they didn’t pay anything at all, depositors would 

start getting charged through the roof to keep deposits at the 

banks. Banks are getting paid right now to hold people’s deposits— 

Mr. SHERMAN. You are saying the banks can’t find another place 

to make 11⁄4 percent on their money? 

Dr. MICHEL. Could I? I think Paul is— 

Mr. SHERMAN. Mr. Pollock, I was going to call on you earlier. 

Mr. POLLOCK. Thank you, Congressman. My answer is you take 

the interest on reserves to zero, where it always was, and thus you 

encourage loans. Now, why the Fed doesn’t want to do that is because that will generate the inflation set up by their big QE investments, which is what they are trying to avoid. 

Dr. DYNAN. If I may just add one more thing, I don’t think that 

there is evidence that those excess reserves being held at the Fed 

are actually holding back the banks from making loans. 

Chairman BARR. The gentlemen’s time has expired. The Chair 

recognizes the gentleman from Arkansas, Mr. Hill, for 5 minutes. 

Mr. HILL. Thank you, Mr. Chairman. I appreciate the opportunity to have this hearing. I want to echo some comments that, 

when it comes to the economic expansion, certainly in the 2nd Congressional district of Arkansas, which is Central Arkansas, Little 

Rock, there are only 4,400 more people employed since July of 

2007—4,400 more people employed since July of 2007. 

22 

So the economic growth over the last 90-plus months has been 

not only subpart anemic, it has been certainly not shared by most 

of the country. In fact, many studies show that more than 50 percent of businesses and jobs are limited to just 20 counties in this 

country, all of which have an NFL franchise, except for Austin, 

Texas. So I call it kind of the ‘‘NFL effect.’’ 

And I agree with Dr. Michel that nonmonetary policy structural 

impediments have been a real drag on productivity, business formation, and labor-force, participation. And those nonmonetary policies, structural impediments include all the comments you made 

about the capital and liquidity rules that have been impacted by 

Dodd-Frank on top of the economic conditions that we have had. 

So I really think that the QE that we have talked so much about 

this morning, the multiple unconventional monetary policy that we 

have had, I don’t think the added GDP growth we have had, and 

the statistics have been thrown around here are measurably better. 

I think if we look with hindsight now, QE1 QE2, will not be proven 

to have been worth ballooning the balance sheet from $900 billion 

to $4.5 trillion. 

So with that, I am interested in the panelist’s views on the preferred course now to shrink this balance sheet. As we have risen 

rates—actually, 10-year rates have backed up a little bit in the 

marketplace, which makes me think because of the dollar and the 

strength of the American economy, there is a high demand for 

Treasuries in the world, which would make me think that market 

conditions are actually right for shrinking the balance sheet. 

And I am also concerned with the fact that we have seen the Fed 

become allocator of credit by buying 40 percent of the new issue 

mortgage-backed securities in this country. That is unheard of, has 

never been done before, and, I think, has terrible possibilities for 

GSE reform, the Federal budget deficit, the impact on credit markets. And I think there is—I read a story by one of the traders who 

was so shocked by the willy-nilly impact of buying mortgage-backed 

securities during the recovery period to the point that he wanted 

to apologize to taxpayers. 

TARP was not the biggest bailout. Maybe QE1 and QE2 were the 

biggest bailouts to Wall Street through particularly the mortgagebacked securities market. So Dr. Michel, what would you suggest 

is the right way to shrink this balance sheet, if you were advising 

Chair Yellen and Governor Powell and others? 

Dr. MICHEL. This may be where Paul and I differ a little bit. And 

I think that if you look at how QE was put into place, you have 

a roadmap for how to undo it. It was done in terms of the relative 

market—size to the relative overall market. It was done in a small 

fashion per month. And you remove interest on excess reserves. 

That does have an inflationary tendency. But as you sell assets, 

that has offsetting contractionary effect. 

So the thing to do is both of those at the same time, and do it 

in a slow, gradual manner. Pre-announce it and start auctioning 

them off. And I don’t know that the number is as important as the 

announcement and the timing and the slow graded sort of manner 

in which you do it. 

If you want to do it in exactly the amount that you purchased them, fine. Do it, $50-, $75 billion a month. But you have to make 

23 

the announcement, you have to start doing it slowly over time. And 

both at the same time have the offsetting interest on reserves being 

pared back so that you have the contractionary and expansionary 

effect going against each other so that don’t see the high inflation 

and that you dont’ see the large contraction. 

Mr. HILL. Do you think the Fed should limit its purchases in the 

future to Treasuries as opposed to other asset classes? 

Dr. MICHEL. Possibly. It depends on the framework that we were 

talking about. But in general, I think that you still have the risk 

of saying that what we are doing by Treasuries only is allocating 

credit to the government in a preferred position over everybody 

else. So there is a question there that I would say it depends. 

Mr. HILL. I yield back. 

Chairman BARR. The gentleman’s time has expired. The Chair 

recognizes the gentleman from Minnesota, Mr. Emmer. 

Mr. EMMER. Thank you, Mr. Chairman, and thanks to the panel. 

You know, as I sit here, it is my second term in this place, and I 

listen to people who are brilliant, like you folks, come in and talk 

about the economy and numbers. And I wonder sometimes, have 

you ever been to Main Street? Because I will tell you what, the 

topic is about what the Fed has done to Main Street. And I think 

my colleague Mr. Williams was getting at it, because that is where 

he comes from. I think some people have been touching on it. But 

we have too many people who want to play with particular fact. 

And I don’t have your degrees. I think you could say I graduated 

from the School of Hard Knocks. I am somebody who actually was 

a consumer and still am a consumer. 

I think about the fact that my colleague French Hill just commented that we have some of the lowest employment participation 

in decades, that we are not producing the jobs that we should be 

producing. But everybody wants to say we got this incredible recovery. And it goes on and on. 

Dr. Michel, can you tell me one good thing the Federal Reserve 

has done in the last decade? 

Dr. MICHEL. In the last decade? 

Mr. EMMER. Well, maybe that is not fair. Let’s go back to 1913. 

Can you tell me one good thing they have done since 1913? 

Dr. MICHEL. I am sure they have done something right somewhere. Maybe if we focused on the great moderation period, 

Volcker’s second term, maybe up in there, something like that, I 

guess. That would be the highlight for me. 

Mr. EMMER. Here is another thing you have to help me with is 

that up here I keep hearing about how studies have shown you 

have to insulate financial or monetary decisions from the political 

process. And yet somewhere in our genius somebody in a previous 

Congress decided that we were going to add maximum employment 

to this price stability thing when, in fact—again, I am just a simple 

guy from the Midwest—my understanding is that price stability 

will drive maximum employment. Isn’t that correct, Dr. Kupiec? 

