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MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

JULY 12, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–27 

( 

(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) 

C O N T E N T S 

Page 

Hearing held on: 

July 12, 2017 ..................................................................................................... 1 

Appendix: 

July 12, 2017 ..................................................................................................... 55 

WITNESSES 

WEDNESDAY, JULY 12, 2017 

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

System ................................................................................................................... 5 

APPENDIX 

Prepared statements: 

Yellen, Hon. Janet L. ....................................................................................... 56 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Yellen, Hon. Janet L.: 

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

System,’’ dated July 7, 2017 ......................................................................... 63 

Written responses to questions for the record submitted by Representative Beatty ..................................................................................................... 125 

Written responses to questions for the record submitted by Representative Loudermilk ............................................................................................. 128 

Written responses to questions for the record submitted by Representative Ross ......................................................................................................... 131 

Written responses to questions for the record submitted by Representative Rothfus ................................................................................................... 133 

Written responses to questions for the record submitted by Representative Royce ....................................................................................................... 134 

Written responses to questions for the record submitted by Representative Tipton ..................................................................................................... 140 

(1) 

MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

Wednesday, July 12, 2017 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Jeb Hensarling [chairman of 

the committee] presiding. 

Members present: Representatives Hensarling, Lucas, Pearce, 

Posey, Luetkemeyer, Huizenga, Duffy, Hultgren, Ross, Pittenger, 

Wagner, Barr, Rothfus, Messer, Tipton, Williams, Poliquin, Love, 

Hill, Emmer, Zeldin, Trott, Loudermilk, Mooney, MacArthur, Davidson, Budd, Kustoff, Tenney, Hollingsworth; Waters, Maloney, 

Velazquez, Sherman, Capuano, Clay, Scott, Green, Moore, Ellison, 

Perlmutter, Himes, Foster, Kildee, Delaney, Sinema, Beatty, Heck, 

Vargas, Gottheimer, Gonzalez, Crist, and Kihuen. 

Chairman HENSARLING. The Committee on Financial Services 

will come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time. 

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

I now recognize myself for 3 minutes to give an opening statement. 

Since we last convened to take Chair Yellen’s testimony on monetary policy, there have been some very encouraging economic headlines. Confidence is up, headline unemployment remains low, as 

does inflation, but the headline unemployment rate still rests too 

much on an incredibly low labor participation rate and, regrettably, 

high disability payment participation rates. 

Both paychecks and savings for working Americans still have 

considerable room to grow after 8 years of distortionary economic 

policy under the previous Administration. 

Fortunately, on the fiscal front, help is on the way. House Republicans have passed both the American Health Care Act, to lift the 

burden of ObamaCare from our economy, and the Financial 

CHOICE Act, to end bank bailouts to unleash trillions of dollars of 

capital sitting on the economic sidelines due to the Dodd-Frank 

Act. These are landmark pieces of legislation. In the months to 

come, the House will vote on a fairer, flatter, more competitive Tax 

Code that will undoubtedly bring us a far healthier and dynamic 

2 

economy, and the Trump Administration is busy rolling back rules 

that harm our economy as well. 

Monetary policy must, of course, do its part as well. I am highly 

encouraged that Chair Yellen and her colleagues seem to be on 

track toward some type of monetary policy normalization. Keeping 

interest rates artificially low for too long was a key contributing 

factor to the last crisis. Let’s hope it does not prove to be a key contributing factor to the next. 

What is most desirable for long-term economic growth is for the 

Fed to set out an easily discernible and transparent policy strategy 

to achieve its mandate and, but for highly exigent circumstances, 

to stick to it. Forays by the Fed into fiscal policy, specifically credit 

allocation, cannot and should not be permitted. Assuming press reports are accurate and the Fed will soon commence an orderly wind 

down of its balance sheet, this is more good news. Both the size 

and composition of the balance sheet remain alarming. 

Intervention into distinct credit markets like mortgage-backed 

securities is inherently fiscal policy, not monetary policy. Already, 

there is talk of having the Fed bail out student loans and public 

pension funds. I again maintain, if we are not careful, we may 

wake up one day to find our central bankers have instead become 

our central planners. What has allowed the Fed’s foray into the 

credit allocation is the policy of paying interest on excess reserves 

and, today, paying a premium over market. 

Interest on required reserves was meant to counteract an implicit tax. Interest on excess reserves should not become a permanent tool of monetary policy. Normalization would suggest, after 

setting a level of reserves, and short-term interest rates be set by 

market forces. But today they are set from the top down by an administered rate paid on excess reserves which, again, is a premium 

rate resting on uncertain legal authority. 

Forays into credit allocation in fiscal policy threaten the Fed’s 

independence and economic future. So let’s hope the normalization 

has truly begun. 

And I now recognize the ranking member for 4 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

And thank you, Chair Yellen. It is a pleasure to have you with 

us today. 

Since day one, the story of the Trump Administration has been 

one of chaos and turmoil. This creates uncertainty that threatens 

the progress of our economy and the opportunities available to all 

American households. Trump made many big promises to hardworking Americans about ushering in a new level of economic prosperity in America. Yet, despite all of his bluster, let’s look at what 

Trump has actually done when it comes to our economy. 

None of it is good. He reversed a planned cut to Federal Housing 

Administration mortgage insurance premiums that would have 

saved homeowners $500 a year. He issued executive actions to 

begin to dismantle Wall Street reforms and embrace the wrong 

choice act, the chairman’s bill to gut the Dodd-Frank Wall Street 

Reform and Consumer Protection Act and hobble the Fed. 

There are actions that endanger the economic progress we have 

made since the Great Recession. In passing the wrong choice act, 

House Republicans, once again, are trying to weaken the independVerDate Nov 24 2008 20:03 May 04, 2018 Jkt 028746 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\28746.TXT TERI
3 

ence of the Fed and chain the Fed’s policy decisions to a mathematical formula that would diminish its ability to support the economy and fulfill its mandate to promote full employment. 

The Republicans’ bill would also subject Federal financial regulators, including the Fed, to the politicized annual appropriations 

process. 

All of this wasn’t bad enough. President Trump will soon have 

the opportunity to reshape the makeup of the Board of Governors, 

thereby tilting policy in the direction of Wall Street. 

For example, earlier this week, the White House announced the 

President’s intent to nominate Randal Quarles to serve as the Fed’s 

Vice Chair for Supervision and in part a post responsible for overseeing the Fed’s implementation of Wall Street reform. 

This is troubling, given Quarles’ public opposition to key aspects 

of the Dodd-Frank Act and support for measures that would curtail 

the Fed’s independence. 

While our economy has made substantial progress since the 

height of the financial crisis and we continue to see positive trends 

in the labor market as a result of the policies put in place by the 

Fed, Congressional Democrats, and President Obama, key aspects 

of our economy have yet to fully recover. 

Since your last testimony before this committee, wage growth 

continues to lag and troubling economic disparities continue to 

exist among racial and ethnic lines. So I hope that policymakers 

will keep these trends in mind and the fact that inflation expectations have fallen as they evaluate the stance of monetary policy. 

So, Chair Yellen, I commend you for your steady leadership and 

look forward to your testimony. 

And, with that, Mr. Chairman, I yield back the balance of my 

time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair recognizes the gentlemen from Kentucky, Mr. Barr, 

the chairman of our Monetary Policy and Trade Subcommittee, for 

2 minutes. 

Mr. BARR. Chair Yellen, welcome back to the committee. And despite nearly 9 years of the most accommodative and unconventional 

monetary policy in U.S. history and despite some recent positive 

economic news, labor force participation remains at a disappointing 

40-year low, wages are stagnant, and economic growth has yet to 

eclipse 3 percent. 

Making matters worse, just like the farm bill used to pay farmers not to plant, the Federal Reserve, by paying interest on excess 

reserves, is effectively paying banks not to lend. 

Former Fed Chairman Ben Bernanke said as much in 2013 when 

he stated, ‘‘Banks are not going to lend out the reserves at a rate 

lower than they can earn at the Fed.’’ 

The Fed has adopted this interest on excess reserves policy to 

fund its enormous $4.5 trillion balance sheet. By guaranteeing the 

largest banks in America this low-risk, above-market rate of return 

on deposits, the Fed is discouraging lending into the real economy, 

effectively taking money out of the communities across America 

and leaving less capital for Main Street households and businesses 

to prosper. 

4 

I was glad to read about the Fed’s intentions to start shrinking 

its oversized portfolio. I share the view of St. Louis Fed President 

James Bullard and others that this decision is long overdue. What 

concerns me, however, is that, once again, the Fed seems to be improvising instead of following a well-grounded strategy. 

Earlier this year, some officials pointed to another Fed funds rate 

increase in September with a move to start reducing the balance 

sheet beginning in December. Now we are hearing that the FOMC 

might start the portfolio reduction plan in September and put off 

until December any further interest rate increase. 

Again, I welcome initiating the process to reduce the size of the 

balance sheet sooner rather than later, but I look forward to your 

testimony and hopefully an explanation of whether the Fed is once 

again changing its strategy and, if so, why. 

Thank you for coming today, and I look forward to your testimony about these and other topics. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, the ranking member of our Monetary Policy and Trade Subcommittee, for 1 minute. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And thank you, Madam Chairwoman, for appearing here for the 

annual Humphrey-Hawkins report. 

I want to start out by thanking you for your very thorough and 

thoughtful reply to our Congressional letter regarding disparities in 

labor markets for African Americans and other minorities. Thank 

you. It did not have a lot of solutions, but it was very thoughtful 

pointing out projects that seek to find the answers. 

This disparity is really clear among minorities, but I am concerned that it is also increasing in all populations of working Americans. And it seems pretty clear from the research, that the challenge moving forward will be able to use fiscal policy to address income and wealth inequality in a way that the blunt instrument of 

monetary policy can’t, especially as the Fed moves forward to raise 

rates. 

I understand you have to do it, but there is an asymmetric recovery that is troubling. Given that the poor and working class have 

not felt the benefits of the booming stock market, and that inflation 

is under control, I think that Congress can and should use the 

power of the purse to shore up those segments of the population 

that are still hurting from the recession. And I look forward to 

hearing your testimony. 

I yield back. 

Chairman HENSARLING. The time of the gentlelady has expired. 

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

Chair Yellen has testified before this committee on numerous occasions, so I feel she needs no further introduction. 

Without objection, the witness’ written statement will be made a 

part of the record. 

Chair Yellen, you are now recognized for 5 minutes to give an 

oral presentation of your testimony. Thank you for being here. 

5 

STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mrs. YELLEN. Thank you. Chairman Hensarling, Ranking Member Waters, and other members of the committee, I am pleased to 

present the Federal Reserve’s semi-annual Monetary Policy Report 

to the Congress. 

In my remarks today, I will briefly discuss the current economic 

situation and outlook before turning to monetary policy. 

Since my appearance before this committee in February, the 

labor market has continued to strengthen. Job gains have averaged 

180,000 per month so far this year, down only slightly from the average in 2016 and still well above the pace we estimate would be 

sufficient on average to provide jobs for new entrants to the labor 

force. 

Indeed, the unemployment rate has fallen about a quarter percentage point since the start of the year and, at 4.4 percent in 

June, is 51⁄2 percentage points below its peak in 2010 and modestly 

below the median of Federal Open Market Committee participants’ 

assessments of its longer run normal level. The labor force participation rate has changed little on net this year, another indication 

of improving conditions in the jobs market given the demographically driven downward trend in this series. A broader measure of 

labor market slack that includes workers marginally attached to 

the labor force and those working part time who would prefer fulltime work has also fallen this year and is now nearly as low as it 

was just before the recession. 

It is also encouraging that jobless rates have continued to decline 

for most major demographic groups, including for African Americans and Hispanics. However, as before the recession, unemployment rates for these minority groups remain higher than for the 

Nation overall. 

Meanwhile, the economy appears to have grown at a moderate 

pace on average so far this year. Although inflation adjusted gross 

domestic product is currently estimated to have increased at an annual rate of only 11⁄2 percent in the first quarter, more recent indicators suggest the growth rebounded in the second quarter. 

In particular, growth in household spending, which was weak 

earlier in the year, has picked up in recent months and continues 

to be supported by job gains, rising household wealth, and favorable consumer sentiment. 

In addition, business fixed investment has turned up this year 

after having been soft last year. And the strengthening in economic 

growth abroad has provided important support for U.S. manufacturing production and exports. 

The housing market has continued to gradually recover, aided by 

the ongoing improvement in the labor market and mortgage rates 

that, although up somewhat from a year ago, remain at relatively 

low levels. 

With regard to inflation, overall consumer prices, as measured by 

the price index for personal consumption expenditures, increased 

1.4 percent over the 12 months ending in May, up from 1 percent 

a year ago but a little lower than earlier in the year. 

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

edged down in recent months and was 1.4 percent in May, a couple 

6 

of tenths below the year-earlier reading. It appears that the recent 

lower readings on inflation are partly the result of a few unusual 

reductions in certain categories of prices. These reductions will 

hold 12-month inflation down until they drop out of the calculation. 

Nevertheless, with inflation continuing to run below the Committee’s 2 percent longer run objective, the FOMC indicated in its 

June statement that it intends to carefully monitor actual and expected progress toward our symmetric inflation goal. Looking 

ahead, my colleagues on the FOMC and I expect with further gradual adjustments in the stance of monetary policy, the economy will 

continue to expand at a moderate pace over the next couple of 

years with a job market strengthening somewhat further and inflation rising to 2 percent. This judgment reflects our view that monetary policy remains accommodative. 

Ongoing job gains should continue to support the growth of incomes and therefore consumer spending. 

Global economic growth should support further gains in U.S. exports. And favorable financial conditions coupled with the prospect 

of continued gains in domestic and foreign spending and the ongoing recovery in drilling activity should continue to support business 

investment. These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage 

and price increases. Of course, considerable uncertainty always attends the economic outlook. 

There is, for example, uncertainty about when and how much inflation will respond to tightening resource utilization. Possible 

changes in fiscal and other government policies here in the United 

States represent another source of uncertainty. 

In addition, although the prospects for the global economy appear to have improved somewhat this year, a number of our trading partners continue to confront economic challenges. At present, 

I see roughly equal odds that the U.S. economy’s performance will 

be somewhat stronger or somewhat less strong than we currently 

project. 

I will now turn to monetary policy. The FOMC seeks to foster 

maximum employment and price stability as required by law. Over 

the first half of 2017, the Committee continued to gradually reduce 

the amount of monetary policy accommodation. Specifically, the 

FOMC raised the target range for the Federal funds rate by onequarter percentage point at both its March and June meetings, 

bringing the target to a range of 1 to 11⁄4 percent. In doing so, the 

Committee recognized the considerable progress the economy had 

made and is expected to continue to make toward our mandated 

objectives. 

The Committee continues to expect that the evolution of the 

economy will warrant gradual increases in the Federal funds rate 

over time to achieve and maintain maximum employment and stable prices. That expectation is based on our view that the Federal 

funds rate remains somewhat below its neutral level. That is the 

level of the Federal funds rate that is neither expansionary nor 

contractionary and keeps the economy operating on an even keel. 

Because the neutral rate is currently quite low by historical standards, the Federal funds rate would not have to rise all that much 

further to get to a neutral policy stance. But because we also anVerDate Nov 24 2008 20:03 May 04, 2018 Jkt 028746 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\28746.TXT TERI
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ticipate that the factors that are currently holding down neutral 

rate will diminish somewhat over time, additional gradual rate 

hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent 

goal. Even so, the Committee continues to anticipate that the 

longer run neutral level of the Federal funds rate is likely to remain below levels that prevailed in previous decades. 

As I noted earlier, the economic outlook is always subject to considerable uncertainty, and monetary policy is not on a preset 

course. FOMC participants will adjust their assessments of the appropriate path of the Federal funds rate in response to changes to 

their economic outlooks and to their judgments of the associated 

risks as informed by incoming data. 

In this regard, as we noted in the FOMC statement last month, 

inflation continues to run below our 2 percent objective and has declined recently. The Committee will be monitoring inflation developments closely in the months ahead. 

In evaluating the stance of monetary policy, the FOMC routinely 

consults monetary policy rules that connect prescriptions for the 

policy rate with variables associated with our mandated objectives. 

However, such prescriptions cannot be applied in a mechanical 

way. Their use requires careful judgments about the choice and 

measurement of the inputs into these rules as well as the implications of the many considerations these rules do not take into account. 

I would like to note the discussion of simple monetary policy 

rules and their role in the Federal Reserve’s policy process that appears in our current Monetary Policy Report. 

Let me now turn to our balance sheet. Last month, the FOMC 

augmented its policy normalization principles and plans by providing additional details on the process that we will follow in normalizing the size of our balance sheet. 

The Committee intends to gradually reduce the Federal Reserve’s 

security holdings by decreasing its reinvestment of the principal 

payments it receives from the securities held in the System Open 

Market Account. Specifically, such payments will be reinvested 

only to the extent that they exceed gradually rising caps. 

Initially, these caps will be set at relatively low levels to limit 

the volume of securities that private investors will have to absorb. 

The Committee currently expects that, provided the economy 

evolves broadly as anticipated, it will likely begin to implement the 

program this year. 

Once we start to reduce our reinvestments, our securities holdings will gradually decline, as will the supply of reserve balances 

in the banking system. 

The longer run normal level of reserve balances will depend on 

a number of as-yet-unknown factors, including the banking system’s future demand for reserves and the Committee’s future decisions about how to implement monetary policy most efficiently and 

effectively. The Committee currently anticipates reducing the quantity of reserve balances to a level that is appreciably below recent 

levels but larger than before the financial crisis. 

Finally, the Committee affirmed in June that changing the target 

range for the Federal funds rate is our primary means of adjusting 

8 

the stance of monetary policy. In other words, we do not intend to 

use the balance sheet as an active tool for monetary policy in normal times. 

However, the Committee would be prepared to resume reinvestments if a material deterioration in the economic outlook were to 

warrant a sizable reduction in the Federal funds rate. More generally, the Committee will be prepared to use its full range of tools, 

including altering the size and composition of its balance sheet, if 

future economic conditions were to warrant a more accommodative 

monetary policy than can be achieved solely by reducing the Federal funds rate. 

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

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

56 of the appendix.] 

Chairman HENSARLING. The Chair now recognizes himself for 5 

minutes for questions. 

Chair Yellen, the first question I have is with respect to the 2 

percent inflation target that was adopted several years ago. I must 

admit as an aside, a back-of-the-envelope calculation tells me that 

nominal prices will double every generation. I am still trying to figure out how that is commensurate with price stability, but that is 

not my question. 

In a recent press conference, some interpreted comments that 

you made to indicate that you were open to an increase in the inflation target. Are you pursuing an increase in the inflation target? 

Are other members of the FOMC? Is this a matter of discussion 

within the FOMC to increase the 2 percent inflation target? 

Mrs. YELLEN. It is not. We reaffirmed our 2 percent inflation target in January. We are very focused on trying to achieve our 2 percent inflation target, and it is not a subject of discussion. 

Chairman HENSARLING. Thank you. I will take ‘‘no’’ for an answer. 

As you heard in my opening statement, I remain concerned, as 

do other Members, about a blurring between the lines of monetary 

policy and fiscal policy, specifically credit allocation. We feel that 

ultimately this could impede upon the Fed’s independence. Professor Marvin Goodfriend of Carnegie Mellon,, whom I think you 

may be familiar with, gave what I thought was an instructive distinction between monetary and fiscal policy. And he said, ‘‘Monetary policy does not favor one sector of the economy over another, 

and monetary policy does not involve taking credit risk onto the 

Fed’s balance sheet.’’ 

By contrast, he went on to say: ‘‘Credit policy works by interposing the government’s creditworthiness, the power to borrow 

credibly against future taxes between private borrowers and lenders to facilitate credit flows to distressed borrowers. Fed credit policy involves lending to private institutions or acquiring non-Treasury securities with freshly created bank reserves or proceeds from 

the sale of Treasuries from the Fed portfolio.’’ 

I guess my question is, Chair Yellen, do you agree with this distinction? And if you don’t agree with this distinction, do you feel 

that credit policy is commensurate with your Congressional mandate? 

9 

Mrs. YELLEN. The FOMC, in its principles for normalization of 

monetary policy, has clearly indicated that it intends to return over 

time to a primarily Treasury-only portfolio, and that is in order not 

to influence the allocation of credit in the economy. 

That said, our purchases of mortgage-backed securities took 

place after a financial crisis when the market for mortgage-backed 

securities was not working at all well, and I believe it was appropriate. But we have endorsed the principle— 

Chairman HENSARLING. I understand that. 

Mrs. YELLEN. —of returning to a Treasury portfolio. 

Chairman HENSARLING. So do you or do you not associate yourself with Professor Goodfriend’s comments? Is that a useful distinction to you as he articulated? 

Mrs. YELLEN. I think it is a useful distinction. 

Chairman HENSARLING. Okay. Thank you. 

It is my understanding that the Fed can legally purchase student 

debt guaranteed by the Federal Government, and municipal debt 

that matures in less than 6 months. Is that your understanding as 

well? 

Mrs. YELLEN. I am not sure about student debt. We are able to 

purchase Treasury and agency securities. 

Chairman HENSARLING. Has the FOMC ever discussed the possibility of purchasing either student debt or municipal debt? 

Mrs. YELLEN. Not to the best of my knowledge. 

Chairman HENSARLING. Finally, in this part of the questioning, 

am I led to believe, then, that your balance sheet reduction will 

allow you to return the Fed funds rate as a primary policy instrument instead of interest on reserves? Is that my understanding 

from your testimony? 

Mrs. YELLEN. We are reliant on interest on excess reserves as 

our key tool for setting the Federal funds rate. So that is a key instrument of monetary policy. But what I said is that we intend to 

rely on adjustments through interest on reserves through our Fed 

funds rate target as a means of regulating— 

Chairman HENSARLING. My time is rapidly winding down. I was 

very heartened to see in your report a comparison of Fed policy 

with a number of policy rules. I think this is very helpful, Chair 

Yellen. I would say, though, that, in some respects, your report 

says how the FOMC differed from these policy rules, but it does not 

say why. In order to give the broadest amount of information to the 

markets so that people can plan their lives, I would simply encourage you to perhaps go even further and discuss why the actual 

FOMC policy differed from these policy rules. I think that would 

be very encouraging, if you would have a brief comment on that. 

Mrs. YELLEN. Let me just say that I am very pleased that you, 

the committee, found the material on rules useful, and we look forward to working with you to provide further information that 

would be useful to the committee. 

Chairman HENSARLING. Thank you. 

I now recognize the ranking member for 5 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

As part of the Federal Open Market Committee’s, ‘‘Statement on 

Longer-Run Goals and Monetary Policy Strategy,’’ the Committee 

states that it would be concerned if inflation were running persistVerDate Nov 24 2008 20:03 May 04, 2018 Jkt 028746 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\28746.TXT TERI
10 

ently above or below its 2 percent objective. Given that core inflation has been below the Fed’s 2 percent target for more than 5 

years and is currently at 1.4 percent, what is the Fed’s rationale 

for further raising rates at this time? If the 2 percent market truly 

is symmetric, shouldn’t the Federal Open Market Committee be 

willing to allow inflation to begin rising closer to its 2 percent target before it is able to justify additional rate increases? 

Mrs. YELLEN. Let me say that we are very committed to achieving our 2 percent inflation objective and are well aware that, for 

a number of years, we have been running under that and recognize 

that there are dangers that would be associated with persistent 

undershoots of our inflation objective, and it is a symmetric inflation objective; 2 percent is not a ceiling. It is a symmetric objective. 

Now, I would say with respect to the inflation outlook, although 

inflation has been running below 2 percent, earlier this year, on a 

12-month basis, core inflation had reached 1.8 percent and headline inflation came close to 2 percent. 

We have seen increasing strength in the labor market that continues, and although there are lags in this process, I believe that 

is something that over time will put upward pressure on both 

wages and prices. 

Now, for several months running, we have seen unusually low inflation readings. As I mentioned, there appear to be some special 

factors that partly account for that. For example, quality-adjusted 

prices of cell phone plans plunged several months ago, and prescription drug prices also plunged. 

Some temporary factors appear to be at work. Nevertheless, our 

12-month inflation rates will remain low until those factors drop 

out. But I would say it is premature to reach the judgment that 

we are not on the path to 2 percent inflation over the next couple 

of years. 

As we indicate in our statement, it is something that we are 

watching very closely, considering risks around the inflation outlook. To my mind, a prudent course is to make some adjustments 

as long as our forecast is that we are heading back to 2 percent. 

But monetary policy is not on a preset course. We are watching 

this very closely and stand ready to adjust our policy if it appears 

that the inflation undershoot will be persistent. 

Ms. WATERS. Thank you very much. 

I would like to move on to ask you a question about Deutsche 

Bank. First, I would like to commend you and your colleagues at 

the Federal Reserve for recently fining Deutsche Bank, a top creditor of the President and his immediate family, for its failure to 

comply with anti-money-laundering requirements. I would like to 

learn a bit more about what you may have discovered in the course 

of your investigation of Deutsche Bank. Were you able to verify 

that Deutsche Bank had completed its own internal review of a 

Russian mirror trading scheme that took place from 2011 to 2015? 

And, separately, as part of the Fed’s supervision of Deutsche 

Bank’s anti-money-laundering compliance, can you comment on the 

due diligence that the bank conducted on the accounts of President 

Trump and his immediate family members, given the high-profile 

nature of their accounts? 

11 

Mrs. YELLEN. We issued an enforcement action against Deutsche 

Bank for violations of Bank Secrecy Act anti-money-laundering procedures in the United States, and that was based on our own investigations. 

The mirror trades that you referred to occurred outside the 

United States. Recently, the U.K. FCA took an action against Deutsche Bank for those trades. Those are not ones that we are involved in looking at, and we haven’t, of course, in the course of our 

investigations, looked into individual transactions with the President. 

Ms. WATERS. That was one of two reviews that was done on 

Deutsche Bank, the mirror trading and the high-profile politicians 

or elected officials review. Are you familiar with that? 

Mrs. YELLEN. I am not familiar with the details. Our focus has 

been on the safety and soundness of the operations of Deutsche in 

the United States. 

Ms. WATERS. Thank you. 

I yield back. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, chairman of our Monetary Policy and Trade Subcommittee. 

Mr. BARR. Thank you, Mr. Chairman. 

And, again, welcome back, Chair Yellen, welcome back. And we 

welcome the decision, the announced intentions of the Fed to begin 

the process of reducing the size of its oversized portfolio. But in 

terms of the plan and in terms of portfolio composition and balance 

sheet normalization, why does your plan contemplate rolling off 

Treasury securities at a faster pace than mortgage bonds? 

Mrs. YELLEN. The differences are relatively slight. My expectation is, although one can’t be certain of what the prepayments of 

principal will be on mortgage-backed securities, that ultimately our 

caps on reinvestment of mortgage-backed securities will not be 

binding, that they will only come into play in exceptional circumstances. 

So, once we have phased in those caps, I don’t expect them to be 

binding. The Treasury market is very deep and liquid. It is a huge 

market. Our intention in gradually phasing up these caps is to 

avoid disruption, and we are comfortable— 

Mr. BARR. Thank you for that. 

And this kind of gets to the question of credit allocation. Let me 

move on quickly to the issue of the Fed’s use of interest on excess 

reserves as a monetary policy tool. 

The Fed is now paying banks 11⁄4 percent on their reserve balances, and if the Fed follows through with its normalization plans, 

the Fed will be paying banks a higher interest rate on their reserves sometime later this year. These interest rates, as I said in 

my opening statement, provide banks with a government subsidy 

to not lend out their reserves. 

Does the Fed have any evidence that banks are passing on these 

higher interest on excess reserves rates to their customers in the 

form of higher interest rates on customer deposits? 

Mrs. YELLEN. My impression is that, on larger deposits, on CDs, 

we are beginning to see some upward movement in the rates that 

are available to customers, but not on retail deposit accounts. 

12 

My expectation is, although there will be a lag, that, as the general level of short-term interest rates rise, that competition among 

banking organizations will begin to put some upward pressure on 

those rates, and— 

Mr. BARR. And we looked at what some of the big banks pay on 

customer deposits: one basis point for many of them, multiple institutions paying only one basis point on customer deposits. And the 

Fed is paying 125 basis points. And so it doesn’t appear as though 

any of this pass-through is happening to customer accounts, and 

that might compel the Fed to reconsider the merits of its IOER policy. 

Wouldn’t it be better for growth if banks were encouraged to deploy more capital in the real economy instead of just parking it at 

the Fed in exchange for IOER? 

Mrs. YELLEN. I don’t see banks as parking it at the Fed and not 

lending. My discussions with bankers and the information that we 

regularly collect suggests that banks are looking to make loans. 

There was a period of very slow loan growth at the beginning of 

the year, but our survey suggests that it was more a matter of demand than supply. 

So, remember, our interest on reserves is at a very low level— 

Mr. BARR. Yes, ma’am. I would just interject an editorial comment, which is that the dilemma that the Fed now appears to face 

is that lowering interest on excess reserves, of course, would decrease the Fed funds rate, but normalization would also entail moving back to the conventional open market operations. 

Let me, finally, in my limited time left, talk to you a little bit 

about the limits of monetary policy. Of course, we know we have 

been struggling overall with slow growth and low labor participation, even though unemployment has come down. And you talk a 

lot about substandard productivity. What many employers say to 

me is that they simply can’t compete with the government for labor 

and that the government is paying people to not work. 

And as you know, we are in the middle of this big debate in 

Washington about ObamaCare and whether or not we should reform Medicaid. Here is what Alan Greenspan, who calls you a firstrate economist, said, ‘‘You can’t get growth going so long as entitlement expansion is anywhere near what it has been recently. It is 

eating up the sources of investment and the sources of growth, and 

you can’t have it both ways. You cannot fund all of the entitlements everybody wants and expect that you are going to get a GDP 

out of that of 3 percent of more than the annual rate. The arithmetic just doesn’t work.’’ 

Wouldn’t you agree that the structure of our welfare programs, 

including ObamaCare, contain disincentives for work? 

Chairman HENSARLING. A brief answer, please. 

Mrs. YELLEN. To my mind, the major factor here is an aging population that is putting downward pressure on labor force participation. There are other factors that affect labor force participation as 

well, but the slow growth that we have and anticipate reflects in 

part an aging population and slow productivity growth. 

Chairman HENSARLING. The time of the gentleman has expired. 

13 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

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

Ms. MOORE. Thank you so much, Mr. Chairman. 

Let me sort of pursue the question, Madam Chair, that Mr. Barr 

was raising with you with regard to paying people not to work, and 

he gave as an example Medicaid. 

I just want to mention that two-thirds of the people who use 

Medicaid are in nursing homes and they are unable to work. I just 

want to point that out. 

I also want to pursue some questions from you that the chairman 

seemed to be interested in some rules-based policy that the FOMC 

had put out there. And I want to note that, a couple of weeks ago, 

you were very critical of the Taylor Rule, one of the rules that 

seems to be favored by the leadership on this committee. 

I was wondering if you could spend just a little time talking to 

us about your reservations about the Taylor Rule and the appropriate application of it? 

Mrs. YELLEN. I don’t believe that the FOMC should mechanically 

follow any single simple rule. But as we point out in the Monetary 

Policy Report, policy rules do embody some principles of sound 

monetary policy that should inform our policy decisions. And we 

have for several decades now looked at the recommendations of the 

Taylor Rule and a number of other different rules in deciding on 

the appropriate stance of policy. 

As we try to point out in the report, there are many different 

rules. There is no clear way to decide which one is better than the 

others. They lead to a range of recommendations. So there is no 

single recommendation that comes out of a rules-based approach. 

And they require judgment in order to implement about measuring 

things like the GDP or output gap and particularly the neutral real 

level of interest rates, something that we have been struggling 

with, as has the professional economics community, now for many 

years, so— 

Ms. MOORE. Thank you, Chair Yellen. 

So the CHOICE Act is a bill that we pushed out of this committee, and it proposes sort of a rules-based monetary policy, and 

I want to know what your thoughts specifically are about that piece 

of legislation? 

Mrs. YELLEN. I have said on many occasions that I am opposed 

to the requirements in the CHOICE Act. 

Ms. MOORE. Okay. What about subjecting the Fed to the appropriations process? 

Mrs. YELLEN. I would be very concerned about subjecting the Fed 

to appropriations. We, of course, want to start with saying that we 

are, obviously, operating in all that we do under Congressional 

mandates and laws. We seek to be transparent, to be accountable 

to Congress, and to communicate as clearly as we can the basis for 

our actions in monetary policy and also in supervision. But I do 

think our independence in setting our own appropriations— 

Ms. MOORE. Thank you for that, Madam Chair. 

Mrs. YELLEN. —are safeguarded. 

Ms. MOORE. I want to go back to the limitations that the FOMC 

has with regard to closing the disparity and the gap of recovery for 

14 

African Americans, and lower-income Whites. There is only so 

much you can do. So I was wondering if you would agree that some 

of the austerity measures that Congress accounts—we place—saying we are paying people not to work when, actually, people who 

receive food stamps are old people, disabled people, children, people 

on Medicaid. Would you say that Congress needs to step up on the 

appropriations side doing things for lower-income people to subsidize wages, that that is a better tool than what the Fed has to 

offer in closing those gaps? 

Mrs. YELLEN. As you indicated in your opening statement, monetary policy is a blunt tool, and it is not something that we can use 

to achieve distributional objectives. Although, as we point out in 

the report, a strong labor market does benefit all groups, and particularly minority groups, although the experience is worse for 

them. 

So, yes, I think it is absolutely appropriate for Congress to consider appropriate fiscal policy and how it might be used to advance 

those objectives. 

Ms. MOORE. Thank you so much. 

And my time has expired. 

Chairman HENSARLING. The time of the gentlelady has expired. 

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

Pearce, chairman of our Terrorism and Illicit Finance Subcommittee. 

Mr. PEARCE. Thank you, Mr. Chairman. 

And thank you to the Chair for being here. We always appreciate 

your visits. 

Now, I note in your comments today you are talking about the 

labor force participation rate, and in the past, I think you and I 

have had an opportunity to discuss that, and it was not something 

I have seen to be a concentration on the part of the Feds before 

now—and it is now. 

What changed that it has become a bigger concentration for you 

all? 

Mrs. YELLEN. It is important for us to try to determine how 

much slack there is in labor markets, how much potential— 

Mr. PEARCE. Sure. I understand that, but that was important before, and there didn’t seem to be any comments from you. And, in 

fact, in 2016, it was just a number that didn’t come readily to your 

mind when you were in front of the committee here. I just wondered what has changed since January that you would now be concentrating on that? 

Mrs. YELLEN. I think I was discussing this last year, because it 

is a source of uncertainty after a very long and deep recession. We 

want to understand what potential there is for people to come back. 

