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85–910 PDF 2014

S. HRG. 113–125 

NOMINATION OF JANET L. YELLEN 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

NOMINATION OF JANET L. YELLEN, OF CALIFORNIA, TO BE CHAIRMAN 

OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

NOVEMBER 14, 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 

KRISHNA PATEL, FDIC Detailee 

BRIAN FILIPOWICH, Professional Staff Member 

GREG DEAN, Republican Chief Counsel 

MIKE LEE, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

(III) 

C O N T E N T S 

THURSDAY, NOVEMBER 14, 2013 

Page 

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

Opening statements, comments, or prepared statements of: 

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

NOMINEE 

Janet L. Yellen, of California, to be Chairman of the Board of Governors 

of the Federal Reserve System ............................................................................ 4 

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

Biographical sketch of nominee ....................................................................... 39 

Responses to written questions of: 

Senator Crapo ............................................................................................ 52 

Senator Brown ........................................................................................... 57 

Senator Hagan ........................................................................................... 58 

Senator Warren ......................................................................................... 60 

Senator Vitter ............................................................................................ 63 

Senator Johanns ........................................................................................ 67 

Senator Kirk .............................................................................................. 71 

Senator Moran ........................................................................................... 81 

Senator Coburn ......................................................................................... 84 

(1) 

NOMINATION OF JANET L. YELLEN, 

OF CALIFORNIA, TO BE CHAIRMAN OF THE 

BOARD OF GOVERNORS OF THE FEDERAL 

RESERVE SYSTEM 

THURSDAY, NOVEMBER 14, 2013 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:01 a.m., in room SD–106, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. 

Today we consider the nomination of the Honorable Janet Yellen 

to be Chair of the Board of Governors of the Federal Reserve System for a term of 4 years. 

Dr. Yellen is an extraordinary candidate to lead the Federal Reserve. She currently serves as a Member and Vice Chair of the 

Board of Governors; she previously served as a Member of the 

Board of Governors in the 1990s; she was the Chair of President 

Clinton’s Council of Economic Advisers; and she served 6 years as 

the President of the San Francisco Fed. 

In addition, Dr. Yellen has an impressive academic record. She 

is a professor at Berkeley’s Haas School of Business and was previously a professor at Harvard University, as well as a faculty 

member at the London School of Economics. Dr. Yellen graduated 

summa cum laude from Brown University and received her Ph.D. 

in economics from Yale. 

Dr. Yellen’s nomination is especially timely as our Nation struggles with high unemployment in the wake of the Great Recession. 

She has devoted a large portion of her professional and academic 

career to studying the labor market, unemployment, monetary policy, and the economy. 

Dr. Yellen also has a strong track record in evaluating trends in 

the economy; her economic analysis has been spot-on. The New 

York Times recently noted that she was ‘‘the first Fed official, in 

2005, to describe the rise in housing prices as a bubble that might 

damage the economy. She was also the first, in 2008, to say that 

the economy had fallen into a recession.’’ 

These forecasts were not an anomaly. The Wall Street Journal 

recently analyzed 700 predictions made between 2009 and 2012 in 

speeches and congressional testimony by 14 Federal Reserve policy 

2 

makers and found Dr. Yellen was the most accurate. Such accurate 

economic judgment would be a tremendous quality of a Fed Chair. 

Dr. Yellen has proven through her extensive and impressive 

record in public service and academia that she is most qualified to 

be the next Chair of the Federal Reserve. We need her expertise 

at the helm of the Fed as our Nation continues to recover from the 

Great Recession, completes Wall Street reform rulemakings, and 

continues to enhance the stability of our financial sector. 

I am excited to cast my vote to confirm her as the first woman 

to serve as Chair of the Federal Reserve, and when we vote on the 

nomination, I urge my colleagues to do the same. 

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

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you, Mr. Chairman, for holding today’s 

hearing on the nomination of Dr. Yellen to be the next Chair of the 

Federal Reserve Board. Today’s hearing is an opportunity not only 

to examine Governor Yellen’s qualifications but also her views on 

the role and direction of the Federal Reserve. 

In recent years the Fed has engaged in unprecedented policies, 

including purchasing trillions of dollars in Treasuries and mortgage-backed securities. Current Fed purchases total up to $85 billion a month. As a result, the next Fed Chair will inherit a balance 

sheet that currently stands at approximately $3.8 trillion, four 

times higher than before the financial crisis. 

As I think everyone knows, I have been a long-time critic of the 

Fed’s quantitative easing purchases. Now that a reduction in asset 

purchases finally seems to be on the horizon, I am concerned that 

markets have become overly reliant on them. That is why it is essential to know how Dr. Yellen, if confirmed, would manage the 

process of normalizing our monetary policy. The Fed has indicated 

that it will hold short-term interest rates low for an extended period. In a speech in April, Governor Yellen stated, ‘‘The policy rate 

should, under present conditions, be held lower for longer.’’ But 

how long is too long? 

The extended period of low rates is hurting individuals living on 

fixed-income investments and defined benefit pension funds. The 

International Monetary Fund cautioned that the actions taken by 

central banks are associated with financial risks that are likely to 

increase the longer the policies are maintained. 

How would the Fed ensure that these risks are avoided under 

Dr. Yellen’s chairmanship? In addition to unprecedented monetary 

policy, the next Fed Chair will finalize several key financial regulatory reform rules. These rules must balance the financial stability 

with the inherent need for markets to take on and accurately price 

risk. They must be done without putting the U.S. markets at an 

undue competitive disadvantage or harming consumers with unintended consequences. 

The Chair of the Federal Reserve must understand how different 

rules interact with each other, what impact they have on the affected entities and the economy at large. Just as some worried that 

we did not have another regulations on the books to prevent the 

economic crisis, some of us worry now that the post-crisis response 

3 

will result in a regulatory regime that stifles growth and job creation. 

The Chair of the Federal Reserve must know and understand the 

need for that balance and how to carefully manage competing demands without harming the economy. The U.S. banking system 

and capital markets must remain the preferred destination for investors throughout the world. 

During previous hearings, I have asked Chairman Bernanke 

what parts of Dodd-Frank could be revisited on a bipartisan basis. 

The Chairman identified the end user and swaps push-out provisions as well as the need for regulatory relief on small banks. 

Chairman Bernanke also commented in July that legislation is 

needed to allow the Fed flexibility to deal with the Collins amendment and tailor appropriate capital requirements for insurance 

companies. 

I look forward to hearing Dr. Yellen’s views on what Dodd-Frank 

fixes Congress ought to consider and how she intends to achieve an 

appropriate balance between the prudential regulation and economic growth, if confirmed. 

In addition to the previously mentioned issues, the makeup of 

the Board itself will change in the near future. Governor Sarah 

Bloom Raskin has been nominated to a position at Treasury, and 

Governor Elizabeth Duke resigned in August. If Governor Yellen is 

confirmed as Chair, the Fed will need a new Vice Chair. Moreover, 

Dodd-Frank created a Vice Chair of Supervision, which has not yet 

been officially filled. These appointments will shape the direction 

of the Federal Reserve policymaking for years to come. 

I look forward to working with the Chairman to see these positions are filled in a way that provides the proper balance and expertise at the Fed. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Senator Crapo. 

Senator Crapo and I have agreed that, to allow for sufficient time 

for questions, we are limiting opening statements to the Chair and 

Ranking Member. All Senators are welcome to submit an opening 

statement for the record. 

We will now swear in Dr. Yellen. Please rise and raise your right 

hand. Do you swear or affirm that the testimony that you are 

about to give is the truth, the whole truth, and nothing but the 

truth, so help you God? 

Ms. YELLEN. I do. 

Chairman JOHNSON. Do you agree to appear and testify before 

any duly constituted committee of the Senate? 

Ms. YELLEN. I do. 

Chairman JOHNSON. Please be seated. 

Please be assured that your written statement will be part of the 

record. I invite you to introduce your family and friends in attendance before beginning your statement. 

Dr. Yellen, please proceed with your testimony. 

4 

STATEMENT OF JANET L. YELLEN, OF CALIFORNIA, TO BE 

CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. YELLEN. Thank you. I would like to introduce my husband, 

George Akerlof; and my sister-in-law, Allison Brooks; and my 

friend and a former San Francisco Fed Director, Karla Chambers, 

who are here with me today. 

Chairman Johnson, Senator Crapo, and Members of the Committee, thank you for this opportunity to appear before you today. 

It has been a privilege for me to serve the Federal Reserve at different times and in different roles over the past 36 years and an 

honor to be nominated by the President to lead the Fed as Chair 

of the Board of Governors. 

I approach this task with a clear understanding that the Congress has entrusted the Federal Reserve with great responsibilities. 

Its decisions affect the well-being of every American and the 

strength and prosperity of our Nation. That prosperity depends 

most, of course, on the productiveness and enterprise of the American people, but the Federal Reserve plays a role too, promoting 

conditions that foster maximum employment, low and stable inflation, and a safe and sound financial system. 

The past 6 years have been challenging for our Nation and difficult for many Americans. We endured the worst financial crisis 

and deepest recession since the Great Depression. The effects were 

severe, but they could have been far worse. Working together, Government leaders confronted these challenges and successfully contained the crisis. Under the wise and skilled leadership of Chairman Bernanke, the Fed helped stabilize the financial system, arrest the steep fall in the economy, and restart growth. 

Today the economy is significantly stronger and continues to improve. The private sector has created 7.8 million jobs since the 

post-crisis low for employment in 2010. Housing, which was at the 

center of the crisis, seems to have turned a corner. Construction, 

home prices, and sales are up significantly. The auto industry has 

made an impressive comeback, with domestic production and sales 

back to near their pre-crisis levels. 

We have made good progress, but we have further to go to regain 

the ground lost in the crisis and the recession. Unemployment is 

down from a peak of 10 percent, but at 7.3 percent in October, it 

is still too high, reflecting a labor market and economy performing 

far short of their potential. At the same time, inflation is running 

below the Federal Reserve’s goal of 2 percent and is expected to 

continue to do so for some time. 

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will 

ultimately enable the Fed to reduce its monetary accommodation 

and its reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest 

path to returning to a more normal approach to monetary policy. 

In the past two decades, and especially under Chairman 

Bernanke, the Federal Reserve has provided more and clearer information about its goals. Like the Chairman, I strongly believe 

that monetary policy is most effective when the public understands 

what the Fed is trying to do and how it plans to do it. At the reVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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quest of Chairman Bernanke, I led the effort to adopt a statement 

of the Federal Open Market Committee’s longer-run objectives, including a 2-percent goal for inflation. I believe this statement has 

sent a clear and powerful message about the FOMC’s commitment 

to its goals and has helped anchor the public’s expectations that inflation will remain low and stable in the future. In this and many 

other ways, the Federal Reserve has become a more open and 

transparent institution. I have strongly supported this commitment 

to openness and transparency, and I will continue to do so if I am 

confirmed and serve as Chair. 

The crisis revealed weaknesses in our financial system. I believe 

that financial institutions, the Federal Reserve, and our fellow regulators have made considerable progress in addressing those weaknesses. Banks are stronger today, regulatory gaps are being closed, 

and the financial system is more stable and more resilient. Safeguarding the United States in a global financial system requires 

higher standards both here and abroad, so the Federal Reserve and 

other regulators have worked with our counterparts around the 

globe to secure improved capital requirements and other reforms 

internationally. Today, banks hold more and higher-quality capital 

and liquid assets that leave them much better prepared to withstand financial turmoil. Large banks are now subject to annual 

‘‘stress tests’’ designed to ensure that they will have enough capital 

to continue the vital role they play in the economy, even under 

highly adverse circumstances. 

We have made progress in promoting a strong and stable financial system, but here, too, important work lies ahead. I am committed to using the Fed’s supervisory and regulatory role to reduce 

the threat of another financial crisis. I believe that capital and liquidity rules and strong supervision are important tools for addressing the problem of financial institutions that are regarded as 

‘‘too big to fail.’’ In writing new rules, however, the Fed should continue to limit the regulatory burden for community banks and 

smaller institutions, taking into account their distinct role and contributions. Overall, the Federal Reserve has sharpened its focus on 

financial stability and is taking that goal into consideration when 

carrying out its responsibilities for monetary policy. I support these 

developments and pledge, if confirmed, to continue them. 

Our country has come a long way since the dark days of the financial crisis, but we have farther to go. I believe the Federal Reserve has made significant progress toward its goals but has more 

work to do. 

Thank you for the opportunity to appear before you today. I 

would be happy to respond to your questions. 

Chairman JOHNSON. Thank you for your testimony. 

Will the clerk please put 5 minutes on the clock for each Member? 

Dr. Yellen, you know, as I do, that unemployment is not just 

numbers but real men and women who are ready to work if given 

the chance. As Chair, how will you lead the Fed to continue reducing unemployment aggressively and improve the prospects of young 

Americans and others who are unemployed? 

Ms. YELLEN. Thank you, Senator. I would be strongly committed 

to working with the FOMC to continue promoting a robust ecoVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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nomic recovery. As you noted, unemployment remains high. A disproportionate share of that unemployment takes the form of long 

spells of unemployment. Around 36 percent of all those unemployed 

have been unemployed for more than 6 months. This is a virtually 

unprecedented situation, and we know that those long spells of unemployment are particularly painful for households, impose great 

hardship and costs on those without work, on the marriages of 

those who suffer these long unemployment spells, on their families. 

So I consider it imperative that we do what we can to promote a 

very strong recovery. 

We are doing that by continuing our asset purchase program 

which we put in place with the goal of assuring a substantial improvement in the outlook for the labor market. We are taking account of the costs and efficacy of that program as we go along. At 

this point I believe the benefits exceed the costs. As that program 

gradually winds down, we have indicated that we expect to maintain a highly accommodative monetary policy for some time to come 

thereafter, and the message that we want to send is that we will 

do what is in our power to assure a robust recovery in the context 

of price stability. 

Chairman JOHNSON. What are the dangers of tapering asset purchases too early? If confirmed, how should the FOMC move forward 

on an exit strategy? 

Ms. YELLEN. Senator, I think there are dangers, frankly, on both 

sides of ending the program or ending accommodation too early. 

There are also dangers that we have to keep in mind with continuing the program too long or more generally keeping monetary 

policy accommodation in place too long. So the objective here is to 

assure a strong and robust recovery so that we get back to full employment and that we do so while keeping inflation under control. 

It is important not to remove support, especially when the recovery 

is fragile and the tools available to monetary policy should the 

economy falter are limited, given that short-term interest rates are 

at zero. I believe it could be costly to withdraw accommodation or 

to fail to provide adequate accommodation. 

On the other hand, it will be important for us also, as the recovery proceeds, to make sure that we do withdraw accommodation 

when the time is appointed. My colleagues and I are committed to 

our longer-run inflation goal of 2 percent, and we will need to ensure that, as the recovery takes hold and progresses, we also exit 

or bring monetary policy back to normal in a timely fashion. 

I believe we have the tools necessary to do so. We have been very 

careful to make sure that we have the tools available at our disposal and we also have the will and commitment, and I look forward to leading, when the time is appropriate, the normalization 

of monetary policy. 

Chairman JOHNSON. Thank you. 

Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman, and I would like to 

follow up on the Chairman’s question with you, Ms. Yellen, with 

regard to quantitative easing. You have indicated that you feel that 

as long as the economy remains—well, I do not want to put words 

in your mouth. But as the economy remains fragile, that we need 

to continue the accommodation from the Federal Reserve. 

7 

According to the July quarterly survey of the primary dealers by 

the New York Fed, the Fed’s balance sheet will reach almost 24 

percent of GDP in the first quarter of 2014. And I am concerned 

about the size of the Fed’s balance sheet and its impact on the 

economy and the unintended consequences of these accommodations. 

It seems to me that there is a disconnect between what the Fed 

intended to accomplish and the results. A PIMCO executive recently stated that the $4 trillion in quantitative easing may have 

contributed as little as one-quarter of 1 percent to GDP growth. 

And even the Fed’s own economists estimates that the QE2 added 

only about 0.13 percent to real GDP growth in 2010. And another 

expert has indicated that Fed policies contribute to bubble-like 

markets. 

How do you respond to the concerns that quantitative easing has 

limited impact on economic growth and is, in fact, creating very serious risks in our financial markets? 

Ms. YELLEN. A number of different studies have been done attempting to assess what the contribution of our asset purchases 

have been, and, of course, this is something we can only estimate 

and cannot know with certainty. But my personal assessment 

would be, based on all of that work, that these purchases have 

made a meaningful contribution to economic growth and to improving the outlook. 

Certainly long-term interest rates. The purpose of these purchases was to push down longer-term interest rates. We have seen 

interest rates fall very substantially. Lower interest rates, lower 

mortgage rates particularly, I think have been a positive factor in 

generating the recovery of the housing sector. House prices, after 

having fallen very substantially, are moving up, and that is helping 

substantially many households, including the large fraction of 

American households who found themselves underwater on their 

mortgages. It is improving their household finances. 

We have seen a very meaningful recovery in automobile sales, 

spurred in part by low interest rates. 

Senator CRAPO. But how long can we artificially hold or operate 

monetary policy in what I consider to be such extreme levels of the 

quantitative easing? 

Ms. YELLEN. Senator, when we initiated this program, the unemployment rate was 8.1 percent, and the committee was somewhat 

pessimistic about its expectations for what we would see in the 

labor market over the ensuing year. In fact, the committee expected little or no meaningful progress in bringing down unemployment. And when we began this program, we indicated that our goal 

was to see a substantial improvement in the outlook for the labor 

market. 

So the progress of this program, it is not on a set course. It is 

data dependent, but we have seen improvement in the labor market. 

Senator CRAPO. But can it just continue indefinitely? I mean, if 

the labor market does not improve to the point that you reach your 

target, how long can this continue? Do you agree that there has to 

be some point at which we return to normal monetary policy? 

8 

Ms. YELLEN. I would agree that this program cannot continue 

forever, that there are costs and risks associated with the program. 

We are monitoring those very carefully. You noted potential risks 

to financial stability, and those are risks that we take very seriously. 

The committee is focused on a variety of risks and recognizes 

that the longer this program continues, the more we will need to 

worry about those risks. So I do not see the program as continuing 

indefinitely. 

Senator CRAPO. Do you have any estimate right now as to when 

there may be a beginning of the tapering? 

Ms. YELLEN. Well, we at each meeting are attempting to assess 

whether we have seen meaningful progress in the labor market, 

and what the committee is looking for is signs that we will have 

growth that is strong enough to promote continued progress. As the 

FOMC indicated in its most recent statement, we do see strength 

in the private sector of the economy, and we are expecting continued progress going forward. So while there is no set time that we 

will decide to reduce the pace of our purchases, at each meeting we 

are attempting to assess whether or not the outlook is meeting the 

criterion that we have set out to begin to reduce the pace of purchases. 

Senator CRAPO. My time has expired. Thank you. 

Chairman JOHNSON. Senator Menendez. 

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

Dr. Yellen. I appreciated our visit together. 

Let me ask you, as the Federal Reserve has engaged in measures 

to strengthen our economy, some critics have argued that any 

growth that results might somehow be artificial—I know we have 

heard that here—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, my question is: Isn’t weak 

demand the greater concern? I look at consumers pulling back on 

their spending because of high debt burdens, underwater mortgages from the financial crisis, businesses holding off on investing 

because of weak consumer demand. Doesn’t that change the relative costs, benefits, and risks of different monetary policy actions? 

Ms. YELLEN. Well, Senator, I completely agree that weak demand 

for the goods and services that this economy is capable of producing is a major drag holding back the economy. And, of course, 

the purpose of our policies, all of them, is to bring down interest 

rates in order to spur spending in interest-sensitive sectors, and if 

we are capable of doing that, that will help to stimulate a favorable 

dynamic in which jobs are created, incomes rise, and more spending takes place, which will create more jobs throughout the economy. So I agree with your diagnosis, and our programs are intended to remedy the situation of weak demand. 

On the other hand, it is very important for us to monitor financial risks that could be developing as a consequence of the program 

or of low interest rates more generally or even more broadly of developing financial risks in the economy. No one wants to live 

through another financial crisis, and the Federal Reserve is devotVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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ing substantial resources and time and effort at monitoring those 

risks. 

At this stage I do not see risks of financial stability. Although 

there is limited evidence of reach for yield, we do not see a broad 

buildup in leverage or the development of risks that I think at this 

stage poses a risk to financial stability. 

Senator MENENDEZ. Well, let me ask you—I appreciate that. 

Some commentators have suggested that, in addition to managing 

inflation and promoting full employment, the Fed should also monitor an attempt to fight asset bubbles. Do you think it is a feasible 

job and something that the Fed should be doing? And if so, how 

would you go about it? 

Ms. YELLEN. Well, Senator, I think it is important for the Fed, 

hard as it is, to attempt to detect asset bubbles when they are 

forming. We devote a good deal of time and attention to monitoring 

asset prices in different sectors, whether it is house prices or equity 

prices or farmland prices, to try to see if there is evidence of price 

misalignments that are developing. 

By and large, I would say that I do not see evidence at this point 

in major sectors of asset price misalignments, at least of the level 

that would threaten financial stability. But if we were to detect 

such misalignments or other threats to financial stability, as a first 

line of defense, we have a variety of supervisory tools, micro and 

macro prudential, that we can use to attempt to limit the behavior 

that is giving rise to those asset price misalignments. 

I would not rule out using monetary policy as a tool to address 

asset price misalignments, but because it is a blunt tool and because Congress has asked us to use those tools to achieve the goals 

of maximum employment and price stability, which are very important goals in their own right, I would like to see monetary policy 

first and foremost directed toward achieving those goals Congress 

has given us and to use other tools in the first instance to try to 

address potential financial stability threats. But an environment of 

low interest rates can induce risky behavior, and I would not rule 

out monetary policy conceivably having to play a role. 

Senator MENENDEZ. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you. Welcome, Governor. 

Would you describe the portfolio of the Federal Reserve as unprecedented, the size of it today? 

Ms. YELLEN. Yes, Senator. 

Senator SHELBY. You are an economist, and you have been on 

the Fed, and you were also the Chairman of the Economic Advisers 

of President Clinton. Looking back in history, recent history, the 

last 30, 40, 50 years, have you noticed any portfolio of the Fed approaching what it is today? 

Ms. YELLEN. Not of the Federal Reserve, but—— 

Senator SHELBY. That is what I mean. 

Ms. YELLEN. But other central banks—— 

Senator SHELBY. I am asking about the Federal Reserve of the 

United States of America. 

Ms. YELLEN. No, I have not, Senator. 

10 

Senator SHELBY. OK. Would you describe what you are doing 

here by—you call it ‘‘quantitative easing,’’ a term that has been 

made up, I guess. We all make up terms. But is that a stimulus 

toward the economy, a tool—you used the word, the term ‘‘monetary tool.’’ Is that what you would call it?—to help augment, to 

stimulate the economy? 

Ms. YELLEN. It is a tool that is intended to push down longerterm interest rates—— 

Senator SHELBY. Yes, ma’am. I understand that. 

Ms. YELLEN. ——and to stimulate demand and spending in the 

economy, yes. 

Senator SHELBY. Is this, in the area of economics, something that 

Keynes and Tobin and others have espoused over the years at 

times when you have got high unemployment, to use a monetary 

tool to stimulate the economy? 

Ms. YELLEN. Well, Tobin and Friedman and others have—— 

Senator SHELBY. What about Keynes, too? 

Ms. YELLEN. I do not know that Keynes actually thought about 

this. 

Senator SHELBY. OK. 

Ms. YELLEN. But a number of economists have written about 

something called the portfolio balance effect that is basically about 

supply and demand, that by buying up a class of assets, it may be 

possible to push up their prices and push down their yields and 

thereby affect financial conditions in the economy. 

Senator SHELBY. You know, it was said several years ago that 

China was buying our bonds—in other words, we were totally dependent on China to buy our paper, finance our deficits, and so 

forth. But isn’t it true that the Federal Reserve in the last—since 

you had quantitative easing, is basically the buyer of our bonds, 

our paper? 

Ms. YELLEN. Well, Senator, we are purchasing—— 

Senator SHELBY. For the most part. 

Ms. YELLEN. We are purchasing a substantial, at this point, 

quantity of both Treasury and mortgage-backed, agency mortgagebacked securities. But we are certainly not doing so for the sake 

of helping the Government finance the deficit. We are doing so to 

achieve the goals that Congress has assigned to the Federal Reserve in circumstances where we have run out of scope for conducting additional normal monetary policy. Once our overnight interest rate target has hit zero, we really have to rely on alternative 

techniques, and we are certainly not the only central bank that has 

recognized this and undertaken similar programs. 

Senator SHELBY. Now, you have alluded to other central banks, 

but, of course, you look around the world, and I do not know of any 

central bank that I think we should follow myself, and a lot of 

economists do not. We should set the example here in the United 

States, and the Fed has historically. 

I will run out of time in a minute. Unemployment, you mentioned unemployment, stated unemployment is, what, 7.2 or 7.3 

percent? 

Ms. YELLEN. 7.3 percent. 

11 

Senator SHELBY. What is the real unemployment, that is, people 

that have given up looking for a job, working part-time, frustrated 

by the whole system? Is it around 13, 14 percent? 

Ms. YELLEN. Well, Senator, you are absolutely right that broader 

measures of unemployment are much higher. Part-time employment among people who would prefer full-time jobs or more work 

are at unprecedented levels, and we have seen a significant decline 

in labor force participation. Part of it reflects an aging workforce. 

But some of it may be a reflection of very weak labor market conditions where people who have been unemployed for a long time feel 

frustrated about their job prospects. 

Senator SHELBY. Could you quickly mention your views on Basel 

III, how important Basel III is, how important it is for our banks 

to make the standards of capital and liquidity, and also the other 

banks in Europe? How important is that? 

Ms. YELLEN. Senator, it is extremely important for our banks to 

have more capital, higher-quality capital. Basel III putting those 

rules into effect has been an important step, and there are further 

steps that we will be taking with other regulators down the line 

to make sure that the most systemically important institutions, 

those whose failure could create financial distress, will be asked to 

hold more capital and meet higher standards of liquidity and prudential supervision to make sure that they are more resilient. 

Senator SHELBY. What have you learned since you were President of the San Francisco Bank? You were there during the housing bubble and the debacle. As a regulator, I hope that you and 

others have learned a lot, not just the Federal Reserve but others, 

that you cannot let a bubble continue to grow. 

Ms. YELLEN. Senator, I think that in the aftermath of the crisis, 

all of us have spent a great deal of time attempting to draw the 

appropriate lessons. There have been many of them. The Federal 

Reserve is very focused on a broad financial stability mandate, both 

in terms of our monitoring of the economy, attempting to understand the threats that exist broadly in the financial system, and to 

improve our supervision especially of the largest institutions to 

make sure that we are identifying those threats that can be risks 

to the economy. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. Welcome, Ms. 

Yellen. 

When Chairman Bernanke came before this Committee 31⁄2 years 

ago, he noted that the two sectors that typically pull us out of recession are housing and manufacturing—the Fed’s monetary policy 

through large-scale purchases of mortgage-backed securities clearly 

aimed at stimulating and promoting housing. You have spoken 

compellingly about the real economy. I hope that that means a real 

emphasis on manufacturing, particularly because of its impact rippling through the entire economy. 

But one of my concerns is that the Fed’s monetary policy does 

not do enough to serve all Americans. Last year, a journalist described the execution of monetary policy as a sort of trickle-down 

economics; it boosts the price of assets like stocks and bonds and 

12 

homes and can enrich the wealthy and Wall Street. But it is not 

clear to me and, more importantly, it is not clear to the many 

Americans who have not seen a raise in a number of years that 

this policy increases wages and incomes for workers on Main 

Street. 