Dr. KUPIEC. That used to be the theory, but theories change all 

the time. But I think Congress created the Fed. Congress is in 

charge of the Fed. And I think the whole issue is Congress needs 

to have these kinds of discussions with the Fed and have the Fed 

explain clearly how they are going to unwind their portfolio. 

24 

Why paying interest on reserves is a good idea, not a bad idea, 

you are asking us, but this is the kind of thing that the Fed should 

be really having a discussion about. That is what is missing. 

Mr. EMMER. It is interesting. Again, I’m just a simple guy. We 

have gone from an economy that is based on wealth creation to an 

economy that is based on debt leverage. So an economy based on 

wealth creation is for everybody. Even the little guy or gal who 

goes down to the community bank or the credit union and gets a 

loan to start the next great idea. We are not starting new businesses like we used to. And yet I come here and I hear it is great. 

They are doing wonderful things. In the time I have left, there 

is something that I want to talk to Mr. Pollock about, because you 

hit on it, and I think the chairman and/or his staff probably knew 

when you submitted your written testimony that this would get me 

all fired up. I don’t know any other way to put it other than theft. 

But this 2 percent annual inflation rate, this target, Mr. Pollock, 

that is purely arbitrary, correct? 

Mr. POLLOCK. It is Congressman, and it is a pure theory. 

Mr. EMMER. And call it a hidden tax. Call it what you want. But 

you are stealing from my parents. You are stealing from all the 

Boomers who have saved and planned. And then I hear testimony 

that, you know what, people haven’t saved enough. Where is the 

incentive? What are we doing? 

Mr. POLLOCK. Congressman, you are absolutely right. And I will 

add that the Federal Reserve Act, as amended in 1977 with the socalled dual mandate, doesn’t talk about steady inflation. It talks 

about price stability. The Fed itself made up the idea that it was 

going to redefine price stability to mean perpetual inflation. 

Mr. EMMER. And isn’t that somewhat subject to political pressure? 

Mr. POLLOCK. Absolutely. That is why I said in my testimony, if 

I may repeat myself, that the nature of money is a political decision to be made by the Congress. 

Mr. EMMER. And I appreciate you repeating yourself, because it 

is interesting to me that this is not more widely discussed outside 

of Washington, D.C., that the average person who is out there 

working hard, trying to play by the rules saving for their retirement, they have these insidious policies that are literally stealing 

the money from them while they are sleeping. And I think more 

people need to talk about it. And, frankly, the Administration, I 

think, needs to take a bigger a role in this. 

Dr. KUPIEC. Some of the Fed Governors or presidents of the 

banks are arguing they need a higher inflation target to meet their 

high employment price stability bill. 

Mr. EMMER. And some are also arguing we should make banks 

utilities which would completely frustrate the process. Thank you 

for your patience, Mr. Chairman. 

Chairman BARR. I wish the gentleman’s time had not expired, 

but it has expired. And now we move to the gentleman from Ohio, 

Mr. Davidson. 

Mr. DAVIDSON. Thank you, Mr. Chairman. Thank you to our 

panel. I really appreciate your written testimony and what you 

have shared with us here. It’s very tempting to pick right up where 

25 

Mr. Emmer left off, but I do have a couple of other questions, so 

maybe we can get back to that. 

Dr. Michel, your testimony highlights a sense of humility and 

perspective about what is the proper scope of monetary policy. And 

you also highlighted—we didn’t really see an incredibly good track 

record for the Fed. If you look at the decision to have the Federal 

Reserve in the system that we have today, is it a structural problem or is it a strategic problem? 

Dr. MICHEL. I think it is a structural problem in the sense that 

we have way too much faith in our ability to sort of turn dials on 

the economy through monetary policy. And I think that the evidence bears out that this just doesn’t work when we had almost exactly 100 years to experiment with this type of thing. 

And recessions have not gotten shorter, recoveries have not gotten quicker, as we have just talked about what happens with inflation. So the idea—I will go quickly—that you can have this trade 

off between inflation and employment, that was an idea that started and I believe came to its peak in the 1960s. And I thought it 

was dead. Somehow it keeps coming back. 

So, I don’t think that there should be an employment mandate 

anywhere in there with the Fed. And I think they need to be more 

accountable for what they are doing, and in that sense it is a structural problem for sure. So maybe that answers your question. Yes, 

I think it is a structural issue in terms of, we have not properly 

defined what they should be doing and held them to account. 

Mr. DAVIDSON. We have a lot of debate about this strategy or 

that strategy. But in a way, we have put in place a system. And 

to pick up where Dr. Pollock, you left off, a system that has a structure in place that preserves the status quo of inflationary which deflates the value of savings. It destroys the value of our money. If 

the purpose of money is to be a store of value, everything about the 

current structure erodes it. 

And I might add that we are not doing ourselves any favors with 

fiscal policy. And if you could comment about the intersection, Dr. 

Kupiec, if you could talk about the intersection of fiscal policy and 

the fact that we borrow so much and the Fed’s role in that? 

Dr. KUPIEC. If you look at what has happened since the financial 

crisis, the whole idea of stimulative monetary policy is to get consumers to borrow and spend more and increase growth that way, 

and businesses to invest and spend more and increase growth that 

way, borrow and spend. But, really, who borrowed since the crisis 

is the Federal Government. 

And there are some nice graphs in the back of my written testimony which show that the government borrowings are up almost 

300 percent since the crisis, while the private sector level of borrowing is nowhere near that. And some parts of it it are pretty flat. 

So, the whole monetary expansion has very much benefited the 

government in terms of keeping the cost of government borrowing 

exceptionally low for an exceptionally long period of time, and the 

Fed owns a lot of that. And without a doubt, that has been one of 

the big impacts. And now, as we move into a period where we want 

to raise rates, it is going to have an impact on the deficit in two 

ways. One, because we are going to have to pay banks more to keep 

these excess reserves. 

26 

And, two, if they were to sell off their bond portfolio and raise 

long-term interest rates, the Federal Government would have to refund those bonds, the ones that mature at much higher interest 

rates. And that is going to cause you guys headaches in the Budget 

Committee hearings. So that is kind of where we are right now, 

that these things are going to impact—they are going to feed back 

on the budget, and it is going to happen. 

Mr. DAVIDSON. Thank you. And I will close with Dr. Pollock, just 

a question. But when we talk about this, what is the impact on the 

household? What is the impact on Main Street? Destroying the 

store of value in our money is a huge problem. And our fiscal path 

of bankrupting our country is a big problem. 

Mr. POLLOCK. Congressman, I agree with your thoughts here. 

The longest-serving Federal Reserve Chairman, William 

McChesney Martin, called inflation, ‘‘a thief in the night.’’ The Fed 

has changed its ideas since then. And if I could—could I have 20 

seconds, Mr. Chairman? 