And as I mentioned in my testimony, labor force participation rate 

has been— 

Mr. PEARCE. No. I appreciate that. If I could grab back my time 

now. I am going through the Monetary Policy Report here, and I 

am going through your comments, and I almost don’t see anything 

about that number on the screen behind you that is just constantly 

rolling there, and it is a debt, and maybe it doesn’t mean anything, 

and maybe it does. Do you all ever talk about that in your Committee? Do you ever contemplate that in your position? 

15 

Mrs. YELLEN. I have discussed this previously with this committee and others. 

Mr. PEARCE. I understand, but we didn’t note it in the report 

today as one of the driving factors and something we ought to be 

thinking about. 

So how did it affect you all when Illinois was downgraded—their 

bond rating was downgraded the 1st of the year, and they are paying what one analyst said is the highest differential in our history? 

Now, the reason they are having to pay more and the bonds are 

being downgraded is because they can’t afford to pay the bills, basically. And if you hold their bonds, you may not get paid. 

If you went back to Detroit when it filed bankruptcy, bondholders 

only got 74 percent on the dollar. And it all feeds back toward this 

number here and the fact that it doesn’t even make the print, not 

even the fine print that I can find. Maybe I missed it, but I did 

see the one sentence about Illinois being downgraded, and there 

was a brief discussion of Puerto Rico. 

But the idea that we as a country are not discussing our ability 

to pay our bills is something that, I think, there is a downside effect to the problem, but the fact that your report doesn’t bring it 

up is a little concerning to me. 

And the way that really played out was a couple of weeks ago 

when Chicago schools tried to issue a bond rating and they didn’t 

get any bidders at all, none. So they ended up driving the rate up 

to 7, 71⁄2, 73⁄4 or something. But it seems like the people in charge 

of the financial stability of the country, the value of our dollar, the 

value of our promises to pay, it just seems like it would have a little bit more importance in the document here. 

I would expect, frankly, maybe a whole chapter, because there 

are estimates that we can’t pay our bills in this country, and so we 

continue to operate as if—as if it is not going to matter if our ratings are downgraded. If our interest rate goes up—we are already 

running deficits, which means we have to print the money every 

year in which to operate, and it seems like that the people in 

charge of the system would be talking about it and postulating and 

telling us: Hey, this is kind of serious. Why don’t we all work together and start figuring out what we can do to live within our 

means, to just make sure that we are not paying triple and quadruple what other people are paying for debt? I don’t know. I would 

love to hear your comments. 

Mrs. YELLEN. Let me state it in the strongest possible terms that 

I agree that what you are showing here represents a trend that, 

given current spending and taxation decisions, is going to lead to 

an unsustainable debt situation with rising interest rates and declining investment in the United States that will further harm our 

productivity growth and living standards. 

I believe a key thing that Congress should be taking into account 

in designing fiscal policy is the need to achieve sustainability of 

this debt path over time. This is something I am not just saying 

today but have been emphasizing for some time in my testimony. 

Mr. PEARCE. Thank you very much. 

I yield back, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

16 

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

Maloney, ranking member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Chair Yellen, as you mentioned earlier, inflation 

has not been moving up as quickly as the Fed had been expecting. 

And given that the labor market has continued to tighten and inflation still hasn’t increased to the Fed’s target of 2 percent, do you 

think the Fed should wait to see some improvement in the inflation 

outlook before it starts the process of balance sheet normalization 

by phasing out the Fed’s reinvestment policy, or, in other words, 

are your plans for the timing of balance sheet normalization unchanged? 

Mrs. YELLEN. We have been trying to very carefully lay out our 

plans to normalize the size of our balance sheet in a gradual and 

predictable way. And my colleagues made the judgment in June 

when we laid out the final details that, if the economy continues 

to evolve in line with our expectations, that it is something that we 

should begin to do this year and, to my mind, I would say relatively soon. 

The exact timing of this I don’t think matters a great deal. It is 

something we have long been preparing to undertake. 

As I mentioned earlier, we are watching inflation very carefully. 

I do believe that part of the weakness in inflation represents transitory factors but will recognize inflation has been running under 

our 2 percent objective, that there could be more going on there. 

It is something that we will watch very carefully and will be a factor in our future decisions about rate increases. 

Mrs. MALONEY. Thank you. 

As you know, your term as Fed Chair ends in 2018. And there 

is a long history of Presidents renominating Fed Chairs that their 

predecessors had originally named. Ronald Reagan renominated 

Paul Volcker. Bill Clinton renominated Alan Greenspan. And President Obama renominated Ben Bernanke. 

So my question is, are you open to serving another 4 years as 

Fed Chair if President Trump decides that he wants to renominate 

you? 

Mrs. YELLEN. What I previously said is that I absolutely intend 

to serve out my term. I am very focused on trying to achieve our 

Congressionally mandated objectives, and I really haven’t had to 

give further thought at this point to this question. 

Mrs. MALONEY. When the Fed does start the process of balance 

sheet normalization, are you less likely to raise interest rates at 

the same time, or do you view these two actions as being on separate tracks? 

Mrs. YELLEN. The path for the Federal funds rate is a decision 

for the Committee, and they have made no decision about whether 

or not both things could occur at the same time. 

I would note that in June, at our most recent meeting, we produced the, ‘‘Summary of Economic Projections,’’ which appears in 

the Monetary Policy Report. Most of my colleagues or at least the 

median anticipated that one further increase in the Federal funds 

rate would likely be appropriate this year, but as I say, we constantly watch the economy, the evolution of inflation, and the labor 

market, and we will make decisions on the basis of our evaluation 

of that information. 

17 

Mrs. MALONEY. The Fed has suggested that the stock market is 

currently overvalued. Are there other markets that you consider or 

see as overvalued as well, and do you think a correction in any of 

these markets would cause problems for financial stability? 

Mrs. YELLEN. In looking at asset prices and valuations, we try 

not to opine on whether they are correct or they are not correct. 

But on—as you asked what the potential spillovers or impacts on 

financial stability could be of asset price revaluations, my assessment of that is that, as asset prices have moved up, we have not 

seen a substantial increase in borrowing based on those asset price 

movements. We have a financial system, a banking system that is 

well-capitalized and strong, and I believe it is resilient. 

Mrs. MALONEY. Okay. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, chairman of our Financial Institutions Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

And thank you, Madam Chair, for being here today. 

As chairman of the Financial Institutions Subcommittee, one of 

my jobs and my greatest concerns is the regulatory oversight by 

the various financial services agencies. 

Chair Yellen, when it comes to the Fed’s supervisory role, I want 

to renew my call and the calls of so many of my colleagues that 

the Fed take a more measured approach and withhold any new 

regulation until the nominee for Vice Chair for Supervision has 

been confirmed by the Senate. 

I do appreciate some of your comments and the comments of your 

colleagues, particularly Governor Powell, on issues such as the 

treatment of margin on the supplemental leverage ratio and on 

CCAR testing. Issues like these have a very real impact on the 

economy. I think it is wise that the Fed ease the associated burdens. You recall I sent you a letter on CCAR. Your response to me 

indicated that, while you understood my concerns, the Fed wasn’t 

necessarily looking to curtail some of its stress-test-related activity. 

So, now that the Vice Chair of Supervision has been named, I 

will again ask that the Fed hold off on imposing any new supervisory burdens before the individual is in place, and I would just 

ask for a response to these statements and concerns. 

Mrs. YELLEN. We have a relatively light regulatory agenda at 

this point. I am pleased to see a nomination. Clearly, we will look 

very carefully at the whole set of issues around regulatory burden. 

Mr. LUETKEMEYER. Okay. 

Mrs. YELLEN. And I look forward to having the input of that individual if he is confirmed. 

Mr. LUETKEMEYER. Okay. Thank you. 

To that end, I also want to mention that I am very supportive 

of many provisions included in the recent Treasury report. I hope 

that the Federal Reserve is taking some recommendations seriously. Have you read the report yet? Are you aware of it? 

Mrs. YELLEN. Yes, I have read the report, and there are many 

very useful and productive suggestions that mirror things that we 

have been thinking and doing ourselves with respect to tailoring of 

our regulations, reducing burdens on community banks. I think the 

18 

recommendations pertaining to the Volcker Rule and looking for 

ways to reduce burdens are all very useful. 

There are a few points where we have a different view and a lot 

in it that is very useful. 

Mr. LUETKEMEYER. I look forward to working with you on that 

because, while our Legislative Branch of the Government is a check 

on the Executive Branch and agencies, we want to work with you 

to try and improve the ability of our banks to be able to do the job 

of helping their communities grow. 

And I am glad you mentioned community banks because I have 

a quick story here for you, and I would like your response to it. I 

have shared this story with the committee in the past with regard 

to Mid America Bank & Trust. It’s a small bank in my district that 

has been caught in Federal Reserve purgatory for the last 5 years. 

Your agency has blocked the merger and acquisition of this institution because of concerns over certain products, the same products 

that have actually been encouraged by the FDIC and the State of 

Missouri’s Division of Finance. 

Your staff has forced this bank through the years to produce document after document, which they have done. And the bank has 

made now several offers to remediate, but the Fed has rejected 

them. Mid America has spent more than $2 million in legal fees. 

And this is a small bank; they really can’t afford to do this. And 

this process has to stop. The Federal Reserve, after 5 years, owes 

this institution a determination of whether they can get this done. 

So my first question is, are you aware of this case? 

Mrs. YELLEN. I am aware of this case. 

Mr. LUETKEMEYER. Okay. What can be our expectation of the 

resolution of this? 

Mrs. YELLEN. I am not prepared today to comment in detail on 

what is a confidential supervisory matter, but there have been a 

set of complicated issues pertaining to consumer— 

Mr. LUETKEMEYER. Madam Chair, with all due respect, I understand where you are coming from. The bank on my side is very 

open about what their problems are, their concerns are. We have 

an elderly individual who has medical problems who wants to divest themselves of this bank. They have a very viable, well-structured, well-financed, well-capitalized bank that wants to take them 

over. And basically what is happening here is a very punitive way 

of going about punishing this bank for a product that was something that the Fed didn’t like, quite frankly. 

And so the 5 years this has gone on is enough, and the opaque 

rules and the unwillingness of the Fed to work cooperatively with 

the banks and their attorneys and the regulators is not something 

we can continue to go and support. And this is why I asked the 

question when we started back with the Treasury report. The 

Treasury report has, I think, some solutions to some of the problems that regulatorily we have. And that is the punitive nature of 

some of the actions taken by some of the agencies, including yours. 

And so I think it has to stop. We want to work with you to find 

ways to increase the ability of these community banks to be able 

to improve their communities and help their economies grow, and 

we look forward to that. 

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

19 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. Good morning, Chair Yellen. 

Thank you for being here today. Let me start out by saying I am 

really happy about the appointment of Raphael Bostic as president 

of the Federal Reserve Bank of Atlanta. He meets the legal mandates, and he has great expertise, and also, he increased the number of African-American bank presidents from none to one, which 

I think is important. And so thank you for that. 

Mrs. YELLEN. Yes. 

Mr. ELLISON. We debate around here a lot of the cause of slower 

growth over the last several years. You have already been exposed 

to some people’s theories as to why we have slower growth, but I 

was intrigued by this book I read recently called, ‘‘Makers and Takers.’’ I don’t know if you are familiar with this particular book, but 

it is a book that really talks about the financialization of the economy. 

And I guess I would like to just get your take on it. The author 

of the book notes that one reason for lower productivity and lower 

wages is the outsized profits earned by some in the financial services sector—banking, real estate, insurance, hedge funds, Wall 

Street. And, in fact, the author, whose name is Rana Foroohar, and 

she has the stat up there on the screen that I would like you to 

just take a look at. She says that while the financial sector is a little less than 7 percent of the economy, it provides about 4 percent 

of the jobs but earns a whopping 25 percent of corporate profits. 

Twenty-five percent of corporate profits is a lot of money. And so, 

as a result, you see money flowing into those sectors rather than 

plant and equipment and the other sectors of the economy that 

might lend themselves to greater employment. 

Do you have any take on that? Do you have any impressions 

about that particular theory? 

Mrs. YELLEN. The financial sector has grown in importance relative to the U.S. economy, but my sense is that if we look at the 

plight with respect to wages and jobs of middle-class families who 

have seen diminishing opportunities and downward pressure on 

their wages, that we have to take account of factors, such as technological change that have eliminated many middle-income jobs, 

and globalization that has reinforced the impact of technological 

change, and that those things have to be an important piece of understanding what has happened. 

Mr. ELLISON. I am sure that technology does play some role, but 

we have always had technology, haven’t we? When we went from 

horse-drawn carriages to cars, people who made horseshoes had to 

find something new to do. So I am always a little skeptical when 

I hear people say technology. We have always had technology. We 

have also had more employment. 

But we have had kind of this slow growth period, and we have 

had some people say: Well, it is because people don’t want to supply labor because they are living too good on welfare. 

Also, is it possible that the financial services sector is sort of 

channeling investment into financial activity and not into agricultural and manufacturing services to actually employ people? 

20 

So I will give you an example. If you look at Sears Department 

Store, it is closing about 250 stores this year. That means thousands of Sears and Kmart employees are going to lose their jobs, 

and hundreds of communities will lose retail access. Of course, you 

could point to technology. I am sure that is part of the explanation, 

but can you share some ideas or point to some analysis to explain 

why the retail sector is being hit so hard? You could say Amazon, 

but I am doubtful that explains the whole problem. Do you have 

any specific information on the role that finance might be playing 

in part of these decisions? And that investors demand outsized returns that demanded companies like Sears fire workers, sell real 

estate so that you can have better returns on financial equities. 

Mrs. YELLEN. I don’t have anything specifically for you on that. 

I would be happy to take a look. I would point out that, for many 

years, many American companies have been sitting on a lot of cash. 

Mr. ELLISON. Yes. 

Mrs. YELLEN. —and have been unwilling to undertake investment in plant and equipment of the scale that we would ideally 

like to see. So I think there are a number of different things going 

on. 

Mr. ELLISON. Thank you very much. 

I yield back my time. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Capital Markets Subcommittee. 

Mr. HUIZENGA. Thanks, Chair Yellen. It is good to have you here. 

I appreciate the opportunity. And I was not expecting to do this, 

but I want to touch briefly on something that Chairman Barr had 

talked about, the labor workforce participation. These are U.S. Bureau of Labor Statistics civilian labor force participation rates. This 

was a study released by the St. Louis Fed. I am sure you are familiar with it: fred.stlouisfed.org. That was June 17th, and it clearly 

shows that what I heard you say is sort of these disappointing levels of labor force participation are unavoidable because of an aging 

demographic, and I wish I had the chart that I was able to put up, 

but it seems to me what is most concerning is this drop in participation really comes from youngest Americans, and, in fact, that 

chart, again released by the Fed of St. Louis, shows the highest 

levels we have seen since the 1960s for Americans aged 55 and 

older. And it seems to me this argument that our economy hasn’t 

responded the way that it has, we talked about this actually the 

last time you were here, and I think I labeled it flim-flam, not in 

a disrespectful way, but it was clearly not what some of those statistics are showing. 

What I want to talk about, though, quickly is that, during your 

semiannual testimony before this committee in 2015, you were 

asked about concerns regarding the lack of liquidity in certain 

fixed-income markets, and you stated that, ‘‘It is not clear what is 

happening in these markets and what is causing what.’’ You continued that, ‘‘We don’t see a problem,’’’ but that it was something 

that you needed to study further. 

So my question is, has there been additional study and followup by the Fed on that particular issue? 

21 

Mrs. YELLEN. That is something that we continue to look at. We 

provide this committee with regular reports, particularly pertaining 

to corporate bonds. There have been a number of studies inside the 

Fed and also outside of it that show no clear pattern, some suggestions that regulations may be negatively impacting liquidity but 

other studies reaching different conclusions. 

Mr. HUIZENGA. So you don’t believe there are problems in the 

fixed-income markets? 

Mrs. YELLEN. The inventories of bonds held by some of the largest banks and market makers have declined. On the other hand, 

bid-ask spreads are low. Corporate bond issuance has been healthy. 

The market has done well. 

Mr. HUIZENGA. But isn’t it true we don’t know whether those bidask spreads are really there because there is a lack of transparency? 

Mrs. YELLEN. It is hard to draw conclusions purely based on 

that. 

Mr. HUIZENGA. We are going to actually be exploring this in my 

Capital Markets Subcommittee on Friday. We have a hearing on 

fixed-income markets really just trying to find out what is going on. 

So maybe we can help you with some of that analysis with some 

testimony from here, but we need to have that investigative effort 

by the Fed on this, as well. 

I quickly want to move on. Former Fed Governor Tarullo suggested in a speech that, ‘‘A new regulatory paradigm is needed to 

expand fiduciary duties of directors of banking institutions.’’ 

He posed the question whether existing modes of financial regulation could be further supplemented by modifying, ‘‘the fiduciary 

duties of the boards of regulated financial firms to reflect what I 

have characterized as regulatory objectives.’’ Specifically, Mr. 

Tarullo believed that, ‘‘Special corporate governance measures are 

needed as part of an effective prudential regulatory system.’’ And 

he argues that traditional fiduciary duties focused on shareholders 

are inadequate for banking institutions. So we are not talking 

about DOL or any of the other fiduciary side of this. This is for 

banking institutions. Do you agree with his recommendations? 

Mrs. YELLEN. Those are his personal recommendations. 

Mr. HUIZENGA. So, is that a ‘‘no?’’ 

Mrs. YELLEN. I am not prepared to say that I agree with all of 

those recommendations. We are focused on trying to clarify expectations for boards of directors to distinguish what the important 

role that they have in the banking organization and what is the job 

of senior management versus a board of directors. 

Mr. HUIZENGA. That would be a concern that I have here is, what 

expertise the Fed has on corporate governance issues like fiduciary 

duties of corporate boards, and, frankly, under what legal authority 

does the Federal Reserve seek to preempt State corporate governance requirements, as well as a number of things? 

I appreciate your answer, and thank you for being here. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Colorado, Mr. Perlmutter, ranking member of our Terrorism and Illicit Finance Subcommittee. 

22 

Mr. PERLMUTTER. Good morning, Madam Chair, and thank you 

for being here, and thank you for being a steady hand at the Federal Reserve. 

Mrs. YELLEN. Thank you. 

Mr. PERLMUTTER. And you must be doing an okay job because I 

have listened to my friends, my Republican friends, who generally 

have very crisp, sharp, piercing, probing, and accusatory questions. 

They don’t have those today because things are going pretty well. 

In Colorado, I want to thank you. We were in the real dumps 8 

years ago—10 percent unemployment, housing crashing with foreclosures through the roof. In my district, we are at 2.1 percent unemployment; the State, generally, 2.3 percent. And I know that is 

not the same for some of the parts of my State a little tougher, and 

I know across the Nation, but generally things have been steady, 

and I want to thank you and the policies of the Fed for helping us 

get out of what was a very bad situation. 

Mrs. YELLEN. Thank you for that. 

Mr. PERLMUTTER. I have a a couple of questions. First, there is 

a guy who has been pretty dogged in telling me that we need to 

shrink the Fed’s accommodative policies, and he is in the audience 

today. So explain to me—he is right directly behind you a couple 

of rows. And he has been very firm over these years in wanting me 

to press you on this. So would you explain to me how you plan to 

shrink the accommodative policies that we took back in 2008, 2009, 

and 2010? 

Mrs. YELLEN. The Federal Reserve was dealing for many years 

with an economy with very high unemployment and inflation running below our 2 percent objective. We did everything that we possibly could to try to achieve the goals that we have been assigned 

by Congress, namely maximum employment and price stability. We 

were constrained in our ability to use short-term interest rates as 

a tool, and so we used our balance sheet and undertook other 

measures to try to stimulate the economy. And I believe we have 

been succeeding. While inflation is still running below our 2 percent objective, the labor market, as you pointed out, is much 

healthier. The unemployment rate is now even running a little bit 

under levels that we regard as sustainable in the longer run. I 

think that is entirely appropriate, given that inflation is running 

below our objective. 

So, as the economy improves and we come closer to achieving our 

objectives, we see it as appropriate to begin to gradually remove accommodation and move to a neutral stance. As I have said on 

many occasions, the new normal with respect to what level of interest rates is neutral appears to be rather low. So we have raised the 

Federal funds rate target. I believe policy remains accommodative, 

but given how low estimates of the neutral Federal funds rate are 

now, namely levels of the funds rate that would just be consistent 

with sustaining the strong labor market over time, we perhaps 

have some further moves that we envision making. If the economy 

proceeds along the path it is on, we anticipate that neutral may 

move up some, although remaining at low levels, and that generates a view that, over time, we may want to increase the funds 

rate a bit more, but that all really depends on how things evolve. 

23 

Mr. PERLMUTTER. Let me change the subject really quick. And on 

page 12 of the report, there are two words that I have never seen 

in any of your reports, and it is ‘‘abysmal performance,’’ and it is 

as to productivity developments in the advanced economics. That is 

the section. And the combination of technology and advances in 

science and everything else coupled with labor, we are seeing something—so it is in the second column: A number of potential explanations have been put forth for the abysmal performance of TFP, 

that there is a waning—oh, well, I am out of time. I thank you for 

your service. You are doing a heck of a job. Thank you very much. 

Mrs. YELLEN. Thank you very much. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, the chairman of our Housing and Insurance— 

Mr. DUFFY. Thank you. 

Chairman HENSARLING. —Subcommittee. 

Mr. DUFFY. Welcome, Madam Chair. 

My friends across the aisle seem to be relatively excited about 

lower unemployment, an economy that is picking up. Excited that 

the stock market and people’s 401(k)’s are improving. And they 

want to give you a lot of high fives and back slapping. You get all 

the credit. What changes have you made since November 8th to 

kick-start this economy and make it grow that you weren’t doing 

before November 8th? 

Mrs. YELLEN. What changes have we made to kick-start the 

economy? 

Mr. DUFFY. Yes. 

Mrs. YELLEN. We have continued on the course that we have 

been on of normalizing the path of monetary policy as the economy 

continues to recovery— 

Mr. DUFFY. You haven’t changed anything really since November 

8th. The real change has been we have a new President in the 

White House. I just make that point to my friends across the aisle 

to not get too excited on who should get credit for an improving 

economy. 

But I do want to follow up on what my friend Mr. Huizenga was 

asking about, the gentleman from Michigan, in regard to the role 

that the Fed is playing in corporate board rooms in our financial 

institutions. You acknowledge you do have a role at the Fed in 

these board rooms. What role do you have? What are you doing? 

Mrs. YELLEN. It is our job to make sure that banking organizations are operating in a safe and sound manner and have policies 

in place that ensure both their safe and sound management and 

compliance with Federal laws and regulations, and corporate 

boards play a critical role in ensuring the performance of financial 

institutions. 

Mr. DUFFY. Isn’t it fair to say though that virtually anything 

could fall under the umbrella of safety and soundness? Who is 

hired and who is fired and who is disciplined within a financial institution could fall under safety and soundness, right? 

Mrs. YELLEN. I think it is important to—and we are going to try 

to do this. 

Mr. DUFFY. That could fall under safety and soundness, right? 

Mrs. YELLEN. Yes, it could. 

24 

Mr. DUFFY. And how capital flows, who a financial institution 

lends to could fall under the auspices of safety and soundness, 

right? 

Mrs. YELLEN. Yes, it could. 

Mr. DUFFY. In essence, the Fed, under the auspices of safety and 

soundness, could replace the board of directors who have a fiduciary duty to shareholders and actually take over boards all under 

the premise of safety and soundness. 

Mrs. YELLEN. We believe the corporate boards play critical roles 

in ensuring— 

Mr. DUFFY. A critical role, okay. What falls outside the scope of 

safety and soundness in a financial institution? Exactly. 

Mrs. YELLEN. Probably anything that you mentioned would have 

some. 

Mr. DUFFY. You can’t give me an answer because everything falls 

under that scope, and that is a concern. 

The Fed doesn’t have a fiduciary duty to shareholders, and actually board members have potential civil and criminal liability in 

their service on a board. Does the Fed have any civil or criminal 

liability should things go wrong on a corporate board? Board members are liable, how about the Fed? 

Mrs. YELLEN. We have supervisory responsibilities. 

Mr. DUFFY. No, you do, but are those Fed members who are sitting in on board meetings potentially criminally or civilly liable for 

the decisions they push a board to make? 

Mrs. YELLEN. Not to the best of my knowledge. 

Mr. DUFFY. Mine either. That is concerning for us, and I am 

pushing you on this because you do have a supervisory role, and 

I want you to do a good job, but from the feedback that we get, the 

involvement that the Fed has in our corporate boardrooms has far 

surpassed I think the vision that any of us had in this room. And 

it concerns us. 

Mrs. YELLEN. Let me say that we have talked to many corporate 

board members and understand that there has been an accumulation of a large number of items. We have indicated that board 

members along with senior management should be responsible 

for— 

Mr. DUFFY. I don’t believe you have the authority, Madam Chair. 

Mrs. YELLEN. —and believe we should clarify— 

Mr. DUFFY. I don’t think you have the authority to make hiring 

and firing decisions, and that is the feedback that we have had 

from members. 

My time has almost expired. If I could ask you one last question, 

do you anticipate that this will be your last time testifying before 

this committee? 

Mrs. YELLEN. My term expires in February, and so— 

Mr. DUFFY. That is a roundabout way of asking you— 

Mrs. YELLEN. It may well be. 

Mr. DUFFY. —are you seeking another term? 

Mrs. YELLEN. I have not said anything about that. I intend to 

serve out my term and not— 

Mr. DUFFY. I know we push you hard. I want to thank you for 

your service. 

And I yield back. My time has expired. 

25 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you, Mr. Chairman, and, Chair Yellen, for 

your service. 

In the past I have sent letters to you and other Federal regulators and asked you in hearings before about the requirement that 

custody banks hold supplementary leverage ratio against deposits 

and at the Federal Reserve presumably because of worries that, in 

some future universe, the Fed deposits may become less safe and 

available than cash, which is a universe I don’t enjoy contemplating. 

I believe that the Federal Reserve deposits are exactly the sort 

of safe place for these large immediately callable cash positions 

that we should actually be encouraging because of the strength and 

reliability of the Federal Reserve as a counterparty. 

Now, as you may be aware, we now have bipartisan legislation 

to require that prudential regulators provide relief for institutions 

that place cash with the Fed at the same time as providing significant flexibility for the regulators to deal with unusual circumstances. 

So do you see any safety and soundness difficulties if this legislation were to go forward? 

Mrs. YELLEN. I am not going to comment on the legislation, but 

we are looking at the supplementary leverage ratio because of the 

impacts that you mention. A leverage ratio was meant to be a 

backup, a backup supervisory device calibrated appropriately relative to risk-based capital requirements. And while, in general, I 

think risk-based capital requirements, especially for the largest 

and most systemic institutions, are at levels that I think are appropriate and I am comfortable with, it may be that the supplementary leverage ratio needs to be recalibrated relative to that, 

and I am very much aware of the problems you are mentioning, 

and we are considering how to address them. 

Mr. FOSTER. Thank you. 

And I would like to use a little of my time to just comment briefly in defense of my home State of Illinois in response to some of 

the remarks from my colleague from New Mexico. Every year, the 

citizens of Illinois write a check for approximately $40 billion to 

States largely in the Sun Belt and rural areas because, for every 

dollar of tax money, Illinois receives back only 75 cents of Federal 

spending. 

In contrast, New Mexico receives $2.40 back for every dollar of 

tax money. 

And so this check that we write for $40 billion a year, had it 

been put into a rainy day fund instead of redistributed to other 

States in the Union, would have resulted in a balance in that rainy 

day fund in excess of $1.5 trillion today. 

And so that I think that, when people discuss the fiscal problems 

of Illinois, the starting point should be there. 

Now, I would like as my—finally, I would like to—I co-Chair a 

Future of Work Task Force for the New Democrat Coalition, and 

we are looking at the effects of technological and other changes 

26 

that might occur in our workforce in the coming years and what 

policies we should adopt to remediate the bad side of those effects. 

There is a lot of discussion now about why inflation is not increasing as you would have guessed in the past, particularly wage 

inflation. In the past, when the gap, the gap closed up in the job 

market, that very rapidly employers would start bidding up wages. 

That doesn’t appear to be happening the way it used to, and one 

of the explanations that is suggested for that is that employers 

have the opportunity, instead of just bidding up wages, to simply 

invest in technology that replaces jobs. 

I was wondering if you think there is a reasonable chance that 

you are going to have to change your macroeconomic models to reflect the loosening of the link between the closeness of the—the 

tightness in the job market and the increase in wages. 

Mrs. YELLEN. We are seeing attenuated links, I think, between 

the labor market and wages, but even to a greater extent prices 

and inflation. The relationship between those two things has become more attenuated than we have been accustomed to historically and— 

Mr. FOSTER. In general, when the robots show up, they show up 

as low prices. If you ask the average farmer what forced them to 

consolidate, they don’t say it is the machines; they say it is low 

grain prices. And that goes on in many ways. Retailers are struggling with price competition from Amazon. They don’t often name, 

well, we are not as efficient as the robots in Amazon distribution 

centers and so on. And so I think that really we have to look at 

this in a macroeconomic sense because its effects will not be small, 

and I encourage you to think about that. 

Mrs. YELLEN. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner, chairwoman of our Oversight and Investigations Subcommittee. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

And Chair Yellen, our committee has been concerned for some 

time about confidential FOMC information being shared with favored constituents. In March, Vice Chair Fischer delivered the keynote for a Brookings Institution dinner and reportedly delivered remarks and took questions on interest rate policy. I say ‘‘reportedly’’ 

because the dinner was closed to the public and the press but open 

to Wall Street and other financial interests. 

In addition, Vice Chair Fischer’s prepared comments have not 

been made available, and the fact the speech took place, frankly, 

at all was not widely known. This keynote flies in the face of the 

FOMC’s policy on external communications of Committee participants, which states that, and I am going to read this right out of 

the policy, ‘‘Committee participants will strive to ensure that their 

contacts with members of the public do not provide any profit-making person or organization with the prestige advantage over its 

competitors. They will consider this principle carefully and rigorously in scheduling meetings with anyone who might benefit financially from apparently exclusive contacts with Federal Reserve officials and in considering invitations to speak at meetings that are 

27 

sponsored by profit-making organizations or that are closed to the 

public and the media.’’ 

Chair Yellen, we all want transparency and accountability for 

our monetary policy so that it remains insulated from political and 

profit-making interests. The Vice Chair’s speech does not help with 

that at all and in fact, flagrantly flies in the face of policy. 

The speech occurred just days before another Fed official, Jeffrey 

Lacker, abruptly resigned as Richmond Fed President after admitting to playing a role in the 2012 FOMC leak, where market-sensitive details of the central bank’s internal deliberations were 

leaked to a private consultant that then shared the details with clients who stood to net millions in profits by trading ahead of the 

release of the news. However, the true leaker still remains at large 

apparently as former President Lacker appears to have only incidentally confirmed insider information that Medley had already received. This is something that I, certainly as Chair of the Oversight 

and Investigations Subcommittee, will continue to look into. Chair 

Yellen, how could this speech have been allowed to happen, given 

everything that had occurred with the 2012 FOMC leak? 

Mrs. YELLEN. Okay. So let me start by saying that the very beginning of our policy on FOMC external communications states the 

two-way communications between members of the Committee and 

members of the public are very important both to communicate 

with the public and also to gain information, and that these will 

occur in a variety of ways, including in some closed-door meetings. 

So there is no requirement that FOMC members cannot meet in 

closed-door sessions. The Brookings Institution is not a for-profit 

institution. It is a nonprofit. And we have a clear set of guidelines 

governing what can and cannot happen in such— 

Mrs. WAGNER. Will the remarks be released to the public? 

Mrs. YELLEN. The clear rules are that no FOMC confidential information can be divulged ever, including in a closed-door setting, 

and that FOMC officials may not discuss even their own views on 

policy, except to the extent that they have already been presented 

in a public forum. 

Mrs. WAGNER. So Wall Street— 

Mrs. YELLEN. The Vice Chair’s remarks did not pertain to monetary policy. They pertained to financial— 

Mrs. WAGNER. Reclaiming my time, Chair Yellen, the difficulty 

with this is that we don’t know that. And in the interest of transparency and accountability, perhaps it would be good to show the 

light of day on whatever his remarks were to Wall Street bankers 

that were invited to a speech at the Brookings Institution. And I 

have to say, Madam Chair, it is very clear that these should not 

be closed to the public or the media. So I am very concerned about 

this going forward, and I am also concerned about the resolution 

with the Board due to the internal governance that happened on 

the FOMC leak. So I would like to submit that in writing and get 

your information on that. 

Thank you, Mr. Chairman. I am sorry to have gone over my 

time. 

Mrs. YELLEN. I want to say that we have cooperated fully with 

our inspector general and law enforcement agencies, that they have 

28 

had access to all information that is relevant to this matter and 

that they announced simultaneously with President Lacker. 

Mrs. WAGNER. The Board must improve the standards and keep 

to its standard, Madam Chair. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Clay, ranking member of our Financial Institutions Subcommittee. 

Mr. CLAY. Thank you, Mr. Chairman. 

Thank you, Chair Yellen, for being here. 

Perhaps we should replace some of the fantasy that we have 

heard today on the other side with the reality. I hear my colleagues 

over there say that, within 6 months of this new Administration, 

we have improved the economy, we have improved employment opportunities for Americans. I guess they are pointing to the Carrier 

deal in Indiana where they were promised over 1,000 jobs to stay 

in this country, and about 750, we hear, are moving to Mexico. But 

we will give the President credit for that deal. 

And really I know that the reason why the economy has turned 

around is the sustained job growth of the previous Administration 

over more than 6 years. 

So here’s my question to you, Chair Yellen: In May, the overall 

unemployment rate of 4.3 percent hit a 16-year low. Although the 

unemployment rate rose one-tenth of a percent in June, this reflected the positive news that more workers who had dropped out 

of the labor force have returned to look for work. With the overall 

rate of employment now down at historically low levels, would you 

say that the economy has reached full employment, or do you believe that this headline rate masked weaknesses is in the labor 

market where additional progress must be made? 

Mrs. YELLEN. Not all groups in the labor market are faring 

equally well, and we remain concerned about, particularly for African Americans and Hispanics, weaker job market outcomes, but 

monetary policy is a blunt tool. 

As you point out, the unemployment rate and overall state of the 

labor market is strong with many job openings and opportunities 

for workers. The unemployment rate has even fallen slightly below 

levels that my colleagues would regard as sustainable in the longer 

run. We have seen a steady rate for several years now, a constant 

rate more or less of labor force participation, which, with an aging 

population tending to push it down, suggests that groups that have 

been sidelined are finding opportunities and entering the labor 

force and gaining employment. So that is a strong performance. 

