U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

99–726 PDF 2016

S. HRG. 114–231 

FEDERAL RESERVE’S FIRST MONETARY POLICY 

REPORT FOR 2016 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

ON 

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

FEBRUARY 11, 2016 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

DANA WADE, Deputy Staff Director 

JELENA MCWILLIAMS, Chief Counsel 

THOMAS HOGAN, Chief Economist 

SHELBY BEGANY, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

PHIL RUDD, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, FEBRUARY 11, 2016 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 3 

WITNESS 

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System ...... 5 

Prepared statement .......................................................................................... 47 

Responses to written questions of: 

Chairman Shelby ....................................................................................... 50 

Senator Toomey ......................................................................................... 54 

Senator Kirk .............................................................................................. 62 

Senator Heller ........................................................................................... 64 

Senator Sasse ............................................................................................ 70 

Senator Cotton ........................................................................................... 80 

Senator Rounds ......................................................................................... 83 

Senator Moran ........................................................................................... 86 

Senator Menendez ..................................................................................... 90 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to the Congress dated February 10, 2016 ..................... 96 

‘‘Reducing the IOER Rate: An Analysis of Options’’ Memo submitted by Senator Toomey .......................................................................................................... 148 

Statement of the Financial Innovation Now Coalition submitted by Senator 

Brown .................................................................................................................... 159 

(III)

(1) 

FEDERAL RESERVE’S FIRST MONETARY 

POLICY REPORT FOR 2016 

THURSDAY, FEBRUARY 11, 2016 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:01 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Richard C. Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The Committee will come to order. 

Today we will receive testimony from Federal Reserve Chair 

Janet Yellen. The semiannual Monetary Policy Report to the Congress is an important statutory tool for oversight of the Federal Reserve, which was created by Congress over 100 years ago as part 

of the Federal Reserve Act. 

The act grants the Fed a certain degree of independence, but in 

no way does it preclude congressional oversight or accountability to 

the American people. There is broad consensus that the Fed should 

communicate in a manner that helps Congress and the public understand its monetary policy decision making. 

How the Federal Open Market Committee makes its decisions remains a point of contention, however. Some argue for unfettered 

discretion, while others advocate a rule-based construct. 

Recently, a statement released by 24 distinguished economists 

and other officials, including John Taylor, George Shultz, Allan 

Meltzer, and three Nobel Prize winners, disputes the idea that adherence to a clearer, more predictable rule or strategy would reduce Fed independence. 

In fact, their statement argues, and I will quote, that ‘‘publicly 

reporting a strategy helps prevent policymakers from bending 

under pressure and sacrificing independence.’’ 

Last year, this Committee favorably reported the Financial Regulatory Improvement Act, which included a provision that would not 

establish a rule but, rather, require the Fed to disclose to Congress 

any rule it may happen to use in its decision making process. 

I believe this represents a reasonable step toward increased 

transparency and accountability. It is my hope that this year we 

will be able to reach some kind of agreement on this and other 

banking reforms. 

Never before has it been more important for Congress to consider 

ways to strengthen Fed transparency and accountability. Since the 

2 

financial crisis, the Fed has expanded its monetary policy actions 

to an extent that would have been unthinkable 10 years ago. 

As former Fed Chairman Paul Volcker described, during the crisis, the Fed took, and I will quote him, ‘‘actions that extend the 

very edge of its lawful and implied powers, transcending certain 

long-embedded principles and practices.’’ 

We are all too familiar with the successive rounds of quantitative easing that brought the Fed’s balance sheet to over $4 trillion, with 

no wind-down in sight. 

I think it begs the question: How will the Fed shrink a balance 

sheet that exceeds 20 percent of the entire U.S. economy? 

Some also worry that the Fed may have assumed economic responsibilities beyond its statutory mandates of price stability and 

full employment. To the extent that the Federal Reserve has done 

so, it should be disclosed and justified. 

While I agree that the Fed should be free to make independent 

decisions, it should not be completely shielded from explaining its 

decisions and the factors that it uses to guide them. At times, it 

seems that Federal Reserve officials resist even sensible reforms 

designed to improve economic performance, congressional oversight, or public understanding of the Federal Reserve’s actions. 

The need to preserve Fed independence is very real, but surely 

it does not justify objection to any reform. Independence and accountability should not be viewed as mutually exclusive concepts. 

In fact, accountability is even more crucial given the Federal Reserve’s role as a financial regulator. Never before has a single entity held so much power over the direction of our financial system. 

Notably, Dodd-Frank expanded the Fed’s regulatory authority 

over large sectors of the economy, including insurance companies 

and other nonbank financial institutions. Such regulatory authority 

and the rulemakings issued as a result of it raise significant questions. 

Recently, the Federal Reserve has issued a number of new regulations stemming from the Basel III bank capital rules, such as 

total loss-absorbing capital, the liquidity coverage ratio, and highquality liquid asset ratings. These rulemakings are based on the 

requirements set by the Bank for International Settlements and its 

Basel Committee on Banking Supervision. 

But instead of allowing international bodies to serve as de facto 

U.S. regulators, the Fed should appropriately vet these rules and 

answer important questions. 

For example, are those international requirements appropriately 

tailored for our domestic financial institutions? Are they even necessary given existing rules? Are they harming our economy or placing U.S. firms at a disadvantage? 

I continue to encourage the Federal Reserve to further exercise 

its regulatory discretion to tailor enhanced prudential standards 

according to the systemic risk profile of each institution, not arbitrary factors. And where it does not have the authority to do so, 

Congress should step in with legislative changes. None of the Federal Reserve’s authorities are immune from reform, and many of us 

believe that reform is long overdue. 

Madam Chairman, I look forward to your testimony today and 

your thoughts on these important issues. 

3 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

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

Chair. It is so nice to have you back here. It is good to see everyone 

back in this hearing room. This is our first gathering since October, 

and I welcome all of you back. 

I cannot help but think back to February 2009 when then-Chair 

Ben Bernanke told this Committee that our economy was suffering 

a severe contraction. President Obama had just taken the reins in 

the middle of a financial crisis that would become the worst since 

the Great Depression. American taxpayers had just rescued the 

banking and auto industries. By the time we hit bottom, 9 million 

jobs had disappeared. The unemployment rate soared to 10 percent. 

In some places that we all represent it was higher. Five million 

families lost their home to foreclosure. I mentioned to Chair Yellen 

that my wife and I live in Zip code 44105 in Cleveland, which had 

more foreclosures in the first half of 2007 than any Zip code in the 

United States. Thirteen trillion dollars in household wealth was 

wiped out. It was one of the darkest periods in our Nation’s economic history. 

Seven years later, it is clear we have come a long way since the 

financial crisis. Our economy has added 13 million jobs since 2010. 

We have had 71 consecutive months—that is almost 6 years—of job 

growth. The unemployment rate has dropped to below 5 percent, 

the lowest level since 2008. Average hourly earnings are up 0.5 

percent since December, the second strongest monthly gain since 

the crisis, up 2.5 percent in the last year. And the Fed, as we 

know, increased rates for the first time in a decade. That is the 

good news. 

But we still face severe challenges. Wages have been too flat for 

too long. Too many workers are still looking for jobs. Those that 

have one are not making as much as they should be, and some are 

benefiting from the recovery. Mostly the top 5 percent are benefiting from the recovery far more than average workers. 

International economies are slowing. American exports are challenged by the strong dollar. Oil prices are at all-time lows, though 

they have not provided the economic boost that many analysts expected. Inflation remains very low. 

The slow and steady progress of the economy has given rise to 

what I fear—and I see that in this room—what I fear is a collective 

amnesia for many on Wall Street and many in Congress, as if they 

forgot what happened in 2006, 2007, and 2008, as if they did not 

know about the human suffering in every one of our States, the lost 

wealth, the lost jobs, the foreclosed homes. 

I think that few of us, and none of us enough, spend time talking 

to people who have lost their homes and have to explain to their 

child that they are going to have to move to a new neighborhood 

in a less nice house and go to a different school, and the pain that 

caused to the millions of people who have seen their homes foreclosed on. 

They seem to have forgotten—this collective amnesia suggests 

that far too many people that sit on this side of this dais have forgotten just how devastating the crisis was for an entire generation 

4 

of working and middle-class Americans. Instead of working to 

strengthen our economy and to bolster the financial system safeguards, some Republicans want to unleash the forces that almost 

destroyed the economy in the first place. They want to go back to 

business as usual with Wall Street. 

Instead of conducting oversight hearings to push for implementation of the Wall Street Reform Act, we all remember when President Obama signed Dodd-Frank that chief financial services lobbyists in this town said, ‘‘Now it is half-time,’’ meaning they were 

going to go to work to try to stop the Fed and weaken the FDIC 

rules and do whatever they could do on behalf of Wall Street. So 

instead of conducting hearings to push for implementation of Wall 

Street reform, this Committee instead has been holding hearings 

on weakening the law for banks and nonbanks and how to make 

it impossible for regulators to finalize their rules. 

The Banking Committee has not in 13 months held a single 

hearing on strengthening consumer protections. We have not 

talked about improving credit reporting and debt collection. We 

have not examined how to curtail payday lending or make rental 

housing more accessible, affordable, and safe. 

There is a lot of work to do to ensure we do not repeat the mistakes that led to the Great Recession. I sent a letter to Chair 

Yellen this week urging the Federal Reserve to do more to reduce 

the risks posed by big banks’ involvement in the commodities business. The Fed and the FDIC need to make public determinations 

if individual firms have not provided credible living wills that demonstrate that they could go out of business without wrecking the 

financial system. This is one of the ways we determine if too big 

to fail still actually exists. 

The regulators should finish rules relating to compensation incentives on Wall Street, understanding when Americans who have 

not had a raise for years are just barely making it when they see 

this kind of compensation on Wall Street and these kinds of bonuses for executives in many cases who helped to get us into the 

bad situation we are in. 

If we have learned anything from the crisis, it is that Wall Street 

encouraged behavior that caused the crisis at a steep price to 

American homeowners and American renters. The Fed still has 

work remaining on its regulatory framework for the nonbanks that 

it supervises as well as insurance companies that own savings and 

loan holding companies, and I hope you will pay close attention, 

Madam Chair, to those business models. 

And while regulators have taken important steps to rein in risks 

in money market mutual funds and the tri-party repo market, policymakers should continue to examine these and other potential 

threats in the nonbank sector. 

To those that say that the reforms that have taken place in the 

U.S. will put us at a competitive disadvantage, this week has 

shown us that they actually benefit our financial system. It is clear 

to me that as a result of the new regulations, U.S. financial institutions are more resilient than their counterparts in other parts of 

the world. 

Chair Yellen, I look forward to your assessment of both the economy and where we are with efforts to strengthen and more staVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
5 

bilize our financial system. All of us must do the necessary work 

to promote financial stability, to protect consumers, to help prevent 

what could be the next crisis. There is far too much at stake for 

American families to do otherwise. 

Thank you. 

Chairman SHELBY. Madam Chair, your written testimony will be 

made part of the record in its entirety. You proceed as you wish. 

Welcome to the Committee again. 

STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

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

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

present the Federal Reserve’s semiannual Monetary Policy Report 

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

economic situation and outlook before turning to monetary policy. 

Since my appearance before this Committee last July, the economy has made further progress toward the Federal Reserve’s objective of maximum employment. And while inflation is expected to 

remain low in the near term, in part because of the further declines in energy prices, the Federal Open Market Committee expects that inflation will rise to its 2-percent objective over the medium term. 

In the labor market, the number of nonfarm payroll jobs rose 2.7 

million in 2015 and posted a further gain of 150,000 in January of 

this year. The cumulative increase in employment since its trough 

in early 2010 is now more than 13 million jobs. Meanwhile, the unemployment rate fell to 4.9 percent in January, 0.8 percentage 

point below its level a year ago and in line with the median of 

FOMC participants’ most recent estimates of its longer-run normal 

level. Other measures of labor market conditions have also shown 

solid improvement, with noticeable declines over the past year in 

the number of individuals who want and are available to work but 

have not actively searched recently, and in the number of people 

who are working part-time but would rather work full-time. However, these measures remain above the levels seen prior to the recession, suggesting that some slack in labor markets remains. 

Thus, while labor market conditions have improved substantially, 

there is still room for further sustainable improvement. 

The strong gains in the job market last year were accompanied 

by a continued moderate expansion in economic activity. U.S. real 

gross domestic product is estimated to have increased about 1–3⁄4

percent in 2015. Over the course of the year, subdued foreign 

growth and the appreciation of the dollar restrained net exports. In 

the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply, to an annual rate of 

just 3⁄4 of a percent; again, growth was held back by weak net exports as well as by a negative contribution from inventory investment. Although private domestic final demand appears to have 

slowed somewhat in the fourth quarter, it has continued to advance. Household spending has been supported by steady job gains 

and solid growth in real disposable income—aided in part by the 

declines in oil prices. One area of particular strength has been purchases of cars and light trucks; sales of these vehicles in 2015 

6 

reached their highest level ever. In the drilling and mining sector, 

lower oil prices have caused companies to slash jobs and sharply 

cut capital outlays, but in most other sectors, business investment 

rose over the second half of last year. And homebuilding activity 

has continued to move up, on balance, although the level of new 

construction remains well below the longer-run levels implied by 

demographic trends. 

Financial conditions in the United States have recently become 

less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove 

persistent, could weigh on the outlook for economic activity and the 

labor market, although declines in longer-term interest rates and 

oil prices provide some offset. Still, ongoing employment gains and 

faster wage growth should support the growth of real incomes and, 

therefore, consumer spending, and global economic growth should 

pick up over time, supported by highly accommodative monetary 

policies abroad. Against this backdrop, the Committee expects that 

with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and 

that labor market indicators will continue to strengthen. 

As is always the case, the economic outlook is uncertain. Foreign 

economic developments, in particular, pose risks to U.S. economic 

growth. Most notably, although recent economic indicators do not 

suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty 

about China’s exchange rate policy and the prospects for its economy. This uncertainty has led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global 

growth. These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the 

prices of oil and other commodities. In turn, low commodity prices 

could trigger financial stresses in commodity-exporting economies, 

particularly in vulnerable emerging market economies, and for 

commodity-producing firms in many countries. Should any of these 

downside risks materialize, foreign activity and demand for U.S. 

exports could weaken, and financial market conditions could tighten further. 

Of course, economic growth could also exceed our projections for 

a number of reasons, including the possibility that low oil prices 

will boost U.S. economic growth more than we expect. At present, 

the Committee is closely monitoring global economic and financial 

developments, as well as assessing their implications for the labor 

market and inflation and the balance of risks to the outlook. 

As I noted earlier, inflation continues to run below the Committee’s 2-percent objective. Overall consumer prices, as measured by 

the price index for personal consumption expenditures, increased 

just 1⁄2 percent over the 12 months of 2015. To a large extent, the 

low average pace of inflation last year can be traced to the earlier 

steep declines in oil prices and in the prices of other imported 

goods. And given the recent further declines in the prices of oil and 

other commodities, as well as the further appreciation of the dollar, 

the Committee expects inflation to remain low in the near term. 

7 

However, once oil and import prices stop falling, the downward 

pressure on domestic inflation from those sources should wane, and 

as the labor market strengthens further, inflation is expected to 

rise gradually to 2 percent over the medium term. In light of the 

current shortfall of inflation from 2 percent, the Committee is carefully monitoring actual and expected progress toward its inflation 

goal. 

Of course, inflation expectations play an important role in the inflation process, and the Committee’s confidence in the inflation outlook depends importantly on the degree to which longer-run inflation expectations remain well anchored. It is worth noting, in this 

regard, that market-based measures of inflation compensation have 

moved down to historically low levels; our analysis suggests that 

changes in risk and liquidity premiums over the past year-and-ahalf contributed significantly to these declines. Some survey measures of longer-run inflation expectations are also at the low end of 

their recent ranges; overall, however, they seem reasonably stable. 

Turning to monetary policy, the FOMC conducts policy to promote maximum employment and price stability, as required by our 

statutory mandate from Congress. Last March, the Committee stated that it would be appropriate to raise the target range for the 

Federal funds rate when it had seen further improvement in the 

labor market and was reasonably confident that inflation would 

move back to its 2-percent objective over the medium term. In December, the Committee judged that these two criteria had been satisfied and decided to raise the target range for the Federal funds 

rate 1⁄4 percentage point, to between 1⁄4 and 1⁄2 percent. This increase marked the end of a 7-year period during which the Federal 

funds rate was held near zero. The Committee did not adjust the 

target range in January. 

The decision in December to raise the Federal funds rate reflected the Committee’s assessment that, even after a modest reduction in policy accommodation, economic activity would continue 

to expand at a moderate pace and labor market indicators would 

continue to strengthen. Although inflation was running below the 

Committee’s longer-run objective, the FOMC judged that much of 

the softness in inflation was attributable to transitory factors that 

are likely to abate over time, and that diminishing slack in labor 

and product markets would help move inflation toward 2 percent. 

In addition, the Committee recognized that it takes time for monetary policy actions to affect economic conditions. If the FOMC delayed the start of policy normalization for too long, it might have 

to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting 

its objective. Such an abrupt tightening could increase the risk of 

pushing the economy into recession. 

It is important to note that even after this increase, the stance 

of monetary policy remains accommodative. The FOMC anticipates 

that economic conditions will evolve in a manner that will warrant 

only gradual increases in the Federal funds rate. In addition, the 

Committee expects that the Federal funds rate is likely to remain, 

for some time, below the levels that are expected to prevail in the 

longer run. This expectation is consistent with the view that the 

neutral nominal Federal funds rate—defined as the value of the 

8 

Federal funds rate that would be neither expansionary nor 

contractionary if the economy was operating near potential—is currently low by historical standards and is likely to rise only gradually over time. The low level of the neutral Federal funds rate may 

be partially attributable to a range of persistent economic 

headwinds—such as limited access to credit for some borrowers, 

weak growth abroad, and a significant appreciation of the dollar— 

that have weighed on aggregate demand. 

Of course, monetary policy is by no means on a preset course. 

The actual path of the Federal funds rate will depend on what incoming data tell us about the economic outlook, and we will regularly reassess what level of the Federal funds rate is consistent 

with achieving and maintaining maximum employment and 2 percent inflation. In doing so, we will take into account a wide range 

of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In particular, 

stronger growth or a more rapid increase in inflation than the 

Committee currently anticipates would suggest that the neutral 

Federal funds rate was rising more quickly than expected, making 

it appropriate to raise the Federal funds rate more quickly as well. 

But, conversely, if the economy were to disappoint, a lower path of 

the Federal funds rate would be appropriate. We are committed to 

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

Consistent with its previous communications, the Federal Reserve used interest on excess reserves, or IOER, and overnight reverse repurchase, or RRP, operations to move the Federal funds 

rate into the new target range. The adjustment to the IOER rate 

has been particularly important in raising the Federal funds rate 

and short-term interest rates more generally in an environment of 

abundant bank reserves. Meanwhile, overnight RRP operations 

complement the IOER rate by establishing a soft floor on money 

market interest rates. The IOER rate and the overnight RRP operations allowed the FOMC to control the Federal funds rate effectively without having to first shrink its balance sheet by selling a 

large part of its holdings of longer-term securities. The Committee 

judged that removing monetary policy accommodation by the traditional approach of raising short-term interest rates is preferable to 

selling longer-term assets because such sales could be difficult to 

calibrate and could generate unexpected financial market reactions. 

The Committee is continuing its policy of reinvesting proceeds 

from maturing Treasury securities and principal payments from 

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

December statement, the FOMC anticipates continuing this policy 

‘‘until normalization of the level of the Federal funds rate is well 

under way.’’ Maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and 

reduce the risk that we might need to return the Federal funds 

rate target to the effective lower bound in response to future adverse shocks. 

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

9 

Chairman SHELBY. Madam Chair, we have talked about this privately before, but does the Fed still use the Phillips rule in a lot 

of its deliberations? 

Ms. YELLEN. Well, the—— 

Chairman SHELBY. Is that an important tool? Or is it just one 

of many tools? 

Ms. YELLEN. It is essentially a theory that fits reasonably, but 

certainly not perfect, explaining the inflation process. And it is a 

theory that says first that inflation expectations play a key role in 

determining inflation; second, that various supply shocks, such as 

movements in the price of oil or commodities or import prices, also 

play an important role; and, third, that the degree of slack in the 

labor market or the degree more generally of pressure on resources 

in the economy as a whole exert an influence on inflation as well; 

and that theory underlines the kind of statement that I have made 

that, if inflation expectations remain well anchored and the transitory influence of energy prices and the dollar fade over time, that 

in a tightening labor market with higher resource utilization, I expect inflation to move back up to 2 percent. It is consistent with 

that Phillips curve theory. 

So, in essence, yes, I want to make clear that all of those elements play a role. And, of course, there can be other factors, idiosyncratic factors or other factors not captured by that model that 

make a difference. So that model in part underlies an expectation 

inflation will return to 2 percent. But in our statement in December and January, the Committee indicated that we will continue to 

assess actual developments with inflation and see whether they are 

in alignment with our expectations because, after all, this is not a 

theory that is perfect. 

Chairman SHELBY. Would you say today that the precipitous decline in the price of oil and gas plus the rise of the dollar has surprised the Fed to some extent? Or could you have predicted all of 

this? 

Ms. YELLEN. So I think we have been—markets have been and 

we have been quite surprised by movements in oil prices. I think 

in part they reflect supply influences, but demand may also play 

a role. 

The stronger dollar is partly something that we anticipated because the U.S. economy has been performing more strongly than 

many foreign economies, and we have a divergence in the stance 

of monetary policy that influences capital flows in the dollar. Nevertheless, the strength of the dollar and the extent to which it has 

moved up since mid-2014 is not something that we anticipated. 

So, yes, we have been surprised in part by those developments, 

and they have played a significant role in holding down inflation. 

Chairman SHELBY. Do you believe this economy, although it is a 

number of years old, as you would say, has peaked or is near peaking or will start declining and put us into a recession of some type? 

Or you just do not know, it is something you are watching? 

Ms. YELLEN. Well, we are watching developments very carefully. 

I would say there is always some chance of a recession in any year, 

but the evidence suggests that expansions do not die of old age. We 

are, as I mentioned in my testimony, looking very carefully at global financial market and economic developments that create risks to 

10 

the economy, and we are evaluating them, recognizing that these 

factors may well influence the balance of risks or the trajectory of 

the economy, and thereby might affect the appropriate stance of 

monetary policy. But at this point I think it is premature to make 

a judgment. We will meet in March, and our Committee will carefully deliberate about what impact these developments have had. 

Today I think it is premature to render a judgment on that. 

Chairman SHELBY. Are you saying basically the Fed will be careful, looking at every aspect of the economy and the international 

economy, before it raises the Federal funds rate? Is that what you 

are saying? 