Chairman BARR. Well, the gentleman’s time has expired. 

Mr. POLLOCK. All right. I don’t get 20 seconds, Congressman. I 

will tell you later. 

Chairman BARR. We will have an opportunity for a second round. 

Mr. DAVIDSON. My time has expired. I yield back. 

Chairman BARR. I am sure you will have an opportunity, Mr. 

Pollock. And now the Chair recognizes the gentleman from Indiana, 

Mr. Hollingsworth. 

Mr. HOLLINGSWORTH. Mr. Pollock, I will give you 20 seconds. 

Mr. POLLOCK. Thank you very much. In ancient Greece, 

Dionysius, the tyrant of Syracuse, couldn’t pay his debt. So he expropriated all the silver coins from his citizens on pain of death 

and took the One Drachma coins and restamped them two Drachmas and gave them back to pay off the debt—thereby setting the 

pattern for inflation by governments in all future times. 

Mr. HOLLINGSWORTH. Before we delve into a couple of questions, 

I wanted to reiterate something my colleagues have said. I found 

the use of the word ‘‘strong’’ in recovery almost an insult. And I 

think Hoosiers across the district would feel the same way back 

home. Certainly, this recovery hasn’t been strong. And to say it has 

been strong relative to the nadir of the recession is a misnomer. 

And to say it has been strong relative to other countries is just 

measuring who is the tallest dwarf in the room rather than a 

measure of real strength in the economy. 

Dr. Kupiec, in reading your testimony, I really appreciated that 

you walked through kind of a lifetime consumption model and how 

lowering interest rates theoretically should move savers—or move 

down the preference line between saving and consumption and create more consumption. But have we really seen before what happens when interest rates are very low for a very long period of time 

and, rather, instead of allowing for the tradeoff consumption and 

saving, whether we are permanently altering the preferences themselves and expectations for rates in the future. 

Dr. KUPIEC. Congressman, that is a great question, and the answer is, ‘‘no.’’ Back in December, we had an event at AEI where 

we had a noted historian, Dick Sylla, come in, who has actually 

written the book on the history of interest rates all the way back 

27 

to the Roman times. And in Dick’s book, he did remark that he had 

never seen in history anywhere a period where interest rates were 

0 or negative for such a long period. 

So it is extraordinary, and it has a number of implications, because if you really think about it, the financial services industry is 

built on a model where interest rates are positive. They make investments at some higher rate to provide a service to consumers 

and take some spread. When interest rates get to 0 or below, there 

is no spread anymore. 

So things like life insurance—all those things become problematic. They either have to directly charge more for it. And so this 

is an experiment that has far-reaching implications for the whole 

financial sector in how we move forward. 

Mr. HOLLINGSWORTH. I think, if I could speak anecdotally, certainly millennials don’t know what it is like to see interest rates 

at 7, 8, 9, 6, 5 percent. They think of mortgages. And when they 

hear 31⁄2 percent, they think that is outrageously high. That must 

be usury, right? And the second question I really wanted to talk 

about, and it has been touched on before, but have we really started to see the cost of unwinding this balance sheet? Because one of 

the things that I really worry about is not just, as French Hill said, 

the mechanics, but also the crowding out of investment. As we 

start to unwind the investment in those Treasuries, it has to come 

from somewhere. It is going to come from the private sector, maybe 

some of it coming from abroad. But it is not going to be invested 

in the private sector. And I worry that we have not begun to see 

the significant costs. 

We have seen very little benefit. Now we are going to start to see 

the significant cost in the future, and I wonder whether Dr. Michel 

might touch on that and Dr. Kupiec, and Mr. Pollock as well? 

Dr. KUPIEC. I would say I agree with you. I think we are treading water at this point in time. And the Fed is starting slowly to 

try to engineer the old way they used to raise rates, the Federal 

funds rate, and they have to do it in a different mechanism. They 

don’t want to sell off their long-term Treasury portfolio. They have 

not figured out how to do that yet, because it would spook, I think, 

longer-term rates if they did it in a big way. And if they announced 

a long-term program to sell it off, if it was slow enough that the 

economy could absorb it, maybe. But I think they are treading 

water, hoping there is no inflation now, things don’t look so bad. 

But I really don’t think the whole process of unwinding all this has 

been thought through. And I don’t think the costs have actually 

shown up yet. 

Mr. HOLLINGSWORTH. I will go to Mr. Pollock, because I want to 

ask Dr. Michel a question at the very end. Go ahead? 

Mr. POLLOCK. Congressman, on the 0 interest rate question, I 

think the answer is long periods of negative real rates are a narcotic for financial markets, and it usually doesn’t end well. You are 

absolutely right on the Fed’s balance sheet. We are not seeing the 

cost on the unwinding, because they are not unwinding. They are 

still buying every month. 

Mr. HOLLINGSWORTH. Right. And Dr. Michel, the last thing I 

want to talk about is, is it universally agreed upon by economists 

that inflation is a positive thing? Deflation exists, right? If price 

28 

levels were the same and productivity were increasing, we would 

see deflation, right? 

Dr. MICHEL. Right. It is not universally agreed upon. So it is not 

universally agreed upon that it is a good thing. It is not universally 

agreed upon in that group, what rate it should be. And both of the 

those groups ignore something that we knew a very long time ago 

and somehow or another, as a profession, seemed to have forgotten, 

which is that you need less less money if the economy is more productive, not more. So you should have—there is a difference between a massive deflation in asset prices and a good deflation as 

the economy grows. We shouldn’t be stamping that one out. 

Mr. HOLLINGSWORTH. Perfect. Thank you so much. I yield back, 

Mr. Chairman. 

Chairman BARR. The gentleman’s time has expired. The Chair 

recognizes the gentlelady from Utah, Mrs. Love. 

Mrs. LOVE. Thank you so much for being here today. I just have 

a couple of questions. Dr. Michel, you state in your testimony that 

we should hold the Fed accountable for maintaining a stable inflation rate where the target rate is conditional on the rate of productivity growth so that inflation rises above its long-run rate only 

when there are productivity setbacks and it falls below its long-run 

rate only when there are exceptional productivity gains. Would you 

expand on that for me? 

Dr. MICHEL. Sure. Think of something like, stable inflation under 

the Fed’s current interpretation of it means you should have constant inflation all the time at 2 percent. That is the idea. And, of 

course, we don’t really get 2 percent over the long-term. We get 

more like 4 percent. But leaving that aside, think of something like 

a supply shock that we had, say, in the 1970’s with an oil embargo. 