And this has now been going on, as you said, for a number of years 

and has continued—is continued this year. 

Mr. CLAY. And thank you for that response because progress 

doesn’t happen in 6 months, especially when you have to recover 

from a devastating recession. And so for the other side to give credit to someone who is not even focused on our economy is ridiculous. 

One more question: What in your view have been the key drivers 

of the job gains since your last testimony before this committee 6 

months ago? Have job gains been driven by longer term trends 

from a growing economy, or have they largely resulted from new 

policies adopted in recent months? 

29 

Mrs. YELLEN. The global economy has recovered. It was a source 

of weakness earlier. That has been a source of support. And we 

have had ongoing job gains and increases in, for example, housing 

prices that are boosting the wealth and consumer sentiment of 

Americans, and that is driving consumption spending that is strong 

enough to create ongoing job gains that exceed what is needed for 

an expanding labor force. So the job market continues to strengthen, and unemployment continues to move down. 

Mr. CLAY. And thank you for that response. I hope this is not 

your last visit to this committee, but I am sure it won’t be the last 

time we visit. 

Thank you, and I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Mr. Florida, Mr. 

Posey. 

Mr. POSEY. Thank you, Mr. Chairman. 

I hate to get into the cat fight or dog fight of who shot John and 

whose policies are doing what, and I heard the remark that the 

economic analysis cannot show any significant short-term results 

or something to that effect, and I would just like to remind the 

other side that I saw dramatic overnight change in the stock market from the election to the inauguration. And I think we will go 

on. 

Chair Yellen, it’s good to see you again. Since I arrived in Congress, the most cosponsored bipartisan significant piece of legislation has been Dr. Paul’s original legislation to audit the Fed. We 

passed it. But it goes nowhere at the other end of the building. Are 

you afraid of getting that passed? 

Mrs. YELLEN. I am strongly opposed to audit the Fed. What 

audit? The Fed is audited in every way that normal Americans 

would regard an audit. Our financial accounts and holdings are— 

Mr. POSEY. It is not audited like all other agencies. You are 

aware, as well as I am, of the list of exemptions to the Fed. 

Mrs. YELLEN. Audit the Fed removes exactly one exemption that 

the Federal Reserve enjoys, which is real-time policy reviews by the 

GAO of our monetary policy decisions, and that is the essence of 

Federal Reserve independence and trying to keep politics out of decisions that should be technical, professional, and nonpartisan. 

Mr. POSEY. I would agree if I thought there was a lot of truth 

to that statement, but auditing something after the fact has nothing to do with influencing the decision, I wouldn’t think. I would 

consider it a matter—an important matter, actually, of transparency, and I, for the life of me, cannot understand what the Fed 

fears. 

Can you give me an example that would justify the lack of transparency? 

Mrs. YELLEN. We don’t have a lack of transparency. 

Mr. POSEY. You do if you can’t audit it. It is a lack of transparency. To most people I know, it is lack of transparency. To some 

people, it may not be, but I don’t understand that. That is the reason I am questioning you about it. 

Mrs. YELLEN. I regard the Federal Reserve as one of the most 

transparent central banks in the world. 

30 

Mr. POSEY. That is a statement. What do you fear about the 

audit? Give me a real-time example. 

Mrs. YELLEN. I think the FOMC needs a space in which it can 

have honest conversations and deliberate in real time about the decisions that we make without having political influence brought to 

bear and second-guessing decisions that we have made and opining 

on them possibly with the idea of revisiting them. 

Mr. POSEY. We can discuss things in public that are sensitive, 

talk about national security. The Supreme Court does the same 

thing. They don’t worry about the transparency influencing them. 

Just give me an example. Give me an example of how transparency 

could hurt the Fed? Just give me one example how it could hurt 

the Fed being transparent. 

Mrs. YELLEN. Because what you are talking about with the GAO 

are policy reviews— 

Mr. POSEY. No, give me an example, not a general swipe of review. Just say: Take for example this. If somebody said this, it 

would be horrible; it would be the end of the world for the Fed. 

Give me an example like that. 

Mrs. YELLEN. I would envision a situation where the GAO at the 

request of Members of Congress might come in and say, at our 

meeting a week ago, they have taken the transcripts and reviewed 

what we said; they believe that the decision we made was the 

wrong one at that particular meeting. And I would say that is an 

extreme interference and politicization of our ability to make independent monetary policy decisions. 

Mr. POSEY. So you are telling me we shouldn’t be transparent for 

the fear of being second-guessed or somebody criticizing you because they thought you were wrong. Do I get it? 

Mrs. YELLEN. What we are talking about is political interference 

in decision-making by the Committee. 

Mr. POSEY. I don’t see that. If it is after the fact, I don’t see the 

interference in decision-making. 

Mrs. YELLEN. Well, I do, so I— 

Mr. POSEY. Give me an example. 

Mrs. YELLEN. I gave you an example. 

Mr. POSEY. Give me one example why they shouldn’t have that 

transparency. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Chair Yellen, welcome. It’s good to have you here again. Chair 

Yellen, I, first of all, want to thank you and the Federal Reserve. 

Under the leadership of our ranking member, Ms. Waters, and the 

ranking member of Judiciary, John Conyers, and myself and others, we were hopeful that, for the first time in history, American 

history, that the Federal Reserve would appoint and hire the very 

first African American ever to hold the position as a regional president of the Fed, and you all did that. And we want to say thank 

you so much. We deeply appreciate that. That means a lot, not just 

to the African-American community, but to all Americans. That is 

what this great country is about. 

31 

Now let me go to one other thing. Chair Yellen, you and I have 

had ongoings about, of course, the high unemployment rate of African Americans, and I always remember fondly when you referred 

to that as a blunt instrument. As I said, that is what M said to 

James Bond to describe him. In other words, he couldn’t go through 

it. So you said that Congress had to come up with some legislation. 

We did that, House Resolutions 51 and 52, of which we sent a copy 

to you, which would tie the staggering unemployment rate of African-American young men in the inner city to apprenticeship training programs attached to rebuilding the crumbling infrastructure. 

That has been introduced, and, of course, each 5 years, we have to 

by law fund the 1890s, African-American colleges. So we put $95 

million in the appropriations hopefully that we will be able to 

spread over for 5 years at $5 million for each of these universities 

over that period. 

Now I have read your past reports that you have given and you 

have talked about housing. And we would like to move to that next, 

and in your past three reports, you made a point to dedicate full 

sections of the report to specific topics related to the disparity that 

the Federal Reserve is seeing in the data for the African-American 

community. So I want to call your attention specifically to those 

sections from the three most recent reports to Congress. The titles 

of these—and you referred to them as boxes, if you recall, boxes. 

That is what the Fed calls them. And one box was, have the gains 

of the economic expansion been widely shared? Box No. 3, homeownership by race, ethnicity. And box No. 3, does education determine who climbs the economic ladder? And in that discussion of 

those problems you highlighted—included socioeconomic differences 

between Whites and Blacks, poor credit scores due to income disparities, and continued discrimination. That lays it bare. 

So, Chair Yellen, let me just ask you, of all of these factors in 

your boxes, which of these factors is most pressing and what recommendations on substantive solutions can we in Congress work 

on to help address the homeownership problem hurting African 

Americans, much as you suggested that we develop this legislation 

that is moving forward on the unemployment of African Americans? 

Mrs. YELLEN. I don’t want to try to give you detailed suggestions 

for what legislation you can put forward. Our job is to try to do the 

best we can to provide information and background that will be 

helpful to you as you decide what is appropriate. And I do believe 

this is squarely in the domain of Congress and the President, and 

we are trying to provide useful information. 

Mr. SCOTT. Absolutely. And we will pursue that. I commend you 

for bringing that up, and I would love for you to stay on in your 

position as Chair of the Fed. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes— 

Mr. SCOTT. If I have a chance to speak to Mr. Trump, I will mention that. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

MacArthur. 

Mr. MACARTHUR. Thank you. Chair Yellen, welcome. 

32 

I want to thank you for your service to our country, and I appreciate you being here today. Your testimony has been helpful to me. 

I had two areas I wanted to explore. One is nonbank SIFIs. My 

State, New Jersey, in 2014 authorized by legislation our Department of Banking and Insurance to do group supervision of insurers 

that were involved in the international marketplace. And I know 

that FSOC, under Dodd-Frank, when it reevaluates SIFI designations annually is required to consult with State regulators, and I 

wanted to get a sense from you of whether—how you would view 

now a State insurance department doing regulatory work of a 

group insurer, does that impact, in your view, how FSOC might 

look at the SIFI designation of an insurer? 

Mrs. YELLEN. This is a matter for FSOC to decide. We have met 

with State regulators in New Jersey, and I am aware of this development, which is a heartening one. I would say that the FSOC’s 

focus in designation is the systemic risk that the failure of a given 

entity could pose to the broader financial system. To the best of my 

knowledge, most State regulators focus in supervision on protection 

of policyholders, which is, of course, a very important objective, but 

not on the systemic risk that the activities of a company could pose 

to the broader financial system. And so, in considering this matter, 

FSOC would, I think, have to take account of what the focus of 

that holding company supervision would be. 

Mr. MACARTHUR. I appreciate that, although I would add as just 

somebody who spent a lifetime in insurance, I think State regulation has proven to be, when you regulate individual companies 

within a group, you create a safer company, and I think our system 

is better than the European system, which focuses on the group, 

not the company. But that is another matter. 

The other area I wanted to explore with you was the labor participation rate. You have mentioned it twice today, and each time, 

you have said that our aging population is pushing it down. And 

I guess, on the one hand, that makes a certain amount of intuitive 

sense. We have a Baby Boomer bubble working its way through, 

but I did want to ask you about a few particulars with that. Do 

you use—does the Fed use the Bureau of Labor Statistics’ data on 

labor participation? 

Mrs. YELLEN. I believe that is the core data we have on— 

Mr. MACARTHUR. That is the core data. So I have the Bureau of 

Labor Statistics’ employment data on my iPad. I am looking at it. 

Unfortunately, I didn’t do it ahead of time, so I can’t put it on the 

screen. But when I look at the actual data, all people over 16 years 

old—so basically everyone who is of working age—that has gone— 

labor participation rate has gone from 66.6 percent in 1994 to 62.9 

percent in 2014. So it is a 3.7 percentage point decline in labor participation. And you have suggested that is because people are getting older, and they are dropping out of the workforce. But that is 

not what this chart says. What it says is that 65 and older has actually increased from 12.4 percent in 1994 to 18.6 percent. That is 

a 6.2-percent increase in that 20-year period—let me just finish the 

question—for that group, and then for 55 and older, which is 

broader and includes those of normal retirement age, that number 

has gone up by 10 percentage points. The one that has gone down, 

the group that has gone down is the 25- to 50-year-old. They have 

33 

declined from 83.4 percent participation to 80.9 percent participation. That group, the 25- to 54-year-old group peak earning years 

has declined by 2.5 percent; 2.5 percent times 324 million population is 8.1 million unemployed people in peak earning years. It 

doesn’t seem to square with your assertion earlier twice. 

Mrs. YELLEN. So, very quickly, it is true that people in the retirement years 65 and older are working more now than they used to, 

but the level of labor force participation of that group is dramatically lower than of prime age workers, and an increasing share of 

the population is now moving into those years with low labor force 

participation. So there is no conflict between the number that you 

cited and my statement that an aging labor force— 

Mr. MACARTHUR. My time has expired. 

Mrs. YELLEN. It is also true— 

Chairman HENSARLING. The time of the gentleman has expired. 

Mrs. YELLEN. —that participation of prime age workers has declined. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Madam Chair, for coming here. 

Every few months I remind you that you have not yet used your 

authority to break up the too-big-to-fail institutions. And I will 

spend the next minute reminding you. They are too-big-to-fail. If 

the entity, just one entity, goes down, it could take our whole economy down with them. They are too-big-to-compete-against because 

economic studies say that they—that investors and the markets assume that they will be bailed out. They have seen that Congress 

will pass new legislation to bail out if that is thought necessary to 

save the economy, and that, therefore, they are able to get a cost 

of funds that may be as much as 80 basis points less than they 

would otherwise. They are too-big-to-jail, as former attorney generals have said they wouldn’t criminally prosecute because it might 

take down the whole economy. If the same thing was done by a medium-sized bank, no economic problem, go ahead and prosecute. 

And then, with the Wells Fargo debacle, we have a difference between Republicans and Democrats. Democrats tend to blame the 

management of Wells Fargo and say that that proves they were too 

big to manage, and Republicans tend to blame you, the regulators, 

which just proves that they were too-big-to-regulate. So too-big-tofail, too-big-to-compete-against, too-big-to-jail, too-big-to-manage, 

too-big-to-regulate. When a protozoa gets too big, it is able to split 

into two healthy cells, and I would think that the geniuses on Wall 

Street would have at least the same level of intelligence as the average one-celled aquatic animal. 

Every time you come here, you are attacked by those who criticize the low interest rates that we have had in our economy. Now 

with low interest rates, you get more economic growth, but you 

might also get more inflation. 

Over the last 5 years, has rampant inflation been a disastrous 

difficulty for the American economy? 

Mrs. YELLEN. Inflation has been running under our 2 percent objective for the last 5 years and continues to do so. 

Mr. SHERMAN. And I won’t even ask you this question, because 

it is so obvious. Has economic growth been too robust? Go ahead. 

34 

Mrs. YELLEN. It has not been particularly robust, but it has been 

sufficiently robust to create a lot of jobs and drive down the unemployment rate. 

Mr. SHERMAN. But every day, every time you come here, you are 

told that the interest rates are too low, but you are also criticized 

because the economic growth has not been robust enough. 

Now, behind you, at the request of the Majority, is the National 

Debt Clock. The Majority always comes and tells you that you 

should shrink your balance sheet, that you should sell off your assets. Of course, you in effect are lending money for longer terms 

and borrowing money for shorter terms or just printing it, one way 

or the other, and you create a tremendous profit for the Federal 

Government by having a big balance sheet. So people want you to 

have a small balance sheet when your big balance sheet is creating 

a lot of profits for the Federal Government. 

Have any of the advocates for a smaller balance sheet proposed 

to you the taxes they want to increase in order to replace the profits that you are earning on the balance sheet that they are telling 

you to shrink? 

Mrs. YELLEN. It is certainly true that our large balance sheet has 

resulted in very substantial transfers to the Treasury and to the 

Federal budget. Let me say our objective is not to make a profit 

and to maximize those transfers, but rather to do what is right in 

the pursuit of our objectives, but it is true. 

Mr. SHERMAN. I would say that the millions of Americans who 

want us to run the Federal Government more like a business would 

say that perhaps profit should be thought of as an important objective. And I will take your answer as that you have not heard any 

proponent of a smaller balance sheet put forward a tax increase 

proposal designed to replace those revenues or to keep that clock 

behind you from turning more quickly. 

Finally, we want businesses to do things that require longer-term 

capital. You tend to focus on short-term interest rates. What has 

your big balance sheet done to decrease the gap between short- and 

long-term interest rates, the yield curve? 

Mrs. YELLEN. We purchase those assets to drive down long-term 

interest rates relative to short or to flatten the yield curve and 

lower longer-term borrowing rates. 

Mr. SHERMAN. And so the proposals are to make it more difficult 

to borrow money long term. 

Mrs. YELLEN. That is correct. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Tennessee, Mr. 

Kustoff. 

Mr. KUSTOFF. Thank you, Mr. Chairman. 

Thank you, Madam Chair, for appearing this morning. 

In the next hour or so when this hearing ends, if you were to receive a call from the President telling you that he intended to 

nominate you for another term, would you accept? 

Mrs. YELLEN. It is something that hasn’t been an issue so far. 

It has not been something that has come up. But it is certainly 

something that I would discuss with the President, obviously. 

Mr. KUSTOFF. Thank you. 

35 

And yesterday, when I asked you about comments that Jamie 

Dimon made as it relates to assets coming off your books, you have 

stated here today and you have stated in previous reports that the 

Fed does intend to reduce its asset, the balance sheet, assets off the 

balance sheet. 

I would like to ask you first, before I ask you about Mr. Dimon, 

if you could address the timing of when those assets will come off 

the books, the amounts, and procedurally, how that will be done? 

Mrs. YELLEN. Yes. We have tried to set out a relatively complete 

plan. Our assets currently total close to $4.5 trillion, consisting of 

roughly $2.5 trillion of Treasuries and $1.7 trillion of mortgagebacked securities. 

We have said that we intend to shrink our balance sheet and 

particularly the outstanding quantity of reserves in the banking 

system, which are now around $2.2 trillion, in a gradual and predictable way. And we have said that what we intend to do is, once 

we begin this, as we receive principal payments on Treasuries and 

the agency securities and our portfolio, currently, we are reinvesting all of those principal payments, we will begin to diminish 

our reinvestments and only reinvest to the extent that our monthly 

receipt of principal exceeds a cap. 

The cap will initially start at low levels, $6 billion a month for 

Treasuries and $4 billion a month for mortgage-backed securities, 

and over the space of a year will ramp up to $20 billion for mortgage-backed securities and $30 billion for Treasuries. So after a 

year of this process running, the caps will remain in place but bind 

only infrequently when there are unusually large redemptions of 

principal that take place. 

And we have not decided yet on what our longer-run monetary 

policy framework will be and what quantity of reserves that will 

entail our supplying to the banking system. We expect it to be substantially larger than pre-crisis but substantially less than we have 

now. And I would say this process will play out probably to around 

2022 when our balance sheet would probably somewhere in that 

range shrink to normal levels. 

Now, since the crisis, currency has more than doubled in quantity from about $700 billion to $1.5 trillion now. So our balance 

sheet will end up substantially larger than it was before the crisis 

but appreciably lower than it is now. And then over time when this 

process is complete, if currency and circulation continues to grow, 

our balance sheet would likely grow in line with the overall economy. 

Mr. KUSTOFF. I think you probably saw the comments yesterday 

from Jamie Dimon, chairman of JPMorgan Chase, about his concerns about assets being moved off the balance sheet. Do you share 

those concerns? 

Mrs. YELLEN. We have tried to be very methodical about informing the public and the markets about how we are going to do this. 

We have provided essentially complete information. We have not 

heard significant concerns or seen a significant market reaction. 

So we have indicated we expect to begin this if the economy stays 

on track this year. I expect and certainly hope that this will go 

smoothly and it will be a gradual and orderly process, one that we 

36 

will not be revisiting on a regular basis. It is something that we 

will run. It will be understood and play out over time. 

So, obviously, we will watch what the market impacts of this are 

when we put it into effect, but I expect this to play out smoothly. 

It is certainly my hope and expectation. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. Kildee, the vice ranking member of the committee. 

Mr. KILDEE. Thank you, Mr. Chairman. 

And thank you, Chair Yellen. It is good to see you. Glad to have 

you back. 

As you may recall, and I am sure some committee members will 

recall from previous discussions, I sort of consistently raise this 

issue of older industrial cities, the condition of older communities, 

a subset of American cities that are continuing to struggle. 

In fact, I am launching an effort actually beginning today with 

a discussion at 2:00, entitled, ‘‘The Future of America’s Cities and 

Towns,’’ specifically to raise more attention around this question. 

And we have talked in the past about the role that regional 

banks might play in working with these particular cities that face 

both economic challenges, but specifically the cities that face fiscal 

stress. 

The thing that I am concerned about is that when we look at aggregate data, even with relatively slow growth in the economy, the 

assumption is that even a slowly rising tide raises all boats. Well, 

it does not, and we know that. 

And so the question I have that I would like you to comment on 

is what policies might the Fed engage in? And to the extent that 

your mandate regarding employment is also affected by policy that 

we make, what are the sorts of initiatives that you think should 

be engaged, both by the Fed and by Congress, to help deal with 

this real disparity which continues to grow? 

And I will just underscore this point by saying, there is a whole 

set of American cities that are really struggling, both in terms of 

the growing unemployment, increased poverty, lack of opportunity, 

low educational attainment, aging infrastructure, fiscal stress in 

these cities where we are going to see bankruptcies, or at least insolvency. If the States won’t allow those communities to go into 

bankruptcy, they are still insolvent. 

These are communities that have high concentrations of minority 

populations, and you note in your testimony the disparity that 

those particular communities face. And this is not some sort of accident where just by bad luck a bunch of communities are struggling. It is a result of policy. 

And I wonder if you just might comment on what you think the 

Fed can do and what Congress can do to help achieve not only 

growth in terms of employment and wages, but greater equity in 

terms of how those areas of growth might be shared. 

Mrs. YELLEN. So the Federal Reserve, and particularly the Reserve Banks around the country, play an important role in doing 

research on community development and try to understand and 

publicize what kinds of strategies seem to work. Of course, we play 

a role in the Community Reinvestment Act, which financial instituVerDate Nov 24 2008 20:03 May 04, 2018 Jkt 028746 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\28746.TXT TERI
37 

tions are looking to ways—for effective ways of promoting development. 

A number of Reserve Banks have looked specifically at older industrial cities and tried to study, and we have volumes that have 

been published on this. The Boston Fed in particular has been very 

active in trying to understand what strategies have been effective 

in older industrial cities in regenerating activity in dealing with 

these problems. 

And of course they are complex, but there are workforce development programs and collaborations between governments, local governments, State governments, nonprofits, businesses, that have 

been singled out as ones that appear to be promising. But of course 

these are very difficult issues, and Congress and policymakers as 

well as the Fed may have a role. Ours is mainly research and trying to disseminate findings that we have. 

Mr. KILDEE. I appreciate that. And I have in my past work 

worked with the Philadelphia Fed, and Cleveland, on these issues. 

I wonder if you might just in the final 2 seconds that we have 

comment on policy that Congress might enact, basically around 

budgetary policies that we have in place. I am really concerned 

that is an area where we may undermine not only your mandate 

but also our own work, in the 1 second remaining. 

Mrs. YELLEN. I am not going to give you detailed advice on fiscal 

policy. I think focusing on policies that promote productivity 

growth and stronger economic growth should be near the top of 

your list. 

Mr. KILDEE. Thank you, and I appreciate you coming back again. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Tenney. 

Ms. TENNEY. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here today, and also for 

your service to our country. 

I want to touch on exactly the same issues that my colleague just 

touched on, and it sounds like our districts are very similar. I come 

from upstate New York, a very highly agricultural area, but a place 

that has seen better days in terms of our economy. We once had 

many, many community banks. And I might quote a very interesting comment that was made by President Trump in his inaugural address in describing our manufacturing landscape. And he 

described it as, ‘‘rusted-out factories scattered like tombstones 

across the landscape.’’ 

And you can look at our community banks much the same way. 

You can go to just about any corner in any suburban or small city 

area in my district and find community banks closed and overgrown with grass and not operating and empty where they once 

were providing great resource to our community, our small-business community. 

Fifty percent of the small-business loans are made by community 

banks, 77 percent of agricultural loans are made by small community banks and credit unions in our community, and agriculture is 

still the number one industry in New York State, believe it or not. 

And what I see, and very similar, I think this mirrors what has 

been going on in the business community as well as the banking 

38 

community, as you provided in your prior comments to my predecessor speaker, that you think that a lot of government programs 

can help this and taxpayer money may be spent for work revitalization, but I am suggesting possibly the free market, since in New 

York State we spend 4 times more using taxpayer money in socalled ‘‘cronyism’’ on producing jobs and have the worst job production record in the Nation, the highest out-migration of jobs and the 

highest out-migration of people because of our regulatory burden. 

And I thank you for indicating earlier that you do think that 

there are some ways that we can reduce regulations on some of 

these banks, especially the smaller ones who can’t compete because 

of their compliance requirements. We now have the growing cybersecurity issue, where that is becoming very costly and burdensome. 

Obviously, lending to mortgages and to personal loans are very difficult. 

You indicated earlier that you would support the Treasury’s release that certain regulatory relief is in order. Could you tell me 

a couple of those recommendations that you would support in reducing regulations to help our small community banks and credit 

unions? 

Mrs. YELLEN. I am very supportive of trying to reduce the burdens on community banks. We have suggested that there are 

things that Congress could do to help reduce burdens, for example, 

Volcker Rule and incentive compensation. 

Ms. TENNEY. Are you saying you would eliminate the Volcker 

Rule for small community banks? 

Mrs. YELLEN. I wouldn’t apply it to community banks. 

Ms. TENNEY. And where would you make that cutoff? Would it 

be something you would be interested in using overall eliminating 

the Volcker Rule or just—where would you make that arbitrary decision on what makes a small bank? 

Mrs. YELLEN. We could discuss that. I don’t have— 

Ms. TENNEY. So you don’t have an idea in mind where we could 

actually do that? I would love to know. Honestly, I am asking 

your— 

Mrs. YELLEN. I would prefer to get back to you with a suggestion 

on that. 

Ms. TENNEY. Okay. So we don’t have a specific cutoff? 

Mrs. YELLEN. But I think there is a lot that the banking regulators can do on their own. We have finished an EGRPRA review. 

The banking regulators are committed to addressing concerns of 

community banks about the complexity of capital regulations to 

come out with a simplified capital regime. We have recently cut reporting requirements for community banks. We are trying to extend exam cycles and to tailor the work that we do so more of it 

is done offsite in ways that are less burdensome to community 

banks and to risk focus our supervision so that we are focusing in 

our exams on the areas that are really of greatest risk. So we have 

a long list of suggestions coming out of the EGRPRA review that 

we will be working on. 

Ms. TENNEY. Could you tell me what—so you indicated that 

there were some—earlier, you testified that these are some of the 

ones that you would support. Which ones wouldn’t you support that 

are recommended by Treasury, as you indicated? 

39 

Mrs. YELLEN. I don’t have that list before me. Let me say in general that is an area of the report that we are quite supportive of. 

Ms. TENNEY. But definitely the Volcker Rule, at some point you 

would like to eliminate that especially regarding community 

banks? 

Mrs. YELLEN. Yes. 

Ms. TENNEY. Can you give me an estimate about where the capitalization requirement would be eliminated? 

Mrs. YELLEN. What we would try to do is simplify requirements 

for things like commercial real estate, high volatility commercial 

real estate that banks have—community banks have found very 

complex or tax-deferred assets or whether capital instruments that 

have resulted in complexity. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty. 

Mrs. BEATTY. Thank you, Mr. Chairman and Ranking Member 

Waters. 

And thank you, Chair Yellen. Let me just first take a point of 

privilege to thank you for all of your work and tell you what an 

honor it is for me to have been in Congress at the time that I could 

sit here and ask questions of you. 

And secondly, you will hear throughout all of our hearings colleagues oftentimes referencing that letters were written and 30 

days have gone by, or months, or they did not receive an answer. 

I want, Mr. Chairman and Ranking Member Waters, to state for 

the record that every single letter I addressed to you, I got a response. And not only did I get a response, I got a note or something 

attached with it from a staff person, and one I believe was actually 

your thanks. 

So I think it is important because so often we criticize those. And 

I support colleagues on either side when someone does not respond 

to us. So I wanted to say thank you. 

I am going to be consistent, but I am going to use some words 

I had not intended to use, but after my colleague from New York, 

Congresswoman Tenney, used the words, ‘‘finding common ground.’’ 

I want to thank her for that, and I am going to start with common 

ground. 

I think it is important when you represent a subset or you have 

a background, which we hear from real estate to small business to 

legal to housing or bankers, that you should use that expertise. 

Well, what I have is something that is oftentimes not included in 

the subset. While, yes, I am a small-business owner, I understand 

finance, I have been on a bank board, what is important to me is 

when we have inequalities when we are talking about economic development and monetary growth and we don’t count ethnicity and 

race because it is a subset. 

And while I appreciate your comments on page 1 of your testimony when you talk about the jobless rates have decreased, but because we know there is still so much disparity when we get to unemployment with people who look like me. So I have to be that 

voice for Black people and for minorities who get caught in the gap. 

So with that, I am very afraid, because I know when we look at 

the economy and growth, if 22 million people are going to lose their 

40 

healthcare, if we are going to cut programs where people then will 

have to or won’t have the money to pay for them, I am nervous. 

Now, with that said, I serve on the Financial and Economic Literacy Caucus. It is a Democrat and Republican. And as we are 

speaking now, I am being appointed to the Congressional Black 

Caucus Economic Development and Wealth Creation task force as 

co-chair. 

You have stated that income equality is a long-term risk to our 

economy. We cannot talk about income equality without looking at 

the disparities and the discrepancies in household wealth among 

African Americans and minorities. 

So I would like to say that recessions like the one we have just 

had—and there is a chart on the board, and I think it speaks for 

itself—that led to African Americans losing 52 percent of their 

wealth while White households only lost about 16 percent of their 

wealth, I am concerned that rising income equality will further exacerbate the problems for minorities with historically lower household wealth and higher unemployment. 

Can you explain to this committee why income inequality is a 

long-term threat to the United States economy and who has the 

power to help us fix this? 

Mrs. YELLEN. I am very concerned about inequality in income 

and wealth. I think Americans need to feel that this system, our 

economic system, is one where rewards come to those who work 

hard and play by the rules. And when some groups do disproportionately well and others seem to be lagging behind, as has been 

the case, there is a sense of its being a very unfair system. 

Worse, to the extent that resources are important in assuring intergenerational mobility, that parents want to make sure that their 

children have access to the opportunities and ability to gain education— 

Mrs. BEATTY. Thank you. I going to interrupt you to yield my 

time back on opportunities. Thank you, because we introduced the 

Beatty rule after the Rooney rule, and now we have a Black man 

for the first time, Chairman Bostic out of Atlanta, who is on the 

National Federal Reserve Board. 

Thank you, and I yield back. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Indiana, Mr. Hollingsworth. 

Mr. HOLLINGSWORTH. It is time to take a deep breath. You have 

reached the bottom of the rank on our side of the aisle, a mere private and freshman. 

So I wanted to touch on something that my colleague Ms. Tenney 

had talked about in the Treasury report and kind of better understand some of those recommendations that you might agree with 

and disagree with as well. 

I went through the report and kind of pulled out some of the 

ones that I think are most pertinent to your role in the Federal Reserve generally, either from a regulatory standpoint or with regard 

to monetary policy, and just thought I would ask very specifically, 

kind of agree, disagree. And I know there may be some follow-up 

after that, but you have to remember, I got probably a C-minus 

41 

and probably deserved worse in economics, so mainly focus on the 

agree and disagree. 

Do you agree or disagree that there should be expanded treatment of certain qualifying instruments as HQLA, including highgrade municipal bonds as level 2B liquid assets, and improvements 

to the degree of conservatism and cash flow assumptions incorporated into the LCR to more fully reflect banks’ historical experience with calculation methodologies? That is a long-winded one. 

Take a deep breath. 

Mrs. YELLEN. So let me see. On the first part of it, I think the 

Fed has gone further than the other regulators in including the 

more liquid municipal securities as level 2B assets, and so we are 

supportive of that. 

Mr. HOLLINGSWORTH. Marvelous. 

Second one, do you agree or disagree that U.S. rules implementing international standards should be revisited, including the 

G-SIB risk-based surcharge, including the short-term wholesale 

funding component? 

Mrs. YELLEN. We recently finalized that rule, and I participated 

in that review and I regard that as appropriate. And I think the 

G-SIB surcharges are at a level that I think is justifiable given 

the— 

Mr. HOLLINGSWORTH. What about the mandatory minimum debt 

ratio, including the Fed’s TLAC minimum debt rule? 

Mrs. YELLEN. I believe that is important as well to ensure that 

systemically important firms can be resolved. 

Mr. HOLLINGSWORTH. Disagree with revisiting that. 

And the calibration of the eSLR for G-SIBS? 

Mrs. YELLEN. We discussed that earlier in connection with custody banks, and it is something I think we should look at. It may 

be having an unintended consequence. 

Mr. HOLLINGSWORTH. So that we might agree with. 

Do you agree or disagree with the efforts to finalize remaining 

elements of the international reforms of the Basel Committee, including establishing a global risk-based capital for it to promote a 

more level playing field for U.S. firms competing internationally? 

Mrs. YELLEN. I would like to see Basel III finalized. Our banking 

organizations are operating with very high capital standards. 

Mr. HOLLINGSWORTH. Correct. 

Mrs. YELLEN. And this is mainly a matter of ensuring that other 

countries put into place appropriate capital regulation so that we 

have a level playing field. So, yes, I would like to see that happen. 

Mr. HOLLINGSWORTH. Perfect. So agree with that. 

In the final implementation-slash-finalization of the Basel III 

standard, would you exempt community banks from this? Would 

you exempt them from the risk-based capital regime that is promoted by Basel III? 

Mrs. YELLEN. I am supportive of developing a simplified capital 

regime. 

Mr. HOLLINGSWORTH. For community banks specifically? 

Mrs. YELLEN. But to the extent that community banks were affected by Basel III, I am supportive of that. 

Mr. HOLLINGSWORTH. Okay. Would you agree or disagree with 

raising the asset threshold of the Fed small bank holding company 

42 

and savings and loan holding company policy to $2 billion from the 

current $1 billion? 

Mrs. YELLEN. I think that is something we could look at. 

Mr. HOLLINGSWORTH. Great. 

And then the last one of these that I had was, do you agree or 

disagree that the Fed should carefully consider the implications on 

U.S. credit intermediation and systemic risk from implementation 

in the United States of a revised standardized approach to credit 

risk under Basel III capital framework? 

Mrs. YELLEN. That was a mouthful. 

Mr. HOLLINGSWORTH. Indeed. 

Mrs. YELLEN. Excuse me? 

Mr. HOLLINGSWORTH. Indeed, yes. 

Mrs. YELLEN. I need to get back to you on that. 

Mr. HOLLINGSWORTH. Okay. Thank you so much. I really appreciate you taking some time and coming to see us again. I really enjoyed your first testimony and this one as well. 

Mrs. YELLEN. Thank you. 

Mr. HOLLINGSWORTH. With that, I yield back, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck. 

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

Waters. 

Chair Yellen, a couple of years ago at the Humphrey-Hawkins 

hearing I asked you, when does America get a raise? I asserted 

America deserves a raise, fueled in part on my behalf, because we 

have been through 30 years of fairly stagnant wage growth with 

the exception of some warmth, as it were, in the late 1990s. 

I respect you because of your prowess as an economist. I admire 

you because of what I perceive to be your commitment to some values, including a concern for how the Fed’s policies actually impact 

Americans, and that includes in this area of wage growth. 

I believed it 2 years ago, I believe it now, 2.5 percent nominal 

growth, while better than a few years ago, does not render Americans feeling as though they are getting ahead, let alone staying 

even. 