During your time as Chair, tell us how you will ensure that the 

Fed’s monetary policy directly benefits families on Main Street in 

places like Cleveland and Mansfield, Ohio? 

Ms. YELLEN. Well, Senator, the objective of our policy is to broadly benefit all Americans, especially those who were seeing harm 

come to them and their families from high unemployment in a recovery that has taken a long time and been, frankly, disappointing. 

It is true that in the first instance the policies that the Fed conducts when we implement monetary policy drive down interest 

rates, affect asset prices, and you used the term ‘‘trickle down.’’ We 

tend to affect interest-sensitive spending—automobiles, housing— 

but the ripple effects go through the economy and bring benefits to, 

I would say, all Americans, both those who are unemployed and 

find it easier to get jobs as the recovery is stronger, and also to 

those who have jobs. You mentioned that wage growth has been 

weak or nonexistent in real terms over the last several years. As 

the economy recovers, my hope and expectation is that would 

change, and if we can generate a more robust recovery in the context of price stability, that all Americans will see more meaningful 

increases in their well-being. 

Senator BROWN. Thank you. I in my role on this committee spend 

a lot of time talking to bankers, to community bankers, to the 

regionals like bankers at Key and Huntington and PNC and Fifth 

Third and some of the largest six or seven or eight banks, which— 

and I hear a concern from so many of these bankers across the 

board that too big to fail still has not been solved. In March, Chairman Bernanke said too big to fail is not solved and gone, it is still 

here. Last Friday, you, I am sure, saw the comments of the President of the New York Fed, Bill Dudley, not exactly a populist firebrand. He said that there are deep-seated cultural and ethical failures at many large financial institutions. ‘‘They have an apparent 

lack of respect for law, regulation, and the public trust.’’ He said 

our current regulatory efforts may not solve these problems. His 

view is reinforced by the fact that DOJ currently has eight separate investigations open against the largest U.S. banks alone. 

Do you agree with what I assume you are hearing from bankers, 

too, and from others and do you agree with Chairman Bernanke 

and Mr. Dudley that a system where too-big-to-fail institutions 

have, in Dudley’s words, ‘‘an apparent lack of respect for law, regulation, or the public trust,’’ do you agree we have not solved the 

problem? And what do you do as Fed Chair to address too big to 

fail? 

Ms. YELLEN. Senator, I would agree that addressing too big to 

fail has to be among the most important goals of the post-crisis period. That must be the goal that we try to achieve. Too big to fail 

is damaging. It creates moral hazard. It corrodes market discipline. 

It creates a threat to financial stability, and it does unfairly, in my 

view, advantage large banking firms over small ones. 

13 

My assessment would be that we are making progress, that 

Dodd-Frank put into place an agenda that, as we complete it, 

should make a very meaningful difference in terms of too big to 

fail. We have raised capital standards. We will raise capital standards further for the largest institutions that pose the greatest risk 

by proposing so-called SIFI capital surcharges. We have on the 

drawing boards the possibility of requiring that the largest banking 

organizations hold additional unsecured debt at the holding company level to make sure that they are capable of resolution. 

Right now the FDIC has the capacity and the legal authority to 

resolve, possibly using orderly liquidation authority, a systemically 

important firm that finds itself in trouble, and they have designed 

an architecture that I think is very promising in terms of being 

able to accomplish that. 

So we are working with foreign regulators to improve the odds 

of a successful resolution and continuing to put in place higher prudential standards, capital and liquidity requirements. We have put 

out a proposal for a supplementary leverage requirement for the 

largest banks. So I think that this agenda will make a meaningful 

difference, and we are hoping to complete this in the months 

ahead. 

Senator BROWN. You said you look for something potentially— 

something maybe to do further. How will you assess the regs put 

out, the higher capital standards by the Fed, the OCC, and FDIC? 

How will you assess as they go into effect if you need higher capital 

requirements, not just—I mean, certainly the surcharges, but how 

will you assess the effectiveness of those? 

Ms. YELLEN. There are, as you know, studies that attempt to estimate what the too-big-to-fail subsidy is in the market, and while 

there are a lot of question marks around those studies, we can look 

to see what is happening there. 

Senator BROWN. Do you believe there is a subsidy, as—— 

Chairman JOHNSON. Would the Senator wrap it up? 

Senator BROWN. I apologize. OK. That was the last question. Do 

you believe there is a subsidy, as Bloomberg and so many others 

have pointed out, of tens of billions of dollars a year for the largest 

banks? 

Ms. YELLEN. I think there are different methodologies that are 

used in different studies, and it is hard to be definitive. But, yes, 

I would say most studies point to some subsidy that may reflect too 

big to fail, although other factors also may account for part of the 

reason that larger firms tend to face lower borrowing costs. 

Senator BROWN. Thank you. I am sorry, Mr. Chairman. 

Chairman JOHNSON. Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman. Thank you, Dr. 

Yellen. 

I want to pick up where my colleague left off because, as you 

know, I share his and many others’ concerns about too big to fail 

being alive and well. 

As both of you noted, there are many studies that document, 

even try to measure too big to fail and the market subsidy or advantage that the megabanks have. Another is coming out today. 

GAO is releasing its first study that Senator Brown and I asked 

for and again confirms this in general. It focuses on the huge disVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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count that the Federal Reserve offered the megabanks during the 

financial crisis and the huge market advantage that they got. And, 

specifically, this GAO report coming out today said—it recommended ‘‘the Federal Reserve Board finalize policies and procedures related to its emergency lending authority and establish internal timelines for developing those procedures to ensure timely 

compliance with Dodd-Frank Act requirements.’’ 

What that means, really, is Dodd-Frank gives you the ability to 

wind down that emergency lending authority. The Board has not 

acted on that or even established, as far as I know, internal 

timelines to do that. 

So one obvious question related to this study coming out today: 

Will you do that as Chairman? And when will you do it? 

Ms. YELLEN. Senator, I think that that guidance is in the works, 

and we will try to get it out soon. 

Senator VITTER. Do you have a general timeframe in mind? 

Ms. YELLEN. I am not certain just what the timeframe is, but I 

will try to make sure that that happens. 

Senator VITTER. OK. If I could just ask you to supplement the 

record following the hearing with more specifics about the Fed’s 

plan to act on Dodd-Frank with regard to that. 

Ms. YELLEN. Yes. 

Senator VITTER. Thank you. 

You also mentioned increased leverage ratios for the biggest 

banks. I agree that the action you supported in July in terms of 

supplementary leverage ratio for larger banks was very positive. I 

do not agree that it is enough, and I think even when you consider 

the SIFI surcharge and other things, more needs to be done. 

Would you support going further in terms of leverage ratios for 

the largest banks or not? 

Ms. YELLEN. I think we will have a very meaningful improvement in capital standards by going the approach that Dodd-Frank 

has recommended, which is higher risk-based capital standards. 

There will be a SIFI surcharge. We are contemplating a countercyclical capital surcharge that would add to that. We are contemplating additional ways of dealing with problems of reliance on 

short-term wholesale funding that could take the form of a capital 

charge that is related to reliance on that kind of funding, or it 

could take the role of margin requirements. 

I think a belt-and-suspenders kind of approach in which we have 

a leverage requirement that serves as a backup because there are 

potential issues with risk-based capital requirements. Remember 

that we also have stress tests which are yet another approach to 

assessing whether or not the largest systemically important institutions have the wherewithal to be able to lend, and—— 

Senator VITTER. I do not mean to cut you off, but if I can follow 

up before my time is up, I understand those other categories, including the SIFI surcharge. But considering all those, including the 

SIFI surcharge, I personally, and others, think you should go further with the supplementary leverage ratio. Would you support 

that as we speak today or not? 

Ms. YELLEN. I would want to see where we are when we have 

implemented all of the Dodd-Frank requirements that we need to 

put in place. 

15 

Senator VITTER. OK. A final question. You have said in the past, 

‘‘Like Chairman Bernanke, I strongly believe that monetary policy 

is most effective when the public understands what the Fed is trying to do and how it plans to do it.’’ 

A lot of us would agree with that, and many of us think the best 

way to get there is through true openness and transparency at the 

Fed, not just a better sort of managed PR campaign but real openness and transparency. 

Would you publicly support S.209? I am sure you are familiar 

with that. And if not, what specific changes to that would be required to earn your public support? 

Ms. YELLEN. I strongly, as I have indicated, support transparency and openness on the part of the Fed, and I think with respect to monetary policy, in terms of the range of information and 

the timeliness of that information, we are one of the most transparent central banks in the world. What I would not support is a 

requirement that would diminish the independence of the Federal 

Reserve in implementing and deciding on implementing in monetary policy. 

For 50 years Congress has recognized that there should be an exception to GAO ability to audit the Fed to avoid any political interference in monetary policy. I believe it is critically important to the 

economic performance of this country—and we have seen this 

around the world—that allowing a central bank to be independent 

in formulating monetary policy is critical to assuring markets and 

the public that we will achieve price stability. And I would be very 

concerned about legislation that would subject the Federal Reserve 

to short-term political pressures that could interfere with that independence. 

Senator VITTER. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Tester. 

Senator TESTER. Yes, thank you, Mr. Chairman. I want to thank 

you for being here, Vice Chair Yellen. 

At the end of October, the Federal Reserve formally applied for 

application in the—International Association of Insurance Supervisors for membership. The United States already has membership 

on that through the Federal Insurance Office created by DoddFrank. Can you tell me why the Fed should have its own membership on that board and, furthermore, why there should be a focus 

on that when domestic oversight challenges seem to be a much 

higher priority? 

Ms. YELLEN. Well, my understanding, Senator, is that now that 

the Federal Reserve has been charged with supervising some of the 

largest insurance companies that have been designated by FSOC 

as systemic, that we want to be in a position to work with regulators in other countries, as we have in the case of banking rules, 

to make sure that we have internationally compatible—— 

Senator TESTER. And the FIO—— 

Ms. YELLEN. ——appropriate standards. 

Senator TESTER. Excuse me, but the FIO cannot fill that need for 

you? 

Ms. YELLEN. I am not certain. I think we felt it would be beneficial to participate in that group. 

16 

Senator TESTER. OK. In our conversations about ensuring capital 

standards are appropriately tailored to insurers, I raised concern in 

this same vein with the FSOC, who I have encouraged to develop 

industry-specific guidance and metrics for systemically important 

financial institutions. 

Do you agree that the FSOC has and should exercise its authority to develop industry-specific guidance and metrics rather than 

forcing insurers or asset managing firms, for example, into a bankcentric regulatory model? 

Ms. YELLEN. Senator, I do believe that one size fits all should not 

be the model for regulation and that we need to develop appropriate models for regulation and supervision of different kinds of 

institutions. Insurance certainly has some very unique features 

that make them very different from banks, and we are taking the 

time to try to study what the best way is to craft regulations that 

would be appropriate for those organizations. 

Senator TESTER. So what I am hearing you saying is that a bankcentric regulatory model would not work for insurance companies 

in this country? 

Ms. YELLEN. Well, there certainly are critical differences in 

terms of their business models that we want to understand and respond to. 

Senator TESTER. OK. I want to express a serious disappointment 

with a recent decision by FSOC not to release for public comment 

a study produced by the Office of Financial Research regarding the 

asset management industry. While the Council has publicly indicated that it would release any metrics or guidance on this industry for public comment, it has declined to release this study, which 

will presumably provide formal basis for future consideration. 

If you are confirmed as Chairman of the Fed and a member of 

the FSOC, will you ensure that the Council lives up to its commitment of transparency? And will the Fed support efforts to make 

any potential evaluation metrics and studies on which they may 

based available for public comment? 

Ms. YELLEN. Senator, I have not participated in FSOC, but if I 

do so, I will try to take those concerns seriously. 

Senator TESTER. If you are confirmed, you will be participating 

in FSOC. 

Ms. YELLEN. I will. 

Senator TESTER. And the question is about transparency, and it 

is the transparency of metrics that are going to be used that people 

need to have the ability to comment on before they are applied. 

And I guess my question to you is: Will you be willing to make that 

commitment to transparency as it applies to the FSOC? 

Ms. YELLEN. I will need to study this issue more closely in terms 

of what FSOC’s procedures are, but I feel it should be clear why 

a particular firm has been designated if that occurs. 

Senator TESTER. And the metrics that they are using for that 

designation. OK. 

In closing, I just want to say thank you for your willingness to 

work on the end user issue that we discussed last week. I very 

much appreciate it. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Kirk. 

17 

Senator KIRK. Dr. Yellen, I would like to ask you a technical 

question on behalf of large insurance employers in Illinois, to extract a commitment from you to do a cost-benefit analysis if we are 

to require them to switch from SAP to GAAP accounting, which 

they have warned me could cost a couple hundred million dollars. 

Ms. YELLEN. Senator, I am aware that there is an issue around 

different accounting standards in insurance companies. I have not 

had a chance to study that myself, but I would certainly agree that 

this is something that we need to look into and to consider very 

carefully, and pledge to do so. 

Senator KIRK. Thank you, Dr. Yellen. 

Mr. Chairman, thank you. 

Chairman JOHNSON. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman, and thank you, Dr. 

Yellen, for being here. I have a series of quick questions. 

One, I guess I would like to make a comment. I understand some 

of our colleagues’ concerns about, you know, some of the extraordinary measures the Fed has had to take on quantitative easing. 

I guess I would simply make a comment and ask for a short response on this. Part of our political dysfunction in this town in 

terms of the ability to actually grapple with getting our country’s 

balance sheet right in terms of a so-called grand bargain or even 

an actual budget in place, if we were able to actually perform our 

functions, wouldn’t that allow you to move out of these extraordinary measures in a quicker manner? 

Ms. YELLEN. Well, Senator, it is certainly the case that the economy has suffered over the last year a substantial drag from fiscal 

policy. The CBO estimates that the drag amounts to something like 

1.5 percent on growth, and as we commented in our FOMC statement most recently, taking account of that large amount of fiscal 

drag, the economy, even though it has only been growing around 

2 percent, is showing greater momentum. So I think it is fair to 

say and I would expect that if there were less fiscal drag—and I 

hope there will be less going forward—that the economy’s growth 

rate is going to pick up. 

So certainly that has been a headwind on the economy and something that we have tried to offset, but obviously our tools to do so— 

it is not perfect, not—— 

Senator WARNER. Right. And, obviously, Government shutdowns, which cost, the latest estimate, $24 billion or potential default 

threats, which result in spikes of interest rates, sure as heck do not 

provide that predictability. 

I want to actually follow up as well where Senator Tester left off. 

I have to say, as someone, along with my friend Senator Corker, 

we are very involved in Title I and Title II, I have been personally 

disappointed in the FSOC’s ability to kind of be that interagency 

arbiter around regulatory conflicts. I have also been somewhat disappointed with the actions so far of the OFR, and I simply would 

say I think it is a—I hope as you move into this role on the FSOC 

there will be financial institutions, nonbank financial institutions 

that will be SIFIs. Senator Tester mentioned asset management 

firms. It did seem to me as well that the OFR’s report did not have 

a lot of collaboration, did not have a lot of clarity, and I would hope 

that in your role on the FSOC—and, again, I think one of the reaVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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sons why I wish we ended up with an independent chair on the 

FSOC, but you will clearly have an outsized role as the Fed representative—that we try to give some clarity that we do not think 

we are going to view everything through a bank-centric regulatory 

prism, that we realize as we look at nonbank institutions that 

maybe require that SIFI designation, that we give some clarity 

about how we are going to evaluate those nonbank institutions. 

Ms. YELLEN. I think that is completely fair and a very reasonable 

and logical objective for FSOC to have. Our staff have been working very closely with FSOC and the OFR, trying to participate constructively and facilitate the works of those groups. 

Senator WARNER. Well, I would just add my voice to Senator 

Tester’s that we would like to see that transparency as we start to 

evaluate nonbank institutions for SIFI designation so we kind of all 

know the rules going forward. I think that would be helpful. 

One of the things—as we think about balance sheets and stimulation or getting more private capital lent, one of the things I know 

that the Fed pays interest on excess reserves of the banks, but I 

believe now you are holding about $2.4 trillion of those banking excess reserves, and I think we pay 25 basis points. We have seen 

other central banks, I think Denmark and others, start to lower 

those payments. Would you consider that possibility of, in effect, 

incenting the banks to get this capital not on your balance sheet 

but back out into the marketplace to stimulate more loans and 

more private capital into the market? 

Ms. YELLEN. Senator, that is something that the FOMC has discussed and the Board has considered on past occasions, and it is 

something we could consider going forward. 

We have worried that if we were to lower that rate too close to 

zero, we would begin to impair money market function, and that 

has been a consideration on the other side. But it certainly is a possibility, Senator. 

Senator WARNER. I would just say that I would ask you to look 

at this as well because it is one of the ways, without necessarily 

growing your balance sheet, that some of my colleagues have expressed a concern with. 

Thank you. 

Ms. YELLEN. Thank you, Senator. 

Chairman JOHNSON. Senator Heller. 

Senator HELLER. Thank you, Mr. Chairman, and, Dr. Yellen, 

thank you very much for being here today. And I also want to 

thank your family for taking time and showing their support. I 

think that makes a real difference. 

Question: Do you follow gold prices? 

Ms. YELLEN. To some extent. 

Senator HELLER. Do you believe there is any economic indicator 

behind the rise and fall of gold prices? 

Ms. YELLEN. Well, I do not think anybody has a very good model 

of what makes gold prices go up or down, but certainly it is an 

asset that people want to hold when they are very fearful about potential financial market catastrophe or economic troubles entail 

risks. And when there is financial market turbulence, often we see 

gold prices rise as people flee into them. 

19 

Senator HELLER. Well, that was a better than I got from Chairman Bernanke last July. I asked him the same question, and he 

said that nobody really understands gold prices, and he went on to 

say, ‘‘And I do not pretend to really understand them either.’’ Do 

you share that view, clearly with the few extra tidbits that you just 

shared with us? 

Ms. YELLEN. Beyond what I shared, I do not have strong views 

on what drives them. I have not seen a lot of models that have 

been successful in predicting them. 

Senator HELLER. Thank you. You talked in your general statement at the beginning about the role of the Federal Reserve: promoting conditions that foster maximum employment, low and stable inflation, safe and sound financial system. Do you believe we 

have a safe and sound financial system today? 

Ms. YELLEN. I think we have a much safer and sounder financial 

system than we had pre-crisis, but as I indicated, we need to do 

more. We are not at the end of the road in terms of putting in place 

regulations and enhanced supervision that will make the system as 

safe and sound as it needs to be to contain systemic risk. 

Senator HELLER. The reason I raise the question is we had this 

discussion when you were in my office about community banks, and 

sitting as Chairwoman of the San Francisco Federal Board, you 

have a pretty good understanding of what is going on out West— 

California, Nevada. And as you are aware, and as I shared with 

you, we have lost half of the community banks and credit unions 

in our communities, making it very, very difficult for choices, making it very difficult for housing recovery, getting loans for small 

businesses. I guess the question is: What steps will you take to 

avert a culture of consolidation of these major banks and the loss 

of the small community banks? 

Ms. YELLEN. Well, Senator, in the first place, to the extent that 

the large banks have an advantage because they benefit from a toobig-to-fail subsidy, I think our objective in regulation should be to 

put in place tough enough regulations and capital and liquidity 

standards that would level the playing field. Since those firms do 

pose systemic risk to the financial system, we should be making it 

tougher for them to compete and encouraging them to be smaller 

and less systemic. 

And with respect to the community banks, we need a model for 

supervision of them that is different and much less onerous and 

has much less regulatory burden and is appropriate to their business model. We are obviously imposing on the largest systemic institutions much higher and more onerous prudential standards. 

Senator HELLER. And I appreciate your comments, because I do 

believe the one size fits all is what is really at a disadvantage for 

the community banks and these smaller banks. 

A quick question about quantitative easing. Do you see it causing 

an equity bubble in today’s stock market? 

Ms. YELLEN. Stock prices have risen pretty robustly, but I think 

that if you look at traditional valuation measures, the kind of 

things that we monitor akin to price equity ratios, you would not 

see stock prices in territory that suggests bubble-like conditions. 

When we look at a measure of what is called the ‘‘equity risk premium,’’ which is the differential between the expected return on 

20 

stocks and safe assets like bonds, that premium is somewhat elevated historically, which again suggests valuations that are not in 

bubble territory. 

Senator HELLER. Do you believe there is a Federal role to support the stock market? 

Ms. YELLEN. A Federal role to support the stock market? 

Senator HELLER. A Federal role. 

Ms. YELLEN. No. 

Senator HELLER. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Well, thank you, Mr. Chair, and thank you, 

Dr. Yellen. And I do not believe any nominee for this position has 

come with such an extensive set of qualifications, and it is fascinating to read the diversity of your writings over the last four 

decades. 

I wanted to give a special welcome to Karla Chambers, who represented Oregon very well on the Board of Directors of the Federal 

Reserve Bank of San Francisco. 

A number of issues have arisen in the international banking 

community just since the meltdown in 2008, including LIBOR rate 

manipulation, energy market manipulation, the London Whale, 

massive issues related to money laundering, robo-signing fraud on 

foreclosure documents. The Fed plays an important role in regulation and supervision. Can the Fed under your leadership help restore public faith in our regulatory system? 

Ms. YELLEN. Senator, I feel that that is an exceptionally important goal and one that I am happy to espouse and work toward. 

I absolutely feel that that is essential and appropriate, yes. 

Senator MERKLEY. Thank you very much. And, second, I wanted 

to ask you to address the rules that are being completed on the 

Volcker Rule or firewall, which creates a wall between hedge funds 

that make risky bets with funds from private investors and commercial banks that have insured deposits and access to the discount window and play an essential role in providing loans to individuals and businesses. 

There has been a lot of concern that this firewall will be compromised with loopholes related to liquidity management, portfolio 

hedging, and market making. Can we count on the Fed under your 

leadership to work with the other regulators to produce a strong 

Volcker Rule? And perhaps it will be completed before you are 

there because they are in the final stages. But if so, to implement 

it in a fashion that keeps faith with this goal of reducing systemic 

risk by keeping the commercial banking world in the commercial 

banking sphere? 

Ms. YELLEN. Yes, Senator, we are working very closely and I believe constructively on this rulemaking with the other agencies. We 

are certainly trying to be faithful to the intent of this rule, which 

is to eliminate short-term financial speculation in institutions that 

enjoy the protection of the safety net. The devil here is in the details. The rule does permit appropriate hedging in market-making 

activities, and we are trying to devise a rule that will permit those 

activities but absolutely be faithful to the intent that Congress had 

here. 

21 

Senator MERKLEY. Thank you. And, third, I wanted to ask you 

to ponder an issue that received considerable attention regarding 

commodities and the concern that under a certain situation, large 

banks will be able to put their thumb on the scale through their 

ownership of electric power generation facilities, pipelines, oil tankers, warehouses for key metals. And there is certainly a history in 

terms of Gramm-Leach-Bliley, in terms of grandfathered commodity investments, and in terms of related activities. 

But there is concern that the ability to influence supply and demand and affect price while at the same time as having the ability 

to make bets on the price creates a conflict of interest that provides 

essentially a hidden tax on the American economy. And the Fed 

does have regulatory powers related to this, and can you maybe 

chew on this a little bit in terms of your perspectives? 

Ms. YELLEN. Senator, we are involved in a very comprehensive 

review of commodities activities in financial holding companies. As 

you indicated, we allowed some activities that we deemed to be 

complementary to financial activities, and we are reviewing what 

is appropriate there. In addition, Congress, as you noted, grandfathered certain activities in firms that later become financial holding companies. We want to make sure that these are conducted in 

a safe and sound manner, and we may be involved in additional 

rulemaking as we complete this review. 

With respect to market manipulation, I would just note, though, 

that it is the role and responsibility of market regulators, particularly the CFTC here, to be looking into possibilities of market manipulation and we would certainly cooperate in any look there. Our 

main role is prudential and safety and soundness. 

Senator MERKLEY. Well, thank you so much for being willing to 

consider taking on this role at the Fed and bringing your expertise 

to bear and your past public service, and I certainly wish you well. 

Thank you. 

Ms. YELLEN. Thank you, Senator. 

Chairman JOHNSON. Senator Corker. 

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

thank you for being here, and I appreciate the time in our office 

and your transparency here today. 

Just for the Committee’s record, if you would, share with all of 

us how many rate increases you have voted for during your term 

on the Federal Reserve. 

Ms. YELLEN. I served as a Governor from 1994 to 1997, and we 

had a cycle of rate increases during that time. 

Senator CORKER. If you could just give me the number so I 

can—— 

Ms. YELLEN. I believe 20 or more. 

Senator CORKER. Twenty or more. I think it was maybe 27 or so. 

Ms. YELLEN. It could be. 

Senator CORKER. And how many have you voted against? 

Ms. YELLEN. None. 

Senator CORKER. OK. I thought that was just good to get into the 

record, and I appreciate—— 

Ms. YELLEN. I appreciate that. 

Senator CORKER. ——you very much for being here. We talked 

a little bit about monetary policy, maybe more than a little bit in 

22 

the office, and I think one of the things that we discussed was my 

concern—and I think yours, too—that in many ways easy money is 

an elitist policy. It is the ultimate trickle-down, and that, you 

know, it is based on the premise that you are going to have this 

wealth creation. And what we have seen, obviously, is the largest 

Wall Street institutions have done the best and that fund managers have made a lot of money, but it generally has not trickled 

down to the economy. And as you were mentioning earlier, it is a 

blunt object. 

Would you agree that while it has been an attempt to stimulate 

the economy, the more well off have benefited much better than 

those at the lower end of the spectrum? 

Ms. YELLEN. Well, to the extent that low interest rates do have 

an impact on asset prices, these policies have probably to some extent boosted the stock market, which may be an example of what 

you are talking about. But it has also played an important role, I 

think, in helping the housing sector and boosting housing prices. 

And I think this is something that has been broadly beneficial to 

all those Americans who own homes and has improved their sense 

of financial well-being, and that is broad based. 

Senator CORKER. We talked a little bit about the Fed in the early 

summer began to talk about moderating the pace at which it was 

going to be making purchases. And the market had a pretty stringent reaction, and the Federal Reserve appeared as if it had 

touched a hot stove and that this policy was going to greatly affect, 

if you will, the wealth effect that you were trying to create the policy of moderating. And so the Fed jumped back, and it seemed to 

me—and I think you discussed this a little bit in the office—that 

the Fed had become a prisoner to its own policy, that to really try 

to step away from QE3 was really going to shatter possibly the 

markets and, therefore, take away from the wealth effect. 

I wonder if you could talk a little bit about some of the discussions that were taking place during that time. 

Ms. YELLEN. Well, Senator, I do not think that the Fed ever can 

be or should be a prisoner of the markets. Our job—— 

Senator CORKER. But to a degree in this case, it did affect the 

Fed, did it not? 

Ms. YELLEN. Well, we do have to take account of what is happening in the markets, what impact market conditions are likely to 

have on spending and the economic outlook. 

So it is the case—and we highlighted this in our statement— 

when we saw a big jump in rates, a jump that was greater than 

we would have anticipated from the statements that we made in 

May and June, and particularly saw mortgage interest rates rise 

in the space of a few months by over 100 basis points, we had to 

ask ourselves whether or not that tightening of conditions in a sector where we were seeing a recovery, and a recovery in housing 

that could drive a broader recovery in the economy, we did have 

to ask ourselves whether or not that could potentially threaten 

what we were trying to achieve. 