What happens is you have less oil, so everybody is hurting, and 

prices go up, and you see inflation across-the-board. It makes absolutely no sense to try to stick to an inflation target by taking more 

money out of the economy and, therefore, killing the people who 

don’t have the fuel they need, right. 

Mrs. LOVE. Right. 

Dr. MICHEL. But that is what this constant low, ‘‘positive inflation’’ does in that environment. So you cannot let the Fed interpret 

price stability the way that they have, otherwise you get into that 

problem. And it is the same on the other side when you have productivity and prices should be declining. 

Mrs. LOVE. Okay. Mr. Pollock, you say in your testimony that the 

Fed is just as bad as everyone else at economic and financial forecasting, despite having an army of Ph.D. economists who can run 

computer models as complicated as they choose. So why do you 

think the Fed is so bad at forecasting? And I want to get back to 

that, because you have a brilliant quote in your testimony that I 

want to get back to. But why do you think the Fed is so bad at 

forecasting? 

Mr. POLLOCK. Thank you very much for liking my quote, Congresswoman. It is bad at forecasting because forecasting is about 

the financial and economic future, which is fundamentally uncertain. It is not like a physicist calculating the path of a planet using 

Newton’s laws. This is about forecasting the interacting behavior, 

interacting strategies of governments, investors, consumers, entreVerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI
29 

preneurs. And no one, including the Fed, knows what is going to 

happen. And that is why they should not pretend to be philosopherkings who know this, and why they should not be granted independence from the elected Representatives of the People. 

Mrs. LOVE. Okay. So you have said that in our current national 

policy it is not one of savings and loans but one of loan and loan. 

And I want to know what that means for the average American. 

In other words, what does that mean for the young person who is 

still dealing with the high cost of education and paying off their 

student loan debts or the trucker who is trying to make ends meet 

and he is realizing that the cost of healthcare has continued to go 

up? What does that mean for the single mother who is just busting 

her chops every day to provide for her children? 

Mr. POLLOCK. Congresswoman, without savings, there are no 

loans, in the end, or any investment or any growth, in the long run. 

Savings should be encouraged, and we have forgotten how to do 

that. Now, in certain circumstances, of course, it is more difficult 

to save than others. I mentioned in my testimony the old theory 

of the savings and loans, I am talking in the 1920s and 1930s, 

which were focused on low-income people and inducing them to 

save; it was a wonderful and right idea, in order to get control of 

their lives. 

It is harder sometimes than others. But I used to have the historical savings contracts from the savings and loan I ran in which 

people promised to save $2 a week, $1 a week, $5 a week. It was 

to establish the pattern and practice of savings which will stand 

you in good stead over time. 

Mrs. LOVE. It is really interesting because as I speak to people 

in my district, I ask them if it is a lot easier or a lot more difficult 

to save for the future. And over and over and over again they tell 

me that it is absolutely impossible to have any savings, because 

every time they turn around and save something, there is something else that is coming out of it, and they can’t keep up. I know 

my time has expired. But I just want to say this. You said that the 

notion of philosopher-kings is distinctly contradictory to the genius 

of the American constitutional design. That is a great quote. I yield 

back. 

Mr. POLLOCK. Thank you very much. 

Chairman BARR. Thank you. And the gentlelady’s time has expired. The Chair now recognizes the chairman of our Capital Markets Subcommittee, the gentleman from Michigan, Mr. Huizenga. 

Mr. HUIZENGA. Thank you, Mr. Chairman. And I am attempting 

to go back into Plato’s Republic on this, again, as a Brown’s child, 

approaching how we are going to deal with what lies in front of us. 

There are so many different directions to go. And I think I am 

going to need to lay out a couple of things. Something that I am 

very concerned about, and I know other members on this committee are, on both sides of the aisle, is income disparity. You look 

at where we are as a Nation. It is a real issue. And we have pockets of economic activity. My home county has a 21⁄2 percent unemployment rate. Within my district, I house that county. I also house 

the poorest county in the State of Michigan, like one of the top 50 

counties in the Nation when it comes to poverty. I house, just literally 25 miles north of where I live, the county that butts up to 

30 

this county with 21⁄2 percent unemployment has double that, triple 

that. Quadruple that in the African-American community. We have 

a significant pocket of minorities that are there. 

We are seeing older workforce participation and, really, frankly, 

underemployment among youth. So the workforce is getting older. 

Why? Because they are having to work longer. And this notion that 

seniors are doing great because the stock market’s doing great, I 

just do not buy it. We are seeing IPOs at modern era lows. We are 

seeing a select few groups of people, whether they are Wall Street 

folks, whether they are qualified investors, folks who have a million dollars in value or net incomes of $250,000. They are doing 

great. It is the other folks. It is the folks that we represent who 

are struggling, who are really kind of bumping along. And as we 

look, we have seen the other side others have thrown up a chart 

about. Loan activity is up. Oh, but if you dive into it, industrial 

loan activity is up. Small business loans are down. 

And so we are losing the engine of economic activity on that 

grassroots micro basis for this larger scheme that has been painted 

out there. And it seems to me for—why would we keep trying this, 

certainly, at a minimum, underperforming system, if not failing 

system of stimulus, that is not reaching the people that it is intended to reach? Why do we keep doing it? Read Keynes. You all 

have, right? You probably are not on this committee if you have not 

read John Maynard Keynes at some point or another. He talks 

about short stimulus. Not 10 years. Not bumping up on the 10 

years of this. And if monetary policy is not doing what it can to 

facilitate investments wherever they show this promise, lone American households and American businesses and American entrepreneurs just keep bumping up against this wall as they are trying 

to fulfill their potential. 

That really, I think, ought to be concerning to all of us. And how 

do we unwind—getting back to my colleague from Arkansas—this? 

Because I am concerned. Just yesterday we had a phenomenal 

hearing. Two panels on market structure and where the market is 

going. And ultimately, it doesn’t matter if we are not allowing the 

system to work for those who need it the most, which is our constituents, hardworking taxpayers who have felt like they have had 

nothing but headwinds coming at them from their own government 

with a monetary policy and a whole raft of other things, like tax 

policy and regulatory policy. And I am just very concerned about 

that. And I don’t know, Dr. Kupiec, if you care to comment quickly? 

Dr. KUPIEC. I think your concerns are well-founded. And I would 

say first that monetary policy is a blunt instrument. I don’t think 

the Fed ever had the intention of causing the income redistribution 

that I think it has caused. I think it tried to do what it thought 

was right to resuscitate growth. And it had these unintended consequences. And at this point, I am not sure we all have answers 

on how you get out of this in the long run. I think there are going 

to be costs involved. But I think the point is— 

Mr. HUIZENGA. As Keynes said, we are dead in the long run anyway, right? 

Dr. KUPIEC. Well, no. I didn’t say that exactly. 