Ms. YELLEN. Yes, certainly, we will. We will evaluate the outlook, certainly taking these developments into account, and I want 

to emphasize that, as I said, monetary policy is not on a preset 

course. We want to set the path of policy that will achieve the objectives that Congress has assigned to us, and that certainly entails 

doing what we can to make sure that the expansion continues. 

Chairman SHELBY. Could you just take a couple of minutes and 

share with us your view as to the strength of our banking system 

today if we were to—we hope we will not go into a recession, but 

we do have cycles, and we know that. What is the condition of our 

banking system? Do you feel comfortable about our banking system? Or is it work you are working every day on? 

Ms. YELLEN. I think the steps that we have taken over the last 

7 years have had very substantial payoffs in the form of a much 

more resilient and stronger, better capitalized, more liquid banking 

system. We have not only raised capital and liquidity standards, including especially ramping those up for the most systemic firms; 

we have also used stress test methodology to see whether we think 

those firms—and we do think that they can—continue to support 

the credit needs of our economy, even in this scenario of very significant stress. So I think we do have a strong banking system, and 

we have seen marked improvement. 

Chairman SHELBY. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

You said in your testimony and in your response to Chairman 

Shelby, Madam Chair, you said that in regards to monetary policy 

the Committee is by no means on a preset course, and then you 

later said if the economy were to disappoint that you would—you 

suggested it would be less likely to raise interest rates. And I want 

to make just one comment, and then I have three questions—or a 

couple questions about wages, that the dual mandate is so important, I so appreciate your emphasis always on it, on, of course, restraining inflation, but also equally importantly, and to many of 

our constituents, I think maybe even more importantly, the importance of job growth. And I also appreciate the importance to you 

of wage growth as you deliberate on these questions of raising interest rates. And while job growth has been better than some 

might have expected with 71 consecutive months, wage growth has 

not, as you know, and with some good signs recently but not 

enough. Data released earlier this month show average hourly 

earnings increased in 2015. 

My questions are these: Are other wage growth—and just three 

questions, and answer them together, if you would. Are other wage 

11 

growth indicators showing the same increases? Are wage increases 

occurring across race and gender and across economic sectors, or 

are certain groups doing better than others in that wage growth? 

And, finally, can the economy reach full employment without labor 

force participation increases for women and minorities and have 

widespread wage growth? So if you would sort of pull those together and answer, Madam Chair. 

Ms. YELLEN. So you asked about other wage indicators. As you 

indicated, average hourly earnings have picked up, but it is a series that is volatile. And while I think we see some evidence of faster wage growth there, I would still refer to that evidence as tentative. 

In compensation per hour, we also see a somewhat slightly higher pace over the last 12 months in its growth, but, again, this is 

a very volatile series. 

And in terms of the employment cost index, compensation growth 

has really not shown any sustained pickup, and that is a significant series. 

So at best, I would say the evidence of a pickup is tentative. I 

do continue to envision that if the labor market continues to improve, as we certainly hope it will, that there is scope and we will 

likely see some further pickup in wage growth. 

In terms of particular groups in the economy, I cannot give you 

recent evidence on developments by—I think you asked for race 

and gender, but—— 

Senator BROWN. And sector. 

Ms. YELLEN. So I do not have that data at my fingertips, but, we 

know that in the U.S. we have had a longstanding trend toward 

rising inequality, rising wage inequality in this country, and that 

more educated people have seen faster wage growth than those in 

the middle and at the bottom, and I believe that trend continues. 

A lot of jobs during the downturn, middle-income jobs, were lost. 

And although jobs across the occupational distribution have been 

created, job creation has perhaps been more heavily skewed toward 

sectors that have lower pay. And I think that there are deeper 

structural reasons that these trends continue. They predate the 

downturn in the economy, but the downturn probably accelerated 

those trends that perhaps relate to globalization and technological 

change that are demanding increased skill. 

Senator BROWN. Thank you, and I think you cannot—and I just 

have one comment. I think we cannot be satisfied that we have full 

employment without full employment across demographic lines, 

meaning women and minorities, especially. We do not really have 

full employment until it is full for them also, and I know that you 

recognize that. 

Let me shift—and I know we do not have a lot of time because 

there is a vote called—to a question on living wills. We have discussed that process. Last year, you said you felt that the Fed and 

FDIC have provided companies with clear feedback on the deficiencies in the submissions to you, and that you would be willing 

to make formal determinations that certain plans are not credible. 

Three questions. When do you anticipate providing feedback on 

last year’s submissions? Are you still committed to making formal 

determinations about insufficient plans? And will you differentiate 

12 

between and among firms when you provide feedback or make determinations? 

Ms. YELLEN. So, when, we are actively engaged and far along in 

evaluating these plans. The Board has met regularly since August. 

I believe we have had seven Board meetings to discuss these plans. 

We have worked closely with the FDIC. We have not made final 

determinations, so it is premature for me to give you a definite 

time, but we will make these determinations in the not too distant 

future. We are very actively engaged. 

And, yes, we are still committed, as I indicated, to finding that 

plans that do not meet the specifications we outlined, we are certainly prepared to find them deficient and to specify what those deficiencies are. 

Senator BROWN. And one more quick one. Does an aggressive, 

thorough living will process answer the question of too big to fail? 

Ms. YELLEN. It certainly helps. We have also put in place requirements for adequate—our so-called TLAC rules for adequate 

loss absorbency. We certainly are requiring that firms have workable plans for how they would be resolved under bankruptcy. And 

Dodd-Frank—so we want to make sure that there is a way that 

they could be resolvable under bankruptcy, and that the resources 

are there so that the taxpayer would not be at risk. And DoddFrank provided as a backup authority Title 2, which would be, if 

it is necessary, an additional tool that we can use. 

So I think it is premature to say we have solved too big to fail, 

but I do think we have made very substantial strides toward dealing with it, toward addressing it. 

Chairman SHELBY. Thank you. 

Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Chair Yellen, I appreciated your comments at our last Humphrey-Hawkins hearing when we discussed the $50 billion trigger 

being used to determine when a bank is systemically important 

and your openness to increasing the threshold and focusing on the 

flexibility that we need there. 

While Congress continues to make progress on this effort—and 

hopefully we will make some progress soon—you have previously 

noted that the Federal Reserve has the authority and discretion on 

its own to tailor the application of these rules as they apply to systemically important designated banks, those covered by Section 165 

of Dodd-Frank. 

My question is: Can you give us some specific examples of the 

kind of tailoring that might be in the works as the Federal Reserve 

works on this? And will there be relief on stress testing and resolution planning? 

Ms. YELLEN. So we are, for example, actively engaged in reviewing our stress test testing and capital planning framework for the 

bank holding companies above $50 billion, and we are considering 

ways in which we can make that less burdensome for the bank 

holding companies that are close to the $50 billion asset line. 

Along with that, we might make it somewhat stricter for some 

of the GCIBs. We are considering that as well, and I think that 

would be tailoring appropriately, I think—at both ends of the specVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
13 

trum. We are paying close attention to the costs and benefits of 

particular changes, how they affect those institutions. 

So we have not made final decisions, but that is certainly something on the drawing board where I hope we can make progress. 

Senator CRAPO. Do you believe we will see any of that tailoring 

announced soon or applied soon? 

Ms. YELLEN. Certainly this year, but I think if we were to make 

changes, they would not take effect until the 2017 cycle of stress 

testing. 

Senator CRAPO. Thank you. And shifting topics, because of the liquidity issues that occurred on October 15, 2014, in the Treasury 

market, there has been a lot of effort by the Federal Reserve and 

others to better understand the factors that impact the liquidity of 

the Treasury market, especially during stressed market conditions. 

The concern that I heard is that several factors, including new 

regulations, may have reduced market-making capacity in the market, and that during stressed market conditions, liquidity may be 

more prone to disappearing at times when it is most needed, as it 

seemed to do on October 15th. 

Are you concerned that liquidity in the bond markets may be less 

available in stressed market conditions and that we need to better 

understand and analyze all the factors, including the impact of regulations on this? 

Ms. YELLEN. Senator, yes, I agree with what you said. You know, 

normal metrics, the ones we typically monitor on liquidity conditions in these markets, have not changed that much, but the perception and, of course, some experiences, as you cited, suggest that 

under stressed conditions liquidity may disappear when it is most 

needed. So we are looking very carefully at that and at all of the 

factors that may be involved. Regulation is on the list, but there 

are other things as well. The prevalence of high-frequency trading 

has increased. Broker-dealers have reconsidered in the aftermath 

of the crisis the appropriate models they want to use to run their 

businesses. There have been changes in disclosure that affect corporate bond markets, and we want to recently to disentangle the 

impact of all of those different influences. 

Senator CRAPO. Well, thank you. And one last question. There 

have been several hearings on the Financial Stability Oversight 

Council that focused on ways to improve transparency, accountability, and communications. In the April Subcommittee hearing 

that Senator Warner and I held, the witnesses agreed that the Financial Stability Oversight Council needed to provide actionable 

guidance to designated systemically important financial institutions on how they could de-risk and ultimately shed their designation label. 

What has been done—this has been referred to as an ‘‘off ramp.’’ 

Do you agree that further progress in this area is appropriate? And 

wouldn’t our financial system be safer if companies knew what 

they could do to address the risks and had an incentive to become 

less systemically risky? 

Ms. YELLEN. So I would certainly agree with you, it would be 

good if they became less systemically risky, and designation is not 

intended to be permanent. The FSOC reviews these designations 

every year, and it is, of course, important for firms to understand 

14 

the kinds of steps that they could take to shed their designation 

and to become less risky. 

But I think the FSOC needs to be very careful not to micromanage these firms and to try to tell them exactly what their business models ought to be. Those firms know exactly why they were 

designated. They have received detailed letters and analysis explaining what the factors were about their businesses that would 

give rise to systemic risk in the event of their failure. So they do 

understand why they have been designated and the things that 

they would need to address. 

So designation is not intended to be permanent. We do have regular reviews, and I think those firms do have an understanding of 

the kinds of things they would need to be prepared to do. So I just 

do not think it is appropriate for the FSOC to say, ‘‘We want you 

to do the following business plans.’’ There are a lot of different 

ways in which a firm might decide to address those issues. 

Senator CRAPO. Thank you. My time has expired. I would like to 

discuss this with you further. Thank you. 

Ms. YELLEN. Certainly. 

Senator CORKER. [Presiding.] Senator Tester. 

Senator TESTER. Thank you, Senator Corker. 

Thank you, Chairman Yellen, for being here today. I want to follow up with Senator Crapo’s questions a little bit because there is 

some new information that you just gave that I was not aware of, 

and that is that—and correct me if I am wrong—you just said that 

the companies understand why they are designated as a SIFI and, 

therefore, they understand what they have to do to get undesignated. Is that what you just said? Because that is new information 

for me. 

Ms. YELLEN. Well, in the sense that they have been given very 

detailed explanations of what aspects of their business give rise to 

the systemic risks that have caused them to be designated. 

Senator TESTER. And so is that information given as the process 

goes on or after the process of designation is done? 

Ms. YELLEN. Well, there is a three-stage process. 

Senator TESTER. Yeah. 

Ms. YELLEN. And there is a great deal of interaction with FSOC 

during that process. 

Senator TESTER. OK. 

Ms. YELLEN. So I believe before they are designated, there is a 

sufficient amount of interaction that they well understand the aspects—— 

Senator TESTER. Why they are being designated? 

Ms. YELLEN. ——that are leading them to be designated, and 

then they are given a very detailed—— 

Senator TESTER. Would they have the opportunity as that process goes on to make changes so they would change the direction the 

FSOC is going? If that information is—what I am getting at is if 

that information is being given out early enough so the company 

can say, well, we are going to make some changes—not changes 

that the FSOC demands of them to make, but they have chosen to 

make some changes to stop the designation, do you believe they 

have time to do that before the designation is made? 

15 

Ms. YELLEN. So they certainly have lots of opportunities to interact with FSOC and to explain—— 

Senator TESTER. OK. 

Ms. YELLEN. ——their business model and the direction it is 

going. 

Senator TESTER. I think that is good. Thank you, Chairman. 

I want to talk a little bit about the housing sector just very, very 

briefly. Could you give us your perspective on what the Fed is seeing in the housing sector right now and what a hiccup in that sector would mean for the American taxpayer? 

Ms. YELLEN. So we are seeing a recovery, I would say, in housing. It has gone on now for a number of years, but it is very, very 

gradual. 

Senator TESTER. Yeah. 

Ms. YELLEN. House prices are recovering. They have increased 

quite a bit, and I think that is helping the financial situation of 

many households. 

Senator TESTER. Yeah. 

Ms. YELLEN. The level of new construction of residential investment remains quite low relative to underlying demographic trends. 

So it seems to me there is quite a significant way for housing to 

go before we could say it is at levels consistent with demographic 

trends. So I think it will continue to improve. 

Senator TESTER. OK. 

Ms. YELLEN. And it is a support to the economy. 

Senator TESTER. All right. And a hiccup in the housing industry, 

what would that mean for the taxpayer right now? 

Ms. YELLEN. For the taxpayer. 

Senator TESTER. The American taxpayer, what would a housing 

slowdown or perhaps not a collapse but a decrease in their growth 

mean to the American taxpayer vis-a-vis Fannie Mae and Freddie 

Mac? 

Ms. YELLEN. Oh, vis-a-vis Fannie Mae and Freddie Mac? 

Senator TESTER. Yeah. 

Ms. YELLEN. So I am not—— 

Senator TESTER. OK. 

Ms. YELLEN. I do not have—— 

Senator TESTER. We are probably going down a line that we—— 

Ms. YELLEN. I am sorry. I do not have numbers on—— 

Senator TESTER. Tell me, can you give me a sense of what the 

Fed is doing to ensure that we are protecting consumers while at 

the same time differentiating between community banks and the 

big banks—— 

Ms. YELLEN. Well, when you say that we are protecting consumers—— 

Senator TESTER. Yes, while at the same time differentiating the 

regulations that impact the small banks versus the big guys. 

Ms. YELLEN. So consumer protection is a very important part of 

our supervision, and the CFPB examines the larger banks in terms 

of their consumer compliance, and our responsibility is now with 

the smaller banks in community banks where we have consumer 

protection enforcement. 

16 

We try to tailor our examinations, our consumer exams of the 

community banks so that they are not too burdensome and they 

are focused on real risks. 

Senator TESTER. Do you feel you have been successful in that tailoring from a community bank standpoint? 

Ms. YELLEN. We are very focused on regulatory burden on community banks, and we are trying to do both in the safety and 

soundness side and on the consumer compliance side everything 

that we can to reduce burden while still making sure that banks 

abide by consumer protection. 

Senator TESTER. OK. If I might, Mr. Chair, just very quickly, we 

are seeing consolidation in banks in Montana pretty rapid. Is that 

true throughout the country? And are you concerned about that? 

Ms. YELLEN. Well, there has been consolidation. We are concerned about the burdens on community banks and trying to relieve that. In a low-interest-rate environment, net interest margins 

are also squeezed for many of these banks, and that is a factor also 

here. 

Senator TESTER. Thank, Mr. Chairman. Thank you, Janet. 

Senator CORKER. Thank you. 

Madam Chairman, thank you for being here. I know when we 

went through our confirmation hearings, I noted that you were the 

first avowed dove to head the Fed, and yet you honored the statements you made, which were at the time that if the data showed 

that you needed to raise interest rates, you were going to do so, 

and you just did that recently. And I noticed during this hearing 

you were talking about 2 percent inflation and full employment. I 

think the question by many is: Are there any other rules at the Fed 

other than 2 percent inflation and full employment as you look at 

data that guide where you are going? I would like not a particularly long answer to that. 

Ms. YELLEN. Well, those are—— 

Senator CORKER. I think there has been—as you know, there 

have been criticisms about whether there really is a rule-based system that people understand so that it is not like the Fed is the 

Wizard of Oz and no one really knows what is going to happen. 

And, you know, markets have fallen 500 points, which is unusual, 

in the last couple days after testimony, which I thought was good 

yesterday. But is there some other rule-based system that those of 

us who care about these kind of things could count on relative to 

what the Fed’s actions are? 

Ms. YELLEN. So, Senator, if I might, I would like to distinguish 

between a systematic approach to monetary policy, which I believe 

we have put in place, and a system that we use that is in line with 

what other advanced central banks do and a mechanical, mathematical rule-based approach, which I do not support and no central 

bank that I am aware of follows. 

We have articulated in a clear statement what our objectives are: 

2 percent inflation and our interpretation of maximum employment. Every 3 months, all members, all participants in the FOMC 

set out their explicit projections for key variables and also the monetary policy path that they regard as appropriate to achieve those 

variables, and we publish these projections. 

17 

Now, it is not a single Committee-endorsed view, but it does 

show the range of forecasts and assessments of what appropriate 

policy would be in line with those forecasts, and we update those 

projections every 3 months in line with incoming data. And I would 

regard that as quite a bit of information and a systematic approach. We are telling the public what the range of opinion is about 

appropriate policy and the associated path for the economy. And, 

of course, there is uncertainty. So policy is not on—— 

Senator CORKER. I got it. 

Ms. YELLEN. ——a preset path. We update those projections, but 

we are showing what we think in a systematic way. 

Senator CORKER. I would think—we had a nice conversation the 

other day at length, and I think that one of the things the Fed 

could do—you asked me questions along those lines—would be to 

maybe come in here in an off-the-record meeting and lay that out, 

and then contrast that with a rule-based system. I think that 

would be very helpful to the Fed and I think very helpful to the 

Committee Members here. 

Let me ask you this: Just briefly on the $4.5 trillion balance 

sheet that the Fed now has, as we look at where we are today, has 

there been any thought, looking in the rearview mirror, that it 

might have been good to unload some of that earlier so there was 

additional ammunition should that be needed in the future? 

Ms. YELLEN. Well, so I think the thinking about additional ammunition is that the best ammunition we have and the single most 

reliable and predictable tool for affecting the stance of monetary 

policy is variations in short-term interest rates. So as the economy 

has now gotten to a point where we are slowly reducing accommodation, we have a choice between selling off assets or raising shortterm interest rates. 

Senator CORKER. I am talking about as the economy goes the 

other direction, and I guess the question then is—so you have got 

a pretty loaded up balance sheet, and I think people are beginning 

to observe that the Fed is probably out of ammunition, unless you 

decided to go to negative rates. And if you could, briefly—I am not 

proposing this. I am just observing what is happening around the 

world and what is happening here in our own country. I think people are waking up and realizing that the Fed really has no real ammunition left. You alluded to this some yesterday, but—and I have 

one more question, so I do not want this to be too long. But are 

you considering if things go south, which none of us hope do, are 

you considering negative rates? I know you had that question yesterday. Yes or no? 

Ms. YELLEN. So the answer is that we had previously considered 

them and decided that they would not work well to foster accommodation back in 2010. In light of the experience of European countries and others that have gone to negative rates, we are taking a 

look at them again because we would want to be prepared in the 

event that we needed to add accommodation. We have not finished 

that evaluation. We need to consider the U.S. institutional context 

and whether they would work well here. It is not automatic. 

Senator CORKER. Yeah. 

Ms. YELLEN. There are a number of things to consider. We have 

not—— 

18 

Senator CORKER. I got it. 

Ms. YELLEN. So I would not take those off the table, but we 

would have work to do to judge whether they would be workable 

here. And I would say we have—— 

Senator CORKER. I would have thought that where we would be 

is that we were out of ammunition. And it would be good for the 

markets to understand that we are out of ammunition, and now it 

is up to other factors. But now, as I hear it, potentially negative 

rates are something that could affect things over time. 

If I could just go down one more path, productivity. You have 

talked about that as the greatest driver for wage increases. And I 

appreciated some of Senator Brown’s opening comments, and I 

want to say that, you know, the concern that we all have is the 

most vulnerable in our society are the ones that are hurt most 

when we have downturns and the slowest to regain, and there is 

no question there is a wealth gap in our country. The question is: 

What do we do about it? 

You have mentioned the most important factor determining productivity in advances in living—advances in living standards is 

productivity growth, defined as the rate of increase on how much 

a worker can produce in an hour of work. Over time, sustained increases in productivity are necessary to support rising household 

incomes. And then later on, we do know that productivity ultimately depends upon many factors, including our workforce knowledge and skills. By the way, does monetary policy affect knowledge 

or skills? The answer is no. 

Does the quality of capital equipment—monetary policy does not 

affect that. Is that correct? 

Ms. YELLEN. Well, the only qualification I would make is that 

during a long, deep downturn like we had, capital investment, in 

part because it was not needed, was very slow. And that leaves a 

legacy that has a negative impact. And when people are out of 

work for a long period of time, their skills can erode to the point 

where it becomes difficult for them—— 

Senator CORKER. I am trying to help you here. The teacher has 

now showed up, and he is going to reprimand me for going over. 

So is there anything about monetary policy that—— 

Chairman SHELBY. Senator Corker knows that would not be in 

order. 

Senator CORKER. Does monetary policy affect infrastructure investment? 

Ms. YELLEN. No. 

Senator CORKER. OK. So the point is productivity is sort of on 

this side of the dais. Is that correct? 

Ms. YELLEN. Yes. 

Senator CORKER. And when people try to look at the Fed through 

monetary policy to increase productivity, it is a ridiculous notion, 

is it not? 

Ms. YELLEN. Fundamentally, it is not something we control. 

Senator CORKER. And that is our job, and we are not doing our 

job. 

Let me just ask one last question, and the Chairman has been 

very nice. He came in today in a very good mood. 

[Laughter.] 

19 

Senator CORKER. Last year, in a budget meeting, the head of— 

Doug Elmendorf came in and said that because Federal borrowing 

reduces total saving in the economy over time, the Nation’s capital 

stock would ultimately be smaller than it would be if debt was 

smaller, and productivity and total wages would be lower. So as we 

accumulate debt, we are actually hurting many of the people in 

this room that came today because they care about this, because 

we are really hurting productivity. Is that a true statement? 

Ms. YELLEN. Well, over long periods of time, yes, I would agree 

with that. 

Senator CORKER. Thank, Madam Chairman. 

Thank you, Chairman. 

Chairman SHELBY. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Madam Chairman, let me talk about the challenges of families 

who still, notwithstanding the numbers, do not see their incomes 

rising. I know that in some respects the numbers are indisputable. 

The unemployment rate is at 4.9 percent, the lowest since we have 

seen since February 2008, less than half of what it was at the peak 

in October 2010, 14 million jobs over 71 straight months. But those 

numbers in my mind do not tell the whole story. Long-term unemployment persists with people unemployed for 27 weeks or longer, 

compromising more than a quarter of all of the total number of jobless individuals. Hardworking families throughout the country 

have been waiting too long for income increases to materialize. And 

those the economy has partially healed and hopefully will continue 

to heal, to me there is a clear indicator of how much harm was inflicted by the financial crisis. 