But overall we are not a prisoner of the markets. I continue to 

feel that we are seeing an improvement in the labor market, which 

was the goal of the program, and we will continue to evaluate inVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
23 

coming data and to make decisions on the program in that light 

going forward. 

Senator CORKER. Thank you. I am just a little bit of a prisoner, 

maybe not fully. I understand. I would just—my last question is: 

You talked a little bit about monitoring sort of the financial markets, and I know that it is—again, monetary policy is a blunt instrument. I know that you have been credited with, back in 2005, 

signaling that the housing market was bubbling, if you will, in that 

part of the country. 

I guess my question is: Do you believe that under your leadership the Fed would have the courage to, when it saw asset bubbles, 

even though you only have blunt instruments—and I realize that— 

would it have the courage to actually prick those bubbles and ensure that we did not create another crisis? 

Ms. YELLEN. Senator, no one who lived through that financial 

crisis would ever want to risk another one that could subject the 

economy to what we are painfully going through and recovering 

from. And we have a variety of different tools that we could use 

if we saw something like that occur. They include tools of supervision and monetary policy is a possibility—— 

Senator CORKER. And you would have the courage to do that? 

Ms. YELLEN. I believe that I would, and I believe that this is the 

most important lessons learned from the financial crisis, Senator. 

Senator CORKER. Mr. Chairman, thank you for having this hearing, and, Dr. Yellen, I do want to tell you I very much appreciate 

your candor and transparency. I really do. I appreciate the conversation both in the office—and I want to thank you for giving the 

same answers to questioners here today that you gave in the office, 

so thank you very much. 

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

Chairman JOHNSON. Senator Hagan. 

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

Member Crapo. I want to echo what I am sure everybody has stated. I have been impressed by the depth of your background, your 

experience, and your expertise. We are very honored to have you 

here and thank you for your testimony. 

I wanted to talk about Section 716 of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act. Section 716 requires 

that banks with access to deposit insurance or the Federal Reserve 

discount window to push out certain derivatives such as equity and 

commodity-based swaps in to separately capitalized affiliates. 

This move would raise cost to the end users without significantly 

reducing risk to the financial system. Chairman Bernanke has consistently stated that the Federal Reserve had concerns about the 

swaps push-out rule prior to the enactment of Dodd-Frank and that 

they still have concerns about it today. 

Are your views on this issue consistent with Chairman 

Bernanke’s? Would you share the view that it is a good idea to repeal parts of the swaps push-out rule? 

Ms. YELLEN. Senator, as you indicated, the Federal Reserve and 

other agencies did have concerns about this rule and they expressed them when Dodd-Frank was being considered. We are 

working very hard to address some of the concerns around this 

rule, and we think that we are likely to be able to do so. I certainly 

24 

hope that in the final rule we will be able to effectively address 

some of the concerns that people had. That is my hope. We are certainly trying to do that. 

Senator HAGAN. What is your timeframe on that? 

Ms. YELLEN. I believe this is something we hope to get out, hopefully, later this year. 

Senator HAGAN. You could address some concerns, but not all, 

without changing Section 716? 

Ms. YELLEN. I believe that that is the case. We are hopeful that 

we will be able to find ways to address the concerns. 

Senator HAGAN. OK. 

Ms. YELLEN. We understand the concerns and we are trying very 

hard to—— 

Senator HAGAN. Do you share Chairman Bernanke’s viewpoint? 

Ms. YELLEN. I believe so. About the concerns that are there and 

the need to address them, I am hopeful that we will be able to do 

so in the rule. 

Senator HAGAN. OK. Thank you. Since the start of QE the financial markets have responded to pronouncements by the Federal 

Open Markets Committee. Are you at all concerned that markets 

are too driven by speeches and official pronouncements from central banks around the world? If the suggestion of tapering can contribute to volatility in asset prices, can we expect more volatility 

in the future? 

Ms. YELLEN. Well, at the Federal Reserve, and I think this is 

true of other central banks, we are trying as hard as we can to 

communicate clearly about monetary policy, both our goals and our 

intentions in terms of how we carry out programs. Now, this is 

challenging. We are in unprecedented circumstances. We are using 

policies that have never really been tried before, and multiple policies, and we are trying to explain to the public how we intend to 

conduct these policies. 

So it is a work in progress, and sometimes miscommunication is 

possible. But I think my own view would be we certainly want to 

diminish any unnecessary volatility. Sometimes there is volatility 

because we all learn news about the economy that changes our 

views about the course of the economy and the course of policy, and 

there it is natural to see a response. 

But to diminish unnecessary volatility, I think we have to redouble our efforts to communicate as clearly as we possibly can, and 

that will be my emphasis. 

Senator HAGAN. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman, and Dr. Yellen, 

thank you for being here. Thanks for our chat earlier this week. I 

appreciate that. 

I want to get back to where—some of the issues Senator Corker 

was raising regarding monetary policy. But first, I just think it is 

important to stress, and I know you are very well aware of these, 

but the adverse consequences that we are already experiencing directly as a result of the extraordinary monetary policy is really 

problematic, I think. 

We continue to have this artificially suppressed cost of funding 

these excessively large deficits that we run. It contributes to, I 

25 

would argue, fiscal imbalances. We are punishing middle class savers for years now, people who spent an entire working lifetime 

choosing to forego consumption because they decided they would 

save and they would have a little sum, a little bit of income in their 

retirement and now they have no income because they earn nothing on their savings, but they do watch as it gradually gets eroded, 

even by a low level of inflation, when they have no income from 

it. 

We have exacerbated the problems of under-funded pension 

plans and we have got distortions in financial markets. So these 

are all the things that have been occurring, I would argue, and continue to occur. And yet, what worries me perhaps even more is the 

point that Senator Corker was getting to, I think, which is, what 

happens when this morphine drip starts to end? 

At some point, some time, this is going to be—we are going to 

move away from this, I assume. I think everybody believes that. 

And the assumption seems to be that the markets will behave very 

benignly when that occurs. And yet, we have seen, I think, some 

worry, some glimpses that maybe that is not a safe assumption. 

Back in June, the mere suggestion that some of the members of 

the Fed might be contemplating stepping back a little earlier, and 

10-year Treasury backs up 100 basis points. Yesterday, the release 

of your testimony and the equity markets rally. 

Does this not feel like there is something a little artificial here, 

and is it not possible that while you have many tools available to 

begin and unwind, to retreat from this, that the markets may not 

respond very well and that we could end up creating a real problem 

as we try to exit from this? 

Ms. YELLEN. Senator, you made a number of different points and 

I think the first point you mentioned is that low rates, in a way, 

give rise to fiscal irresponsibility, that it takes the pressure off 

Congress. 

Senator TOOMEY. Make it easy. 

Ms. YELLEN. You know, we have established low rates in order 

to get the economy moving, which is Congress’s mandate to us. I 

think it is important for Congress to recognize that as the economy 

recovers and both short- and long-term rates move up, a situation 

in which the Government’s funding costs remain as low as they 

are, if we are successful in achieving our goal of getting the economy back on track, this is a very temporary situation. 

And so, I believe Members of Congress should be looking out a 

few years to a time when rates are going to be higher. Low interest 

rates harm savers; it is absolutely true. And this is a burden on 

people who were trying to survive on the income from a CD. There 

is not much they can get. 

But if you think about, how can we get rates back up to normal, 

I would argue that we cannot have normal rates unless the economy is normal. At the moment, we have a lot of saving and not 

very much investment, and there are fundamental reasons here 

why rates are low. 

So pursuing a policy of low rates to get the economy moving will 

be enable us to normalize policy and to get rates back to normal 

levels over time. 

26 

In terms of jumps in rates, we will, as the economy recovers, 

need to withdraw the monetary accommodation we have put in 

place, and we will make every effort to do so at a pace that is appropriate to continue the recovery and to maintain price stability, 

and to communicate that plan to markets. 

But as we have seen, and as you indicated, it is possible for rates 

to jump. It is not just true now, but in previous tightening cycles 

like the one we had from 1994 to 1995, where long rates moved up 

over the span of 6 months over 100 basis points. We have tried to 

make sure the financial system is more resilient. 

In our stress tests, we have tested and continue to do so in this 

round to make sure that banks are appropriately managing interest rate risk. And that is a risk that we will try to mitigate. But 

it is inherent in any tightening cycle. 

Senator TOOMEY. Mr. Chairman, I know I am running out of 

time. Just two quick points I would like to make. One is, I would 

like to express my concern, which is the exact opposite of the concern that was raised by Senator Merkley, which is, I think, the 

danger of the implementation of the Volcker rule is actually—it 

could be too restrictive and increase the cost of especially corporate 

bond issuers. 

I think the decision by Congress to exempt U.S. Treasuries was 

an implicit acknowledgment that when you ban proprietary trading 

in those instruments, you make them less liquid and more expensive for issuers. I am told that the next rule might very well also 

exempt other sovereign issuers, which is another implicit acknowledgment of this problem. 

This is a problem for corporate issuers in America and I am very 

concerned that we not unnecessarily raise their cost of borrowing. 

And the last point I would make is, I am deeply concerned about 

the consolidation that is happening in small banks, the lack of new 

small banks. As you know, we used to routinely launch sometimes 

hundreds of new community banks. I am told by the FDIC there 

is not a single new community bank that has been launched since 

2010. 

The regulatory compliance for institutions that have no systemic 

risk to the economy is way overboard, and I hope you will make 

an effort to diminish that burden. 

Ms. YELLEN. I promise to do so, Senator. 

Senator TOOMEY. All right. Thank you. 

Chairman JOHNSON. Senator Warren. 

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

Yellen. 

There has been a lot of talk today about the Fed’s use of quantitative easing to try to help the economy get back on its feet. But 

the truth is, if the regulators had done their jobs and reigned in 

the banks, we would not need to be talking about quantitative easing because we could have avoided the 2008 crisis altogether. 

So I want to focus on the Fed’s regulatory and supervisory responsibilities to keep the big banks in check. Now, I am concerned 

that those responsibilities just are not a top priority for the Board 

of Governors. Earlier this year, the Fed and the OCC reached a 

settlement with 13 mortgage servicers that engaged in a long list 

of illegal foreclosure activities, and the settlement was for over $9 

27 

billion. It directly affected more than four million families. But the 

Fed’s Board of Governors never voted on whether to accept the settlement. 

Instead, this decision was just left to the staff. Now, the Fed has 

smart, hardworking staff, but the Board of Governors would never 

delegate critical monetary policy to them. And yet, even now, after 

the biggest financial crisis in generations, the Board seems all too 

willing to delegate critical regulatory and supervisory decisions. 

So I think we need to make reigning in the banks a top priority 

for the Board. So I know the Board meets regularly to discuss monetary policy. Do you think the Board should have regular meetings 

on supervisory and regulatory issues as well, making it clear that 

both of those are important to the Fed? 

Ms. YELLEN. Well, Senator, I absolutely believe that our supervisory responsibilities are critical and they are just as important as 

monetary policy, and we need to take them just as seriously and 

devote just as much time and attention to them as we do to monetary policy. 

The Board operates under a variety of restrictions. You may 

know about the Government in the Sunshine Rule, and so when 

you suggest that the Board meet to discuss regulatory matters, our 

ability to do so outside of open meetings is very limited. 

And so, we tend to handle those by meeting individually with 

staff or meeting in small groups. We have a committee system 

where committees are put in charge of managing particular areas 

and making recommendations to the Board. 

I remember in the 1990s that the Board did regularly meet to 

discuss supervisory issues because there is confidential supervisory 

information and it is easier for us to have a meeting. I did consider 

those very valuable. And so, I think that is a very worthwhile idea. 

I should just say, when there are delegations to staff and the 

Board of Governors does not vote, that does not mean that Board 

members are not consulted, and maybe those with expertise may 

have played a critical role and had very important input, even 

when there is no formal vote by the Board of Governors. 

Senator WARREN. Fair enough. But I think it is an important signal here and I am glad to hear that you are thinking about this 

and thinking about the question of the appropriate delegation to 

staff and when it is appropriate to delegate to staff. 

Could I ask you just to say something briefly about that, about 

when it is appropriate to staff and when you have to retain for the 

Board itself? Just very briefly, if you could, because I want to get 

on to one other question. 

Ms. YELLEN. I believe there are certain matters that, under law, 

the Board must vote on, supervisory findings, mergers, and so 

forth, or rule changes. Typically, we delegate enforcement matters 

to the staff in the area of supervision. 

Senator WARREN. And I am glad to hear, though, that you want 

to continue to think about that, particularly when we are talking 

about something this important. 

Ms. YELLEN. Yes. 

Senator WARREN. I want to ask you one other fundamental question here, and that is, do you think that the Fed’s lack of attention 

28 

to regulatory and supervisory responsibilities helped lead to the 

crash of 2008? 

Ms. YELLEN. In the aftermath of the crisis, we have gone back 

and tried to look carefully at what we should have done differently, 

and there have been important lessons learned. We have massively 

revamped our supervision, particularly of the largest institutions, 

where we are simultaneously reviewing all of the largest institutions, and the Federal Reserve system works jointly on these reviews. We no longer delegate to individual Reserve banks the supervision of, say, one or two of these large institutions. 

It has also become an interdisciplinary matter that the economists and lawyers and others are involved in. So we have learned 

a lot there about supervision. I would say, one of our top priorities 

now is ramping up our monitoring of the financial system as a 

whole to detect financial stability risks. I think that is something 

that we were not doing in an adequate basis before the crisis. 

And so, we missed some of the important linkages whereby problems in mortgages would rebound through the financial system. 

Senator WARREN. Thank you very much. Thank you, Mr. Chairman. I just want to say, Dr. Yellen, when you are confirmed, and 

I very much hope you are confirmed, that I am glad to hear you 

will make it a top priority for the Federal Reserve to engage in the 

supervisory and regulatory responsibilities that help keep our financial system safe, and that cannot be something that is merely 

an afterthought, but has to be a primary effort on your part. 

Ms. YELLEN. Thank you, Senator. I completely agree with that. 

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

Chairman JOHNSON. Senator Reed. 

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

Governor, you demonstrated your wisdom early by going to Brown 

University in Providence, Rhode Island. 

Ms. YELLEN. Thank you, Senator. 

Senator REED. Everything else after that is, I know, anticlimactic, but when you are confirmed as the Chairman of the Federal Reserve, it will be consistent with your record of wise selections and wise choices. 

Chairman Bernanke has indicated that many times our fiscal 

policy and our monetary policy have been working at cross purposes. The Federal Reserve has been quantitative easing. They 

have been trying to get an expansive policy in place and we have 

been contracting, shutting the Government down. We anticipate— 

I hope we can avoid this—but we are going to end unemployment— 

mercy unemployment insurance abruptly at December 31st. 

How would your job and, obviously, the size and scope of your 

portfolio and everything else, maybe the question has been asked 

today, be affected if our fiscal policy was complementary to your 

monetary policy? 

Ms. YELLEN. Well, Senator, I agree that fiscal policy has been 

working at cross purposes to monetary policy. I certainly recognize 

the importance of the objective of putting the U.S. deficit and debt 

on a sustainable path. Congress has worried about that and I think 

it is important to do so. 

But some of the near-term reductions in spending that we have 

seen have certainly detracted from the momentum of the economy 

29 

and from demand, making it harder for the Fed to get the economy 

moving, making our task more difficult. And it certainly would be 

helpful, going forward, if it were possible for deficit reduction efforts to focus on achieving gains in the medium term horizon and 

addressing those aspects of fiscal policy that give rise to concerns 

about debt sustainability over the medium term while not subtracting from the impetus that we need to keep a fragile recovery 

moving forward. 

Senator REED. And such a policy, a fiscal policy, would help you 

in terms of what we all anticipate is the point at which you have 

to begin your tapering, because basically this balance would allow 

you more flexibility and more confidence that when you start to 

taper it, it would not lead to a reverse to a poor economy. Is that 

fair? 

Ms. YELLEN. I think that is fair, Senator, because we are worried 

about a fragile recovery and a more supportive fiscal policy or one 

that, at least, had less drag that did no harm would make life easier. 

Senator REED. Let me switch gears slightly, and that is that we 

were a few weeks ago discussing the possibility of default on our 

debt and the markets were beginning to react. And given the central role that Treasury securities play, not just in funding the Government, but also the tri-party repurchase markets, the collateral 

markets across the globe. Were you beginning to see at the Fed 

sort of ominous signs of a potential catastrophic impact of the default? 

Ms. YELLEN. Well, Senator, I do believe that a default on the 

U.S. debt would be catastrophic, and we did see some signs in the 

run-up to the debt ceiling that suggested that financial markets 

were taking notice and that there were preemptive protective actions that market participants were beginning to do to protect 

themselves from what could have been catastrophic consequences. 

More generally, I think we did see an impact on consumer and 

business confidence that is not helpful to a general willingness to 

make investments in the economy. 

Senator REED. And just a final point. We have been talking a lot 

about the size of your portfolio, but essentially—and I do not want 

to over-simplify it—the benchmarks that typically you are looking 

at is inflation and deflation and unemployment. 

Ms. YELLEN. Correct. 

Senator REED. And I think for a while under Chairman 

Bernanke there was a real fear, particularly in 2009 and 2010, of 

deflation, which would have had adverse consequences. We have 

avoided that. We have avoided inflation pressures. 

Ms. YELLEN. We have. 

Senator REED. And what we have not yet done is got the employment numbers at a suitable level. So I think the focus, the traditional and appropriate focus is on those measures, rather than just 

the absolute size of your portfolio. Is that sensible? 

Ms. YELLEN. I think that is sensible, Senator. We are very focused on achieving our dual mandate, which is, we absolutely want 

to avoid deflation. We have a 2 percent price stability objective. We 

are trying to get the economy back to full employment. I do think 

we have made progress, but we are not there yet. 

30 

On the other hand, as we recognized from the outset of the asset 

purchase program, there are costs and risks associated with a large 

balance sheet. 

Senator REED. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Johanns. 

Senator JOHANNS. Mr. Chairman, thank you. It is good to see you 

again and thanks so much for stopping by the office the other day. 

Ms. YELLEN. It is my pleasure. 

Senator JOHANNS. I felt like we had a good conversation and I 

would like to continue, if I could, with a few questions along the 

lines of what we talked about in my office. 

I found your testimony about asset bubbles to be interesting. 

Just before the Chairman turned to me, I looked at where the dollar is at. It is about 15,850, an economy that, quite honestly, most 

everybody would recognize as too much unemployment, an economy 

where people continue to struggle, an economy where it is kind of 

hard to see where the growth is going to be. 

We are now starting to see real estate bidding wars, just like the 

old days. Now, that is confined to cities in certain areas of the 

country. We are now starting to see private equity firms, who I 

think are very good at looking where the economy is headed, and 

lo and behold, they are buying single family houses. 

That was a shocker to me, having owned a few rentals in the 

past. I was kind of amazed that they would do that. But obviously, 

they see something there. And so, Dr. Yellen, I kind of look at 

these factors and I think I could go on and on with some other 

items, and I must admit, what am I missing here? 

I see asset bubbles. And I think if you were to announce today 

that over the next 24 months you are going to bring that balance 

sheet down from $4 trillion to zero, or $1 trillion, I think if you 

even said over the next 4 years we are going to bring it down from 

$4 trillion to zero, I think we would see how big those asset bubbles are. Would you not agree with me on that? 

Ms. YELLEN. With respect to real estate, we certainly are seeing, 

as you mentioned, private investors come in to invest and often use 

all cash in certain markets in the country. Is that evidence of an 

asset bubble? 

If you look at the markets where that is occurring, it is in some 

of the hardest hit, the markets where prices went up the most like 

Las Vegas or Phoenix. In my part of the country that had the biggest crashes where you have the largest number of foreclosures 

with houses being put on the market and many of these housing 

markets where these investments are taking place are ones where 

you have a substantial fraction of underwater borrowers and individuals who have lost houses, whose credit is impaired, who are 

not in a position to be buying houses, and these investors are purchasing these houses often at very low prices for cash and appear 

to be in the business of renting them out over a reasonably long 

period of time. 

I would say, we have to watch this very carefully, but I do not 

see that as an asset bubble. I see that as a very logical response 

of the market to generate a recovery in very hard-hit areas. 

Senator JOHANNS. Dr. Yellen, I do not want to be rude and interrupt you, but I am also running out of time. Here is what I would 

31 

offer, and I think you would agree with me, although you probably 

will not want to agree with me in a public hearing setting. 

But I think if I were to say to you, Why do you not announce 

today that you are going to draw this down over the next 24 

months from $4 trillion to zero? I think you would see the impact 

of your policies on the value of real estate all across the United 

States, not just in the hardest hit areas. I think the real estate 

that I own and others own would go down in value. 

I also think that the stock market would have the same sort of 

reaction that it has had when Chairman Bernanke just suggested 

that there might be a phase-down here. Here is what I am saying, 

because now I am out of time. I think the economy has gotten used 

to the sugar you have put out there and I just worry that we are 

on a sugar high. 

That is a very dangerous thing for the little person out there who 

is just trying to pay the bills and maybe put a buck away for retirement. The last thing I will say, the flip side of your policies that 

you are advocating for are very, very hard on certain segments of 

our society. 

You know, explain to the senior citizen who is just hoping that 

CD will earn some money so they do not have to dig into the principal, what impact you are having on a policy that says we are 

going to, for as far as the eye can see or foreseeable future, keep 

interest rates low. They are hurt by that policy. 

Ms. YELLEN. Senator, I agree and I understand that savers are 

hurt by this policy, but, if we want to get back to business as usual 

and a normal monetary policy and normal interest rates, I would 

say we need to do that by getting the economy back to normal. And 

that is what this policy, I hope, will succeed in doing. 

The other thing I think is important is to recognize that savers 

wear a lot of different hats. They play many different roles in the 

economy. They may be retirees who were hoping to get part-time 

work in order to supplement their income. They may be people who 

have children who were out of work and who were suffering because of that, or grandchildren who were going to college and coming out of college and hoped to be able to put their skills to work, 

finding good jobs and entering the job market when it is strong. 

I think when those people who worry about our policy, thinking 

about themselves as savers, take into account the broader array of 

interest they have in a strong economy, they would see that these 

policies, even though they may harm them in one respect, are 

broadly beneficial to them as I believe they are to all Americans. 

Senator JOHANNS. My time has expired. Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you. Senator Heitkamp. 

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

Dr. Yellen, for hanging in there with us. Those of us at the end of 

the desk will love an opportunity to ask you some questions, as 

well. 

I want to get back to the Fed goal of full employment, and I want 

to ask you just some quick questions. Give me a number on what 

you consider full employment? 

Ms. YELLEN. We do not have a precise estimate, but every 3 

months all of the participants in the FOMC indicate what they 

32 

think the normal, longer-run level of unemployment is. And in our 

most recent survey, in September, the range of opinion was 5 to 6 

percent. 

Senator HEITKAMP. OK. And tell me, what do you believe the 

real unemployment rate is today? 

Ms. YELLEN. Well, the measured unemployment rate is 7.3 percent—— 

Senator HEITKAMP. I know what the measured unemployment 

rate is. That was not the question. 

Ms. YELLEN. ——but as we have discussed previously, we have 

very high incidents of involuntary part-time employment. We have 

all too many people who appear to have dropped out of the labor 

force because they are discouraged—— 

Senator HEITKAMP. I do not want to belabor this Committee 

hearing any longer than what I have to but would you agree that 

it is at least close to or probably over 10 percent? 

Ms. YELLEN. Well, certainly by broader measures, it is that high. 

Senator HEITKAMP. And would you also agree that right now in 

America we have the greatest income disparity that we have had 

since the Great Depression, right before the Great Depression? 

Ms. YELLEN. We have had widening wage inequality and income 

inequality in this country going back to the mid- to late-1980s, and 

that continues. 

Senator HEITKAMP. So I just want to take a moment to speak for 

maybe those folks who are on the lower end who look at the Fed 

policy and look at the stock market, do not have a stake as they 

see it—as you just explained to Senator Johanns. We all have a 

stake in this economy, but they are day-to-day. They do not see a 

stake. They do not see their economic condition getting any better. 

And certainly, they do not see their employment opportunities getting any better, especially for those with low job skills. I will not 

say low education but low job skills. 

So what can you do or what you done to address income disparity, unemployment disparity in this country? And what would 

you suggest that the Fed pursue to avoid the consequences longterm of that income disparity? 

Ms. YELLEN. Senator, I think that you are asking about something that is a very deep problem that has afflicted the U.S. economy and other advanced economies. Economists have spent a lot of 

time trying to understand what is responsible for widening inequality. 

Many of the underlying factors are things that are outside of the 

Federal Reserve’s ability to address. 

Senator HEITKAMP. Do you believe your policies have added to 

the problem? 

Ms. YELLEN. I believe that the policies we have undertaken have 

been meant to generate a robust recovery. I would like to see the 

U.S. economy and the job market recovering more rapidly than 

they are, but I believe our policies have helped. 

I think, as we saw during the 1990s, when we still had trends 

toward widening inequality, we did have real wage gains and we 

did have a reduction in inequality when we had an exceptionally 

strong and getting ever stronger job market. 

33 

So faster growth in the United States is going to help, a stronger 

job market. And you know, when the economy recovers, we are 

going to see firms be more willing to undertake training when they 

cannot find workers. They are going to be willing more to invest 

in people, to hire, to make capital investments that will make 

workers more productive when they are on the job, and we will see 

greater wage gains. 

Senator HEITKAMP. Just a final comment. I would suggest that 

those at the bottom are not feeling the effects of these policies. The 

trickle down has not happened for them. And so they struggle 

every day and they may not see their wealth grow because they do 

not hold a lot of assets. 

And so anything that you can do, taking a look at this broader 

issue—because this is an issue that will affect the American economy for years to come and affect our competitiveness in years to 

come. They are the consuming class. When you look at why consumers are not consuming, because we are not getting resources to 

those who do consume. 

And so I thank you for your willingness to serve and look forward to a long relationship with you. 

Ms. YELLEN. Thank you, Senator. 

Chairman JOHNSON. Senator Manchin. 

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

Ms. Yellen. I enjoyed our visit and you have done a great job today. 

Let me just say this, that I look at you and think if there is a 

person who involved the last time we had a balanced budget, the 

last time that we would have been on track to be debt free, if you 

go back to those days I am sure there was naysayers then said we 

could not do it, it will never happen. But you all did it. 

And then we went off the tracks. What I am asking is how we 

get back on the tracks. 

I know quantitative easing, you and I have a little difference of 

opinion on this, or concern. I have a concern but you have a concern. You have a little, I think, broader view of what has worked 

or not worked around the world. I think we spoke about Japan and 

why you believe that what we are doing needs to be done. 

I would only say this, if $85 billion a month in quantitative easing has not really given us the results that we desired, why would 

you not recommend doing $200 billion a month? Why just $85 billion? We know that has not worked. 

Of course, I have concerns with continuing it because I do not 

think—as I think that Senator Johanns had said—we are on a 

sugar high. The bottom line is you all have done your job. You have 

done everything possible to prop up this economy. We have failed 

miserably, as Congress, to do our job. 

And to me, to get even a budget—we do not even have a budget—and then to say that we could have a balanced budget where 

people think we are crazy, it cannot happen, it will be too harmful, 

a balanced budget. 

Those of us who were Governors and come from the executive 

branch, that is all we understand. We had to, by law. 

And then to even thing that we could be debt free in the next 

generation or beyond. Do you think those are impossible or 

unreachable goals? 

