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S. HRG. 113–77 

FEDERAL RESERVE’S SECOND MONETARY POLICY 

REPORT FOR 2013 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

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

JULY 18, 2013 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

LAURA SWANSON, Deputy Staff Director 

GLEN SEARS, Deputy Policy Director 

KRISHNA PATEL, FDIC Detailee 

RIKER VERMILYE, Legislative Assistant 

GREG DEAN, Republican Chief Counsel 

CHAD DAVIS, Republican Professional Staff Member 

MIKE LEE, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, JULY 18, 2013 

Page 

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

Opening statements, comments, or prepared statements of: 

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

WITNESS 

Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 3 

Prepared statement .......................................................................................... 28 

Responses to written questions of: 

Chairman Johnson .................................................................................... 32 

Senator Crapo ............................................................................................ 35 

Senator Reed .............................................................................................. 37 

Senator Hagan ........................................................................................... 38 

SenatorWarren .......................................................................................... 39 

Senator Heitkamp ..................................................................................... 41 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to the Congress dated July 18, 2013 ............................. 43 

(III)

(1) 

FEDERAL RESERVE’S SECOND MONETARY 

POLICY REPORT FOR 2013 

THURSDAY, JULY 18, 2013 

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

The Committee met at 10:45 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I call this hearing to order. 

Today we welcome Chairman Bernanke back to the Committee to 

deliver the Federal Reserve’s semiannual Monetary Policy Report. 

Nearly 5 years after the worst financial crisis since the Great Depression, the U.S. economy continues to show signs of improvement. Recently, we have seen the housing market strengthen and 

payroll employment firm up. Private sector job growth strengthened this year to around 200,000 jobs per month. The economy has 

shown signs of resilience despite fiscal tightening. 

On housing, I am pleased to see that the recovery is gaining momentum, with solid home price gains nationwide. New home construction has seen double-digit growth, and single-family home 

sales have also picked up. Many homeowners remain underwater, 

but overall numbers continue to decline. Going forward, I would encourage the Fed to be thoughtful in its actions to make sure these 

positive trends in housing continue. 

Congress has a role to play, too. To address FHA’s short-term 

challenges, Ranking Member Crapo and I released details this 

week of bipartisan legislation to get FHA back on stable footing 

and strengthen a program important to many Americans. Following this effort, we will turn to comprehensive housing finance 

reform legislation. 

Much progress has been made, but the labor market has not fully 

recovered from the Great Recession. Labor force participation remains low even when accounting for retiring baby boomers, and 

long-term unemployment remains near historic levels. Moreover, 

youth unemployment remains high, and even many young college 

graduates struggle to find gainful employment. These trends have 

lasting effects on the economy. Over the longer term, skill erosion 

from prolonged unemployment would reduce our economy’s potential. It is important that we help, not hurt, young Americans’ prospects and why it is so important that Congress finds a reasonable 

solution to the recent increase in student loan rates. 

2 

To fulfill its dual mandate, the Fed should not prematurely step 

on the brakes. With consumer price inflation low and the unemployment rate unacceptably high, the Fed must continue to take action to support employment. When the time comes, it is important 

that monetary policy adjustments are gradual and do not disrupt 

financial stability and economic growth. 

Chairman Bernanke, I thank you for your years of service and 

leadership at the Federal Reserve during a challenging period in 

our Nation’s history, and I look forward to hearing your testimony. 

I now turn to Ranking Member Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman. And 

Chairman Bernanke, welcome. 

I welcome our Federal Reserve Chairman Ben Bernanke back to 

the Banking Committee to testify at the semiannual HumphreyHawkins hearing regarding the Federal Reserve’s monetary policy 

and the state of the economy. 

In recent weeks, the prudential banking regulators have been 

very active on a number of regulatory fronts, including releasing 

final regulations to implement the Basel III capital rules and proposed regulations on capital leverage ratios. I thank Chairman 

Bernanke personally for addressing the concerns that Chairman 

Johnson and I raised in our February letter about the unique characteristics of community banks and insurance companies. A onesize-fits-all approach regarding capital rules does not work for 

these types of entities. 

With regard to monetary policy, we have experienced a period 

where the Fed has pushed the short-term interest rate down to 

zero more than 4 years ago. The Fed pursued quantitative easing, 

or what has become known as ‘‘QE’’, in order to suppress long-term 

interest rates. As a result, the Fed’s balance sheet now stands at 

nearly $3.5 trillion, with an additional $85 billion every month in 

long-term assets being added. 

Recently released FOMC minutes from the June meeting indicate 

that several members of the Board felt that a reduction in asset 

purchases would likely soon be warranted. Several noted economists have called into question whether the benefits of these purchases outweigh the risks. The negative reaction by equity markets 

to the June FOMC statement on tapering indicates that some of 

the increase in the prices of equities and other assets recently is 

attributable to the Fed’s balance sheet expansion and not to purely 

economic fundamentals. In fact, June marked the worst month on 

record for bond fund outflows. 

The reaction indicates that markets are still heavily reliant on 

Government intervention, which is not good for the long-term 

health of the economy. I am interested to hear from Chairman 

Bernanke to what extent the Fed anticipates the inevitable tapering process will cause in terms of additional periods of market volatility. 

Because the official stance of the Fed is that the decision to taper 

remains data dependent, I am interested in hearing if the Chairman believes laying out specific data would improve both the Fed’s 

commitment to the policy and the market’s reaction to it. 

3 

Beyond tapering, which is simply slowing the rate of growth of 

the Fed’s balance sheet, is the more important issue of winding 

down the Fed’s massive balance sheet. The Fed has indicated that 

it may continue to roll over its holdings of long-term assets, which 

means that its balance sheet may not shrink for some time. 

A key element of the exit strategy adopted by the FOMC in June 

of 2011 is a 3- to 5-year period over which the Fed expected that 

it could completely eliminate its holdings of agency securities. This 

was done for the purpose of minimizing the extent to which the 

agency securities portfolio might affect the allocation of credit 

across sectors of the economy. Since then, the balance sheet has increased in size by more than 20 percent to, as I said, almost $3.5 

trillion, and the Fed’s holding of agency securities has increased by 

more than 30 percent to about $1.2 trillion. 

Why does the Fed see the need for such accommodative policy to 

continue into the future? 

In light of the Fed’s large portfolio increases, the dominant role 

that the GSEs play in today’s mortgage market and the recent increases in the level and volatility of mortgage rates, will the Fed 

revise its balance sheet exit strategy principles? In particular, will 

the Fed be revising the time period over which it expects to eliminate its holdings of agency securities? 

It is my hope that this hearing gives us additional insight into 

the Fed’s plans for the future reduction of asset purchases and a 

road map for a return to normalized, rules-based monetary policy. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Senator Crapo. 

To preserve time for questions, opening statements will be limited to the Chair and Ranking Member. I would like to remind my 

colleagues that the record will be open for the next 7 days for additional statements and any other materials. 

I would like to welcome Chairman Bernanke. Dr. Bernanke is 

currently serving a second term as Chairman of the Board of Governors of the Federal Reserve System. His first term began under 

President Bush in 2006. Before that, Dr. Bernanke was Chairman 

of the Council of Economic Advisers and served as a member of the 

Board of Governors of the Federal Reserve System. 

Chairman Bernanke, please being your testimony. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

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

Crapo, and other Members of the Committee. I am pleased to 

present the Federal Reserve’s semiannual Monetary Policy Report 

to the Congress. In my brief remarks I will discuss current economic conditions and the outlook and then turn to monetary policy, 

and I will finish with a short summary of our ongoing work on regulatory reform. 

With respect to the outlook, the economic recovery has continued 

at a moderate pace in recent quarters despite the strong headwinds 

created by Federal fiscal policy. 

Housing has contributed significantly to recent gains in economic 

activity. Home sales, house prices, and residential construction 

have moved up over the past year, supported by low mortgage 

4 

rates and improved confidence in both the housing market and the 

economy. Rising housing construction and home sales are adding to 

job growth, and substantial increases in home prices are bolstering 

household finances and consumer spending while reducing the 

number of homeowners with underwater mortgages. Housing activity and prices seem likely to continue to recover, notwithstanding 

the recent increases in mortgage rates, but it will be important to 

monitor developments in this sector carefully. 

Conditions in the labor market are improving gradually. The unemployment rate stood at 7.6 percent in June, about a half percentage point lower than in the months before the Federal Open Market Committee initiated its current asset purchase program in September. Nonfarm payroll employment has increased by an average 

of about 200,000 jobs per month so far this year. Despite these 

gains, the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and 

rates of underemployment and long-term unemployment are still 

much too high. 

Meanwhile, consumer price inflation has been running below the 

Committee’s longer-run objective of 2 percent. The price index for 

personal consumption expenditures rose only 1 percent over the 

year ending in May. This softness reflects in part some factors that 

are likely to be transitory. Moreover, measures of longer-term inflation expectations have generally remained stable, which should 

help move inflation back up toward 2 percent. However, the Committee is certainly aware that very low inflation poses risks to economic performance—for example, by raising the real cost of capital 

investment—and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we 

will act as needed to ensure that inflation moves back toward our 

2-percent objective over time. 

At the June FOMC meeting, my colleagues and I projected that 

economic growth would pick up in coming quarters, resulting in 

gradual progress toward the levels of unemployment and inflation 

consistent with the Federal Reserve’s statutory mandate to foster 

maximum employment and price stability. Specifically, most participants saw real GDP growth beginning to step up during the second half of this year, eventually reaching a pace between 2.9 and 

3.6 percent in 2015. They projected the unemployment rate to decline to between 5.8 and 6.2 percent by the final quarter of 2015. 

And they saw inflation gradually increasing toward the Committee’s 2-percent objective. 

The pickup in economic growth projected by most Committee participants partly reflects their view that Federal fiscal policy will 

exert somewhat less drag over time, as the effects of the tax increases and the spending sequestration diminish. The Committee 

also believes that risks to the economy have diminished since the 

fall, reflecting some easing of financial stresses in Europe, the 

gains in housing and labor markets that I mentioned earlier, the 

better budgetary positions of State and local governments, and 

stronger household and business balance sheets. That said, the 

risks remain that tight Federal fiscal policy will restrain economic 

growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such 

5 

as the status of the debt ceiling, will evolve in a way that could 

hamper recovery. More generally, with the recovery still proceeding 

at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic 

growth may be slower than currently anticipated. 

With unemployment still high and declining only gradually, and 

with inflation running below the Committee’s longer-run objective, 

a highly accommodative monetary policy will remain appropriate 

for the foreseeable future. 

In normal circumstances, the Committee’s basic tool for providing monetary accommodation is its target for the Federal funds 

rate. However, the target range for the Federal funds rate has been 

close to zero since late 2008 and cannot be reduced meaningfully 

further. Instead, we are providing additional policy accommodation 

through two distinct yet complementary policy tools. The first tool 

is expanding the Federal Reserve’s portfolio of longer-term Treasury securities and agency mortgage-backed securities; we are currently purchasing $40 billion per month in agency MBS and $45 

billion per month in Treasuries. The second tool is ‘‘forward guidance’’ about the Committee’s plans for setting the Federal funds 

rate target over the medium term. 

Within our overall policy framework, we think of these two tools 

as having somewhat different roles. We are using asset purchases 

and the resulting expansion of the Federal Reserve’s balance sheet 

primarily to increase the near-term momentum of the economy, 

with the specific goal of achieving a substantial improvement in the 

outlook for the labor market in a context of price stability. We have 

made some progress toward this goal, and with inflation subdued, 

we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. In addition, 

even after purchases end, the Federal Reserve will be holding its 

stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities, which will continue 

to put downward pressure on longer-term interest rates, support 

mortgage markets, and help to make broader financial conditions 

more accommodative. 

We are relying on near-zero short-term interest rates, together 

with our forward guidance that rates will continue to be exceptionally low—this is our second tool—to help maintain a high degree 

of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with 

price stability. 

In the interest of transparency, Committee participants agreed in 

June that it would be helpful to lay out more details about our 

thinking regarding the asset purchase program—specifically, to 

provide additional information on our assessment of progress to 

date, as well as of the likely trajectory of the program if the economy evolves as projected. This agreement to provide additional information did not reflect a change in policy. 

The Committee’s decisions regarding the asset purchase program 

(and the overall stance of monetary policy) depend on our assessVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
6 

ment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised 

when new information arrives and thus are necessarily provisional. 

As I noted, the economic outcomes that Committee participants 

saw as most likely in their June projections involved continuing 

gains in labor markets, supported by moderate growth that picks 

up over the next several quarters as the restraint from fiscal policy 

diminishes. Committee participants also saw inflation moving back 

toward our 2-percent objective over time. If the incoming data were 

to be broadly consistent with these projections, we anticipated that 

it would be appropriate to begin to moderate the monthly pace of 

purchases later this year. And if the subsequent data continued to 

confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had 

evolved along the lines we anticipated, the recovery would have 

gained further momentum, unemployment would be in the vicinity 

of 7 percent, and inflation would be moving toward our 2-percent 

objective. Such outcomes would be fully consistent with the goals 

of the asset purchase program that we established in September. 