Mr. HUIZENGA. No. No. I know you didn’t. Keynes did. 

31 

Dr. KUPIEC. Yes, he did. But I think the whole point is to encourage and not discourage better dialogue with the Fed on all these 

other issues that aren’t just the top number GDP numbers, inflation numbers that tend to hide all that is going on underneath. 

Mr. HUIZENGA. Thank you. 

Chairman BARR. The gentleman’s time has expired, and the 

Members have requested a second round of questioning for the witnesses. So with your indulgence, we will proceed with that second 

round. And the Chair recognizes himself now for an additional 5 

minutes. 

I wanted to follow up on the question related to the oversized 

balance sheet. Mr. Hollingsworth asked a series of very good questions about that. And he asked about the cost of unwinding and the 

potential of crowding out private investment. What other risks does 

an oversized balance sheet pose to Main Street America? What are 

those risks? And is there any way that the Fed can, as it unwinds, 

avoid those risks? We will just go down the line here. Dr. Michel? 

Dr. MICHEL. One of the risks is that you are paying—literally 

paying these people on these assets. So if you look at what is going 

on with interest and excess reserves on the extra balances, under 

the Fed’s projections, you are going to be seeing—taxpayers, rather, 

are going to be seeing that they are going to be paying large banks 

$50 billion a year. That is a direct cost to people, and it is going 

to be a political nightmare when you have the Fed set up to continue paying these banks literally billions of dollars a year. 

I will concede that we don’t know exactly what is going to happen here. But I think when we talk about the recovery, the anemic 

recovery, you have to put it in context of, oh, and then there is 

some more to come, because we haven’t unwound all this stuff. 

Chairman BARR. And, Dr. Kupiec, as you answer this question, 

please amplify your testimony when you basically described a dilemma between, on the one hand, a need to normalize, and on the 

other hand, the economic downside of the Fed’s only policy tool that 

it is using right now of increasing interest on excess reserves. 

Dr. KUPIEC. That is the dilemma. They have this problem, in 

part—not in part, in total, because of the QE. And they bought 

enormous—billions of dollars—well trillions, actually, in assets, 

right, and they turned those into reserves. And for the bank to 

make that tradeoff, they paid the bank on reserves to keep reserves 

in the Fed. And now their only policy tool—they have two policy 

tools. They could start selling their Treasuries. If they sold their 

Treasuries, the market would react in a fairly big way, I think. 

They have such a large part of the Treasury in GSC market that 

long-run rates would react to any kind of unwinding announcement 

or something like that. And they don’t want long-run rates to rise. 

We haven’t recovered. We need a recovery still. 

And so now they are sticking with their old instrument to keep— 

to tighten or to look—do whatever they are doing which raising the 

Federal funds rate, and it is not clear that that works the same 

way it used to work with all these excess reserves in the banking 

system. But that is the only other technique they have. Now, they 

could do repo operations and not pay on bank reserves, but then 

that would—repos, mutual funds can participate in, and that would 

move money out of the banking system into the mutual fund sysVerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI
32 

tem. And the Federal Reserve wouldn’t want to do that. So they 

wouldn’t want to do anything that disadvantaged the banking system relative to what they would call the so-called shadow banking 

system. So they are kind of stuck. If short-term market rates were 

to change anywhere else in the economy, they are going to have to 

pay banks to keep the money in the banking system and not migrate out. So I am sorry this—I know this sounds confusing, and 

I don’t have an answer to the question. But it is sort of a quandary 

we have gotten ourselves into that— 

Chairman BARR. My time is about ready to expire. So I have another question for Mr. Pollock, really quickly. Obviously, the loose 

monetary policy that has been pursued by the Fed was supposed 

so boost asset prices. 

The idea was to goose these asset prices to make people feel 

wealthier, and the synthetic wealth was, in turn, supposed to cause 

households to spend more and, therefore, jump start the economy. 

That is, in effect, Dr. Dynan’s testimony. Clearly, the results 

haven’t been as projected. In the previous Administration, we 

didn’t see a single year of GDP growth of 3 percent or greater. That 

is the first time that has happened since the Administration of 

Herbert Hoover. So clearly, the Fed’s policies have not produced 

the result that they predicted. Can you respond to that analysis? 

Mr. POLLOCK. Mr. Chairman, it has produced the result of 

goosing asset prices, just as you say. So we have had a huge boom 

in house prices, stock prices, and bond prices. The problem with an 

eternal monetary policy of that sort, which we could better call a 

market distortion, is those prices will not go up forever. Let’s talk 

about house prices for just a second. High house prices may feel 

good if you own a house. It is terrible if you are a new family trying to buy a house. And when the overinflated house prices then 

go down, everybody will feel terrible. 

Chairman BARR. My time has expired, and the Chair recognizes 

the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. I am glad you are 

doing a second round, but no Democrat can stay here past another 

5 minutes. So I hope the second round is as nonpartisan as possible. We won’t be here to inject our words of wisdom should that 

not be the case. The policies we have had over the last 5 or 7 years 

have given us the longest if not the fastest recovery. 

House prices for the buyer are not the stated price. They are the 

mortgage payment that comes with that house. Can you afford the 

mortgage payment? So housing prices are not at an all-time high 

until we get normal interest rates, and then they will be. And then 

I think, as Mr. Pollock points out, some people are going to get 

hurt. 

The gentleman from Michigan talks about the need to lend 

money to small business. We have a lot of money in capital. And 

it is all going to T bonds and highly safe instruments. And that is 

perhaps the responsibility of this committee, because we have this 

very efficient banking system that is told raise all this money, and 

it is insured by the Federal Government. And then we are telling 

them only lend it at prime, maybe prime plus 1, prime plus 2. The 

businesses in our district and your district that you want to get the 

loan, you wouldn’t loan the money at prime plus 1. The pizzeria in 

33 

my district has a chance of going bankrupt. That is why we need 

prime plus 4, prime plus 5 loans. But we have a very efficient system that takes all the money and prohibits them from putting it 

in prime plus 5 loans. And instead, that money has to be given— 

it has to be loaned to a small business or a private equity or a venture capital. And then maybe it can get to a business that is doing 

something that is risky or different or small. We have a low—great 

target. It ought to be higher. 

In my first statement, I pointed out the psychological benefit for 

seniors of living in a world with a 6 percent interest rate and a 5 

percent inflation rate. Economists can tell them that they are eating into their capital. They don’t think they are, and the mistake 

that they are making is wonderful. It makes them feel better. And 

that is very helpful. Also, we see that rents, salaries, and other 

things stick. But in inflation, you don’t have to lower things. You 

can just keep them the way they are. And that is your method of 

lowering them. So it actually adds some ability to move prices up 

or down as the economy calls for. But the main reason we should 

have lower interest rates, which will lead to somewhat higher inflation rate, is we need the labor shortage that will give us rapidly 

expanding wages. IPOs are down. I don’t know whether that is because our system for initial public offerings is worse or a private 

equity system is better. 