34 

Ms. YELLEN. Well, Senator, I feel achieving debt sustainability 

over the medium term for this country is an exceptionally important goal. 

Senator MANCHIN. Could we balance a budget again? 

Ms. YELLEN. It requires very tough decisions, as you know—— 

Senator MANCHIN. Well, you all made decisions back in the 

1990s. I remember the dialog, it could not be done. 

Ms. YELLEN. Well, we did make tough decisions. Congress and 

the Administration made very tough decisions in the 1990s. They 

did it in a way that I would think would set a model, in a sense, 

for this Congress. When President Clinton was elected, the economy had high unemployment. It was just beginning to recover. The 

Administration and Congress wanted to achieve deficit reduction 

but to do so in a way that would not harm the economic recovery. 

And so they agreed on a set of tax increases and spending cuts, 

not all of which came into effect immediately but were phased in 

over time. 

There has been, at that time, a lot of uncertainty among businesses and in the markets, among households, about whether or 

not the Government would ever balance its budget. And the response was very positive. Long-term interest rates came down. 

Now the Fed had scope to use monetary policy to offset any adverse 

impact on the economy. But we really did not see a lot of adverse 

impact because of the fiscal tightness was phased in over a period 

of years and the economy enjoyed a long and robust boom. 

Senator MANCHIN. Let me just say this, that you having that experience and lived through it, worked through it, and was successful with it. And we have the utmost respect for the Reserve, yourself, and I am sure that you see the Committee has that much respect for you. 

We just need you to speak out and help us a little bit more and 

challenge us to do our job. If people like yourself, who are in the 

know, are unwilling to challenge us I will guarantee you we do not 

have the political will, it seems like, to do what needs to be done. 

We have got to get our financial house in order. Every citizen in 

America has to face a budget. Every one of them has to live within 

that budget. And we are unwilling to make that difficult decision. 

We are on not only a sugar high, we are going to go into sugar 

shock pretty soon. That is what I have been talking—but unless we 

hear the unbridled truth from people in the know, people who have 

been there. They said you could not do it and you did it. 

So it is not like it is the impossible dream. We have had budgets—we have not had one for five, going on 6 years. We have balanced budgets. And we have had surpluses. I would like to get back 

to that again, and I think people like yourself can help us be 

steered in that direction. 

So be bold. 

Ms. YELLEN. Thank you, Senator. 

Senator MANCHIN. Be bold. 

Ms. YELLEN. Thanks, I appreciate that. 

Chairman JOHNSON. Senator Schumer. 

Senator SCHUMER. Hi, thank you, Madame Chair, and thank everybody. 

35 

I just want to follow up first on a question that Heidi Heitkamp 

talked about. And I agree with Senator Manchin that the deficit is 

a serious problem. It is less of a problem than it was a year or two 

ago, and I know you acknowledge that. But it is not our greatest 

problem. 

Our greatest problem is that middle class incomes are declining 

in America for the first time in American history, in my judgment, 

in terms of our political economy. And the amazing thing is they 

declined not just because of the recession but they actually declined 

between 2001 and 2007. And serendipitously, if that is a word, the 

person who alerted me to this tension was a professor at Harvard 

Law School named Elizabeth Warren, who wrote articles about this 

long before being a Senator was a gleam in her eye. 

But it is our most serious problem. And if middle class incomes 

continue to decline, they declined close to 10 percent between 2001 

and today, this is going to be a different America. I tell this particularly to business executives I meet. I get in New York, ‘‘what 

is all of this populism about?’’ 

Well, I say you know, the American people are a generous people. 

And they do not mind if the people at the top income goes up 20 

percent if theirs goes up 3 or 4 percent. When theirs starts going 

down, it is a different story. We have never had that in America. 

So my question to you is how concerned are you about this? 

What impact will it have on growth and our economic potential? 

And does the Fed have tools to do this? I understand this relates 

to some of my Republican colleagues’ skittishness about continuing 

some policies that maintain growth, but I do think—given the seriousness, at least, which I regard this problem—that the Fed has 

really a dual mandate which I know you observe, which is not simply keeping inflation down and not simply monitoring the budget 

deficit and its effects on our economy, but in trying to get jobs and 

middle class incomes back up again. 

It is so serious, and frankly no one gives it the attention that it 

needs. 

Ms. YELLEN. Well, Senator, I want to echo my agreement with 

you that this is a very serious problem. It is not a new problem. 

It is a problem that really goes back to the 1980s, in which we 

have seen a huge rise in income inequality with, as you said, for 

many, many years the middle and those below the middle actually 

losing absolutely. And frankly, a disproportionate share of the 

gains. It is not that we have not had pretty strong productivity 

growth for much of this time in the country. But a disproportionate 

share of those gains have gone to the top 10 percent, and even to 

the top 1 percent. So this is an extremely difficult and, to my mind, 

very worrisome problem. 

There is a lot of research, a lot of debate about exactly what the 

causes of this problem are, perhaps having to do in part with the 

nature of technological change with globalization, with institutional 

changes in the United States including the decline of unions. But 

there are many things that are involved in this problem. 

What can the Fed do? We cannot change all of those trends. The 

solutions involve a multitude of things, including education, maybe 

early childhood education, job training, other things. 

36 

But what we can do is try to achieve, as we are, a robust recovery so that we create jobs, we have a stronger job market. And in 

a stronger job market people who are having a lot of trouble getting jobs will be drawn into jobs. They will get better jobs. There 

will be more training. People will move up job ladders and opportunities will increase. 

It is not going to put an end to the problems, these long-term 

structural problems that are driving this. But it will be helpful. 

And I think it is the contribution the Federal Reserve can try to 

make. 

Senator SCHUMER. Just related to that, but in a specific, some of 

my colleagues have criticized for keeping rates ‘‘artificially low.’’ 

But is not the zero lower bound on the short-term interest rates in 

some way also artificial? So let us say rates were 5 percent today 

but we had high unemployment, very low inflation. Would you not 

lower rates? And is not QE2 just another way to influence interest 

rates when you get close to the zero mark? 

So if you did not do QE, would not real interest rates be artificially high, so to speak? 

Ms. YELLEN. I think that is fair, if you judge what is high or low 

by the needs of the economy. People sometimes talk about a concept called the equilibrium real rate, it is what is natural given the 

levels of saving and investment in the economy. When there is a 

lot of saving and not very much investment, which is where we are 

now in a weak economy, the natural forces of the economy are 

pushing interest rates down. And it is these forces that we are trying to go with to—if we were to try to push rates up when the economy has that much saving and such weak investment, we would 

truly harm the recovery. 

And of course, having pushed rates to zero, according to many estimates we would ideally have negative short-term interest rates. 

Of course, we cannot achieve that. And as you indicate, that is why 

we are trying to push down longer term interest rates. 

Senator SCHUMER. I think you will—I think you will make a 

great Chair and your Brooklyn wisdom shines through. 

[Laughter.] 

Ms. YELLEN. Thank you, very much. I never forget my roots and 

I appreciate that. 

Chairman JOHNSON. Thank you, Dr. Yellen, for your excellent 

testimony. 

I ask the Members of this Committee to submit any written 

questions for the record for Dr. Yellen by close of business tomorrow. Dr. Yellen, please respond promptly so that the Committee 

may proceed to a markup as soon as possible. 

This hearing is adjourned. 

[Whereupon, at 12:16 p.m., the hearing was adjourned.] 

[Prepared statement, biographical sketch of nominee, and responses to written questions supplied for the record follow:] 

37 

PREPARED STATEMENT OF JANET L. YELLEN 

TO BE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

NOVEMBER 14, 2013 

Chairman Johnson, Senator Crapo, and Members of the Committee, thank you for 

this opportunity to appear before you today. It has been a privilege for me to serve 

the Federal Reserve at different times and in different roles over the past 36 years, 

and an honor to be nominated by the President to lead the Fed as Chair of the 

Board of Governors. 

I approach this task with a clear understanding that the Congress has entrusted 

the Federal Reserve with great responsibilities. Its decisions affect the well-being 

of every American and the strength and prosperity of our Nation. That prosperity 

depends most, of course, on the productiveness and enterprise of the American people, but the Federal Reserve plays a role too, promoting conditions that foster maximum employment, low and stable inflation, and a safe and sound financial system. 

The past 6 years have been challenging for our Nation and difficult for many 

Americans. We endured the worst financial crisis and deepest recession since the 

Great Depression. The effects were severe, but they could have been far worse. 

Working together, Government leaders confronted these challenges and successfully 

contained the crisis. Under the wise and skillful leadership of Chairman Bernanke, 

the Fed helped stabilize the financial system, arrest the steep fall in the economy, 

and restart growth. 

Today the economy is significantly stronger and continues to improve. The private 

sector has created 7.8 million jobs since the post-crisis low for employment in 2010. 

Housing, which was at the center of the crisis, seems to have turned a corner—construction, home prices, and sales are up significantly. The auto industry has made 

an impressive comeback, with domestic production and sales back to near their precrisis levels. 

We have made good progress, but we have farther to go to regain the ground lost 

in the crisis and the recession. Unemployment is down from a peak of 10 percent, 

but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been 

running below the Federal Reserve’s goal of 2 percent and is expected to continue 

to do so for some time. 

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to 

reduce its monetary accommodation and reliance on unconventional policy tools such 

as asset purchases. I believe that supporting the recovery today is the surest path 

to returning to a more normal approach to monetary policy. 

In the past two decades, and especially under Chairman Bernanke, the Federal 

Reserve has provided more and clearer information about its goals. Like the Chairman, I strongly believe that monetary policy is most effective when the public understands what the Fed is trying to do and how it plans to do it. At the request 

of Chairman Bernanke, I led the effort to adopt a statement of the Federal Open 

Market Committee’s (FOMC) longer-run objectives, including a 2 percent goal for inflation. I believe this statement has sent a clear and powerful message about the 

FOMC’s commitment to its goals and has helped anchor the public’s expectations 

that inflation will remain low and stable in the future. In this and many other 

ways, the Federal Reserve has become a more open and transparent institution. I 

have strongly supported this commitment to openness and transparency, and will 

continue to do so if I am confirmed and serve as Chair. 

The crisis revealed weaknesses in our financial system. I believe that financial institutions, the Federal Reserve, and our fellow regulators have made considerable 

progress in addressing those weaknesses. Banks are stronger today, regulatory gaps 

are being closed, and the financial system is more stable and more resilient. Safeguarding the United States in a global financial system requires higher standards 

both here and abroad, so the Federal Reserve and other regulators have worked 

with our counterparts around the globe to secure improved capital requirements and 

other reforms internationally. Today, banks hold more and higher-quality capital 

and liquid assets that leave them much better prepared to withstand financial turmoil. Large banks are now subject to annual ‘‘stress tests’’ designed to ensure that 

they will have enough capital to continue the vital role they play in the economy, 

even under highly adverse circumstances. 

We have made progress in promoting a strong and stable financial system, but 

here, too, important work lies ahead. I am committed to using the Fed’s supervisory 

and regulatory role to reduce the threat of another financial crisis. I believe that 

capital and liquidity rules and strong supervision are important tools for addressing 

38 

the problem of financial institutions that are regarded as ‘‘too big to fail.’’ In writing 

new rules, however, the Fed should continue to limit the regulatory burden for community banks and smaller institutions, taking into account their distinct role and 

contributions. Overall, the Federal Reserve has sharpened its focus on financial stability and is taking that goal into consideration when carrying out its responsibilities for monetary policy. I support these developments and pledge, if confirmed, to 

continue them. 

Our country has come a long way since the dark days of the financial crisis, but 

we have farther to go. Likewise, I believe the Federal Reserve has made significant 

progress toward its goals but has more work to do. 

Thank you for the opportunity to appear before you today. I would be happy to 

respond to your questions. 

39 


STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES 

Name: Yellen Janet Louise 

(Last) 

Position to which nominated: 

(First) (Other) 

Chainnan of the Board of Governors of the Federal Reserve System 

Date ofnomination: 

Date of birth: 13 08 1946 Place of birth: Brooklyn, New York 

(Day) (Month) (Year) 

Marital Status: Married Full name of spouse: George Arthur Akerlof 

Name and ages of children: Robert Joseph Akerlof, 32. 

Education: Dates Degrees Dates of 

Institution attended received degrees 

Brown University 1963-67 B.A 6/67 

Yale University 1967-71 Ph.D. 12171 

Honors 

and awards: 

List below all scholarships, fellowships, honorary degrees, military medals, honorary 

society memberships and any other special recognitions for outstanding service or 

achievement. 

Phi Beta'Kappa, 1966 

B.A. summa cum laude with highest honors in economics, Brown University, 1967 

__ National Science Foundation Graduate Fellowship, 1967"71 -

Honorary Woodrow Wilson Fellowship, 1967 

Guggenheim Fellow, 1986-87 

Maria and Sidney Rolfe Award for National Economic Service, Women's Economic Round Table, 

October 1997 

Wilbur Lucius Cross Medal, Yale University, May 1997 

Honorary Doctor of Laws degree, Brown University, May 1998 

Honorary Doctor of Humane Letters degree, Bard College, May 2000 

Fellow, American Academy of Arts and Sciences, 2001 

Berkeley Fellow, 2012 

Distinguished Fellow, American Economic Association, 2012 

Memberships: 

Organization 

Group of Thirty 

List below all memberships and offices held in professional, fraternal, business, scholarly, 

civic, charitable and other organizations. 

Office held (if any) Dates 

Member 2009-2010 

Children's Hospital of Oakland Honorary Member, Board 

ofDirectors 2008-2010 
40 


Bay Area Council 

University of California 

Council on Foreign Relations 

National Science Foundation 

American Economic Association 

Pacific Council on International Policy 

Western Economics Association 

Macroeconomic Advisers 

Delta Dental of California 

California Assembly Select Committee on 

Asian Trade 

Jerome Levy Economics Institute 

Economists for Peace and Security 

American Academy of Arts and Sciences 

Yale University 

National Academy of Sciences 

The Faculty Club, University of California 

At Berkeley 

Yale Club of San Francisco 

National Bureau of Economic Research 

Center for International Political Economy 

Brookings Panel on Economic Activity 

Women's Economic Roundtable 

OECD High Level Sustainable 

Development Group 

Barter Trust 

OECD Economic Policy Committee 

President's Interagency Committee on 

Women's Business Enterprise 

British Ambassador's Advisory Committee 

Member of the Executive 

Committee 2007-2010 

Professor Emeritus 2006-present 

Member 2005-present 

Term Member 1976-1981 

Committee of Visitors 2004, 1996 

Economics Advisory Panel 1977-78, 1991-92 

Vice President 2004-2005 

Nominating Committee 1988-1990 

Advisory Committee to Pres. 1986-1987 

Member 1971-present 

Board ofDirectors 2004-2008 

President 2003-2004 

Senior Adviser 2003-2004 

Member Bd ofDirectors 2003-2004 

Advisory Board 

Board of Advisers 

Trustee 

Member 

Fellow of the Corporation 

Panel Member 

Director 

Member 

Member 

Research Associate 

Advisory Board 

Advisory Board 

Senior Advisor 

Member 

Advisory Board 

Member 

Adviser 

Chair 

Chair 

2003 

2002-2004 

2002-2010 

200 I-present 

2000-2006 

2000 

2000-2002 

1982-present 

2000-2004; 1993-1996 

1999-2010 

1999-2004 

1999-2004 

1989-1994 

1987-88,1990-91 

1999-2004 

1999-2001 

1999-2000 

1997-1999 

1997-1999 

For the Marshall Fellowships Member 1996-1997 

Rollingwood Citizens Assn. Member 1996-1999 

Chevy Chase Recreation Assn Member 1994-1999 

Congressional Budget Office Panel of Economic Advisers 1993-1994 

International Trade and Finance Assn. Member 1990-1994 

Journal of Economic Perspectives Associate Editor 1987-1991 

Hadassah Member 1987-present 

Committee on the Status of Women 

In the Economics Profession 

Congregation Beth EI 

Member 

Member 

1985-1996 

1983-1994 
41 


Hiller Highlands Country Club 

YIjo Jahnsson Foundation 

Member 1978-present 

Lecturer on Macroeconomics 1977-1978 

Employment record: List below all positions held since college, including the title or description of job, name 

2010 - present 

2004-2010 

1999-2004 

1997·1999 

1994·1997 

1992·1994 

1985·1992 

1982·1985 

1980·1982 

1978·1980 

1977·1978 

1971-1976 

1974·1975 

19q9-1971 

1967 

Government 

Experience: 

2010·present 

2004·2010 

2003 

2000 

1997·1999 

1994-1997 

1993 

1977-2004 

of employment, location of work, and inclusive dates of employment. 

Vice Chainnan, Board of Governors of the Federal Reserve System, Washington, D.C. 

President and Chief Executive Officer, Federal Reserve Bank of San Francisco, San 

Francisco, California 

Eugene E. and Catherine M. Trefethen Professor of Business and Professor of Economics, 

University of California, Berkeley 

Chairman, Council of Economic Advisers, The White House, Washington, D.C. 

Member, Board of Governors of the Federal Reserve System, Washington, D.C. 

Bernard T. Rocca Jr. Professor of International Business and Trade, Walter A. Haas School of 

Business, University of California, Berkeley 

Professor, Walter A. Haas School of Business, University of California, Berkeley 

Associate Professor, School of Business Administration, University of California, Berkeley 

Assistant Professor, School of Business Administration, University of California, Berkeley 

Lecturer, London School of Economics and Political Science, London, England 

Economist, Division of International Finance, Trade and Financial Studies Section, Board of 

Governors of the Federal Reserve System, Washington, D.C. 

Assistant Professor of Economics, Harvard University, Cambridge, MA. 

Consultant, Division of International Finance, Board of Governors of the Federal Reserve 

System, Washington, D.C. 

Teaching Fellow and Research Assistant"Yale University, New Haven, Connecticut 

Summer Intern, Women's Bureau, U.S. Department of Labor, Washington, D.C. 

List any experience in or direct association with Federal, State, or local governments, 

including any advisory, consultative, honorary or other part time service or positions. 

Vice Chairman, Board of Governors of the Federal Reserve System 

President and CEO, Federal Reserve Bank of San Francisco (The Federal Reserve Banks 

were chartered by Congress to fulfill a public purpose and are part of the Federal Reserve 

System. The Federal Reserve Banks are not, however, considered Federal government 

agencies and are usually not deemed to be part of the Federal government.) 

California Assembly Select Committee on Asian Trade, Advisory Board, 2003 

National Academy of Sciences, member of a panel on Ensuring the Best Presidential 

Science and Technology Appointments 

Chainnan, Council of Economic Advisers, the White House 

Member, Board of Governors of the Federal Reserve System 

Congressional Budget Office - Panel of Economic Advisers 

National Science Foundation Committee of Visitors, Advisory Panel in Economics, 

Visiting Committee and other NSF review panels 
42 


1977-1978 

1974-1975 

1974-1975 

1967 

Published 

Writings: 

Economist, Division ofIntemational Finance, Trade and Financial Studies Section, Board 

of Governors of the Federal Reserve System, Washington, D.C. 

Consultant, Division ofInternational Finance, Board of Governors of the Federal Reserve 

System, Washington, D.C. 

Consultant, Congressional Budget Office 

Summer Intern, Women's Bureau, U.S. Department of Labor, Washington, D.C. 

List the titles, publishers and dates of books, articles, reports or other published materials 

you have written. 

I have done my best to identify titles, publishers and dates of books, articles, reports or other published 

materials, including a thorough review of personal files and searches of publicly available electronic databases. 

Despite my searches, there may be other materials I have been unable to identify, find or remember. I have 

located the following: 

"Consequences of a Tax on the Brain Drain for Unemployment and Income Inequality in Less Developed 

Countries," (with Rachel McCulloch), Journal oj Development Economics, September 1975; reprinted 

in J. Bhagwati, editor, The Brain Drain and Taxation: Theory and Empirical AnalYSis, North Holland, 

1976. 

"Commodity Bundling and the Burden of Monopoly," (with William James Adams), Quarterly Journal oj 

Economics, August 1976. 

The Limits oJthe Market in Resource Allocation (with Kenneth Arrow and Steven Shavell), Japan Trade 

Council, monograph, 1977. 

"FactorMobility,RegiEilai Development and the Distribution of Income," (with Rachel McCulloch), Journal oj 

Political Economy, February 1977. 

"What Makes Advertising Profitable?" (with William James Adams), The Economic Journal, September 1977. 

"Factor Market Monopsony and the Allocation of Resources," (with Rachel McCulloch), Journal oj 

International Economics, January 1980. 

"On Keynesian Economics and the Economics of the Post-Keynesians," American Economic Review, Papers 

and Proceedings, May 1980; reprinted in John Maynard Keynes: Critical Assessments, Vol. 4, John 

Wood, editor, Croom Helm Ltd., 1983. 

"Can Capital Movements Eliminate the Need for Technology Transfer?' (with Rachel McCulloch), Journal oj 

International Economics, May 1982. 

"Technology Transfer and the National Interest," (with Rachel McCulloch), International Economic Review, 

May 1982. 

".Efficiency Wage Models ofUnemp!oyment," American. Economic Review, Papers and Proceedings, May 

1984; reprinted in New Keynesian Economics, Vol. 2, Coordination Failure and Real Rigidites, N. 

Gregory Mankiw and David Romer, editors, MIT Press, 1991. 

4 
43 


"Unemployment through the Filter of Memory," (with George Akerlof), Quarterly Journal of Economics, 

August 1985. 

"A Near-Rational Model of the Business Cycle with Wage and Price Inertia," (with George Akerlof), Quarterly 

Journal of Economics, September 1985; reprinted in New Keynesian Economics, Vol. 1, Imperfect 

Competition and Sticky Prices, N. Gregory Mankiw and David Romer, editors, MIT Press, 1991. 

"Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?" (With George 

Akerlof), American Economic Review, September 1985. 

Efficiency Wage Models of the Labor Market (with George Akerlof), an edited collection of papers with an 

introduction by the authors, Cambridge University Press, 1986. 

"Rational Models ofIrrational Behavior," (with George Akerlof) American Economic Review, Papers and 

Proceedings, May 1987. 

"Fairness and Unemployment," (with George Akerlof), American Economic Review, Papers and Proceedings, 

May 1988. 

"Discussion" of "The New Keynesian Economics and the Output-Inflation Trade-off," (with George Akerlof 

and Andrew Rose) Brookings Papers on Economic Activity, 1988: 1. 

"Job Switching and Job Satisfaction in the u.S. Labor Market," (with George Akerlof and Andrew Rose), 

Brookings Papers on Economic Activity, 1988:2. 

"Is There a J-Curve?" (with Andrew Rose), Journal of Monetary Economics, July 1989. , 

"Introduction" to "Symposium on the Budget Deficit," Journal of Economic Perspectives, 

Summer 1989. 

"Discussion" of "The Beveridge Curve," (with George Akerlof), Brookings Papers on Economic Activity, 

1989:1. 

"The Fair WagelEffort Hypothesis and Unemployment," (with George Akerlof), Quarterly Journal of 

Economies, May 1990. 

"How Large are the Losses from Rule of Thumb Behavior in Models of the Business Cycle?" (with George 

Akerlof) in William Brainard, William Nordhaus and Harold Watts, eds., Money, Macroeconomics and 

Economic Policy: Essays in Honor of James Tobin, Cambridge, Mass: M.I.T. Press, 1991. 

"East Germany In From the Cold: The Economic Aftermath of Currency Union," (with George Akerlof, 

Andrew Rose and Helga Hessenius), Brookings Papers on Economic Activity, 1991:1. 

"Discussion" of "Unemployment, Non-Employment and Wages: Why Has the Natural Rate Increased through 

Time?" (with George Akerlof) Brookings Papers on Economic Activity, 1991 :2. 

Comment on "East German Economic Reconstruction," by Rudiger Dornbusch and Holger C. Wolf, in The 

Transition in Eastern Europe, Olivier Jean Blanchard, Kenneth A. Froot and Jeffrey Sachs, editors, 

NBER and University of Chicago Press, 1994. 
44 


"Gang Behavior, Law Enforcement and Community Values," (with George Akerlof), in Henry Aaron, Thomas 

Mann and Timothy Taylor, eds., Values and Public Policy, Brookings Institution, 1994. 

"An Analysis of Out-of-Wedlock Childbearing in the United States," (with George Akerlof and Michael Katz), 

Quarterly Journal of Economics, May 1996. 

"Technology Shock, Demise of Shotgun Marriage, and the Increase in Out-of-Wedlock Births", (with George 

Akerlof) Brookings Review, Fall 1996. 

"An Analysis of Out-Of-Wedlock Births in the United States," (with George Akerlof) Brookings Policy Brief, 

August 1996, No.5. 

"Why Kids Have Kids: Don't Blame Welfare, Blame 'Technology Shock'," (with George Akerlof) Slate, 

November 15, 1996, http:/www.slate.com/Features fTeenPregnancyfTeenPregnancy.asp 

"Monetary Policy: Goals and Strategy," Business Economics, July 1996. 

"The 'new' science of credit risk management," The Region, Federal Reserve Bank of Minneapolis, September 

1996. 

"Plan Helps Families, Nation," USA Today, July 30, 1997 at 12A. 

"Trends in Income Inequality and Policy Responses," Looking Ahead, October 1997 and James Auerbach and 

Richard Belous eds., The Inequality Paradox: Growth of Income Disparity, National Policy Association, 1998. 

"The Continuing Importance ofTrade Liberalization," Business Economics, January 1998. 

Economic Report of the President, February 1998. (with Jeffrey Frankel and Rebecca Blank) 

Economic Report of the President, February 1999. (with Jeffrey Frankel and Rebecca Blank). 

The Fabulous Decade: Macroeconomic Lessonsfrom the 1990s (with Alan Blinder), The Century Foundation 

Press, New York, 2001. Reprinted in The Roaring Nineties: Can Full Employment be Sustained? Edited 

by Alan B. Krueger and Robert Solow, Russell Sage Foundation and Century Foundation, New York, 

2001. Korean translation published by the Korea Institute of Public Finance, 2003. 

"Is He Making the Grade?" The International Economy, 15(5),21 (2001). 

"Overview Panel Commentary," in Economic Policy for the Information Economy, Proceedings of a 

Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming -- August 30-

September 1,2001. 

"Discussion" of "Capital and Migration Constraints on the Economic Integration of Eastern Germany" by 

Michael Burda and Jennifer Hunt, Brookings Papers on Economic Activity, 2001 :2. 

"Yale Economics in Washington," Foreword to James Tobin, World Finance and Economic Stability, Edward 

Elgar, London, 2002. 

"The Binge Mentality in the Federal Budget," The New York Times, July 22, 2002. 

6 
45 


"Government Needs a Return to Fiscal Discipline," The Times Union (Albany, NY), October 27, 2002, at BI. 

"Discussion" of "Robust Monetary Policy Rules," by Athanasios Orphanides and John Williams, Brookings 

Papers on Economic Activity, 2002:2. 

"Waiting for Worle," with George Akerlof and Andrew Rose, in Economics for an Imperfect World: Essays in 

Honor of Joseph Stiglitz, edited by Richard Arnott, Bruce Greenwald, Ravi Kanbur, and Barry Nalebuff, 

M.I.T. Press, 2003. 

Comments on Daniel Benjamin and David Laibson, "Good Policies for Bad Governments: Behavioral Political 

Economy," Federal Reserve Bank of Boston Conference: "How Humans Behave: Implications for 

Economics and Economic Policy," June 8-10,2003. 

"Putting State's Budget Conundrum in Perspective," with George Akerlof and Alan Auerbach, Sacramento Bee, 

July 23, 2003 at B7. 