I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve 

faster than expected and inflation appeared to be rising decisively 

back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook 

for employment were to become relatively less favorable, if inflation 

did not appear to be moving back toward 2 percent, or if financial 

conditions—which have tightened recently—were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for 

longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for 

a time, to promote a return to maximum employment in a context 

of price stability. 

As I noted, the second tool the Committee is using to support the 

recovery is forward guidance regarding the path of the Federal 

funds rate. The Committee has said it intends to maintain a high 

degree of monetary accommodation for a considerable time after 

the asset purchase program ends and the economic recovery 

strengthens. In particular, the Committee anticipates that its current exceptionally low target range for the Federal funds rate will 

be appropriate at least as long as the unemployment rate remains 

above 61⁄2 percent and inflation and inflation expectations remain 

well behaved in the sense described in the FOMC’s statement. 

As I have observed on several occasions, the phrase ‘‘at least as 

long as’’ is a key component of the policy rate guidance. These 

words indicate that the specific numbers for unemployment and inflation in the guidance are thresholds, not triggers. Reaching one 

of the thresholds would not automatically result in an increase in 

the Federal funds rate target; rather, it would lead the Committee 

to consider whether the outlook for the labor market, inflation, and 

the broader economy justified such an increase. For example, if a 

7 

substantial part of the reductions in measured unemployment were 

judged to reflect cyclical declines in labor force participation rather 

than gains in employment, the Committee would be unlikely to 

view a decline in unemployment to 61⁄2 percent as a sufficient reason to raise its target for the Federal funds rate. Likewise, the 

Committee would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective. Moreover, so 

long as the economy remains short of maximum employment, inflation remains near our longer-run objective, and inflation expectations remain well anchored, increases in the target for the Federal 

funds rate, once they begin, are likely to be gradual. 

Let me finish by providing you with a brief update on progress 

on reforms to reduce the systemic risk at our largest financial 

firms. As Governor Tarullo discussed in his testimony last week before this Committee, the Federal Reserve, with the other Federal 

banking agencies, adopted a final rule earlier this month to implement the Basel III capital reforms. The final rule increases the 

quantity and quality of required regulatory capital by establishing 

a new minimum common equity tier 1 capital ratio and implementing a capital conservation buffer. The rule also contains a supplementary leverage ratio and a countercyclical capital buffer that 

apply only to large and internationally active banking organizations, consistent with their systemic importance. In addition, the 

Federal Reserve will propose capital surcharges on firms that pose 

the greatest systemic risk and will issue a proposal to implement 

the Basel III quantitative liquidity requirements as they are 

phased in over the next few years. The Federal Reserve is considering further measures to strengthen the capital positions of large, 

internationally active banks, including the proposed rule issued 

last week that would increase the required leverage ratios for such 

firms. 

The Fed also is working to finalize the enhanced prudential 

standards set out in sections 165 and 166 of the Dodd-Frank Act. 

Among these standards, rules relating to stress testing and resolution planning already are in place, and we have been actively engaged in stress tests and reviewing the ‘‘first-wave’’ resolution 

plans. In coordination with other agencies, we have made significant progress on the key substantive issues relating to the Volcker 

rule and are hoping to complete it by year-end. 

Finally, the Federal Reserve is preparing to regulate and supervise systemically important nonbank financial firms. Last week, 

the Financial Stability Oversight Council designated two nonbank 

financial firms; it has proposed the designation of a third firm, 

which has requested a hearing before the Council. We are developing a supervisory and regulatory framework that can be tailored 

to each firm’s business mix, risk profile, and systemic footprint, 

consistent with the Collins amendment and other legal requirements under the Dodd-Frank Act. 

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

Chairman JOHNSON. Thank you, Chairman Bernanke. 

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

the clock for each Member. 

Chairman Bernanke, with inflation low and unemployment still 

high, what trends in the data would you need to see before deciding 

8 

to begin unwinding monetary policy measures? Would unwinding 

too early threaten the economy and the financial system? 

Mr. BERNANKE. Well, certainly we face the same issues that are 

always faced when monetary policy begins to normalize after a period of recession and expansion, which is if we tighten too soon, we 

risk not letting the economy getting back to full employment; if we 

tighten too late, we risk having some inflation. So, as always, there 

are going to be issues of judgment there that are unavoidable in 

any monetary policy normalization. 

That being said, we have laid out essentially a three-stage process for our normalization. The first, which is dependent on the 

economy strengthening, the labor market continuing to normalize, 

and inflation beginning to move back toward 2 percent, is a process 

of moderating the pace of our asset purchases and eventually 

bringing those to zero, additional purchases, at the point that we 

can say that we have made substantial improvement in the outlook 

for the labor market. And we have given some guidelines about 

how that process would go forward. 

The second stage would be a potentially lengthy period in which 

we are watching the economy for continued improvement, continued reduction in unemployment, normalization of inflation; and as 

I described in my testimony, when unemployment gets to 6.5 percent, and not before, and when inflation is looking closer to target, 

at that point we would consider whether tightening in the form of 

raising short-term interest rates is appropriate. So that would be 

the second stage. 

The final stage would be the ultimate normalization of policy, the 

raising of short-term interest rates, and eventually the normalization of our balance sheet. As I noted in my testimony, assuming 

that the economy remains in a slow-growth mode, as we have been 

seeing, that process will be a very gradual process. 

Chairman JOHNSON. What explains the recent rise in long-term 

interest rates? And how much more of an increase in rates could 

cause the recovery to falter? And what would the Federal Reserve 

do to respond if interest rates spike? 

Mr. BERNANKE. Well, there are essentially three reasons why we 

have seen some increase in longer-term rates, although I would 

emphasize they remain relatively low. 

The first is that there has been some better economic news. As 

investors see brighter prospects ahead, interest rates tend to rise. 

For example, we saw a relatively good labor market report, which 

was accompanied by a pretty sharp increase in interest rates on 

that day. 

The second reason for the increase in rates is probably the 

unwinding of leveraged and perhaps excessively risky positions in 

the market. It is probably a good thing to have that happen, although the tightening that is associated with that is unwelcome. 

But at least the benefit of it is that some concerns about building 

financial risks are mitigated in that way and probably make some 

FOMC participants more comfortable with using this tool going forward. 

The third reason for the increase in rates has to do with Federal 

Reserve communications and market interpretations of Fed policy. 

We have tried to be very clear from the beginning and I have reitVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
9 

erated again today that we have not changed policy. We are not 

talking about tightening monetary policy. Merely we have been trying to lay out the same sequence which I just described to you 

about how we are going to move going forward and how that will 

be tied to the economy. But I want to emphasize that none of that 

implies that monetary policy will be tighter at any time within the 

foreseeable future. 

Chairman JOHNSON. What do you currently see as the biggest 

threat to the housing market recovery as we continue housing finance reform? 

Mr. BERNANKE. Well, certainly we have to keep our eyes open to 

pay attention to mortgage rates and affordability. That is our job 

at the Fed. But I think it is very important for us to get our housing institutions, our regulatory structure cleared up and in working 

order. I am glad to see that the Congress is now looking at reforms 

of Fannie and Freddie, the mortgage securitization system. We still 

have rules to do about skin in the game and other aspects of the 

mortgage market. 

I think as there is greater clarity about the rules of the game for 

mortgage making and mortgage securitization that we will see less 

tightness in the market for mortgages for first-time home buyers 

and people with less than perfect credit scores. And I think one of 

the risks that we face now is that there is still a pretty significant 

part of the population that is having considerable difficulty accessing mortgage credit even though they may have the financial 

wherewithal to be worthy of that credit. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Chairman Bernanke, you have previously indicated that the Fed 

wants to see substantial improvement in the labor market before 

cutting off QE. And in your June press conference, you noted that 

‘‘substantial’’ is in the eye of the beholder. If I understood you 

today, you indicated that if all goes as expected, we could expect 

to see this wound down completely by midyear next year. Is that 

correct? 

Mr. BERNANKE. If all goes as expected, yes. 

Senator CRAPO. And I guess the flip side of that is you said if 

all does not go as expected, we could see QE continue for the indefinite future? 

Mr. BERNANKE. I suspect that at some point the economy will 

reach that substantial improvement in the outlook given the way 

we have seen progress to this point. Exactly whether it is a little 

bit later or a little bit earlier, that remains to be seen. 

Senator CRAPO. I guess my question is I assume you would agree 

that there is a risk in continuing QE indefinitely. Would you agree 

with that? 

Mr. BERNANKE. Yes, there are costs and risks to QE, and we are 

watching those carefully. We have said in our statement that one 

of the considerations that we are looking at at every meeting is the 

efficiency and costs of this program. And we do a benefit/cost analysis as we discuss the benefits of additional purchases. 

Senator CRAPO. Well, given the notion that ‘‘substantial’’ is really 

in the eye of the beholder, I do not think it is very easy for the 

markets to understand exactly how and when we are going to see 

10 

the winding down occur. And to me, it appears that possibly communicating more specific targets rather than thresholds would help 

to reduce that risk. Do you agree, or do you think it is just not possible to get more specific? 

Mr. BERNANKE. Well, this is an issue that the Committee will 

continue to discuss. I would say first that we have given some fairly specific qualitative guidance about what we are looking for, and 

I did say that unemployment in the general vicinity of 7 percent 

with inflation moving back toward the 2-percent objective was indicative of the kind of progress that we were trying to achieve. 

The thresholds are tied to rate increases, and there, while reaching that threshold does not necessarily mean that we will raise 

rates, we are quite confident that we will not raise rates before we 

get to those points. In that sense we are providing a reassurance 

to the public and to the markets. 

Senator CRAPO. Thank you. And with regard to winding down 

the Fed’s balance sheet, you and others have indicated a willingness to keep the Fed’s QE securities on the balance sheet, rolling 

over maturing securities and keeping them out of the market. Governor Tarullo said on Monday that, ‘‘No one is talking about 

unwinding or selling the securities we have been buying,’’ which 

would mean then that the Fed’s balance sheet could be over $3 trillion for some time. Correct? 

Mr. BERNANKE. Well, not necessarily, because, of course, ultimately we will stop rolling over and reinvesting the securities, and 

then they will begin to run off. Then the balance sheet will start 

to come down. 

We have done a lot of scenario analysis, of course, and allowing 

the securities to run off at a certain point when the economy is 

strong enough does not delay normalization by very much. 

Senator CRAPO. But you are not expecting the winding down of 

the balance sheet at any time soon. Is that correct? 

Mr. BERNANKE. Certainly not until we get to the rate increase 

part of the three-part sequence that I described to you, and there, 

again, we are not planning at this point to sell any MBS. At some 

point we would be allowing the maturing securities just to run off 

and not replacing them. 

Senator CRAPO. But as long as you continue to hold and not wind 

down the balance sheet, doesn’t this lead to credit mispricing and 

increased investor risk undertaking? 

Mr. BERNANKE. I do not think so, particularly when we are winding down. I do not see that there is any real difference between, 

for example, our holding mortgage-backed securities, which is intended to strengthen the housing market, and usual monetary policy, which lowers long-term interest rates through short-term rate 

cuts, which is also intended to strengthen the housing market. The 

housing market is always an important channel of monetary policy, 

and so I do not really see that there is any significant misallocation 

going on there. 

Senator CRAPO. All right. Thank you. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman Bernanke, I understand this may be your final Monetary Policy Report hearing before the Committee before the end of 

11 

your term as Chairman of the Federal Reserve, and I am sure you 

will miss us. But I want to thank you for your hard work and dedication and your service to our country, especially during a time of 

crisis, and I appreciate your service. 

We seem to be experiencing a trend right now where our economy and employment are growing and recovering, but we still 

have, from my perspective, a ways to dig ourselves out from the 

deep hole caused by the financial crisis. Unemployment is coming 

down, but it is still 7.6 percent. More than a third of the people 

who are unemployed are long-term unemployed, which is a true crisis for those more than 4 million individuals and families caught 

in this situation. And as you have discussed with this Committee 

in the past, long-term unemployment can have serious consequences, make it harder for people to maintain skills and networks to reenter the workforce. 

So my question is: While the economy is recovering, we still have 

a lot of work to do to get full employment and strong broad-based 

growth. With core inflation well below the Fed’s target and weak 

demand suggesting that inflation is unlikely to be a problem anytime soon, isn’t it still way too soon to consider any kind of policy 

tightening? 

Mr. BERNANKE. Well, again, I have distinguished between changing the mix of our two tools and the overall thrust of monetary policy. And I agree with you that with inflation below target and with 

unemployment still quite high, and by some measures with unemployment in some ways being even too optimistic a measure of the 

state of the labor market, given some of the other statistics that 

you have cited, that both sides of our statutory mandate are suggesting that we need to maintain a highly accommodative monetary policy for the foreseeable future, and that is what we intend 

to do. 