Many employers due to market conditions are paying low wages 

and offering limited benefits to their employees with little concern 

that these employees will leave because of the slack in the job market. Employers have a sea of prospects every time an employee 

jumps ship. 

So talk to me about what needs to be done at the Fed and elsewhere to address long-term unemployment and to foster policies 

that transform economic growth into growth for hardworking families. 

Ms. YELLEN. Well, I think what we are trying to do to contribute 

to the solution of that problem is to keep the economy growing at 

a steady pace, to keep the labor market improving in the hope and 

expectation that a stronger labor market will improve the status of 

all groups in the labor market and begin to bring down long-term 

unemployment, involuntary part-time employment, and we have 

seen that. 

So unemployment rates have come down for almost all demographic groups. As high as it is, the incidence of long-term unemployment has declined. Involuntary part-time unemployment has 

also declined as the economy has improved. But these are longstanding adverse trends, including structural factors like 

globalization, the very slow growth in middle-income jobs, technological trends that have favored higher-skilled workers. I mean, I 

think for Congress there are any number of things that you might 

consider and might do that would be helpful in addressing these 

trends. Some of them, many of them would be related to training, 

20 

education, increasing opportunity to make sure that those skills 

can be more readily acquired. 

Senator MENENDEZ. Let me ask you, just before I turn to another 

subject, how can the Fed better account for full employment and, 

thus, enhanced efficiency and production in its analysis and planning? 

Ms. YELLEN. Well, from my point of view, and I think from the 

point of view of the FOMC, more jobs are always good, employment 

is good. And when we think about maximum employment, we are 

really considering is there a point at which pursuing that goal 

would lead to higher inflation and inflation above our 2-percent objective. 

So we try to estimate, and, in fact, all participants in the FOMC 

every 3 months write down their estimate of the unemployment 

rate in the economy that would be sustainable and consistent with 

our inflation objective. At the moment the median of those estimates is 4.9 percent, but most of us recognize that there are additional forms of slack that we would certainly like to see diminished. 

Senator MENENDEZ. Well, as a corollary, and a final point I 

would like to hear from you on, context matters. When I sit on the 

Senate Foreign Relations Committee and I see what is happening 

with China and other places in the world, context matters. And 

here in the United States and in Europe and Asia, we have seen 

the combination of fiscal austerity and tight monetary policy can be 

toxic for an economy that is recovering. And so I know that there 

is this sense among—I think there is a sense among Fed policymakers that they are eager to reach the point in the economy 

where we can ‘‘normalize’’ monetary policy by raising rates. But 

can you describe the risks to the economy—and this is always a 

calibration, I understand—of tightening too soon? And do you take 

this global context into consideration when you are looking at that? 

Ms. YELLEN. We absolutely take the global context into consideration, and normalization is not something we want to pursue and 

accomplish for its own sake. We only want to move to more normal 

levels of interest rates if it is consistent with achieving our objectives of 2 percent inflation and maximum employment. We want to 

and intend to put in place the monetary policy that is consistent 

with achieving those objectives. 

In an economy that has been recovering, the Committee felt that 

it could be on a path and would likely be on a path where shortterm rates would gradually rise over time consistent with that objective. But I want to emphasize that monetary policy is not on 

some preset course. Monetary policy will be set and calibrated to 

do the best we can to achieve our congressionally mandated objectives. 

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

Chairman SHELBY. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. And, Madam Chairman, thanks for joining us again. 

I want to follow up on the line of discussion that Senator Corker 

was discussing, and, Madam Chairman, we have had this conversation before. You may recall I have been advocating that the Fed 

normalize interest rates for a long time now. One of my deep concerns is that central banks around the world, very much including 

21 

our own, seem to be trying to compensate for an inability of the political class around the world to address what is really holding back 

economic growth, which are fiscally unsustainable budgets, in our 

case and I would argue in much of the rest of the world, an avalanche of new regulations that is holding back economic growth, 

high marginal tax rates that discourage savings, work, investment. 

And the fact is central banks’ monetary policy cannot make up for 

those problems. 

In fact, you could argue in some cases they can make it worse. 

Now we see the markets as of this morning appear to be pricing 

in an expectation that there will be no further increases in the interest rates that the central bank controls. They may be right, they 

may be wrong, but that is the expectation now. And there is this 

discussion, since the rest of the world is pursuing ever further this 

new chapter in radical monetary policy, we have this discussion 

about negative interest rates. And I appreciate the fact that you in 

your discussion with Senator Corker pointed out that there might 

be some serious concerns. 

I find it very, very disturbing to even seriously consider moving 

in that direction, and I hope we could talk about some of the potential risks of negative interest rates, because I think there is a qualitative difference, and I would like to get your thought on this between, say, a 25-basis-point movement in Fed-controlled rates, a 

movement that takes you from a low-positive rate to another lowpositive rate, versus one that crosses the threshold into the negative. 

Above and beyond the psychological effect—I think most of us 

have grown up our entire life with the expectation that there is an 

absolute floor to interest rates. That would be shattered, and that 

might have unanticipated consequences. But there are practical 

consequences, too, and I am hoping you could comment on some. 

For instance, it would seem that it would crush net interest margins for banks and perhaps dramatically diminish their ability to 

provide capital. I do not know how a money market business survives at all if there is a sustained period of negative interest rates. 

I could see an adverse effect on business investments. Investors 

would be pressured to move further out the risk curve, even further 

than they have already been pressured. It would put the U.S. deep 

in the midst of a global currency war, which is won by he who debases his currency the most. 

And I would suggest that the results where it has been tried 

have not gone so well. Sweden has had negative interest rates 

since 2009. They have got a massive property bubble. The eurozone 

area generally has had negative interest rates since June of 2014. 

GDP growth has been very, very weak. Japan recently instituted 

negative interest rates, and as you saw, among other problems, 

they recently had a completely failed auction. They had to give up 

on auctioning off JGBs, so I guess we just monetize the debt. 

It seems to me there are a lot of potential problems, and I wonder if you could, first, confirm that, for a layman, when we talk 

about negative interest rates, if that is imposed on savers, we are 

talking about savers having to pay a bank in order to take their 

money on deposit. Isn’t that equivalent to a tax on savings? And 

could you just comment on some of these other problems? 

22 

Ms. YELLEN. So in the European countries that have taken rates 

to negative territory, while I will say I was surprised that it was 

possible to move rates as negative as some countries have done, I 

think we have not in those countries seen actual fees levied on depositors. I may be wrong about—there may be some experiences 

there that I am not aware of, but I do not think there has been 

broad-based passthrough of negative rates to at least small depositors. But—— 

Senator TOOMEY. And if banks resist that, then that just means 

their margins are crushed. 

Ms. YELLEN. Their margins have been squeezed. A low interest 

rate environment generally tends to push down net Internet margins. 

Now, they adopted it because they were concerned about inflation running very much below their objectives and wanted to stimulate the economy in order to achieve those objectives, so there 

were reasons that they adopted it. In our own context, when we 

considered this in 2010, we were concerned about potential impacts 

on money market functioning and did not really think it was be 

possible to bring them to very negative levels. And before we were 

to take a step like that, we would have to think through all of the 

institutional details and how they would work in the U.S. context. 

I think as a matter of due diligence and preparedness, these are 

things we need to work through, but we do not even know if payments and clearing and settlement systems in our context would be 

able to easily handle negative rates. So we have not studied that. 

Senator TOOMEY. And just a very quick follow-up, Mr. Chairman, 

and I will be finished, but isn’t it also true that there is an internal 

memo at the Fed from, I think it was, August of 2010 that raises 

doubts about whether the Fed has the legal authority to impose 

negative interest rates? 

Ms. YELLEN. No. So there is a memo from 2010, and what it really said is that the legal issues have not been studied. It was silent 

on the legality. It was a memo that discussed market functioning 

and economic issues connected with it, and the legal issues had not 

been vetted. 

I am not aware of any legal restriction that would mean that we 

could not establish negative rates, but I will say that we have not 

looked carefully at the legal side of this. 

Senator TOOMEY. I would like to submit that memo to the record, 

Mr. Chairman, and just quote very briefly from—— 

Chairman SHELBY. Without objection, it will be made part of the 

record. 

Senator TOOMEY. Thank you, Mr. Chairman. Among other 

things, the memo does say, and I quote, ‘‘There are several potentially substantial legal and practical constraints.’’ In another part 

of the letter it says, and I quote, ‘‘It is not at all clear that the Federal Reserve Act permits negative IOER rates.’’ 

So, obviously, there was a question in somebody’s mind. 

Ms. YELLEN. Right. It had not been seriously studied, and at this 

point I am not aware of a legal constraint. But, again, we have not 

run that through a careful legal analysis. 

Senator TOOMEY. Thank you very much. 

Chairman SHELBY. Thank you. 

23 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

Chairwoman Yellen, it is great to see you, and thank you for 

your service. As we kind of go back and forth about effects of monetary policy or not—and I share some of Senator Toomey’s concerns 

about negative interest rates—I would, a little tongue in cheek, 

make mention of one of your comments in reply earlier to Senator 

Menendez, which I think would actually have 100 percent approval 

on this panel, where you said more jobs are good for the economy. 

How we get those more jobs is some question, and we can debate 

monetary policy or not. But one of the things—and we were talking 

about productivity, and, again, I share your views on productivity. 

Productivity gains often are driven by knowledge and skills, and I 

think one of the things that we have talked about before, but unfortunately this Congress has not fully addressed, is the rising 

challenge around student debt, now at $1.3 trillion and rising, 

greater than credit card debt, and the ripple effect that has across 

our whole economy, not just to those individual students or recent 

graduates and their families, but I would like you to comment upon 

that kind of wage box you are caught in with rents, student debts, 

not enough rising wages, and the effect that has both on startups, 

as someone—we all know 80 percent of our net new jobs have been 

created by startups over the last 30 years. Startup entrepreneur 

numbers are down, a lot of that, I believe, due to student debt. 

First-time home buyers are down, often times due to student debt. 

I know you and other regulatory entities have looked at this, but 

I would like you to comment on the effect if we continue to have 

this number grow and do not take a more comprehensive approach 

to student debt, what kind of drag that will be on the economy, because, again, echoing your comments that more jobs are better for 

the economy, driving down that student debt I believe would lead 

to further growth in the housing market and further growth in entrepreneurial activities. 

Ms. YELLEN. So, on the one hand, taking on that student debt, 

to the extent it is successful in building skills that put people in 

higher-wage jobs and qualify them for better work is really critical 

to their getting ahead. 

You know, on the other hand, there is a lot to worry about with 

student debt, with people attending colleges or gaining education 

where they do not finish, the reward is not there, to me a major 

concern is that people may not be well-informed about what the 

benefits are of what they are taking on. And if an individual finds 

themselves in difficult financial straits for any reason, that debt, 

because it is not dischargeable in bankruptcy, can be a very severe 

burden that really holds people back. 

In terms of studies, there has been, it would appear, a decline 

in new business formation. I have not seen anything myself, but I 

might not be aware of studies that link it to student debt. I have 

not seen that. It is certainly possible, but I am not aware of that. 

With respect to housing, some economists at the Fed have tried 

to look at that, and others have, and I think the results are mixed. 

It is not clear that student debt is a major factor responsible for 

inability to buy homes or get ahead in the housing market, alVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
24 

though I understand it is quite logical that a heavy student debt 

burden would make it difficult—— 

Senator WARNER. I would simply note that home builders across 

all sectors are indicating particularly the weakest part of the housing market is first-time home buyers, oftentimes people who, because they are otherwise burdened with student debt, do not make 

those investments. 

And I think I would just urge my colleagues there are comprehensive approaches that Senator Warren and others have suggested in terms of total refinancing. But there are other steps that 

can be taken, whether it is better transparency—we all know higher education next to buying a house may be your most expensive 

item you purchase. Better transparency about outcomes, that 

would force higher education to come clean a little more. Clearly, 

the problem of not finishing is a huge issue. But we do not have 

very much transparency in higher education. On top of that, income-based repayment, the Administration has made some movements there. I think there are more. I mean, there is low-hanging 

fruit. 

Ms. YELLEN. Yes. 

Senator WARNER. Businesses already can provide ongoing education to employees on a pre-tax basis. I scratch my head, and I 

have got bipartisan legislation that would say if you can go ahead 

and continue your education on a pre-tax basis, why shouldn’t an 

employer be able, in concert with an employee, to use pre-tax dollars to pay down student debt on both sides of the balance sheet? 

Good for retention, good obviously for the employees as well. 

I will not go ahead and take the additional 3 or 4 minutes that 

most of my colleagues have had beyond the timeline in respect to 

my other colleagues, but I would like to submit for the record a 

couple of questions about what happens as we draw down this capital surplus account, and obviously the Fed has kicked in about 

$517 billion over the last 6 years. As you wind down that portfolio, 

we could see, obviously, those dollars go down. And I know that 

you share some of the concerns. As we unwind that $4 trillion balance sheet, how much cushion does the central banking system 

need, particularly when Congress most recently has raided part of 

that cushion, and I would take that for the record. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. 

Senator Cotton. 

Senator COTTON. Thank you. Since Senator Warner graciously 

yielded back his extra 3 or 4 minutes, I will just add that to my 

extra 3 or 4 minutes to get 8 or 9 extra minutes maybe. 

[Laughter.] 

Chairman SHELBY. Chair Yellen is not up here every day. 

Senator COTTON. I will try to be brief. Madam Chair, welcome 

back. Throughout much of history, the Federal Reserve has raised 

interest rates when economic growth is strong and accompanying 

inflation is growing—hence, the cliche that the Federal Reserve 

takes the punch bowl away right as the party is getting going. 

In December, we were in the middle of a quarter with seventenths of a percent economic growth and inflation was below the 

25 

stated target. The Open Market Committee raised interest rates. 

Could you explain why this historical anomaly occurred? 

Ms. YELLEN. Well, our focus is on the labor market and the path 

that it is on and the fact that economic growth has been very slow 

and this has been true for quite some time and yet the labor market has made more or less continuous improvements is a reflection 

of slow pace of productivity growth, I would say. So we saw a labor 

market where jobs were being created at a pace of around 225,000 

or so a month. The unemployment rate had fell to very close to levels we would regard as sustainable in the longer run, although in 

my view there remains slack. There did and still remains some 

slack in the labor market. 

Monetary policy was highly accommodative. The funds rate had 

been at zero for 7 years, and we had a large balance sheet, so we 

were not talking about moving to a restrictive stance of policies 

simply diminishing accommodation by a modest amount. And while 

inflation was running below our 2-percent objective, the Committee 

judged that transitory factors, particularly energy prices and the 

appreciation of the dollar, were placing significant downward pressure, that that would ebb over time, and as the labor market continued to improve, that inflation would move back up to 2 percent. 

And we want to make sure, given the lags in monetary policy, that 

we do not wait so long to begin the process of modest adjustments 

in the Fed funds rate that we end up significantly overshooting 

both of our objectives and allowing inflation to rise to the point 

where we would have to tighten policy in a more precipitate manner, which could potentially place ongoing sustainable economic 

growth and improvement in the labor market in jeopardy. 

So we wanted to be able to move in a very gradual way and to 

make sure that the economy remained on a sustainable course of 

improvement. 

Senator COTTON. Thank you. You used a term there, ‘‘transitory 

factors,’’ that you also cite on page 5 of your testimony where you 

say the Committee ‘‘judged that much of the softness in inflation 

was attributable to transitory factors that are likely to abate over 

time,’’ without specifying in the written testimony, you just cited 

energy prices and appreciation of the dollar. Are there any other 

transitory factors that you—— 

Ms. YELLEN. Those are the main ones, and, you know, of course, 

energy prices have continued to move down. 

Senator COTTON. So now 2 months on, do you still expect that 

energy prices and the appreciation of the dollar will halt or even 

turn around on their current trajectory? 

Ms. YELLEN. So, you know, energy prices have continued to move 

down. I feel eventually they will stop moving down and stabilize. 

Exactly when that will be, when that happens, when that eventually happens and the dollar stabilizes, inflation will begin to move 

up, it is hard to predict exactly when that will be, and there can 

be and have been surprises. 

Senator COTTON. Thank you. 

I want to turn briefly to wages. Several Members of this Committee have expressed their concern about stagnant wages, especially for working-class men and women in this country. I share 

26 

that concern, as do apparently many people in the audience, judging by their T-shirts. 

One point we have not touched upon is immigration, and here I 

do not mean illegal immigration but legal immigration. We are now 

at record-high levels of foreign-born residents in this country. 

Something like one-seventh of all American residents were born in 

a foreign country. Do you think that that level of mass legal immigration has put downward pressure on the wages of working men 

and women in this country, native-born Americans? 

Ms. YELLEN. I am not aware of evidence that suggests it has, but 

I would need to look into it. I am not aware of evidence on that. 

Senator COTTON. OK. Thank you. 

Chairman SHELBY. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. And it is good to 

see you again here, Chair Yellen. And it is also good to see people 

here from across the country, people who are fed up. 

I know that as Chair you have done a lot of outreach, but seeing 

people here who have come in from a lot of different places is a 

strong reminder that every Fed decision affects every person in this 

country. And the Fed has plenty of opportunities to hear from giant 

banks. It is good to hear from real people and get that reminder, 

so thank you. 

Now, I want to go back to another question here. As you know, 

Dodd-Frank requires giant financial institutions to submit living 

wills. These are the documents that describe how these banks could 

be liquidated in a rapid and orderly fashion in bankruptcy without 

either bringing down the economy or needing a taxpayer bailout. 

If the Fed and the FDIC find that those living wills are not credible, the agencies can take steps to reduce the risks poses by these 

banks by imposing higher capital standards, by lowering leverage 

ratios, or by breaking up the banks by forcing them to sell off assets. 

A year-and-a-half ago, in August of 2014, the Fed and the FDIC 

identified several problems with the living wills submitted by 11 of 

the biggest banks in this country. The FDIC found that all 11 of 

those wills were not credible, while the Fed agreed about the problems but then refused to make any determination about whether 

the wills met the legal standard about credibility. In other words, 

the Fed did not say they were credible, but the Fed did not say 

they were not credible either. 

Now, that mattered a lot because it is only a joint determination 

by the agencies that has any legal force. The Fed’s refusal to call 

the plans ‘‘not credible’’ meant the agencies could not use statutory 

tools to push these risky banks in the right direction. So I want to 

start by looking back at that decision by the Fed. 

The FDIC stands behind insured deposits, so its main mission is 

to stop bank failures before they happen so taxpayers will not be 

on the hook for some kind of bank failure. Of all the regulators, the 

FDIC has the most expertise in liquidating failed banks. So if the 

FDIC found that the banks’ liquidation plans were not credible and 

the Fed agreed with the FDIC on the basic problems with each of 

these plans, why did the Fed refuse to join the FDIC and designate 

these plans as not credible? 

27 

Ms. YELLEN. Well, looking back to the decision we made last 

year, we had set out in the guidance pertaining to these living wills 

that we expected to go through a few rounds of submissions to clarify. It is a completely new process, and we felt the banks needed 

to understand what expectations were in terms of what we wanted 

to see, and we felt that we had not given sufficiently clear guidance 

to make the decision at that time. 

We worked very closely with the FDIC. As you noted, we have 

given detailed guidance to these firms about what we want to see 

in this round of living wills. We are spending a great deal of time, 

we have had seven full Board meetings so far since August to discuss and work through these living wills. We are working closely 

with the FDIC in evaluating them, and we did make clear and it 

continues to be the case that if a living will does not satisfactorily 

address the shortcomings that we identified last year, that we are 

prepared to make findings that a living will is deficient. 

Senator WARREN. OK. So let me go then to where you are going 

here. The FDIC already thought that the facts established that the 

plans were not credible for 11 of the largest financial institutions. 

In August of 2014, the Fed and the FDIC required those 11 firms 

to resubmit living wills that addressed the problems they had identified, and the firms resubmitted their plans last July. And as you 

say, it is my understanding that you are just about finished reviewing those plans. So once again I want to underline only joint determinations by both the FDIC and the Fed will carry the force of law. 

So can you say today that you will work with the FDIC to ensure 

that the agencies issue joint determinations of credibility on each 

of the 11 living wills that were resubmitted? 

Ms. YELLEN. We are working very closely with them to evaluate 

these living wills, and—— 

Senator WARREN. Well, I assume you did that last time, that you 

worked closely with them. I think that is what you said in your testimony. 

Ms. YELLEN. We did, and we wrote joint letters to these firms, 

and we will certainly try to do that again to identify shortcomings 

that the living wills have and further steps that we want to see. 

Each member of the Board of Governors and members of the FDIC 

Board are charged with arriving at our own individual judgments 

as to whether or not these living wills are credible or facilitate resolution, and I cannot guarantee you that we will arrive at identical 

conclusions. 

Senator WARREN. OK. Fair—— 

Ms. YELLEN. ——we have each been vested by Congress into 

making a judgment based on the merits. 

Senator WARREN. OK. If you cannot ensure that the agencies will 

issue joint determinations, which is how we get to the effect of the 

law, let me ask if you will make another commitment, and that is, 

will you at least commit that if the Fed finds a living will credible 

and the FDIC does not find a living will credible, that the Fed will 

issue a written public explanation for why it is reaching a different 

conclusion? It seems like that is the least that the Fed can do to 

help the public understand its position. 

28 

Ms. YELLEN. Well, my expectation is that we will release the letters that we send to the firms giving our evaluations of their living 

will. 

Senator WARREN. So you will be explaining—if there is a difference between the Fed and the FDIC, you will be issuing a written statement about why the Fed decided something was credible 

that the FDIC found was not credible? 

Ms. YELLEN. Well, I want to be careful exactly what I say about 

this. 

Senator WARREN. Good. 

Ms. YELLEN. We expect to send letters; hopefully they will be 

joint letters; hopefully we will be able to agree on what the shortcomings are of the living wills and if either agency finds that they 

are not credible, we need to identify specific deficiencies that we 

wish to see remedied. And my strong hope and expectation is that 

we will arrive at joint agreement with the FDIC on those deficiencies and release letters that explain what we find them to be. 

Senator WARREN. Well, I very much hope that the Fed and the 

FDIC are on the same page. That is the only way we get the impact of this law. Living wills are one of the primary tools that Congress gave to regulators to make sure that the taxpayers will not 

be on the hook if another giant bank fails, and it is critical that 

the Fed use this authority, like the FDIC has been willing to do, 

to make sure our financial system safer. 

Thank you. 

Ms. YELLEN. I agree with you on that, and we have been working 

with them all along through our supervisory process as well, which 

is separate, but we are also emphasizing recovery planning and 

resolution through our supervision. 

Senator WARREN. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator Warren. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. And welcome. I suspect now that you have had more than 60 different individuals asking questions. Most of them perhaps have been asked. 