"Overview Panel Cornmentary," in Monetary Policy and Uncertainty: Adapting to a Changing Economy; 

Proceedings of a Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, 

Wyoming - August 28-30, 2003. 

"Coordinating Monetary and Fiscal Policies," .in Stabilizing the Economy" edited by Adam S. Posen and Benn 

Steil, Blackwell Publishers, 2004. 

"Foreword," to Painting the White House Green: Environmental Policy inside the Executive Office of the 

President," edited by Randy Lutter and Jason Shogren, Resources for the Future, 2004. 

"Discipline and Judgment in Monetary Policy: The Greenspan Years," presented at AEA session on 

"Innovations and Issues in Monetary Policy: The Last 15 Years," January 3, 2004; American Economic 

Review: Papers and Proceedings, May 2004. 

"Stabilization Policy: A Reconsideration," (with George AkerJof), Presidential Address to the Western 

Economic Association, Economic Inquiry, 2006 (44)1: pp. 1-22. 

"Enhancing Fed Credibility," Business Economics, April 2006, pp. 45-51. 

"Reflections on China's Economy," Economic Letter, Federal Reserve Bank of San Francisco, Nov. 5,2004. 

"Productivity and Inflation," Economic Letter, Federal Reserve Bank of San Francisco, February 18,2005. 

"Policymaking on the FOMC: Transparency and Continuity," Economic Letter, Federal Reserve Bank of San 

Francisco, September 2,2005. 

"2006: A Year ofTransition at the Federal Reserve," Economic Letter, Federal Reserve Bank of San Francisco, 

January 27, 2006. 

"Enhancing Fed Credibility," Economic Letter, Federal Reserve Bank of San Francisco, March 172006. 

"Prospects for the Economy," Economic Letter, Federal Reserve Bank of San Francisco, April 28, 2006. 
46 


"Monetary Policy in a Global Economy," Economic Letter, Federal Reserve Bank of San Francisco, June 2, 

2006. 

"A Monetary Policymaker's Passage to India," Economic Letter, Federal Reserve Bank of San Francisco, July 

7,2006. 

"Economic Inequality in the United States," Economic Letter, Federal Reserve Bank of San Francisco, 

December 1, 2006. 

"Update on China: A Monetary Policymaker's Report," Economic Letter, Federal Reserve Bank of San 

Francisco, March 9, 2007. 

"The U.S. Economy and Monetary Policy," Economic Letter, Federal Reserve Bank of San Francisco, July 13, 

2007. 

"Recent Financial Developments and the U.S. Economic Outlook," Economic Letter, September 13,2007. 

"The U.S. Economy and Monetary Policy," Economic Letter, Federal Reserve Bank of San Francisco, 

December 7, 2007. 

"Prospects for the Economy in 2008," Economic Letter, Federal Reserve Bank of San Francisco, February 8, 

2008. 

"Economic Conditions in Singapore and Vietnam: A Monetary Policymaker's Report," Economic Letter, 

Federal Reserve Bank of San Francisco, February 22, 2008. 

"The Financial Markets, Housing and the Economy," Economic Letter, Federal Reserve Bank of San Francisco, 

April 18, 2008. 

"The U.S. Economic Situation and the Challenges for Monetary Policy," Economic Letter, Federal Reserve 

Bank of San Francisco, September 19,2008 

"The Mortgage Meltdown, Financial Markets, and the Economy," Economic Letter, Federal Reserve Bank of 

San Francisco, November 7, 2008. 

"The Path to Recovery," Origination News, 17(12),4 (September 2008). 

"Economic Conditions in Korea and Japan: A Monetary Policymaker's Report," Economic Letter, Federal 

Reserve Bank of San Francisco, December 19,2008. 

"U.S. Monetary Policy Objectives in the Short and Long Run," Economic Letter, Federal Reserve Bank of San 

Francisco, January 9, 2009. 

"A Minsky Meltdown: Lessons for Central Bankers," Economic Letter, Federal Reserve Bank of San Francisco, 

May 1,2009. 

"A View of the Economic Crisis 'and the Federal Reserve's Response," Economic Letter; Federal Reserve Bank 

of San Francisco, July 6, 2009. 
47 


"Linkages between Monetary and Regulatory Policy: Lessons from the Crisis," Economic Letter, Federal 

Reserve Bank of San Francisco, November 23, 2009. 

"Hong Kong and China and the Global Recession," Economic Letter, Federal Reserve Bank of San Francisco, 

February 8, 2010. 

Political 

AffIliations 

and activities: List memberships and offices held in and services rendered to all political parties or 

Political 

Contributions: 

QualifIcations: 

election committees during the last 10 years. 

None. 

Itemize all political contributions of $500 or more to any individual, campaign 

organization, political party, political action committee or similar entity during the last 

eight years and identify specific amounts, dates, and names of recipients. 

None. 

State fully your qualifications to serve in the position to which you have been named. 

I have served as Vice Chairman of the Board of Governors of the Federal Reserve System since October 

2010, as President and Chief Executive Officer of the Federal Reserve Bank of San Francisco from 2004 

to 2010 and as Governor of the Federal Reserve System between AugUst 1994 and February 1997. 

Through this service, I have acquired experience in every area of responsibility of the Federal Reserve 

System including monetary policy, fmancial stability, banking supervision and regulation, consumer and 

community affairs, and the operation of the payments system. 

With respect to monetary policy, I have participated both as a Governor and as a Reserve Bank President 

in the deliberations of the the Federal Open Market Committee. During the last three years, I have 

chaired the Communications subcommittee of the FOMC, which is committed to enhancing the 

transparency and clarity of monetary policy communications concerning the FOMC's forecasts, 

objectives and monetary policy strategy. My goal in the FOMC is to bring a thoughtful and independent 

view to the FOMC's deliberations on monetary policy. My views on policy are informed by economic 

analysis of macroeconomic trends relevant to assessing the economic outlook and risks to the forecast. 

As a Reserve Bank President, I shared the insights that I gained through my many contacts with business 

and community leaders in the Twelfth District. I have been committed to insuring that policy fosters the 

attainment of the dual goals assigned to the Federal Reserve by Congress-price stability and maximum 

employment. 

During the last three years, I have overseen the Federal Reserve's work on financial stability, particularly 

its new Office of Financial Stability, Policy and Research. In addition, I've headed the Board's 

Payments System Committee, which oversees our supervision ofDesignated Financial Market Utilities 

as well as regulatory policy issues pertaining to the payments system. I also chair the Board's Bank 

Activities Committee, through which the Board exercises its oversight of the Reserve Banks. And I 

have represented the Board in a number of international fora, including the BIS, G7 and G20. In the 

9 
48 


area of banking supervision, I acquired first hand experience in its conduct through my oversight of the 

Federal Reserve Bank of San Francisco's banking supervision and regulation division. This division, 

which operated under delegated authority from the Board of Governors and subject to the Board's 

oversight and policy guidance, is responsible for supervising state member banks and bank holding 

companies in the nine district states comprising the Fed's Twelfth District. As President and CEO, I 

participated directly in this important supervisory work and oversaw its conduct. I believe this 

experience greatly enhanced my understanding of the challenges facing supervisors in both complex 

financial holding companies and smaller community banks and it has informed my thinking about the 

changes that are needed in supervision and regulation to enhance the safety and soundness of the 

banking system and the financial system more broadly to promote financial stability. 

My training is as a professional economist with a specialty in macroeconomics and international 

economics. I have published original research on a wide variety of topics in international and 

macroeconomics. I am best known for my work exploring the causes of price and wage rigidity. This 

work provides a basic rationale for the use of monetary policy to stabilize the economy. My research 

has also focused on the causes and consequences of unemployment. 

From 1980 until I joined the Federal Reserve Board as a Governor, and for five years after leaving the 

Council of Economic Advisers, I served on the faculty of the Walter A. Haas School of Business at the 

University of California, Berkeley where I taught international and macroeconomics in the MBA and 

executive education programs of the School. Beginning in 1999, I also held a faculty appointment in 

the Department of Economics. 

I received my B.A. summa cum laude from Brown University in 1967 and my Ph. D. in economics from 

Yale University in 1971. From 1971 to 1976 I served on the faculty of the Economics Department at 

Harvard University, after which I served as an economist in the International Finance Division of the 

Federal Reserve Board. I was a faculty member at the London School of Economics and Political 

Science before moving to Berkeley. 

10 
49 


Future employment 

relationships: 

Potential conflicts 

of interest: 

1. Indicate whether you will sever all connections with your present employer, business 

firm, association or organization if you are confirmed by the Senate. 

If I am confmned by the Senate for this position, I will remain with the same employer--

the Board of Governors of the Federal Reserve System. 

2. As far as can be foreseen, state whether you have any plans after completing 

government service to resume employment, affiliation or practice with your previous 

employer, business firm, association or organization. 

I have no such plans. 

3. Has anybody made you a commitment to a job after you leave government? 

No. 

4. Do you expect to serve the full term for which you have been appointed? 

Yes. 

1. Describe any fmancial arrangements or deferred compensation agreements or other 

continuing dealings with business associates, clients or customers who will be 

affected by policies which you will influence in the position to which you have been 

nominated. 

I have accrued pension and retiree medical benefits due to my employment at the San 

Francisco Fed, in which I now have a vested interest. After moving to the Board of 

Governors in 2010, I have not accrued any additional benefits fmanced by the Federal 

Reserve Bank of San Francisco. The Board of Governors, which I will Chair, if 

confirmed, has oversight responsibility for the Federal Reserve Banks, including the 

Federal Reserve Bank of San Francisco. 

2. List any investments, obligations, liabilities, or other relationships which might involve 

potential conflicts of interest with the position to which you have been nominated. 

In connection with the nomination process, I have consulted with the Office of 

Government Ethics and the Federal Reserve Board's Designated Agency Ethics Official 

(DAEO) to identify potential conflicts of interest. Any potential conflicts of interest will 

be resolved in accordance with the terms of an ethics agreement that I have entered into 

with the Board's DAEO and that has been provided to this Committee. I am not aware of 

any other potential conflicts of interest. 

3. Describe any business relationship, dealing or financial transaction (other than tax 

paying) which you have had during the last 10 years with the Federal Government, 

whether for yourself, on behalf of a client, or acting as an agent, that might in any 

way constitute or result in a possible conflict of interest with the position to which 

you have been nominated. 

11 
50 


Civil, criminal and 

investigatory 

actions: 

In connection with the nomination process, I have consulted with the Office of 

Government Ethics and the Federal Reserve Board's Designated Agency Ethics Official 

(DAEO) to identify potential conflicts of interest. Any potential conflicts of interest will 

be resolved in accordance with the terms of an ethics agreement that I have entered into 

with the Board's DAEO and that has been provided to this Committee. I am not aware of 

any other potential conflicts of interest. 

4. List any lobbying activity during the past ten years in which you have engaged in for 

the purpose of directly or indirectly influencing the passage, defeat or modification 

of any legislation at the national level of government or affecting the administration 

and execution of national law or public policy. 

None. 

5. Explain how you will resolve any conflict of interest that may be disclosed by your 

responses to the items above. 

In connection with the nomination process, I have consulted with the Office of 

Government Ethics and the Federal Reserve Board's Designated Agency Ethics Official 

(DAEO) to identify any potential conflicts of interest. Any potential conflicts of interest 

will be resolved in accordance with the terms of an ethics agreement that I have entered 

into with the Board's DAEO and that has been provided to this Committee. I am not 

aware of any other potential conflicts of interest. 

1. Give the full details of any civil or criminal proceeding in which you were a defendant 

or any inquiry or investigation by a Federal, State, or local agency in which you were 

the subject of the inquiry or investigation. 

None. 

2. Give the full details of any proceeding, inquiry or investigation by any professional 

association including any bar association in which you were the subject of the 

proceeding, inquiry or investigation. 

None. 

12 
51 


2. List sources, amounts and dates of all anticipated receipts from deferred income arrangements, stock options, 

uncompleted contracts and other future benefits which you expect to derive from previous business relationships, 

professional services and fllTll memberships or from former employers, clients, and customers. 

Signed: __________________ Date: October 24, 2013 

21 
52 

1See, 11 FR 62018 (October 11, 2013). 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JANET L. YELLEN 

Q.1. The Federal Reserve is currently developing the regulatory 

framework for the first nonbank financial institutions designated 

by the Financial Stability Oversight Council. Chairman Bernanke 

and Governor Tarullo have stated that the Collins Amendment limits the Fed’s ability to regulate insurance companies differently 

than bank holding companies. Do you agree that the Fed is constrained by the Collins Amendment? If the Fed is required to apply 

bank-like capital requirements to insurers, would you support bipartisan legislation to address that? 

A.1. Section 171 of the Dodd-Frank Act, by its terms, requires the 

appropriate Federal banking agencies to establish minimum riskbased and leverage capital requirements for bank holding companies (BHCs), savings and loan holding companies (SLHCs), and 

nonbank financial companies supervised by the Board (supervised 

nonbank companies) on a consolidated basis. This statutory provision further provides that these minimum capital requirements 

‘‘shall not be less than’’ the generally applicable capital requirements for insured depository institutions. In addition, the minimum capital requirements cannot be ‘‘quantitatively lower than’’ 

the generally applicable capital requirements for insured depository 

institutions that were in effect in July 2010. Section 171 does not 

contain an exception from these requirements for an insurance 

company (or any other type of company) that is a BHC, SLHC, or 

supervised nonbank company (Board-regulated company), or for a 

Board-regulated company that has an insurance company subsidiary. This requirement constrains the scope of the Board’s discretion in establishing minimum capital requirements for Boardregulated companies. 

The final capital rule approved by the Board earlier this year, 1

did, however, take into consideration differences between the banking and insurance business within these constraints. The final capital rule included specific capital treatment for policy loans and 

separate accounts, which are assets typically held by insurance 

companies but not by banks. Additionally, the Board determined to 

defer application of the final capital rule to SLHCs with significant 

insurance activities (i.e., those with more than 25 percent of their 

assets derived from insurance underwriting activities other than 

credit insurance) and to SLHCs that are themselves State regulated insurance companies. 

To the extent permitted by law, the Board continues to carefully 

consider how to design capital rules for Board-regulated companies 

that are insurance companies or that have subsidiaries engaged in 

insurance underwriting in determining how to design an appropriate capital framework for these companies. 

Q.2. The Dodd-Frank Act created an expanded regulatory structure 

in which the Fed plays a significant role. Dodd-Frank significantly 

expanded the Board’s regulatory authority over banking institutions, financial firms, and their subsidiaries, and new authority 

over several types of other institutions, as well as to monitor finanVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
53 

cial system risk. How will you balance these expanded responsibilities with the Fed’s traditional mandate and political independence? 

A.2. The Dodd-Frank Act instituted substantial changes to financial sector supervision and regulation. For instance, the Act established the multiagency Financial Stability Oversight Council 

(Council), of which the Chairman of the Board is a member, in 

order to promote a more comprehensive approach to monitoring 

and mitigating systemic risk. In addition to the Board’s role as a 

member of the Council, the Dodd-Frank Act gives the Board other 

new important responsibilities. These responsibilities include supervising nonbank financial firms that are designated as systemically important by the Council, supervising thrift holding companies, and developing enhanced prudential standards—including 

those for capital, liquidity, stress tests, single-counterparty credit 

limits, and living will requirements—for large bank holding companies and systemically important nonbank financial firms designated by the Council. In addition, the Dodd-Frank Act expanded 

the supervisory responsibilities of the Board and the other Federal 

banking agencies to include consideration of the effects on financial 

stability in the United States of the operations of banking organizations that we each supervise. 

The Board’s duty to supervise financial institutions for safety 

and soundness and financial stability is complementary to the 

Board’s monetary policy mandate to pursue maximum employment, 

stable prices, and moderate long-term interest rates. While the 

Dodd-Frank Act expanded the Board’s supervisory and financial 

stability duties, the Federal Reserve’s role as a supervisor of banking organizations is longstanding and dates from the founding of 

the Federal Reserve System a century ago. The Federal Reserve 

has long operated in the role of a banking supervisor as an independent agency. 

The Board has made a number of internal changes to better 

carry out its responsibilities. Prior to the enactment of the DoddFrank Act, we had begun to reorient our supervisory structure to 

strengthen supervision of the largest, most complex financial firms, 

through the creation of the Large Institution Supervision Coordinating Committee, a centralized, multidisciplinary body. Relative 

to previous practices, this body makes greater use of horizontal, or 

cross-firm, evaluations of the practices and portfolios of firms. It relies more on additional and improved quantitative methods for 

evaluating the performance of firms, and it employs the broad 

range of skills of the Federal Reserve staff more efficiently. 

In addition, we have reorganized to more effectively coordinate 

and integrate policy development for and supervision of systemically important financial market utilities. As the Dodd-Frank Act 

recognizes, supervision should take into account the overall financial stability of the United States, in addition to the safety and 

soundness of each individual firm. Our revised internal organizational structure facilitates our implementation of this 

macroprudential approach to oversight. 

Q.3. In December of 2012, the GAO issued a report on Dodd-Frank 

implementation and found deficiencies with most agencies’ cost 

54 

benefit analyses. One concern is that agencies are not considering 

the cumulative burden of the new rules. The Board does not have 

an express mandate to conduct economic analysis in connection 

with its rulemakings. However, economic analysis is a useful tool 

for tracking the impacts of all of these new rules. Are you willing 

to perform economic and regulatory analysis for new Fed rules? 

A.3. I agree that economic analysis is a useful tool for evaluating 

the potential impacts of rulemakings and support the Federal Reserve’s continued use of this tool. 

The Federal Reserve takes quite seriously the importance of evaluating the burdens imposed by our rulemaking efforts. To become 

informed about these benefits and costs, before we develop a regulatory proposal we often collect information directly from parties 

that we expect will be affected by the rulemaking through surveys 

of affected parties and meetings with interested parties and their 

representatives. This helps us craft a proposal that is both effective 

and minimizes regulatory burden. In the rulemaking process, we 

also generally seek comment from the public on the costs and benefits of our proposed approach as well as on a variety of alternative 

approaches to the proposal. In adopting the final rule, we consider 

a variety of alternatives and seek to adopt a regulatory alternative 

that faithfully reflects the statutory provisions and the intent of 

Congress while minimizing regulatory burden. We also provide an 

analysis of the costs to small depository organizations of our rulemaking consistent with the Regulatory Flexibility Act and compute 

the anticipated cost of paperwork consistent with the Paperwork 

Reduction Act. 

Q.4. With several rulemakings affecting foreign banking organizations, including under Section 165 of Dodd-Frank and the Volcker 

rule, some have argued that these proposals could risk a protectionist backlash from foreign Governments that could make it more 

difficult and costly for U.S. banks to operate abroad. What would 

you do differently to encourage and foster international cooperation? 

A.4. Since the financial crisis, the Federal Reserve has consistently 

worked with its international counterparts to increase the stability 

of the global financial system and to promote economic growth. 

U.S. and global financial stability and the preservation of competitive equity among U.S. and foreign banks can be best achieved by 

reaching global agreements on the core financial sector reforms. In 

the core reform areas, our efforts have led to a number of internationally agreed regulatory approaches, such as the Basel III capital and liquidity frameworks for global banks. In some instances, 

however, it has been appropriate for countries to develop different 

solutions that are tailored to their unique risks, institutional situations, and industry structures. 

The Board’s foreign bank proposal under section 165 of the DoddFrank Act was designed to provide a consistent platform for the supervision and regulation of the U.S. operations of foreign banks 

and to help ensure that the U.S. operations of foreign banks have 

sufficient capital and liquidity. The proposal was responsive to the 

evolution of the foreign banking sector in the United States over 

the past couple decades and to lessons learned in the financial criVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00058 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
55 

2See, 12 U.S.C. 1851(c). 

sis. Although the impact of potential reciprocal actions in other 

markets on U.S. banking firms is difficult to forecast with precision, we do not expect the impact of such potential actions on U.S. 

banking firms to be significant—principally because most of the 

material foreign subsidiaries of U.S. banking firms are already subject to local, bank-like risk-based capital and other prudential requirements. 

Q.5. In late 2011 the regulators issued a highly complex and 

lengthy proposal to implement the Volcker rule. Because of the size 

and complexity, it is essential that the regulators get this right. 

Otherwise, there will be significant unintended consequences for 

our financial system and economy. Some regulators are in favor or 

reproposing the rule if it differs significantly from the initial proposal. Are you in favor of reproposing the Volcker rule? How would 

you distinguish hedging from proprietary trading? Would you allow 

portfolio-wide hedging limit risks? How would you propose that financial firms comply by 2014? 

A.5. The Federal Reserve is committed to getting the rules implementing section 619 of the Dodd-Frank Act right and has been 

working for some time with the FDIC, OCC, SEC, and CFTC to develop a final rule that effectively implements that section in a manner faithful to the words and purpose of the statute. We are striving to consider this rule before year-end in order to provide clarity 

and certainty to the affected members of the industry and to the 

public more broadly about the requirements of section 619. In developing the rule, the Federal Reserve has met with numerous 

members of the public about a wide variety of issues raised by the 

statute and the original agency proposal and has considered more 

than 18,000 comments on the proposal. 

As you note, section 619 of the DFA provides an exception from 

the prohibition on proprietary trading for ‘‘risk-mitigating hedging 

activities in connection with and related to individual or aggregated positions, contracts, or other holdings of the banking entity 

that are designed to reduce the specific risks to the banking entity 

in connection with and related to such positions, contracts and 

other holdings.’’ 12 U.S.C. 1851(d)(1)(C). By its terms, the statute 

permits risk-mitigating hedging of individual positions or aggregated positions of the banking entity. Risk-mitigating hedging focuses on reducing risk associated with individual or aggregated positions of the banking entity as distinguished from proprietary 

trading, which focuses on attempting to achieve short-term profits 

or gains. The agencies are working hard to ensure this exception 

is implemented as written. 

By its terms, section 619 became effective on July 21, 2012. Section 619 provides banking entities an additional 2 year period following the statute’s effective date to conform activities and investments to the prohibitions and restrictions of that section and any 

final implementing regulation. 2 Under the statute, the Board may, 

by rule or order, extend the 2-year conformance period for up to 

three, 1-year periods, if in the judgment of the Board, an extension 

is consistent with the purposes of section 619 and would not be detrimental to the public interest. The statute provides that the Board 

56 

may grant these extensions for not more than 1 year at a time. As 

it considers the merits of adopting a final rule, the Board will also 

consider the public interest in granting an extension of the conformance period. 

Q.6. With a number of Fed rulemakings affecting capital in a proposed or final stage, much emphasis has been placed on increasing 

the quantity of capital. Is it possible that we can end up with a 

higher capital ratio but lower quality of capital? If so, what would 

be the implication of that scenario on financial stability? Liquidity 

and capital rules work in concert but also serve overlapping ends. 

How do you view the trade-offs between higher capital and liquidity rules and, in that light, how do you view progress in both of 

these areas to date? 

A.6. Higher capital and liquidity standards work in concert to bolster the stability of individual institutions and the financial system, and the Federal Reserve has made significant progress in both 

of these areas. We believe that it is important that large banking 

firms have both sufficient capital to absorb losses and a sufficiently 

strong liquidity risk profile to prevent creditor and counterparty 

runs. The financial crisis demonstrated that preventing the insolvency or material financial distress of large banking firms requires 

regulating both their capital adequacy and liquidity risk. 

Our final Basel III capital rule strengthens the quantity and 

quality of banking organizations’ capital, thus enhancing their ability to continue functioning as financial intermediaries, particularly 

during stressful periods. Accordingly, the Basel III capital rule 

should reduce risks to the deposit insurance fund and the chances 

of taxpayer bailouts and improve the overall resilience of the U.S. 

financial system. The capital requirements in the final Basel III 

rule would serve as the foundation for other key initiatives designed to strengthen financial stability, including the capital plan 

rule, Dodd-Frank Act stress testing, and capital surcharges for systemically important financial institutions. The Basel III capital reforms are a very important part of the global regulatory community’s effort to improve financial stability. 

Our recent Basel III liquidity coverage ratio (LCR) proposal is 

also a core element in our effort to strengthen the resiliency of 

large banking firms. The LCR would impose standardized minimum liquidity requirements on large banking firms for the first 

time. The LCR would require large banking firms to hold an 

amount of high-quality liquid assets that is sufficient to meet expected net cash outflows over a 30-day time horizon in a standardized supervisory stress scenario. 

There is more to be done on both the capital and liquidity fronts, 

however. In particular, the Board intends to supplement the new 

Basel III capital rules with a proposal to implement a risk-based 

capital surcharge for the largest global systemically important 

banking institutions, and is working with the Basel Committee to 

develop a longer-term structural liquidity requirement. 

Q.7. In the recent Basel III rule the Fed adhered to the standard 

set by the Basel Committee for banks. With regard to the capital 

standards for insurers, the Fed said that it is limited by the Collins 

amendment in Dodd-Frank. In the recently proposed liquidity covVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
57 

erage ratio rule, the Fed went beyond the criteria set forth by the 

Basel Committee. Can you explain when is it appropriate for the 

Fed to adhere to the Basel Committee, Dodd-Frank or go beyond 

the requirements set by either the Basel Committee or DoddFrank? 

A.7. The Federal Reserve is bound by the applicable statutes in all 

cases; accordingly, our Basel III capital rules for bank holding companies and savings and loan holding companies reflect the requirements of section 171 of the Dodd-Frank Act (the Collins amendment) and section 939A of the Dodd-Frank Act, which prohibits references to credit ratings in Federal regulations. Future capital 

rules for such companies and nonbank SIFIs with substantial insurance activities will also reflect the requirements of the Collins 

amendment and section 939A. 

We work with our international colleagues on the Basel Committee on Banking Supervision to develop global regulatory and supervisory standards for internationally active banks. However, the 

baseline standards developed by the Basel Committee do not always reflect the unique legal, supervisory, and market conditions 

present in the United States and do not always provide sufficient 

protection for the safety and soundness of U.S. banking firms or 

U.S. financial stability. Therefore, when drafting U.S. banking 

rules, we analyze the provisions of the relevant Basel standards 

and in cases where it is warranted, we decide to apply different requirements in the United States. When analyzing whether to go beyond the requirements of the Basel Committee in a particular regulatory regime, we weigh the safety and soundness and financial 

stability benefits of implementing stricter provisions against the 

competitive equity and other potential adverse effects of the stricter provisions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JANET L. YELLEN 

Q.1. On October 9th, the IAIS announced its plan to develop a 

‘‘risk based global insurance capital standard’’ by 2016. These 

bank-like capital standards would be imposed on U.S. insurers that 

have not been designated nonbank systemically important financial 

institutions (SIFIs) under U.S. law and were not among the insurance groups designated as Global Systemically Important Insurers 

(G–SIIs) in July by the FSB. The IAIS stated in its announcement 

that the development and testing in 2014 of new capital requirements for the G–SIIs will be used to inform the development of the 

insurance capital standard for other internationally active insurers. 

Does the Fed support this development? If not, did it voice its 

concerns? If so, why are we allowing the imposition of Europeanbased, bank-centric capital standards on U.S. insurance companies 

that (a) were not responsible for the financial crisis, and (b) have 

not been designated as nonbank SIFIs under Dodd-Frank or among 

the insurance groups designated as G–SIIs in July by the FSB? 