But I think that we will be able to maintain that high level of 

accommodation ultimately through rate policy and by holding a 

very large balance sheet. But in making that transition to a different stage of this process, we again are intending to keep policy 

highly accommodative. 

Senator MENENDEZ. Let me just follow up on that. As the Reserve has engaged in measures to strengthen our economy, some 

critics have argued that any growth that results might somehow be 

artificial or that low interest rates and cheaper credit might lead 

to financial instability or asset bubbles if investors make riskier investments in order to ‘‘reach for the yield.’’ 

In the current environment, though, isn’t weak demand the 

greater concern? If consumers are pulling back on their spending 

because of high debt burdens and underwater mortgages from the 

financial crisis, and businesses are holding off on investing because 

of the weaker consumer demand, doesn’t that change the relative 

cost, benefits, and risks of different monetary policy actions? 

Mr. BERNANKE. Yes, it can. On the first point about artificial 

growth, during the 1930s there was this view called a 

‘‘liquidationist view’’ which held that recessions and depressions 

were healthy, they purged the evils out of the system. I do not 

think we accept that point of view anymore. We think our economy 

is producing below its potential, and what monetary policy is trying 

12 

to do is help the economy return to its potential, and that would 

be real and sustainable growth that we could achieve. 

On financial stability, obviously given recent experience, we want 

to be very careful that we understand what is going on and pay 

close attention to these issues. The relationship between monetary 

policy and financial stability is a complicated one. On the one hand, 

very low rates for a sustained period can lead to reach for yield and 

other risky behavior. We are trying to address that primarily 

through regulation, through oversight, through monitoring, and 

that is our first line of defense certainly for dealing with those 

sorts of issues. But you correctly point out that it is not a simple 

relationship because, of course, a weak economy also is bad for financial stability because it means weaker credit quality, less lending opportunities, more defaults and delinquencies. So, again, our 

strategy is to try to focus on inflation and unemployment using 

monetary policy, but to pay close attention to any developments in 

the financial stability sphere and use the regulatory and supervisory tools we have as the first line of defense in that case. 

Senator MENENDEZ. I appreciate that. The reason I asked those 

specific questions is because there has been a great deal written 

and said about expansionary austerity. And as I look at what is 

happening in Europe, I am not sure that all the measures taken 

under that guise produce either the economic results that we would 

like to see and certainly the consequential human results that we 

have seen in Europe. And I do not want us making those mistakes 

here. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Corker. 

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

thank you for being here. We were just talking. This second day 

of this Humphrey-Hawkins meeting is about like drinking day-old 

coffee, and maybe even worse, accompanied by a stale doughnut. 

But certainly I am here today—and I do not really have any questions; I read your testimony yesterday—but really to thank you for 

your service. I know we have had our differences on some issues, 

but I really do especially appreciate the way you handled the crisis. 

I think that our country was under extreme duress. I do not know 

how many people could have handled that crisis and the complexities that came with it in the way that you did. So I want to thank 

you for that. 

Mr. BERNANKE. Thank you. 

Senator CORKER. Obviously we have had discussions, both publicly and privately, about some of the quantitative easing, and I 

know we had differences. But I would wonder—I know that, you 

know, there is a whole industry of folks out there who watch every 

word that you say and people right now are doing calculations as 

to whether to buy this instrument or that, and I know that you 

have to be very cautious in what you say sometimes. But this is 

a little bit of a step back. 

I guess, you know, some of the concerns that I have had, and I 

think Members on this side of the dais, have just been the hyperactivity of the Fed and the Fed almost acting as an enabler for 

Congress, which had very bad behavior for a long time, our inability to do the things fiscally and in other ways that would stimulate 

13 

our economy. And I think you are well aware of those. You do a 

pretty decent job of staying away from that, although sometimes I 

wish you weigh in more. 

But I do wonder if you have any possibly parting comments—I 

do not know what your future is and none of us do at this moment. 

But I wonder if you have any comments about that, about any concerns about over time because of the hyperactivity that the Fed has 

been engaged in, and in some ways because Congress has been so 

feckless in living up to its responsibilities and dealing with the 

issues that we have to deal with, if that is of any concern to you. 

And is there any similarities, if you will, to a person who knows 

that they need to do certain things, to eat right and exercise, and 

instead relying on the Fed for amphetamines and other kinds of activities to get in a place that the economy needs to be in our Nation 

and, candidly, the world. 

But, again, as you potentially contemplate those, I do want to 

again thank you for your service, thank you for friendship, and 

whatever happens I wish you well. 

Mr. BERNANKE. Thank you very much for those comments, Senator. 

On hyperactivity, I think what we learned during the crisis was 

that we did not have the right tools. We did not have a way to address a failing investment bank that would not create a huge 

amount of bad effects in financial markets. We did not have appropriate oversight of the shadow banking system. 

There were a lot of weaknesses in our oversight, our regulatory 

system, and our response tools to the crisis, and that is why it 

sometimes seemed frenetic, because the Fed was trying to improvise in many cases. And I think we have made some progress in 

setting up a more orderly framework for both strengthening our financial system, monitoring the system, and responding in case of 

another emergency. So I hope that that is the case. 

It is true that monetary policy I think has carried an awful lot 

of the burden for this recovery, and we would be more than happy 

to share that burden more equally with fiscal policy and other policy makers. But I recognize it has been a difficult time politically 

for people to come to agreement on some very important issues, 

and I do not think—you mentioned the enabler idea. I do not think 

it is my place or the Federal Reserve’s place to try to force Congress to come to any particular outcome. I mean, it is Congress ultimately who is responsible, and our role is to take what Congress 

does as given and to try to figure out how best to meet our mandate given Congress’ actions. I do not think we should be in a position of trying to threaten Congress with higher interest rates or 

something like that. 

Senator CORKER. Yes, and I know that is not your place, and I 

know that you operate under our mandates. I would think, though, 

that most people would ration that, you know, the fact that the Fed 

is there and does have to do what it does in some ways acts as a 

cover for us in our inability to act responsibly. I mean, I think that 

goes without saying, doesn’t it? 

Mr. BERNANKE. Well, I think as you can see, our acting alone is 

not producing the kind of results we all would like. Growth is going 

in the right direction, unemployment is going in the right direction, 

14 

but it still is a very slow process. And as I have said many times, 

monetary policy is not a panacea, so there is still plenty of room 

for Congress to address some of these problems that Senator 

Menendez and others referred to. 

Senator CORKER. Thank you. 

Chairman JOHNSON. Senator Reed. 

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

let me join Senator Corker, Mr. Chairman, and commend you and 

thank you for your service to the Nation. I witnessed your innovative, improvisational, and very thoughtful approach to problems 

that were potentially devastating to the economy. I think through 

your service we avoided a much worse situation, and I thank you 

for that. 

One of the things reflecting back, though, you know, the 20/20 

hindsight, there were a few Governors of the Fed who were talking 

about a housing bubble as the next sort of great crisis, but it did 

not get the traction. Perhaps not identically, but in a similar vein, 

you have got some of your colleagues are now talking about the 

huge growing student debt that could have macroeconomic effects, 

slowing down home purchases, slowing down sort of what we assume was the normal course, that by your late 20s you buy the 

home, you settle down, et cetera. Also, I think, in a way, underscoring another huge problem in the economy, which is the inequality, growing inequality of income. Our sort of American solution to 

inequality is education. That is the engine. 

We have reports, for example, from Georgetown University that 

there is already a 5 million projected gap between jobs available 

that will be there and skills available to fill them. And yet as we 

increase the cost of borrowing—and all the proposals that we are 

talking about currently do increase the cost—that I think will cut 

down on opportunities for a lot of people. 

So can you comment, one, on this potential sort of crisis in student debt, its macroeconomic effects, and whether if we do not provide some type of support both directly and also refinancing support, that this could be the next big problem we face? 

Mr. BERNANKE. Well, first, it should be acknowledged that the 

ability to borrow to build your own human capital, to get an education, is extremely important and a good thing. You know, there 

was a time when a poor student, no matter how qualified, was unable to finance an education, and the fact that we now can do that 

is very good for our economy as well as for individuals. 

The amount of student debt is large. It is over $1 trillion at this 

point. I think that it is not particularly likely to cause any sharp 

instability of the sort we saw in the last few years. It has a couple 

of consequences. One, of course, is it represents a potential fiscal 

risk for the U.S. Government to the extent that some of it is not 

repaid. Second, to the extent that there are people who have taken 

out a lot of debt and the economy is not serving them well, they 

are not finding opportunities, then obviously over time—this is not 

something that is a big issue at any given moment, but over a 

number of years they will not be able to buy the home and do other 

things that they otherwise would be able to because they are paying off the debt. 

15 

So I think the answer to it is, first, of course, to have a strong 

economy that provides job opportunities, and that is something we 

are trying to do, and I am sure you are trying to do as well. But 

the other is I think we need to make sure that students are better 

informed about the market, the labor market, and their opportunities and what different options they have. 

We know of cases of certain—you know, some of the private sector universities, online universities and so on, which do not have 

very good graduation or placement rates. People are still borrowing 

to take those courses. I think if there was better counseling, better 

information, that would certainly be an important step. But I do 

not want us to step back from doing everything we can to give 

young people a chance to get whatever skills are appropriate. 

Senator REED. Let me just ask a broader question, which is, your 

comment, this growing documented inequality in income in the 

United States, does it pose both economic and social risks to the 

country? And how do we deal with it other than through education 

and many different ways? 

Mr. BERNANKE. It is a very, very tough problem. It is not restricted to the United States. It is a global phenomenon. It has 

been going on for a very long time. There are a number of factors 

behind it. I think, though, that one of the most important is that 

the new technologies we are seeing are what is called ‘‘skill bias’’, 

they favor the most skilled workers, and they reduce opportunities 

for people of medium or low skills, particularly in competition with 

the global labor force. 

So I do not have an easy answer. I do think that related to your 

question about student debt, I think that focused skill enhancement, not everybody should necessarily be doing a 4-year B.A. 

Some people would be better off working specifically toward a job 

in industry where there is an understanding in advance that this 

is what is needed, this is the opening. Community college prepares 

those kinds of courses, so more focused job-oriented training for 

some students who are interested in that might be helpful. 

But this is a long-term trend, and I do not have an easy solution 

for it. 

Senator REED. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman, and I, too, want to 

thank Chairman Bernanke not just for being with us today but also 

for his years of service. And we have had our disagreements over 

the years, but not without, on my part, a great deal of respect for 

the way you have approached this work and the work that you 

have done. 

I have a few questions that I hope we would be able to mow 

through. One has to do with the efficacy of the quantitative easing, 

and more specifically there are a number of very thoughtful folks 

who have done analyses that suggest that the benefit of the quantitative easing we have had might be quite modest. And specifically 

I think the suggestion has been that conventional understanding of 

the transmission mechanism of the increase in household net worth 

to consumer spending would suggest a very modest increase to 

GDP that has resulted from the pretty significant increase recently 

in household net worth, even if you attributed all of that increase 

16 

to the Fed, which is itself a questionable premise. And then your 

own previous testimony—I think it was at Joint Economic—to a 

question that I asked, if I understood you correctly, you acknowledged that the nature of the impact that monetary policy tends to 

have on economic growth might be more a matter of timing rather 

than a net increase. So accommodative policy can accelerate, can 

move forward economic activity, might not increase economic activity in total. 

So I guess what I am saying is if the magnitude of the benefit 

has been very modest and, at that, it might be just a shift in timing anyway, that would suggest pretty modest benefits, and yet the 

costs and the risks keep mounting, in my view, the risks of asset 

bubbles, mispricing assets, the risks of whether or not we will have 

an orderly exit. 

So I guess my question would be, number one, how do you quantify the benefits that have been occurring, especially near-term 

marginal benefits going forward? And can you and do you systematically attempt to quantify the risks of what you have done? 

Mr. BERNANKE. Yes, that is a very good question. There is a very 

large literature, academic and within central banks, trying to figure out how big the effects are of quantitative easing, and it is 

quite difficult to know for sure. But the preponderance of the evidence is that while this is not as powerful a tool as ordinary monetary policy, rate policy, that it does have meaningful impact on jobs 

and on the economy. And in particular, since 2008, where we have 

had no ability to move short-term rates and we have had some periods where became somewhat more concerned about deflation, we 

think that QE has provided an important boost at critical times to 

help the economy continue to move forward. 

So I do not want to overstate it, and, again, there is a lot of uncertainty, but there is a lot of work on this, and the preponderance 

of the work suggests that the effects, while not huge, are quite 

meaningful. 

Also, in terms of timing, it is true that no monetary policy can 

do very much about the long-term growth potential of the economy. 

But in a situation where we are well below that potential, if we can 

get back to that potential more quickly, that is a net gain that is 

enjoyed by the economy. 