So given your commitment or my perception of your commitment 

to the average American, if such a thing exists, I read with great 

interest in the Monetary Policy Report the table on page 42, which 

essentially indicates that you project a definition of full employment over the long term of between 4.5 and 4.8 percent if you get 

monetary policy right, 4.5 to 4.8 percent, and yet, an indication 

that 2 years hence, the unemployment rate will be 3.8 to 4.5 percent. 

It was a little hard for me to read that as other than your trying 

to or willing to let the economy run a little warm, presumably because maybe we can get wage growth above 2.5 percent and maybe 

closer to historic recovery rates of 4.0 percent. 

Mrs. YELLEN. Inflation is running over the last 12 months at 1.4 

percent below our 2 percent objective. And we have had 5 years or 

more of inflation running under our 2 percent objective. That is a 

commitment that we have, and it is a symmetric objective. And I 

think allowing the labor market, allowing unemployment to decline 

43 

to the kinds of levels that you cited looks to be consistent with 

achieving our inflation objective. 

Mr. HECK. And would yield higher wage growth than 2.5 percent, 

you would expect? 

Mrs. YELLEN. I think wage growth seems somewhat low given 

our 2 percent objective, but it is very important to remember that 

one of the things that is holding down wage growth in real terms 

is very low productivity growth over the last— 

Mr. HECK. I don’t want to go down that rabbit hole. We did that 

last time. 

Mrs. YELLEN. Without that changing, that really limits the long 

run prospects for workers. 

Mr. HECK. I get that. And I get the controversy surrounding our 

measure of productivity of late. The fact remains, America needs 

a pay raise. 

I take a fairly straightforward view of this. It seems to me—the 

economy—if we fall into a recession, the Fed cuts interest rates, 

and that increases availability and demand for loans, for the purchase of homes, for the purchase of automobiles, which has a stimulative effect on the economy. 

It didn’t happen this time with respect to housing, necessarily. 

It didn’t respond. It did in autos, in fact, fairly robust until recently. And now auto sales are going down. There are layoffs, literally, in the industry. 

You have described the monetary policy approach you are taking 

as still accommodative or stimulative, but that is not occurring in 

autos, especially given what I said earlier about I genuinely believe 

you care about how average Americans are impacted. 

Homes and autos are the two biggest purchases that most Americans ever make. It didn’t work at all through the recession in 

homes, we are stuck back at 1994 construction levels, and it is now 

not working on autos. Are you concerned? 

Mrs. YELLEN. Mortgage rates are a little bit off their lows, although they are down from last year. 

Look, I think you have to look at the bottom line, which is this 

year we have had 180,000 jobs created a month, only slightly lower 

than last year, 190,000 or so. The unemployment rate continues to 

decline. The labor market continues to strengthen. 

And that means that even if auto sales are off their highs, that 

we have strong enough demand through consumer spending, a recovering global economy, a pickup in spending on plant and equipment, that it is supporting continued job creation at rates greater 

than the labor force growth. 

Mr. HECK. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Oklahoma, Mr. 

Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman. 

Chair Yellen, before asking you anything, I would like to express 

concerns about the treatment of centrally cleared customer margin 

under the supplemental leverage ratio. I am concerned, as others 

are, that including this margin in the denominator of the ratio is 

artificially reducing the number of clearing options available to customers. 

44 

As you may be aware, lots of end users in my district use clearinghouses to hedge against risk in both agriculture and energy 

markets. But I am encouraged by the recent Treasury report on 

rate reform suggesting that this margin no longer should be a part 

of the ratio calculation. 

In addition, your colleague, Governor Powell, told the Senate recently that the Fed is reviewing the leverage ratio. And I would 

agree with him that fixing this is critical for the health of the markets, and I look forward to the outcome of this review. 

Madam Chair, I would like to discuss the 2013 leveraged lending 

guidance. In my district, the energy sector is one of the largest employers. As you and everyone else is aware, the energy industry is 

going through a bit of a tough time these days. And now for the 

purposes of leveraged lending guidance, the recent energy downturn means many, if not most, energy companies are qualified as 

distressed industries, meaning the guidance limits the ability of 

those companies to get credit and the loans they need to stay in 

operation and to employ my constituents. 

The guidance also concerns me a bit because of the manner in 

which it was rolled out. The guidance in 2013 and in a series of 

FAQs in 2014—that is not exactly the most clear process—has 

forced institutions to review every loan they made to ensure compliance. The Administration also appears to share my concerns, 

recommending in their recent Treasury report that the guidance be 

revisited. 

Chair Yellen, have you considered retracting the guidance? And 

along with that thought, also have you met with any industries 

that are considered distressed to hear about their difficulties in obtaining credit? 

Mrs. YELLEN. We have put in place the leverage lending guidance I think for a very good reason, which is we were concerned 

about underwriting practices for those kinds of loans and want to 

make sure that lending is safe and sound. 

We had shared national credit exams that resulted in disturbing 

findings about the quality of underwriting of those loans, and I 

think it was appropriate to put such guidance in place. 

If they are having unintended consequences, I will discuss with 

my colleagues looking at that, but believe it was important to have 

put that in place. 

Mr. LUCAS. I very much appreciate that, because the energy sector is not just important to the Third District of Oklahoma, but it 

is important to the entire national economy. And with the technological advances they have adopted where we have now gone from 

in many regions of the country no longer being importers of, for instance, crude oil and natural gas, but exporters, the effect that they 

are having on our overall balance of payments, the potential opportunities there are just incredible. 

And these guidances from 2013 and the FAQs from 2014 seem 

to be causing some real stress out there as they are being interpreted, and your commitment to look at those to try and make sure 

we don’t create unintended consequences—because the number of 

barrels of oil are still in the ground in those proven reserves, the 

number of BCF of natural gas is still there, the technologies that 

have been enhanced and reduce the cost of our production are still 

45 

in place. It is just we have to work our way through a tough time, 

and bearing that in mind, by the Fed and yourself, I very much appreciate that, Chair Yellen. 

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

Chairman HENSARLING. The gentleman yields back. 

The Chair will now recognize the gentleman from Maryland, Mr. 

Delaney. 

Mr. DELANEY. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for your incomparable leadership 

at the Federal Reserve. It is always nice to have you here. And we 

are getting towards the end, so I thought I would ask a question 

and kind of tap into your knowledge as a macro economist and 

think about some of the long-term trends of employment. 

There has been a lot of talk recently about what will happen to 

the future of work and jobs based on technological innovation, automation, machine learning, artificial intelligence, whatever the category may be. And while, historically, innovation has created more 

jobs than it has displaced, it generally does come with a lot of fear 

as to what will happen to the labor market. And maybe that is because we can see the jobs that will be displaced, but we don’t really 

have a good ability to really imagine the jobs that will be created 

by this innovation. 

And this has caused many people to start talking about things 

like universal basic income, where they are kind of talking about 

how there will be no jobs in the future and robots and machine 

learning will displace all the jobs and we are going to have to figure out ways of supporting people. 

To me, that is premature for obvious reasons. Unemployment is 

very low. There are a lot of jobs in society that are being done that 

no one gets paid for, and we should certainly try to figure out how 

to pay those people for what they are doing before we start paying 

people to do nothing. And again, historically, more jobs have been 

created. 

But what are your thoughts on this topic as someone who spends 

a lot of time not only thinking about the macro, but obviously 

someone who cares deeply about employment and its importance to 

people’s dignity and ability to raise their family and earn a living? 

So how is this going to play out, in your opinion? 

Mrs. YELLEN. I don’t have a crystal ball and these are very difficult issues. 

Mr. DELANEY. None of us do. I know. But you are very smart and 

you look at a lot of data, so— 

Mrs. YELLEN. I know technological change has been a tremendously important source of growth and improvement in living 

standards in the United States and around the world, and so it is 

something that we should want to see and foster. But it is disruptive and it can cause considerable harm to groups whose livelihood 

is disrupted by technological change that renders their skills less 

valuable or not at all valuable in the market. 

And I would expect that the kinds of technological changes that 

you describe will continue to change the nature of work, the kinds 

of jobs that will be available, and the skills that will be needed to 

fill those jobs. And to my mind, a very important focus for all of 

us should be on— 

46 

Mr. DELANEY. So what should be the three things we should do 

to prepare? Because I agree with you, it is going to change the nature of work, it will create jobs, it will displace jobs, and people 

need different skills. What would the two or three things you would 

do to best prepare the future to be able to succeed now? 

Mrs. YELLEN. To my mind, education and training are absolutely 

central to the ability of workers to fill the new kinds of jobs that 

will be available and to have the skills. 

When I talk to businesses that are adopting new technologies, 

they tell me it is also creating new kinds of jobs, that they find that 

younger workers, even those with less education, have nevertheless 

been exposed to the kind of training that will enable them to fill 

the kinds of technical jobs that have been created with appropriate 

training. But it is a tremendous challenge for older workers who 

don’t have that kind of training to make adjustments. 

I would look both to ensure that we have appropriate training, 

education, apprenticeship programs, and other things for younger 

people, and also to see what we can do to relieve the burdens on 

older workers who are displaced. 

Mr. DELANEY. So if I could kind of summarize what I think I just 

heard you say, you are not necessarily bearish on the future of jobs 

and work? 

Mrs. YELLEN. Correct. 

Mr. DELANEY. You agree that new jobs will get created to offset 

displaced, probably a net positive? 

Mrs. YELLEN. I believe so. 

Mr. DELANEY. But you are worried that we are not doing enough 

or you think we should do more in reforming education, training, 

apprenticeship programs, et cetera, because the challenges are 

going to be very significant. 

Mrs. YELLEN. That is certainly a key focus for me. 

Mr. DELANEY. Great. Thank you again, Chair Yellen. 

Mrs. YELLEN. Thank you. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here. 

Chair Yellen, the financial sector’s commitment to cybersecurity 

is perhaps better than any other. Unfortunately, many have recently raised concerns that while well intentioned, many regulators 

are starting to require duplicative, conflicting, and improperly calibrated requirements. We want to keep everyone, regulators and industry, moving in the same direction, and that is to achieve stronger cybersecurity. 

Do you believe the efforts by the Treasury Department to coordinate regulatory harmonization of rules and requirements with respect to cybersecurity, do you support those efforts? 

Mrs. YELLEN. I am supportive of those efforts. And we have certainly heard in our own outreach on cybersecurity the importance 

of having uniform standards so that firms are not facing different 

regulatory demands that may be technologically conflicting, and I 

think that is an important goal. 

47 

Mr. HULTGREN. You maybe have answered this enough, but just 

to dig in a little bit more specifically, in its recently released report 

in response to the President’s Executive Order on financial regulation, the Treasury Department called for Federal banking regulators to harmonize cybersecurity regulations using a common lexicon. I wondered if the Federal Reserve is committed to achieving 

this goal? 

Mrs. YELLEN. Yes. 

Mr. HULTGREN. Great. 

During the last appearance that you had before this committee, 

I expressed my concern about the treatment of centrally cleared 

customer margin under the supplemental leverage ratio. The regulatory treatment of customer margin diminishes clearing options 

for customers while forcing them to pay more for these services. 

I applaud the Treasury Department’s recommendation in its core 

principles report to grant an offset for a centrally cleared customer 

margin under the leveraged ratio. An offset would have a relatively 

insignificant impact on bank capital while driving down costs for 

clearing services. 

I understand British regulators have already granted an offset 

for client margins in the U.K., and the EU is expected to offer European banks an offset as well for the sake of clearing customers 

in the United States. I hope the Federal Reserve will follow suit 

and work with its fellow regulators to adopt an offset for U.S. 

firms. 

Mrs. YELLEN. I think the supplementary leverage ratio may be 

having an unintended consequences, and it is something that we 

should look at very carefully, and I am committed to doing that. 

Mr. HULTGREN. Thank you. 

Chair Yellen, on a similar note, on June 22nd, Federal Reserve 

Governor Powell testified before the Senate Banking Committee 

that, ‘‘We believe that the leverage ratio is an important backstop 

to the risk-based capital framework, but that it is important to get 

the relative calibration of the leverage ratio and the risk-based capital requirements right. Doing so is critical to mitigating any perverse incentives and preventing distortions in money markets and 

other safe asset markets. Changes along these lines could also address concerns of custody banks that their business model is disproportionately affected by the leverage ratio.’’ 

And on April 4th, former Governor Tarullo gave a speech where 

he stated, ‘‘As to the impact of the 2 percent enhanced supplementary leverage ratio, our experience leads me to believe that it 

may be worth changing to account for the quite different business 

operations of the G-SIBS, particularly those in custody business.’’ 

He further said, ‘‘In practical terms, the asymmetry is most significant for the two banks that are dominantly custodial and transactional in nature rather than lending and trading firms. These 

banks have had the lowest risk-based surcharges of the eight GSIBS, currently 1.5 percent, but their leverage surcharge is 2 percent. This is especially problematic for their operations, since they 

prudently reinvest customer deposits into safe and liquid assets.’’ 

Furthermore, the Treasury Department’s June 2017 report 

states, ‘‘Exceptions from the denominator of total exposure should 

include cash on deposit with central banks.’’ 

48 

I wonder, do you agree with this assessment, and when could we 

expect the Fed to take action to address these concerns? 

Mrs. YELLEN. I agree with the comments of my colleagues that 

the supplementary leverage ratio may be creating this set of problems that you addressed. You discussed that there are different 

ways of dealing with it. I am committed to looking at it and trying 

to recalibrate it so that it avoids these adverse consequences. 

Mr. HULTGREN. I know it is going to be difficult to say, but do 

you expect that the Fed will take action before January 2018 when 

the new enhanced supplementary leverage ratio goes into effect? 

Mrs. YELLEN. Let me get back to you on the timetable. 

Mr. HULTGREN. Great. Thanks again, Chair Yellen. I appreciate 

your work, and I appreciate you being here today. 

I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair wishes to advise all Members that the Chair intends 

to release the witness at 1:00, and anticipates clearing four more 

Members from the queue. 

The Chair now recognizes the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking 

member as well. 

And, Chair Yellen, I thank you for appearing today. 

I am looking at currently an article from The Washington Post 

dated May 17, 2017. It is styled, ‘‘The Nation’s Biggest Banks Have 

a Common Gripe. They Have Too Much Money.’’ I would just like 

to read some of the relevant portions. 

Banks are sitting on a $131 billion in excess capital, according 

to a March research report by Goldman Sachs. If capital requirements are lowered, banks can return the money to shareholders in 

the form of dividends, boosting the payouts perhaps by 45 percent 

in 2018. This is according to the Goldman Sachs report. 

Hampering the industry’s arguments has been record profits. Despite higher capital requirements, the country’s banking industry 

reported more than $171 billion in profit last year, and the volume 

of bank loans has increased significantly since the financial crisis. 

So the question I have, Madam Chair, is this: Should we change 

the capital requirements simply because we can have the opportunity to return more dividends, boost more payouts? Is that a good 

reason to change capital requirements? 

Mrs. YELLEN. I strongly believe that we should have strong capital requirements for the safety and soundness of the banking system and the financial sector more broadly. 

I am comfortable with the level of risk-based capital requirements that are in place at this point, and especially the most systemic firms should have the largest capital buffers. 

So once those capital buffers are in place, the Federal Reserve 

has no objection to firms distributing profits as dividends to shareholders or in the form of share repurchases. 

This year in our stress tests we approved the plans of almost all 

of the firms involved to return capital of their shareholders, but 

that is because we are comfortable that they have built the capital 

buffers that are necessary for a safe and sound banking system and 

comfortable that they can go on, even under severe stress, meeting 

the credit needs of the U.S. economy. 

49 

Mr. GREEN. Thank you. 

Let me move to another topic, because this is quite important 

and I don’t want to neglect it. 

Thank you for your response to the letter that I and some 36 colleagues sent you concerning the African Americans, Latinos, and 

the fact that the unemployment rate for African Americans and 

Latinos always seem to lag behind Anglos. 

I am mentioning this to you now because in your letter you do 

cite some things that may be beneficial in terms of some studies 

that will take place. But I do want to call one thing to your attention, and it has to do with something that these studies probably 

won’t address, and it is just the issue of race itself, just race itself, 

plain old invidious discrimination. 

We have a difficult time legitimizing invidious discrimination as 

a cause for unemployment being higher among certain groups. We 

know that it exists, but we can’t get the actual empirical evidence 

to legitimize the existence. 

Can the Fed, aside from these additional things that you will be 

doing, and I salute and applaud you for doing them, but can the 

Fed endeavor to engage in some sort of process that will allow us 

to acquire this empirical evidence? Because until we can present 

that, we still have persons who are in denial. Your response, 

please? 

Mrs. YELLEN. It is certainly something that we can try to get at, 

although perhaps not definitively in studies that we do. There are 

studies that I am aware of, experimental-type studies, that do pretty clearly document what you are talking about, that economists 

have produced. 

Mr. GREEN. Could we explore the possibility of allowing testing 

to take place within banks? That is something that we have difficulty acquiring, testing empirical evidence? 

Mrs. YELLEN. I need to look into that. I am not— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Good afternoon, Chair Yellen. 

Chair Yellen, do you subscribe to the theory that monetary policy 

can work better if it is independent of politics? 

Mrs. YELLEN. Yes, I do. 

Mr. PITTENGER. In that light, does your opinion about monetary 

policy independence also extend to independence from distributional politics? 

Mrs. YELLEN. Distributional politics? I think the Fed should be 

nonpolitical. 

Mr. PITTENGER. Yes, ma’am. 

I have reviewed some of your speeches since last March. I didn’t 

see a lot relative to monetary policy. I did see one speech where 

you appeared before a community development research conference, and it was a conference on creating ‘‘a just economy.’’ And 

the conference that you also spoke at on women at Brown University, the monetary policy was mentioned only one time in that 

speech, and that reference was in context of explaining why moneVerDate Nov 24 2008 20:03 May 04, 2018 Jkt 028746 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\28746.TXT TERI
50 

tary policy is poorly equipped to address ‘‘pockets of persistently 

high unemployment.’’ 

It just appears that these speeches represent efforts to address 

social issues in a way that establishes the limits of sound monetary 

policy. 

Do you also worry that these in the same way it exposes monetary policy to increased risk from distributional politics? 

Mrs. YELLEN. Let me say that it is my core responsibility to 

speak to the American people in a wide range of forums about the 

conduct of monetary policy in the economy, and I would disagree 

with your characterization of my presentations. 

In March, I gave an important speech in Chicago on monetary 

policy. I have had two press conferences after the March and June 

meetings. I recently gave remarks in London bearing on the U.S. 

economy and monetary policy. And if you go back a little longer to 

January, you will see many speeches to many different audiences 

at many levels as well as testimony pertaining to monetary— 

Mr. PITTENGER. Yes, ma’am, I was just looking at the topics of 

those—to the two speeches, at Brown University and at this— 

Mrs. YELLEN. Let me just say that the Federal Reserve has other 

responsibilities, and in particular we have— 

Mr. PITTENGER. Well, you understand my— 

Mrs. YELLEN. —extensive programs in community development 

that are related to what CRA— 

Mr. PITTENGER. It was just the appearance that they were political. 

Mrs. YELLEN. I spoke at a conference— 

Mr. PITTENGER. Can I go on? 

Mrs. YELLEN. —relating to community development that was run 

by the Board of Governors, which is entirely appropriate. 

Mr. PITTENGER. Reclaiming my time, if you don’t mind. I think 

I made my point that those particular ones were political. 

Paul Kupiec, a resident scholar at the American Enterprise Institute, stated that, ‘‘Supervision and regulation are now so intrusive 

that it is not a stretch to say that the largest financial institutions 

are being run by the Fed.’’ 

Do you agree with that assessment? 

Mrs. YELLEN. No, I don’t. 

Mr. PITTENGER. Well, do you believe it is appropriate for the Federal Reserve to engage in specific firm risk management by influencing corporate governance structures across any industry? 

Mrs. YELLEN. I do believe it is appropriate— 

Mr. PITTENGER. So why—then why do you— 

Mrs. YELLEN. —for the Fed to ensure that there is sound corporate governance in major financial institutions. And we saw what 

happens when that is not the case. That was part of how we ended 

up with the financial crisis. 

Mr. PITTENGER. So you believe that we needed more government 

intrusion and more government management and that would have 

salvaged the problem? 

Mrs. YELLEN. I believe that we should ensure that— 

Mr. PITTENGER. You don’t believe that the government itself 

played a direct role in the financial collapse that we had in terms 

51 

of forcing financial institutions to make loans to people who weren’t 

even creditworthy? 

Mrs. YELLEN. I don’t believe that was the main cause of the financial crisis. 

Mr. PITTENGER. Many of us disagree with that. 

Chair Yellen, do you believe that the Federal Reserve has the 

ability and the authority to usurp or preempt State corporate law? 

Mrs. YELLEN. I am not sure what you have in mind there, and 

I am not going to give a simple yes-or-no answer to the question— 

Mr. PITTENGER. Are you aware that companies that are incorporated in each State are subject to that State’s corporate law requirements, including the fiduciary duties and obligations imposed 

upon the directors of a company’s board? 

Mrs. YELLEN. Okay. 

Mr. PITTENGER. Do you believe that you have the ability, then, 

to usurp the laws? 

Mrs. YELLEN. We are not usurping the laws. We are making sure 

that companies operate in a safe and sound fashion and that their 

boards of directors— 

Mr. PITTENGER. If the State has laws relative to those corporate 

boards, do you believe that you have the authority to usurp those 

laws? 

Mrs. YELLEN. Congress has passed laws that place obligations on 

us to supervise these financial institutions. 

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

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Arkansas, Mr. 

Hill. 

Mr. HILL. I thank the chairman. 

And, Chair Yellen, it is nice to see you here and looking fit and 

rested from all your travels. 

Mrs. YELLEN. Thank you. 

Mr. HILL. Thanks for your perseverance in front of us. 

We have talked before about monetary policy, and I haven’t been 

a fan as a banker before I was in Congress of going beyond the 

Fed’s initial interest rate policies. I felt like QE1, 2, and 3 didn’t 

produce the GDP effects or the job increases that perhaps Fed policymakers at the time thought. And I have also been concerned 

that, as we go back and look backwards now since 2008, that Fed 

officials really not have—have always been a little reluctant to talk 

about some of the unintended consequences of that, such as distorting the price mechanism in our economy, depressing cap rates 

for commercial real estate, or running up equity prices, which I 

think are a result when you have that—we have flooded from QE2 

into our economy affecting price earnings, multiples, et cetera. 

But, today, I haven’t heard any discussion about—we talked 

about the balance sheet. We talked about setting interest rates, but 

I want to talk a little bit about the money multiplier aspect in your 

toolbox. We have flooded the system with reserves, but we have a 

money multiplier that is down at Eccles rates, 1930s type rates. 

And I guess my view is, shouldn’t you lower the rate of interest 

paid on banks on excess reserves as you are raising rates and planning this very thoughtful, careful shrinkage of the Fed’s balance 

sheet? 

52 

Mrs. YELLEN. The interest we pay on excess reserves is our key 

tool to adjust the general level of short-term interest rates in the 

economy, and the Committee has deemed it appropriate to gradually raise the level of short-term rates as the labor market has 

strengthened and we have come closer to achieving our objectives. 

So, no, I wouldn’t agree that we shouldn’t be using that tool to normalize the general level of short rates in the economy. 

Mr. HILL. The rates on excess reserves. 

Mrs. YELLEN. That is our key tool that we use to encourage the— 

Mr. HILL. How do we get the money multiplier to increase then? 

Mrs. YELLEN. I guess I don’t look at the impact of monetary policy on the economy through the money multiplier. I think the complex— 

Mr. HILL. What do you think accounts for it being at 1930s levels 

when we have advanced reserves into the system as mightily as we 

have over the last 8 years? 

Mrs. YELLEN. We had a highly depressed economy where interest 

rates fell close to zero and banks were willing to hold onto excess 

reserves given the shortage. 

Mr. HILL. But my colleagues on the other side say that the lending business is booming and the economy is growing successfully, 

so why has the multiplier not changed? Why is the velocity still low 

like that, in your view? That is something we measure—that is 

how we measure successful Fed policy by looking at that, so I’m 

just curious. 

Mrs. YELLEN. I wouldn’t agree at all that we measure the success 

of Fed policy by looking at the money multiplier. I think the quantity of money and its relationship to GDP has been extremely unstable and not a good way of running monetary policy. I am not 

aware of any central bank that would any longer approach it that 

way. 

Mr. HILL. And why is that? Why is it, though, that it was, between World War II and 2008, something that people looked at and 

it was talked about as a way that shows that we have a healthy 

investment and lending market and growing economy, but in the 

1930s and since 2008, we are just satisfied with it that it is low 

and we don’t say it is important anymore? Can you put some perspective on that? 

Mrs. YELLEN. Both in the Great Depression and in our more recent Great Recession we have had a situation where short-term 

rates fell essentially to zero percent, and pushing out additional reserves was essentially what they said during the Depression was 

like pushing on a string, and we encountered—or a so-called liquidity trap, and the relationship then between the quantity of reserves 

and nominal income begins to break down in those situations. And 

we faced a similar situation as to what we had during the Great 

Depression. 

Mr. HILL. My time has expired, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The next Member will be the last Member we call upon. I now 

recognize the gentleman from Ohio, Mr. Davidson for 5 minutes. 

Mr. DAVIDSON. Thank you, Mr. Chairman. 

Chair Yellen, thank you for being here today. 

53 

I really appreciate your testimony, and thanks for the work you 

and the team at the Federal Reserve do to get our monetary policy 

right. 

Mrs. YELLEN. Thank you. 

Mr. DAVIDSON. I want to understand that a little bit. You talked 

about your policy is neutral to accommodative, but what you have 

started to do is at least talk about applying the brakes. You have 

raised rates. You’re talking about how to frankly do—you talked 

just briefly about the supply of money being a little unstable. Well, 

$4 trillion of it, we know where it went, but it did create some velocity in the money supply that is nontypical. So is what you are 

doing now essentially gently applying the brakes if you feel like the 

economy is doing it— 

Mrs. YELLEN. Yes, I think that is a fair characterization. We 

have had our foot on the gas. We have been in an accommodative 

stance, and as we have come closer to achieving our objectives, we 

have taken our foot off the gas to some extent so that we can sustain a strong recovery, but we are moving towards something closer 

to let’s call it a neutral stance that keeps the economy operating 

on an even keel. 

Mr. DAVIDSON. Historically, applying the brakes gently or at the 

right time has been a challenge, just like it has been a challenge 

to hit the gas. I guess everyone always feels optimistic about their 

course of action at the time. Generally, people say bubbles have 

been one of the things that have caused this miscalculation. What 

bubbles do you see out there in the macro economy right now? 

Mrs. YELLEN. I try not to opine on the level of asset prices, although our report notes that valuations generally are toward the 

top of their historical ranges. What I try to think about is, if there 

are adjustments in asset prices, what consequences would they 

have on our financial system and our economy, and in that context, 

look for evidence that surging asset prices might be leading to imprudent borrowing, a buildup in leverage in the economy that 

would be dangerous if the prices were to unwind. And we are not 

seeing that. So we sort of judge financial stability risks at this 

point as moderate. 

Mr. DAVIDSON. So you have laid out a good plan, and I don’t really want to go over the whole thing. You have talked a lot about it, 

but I am particularly concerned about the role that you kind of allude to here, as we start to see instability, you kind of shift hats 

from monetary policy to regulator. And in the regulation you talked 

about really a pretty heavy hand in the sense of steering companies 

on policies. The Financial Times has highlighted cases where you 

have even, as regulator, addressed HR practices up to the point of 

advising terminating or replacing certain employees in companies. 

And at that point, I guess, how critical is it that our agent of monetary policy also serve as a regulator? I am not saying that regulation doesn’t need to be done. How important is it that our central 

banker does that? 

Mrs. YELLEN. I would say, especially in the aftermath of the financial crisis, we have found that our understanding of the economy, of the financial system, and of appropriate monetary policy 

has been greatly informed by the role we play in supervision. It has 

helped us understand risks to financial stability, pressures in parVerDate Nov 24 2008 20:03 May 04, 2018 Jkt 028746 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\28746.TXT TERI
54 

ticular portions of credit markets, and there has been a close integration between what we learn in bank supervision, financial stability, and monetary policy. 

Mr. DAVIDSON. And most closely on the mortgage-backed securities markets, where the Fed developed a strong affinity for them 

and accumulated quite a lot of them, which gets to the monetary 

supply. 

So, at this point, you are looking at some of the asset purchases 

that you have made, really directly interacting with a key part of 

the market, putting those on your balance sheet, unwinding them. 

You have talked about a plan to do it. You have talked about a 

change of plan to do it. What do you see as the risk to the monetary supply? And you talk about, not to say it is a bubble, but 

clearly there is going to be an effect on asset prices as you try get 

that right. 

Mrs. YELLEN. We do believe that our asset purchase programs 

were effective in pushing down longer-term rates and the so-called 

term premium embodied in longer-term rates, and very gradually 

over time, as we shrink our balance sheet, I would expect some 

modest but, over a number of years, upward pressure on longer 

term rates. It is not something very substantial, but it is something 

that we have taken into account in deciding on what is the appropriate path for the Federal funds rate. 

Mr. DAVIDSON. Thank you, Chair Yellen. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

And I want to thank our witness, Chair Yellen, for her testimony 

today. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place her responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:11 p.m., the hearing was adjourned.] 

(55) 

A P P E N D I X 

July 12, 2017 

56 


28746.001

For release at 

8:30a.m. EDT 

July 12.2017 

Statement by 

Janet L Yellen 

Chair 

Board of Govemors ofthe Federal Reserve System 

before the 

Committee on Financial Services 

U.S. House of Representatives 

July 12. 2017 
57 


28746.002

Chainnan Hensarling, Ranking Member Waters, and other members of the Committee, l 

am pleased to present the Federal Reserve's semiannuallvfonelary Policy Report to the Congress. 

In my remarks today l will briefly discuss the current economic situation and outlook before 

turning to monetary policy. 

Current Economic Situation and Outlook 

Since my appearance before this committee in February, the labor market has continued 

to strengthen. Job gains have averaged 180,000 per month so far this year, down only slightly 

from the average in 2016 and still well above the pace we estimate would be sufficient, on 

average, to provide jobs for new entrants to the labor force. Indeed, the unemployment rate has 

fallen about l/4 percentage point since the start of the year, and, at 4.4 percent in June, is 

5-1/2 percentage points below its peak in 2010 and modestly below the median of Federal Open 

Market Committee (FOMC) participants' assessments of its longer-run norrnalleveL The labor 

force participation rate has changed little, on net, this year--another indication of improving 

conditions in the jobs market, given the demographically driven dmvmvard trend in this series. 

A broader measure of labor market slack that includes workers marginally attached to the labor 

force and those working part time who would full-time work has also fallen this year and 

is now nearly as low as it was just before the recession. It is also encouraging that jobless rates 

have continued to decline for most major demographic groups, including for African Americans 

and Hispanics. However, as he fore the recession, unemployment rates for these minority groups 

remain higher than for the nation overall. 

Meanwhile, the economy appears to have grown at a moderate pace, on average. so far 

this year. Although inflation-adjusted gross domestic product is currently estimated to have 

increased at an annual rate of only l-l /2 percent in the first quarter, more-recent indicators 
58 


28746.003

- 2-

suggest that growth rebounded in the second quarter. In particular, growth in household 

spending, which was weak earlier in the year, has up in recent months and continues to be 

supported by job gains, rising household wealth, and favorable consumer sentiment. In addition, 

business fixed investment has turned up this year after having been soft last year. And a 

stren1,rthening in economic growth abroad has provided important support for 1J.S. manufacturing 

production and exports. The housing market has continued to recover gradually, aided by the 

ongoing improvement in the labor market and mortgage rates that, although up somewhat from a 

year ago. remain at relatively low levels. 

With regard to inflation. overall consumer prices, as measured by the price index for 

personal consumption expenditures, increased 1.4 percent over the 12 months ending in May, up 

from about 1 percent a year ago bnt a little lower than earlier this year. Core inflation. which 

excludes energy and food prices, has also edged down in recent months and was !.4 percent in 

May, a couple of tenths below the year-earlier reading. It appears that the recent lower readings 

on inflation arc partly the result of a few unusual reductions in certain categories of prices; these 

reductions will hold 12-month inflation down until they drop out of the calculation. 

Nevertheless, with inflation continuing to nm below the Committee's 2 percent longer-run 

objective. the FOMC indicated in its June statement that it intends to carefully monitor actual 

and expected progress toward our symmetric inflation goal. 

Looking ahead, my colleagues on the FOMC and I expect that, with further gradual 

adjustments in the stance of monetary policy, the economy will continue to expand at a moderate 

pace over the next couple of years, with the job market strengthening somewhat further and 

inflation rising to 2 percent. This judgment rellects our view that monetary policy remains 

accommodative. Ongoingjob gains should continue to support the growth of incomes and, 
59 


28746.004

therefore, consumer spending: global economic growth should support further gains in U.S. 

exports; and favorable financial conditions, coupled with the prospect of continued gains in 

domestic and foreign spending and the ongoing recovery in drilling activity, should continue to 

suppott business investment. These developments should increase resource utilization somewhat 

further. thereby fostering a stronger pace of wage and price increases. 

Of course, considerable uncertainty always attends the economic outlook. There is, for 

example. uncertainty about when--and how much--inflation will respond to tightening resource 

utilization. Possible changes in fiscal and other government policies here in the United States 

represent another source of uncertainty. In addition, although the prospects for the global 

economy appear to have improved somewhat this year. a number of our trading partners continue 

to confront economic challenges. At present, l see roughly equal odds that the U.S. economy's 

pcrfonnance will be somewhat stronger or somewhat less strong than we cmTently project. 

Monetary l'oliey 

! will now turn to monetary policy. The FOMC seeks to foster maximum employment 

and price stability, as required by law. Over the tlrst half of 2017, the Committee continued to 

gradually reduce the amount of monetary policy accommodation. the FOMC raised 

the target range for the federal funds rate by l/4 percentage point at both its March and June 

meetings, bringing the target to a range of I to 1-l/4 percent. ln doing so, the Committee 

recognized the considerable progress the economy had made--and is expected to continue to 

make--toward our mandated objectives. 

The Committee continues to expect that the evolution of the economy will warrant 

gradual increases in the federal funds rate over time to achieve and maintain maximum 

employment and stable prices. That expectation is based on our view that the federal funds rate 
60 


28746.005

-4-

remains somewhat below its neutral level--that is, the level of the federal funds rate that is 

neither expansionary nor contractionary and keeps the economy operating on an even keel. 

Because the neutral rate is currently quite low by historical standards, the federal funds rate 

would not have to rise all that much further to get to a neutral policy stance. But because we also 

anticipate that the factors that are currently holding down the neutral rate will diminish 

somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few 

years to sustain the economic expansion and return inflation to our 2 percent goal. Even so, the 

Committee continues to anticipate that the longer-run neutral level of the federal funds rate is 

likely to remain below levels that prevailed in previous decades. 