But everything we can do to make initial public offerings work 

better, we ought to do in this committee. One of the witnesses said 

savings should be encouraged at all times. I disagree. You can’t 

have too much savings, too little consumption. If you have that, 

then you have no—then demand is flat. You have unused capital 

resources. Nobody wants to borrow to build those capital resources. 

But the phrase savings should always be encouraged at least meets 

a particular political plan, which is lower taxes on the savers, those 

people who get a substantial portion of their income from savings, 

when the vast majority of Americans can’t get a—don’t have that 

savings. So it is only a small segment of the economy that gets a 

substantial portion of their income from savings. I would also point 

out that the after-tax inflation adjusted return in our current economy is 0 for those who don’t want to take a credit risk. The yield 

on tips is a little bit over the inflation rate. 

But then you pay taxes not only on the part that is a little bit 

on the inflation rate but also the part that just reimburses you for 

inflation. We have a lot of savings as evidenced by the fact that nobody is—that saver’s reward after tax is roughly 0, and people are 

still willing to save. We ought to, perhaps, provide an inflation justified APR to lenders and to depositors. The information we calculate now is very exact and very complicated and very wrong in 

an economy in which there is inflation. Democracy versus bureaucracy, there is a lot of support in the elites in our society, for philosophers kings and Federal Reserve members and others to make 

the important decisions. And I will point out to this committee, if 

that bridge in Alaska had been a bureaucrat’s decision, nobody 

here would have ever heard of it. The media focuses on attacks on 

decisions made by elected officials. And I am going to have to ask 

for a written response to this question, and that is how much capital gain or loss has the Fed incurred through QE? We know they 

34 

have made a lot of money on interest rate spread. But I assume 

if you bought long-term bonds in 2010 and 2011, you lost some 

money. So, Mr. Pollock, perhaps—is there just a number that you 

have, or should you answer for the record? 

Mr. POLLOCK. I have written on that recently, Congressman. I 

will be glad to send you my article on the interest rate risk of the 

Fed, which I describe as the biggest savings and loan in the world. 

Chairman BARR. The gentleman’s time has expired. Thank you, 

Mr. Sherman. And now the Chair recognizes the gentleman from 

Arkansas again, Mr. Hill. 

Mr. HILL. Thank you, Mr. Chairman. So continuing our discussion, I was looking at the value of QE1 and QE2 and PIMCO, for 

example, estimated that for spending $4 trillion, we got $40 billion 

in additional economic output, not a very good tradeoff. And I can 

remember being in banking back during QE1 and QE2 wondering 

what are we getting for this, as a banker, just as a private sector 

participant, when we—the first thing you learn when you have a 

losing position in an investment portfolio or a losing bond loan— 

a loan in a loan portfolio is, when in a hole, stop digging. And the 

Fed double-downed on digging as it went beyond QE1, QE2. 

So now that we are here and we are talking about the impact 

on Main Street, I would say that, to your comment, Mr. Pollock, 

that, with a 6-year duration at the Fed now, you have set up, not 

a savings and loan, but one of the biggest hedge funds in the world. 

We have monetized the debt of the United States, we have inflated 

speculatively stock prices. We, in turn, with public policy, have 

moved people into index funds instead of making individual decisions about the individual quality of equities. And we have 0 interest rates and yet we have extended car lending from—when I started in banking, it was a 3-year loan. Now it is 72 months—at these 

low rates. And 40 percent of new cars are in a lease program, 

which is even higher than you can borrow at the bank and you 

don’t own anything at the end of the term. 

We have done commercial real estate lending, basically underwritten to a 125 debt service coverage ratio at 3 or 4 percent. And 

if rates normalize, think of the equity contribution those investors 

are going to have to make to maintain that 125 debt service covered ratio. We have hidden the budget deficit, the real impact on 

the budget deficient by the Fed’s actions, and that will get worse 

as rates go up. So the impact on Main Street of the Fed’s actions 

of the last decade are going to be immense. And they are essentially, in my view, all negative. And any benefit that occurred from 

them is modest. As evidenced by PIMCO’s suggestion that, for $4 

trillion, we got $40 billion of extra economic output. So when we 

try to reform the GSCs, Mr. Pollock, could you reflect on—since you 

have written on this subject, we have a 6-year duration, we own 

40 percent of the government-issued, mortgage-backed securities, 

how is that going to impact our ability to reform the broken secondary mortgage market in this country, the Federal Government 

owning 40 percent of those securities? 

Mr. POLLOCK. Congressman, I think that is an excellent point, 

and it gets in the way of reform, since we have the Federal Reserve 

owning the biggest position in Fannie and Freddie’s mortgagebacked securities. We have the U.S. Treasury owning most of the 

35 

equity of Fannie and Freddie. And it gives us what I call the ‘‘government combine’’ in the housing finance business. 

My subtitle is: who is the socialist? Between Fannie Mae, 

Freddie Mac, and the Federal Reserve, and the U.S. Treasury, 

there is a very tight and complex financial set of intercommitments 

and relationships, and it gets in the way of reform. But in my opinion, that shouldn’t stop us from reforming housing finance and 

Fannie and Freddie toward extracting the government from being 

the dominant and distortionary mortgage finance player and moving toward more private, more competitive market. 

Mr. HILL. I appreciate that. 

Dr. Kupiec, I think Governor Powell did lay out a very good longterm speech not long ago about the unwinding and set out some 

expectations and, really, in the market rates have improved, even 

anticipating this shrinkage. 

So I do think, to Dr. Michel’s point, that if the Fed outlines a 

plan, that maybe the market would be more resilient than we 

think, and we should get on with it. 

But Chair Yellen said something that she said that she felt that 

the balance sheet reduction should be delayed until we get the Fed 

funds rate up to a number that she would not say. 

I would be interested in your view. Is there a range of Fed funds 

rate that would make it better for shrinking the balance sheet 

more directly? 

Mr. KUPIEC. I wonder why the Fed funds rate means anything 

if it is the rate that the Fed pays on bank deposits, if that is the 

floor. So I don’t know what it reflects. It is an administered rate. 

So I am not entirely sure I understand why—they could set it at 

whatever rate they want it to tomorrow. Would the economy 

change any differently, immediately? I don’t think so. 

Mr. HILL. Thank you very much. 

I yield back. 

Chairman BARR. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Texas, Mr. Williams. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

And with all due respect to my colleague from Arkansas, Mr. 

Hill, we have gone from 72 months to 84 months. So does anybody 

want to buy a car? 