In terms of costs and risks, I have identified in speeches and 

other places some of these risks, and as I said, it is in our statement that we look at this carefully. I think the one that we have 

paid the most attention to is financial stability, and we have tried 

to greatly increase our vigilance, our monitoring, our use of supervisory tools and the like. And as Senator Menendez actually pointed out, though, there are also risks on both sides because, of 

course, as the economy does very poorly, then that also creates 

risks to financial stability because of the effect on default, delinquency, and so on. 

So let me just acknowledge that this is an issue that is an important one. We believe the first line of defense should be monitoring, 

supervision, regulation, and other similar tools, but we do take into 

account these costs and risks when we debate our monetary policy. 

Senator TOOMEY. Do you attempt to quantify it? Or is it all subjective? 

17 

Mr. BERNANKE. We try to quantify it. It is very difficult, of 

course, to know exactly what the size of the risk is. But what we 

do is we do a lot of work, both qualitative and quantitative, trying 

to measure—for example, we might be looking at covenants on 

loans and whether or not those covenants are becoming less restrictive, which is suggestive of poor underwriting, for example. So we 

monitor those kinds of things, and we report those to the FOMC 

at essentially every meeting so that they can understand where 

there may be sectors where financial risks are building and try to 

gauge those risks. 

Senator TOOMEY. Thank you. I have other questions, but I see 

my time has expired. 

Thanks, Mr. Chairman. 

Chairman JOHNSON. Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

you as well, Chairman Bernanke, as you endure your second marathon on 2 days and echo the views of many of my colleagues in the 

House and Senate who have thanked you for your service during 

such a critical period. Your quiet but strong leadership has been 

instrumental in keeping our economy from falling into an abyss 

and repeating the devastation of a Great Depression, and we are 

now, because of your leadership, on the path toward turning that 

economy around. My view is that 2014 and 2015 will be stronger 

economically than our present time, and that will be in large part 

because of the building blocks that you put into place, even if you 

are no longer Chairman of the Fed. I am not prejudging anything, 

of course. So here are my questions. 

You have been as clear as I think you can be that the timing and 

pace of any tapering—these are monetary—timing and tapering of 

your asset purchases will be dependent on economic and financial 

conditions. That is logical. 

In June, the Committee projected that economic growth would 

pick up in coming quarters, but since then economic data has been 

mixed. We have had decent job numbers, but many signs of weakening growth. We found out that the baseline for your June outlook 

was worse than we first thought. First quarter GDP numbers were 

revised downward. 

So the economy is worse than you thought in June, but the markets appear to think that you are still set to begin tapering in September. So if the economy did not change, were exactly as it is 

today on September 18th, would the Fed be announcing a moderation in the pace of its assets? And just one subsidiary question, you 

have often said that asset purchases will continue until the Fed 

sees ‘‘substantial improvement in the labor market outlook.’’ Does 

weakening data regarding growth change your outlook with respect 

to the strength of the labor market? In other words, can labor markets continue to improve in relative growth? So first about September 18th, and then about the labor markets. 

Mr. BERNANKE. Well, the June FOMC meeting was only a few 

weeks ago. There have been some data points since then, and as 

you say, they have been mixed. So I think it is way too early to 

make any judgment. We will be obviously reviewing the data, and 

what we are looking for is a pickup as the year progresses, because 

our theory of the case, if you will, is that one of the reasons that 

18 

the economy has been so slow in the early part of 2013 is because 

of fiscal factors. It is hard to judge how long those factors will last, 

but if the economy begins to move beyond that point and fiscal restraint becomes somewhat less pronounced, then we should see, as 

you suggested yourself, a pickup in growth. And so that is what we 

will be looking for. It is too early to—— 

Senator SCHUMER. OK. But the September 18th deadline of beginning tapering is not immutable. You are going to look at the 

data. 

Mr. BERNANKE. We are going to obviously look at the data. It is 

a Committee decision. And it is going to depend on whether we see 

the improvement which I described. 

Senator SCHUMER. Right. And the second question, does the 

weakening data regarding growth change your outlook with respect 

to the strength of labor markets? 

Mr. BERNANKE. Yes. So we specifically set as a goal an improvement in the outlook for the labor market as opposed to the labor 

market per se. And what that means is that we want to see improvement in labor market indicators, but we also want to have a 

sense that improvement will continue. And, of course, for improvement to continue, you need to have a broader-based growth. 

And so of the three conditions which I described, one of them is 

a pickup in growth which will be sufficient to provide continued improvement—— 

Senator SCHUMER. You think we still could be on the path to 

labor markets improving even with this relatively weak growth in 

terms of outlook. 

Mr. BERNANKE. It is possible. Again, it has only been a few 

weeks since the June meeting, and I think we have new data—— 

Senator SCHUMER. OK. My first question was about the tapering. 

My second is when you might end asset purchases altogether. The 

minutes of your last meeting said that, ‘‘About half of the participants indicated that it likely would be appropriate to end asset 

purchases late this year.’’ Yet you yourself said in guidance that 

was approved by the Committee based on current projections, you 

expect asset purchases to end sometime in the middle of next year 

when you currently anticipate unemployment will be down around 

7 percent. That is the level of unemployment you say represents 

the amount of improvement that would warrant a moderation in 

Fed policy. 

Do those other members have a different definition of ‘‘substantial improvement in the labor market’’—there seems to be some 

disparity between the other members and you, and if you are not 

there come next year, there is a worry there—or a different view 

of the likely path of the labor market? Do they think unemployment will be 7 percent this year? Or do they have different assessments about the relative cost and benefit of QE? 

Mr. BERNANKE. Well, there are diverse views obviously on this 

program, and in particular, people could see an early wind-down 

because they are optimistic about the economy or because they do 

not think that QE is very effective. I mean, there are a lot of different reasons why you might have that view. 

Let me just assure you that we have a very careful discussion at 

the meeting. We have what is called a ‘‘go-round’’ where every perVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
19 

son, including the nonvoters, gets to express for several minutes 

their view on policy, both current and prospective, and the general 

scenario, which I described in my press conference, is broadly supported by people on the Committee, including both voters and nonvoters. 

Senator SCHUMER. Good. That is good to hear, and it gives me 

a little belief. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Coburn. 

Senator COBURN. Mr. Bernanke, I appreciate the service that you 

have given our country, and we had nobody to compare you to because we have never been in the situation we were in before. But 

I think basically you have done some significant work for the average American, and I appreciate it. 

I have a couple of questions in terms of your balance with your 

mandate, both in terms of inflation and employment and growth. 

One of the things that concerns me is that, since 1980, we have 

changed the way we measure inflation 20 times. And if you use the 

same measure of inflation that we had in 1980, our inflation rate 

would be over 8 percent right now. And the other thing that concerns me is median family income in real dollars is the same as 

it was in 1989. 

So if I had a criticism of anything you have done in the last few 

years, it would really go along and align more with Senator Corker’s thoughts. We have let you down. The kindergarten of Congress 

has let you down by not doing the things to create the confidence, 

to create the certainty in the business community that will allow 

the significant capital that is sitting on the sidelines to be invested, 

which would create some of the growth that you are hoping to do. 

So for that, I apologize. 

But would you care to comment, since in your testimony inflation 

is under control but the average American over the last 10 years 

has seen significant inflation and in the last few years has seen 

significant inflation in the things that really matter? And let me 

talk about it: the cost of an education, transportation, electricity, 

rents, food, plus out of what we have done, not intentionally, we 

have gotten a commodity bubble in many areas in terms of raw 

commodities. 

Would you comment on both the changing metrics that we use 

for inflation as well as maybe what we could have done, looking 

backwards, that might have accentuated and augmented what you 

have done? 

Mr. BERNANKE. Well, on inflation, the inflation statistics are calculated by the Bureau of Labor Statistics, as you know, which is 

made up of highly qualified professional economists—there is no 

partisan influence—and their efforts are always to try to make the 

inflation numbers better, make them more accurate. And that is 

my sense of what has been happening there in terms of changes. 

There was a bipartisan commission on inflation measurements a 

few years ago which concluded that the official inflation numbers 

overstated, not understated, inflation. And so some of the changes 

they recommended have been included. 

20 

So there is a distinction between prices being high and prices 

being rising. It is true that gas prices and food prices—all these 

prices relative to people’s wages—wages are not going up much. 

Senator COBURN. That is right, so the cost of living is going 

up—— 

Mr. BERNANKE. No, it is not going up. It is high. It is not going 

up. In other words, real wages—— 

Senator COBURN. Are going down. 

Mr. BERNANKE. Real wages have been going down because even 

though inflation is very low, wages have been growing slower than 

inflation. So—— 

Senator COBURN. So discretionary income has decreased, so consumer spending is not rising at the rate at which you would like 

to see it. 

Mr. BERNANKE. That is true, but that is not an issue of inflation. 

That is an issue of real living standards, and that has to do with 

the productivity of the economy and the distribution of income. And 

the Fed really cannot do a whole lot about that. 

So I guess I would just respectfully disagree that inflation is 

badly undermeasured. I think the professionals are doing as good 

a job as they can to measure inflation, and if you look at a lot of 

prices, including rents, food, gasoline, and so on, again, while they 

may be high, they are not much different from where they were a 

year ago, and that is what inflation is about. It is the rate of 

change over time. 

In terms of what Congress could do, I mean, I think, you know, 

I can only go so far in recommending, but I do think that an attempt to focus the budget consolidation efforts more on the longer 

term—— 

Senator COBURN. I agree. 

Mr. BERNANKE. ——would have been a more productive way— 

rather than putting so much of the tax increases and spending cuts 

in a front-loaded way, would have been more helpful. That would 

have been one suggestion. 

Senator COBURN. So if, in fact, Congress had behaved appropriately and helped create a certainty in the long term, especially 

with our entitlement programs, but also in terms of some of the 

waste, the effectiveness of some of the things you have done with 

monetary policy might have been greater. 

Mr. BERNANKE. Certainly. 

Senator COBURN. Thank you. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman Bernanke, I thank you for your service, as others have 

done, and we all mean that. And thank you for the new rules on 

capital standards that you have issued with the OCC and FDIC. 

I urge you to hold fast on them when the megabanks fight to weaken those standards, and I hope that you will do that. 

Some financial institutions argue, as we have discussed, that we 

should not get out ahead of Europe in our financial regulation. On 

Monday, Governor Tarullo said, and I want to quote at some 

length: ‘‘I think it is very dangerous that some have tried to characterize Basel agreements as the ceiling and not the floor. So for 

us in the United States, those of us who are charged with financial 

21 

stability of the United States need to make the judgment as to 

what levels of capital will most ensure financial stability in the 

country without unduly affecting the flow of credit. Ever since the 

publication of our proposed reg, I have had calls from my counterparts around the world,’’ Governor Tarullo says. ‘‘That is really interesting. They are saying, ‘Tell me the reasoning on this, how you 

are thinking about it. Explain to me more why you think 3 percent 

is inadequate.’ ’’ 

What I hear Governor Tarullo saying is that we should do what 

we think is best for our financial stability, and if we lead by example, the rest of the world will follow. Do you agree with Governor 

Tarullo? 

Mr. BERNANKE. I certainly agree with the first part, which is 

that Basel III is a floor, it is not a ceiling. It is really a least common denominator because these agreements are made essentially 

by unanimous consensus. And, therefore, if there are a few countries that are very resistant for whatever reason, you know, that 

makes it tougher to get the higher standard. So we view them as 

a floor, and we are prepared to do whatever additional steps are 

needed in order to make our financial system safe. 

I do not know whether all countries will follow us, but there are 

other countries—Switzerland comes to mind, U.K.—that have 

thought hard about this and have made additional—taken additional steps to strengthen their banking systems. And we do have 

a leadership position, and I hope that will happen. But I do not 

think it will be universal. I think that you will see different responses from different countries. 

Senator BROWN. But the most important countries with financial 

systems will follow as Governor Tarullo suggests? 

Mr. BERNANKE. I do not know whether they will follow the exact 

same things, but they have all got the same—the key financial centers which recognize how important banks are to their economy, 

but also the fact that in some cases the banks are bigger than their 

economy, recognize that it is very important to have stability, and 

they have been particularly willing to consider additional steps. 

Senator BROWN. So we should not shrink from doing the right 

thing for stability of our country because some megabanks say that 

we will be an outlier and other countries will not follow. Do you 

agree? 

Mr. BERNANKE. Well, the other countries may or may not follow. 

Some will. But whether they do or not, I do agree that we should 

do whatever we need to do to make sure that the U.S. financial 

system is safe. 

Senator BROWN. Thank you. Let me ask another question. It is 

bank earning season again, as you know, and it is no surprise that 

megabanks are doing quite well. Yet they continue to claim that 

regulations, new regulations and pending regulations, are killing 

them. Tuesday’s Financial Times said, ‘‘Here is the problem: banks 

have spent a lot of time, energy, and money warning of the potential ill effects of ramping up regulation. But since the crisis, international regulators have kept demanding more capital, including a 

surcharge for the bigger banks’’—as you have said. ‘‘Lenders have 

doubled their capital levels as a result, hitting the new Basel III 

targets 6 years early in some cases and, yet,’’ the Financial Times 

22 

asks, ‘‘where are the ill effects? The best of them continue to set 

new profit records . . . with every earnings season, warnings of calamity look more and more hollow.’’ 