As l noted earlier, the economic outlook is always suhject to considerah!e uncertainty. 

and monetary policy is not on a preset course. FOMC participants will adjust their assessments 

of the appropriate path tor the federal funds rate in response to changes to their economic 

outlooks and to their judgments of the associated risks as informed by incoming data. In this 

regard, as we noted in the FOMC statement last month, inHation continues to nm below our 

2 percent objective and has declined recently; the Committee will be monitoring int1ation 

developments closely in the months ahead. 

In evaluating the stance of monetary policy, the FOMC routinely consults monetary 

policy rules that connect prescriptions fc>r the policy rate with variables associated with our 

mandated objectives. However, such prescriptions cannot be applied in a mechanical way; their 

usc requires careful judgments about the choice and measurement of the inputs into these rules, 

as well as the implications ofthc many considerations these rules do not take into account. ! 

would like to note the discussion of simple monetary policy rules and their role in the Federal 

Reserve's policy process that appears in our current MonefarJ' Policy Report. 
61 


28746.006

- 5 -

Balance Sheet Normalization 

Let me now tum to our balance sheet. Last month the FOMC augmented its Policy 

Normalization Principles and Plans by providing additional details on the process that we will 

follow in nonnalizing the size of our balance sheet. The Committee intends to gradually reduce 

payments it receives from the securities held in the System Open Market Account Specifically. 

such payments will be reinvested only to the extent that they exceed gradually rising caps. 

Tnitia!ly, these caps will be set at relatively low levels to limit the volume of securities that 

private investors will have to absorb. The Committee currently expects that, provided the 

economy evolves broadly as anticipated, it will likely begin to implement the program this year. 

Once we start to reduce our reinvestments, our securities holdings will gradually decline, 

as will the supply of reserve balances in the banking system. The longer-run normal level of 

reserve balances will depend on a number as··vet-utnknown factors, including the banking 

system's future demand for reserves and the Committee's future decisions about how to 

implement monetary policy most efficiently and effectively. The Committee currently 

the quantity of reserve balances to a level that is appreciably below recent 

levels but larger than before the financial crisis. 

Finally, the Committee affinned in June that changing the target range for the federal 

funds rate is our primary means ofadjnsting the stance of monetary policy. ln other words, we 

do not intend to use the balance sheet as an active tool for monetary policy in normal times. 

However, the Committee wonld be prepared to resume reinvestments if a material deterioration 

in the economic outlook were to warrant a sizable reduction in the federal funds rate. More 

generally. the Committee would he prepared to use its full range of tools, including altering the 
62 


28746.007

- 6-

size and composition of its balance sheet, if fbture economic conditions were to warrant a more 

accommodative monetary policy than can be achieved solely by reducing the federal funds rate. 

Thank you. I would be pleased to take your questions. 
63 


28746.008

July 7, 2017 

Board of Governors of the Federal Reserve System 

for us~ at 11:00 a.m., EDT 

july 7, 2017 
64 


28746.009

BOARD OF GOVERNORS OF THE 

fEDERAL RESERVE SYSTEM 

Washington, D.C., July 7. 20! 7 

Trm PRESIDENT OF TilE SENATE 

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES 

The Board of Governors is pleased to submit its Monetary Pofiq Report pursuant to 

section 2B of the Federal Reserve Act. 

Sincerely, 

r 

Janel L. Yellen. Chair 
65 


28746.010

The federal Market Committee (FOMC) is firmly committed to fulfllling its statutory 

mandate from Congress of promoting maximum stable and moderate 

long-term interest rates. The Committee seeks to decisions to the public 

as clearly as possible. Such clarity facilitates by households and 

businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary 

policy, and enhances transparency and accountability. which arc essential in a democratic society. 

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and 

fmancial disturbances. Moreover, monetary policy actions tend to influence economic activity and 

prices with a lag. Therefore, the Committee's policy decisions reflect its longer-rnn goals, its mediumterm outlook, and its asscssmcms of the balance of risks, including risks lo the financial system that 

could impede the attainment of the Committee's goals. 

The inflation rate over the longer run is primarily determined by monetary policy, and hence the 

Committee has the ability to specify a longer-run goal for ini1ation. The Committee reailirms its 

judgment that inflation at the rate of 2 as measnrcd by the annnal change in the price 

index for personal consumption is most consistent over the longer run with the 

Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running 

persistently above or below this objective. Communicating this symmetric inflation goal clearly to the 

public helps keep longer-term inflation firmly anchored, thereby fostering price stability 

and moderate long-term interest rates enhancing the Committee's ability to promote maximum 

employment in the face of significant economic disturbances. The maximum level of employment 

is largely determined by nonmonetary factors that a!fcct the structure and dynamics of the labor 

market. These factors may change over time and may not be directly measurable. Conseqnently, 

it would not be to specify a fixed goal for employment; rather. the Committee's policy 

decisions mnst informed by assessments of the maximum level of employment. recognizing that 

such assessments are uncertain and subject to revision. The Committee considers a 

wide range of indicators in these assessments. Information abont Committee narti,cir>ar't'' 

estimates of the longer-run normal rates of output and nnemployment is 

times per year in the FOMC's Snmmary of For example, 

recent projections, the median of FOMC participants' of the longer-run normal rate of 

unemployment was 4.8 percent. 

!n setting monetary the Committee seeks to mitigate deviations of inflation from its 

longer-run goal and of employment from the Committee's assessments of its maximnm 

level. These objectives arc However, under circumstances in which the 

Committee judges that the are not it follows a balanced in 

promoting them, taking into account the magnitude of the deviations and the different 

time horizons over which employment and inflation are projected to rctnrn to levels judged 

consistent with its mandate. 

The Committee intends to reaflirm these principles and to make adjustments as appropriate at its 

annual organizational meeting each January. 
66 


28746.011

Summary ......................... . 

Economic and Financial Developments 

Monetary Policy .. 

Special Topics .... 

Part 1: Recent Economic and Financial 

.............. 1 

Domestic Deve!opn1ents. . . . . . . . . . . . . . . . .. , . . . . . . . . . . ......... 5 

Financial Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 

International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... 29 

Part 2: Monetary Policy ....................................... 33 

Part 3: Summary of Economic ........................ 41 

The Outlook for Economic Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 44 

The Outlook for Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 45 

............................ 45 

............... 51 

Abbreviations .............................................. 59 

list of Boxes 

Does Education Determine Who Climbs the Economic Ladder? ...... 8 

Productivity Developments in the Advanced Economies. . . . . . . . . . . . . . . . .......... 12 

Developments Related to Financial Stability. . . . . . . . . . . . . . . . . . . . .............. 24 

Recent Developments in Corporate Bond Market liquidity. . . . . . . . . . . . ........ 2(, 

Monetary Policy Rules and Their Role in the Federal Reserve's Policy Process ............ 36 

Addendum to the Policy Normalization Principles and Plans . . . . . ................. 40 

Forecast Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . .. 

Nor.: This report reflects information that was publicly available as of noon EDT on July 6, 2017. 

Unless otherwise stated, the time series in the extend through, for data. 2m 7; for monthly data, 

.June 201 and, for d~1ta, . ln noted, change a given period is measured to 

its final quarter frorn 

For figur(•;; 14 and 34. not0 th,lt the S&P 5.00 lnd('x and the Dow jon<'S Hank 1nrlt:"x em: products of S&P Oow jones lndi(es ! 1 C and/or it" aft'ili,ltPS ,wd 

have b0cn 1ic1•ns;:d fO! usP by \he Board lndin·s l t (,a (hvi~ton and/or ih ,Jlfili<>te-;. /\II 

Red1qributlon, reprocluction, 
67 


28746.012

Economic activity increased at a moderate 

pace over the first half of the year, and the jobs 

market continued to strengthen. Measured on 

12-month basis. intlation has softened some 

in the past few months. The Federal 

Market Committee (FOMC) judged on 

balance. current and prospective economic 

conditions called for a further removal 

of policy accommodation. At most recent 

meeting iu June, the Committee boosted 

the target range for the federal funds rate to 

l to 1'/. percent The Committee also issued 

additional information regarding its plans 

for reducing the size of its balance sheet in a 

gradual and predictable manner. 

Labor markets. The labor market has 

strengthened further so far this year. Over the 

Jirst tlve months of 2017, payroll employment 

increased 162,000 per month. on average, 

somewhat slower than the average monthly 

increase for 2016 but still more than enough 

to absorb new entrants into the labor force. 

The unemployment rate fell from 4. 7 percent 

in December to 4.3 in May---modestly 

below the median FOMC n"'r!!c·n><ln 

estimates of its longer-run normal 

Other measures of labor utilization arc also 

consistent with a relatively tight labor market. 

However. despite the broad-based strength 

in measures of employment, wage growth has 

been only modest. held down by 

the weak pace of growth in 

recent years. 

Inflation. Consumer price inflation, as 

measnred by the 12-month change in the price 

index for personal consumption expenditures. 

brielly reached the FOMC"s 2 

objective earlier this year. but more recently 

has softened. The latest reading, for May, 

was 1.4 percent---still up from a year earlier 

when falling energy prices restrained overall 

consumer prices. The 12-month measure of 

intlation that excludes food and energy items 

(so-called core intlation ), which has 

been a beller indicator than the headline 

of where overall inflation will be in the fnturc. 

was also 1.4 percent over the year ending in 

May; this reading was a bit lower than it had 

been one year earlier. Measures of 

run intlation expectations have been 

stable, on balance, though some measures 

remain low by historical standards. 

Economic growth. Real gross domestic 

product (GOP) is reported to have risen at 

an annual rate of about l Y, percent in the 

tlrst quarter of 20!7, but more recent data 

suggest stepped back up in the second 

v'""'""·'~' spending was sluggish 

of the year but appears to 

rPh,nnnrlr•d recently, supported by job 

gains, rising household wealth, and favorable 

consumer sentiment. Business investment 

has turned up this year after having been 

weak for mnch of 2016, and indicators of 

business sentiment have been The 

housing market continues its recovery. 

Economic growth has also been supported by 

recent strength in foreign activity. 

Financial conditions. On balance, domestic 

financial conditions for businesses and 

households have continued to support 

economic growth. Long-term nominal 

Treasury yields and mortgage rates have 

decreased so llu in 2017. yields 

remain somewhat above levels prevailed 

last summer. Broad measures of equity prices 

increased further during the first half of the 

year. Spreads of yields on corporate bonds 

over comparable-maturity Treasury securities 

decreased. Most of consumer loans 

remained widely while mortgage 

credit stayed readily available for households 

with solid credit profiles but was still difficult 

to access lor households with low credit 

scores or harder-to-document incomes. 
68 


28746.013

2 SUMMARY 

In foreign financial markets, equity prices 

increased and risk spreads decreased amid 

generally firming economic growth and robust 

corporate earnings. The broad US. dollar 

index depreciated modestly against foreign 

currencies. 

Financial stability. Vulnerabilities in the 

U.S. financial system remained, on balance, 

moderate. Contributing to the financial 

system's improved resilience, US. banks have 

substantial amounts of capital and liquidity. 

Valuation pressures across a range of assets 

and several indicators of investor risk appetite 

have increased further since mid-February. 

However, these developments in asset markets 

have not been accompanied by increased 

leverage in the financial sector, according to 

available metrics, or increased borrowing in 

the nonfinancial sector. Household debt as a 

share of GDP continues to be subdued, and 

debt owed by nonfinancial businesses, although 

elevated, has been either Bat or falling in the 

past two years. (See the box "Developments 

Related to Financial Stability" in Part 1.) 

Interest rate policy. Over the first half of 2017, 

the FOMC continued to gradually reduce the 

amount of monetary policy accommodation. 

Specifically, the Committee decided to raise the 

target range for the federal funds rate in March 

and in June, bringing it to the current range of 

1 to 1 ~~ percent Even with these rate increases, 

the stance of monetary policy remains 

accommodative, supporting some further 

strengthening in labor market conditions and a 

sustained return to 2 percent int1alion. 

The FOMC continues to expect that, with 

gradual adjustments in the stance of monetary 

policy, economic activity will expand at a 

moderate pace and labor market conditions 

will strengthen somewhat further. Inflation 

on a 12-month basis is expected to remain 

somewhat below 2 percent in the near term bUl 

to stabilize around the Committee's 2 percent 

objective over the medium term. The federal 

funds rate is likely to remain, for some time, 

below levels that are expected to prevail in 

the longer run. Consistent with this outlook, 

in the most recent Summary of Economic 

Projections (SEP), compiled at the time of 

the June FOMC meeting, most participants 

that the appropriate level of the 

funds rate would be below its longernm level through 2018. (The June SEP is 

presented in Part 3 of this report.) However, 

as the Committee has continued to emphasize, 

monetary is not on a preset course; 

the actual path the federal funds rate will 

depend on the evolution of the economic 

outlook as informed by incoming data. In 

the Committee is monitoring 

developments closely. 

BahuK-e sheet policy. To help maintain 

accommodative financial conditions, the 

Committee has continued its existing policy 

of reinvesting principal payments from 

its holdings of agency debt and agency 

mortgage-backed securities in agency 

mortgage-backed securities and rolling over 

Treasury securities at auction. In 

June, FOMC issued an Addendum to the 

Policy Normalization Principles and Plans 

that provides additional details regarding 

the the FOMC intends to follow 

to the Federal Reserve's holdings of 

Treasury and agency securities in a gradual 

and predictable manner. The Committee 

currently expects to begin implementing the 

balance sheet normalization program this year 

provided that the economy evolves broadly as 

anticipated. (See the box "Addendum to the 

Policy Normalization Principles and Plans" 

in Part 2.) 

Education and climbing the economic ladder. 

Education, particularly a college degree, is 

often seen as a path to improved economic 

opportunities. However, despite the fact that 

young blacks and Hispanics have increased 

their educational attainment over the past 
69 


28746.014

quarter-century, their representation in the 

lop 25 percent of the income distribution for 

young people has not materially increased. 

ln part, this outcome has occurred because 

educational attainment has increased for 

young non-Hispanic whites and Asians as welL 

While education continues to be an important 

determinant of whether one can climb 

the economic ladder, sizable ditiercnccs in 

economic outcomes across race and ethnicity 

remain even after controlling for educational 

attainment. (See the box "Does Education 

Determine Who Climbs the Economic 

Ladder?" in Part !.) 

The global productivity slowdown. Over the 

past decade, labor productivity growth both 

in the United States and in other advanced 

economies has slowed markedly. This 

slowdown may rct1cct a waning of the cficcts 

from advances in information technology in 

the l 990s and early 2000s. Prodnctivity growth 

may also be low because of the severity of 

the Global Financial Crisis, in because 

spending for research and dc·vcJ,()DJ.ncnt 

was muted. Some of the factors restraining 

productivity growth may eventually fade, 

but it is difficult to ascertain whether the 

recent subdued pcrli:mnance of nrr"ir1rtiv' 

represents a new normaL (Sec 

"Productivity Developments in the Advanced 

Economies" in Part 1.) 

MONHARY POLICY REPORT: JULY 2017 3 

in the corporate bond market. A series 

including regulatory reforms, 

Financial Crisis have likely 

altered t!nancial institutions' incentives to 

provide Many market participants 

are concerned with liquidity in 

markets for corporate bonds. However, the 

available evidence snggcsls that iinancial 

markets have performed well in recent years, 

with minimal impairment in liquidity, either 

in the market for corporate bonds or in 

markets for other assets. (See the box "Recent 

Developments in Bond Market 

Liquidity" in Part 

Monetary policy rules. Monetary policymakcrs 

consider a wide range of information on 

current economic conditions and the outlook 

before deciding on a policy stance they deem 

most likely to foster the FO M C's statutory 

mandate of maximnm employment and stable 

prices. They also routinely consult monetary 

policy rules that connect prescriptions for the 

policy interest rate with variables associated 

with the dual mandate. The use of such rules 

requires careful judgments about the choice 

and measurement of the inputs into these 

rules as well as the implications of the many 

considerations these rules do not take into 

account. (See the box "Monetary Policy Rules 

and Their Role in the Federal Reserve's Policy 

Process" in Part 2.) 
70 


28746.015

Labor market conditions continued to 

strengthen in the lirst live months of this 

year. On average, payrolls expanded 162.000 

per month between January and May, 

a little slower than the average monthly 

employment t,'llin in 2016 but still more than 

enough to absorb new entrants to the labor 

force and therefore consistent with a further 

tightening of the labor market (ligure 1). 

The unemployment rate has declined 

0.4 percentage point since December 2016, 

and in May it stood at4.3 pcrccn t, its lowest 

level since late 2000 and modestly below the 

median of Federal Open Market Committee 

(FOMC) participants' estimates of its longerrun normal level. 

The labor force participation rate (LFPR)---

that is, the share of adults either working or 

actively looking lor work-~was 62.7 percent in 

May and is little changed, on net, since early 

20 J 4 (fignrc 2). Along with other factors, the 

aging of the population implies a downward 

trend in so the llaltcning out 

of the LFPR the past few years is 

consistent with an overall of improving 

labor market conditions. employmentto-population ratio· that is, the share of the 

population that is working--- was 60 

in May and has been increasing for 

couple of years, reflecting the 

of the declining unemployment rate and the 

fiat LFPR. 

The strengthening condition of the labor 

market is evident in other measures as welL 

The number of people filing initial claims for 

unemployment insurance has fallen to the 

lowest level in decades. In addition. as reported 

in the Job Openings and Labor Turnover 

Survey, the rate of job openings remained 

elevated in the first part of the year, while the 

rate of layoffs remained low; both are signs 

that firms' demand for labor is still solid, In 

addition, the rate of quits stayed high, an 

indication that workers are confident in their 

ability to obtain a new job. Another measure, 

the share of workers who are working part 

time but would prefer to be employed full 

time~~which is part of the U-6 measure of 

underutilization from the Bureau of Labor 

Stalistics---~fell noticeably further in the first 

live months of 2017 (figure 3). 

Although the unemployment 

rate was at a low in May, there are 

substantial disparities across demographic 

(figure 4). Notably, the unemployment 

rate whites averaged 4 percent during 

the first five months of the year, and the rate 

for Asians was about 3'h percent. However, 

the unemployment rates for Hispanics 

(5.4 percent) and African Americans 

(7.8 percent) were substantially higher. The 

differences in the unemployment rates across 

racial and ethnic groups are long-standing, 

and they also vary over the business cycle. 

1. Net change iHfh'l.yro!l employment 

400 

200 

200 

400 

600 

800 

5 
71 


28746.016

6 PART 1' RECfNT ECONOMIC AND FINANCIAl. DEVELOPMENTS 

68 

66 

3. Measures Dflabor undcruti!Jzation 

rates for blacks 

and Hispanics rose considerably more 

than the rates for whites and Asians during 

the Great Recession, and their subsequent 

declines have been more rapid. On balance, 

however, the differences in unemployment rates 

across the have not narrowed relative 

to the period. (For additional 

uJ,,c,u""'u" on differences in economic 

outcomes by race and ethnicity, see the box 

"Does Education Determine Who Climbs the 

Economic Ladder?") 

of 

Indicators of hourly compensation suggest 

has remained modest. 

compensation per hour in the 

business sector---a broad-based measure of 

wages, salaries, and benefits·-····has slowed in 

recent quarters and was 2'!4 percent over the 

four quarters ending in 2017:Ql (figure 5).' 

l. The 

a decline ln 
72 


28746.017

Sm:r:cE: Department of Labor, Bureau ofLab..-,r Statistics. 

This measure can be quite volatile even at 

annual frequencies (and a smoothed version 

is shown in lignrc 5 for that reason). The 

employment cost index---which also measures 

both wages and the cost to employers of 

providing hcnelits- ··also was up percent in 

the 11rst quarter relative to its year-ago level, 

about •;, percentage point faster than its gain 

of a year earlier. Among measures limited to 

wages. average hourly earnings growth---at 

percent through May····was little changed 

from a year and a compensation measure 

computed by Federal Reserve Bank of 

Atlanta that tracks median 12-month wage 

growth of individuals to the Current 

Population Survey was 3V, percent in 

May. also similar to its reading from a year 

earlier. 

2017 in anticipation of a possible cut 

personal income tax rates. If that is the case, the current 

estimate growth in the first quarter 

might be up once full data become available later 

this summer. 

M0Nf1ARY POLICY REPORT: )LiLY 2017 

!vic<~sures of cl1ange in hourly compensation 
73 


28746.018

8 PART 1: RI::CENT ECONOMIC AND FINANCIAL DEVtlOPMtNTS 

Does Education Determine Who Climbs the Economic ladder? 

Education, a college degree, is often 

seen as a path to improved economic 

Past research has shown that human 

form of edue.Hion and 

one-third of the variation 

However, while education to he an important 

determinant of whether one can climb the economic 

!adder, sizable differences in economic outcomes 

across race and ethnicity remain even after controlling 

for educational attainment 

1111!11111111-U Jill 

allows us to betler isolate the effect of education 

from the influence of other variables, 

experience. Furthermore, research has shown 

!eve! of wages received early in an individual's career 

persists over time rtnd lnfluC'nces that individual's 

for to come. 2 The shows 

that has the top 

as a whole. The 

II Ill 
74 


28746.019

!Ill 

MONETARY POLICY REPORT JULY 2017 9 

-!!lilt II 

Overall, the representation of black and ~lispanic 

work~rs in the continues to lag 

in the later occurs 

e<JiJC<iiUOfldl attainment~the 

--that blacks and 

both blacks 

bilchelor's 

economic However, even 

representation is substantially 

cm1ege-eow:atE'll white and /\sian people 

more likely to achieve the top quartile of income 

than their black or African American and Hispanic or 

Latino peers. 

Here the int<>roret:lficm of changes over time is 

because the overall increase 

adults implies 

the top 

perc.ent 

B. Percent of young adults with a bachelor's degree or 

higher 

70 

60 

50 

40 

lLS. c~·n~us Bureau. Current P0pulation Surv<:y, March 

1992 2:016 

the average 

quartile of income 

h<1s increased between generations. 

Taken these observations show that 

eatJCauonar attainment can help adults 

their !ifPtirne potentiaL 

!t•ve!s of attainment across all groups have 

created greater competition for positions at the of 

the economic ladder. fvE>n among those with 

differences remain in renres,ent.aticm 

received and the spt~cific schools among 

other factors,-- n1ay matter much more than previously 

thought.' 
75 


28746.020

] () PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS 

6. Change in business-sector output per hour 

7. in the price index for personal consumption 

cxpcB<Titures 

Momhly 

_lO 

2.0 

!.5 

1.0 

These modest rates of compensation gain 

likely reflect the olrsctting influences of a 

tightening labor market and 

weak productivity growth. 

labor productivity has increased only about 

1 percent per year, on average, well below the 

average pace from 1996 through 2007 and 

also below the gains in the 1974·95 period 

(figure 6). For most of the period since 

201 L labor productivity growth has been 

particularly weak, although it has turned 

The longer-term softness 

nn'"''"''v''v growth may be partly attributable 

to the sharp pullback in capital investment 

during the most recent recession and the 

relatively modest rebound that fo1Jowed. But 

there be other explanations, too, and 

COJ1Si<derable dehate remains about the reasons 

for the general slowdown in nn)dl!CliiVltv 

growth. (For a more cmnprehen:;ive 

of productivity, see the "Productivity 

Developments in the Advanced Economies.") 

Jn the early months of 2017, consumer price 

inflation, as measured by the 12-momh change 

in the index for personal consumption 

H'"'"""' ""''" (PCE), continued its climb from 

very low levels that in 2015 and 

early 20 !6 when it was down by falling 

oil and import prices. Indeed, consumer price 

inflation brielly reached the FOMC's 2 percent 

objective earlier this year before falling 

back to 1.4 percent in May (figure 7). Core 

inflation, which provides a better 

indication than headline measure of where 

overall inflation will be in the future. also was 

1.4 percent over the 12 months ending in May, 

a slightly slower rate than a year earlier. As is 

the case with headline inflation, the 12-month 

measure of core inflation had been higher 

earlier this year, reaching l.R percent. Both 

measures of inflation have recently been held 

down by steep and likely idiosyncratic price 
76 


28746.021

declines for a few specific categories, including 

wireless telephone services and nn•<r.nr•ll<m 

drugs, which do not appear to 

the overall trends in consumer prices. The 

!2-month change in the trimmed mean PCE 

price index- --an alternative indicator of 

underlying inilation produced by the Federal 

Reserve Bank of Dallas--slowed by less than 

overall or core PCE price inflation over the 

past several months. 

After rebounding from their early 2016lows, 

oil prices leveled off early this year 8). 

Since then they have declined ''""''w '""· 

despite OPEC's decision in late May to renew 

its November 2016 agreement to reduce its oil 

production, thereby extending the November 

production cuts through early 2018. Reflecting 

lower crude oil prices as well as smaller retail 

margins, seasonally adjusted retail gasoline 

prices have also declined since the ---0 .... , ... , 

of the year. Nevertheless, of both 

oil and retail gasoline above their early 

2016lows, and futures prices that 

market participants expect oil to rise 

gradually in coming years. 

and declines in commodity 

(figure 9). Nonfuel import last 

year and have risen since 

stopped appreciating and supply disruptions 

boosted world prices of some nonfuel 

commodities, especially industrial supplies 

and metals. In recent months, depreciation 

of the dollar has further pushed up non-oil 

import prices, which are now slightly higher 

than in mid-2016. 

MONfTARY POI.ICY RfPORTo JULY 2017 11 

8. Brent spot and futures prices 

9. Nonfuel impm1 prices and U.S. dollar exchange rate 

IO(l 

L\0 

120 

110 

130 

120 

jj!) 

lO() 

9() 

80 

70 

60 

50 

40 

JO 

20 

wn 

115 

llO 

!05 
77 


28746.022

PART 1: RECENT ECONOMIC AND FINANCIAl OLVELOPMFNTS 

Productivity Developments in 

The slow 

atiracled attention 

on whether the slowdown 

but effect of the 

(GFC) or the start of an era of prolonged lower 

discussion reviews recent 

nrrxlrrctivitv rio'""''''n.nm>k in the United States and the 

Labor productiYity grow1h 

!99{).-20{)4 

2005-20!6 

Advanced Economies 

economies has stagnatNl in the pJst decade against 

historical growth of about 1

/4 percent. 

A number hJve been put 

.w.fmmornrc ofT FE Some 
78 


28746.023

p 

Other explanations blame the weak TFP growth 

on the unusual severity of the GFC. Some empirical 

evidence that the "<;rh"'"'"'''e•·i" 

in which 

impaired since 

CFC/ In addition, measures of innovation such 

as research and (R&D) fell 

MONElARY POliCY REPORT: IULY 2017 13 

long-run neutral interest rate1 making the policy rate 

to reach its effective lower bound and thus 

ability of monetary to 

even in the presence 

recessions. 

C. World trade as a share of gross domestic product 

32 
79 


28746.024

14 PART 1: RECLNT ECONOMIC AND FINANCIAl DEVELOPMENTS 

10. Median inflation expectations 

ll, 5-to-10-ycar-forward int1ation compensation 

~- 2{) 

LO 

Expectations of inflation likely influence 

actual inflation by affecting wage- and pricesetting decisions. Survey-based measures of 

inflation expectations at medium- and longerterm horizons have remained relatively stable 

so far in 2017. In the second-quarter Survey 

of Professional forecasters conducted by 

the Federal Reserve Bank of Philadelphia, 

the median expectation for the annual rate 

of increase in the PCE price index over the 

next !0 years was 2.1 percent, the same 

as in the first quarter and little changed 

from the readings during 2016 (figure 

In the University of Michigan Surveys 

Consumers, the median value for inflation 

expectations over the next 5 to lO years~­

which has been drifting downward for the past 

few years-has held about flat at a low level 

since late last year. 

Inflation expectations can also be ganged 

by market-based measures of inflation 

compensation, though the inference is 

not straightforward because inflation 

can be importantly affected 

nrc,miunlS associated with 

Measures of longer-term 

inflation compcnsation~~dcrivcd either from 

clillcrcnccs between yields on nominal Treasury 

securities and those on comparable Treasury 

Inflation-Protected Securities (TIPS) or from 

inflation swaps---have fallen back somewhat 

this year after having moved up in late 2016 

(figure ll ). 2 The TIPS-based measure of 

2. Inflation compensation implied by the TIPS 

hreakeven inflation rate is based on the difference, at 

comparable maturities, between yields on nominal 

Treasury securities and yields on TJPS, which are indexed 

to the index (CPI)< inflation 
80 


28746.025

5-to-!0-ycar-forward inflation compensation 

is now l% percent, and the analogous measure 

of inflation swaps is now about 2 percent Both 

measures arc well below tht: to 3 percent 

range that persisted for most of the I 0 years 

before 2014. 

After having moved up at an annual rate of 

2% percent in the second half of 2016, real 

gross domestic product (GDP) is reported to 

have increased about 1 y, percent in the first 

of this year (figure 12). 3 The step-down 

first -quarter growth was largely attributable 

to soft inventory investment and a lull in the 

growth of consumer spending; in contrast, net 

exports increased a bit, residential investment 

grew robustly, and spending by businesses 

surged. Indeed, bnsiness investment was 

strong enough that overall domestic 

ilnal purchases----that is, purchases by 

US. households and businesses, which tend to 

carry more signal !or future GDP growth than 

most other components of overall spcnding~-­

movcd up at an annual rate of about 3 percent 

in the first For more recent months, 

indicators spending by consumers and 

businesses have been strong and suggest !hat 

growth of economic activity rebounded in the 

second quarter; thus, overall activity appears 

to have expanded moderately, on average, over 

the lirsl half of the year. 

some horin.m. Focusing on inflation cornpensatinn 5 to 

10 years ahead is useful, partkularly for monetary policy, 

be-cause such fOrward measures encompass market 

participa11ts' views ahout where inl1ation \viii settle in the 

long term after developments influencing inflation in 1 he 

short term have run their course. 

3. Real domestic income (GDl), which is 

same as GDP but is constructed from 

different source data, had heen rising at n>ughly the sam;: 

rate as rca} GOP for most of 2016. However. real GDI 

prove to have been transitory. 

MONETA!<Y POliCY REPORT: JULY 2017 15 

Change in real gross domestic product and gross 

domestic income 

Sol RCf.: Oepartm~·nt of Commerce. Bureau of h·onomic Analysis 
81 


28746.026

1 6 PART 1' RECENT ECONOMIC AND FINANCIAl DlVELUPMLNTS 

l4< Prices of existing single-family houses 

15. Nominal house prices and priC{.."-fent rmlo 

The economic expansion continues to be 

supported by accommodative financial 

conditions, including the low cost of 

borrowing and easy access to credit for many 

households and businesses, continuing job 

gains, rising household wealth, and favorable 

consumer and business sentiment. 

After increasing strongly in the second half of 

2016, consumer spending in the first quarter 

of this year was tepid. Unseasonably warm 

weather depressed spending on services, 

and purchases of motor vehicles from 

an unusually high pace late last year. However, 

household spending seems to have picked up 

in more recent months, as purchases of 

services returned to seasonal norms and 

sales firmed. All told, consumer spending 

increased at an annual rate of 2 percent 

over the first live months of this year, only 

a bit slower than in the past couple of years 

(figure 13). 

Beyond spending, other indicators of 

consumers' economic well-being have 

been strong in the aggregate. The ongoing 

improvement in the lahor market has 

supported further gains in real disposable 

income (DPl), a measure of income 

accounting for taxes and adjt1sting for 

inflation. Real DPI increased at a solid annual 

rate of 3 percent over the first live months of 

this year. 

Gains in the stock market and in house prices 

over the first half of the year have hoosted 

household net wealth. Broad measures of U.S. 

equity prices have continued to increase in 

recent months after moving up considerably 

late last year and in the first quarter. House 

prices have also continued to climb, adding 

to the balance sheet strength of homeowners 

(llgurc 14). Indeed, nominal house price 

indexes are close to their peaks of the mid2000s. However, while the ratio of house 

to rents has edged higher, it remains well 

its previous peak (figure 15). As a result of the 
82 


28746.027

increases in home and equity prices, aggregate 

household net worth has risen appreciably. In 

fact, al the end of the Jirst quarter of 2017, 

household net worth was more than six time,: 

the value of disposable income, the highestever reading for that ratio (figure 16). 

has also been snpportcd 

from debt service payments. 

household debt service burden-the ratio 

of required principal and interest 

on outstanding household debt to 

income, measured for the household sector 

as a whole-has remained at a very low level 

by historical standards. As interest rates rise, 

the debt burden will move up only gradually, 

as most household debt is in fixed-interest 

products. 

Consumer credit has continued to 

this year but more moderately than 

2016 (figure 17). Financing conditions are 

generally favorable, with auto and student 

loans remaining widely available and 

outstanding balances continuing to expand 

at a robust, albeit somewhat reduced, pace. 

Even though delinquency rates on most types 

of consumer debt have remained low by 

historical standards, credit card and auto loan 

delinquencies among borrowers have 

drifted up some. 

deteriorating credit 

tightened standards credit cards and auto 

lending. Mortgage credit has remained readily 

available for households with solid credit 

but it was still ditlicult to access for 

h~nc.c•h··•lrl< with low credit scores or harder-to· 

document incomes. 

Consumers have remained optimistic about 

their financial situation. As measured by the 

Michigan survey, consumer sentiment was 

solid through most of 2016, likely reflecting 

rising income and job gains. Sentiment moved 

up appreciably after the presidential election 

last November and has remained at a high 

level so l~rr this year ((lgure 18). Furthermore, 

MONFTc\RY POLICY REPOH JULY 2017 1 7 

16. Wealth-to-income ratio 

R,1UO 

~-c----------------·------------

7.0 

2005 2009 20!3 

Nor~:: The seri\~S is tli<', ratm oflmusdl(l!d m~t worth to disposabk r•~I~)!).aj 

1,000 

800 

600 

400 

200 

" 0 

2{){) 

400 

600 

l X. Indexes of consumer sentiment and income expectations 

lndcx ---------~------ -----------------·-
83 


28746.028

18 PAR 11' RfctNl ECONOMIC AND fiNANCIAL lliVELOPMENIS 

19. New and existing home sales: 

20. Mortgage rates and housing atTordability 

21. Private housing starts and permits 

20 

the share of households expecting real income 

to rise over the next or two has gone up 

markedly in the past months and is now in 

line with its pre-recession level. 

Several indicators of housing activity have 

continued to strengthen gradually this year. 