Dr. Michel, as Mr. Sherman suggested, if we stopped paying 

IOERs, would we be able to return to the Fed fund’s policy rate, 

do you think? 

Mr. MICHEL. Oh, if we do? 

Mr. WILLIAMS. Yes. 

Mr. MICHEL. I would say yes at some point. I don’t know how 

quickly this happens. I don’t know how quickly they can fix it. I 

think you have to unwind the balance sheet and stop the interest 

on the excess reserve program and the overnight repurchase program, which is effectively very close to the same thing. 

I think all of those things have to happen to get back to where 

you have a competitive—or anything like a competitive Federal 

funds rate market. 

So, yes. I just don’t know how quickly you can do that. And I 

don’t know that they do either. If you go back and look at what 

happened, initially, when they said they were going to pay interest 

36 

on excess reserves, they said we are going to set this rate so that 

it is a floor on the Fed funds rate, as Paul mentioned. And what 

happened? It went straight past the floor. And then they said, oh, 

no, it is going to be a ceiling on the Federal funds rate, and now 

we are going to have a Federal funds target range instead of just 

a target. 

So they have lost control of it because of what they did. And I 

don’t think they fully understand or anybody fully understands exactly how and when that could be put back together. 

Mr. WILLIAMS. Mr. Pollock, would you have a response to that? 

Mr. POLLOCK. I think that if you could get away from the interest on reserves, it would help get back to the previous system of 

Fed funds targeting. But we have to remember, when it comes to 

the Fed setting interest rates, that just like the Fed doesn’t know 

the future, the Fed doesn’t know what the right interest rate is either, because no one knows that. That is why you have a market. 

Mr. WILLIAMS. I remember when 16 percent was a good rate, 

so— 

Mr. Chairman, I yield my time back. 

Chairman BARR. The gentleman yields back. 

The Chair recognizes the gentleman from Minnesota, Mr. 

Emmer. 

Mr. EMMER. Thank you, Mr. Chairman. And thanks for submitting to another round of questions. 

I want to talk about reform, believe it or not, if it is possible. Obviously, I am not a fan of what the Federal Reserve has been doing, 

but I do agree with Dr. Kupiec. I think well-intentioned people are 

trying to do the right thing. 

You talked about procedural change in your initial testimony 

after the Humphrey-Hawkins, once you get the written testimony, 

have experts review it. I am just wondering if any of your colleagues—and, again, put it in this context: I do come from Main 

Street. And I think one or more of you in your testimony said earlier, there is a breakdown between those who are inside the Fed 

or actively working with the Fed and those who are on Main Street 

wondering what in God’s name are they doing, and why can’t we 

see what they are doing, and there must be something going on 

that isn’t quite right, because we aren’t feeling this great recovery 

that everybody tells us is there or at least it is hollow. 

Are there other reforms? And maybe since, Dr. Kupiec, you gave 

one, how about Dr. Michel? Is there some other reform? 

Mr. MICHEL. I have a list, several papers that have—I don’t 

know, maybe 15 different ones. 

But I think basically what you have to do is start one on the balance sheet, getting back to having a minimal footprint on the market, having them only do monetary policy in a very accountable 

way. I think that the approach and the format is the right way to 

go and that you make them benchmark against the rule. 

Everybody says—well, they are all gone, but everybody says that 

the format would tie the Fed to a mechanical rule, and that is not 

true. 

It would make them benchmark against a mechanical rule. 

Mr. EMMER. Right, it wouldn’t have— 

37 

Mr. MICHEL. So they could explain what they are doing and why 

they are doing it. And those are all positive approaches and improvements. 

Mr. EMMER. Dr. Dynan, we probably don’t see this exactly the 

same way. But in this context, I would think there has to be something that you have looked at that would be a helpful reform. 

Ms. DYNAN. So, first of all, I think that Dr. Kupiec’s idea is an 

interesting one. I certainly support giving Congress more time to 

review the monetary policy report written document before going to 

testimony. I think that could lead to a more constructive conversation. 

I think moving to a quarterly frequency for the testimony is also 

a good idea. My main concern is, I do not support more aggressive 

measures that would undermine the Fed’s— 

Mr. EMMER. What about winding down the balance sheet? You 

would agree with that. We should be doing that at some point, 

right? 

Ms. DYNAN. Oh, yes. And with that, I should say I agree with 

Dr. Michel’s earlier comments that it is really, really important 

that it is done gradually, and it is done predictively and transparently. Because I think—I was not asked what I thought the 

dangers were, but I do think the biggest dangers of a surprise— 

and even what the Fed does and even what it says, if the market 

suddenly says, hey, I didn’t understand what they are doing and 

now my view is totally different. I think that, too, would be very 

disruptive to financial conditions. 

Mr. EMMER. Mr. Pollock, same question, but I also want to add 

for you, is it time, at the very least, to eliminate the dual mandate? 

Mr. POLLOCK. Congressman, could I preface this by saying, I 

grew up in the City of Detroit near Schoolcraft Avenue. I think 

that could count as Main Street. 

I think we need to understand the Fed actually has at least six 

different mandates, and they can’t possibly do them all. They can’t 

perform what those with great faith in the Fed have faith that they 

will perform. That is why I think the accountability issue is so important, and what I call a grown-up discussion with the Congress, 

not a media event, but a grown-up discussion of the true uncertainties, the true alternatives, of how much of what is going on is debatable theory. That is essential in my view, including as you know 

from my testimony, that I think we should require the Fed to focus 

on the impact on savers and savings, as well as on all the other 

important things. 

Mr. EMMER. So if I am—if I go based on that, there are at least 

six different mandates. If we were going to give you the task of advising us, how would you rewrite the mandate for the 21st Century 

Fed? How would you rewrite it? 

Mr. POLLOCK. I would take them very much back to the original 

idea—what the founders of the Fed did in 1913, which was the 

overwhelming mandate was to help deal with crises and then other 

than that be mostly out of the way and let the market work. 

Mr. EMMER. Thank you. 

Chairman BARR. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Ohio, Mr. Davidson. 

Mr. DAVIDSON. Thank you, Mr. Chairman. 

38 

Thank you all for taking some additional questions. To get near 

term and potentially practical, using conventional or unconventional means, is there anything the Fed could do to prevent a yield 

curve inversion? And if they could do it, should they? Anyone? 

Mr. MICHEL. I believe that everyone shows overall that the Fed 

can do very little to ultimately make interest rates do whatever 

they want. So I would have to say no, I don’t think that should be 

the goal. I think the goal should be getting back to a minimal footprint so that there is—so that there are as minimal distortions as 

possible from what they do. That is where I would come down on 

that. 

Mr. DAVIDSON. Thank you. 

Dr. Pollock? 