The debate about the Fed’s new proposed supplementary leverage ratio reminds me that when we think about costs, we as policy 

makers, regulators, and elected officials, when we think about costs 

and benefits, industry wants us only to think about costs to them. 

Steel companies dump waste into our rivers, and then they argue 

that it will be costly to clean it up. It has a higher human cost to 

the minors and the children who get sick from the pollution. It 

passes more health care costs on to our society, clearly, as they fail 

to internalize those costs. Those who believe in a society with rules 

understand that auto safety might cost car companies a little bit 

more for air bags and seat belts and other safety features, but 

these protections save lives. 

The same with financial rules. They might cost bank executives 

a little bit more in smaller bonuses and maybe even in dividends, 

but they will help prevent a repeat of what we had 5 years ago 

where the costs obviously were shifted to the broad public in retirement savings, in lost jobs, in every way imaginable, and certainly 

people’s lost homes. 

If these are the costs of a safer financial system, aren’t they 

worth it? 

Mr. BERNANKE. The crisis was an enormous waste of resources, 

and unsafe practices by large financial institutions pose a risk not 

just to themselves but to the rest of society, and in setting policy 

we should look at the social costs and not just the cost to the firms. 

And that is what we are attempting to do. 

Senator BROWN. And if it means the bonuses are a little smaller 

and that dividends are a little less and the earnings reports of the 

banks are not quite up to what they were this quarter, which was 

a pretty lucrative quarter for them, that is a price we should pay 

as a society? 

Mr. BERNANKE. From a cost point of view, I think what we 

should be looking at is whether there is any effect on credit availability, things of that sort that affect our economy more broadly. 

But I certainly agree that, again, given the enormous cost of the 

crisis, strong measures to prevent a repeat are obviously well justified on a cost/benefit—— 

Senator BROWN. Are you concerned that these higher capital 

standards will result in less credit available? 

Mr. BERNANKE. I do not think so—no, I am not concerned about 

it. You know, we have done some analysis of that, and there is not 

much evidence that that—— 

Senator BROWN. So there is not really much downside if you said 

that higher capital—you said that the biggest potential problem 

with rules is does it mean less credit available. If it does not mean 

less credit available, there is no real downside for strong capital 

standards. 

Mr. BERNANKE. The only downside I can think of is that if banks 

are finding it very costly to make loans, then credit may start flowing through other less regulated channels, and those have to be 

monitored. 

23 

Senator BROWN. But you are not implying at all that we are 

there yet, even close to that situation with capital standards. 

Mr. BERNANKE. No, we are not there yet, but we have to watch 

the shadow banking system and other parts of the system and 

make sure that risks are not being offloaded into other parts of the 

financial system. 

Senator BROWN. OK. Thank you. And, Mr. Chairman, thank you 

for your generosity of time. 

Chairman JOHNSON. Senator Heller. 

Senator HELLER. Thank you, Mr. Chairman, and I certainly appreciate the questioning of Senator Brown. And, Chairman 

Bernanke, thank you for being here and taking time, because I was 

pleased to hear that Basel III is the floor. And the question—I 

think you answered the question. I was going to ask you to give 

me some insight why we came to Basel III as opposed to a former 

FDIC Chair who wants that percentage to be closer to 8 percent, 

and we have legislation around here that wants it as high as 15 

percent. So I was looking for some insight as to where we came to 

those Basel III capital rates, and it appears the answer may be 

risk, unless you have more to add to it. 

Mr. BERNANKE. Well, we have a program for building up capital, 

and I described part of it, which was Basel III itself, which triples 

the amount of high-quality capital, then the surcharges, then the 

higher leverage ratio, and, in addition, we were looking at things 

like capital charges for wholesale funding if firms rely on less reliable wholesale funding. And we have discussed also the possibility 

of requiring large firms to have unsecured senior debt in their capital structure which could also provide some buffer in the event the 

firm fails. So we are in a variety of ways trying to buildup the buffer that these large firms have, yes. 

Senator HELLER. Let me change the topic real quick here to 

housing. The Wall Street Journal recently had an article on the city 

of Las Vegas and the difficulty of moving homes. We have had 

300,000 people in Las Vegas receive foreclosure notices, not be foreclosed on but receive notices. Over 50 percent of the homes are underwater. And I know you have played an important role in trying 

to reverse this situation. What are we doing wrong? And what can 

we do, what can we do as a Congress to help move and change the 

situation we have not only in Nevada but Arizona, Florida, and 

some of these other States? 

Mr. BERNANKE. Well, as I was saying earlier, I think that from 

Congress’ point of view, getting the mortgage finance system working better in terms of reforming Fannie and Freddie and helping 

to clarify the rules—some of that is on us as regulators to do that— 

so that there is greater access to credit and more people can buy 

homes, because ultimately the solution is to find a demand side for 

the market so that demand for homes will support prices and help 

us get out of this housing problem we have. 

Senator HELLER. I was not here earlier in the discussion of the 

reforms for Fannie and Freddie. I have signed on to the bill here 

in the Senate side. I now the House rolled out theirs yesterday. Do 

you have a preference? 

Mr. BERNANKE. I think it is very important that the Congress 

move forward on this, and I think it is time to do that. 

24 

Senator HELLER. Your insight on a secondary market or Government involvement in mortgage securities? 

Mr. BERNANKE. I think a key issue is going to be not so much 

making mortgages cheaper but, rather, making sure that there is 

some kind of backstop or protection for situations where the financial markets are in distress, like they were recently. And then the 

question is, the Government is one way to do that. There may be 

other ways to do that. But if the Government is involved, I think 

it would be very important to make sure, first of all, that the Government is appropriately compensated for whatever insurance or 

backing it provides; and, second, that firms that are securitizing 

hold enough capital, again, to protect the taxpayer from losses. If 

that is done, I think those would be very helpful if you come to a 

solution that involves a Government role. 

Senator HELLER. Let me talk about one other topic because I do 

not have a lot of time. Sorry to jump around so much, but gold 

prices. You know, we had gold prices almost $2,000 an ounce. It 

has dropped about $600 an ounce, trading, I think, today around 

$1,275, somewhere around there. 

Do you have any insight on why this volatility? What quantitative easing would have—what long-term impact it will have as 

you ratchet back? 

Mr. BERNANKE. Gold is an unusual asset. It is an asset that people hold as sort of disaster insurance. You know, they feel if things 

go really badly wrong, at least they will have some gold in their 

portfolio. So—— 

Senator HELLER. Is that an accurate—— 

Mr. BERNANKE. Sorry? 

Senator HELLER. Is that an accurate feeling? 

Mr. BERNANKE. It is not all that accurate. I mean, for example, 

a lot of people hold gold as an inflation hedge, but the movements 

of gold prices do not predict inflation very well, actually. But, anyway, the perception is that by holding gold you have a hard asset 

that protects you in case of some kind of major problem. And I suppose that one reason that gold prices are lower is that people are 

less concerned about extreme outcomes, either, you know, particularly negative outcomes, and therefore they feel less need for whatever protection gold affords. 

Senator HELLER. Do you believe it is an indication, perhaps psychologically, the direction of the economy for investors? 

Mr. BERNANKE. I think psychologically the gold price going down 

is not necessarily a bad thing from that perspective. It suggests 

people has somewhat more confidence and are less concerned about 

really bad outcomes. But let me just end by saying that nobody 

really understands gold prices, and I do not pretend to really understand them either. 

Senator HELLER. Thank you. 

Mr. Chairman, thank you very much. 

Chairman JOHNSON. Senator Warren. 

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

Bernanke, thank you for all your service during very hard times. 

I still want to ask about some other risks to the economy. The 

biggest banks in the country have reported huge profits over the 

last couple of years. But just this week they reported some stagVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
25 

gering numbers. Wells Fargo’s profits jumped 19 percent from last 

year, JPMorgan Chase’s profits jumped 31 percent, and Citigroup’s 

profits jumped 42 percent. 

Now, some reports have indicated that a big part of those profits 

have come from the banks’ trading activity—in other words, not 

from boring banking but from trading on Wall Street and elsewhere. 

So are you concerned that these biggest banks are loading up on 

big risks again? Or is there another explanation for this spike in 

profits? 

Mr. BERNANKE. Well, let me just say that we are quite aware of 

these portfolios, and we are addressing them in at least two ways— 

or more than two, really, but one of them is that we have just finalized new capital requirements that banks have to hold against 

these assets for sale, these securities, which should provide protection. We have done stress tests where we assume that a December 

2008 type of financial shock hits and so there is a huge drop in 

asset values. And we have stress-tested the banks again to see if 

they have enough capital to protect themselves against big losses 

in their securities books. 

The other thing, as of course you know, is that we are working 

hard with our colleagues to put the Volcker rule into place, and 

that will restrict proprietary trading. 

Senator WARREN. Let me just say, though, Mr. Chairman, that 

the question I am trying to ask about is whether this indicates they 

are loading up on risk. And I very much appreciate that what you 

are telling me about are the ways we are trying to regulate the risk 

when the banks take it on. 

Maybe I could ask this slightly differently, and that is, yesterday 

Secretary of Treasury Jack Lew said, and I want to get the quote 

right: ‘‘If we get to the end of this year and we cannot with an honest, straight face say that we have ended too big to fail, we are 

going to have to look at other options.’’ 

Do you agree with the Secretary of the Treasury? 

Mr. BERNANKE. I do not know about the timing. Maybe I would 

take another year from now. But I have said to you in an earlier 

hearing that there is a strategy. Dodd-Frank lays out a strategy. 

Basel III provides additional support through capital, et cetera. But 

if those things do not make us comfortable about the status of 

these largest firms, yes, I do think additional steps would be appropriate. 

Senator WARREN. Then we need to look at other steps. As you 

know, I have introduced, along with Senator McCain, Senator 

Cantwell, and Senator King, a Glass-Steagall bill, another tool in 

the toolbox to deal with too big to fail. But I think at least now 

we have got some time on this. The Secretary of the Treasury says 

by the end of the year; you say maybe a year longer. But we have 

got to keep this one under examination. Fair enough? 

Mr. BERNANKE. Yes, I think we obviously want to look at all 

tools. I think that there is probably more scope for capital if we are 

not comfortable with the status of these firms. 

Senator WARREN. Good, and fair enough on that. 

I want to ask you, as you know, the Federal Reserve and the 

OCC announced last January that they were stopping their invesVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
26 

tigation into the system foreclosure fraud and that you had reached 

a settlement with the largest mortgage servicers in the country. 

And just last week, the OCC announced that 52,048 people just in 

Massachusetts received checks so far under this settlement, and it 

was an aggregate total of $41 million in compensation, or about 

$800 a family. Now, that is $800 a family in a State, Massachusetts, where the median home income is $324,500. I will do the math for you. That 

is about 2⁄10 of 1 percent of the purchase price of the average home 

in the Commonwealth of Massachusetts. 

Now, it is my job to look out for families in Massachusetts, including helping them get basic information about whether settlements made on their behalf by the Government are fair. And to do 

that, 6 months ago I started asking for basic documents about the 

investigation and to see what the foreclosure fraud investigation 

had uncovered, how many people had lost their chance to save 

their home, just really how bad the damage was. So far, the Fed 

and the OCC have disclosed very little of what I have asked for. 

So the question I have is how the people I represent in Massachusetts who believe they were cheated or the 4 million people who 

received checks around the country, how they know that the payments they are receiving are fair if the Fed and the OCC will not 

disclose details about what they uncovered in the investigation. 

Mr. BERNANKE. Well, as you know, we stopped the investigation 

well before all 4.2 million borrowers were analyzed, so we do not 

have that information for everybody, but we do have it for some 

folks, and we are looking to see if we can find a way to get that 

information to the individuals whose files were evaluated by the 

independent consultants. 

Senator WARREN. Good. So we are talking about getting that information to them and releasing more information about what you 

did find in the aggregate? 

Mr. BERNANKE. Yes. We hope to have a report on this whole 

thing within the next couple of months that will lay out basically 

all the information we have. Some of the things that you have requested frankly we just did not collect. But we will try to provide 

as much transparency as we can. 

Senator WARREN. I would be very grateful for that, Mr. Chairman. You know my concerns in this area generally that if the regulators are not aggressive enough, if they do not require admission 

of guilt, if they never take large financial institutions to trial, then 

the resulting settlements are too weak. And so I know you appreciate that a slap on the wrist is not enough, and if the OCC and 

the Fed are confident that these are good settlements, I think it 

helps everyone if the information is out there. So thank you, Mr. 

Chairman. I appreciate it. 

Mr. BERNANKE. I would like to add that, of course, the people 

who received checks have not yielded their legal rights, and they 

could pursue this further if they wish. 