In looking at today’s testimony, I think a lot of attention was 

paid to the discussion on negative interest rates, and I noted that 

there were a couple of items that I suspect, as you have shared, 

you have indicated that while you would be looking at negative 

rates, the analysis is not yet done, and that it is not off the table. 

But you have also indicated that the variations in short-term interest rates is one of the key tools that you have. 

Would it be fair, though, to say that today, as you have answered 

these questions, the current discussion and the current focus is not 

so much on reducing the interest rates that we have in effect today 

but, rather, whether they should remain stable or move up? 

Ms. YELLEN. Well, yes. We certainly felt in December when we 

made our decision to raise rates that the economy was recovering, 

that inflation would move up, and it would likely be appropriate to 

gradually continue to raise rates, not to cut them. 

A lot has happened since then. As I have indicated, global economic and financial developments impinge on the outlook. We are 

in the process of evaluating how those developments should affect 

29 

our outlook or our assessment of the balance of risks. We will meet 

in March and provide a new set of projections that will sort of update markets on our thinking on the outlook and the risks. But I 

have not thought that a downturn sufficient to cause the next move 

to be a cut was a likely possibility. And we have not yet seen, I 

would say, a shift in the economic outlook that is sufficient to make 

that highly likely. But in saying that, I also want to make clear 

that policy is not on a preset course, and if our perception of the 

risks and the outlook changes in a manner that did make that appropriate, certainly that is something the Committee would have to 

take into account in order to meet its objectives. It is not what I 

think is the most likely scenario. 

Senator ROUNDS. Very good. Let me just change focus a little bit 

and move into basically the regulatory side of the responsibilities 

which you carry. 

When the Federal Reserve writes its rules, I think it is important 

for the Board to do a thorough cost-benefit analysis before it creates any new red tape or negotiates international agreements like 

insurance capital standards. We talked a little bit in here about the 

fact that there is a regulatory impact on productivity, and the one 

thing that on our side of the dais we talk about is what we can 

do most certainly to provide opportunity for productivity to increase 

within our economy. There are some areas in which you do have 

on the regulatory side an impact as well. 

With regard to the issue of international agreements, specifically 

on insurance capital standards, is the Fed currently working on 

any cost-benefit analysis related to the insurance industry either in 

the context of regulation or for international agreements? 

Ms. YELLEN. So we are very carefully considering what capital 

standards we should impose on the designated firms that we need 

to create standards for or S&L holding companies that are primarily insurance-focused. 

Senator ROUNDS. But will you do a cost-benefit analysis to those 

rules? 

Ms. YELLEN. We are charged with putting in place appropriate 

standards to mitigate systemic risk in the event that one of those 

firms would have failed, to make it operate in a safer and sounder 

way, and that is our charge. We will put rules out for comment. 

We will consider regulatory burden. And we will consider various 

ways of designing rules which might be least burdensome, and—— 

Senator ROUNDS. But would that mean that you would consider 

then doing a cost-benefit analysis and the burden that these may 

place on the individual entities that you are regulating? 

Ms. YELLEN. Well, we will certainly put out a Notice of Proposed 

Rulemaking and consider comments on it, including those that pertain to costs. 

Senator ROUNDS. So the answer is, ‘‘I would rather not answer 

the question on whether or not there is a cost-benefit analysis included’’? 

Ms. YELLEN. Well, I am not going to commit to a cost-benefit 

analysis of those rules. 

Senator ROUNDS. OK. Very good. One of the major concerns 

about the current insurance SIFIs designation process is that there 

is no real comparison with banks to determine systemic risk beVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
30 

cause—I would suspect that we are in rather uncharted waters 

with regard to adding the insurance companies in with the banks 

and considering them as SIFIs. I am concerned that we may not 

have the reliable data to compare banks to insurance companies in 

this regard. 

What has either the Federal Reserve or the FSOC done compare 

the systemic risk of bank SIFIs and nonbank companies against 

each other? Has there been an analysis? 

Ms. YELLEN. So in the case of each of those designations, a very 

detailed analysis was done asking what would be the systemic consequences of the failure of that organization. And in the case of the 

insurance companies that were designated—MetLife, Prudential, 

and AIG—the FSOC did determine and judge with very careful 

work done that the failure of those organizations would potentially 

have systemic consequences that needed to be addressed. 

Senator ROUNDS. Are those publicly available analyses? 

Ms. YELLEN. They are on the FSOC Web site. You can find the 

analysis, and they do not include confidential firm information. The 

firms themselves were provided with greater detail than what is on 

the Web site, but there is detailed information available. 

Senator ROUNDS. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. Madam Chair, 

thank you. 

Yesterday was a really bad day for my home State of Indiana. 

We had over 2,100 workers who were given pink slips yesterday. 

They lost their jobs at a company that had been in Indiana since 

the early 1950s. Carrier’s Indianapolis plant will be closing, and 

UTEC is moving their manufacturing department from Huntington, Indiana, both part of United Technologies, over 2,100 jobs. 

All of those jobs are being shipped to Mexico. 

Last year, Carrier had $58 billion in sales and $6.1 billion in 

earnings. So we have 2,100 people who have lost their jobs because 

apparently $6.1 billion in earnings is not enough. 

Now, the promise of America has always been you work hard, 

you do your job, you help your company be profitable. And then in 

return you hope to have a decent retirement, to be able to maybe 

get a fishing boat, see your kids go to school. 

So how do we tell workers who have put their whole heart and 

soul into a company, who have provided them with over $6.1 billion 

in sales, that that is not enough? 

I mean, the reasons folks are here is because there has always 

been a promise if you work hard that the company in return will 

stand up and do right by you. So how is doing right having $6.1 

billion in earnings and shipping 2,100 Indiana jobs off to Mexico 

when we also in Indiana have said you have one of the best business climates in America? And these same folks said if we put in 

tax extenders, things like bonus depreciation, research credit, 

Eximbank—I sat here and fought for Eximbank because these folks 

came and said this will help American jobs stay in America. 

So how do you provide the confidence to these workers and others that this compact even exists anymore? 

31 

Ms. YELLEN. A great deal has changed in the job market, and 

many families during the downturn particularly but on a longerterm basis have faced the kind of miserable situation that you have 

described of losing a job that they held for the better part of their 

career and expected would provide them a secure retirement. And 

this is a miserable and burdensome situation that many households have faced. 

For our part, what we are trying to do and have tried to do is 

make sure that there are enough jobs overall in the economy that 

those workers can find another job. And, of course, we know—— 

Senator DONNELLY. I understand, but I am just asking you—and 

maybe this is not as the Fed Chair. Why should they have to find 

another job when they produced over $6.1 billion in earnings for a 

company that is doing extraordinarily well but it is still not 

enough? ‘‘We are going to ship your job to Mexico because you created huge profits for us. You created incredible success for us. You 

created the opportunity for this company to grow and for our shareholders to do really, really well, but we just do not have room for 

you as the worker anymore.’’ 

Ms. YELLEN. Many firms have made that decision, that moving 

their activities elsewhere is a profitable course and have made 

those decisions. 

Senator DONNELLY. And the question becomes: Profitable for 

who? For an America that we have forever had the promise that 

you do your job, like I said, you work hard—I mean, that is what 

my dad did every day. He took the train to work every day so he 

could feed us kids. I was the fifth of five. But his company never 

told him, ‘‘Sorry. You made a ton of dough for us. We are moving 

to Mexico.’’ And if they did, I do not know what we would have 

done. 

And now we are facing the same thing in the steel industry as 

well. We have been facing it for a while, and you have probably 

heard there are actually questions about the ongoing viability of a 

number of the American steel companies. And a big part of that is 

currency manipulation, illegal dumping, all of these kind of things. 

And so, you know, as we look at this, I know the Treasury Department monitors currency manipulation. Other agencies monitor 

illegal trade activities. But as head of the Fed, are you concerned 

that the United States tries to play by the rules while other countries dump steel here, dump other products here, manipulate currency, and we seem to be unable to provide our companies who are 

doing with a level playing field? 

Ms. YELLEN. Well, U.S. policymakers—the Treasury has prime 

responsibility for exchange rate policy, but they have made clear 

and the G7 has made very clear that currency manipulation to attempt to gain advantage for a country’s products in global markets 

and to shift the playing field through currency manipulation is unacceptable policy. And I know that the Treasury Department in 

their conversations with foreign officials in other countries is vigilant about looking for and addressing currency manipulation. 

On the other hand, we all recognize that countries should be allowed to use tools of domestic policy like monetary policy to stimulate domestic demand in situations where inflation is running well 

below a country’s inflation objective or domestic spending, unemVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
32 

ployment is high and domestic spending is weak. We have used 

monetary policy for this purpose. Other countries have done the 

same. And there is some impact of monetary policies on exchange 

rates. We recognize that. But it also works through other channels 

that tend to have broadly shared benefits. 

Senator DONNELLY. Well, as Fed Chair, I hope you keep in mind, 

as you set rates, as you set other things, the importance to our 

families of the chance to go to work. And I feel in particular very 

burned today, after having fought so hard for the Eximbank, that 

some of the very same folks who told me it was critical for jobs in 

the United States, to be there when they needed something, and 

then to walk away now. Thank you, Madam Chair. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Heller. 

Senator HELLER. Mr. Chairman, thank you, and thanks for holding this hearing. I want to thank the Chairwoman for being here 

also and taking the time. 

I want to raise some questions about how the Fed communicates 

with the general public, specifically their policies and specifically 

how you communicate those. Let me give you an example here, and 

it led up to the increase of the interest rates back in December. 

You had people from the Fed like the head of the San Francisco 

Fed saying that they were pretty hawkish that interest rates were 

going to be increased and that those increases were coming, and 

the market reacted to it. 

Then there were others like the head of the Chicago Fed calling 

for rates to stay near zero, and the markets reacted to it. 

Then we had some Fed officials implying that any rate increases 

would be data-driven, and the markets responded to that. And then 

we had some saying there was no formula. Even today, we seem 

to have a new person each day giving their thoughts about future 

rates. 

Now, I do not have a problem with broad questions and a variety 

of viewpoints coming from Fed members, but what it is causing, 

though, is confusion and instability in the markets today every 

time someone has something to say, feeling like they have got to 

walk in front of a mic and make a comment. 

My question to you is: Do you think there is a problem here and 

how these markets are reflecting every time one of these Fed members opens their mouth by hundreds of points? Hundreds of points. 

And, in general, I am not sure most of them know what they are 

talking about. 

Ms. YELLEN. So I would say that Congress purposely created a 

system with a large monetary policymaking committee where there 

would be a diversity of views so that we did not fall into a group 

think type of mentality, and we do have at the moment 17 members who come to the table with a range of views. They—— 

Senator HELLER. So you are comfortable? You are comfortable 

where we are today? 

Ms. YELLEN. We have guidelines for communications because it 

is important to explain to the public what our policy is about. 

Senator HELLER. Could I see a copy of that guideline? I would 

sure like that. 

Ms. YELLEN. Yes, I would be glad to—— 

33 

Senator HELLER. OK. 

Ms. YELLEN. First of all, the guideline says that everyone shares 

a joint objective of explaining the Committee’s decisions. They can 

explain their own views, but should be explaining that they are not 

speaking for the Committee, that they are speaking for themselves. 

And the person who speaks—— 

Senator HELLER. But they do have an official capacity, and—— 

Ms. YELLEN. ——for the Committee is the Chair. 

Senator HELLER. ——it clearly carries water. It carries water. 

You raised rates on December 16th by a quarter of a point. At that 

time the markets closed—the S&P 500 closed at 2,073. Yesterday, 

it closed at 1,851, and I think it is down another 34 or 35-plus 

points today. Do you feel that you or the Fed is responsible for this 

decline? 

Ms. YELLEN. Well, the immediate market response, and for a 

number of weeks, to the Fed decision was quite tranquil. It was a 

decision that I believe had been well communicated and was expected, and there was very little market reaction. 

Around the turn of the year, we began to see more volatility in 

financial markets. Some of the precipitating factors seemed to be 

the movement in Chinese currency and the downward move in oil 

prices. I think those things have been the drivers and have been 

associated with broader fears that have developed in the market 

about the potential for weakening global growth—— 

Senator HELLER. OK. Let me—— 

Ms. YELLEN. ——with spillovers to inflation—— 

Senator HELLER. Thank you. 

Ms. YELLEN. ——so I do not think it is mainly our policy. 

Senator HELLER. Let us go back to oil prices again since it is not 

your policies that are causing the market decline. You told us last 

year here in this meeting that a drop in oil prices was a good thing 

for the economy and for the consumer. That is what you said a year 

ago. And yet since then we have seen thousands of jobs lost. We 

see oil companies in bankruptcy and consumers that are not spending their gas savings. Do you still feel the same way about oil 

prices? 

Ms. YELLEN. Well, clearly, declining oil prices have had some 

negative consequences. There have been sharp job cuts and cutback 

in drilling activity and capital spending, and that has been—— 

Senator HELLER. Do you think you made a mistake? Do you 

think you made a mistake a year ago when you said it would be 

good for the economy and good for the consumers? 

Ms. YELLEN. On balance, I would say it is still true for the 

United States. We are net importer of oil, in spite of our large production, and the gains to households from lower oil prices, they average about $1,000 per household. 

Now, whether they spend or do not spend those gains, those are 

substantial gains. From the standpoint of growth, what has been 

dominant so far I would say is the negative consequences on spending from—— 

Senator HELLER. OK. 

Ms. YELLEN. ——the cutback in drilling activity. 

34 

Senator HELLER. Let me get your feeling on a question. Do you 

think that banks here in America are overregulated or underregulated? 

Ms. YELLEN. I recognize that regulatory burden is a significant 

issue for many banks, and it is something we will do our very best 

and have been working to mitigate, particularly for community 

banks that are vital to the health of their communities. But I do 

think for the larger banks whose failure would have systemic consequences, it is critically important to make sure that they hold 

more capital liquidity, are held to higher standards to address the 

threats that they pose to the financial stability of our country and 

the global economy. 

Senator HELLER. So is it fair for me to say that you believe 

smaller banks are overregulated, large banks are underregulated? 

Ms. YELLEN. I do not want to say as a blanket matter that community banks are overregulated. What I do think is that we need 

to do everything in our power to look for ways to simplify and control regulatory burdens for them. 

Senator HELLER. One more question. 

Chairman SHELBY. Go ahead. 

Senator HELLER. One more question. Thank you for being—— 

Chairman SHELBY. We have got a vote, but go ahead. Let him 

ask the question. 

Senator HELLER. One more question. In a recent Wall Street 

Journal survey, the odds of a recession in the next 12 months have 

climbed to 21 percent, and that is double what it was a year ago. 

What are your thoughts on that? 

Ms. YELLEN. Well, as I mentioned in my testimony and in my answers this morning, we have seen global economic and financial developments that may well affect the U.S. outlook. Financial conditions have tightened, and that can have consequences for the outlook. I think it is premature at this point to decide exactly what 

the consequences of those shocks will be, and it depends in part on 

whether they persist. And that is something we will be looking at 

closely going forward. 

Senator HELLER. Madam Chairwoman, thank you very much for 

being here. And, Mr. Chairman, thanks for the time. 

Chairman SHELBY. Thank you. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. Thank you, 

Madam Chair, for the good job you do. And now that Brooklyn is 

in the news, I am glad we have another daughter of Brooklyn doing 

well. 

I see that we have some people in the audience from a group 

called ‘‘Fed Up’’, many from New York, and I welcome them, although it was just my luck the people wearing New York City 

beanies left just before I spoke. Tell them hello. And I see that 

some of the shirts say, ‘‘Let our wages grow’’, and that is apropos, 

and that relates to my first question. 

I was pleased to see that wages rose 0.5 percent—oh, they came 

back. Hi, New York City people. I believe I saw that wages grew 

0.5 percent in the month of January. I hope recent data we have 

seen is a sign that middle class incomes and people trying to be 

35 

in the middle class, their incomes are growing again, because 

wages have been stagnant for too long. 

But I have to be honest with you. Given the fact we are in a deflationary environment globally and our own inflation rate is continuing to run well below the Fed’s 2-percent target, I am concerned that further movement by the Fed to raise rates in the near 

term could snuff out the embers of real wage growth before they 

are even given a chance to catch fire. 

If you believe that the flattening and decline of wages is the 

number one problem our economy faces, that it is harder to stay 

in the middle class, it is harder to get to the middle class than it 

has been in a very long time, you make that a very high priority— 

which I do and I know you do. 

So going forward, do you still believe that, given the room for 

growth in the labor market, considerable evidence of consistent 

wage growth is still important for you to see before the Fed considers raising rates further? And, second, will the FOMC be particularly cautious in its decision making so as to protect against the 

prospect of stifling wage growth before it even gets going? 

Ms. YELLEN. So Congress has assigned us maximum employment 

and price stability as objectives. Our focus is on inflation and trying to achieve a 2-percent objective for inflation. The behavior of 

wages—so, first of all, we have seen substantial improvement in 

the labor market, and we, at the time we raised rates, expected 

that improvement to continue, fully expected as that occurred that 

wages would move up at a somewhat faster pace. 

Senator SCHUMER. We have just begun to see it. I mean, it is 

hardly sufficient. Would you not agree? We have not made up for 

the loss in wage growth over the last decade yet. 

Ms. YELLEN. Well, productivity growth has been extremely slow, 

and the state of the labor market and the pace of inflation are not 

the only factors feeding into wage growth. For the last eight quarters, productivity in the nonfarm business sector has barely grown 

at a quarter of a percent, and that is a substantial drag on wages 

as well. 

So I would not say that wage growth is a litmus test for changes 

in monetary policy. But it is something that is indicative both of 

likely inflationary pressure going forward. It is not a sure sign of 

it, but it is relevant, and it is also relevant in assessing whether 

or not we are at maximum employment. 

Senator SCHUMER. Well, yeah, but I see it just the other way, 

that I am less worried about inflation and more worried about slow 

wage growth, which has picked up a little bit late. But if you look 

at the last decade or even the last three decades, productivity is 

considerably further up than wage growth is. And one of our great 

challenges is tying the two together. 

So I will just say I hope that you and the FOMC will look at 

growth in wages—it may not be the only issue, for sure, but it is 

a very important issue. But I am going to move on here, and you 

can comment further on what I said if you want. But it is related. 

Now, another thing that is going on is the strength of the dollar, 

and it has been critical in the interplay, so I want to get your specific thoughts. Given the strength of the dollar and the influence 

of the global deflationary environment, couldn’t one argue that the 

36 

dollar’s strength has essentially served as another increase to the 

Federal funds rate? If you look at manufacturing, it is not doing 

well because of all of those issues. And, again, it seems to me that 

efforts by the Fed to raise rates further could end up being a double whammy to our economy because here you have the strength 

of the dollar hurting our export businesses, which are still vital to 

us, and another wage rate—wages added onto that. 

So have you seen that the strength of the dollar has influence on 

whether you should raise rates further? 

Ms. YELLEN. The strength of the dollar is certainly something we 

take account of in deciding on monetary policy. I agree with you 

net exports have declined. It has been a drag on the economy and 

for that reason does factor into our thinking. It is one of the reasons we think that the so-called neutral level of the Fed funds rate 

is low at the moment, but remember that in spite of that drag and 

the impact it is having on manufacturing, the economy has continued to create jobs at a pace of 220,000 or some a month. And so 

we cannot just look at sectoral impacts. We have to look at the 

overall performance of the labor market. But certainly the dollar 

and the drag that it implies—it is a symptom and in part a signal 

of the strength of the U.S. economy in comparison with many others. 

Senator SCHUMER. And a drag on the U.S. economy. 

Ms. YELLEN. It is both. 

Senator SCHUMER. Which possibly could make things worse. 

Ms. YELLEN. It is both things. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Reed. 

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

thank you, Madam Chairman, and thank you for your leadership 

and your endurance. We expect nothing less from a Brown graduate, so I am not at all surprised. 

One of human phenomenon is sometimes when you try to fix a 

problem, you unwittingly create other problems. I know in DoddFrank we were concerned about the bilateral nature of derivatives, 

and so we have now required them to be on a clearing platform, 

which creates not a bilateral issue but a multilateral issue. But 

that in itself introduces the possibility of systemic risk. And, frankly, one of the lessons of the crisis was always be on watch for the 

next fault line and take proactive steps to prevent it. 

In that context, the Financial Stability Oversight Council noted 

that there are still a number of central clearinghouse platform 

issues. Can you give us your comments now about how close you 

are watching? Is there any developments that concern you? And is 

this going to be a constant area of emphasis and investigation? 

Ms. YELLEN. So I completely agree with you. Creating those central clearing platforms has importantly diminished risk in the financial system, but they are a source of risk. FSOC has pointed 

out that this is making sure that they are appropriately supervised 

and operate subject to very high standards because they are platforms that concentrate risk. This is a very high priority for us. We 

are very focused on it. These platforms are now supervised. The 

SEC and CFTC have significant authority here. We have backup 

authority. Globally, there is a focus on ensuring comprehensive and 

37 

strong supervision of these platforms. So, you know, we are not 

ready to rest and say everything is done, but we are very focused 

on it, and it—— 

Senator REED. Let me underscore the issue the international is 

very important because of the ability and willingness of entities to 

arbitrage sort of regulatory environments, moving from here to 

someplace that does not have quite the same oversight. 

Ms. YELLEN. That is right. 

Senator REED. And you are trying, I believe in many ways, including margin requirements, to level the playing field internationally. 

Ms. YELLEN. That is exactly right. 

Senator REED. Thank you very much, Madam Chairman. 

The issue of Federal Reserve Bank Presidents, we have talked 

about this. I know you have got 12 that are due for reassignment 

or change at the end of February of 2016, a few weeks from now. 

They will be elected by the Class B Directors, who are elected by 

local financial institutions to represent the public, and then the 

Class C Directors appointed by the Board. 

A general issue is how do you ensure that there is real public 

participation in this process. One of the impressions that we had 

in 2008 and 2009 crafting Dodd-Frank was this sort of is an inside 

game in which, in fact, the Class A Directors appointed by the 

banks were influential. How do you ensure that there is a real public purpose and public scrutiny of these Directors? 

Ms. YELLEN. So the governance around this was established in 

the Federal Reserve Act, and we tried to make sure that the Reserve Banks and the Board adhered to that. We tried to make sure 

that the Class C Directors that are appointed by the Board are 

broadly representative of the public and all sectors mentioned in 

the Federal Reserve Act. I think we have among Federal Reserve 

Bank Directors—— 

Senator REED. I must—I have been rightly corrected by my very 

intelligent staff. Presidents. 

Ms. YELLEN. Presidents. 

Senator REED. The Presidents of the Federal Reserve Banks. 

That is the focus of my question. 