Mr. POLLOCK. Congressman, they could start selling their mortgage-backed securities and long-term Treasury bonds, and that 

would push up the long end of the curve and prevent an inversion. 

They won’t like it. That will cause big capital losses in the Federal 

Reserve itself, probably a large market-to-market insolvency. It 

would be interesting to see what would happen then. 

Mr. DAVIDSON. Any other comments on that? 

Mr. KUPIEC. What we have right now, I think, is very much a 

situation where the Fed really does control a lot of the term structure by its long-term holdings and its trying to control the shortterm rate. So these are pretty much administered interest rates. 

And if an inversion were to come and the problem there is normally, we think that reflects a looming recession. Why would you 

want them to hide the evidence? I am not sure that setting the 

rates would—if the rest—if the world were really tanking, I don’t 

know that raising the long-term interest rate would help anybody. 

Mr. DAVIDSON. That gets to the next question. So you just picked 

the next question is, so if they could manipulate the rates in this 

way and prevent the yield curve inversion, one way Dr. Pollock 

highlighted, dump assets in the long term, at least they certainly 

have plenty of them. It could be very market distorting, particularly if they are done rapidly, would that do what would be indicated? Would it avert a recession? This goes back to the whole limits of monetary policy. And so would it really do what it presumably be targeted at? 

Mr. KUPIEC. Some medicines treat symptoms but they don’t fix 

the underlying problem. They just mask them. So to the extent 

that you think the long-term interest rate is reflecting the real 

economy and something that is going on, manipulating long-term 

interest rate I don’t think is going to fix the real economy. And if 

we were heading for a recession, I don’t know why raising the long 

rate would do anything but make things worse. It might 

cosmetically hide the fact for a while, but I don’t know why that 

would be in the Fed’s interest to do that. 

Mr. DAVIDSON. Okay. 

Mr. MICHEL. And this is why they shouldn’t be in this position 

in the first place. 

Mr. DAVIDSON. Thank you. 

Okay. And they are in this position, I think summing up, because 

you go back to the scorpion and the fox, an analogy. The Fed is in 

39 

this position because that is what they do. They exist, therefore, 

they must do something. And they can’t resist the item passion to. 

How do we get the structure in place that the things they do 

aren’t inherently market distorting? 

Mr. MICHEL. So no more emergency lending. Open market and 

no more primary dealer system, flexible system that lets everybody 

who is eligible for a current discount window come. So it is 

marketwide liquidity. That is the only thing they do, period. And 

a flexible inflation mandate, a flexible price stability mandate and 

that is it. That is all you let them do. 

Mr. DAVIDSON. Thank you. 

Mr. Chairman, I yield back. 

Chairman BARR. The gentleman yields back. 

The Chair recognizes our final questioner, the gentlelady from 

Utah, Mrs. Love. 

Mrs. LOVE. Thank you. I just wanted to finish up some of the 

questioning that I was asking previously, so I appreciate the second round. 

But I wanted to get back to, Mr. Pollock, what you were talking 

about in your statement in terms of if you believe that the Federal 

Reserve had superior knowledge and insight into the economic and 

financial future, you would possibly conclude that it should act as 

a group of philosopher kings and certainly, enjoyed the independent power over the country. You also mentioned that it is unable, as we have all seen, consistently predict the result of its tone 

actions, and there is no evidence that they have any special insight. 

It is almost as if they are trying—it is worse than trying to predict the weather, because you are predicting interaction between 

private consumers, interaction between government and people. It 

is just the—it is incredibly monstrous. 

And you also mentioned that not only—it is not really a dual 

mandate. It is literally six different mandates. And to be fair to the 

Federal Reserve, they cannot do it all. And it is irresponsible for 

us to say that they can do right by the American people by giving 

them, literally, an impossible task. 

So here is what I wanted to ask: In order for consumers, households, and businesses to plan for the future and consume, save, invest most effectively, do they need to be confident that the prices 

will remain relatively constant over time? And do you believe that 

the Fed should spend more time on monetary policy and price stability as opposed to all of these other responsibilities that they have 

been given? 

Mr. POLLOCK. Thank you, Congresswoman. I do. Again, that they 

have the policy of acting in a crisis, which is useful, which was 

their original 1913 mandate. They called it in those days, ‘‘to create 

an elastic currency.’’ 

But when you put on top of that the notion that they are going 

to, as people say, manage the economy, and manage interest rates, 

now long as well as short term, and know what the right inflation 

rate is, all of these things, they can’t, in my judgment, possibly do 

it all, just as you suggest. 

It is my belief that the Congress was right—and this was a 

Democratic Congress in 1977—with the Federal Reserve Reform 

40 

Act, to try to exert the control of Congress over the Fed. They 

wrote, ‘‘price stability.’’ Now, we need to understand what price stability means. In my opinion, that is a long-term concept— 

Mrs. LOVE. Right. 

Mr. POLLOCK. —of price stability, which is, I think, best for consumers, investors, and economic growth. 

That means in any short term, prices may be going up, or they 

may be going down. But on average, over the long term, they are 

something close to flat. That is where I believe we ought to go. Of 

course, there are great debates about all these things among economists, Congresswoman, proving once again, that economics is not 

a science, but a set of competing theories. 

Mrs. LOVE. Okay. I know you want to add to that, so I am going 

to actually have you answer this question: If people understood everything that we were talking about, would you say that, in effect, 

the Fed would be doing more for maximum employment if they actually focused on price stability? 

And I am going to have you answer that, Dr. Michel. 

Mr. MICHEL. Yes. So yes, they would be. And what I was going 

to say is the great irony is that what Alex is talking about is exactly what used to take place before we had a Federal Reserve. The 

short-term price fluctuations were literally 1 percentage point 

greater than they had been since we had the Fed, but it would always come back to zero, the price level, more quickly. That is what 

we have gotten rid of. And the truth of the matter is that the Fed 

can do very little for long-term structural employment. The Fed 

has nothing to do with us having the lowest participation, laborforce participation rate that we have had since the 1970s. That is 

not the Fed’s fault. They can’t do anything other than stay out of 

the distortionary business by not messing around with so many 

things so that we don’t have a worsening employment situation. 

They should not be focused on trying to change something that 

they can’t change. 

Mrs. LOVE. And I would be so bold as to conclude that this is a 

result of Members of Congress not being willing to take on the responsibilities that they have and pushing it over to the Fed so that 

if something happens, we are not the ones who are accountable. 

And we need to take that accountability back. We are the ones who 

are accountable to the American people, and so I am going to conclude with that. 

Thank you. 

Chairman BARR. The gentlelady yields back. 

And I would like to thank all of our witnesses for their testimony 

today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is now adjourned. Thank you. 

[Whereupon, at 12:19 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

June 28, 2017 

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