A.1. The Federal Reserve participated in, and supported, the FSB’s 

July decision to endorse the enhanced policy measures promulgated 

by the IAIS for G–SIIs, including the plan to develop capital requirements for G–SIIs. As a new member of the IAIS, we plan to 

58 

work in a coordinated manner with the other U.S. members on current IAIS initiatives, including development of international capital 

standards for G–SIIs and other internationally active insurance 

groups. The IAIS is comprised of insurance regulators, supervisors 

and central banks from more than 130 countries around the world, 

including the United States. The Federal Reserve recently became 

a member of the IAIS. The Federal Insurance Office, the National 

Association of Insurance Commissioners and the State insurance 

departments are also members of the IAIS. The IAIS works in a 

collaborative way to develop supervisory and regulatory standards 

to address the solvency and financial stability risks inherent in 

global insurance firms. Participation by the Federal Reserve and 

other U.S. members in the IAIS helps us to better understand the 

global insurance industry and to influence the development of global insurance supervisory and regulatory standards. 

The IAIS is undertaking work to develop international capital requirements for G–SIIs and other internationally active insurance 

groups. The work of the IAIS is conducted principally by insurance 

supervisors—supervisory agencies with substantial insurance expertise and responsibility for the supervision of insurance firms. It 

is my understanding the capital requirements under development 

by the IAIS will be insurance-based and will address the types of 

assets held and liabilities incurred by insurance firms. 

Q.2. What will the Federal Reserve’s process be for developing capital standards for insurance savings and loan holding companies 

and insurance SIFIs? Will the Federal Reserve propose rules that 

are specific to insurance companies, and will there be a notice and 

comment period and opportunity for public input? How will the Fed 

ensure that these companies have a sufficient transition period to 

adjust to a new capital regime? 

A.2. The Board is taking additional time to evaluate the appropriate capital framework for insurance nonbank SIFIs and savings 

and loan holding companies (SLHCs) that are significantly engaged 

in insurance activities. We have been carefully evaluating public 

comments (including industry feedback) on how to design such a 

capital framework. The business model and associated risk profile 

of insurance companies can differ materially from those of banking 

organizations, and the Board is taking these differences into account. The Board is committed to taking the necessary amount of 

time to develop workable capital requirements for insurance-related firms. To the extent permitted by law, the Board continues 

to carefully consider how to design capital rules for Board-regulated companies that are insurance companies or that have subsidiaries engaged in insurance underwriting in determining how to design an appropriate capital framework for these companies. 

We do not have a specific deadline for issuing a proposal, but 

once we have developed a proposal, we will issue it for public notice 

and comment. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM JANET L. YELLEN 

Q.1. In today’s hearing you indicated that the Federal Reserve 

Board was taking steps to address certain concerns about Section 

59 

716 of the Dodd-Frank Act through rulemaking and that a final 

rule could be completed as early as this year. 

As a clarification of your comments, were you referring to the 

Federal Reserve Board’s interim final rule issued on June 5, 2013, 

regarding the treatment of uninsured U.S. branches and agencies 

of foreign banks under Section 716, or were you referring to some 

other regulatory effort to interpret or address concerns about Section 716? 

A.1. I was referring in my testimony to the interim final rule 

issued by the Federal Reserve to address the problem created by 

section 716 for U.S. branches and agencies of foreign banks. As you 

know, U.S. branches and agencies of foreign banks, by statute, 

have access to the Federal Reserve discount window in the same 

manner as insured depository institutions. It is this treatment of 

U.S. branches and agencies of foreign banks that causes them to 

become subject to section 716. Consequently, the Federal Reserve 

proposed to treat these branches and agencies as insured depository institutions for all purposes under section 716. We have received a few comments on this interim rule and, as I mentioned at 

the hearing, we expect to consider final action on it by year-end. 

Q.2. In today’s hearing you discussed the Financial Stability Oversight Council’s process for the consideration and designation of 

nonbank systemically important financial institutions with Senator 

Tester. 

Senator Tester: If you’re confirmed, you will be participating in FSOC. And the question is about transparency 

and it’s the transparency of metrics that will be used that 

people need to have the ability to comment on before they 

are applied. And I guess my question to you is will you be 

willing to make that commitment to transparency as it applied to FSOC? 

Governor Yellen: I will need to study this issue more closely in terms of what FSOC’s procedures are, but I feel it 

should be clear why a particular firm has been designated 

if that occurs. 

As a clarification, if you are confirmed, will you support a transparent process for the consideration and designation of nonbank 

systemically important financial institutions that includes the release of any determination metrics for asset managers before those 

metrics are applied—as Senator Tester stated and regulators have 

indicated—and not after the designation has occurred, as your answer suggests. 

A.2. Designation has significant implications for a company, so it 

is important that the designation framework and process is careful 

and deliberative. To implement this authority, the FSOC developed 

a framework and criteria and sought public comments twice on the 

designation framework. After publishing guidance, FSOC began the 

process of assessing individual companies from a list of companies 

that met the quantitative criteria set out in the guidance. The 

guidance is available at: http://www.treasury.gov/initiatives/fsoc/ 

documents/nonbank%20designations%20-%20final%20rule% 

20and%20guidance.pdf. 

60 

The OFR study on Asset Management and Financial Stability did 

not propose any metrics for the FSOC to use to consider asset management firms for designation. If the FSOC develops metrics for 

asset manager firms beyond the metrics in the current guidance, 

if confirmed, I would support that it provide the public an opportunity to review and comment on any proposed metrics. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM JANET L. YELLEN 

Q.1. As you know, Congress has mandated that the Federal Reserve use monetary policy to achieve maximum employment while 

maintaining price stability and moderate long-term interest rates. 

At its December 2012 meeting, the Federal Reserve stated that it 

would continue to keep interest rates low until the unemployment 

rate reached 6.5 percent. Yet a 6.5 percent unemployment rate does 

not reflect maximum employment. As you testified, members of the 

Federal Open Market Committee stated in response to a September 

2013 survey that an unemployment rate of between 5 percent and 

6 percent would more accurately represent maximum employment. 

The difference between a 6.5 percent unemployment rate and an 

unemployment rate between 5 percent and 6 percent is hundreds 

of thousands of jobs. Do you think the Federal Reserve must lower 

its unemployment rate target to fulfill its statutory mandate of 

pursuing maximum employment? 

A.1. In December of 2012, the FOMC established economic thresholds to provide greater clarity to the public about the period over 

which short-term interest rates could be expected to remain at current exceptionally low levels. In particular, the committee indicated 

that an exceptionally low range for the Federal funds rate would 

remain appropriate at least as long as the unemployment rate remained above 6.5 percent and projected inflation between 1 and 2 

years ahead remains below 2.5 percent. It is important to note that 

these economic thresholds for the Federal funds rate are not our 

long-run goals for monetary policy. Rather, they are intended as 

useful benchmarks for the public in understanding how the level 

of the Federal funds rate may evolve over time. 

Indeed, in its September economic projections, FOMC participants’ estimates of the longer-run normal rate of unemployment 

had a central tendency of 5.2 percent to 5.8 percent. In essence, 

this is the unemployment range that the committee believes that 

the economy can achieve over the longer run. 

It is also important to note that the thresholds are not triggers— 

that is, once a threshold has been crossed, the committee will not 

necessarily raise the Federal funds rate target immediately. Instead, crossing a threshold will lead the committee to consider 

whether an increase in rates would be appropriate, with the FOMC 

determining the appropriate stance of monetary policy based on its 

assessment of the economic outlook. We will, as always, follow a 

balanced approach in fostering our objectives of maximum employment and stable prices. Under that approach, as Chairman 

Bernanke has said, monetary policy is likely to remain highly accommodative long after one of the economic thresholds for the Federal funds rate has been crossed. For example, in their economic 

61 

and policy projections prepared for the September FOMC meeting, 

many FOMC participants anticipated that the Federal funds rate 

at the end of 2016 would be at or below a level of about 2 percent, 

well below the anticipated long-run level of the Federal funds rate 

of about 4 percent. These FOMC participants judged that continued 

highly accommodative policy over an extended period would likely 

be appropriate to achieve and maintain our congressionally mandated objectives of maximum employment and stable prices. 

Q.2. I am interested in your views on the following question, which 

I asked Governor Tarullo on July 11, 2013. Under 12 U.S.C. 

§1818(e), Federal banking agencies may remove ‘‘institution-affiliated parties’’ from participation in the affairs of an insured depository when they directly or indirectly violate banking laws or regulations. Were officers or directors of any bank that was party to the 

mortgage servicer settlements removed because they directly or indirectly participated in the violations that led to the settlements? 

If no officer or director was removed, can you explain why? 

A.2. I fully support the use of the full range of the Federal Reserve’s enforcement tools, including actions to bar insiders of banking organizations from the banking business, where appropriate. 

The statutory requirements to bring a removal or prohibition action 

are rigorous. Under 12 U.S.C. §1818(e), the Board must initially 

find that the insider engaged in a violation of law, unsafe or unsound practice, or a breach of fiduciary duty that resulted in a benefit to the insider, a loss to the institution, or prejudice to the 

bank’s depositors. In addition, the Board must determine that the 

conduct involved personal dishonesty or willful or continuing disregard for the safety and soundness of the institution. This standard does not permit an action against an insider whose conduct 

only involved poor, or even negligent, business decisions that resulted in losses to an institution. There must be additional evidence showing heightened culpability, such as personal dishonesty 

or reckless or willful disregard for safety and soundness. 

Applying these standards, the Federal Reserve has not, to date, 

taken any actions removing or prohibiting insiders of the mortgage 

servicing organizations that were subject to the 2011 and 2012 

mortgage servicing enforcement actions for their conduct in connection with servicing or foreclosure activities. We are, however, continuing to investigate whether such removal or prohibition actions 

are appropriate. 

In the past 5 years, the Federal Reserve has issued 68 prohibition orders, including several orders that also assessed a civil 

money penalty. Also in the past 5 years, the Federal Reserve has 

notified more than 200 individuals that they are banned by statute 

from banking under section 19 of the Federal Deposit Insurance 

Act (12 U.S.C. §1829). Section 19 prohibits a person convicted of a 

criminal offense involving dishonesty or a breach of trust from directly or indirectly owning, controlling, or participating in the affairs of any insured depository institution, or a bank or savings and 

loan holding company without the consent of the FDIC in the case 

of an insured depository institution, or of the Federal Reserve in 

the case of a holding company. The Federal Reserve has worked 

with the Department of Justice as it determines whether to bring 

62 

criminal actions against individuals, including in connection with 

mortgage servicing and foreclosure activities. 

Q.3. You testified that the Federal Reserve’s supervisory responsibilities should be just as important as its monetary policy responsibilities. If that is to be the case, the Federal Reserve needs to 

dedicate enough staff to supervision—particularly for the largest, 

most complex financial institutions. Otherwise, significant problems will likely remain undetected until it is too late. 

According to the Federal Reserve System’s 2013 Budget, there 

are 412 staff budgeted for Bank Supervision and Regulation at the 

Board of Governors, and another 3,904 staff budgeted for Supervision and Regulation at the Federal Reserve Banks. How many of 

these staff are assigned full-time to supervision of the six largest 

bank holding companies (JPMorgan Chase & Co., Bank of America 

Corporation, Citigroup, Inc., Wells Fargo & Company, The Goldman Sachs Group, and Morgan Stanley), which collectively hold far 

more than half of the total banking assets in the country? Given 

that a bank holding company like Citigroup dedicates several thousand of its employees to risk management and internal auditing, 

do you think the Federal Reserve needs to significantly increase 

the number of staff dedicated to supervising the largest financial 

institutions in order to carry out its supervisory responsibilities? 

A.3. As a result of lessons learned from the financial crisis, the 

Federal Reserve has taken a number of steps to strengthen its ongoing supervision of the largest, most complex banking firms. Most 

importantly, we established the Large Institution Supervision Coordinating Committee (LISCC) to ensure that oversight and supervision of the largest firms incorporates a broader range of internal 

perspectives and expertise; involves regular, simultaneous, horizontal (cross-firm) supervisory exercises; and is overseen through a 

centralized process to facilitate consistent supervision and the resolution of issues that may be present at more than one firm. 

The LISCC is chaired by the Director of the Board’s Division of 

Banking Supervision and Regulation and includes senior bank supervisors from the Board and relevant Reserve Banks as well as 

senior Federal Reserve staff from the financial stability, research 

and legal divisions, as well as from each of the other divisions at 

the Board and from the Markets and payment systems groups at 

the Federal Reserve Bank of New York. The LISCC provides strategic and policy direction for supervisory activities at the largest 

bank holding companies (BHCs) across the Federal Reserve System 

and, to date, has developed and administered important new supervisory exercises focused on the largest firms, most notably including the Federal Reserve’s annual supervisory stress tests and the 

related annual reviews of capital adequacy and internal capital 

planning practices at the Nation’s largest BHCs. 

At the largest BHCs, the Federal Reserve has on-site teams in 

place full time. At the six firms mentioned in your question, there 

are approximately 215 Federal Reserve staff members on the onsite teams. The work of these teams, however, is just one piece of 

the supervision program for these firms. The work of the on-site 

teams is supported and complemented by System-wide teams of 

specialists, including those focused on credit, market and operVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
63 

ational risk management, compliance, capital adequacy and capital 

planning assessments, liquidity and funding, and stress testing 

practices. All of these System-wide teams participate in the supervision of the firms in the LISCC portfolio. 

In addition to the on-site teams, we have approximately 200 experts from across the Federal Reserve involved in the annual comprehensive capital analysis and review (CCAR) that focus on assessments of the risk measurement, stress testing and internal capital planning practices supporting the 8 largest firms’ capital planning processes. Also, there are approximately 100 economists, supervisors, and other specialists that carry out the annual supervisory stress testing, which is applied to the 30 largest domestic 

BHCs, including those mentioned in your question. Furthermore, 

the Office of the Comptroller of the Currency also has supervisory 

staff that supervise large national banks, including Wells Fargo, 

JPMorgan Chase, Citigroup, Inc., and Bank of America Corporation. We coordinate with the OCC in supervisory planning and the 

execution of supervisory activities of these firms. 

We are still adding more personnel that will be devoted to supervision of systemically important firms. Staffing needs are being 

driven by further focus on and enhancements to the supervision 

program for the largest U.S. banking firms, FSOC-designated 

nonbank SIFIs, and the U.S. operations of large foreign banking organizations. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JANET L. YELLEN 

Q.1. The GAO reports that ‘‘Although the Dodd-Frank Act requires 

the Federal Reserve Board to promulgate regulations that establish 

policies and procedures governing any future lending under section 

13(3) authority, Federal Reserve Board officials told us that they 

have not yet drafted these policies and procedures and have not set 

timeframes for doing so.’’ At the hearing, I asked you to submit for 

the record the Federal Reserve’s detailed plans for how the it will 

implement the Dodd-Frank requirements to limit the Federal Reserve’s bailout including a time line for drafting and implementing 

these rules along with how the Fed proposes to implement these 

rules. Please submit those details here for the record. 

A.1. The Dodd-Frank Act made several major changes to the statutory text of section 13(3). The Federal Reserve 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. The Federal Reserve has undertaken substantial work both internally and with other agencies on the policies 

and procedures intended to implement the Dodd-Frank 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.2. I have heard from many, including Senator Collins and a 

number of lawyers, that the minimum capital requirements of Section 171 of Dodd-Frank, commonly referred to as the Collins 

amendment, that the Federal Reserve Board of Governors has sufficient flexibility as to how it will apply the minimum capital 

64 

standards to nonbank financial companies primarily engaged in the 

insurance business that are designated as SIFIs by FSOC. It seems 

that the Federal Reserve lawyers are the only ones who believe the 

Fed needs additional legislation passed to give them flexibility in 

how to apply this capital requirement to insurance companies. Are 

you aware of the issue? 

• Do you believe that insurance companies should have banklike capital standards or is that a different industry, holding 

different assets and needing a different set of requirements? 

• Some attorneys of insurance companies have argued that the 

Board could determine the application of bank-centric capital 

requirements under the Collins amendment would be duplicative of the Risk-Based Capital framework and that the Board 

could take appropriate action to avoid that duplication. Or, 

since section 171 does not provide proscriptive capital standards the Board has the ability to tailor standards for insurance 

companies differently. Have you looked at that issue and do 

you think that argument has merit? 

• Has the Federal Reserve fully taken into consideration the 

clear congressional intent embodied in Section 165 of the DoddFrank Act that requires the Board to ‘‘tailor’’ prudential rules, 

including capital requirements, that are applied to nonbank 

SIFIs? Why exactly do you believe the Collins Amendment 

overrides the clear statutory language in Section 165? 

• In addition to the clear directive to the Board in Section 165 

to ‘‘tailor’’ the rules for insurer nonbank SIFIs, Section 616 of 

Dodd-Frank includes a general directive that gives the Board 

sufficient discretion to ensure that capital standards for insurers—both nonbank SIFI and thrift insurers—are appropriately 

aligned with insurance risk, rather than bank risk. It is clear 

that Congress did not intend for bank-centric capital rules to 

be applied to insurers. And no one seems to be arguing that 

a bank capital regime is appropriate for insurers. So what is 

the Board’s plan for addressing this issue? Will you issue a 

proposed rule specifically for insurance capital requirements, 

and if so, when? 

A.2. Section 171 of the Dodd-Frank Act, by its terms, requires the 

appropriate Federal banking agencies to establish minimum riskbased and leverage capital requirements for bank holding companies (BHCs), savings and loan holding companies (SLHCs), and 

nonbank financial companies supervised by the Board (supervised 

nonbank companies) on a consolidated basis. This statutory provision further provides that these minimum capital requirements 

‘‘shall not be less than’’ the generally applicable capital requirements for insured depository institutions. In addition, the minimum capital requirements cannot be ‘‘quantitatively lower than’’ 

the generally applicable capital requirements for insured depository 

institutions that were in effect in July 2010. Section 171 does not 

contain an exception from these requirements for an insurance 

company (or any other type of company) that is a BHC, SLHC, or 

supervised nonbank company (Board-regulated company), or for a 

Board-regulated company that has an insurance company subsidiary. This requirement constrains the scope of the Board’s disVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
65 

1See, 11 FR 62018 (October 11, 2013). 

cretion in establishing minimum capital requirements for Boardregulated companies. 

The final capital rule approved by the Board earlier this year, 1

did, however, take into consideration differences between the banking and insurance business within these constraints. The final capital rule included specific capital treatment for policy loans and 

separate accounts, which are assets typically held by insurance 

companies but not by banks. Additionally, the Board determined to 

defer application of the final capital rule to SLHCs with significant 

insurance activities (i.e., those with more than 25 percent of their 

assets derived from insurance underwriting activities other than 

credit insurance) and to SLHCs that are themselves State regulated insurance companies. 

To the extent permitted by law, the Board continues to carefully 

consider how to design capital rules for Board-regulated companies 

that are insurance companies or that have subsidiaries engaged in 

insurance underwriting in determining how to design an appropriate capital framework for these companies. 

Q.3. On Tuesday, Andrew Huszar published a piece in the Wall 

Street Journal entitled ‘‘Confessions of a Quantitative Easer’’. It is 

a significant piece because of the job that Mr. Huszar used to hold. 

In 2009–10, he managed the Federal Reserve’s $1.25 trillion agency 

mortgage-backed security purchase program. As the person responsible for executing the Fed’s experimental and risky monetary policy known as ‘‘quantitative easing’’ he had a simple message, ‘‘I’m 

sorry, America.’’ And, that the Fed ‘‘has allowed QE to become Wall 

Street’s new ‘too big to fail’ policy.’’ 

Mr. Huszar described the primary goal in rolling the dice with 

QE was to ‘‘to drive down the cost of credit so that more Americans 

hurting from the tanking economy could use it to weather the 

downturn.’’ And he laments that when the trading for the first 

round of QE ended on March 31, 2010, ‘‘[t]he final results confirmed that, while there had been only trivial relief for Main 

Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the 

lower cost of making loans. They’d also enjoyed huge capital gains 

on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall 

Street had experienced its most profitable year ever in 2009, and 

2010 was starting off in much the same way.’’ However, more than 

31⁄2 years later the Fed continues to purchase about $85 billion in 

bonds each month and delaying any reduction in its purchases. Do 

you disagree with Mr. Hauser’s assertion that QE is Wall Street’s 

new ‘‘Too Big to Fail’’ policy, if so, why? 

A.3. The FOMC’s asset purchases are aimed at promoting the Federal Reserve’s statutory objectives of maximum employment and 

stable prices. By putting downward pressure on longer-term interest rates and helping to make financial conditions more accommodative, the Federal Reserve’s asset purchases have supported a 

stronger economic recovery, improved labor market conditions, and 

helped keep inflation closer to its 2 percent objective. In particular, 

lower interest rates have allowed many homeowners to refinance 

66 

their mortgages at lower rates and thus supported growth in consumer spending. Lower mortgage rates also have helped to 

strengthen home sales and housing construction. In addition, lower 

interest rates have boosted auto sales. Through these channels, our 

asset purchases have helped strengthen growth and employment. 

Moreover, the Federal Reserve’s asset purchases have helped to 

guard against disinflationary pressures that could otherwise have 

exacerbated the debt burdens faced by some households and businesses. In all of these ways, our asset purchases have benefited 

American families and Main Street businesses. 

It is important to emphasize our asset purchases have been conducted in the open market and have followed a competitive process. 

The changes in overall financial conditions spurred by our asset 

purchases have not been directed toward benefiting any particular 

institution or class of institutions. Rather, by strengthening the 

economic recovery, fostering improved labor market conditions, and 

maintaining stable inflation and inflation expectations, the Federal 

Reserve’s asset purchase programs have benefited all Americans. 

Q.4. At Jackson Hole speech Chairman Bernanke talked about the 

tradeoffs associated with this experimental monetary policy— 

namely higher liquidity premiums on Treasury securities, lack of 

confidence in the Fed’s ability to exit smoothly from its extremely 

accommodative policies, and risk to financial stability by driving 

longer-term yields lower incentivizing risky behavior in the markets. It seems to me that Mr. Huszer and Mohammed El Erian at 

the PIMCO investment firm are right when they point out—‘‘that 

the Fed may have created and spent over $4 trillion for a total return as little as 0.25 percent of GDP, that QE really isn’t working.’’ 

As someone who is viewed as very dovish, in favor of continuing 

or being more aggressive with these accommodative monetary policies, why haven’t we reached the tipping point where the costs and 

risks associated with this experiment outweigh the benefits? 

A.4. A growing body of research by economists at central banks 

and academic institutions has found that asset purchases by central banks help to lower longer-term interest rates and ease financial conditions. These developments, in turn, help to foster a 

stronger economic recovery, improved labor market conditions, and 

stable inflation and inflation expectations. While monetary policy is 

not a panacea for all of the Nation’s economic difficulties, our economic situation would almost certainly be far worse had the Federal Reserve not acted aggressively to address the severe economic 

shock stemming from the financial crisis and the continuing 

headwinds that have slowed the economic recovery. The historical 

precedents of the United States in the 1930s and Japan since the 

1990s provide sobering examples of the potential costs when central banks fail to adequately address severe economic and financial 

shocks. 

While a strong majority of the FOMC judges that asset purchases have been effective in fostering its macroeconomic objectives, the committee is aware of the potential costs and risks associated with asset purchases. As noted in the minutes of recent 

FOMC meetings, policy makers have noted various potential risks 

of asset purchases, including possible challenges in removing policy 

67 

accommodation at the appropriate time and the possibility of encouraging imprudent risk-taking in the financial sector. Regarding 

challenges associated with exit, the Federal Reserve has developed, 

and is continuing to refine, a range of tools that will allow the Federal Reserve to remove policy accommodation at the appropriate 

time. Regarding excessive risk-taking in financial markets, there 

are few signs to date of the types of financial imbalances and excessive reliance on leverage that were evident in the runup to the financial crisis. That said, the Federal Reserve is monitoring financial markets very carefully for signs of excessive risk-taking and is 

prepared to take supervisory and other policy actions as appropriate to address developments that could pose a threat to financial 

stability. 

On balance, the FOMC has judged that the economic benefits of 

continued asset purchases outweigh the potential costs. However, 

asset purchases are not on a preset course and the pace of asset 

purchase will remain contingent on the economic outlook and the 

FOMC’s ongoing assessment of their likely efficacy and costs. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS 

FROM JANET L. YELLEN 

Q.1. How active is the Federal Reserve with the Financial Stability 

Board (FSB) on insurance issues? How does the Fed coordinate its 

insurance-related work within the FSB with Treasury and State 

regulators? 

A.1. As a member of the FSB, the Federal Reserve participates actively in discussions and decisions with respect to insurance-related 

issues. The Federal Reserve recently joined the International Association of Insurance Supervisors (IAIS), the international standard 

setting body for insurance. The Federal Reserve is working with 

the other U.S. members of the IAIS to provide a coordinated U.S. 

perspective in the development of standards by the IAIS. 

The FSB was established to coordinate at the international level 

the work of national financial authorities and international standard setting bodies and to develop and promote the implementation 

of effective regulatory, supervisory and other financial sector policies to promote financial stability. The U.S. Treasury, the Federal 

Reserve, and the SEC are the U.S. members of the FSB. Governor 

Daniel Tarullo serves as the Federal Reserve’s representative to 

the FSB Plenary and is the chairman of the FSB’s standing committee on Supervisory and Regulatory Cooperation (SRC). 

As the international standard-setting body for insurance, the 

IAIS reports to the FSB through the SRC with respect to supervisory and regulatory matters. The IAIS includes insurance regulators, supervisors, and central banks from around the world, including the United States. The U.S. members of the IAIS include 

the Federal Insurance Office, the Federal Reserve, the National Association of Insurance Commissioners, and the State insurance departments. 

Q.2. The bank-centric Basel 3 framework was developed by banking regulators for banks, not for insurers. Do you think it is appropriate for insurers to be subject to bank-centric Basel 3 capital 

68 

1See, 11 FR 62018 (October 11, 2013). 

rules that were never intended for them, or does it make more 

sense to have an insurance-based framework for insurers? 

A.2. The Board’s final revised capital framework for bank holding 

companies and savings and loan holding companies from summer 

2013 does not apply to savings and loan holding companies that are 

engaged substantially in insurance activities. The Board decided to 

take more time to develop appropriate capital requirements for insurance holding companies, including insurance nonbank SIFIs. We 

want to get this right—it is important that we have strong consistent capital requirements for all depository institution holding 

companies and that we have a treatment for insurance risks that 

is economically sensible. 

Q.3. Will you work with Congress to ensure that an insurancebased framework is applied to the insurance companies under Fed 

supervision? If you are confirmed, will you revisit the Fed’s interpretation of the statute to determine if the Fed has the authority, 

as many in the Senate believe that it does, to avoid the negative 

impact of bank rules applied to insurance companies, and instead 

apply a more appropriate insurance framework? Do you support bipartisan legislation that my colleague Senator Brown and I drafted 

that clarifies that the Fed does have the flexibility to distinguish 

capital standards between banks and insurance companies? 

A.3. The Board recognizes that insurance companies that are savings and loan holding companies (SLHCs) or are designated by the 

Council as nonbank financial companies may present different 

business models and risks than bank holding companies. Section 

171 of the Dodd-Frank Act, by its terms, requires the appropriate 

Federal banking agencies to establish minimum risk-based and leverage capital requirements for bank holding companies (BHCs), 

savings and loan holding companies, and nonbank financial companies supervised by the Board on a consolidated basis. This statutory provision further provides that these minimum capital requirements ‘‘shall not be less than’’ the generally applicable capital requirements for insured depository institutions. In addition, the 

minimum—capital requirements cannot be ‘‘quantitatively lower 

than’’ the generally applicable capital requirements for insured depository institutions that were in effect in July 2010. Section 171 

does not contain an exception from these requirements for an insurance company (or any other type of company) that is a BHC, 

SLHC, or supervised nonbank financial company (Board-regulated 

company), or for a Board-regulated company that has an insurance 

company subsidiary. This requirement therefore constrains the 

scope of the Board’s discretion in establishing minimum capital requirements for Board-regulated companies. 