Ms. YELLEN. Yes. So the presidents are appointed by the Class 

B and C Directors. We try to make sure that those Class Cs and 

that the Directors more broadly represent not only business interests but also community interests, that there is sufficient diversity. 

The Board is constantly attentive in its oversight of the Reserve 

Banks to the issue of diversity of representation on those boards, 

and it has improved considerably. At the moment I believe something like 45 percent of Bank Directors are either women or minorities. 

Now, they are charged with making recommendations about appointment and reappointment of Reserve Bank Presidents, and the 

Board of Governors is charged with reviewing those recommendations and deciding. And we will take that obligation seriously. We 

have a regular process, an annual process in which the Board 

through its Oversight Committee. We review each Reserve Bank 

every year and, in particular, the performance of the president. 

And the Members of this Committee discuss with the boards of diVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
38 

rectors, the chair, and deputy chair the performance of the president. 

So there is ongoing monitoring of the performance of the president. There is feedback to the Boards of Directors on it. When we 

come up to the 5-year point to review these appointments, we will 

act on the recommendations of the Boards of Directors, but it is not 

as though we are just looking at that for the first time when we 

make those decisions. 

Senator REED. Thank you, Madam Chairman. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Heitkamp. 

Senator HEITKAMP. I do not know if they save the best for last, 

but, you know, we are hanging in there. 

The first thing I want to say—and it troubles me every time this 

happens. In your exchange with Senator Warner, Chair Yellen, 

when you talk about working people, you know, the answer is always, ‘‘Let us improve their job skills. Let us get them more training, and then they will get a better job.’’ 

Someone has to be a CNA; someone has to drive a garbage truck. 

And they are well trained for those jobs. But those jobs do not pay 

a living wage, and that is why so many people are frustrated, because these jobs are not going to go away. These jobs are essential, 

whether it is being wait staff in a restaurant or whether it is being 

a CNA in a nursing home or whether it is, in fact, you know, delivering pizza. 

And so, we need to be really careful when the response to wage 

inequality or income inequality is more skills for the workers, because I think it does not focus the attention on the value of work 

and what we need to do to improve the opportunities for people 

who work every day. And I know you do not intend that, but I just 

felt like I had to get that off my chest. 

The challenge that I have in North Dakota is we are countercyclical. As you know, we are fundamentally a commodity-driven 

State. Commodity prices have taken a toll, whether it is in our agricultural sector or whether it is in the energy sector, and that has 

been exacerbated by a high dollar value. 

I had a gentleman once ask me, said, ‘‘I just cannot figure out 

in North Dakota if a high dollar value is good or bad.’’ I said, ‘‘Let 

me help you with that. It is bad,’’ because we are fundamentally 

an export State. 

But I will tell you, we are deeply concerned about currency manipulation. We are deeply concerned about the challenges of having 

to compete against other currencies in other markets, and that has 

national and, I think, international ramifications. 

But I also want to point out that in production—oil production, 

gas production—we have lost probably globally about 250,000 and 

about 100,000 jobs in this country. That is a huge hit. And it really 

was that production sector, whether we are talking about agriculture or whether we are talking about oil and gas, that buoyed 

this economy during the tough times. 

There has been so little attention to the challenges of commodity 

producers, not just, you know, people who invest in commodities 

but the challenge of commodity producers. What is the Fed doing 

to analyze the challenges for commodity producers and to analyze 

39 

what the increase in dollar value and potential currency manipulation means going forward to production of commodities in this 

country? 

Ms. YELLEN. Well, we are looking critically—commodities, their 

prices, and trends are a huge global driver and driver for the 

United States. We look carefully at the factors that are resulting 

in low commodity prices and trying to understand the extent to 

which low prices reflect supply or shifts in demand in various 

emerging markets. 

Senator HEITKAMP. What impact do you believe the dollar value 

has had on profitability of commodity production in this country? 

Ms. YELLEN. When the dollar appreciates, it typically tends to 

push down oil prices. So the link that you are suggesting is certainly there. We have a global economy in which there is considerable weakness in many parts of the world, including Europe and 

Japan. Countries are adopting expansionary monetary policies in 

order to bring inflation up to their desired target levels and to address weakness in their own economies. The U.S., with a 4.9 percent unemployment rate, is far more advanced in that process of 

recovery, and the different cyclical positions of our different economies, are a factor that is pushing up the dollar. The dollar in part 

reflects disproportionate strength in the U.S. economy, and that is 

a natural response to it. 

The U.S. Treasury is responsible for currency policy, and currency manipulation is something that they would not sanction. The 

G7 has spoken out against it. But we do believe that countries 

should be able to use tools of policy like monetary policy for domestic ends. 

Senator HEITKAMP. And, obviously, one person’s monetary policy 

is another person’s currency manipulation, and I think we need to 

be very cautious in how we characterize monetary policy in other 

countries lest we not limit our access to tools that we may need. 

Ms. YELLEN. I think that is very important, and we have 

used—— 

Senator HEITKAMP. I get that. In the time that I have remaining—and I want to thank you for your patience, and you sat 

through a lot of hours here. I want to talk about something that 

I have been working on that has caused some concern within the 

Fed organization, and that is cost-benefit analysis and review of 

cost-benefit analysis of independent agencies. 

Senators Warner and Portman have pursued a bill for a number 

of years which, in fact, asks that there be an independent review 

of cost-benefit analysis of independent agencies. You have been 

subject to an Executive order that really is advisory, as near as I 

can tell, and we are trying to figure out how we can get a second 

opinion on your cost-benefit analysis. And I think that is an essential piece of this if we are going to do the appropriate oversight. 

So I would just like a commitment that the Fed will work with 

us to try and understand your need for independent, but to please 

appreciate and understand our need for legitimate oversight and 

tools that help us with legitimate oversight. 

Ms. YELLEN. I am certainly willing to work with you on that, but 

as your comment indicated, you recognize the importance of indeVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
40 

pendence for regulatory agencies that we not be subject to executive branch review. 

Senator HEITKAMP. And we have worked to try and figure out 

how we replace OIRA as the reviewing agency, how we engage 

even to the point we contract with independent economists to actually look at this analysis and get a second opinion. And I think, you 

know, you are kind of caught in the middle here, people who do not 

think you do enough and people who think you do too much. And 

one of the ways that I think we can broaden support for the Fed 

is broaden transparency. 

You know, to Elizabeth’s point, tell us why you are making a decision if you believe that the living will is appropriate. Tell us why 

you made this decision on cost-benefit. And I know, Chair Yellen, 

you have been very interested in being more transparent without 

being disruptive to markets. I appreciate the difficulty of the lane 

that you are in, but we need these tools in order to do our oversight, and we need these tools kind of going forward. 

So I look forward to working with you. This is not an idea that 

is going to go away. It is an idea that has been introduced over and 

over again, and we would appreciate any input so that we can accomplish what we want, which is to not set monetary policy but 

give us the tools that we need to review what decisions you make. 

So thank you, Mr. Chairman, and I am done. 

Senator BROWN. [Presiding.] Thank you. 

Senator Shelby, the Chairman, will return in a moment. He has 

three or four questions in the second round. I will ask a couple of 

questions now, and then I think we can dismiss you, Madam Chair. 

I want to ask a question about Senator Heitkamp’s views on costbenefit. A lot of us are very concerned about these efforts on costbenefit analysis and where it could take us as a Nation. I recall, 

as you do—and we have talked about this before—when the President signed Dodd-Frank, the leading financial services lobbyists 

said, ‘‘It is halftime.’’ And that was a call, that sounded an alarm 

to a lot of us that we knew that they were going to do—Wall Street 

was going to do everything possible to slow walk and delay and 

lobby and push back against any of the Dodd-Frank implementation that we all cared about and the reason we passed Dodd-Frank. 

And this whole cost-benefit analysis idea, frankly, is—I am not 

questioning anybody’s motives, particularly Senator Heitkamp’s, 

but it is, you know, the best way to weaken Dodd-Frank, and it is 

really kind of the dream of Wall Street to keep this slow walk 

going and slow it down even more. It is not just financial regulation, and you have done good work at the Fed. I wish the Fed in 

the past had done more, but generally, regulators are trying but 

this will undercut your efforts, this cost-benefit analysis bill, and 

ultimately lead to weakening health and safety rules, which has 

been the long-time battle in this institution. Emerson would talk 

about the battle between the conservators and the innovators, and 

the conservators wanted to preserve their privilege and power, and 

the innovators wanted to move the country forward. And cost-benefit analysis just helps the powerful people in this town resist any 

kind of regulation that makes people’s lives better, whether it is 

health, whether it is safety, whether it is safety and soundness of 

the financial system. 

41 

So I want to ask a question about that and about your letter. 

Senator Rounds also asked you a question earlier about cost-benefit. It sounds like a good idea. How can you be against regulatory 

reform? How can you be against cost-benefit analysis? But it is obviously how do you calculate the benefit of a rule that contributes 

to safety and soundness? It is so much harder to quantify the benefits than it is the cost. That is not even counting the slow walk that 

this will require and how easy it is to delay things by the cost-benefit analysis. 

So you sent a letter out signed by many other agency heads. Just 

explain why you sent that letter and kind of make your case for 

why that is so important. 

Ms. YELLEN. Well, we were very concerned that the bill under 

consideration, first of all, would have a severe impact on the independent agencies’ ability to put out rules that would involve executive branch, Presidential involvement. I agree with you, it would 

cause very significant delays in implementing regulations and 

probably result in unnecessary and unwarranted litigation in connection with our rules. 

We are putting our rules very often in situations where Congress 

has decided there is a safety and soundness issue they want us to 

address by imposing safeguards in a particular area, and our job 

is to figure out how to do that where Congress has already judged 

that the benefits are worthwhile. As you said, the financial crisis 

took a huge toll, an amazing economic cost to the country and the 

global economy. And you have directed us—— 

Senator BROWN. And I assume there would have been—— 

Ms. YELLEN. ——to try to create a safer and sounder financial 

system when we have done—for example, capital rules, there has 

been cost-benefit analysis. While there are some costs, the benefits 

of reducing the probability of a financial crisis overwhelm those 

costs. So our job is to find the least burdensome way of putting out 

rules to implement what Congress has told us to do. We publish 

Advance Notices of Proposed Rulemaking, Notices of Proposed 

Rulemaking, take comments, look for and discuss alternative ways 

that we might approach promulgating a rule to reduce burden and 

take comments into account. So it is not as though there is no a 

weighing of benefits and costs that are involved already in what we 

do. 

Senator BROWN. How long typically is that process? 

Ms. YELLEN. The process can take years, and especially when 

there are multi-agency rules that have to be put in place. We are 

coming close to completing the Dodd-Frank agenda of rulemaking, 

but it has taken a very long time, and we have been very actively 

engaged in trying to do this as rapidly as we possibly can. 

Senator BROWN. So if it has taken half a decade for the regulators, you and the FDIC and the OCC and others, if it has taken 

half a decade plus to do Dodd-Frank—— 

Ms. YELLEN. That is right. 

Senator BROWN. ——rulemaking, what would it—can you guess 

what it would have taken if there had been a cost-benefit analysis 

like this? 

Ms. YELLEN. Well, clearly, it would be much more burdensome 

and take much longer. There is no doubt about it. I cannot give you 

42 

a guess, but as you indicated, attempting to quantify the benefits 

of safety and soundness regulation is very difficult. 

Senator BROWN. Well, who would have wanted this to take 

longer? 

Ms. YELLEN. You indicated that those who were regulated—— 

Senator BROWN. Well, what do you think? Do not say what I indicated. But who in this town, who in this country would have 

wanted these regulations to have taken longer? 

Ms. YELLEN. Well, we know that banking organizations are concerned with regulations and the burdens that they impose. 

Senator BROWN. OK. Let me shift to another question. I think 

Senator Shelby will be back within a couple of minutes. 

I want to talk about interest on excess reserves. Some have suggested repealing or limiting the Fed’s authority to pay interest on 

excess reserves. I am concerned this is an attempt by those opposed 

to the unconventional steps the Fed took during the crisis to limit 

the Fed’s monetary policy tools. What are the implications of repealing or limiting interest on reserves? 

Ms. YELLEN. It is the most critical tool that we have for monetary policy to adjust the level of short-term interest rates and the 

stance of monetary policy. First let me say that our knowledge that 

we had that tool when the time came to raise interest rates was 

critical to the decisions we made throughout the financial crisis 

and thereafter to undertake unconventional policies, including 

large-scale lending programs, and then quantitative easing or 

large-scale asset purchases. The knowledge that we, when the time 

came, would be able to use interest on excess reserves to raise the 

level of short-term interest rates was critical in the decisions that 

we made that I believe provided great support to the economy and 

caused us to recover more rapidly. 

Now, if Congress were to repeal our ability to pay interest on reserves, we would not be able to control short-term interest rates in 

the way we did before the crisis. So we would be forced to contemplate shrinking our balance sheet perhaps rapidly, and I would 

be greatly concerned about the impact that that could have on the 

economy, on the economic recovery. 

For example, selling of mortgage-backed securities could raise 

mortgage rates and have a very adverse impact on the housing 

market, and we purposely decided that we will shrink our balance 

sheet in a predictable and gradual manner through diminishing or 

ceasing reinvestment to avoid the kind of unpredictable impacts on 

financial conditions that could come from rapidly selling off our 

portfolio. But without the ability to control short-term interest 

rates through using interest on excess reserves, we would be forced 

to contemplate those steps, and I would worry about their consequences. 

And, finally, if I could just take another second, I would like to 

point out that although we are paying banks interest on their accounts with us, the counterpart of those reserves is large asset 

holdings that we have on our balance sheet on which we earn considerably more interest income than we are paying to the banks, 

and that differential has resulted in 2015 in transfers from the Fed 

to the Treasury and the American taxpayers of $100 billion for the 

last 2 years, $600 billion since 2008. If our balance sheet had to 

43 

shrink rapidly, those transfers would clearly diminish to the far 

lower levels that were typical before the crisis. 

So this is not something that would be a financial winner. Our 

goal is economic performance. I think our top concern should be 

what would be the impact on the economy, which would be very 

negative. But even in the financial sense for the taxpayer, it would 

not be a positive. 

Senator BROWN. Good. Thank you, Mr. Chairman. Thanks. 

Chairman SHELBY. [Presiding.] Thank you, Senator Brown. 

Madam Chair, I have several questions. I know it has been a 

long morning, and we are in the afternoon now. Recently, a Housepassed bill would force the Federal Reserve and other regulators to 

consider what you call ‘‘liquid and readily marketable municipal 

bonds’’ as Level 2 assets in the calculation of the bank’s liquidity 

coverage ratio. The Level 2A category, it is my understanding, currently includes GSE securities, which are considered very liquid 

and uniform in structure. In addition, the Fed has proposed treating eligible municipal bonds as Level 2B assets for liquidity purposes. 

My question: Do you support the House bill to treat municipal 

bonds as Level 2 assets? And why or why not? 

Ms. YELLEN. So I would not support the legislation to treat them 

as Level 2A assets. 

Chairman SHELBY. And explain why. 

Ms. YELLEN. Yes. Because this is a liquidity requirement to 

make sure that banks have sufficient liquid assets to cover the 

kinds of outflows they could see—— 

Chairman SHELBY. You are in stressful times. 

Ms. YELLEN. In a stressful situation. So the most liquid assets 

are cash and U.S. Treasuries. Mortgage-backed securities, Fannie 

and Freddie mortgage-backed securities and Level 2A assets are 

quite liquid but not as liquid as cash or Treasuries, which is why 

we have downgraded them. And while we have proposed to include 

some more liquid municipal securities, they are not as liquid as 

those included in 2A, and we have tried to recognize that while 

municipal securities generally are not very liquid, some are sufficiently liquid to include them in limited amounts but in Category 

2B. And I think that this bill would interfere with our supervisory 

judgments about what constitutes adequate liquidity. 

Chairman SHELBY. Are there two things—we talked about this 

up here many times, and you have talked about it. There are two 

things banks need, capital and they have to have liquidity, because 

you could have capital and no liquidity, and in a stressful environment you could be in trouble, could you not? 

Ms. YELLEN. Yes. 

Chairman SHELBY. So your statement is dealing with liquidity. 

You do not want to weaken the banking system. You want to 

strengthen it. Is that your basic premise? 

Ms. YELLEN. Absolutely, yes. 

Chairman SHELBY. OK. In the area of reforming the Federal Reserve that I talked about in my opening statement, currently members of the Board of Governors do not have the ability to employ 

their own staff, instead relying on a shared staff of the Board, 

which you head up. I understand that you oppose a policy that 

44 

would allow a specific member of the Board of Governors of the 

Federal Reserve to employ even a single person to work exclusively 

for them. 

What are your reasons for opposing this policy? Is it control or 

is it—what? What is it? 

Ms. YELLEN. Well, I want to be careful. I think that Governors 

certainly are entitled—they have substantial responsibilities—— 

Chairman SHELBY. They do. 

Ms. YELLEN. ——and are entitled to adequate support. And as 

Chair, I have worked to make sure—and I think this is true that 

each of the Governors has somebody—— 

Chairman SHELBY. Well, you were a member of the Board of 

Governors before you were Chair. 

Ms. YELLEN. Yes, and it was important to me when I was a 

member and Vice Chair, and I took on a staff—it was a staff member, not someone I hired from the outside but a staff member who 

was assigned to work primarily with me to help me with my particular work. And most of the Governors now have staff members 

who were working primarily or exclusively with them to help them 

undertake their particular job responsibilities. And I am not opposed to that. I have tried to foster it. 

We have pretty complicated agendas and a lot of work to do, and 

we do need help. 

Chairman SHELBY. But if you were a member of the Board of 

Governors and you had really no support staff, then there is not 

a heck of a lot you could add to a debate like within the Fed at 

a crucial time. But if you had support, you know, there are many 

voices down there; there should not be just one voice. There should 

be a healthy debate even inside the Federal Reserve, should there 

not? 

Ms. YELLEN. Yes, of course there should be, and Board staff provides support to all of the Governors, including their individualized 

needs. But it is certainly appropriate for Governors who want to 

have staff specially work with them to have that ability. I am not 

opposed to that. 

Chairman SHELBY. In the area of Fed transparency and transcript release, you said before that the Fed, and I will quote, ‘‘is 

one of the most transparent central banks in the world.’’ But, 

also—and these are your words, too—‘‘there is always room for further improvement.’’ 

I understand that you oppose a policy that would improve Fed 

transparency by shortening the delay in the release of Federal 

Open Market Committee transcripts from 5 years to 3 years. Now, 

5 years to 3, that is not—— 

Ms. YELLEN. I believe—— 

Chairman SHELBY. Go ahead. 

Ms. YELLEN. Only a few central banks release transcripts at all, 

and we are the shortest lag. I believe the next shortest lag is 8 

years. When transcripts were first released, it was debated what 

the lag should be, and even with a 5-year lag, I think the experience was that fewer people were willing to engage actively with 

others in meetings, expressing their views rather than read from 

prepared remarks. And while I would say we have a reasonable degree of interaction in the meetings, the knowledge that we will be 

45 

releasing transcripts in 5 years does lead to less interaction in the 

meetings. 

We really need to be able to engage with one another with giveand-take where people feel protected that their unvarnished views 

and exchanges with their colleagues will not quickly be exposed to 

the public. We, after all, release very detailed minutes of those discussions within 3 weeks. I would simply fear that moving up the 

release, the timing of the release of verbatim transcripts actually 

would not add very much, if anything, to what the public already 

knows about our policies from detailed minutes of the discussions, 

statements, reports, that actually there would not be much additional information and it would stifle the level of interaction that 

we have. Clearly, that is a balancing act, but that is my concern. 

Chairman SHELBY. Well, I could see how a release of transcripts 

in 5 months or 3 months could cause problems in the economy, you 

know, the monetary policy and everything else. But 5 years, 3 

years, I do not buy that. I believe that although—and I have said 

this to you privately and publicly here. I believe the Fed should be 

independent, but I do not think that you are totally independent, 

but we ought to know—we should not be a member of the Board 

of Governors. I do not want to be a member of the Board of Governors. But, on the other hand, we should know what you are doing 

and why you are doing it. 

Now, do we need to know that immediately? Probably not, for a 

lot of reasons, sometimes. But we do need to know, and to move 

it the transcript release from 5 years to 3 years seems overly generous to me. That is my view. 

Reforming the Fed structure in the area there, we have talked 

about this, too, Madam Chairman. When asked yesterday, I believe 

it was in the House, about the structure of the Federal Reserve 

System, you said, and I will quote, ‘‘The current structure of the 

Fed is something Congress decided after a long debate and weighing of a whole variety of considerations’’—that is true, like any important—‘‘and while this may be the case, I believe the Federal Reserve System was established by Congress,’’ as we have talked, 

‘‘over 100 years ago.’’ Since then, the country has changed dramatically. Our economy has changed dramatically. And as you are 

aware, the San Francisco Federal District now includes approximately 65 million people—this is the Fed District—while the Minneapolis Fed District includes just 9 million people. 

Why, Madam Chair, do you oppose instituting any type of review 

of the structure of the Fed, an outside, healthy study? Why do you 

do that knowing that things are evolving all the time, as I pointed 

out? 

Ms. YELLEN. It is, of course, up to Congress to consider what the 

appropriate structure is of the Fed, and I am well aware of the fact 

that history plays a great role in deciding what the Fed would be. 

Probably if we were starting from scratch, you would not have the 

12th District with 65 million people, I think 20 percent of the U.S. 

economy having one Federal Reserve Bank. And Congress can, of 

course, reconsider the appropriate structure. 

I simply mean to say I do not regard the structure as broken in 

the sense that it is failing to put in place good monetary policies, 

failing to collect the information we need about what is happening 

46 

in the economy to craft good policies. We do have, as Congress intended, independent-minded people sitting around the table 

crafting policies. 

Of course, the structure could be something different, and it is 

up to Congress to decide that. I certainly respect that. I simply 

mean to say I do not think it is broken the way it is. 

Senator BROWN. Mr. Chairman, if I could add—— 

Chairman SHELBY. Go ahead. 

Senator BROWN. The San Francisco Fed has a really, really good 

president for a number of years. 

Ms. YELLEN. Oh, yes. Thank you. 

Chairman SHELBY. Well, we understand that. But the fact remains that since 1913—just since 1950, you have seen greater population changes in this country. 

Ms. YELLEN. Of course. 

Chairman SHELBY. For example, in the South, where I come 

from, from Virginia to Texas and the border States, that is the 

most heavily populated area of the United States, and it is slated 

to grow even more dense. Is that correct? 

Ms. YELLEN. Yes, and, you know, when I was in San Francisco—— 

Chairman SHELBY. The same thing in the West. Look at the 

West growth since—— 

Ms. YELLEN. Of course. You know, we had places like Las Vegas 

or San Diego—— 

Chairman SHELBY. That is right. 