Sales of existing homes have gained, on net, 

while house prices have continued to rise 

and mortgage rates have remained low, even 

though they are up from last year (ligures 19 

and 20). In addition, single-family housing 

starts registered a slight increase, on average, 

in the first five months of the year. although 

multifamily housing starts have slipped 

(figure 21 ). Despite the modest increase in 

construction activity, the months' supply of 

homes for sale has remained near the low 

levels seen in 20 !6, and the aggregate vacancy 

rate has fallen hack to levels observed in the 

mid-2000s. Lean inventories are likely to 

support further gains in homebuilding activity 

going forward. 

Led by a surge in spending on 

mining structures, real outlays for 

investment---that is, private nonresidential 

llxcd investment-rose at the 

beginning of the year after been about 

fiat for 2016 as a whole (figure 22). The sharp 

gains in drilling and mining in the first quarter 

mark a turnaround tor the sector; energysector investment had declined noticeably 

f(lllowing the drop in oil prices that began 

in mid-2014 and ran through early 2016. 

More recently, rapid increases in the number 

of drilling rigs in operation that 

investment in this area 

second quarter of this year. 

Moreover, business on em11iron1<,nt 

and intangibles as research 

ae·vel<~ptnent) advanced solidly at the 

ocgawJng of the year after having been 
84 


28746.029

roughly fiat in 2016. Furthermore, indicators 

of business spending are upbeat: 

Orders and shipments capital have 

posted net gains in recent and indexes 

of business sentiment and activity remain 

elevated after having improved significantly 

late last year. 

Aggregate flows of credit lo large nonfinancial 

firms have remained solid, supported in part 

by continued low interest rates (figure 23). 

The gross issuance of corporate bonds was 

robust during the first half of 2017. and yields 

on both speculative- and investment-grade 

corporate bonds remained low by historical 

standards (figure 24). Gross issuance by 

nonfinancial iirms stayed on average, as 

seasoned equity offerings continued at a robust 

pace and the pace of initial offerings 

picked up from the low seen in 2016. 

Despite the 

demand for 

in business investment, 

loans was subdued 

early this year, and outstanding commercial 

and industrial (C&I) loans on hanks' books 

contracted in the first quarter. ln the April 

Senior Loan Otiiccr Opinion Survey on Bank 

Lending Practices (SLOOS ). banks reported a 

broad-based decline in demand for C&lloans 

during the first quarter of 2017 even as lending 

standards on such loans were reported to be 

basically Banks also 

weaker demand 

to large nonfinancialilrms appeared to be 

strengthening somewhat during the second 

quarter. Meanwhile, measures of small 

business credit demand remained weak amid 

stable supply. 

4. The SLOOS is available on lhc Board's wcbsilc al 

https://www.fedcralrcscrvc.gov/data/sloos/sioos.htm. 

MONETARY POliCY REPORT: jULY 2017 19 

Change in real private uomcsidcntial fixed investment 

Stntc!urcs 

Equipment and intangible capital 

23. Selected 

Commacia! paper 

Bond.~ 

Bank loam: 

Sum 

Corporate hond yields, hy securities rating 

Q! 25 

80 

Ql 60 

{0 

20 

20 
85 


28746.030

20 PART 1' RECENTECONOMIC AND FINANCIAl DEVELOPMENTS 

25. Change in real impmis and exports of goods 

and services 

lmpor!S 

Exports 

20!2 2013 20!4 2015 20!6 2017 

Department ofCommcrct:, Bureau of Economic Analysis 

U.S. trade and current account balances 

Quart~rly 

27. Change in real 

consmnption 

a pace 

In the first quarter of 2017, U.S. real exports 

increased briskly and broadly following 

moderate growth in the second half of last 

year that was driven by a surge in agricultural 

exports (figure 25). At the same time, real 

import growth declined somewhat from its 

strong pace in the second half of last year. As 

a result, real net exports contributed slightly 

to 1..1.S. rcaJ GOP growth in the first quarter. 

Available trade data through May suggest that 

the growth of real exports slowed to a modest 

pace in the second quarter. Nevertheless, the 

average pace of growth appears to have 

stepped up in the half of 2017 compared 

with last year, reflecting stronger growth 

abroad and a drag from earlier 

dollar All told, the available 

data for first half of this year suggest that 

net exports added a touch to US. real GOP 

growth and that the nominal trade deficit 

widened slightly relative to GDP (figure 26). 

Federal purchases moved sideways in 2016, 

and policy actions had little effect on federal 

taxes or transfers (llgnrc 27). Under currently 

enacted legislation, federal fiscal policy will 

likely again have a roughly neutral influence on 

the growth in real GDP this year. 

After narrowing significantly for several 

years, the federal unified deficit has widened 

from about 2Y,. percent of GOP in fiscal 

year 20!5 to 3Y.; percent currently. Although 

expenditures as a share of GOP have been 

relatively stable over this period at a little 

under 21 receipts moved lower in 2016 

and have down further so far this year 

to roughly 17'/2 percent of GOP (figure 28). 

The ratio of federal debt held hy the public 

to nominal GOP is quite elevated relative 

to historical norms. Nevertheless. the dclieit 

remains small enough to roughly stabilize 

this ratio in the neighborhood of 75 percent 

(figure 29). 
86 


28746.031

The fiscal position of most state and local 

governments is stable, although there is a range 

of experiences across these Many 

state governments are lackluster 

revenue growth, as income tax have 

been only edging up, on 

quarters, In contrast, house gains have 

continued to push up property tax revenues at 

the local leveL Employment growth in the state 

aud local government sector has been anemic 

so far this year following a of hiring in 

2016 that was the strongest 2008, Outlays 

for construction by these governments have 

been declining (figure 30). 

The path for the expected federal funds rate 

implied by market quotes on interest rate 

derivatives has llattcncd, on net, since the 

end of December, moving higher for 2017 

but slightly lower further out (figure 31 ). 

The expected policy path moved at the 

beginning of the year, reportedly 

investor perceptions that expansionary !!seal 

policy would likely be forthcoming over the 

near term, but subsequently fell amid some 

waning of these expectations as well as FOMC 

communications that were interpreted as 

signaling a somewhat slower pace of 

rate increases than had been 

Survey-based measures of the expected path 

of also moved up for 2017. Most 

of respondents to the Federal Reserve 

Bank of New York's Survey of Primary 

Dealers and Survey of Market Participants--

which were conducted just before the June 

FOMC mceting~projected an additional 

25 basis point increase in the FOMC's target 

range for the federal funds rate, relative to 

what they projected in surveys conducted 

before the December FOMC meeting, 

as the most likely outcome for this yeaL 

MONETARY POLICY RlPORT: IUlY 2017 21 

28. Federal receipts and expenditures 

;l,n;nm! f'~rc~J\\ Df!WOJU!al GDl' 

26 

18 

··- 16 

14 

29. Federal govcnuncnt debt hdd by the public 

80 

70 

50 

40 

30 
87 


28746.032

PART l: RECENT ECONOMlC ANO FINANCIAL OfVfl OPMfNTS 

30. State and local employment and structures investment 

HiilmnsolcllaiOcdt:'(l(lil)do!iars.?.nnu~!rak 

Analysis. 

31. Market-implied federal funds rate 

Dec.:"\0,21.-Ho:'> ~ 2.0 

l.O 

32. Yields on nominal Treasury securities 

Expectations lor the number of rate hikes in 

2018 were about unchanged. Market-based 

measures of uncertainty about the policy 

rate approximately one to two years ahead 

decreased slightly, on balance, from their yearend levels. 

After rising significantly during the second 

half of 2016, yields ou medium- and longerterm nominal securities have 

decreased 5 to 25 points, on net, so far 

in 2017 (figure 32). The decrease in longerterm nominal yields since the beginning of 

the year largely reflects declines in inflation 

compensation due in to soft incoming 

data on inflation, real yields little 

changed on net. Consistent with the changes 

in Treasury yields, yields on 30-year agency 

mortgage-backed securities (MBS)----an 

important determinant of mortgage interest 

rates-decreased slightly over the first half of 

the year (ilgure ~3). Treasury and M BS yields 

up somewhat in late June, driven in part 

increases in government yields overseas. 

However, yields remain quite low by historical 

standards. 

Broad U.S. equity indexes continued to 

(figure 34). Equity 

were supported by lower 

rates and increased optimism that 

corporate will continue to strengthen 

this year. Stock of companies in the 

technology sector increased notably on net. 

After rising significantly toward the end of 

last year, stock of banks performed 

about in line the broader market during 

the first half of 2017. The implied volatility 

of the S&P 500 index one month ahead---the 

V!X---decreased, on net, ending the period 

close to the bottom of its historical range. (For 

a discussion of financial stability issues, sec 

the box "Developments Related to Financial 

Stability.") 
88 


28746.033

Bond for investment- and speculativegrade decreased, and spreads for 

speculative-grade firms now stand ncar the 

bottom of their historical ranges. 

Available indicators of Treasury market 

functioning remained stable over the 

first half of 2017. A variety of liquidity 

metrics~including bid-ask spreads, bid 

sizes, and estimates of transaction costS-·· 

either improved or remained unchanged 

over the period, displaying no notable signs 

of liquidity pressures. The agency MBS 

market also continued to function well. (l:'or 

a detailed discussion of bond 

market functioning, see the "Recent 

Developments in Corporate Bond Market 

Liquidity.") 

Conditions in domestic short-term funding 

markets have remained stable so far in 2017. 

Yields on a broad set of money market 

instruments moved higher in to the 

FOMC's actions in aud June. 

The federal funds rate generally 

traded near the middle of the target range 

and was closely tracked by the overnight 

Eurodollar rate. The spread between the 

three-month LIBOR (London interbank 

offered rate) and the OIS (overnight index 

swap) rate has returned to historical norms 

over the first half of 2017, declining from the 

elevated levels that prevailed at the end of 

last year around the implementation of the 

Securities and Exchange Commission money 

market fund reform. 

MONETARY POLICY REPORT: jUI.Y 1017 23 

:u. Yield and spread on agency mortgage~backcJ securities 

400 

34. Equity prices 
89 


28746.034

24 PART 1: RE:CfNT FCONOM!C AND FINANCIAL l)[VELOPMl-NTS 

Developments Related to 

Vulnerabilities in the U5. 

moderate on balance. 

most U.S. banks 

highs, reiidnce on short-term wholesale funding at 

these institutions has cunlinued to decline. Valuation 

of assets and several indicators 

has remoincd subdued, 

and new driven primMily by 

households with strong credit histories. 

·n1e strong capital of the financial sP.ctor 

has contributed to the 

fin;mcia! system. ratios at most bank 

holding companies to be 

high, mainly as a r~?suh of the higher regulatory 

recruHerrrencs. At the same time, measures of 

have increased modestly on a year-on-year 

capital ratios Jt insurance companies 

standards. 

source of funding for the banks, which hdd 

2016, has fa !len in 

A\. The MMf 

Commission 

h;:we led to 

increase if investors shift out of MMFs into more 

Stability 

A. Sdccted funding for large banks 

HlLB advann·s 30{) 

250 

200 

150 

100 

50 

Valuation pressures h<:~ve increased further across a 

rangp of assets, 

corporate bonds, and cornn1en:ial 
90 


28746.035

I J r 1 l!flllllllll 

Term premiums on Treasury securities continue to be in 

the lower pa1i of their historical distribution. A sudden 

to more norma! levels post's a 

lon2-rnatur~'lvTreasury prices, which 

prices of other assets. Forward 

""'"''-tn-•P.<rnmo' ratios rose a bit further and ,are 

levels since the 2000s, whi!e 

B. Ptivatc nontinancial sector crediHo-GDP ratio 

l.R 

!.6 

14 

1.0 

~-- 71QtT s ZU1iU4 

MONETARY POLICY RtPOH IULY 2017 25 

long-term 

households 

1 

!ow leveL nev 

borrowing is among borrowers with 

credit scores. ln contrast, the of nor>~rn<>nr-ut 

corporations continues to be 

is concentrJted among 

and the total out:stano,tng 

hy December 

resolution plans are operations, 

IJIIJIIJI 

and issued to these organi?.alions reflects lhf' 

restructuring they have undertaken to form 

intt>rmediary holding companies. 

bcreg20170J24a.htm. 
91 


28746.036

26 PART l; RECENT ECONOMIC AND FINANCIAL DEVELOP,'V1ENTS 

Recent Developments 

market 

re-turns by invf'stors to assets.; 

it therefore decreases the cost of valuable economic 

and so contributes to the efficient allocation of 

conditions that are resilient 

in 

periods of market stress. However, 

evidence does not point to any substantial impairment 

in liquidity in major financial markets in recent 

A. Mean bid-ask spread and market effect f(w corporate bonds 

tlliilll 

Bond Market liquidity 

In addition, financial markets have 

pPrfonned well during recent 

stre-ss. 1 Fven in instances in 

in cerlain rnarkets 

effects have been 

consequences. tn the of this discussion! we 

with emphasis on the market for 

other markets. Hovvever, a 

of liquidity indicate that 

corporate bond markets have been 

arc 

hJS 

II £& 
92 


28746.037

shows that the estimated mean effective bid-ask spread 

for U.S. corporate bonds has remained low in recent 

years. Before the financial cri,;;is, bid-ask 

averaged about 1 percent of the price 

This measure of trading costs '"'""'kPlPrl 

financial crisis but has to the 

before the crisis. Measures of the effect on 

.and h,we been fairly 

stable in recent addition, other mt"Jsures 

related to factors associated with mJ.rkel liquidity, 

such as trends in average trade and turnover, also 

market Hquidit)~ conditions are benign.' 

said1 some ren>nt work suggests that these 

traditional measurf's of transaction costs might 

the dpgrce of in part because 

have incr~:•asingly as 

principals to acting agents to reduce risk 

H. Broker-dealer holdings of WJ110ta!c and foreign honds 

MONfTARY POliCY REPORT: )UIY 2017 27 

in tighter bid-ask sp1eads,' Indeed, 

DOI'\ICIOants have expressed concern 

inventories rnay reflect in 

reduced willingness or capacity of the 

to make markets, which mdy in turn 

liquidity. 

Figure B shows that 

of bonds 

(continued on next page) 

BtliHiUS{lfdollars 

- 480 

40<1 

~ 80 

S01 1R( 2: Fcdt'ral Rc,~ctYC Board, Statist!cJ! Rdcasc 7.1, ·'flnancw.l AcomnL" of the lJnited St1!C~," L. t30 Security BrnkeDl and !kakrs, June 8, 2017 
93 


28746.038

28 PART I: RECENT ECONOMIC AND FINANCIAL OEVHOPMENTS 

Recent Developments in Corporate Bond Market liquidity rconunued! 

regulations-such as the Vo!ckPr rule and 1he 

ratio, which aimed to make 

system and sounder--and changes 

have contributed to the continued 

&AUWMPN N I lUll! 

C. CDS (cn:dit default swap)-hond basis 

200 

200 

400 

,600 

800 

environrnent"There are indk'Jtions that m<Jrket 

structure has changed in rt.>cent yPars, and trades in 

certain situations and market segments might have been 

n1ore costly at times. But markPts have also 

and some measures of dislocdtion have 
94 


28746.039

Aggregate credit provided by commercial 

banks continued to increase through the 

Jlrst quarter of 2017, though at a slower 

pace than in 2016, leaving the ratio of total 

commercial bank credit to nominal GDP 

slightly lower (i1gure 35). The expansion of 

core loans slowed during 2017, consistent 

with banks' reports in the April SLOOS of 

weakened demand for most loan categories 

and tighter lending standards for commercial 

real estate loans. However, the growth of core 

loans appeared to be picking up somewhat 

during the second quarter. Measures of bank 

profitability have continued to improve so far 

this year but remained below their historical 

averages (Jlgure 36 ). 

have generally remained since year-end. 

Over that period, yield spreads on 20-year 

general obligation municipal bonds over 

comparable-matnrity Treasury securities were 

littic changed on balance. Puerto Rico filed to 

enter a process to restructure 

its debt after it to reach an agreement 

with bondholders, and several credit rating 

agencies downgraded the bond ratings of the 

state of !llinois. However, these events have 

had no noticeable effect on broader municipal 

bond markets. 

Financial market conditions in both the 

advanced foreign economies (Af"Es) and the 

emerging market economics (EMEs) have 

generally eased since January. Better-thanexpected data releases, robust corporate 

earnings, and the passage of risk events---

such as national elections in some European 

countries---boosted investor conlldcncc. Broad 

MONETARY POliCY REPORT: )UEY 2017 29 

35. Ratio of total commercial hank credit to nmninal gross 

domestic product 

Qnart<::rly 

7S 

70 

60 

36. Profitability of hank holding companies 

Pe::cent,arumalrat" 

30 

20 

JO 

JO 

20 

2.0 
95 


28746.040

30 PART 1: RECENTECONOMIC AND fiNANCIAL llLVELOPMENfS 

37. Equity indexes for selected foreign eCDnomies 

Advanced fnretgn econo:nnt'S 

38. Emerging market mutual fund flows and spreads 

120 

1!5 

llO 

105 

lOil 

95 

90 

indexes in advanced and emerging 

economies rose further (figure 37). 

In addition, spreads of emerging market 

sovereign bonds over US. Treasury securities 

narrowed, and capital flows into emerging 

market mutual funds picked up (figure 38). 

Govemment bond yields in the AFEs generally 

remained very low, reflecting investor 

''""N·tocttnn< that monetary 

accommodation would be required 

some time (ilgure 39). In the United 

Kingdom. softer macroeconomic data and 

uncertainty about future policies and growth 

as the country the process of exiting 

the European also weighed on yields. 

However, AFE government bond yields picked 

up somewhat in late June, partly reflecting 

investors' focus on remarks by officials from 

some AFE central banks suggesting possible 

shifts toward less accommodative policy 

stances. In the euro area, hank supervisors 

intervened to prevent the disorderly failure of 

a few small to medium-sized lenders in Italy 

and Spain; business disruptions were minimal, 

and spillovers to other European banks were 

limited. 

Since the start of the year, the broad dollar 

index-a measure of the trade-weighted value 

of the dollar against foreign currencies ... has 

rtc,nrectott'c about 5 percent, on balance, after 

more than 20 between mid20!4 and late 2016 40). The weakening 

since the start of the year partly reflected 

growing uncertainty about prospects lor more 

expansionary U.S. fiscal policy as well as 

n1ounting confidence in the foreign cconotnic 

outlook. The enro rose against the dollar 

following the French presidential election, and 

the Mexican peso appreciated substantially as 

the Mexican centra! bank tightened monetary 

policy and as investor concerns about the 

potential for substantial disruptions of 

U.S.--Mexico trade appeared to ease. 
96 


28746.041

Economic 

pace 

ln the first quarter, real GDP grew at a solid 

pace in Canada, the euro area, and Japan, 

partly reflecting robust growth in fixed 

investment in all three economies (tlgurc 41 ). 

In contrast. economic growth slowed to a 

pace in the United Kingdom, reflecting 

consumption growth and a decline in exports. 

!n most AFEs, economic survey indicators, 

such as purchasing manager generally 

remained consistent with economic 

growth at a solid pace during the second 

quarter. 

In late 2016, consumer price inflation 

(measured as a 12-month percent change) rose 

substantially in most AFEs, partly reflecting 

increases in energy prices (ligurc 42). Since 

then, inflation has leveled off in Japan and 

dedi ned somewhat in the euro area as upward 

pressure from energy prices eased, core 

inflation stayed low, and wage growth was 

subdued even as unemployment rates declined 

further in both economics. In comrast, in the 

United Kingdom, headline inflation rose wdl 

above the Bank of England's (BOE) 2 percent 

target, largely reflecting upward pressure from 

the substantial sterling depreciation since the 

Brcxit referendum in June 20 ln. 

AFE central banks kept their policy rates at 

historically low levels, and the Bank of Japan 

kept its target range for J 0-year government 

bond yields near zero. The European Central 

Bank (ECB) maintained its asset 

program, though it slightly the 

of purchases, and the BOE completed 

bond purchase program it announced last 

August. However, the Bank of Canada, 

BOE, and ECB have recently suggested 

that if growth continues to reduce resource 

slack, some policy accommodation could be 

withdrawn. The ECB remarked that the forces 

MONETARY POliCY REPORT: JULY 2017 J I 

40. U.S. dollar exchange rate indexc:; 

41. Real gross domestic product growth in selected 

advanced foreign economics 

170 
97 


28746.042

3 2 PART J: RECENT ECONOMJC AND FJNANCJAL DEVELOPMENTS 

holding down inllation could be temporary. 

The BOE indicated that some monetary 

accommodation might need to be removed if 

the tradeoff between supporting employment 

and expediting the return of inflation to its 

target is reduced. 

Chinese economic activity was robust in 

the first quarter of 20 !7 as a result of solid 

domestic and external demand 43). 

More recent indicators suggest growth 

moderated in the second quarter as Chinese 

authorities tightened financial conditions 

and as growth slowed. In some other 

emerging economies, growth picked up 

in early 2017 as a result of stronger external 

demand and manufacturing activity. However, 

growth of the region's exports, especially to 

China, slowed so far in the second quarter. 

American economies 

recovery 

ln Mexico, growth decelerated a touch in 

the first quarter of 2017, partly reflecting a 

slowdown in private consumption following 

sharp hikes in domestic fuel prices. These price 

hikes, together with the ctfccts of earlier peso 

depredation on import prices, contributed 

to a sharp rise in Mexican inllation, which 

prompted the Bank of Mexico to further 

tighten monetary policy. Following a 

prolonged period of contraction. the Brazilian 

economy posted solid growth in the first 

of 2017, partly reflecting a surge 

exports and a strong harvest. However, 

domestic demand has remained very weak 

amid high unemployment and herglltened 

political tensions, and indicators economic 

activity have down recently. ln Brazil 

and some other American economies. 

declining inllation has led central banks to 

reduce their policy interest rates. 
98 


28746.043

Over the past year and a half, the Federal 

Open Market Committee (FOMC) has been 

gradnallv increasing its target range for the 

federal f~nds rate as the economy continued 

to make toward the Committee's 

objectives maximum employment and price 

stability. After having raised the target range 

for the federal funds rate last December, the 

Committee decided to raise the range 

again in March and in June, it to 

1 to l ~~percent (figure 44) 5 The FOMC's 

decisions reflected the progress the economy 

has made, and is to make. toward the 

Committee's obicc:th,es. 

When the Committee met in March, it decided 

to raise the target range for the federal funds 

rate to% to l percent Available information 

suggested that the labor market had continued 

See Board of Govemors of the Federal 

Reserve System (201 7), ''Y..C:Jcral Resc-D/C Issues 

FOMC Statement,'' press release, March 

and of Governors of 

the Federal Reserve System (2017), "f'cdcral Reserve 

lssues FOMC Statement,'' press release. June 14, https:// 

w\vw.fedcralreservc.gov/newscvcnts/prcssrclcascs/ 

monctary20170614a.htm_ 

44. Selected interest rates 

33 

to strengthen even as growth in economic 

activity slowed during the first quarter. 

Inflation measured on a 12-month basis had 

moved up appreciably and was close to the 

Committee's 2 percent longer-run objective. 

Core inJlation_ which excludes volatile energy 

and food prices, continued to nm somewhat 

below 2 percent. 

The data available at the time of the June 

FOMC meeting suggested a rebound in 

economic activity in the second quarter, 

leaving the projected average pace of growth 

over the first half of the year at a moderate 

leveL The labor market had continued to 

strengthen, with the unemployment rate falling 

nearly 'h percentage point since the beginning 

of the year to 4.3 percent in May, a low level 

by historical standards and modestly below 

the median of FOMC participants' estimates 

of its longer-run normal leveL Inflation 

measured on a 12-month basis had declined 

few months but was still 

since last summer. Like the 

int1ation measure, core inJlation was 

running somewhat below 2 percent. With 

~ to remain near its 

miiXt!mum sustan.tauH: level, the Committee 

continued to expect !hat inJlation wonld move 

up and stabilize around 2 percent over the next 

couple of years, in line with the Committee's 
99 


28746.044

34 PARt 2: MONETARY i,\)IICY 

longer-run objective. In view of realized 

and expected labor market conditions and 

inflation, the Committee decided to raise 

target another '4 percentage point to a range 

of l to l '4 percent. 

Even with the gradual reductions in the 

amount of policy accommodation to date, the 

Committee judges that the stance of monetary 

policy remains accommodative, 

supporting some further strengthening labor 

market conditions and a sustained return to 

2 percent inflation. In particular, the federal 

funds rate to remain somewhat below 

its neutral is, the level of the federal 

funds rate that is neither expansionary nor 

contractionary. 

In evaluating the stance of monetary 

policymakers routinely consult pn;scnj:•lJCms 

from a variety of policy rnles, can 

serve as useful benchmarks. However, the 

use and interpretation of such prescriptions 

require careful judgments about the choice 

and measurement of the inputs to these 

rules as well as the implications of the many 

considerations these rules do not take into 

account (see the box "Monetary Policy Rules 

and Their Role in the Federal Reserve's 

Policy Process"). 

The FOMC has continued to 0mnh""''P 

that, in determining the timing size of 

future adjustments to the target range for 

the federal funds rate, it will assess realized 

and expected economic conditions relative to 

its objectives of maximum employment and 

2 percent inflation. This assessment will take 

into account a wide range of information, 

including measures of labor market 

conditions, indicators of inflation pressures 

and inflation expectations, and readings on 

financial and international developments. The 

Committee will carefully monitor actual and 

expected inflation developments relative to its 

symmetric inflation goal. 

The Committee currently expects that the 

strength in the economy will warrant 

gradual in the federal funds rate, 

and that the federal funds rate will likely 

remain, for some time, below the levels that 

the Committee expects to prevail in the longer 

run. Consistent with this outlook, in the most 

recent Summary of Economic Projections. 

which was compiled at the time of the June 

FOMC meeting, most FOMC participants 

that the appropriate level of the 

funds rate would be below its longerrun level through 20186 

payments 

and agency securities in 

agency securities and rolling 

over maturing Treasury securities at auction. 

Consequently, the Federal Reserve's total 

assets have held steady at around $4.5 trillion, 

with holdings of U.S. Treasury securities at 

$2.5 trillion and holdings of agency debt 

and mortgage-backed securities at 

nm'·oxim:ltellv $1.8 trillion (figure 45). Total 

on the Federal Reserve's halance 

sheet were also mostly unchanged over the first 

half of 2017. 

ln June. policymakers augmented the 

Committee's Policy Normalization Principles 

and Plans issued in September 2014 by 

providing additional details regarding the 

approach the FOMC intends to use to reduce 

6. Sec the June 2017 Summary of Economic 

Projections, \vhtch as an addendum to the 

minutes of the June 2017, meeting of the Federal 

Market Committee and is included as Part 3 of 

report 
100 


28746.045

45. Federal Reserve assets and liabilities 

the Federal Reserve's holdings of Treasury 

and agency securities once normalization , 

of the federal funds rate is well under way.' 

The Committee intends to reduce 

the Federal Reserve's by 

decreasing its reinvestment of the 

D8LYnlleJn' it receives from the in 

System Open Market Account Speciilcally, 

such payments will be reinvested only to the 

extent that they exceed caps. 

Initially, these caps set at .. 

low levels to limit the volume of secunttes 

that private investors will have to absorb. The 

Committee currently expects that, 

the economy evolves broadly as """"'l""~·u, 

it would likely begin to ""'l"'d""" 

this year. In 

that changing the target range lor 

the federal funds rate remains its primary 

means of adjusting the stance of 

policy (see the box "Addendum to the 

Normalization Principles and Plans"). 

Sec Board of Governors of the Federal Reserve 

System (2017), "FOMC Issues Addendum to the Policy 

Normali:.w.tion and Plans,'' press release. 

June 14. httns:l'lw\vw.!Cdera. 

MONETARY POLICY RfPORT: jUlY 2017 35 

The Federal Reserve successfully raised the 

eifective federal funds rate in March and June 

of 2017 increasing the interest rate paid 

on reserve along with the interest 

rate offered on overnight reverse repurchase 

aarccmcnts (ON RRPs). Specifically, the 

F~deral Reserve increased the interest rate 

paid on required and excess reserve balances 

to I .00 percent in March and 1.25 percent m 

June while increasing the ON RRP oflcring 

rate to 0.75 percent in March and LOO percent 

in June. ln addition, the Board of Governors 

approved '4 percentage point increases in 

the discount rate (the primary credit rate) in 

March and June. In both March and June, the 

cJfcctive federal funds rate rose ncar the middle 

of its new target range amid orderly trading 

conditions in money markets, closely tracked 

by most other overnight money market rates. 

Usage of the ON RRP facility, which had 

increased late last year as a result of higher 

demand by aovernment money market funds 

in the wake ~f last October's money fund 

reform, has declined some, on average, in 

recent months. However, usage has remained 

somewhat above its levels of one year ago. 
101 


28746.046

36 PART 2: MONETARY POLICY 

Monetary Policy Rules and 

Policy Process 

What are monetary policy rules? 

policy rules are formulas that prescribe 

a srnal! number of ec:onornic 

the between actual 

and t<lrget 

slack in the Prr.nnmv--.. o 

rate, such as the funds rate. 1 

rules can provide helpful guidancp 

their interpretation careful 

the measurement inputs to these rules and the 

implications of the many considerations these rules do 

not take into account. 

Po!icv rules c:m incorporate 

' One key 

Role in the Federal Reserve's 

rate of unemployment in the run (ll") and 1he 

current unemployrnent rate.3 other rules, 

the first-difference rule ronsiders the change in the 

rather thJn its leveL 

recovers. 

The sman number of variables involved in 

rules n1ak0s them easy to use. However, the 
102 


28746.047

MONETARY POLICY REPORT: JULY 2017 3 7 

PIP I 1 11 r T pgwz MT 17 

A Monetary policy rules 

Taylor (1993) rule 

Balanced-approach rule 

Taylor (I 993) rule, 

Change rule 

First-difference rule 

NoTE: R{13, Rf'\ 

Taylor (1993), baliaoced-ar>pn:>ac:h, change, and first-difference rules, respectively. 

denotes the actual nominal federal funds rate for quarter t, n:t for quarter t, and 

unemployment rate in quarter 1, rlR is the level of the neutral real federal rate in the longer run that, 

on to he consistcni with sustaining maximum and infiatlon at its 2 percent longerrun in the longer run. Zt the cumulative sum of 

the Taylor (1993) rule when that rule prescribes 

funds rate below zero. 

The Taylor ( 1993) rule and other policy 

full level. In these 

ploymcnt longer run and 

ruks in tenus of the FOMC's 

been highly correlated. Footnote 

lln,omnlovm"'nt rate is an 

market, it often 

rle11e1<mrnertts and does not provide a 

complete measure or tightness. !n practice, 

federal Open Market Committee (fOMCJ 

examine a great deal of infmmJtion about 

market to gauge its hea!th; this informdt!on includes 

broader measures of labor underutilization, the labor 

force hours worked, 

and 

numerical indexes. 5 

Another issue related to the implementation of rules 

involves the mPasurement of the variables that drive the 

prescriptions ge-nerated the rules. For example, there 

are many measures of and do not always 

move together or by the same dmmmt. broadest 

measure of inf!Jtion, shown by the 

in the dorneslic product price 

differences fmm rneasur0s th<lt gauge 

in consumer prices (figure B). Even measures 

r continued on next page) 

S. discussion of tht'se and other 

see He:;s ChunK. Bruce fallick. 

- -

B. Inflation measures 
103 


28746.048

33 PART 2: MONfTARY POliCY 

Monetary Policy Rules and Their Role in the federal Reserve's Policy Process I continued! 

I 111111 

Total inflation versus core inflation 

SotJRCt: f3urcau ofb:onomic Analysis 

D. Real-time ¢stlmatcs of the neutral real interest 

rate and the unemployment rate in the longer nm 

II!F 
104 


28746.049

highPr rates than prescribed by 

How does the FOMC use monetary policy 

rules? 

MONETARY POLICY REPORT: JULY 201 7 3 9 

J 1 

in 

estimates of the 

real interest rate in the longer run and of the rate of 

unemployment in the run--data and estimates 

that were avail<~ble to policymakers at the 

time.) Moreover1 the rules sometimes prescribe setting 

short-term interest rates well below zero~1 setting 

that is not feasible. With the exception of the adjusted 

Taylor (1993) rule, which a lower limit of 

all of the rules shown figure E called for the 

federal funds rate 10 turn in 2009 and to 

rules have called for higher values 

rate in recPnt years, the 

prescribe has varied 

rules for the- level of the 

quarter of 2017 

rule) to 

E. [Ii:-:torical fe-deral funds rate rwescdptions tlwn simple policy rules 

111111111 l Uill 
105 


28746.050

40 PA~T 2: MONETARY l~)l!CY 

its reinvestment of the 

receives from securities 

Markel Account Specifically, such 

be reinvested only to the extent that 

gradually rising caps. 

o for payments 

Reserve receives 

and 

reaches $30 billion per rnonth. 

o For payments that the Federal 

Reserve receives 

debt and mcrrtgagc'-bJiCk<,C 

Committee thJt thr 

be $4 billion per month initially 

increase in of $4 billion at three-month 

intervals over months until it reaches 

$20 billion month. 

II 

that the caps 

reach their 

respective so Federal 

Reserve's securities holdings will continue to 

decline in a gradual and predictable manner 

untilrhe Committee judges that the Federal 

no more securities than 

monetary policy 

to !f>arn more about the 

underlying for reserves during the process 

of balance sheet normalization. 

Committee .affirms that the target 

range for the federal funds rate is primary 

means of adjusting the stance of monetary 

However, the Committee would be 

received on securities 

economic 

outlook \Vere to warrant a sizable reduction in 

the Committee's target for the federal funds rJte. 

Moreover, the Committee would be to 

use its full range of including the 

and balance sheet, 

economic 

ll II 
106 


28746.051

41 

OF 

an addendum to the minutes of the june 13-14, 2017, meeting 

In conjunction with the Federal 

Market Committee (FOMC) held 

on June 13-14, 2017, meeting participants 

submitted their projections of the most 

likely outcomes for real output growth, the 

unemployment rate, and inflation for each 

year from 20 !7 to 2019 and over the longer 

run8 Each projection was based 

at the lime of the 

meeting, together with his or her assessment 

of appropriate monetary policy, including a 

path for the federal funds rate and its longernm value, and assumptions about other 

factors likely to alfect economic outcomes9 

The longer-run projections represent each 

participant's assessment of the value to which 

each variable would be expected to converge, 

over time, under appropriate monetary 

policy and in the absence of further shocks 

to the economy. 10 "Appropriate monetary 

policy" is delined the future path of policy 

that each deems most likely to 

foster outcomes economic activity and 

inflation that best satisfy his or her individual 

rmeq:1rercanon of the Federal Reserve's 

of maximum employment and stable 

prices. 