Senator WARREN. Yes, and I hope that by revealing this information they will be able to better evaluate whether or not that is appropriate for them. Thank you. 

Chairman JOHNSON. Senator Crapo has a brief statement to 

make. 

27 

Senator CRAPO. Yes, thank you, Mr. Chairman. I have a number 

of additional questions, but we are coming up against a vote right 

away. So, Chairman Bernanke, if it is OK with you and with the 

Chairman, I will submit these questions to you and ask you to respond later. The questions that I have, among others, are some further inquiries about the short-term interest rate policy, the actions 

right now at the FSOC, the Financial stability Oversight Council, 

in particular in relationship to nonbank, systemically important financial institutions. And as you might guess, on GSE reform, I 

would love to get some further information from your perspective 

on that. 

But I will submit those questions, Mr. Chairman, in light of the 

fact that we do have a vote pending. Thank you. 

Chairman JOHNSON. Chairman Bernanke, I want to thank you 

for your extraordinary service to our Nation. 

Mr. BERNANKE. Thank you. 

Chairman JOHNSON. And I want to thank you for your testimony. 

This hearing is adjourned. 

[Whereupon, at 12:12 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

28 

1These projections reflect FOMC participants’ assessments based on their individual judgments regarding appropriate monetary policy. 

PREPARED STATEMENT OF BEN S. BERNANKE 

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JULY 18, 2013 

Chairman Johnson, Ranking Member Crapo, and other Members of the Committee, I am pleased to present the Federal Reserve’s Semiannual Monetary Policy 

Report to the Congress. I will discuss current economic conditions and the outlook 

and then turn to monetary policy. I’ll finish with a short summary of our ongoing 

work on regulatory reform. 

The Economic Outlook 

The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by Federal fiscal policy. 

Housing has contributed significantly to recent gains in economic activity. Home 

sales, house prices, and residential construction have moved up over the past year, 

supported by low mortgage rates and improved confidence in both the housing market and the economy. Rising housing construction and home sales are adding to job 

growth, and substantial increases in home prices are bolstering household finances 

and consumer spending while reducing the number of homeowners with underwater 

mortgages. Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor 

developments in this sector carefully. 

Conditions in the labor market are improving gradually. The unemployment rate 

stood at 7.6 percent in June, about a half percentage point lower than in the months 

before the Federal Open Market Committee (FOMC) initiated its current asset purchase program in September. Nonfarm payroll employment has increased by an average of about 200,000 jobs per month so far this year. Despite these gains, the jobs 

situation is far from satisfactory, as the unemployment rate remains well above its 

longer-run normal level, and rates of underemployment and long-term unemployment are still much too high. 

Meanwhile, consumer price inflation has been running below the Committee’s 

longer-run objective of 2 percent. The price index for personal consumption expenditures rose only 1 percent over the year ending in May. This softness reflects in part 

some factors that are likely to be transitory. Moreover, measures of longer-term inflation expectations have generally remained stable, which should help move inflation back up toward 2 percent. However, the Committee is certainly aware that very 

low inflation poses risks to economic performance—for example, by raising the real 

cost of capital investment—and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed 

to ensure that inflation moves back toward our 2 percent objective over time. 

At the June FOMC meeting, my colleagues and I projected that economic growth 

would pick up in coming quarters, resulting in gradual progress toward the levels 

of unemployment and inflation consistent with the Federal Reserve’s statutory mandate to foster maximum employment and price stability. Specifically, most participants saw real GDP growth beginning to step up during the second half of this year, 

eventually reaching a pace between 2.9 and 3.6 percent in 2015. They projected the 

unemployment rate to decline to between 5.8 and 6.2 percent by the final quarter 

of 2015. And they saw inflation gradually increasing toward the Committee’s 2 percent objective. 1

The pickup in economic growth projected by most Committee participants partly 

reflects their view that Federal fiscal policy will exert somewhat less drag over time, 

as the effects of the tax increases and the spending sequestration diminish. The 

Committee also believes that risks to the economy have diminished since the fall, 

reflecting some easing of financial stresses in Europe, the gains in housing and 

labor markets that I mentioned earlier, the better budgetary positions of State and 

local governments, and stronger household and business balance sheets. That said, 

the risks remain that tight Federal fiscal policy will restrain economic growth over 

the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve 

in a way that could hamper the recovery. More generally, with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated 

shocks, including the possibility that global economic growth may be slower than 

currently anticipated. 

29 

Monetary Policy 

With unemployment still high and declining only gradually, and with inflation 

running below the Committee’s longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future. 

In normal circumstances, the Committee’s basic tool for providing monetary accommodation is its target for the Federal funds rate. However, the target range for 

the Federal funds rate has been close to zero since late 2008 and cannot be reduced 

meaningfully further. Instead, we are providing additional policy accommodation 

through two distinct yet complementary policy tools. The first tool is expanding the 

Federal Reserve’s portfolio of longer-term Treasury securities and agency mortgagebacked securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. The second tool is ‘‘forward guidance’’ about the Committee’s plans for setting the Federal funds rate target over the 

medium term. 

Within our overall policy framework, we think of these two tools as having somewhat different roles. We are using asset purchases and the resulting expansion of 

the Federal Reserve’s balance sheet primarily to increase the near-term momentum 

of the economy, with the specific goal of achieving a substantial improvement in the 

outlook for the labor market in a context of price stability. We have made some 

progress toward this goal, and, with inflation subdued, we intend to continue our 

purchases until a substantial improvement in the labor market outlook has been realized. In addition, even after purchases end, the Federal Reserve will be holding 

its stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities, which will continue to put downward pressure on 

longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 

We are relying on near-zero short-term interest rates, together with our forward 

guidance that rates will continue to be exceptionally low—our second tool—to help 

maintain a high degree of monetary accommodation for an extended period after 

asset purchases end, even as the economic recovery strengthens and unemployment 

declines toward more-normal levels. In appropriate combination, these two tools can 

provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability. 

In the interest of transparency, Committee participants agreed in June that it 

would be helpful to lay out more details about our thinking regarding the asset purchase program—specifically, to provide additional information on our assessment of 

progress to date, as well as of the likely trajectory of the program if the economy 

evolves as projected. This agreement to provide additional information did not reflect a change in policy. 

The Committee’s decisions regarding the asset purchase program (and the overall 

stance of monetary policy) depend on our assessment of the economic outlook and 

of the cumulative progress toward our objectives. Of course, economic forecasts must 

be revised when new information arrives and are thus necessarily provisional. As 

I noted, the economic outcomes that Committee participants saw as most likely in 

their June projections involved continuing gains in labor markets, supported by 

moderate growth that picks up over the next several quarters as the restraint from 

fiscal policy diminishes. Committee participants also saw inflation moving back toward our 2 percent objective over time. If the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin 

to moderate the monthly pace of purchases later this year. And if the subsequent 

data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that 

point, if the economy had evolved along the lines we anticipated, the recovery would 

have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective. Such outcomes 

would be fully consistent with the goals of the asset purchase program that we established in September. 

I emphasize that, because our asset purchases depend on economic and financial 

developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to 

be rising decisively back toward our objective, the pace of asset purchases could be 

reduced somewhat more quickly. On the other hand, if the outlook for employment 

were to become relatively less favorable, if inflation did not appear to be moving 

back toward 2 percent, or if financial conditions—which have tightened recently— 

were judged to be insufficiently accommodative to allow us to attain our mandated 

objectives, the current pace of purchases could be maintained for longer. Indeed, if 

needed, the Committee would be prepared to employ all of its tools, including an 

30 

2See, Daniel K. Tarullo (2013), ‘‘Dodd-Frank Implementation’’, statement before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 11, www.federalreserve.gov/ 

newsevents/testimony/tarullo20130711a.htm; and Board of Governors of the Federal Reserve 

System (2013), ‘‘Federal Reserve Board Approves Final Rule To Help Ensure Banks Maintain 

Strong Capital Positions’’, press release, July 2, www.federalreserve.gov/newsevents/press/ 

bcreg/20130702a.htm. 3See, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (2013), ‘‘Agencies Adopt Supplementary Leverage Ratio Notice of Proposed Rulemaking’’, joint press release, July 9, 

www.federalreserve.gov/newsevents/press/bcreg/20130709a.htm. 4 U.S. Department of the Treasury (2013), ‘‘Financial Stability Oversight Council Makes First 

Nonbank Financial Company Designations to Address Potential Threats to Financial Stability’’, 

press release, July 9, www.treasury.gov/press-center/press-releases/Pages/jl2004.aspx. 

increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability. 

As I noted, the second tool the Committee is using to support the recovery is forward guidance regarding the path of the Federal funds rate. The Committee has 

said it intends to maintain a high degree of monetary accommodation for a considerable time after the asset purchase program ends and the economic recovery 

strengthens. In particular, the Committee anticipates that its current exceptionally 

low target range for the Federal funds rate will be appropriate at least as long as 

the unemployment rate remains above 61⁄2 percent and inflation and inflation expectations remain well behaved in the sense described in the FOMC’s statement. 

As I have observed on several occasions, the phrase ‘‘at least as long as’’ is a key 

component of the policy rate guidance. These words indicate that the specific numbers for unemployment and inflation in the guidance are thresholds, not triggers. 

Reaching one of the thresholds would not automatically result in an increase in the 

Federal funds rate target; rather, it would lead the Committee to consider whether 

the outlook for the labor market, inflation, and the broader economy justified such 

an increase. For example, if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather 

than gains in employment, the Committee would be unlikely to view a decline in 

unemployment to 61⁄2 percent as a sufficient reason to raise its target for the Federal funds rate. Likewise, the Committee would be unlikely to raise the funds rate 

if inflation remained persistently below our longer-run objective. Moreover, so long 

as the economy remains short of maximum employment, inflation remains near our 

longer-run objective, and inflation expectations remain well anchored, increases in 

the target for the Federal funds rate, once they begin, are likely to be gradual. 

Regulatory Reform 

I will finish by providing you with a brief update on progress on reforms to reduce 

the systemic risk of the largest financial firms. As Governor Tarullo discussed in 

his testimony last week before this Committee, the Federal Reserve, with the other 

Federal banking agencies, adopted a final rule earlier this month to implement the 

Basel III capital reforms. 2 The final rule increases the quantity and quality of required regulatory capital by establishing a new minimum common equity tier 1 capital ratio and implementing a capital conservation buffer. The rule also contains a 

supplementary leverage ratio and a countercyclical capital buffer that apply only to 

large and internationally active banking organizations, consistent with their systemic importance. In addition, the Federal Reserve will propose capital surcharges 

on firms that pose the greatest systemic risk and will issue a proposal to implement 

the Basel III quantitative liquidity requirements as they are phased in over the next 

few years. The Federal Reserve is considering further measures to strengthen the 

capital positions of large, internationally active banks, including the proposed rule 

issued last week that would increase the required leverage ratios for such firms. 3

The Fed also is working to finalize the enhanced prudential standards set out in 

sections 165 and 166 of the Dodd-Frank Act. Among these standards, rules relating 

to stress testing and resolution planning already are in place, and we have been actively engaged in stress tests and reviewing the ‘‘first-wave’’ resolution plans. In coordination with other agencies, we have made significant progress on the key substantive issues relating to the Volcker rule and are hoping to complete it by yearend. 

Finally, the Federal Reserve is preparing to regulate and supervise systemically 

important nonbank financial firms. Last week, the Financial Stability Oversight 

Council designated two nonbank financial firms; it has proposed the designation of 

a third firm, which has requested a hearing before the council. 4 We are developing 

a supervisory and regulatory framework that can be tailored to each firm’s business 

31 

mix, risk profile, and systemic footprint, consistent with the Collins amendment and 

other legal requirements under the Dodd-Frank Act. 

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

32 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM BEN S. BERNANKE 

Q.1. I am concerned about the long-term impact of youth unemployment. What more can the Federal Reserve do to help promote 

youth employment? 

A.1. Your concerns about the long-term impact of youth unemployment are well-founded. The unemployment rate for 16–24 year olds 

was 15.1 percent in October 2013, down from its peak of 19 percent 

in late 2009, but still 5 percentage points above its level prior to 

the recession. A persistent lack of job opportunities for young people inhibits many of them from gaining valuable work experience 

and may cause lasting damage to their future employment and 

earnings prospects. The Federal Reserve can best help to promote 

youth employment—and indeed to enhance the economic well-being 

of all Americans—through our efforts to promote a stronger economy and a further improvement in labor market conditions. To this 

end, the Federal Reserve—consistent with its congressional mandate—will continue to provide the policy accommodation that is 

needed to foster maximum employment and price stability. 

Q.2. As we approach the 5 year anniversary of the financial crisis, 

what lessons should we never forget regarding appropriate regulation and supervision? 

A.2. The primary lesson for financial regulation and supervision of 

the financial crisis and the ensuing Great Recession is that financial instability can do grave damage to the broader economy. This 

is a lesson that was also learned following other severe crises, such 

as the Great Depression. To a certain extent, policy makers forgot 

this lesson in the decades of prosperity that followed the end of 

World War II. 