Ms. YELLEN. ——that had no Fed branch or Reserve Bank representation that are growing faster and far larger than many 

places that do have branches. So, yes, there is a historical legacy 

that has left the Federal Reserve System in place where geographically it no longer represents the distribution of economic activity in 

the country. I would not argue with that. 

Chairman SHELBY. And when things change, do you not think we 

should be aware of that to change with it? 

Ms. YELLEN. So it is up to Congress to decide—— 

Chairman SHELBY. That is right. 

Ms. YELLEN. ——if changes are necessary. I only mean to say 

that, for example, when I was the president in the 12th District, 

I was highly attentive to making sure, even though we have a very 

large district, that I was aware of developments all around our region and made a big effort to collect information from the various 

parts, very diverse parts of our district. And I think my colleagues 

do that as well. 

Chairman SHELBY. Thank you. Madam Chair, thank you for your 

patience this morning. 

Ms. YELLEN. No problem. 

Chairman SHELBY. We appreciate your time today. Thank you 

very much. 

Ms. YELLEN. Thank you for having me. 

Chairman SHELBY. This hearing is adjourned. 

[Whereupon, at 12:53 p.m., the hearing was adjourned.] 

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

47 

PREPARED STATEMENT OF JANET L. YELLEN 

CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEBRUARY 11, 2016 

Chairman Shelby, Ranking Member Brown, and other Members of the Committee, 

I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report 

to the Congress. In my remarks today, I will discuss the current economic situation 

and outlook before turning to monetary policy. 

Current Economic Situation and Outlook 

Since my appearance before this Committee last July, the economy has made further progress toward the Federal Reserve’s objective of maximum employment. And 

while inflation is expected to remain low in the near term, in part because of the 

further declines in energy prices, the Federal Open Market Committee (FOMC) expects that inflation will rise to its 2 percent objective over the medium term. 

In the labor market, the number of nonfarm payroll jobs rose 2.7 million in 2015, 

and posted a further gain of 150,000 in January of this year. The cumulative increase in employment since its trough in early 2010, is now more than 13 million 

jobs. Meanwhile, the unemployment rate fell to 4.9 percent in January, 0.8 percentage point below its level a year ago and in line with the median of FOMC participants’ most recent estimates of its longer-run normal level. Other measures of labor 

market conditions have also shown solid improvement, with noticeable declines over 

the past year in the number of individuals who want and are available to work but 

have not actively searched recently, and in the number of people who are working 

part time but would rather work full time. However, these measures remain above 

the levels seen prior to the recession, suggesting that some slack in labor markets 

remains. Thus, while labor market conditions have improved substantially, there is 

still room for further sustainable improvement. 

The strong gains in the job market last year were accompanied by a continued 

moderate expansion in economic activity. U.S. real gross domestic product is estimated to have increased about 13⁄4 percent in 2015. Over the course of the year, 

subdued foreign growth and the appreciation of the dollar restrained net exports. 

In the fourth quarter of last year, growth in the gross domestic product is reported 

to have slowed more sharply, to an annual rate of just 3⁄4 percent; again, growth 

was held back by weak net exports as well as by a negative contribution from inventory investment. Although private domestic final demand appears to have slowed 

somewhat in the fourth quarter, it has continued to advance. Household spending 

has been supported by steady job gains and solid growth in real disposable income— 

aided in part by the declines in oil prices. One area of particular strength has been 

purchases of cars and light trucks; sales of these vehicles in 2015, reached their 

highest level ever. In the drilling and mining sector, lower oil prices have caused 

companies to slash jobs and sharply cut capital outlays, but in most other sectors, 

business investment rose over the second half of last year. And homebuilding activity has continued to move up, on balance, although the level of new construction 

remains well below the longer-run levels implied by demographic trends. 

Financial conditions in the United States have recently become less supportive of 

growth, with declines in broad measures of equity prices, higher borrowing rates for 

riskier borrowers, and a further appreciation of the dollar. These developments, if 

they prove persistent, could weigh on the outlook for economic activity and the labor 

market, although declines in longer-term interest rates and oil prices provide some 

offset. Still, ongoing employment gains and faster wage growth should support the 

growth of real incomes and therefore consumer spending, and global economic 

growth should pick up over time, supported by highly accommodative monetary policies abroad. Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate 

pace in coming years and that labor market indicators will continue to strengthen. 

As is always the case, the economic outlook is uncertain. Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although 

recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty 

about China’s exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for 

global growth. These growth concerns, along with strong supply conditions and high 

inventories, contributed to the recent fall in the prices of oil and other commodities. 

In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks maVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00051 Fmt 6621 Sfmt 6621 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
48 

terialize, foreign activity and demand for U.S. exports could weaken and financial 

market conditions could tighten further. 

Of course, economic growth could also exceed our projections for a number of reasons, including the possibility that low oil prices will boost U.S. economic growth 

more than we expect. At present, the Committee is closely monitoring global economic and financial developments, as well as assessing their implications for the 

labor market and inflation and the balance of risks to the outlook. 

As I noted earlier, inflation continues to run below the Committee’s 2 percent objective. Overall consumer prices, as measured by the price index for personal consumption expenditures, increased just 1⁄2 percent over the 12 months of 2015. To 

a large extent, the low average pace of inflation last year can be traced to the earlier 

steep declines in oil prices and in the prices of other imported goods. And, given 

the recent further declines in the prices of oil and other commodities, as well as the 

further appreciation of the dollar, the Committee expects inflation to remain low in 

the near term. However, once oil and import prices stop falling, the downward pressure on domestic inflation from those sources should wane, and as the labor market 

strengthens further, inflation is expected to rise gradually to 2 percent over the medium term. In light of the current shortfall of inflation from 2 percent, the Committee is carefully monitoring actual and expected progress toward its inflation goal. 

Of course, inflation expectations play an important role in the inflation process, 

and the Committee’s confidence in the inflation outlook depends importantly on the 

degree to which longer-run inflation expectations remain well anchored. It is worth 

noting, in this regard, that market-based measures of inflation compensation have 

moved down to historically low levels; our analysis suggests that changes in risk 

and liquidity premiums over the past year-and-a-half contributed significantly to 

these declines. Some survey measures of longer-run inflation expectations are also 

at the low end of their recent ranges; overall, however, they have been reasonably 

stable. 

Monetary Policy 

Turning to monetary policy, the FOMC conducts policy to promote maximum employment and price stability, as required by our statutory mandate from the Congress. Last March, the Committee stated that it would be appropriate to raise the 

target range for the Federal funds rate when it had seen further improvement in 

the labor market and was reasonably confident that inflation would move back to 

its 2 percent objective over the medium term. In December, the Committee judged 

that these two criteria had been satisfied and decided to raise the target range for 

the Federal funds rate 1⁄4 percentage point, to between 1⁄4 and 1⁄2 percent. This increase marked the end of a 7-year period during which the Federal funds rate was 

held near zero. The Committee did not adjust the target range in January. 

The decision in December to raise the Federal funds rate reflected the Committee’s assessment that, even after a modest reduction in policy accommodation, economic activity would continue to expand at a moderate pace and labor market indicators would continue to strengthen. Although inflation was running below the 

Committee’s longer-run objective, the FOMC judged that much of the softness in inflation was attributable to transitory factors that are likely to abate over time, and 

that diminishing slack in labor and product markets would help move inflation toward 2 percent. In addition, the Committee recognized that it takes time for monetary policy actions to affect economic conditions. If the FOMC delayed the start of 

policy normalization for too long, it might have to tighten policy relatively abruptly 

in the future to keep the economy from overheating and inflation from significantly 

overshooting its objective. Such an abrupt tightening could increase the risk of 

pushing the economy into recession. 

It is important to note that even after this increase, the stance of monetary policy 

remains accommodative. The FOMC anticipates that economic conditions will evolve 

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

addition, the Committee expects that the Federal funds rate is likely to remain, for 

some time, below the levels that are expected to prevail in the longer run. This expectation is consistent with the view that the neutral nominal Federal funds rate— 

defined as the value of the Federal funds rate that would be neither expansionary 

nor contractionary if the economy was operating near potential—is currently low by 

historical standards and is likely to rise only gradually over time. The low level of 

the neutral Federal funds rate may be partially attributable to a range of persistent 

economic headwinds—such as limited access to credit for some borrowers, weak 

growth abroad, and a significant appreciation of the dollar—that have weighed on 

aggregate demand. 

Of course, monetary policy is by no means on a preset course. The actual path 

of the Federal funds rate will depend on what incoming data tell us about the ecoVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00052 Fmt 6621 Sfmt 6621 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
49 

nomic outlook, and we will regularly reassess what level of the Federal funds rate 

is consistent with achieving and maintaining maximum employment and 2 percent 

inflation. In doing so, we will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In particular, stronger growth or a more rapid increase in inflation than the Committee 

currently anticipates would suggest that the neutral Federal funds rate was rising 

more quickly than expected, making it appropriate to raise the Federal funds rate 

more quickly as well. Conversely, if the economy were to disappoint, a lower path 

of the Federal funds rate would be appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with the attainment of our objectives over time. 

Consistent with its previous communications, the Federal Reserve used interest 

on excess reserves (IOER) and overnight reverse repurchase (RRP) operations to 

move the Federal funds rate into the new target range. The adjustment to the IOER 

rate has been particularly important in raising the Federal funds rate and shortterm interest rates more generally in an environment of abundant bank reserves. 

Meanwhile, overnight RRP operations complement the IOER rate by establishing a 

soft floor on money market interest rates. The IOER rate and the overnight RRP 

operations allowed the FOMC to control the Federal funds rate effectively without 

having to first shrink its balance sheet by selling a large part of its holdings of 

longer-term securities. The Committee judged that removing monetary policy accommodation by the traditional approach of raising short-term interest rates is preferable to selling longer-term assets because such sales could be difficult to calibrate 

and could generate unexpected financial market reactions. 

The Committee is continuing its policy of reinvesting proceeds from maturing 

Treasury securities and principal payments from agency debt and mortgage-backed 

securities. As highlighted in the December statement, the FOMC anticipates continuing this policy ‘‘until normalization of the level of the Federal funds rate is well 

under way.’’ Maintaining our sizable holdings of longer-term securities should help 

maintain accommodative financial conditions and reduce the risk that we might 

need to return the Federal funds rate target to the effective lower bound in response 

to future adverse shocks. 

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

50 

1Large and complex firms are U.S. BHCs and intermediate holding companies of foreign 

banking organizations that are either (i) subject to the Federal Reserve’s LISCC framework or 

(ii) have total consolidated assets of $250 billion or more or consolidated total on-balance sheet 

foreign exposure of $10 billion or more. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM JANET L. YELLEN 

Q.1. At a hearing before the House Financial Services Committee 

on November 4, you stated, ‘‘we are looking at further ways in 

which we can tailor our supervisory approach, in particular, the 

CCAR process . . . We have some ideas about how we might tailor 

it, particularly [as it applies] to smaller firms.’’ On December 18, 

the Federal Reserve Board released CCAR guidance that clarified 

existing practices, and did not introduce new tailoring, according to 

a briefing by Federal Reserve Board staff. Will the Board tailor 

CCAR expectations in a meaningful way that reflects the relative 

systemic risk of financial institutions? If so, when do you anticipate 

commencing and finalizing that effort? 

A.1. The Federal Reserve’s capital plan rule and related Comprehensive Capital Analysis and Review (CCAR) apply only to bank 

holding companies (BHCs) with total consolidated assets greater 

than $50 billion, not small- to mid-size banking organizations. 

As you note, on December 18, 2016, the Federal Reserve published two supervisory guidance letters that set forth supervisory 

expectations for large BHCs’ capital planning processes. SR letter 

15-18 (Federal Reserve Supervisory Assessment of Capital Planning and Positions for Large Institution Supervision Coordination 

Committee (LIS CC) Firms and Large and Complex Firms) sets 

forth supervisory expectations for capital planning for firms subject 

to the Federal Reserve’s LISCC framework and other large and 

complex firms, and SR letter 15-19 (Federal Reserve Supervisory 

Assessment of Capital Planning and Positions for Large and Noncomplex Firms) details the supervisory expectations for capital 

planning for firms with total consolidated assets of $50 billion or 

more that are not large and complex. 1 The guidance consolidated 

supervisory expectations that were previously communicated to the 

industry, and it formalizes the differences in expectations for firms 

of different size and complexity. Supervisory expectations applicable to SR 15-19 firms are less intensive than those applicable to SR 

15-18 firms, particularly in the expectations for model use and controls, scenario design, and governance. 

Currently, the Board is considering a broad range of issues related to the capital plan and stress testing rules and whether any 

modifications may be appropriate, including any modifications to 

the rules to reduce burden on firms that pose less systemic risk. 

The Board would publish a notice of proposed rulemaking for public comment in connection with any proposed change to the capital 

plan or stress testing rules. 

Q.2. You have stated in the past that the Federal Reserve Board 

has limited ability to tailor certain requirements under Section 165 

of Dodd-Frank. However, Section 165(a)(2) states that the Board 

may ‘‘differentiate among companies on an individual basis or by 

category,’’ taking various factors into consideration. Has the Board 

51 

2 12 U.S.C. 5365(a)(2). 

3 12 CFR 252.32. 

4 12 CFR part 252, subparts E and F. 

5 12 CFR part 252.34. 

6 12 CFR part 243. 

7 12 CFR 252.33. 

8 12 CFR part 217, subpart E. 

9 12 CFR 217.10(c)(4). 

10See 12 CFR part 249. 11 12 CFR 217.11(b). 12 12 CFR part 217, subpart H. 13 12 CFR 217.11(a)(2)(v), (a)(2)(vi), and (c) (effective January 1, 2018). 14Federal Reserve supervisory letter 14-8, available at http://www.federalreserve.gov/ 

bankinforeg/srletters/sr1408.htm. 

done all it can do under the statute to appropriately tailor its regulations? 

A.2. Under section 165 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, the Board is authorized to tailor the application of enhanced prudential standards. 2 In implementing section 165, the Federal Reserve has identified three categories of 

bank holding companies with $50 billion or more in total consolidated assets based not only on their size but also based on complexity and other indicators of systemic risk. Specifically, all bank 

holding companies with $50 billion or more in consolidated assets 

are subject to certain enhanced prudential standards, including 

risk-based and leverage capital requirements, 3 company-run and 

supervisory stress tests, 4 liquidity riskmanagement requirements, 5

resolution plan requirements, 6 and risk management requirements. 7 Bank holding companies with $250 billion or more in total 

consolidated assets or $10 billion or more in on-balance-sheet foreign assets are also subject to the advanced approaches risk-based 

capital requirements, 8 a supplementary leverage ratio, 9 more 

stringent liquidity requirements, 10 and a countercyclical capital 

buffer. 11 In identifying global systemically important banks, the 

Federal Reserve considers measures of size, interconnectedness, 

cross-jurisdictional activity, substitutability, complexity, and shortterm wholesale funding. The eight U.S. firms identified as global 

systemically important banks (GSIBs) are subject to additional requirements including risk-based capital surcharges, 12 enhanced 

supplementary leverage ratio standards, 13 and more specific recovery planning guidance. 14

Q.3. The Federal Reserve recently introduced and enhanced a variety of regulations including: more detailed Basel III capital requirements, a minimum Liquidity Coverage Ratio, margin trading rules, 

and Total Loss-Absorbing Capital requirements. While the stated 

goals of these rules are to ensure that banks have sufficient capital 

and liquidity cushions, it is not clear what the combined impact of 

such rules is on the economy. Has the Board conducted any studies 

to estimate the cumulative impact of these regulations? If not, do 

you believe that the Board should be doing so? 

A.3. The Federal Reserve conducts a variety of economic analyses 

and assessments to support the rulemaking process. In the context 

of rulemakings that have been specifically referenced, the Federal 

Reserve included economic cost and impact assessments in its margin trading and Total Loss-Absorbing Capacity (TLAC) proposals. 

As these proposals relate to a specific regulation or requirement, 

52 

the impact analyses naturally focus on the impact of the specific 

regulation in question, though impact and cost estimates can generally be aggregated across different regulatory initiatives. More 

broadly, the Federal Reserve engages in a regular quantitative impact assessment and monitoring program that is coordinated with 

other global regulators through the Basel Committee on Banking 

Supervision to assess the overall impact of prudential capital and 

liquidity requirements. This impact assessment has been conducted 

and made public regularly since 2012, and continues to inform the 

Federal Reserve’s understanding of the cost and impact of capital 

and liquidity regulation. 

More broadly, the Federal Reserve participates in a global effort 

through its participation on the Financial Stability Board (FSB) 

and the Basel Committee on Banking Supervision’s Macroeconomic 

Assessment Group. The group published a study in 2010 that assessed the overall macroeconomic impact of stronger capital and liquidity requirements. 

The Federal Reserve seriously considers the overall costs and 

benefits of all of the regulations it promulgates. The overarching 

goal of the Federal Reserve’s regulatory program is to enhance financial stability while at the same time not creating any undue 

costs or burdens for the rest of the economy. The Federal Reserve 

is committed to engaging in an ongoing assessment program to better understand how post-crisis reform is influencing financial stability as well as the economic costs of enhanced regulation. 

Q.4. Members of this Committee have raised concerns that U.S. 

regulators at the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS) are not representing the United States in a coordinated, cohesive and centralized manner. 

Have you ever represented the Federal Reserve at an FSB or 

IAIS meeting? 

If not you, then who represents the Federal Reserve at these 

meetings? 

Have you had any meetings with the Treasury Secretary or the 

SEC Chair in advance of these meetings to develop a cohesive and 

unified strategy? 

A.4. As members of the FSB and International Association of Insurance Supervisors (IAIS), participation in these for a require certain commitments of staff and resources. Governor Daniel Tarullo 

or senior employees of the Federal Reserve, such as Mark Van Der 

Weide and Thomas Sullivan, represent the Federal Reserve at 

meetings of the FSB and IAIS. The Federal Reserve’s representatives are supported by various staff members. 

The Federal Reserve confers with other agencies regularly on 

many FSB and IAIS topics. With regards to U.S. representation at 

the FSB and IAIS, several U.S. agencies participate in the work of 

the FSB and the IAIS, and provide input that considers implications for U.S. domiciled firms that we supervise. The Federal Reserve, the U.S. Securities and Exchange Commission, and the U.S. 

Department of Treasury are all members of the FSB and engage 

in the FSB’s global financial stability work. Related to the work of 

the IAIS, the Federal Reserve is participating alongside the FedVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
53 

eral Insurance Office (FIO), the National Association of Insurance 

Commissioners (NAIC), and State insurance regulators in the development of international insurance standards that best meet the 

needs of the U.S. insurance market and consumers. The Federal 

Reserve, along with other members of the U.S. delegation at the 

FIO and the NAIC, actively engage U.S. interested parties on 

issues being considered by the IAIS. 

Additionally, the FSB and the IAIS have public consultation 

processes designed to facilitate stakeholder participation and solicit 

industry and public views on key issues. The U.S. agencies ensure 

that U.S. comments are considered in the final deliberation process 

on such issues. However, it is important to note that neither the 

FSB, nor the IAIS, has the ability to impose requirements in any 

national jurisdiction. Implementation in the United States would 

have to be consistent with U.S. law and comply with the U.S. administrative rulemaking process, which would include issuing proposed rules for public comment. 

Q.5. A recent report by the Office of Financial Research discussed 

the risk of a downturn in the credit markets, noting that ‘‘nonfinancial corporate balance sheet leverage is close to peak levels 

. . . and weak underwriting standards have persisted.’’ In your 

opinion, has the low interest rate environment contributed to increased leverage and reductions in credit quality? What other factors are involved? 

A.5. Corporate bond yields have been very low in recent years by 

historical standards, which has made borrowing through debt markets more attractive for corporations and has likely contributed to 

the notable increase in corporate borrowing. A substantial amount 

of the recent debt issuance has been used by firms to refinance existing debt into lower rates and longer maturities. In addition 

though, outstanding debt has grown and aggregate leverage ratios 

for the corporate sector have increased noticeably over the past few 

years and are now close to the top of their range during previous 

economic expansions. Even so, cash flow coverage ratios for the 

nonfinancial corporate sector remain fairly moderate. 

A large part of the deterioration in credit quality in the corporate 

sector can be attributed to the steep downturn in oil prices and the 

resultant outlook for the energy sector, which had borrowed heavily 

from debt markets before the sharp drop in oil prices since mid2014. Indeed, rating downgrades on corporate bonds over the past 

year have been particularly concentrated in the energy sector. 

Signs of some deterioration in credit quality in other industries are 

also apparent but notably smaller. 

Q.6. The Federal Reserve Board’s Total Loss Absorbing Capacity 

(TLAC) rule would require U.S. subsidiaries of foreign banks to include certain contractual provisions in their long-term debt instruments, including a contractual clause providing that the Federal 

Reserve can convert the debt into equity of the bank or cancel the 

debt, even if the bank is not in resolution proceedings. It is unclear 

if such long-term debt will be treated as debt or equity for tax purposes. 

Is the intended outcome of the Federal Reserve’s proposal that 

long-term debt should be treated as equity for tax purposes? 

54 

15 80 Federal Register 74929 (November 30, 2015). 

If so, does the Board intend to take the same approach for U.S. 

banks? 

Has the Board consulted with the Treasury Department on this 

issue? 

A.6. With regard to the Federal Reserve’s proposed TLAC rule, the 

purpose of the proposed internal long-term debt requirement is 

generally to protect the financial stability of the United States and, 

if applicable, to facilitate the single-point-of-entry resolution of the 

foreign GSIB parent of a given U.S. intermediate holding company. 

To accomplish these goals, it is important that the U.S. intermediate holding company be recapitalized (if necessary) on a goingconcern basis, without entering a resolution proceeding and without disruption to the foreign GSIB’s U.S. operations. To make such 

a going-concern recapitalization possible, the proposed rule would 

require the U.S. intermediate holding companies of foreign GSIBs 

to issue to a foreign parent entity a minimum amount of long-term 

debt instruments with a contractual provision providing for the 

Federal Reserve to convert that long-term debt into equity under 

specified conditions. Under the proposal, one of the required preconditions for conversion would be a determination by the Federal 

Reserve that the U.S. intermediate holding company is in default 

or in danger of default. 

By contrast, the TLAC proposal does not seek to provide for the 

recapitalization of the top-tier holding company of a U.S. GSIB on 

a going-concern basis. Rather, the proposed rule would require 

those entities to issue plain vanilla 15 long-term debt, with no provision for conversion to equity. The recapitalization of a U.S. GSIB 

would be effected only through the top-tier parent holding company’s entry into a resolution proceeding, during which the entity’s 

long-term debt would be subject to write-down. 