8. l-Our members of the Board of Governors. one 

fewer than in March 2017, \vcrc in office at the time 

nf the June 2017 meeting and submitted ccnnomic 

projections. The office of the president of the Federal 

Reserve Bank of Richmond vacant at the time 

of this FOMC meeting: First Vice President Mark L 

no projections were 

revised following the release of economic data on the 

14. 

not submit longer-run 

growth, the unemployment 

who submitted longer-run 

that, under appropriate 

growth in real gross domestic 

product this year would run somewhat 

above their individnal estimates of its longerrun rate. Over half of these participants 

that economic growth would slow a 

2018, and almost all of them expected 

that in 20 !9 economic growth would run at or 

near its longer-run leveL All participants who 

submitted longer-run projections expected that 

the unemployment rate would run below their 

estimates of its longer-run normal level in 20! 7 

and remain below that level through 2019. 

The of also lowered 

their the longer-run normal rate 

of unemployment by 0.1 to 0.2 percentage 

point All projected that inflation, 

as by the !our-quarter percentage 

change in the price index lor personal 

consumption expenditures (PCE), would run 

below 2 percent in 2017 and then step up in 

the next two years; over half of them projected 

that inflation would be at the Committee's 

2 objective in 2019, and all judged that 

would be within a couple of tenths of 

a percentage of the objective in that year. 

Table 1 and 1 provide summary statistics 

for the projections. 

As shown in fignrc 2, participants generally 

expected that evolving economic conditions 

would likely warrant further gradual increases 

in the federal funds rate to achieve and sustain 

maximum employment and 2 percent inflation. 

Although some participants raised or lowered 

their federal fnnds rate projections since 

March, the median projections for the federal 

funds rate in 2017 and 2018 were essentially 

unchanged. ;md the median projection in 

2019 was slightly lower; the median projection 

for the longer-run federal fnnds rate was 
107 


28746.052

42 PART 3: SUMMARY Of ECONOMIC PROifCTIONS 

Table I. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their 

individual assessments of projected appropriate monetary policy, June 2017 

3 Th~ rnnge fN a vanuble m a gwen ye~1r mdud\'S all partlupants' pwjcctmns. from ln\>.e,>110 h1ghe~t for that \1Jri1ble m that yur. 

4 Ll\!J)"!:tr-nm pMjecupns l<>r .;,we l'CL mtlanon :J.JC not ~olk...:t<:d 

unchanged. However. the economic outlook 

is uncertain. and participants noted that their 

economic projections and assessments of 

appropriate monetary policy could change in 

response to incoming information. 

In general. viewed the uncertainty 

attached to projections as broadly 

similar to the average of the past 20 years. 

although a couple of participants saw the 

uncertainty associated with their real GOP 

growth forecasts as higher than average. 

Most participants judged the risks around 

their projections for economic growth. the 

unemployment rate. and intlation broadly 

halanced. 

Figures 4.A through 4.C for real GOP 

growth, the unemployment rate, and intlation, 

respectively. present "fan charts,. as well as 

charts of participants' current assessments 

of the uncertainty and risks surrounding 

the economic projections. The fan charts 

(the panels at the top of these three figures} 

show the median projections surrounded by 

confidence intervals that are computed from 

the forecast errors of various private and 

government projections made over the past 

20 years. The width of the confidence interval 

for each variable at a given point is a measure 

of forecast uncertainty at that horizon. For 

all three macroeconomic variables. these 

charts illustrate that forecast uncertainty is 

substantial and generally increases as the 

forecast horizon lengthens. Reflecting. in part, 

the uncertainty about the future evolution 

of GOP growth, the unemployment rate. 

and in flat ion, participants' assessments of 

appropriate monetary policy are also 

to considerable uncertainty. To illustrate 

uncertainty regarding the path for 

monetary policy. tigure 5 a comparable 

fan chart around the median projections 

for the federal funds rate." As with the 

II. The fan chart fOr the federal funds rate 

the about the future path of 

monetary and is closely connected 

uncertainty about the future value of economic variables. 

ln contrast, the dot plot shown in Ggurc 2 displays the 
108 


28746.053

MONETARY POLICY REPORT: jULY 20T7 43 

Figure l. Medians, central tendencies. and ranges of economic projections., 2017- 19 and over the longer run 

Change in real GDP 

Actual 

' ' 

Pert'ent 

- J 

'--'----'----'-----'------''------L--_L_ ___ j_ __ _:_ _____ LJ 20!7 2019 

Unemployment rate 

Percent 

PCE inftati0n 

--· :_:\ 

LL_____l_ _____ t_____j __ _l ____ _ 

2012 201) 20t4 2015 2016 

Core PCE inflation 

LL 20!2 21113 2014 2015 2016 2017 2{)18 2019 

and other cxplanatinns are in the nntcs to tahle J. The data for 1hc actual values of the 
109 


28746.054

44 PART SUMMARY m ECONOMIC PROjECTIONS 

appropriate monetary policy: Midpoint of target range or target 

Pncent 

4.5 

. . . . -. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i . . 

.............................................. ~... . .............. ······- 1.5 

1.0 

.................................... ····t·· ························ ····- 0.5 

20!7 20!8 

macroeconomic variables, forecast uncertainty 

for the federal funds rate is substantial and 

increases at longer horizons. 

The median of participants' projections tor 

the growth rate of real GDP, conditional 

on their individual assumptions about 

appropriate monetary policy, was 2.2 percent 

in 2017,2.1 percent in 2018, and 1.9 percent 

in 2019; the median of projections for the 

longer-run normal rate of real GDP growth 

dispersion of views across individual n"'''"'m""" about 

the appropriate level of the federal 

' 

2019 Longernm 

was LS percent Compared with the March 

Summary of Economic Projections (SEP), the 

medians of the torecasts for real GDP growth 

over the from 2017 to 2019, as well 

as the assessment of the longer-run 

growth rate, were mostly unchanged. Fewer 

than half of the incorporated 

expectations of stimulus into their 

projections, and a couple indicated that they 

had marked down the magnitude of expected 

liscal stimulus relative lo March. 

All participants revised down their projections 

lor the rate in the fourth 

quarter of and of 2018, and almost all 

also revised down their projections for the 
110 


28746.055

unemployment rate in the fourth quarter of 

2019. Many who did so cited recent lowerthan-expected readings on unemployment 

The median of the projections for the 

unemployment rate was 4.3 percent in 2017 

and 4.2 percent in each of 2018 and 2019, 

0.2 percentage point and 0.3 percentage 

point lower than in the March projections, 

respectively. The majority of also 

revised down their estimates 

run normal rate of unemployment 

0.2 percentage point, and the median 

nm level was 4.6 percent, down 0.1 pcrcemage 

point from March. 

Figures 3.A and 3.B show the distribntions of 

participants' projections for real GDP growth 

and the unemployment rate from 2017 to 20!9 

and in the longer run. The distribution of 

individual projections for real GDP growth for 

this year shifted up, with some norhr·m'"' 

now expecting real GDP 

2.4 and 2.5 percent and none seeing it below 

2 percent The distributions of real 

GDP growth in 2018, 2019, and 

run were broadly similar to the distributions 

of the March The distributions of 

individual for the unemployment 

rate shifted down noticeably for 2017 

and 2018. Most an 

unemployment rate or percent at the 

end of this year. and the majority aHu~•va•cu 

an unemployment rate between 4.0 

4.3 allbc end of 2018. Participants' 

nn)lPo"f"m' also shifted down in 2019 but 

were more dispersed than the distributions of 

their projected rates in the two 

earlier The of '"'"J"'''"'"'" 

for the 

price infiation year was 1.6 percent, 

down 0.3 percentage point from March. As 

in March, median projected inflation was 

2.0 percent in 2018 and 2019. About half of 

the participants anticipated that in11ation 

MONETARY POLICY REPORT: JULY 2017 45 

wonld continue to run a bit below 2 percent 

in 2018, while only one participant expected 

inllalion above 2 percent in that ycar~-and, 

in that case, just modestly so. More than 

half projected that in11ation would he equal 

to the Committee's objective in 2019. A few 

participants projected that in11ation would 

nm slightly below 1 percent in that year, while 

several projected that it would run a little 

above 2 percent The median of projections 

for core PCE price inflation was L 7 percent 

in 2017, a decline of 0.2 percentage 

from March; the median projection 2018 

and 20 J 9 was 2.0 percent, as in the March 

projections. 

Figures lC and 3.D provide information on 

the distributions of views about 

the outlook for distributions of 

projections for headline PCE price inflation 

and for core PCE price in11ation iu 2017 

shifted down noticeably from March, while the 

distributions for both measures of in11ation in 

2018 shifted down Many participants 

cited recent low readings on 

inflation as a factor contributing to the 

revisions in their inflation forecasts. 

Figure 3.E provides the distribution of 

participants' judgments regarding the 

or midpoint of the 

range the funds rate at the 

of each year from 201 7 to 2019 and over 

the longer run-" The distribution for 2017 

was less dispersed than that in March, while 

the distribution for 20 l 8 was slightly less 

12. One participant's projections fOr the federal 

funds rate, real the rate, 

and inilation by tht: there are 

multiple possible medium-term regimes for the U.S. 

economy. that these regimes and that the 

economy shifts between regimes 

forecast. Under this view, the economy currently is in 

characterized 

low productivity 

interest rate, but longer-term outcomes for variables 

other than inflation cannot be usefully projected. 
111 


28746.056

46 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

Figure 3.A. Distribution of participants' projections for the change in real GDP, 2017 19 and over the longer run 

2017 

0 

20!8 

Pcn:..·,ent range 

2019 

Longer run 

Pcrccoi 

NoTE: Definitions nf variabk'\ and Mhcr explanation.;, arc in the notes to tahl-c L 

Number of participant~ 

14 

Numher of participant;; 

-!8 

'" " 

10 

8 

Numher ()f participants 

lE 

16 

14 

Numher of participants 

18 

16 

-14 
112 


28746.057

20!7 

t:l 

20!8 

20!9 

Longer nm 

:ts3.9 

forthc 

Pt?rceut range 

Pcrc{'m range 

the notes to tahlc t. 

MONETARY POliCY REPORT: IUlY 2017 47 

2017- !9 and over the run 

Number of participant~ 

-!R 

16 

14 

lll 

-s 

0 _, 

Number ofpartieipants 
113 


28746.058

4 8 PART SUMMARY OF ECONOMIC PRO)FCTIONS 

for PCE inflation, 2017 ~ 19 and overlhe run 

20!7 

0 

Percent range 

2018 

2019 

Perc~~ut range 

Longer run 

16 

Pcn:eni range 

NoTE: Definitions of variable<>. and other cxplanatlnns arc, ill the notes t(1 table l. 

L 

Number of partit·ipants 

-18 

16 

-14 

lll 

-g 

-4 

_, 

Number ,,f partkipants 

1S 

16 

-14 

10 

-6 ' -4 

Number o..lfpartkipants 

1S 

-16 

14 

12 

lG 

Number of participants 
114 


28746.059

2017 

0 

Percent range 

2018 

Percent range 

2019 

1.6 

Pcn.-x::nt range 

NmT: Definitions of variables and other explanations arc ill 

MONETARY POLICY REPORT: JULY 2017 49 

20!7-19 

Number nf participants 

-1g 

16 

-14 

-10 

-4 

Number of participants 

IS 

-16 

14 

12 

-4 

!-

Number of participants 

'" 16 

14 
115 


28746.060

5() PART 3c SUMMARY Of ECONOMIC PROjfCTIONS 

20{7 

Percent range 

2018 

Percent range 

20!9 

Longer run 

Percent range 

18 

16 

14 

18 

16 

14 

---12 

Hl 

8 

Numbt'r of panicipants 

18 

16 

14 

Nmnberofparncipant~ 

16 

~14 

10 

8 
116 


28746.061

dispersed. The distributions in 2019 and in 

the longer run were broadly similar to those 

in March. The median projections of the 

federal funds rate con tinned to show gradual 

increases, with the median assessment lor 

2017 standing at l.3R percent, consistent 

with three 25 basis point increases this year. 

Thereafter, the medians of the nn1ie<cli<1ns 

were 2.13 perccn t at the end and 

2.94 percent althc end of 2019; the median of 

the longer-run projections of the federal funds 

rate was 3.00 percent. 

In discussing their June projections, many 

participants continued to express the view 

that the appropriate upward trajectory of 

the federal funds rate over the next few years 

would be gradual. That ~nticipated pace 

rellcctcd a factors, such as a neutral real 

interest rate that was low and was 

expected to move up only as well as a 

gradual return of inflation to the Committee's 

2 percent objective. Several participants judged 

that a slightly more accommodative 

of monetary policy than in their 

projections would likely be appropriate, citing 

an apparently slower rate of toward 

the Committee's 2 percent objective. 

In their discussions of appropriate monetary 

policy, half of the participants commented 

on the Committee's reinvestment policy; all 

of those who did so expected a change in 

reinvestment policy before the end of this year. 

Projections of economic variables arc subject 

to considerable uncertainty. In assessing the 

of monetary policy that, in their view, 

likely to be most appropriate, FOMC 

take account of the range of 

outcomes, the likelihood of those 

outcomes, and the potential bcnctits and costs 

to the economy should they occur. Table 2 

provides one measure of forecast uncertainty 

lor the change in real GDP, the unemployment 

rate, and total consumer price inflation-~·thc 

root mean squared error (RMSE) lor forecasts 

made over the past 20 years. This measure of 

MONETARY POLICY REPORT: JULY 2017 5 l 

Table Average historical projection error ranges 

forecast uncertainty is incorporated graphically 

in the of figures 4.A, 4. B, and 

4.C, fan charts plotting the 

median SEP projections for the three variables 

surrounded by symmetric confidence intervals 

derived from the RMSEs presented in table 2. 

lf the degree of uncertainly attending these 

nnJie·ctil)nS is similar to the typical magnitude 

past forecast errors and if the risks around 

the projections arc broadly balanced, future 

outcomes of these variables would have 

about a 70 percent of occurring 

within these intervals. For all three 

variables, this measure of forecast uncertainty 

is substantial and generally increases as the 

forecast horizon lengthens. 

width 

fignrcs 4.A through 4.C does not adequately 

their current assessments of the degree 

uncertainty that surrounds their economic 

projections. Participants' assessments of the 

current level of uncertainty surrounding their 

economic projections are shown in the bottomleft panels of figures 4.A, 4.B, and 4.C. All or 

all participants viewed the uncertainty 

to their economic projections as 
117 


28746.062

52 PART 3: SUMMARY OF ECONOMIC PROirCTIONS 

broadly similar to the average of the past 

20 years, with three fewer participants than in 

March seeing uncertainty about GDP growth, 

the unemployment rate, and inflation as higher 

than its historical average, u In their discussion 

of the uncertainty attached to their current 

projections, most participants again expressed 

the view that, at this point uncertainty 

surrounding prospective changes in fiscal and 

other government policies is large or that 

there is not yet enough to make 

reasonable assumptions about the timing, 

nature, and magnitude of the changes. 

The fan charts-which are constructed so as to 

be symmetric around the median projections--· 

also may not fully reflect participants' 

current assessments of the balance of risks 

to their economic projections. Participants' 

assessments of the balance of risks to their 

economic projections are shown in the bottomright panels of figures 4.A, 4J3, and 4.C. As 

in March, most participants judged the risks 

to their projections of real GDP the 

unemployment rate, headline 

core inflation as broadly balanced--in other 

words, as broadly consistent with a symmetric 

fan chart. Three participants judged the risks 

to the unemployment rate as weighted to the 

downside, and one participant judged the risks 

to the (as shown in the 

panel 4.B). In addition, 

the balance of risks to participants' inflation 

projections shifted down slightly from March 

(shown in the lower-right of figure 4.C), 

as two fewer the risks to 

inflation to be and 

downside. 

13. At the end of this summary, the box 

discusses the sources and 

rmccrtanl!v in the economic forecasts 

to the 

assessments of the fntnre 

path 

with appropriate policy are also subject to 

considerable uncertainty, reflecting in part 

uncertainty about the evolution of GDP 

growth, the unemployment rate, and inflation 

over lime. The final line in table 2 shows the 

RMSEs for forecasts of short-term interest 

rates. These RMSEs are not strictly consistent 

with the SEP for the federal limds 

rate, in part the SEP projections are 

not forecasts of the likeliest ontcomes but 

rather reflect each participant's individual 

assessment of appropriate monetary policy. 

However, the associated confidence intervals 

provide a sense of the likely uncertainty 

around the future path of the federal funds 

rate generated by the uncertainty about the 

macroeconomic variables and additional 

adjustments to monetary policy that may be 

appropriate to offset the efl"ects of shocks to 

the economy. 

Figure 5 shows a fan chart plotting the median 

SEP projections for the appropriate path of the 

federal fnnds rate surrounded by conftdcncc 

intervals derived from the results presented in 

table 2. As with the macroeconomic variables, 

forecast is substantial and l4 

14. at some point in the future the coniidcncc 

interval around the federal funds rate were to extend 

below zero, it would be truncated at zero for purposes 

of the chart shown in 5; zero is the bottom of 

federal funds rate that 

This 

rate 

chart would be merely a convention and woul{l not 

have any fOr possible future policy decisions 

regarding negative interest rates to 

additional monetary policy accommodation so 

were appropriate. 
118 


28746.063

MONETARY POLICY REPORT: jULY 2017 53 

Figure 4.A. Uncertainty and risks in projections or GDP growth 

Median projection and confidence interval based on historical forecast errors 

Actual 

2012 2013 2fll4 2015 20!9 

FOMC participants' assessments of uncertainty and risks around their economic projections 

Uncertainty about GDP grnwth [::J 

similar 

-n 

-IS 

lh 
119 


28746.064

54 PART 3: SUMMARY OF ECONOMIC PROJECTIONS 

Median projection and confidence interval based historical forecast errors 

10 

-s 

-5 

:!012 2013 2014 2015 2016 20l7 2018 2019 

FOMC participants' assessments of uncertainty and risks around their economic projections 

1JIK£rtainty about th~ unemplnymcut rate 

0 

Lnwcr Broadly 

similar 

Numhe.rofpart!C!pant.~ 

Ifip:hcr 

IS 

In 

14 

12 

10 

Ntnnhe:r of paru..:ipant'\ 

IS 

12 

j{) 
120 


28746.065

MONtTARY POLICY REPORTc JULY 1017 55 

of PCE inflation 

Median projection and confidence interval based on historical forecast errors 

20!2 2013 2014 2015 2010 2017 20!8 2019 

FOMC participants' assessment$ of uncertainty and risks around their economic projections 

Uncertainty about PCE inflation 

0 

LCl\VCf Broadly 

similar 

Uncertainty ahout wrc PC'E infhnir•n 

0 

~tunl'<.:r of panicipants 

Higher 

!S 

!6 

- !4 

1.? 

10 

8 

Risks to PC'E inflation 

0 

Risks tn cnrc PCl~ inflation 

0 

-0 

-IS: 

!6 

14 
121 


28746.066

56 PAKI SLUvllv\ARY Of ECONOMIC PROJECTIONS 

!;igure 5, Uncertainty in projections of the federal funds rate 

Medirll1 projection and wnfidcnc,c interval based (lfl historical 

federal funds. rate 

Actual 

20!2 2013 20!4 20!5 

proj(:ctions. 

* The cunfidence interval is derived 

errors Percent 

-4 

-2 

2016 20!7 2018 20!9 

rates in the fourth quarter of the 

table 2. The shaded area encompasses less than a 70 percent 
122 


28746.067

Forecast Uncertainty 

however. The economic 

and relationships used to'"'~ P'"""cc 

economic forecasts are necessarily 

of the rea! wodd, and the future path economy 

can be affected by myriad unforeseen developments and 

events. Thus, in setting the stance of monetary 

consider not only to 

staff in advance of meetings of the 

Federal Open Market Committee 

error ranges shown in the table iHustrate the COilSi(krilble 

uncertainty associatE>d with economic forecasts. For 

example, real gross 

domestic consumer prices will 

•eouec~uv•e•v. ,1 percent and 

cxpJnd within a range 

in the current year, 1.0 to 5.0 

ye<Jr, and 0.8 to 5.2 p('rcent in 

70 confidence inte-rvzds 

1.2 to 2.8 in the 

are symmetric and centPr<'d on 

!he medians of FOMC participants' for GDP 

growth, the unemployment rate, However, 

in ~ome in~tanu~s, the risks around the projections may 

not be !n the unemployment rate 

the risks around a 

be tilted to either the upside or 

in CJSP the fan chart 

would be asymmetrically positioned around medi<1n 

current condilions may differ from I hose that 

prpvai!ed, on 

projections of e~1ch economic 

than, smaller than, or broadly similar to 

of forecast uncertainty seen in the past 20 

presented in table and reflected in of the 

confidence intervals shown in the top panels of 

4.A through J::>articipants' current assessments of the 

MONETARY POLICY REPORT IULY 2017 57 

activity 

economic conditions evolve in an 

then assessments of the 

funds rrtte would change 

final line in table 2 shows the error 

short-term interest rates. They 

confidence intervals associated 

fc0eral funds rate are quite wide. lt be noted, 

however, that these confidence intervals are not strictly 

consistent with the projections for the federal funds ' 

rate, as these are not forecasts of the most 

likely 

the macroeconomic 

variables as well <Kfditlonal adjustments to 

that would be appropriate to offset the effects 

to the 

in future the confidence interval 

around funds rate were to extend below zero, 

i! would be trunc~1ted at zero for purposes of the fan chart 

shown in zero is the bottom of the 

for federal funds r,1te that has been 

by Cornmittee in the This 

construction of the funds chan would be 

m<.~re!y a convention; it would not have anv im~nlic·,,i,nn' 

for possible future policy decisions ' 

interest rdtes to 

accommodation were ao,oronoo,le 

situations, the Committee could 

tools, including forvvard guidance and asset 

provide additional accommodation. 

While figures 4.A through 4.( provide information on 

the uncertainty Jround the economic projections, 1 

provides information on the range of views across 

A of figure 1 with figures 4.A 

of the projections 

_ than the average 

1on.'cast E>rrors over the past 20 )'f'ars. 
123 


28746.068

AFE 

BOE 

C&J 

DP! 

ECB 

EME 

FOMC 

GDP 

LFPR 

LIBOR 

MBS 

Michigan survey 

OJS 

ONRRP 

OPEC 

PCE 

SEP 

SLOOS 

S&P 

TIPS 

advanced foreign economy 

Bank of England 

commercial and industrial 

disposable personal income 

European Central Bank 

emerging market economy 

Federal Open Market Committee; also, the Committee 

gross domestic product 

labor force participation rate 

London interbank offered rate 

mortgage-backed securities 

University of Michigan Surveys of Consumers 

overnight index swap 

overnight reverse repmchase agreement 

Organization of the Petroleum Exporting Countries 

personal consumption expenditures 

Summary of Economic Projections 

Senior Loan Olficcr Opinion Survey on Bank Lending Practices 

Standard & Poor's 

Treasury lntlation-Protcctcd Securities 

59 
124 


28746.069
125 


28746.070

~l!Jr The Honorable ·!aMI L Yellc.!b.._(~hair, !!!J.:ti:.tl..Jl!:J~JJ~:!Ll!.'!rs of the Feqer'!.! 

!~<>serve Svslcm from Rcprcscnla!ivc Bcaity: 

L While I he economy has bal!lcrl its way recession since the Great 

Uem·css:iml. many Americans still have recovery. For instance, 

the overall unemployment numbers have come down clmsidcnd)ly since the depths of 

the Financial Crisis in 2008, wage gn1wth has only recently begun In grow. While the cost 

of l!ealthcare, housing, ami everyday constmler products has increased, Americans wages 

have not kept pace. After the March FOMC mc~ting, yon stated that "one of the things thai 

has been holding down im~reases is slow productivity growth." You also have 

slated in the past that slow productivity gmwih, widening income gap, arc 

long-term risks facing our economy, that polirymakers address. 

Why the U.:S. facing slow productivity growth ami hnw policymakcrs combat this 

pn1hiem, ill at we can sec wage growth for !he average American'? 
126 


28746.071

2. As you may know, thousands of my constituents work for several regional banks with 

significant operations in the Third Congressional District of Ohio and the Greater 

Columbus Metropolitan area. In April, former Governor Tarullo gave a departing speech 

at the Woodrow Wilson School at Princeton University where he discussed the post-crisis 

regulatory response. Within that speech, be offered some areas of bank regulation that he 

thought made sense to right-size, spedfically, the $50 billion S!FI threshold, the $10 billion 

stress test threshold, and implementation of the Volcker rule. 

Obviously, these are decisions for policymakers to make, but I wanted to give you the 

opportunity to address these remarks by your former colleague and offer any comments or 

thoughts you may have on some ofthe issnes he addressed. Specifically, what is the 

appropriate asset threshold for SIFI designation, if there is one? 

In all of our efforts, our goal is to establish a regulatory framework that helps ensure the 

resiliency of our financial system, the availability of credit, economic growth, and financial 

market efficiency. The Federal Reserve has been working for many years to make sure that our 

regulation and supervision is tailored to the size and risk posed by individual institutions. 

The failure or distress of a large bank can harm the U.S. eeonomy. The recent financial crisis 

demonstrated that excessive risk-taking at banks makes the U.S. economy vulnerable. The 

crisis led to a deep recession and the loss of nearly nine million jobs. Onr regulatory framework 

must reduce the risk that banlc failures or distress will have such a hannful impact on economic 

groVlth in the future. 

The Federal Reserve Board (Board) has already implemented, via a regulation that was proposed 

and adopted following a period of public notice and comment, a methodology to identify global 

systemically important banking organizations (GS!Bs), whose failure could pose a significant 

risk to the financial stability of the United States. 1 The "systemic footprint" measure, which 

detennines whether a large firm is identified as a GSIB, includes attributes that serve as proxies 

for the firm's systemic importance across a number of categories: size, interconnectedness, 

complexity, cross-jurisdictional activity, substitutability, and reliance on short-term wholesale 

fimding. 

There are many large financial finns whose failure would pose a less significant risk to U.S. 

financial stability, but whose distress could nonetheless cause notable harm to the U.S. economy 

(i.e., large regional banks). The failure or distress of a large regional bank could harm the U.S. 

economy in several ways: by disrupting the J:low of credit to households and businesses, by 

disrupting the functioning of financial markets, or by interrupting the provision of critical 

financial services, including payments, clearing, and settlement. Eeonomic research has 

documented that a disruption in the flow of credit through banks or a disruption to financial 

' Board of Governors of the Federal Reserve 

Based Capital Surcharges for Global Sy~;tertlie<llly 

Register, vol80 (August 14), pp. 
127 


28746.072

- 2-

market functioning can affect economic Some level of tailoced enhanced regulation is 

therefore appropriate for these large re&':ional banks. 

The application of tailored enhanced regulation should consider the size, complexity, and 

business models of large regional banks. The on economic growth of a large regional 

bank's failure will depend on factors such as the and geographic distribution of the bank's 

customer base and the types and number of borrowers that depend on the bank for credit Asset 

size is a simple way to proxy for these impacts, although other measures may also be 

appropriate. For large regional banks with more complex business models, more sophisticated 

supervisory and regulatory tools may be appropriate. For example, the Board recently tailored 

our Comprehensive Capital Analysis and Review qualitative assessment to exclude some smaller 

and less complex large regional banks, using asset size and nonbank asset~ to measure size and 

complexity, respectively.3 ln other contexts, foreign activity or short-term wholesale funding 

may be another dimension of complexity to consider. Any characteristics or measures that are 

used to tailor enhanced regulation for large regional banks should be supported with clear 

analysis that links them with the potential for the bank's failure or distress to cause notable harrn 

to the U.S. economy. 

The Board currently has only limited anthority to tailor the enhanced prudential standards 

included in sectionl65 of the Dodd-Frank Act. In particular, Congress required that certain 

enhanced prudential standards must apply to firrns with $10 billion in total assets, with other 

standards begirming to apply at $50 billion in total assets. I understand that Congress is currently 

considering whether and how to raise these stamtory thresholds. The Board has supported 

increasing these thresholds. As an alternative to simply raising the thresholds, I believe that it 

would be logical to use a wider range of factors th<m asset size to determine fhe application of 

tailored enhanced regulation for large regional banks. Congress could usefully decide to pursue 

either raising the dollar thresholds and/or authority to the Board to decide which fim1s are 

subject to enhanced prudential standards. TI1e Board is committed to continuing to work with 

Members of Congress on this issue. 

2 For evidence on the link between bank distress and economic growth, see Mark A. Carlson, Thomas King, and 

Kurt Lewis (2011) "Distress in the Financial Sector and Economic Activity," The B.E. Journal of Economic 

Analysis & Policy: Vol. I l: lss. I (Contrihntiom), Article 35. For evidence on the link between financial market 

functioning and economic growth, see Simon Gilchrist (20 12), "Credit Spreads and Business 

Cycle Fluctuations," American Economic Review, Vol. 3 Board of Governors of the Federal Reserve 

Rules; Regulations Y and YY," final nde. 

·Anlen,dm<ontsto the Capital Plan and Stress Test 

vo! 82 (February 3), pp. 9308-93:10. 
128 


28746.073

1. As you know, pursuant to Executive Order 13772, the Department of the Treasury 

released a report titled "A Financial System that Creates l~conomic Opportunities: Banks 

and Credit Unions" on June 12, 2017. This report contains numerous recommendations for 

regulatory relief for financial institutions, aod I appreciate that you have indicated that you 

generally support these recommendations. 

a. Specifically, the report recommends that the $50 billion threshold for application of 

enhanced prudential standards to institutions be more appropriately tailored to the risk 

profile of bank holding companies. Further, the report recommends that Federal Reserve 

update the threshold for CCAR stress tests and living wills to match tbat revised 

threshold. Do you agree with this recommendation? 

b. The report also recommends that the Federal Reserve consider putting CCAR stress 

test~ and living wills under a two-year cycle. Do you agree with this recommendation? 

In all of our efforts, our goal is to establish framework that helps ensure the 

resiliency of our financial system, the of credit, economic growth, and financial 

market efficiency. The Federal Reserve has been working for many years to tailor our regulation 

and supervision to the size and risk posed by individual institutions. 

111e failure or distress of a large bank can harm the U.S. economy. The recent financial crisis 

demonstrated that excessive risk-taking at large banks can threaten the U.S. economy. The crisis 

led to a deep recession and the loss of nearly nine million jobs. Our regulatory and supervisory 

framework must aim to reduce the risk that bank failures or distress will have such a harmful 

impact on economic growth in the future. 

The Federal Reserve Roard (Board) has already implemented, via a regulation that was proposed 

and adopted following a period of public notice and comment, a methodology to identity global 

systemically important banking organi?~tions (GSIBs), whose failure could pose a significant 

risk to the financial stability of the United States. 1 This "systemic footprint" measure, which 

detennines whether a large firm is identified as a GSIB, includes attributes that serve as proxies 

for the firm's systemic importance across a number of categories: size, interconnectedness, 

complexity. cross-jurisdictional activity, substitutability, and reliance on short-tenn wholesale 

funding. 

There are many large financial firms whose failure would pose a less significant risk to U.S. 

financial stability, but whose distress could nonetheless cause notable harm to the U.S. economy. 

The failure or distress of a bank of this nature could harm the U.S. economy in several ways: by 

dismpting the flow of credit to households and businesses, by the functioning of 

financial markets, or by interrupting the provision of critical services, including 

payments, clearing, and settlement. Economic research has doeumented tlmt a disruption in the 

1 Board of Governors of the Federal Reserve 

Based Capital Surcharges for Global Svo:teuilicilllY 

Register, vol80 (August14), pp. 
129 


28746.074

-2 

flow of credit through banks or a disruption to financial market functioning can affect economic 

growth? Some level of enhanced, but tailored, standards are therefore appropriate 

for certain large, non-GSIB banks. 

Any application of enhanced, but tailored standards to large, non-GSIB banks should consider 

their size, and business models. The on economic growth of a bank's failure 

will depend on such as the size and distribution of the bank's customer base 

and the types and number of borrowers tbat depend on the bank for credit Asset size is a simple 

to proxy for these impacts, although other measures may also be appropriate. For banks 

more complex business models, more sophisticated supervisory and regulatory tools may be 

appropriate. For example, the Board recently tailored our Comprehensive Capital Analysis and 

Review (CCAR) qualitative assessment to exclude some smaller and less complex large regional 

banks, using asset size and nonbank assets to measure size and complexity, respectively.3 In 

other contexts, foreign activity or short-tenn wholesale funding may be another dimension of 

complexity to consider. Any characteristics or measures that are used to tailor enhanced 

standards for large, non-GSIB banks should be with clear analysis that links them to 

the potential for the bank's failure or distress to cause notable harm to the U.S, economy. 

The Board currently has only limited authority to tailor the enlmnced prudential standards 

included in section 165 of the Wall Street Reform and Consumer Protection Act. In 

particular, Congress required that certain enhanced prudential standards apply to firms with 

$10 billion or more in total assets, with different standards beginning to apply at $50 billion or 

more in total assets. 

I understand that Congress is currently considering whether and how to raise these statutory 

thresholds. The Board has supported increasing these thresholds and is committed to continuing 

to work with Members of Congress on this issue, 

With regard to the proposal to extend the timing of the CCAR assessment from annually to every 

two years, large banks continue to innovate and adapt their businesses, which is a normal 

practice for profit-making institutions. CCAR is designed to evaluate capital planning and 

positions relative to those changes, as well as any changes -in a bank's balance sheet, and test for 

salient risks across the entire financial system. Given the dynamic nature of banks and the risks 

that they face, capital planning practices are most effective when they address the relevant risks 

of the firm, and therefore om current supervisory practice includes annual quantitative and 

qualitative assessments.4 

With regard to resolution planning, the Government Accountability Office has recommended 

lengthening the current one-year resolution plan filing cycle to provide sufficient time for 

regulators to complete their plan reviews and feedback, and for fmns to address and incorporate 

2 For evidence on the link between bank distress and economic growth, see Mark A. Carlson, Timmas King, and 

Kurt Lewis (2011) "Distress in the Financial Sector tmd Economic Activity," The B.E. Journal of Economic 

Analysis & Policy: Vol. ll: Iss. 1 Atticle 35. For evidence on the link between fmancial market 

fimctioning and economic growth, see ~'Credit Spreads and Business 

Cycle Fluctuations," American Ecooomic Review, Vol. 