Thus, it is important that financial institutions are well-capitalized, have sufficient liquidity on hand to meet a range of contingencies, and that counterparties, regulators and others are prepared for the failure of any given firm. The Federal Reserve, working with other regulatory agencies, has made great progress putting in place enhanced standards for capital, liquidity, risk management, and resolution for the largest financial institutions. 

However, while financial crises share many features, they happen infrequently enough that each has its own unique aspects. 

Thus, regulators must be flexible in their consideration of the key 

risks facing the financial system. To this end, the Federal Reserve’s 

annual stress testing exercise uses scenarios designed to stress the 

most salient risks. In addition, the Federal Reserve has devoted increased resources to monitoring the evolution of the financial system and emerging threats to better ensure that policy makers have 

the information necessary to preserve financial stability. Such efforts and increased interagency focus on systemic issues through 

the FSOC represent an important shift toward a macroprudential 

approach to regulation and supervision of the financial system. 

Q.3. It was recently announced that the New York Stock Exchange 

Euronext would administer LIBOR rates. What steps are needed to 

ensure that LIBOR and other benchmarks are appropriately structured and regulated going forward? 

33 

A.3. While the announcement of Euronext as the administrator is 

an important step, we do not yet know the details of Euronext’s 

plan for its system of oversight or how it will link the submission 

of rates to transactions. We look forward to learning more. Another 

important step to ensure that LIBOR and other benchmarks are 

appropriately structured and regulated is the work that has been 

undertaken by the Financial Stability Board (FSB) to review existing reference rates and to examine possible complements or alternatives to existing rates. The FSB commissioned the International 

Organization of Securities Commissions (IOSCO) to undertake the 

review of existing rates, including LIBOR, EURIBOR, and TIBOR; 

and it is our understanding that IOSCO has convened a group of 

regulators to come up with the parameters for that review. The reviews of those rates are expected to be completed sometime next 

year. The FSB report on possible alternatives is due to be completed in the second quarter of 2014. 

Q.4. How is the Federal Reserve preparing the financial institutions it regulates for higher interest rates? 

A.4. From a policy perspective, the Federal Banking agencies have 

established guidance in place on interest rate risk (IRR) since 1996 

(Joint Policy Statement on Interest Rate Risk SR 96-13) with more 

recent guidance in 2010 (Interagency Advisory on Interest Rate 

Risk SR 10-1) and in 2012 (Questions and Answers on Interagency 

Advisory on Interest Rate Risk Management SR 12-2). Together 

these documents outline supervisory expectations for effective interest rate risk management. Through on-site examinations, ongoing monitoring, and analysis of bank supplied information and/or 

regulatory filings, the Federal Reserve assesses and monitors the 

level of interest rate risk and the quality of interest rate risk management. Institutions that are found to contain outsized levels of 

interest rate risk and/or poor quality interest rate risk management routines may be subject to enforcement actions to reduce interest rate risk, improve available capital levels, or improve their 

interest rate risk management process. 

Over the past few years, the FRB has taken additional action 

steps to strengthen the supervisory oversight with regard to interest rate risk. As part of this, we have devoted more resources to 

interest rate risk teams that continuously monitor cross-institution 

risk and keep abreast of emerging risk issues affecting the largest 

firms. In addition, we have conducted, when necessary, in-depth 

on-site examinations targeting IRR in order to assess firms’ preparedness for potential interest rate shocks. The Federal Reserve 

has also undertaken a number of outreach efforts to raise awareness of interest rate risk. Some recent topics include: 

• Essentials of Effective Interest Rate Risk Measurement 

• Effective Asset/Liability Management: A View From the Top 

• Interest Rate Risk Management at Community Banks 

• Managing Interest Rate Risk in a Rising Rate Environment 

Q.5. As you know, on July 21 the 3-year moratorium on Industrial 

Loan Company (ILC) charters mandated by Wall Street Reform expired. Do you believe there will be any impact on the banking system now that the moratorium has expired? Do you believe the regVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00037 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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ulators have sufficient supervisory and enforcement authority to 

appropriately regulate firms that own ILCs? If not, what supervisory gaps exist? 

A.5. Industrial loan companies (ILCs) are State-chartered banks 

that have virtually all of the powers and privileges of other insured 

commercial banks, including the protections of the Federal safety 

net—deposit insurance and access to the Federal Reserve’s discount 

window and payments system. Nonetheless, ILCs operate under a 

special exception to the Federal Bank Holding Company Act (BHC 

Act). This special exception allows any type of firm, including a 

commercial firm or foreign bank, to acquire and operate an ILC 

chartered in one of a handful of States—principally Utah and California—without complying with the standards that Congress has 

established for bank holding companies to maintain the separation 

of banking and commerce and to protect insured banks, the Federal 

safety net and, ultimately, the taxpayer. 

The Board believes the best way to prevent this exception from 

further undermining the general policies that Congress has established and further promoting competitive and regulatory imbalances within the banking system is to close the loophole in current 

law to new acquirers of ILCs. This is precisely the approach that 

Congress has taken on previous occasions when earlier loopholes 

began to be used in unintended and potentially damaging ways. 

It is important to keep in mind that the exception currently is 

open-ended and subject to very few statutory restrictions. Although 

only a handful of States have the ability to charter exempt ILCs, 

there is no limit on the number of exempt ILCs that these States 

may charter. Moreover, Federal law places no limit on how large 

an ILC may become and only one restriction on the types of activities that an ILC may conduct. That restriction prevents most ILCs 

from accepting demand deposits that the depositor may withdraw 

by check or similar means for payment to third parties. This Federal restriction has lost much of its meaning as ILCs have entered 

the world of retail banking by offering retail customers negotiable 

order of withdrawal (NOW) accounts—transaction accounts that 

are functionally indistinguishable from demand deposit accounts. 

The ILC exception also fosters an unfair and unlevel competitive 

and regulatory playing field by allowing firms that acquire an insured ILC in a handful of States to operate outside the activity restrictions and consolidated supervisory and regulatory framework 

that apply to other community-based, regional, and diversified organizations that own a similarly situated bank. Addressing these 

matters will only become more difficult if additional companies are 

permitted to acquire and operate ILCs under this special exception. 

The ILC exception in current law undermines the supervisory 

framework that Congress has established for the corporate owners 

of insured banks. ILCs are regulated and supervised by the FDIC 

and their chartering State in the same manner as other types of 

State-chartered, nonmember insured banks and the Board has no 

concerns about the adequacy of this existing supervisory framework for ILCs themselves. However, due to the special exception in 

current law, the parent company of an ILC is not considered a 

bank holding company. This creates special supervisory risks beVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00038 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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cause the ILC’s parent company and nonbank affiliates may not be 

subject to supervision on a consolidated basis by a Federal agency. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM BEN S. BERNANKE 

Q.1. You mentioned in your testimony that the Fed is developing 

the regulatory framework for the two nonbank systemically important financial institutions designated by the FSOC. These companies by definition are not banks. They have different assets and liabilities than the entities traditionally regulated by the Fed. How 

will the Fed address the unique characteristics of nonbank financial institutions that are designated as systemically important? If 

the idea is to have a general framework for nonbank SIFIs, what 

specific steps is the Fed planning to undertake to ensure that the 

diverse nature of these companies is accounted for while also ensuring they remain competitive in their industries? How long will 

that process take? 

A.1. The Dodd-Frank Act requires the Board to apply enhanced 

prudential standards and early remediation requirements to bank 

holding companies with at least $50 billion in consolidated assets 

and to nonbank financial companies designated by the FSOC for 

supervision by the Board (designated companies). The Act authorizes the Board to tailor the application of these standards and requirements to different companies on an individual basis or by category. In so doing we can consider any factor we deem appropriate, 

including capital structure, nature of financial activities, riskiness, 

size, and complexity. In our proposed rulemaking, we noted that 

this tailoring authority would be particularly important in applying 

the standards and requirements to designated companies that are 

organized and operated differently from banking organizations. We 

sought and received comment on how the standards should be applied to designated companies. Staff has carefully reviewed the 

comments and met with interested members of the public, including the designated companies and other financial firms. As we indicated in the proposal, following the recent designations by the 

FSOC of AIG, GECC, and Prudential, we are assessing the business model, capital structure, and the risk profile of each company 

to determine how the standards and requirements should apply. 

The Federal Reserve currently supervises AIG and GECC as savings and loan holding companies and formerly supervised Prudential in this capacity. We intend to design a supervisory program for 

these firms as designated companies that is consistent with the approach we use for the largest financial holding companies but tailored to account for different material characteristics of each firm. 

We intend to utilize expertise gained from our prior and current 

supervisory activities and from the designation process, to leverage 

our strong working relationships with State insurance supervisors 

(in the case of AIG and Prudential), and to include a focus on 

threats to financial stability posed by each firm. 

Q.2. After completing work on FHA reform, the Banking Committee will move to the issue of reforming the GSEs. As we begin 

this process, what are the guiding principles that we ought to conVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00039 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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sider? If there is a Government guarantee, how do we make sure 

that it is priced accordingly? 

A.2. The historical experience with mortgage-backed securities provides three principles for successful mortgage securitization. First, 

for the ultimate investors to be willing to acquire and trade mortgage-backed securities, they must be persuaded that the credit 

quality of the underlying mortgages is high and that the origination-to-distribution process is managed so that originators, such as 

mortgage brokers and bankers, have an incentive to undertake 

careful underwriting. Second, because the pools of assets underlying mortgage-backed securities have highly correlated risks, including interest rate, prepayment, and credit risks, the institutions 

and other investors that hold these securities must have the capacity to manage their risks carefully. Finally, because mortgagebacked securities are complex amalgamations of underlying mortgages that may themselves be complex to price, transparency about 

both the underlying assets and the mortgage-backed security itself 

is essential. 

From a public policy perspective, the question arises whether 

fully privatized mortgage securitization would continue under highly stressed financial conditions. Government-backed insurance for 

any form of bond or securities financing used to provide funding to 

mortgage markets should be explicitly priced and transparent, so 

that the taxpayers’ risks can be fully understood. Pricing such insurance is difficult unless the Congress provides an objective for 

the Government insurer. If there is a Government guarantee, Congress needs to establish a standard for when it should be used and 

provide sufficient authority and clarity so that the Government catastrophic insurer knows how to balance concerns about taxpayer 

risk and credit availability. 

Q.3. Beyond the discussion of tapering and winding down the Fed’s 

balance sheet is the fact that short-term rates are still being held 

close to zero. In fact, it has been more than 4 years since the Fed 

Funds Rate was reduced to near zero. Some have suggested the 

Fed should commit to leave the rate low for a period of time after 

the economy begins improving, while others are concerned that any 

delay would provoke inflation. Given the limits of the accuracy of 

real-time economic data and economic forecasting, how confident 

are you that the Fed will be able to move from a zero-interest rate 

policy at the right time? 

A.3. The Committee is firmly committed to its price stability objective, and, as affirmed in its statement of Longer-Run Goals and 

Policy Strategy, its policy decisions will be aimed at achieving its 

longer-run goal of 2 percent inflation (as measured by the deflator 

for personal consumption expenditures). The FOMC has stated that 

it will be appropriate to keep its target range for the Federal funds 

rate at its current very low level at least as long as the unemployment rate remains above 61⁄2 percent, inflation between one and 

two years ahead is projected to be no more than a half percent 

about the Committee’s 2 percent longer-run goal, and longer-term 

inflation expectations continue to be well anchored. In any set of 

circumstances, it is difficult to accurately judge the ideal timing of 

a shift in the direction of monetary policy and one cannot rule out 

37 

the risk that inflation could at some point increase unexpectedly. 

However, policy makers carefully and continuously monitor a range 

of inflation indicators and will adjust the stance of policy as appropriate to achieve low and stable inflation as well as maximum employment. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM BEN S. BERNANKE 

Q.1. In February you testified before this Committee that monetary 

and fiscal policy were working at ‘‘cross-purposes.’’ Many more 

Americans would have jobs and be much better off if Congress 

passed sensible fiscal policy—policies that are good investments 

with high bang for the buck like infrastructure projects, tax relief 

for low and middle-income Americans, and incentives to companies 

to hire and expand their payroll. 

Could you describe how the Fed’s policy would be different, in 

size or scope, if there was sensible fiscal support? And how many 

more Americans would have a job? Would a stronger recovery, supported by fiscal policy, help the Fed manage its monetary policy as 

employment increases and the economy nears the thresholds laid 

out by the FOMC? 

A.1. As I have suggested to the Congress in the past, a fiscal policy 

that was less focused on near-term consolidation and more focused 

on long-run sustainability would be preferable to the current policy. 