The period for public comment on the TLAC proposal has ended, 

and the Federal Reserve is now reviewing the comments that it has 

received. Some of these comments address the potential tax treatment of long-term debt instruments that the proposed rule would 

require covered entities to issue. The Federal Reserve will give 

careful consideration to all comments as it moves towards the 

issuance of a final rule. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM JANET L. YELLEN 

Q.1. As part of the policy tools it is using to normalize interest 

rates, the Federal Reserve has set up reverse repurchase facilities. 

It is my understanding that there are two such RRP facilities at 

the Federal Reserve Bank of New York (FRBNY)—one for domestic 

participants (with a regularly updated list of counterparties posted 

on the FRBNY’s Web site) and one for foreign central banks (where 

a list of counterparties does not appear to be publicly available). I 

have several questions regarding these facilities. 

Which entities or committees set the policy which the foreign 

RRP facility abides by? Is it the FOMC? The Board of Governors? 

The FRBNY? 

55 

1See http://www.federalreserve.gov/monetarypolicy/files/FOMClDomesticAuthorization.pdf. 2See ADMO, paragraph 4. 

3See figure 16 from Simon Potter’s presentation, ‘‘Money Markets After Liftoff: Assessment 

to Date and the Road Ahead’’, February 22, 2016. https://www.newyorkfed.org/newsevents/ 

speeches/2016/pot160222. The accompanying figures and data are available at https:// 

www.newyorkfed.org/medialibrary/media/newsevents/speeches/2016/pot160222/full-presentation.pdf and https://www.newyorkfed.org/medialibrary/media/newsevents/speeches/2016/ 

pot160222/data-r.xlsx. 4From Treasury International Capital System, Major Foreign Holders of U.S. Treasury Securities, http://ticdata.treasury.gov/Publish/mfhhis01.txt. 

A.1. The Federal Open Market Committee (FOMC) authorizes the 

operation of the foreign repurchase (RP) pool for foreign central 

bank and international accounts. The most recent authorization 

language can be found in the Committee’s Authorization for Domestic Market Operations (ADMO) from January of this year. 1

Q.2. How is pricing set for the foreign RRP facility? How does the 

policy and process compare to that which is applied to the domestic 

RRP facility? 

A.2. Pricing for the foreign RP pool is ‘‘undertaken on terms comparable to those available in the open market.’’ 2 In fact, the rate 

on the pool has averaged about one basis point below the overnight 

tri-party repo rate and has moved very closely over time with market rates. 3 This policy toward pricing for the foreign RP pool has 

not varied with changes in the setting of monetary policy by the 

FOMC. 

By contrast, the offering rate on the domestic reverse repurchase 

(RRP) facility is set by the FOMC to help maintain the Federal 

funds rate at the FOMC’s monetary policy target. As such, the 

FOMC is using the domestic RRP rate as a monetary policy tool, 

which is distinct from the way it uses the foreign RP pool, which 

is as an investment service to foreign central banks and other official account holders. 

Q.3. Why is the foreign RRP rate, beginning in 2015, relatively 

high given the trend? Why did the Fed feel it was necessary to 

price foreign RRP rates higher than 6-month Treasury bill rates? 

A.3. The rate offered on the foreign RP pool is tied to a comparable-maturity, market-based Treasury repo rate. As such, any 

change in the relation between the rate on the foreign RP pool and 

the rate on 6-month Treasury bills is the result of changes in market conditions in the repo and Treasury markets and not the result 

of a change in Federal Reserve policy with respect to the foreign 

RP pool. 

Q.4. As expected, foreigners rotated tens of billions of dollars out 

of Treasury bills and instead increased their usage of the foreign 

RRP facility. Was this an intended and anticipated effect by the 

Fed? 

A.4. Foreign official holdings of Treasury bills were little changed 

on net in 2015—at $335.3 billion in December 2014 and $336.7 billion in December 2015. 4 Thus, it is not apparent that foreign official holders of Treasury bills did reduce their holdings. 

However, usage of the foreign RP pool has increased following a 

relaxation in restrictions on the size of investments in the pool. Official investors have for some time wanted to increase their positions in the pool, but, prior to 2008, participation was restricted beVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00059 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
56 

5See Simon Potter’s presentation, p.11, for a discussion of this point. 

6 As of the fourth quarter of 2015, total foreign holdings of money market mutual fund shares, which includes holdings by official foreigners, were $114.5 billion, compared to total money market mutual fund assets of $2,715.7 billion. See L.206 Money Market Mutual Fund Shares, Board 

of Governors, http://www.federalreserve.gov/apps/fof/DisplayTable.aspx?t=1.206. 

cause movements in the pool affected market interest rates, which 

could have interfered with the implementation of monetary policy. 

Since 2008, however, in the environment of reserve abundance, 

movements in the repo pool have had little to no impact on market 

rates. Accordingly, to accommodate the demands of account holders, the Federal Reserve eased the constraints on the permitted 

size of the investments in the pool. The Federal Reserve was not 

seeking to increase pool investments, but given the previous interest expressed by account holders, it was no surprise that investments increased when these constraints were lifted. 

Q.5. To what extent was the Fed motivated by a desire to substitute the use of deposits at U.S. banks with cash pools (and the 

accompanying need for short-term risk-free Treasury instruments)? 

A.5. As noted above, the Federal Reserve was not seeking to increase the size of the pool, nor was it seeking to induce official account holders to substitute one type of asset for another. Demand 

for investments in the foreign RP pool has been driven solely by 

the interests of the foreign official account holders. 

Q.6. It would seem to me that this policy is encouraging foreigners 

to use the Fed’s foreign RRP facility rather than making use of 

U.S. money market funds, the largest of which are counterparties 

to the Fed through the domestic RRP facility. Was this an intended 

and anticipated effect by the Fed? 

Additionally, to what extent is the Fed concerned that pursuing 

this policy undermines the health and depth of money market 

funds? 

A.6. The foreign RP pool is a long-standing service that the Federal 

Reserve has provided to foreign central banks, foreign Governments, and official international institutions, and the way in which 

the interest rate for the pool is calculated has not changed. Although the restrictions on the size of investments have changed recently, the resulting changes in the overall size of the foreign RP 

pool have had no noticeable effect on market interest rates because 

of the large volume of reserves now in the system. 5 Finally, these 

account holders generally do not hold significant balances with 

money market funds, so shifts into the foreign RP pool are not directly affecting the assets under management at money market 

funds. 6

Q.7. The Fed has expressed some reluctance to allow too much 

usage of the domestic RRP facility, fearing that the market would 

become too used to the Fed as a counterparty. Additionally, there 

is concern that the Fed could increase systemic risk by creating a 

single point-of-failure for cash markets, rather than a diffused system that has traditionally been in place through the interbank 

market. Does the Fed share these concerns as it relates to the foreign RRP facility? 

A.7. The Federal Reserve closely monitors the impact of its operations to determine whether they are having any unintended or unVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
57 

desirable impact. If such impact were to be observed, the FOMC 

could then take appropriate action to ameliorate it. The Federal 

Reserve maintains the right to limit the size of the RP pool at any 

time. 

Q.8. On October 30, 2015, the Federal Reserve Board proposed its 

Total Loss-Absorbing Capacity (TLAC) rule. As I have written to 

you in the past, I support a strong and workable TLAC with the 

goal of making the failure and resolution of large financial institutions more manageable and without taxpayer bailouts. However, I 

have a few questions that I would like addressed. 

As I read the rule, bank holding companies (BHCs) designated 

as a global systemically important bank (GSIB), or the bridge companies that succeed them, would be prohibited from obtaining secured liquidity from the private sector, such as debtor-in-possession 

(DIP) financing, as part of a resolution under Title I under DoddFrank. 

Did the Fed intend to restrict access to DIP financing? 

Doesn’t this contradict Dodd-Frank’s stated goal of using Title I 

resolution as a first option if mechanically the BHC would find 

bankruptcy unworkable without short-term liquidity provided without taxpayer support? 

Will you commit to explicitly allowing these firms to access DIP 

financing during bankruptcy proceedings? 

A.8. The proposed total loss-absorbing capacity (TLAC) rule would 

prohibit global systemically important banking organization (GSIB) 

top-tier holding companies from issuing debt instruments with an 

original maturity of less than one year to a third party. The general purpose of this prohibition is to mitigate the risk posed to the 

financial stability of the United States by potentially destabilizing 

short-term funding runs on those holding companies. 

The proposed prohibition generally should not prevent a GSIB 

from obtaining needed liquidity, including during resolution. This 

is because the proposed TLAC rule would generally require that a 

GSIB’s operations be engaged in by its subsidiary legal entities 

rather than by its top-tier holding company, and it would place no 

restriction on the ability of those operating subsidiaries to obtain 

liquidity themselves (including both secured and unsecured and 

long-term and short-term liquidity). As discussed in the preamble 

to the proposed TLAC rule, the proposal is intended to mitigate the 

risk of liquidity runs on those subsidiary entities by facilitating single-point-of-entry (SPOE) resolution, pursuant to which only the 

top-tier holding company would enter resolution while its operating 

subsidiaries would continue normal operations. By enhancing the 

credibility of SPOE resolution, in which losses would be borne by 

the equity holders and creditors of the top-tier holding company, 

the proposal should increase the confidence of the creditors of GSIB 

operating subsidiaries and reduce their incentive to run if the 

GSIB experiences financial distress. 

We are committed to making the GSIBs more resolvable under 

the U.S. Bankruptcy Code, consistent with Title I of the DoddFrank Wall Street Reform and Consumer Protection Act (DoddFrank Act), as well as under the orderly liquidation authority 

(OLA) provided by Title II of the Dodd-Frank Act, and the proviVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
58 

sions discussed above are intended to facilitate orderly resolution 

under both of those frameworks. As we move forward with the 

process of considering comments and finalizing the proposed TLAC 

rule, we will consider how to address issues related to debtor-inpossession funding during a resolution under the U.S. Bankruptcy 

Code. 

Q.9. Similarly, provisions restricting the issuance of short-term 

debt by intermediate holding companies (IHCs) would preclude 

JHCs from obtaining DIP financing in bankruptcy. 

Was this intended? 

Would the Fed consider making it explicit that IHCs would be 

able to obtain DIP financing if they were to file for bankruptcy? 

A.9. Similarly, the identical restrictions on the issuance of shortterm debt by the U.S. intermediate holding companies (IHCs) of 

foreign GSIBs were intended to promote resolvability under both 

the U.S. Bankruptcy Code and the OLA, as well as SPOE resolution of the foreign GSIB parent entity in its home jurisdiction. As 

we move forward, we will consider how to address issues related 

to debtor-in-possession funding with respect to foreign GSIB IHCs 

as well as U.S. GSIBs. 

Q.10. It seems very clear that the Fed is heavily restricting the use 

of convertible features in the debt instruments allowed. 

Is this to maintain flexibility under Title II Orderly Resolution 

Authority? In effect, is this preserving a regulator’s ability to decide when to place a firm into resolution and how to structure the 

capital stack? 

Wouldn’t markets be better at signaling when a firm needs to be 

resolved and wouldn’t convertible features strengthen the value of 

that signal? 

Wouldn’t having convertible features as an option allow BHCs 

and investors the ability to be explicit and clear of creditor rights 

going in to a resolution? 

A.10. The proposed TLAC rule would restrict the use of convertible 

features in eligible long-term debt instruments in order to safeguard the fundamental objective of the proposal’s standalone longterm debt requirement: ensuring that a failed GSIB will have at 

least a fixed minimum amount of loss-absorbing capacity available 

to absorb losses at the time that its holding company enters resolution. This objective is equally important for increasing the prospects for orderly GSIB resolution under both the U.S. Bankruptcy 

Code and the OLA. Debt instruments with features that would 

cause conversion into or exchange for equity prior to the holding 

company’s entry into resolution would not serve this goal, since the 

instruments could convert into equity—which absorbs losses on a 

going-concern basis—before the firm enters resolution and could 

then be depleted prior to failure, leaving the firm with insufficient 

loss-absorbing capacity for orderly resolution at the point of failure. 

Thus, while convertible debt, like equity, could reduce a GSIB’s 

probability of failure, it would do little to achieve the proposal’s 

principal goal of reducing the harm that a GSIB’s failure would do 

to the financial stability of the United States. 

The proposed TLAC rule is intended to promote clarity about the 

consequences of a GSIB’s failure for various classes of creditors, in 

59 

particular, by making clear that losses will generally be absorbed 

first by the holding company’s TLAC holders, and thereby to increase the role of market discipline played by the entities that hold 

the holding company’s equity and unsecured long-term debt. 

Question 12 of the preamble to the proposed TLAC rule invites 

comment on whether eligible long-term debt instruments should be 

permitted to have any of the features that would be prohibited 

under the proposal (which include provisions for conversion). As we 

move toward finalization, we will consider whether allowing eligible long-term debt instruments to include any conversion features 

would be appropriate in light of the objectives of the proposed rule. 

Q.11. The rule proposes a requirement that internal TLAC be 

issued to a foreign parent. 

Would this outright prohibit a foreign parent’s ability to use its 

receivables on internal TLAC to recapitalize a foreign affiliate of 

the IHC? 

If this is an attempt to ring-fence internal TLAC, wouldn’t this 

make the preferred single-point-of-entry (SPOE) strategy for resolution through bankruptcy or OLA unworkable should foreign jurisdictions take the same approach? 

A.11. The proposed TLAC rule would require that a foreign GSIB 

IHC’s cross-border internal TLAC instruments be issued to a foreign parent entity that controls the IHC. The primary purpose of 

including this restriction, rather than permitting internal TLAC to 

be issued to another foreign entity within the foreign GSIB or to 

a third party, is to prevent the conversion of internal TLAC into 

equity from effecting a change in control over the IHC. A change 

in control could create additional regulatory and management complexity that would be undesirable and potentially disruptive during 

resolution. Ensuring that internal long-term debt instruments are 

held by a foreign parent entity also safeguards the financial stability of the United States by ensuring that losses incurred by a 

foreign GSIB IHC will be passed out of the U.S. economy during 

resolution and by ensuring that the foreign GSIB has sufficient 

skin in the game to encourage it to support the IHC rather than 

simply allowing it to fail if its equity stake is depleted. 

Question 32 of the preamble to the proposed TLAC rule invites 

comment on the definition of eligible internal TLAC instruments 

(which includes the requirement that such instruments be issued 

to a foreign parent that controls the IHC). We are committed to facilitating GSIB resolution and will consider whether a modification 

to this element of the internal TLAC proposal would be appropriate 

in light of the considerations discussed above and the objectives of 

the proposed rule. 

Q.12. In 2014, I wrote a letter to you on the Supplementary Leverage Ratio (SLR) expressing concern that the rule, at least as applied to custody banks, did not reflect their unique business model 

and risks they presented to the financial system. At the time I 

raised concerns that this would harm their customers, because custody banks would find it economically unattractive to accept cash 

deposits during times of stress. 

60 

1See 79 Fed. Reg. 57725 (September 26, 2014), available at http://www.gpo.gov/fdsys/pkg/ 

FR-2014-09-26/pdfl2014-22083.pdf. 2The Agencies have reserved authority under the capital rule to require a banking organization to use a different asset amount for an exposure included in the SLR to address extraordinary situations. See 12 CFR 3.l(d)(4) (OCC); 12 CFR 217.1(d)(4) (Federal Reserve); 12 CFR 

324.1(d)(4) (FDIC). 

Since the rule’s adoption and given the state of play in shortterm markets, have you evaluated the extent to which it should be 

revisited? 

A.12. The Federal Reserve, the Office of the Comptroller of the 

Currency, and the Federal Deposit Insurance Corporation (the 

Agencies) finalized he supplementary leverage ratio rule (SLR rule) 

in September 2014, which requires internationally active banking 

organizations to hold at least 3 percent of total leverage exposure 

in tier 1 capital, calculates total leverage exposure as the sum of 

certain off-balance sheet items and all on-balance sheet assets. 1

The on-balance sheet portion does not take into account the level 

of risk of each type of exposure and includes cash. As designed, the 

SLR rule requires a banking organization to hold a minimum 

amount of capital against on-balance sheet assets and off-balance 

sheet exposures, regardless of the risk associated with the individual exposures. This leverage requirement is designed to recognize that the risk a banking organization poses to the financial system is a factor of its size as well as the composition of its assets. 

Excluding select categories of on-balance sheet assets, such as cash, 

from total leverage exposure would generally be inconsistent with 

this principle. 

We understand the concern that certain custody banks, which act 

as intermediaries in high volume, low-risk, low-return financial activities, may experience increases in assets as a result of macroeconomic factors and monetary policy decisions, particularly during 

periods of financial market stress. 2 Because the SLR is not a riskbased measure, it is possible that increases in banking organizations’ holdings of low-risk, low-return assets, such as deposits, 

could cause this ratio to become the binding regulatory capital constraint. However, when choosing an appropriate asset profile, 

banking organizations consider many factors in addition to regulatory capital requirements, such as yields available relative to the 

overall cost of funds, the need to preserve financial flexibility and 

liquidity, revenue generation, the maintenance of market share and 

business relationships, and the likelihood that principal will be repaid. 

Federal Reserve staff has held meetings with and reviewed materials prepared by the custody banks in connection with the implementation of the SLR. The Federal Reserve continuously considers 

potential improvements to its regulations based on feedback from 

affected parties and the general public but is not considering making any modifications to the SLR at this time. The SLR requirement and the enhanced SLR requirements do not become effective 

until January 1, 2018. According to public disclosures of firms subject to these requirements, the GSIBs have made significant 

progress in complying with the enhanced SLR requirements. 

Q.13. It is my understanding that custody banks have been in to 

meet with the Fed on the problems created by the SLR in times 

61 

3 See, for example, 12 CFR part 217 (Federal Reserve). 4 12 U.S.C. 5371. 

5 12 CFR part 217, subpart E. 

6 12 CFR part 217, subpart H. 

7 12 CFR 217.11(a)(2)(v), (a)(2)(vi), and (c) (effective January 1, 2018). 

8Federal Reserve supervisory letter 14-8, available at http://www.federalreserve.gov/ 

bankinforeg/srletters/sr1408.htm. 

of stress. What has your response to them been? Where do you anticipate their clients placing their cash if custody banks are penalized for taking it in on deposit? 

A.13. Please see response to Question 12. 

Q.14. I remain concerned that despite Congress expressing a desire 

for the Fed and other regulators to reevaluate and recalibrate the 

treatment different-sized banks receive under rules promulgated in 

accordance with Basel III, there has been no meaningful improvement. As a result, consumers and small business-owners find it 

harder and more expensive to borrow. 

Given that the asset and foreign activity thresholds used to implement Basel are woefully outdated and pre-date the 2008 Financial Crisis, wouldn’t it be better for the Fed to abandon these 

standards in favor of those which more closely reflect the current 

banking landscape and the risks posed by today’s institutions? 

A.14. The financial crisis showed there was a need for higher quantities of higher quality capital for banks of all sizes so that they 

could continue operating and lending to their communities during 

periods of stress. To this end, the revised regulatory capital rules 

adopted by the Agencies strengthen the quantity and quality of 

banking organizations’ capital, thus enhancing their ability to continue functioning as financial intermediaries during stressful periods, reducing risks to the deposit insurance fund and the chances 

of taxpayer bailouts, and improving the overall resilience of the 

U.S. financial system. 3 Consistent with section 171 of the DoddFrank Act, the Agencies’ capital rules apply to all insured depository institutions and depository institution holding companies that 

have $1 billion or more in total consolidated assets or that engage 

in significant nonbanking activities. 4

In addition, the Agencies have tailored the application of certain 

components of the capital rules. Certain large and more complex 

banking organizations are subject to additional capital requirements in light of their size and increased risk profile. For example, 

banking organizations that have $250 billion in total consolidated 

assets or total consolidated on-balance sheet foreign exposure of 

$10 billion or more are subject to the advanced approaches capital 

rules, a supplementary leverage ratio requirement, and the requirement to recognize most elements of accumulated other comprehensive income in regulatory capital. 5 In addition, the eight 

U.S. firms identified as global systemically important banks 

(GSIBs) are subject to risk-based capital surcharges, 6 enhanced 

supplementary leverage ratio standards, 7 and more specific recovery planning guidance. 8

Underlying this tailoring was the principle that progressively 

more stringent regulation should apply to the different firms based 

on their relative importance to the financial system, and thus the 

harm that could be expected to the system if they failed. The FedVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
62 

9 12 U.S.C. 5365. 

eral Reserve continues to consider ways to further tailor the capital 

standards and related requirements to reflect differences in risk 

among firms. 

Q.15. Has the Fed considered using the Fed’s own systemic indicator approach? Currently the systemic indicator approach is applied for some rules but not for others. 

A.15. As indicated in the response to Question 14, the Federal Reserve has established tailored regulatory requirements and supervisory expectations since the recent financial crisis for the large 

banking organizations that take into account macroprudential considerations and systemic risk. These include various enhanced prudential standards under section 165 of the Dodd-Frank Act. 9

Q.16. Would you agree that a more holistic approach, such as that 

guided by the Fed’s systemic indicators, would assist in better calibrating rules, such as the LCR, than simple asset thresholds? 

A.16. As I have stated in the past, one-size-fits-all should not be 

the model for regulation. The Federal Reserve has made it a top 

priority to ensure that we appropriately tailor our regulation and 

supervision of banks to their size, complexity, and risk. As indicated in the responses to Questions 14 and 15, the Federal Reserve 

has used a variety of measures to tailor its prudential requirements. The Federal Reserve continues to consider ways to further 

tailor the standards to reflect differences in risk among firms. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM JANET L. YELLEN 

Q.1. In 2009, the Federal Reserve expressly recognized that the insurance premium finance industry was an essential source of credit 

to the Nation’s small business community and vital to the restoration of the Nation’s economy when it designated insurance premium finance loans as one of the select categories of collateral eligible for its Term Asset Backed Securities Loan Facility (TALF). 

Today, the insurance premium finance industry provides loans to 

finance the purchase of commercial insurance coverage worth more 

than $40–45 billion in annual premiums. 

I am writing specifically to ask how the Fed intends to enforce 

a forthcoming final rule, entitled ‘‘Customer Due Diligence Requirements for Financial Institutions’’, that is to be issued by the Department of the Treasury and the Financial Crimes Enforcement 

Network (FinCEN) imminently. I am concerned that this rule could 

adversely affect the ability of bank-owned insurance premium finance companies to provide financing for small businesses that is 

critical to their day-to-day operations. The Fed should work closely 

with Treasury and FinCEN when the rule comes out to avoid any 

unintended consequences of implementation. 