The final capital rule approved by the Board earlier this year 1

took into consideration differences between the banking and insurance business within these constraints. The final capital rule included specific capital treatment for policy loans and separate accounts, which are assets typically held by insurance companies but 

not by banks. Additionally, the Board determined to defer application of the final capital rule to SLHCs with significant insurance 

69 

activities (i.e., those with more than 25 percent of their assets derived from insurance underwriting activities other than credit insurance) and to SLHCs that are themselves State regulated insurance companies. 

To the extent permitted by law, the Board continues to carefully 

consider how to design capital rules for Board-regulated companies 

that are insurance companies or that have subsidiaries engaged in 

insurance underwriting in determining how to design an appropriate capital framework for these companies. The Board remains 

willing to work with Congress on this important matter. 

Q.4. The Federal Reserve has oversight for nonbank financial institutions that are designated as systemically important by the Financial Stability Oversight Council (FSOC). How will you ensure that 

the Fed does not apply a one-size-fits-all approach to regulating 

these entities? Is the Fed limited in its ability to tailor requirements by the Collins Amendment or any other provision of DoddFrank? 

A.4. The Dodd-Frank Act directs the Board to apply prudential 

standards to nonbank financial companies that have been designated by the FSOC for supervision by the Board that are more 

stringent than the standards applied to banking organizations that 

do not pose such significant risks to financial stability. The prudential standards must include enhanced risk-based capital, leverage, 

liquidity, stress test, resolution planning, and risk management requirements as well as single-counterparty credit limits, and a debtto-equity limit for companies that pose a grave threat to the financial stability of the United States. 

In establishing enhanced prudential standards for BHCs and 

nonbank financial companies under section 165 of the Dodd-Frank 

Act, section 165(a)(2) provides that the Board may tailor application of the standards imposed under that section on an individual 

basis or by category. The Board intends, in prescribing prudential 

standards for a particular nonbank financial company under section 165, to thoroughly assess the business model, capital structure, and risk profile of the designated company to determine how 

the proposed enhanced prudential standards should apply, and if 

appropriate, would tailor application of the standards by order or 

regulation to that nonbank financial company or a category of 

nonbank financial companies. 

The Board recognizes that insurance companies that are SLHCs 

or are designated by the Council as nonbank financial companies 

may present different business models and risks than bank holding 

companies. The final capital rule the Board issued this summer implementing the Basel III capital standards included specific capital 

treatment for policy loans and separate accounts held by insurance 

companies, which are assets not held by banks. Additionally, the 

Board determined to defer application of the final capital rule to 

SLHCs with significant insurance activities (i.e., those with more 

than 25 percent of their assets derived from insurance underwriting activities other than credit insurance) and to SLHCs that 

are themselves State regulated insurance companies. 

To the extent permitted by law, the Board continues to carefully 

consider how to design capital rules for Board-regulated companies 

70 

that are insurance companies or that have subsidiaries engaged in 

insurance underwriting in determining how to design an appropriate capital framework for these companies. 

Q.5. The U.S. Department of the Treasury’s Office of Financial Research (OFR) recently delivered a report to the FSOC on ways that 

activities in the asset management industry may create, amplify, 

or transmit systemic risk. While the OFR report stops short of calling for SIFI designations for asset managers, it does lay out potential factors that could be used to determine if an asset manager 

poses systemic risk. Many have commented publicly that the process for the OFR study and FSOC’s review of asset managers is 

flawed and lacks transparency. 

As a voting member of FSOC, if the FSOC undertakes to designate asset managers as systemically important, would you support the metrics for designation being put out for public comment? 

If the FSOC ultimately designates asset managers as systemically important, do you agree that asset managers should be regulated differently than bank holding companies and that a one-sizefits-all approach is not appropriate? 

A.5. The study on Asset Management and Financial Stability was 

written by the OFR in response to a request by the FSOC to identify data gaps and provide analysis to better inform the FSOC’s 

analysis of how to consider asset management firms for enhanced 

prudential standards and supervision under Section 113 of the 

Dodd-Frank Act. The study is not an FSOC publication. The OFR 

study did not propose any metrics for the FSOC to use to consider 

asset management firms for designation. If the FSOC develops 

metrics for asset manager firms beyond the metrics in the current 

guidance (available at: http://www.treasury.gov/initiatives/fsoc/ 

documents/nonbank%20designations%20-%20final%20rule% 

20and%20guidance.pdf), if confirmed, I would support that it provide the public an opportunity to review and comment on any proposed metrics. 

Section 165 of the Dodd-Frank Act requires the Federal Reserve 

to establish enhanced prudential standards both for bank holding 

companies with total consolidated assets of $50 billion of more and 

for nonbank financial companies designated by the Council. In the 

Federal Reserve’s proposed rule, we may tailor the application of 

the enhanced standards to different companies on an individual 

basis or by category, taking into consideration each company’s capital structure, riskiness, complexity, financial activities, size, and 

any other risk-related factors that the Federal Reserve deems are 

appropriate. This commitment to tailoring is reflected in the recently finalized capital rules in which the Federal Reserve excluded 

savings and loan holding companies that are predominantly engaged in insurance activities in order to allow for the development 

of more appropriate capital standards. Still, our ability to tailor the 

enhanced standards may be limited by the Collins Amendment and 

other provisions of the Dodd-Frank Act. 

Q.6. As chairman of the Fed, what specifically will you do to increase the transparency of the Fed with regard to insurance regulators and the insurance industry? How will you consult with State 

insurance regulators before taking a position on insurance reguVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
71 

latory matters and will that position be consistent with the advice 

you receive from State insurance regulators? 

A.6. The Federal Reserve has a long history of cooperation, consultation, and engagement with Federal and State regulators, key 

stakeholders, and other interested parties. 

To raise transparency with respect to the development of our supervisory programs and regulations for the insurers under Federal 

Reserve supervision, Federal Reserve staff regularly meets with 

the Federal Insurance Office, insurance industry groups and company representatives, the National Association of Insurance Commissioners, State insurance regulators, and others regarding issues 

related to insurance capital requirements, supervision, risk management, and other insurance matters. 

The Federal Reserve considers and assesses the views of industry 

groups and State regulators and has made adjustments in our approach to supervising and regulating insurers to reflect such input. 

The Federal Reserve recognizes the differences between banking 

and insurance, and is committed to tailoring its supervisory and 

regulatory regime for insurance holding companies to reflect the 

unique business lines and risks of insurance—to the extent permitted by law. We will continue to engage the industry and State 

regulators to further expand the Board’s expertise and gain additional perspectives regarding the regulation and supervision of insurance companies, with the goal of continuing to promote a financially safe and sound financial system. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM JANET L. YELLEN 

Capital Rules for Insurance Companies 

Q.1. While many of us believe that the Dodd-Frank Act already 

gives the Federal Reserve the authority to distinguish between insurance companies and banks when promulgating capital standards under the Collins Amendment, the Federal Reserve has made 

statements publicly that it does not believe it has the statutory authority to do so. Therefore, a number of Senators on this Committee introduced legislation, S.1369 to codify and clarify that the 

Federal Reserve can and should make distinctions between insurance companies and banks when setting capital standards. Is it 

your interpretation that this authority currently exists? 

A.1. Section 171 of the Dodd-Frank Act, by its terms, requires the 

appropriate Federal banking agencies to establish minimum riskbased and leverage capital requirements for bank holding companies (BHCs), savings and loan holding companies (SLHCs), and 

nonbank financial companies supervised by the Board (supervised 

nonbank companies) on a consolidated basis. This statutory provision further provides that these minimum capital requirements 

‘‘shall not be less than’’ the generally applicable capital requirements for insured depository institutions. In addition, the minimum capital requirements cannot be ‘‘quantitatively lower than’’ 

the generally applicable capital requirements for insured depository 

institutions that were in effect in July 2010. Section 171 does not 

contain an exception from these requirements for an insurance 

72 

1See, 11 FR 62018 (October 11, 2013). 

company (or any other type of company) that is a BHC, SLHC, or 

supervised nonbank company (Board-regulated company), or for a 

Board-regulated company that has an insurance company subsidiary. This requirement therefore constrains the scope of the 

Board’s discretion in establishing minimum capital requirements 

for Board-regulated companies. 

The final capital rule approved by the Board earlier this year, 1

did, however, take into consideration differences between the banking and insurance business within these constraints. The final capital rule included specific capital treatment for policy loans and 

separate accounts, which are assets typically held by insurance 

companies but not by banks. Additionally, the Board determined to 

defer application of the final capital rule to SLHCs with significant 

insurance activities (i.e., those with more than 25 percent of their 

assets derived from insurance underwriting activities other than 

credit insurance) and to SLHCs that are themselves State regulated insurance companies. 

The Board continues to carefully consider how to design capital 

rules for Board-regulated companies that are insurance companies 

or that have subsidiaries engaged in insurance underwriting in determining how to design an appropriate capital framework for 

these companies. 

Q.2. This ability for distinction should also transfer to the Fed’s 

ability to distinguish between insurance companies and banks for 

purposes of accounting practices. I have at least two insurance 

companies in my State that are supervised by the Fed as savings 

and loan holding companies. These companies are not publicly 

traded and do not prepare financial statements in accordance with 

GAAP—but rather, in accordance with GAAP-based insurance accounting known as Statutory Accounting Principles (SAP). Every 

person I consult tells me that SAP is the most effective and prudential way to supervise the finances of an insurance company. It 

is my understanding that the Federal Reserve may want to force 

these insurance companies that have used SAP reporting for many 

decades to spend hundreds of millions of dollars preparing GAAP 

statements—primarily because the Fed is comfortable with GAAP 

and understands it since it’s what banks use. Is this is true? If it 

is true, is it simply because the Fed is so accustomed to bank regulation and not insurance regulation that it simply wants to make 

things easier for itself? Do you agree with this one-size-fits-all approach to regulation? Can you provide a cost benefit analysis to 

this as it seems to not add any additional supervisory value and 

only adds astronomic costs to these companies? 

A.2. The Federal Reserve is still considering regulatory capital and 

financial reporting requirements for companies with significant insurance activities in light of the Collins amendment requirement 

that we institute consolidated capital requirements for all bank 

holding companies (BHCs), savings and loan holding companies 

(SLHCs), and nonbank SIFIs. SLHCs with significant insurance activities are not covered by the new regulatory capital rules published this summer. 

73 

Our willingness to take more time to develop a capital rule for 

insurance holding companies is an acknowledgement that the business model and associated risk profile of insurance companies can 

differ materially from those of banking organizations and that further evaluation of the appropriate capital framework for these entities is warranted. 

Because the calculation of insured depository institution capital 

requirements begins with consolidated GAAP measurements, and 

because statutory accounting has a legal entity rather than a consolidated basis, the Collins amendment is an impediment to use of 

statutory accounting as the basis for consolidated capital requirements for BHCs, SLHCs, and nonbank SIFIs with insurance operations. 

Q.3. Each Chairman of the Federal Reserve can appoint other Governors to specific posts and issues—such as representation to the 

Financial Stability Oversight Council, representing the Federal Reserve to the Financial Stability Board (FSB), etc. Do you have a 

written list of any changes in Fed governors you will make to these 

posts that you can provide in writing? 

A.3. No, I do not have a list at this point. If confirmed as Chairman, I look forward to working with my fellow governors to fulfill 

the important responsibilities of the Federal Reserve. 

FSOC 

Q.4. FSOC has been in existence for more than 3 years. Since that 

time, three companies have been deemed systemically significant 

and a second round of companies appear to be under consideration. 

There have been a number of calls, supported by a 2012 GAO report, on the FSOC to provide greater transparency about the process used for designation and the criteria followed. Can you provide 

greater details on why more transparency has not been achieved? 

A.4. Although I have not participated in the Financial Stability 

Oversight Council (Council) matters, I understand it is firmly committed to promoting transparency and accountability in connection 

with its activities. In November 2012, the Council and the Office 

of Financial Research jointly provided a response to Congress and 

the GAO with a description of the actions planned and taken in response to each of the recommendations in the report. The report 

made a number of recommendations on ways in which the Council 

could further enhance its transparency, including improving the 

Council’s Web site. 

Subsequently, the Council’s Web site was reintroduced, in December 2012, to improve transparency and usability, to improve access to Council documents, and to allow users to receive email updates when new content is added. The Council is firmly committed 

to holding open meetings and closes its meetings only when necessary. However, the Council must continue to find the appropriate 

balance between its responsibility to be transparent and its central 

mission to monitor emerging threats to the financial system. Council members frequently discuss supervisory and other market-sensitive data during Council meetings, including information about 

individual firms, transactions, and markets that require confidentiality. In many instances, regulators or firms themselves provide 

74 

nonpublic information that is discussed by the Council. Continued 

protection of this information, even after a period of time, is often 

necessary to prevent destabilizing market speculation or other adverse consequences that could occur if that information were to be 

disclosed. 

Congress authorized the FSOC to designate nonbank financial 

companies whose material financial distress could threaten U.S. financial stability. Congress provided the FSOC with a list of 10 factors for consideration but left it to FSOC to determine how these 

factors, such as interconnectedness, size, leverage, and activities, 

should be considered in determining whether a company posed a 

threat to financial stability. 

Designation has significant implications for a company, so it is 

important that the designation framework and process is careful 

and deliberative. To implement this authority, FSOC developed a 

framework and criteria and sought public comments twice on the 

framework. After publishing guidance, FSOC began the process of 

assessing individual companies from a list of companies that met 

the quantitative criteria set out in the guidance. The guidance is 

available at: http://www.treasury.gov/initiatives/fsoc/documents/ 

nonbank%20designations%20-%20final%?0rule% 

20and%20guidance.pdf. 

As described in the guidance, FSOC screens companies through 

a three-stage process which provides a company with more due 

process than set forth in the enabling provisions of Dodd-Frank. 

This authority is focused on individual companies, not categories of 

activities or industries. Because being considered for designation is 

an important event for a firm, and the process may involve evaluation of proprietary information, there may be some costs to providing too much information to the public. 

Q.5. The methodology and blanket statements made in the OFR 

Study on Asset Management and Financial Stability have been 

highly criticized as making broad assumptions, blanket statements, 

and for a misuse/misstatement and misunderstanding of data to 

analyze the industry. Can you speak to the reports’ accuracies and/ 

or if there are errors how best to address these since these reports 

are presumably part of the basis for designation? 

A.5. The study on Asset Management and Financial Stability was 

written by the OFR in response to a request by the FSOC to identify data gaps and provide analysis to better inform the FSOC’s 

analysis of how to consider asset management firms for enhanced 

prudential standards and supervision under Section 113 of the 

Dodd-Frank Act. The study is not an FSOC publication. In addition, because the designation authority is focused on individual 

companies rather than industries, it will be only one of many inputs used by the FSOC in its analysis. 

Q.6. In terms of Asset Management companies, the Council has 

previously stated that in any additional metrics are developed ‘‘it 

intends to provide the public with an opportunity to review and 

comment on any such metrics and thresholds.’’ Why was it the SEC 

then and not the FSOC that released these for public comment? 

Can you speak to other reports/studies that the OFR may do and 

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75 

2See, 12 U.S.C. 1851(c). 

lowed for the public to review and comment? In terms of the OFR’s 

Study on Asset Management and Financial Stability, do you know 

how many comments were received and the general nature/issues 

raised in these comments? 

A.6. The study on Asset Management and Financial Stability was 

written by the OFR in response to a request by the FSOC to provide data and analysis to better inform the FSOC’s analysis of how 

to consider asset management firms for enhanced prudential standards and supervision under Section 113 of the Dodd-Frank Act. The 

OFR study did not propose any metrics for the FSOC to use to consider asset management firms for designation. If the FSOC develops metrics for asset manager firms beyond the metrics in the current guidance (available at: http://www.treasury.gov/initiatives/ 

fsoc/documents/nonbank%20designations%20-%20final%20rule% 

20and%20guidance.pdf, I would support that it provide the public 

an opportunity to review and comment on any proposed metrics. 

Volcker 

Q.7. Can you update me on the timing of the rule and will the conformance period be extended for firms to implement it? 

A.7. The Federal Reserve is committed to getting the rules implementing section 619 of the Dodd-Frank Act right and has been 

working for some time with the FDIC, OCC, SEC, and CFTC to develop a final rule that effectively implements that section in a manner faithful to the words and purpose of the statute. We are striving to consider this rule before year-end in order to provide clarity 

and certainty to the affected members of the industry and to the 

public more broadly about the requirements of section 619. 

By its terms, section 619 became effective on July 21, 2012. Section 619 provides banking entities an additional 2-year period following the statute’s effective date to conform activities and investments to the prohibitions and restrictions of that section and any 

final implementing regulation. 2 Under the statute, the Board may, 

by rule or order, extend the 2-year conformance period for up to 

three, 1-year periods, if in the judgment of the Board, an extension 

is consistent with the purposes of section 619 and would not be detrimental to the public interest. The statute provides that the Board 

may grant these extensions for not more than 1 year at a time. As 

it considers the merits of adopting a final rule, the Board will also 

consider the public interest in granting an extension of the conformance period. 

Q.8. Can you assure me that the rule will be structured so it 

doesn’t negatively impact small issuers? 

A.8. Among other things, section 619 of the Dodd-Frank Act prohibits banking entities from engaging in proprietary trading, which 

is defined by the statute to be trading in financial instruments for 

the purpose of selling in the near term or the intent to resell in 

order to profit from short-term price movements. Section 619 also 

provides an exception from this prohibition for underwriting activities and for market-making activities that are designed not to exceed the reasonably expected near term demands of clients, cusVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
76 

tomers, and counterparties. Underwriting activities and marketmaking activities serve a very important role in providing capital 

to businesses and liquidity to markets. 

The Federal Reserve has been working for some time with the 

FDIC, OCC, SEC, and CFTC to develop a final rule that effectively 

implements section 619, including the exceptions for underwriting 

and market-making activities and the other activities permitted by 

the statute, in a manner faithful to the words and purpose of the 

statute. In developing the rule, the Federal Reserve has met with 

numerous members of the public about a wide variety of issues 

raised by the statute and the original agency proposal, including 

the issues you have raised, and has considered more than 18,000 

comments on the proposal. We are striving to consider this rule before year-end in order to provide clarity and certainty to the affected members of the industry and to the public more broadly 

about the requirements of section 619. 

Enhanced Banking System: Ending Too Big to Fail and Protecting Against Future Collapses 

Q.9. It is safe to say that in 2008 the U.S. Government did not 

have the tools to wind down a large failing financial institution. 

This inability is one of the primary reasons behind the Orderly Liquidation Authority (OLA) enacted in the Dodd-Frank Act. Recently, 

Bank of England’s Paul Tucker stated, ‘‘ . . . the U.S. authorities 

have the technology—via Title II of Dodd-Frank; and just as important, most U.S. bank and dealer groups are, through an accident 

of history, organized in a way that lends them to top–down resolution on a group-wide basis. I don’t mean to it would be completely 

smooth right now; it would be smoother in a year or so as more 

progress is made, but in extremis, it should be done now. That 

surely is a massive signal to bankers and markets.’’ Do you agree 

with Mr. Tucker’s statement and what does progress on this front 

mean for those arguing large banks benefit from an implicit subsidy? 

A.9. The Dodd-Frank Act and Basel III approach to addressing systemically important financial institutions (SIFIs) involves much 

stricter regulation of SIFIs and improving the resolvability of 

SIFIs. This is a sensible path that will lower the probability of failure of SIFIs, improve market discipline of SIFIs, and reduce the 

damage to the system if a SIFI does fail. The Board, the FDIC, and 

other regulators have made much progress on this path. Market 

participants and some rating agency actions for large bank holding 

companies have recognized this progress. 

The FDIC’s orderly liquidation authority (OLA) is effective today 

and its core regulatory implementation architecture is in place. The 

FDIC’s single-point-of-entry approach to implementing Title II of 

the Dodd-Frank Act is a big step forward in this regard. More work 

remains to be done around the world to maximize the prospects for 

an orderly SIFI resolution, but the basic framework has been established in the United States. 

Potential impediments to an orderly SIFI resolution remain—including the need for other countries to adopt workable statutory 

resolution regimes for SIFIs, the need to ensure that SIFIs have 

77 

sufficient gone concern loss absorption capacity and resolutionfriendly internal organizational structures, the need to provide host 

regulators of SIFIs with credible assurances that local operations 

will be protected in a resolution, and the need to address the potential disorderly unwind of cross-border derivative contracts. The 

Federal Reserve is committed to working with the FDIC and our 

supervised firms to remove these impediments. 

The Fed, in consultation with the FDIC, has been developing a 

regulatory proposal that would require the largest, most complex 

U.S. banking firms to maintain a minimum amount of outstanding 

long-term unsecured debt that could be converted to equity in resolution. Such a requirement would increase the prospects for an orderly resolution under OLA by ensuring that shareholders and 

long-term debt holders of a systemic financial firm can bear potential future losses at the firm and sufficiently capitalize a bridge 

holding company in resolution. In addition, by increasing the credibility of OLA, a minimum long-term debt requirement should help 

counteract the moral hazard arising from taxpayer bailouts and improve market discipline of systemic firms. 

U.S. regulators are in active discussions with their foreign counterparts with respect to crisis planning around potential future 

SIFI failures. In particular, the U.S. and U.K. resolution authorities—the FDIC and the Bank of England—together with the Federal Reserve Board, the Federal Reserve Bank of New York and the 

U.K. Financial Services Authority, have been working closely to develop contingency plans for the failure of global SIFIs with significant operations on both sides of the Atlantic. 

Q.10. There have been some that have expressed concerns that 

winding down a large bank is impossible because of cross border 

problems. One solution offered has been the Single Point of Entry 

(SPOE) approach. Does this approach significantly mitigate the 

challenge posed by winding down a firm that has operations in 

multiple jurisdictions? 

A.10. The FDIC’s single-point-of-entry approach to resolution of a 

systemic financial firm does mitigate the challenges posed by winding down a large, cross-border banking firm. Under the singlepoint-of-entry approach, the FDIC will be appointed receiver of only 

the top-tier parent holding company of the failed firm. After the 

parent holding company is placed into receivership, the FDIC will 

transfer assets of the parent company to a bridge holding company. 

The firm’s operating subsidiaries (foreign and domestic) will remain open for business as usual. To the extent necessary, the FDIC 

will then use available parent holding company assets to recapitalize the firm’s critical operating subsidiaries. Equity claims of the 

failed parent company’s shareholders will effectively be wiped out, 

and claims of its unsecured debt holders will be written down as 

necessary to reflect any losses or other resolution costs in the receivership. The FDIC will ultimately exchange the remaining 

claims of unsecured creditors of the parent for equity or debt 

claims of the bridge holding company and return the restructured 

firm back to private sector control. 

This conceptual approach to resolution under Title II of the 

Dodd-Frank Act represents an important step toward addressing 

78 

the market perception that any U.S. financial firm is too big or too 

complex to be allowed to fail. The aim of the single-point-of-entry 

approach is to stabilize the failed firm quickly, in order to mitigate 

the negative impact on the U.S. financial system, and to do so 

without supporting the firm’s equity holders and other capital liability holders or exposing U.S. taxpayers to losses. The singlepoint-of-entry approach offers the best potential for the orderly resolution of a systemic financial firm under Title II, in part because 

of its potential to mitigate run risks and credibly impose losses on 

parent holding company creditors and, thereby, to enhance market 

discipline. 

As noted in my previous answer, although use of the singlepoint-of-entry resolution approach materially improves the prospects for the orderly resolution of a cross-border banking firm as 

compared to alternative implementation paths, impediments to 

such an orderly resolution remain. The Federal Reserve is committed to working with the FDIC in the coming months and years 

to mitigate those residual impediments. 

Q.11. Liquidity and capital rules work in concert, but also serve 

overlapping ends. How do you view the trade-offs between higher 

capital and liquidity rules and in that light, how do you view 

progress in both of these areas? 

A.11. Higher capital and liquidity standards work in concert to bolster the stability of individual institutions and the financial system, and the Federal Reserve has made significant progress in both 

of these areas. We believe that it is important that large banking 

firms have both sufficient capital to absorb losses and a sufficiently 

strong liquidity risk profile to prevent creditor and counterparty 

runs. The financial crisis demonstrated that preventing the insolvency or material financial distress of large banking firms requires 

regulating both their capital adequacy and liquidity risk. 

The new capital framework published by the U.S. banking agencies this summer will increase the quantity and quality of banks’ 

required capital, whereas the proposed liquidity coverage ratio will 

establish for the first time a standardized minimum liquidity requirement for large banking organizations. Both measures enhance 

banking organizations’ ability to continue functioning as financial 

intermediaries, particularly during stressful periods, thereby reducing risks to the deposit insurance fund and the chances of taxpayer 

bailouts and improving the overall resilience of the U.S. financial 

system. 

There is more to be done on both the capital and liquidity fronts, 

however. In particular, the Board intends to supplement the new 

Basel III capital rules with a proposal to implement a risk-based 

capital surcharge for the largest global systemically important 

banking institutions, and is working with the Basel Committee to 

develop a longer-term structural liquidity requirement for global 

banks. 

Macro Economic 

Q.12. To what extent could potential challenges within the Chinese 

banking and ‘‘shadow’’ banking industry transmit credit risk into 

the global financial markets? 

79 

3http://www.bankrate.com/finance/mortgages/mortgage-analysis.aspx 

A.12. The Chinese economy has experienced very rapid credit 

growth in recent years. Along with bank loans, nonbank (shadow) 

financing has expanded substantially, which includes lending via 

trust companies, corporate bond issuance, and off-balance sheet 

lending undertaken by banks. This rapid and sizable credit expansion has raised concerns about asset quality at banks and in the 

shadow banking sector. A future rise in problem loans could lead 

to capital shortfalls in the banking sector and potentially large expenses for the Government. That said, currently banks report 

sound capital buffers, and the Chinese Government has extensive 

resources to meet potential shortfalls in capital. In addition, Chinese authorities appear to recognize the potential risks of excessive 

credit growth to their economy, and have signaled intentions to 

curb it. However, notable risks remain and the situation bears 

monitoring closely. Although China has a relatively closed financial 

system with fewer financial links to other countries than many 

other major economies, a sharp slowdown in the Chinese economy 

would slow growth in other countries as well. 

Q.13. How do you view the bond purchase program orchestrated by 

the Bank of Japan? How does it differ from quantitative easing? 

Does it appear that the Japanese are attempting to manipulate 

their currency, or is this a proper response to Japan’s more than 

20 years of economic stagnation and deflation? 

A.13. Japan has experienced low growth coupled with mild deflation or very low inflation for nearly two decades. It is important to 

address this problem, and the Bank of Japan (BOJ) has recognized 

that aggressive action is necessary. The BOJ has taken a couple of 

steps. In January, the BOJ introduced an inflation target of 2 percent, similar to that of other major central banks. In April, the 

Bank of Japan announced it would be greatly expanding its existing asset purchase program and increasing the maturity of its purchases (a break from prior quantitative easing, which was focused 

on shorter-term maturity assets) with the goal of raising inflation 

to the 2 percent goal in 2 years. These asset purchases are mainly 

concentrated in Japanese Government bonds. 