' Board of Governors of the Federal Reserve 

Rules; Regulations Y and YY," final rule, 

"AmeJ,dn~en,tq to the Capital Plan and Stress Test 

vol 82 (Febmary 3), pp. 930&-9330. 
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regulators' feedback in subsequent plan filings. The Board and Federal Deposit Insurance 

Corporation continue to explore ways to improve the resolution planning process and believe it 

would be worthwhile to consider extending the 1ur living will submissions from ammally 

to once every two years. Doing so would require amending the agencies' respective 

Impte:m<mtmg regulations, which currently annual plan submissions. In the meantime, I 

would note that the agencies have taken a in recent years to simplifY the 

resolution plan filing process, tor plan submission deadline in a 

number of instances, and by reducing content for foreign banking 

orf~anizatio:ns with a relatively Slllall footprint in the States. Also, resolution plan 

provided to firms other than those that are largest and most systemically important has 

been tailored to reflect iheir smaller size and business models. 
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1. Since the Federal Reserve Board (FRB) is a significant participant in the International 

Association of Insurance Supervisors (IAIS), which is attempting to develop a global group 

capital standard, can you provide any insight into the status of the Insurance Capital 

Standard (ICS) work at the IAIS and do you believe the 2019 deadline for WS adoption of 

ICS 2.0, the first version that member jurisdictions are expected to implement, will be 

kept? Will the FRB advocate that any version of the ICS should include recognition of U.S. 

state based capital standards and the capital standard currently under development by the 

FRB as at least one alternative for compliance? 

The Insurance Capital Standard (ICS) aims to be the :first international, group-wide capital 

standard broadly applicable to internationally active insurance groups. The Inten:tational 

Association ofinsurance Supervisors began work on the ICS in 2013, issued an initial 

consultative proposal in late 2014, and consultative proposal on an ICS 

version LOin July 2016. A revised on an ICS version 2.0 is currently 

contemplated for the middle of2018. Depending on outcome oftbe consultation, stakeholder 

input, and data collection. as well as IAIS member review, appropriate subsequent steps will be 

detern1ined. The ICS is scheduled to be adopted by the TAIS in late 2019. However, it is 

possible that ongoing discussions the inclusion of other methods in the ICS, including 

possible aggregation appwaches, resnlt in postponement ofthe IAIS' adoption. Importantly, 

standards developed at the IAIS are not or binding on the U.S. unless adopted by 

the appropriate lawmakers or regulators in the U.S. in accordance with applicable domestic laws 

and rulemaking procedures. 

Together with the National Association ofinsurance Commissioners (NAIC) and Federal 

Insurance Office, the Federal Reserve advocates for the development of international standards 

at tbe IAIS that would be appropriate for the U.S., including an implementable ICS. The 

Federal Reserve, along with its other U.S. colleagues, is advocating the ICS's inclusion of 

aggregation methods such as the NAlC's group capital calculation and the Federal Reserve's 

building block approach. 

2. It appears that the "Building Hlocl' Approach" the FRB is developing as a capital 

standard for savings & loan holding that include insurers is similar iu some 

basic respects to the "RBC (Risk-Based Aggregation Approach" being developed 

by the National Association of Insurance Commissioners (NAIC). If any capital standard 

proposed by the FRB differs from the NAIC's state-based standards, will the costs versus 

benefits ofthose differences be publicly assessed with regard to their effect on U.S. 

consumers and U.S. markets? How win that be done, with Congressional, state and 

stakeholder input? 

The Federal Reserve Board (Board) remains mindful of the importance of the 

states' primary supervision of the insurance industry, which the Board's consolidated supervision 

complements and supplements. As stated in its advance notice of proposed rulemaking (ANPR) 

published in June 2016, a goal of the Board's proposed building block approach (Bl3A) is to 
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efficiently use existing legal-entity-level regulatory capital frameworks, including those under 

state laws. 

In its comment letter to the ANPR, the NATC expressed its desire to work with the Board in its 

development of the BBA. The Board welcomes this interest, consistent with the Board's 

commitment to transparency and with interested parties. Input from the NAIC 

would enhance the identification and ways to minimize inconsistency and 

burden upon the Board's supervised insurance firms. The proposed BBA is pursuant to the 

Board's statutory authority to set out capital standards for supervised insurance institutions as 

consolidated supervisor. It is not yet clear what fom1 the NAIC's group capitaJ calculation will 

take, though we note that the NAIC frequently produces model laws and regulations for states to 

evaJuate and, if agreeable, adopt, potentiaJiy with tailoring. This differentiates the two capital 

frameworks strncturally, and it is premature to say whether this will affect the content of the 

frameworks. 

To the extent that technical or other considerations result in areas that reasonably may not be 

addressed identically between the two frameworks, the Board remains committed to transparency 

in its rulemak:ing engagement with congressional, state, and any other interested pruties, 

and evaluation benefits, and economic impacts. In developing its proposed rules, the 

Board routinely considers a variety of alternatives and an initial balancing of costs and benefits 

of a proposaL As part of its rulemaking the Board seeks comment from the public on 

the burdens and benefits of our approach in a rule as well as on alternative approaches. 

With respect to its insurance and aJl other the Board follows the 

Administrative Procedures Act and· other applicable laws and practices tl1at 

govern the various aspects of rulemakings, including the consideration of costs and benefits. 
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Questions for The Honorable Janet L. Yellen, Chair, Hoard of Governors of the Federal 

Reserve System from Representative Rothfus; 

l. The Financial Stability Board (FSB) and International Association of Insurance 

Supervisors (IAIS) conduct most oftheir activities behind closed doors, to the detriment of 

stakeholders ami consumers affected by their activities. While the IAIS has made some 

improvements lately, its procedures still require significant improvement Will you agree to 

additional transparency and accountability and more consultation with Congress before 

taking positions in international insurance regulatory discussions? If not, why not? And 

will you agree to use your influence at the IAIS and the FSB to improve their openness and 

accountability? If not, why not? 

The Federal Reserve Board (Board) remains committed to transparency and accountability in the 

de,vel<Jprnerlt of international insurance standards at the Financ.ial Stability Board (FSB) and 

lnterrtational Association oflnsurance Supervisors (IAlS). We support building on the enhanced 

transparency at the FSB and IAIS with further steps to improve access and stakeholder 

engagement at these institutions. For instance, before the FSB rec<Jmmends a particular policy 

action, the FSB typically goes through a notice and comment process similar to that which 

would accompany rulemak:ing in the States. At the JAIS, the Federal Reserve supports 

the continued publication for public comment of consultation doc'Ulllents with proposed 

approaches and frameworks for the of internationally active insurance groups. The 

Board, along with our partners, Association of Insurance Supervisors (NAIC) and 

Federal Insurance Office (FlO), will also continue to actively seek out and engage U.S. insurance 

stakeholders to ensure an tmderstanding of their Indeed, the U.S. delegation 

routinely hosts meetings with U.S. insurance for open dialogue and active working 

sessions regarding policy matters before the JAIS, a level of engagement that will 

continue. We remain open to additional suggestions on how to transparency at the IAIS 

and FSB through our participation. 

!n addition, it is important to note that none of the policy actions recommended by the FSB 

would take effect in the U.S. without being adopted by U.S. authorities through a public notice 

and comment process. Thus, the Federal Reserve would not implement any FSB or JA!S 

standards in the U.S. without going the same process as we do for our m!emakings. 

The Federal Reserve continues to work with other U.S. participants in international insurance 

standard-setting processes--including slate insurance regulators, the NAIC, and FIO--to develop 

international insurance standards that are consistent with supervisory objectives lmder applicable 

tederal and state laws, regulations, and policies. Excessive delays in the ability of U.S. 

participants to advocate positions in international standards negotiations could seriously diminish 

the ability ofthe U.S. to influence outcomes and ensure that international standards work for 

U.S. firms, U.S. consumers, and the U.S. financial markets. 
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1. Today, the Fed's $4.5 trillion portfolio is made up of roughly 55% Treasury securities 

and 45% agency MBS. You and the F-0-M-C (Federal Open Market Committee) have 

announced your intentions to begin unwinding this historic portfolio. As that portfolio 

normalizes, do you expect the ratio of Agency MBS to Treasuries to remain the same over 

time'! 

Following its June meeting, the Federal Open Market Committee (FOMC) provided additional 

details regarding its plans for normalizing the size and composition of the Federal Reserve's 

securities portfolio over time. 1 Under this plan. the Federal Reserve will reduce its securities 

holdings in a gradual and predictable process by reducing the reinvestment of principal payments 

on existing securities holdings. Projections by the Federal Reserve Bank of New York 

in July indicate that, under a baseline this gradual, passive runoff of securities holdings 

will result in the nonnalization of the size of the Federal Reserve's balance sheet by the end of 

2021 2 

Under these projections, the share of Treasury securities in the Federal Reserve System's 

securities holdings will decline slightly over the next few years because the runoff of Treasury 

securities is somewhat faster than the nmoff of agency mortgage-backed securities (MBSs ). 

However, as noted in the FOMC's Policy Normalization Principles and Plans document 

published in September 2014, the FOMC has indicated that in the longer run it expects to hold a 

portfolio that consists "primarily of Treasury securities, thereby minimizing the effect of the 

Federal Reserve's securities holdings on the allocation of credit across sectors of the economy." 

2. As you know, many have criticized the Fed for placing their "thumb on the scale" for 

one sector of our economy, currently holding 29'Yo of the total outstanding Agency MBS. 

There are others who want you to go even further and invest in infrastructure and 

municipal securities, etc. As this extraordinary ej)isodc in the Fed's history comes to an end 

-and we are also looking towards housing finance reform- do you think it makes sense to 

reassess whether or not the Fed should be in a position to support certain sectors over 

others'? 

The Federal Reserve conducts monetary policy to achieve tbe dual mandate objectives of 

maximum employment and stable prices. At the end of 2008, the federal fnnds rate had already 

been cut to near zero, and the economy was in dire circumstances with unemployment moving 

sharply higher and deflationary pressures mounting. Additional policy accommodation was 

clearly required to support the economy and keep inflation from moving much lower. Against 

this backdrop, the Federal Reserve conducted large scale purchases oflonger-tenn Treasury and 

agency MBSs as a tool to put downward pressure on longer-term interest rates and to make 

financial conditions more accommodative. Purchases of agency MBSs helped to support the 

mortgage and housing markets. These markets were under severe stress during the crisis and the 

1 This infonnation is available on the Board's website at h!!ps://www.federalreserve.gov/monetarypolicy/policynonnalization.htm. 
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strains in these markets posed significant downside risks to the U.S. economy. These policies 

were effective in helping to stabilize the economy and foster progress toward the 

Federal Reserve's goals of maximum employment and stable prices. 

The conduct of monetary policy is focused on promoting maximum employment and stable 

prices and does not seek to support one sector over another. A joint statement of the Treasury 

and the Federal Reserve in 2009 noted that "Actions taken by the Federal Reserve should also 

aim to improve financial or credit condition broadly, not to allocate credit to narrowly-defined 

sectors or classes of bonowers. Government decisions to inlluence the allocation of credit are 

the province of the fiscal authorities.'' 

It is important to note that the range of assets that the Federal Reserve can purchase is quite 

limited. The most important classes of assets by far that the Federal Reserve can purchase are 

Treasury and agency MBSs. The Federal Reserve's authority to purchase municipal securities is 

extremely limited and of little practical value as a policy tool. The Federal Reserve has no 

authority to purchase securities issued by the private sector. 

3. In your submitted testimony you state that 'the longer-run normal level of reserve 

balances will depend on a number of as-yet-unknown factors .. .' But conclude that you 

'anticipate' keeping the reserve balances at a level 'larger than before the financial crisis.' 

What is the reasoning behind keeping the portfolio above past 'normal' levels? 

These issues are discussed at length in projections published by the Federal Reserve Bank of 

New York in an update to the Annual Report of the System Open Market Account. 3 The size of 

the portfolio over time is largely detelTl1ined by two factors--the level of currency and other 

non-reserve liabilities and the level of reserve balances held by depository institutions. The level 

of currency and non-reserve liabilities is largely unrelated to the stance of monetary policy, and 

these liabilities tend to grow over time. The Federal Reserve generally increases its securities 

holdings slowly over time to match the growth of these liabilities. For example, the level of 

currency outstanding at the end of 2007 was about $800 billion and has risen to a level of about 

$1.6 trillion today. So even if the Federal Reserve had not engaged in large scale asset 

purchases, the size of the port!blio would have doubled in size since 2007 based on the 

expansion of currency alone. 

The other key factor affecting the size of the balance sheet is the level of reserve balances held 

by depository institutions. This factor reflects the stance of monetary policy and the 

Federal Reserve's policy implementation framework. Just prior to the crisis, the level of reserve 

balances was quite small, on the order of$5 to $10 billion. Today, largely reflecting the 

expansion of the portfolio through asset purchase progran1s, reserve balances exceed $2 trillion. 

As the size ofthe Federal Reserve's balance sheet is nolT!1alized, the level of reserve balances 

will decline substantially. However, reserve balances may not decline to the very low levels that 

prevailed in the pre-crisis period because the level of reserve balances consistent with effective 

policy implementation may be higher than in past. For example, banks may demand 

signi:t1cantly higher levels of reserve balances than in the past due to new liquidity regulations. 

Moreover, the scale transactions among banks has expanded over time, and this trend could lead 
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banks to hold large precautionary levels of reserves. Although the level of reserve balances may 

ultimately be higher thau in the pre-crisis period, as noted in the FOMC's Policy Normalization 

Principles and Plans, the FOMC intends to with the smallest balauce sheet consistent 

with efficient and effective implementation policy. 

4. Last week the G20 Leaders highlighted the importance of improving efforts on antimoney laundering and countering the financing ofterrorism. As you know, this has been a 

focus of mine for some time. Rep. Velazquez and I sent a letter to Treasury Secretary last 

week on this issue, As we look at the effectiveness of our AML regime over time, it seems a 

'compliance for the sake of compliance" approach has moved us away from the original 

intent of these rules. There have been a number of suggestions to both more effectively 

target bad actors and simplify the compliance regime. 

Do you agree our AML regulatory regime deserves a fresh look? 

Elements of the Bank Secrecy Act/anti-money laundering (BSA/AML) regulatory requirements 

are several decades old. The Federal Reserve is constantly looking for ways to improve and 

maintain the effectiveness of the BSA and U.S. anti-money laaudering (AML) regime as 

appropriate. In this regard, the Federal Reserve is an active member of the Bauk Secrecy Act 

Advisory Group (BSAAG), a body established by Congress consisting of representatives from 

lcderal regulatory and law enf(lrcement agencies, financial institutions, and trade groups, and 

participates in BSAAG's e!Torts to enhance the BSA. 

f understand that Congress has recently enacted the "Countering America's Adversaries through 

Sanctions Act," which requires the President, acting through the Secretary of the Treasury to 

assess the effectiveness ot: aud ways in which, the United States is currently addressing the 

highest levels of risk of various forms of illicit finance. The Federal Reserve is committed to 

working with the Secretary of the Treasury in this regard. 

Have you personally spoken with the Treasury Secretary about the need for reform of 

the AML regulatory requirements? 

The Federal Reserve is committed to continuing tl1e close working relationships already in place 

with the Treasury Department, Financial Crimes Enforcement Network (FinCEN), law 

enforcement, and the other supervisory agencies to develop ways to improve the efficiency and 

e1Tectiveness of the BSA/AML We look forward to working on these matters with 

the Treasury Secretary as well as Treasury Undersecretary of Terrorism and Financial 

Intelligence. 

Is it time for FinCEN to reclaim its exam authority for AML compliance, at least for 

the most complex, internationally active institutions? 

The Federal Reserve takes seriously its responsibility to provide enhanced supervision 

of the largest, most complex banking org<mizations. Our and evaluations of a 

banking organization's risk mauagement and compliance practices related to anti-money 

laundering laws are an important part of our overall approach to ensuring the safety and 

soundness of the institutions we supervise. A more exclusive BSA exau1ination role for FinCEN 
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-4-

would be a fw1damental re-alignment in how the federal government supervises for BSA 

compliance at large, complex banks and could potentially result in duplication of effort, lead to 

gaps between the supervision of small and large banks, and reduce flexibility for the federal 

banking agencies when addressing compliance issues that are relevant to safety and soundness. 

5. In their Declaration, the G20 leaders raised the importance of "effective implementation 

ofthe international standards on transparency and beneficial ownership of legal persons 

and legal arrangements, including the availability of information in the domestic and crossborder context." I recently cosponsored legislation with Reps. Maloney and King, which 

would effectively ensure the beneficial owner of a corporation is known and readily 

verifiable. Given your role iu AML supervision, from a "Know Your Customer" 

standpoint, do you think this would be a worthwhile step? 

While the Federal Reserve does not have an official position on H.R. 3089, "Corporate 

Transparency Act of2017," in general, it has supported past etTorts to promote transparent 

incorporation practices and enhance inforn1ation available to law enforcement. In addition, this 

step may complement the legal entity customer information that banks and other financial 

institutions are required to collect trader FinCEN's Customer Due Diligence and Beneficial 

Ownership Final Rules. 

6, Clearly one problem we faee in this country that is difficult for us to address at the 

federal level alone is local zoning laws and ordinances whieh may unintentionally be a 

barrier to increasing our housing supply and notably a supply of affordable housing for 

mainstream Americans. Would you agree that having this Administration create a new 

council consisting of federal reserve officials, federal home loan banks, US mayors and 

other local officials, affordable housing advocates, academics and the private sector would 

be an important step towards a necessary dialogue on creating a housing market for all 

Americans? 

Efficient regulation in all areas is an extremely important issue for the Congress and the 

Administration to address, and housing-related regulation is no exception. However, zoning 

laws and ordinances lie outside the purview of the Federal Reserve Board (Board). 

7. As you know housing finance reform remains the biggest piece of unfinished business 

left from the financial crisis. In the past the Fed has played a constructive role in housing 

finanee reform. I was pleased to see last week Governor Powell highlighted the role 

housing played in the crisis and the flaws within the existing system, which is still 

dominated by the duopoly of Fannie and Freddie. This duopoly is shouldering much of the 

risk in the market despite interest from the private sector. As you know the recent 

Treasury report highlighted the need to reassess the way mortgages are treated -from 

assignee liability being placed on investors who do not have control over the origination 

process to the risk-weighting and stress-testing of mortgage products vis-a-vis other asset 

classes. As we begin to contemplate GSE reform, is the Fed willing to take another look at 

these rules and the extent to which we are propping up this duopoly through potentially 

overly punitive measures on private markets'! 
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5 

Capital rules require banks to hold a percentage of their assets as capital to act as a financial 

cushion to absorb unexpected losses. Riskier assets require higher capital cushions and less risky 

assets require smaller capital cushions. For example, banks are required to have Jess capital 

when they hold mortgage-backed securities that have explicit government backing (e.g., Ginnie 

Mae securities), than when they hold securities that protect a government-sponsored enterprise 

(GSE) against credit losses that could occur during stressful macroeconomic conditions (e.g., 

subordinated securities that are included in so-called credit risk transfer transactions). Collateral 

matters as well, so mortgages held in bank portfolios are typically weighted favorably compared 

to other asset classes; therefore. no further reductions in risk-weights for such loans is likely 

necessary. 

Analogously, stress test rules are designed to ensure that banks have effective capital planning 

processes and suft!cient capital to absorb losses during stressful conditions, while meeting 

obligations to creditors and counterparties and continuing to serve as credit intermediaries. At 

the same time, liquidity stress tests are designed so that banks can meet their near-term payment 

obligations in the presence of contractual outf1ows and counterparty runs. ln prescribing more 

stringent prudential standards, including stress test and liquidity requirements, the Board may 

differentiate among bank holding companies on an individual basis or by category, taking into 

consideration their capital structure, riskiness, complexity, financial activities (including the 

financial activities of their subsidiaries), size, and any other risk-related factors that the Board 

deems appropriate. 

Because capital and stress test rules are risk-dependent, it is likely such rules will change as a 

result of GSE reform. On the one hand, if Congress decides to provide an explicit, transparent, 

guarantee to certain mortgage-backed securities. then less capital will need to be held when 

banks hold such securities than otherwise. On the other hand, if there is no govemment-backing 

for certain mortgage-backed securities, then banks will need to assess pntential unexpected 

losses associated with the underlying mortgages for such securities and then hold sufticient 

capital to absorb losses in stressful conditions. This would also be the case when a bank holds 

mortgages, rather than mortgage-backed securities, on its balance sheet. 

As Governor Powell noted in his July 6, 2017 remarks, a government guarantee should apply to 

securities, not to institutions. GSE reform should not leave us with any institutions that are so 

important as to be candidates for too-big-to-tail. 

8. Ouring prior statements you previously discussed in some detail fixed income liquidity. 

And while the Fed continues to say that the corporate debt and Treasury markets are 

robust in the wake of profound regulatory changes, we observe that uot all markets are 

assessed equally. Asset-backed securities do not eujoy the same robust liquidity 

principally due to regulatory pressures snch as the Volckcr Rule and others. You have 

previously eluded that the Volcker Rule could be well-suited to revisions. Just weeks ago, 

Governor Powell indicated these efforts are undenvay. Would you please tell our office 

what the Fed is doing to make sure the remedy fits the symptom? And, are you talking with 

stakeholder groups such as broker/dealers and large investors? Lastly, when might these 

efforts produce a revised product? 
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To help monitor fixed-income market liquidity, staff of the Board, Of1ice of the Comptroller of 

the Currency, Federal Deposit Insurance Corporation, Secmities and Exchm1ge Commission, and 

Commodity Futures Trading Commission (agencies) quarterly reports regarding liquidity 

in the corporate bond market, which are available on Board's public website.4 A number of 

other researchers have also perfonned analyses of fixed-income market liquidity. Although 

some studies have found evidence of somewhat reduced liquidity in a few pockets of the 

financial markets, most studies have concluded that market liquidity broadly is in good condition 

across the U.S. financial markets. Many factors simultaneously affect fixed-income market 

liquidity. including current financial market conditions, making it extremely dif1icult to 

separately identify the impact of the Volcker Rule with any degree of precision. The Board will 

continue to monitor m1d report on developments. 

Regardless, there may be benefits to aspects of the Volcker Rule. The agencies m·e 

currently exploring possibilities to m1d tailor regulations implementing the Volcker 

Rule, while fully implementing the statutory provisions. While it is difficult to predict the timing 

of any potential revisions with certainty, the Board is open to meeting with all relevm1t 

stakeholders and considering all input received throughout the revision process. 

4 https://www.federalreservc.gov/foia/corporate-bond-liquidity-repons.htm. 
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1. Last month the Treasury released their first report ou the state of financial regulation 

and included in that report was a recommendation for regulators to expand coordination 

of their examination and data collection efforts. I recently sent a bipartisan letter to 

Secretary Mnuchin, with 31 other Financial Services Committee colleagues, on this very 

topic. In a press conference, you made remarks agreeing that there are burdens that can be 

simplified and reduced in the financial system. Do you support greater exam coordination 

and data collection efforts among regulators? 

The Federal Reserve Board (Board) supports continuing and enhancing eftorts to coordinate the 

agencies' examination and data collection activities. As the Treasury Department's report notes, 

the Board and other agencies already coordinate many of these activities through their 

participation on the Federal Financial Institutions Examination Council (FFIEC). Notable recent 

coordination eflorts by the FFIEC have aimed to streamline the data collected from financial 

institutions on the quarterly Call Report, improve the consistency and coordination of agency 

efforts to assess the cybersecurity readiness of supervised banks, and identify and initiate 

changes to rules and regulations in order to eliminate unnecessary burdens on conununity banks, 

such as simplifying certain requirements of the agencies regulatory capital rules. Moreover, the 

FF!EC member agencies are currently engaged in an examination modernization project. This 

project is reviewing community bank examination processes used by the FFIEC members and is 

expected to result in recommendations for procedural changes that would make examinations 

more efficient and less burdensome to banks. 

In addition to these efforts, the Board has consistently coordinated with and relied on the work of 

other bank regulators, to the greatest extent possible, in supervising bank and savings and loan 

holding companies. At community and regional bank holding companies where the Board is not 

the primary insured depository institution regulator (lDIR) and the majority of the consolidated 

assets are at the bank level, the Board's policy is to rely substantially on the work conducted hy 

the primary lDIRs. These efforts include using existing examination reports and other 

supervisory information submitted to other regulatory agencies to reduce the scope and 

frequency of holding company inspections and closely coordinating with other agencies to avoid 

duplication of supervisory activities. reporting requirements. and infom1ation requests. Periodic 

reviews are conducted by the Board staff to ensure that Reserve Banks are coordinating with and 

appropriately relying on the work of primary regulatory agencies. 

2. A recent survey conducted by Morning Consult found that 89% ofthe general public 

believes that it is important to tbe U.S. economy to have banks of all sizes. Tailoring of 

regulations, as it's commonly used, means adjusting regulations and supervision to fit and 

accommodate the variety of sizes, risk profiles, and business models in the banking 

industry. Without tailoring, financial institutions are driven to consolidate and adopt the 

same business model, homogenizing the industry. What is the Federal Reserve doing to 

promote variety in the banking industry'! 

The Board recognizes the importance of having a diversified and competitive banking industry 

that is comprised of banking organizations of many sizes and specializations. To promote this. 
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2 

the Board has, and continues to, tailor its regulations and supervisory program based on the risk 

profile, size and complexity of the organizations we supervise. Doing so allows the Board to 

achieve its goal of promoting a strong b<mking system and preventing or mitigating against the 

risk of bank Htilures, while minimizing a bank's regulatory compliance costs and 

accommodating the variety of sizes, risk profiles, and business models in the banking industry. 

This tailored approach is reflected in our rulemaking, supervisory guidance, reporting 

requirements, and in the execution of supervision. Banking organizations with $50 billion or 

more in assets arc subject lo enhanced prudential requirements--including capital and capital 

planning, stress testing, and liquidity requirements----that increase in stringency, based on the 

size, complexity, and risk profile of the finn. The largest, most systemically important tirms are 

subject to the Large Institution Supervision Coordinating Committee tramcwork, which is a 

supervisory program designed to materially increase the financial and operational resiliency of 

systemically important financial institutions to reduce the probability of, and cost associated 

with, their material financial distress or failure. 

In contrast, the Board has taken many steps to reduce regulatory burdens for the small and 

regional banking organizations. These include issuing guidance to encourage examiners to 

review loans off-site ft)r banks with less than $50 billion in total assets, thereby reducing the 

number of examiners physically on-site: reducing the regulatory filing requirements for banks 

with less than $1 billion in consolidated assets by eliminating about 40 percent of the items in the 

required quarterly financial reporting fcnn1 knmvn as the Call Report; and improving 

examination planning efforts so that well-managed, lower risk banks receive less supervisory 

scrutiny. 

To help further ease regulatory burdens for small banks, we routinely review our guidance and 

examination processes to insure they are appropriate. To that extent, we are looking at ways to 

develop a simplified regulatory capital regime for small banks, turther simplify regulatory filing 

requirements for small banks, and have initiated efforts to ease the conditions under which an 

appraisal is required to support a commercial loan. We have also recommended that Congress 

consider exempting community banks from two sets of Dodd-Frank Wall Street Reform and 

Consumer Protection Act requirements--the Volcker Rule and the incentive compensation limits 

in section 956. 

3. Under current interest rate policies, banks will receive from the ,Federal Reserve interest 

payments for the funds that banks have on deposit at the Fed. Former Fed Governor Don 

Kohn, discussing the importance of paying interest on these reserves, wrote that "the Fed 

will need to make good economic arguments to explain why paying interest to banks is 

necessary." What are the Federal Reserve's "good economic arguments" for this practice? 

The payment of interest on excess reserves contributes to effective implementation of monetary 

policy by helping to manage the level of the federal funds rate and other short-term interest rates. 

Most major central banks have the authority to pay interest on excess reserves and have used this 

authority to help manage the level of short-term interest rates. 

In the current circumstances, interest on excess reserves is essential to the Board's ability to 

manage the level of short-tem1 interest rates even with a very elevated level of reserve balances 
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in the system. Absent this tool, the Board would not have been able to raise the level of shortterm interest rates until it had dramatically reduced its holdings of!onger-term securities. As 

demonstrated in the so-called "taper tantrum'' in the summer of 2013, markets can be very 

sensitive to information bearing on the Board's holdings oflonger-tenn securities. lt seems 

likely then that a program of rapid large scale sales of assets to reduce the level of reserve 

balances in the system would have been very dismptive to markets and counterproductive in 

fostering continued economic recovery and a return of inflation to 2 percent 

4. The Volcker Rule was written under the justification that banks should not be using 

insured deposits to fund inappropriate securities activities, To what degree is authority 

under Section 23A of the Federal Reserve Act not enough to keep banks from using insured 

deposits to engage in the securities activities that are the target ofthe Volcker Rule? 

Section 13 of the Bank Holding Company Act, also known as the Volcker Rule, prohibits 

banking entities from engaging in proprietary trading of financial instruments or from acquiring 

or retaining an ownership interest in, sponsoring, or having certain relationships with private 

equity funds or hedge funds (covered funds), subject to certain exceptions. Section23A of the 

Federal Reserve Act limits the ability of a depository institution to engage in certain transactions 

with an affiliate, such as loans or extensions of credit to the afilliate. 1 

The Volcker Rule's activity restrictions generally apply to banking entities, which the statute 

defines to include insured depository institutions 1md their subsidiaries and affiliates, with 

limited exceptions.2 Section23A does not limit the proprietary trading and covered fund 

activities of a bank itself. Rather, it limits the ability of a bank to fund activities of an affiliate 

through loans to or transactions with the affiliate. As such, section 23A may limit the direct 

exposure of a bank to risks associated with an aftlliate's activities, as well as the direct transfer 

of any funding subsidy effects relating to deposit insurance and access to the Board's discount 

window. Other measures such as capital, liquidity. and risk management requirements 

applicable to the bank. affiliate, or consolidated firm may also serve as potential limitations. 

Any decision to remove the Volcker Rule's restrictions and rely on other measures such as these 

would be a matter for Congress. 

5. Former Fed Chairman Paul Volcker, when recently asked about proposed revisions to 

the Volcker Rule, responded by saying, "Everybody wants to see it more simple.,, [and] if 

they can do it in a more efficient way, God bless them." Do you share the views of 

Chairman Volckcr, that there is value in making implementation of the Volcker Rule 

simpler and more efficient? If so, what changes would you consider? 

The statutory requirements of the Volcker Rule are very complex- the statute includes many 

detailed restrictions that have broad effect throughout a firm. Even without a statutory change, 

1 By its tenus. section 23A of the Federal Reserve Act to all Federal Reserve member banks. 

12 U.S.C. 371c. Other statutes the coverage 23A to apply to aU insured depository 

institutions. See. e.g., 12 U.S.C. and !2 U.S. C. 1 Section !3 defines "banking institution. any company that controls an 

insured depository institution is treated as a bank for purposes of section 8 of the 

lntemational Banking Act of 1978, and any affiliate or subsidiary of any such entity, with limited exceptions. 

12 U.S.C. J851(h)(J). 
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there may be ways to streamline, simplify, and tailor the interagency Volcker Rule regulation to 

reduce costs while continuing to ensure the statutory requirements are fully implemented. The 

Board is assessing opportunities for changes in coordination with the other agencies also 

responsible for the Volcker Rule's implementation under the statute. 

6. The leverage capital ratio requires banks to hold capital against any and all assets, 

regardless of the risk of the assets. Recognizing the value of the leverage ratio as a backstop 

where risks can change, arc hard to calculate, or where the risks are unknown, what is the 

purpose of holding leverage capital for riskless assets, snell as Treasury securities and 

funds on deposit, at the Federal Reserve? Would there be economic or supervisory value in 

excluding these riskless assets from leverage ratio calculations? 

The leverage ratio provides a backstop to risk-based capital requirements pursuant to which a 

firm must hold capital in accordance with the riskiness of its exposures. Risk-based measures 

generally rely on either a standardized set of risk weights that are applied to exposure categories 

or on models. In either case, there are opportunities for potential arbitrage. Standardized risk 

weights reflect the risk of a class of exposures rather than each particular exposure, and models 

are reliant on historical data and thus may understate risk. In contrast, a leverage ratio, by its 

nature, lacks this potential for arbitrage because it does not differentiate the level of capital 

required by exposure type. Excluding select categories of assets from the leverage ratio would 

be inconsistent with the leverage ratio's purpose as a risk-insensitive measure that simply 

measures how much a finn's assets are supported by leverage and with its goal of addressing the 

risk that a banking organization will fund itself with too much debt. In the Federal Reserve 

Board's experience, a banking organization can be vulnerable if its total leverage is high during 

stress periods because high leverage decreases the amount of equity a banking organization has 

available to absorb losses. 

7. It is important with regard to governance and other matters that a bank's board of 

directors remains active and informed as well as set tone and policies for the bank. 

However, the accumulation of recent rules and regulations seems to be dragging boards 

into actual bank management and distracting them from tbe business plan and overall 

strategic policy-setting function of boards. Governor Powell has already talked about 

looking at restoring balance to the role of boards of directors. What is the Fed looking at in 

that regard, and what are the principles guiding your review? 

The Board strongly agrees thnt boards of directors need to play an active, informed oversight role 

that is distinct from the role of senior management. 

ln that regard, on August 3, the Board announced that it is seeking public comment on a 

corporate governance proposal designed to enhance the effectiveness of boards of directors. 

The Board's proposed guidance was infonned by a multi-year review of the factors that make 

boards effective, the challenges that boards face, and how boards influence the safety and 

soundness of their firms and promote compliance with laws and regulations. The proposed 

guidance is intended to address three primary findings from the review: 
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5 

" Many existing supervisory expectations do not clearly distinguish the roles and 

responsibilities of boards of directors from the roles and responsibilities of senior 

management. 

" Boards often devote significant time satisfying supervisory expectations that do not 

directly relate to the board's core oversight responsibilities. 

• Boards face significant information challenges that require active management of 

information flow. 

The Board's proposed guidance consists of three parts: 

" The Board Effectiveness Guidance (BE Guidance) that identifies the key attributes of 

effective boards of directors for the largest domestic bank and savings and loan holding 

companies and non-bank systemically important financial institutions. This proposed 

guidance is intended to better distinguish supervisory expectations for boards from that of 

senior management, and shift the supervisory focus to the board's core responsibilities. 

In particular, the proposal would emphasize a board's responsibilities to set clear, aligned 

and consistent direction, and to hold senior management accountable for, among other 

things, adhering to the firm's strategy and risk tolerance, and remediating material or 

persistent deficiencies in risk management and control practices. 

• A proposal to eliminate or revise unnecessary, outdated, or redundant supervisory 

expectations for boards of directors included in certain existing Board Supervision and 

Regulation letters. This should allow board of directors to focus more of their time and 

resources on fulfilling their core responsibilities. 

• A proposal to clarify expectations regarding the communication of supervisory findings 

by the Board to boards and senior management (revised SR 13-13/CA 13-1 0). 

The Board's corporate governance proposal is cmTently out lor public comment for a 60-day 

period ending October 10. 

0