According to the CBO, the near-term policies embodied in current 

law—such as sequestration, tax increases and other measures—are 

cutting an estimated 1.5 percentage points off GDP growth this 

year, or approximately 750,000 jobs. Although Fed policies are 

working to support the labor market and offset some of this drag, 

monetary policy is not a panacea, and we would surely see stronger 

labor market conditions if fiscal policy were not imposing strong 

headwinds on the economy this year. By the same token, it is imperative that Congress come to grips in a compelling, credible way 

with the fact that fiscal policy as encoded in current law is not sustainable in the long term. These two objectives are not contradictory; on the contrary, they could be mutually reinforcing. A less restrictive fiscal policy in the near term that supported a stronger 

economic recovery would help improve the sustainability of the 

Federal Government’s overall fiscal position over the long term. At 

the same time, a credible and growth-oriented long-term plan for 

sustainability, enacted into law, would alleviate widespread concerns and reduce uncertainty—both of which could add to the vigor 

of aggregate demand in the near term. 

I am confident that we have the tools to manage monetary policy 

effectively once we get to the point where the economy is nearing 

the thresholds laid out by the Federal Open Market Committee. 

Q.2. The United States just concluded the first round of negotiations with the European Union on the Transatlantic Trade and Investment Partnership (T–TIP) agreement. There is some concern 

that these negotiations and the resulting FTA could adversely affect financial regulatory reforms made by the Fed and other domestic prudential regulators. 

38 

Has the Federal Reserve been consulted by or weighed in with 

the United States Trade Representative on whether this trade 

agreement would affect your rulemaking? Would an FTA with significant financial regulatory changes frustrate your ongoing rulemaking and multilateral efforts with the G20? 

A.2. Federal Reserve staff works closely with the staff of the Treasury Department and other agencies to keep abreast of the status 

of trade negotiations to assure that any agreement would not interfere with U.S. prudential regulation. We are aware that there has 

been interest on the part of the EU to negotiate financial regulations in the context of the T–TIP agreement. However, the U.S. 

agencies working on the T–TIP, including USTR, are in agreement 

that the negotiations will not include prudential or financial regulations or attempt to set standards for such regulations. The Federal Reserve will continue to monitor the negotiations to assure 

that its ability to establish appropriate prudential regulations is 

not compromised. 

The Federal Reserve has long supported including the financial 

services sector itself in trade negotiations in the interest of opening 

markets, reducing trade barriers, and encouraging the free flow of 

trade, but only subject to prudential considerations. As the financial crisis demonstrated, market discipline alone is not sufficient to 

ensure a healthy and stable economy. Financial institutions must 

be held to rigorous prudential standards. Efforts to restore and 

strengthen the health and stability of the U.S. financial sector 

could be undermined if prudential or financial regulations are subject to exemptions or modifications through trade agreements. It 

could also undermine other multilateral efforts to agree on international financial standards, already underway in such fora as the 

FSB, Basel Committee, IOSCO, and the IAIS. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM BEN S. BERNANKE 

Q.1. There has been a significant sell-off in the fixed income markets in recent weeks, with substantial outflows from bond mutual 

funds. Are you at all concerned you that markets are too driven by 

the speeches and official pronouncements from central banks 

around the world? If the suggestion of tapering has been contributing to volatility in asset prices, can we expect more volatility as 

policy action nears? 

A.1. The recent rise in interest rates appears to partly reflect shifts 

in investor expectations about monetary policy, but other factors 

likely played important roles as well. In particular, incoming data 

appears to have led investors to mark up their expectations for economic activity relative to earlier in the year. Yield movements were 

also reportedly exacerbated by an unwinding of leveraged and risky 

trading positions that had been predicated on highly optimistic investor expectations of persistently low and stable interest rates. 

Notably, an unwinding of such positions, while having the unfortunate effect of tightening financial conditions, may also have removed some of the risks to financial stability posed by those overextended positions, putting financial markets on a firmer footing. 

39 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM BEN S. BERNANKE 

Q.1. The Federal Reserve proposes to end its asset purchases by 

the middle of next year, assuming that the recovery has gained momentum, unemployment is near 7 percent, and inflation is moving 

toward 2 percent. However, unemployment of 7 percent would be 

well above the so-called ‘‘natural’’ rate of unemployment (http://research.stlouisfed.org/fred2/series/NROUST), suggesting that inflation would not be a concern, and many households would still be 

in considerable distress because of the slack labor market. Why 

does the Federal Reserve plan to abandon a tool that you say helps 

‘‘to increase the near-term momentum of the economy, with the 

specific goal of achieving substantial improvement in the outlook 

for the labor market in the context of price stability’’ when macroeconomic conditions remain far from normal? 

A.1. The FOMC is currently providing monetary stimulus to the 

economy using two tools: large scale asset purchases and communications about its expectations for the path of the Federal funds 

rate, or ‘‘forward guidance.’’ Asset purchases help to lower longerterm interest rates by reducing the stock of available longer term 

securities, thereby helping to raise their price in the open market, 

and reduce their yield. Thus, a cessation of asset purchases would 

not imply a reduction in monetary stimulus because the Federal 

Reserve will continue to hold the assets it has purchased in its 

portfolio and thereby maintain downward pressure on long-term interest rates. Moreover, as the Committee has indicated in its most 

recent post-meeting statement, it expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends. In particular, 

the Committee sees its asset purchases as providing near-term momentum to the economy with the specific goal of achieving a substantial improvement in the labor market in a context of price stability. However, even after this goal has been achieved, the Committee expects that it will be appropriate to maintain the current 

low range for the Federal funds rate at least as long as the unemployment rate remains above 61⁄2 percent, inflation between 1 and 

2 years is projected to be no more than half a percentage point 

above the Committee’s 2 percent longer-run goal, and longer-term 

inflation expectations continue to be well anchored. 

Q.2. In a recent Notice of Proposed Rulemaking the Federal Reserve proposes to treat branches and agencies of foreign banking 

organizations as if they were insured depositories for purposes of 

section 716 of the Dodd-Frank Act (http://www.gpo.gov/fdsys/ 

pkg/FR-2013-06-10/pdf/2013-13670.pdf). This rule would allow 

branches and agencies to act as a swaps entity for certain types of 

swaps, and to use swaps for hedging, while retaining access to the 

Federal Reserve discount window and emergency lending. This 

change is described in the rule proposal being, ‘‘ . . . consistent 

with the purpose and legislative history of section 716. Section 716 

and Title VII of the Dodd-Frank Act generally are intended to reduce systemic risks from derivatives activities.’’ Can you explain 

how extending the Federal safety net to swaps entities located in 

branches and agencies—which are not subject to the full range of 

40 

1Section 13(14) of the Federal Reserve Act; 12 U.S.C. 347d. 

2See, 156 Cong. Rec. S5904 (daily ed. July 15, 2010) (statement of Senator Lincoln). 

U.S. banking regulation—reduces the systemic risks created by derivatives activities? 

A.2. The Board’s interim final rule treats an uninsured U.S. branch 

or agency of a foreign bank as an insured depository institution for 

purposes of section 716 of the Dodd-Frank Act. 

The interim final rule does not extend the Federal safety net to 

these branches and agencies. Under the Federal Reserve Act, both 

uninsured and insured U.S. branches and agencies of foreign banks 

may receive Federal Reserve advances on the same terms and conditions that apply to domestic insured State member banks. 1 In 

section 716, Congress also determined to permit insured depository 

institutions to continue to conduct certain limited hedging and 

bank permissible activities. It made this determination to allow insured depository institutions to manage the risk from their activities in a safe and sound manner. This treatment is consistent with 

congressional intent as reflected in a colloquy between Senator Lincoln, the sponsor of section 716 and Senator Dodd, the Chairman 

of the Senate Committee on Banking, Housing, and Urban Affairs. 

During Senate consideration of the Dodd-Frank Act Conference Report, Senators Lincoln and Dodd had a colloquy during which they 

expressed the view that uninsured U.S. branches and agencies 

should be treated in the same manner as insured depository institutions. 2 The Board’s rule allows uninsured branches of foreign 

banks to engage in the same bank permissible activities so that 

they too can better manage risk. 

Q.3. During the financial crisis, the unprecedented use of emergency lending powers under Section 13(3) of the Federal Reserve 

Act raised important questions about moral hazard in the financial 

sector. In response to these concerns, Section 1101 of the DoddFrank Act placed important new restrictions on the Federal Reserve’s use of its emergency lending powers. Section 1101(a)(6) required the Federal Reserve to write rules ‘‘as soon as is practicable 

after the enactment of this subparagraph’’ establishing policies and 

procedures for emergency lending that implement these restrictions. 

It has been 3 years since Dodd-Frank was enacted but I am not 

aware that any rules have been issued or proposed establishing 

policies and procedures for emergency lending under Section 13(3). 

If any rules implementing the new Dodd-Frank restrictions on 

emergency lending been proposed, can you please provide them to 

my office? If such regulations have not been proposed, what explains the failure to issue them ‘‘as soon as is practicable’’ and 

when do you expect these regulations to be issued? 

A.3. The Dodd-Frank Act imposed numerous requirements upon 

the Board for rulemakings, both on its own as well as in consultation with other agencies, as well as requirements for process 

changes and development, studies, consultations, and reports. The 

Board has taken its obligations under the Dodd-Frank Act very seriously. As of last month, the Board had completed 27 final 

rulemakings, 12 proposed rulemakings, and 12 studies and reports 

(on its own or jointly with other agencies). The Board has underVerDate Nov 24 2008 13:05 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00044 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\07-18 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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taken substantial work both internally and with other agencies 

where required on other Dodd-Frank Act requirements, including 

on the policies and procedures intended to implement the DoddFrank Act amendments to section 13(3). The Board expects to issue 

a proposal for public comment on the section 13(3) policies and procedures shortly. 

Q.4. Given the statutory directive to issue detailed policies and procedures restricting 13(3) powers, do you believe that the Federal 

Reserve would be legally authorized to use its emergency lending 

powers in the absence of the mandated regulation? 

A.4. The Dodd-Frank Act made several major changes to the statutory text of section 13(3). The Board believes that the provisions 

enacted in the Dodd-Frank Act governing its emergency lending 

authority have governed the use of that authority since enactment 

of that act. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP 

FROM BEN S. BERNANKE 

Q.1. How are the unpredictability in taxes and regulation that 

businesses face affecting our economic recovery and future growth? 

A.1. Economic research suggests that uncertainty about Federal 

Government policies, including those for taxes and regulation, can 

restrain business investment and hiring, although there is not a 

consensus on the magnitude of these effects. Policy makers can 

help alleviate this uncertainty by putting in place a stable and sustainable set of policies. It is important that taxes are set in order 

to raise sufficient tax revenue for a given amount of Federal Government spending and that Federal regulations are set in order to 

achieve key economic and social goals. The decisions made about 

the size and structure of Federal taxes and regulations have important effects on the future performance of the economy. These decisions entail balancing many factors to implement policies that reflect our values and priorities as a Nation. 

Q.2. How can we improve the development of our future workforce 

to ensure we have the human capital necessary for the economy 

they will enter? 

A.2. The skills and talents of the American workforce are important determinants of the long-run growth potential of the U.S. 

economy and of the standard of living of the population. Both to 

promote economic growth and to enhance the well-being of future 

generations, it is important that we provide our young people and 

our future workers more generally with the resources and opportunities they need to build their human capital and succeed in the 

modern economy. 

A first step toward achieving this goal is to make our education 

system as strong and accessible as possible. If we are to successfully navigate such challenges as the retirement of the baby boom 

generation, technological change, and increasing globalization, we 

must work diligently to maintain the quality of our educational 

system where it is strong and strive to improve it where it is not. 

Our efforts need to focus on all levels of education, from preschool 

on up. And even though higher education currently represents the 

42 

strongest part of the U.S. educational system, we must find ways 

to move more of our students, especially minorities and students 

from disadvantaged backgrounds, into educational opportunities 

after high school. 

Of course, not everybody should necessarily be pursuing a 4-year 

college degree. Indeed, there are many educational opportunities 

that lie outside the traditional route of a kindergarten-throughtwelfth-grade education followed by 4 years of college. For example, 

some individuals would be better off looking specifically towards a 

job in an industry where there is an understanding in advance that 

workers are needed with particular sets of skills. For students interested in that career path, support for focused job-oriented training programs such as those offered by many community colleges 

may be helpful. 

A third set of policies relates to those who are already in the 

workforce but need to adapt to a changing economic environment. 

In this regard, policies targeted towards providing those workers 

with the resources they need to upgrade their skills and find new 

jobs can be helpful. For example, community college and other 

adult education programs have been effective in helping workers 

advance their careers, as well as helping those who have lost their 

jobs to obtain new skills that strengthen their qualifications for 

available jobs. Similarly, innovative workforce development programs can play an important role in anticipating future job market 

demands, and by helping workers improve their skills to meet the 

requirements of businesses as they adopt more advanced technologies. 

Finally, promoting a strong economy that provides job opportunities for our future workforce is, of course, critical to the success of 

future generations. In this regard, the Federal Reserve remains 

firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. 

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