These measures have already contributed to supporting economic 

activity in Japan—with real GDP accelerating in the first half of 

the year—and deflationary pressures have also begun to recede. 

However, ultimately Japan will need to take steps to restore fiscal 

sustainability and implement pro-growth structural reforms. 

Q.14. Do you believe that the recent increases in mortgage interest 

rates this past summer—that went up nearly 100 basis points from 

May 2012 3 were an overreaction to the Fed’s June statements on 

‘‘tapering’’ the stimulus? Do you believe that these moves are indicative that housing sector is being over-stimulated by economic policies? 

A.14. The increase in longer-term interest rates over the summer 

reflected a number of factors. First, the incoming economic data 

suggested a somewhat stronger economic outlook, which boosted 

rates. Second, as you note, in June the FOMC provided additional 

information on its expectations regarding its current purchase proVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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gram, offering a conditional outlook for reductions in the pace of 

purchases over coming quarters if the incoming economic data continued to be consistent with the outlook for ongoing improvement 

in labor market conditions. The committee was clear that the policy 

outlook was conditional on economic and financial developments— 

our purchases are by no means on a preset course. Nonetheless, 

some investors who had taken on leveraged positions in longerterm instruments reportedly decided to exit those positions, putting 

additional upward pressure on rates. While the resulting tightening of financial conditions was unwelcome, and could slow the recovery in the housing sector to some degree, the reduction in leveraged positions should reduce the risks to financial stability going 

forward. The committee will continue to adjust policy as appropriate to foster our dual objectives of maximum employment and 

price stability. 

Q.15. After the initial round of the Federal Reserve’s monetary 

measures to keep the financial system solvent during the financial 

crisis, the threshold for additional central bank easing action has 

become lower and lower, especially with each successive round of 

QE. We now see loose central bank policies in the U.S., Japan, Europe, and elsewhere. Policy makers appear to be relying on monetary manipulation as a substitute for necessary tough decisions to 

structurally reform our tax, spending, and trade policies that would 

make for long-term, true economic growth. Do you believe that the 

U.S. Federal Reserve can continue to be a shining example of Central Bank independence? Do you anticipate that you will have the 

courage to end the stimulus programs and make some of the more 

difficult decisions to get our economy back to a ‘‘true’’ functioning 

economy rather than an economy that only functions with Government stimulus? 

A.15. Americans can be confident that the FOMC has both the ability and the will to slow our asset purchases and eventually end our 

asset purchase program, and ultimately to begin to remove policy 

accommodation, when the economy is strong enough to make doing 

so appropriate. We have clearly indicated that the purchase program is conditional on economic and financial developments. We 

anticipate ending our purchases once we have seen a substantial 

improvement in the outlook for the labor market in a context of 

price stability. More broadly, we are providing a high degree of 

monetary policy accommodation in order to support a stronger economic recovery and move inflation back toward its 2 percent 

longer-run objective—that is, to foster our congressionally mandated objectives of maximum employment and price stability. 

That said, as economic conditions normalize, it will become appropriate to begin removing policy accommodation. In considering 

the timing of such a step, our objective will be to assure a strong 

and robust recovery while keeping inflation under control. On the 

one hand, it is important not to remove support too soon, especially 

when the recovery is fragile. On the other hand, it is crucial not 

to wait too long to withdraw accommodation, and so allow an undesirable rise in inflation. My colleagues and I are committed to our 

longer run inflation goal of 2 percent, and we will need to ensure 

81 

that, as the recovery takes hold and progresses, we bring monetary 

policy back to normal in a timely fashion. 

Q.16. The Federal Reserve’s recent monetary actions have created 

somewhat of an unfair recovery, where investors and banks seem 

to be fairing quite well while the middle and lower classes seem to 

continue to struggle. Do you agree that the monetary policies put 

into place by the Federal Reserve since the financial crisis have 

been a ‘‘top–down’’ approach to bolstering the economy? Do you 

think that the Fed’s easy money policies punish savers? We’ve seen 

a growth and love spawned in the equities market—Do you think 

that this artificial ‘‘boom’’ in equities will falter once the Fed begins 

tapering? 

A.16. It is certainly true that savers and those who rely on investments such as certificates of deposit and Government bonds are receiving very low returns. However, savers typically wear many economic hats. For example, many savers are homeowners or would 

like to be homeowners, and low interest rates make it easier to own 

a home and contribute to rising house prices. In addition, many 

savers own stocks and other assets through pension funds and 

401(k) accounts; low interest rates are supporting the economic recovery and are thus good for businesses’ sales and earnings, and 

so for stock investors. And a stronger economy will help people who 

need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective 

of the current level of interest rates. 

More broadly, we cannot have a more normal configuration of interest rates until the economy returns to a more normal state. Currently, interest rates are low for fundamental economic reasons, 

not just because the Federal Reserve and other central banks are 

providing accommodative monetary policy. Those fundamental reasons include slow growth and low inflation in the U.S. and other 

major economies. Pursuing an accommodative monetary policy now 

will help to get the economy moving and so will best enable us to 

normalize policy and to get rates back to normal levels over time. 

Indeed, an improved economic outlook has contributed to the rise 

in interest rates we have seen of late, and most forecasters anticipate that rates will rise further as the economy strengthens. 

Q.17. When does the Fed plan to begin tapering? 

A.17. As we have emphasized, our purchase program is not on a 

pre-set course. Instead, our decisions regarding the purchase program are data dependent. Our goal for the purchase program, as 

stated in September 2012 and reiterated since then, is to achieve 

a substantial improvement in the outlook for the labor market. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM JANET L. YELLEN 

Q.1. Community banking is undergoing a change, especially in 

rural America. There are fewer banks in Kansas, but the banks 

that remain are growing due to mergers and acquisitions. One consequence of this growth is that the bank holding companies absorbing these smaller institutions fall under greater regulatory thresholds due to their increasing asset size. These small bank holding 

82 

companies (SBHCs) are increasingly exposed to the current $500 

million threshold under the Federal Reserve’s Small Bank Holding 

Company Policy Statement. For example, an SBHC located in Kansas has seven branches. These branches are located in rural communities where they are, in some instances, one of the only remaining businesses located on Main Street. But since an SBHC 

brought those small banks under its purview and kept a branch 

open for these small communities, that SBHC is now very close to 

exceeding that $500 million threshold. As I understand it, the Federal Reserve has the discretion to alter the Small Bank Holding 

Company Policy Statement and has exercised that discretion in 

raising the threshold in the past. 

I have introduced legislation along with Sen. Tester and Sen. 

Kirk along with an additional 13 of our Senate colleagues as cosponsors. Section 3 of the CLEAR Relief Act, S.1349, would require 

the Federal Reserve to raise that threshold. This seems to me a 

commonsense reform we could make that would ensure that small 

communities across the country will maintain access to hometown 

banking services. This is only one example of a regulatory burden 

the Federal Reserve could lift for the betterment of community 

banking. Would you comment on how you will go about reducing 

the regulatory burden on small banks, utilizing the Federal Reserve’s discretionary regulatory framework, so that communities in 

Kansas will still have access to a hometown bank? 

A.1. Community banks play a critical role in the U.S. economy, and 

the Federal Reserve is committed to implementing a supervisory 

and regulatory regime for community banks that is appropriate for 

their business model and economic function. To better tailor our 

oversight framework to the specific characteristics of community 

banks, the Federal Reserve has formed a Community Depository 

Institutions Advisory Council and a small bank subcommittee of its 

Committee on Bank Supervision. 

The Federal Reserve has been very focused on addressing toobig-to-fail (TBTF) and protecting financial stability by strengthening the regulatory regime for systemically important financial institutions (SIFIs). TBTF is a damaging economic phenomenon that 

corrodes market discipline of our largest banking firms and contributes to an unlevel playing field between large banks and small 

banks. The much stricter regulatory regime that the Federal Reserve and other U.S. and global regulators are implementing for 

SIFIs should help level that playing field. Consistent with this 

principle, our recent final Basel III capital rule also created substantial differences between the regulatory capital regime that will 

apply to large U.S. banking firms as compared to community 

banks. 

The Federal Reserve periodically reviews the scope of application 

of its Small Bank Holding Company Policy Statement. The Federal 

Reserve raises the asset threshold when appropriate in light of 

changes to U.S. banking markets and the economy. 

Q.2. The drafting process of the Volcker Rule has caused some confusion among investors and regulators alike. Without delving into 

the specifics of the rule, I would simply mention that I have heard 

concerns as to where market making ends and proprietary trading 

83 

begins. As you well know, market making serves a very important 

role in providing liquidity. I am concerned that an overly restrictive 

Volcker Rule could damage a business’s ability to operate and expand. I have also heard discussions about certain asset classes, 

namely non-U.S. sovereign debt, that may be under consideration 

for an exemption from the Volcker rule. If you believe the Volcker 

Rule is structured in a way to not have an overly negative impact 

on liquidity and the costs of issuing debt, for what purpose would 

certain asset classes require exemptions? Could not an asset class 

exemption of this nature be viewed as favoring foreign countries 

over American companies? 

A.2. Among other things, section 619 of the Dodd-Frank Act prohibits banking entities from engaging in proprietary trading, which 

is defined by the statute to be trading in financial instruments for 

the purpose of selling in the near term or the intent to resell in 

order to profit from short-term price movements. Section 619 also 

provides an exception from this prohibition for market-making activities that are designed not to exceed the reasonably expected 

near term demands of clients, customers and counterparties. As 

you note, market-making activities serve a very important role in 

providing liquidity to markets. 

The statute also provides exceptions from the proprietary trading 

prohibition for trading in certain asset classes. In particular, the 

statute permits trading by banking entities in obligations of the 

United States, obligations of any agency of the United States (including the Federal National Mortgage Association, the Federal 

Home Loan Mortgage Corporation, the Federal Home Loan Banks, 

and the Government National Mortgage Association) and obligations of any State or political subdivision thereof. 

The Federal Reserve has been working for some time with the 

FDIC, OCC, SEC, and CFTC to develop a final rule that effectively 

implements section 619, including the exception for market-making 

activities and the other activities permitted by the statute, in a 

manner faithful to the words and purpose of the statute. In developing the rule, the Federal Reserve has met with numerous members of the public about a wide variety of issues raised by the statute and the original agency proposal, including the issues you have 

raised, and has considered more than 18,000 comments on the proposal. We are striving to consider this rule before year-end in order 

to provide clarity and certainty to the affected members of the industry and to the public more broadly about the requirements of 

section 619. 

Q.3. Among the concerns that have been raised about Basel III, the 

possibility of bank-centric capital standards being applied to insurance companies is among the most difficult to justify. I realize the 

Federal Reserve may feel it is obligated to regulate certain components of the insurance industry due to the Collins Amendment language of the Dodd-Frank Act. However, I believe, as do many of my 

Senate colleagues, that the Federal Reserve does have flexibility in 

the statute to develop insurance-based standards. I am concerned 

that the very different capital accounting methods utilized by the 

insurance industry will make bank-centric Basel III standards unworkable and disruptive if applied to insurers. Are you able to proVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00087 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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vide any insight as to whether the Federal Reserve intends to saddle insurance companies with bank-centric prudential standards, 

and do you believe there is a way to develop strong insurancebased standards that would make more sense? Could you elaborate 

on the process moving forward? 

A.3. Section 171 of the Dodd-Frank Act, by its terms, requires the 

appropriate Federal banking agencies to establish minimum riskbased and leverage capital requirements for bank holding companies (BHCs), savings and loan holding companies (SLHCs), and 

nonbank financial companies supervised by the Board (supervised 

nonbank companies) on a consolidated basis. This statutory provision further provides that these minimum capital requirements 

‘‘shall not be less than’’ the generally applicable capital requirements for insured depository institutions. In addition, the minimum capital requirements cannot be ‘‘quantitatively lower than’’ 

the generally applicable capital requirements for insured depository 

institutions that were in effect in July 2010. Section 171 does not 

contain an exception from these requirements for an insurance 

company (or any other type of company) that is a BHC, SLHC, or 

supervised nonbank company (Board-regulated company), or for a 

Board-regulated company that has an insurance company subsidiary. In addition, because the calculation of insured depository 

institution capital requirements begins with GAAP measurements, 

and because statutory accounting is on a legal entity rather than 

a consolidated basis, consideration of accounting methods is part of 

the analysis in determining whether capital regulations meet the 

requirements of section 171 of the Dodd-Frank Act. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN 

FROM JANET L. YELLEN 

Q.1. Was there any task more important for the Fed since the 

1930s than understanding the financial system, understanding the 

financial institutions which were using more and more leverage 

and building massive opaque books of complicated derivatives positions, and heading off the next financial collapse? Fed minutes 

from 2006 and 2007 show that the Fed did not understand the 

risks of the modern financial system. Now, the Fed contends that 

its policy of quantitative easing does not present a serious inflation 

risk. However, considering the failure of the Federal Reserve to anticipate broad changes in the economy—including the 2008 financial crash and the worst recession in 50 years—why should Americans have confidence in that judgment? 

A.1. Americans can be confident that the FOMC has both the ability and the will to prevent inflation. Everyone on the committee, 

including myself, is firmly committed to our 2 percent longer-run 

goal for inflation. Over the past 5 years inflation has averaged 

near, but a bit below, our goal of 2 percent. More recently, inflation 

has generally been running more significantly below our 2 percent 

objective, and falling inflation has been a concern. 

At some point as economic conditions normalize, maintaining 

price stability will require removing accommodation. At that time, 

the Federal Reserve will tighten the stance of monetary policy by 

raising its target for the Federal funds rate and the interest rate 

85 

it pays on reserve balances, which will put upward pressure on 

short-term market interest rates to avoid an overheated economy 

and higher-than-target inflation in the historically normal and well 

understood way. The Federal Reserve has also developed a number 

of tools that it can use if necessary to help keep market rates near 

the interest rate on reserve balances. Moreover, the FOMC intends 

to gradually reduce its securities holdings once the economy is 

strong enough so that it no longer needs the support provided by 

the committee’s large scale asset purchases. We are confident we 

have the tools to normalize the stance of policy when doing so becomes appropriate, and that we can do so in a way that will avoid 

inflationary consequences down the road. 

Q.2. Fiat money is very difficult to preserve in value, and generations of central bankers have tried hard to project an image of sobriety and proprietary regarding the purchasing power of paper 

money. Do you think the Fed has put at risk the confidence of investors and citizens in paper money by its zero-percent-interestrates and successive rounds of QE? 

A.2. Investors and citizens can be confident that the FOMC has 

both the will and the ability to prevent rapid inflation. Everyone 

on the committee, including myself, is firmly committed to our 2 

percent longer-run goal for inflation. The FOMC has employed its 

nontraditional policy tools in order to support a stronger recovery 

and move inflation back toward its longer-run goal—that is, to better foster its Congressionally established goals of maximum employment and price stability. Investors would only have reason to 

lose confidence in the purchasing power of the dollar if inflation 

had been excessive or was at risk of being excessive in the future. 

However, as described in my answer to the previous question, inflation has been low in recent years and remains below our 2 percent 

target, and the committee has the tools necessary to remove policy 

accommodation when doing so becomes appropriate. 

Q.3. Are the Fed’s statements that it could snuff out inflation in 

15 minutes by raising rates consistent with past historical experience? This past spring the mere mention of slightly reducing the 

Fed’s pace of bond-buying sent global fixed income markets into a 

panic, and prices of long-term debt reversed almost all of the price 

elevation caused by QE since the spring of 2009. It is impossible 

to know whether this market reaction was the beginning of an anticipation of serious inflation, or the beginning of a loss of confidence in long-term claims on paper money that are seen as being 

debased by the Fed’s policies. What do you think about what happened in the markets this past spring, and what is the support for 

the Fed’s statement that if inflation arises, the Fed can get rid of 

it in 15 minutes? 

A.3. As you note, last spring, the FOMC provided additional information on its expectations regarding its purchase program, suggesting a conditional outlook for reductions in the pace of purchases. That outlook was explicitly conditional on economic and financial developments—our purchases are by no means on a preset 

course. Partly in response to the information the committee provided about the possible path for policy, but also reflecting some 

strengthening in the economic data at that time, interest rates 

86 

rose. In addition, some investors who had taken on leveraged positions in longer-term instruments reportedly decided to exit those 

positions, putting additional upward pressure on rates. However, 

measures of inflation expectations, such as the difference between 

yields on nominal Treasury securities and those on Treasury Inflation Protected Securities, did not change appreciably and remained 

close to 2 percent, indicating that investors did not anticipate high 

inflation. 

As I noted above, the FOMC is firmly committed to its 2 percent 

longer-run goal for inflation. The committee has the tools it needs 

to address incipient inflation risks, should they develop, and it can 

take steps to address unwelcome increases in inflation very rapidly 

if required. Such steps would include increases in our target for the 

Federal funds rate and in the interest rate paid on reserve balances as well as the use of other tools to tighten the relationship 

between short-term market interest rates and the rate paid on reserves. 

Q.4. After the first round of the Fed’s emergency monetary measures to keep the financial system afloat, the threshold for additional central bank easing action has become lower and lower with 

successive rounds of QE. As a result, loose central bank policies in 

the U.S., in Japan, and elsewhere, has resulted in policy makers 

relying on monetary policy as a substitute for necessary tough decisions to structurally reform our tax, spending, and trade policies 

that would allow for long lasting growth. Do you believe it is a critical role of the Fed Chair to tell the President and Congress that 

monetary policy can only go so far, and that it is up to the President and Congress to do everything they can to remove the impediments to strong sustainable growth so that the Fed can discontinue 

its unprecedented monetary accommodations and their associated 

risks? 

A.4. Policy makers should understand that monetary accommodation is not a panacea, and that other parts of the Government need 

to take the necessary steps to address the challenges our economy 

faces. In particular, I have emphasized that it would be helpful to 

the economy to put in place a strategy for fiscal policy that is not 

as restrictive in the near term, but that focuses on the longer-term 

fiscal issues that are at the heart of achieving fiscal sustainability, 

and that over the longer run can boost the capacity of the economy 

through greater national saving, higher investment and, in turn, 

increased productivity and long-run economic growth. 

Q.5. The Fed’s policies of zero-percent interest rates and QE have 

created a distorted, unfair recovery. Investors in bonds and stocks 

are doing great, with record highs in stock prices and very high 

prices of bonds across the yield curve. At the same time, ordinary 

people are experiencing just about recessionary unemployment and 

underemployment conditions, and millions of Americans have become discouraged by long-term unemployment and are no longer 

even looking for work. Moreover, QE has boosted the prices of some 

of the necessities of life and has made it impossible for savers to 

earn a safe fair return on their savings, forcing them to take higher 

risks. This set of distortions naturally creates resentment in those 

not experiencing a full economic recovery. Do you count this widVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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ening of inequality as a cost of QE and zero-percent interest rate 

policy? 

A.5. Too many people remain unemployed or have stopped looking 

for work, and the extent of long-term unemployment is still very 

troubling. However, only a stronger economy will allow people who 

need jobs to find them. It is certainly true that savers and those 

who rely on investments such as certificates of deposit and Government bonds currently are receiving low returns. But savers also 

participate in the economy in many other ways as well. Many are 

workers or would-be workers, and low interest rates boost economic 

growth and help create jobs throughout the economy. Many are 

borrowers or would-be borrowers, and Federal Reserve policy has 

kept mortgage and other interest rates lower than they would have 

been otherwise, helping those who want to buy homes, automobiles, 

and other durable goods. Many are investors in stocks and other 

financial investments, and a stronger economy will naturally generate better returns on those other investments. More generally, in 

light of the continued headwinds restraining economic growth, the 

FOMC judges that low interest rates are needed at this time to 

provide support to the ongoing recovery. Unequivocally, the goal of 

our accommodative monetary policy is to foster a more rapid return 

to an economy that works better for everyone, by promoting a return to maximum employment in a context of price stability. 

Q.6. Since 2008, our Nation’s largest banks are even larger than 

prior to the crisis, and studies have found they can raise money at 

lower rates due to their TBTF status. A major reason these firms 

retain the perception of TBTF is that even the most sophisticated 

market participants cannot understand the complex risks embedded in their derivatives books, which were at the heart of the recent crisis and which still contain trillions of dollars of potentially 

volatile positions. In the absence of adequate derivatives disclosures, the market will continue to lack confidence that these firms 

are actually safe and sound and won’t threaten a breakdown of the 

financial system. Dodd-Frank gave the Fed vast new powers to end 

TBTF. A key component of ending TBTF is ensuring that the market understands the risk exposures of these multi-trillion dollar derivatives books. Will you commit to using the Fed’s new powers to 

make sure that the market has significantly more robust access to 

the derivatives exposures of financial institutions? 

A.6. I agree that TBTF is a damaging economic phenomena, and 

regulators around the world need to work to address TBTF. We 

have made progress in reducing the TBTF problem since the financial crisis by reducing the probability of failure of systemically important financial institutions (SIFIs), by reducing the damage to 

the system if a SIFI were to fail, and by strengthening the broader 

financial markets and infrastructure. For example, we have substantially raised bank capital requirements, implemented stress 

tests for large bank holding companies and disclosed results, 

strengthened our approach to large bank supervision, and agreed 

on new liquidity rules for global banking firms. Progress also has 

been made to address the failure of a SIFI, through the resolution 

planning process and through the development of the FDIC’s single-point-of-entry approach to orderly liquidation authority. In adVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00091 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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dition, the Federal Reserve is now required to consider financial 

stability when reviewing merger and acquisition applications by 

bank holding companies. Finally, we have strengthened financial 

markets and infrastructures by, among other things, improving the 

tri-party repo settlement infrastructure, strengthening the supervision of financial market utilities, moving more over-the-counter 

derivatives to central clearing, and substantially improving transparency in the derivatives markets. 

Market participants and some rating agency actions for large 

bank holding companies have recognized this progress. But we still 

have work to do to eliminate residual TBTF subsidies. We are committed to that work. If the existing regulatory reform efforts in 

train prove to be insufficient to solve the TBTF problem, we are 

willing to look at the costs and benefits of other approaches. 

On the specific issue of disclosure of bank derivatives activities, 

the Federal Reserve has been working in concert with other agencies—in particular the CFTC and SEC—to implement the broad set 

of derivatives reforms mandated by the Dodd-Frank Act. These reforms should substantially increase transparency regarding banking firms’ derivatives activities, as more derivatives trading takes 

place through central counterparties (CCPs) and data regarding 

such activity is stored and accessible via trade repositories (TRs). 

This information should augment existing data on firms’ derivatives activities publicly disclosed in regulatory filings (e.g., Y–9Cs 

and 10–K/Qs). 

In addition, firms’ derivatives exposures are included in the Federal Reserve’s Dodd-Frank Act Stress Test and Comprehensive 

Capital Analysis and Review (CCAR) exercises, the results of which 

are released publicly each year. 

The Federal Reserve has a long history of supporting enhancements in bank disclosure practices. 

Q.7. The Bank for International Settlements noted in its annual report that ‘‘in the years ahead, exiting from the extraordinarily accommodative policy stance will raise significant challenges for central banks. They will need to strike the right balance between the 

risks of exiting prematurely and the risks associated with delaying 

exit further. While the former are well understood, it is important 

not to be complacent about the latter just because they have not 

yet materialized.’’ Do you believe there could be a tendency to delay 

exiting because the risks related to waiting too long (asset bubbles, 

inflation, misallocation of credit) are not clear until it is too late? 

A.7. There are risks associated with both keeping monetary policy 

accommodative for too long and tightening policy too soon. As you 

note, keeping policy accommodative for too long could result in an 

unwelcome increase in inflation and could encourage excessive risktaking that might eventually lead to financial instability. Tightening policy too soon could cut off an incipient strengthening of the 

recovery, preventing a beneficial decrease in unemployment, and 

possibly causing inflation to move further below the FOMC’s target 

of 2 percent. In order to determine the appropriate setting of monetary policy, the Federal Reserve assesses the outlook for economic 

conditions as well as the risks around that outlook on an ongoing 

basis. 

89 

I agree that there are unique risks associated with the unconventional monetary policy instruments the FOMC is currently employing, including its large-scale asset purchases and forward guidance 

for the Federal funds rate, but I do not believe those risks result 

in a tendency for the FOMC to keep policy accommodative for too 

long. The Federal Reserve is carefully monitoring the sources of 

risk associated with accommodative policy. In particular, the Federal Reserve has increased considerably the resources it is devoting 

to monitoring risks to financial stability. While there are currently 

some indications of ‘‘reach for yield’’ in the low-rate environment, 

there does not appear to be a widespread increase in excessive risk 

taking. 

It is important to note that there are also unique risks associated 

with removing policy accommodation too soon because of the current policy situation. Indeed, I think the best way to bring about 

an expeditious end to unconventional monetary policy is to avoid 

a premature removal of accommodation. 

Q.8. In a speech this spring, Fed Board Governor Jeremy Stein indicated that certain sectors of the credit market are showing signs 

of overheating due to the extended period of low interest policy. He 

noted these risks are developing in the corporate junk bond markets, the mortgage REIT sector, and commercial bank securities, 

and he concluded that these risks may need to be dealt with 

through rate increases. FSOC also identified the extended period of 

low-interest as potentially causing banks to push further out along 

the risk curve to ‘‘reach for yield,’’ increasing credit risk for nearterm earnings but sacrificing long term stability in the event of a 

sudden large rise in rates or widening in credit spreads. Do your 

views of the overheating of certain markets differ from Governor 

Stein’s? Do you believe there is a potential that we can experience 

a boom and bust in asset prices without ever experiencing a full 

economic recovery? 

A.8. We follow a great many markets and overall, I do not think 

we see very much evidence of troubling excesses. I agree with Governor Stein, however, that we saw some issues in some markets 

this spring and that these warrant careful monitoring. The rise in 

interest rates over the summer may have helped reign in some behavior that might otherwise have grown even more concerning. 

Still we continue to monitor a number of areas. We are mindful of 

the fact that financial excesses can appear even before a full recovery is complete. 

As Governor Stein noted, we have a number of tools for dealing 

with such problems should they reach the point that a response is 

required. My preferred first lines of defense involve supervisory 

and regulatory tools. This is because monetary policy is a very 

blunt tool for addressing excesses in particular markets. Raising 

the price of credit for everyone in the economy may help to reign 

in some troubling behavior, but would also impose costs on all 

those behaving prudently. Thus, while it is important to maintain 

the monetary policy option for dealing with financial excesses, I believe it should be a backstop used if more directed approaches fail. 

Q.9. How much are the Fed’s tools to lower interest rates to stimulate consumer spending on durable goods and mortgages diminVerDate Nov 24 2008 14:24 Jan 30, 2014 Jkt 046629 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\11-14 NOMINATION OF YELLEN\HEARING\111413.TXT JASON
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ished by the fact that the private sector is deleveraging from recent 

overleveraging and massive asset bubbles? To what extent is 

incentivizing consumer debt counterproductive to a stable long-run 

economy? How could fixing our fiscal, tax, and regulatory policies 

impact the economy as compared to accommodative monetary policies? 

A.9. One key factor shaping the contours of the recovery has been 

the effort of the private sector to reduce its leverage. Substantial 

progress in that direction has been accomplished, and that progress 

helps lay the groundwork for a more secure economic expansion 

going forward. Another important factor helping to lay that groundwork is a highly accommodative monetary policy. These factors are 

complementary, in that they both help to boost consumer confidence, boost hiring above where it would otherwise be, and increase business demand for capital. That said, monetary policy is 

not a panacea, and policy makers of all types should be endeavoring to align their policies similarly toward bolstering the recovery 

and ensuring a solid foundation for growth and stability going forward.