In light of the Fed’s recognition of this industry’s significance as 

a source of affordable, essential credit to small businesses, I would 

respectfully ask the following: 

FinCEN long ago determined that purchases of property and casualty insurance policies by insureds from insurance companies in 

63 

1 31 CFR §1020.100(c), (a). 2 31 CFR §103.121(a)(i). 3 Interagency Interpretive Guidance on Customer Identification Program Requirements Under 

Section 326 of the USA PATRIOT Act, FAQs Final CIP Rule (April 28, 2005). 4 31 CFR §1020.220(a)(2)(i). 5 31 CFR §1020.220(a)(2)(ii). 6 31 CFR §1020.220(a)(3) and (a)(5). 7See generally, Federal Financial Institution Examination Counsel, Bank Secrecy Act/AntiMoney Laundering Examination Manual (2014) (available at: https://www.ffiec.gov/bsa—am1— 

infobase/pages—manual/manual—online.htm). The FFIEC member agencies include the Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, as well as the Federal 

Reserve Board. 

and of themselves do not present any appreciable risk of money 

laundering or other financial crimes and have therefore been excluded from applicable FinCEN regulations. Accordingly, there does 

not appear to be any appreciable risk that insurance premium financing will be used to launder money or fund terrorism. What is 

the basis for the Fed applying CIP requirements to premium finance companies and when specifically can we expect to hear specific guidelines on how Fed enforcement will look? 

A.1. We understand the concerns that have been raised by some in 

the insurance premium finance industry regarding the requirement 

to collect customer identification information under the Bank Secrecy Act (BSA). In 2003, Financial Crimes Enforcement Network 

(FinCEN) and the Federal banking agencies issued an interagency 

Customer Identification Program (CIP) rule implementing section 

326 of the USA PATRIOT Act. The CIP rule requires banks and 

other financial institutions to form a reasonable belief regarding a 

customer’s identity when opening an account. 1 The CIP rule applies to any ‘‘formal banking relationship established to provide or 

engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit.’’ 2 The CIP rule does not exempt 

accounts established for the purpose of insurance premium financing. The CIP rule applies equally to banks and their subsidiaries 

when opening an account within the meaning of the rule. 3

The requirements of the CIP rule are typically satisfied by adopting risk-based procedures at account opening that enable the bank 

to verify the customer’s identity to the extent reasonable and practicable. First, a bank’s CIP must obtain a name, date of birth, address, and identification number from a customer who is an individual. 4 Second, the bank must adopt identity verification procedures that describe when and how the bank will verify the customer’s identity using documentary or nondocumentary methods. 5

Finally, the CIP rule has specific account record keeping and notice 

requirements. 6 The procedures used by the Federal Reserve and 

other banking agencies to examine a bank’s compliance with the 

CIP rule are identified in the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) manual published by the Federal Financial Institutions Examination Council member agencies. 7

In 2014, separate from the CIP rule, FinCEN issued a proposed 

rule that establishes customer due diligence (CDD) requirements 

for banks and other financial institutions with obligations under 

BSA. As proposed, the CDD rule requires banks to identify the beneficial owner(s) of any legal entity customer who opens an ‘‘account’’ within the meaning of the CIP rule. Although the proposed 

64 

CDD rule exempts certain customers, these exemptions do not extend to customers who establish an insurance premium financing 

relationship with a bank or its subsidiary. The Federal Reserve 

does not have the authority to exempt insurance premium finance 

companies from any increased costs associated with FinCEN’s proposed CDD rule. The Federal Reserve’s responsibility is limited to 

examining banks under its supervision for compliance with the 

CDD rule once FinCEN reaches its final determination. Indeed, 

only FinCEN retains the authority to determine whether the final 

CDD rule will apply to the insurance premium financing industry. 

Q.2. I am concerned that the Fed’s application of CIP requirements, once the rule is finalized, to bank-owned premium finance 

companies will result in higher costs to small businesses that depend on affordable premium financing to operate. How would the 

Fed propose to address this presumably unintended consequence of 

applying CIP requirements to bank-owned premium finance lenders? 

A.2. Please see response to Question 1. 

Q.3. Since it is not clear that even the existing CIP requirements 

should apply to the premium finance industry, will you please confirm that the Fed will not apply the proposed incremental CIP requirements (if such rules become final) to the insurance premium 

finance industry? Absent such confirmation, please explain the rationale for application of incremental CIP requirements to bankowned insurance premium finance companies. 

A.3. Please see response to Question 1. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM JANET L. YELLEN 

Q.1. Through our previous correspondence you have stated that, 

‘‘we are committed to a formal rulemaking process in the development of a domestic insurance capital standard. Issuance of a final 

rule will commence after we assess the feedback given during the 

Notice of Proposed Rulemaking.’’ 

Do you expect that proposed rulemaking will be issued in 2016, 

and if so when? 

A.1. The Federal Reserve remains committed to tailoring its approach to consolidated supervision of insurance firms, including the 

development and application of a domestic regulatory capital 

framework and other insurance prudential standards, to the business of insurance, reflecting insurers’ different business models and 

systemic importance compared to other firms supervised by the 

Federal Reserve. Moreover, as you note, we are committed to a formal rulemaking process in the development of a domestic insurance capital standard. We are approaching our mandate carefully 

and are engaged in a deliberative process. We are committed to following a transparent rulemaking process that will include a public 

comment period on a concrete proposal. 

Q.2. You have stated that the Board is committed to a capital approach that is tailored to the unique risks of insurers and one that 

is appropriate for the U.S. market, insurers, and consumers. Please 

65 

provide specific decisions that have been made on how the Board 

may tailor regulations to account for the difference between insurance businesses and the banking sector. 

A.2. As stated in the answer above, in our consolidated supervision 

of insurance firms, the Federal Reserve remains committed to tailoring its supervisory approach, including a domestic regulatory 

capital framework and other insurance prudential standards, to the 

business of insurance, reflecting insurers’ different business models 

and systemic importance compared to other firms supervised by the 

Federal Reserve. The Federal Reserve appreciates that insurance 

involves unique risks among financial institutions, encompassing 

both liabilities and assets, and it is important to keep in mind the 

liability structure of firms in determining capital requirements for 

insurance companies, particularly with regard to the mix of the insurers’ activities. It would be premature to comment on how the 

Federal Reserve may treat the unique risks of certain insurance 

lines, mix of business and the like, before we have fully evaluated 

the potential options and complicated our deliberations. We are, 

however, approaching our mandate carefully and with proper deliberation. In our development of domestic standards, we continue to 

solicit views from external parties and engage in internal deliberation as we develop the domestic capital frameworks as well as rulemaking regarding other aspects of the Federal Reserve’s mandate 

and authority as set out in the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. Moreover, The Insurance Capital Standards Clarification Act of 2014 gave the Federal Reserve further 

flexibility to tailor a capital standard to the business of insurance. 

Q.3. Will the Board issue one proposed domestic capital rule for all 

insurers it supervises? If the Board is currently exploring multiple 

domestic capital standards what are the possible benefits and detriments to this approach based on the Board’s evaluations so far? 

A.3. The Federal Reserve is considering a variety of options for the 

domestic capital standards that reflect the unique risks of certain 

insurance lines, mix of business, and other factors. However, the 

Federal Reserve has not fully evaluated these options and has not 

completed its deliberations, so it would be premature to comment 

on these matters. In our consolidated supervision of insurance 

firms, the Federal Reserve remains committed to tailoring its supervisory approach, including a domestic regulatory capital framework and other insurance prudential standards, to the business of 

insurance, reflecting insurers’ different business models and systemic importance compared to other firms supervised by the Federal Reserve. Moreover, we are committed to a formal rulemaking 

process in the development of insurance prudential standards. 

Q.4. As a member of the Financial Stability Oversight Council 

what information does the Board provide to systemically important 

financial institutions on how they can de-risk and de-designate? Do 

you support providing a clear roadmap or analysis on actions a 

company can take to be less of a potential risk to the financial system? 

A.4. The Federal Reserve Board’s (Board) regulations and supervisory guidance applicable to the largest U.S. bank holding companies and nonbank financial companies that are designated by the 

66 

Financial Stability Oversight Council (FSOC) are intended to reduce the threat that could be posed to U.S. financial stability by 

the material financial distress or failure of these organizations and 

promote their safe and sound operations. Such regulations are designed to increase the resilience of systemically important financial 

institutions and foster such firms’ ability to provide credit and 

other financial services in times of financial stress. Through 

speeches and testimony, the Board and its staff also provide information on how financial institutions, both banks and nonbanks, 

can reduce the risk they could pose to U.S. financial stability. 

FSOC designation of nonbanks is not intended to be permanent. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act) provides that the FSOC annually review designations to make sure that they remain appropriate and take into account significant changes at the firms that materially affect the 

FSOC’s determination. At the time of designation, nonbank financial companies are given a detailed basis for the determination that 

a nonbank financial company should be subject to supervision by 

the Board. Factors include the extent of short-term funding activities at those organizations, the firms’ products and associated 

short-term liabilities, their capital markets activities, securities 

lending, over the counter derivatives, and interconnectedness with 

the rest of the financial system. Firms can use that information, as 

well as factors the FSOC is required to consider under the DoddFrank Act, to guide their efforts to reduce their systemic footprint. 

Q.5. During your testimony you stated to me that you recognize 

that regulatory burden is a significant issue for many banks and 

it is something the Board will do its best to mitigate particularly 

for community banks. You also stated the Board will do everything 

in its power to look for ways to simplify and control regulatory burdens for community banks. What specific actions will the Board 

take to tailor or simplify regulations specifically for community 

lenders this year? 

A.5. The Federal Reserve has long maintained that our regulatory 

efforts should be designed to minimize regulatory burden consistent with the effective implementation of our statutory responsibilities. In addition, the Federal Reserve and the other banking 

agencies have developed a number of compliance guides that are 

specifically designed to assist community banks’ understanding of 

applicable regulatory requirements. 

Generally, the Federal Reserve strives to balance efforts to ensure that supervision and regulation are calibrated appropriately 

for smaller and less risky institutions with our responsibility to ensure that consumer financial transactions are fair and transparent, 

regardless of the size and type of supervised institutions involved. 

The Federal Reserve has worked to minimize regulatory burdens 

for community banks, by fashioning simpler compliance requirements and clearly identifying which provisions of new regulations 

are of relevance to smaller banks. 

In February, the Federal Reserve, Federal Deposit Insurance 

Corporation, and the Office of the Comptroller of the Currency (the 

Agencies) increased the number of small banks and savings associations eligible for an 18-month examination cycle rather than a 

67 

12-month exam cycle. Upon authorization provided in the Fixing 

America’s Surface Transportation Act, enacted on December 14, 

2015, the Agencies moved quickly to raise the asset threshold from 

$500 million to $1 billion in total assets for banks and savings associations that are well-capitalized and well-managed to be eligible 

for an 18-month examination cycle. 

In April, the Board implemented new procedures for examiners 

to conduct off-site loan reviews for community and small regional 

banks. State member banks and U.S. branches and agencies for 

foreign banking organizations with less than $50 billion in total assets can opt to allow Federal Reserve examiners to review loan files 

off-site, so long as loan documents can be sent securely and with 

the required information. Banks may still select to have on-site 

loan reviews if they prefer. 

Continued efforts to reduce burden include a new consumer compliance examination framework for community banks instituted by 

the Board that more explicitly bases examination intensity on the 

individual bank’s risk profile, weighted against the effectiveness of 

the bank’s compliance controls. The Board also revised its consumer compliance examination frequency policy to lengthen the 

time between on-site consumer compliance and Community Reinvestment Act examinations for many community banks with less 

than $1 billion in total consolidated assets. 

Also in April, the Board approved a final rule raising the asset 

threshold of the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (Policy Statement) from $500 million to $1 billion and expanding its application 

to savings and loan holding companies. As a result of this action, 

89 percent of all bank holding companies and 81 percent of all savings and loan holding companies are now covered under the scope 

of the Policy Statement. The Policy Statement reduces regulatory 

burden by excluding these small organizations from certain consolidated capital requirements. In addition to reducing capital burden, 

the action significantly reduced the reporting burden associated 

with capital requirements by eliminating the more complex quarterly consolidated financial reporting requirements and replacing 

them with semiannual parent-only financial statements for 470 institutions. In addition, raising the asset threshold allowed more 

bank holding companies to take advantage of expedited applications processing procedures. 

To deepen its understanding of community banks and the specific 

challenges facing these institutions, the Board meets twice a year 

with the Community Depository Institutions Advisory Council 

(CDIAC) to discuss the economic conditions and issues that are of 

greatest concern to community institutions. The CDIAC members 

are selected from representatives of community banks, thrift institutions, and credit unions who serve on local advisory councils at 

the 12 Federal Reserve Banks. The Board also has launched a 

number of outreach initiatives, including the establishment of its 

‘‘Community Banking Connections’’ program, which is designed to 

enhance the dialogue between the Board and community banks. In 

addition, this program highlights key elements of the Board’s supervisory process for community banks and provides clarity on supervisory expectations. 

68 

Under the auspices of the Federal Financial Institution Examination Council (FFIEC), the Board is participating in the decennial review of regulations as required by the Economic Growth and 

Regulatory Paperwork Reduction Act of 1996 (EGRPRA). Four Federal Register notices have been released requesting comments on 

the regulations that are applicable to insured depository institutions and their holding companies in 12 substantive categories: Applications and Reporting; Powers and Activities; International Operations; Banking Operations; Capital; the Community Reinvestment Act; Consumer Protection; Directors, Officers and Employees; 

Money Laundering; Rules of Procedure; Safety and Soundness; and 

Securities. The final comment period closed on March 22, 2016, and 

produced over 160 written comment letters. Additionally, the Federal Reserve participated in six outreach events across the country 

with over 1,030 participants attending in person, by telephone, or 

via live stream. The member agencies of the FFIEC are carefully 

reviewing the comments and a final report will be provided to Congress later in the year. 

Additionally, under the auspices of the FFIEC, public notice was 

issued in September 2015 that established a multistep process for 

streamlining Call Report requirements. The notice included proposals to eliminate or revise several Call Report data items, announced an accelerated start of a statutorily required review of the 

Call Report, and began an assessment of the feasibility of creating 

a streamlined community bank Call Report. In addition to the formal EGRPRA process, efforts continue for engaging in industry dialogue and outreach, to better understand significant sources of Call 

Report burden. 

Q.6. Coming from a State where we have lost many community 

lenders, are you worried about credit availability? Will the Board 

do any specific research on how regulations are impacting credit 

availability in our economy? 

A.6. The Board recognizes the unique and important role that community banks play, particularly by lending to small- and mediumsized businesses in local economies. The Board is committed to establishing a deep understanding of the role of community banks in 

providing credit, and of the impact of economic conditions and regulation on community bank activity. 

As part of our surveillance function, the Board produces regular 

reports on profitability, risks, and lending activity for each of its 

supervisory portfolios, including Community Banking Organizations. There is a challenge to monitoring community banks, in that 

the Board must strike a balance between the desire for more information and the burden of increased regulatory reporting for the 

banks. 

As mandated by the EGRPRA, the Board submits a report to 

Congress every 5 years on the availability of credit to small businesses. The last such report was submitted in 2012, and detailed 

the substantial changes in credit conditions during the financial 

crisis of 2007–2008, as well as the improvements in credit availability that had occurred as of 2012. The next report on small business credit availability will be submitted in 2017. 

69 

1See ‘‘Community Banking in the 21st Century: Policy and Research Conference’’, Sept. 31– 

Oct. 1, 2015, https://www.csbs.org/news/press-releases/pr2015/Pages/PR-100115b.aspx. 2https://www.federalreserve.gov/newsevents/press/monetary/20140917c.htm 

Since 2013, the Board, in partnership with the Conference of 

State Bank Supervisors (CSBS), has hosted an annual conference 

on community banking research and policy. The conference brings 

together researchers from the Board and academic institutions, and 

consists of 2 days of research presentations and panels. Governor 

Brainard and I provided keynote addresses to the 2015 event. 

Coinciding with the conference, the Board and CSBS have issued 

an annual report on community banking. 1 The report is based 

largely on a survey conducted by the CSBS and State regulators. 

The survey seeks to provide an understanding of the profile of community banks, including their product and customer mix, as well 

as a view of bankers’ impressions on key issues facing the industry, 

including the cost impact of regulatory compliance. 

The Board also recognizes that regulatory compliance often represents a fixed cost, and as such community banks can be at a disadvantage to their larger counterparts in shouldering the burden 

of compliance. For this and other reasons, the Board is convinced 

committed to tailoring banking supervision and regulation based on 

the size and complexities of firms. Among our efforts to reduce regulatory burden for small banks, the Board is currently participating in the decennial review under EGRPRA, as previously 

noted. The review has included numerous public comments and 

outreach sessions, and has helped identify a number of themes on 

which the Board and other agencies have already taken action. In 

addition, the Board is acting along with other regulators to reduce 

the burden of various examinations for small banks. 

Q.7. Specifically, what is the Board’s plan to unwind the Federal 

Reserve’s nearly $4.5 trillion dollar balance sheet and when will 

that happen? 

A.7. The size and composition of the Federal Reserve’s balance 

sheet reflects the policy actions the Federal Open Market Committee (FOMC) has taken over recent years to achieve its statutory 

objectives for monetary policy—maximum employment and stable 

prices. In September 2014, as part of prudent planning, the FOMC 

released Policy Normalization Principles and Plans 2 (Principles 

and Plans) that provided information regarding its strategy to reduce the size of the Federal Reserve’s securities holdings once it 

began normalizing the stance of monetary policy. 

As stated in the Principles and Plans, the FOMC intends to reduce the Federal Reserve’s securities holdings in a gradual and 

predictable manner primarily by ceasing to reinvest repayments of 

principal on securities holdings. In its most recent statement, the 

FOMC again noted that it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and 

agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, 

and it anticipates doing so until normalization of the level of the 

Federal funds rate is well under way. 

The FOMC also noted in the Principles and Plans that it currently does not anticipate selling agency mortgage-backed securiVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00073 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
70 

3http://libertystreeteconomics.newyorkfed.org/2016/02/continuing-the-conversation-on-liquidity.html#.Vs3HdXIUWmR 4http://www.federalreserve.gov/newsevents/press/other/20150713a.htm 

ties as part of the normalization process, although limited sales 

might be warranted in the longer run to reduce or eliminate residual holdings. In addition, the timing and pace of any sales would 

be communicated to the public in advance. Of course, all of these 

balance sheet plans can be adjusted in light of economic and financial developments. 

Q.8. During your testimony you responded to Senator Crapo’s question regarding liquidity conditions and stated that you are looking 

very carefully at that the factors that may be affecting liquidity in 

the markets. Will you please further elaborate on what specific 

studies or evaluations are currently being conducted by the Federal 

Reserve regarding liquidity conditions in the fixed income market? 

A.8. Federal Reserve staff have been involved in several projects on 

market liquidity both internally and with other U.S. Government 

agencies. Internally, staff have studied and are continuing to study 

whether there has been a decline in secondary market liquidity in 

the fixed income markets. Although we have not found strong evidence of a significant deterioration in day-to-day liquidity, it is possible that changes in the structure of markets have made liquidity 

less resilient. This is more difficult to analyze because it involves 

the study of relatively infrequent events. Among the factors we 

have looked at, algorithmic traders have become more prevalent in 

the Treasury market, and the share of bond holdings held by openend mutual funds, some of which provide significant liquidity 

transformation, has grown significantly in the postcrisis period. We 

have explored the importance of these factors, and focused on 

changes in the broker dealer business model and on the potential 

impact of regulatory changes on market liquidity. We note that 

staff at the Federal Reserve Bank of New York have also done a 

number of studies on market liquidity and have recently published 

some of this work online. 3

Federal Reserve staff have also played a key role in the interagency work on the events of October 15, 2014, when fixed income 

markets experienced a sudden and extreme increase in market volatility. 4 Staff also continue to engage actively with the U.S. Treasury, the Commodity Futures Trading Commission, and the Securities and Exchange Commission on work examining longer term 

changes in fixed income market structure and their potential impact on market liquidity. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM JANET L. YELLEN 

Q.1. State of the Economy—I’d like you to elaborate on your statement during the February 11, 2016, Senate Banking Committee 

hearing that ‘‘job creation has perhaps been more heavily skewed 

toward sectors that have lower pay,’’ and that ‘‘the downturn probably accelerated those trends that perhaps relate to globalization 

and technological change that are demanding increased skill.’’ This 

is an important concept to grapple with because our economy is facVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
71 

ing a crisis in the nature of work. If we think about the history of 

economics, we had the ‘‘old economy,’’ which evolved from hunter 

gatherers, to settled farmers and big tool manufacturing economies. 

Now we’re entering into a ‘‘new economy’’ which exists within a 

global economy and a fast, technology-based, information age. 

With this old and new economy framework in mind, in what sectors do you find the unemployment rate is lower? Where is it increasing or decreasing more quickly? 

A.1. The Bureau of Labor Statistics collects data on the previous 

industry and occupation of people who are unemployed. These data 

indicate that the unemployment rates of highly skilled workers, including managers and professionals (around 2 to 3 percent) are 

lower than the unemployment rates for lower-skilled service workers and workers in goods producing industries (typically around 

41⁄2 to 61⁄2 percent). By sector, the unemployment rates for workers 

in the information and professional, and business services industries are lower than for workers in the construction and leisure and 

hospitality industries. These findings are indicative of the patterns 

of job creation that I mentioned in my remarks. 

However, the unemployment rate data can be difficult to interpret, because they reflect not only the long-term changes in the demand for certain types of workers that you mentioned, but also the 

state of the business cycle and transitory sector-specific factors. For 

instance, unemployment rates for those in lower-skilled occupations 

have been falling, likely reflecting the further progress in cyclical 

recovery. And while the unemployment rate is high among former 

construction workers, this is likely a holdover from the housing 

market collapse and subsequent slow recovery in residential investment. Similarly the high (and rising) unemployment rate among 

workers in the mining industry is largely the result of the contraction in oil extraction due to the decline in oil prices, rather than 

longer run trends. 

Another way to appreciate the shift in job creation that I mentioned is to look at an occupation’s share of civilian employment. 

For instance, the share of total employment made up by managers, 

professionals, and related workers has risen from less than 30 percent in the mid-1980s to nearly 40 percent. In contrast, the share 

of employment constituted by office and administrative workers 

has fallen from 16 percent to 12 percent over that same time period, while the production worker share of employment has fallen 

from 9 percent to less than 6 percent. 

Q.2. In what sectors are wages higher? Where are they increasing 

more and less quickly? 

A.2. Data from the Bureau of Labor Statistics’ Employer Costs for 

Employee Compensation survey indicate that compensation is higher for workers in industries, such as professional and business 

services, financial activities, educational services and information, 

that could be thought to have many high-skilled workers (compensation at $40 per hour or more, on average). Industries such as 

manufacturing and transportation and warehousing also pay their 

workers relatively well (compensation between $35 and $40 per 

hour, on average). Low-paying industries include leisure and hospitality and retail trade (compensation under $20 per hour). One 

72 

1http://www.bls.gov/news.release/disp.nr0.htm 

thing to note is that all these industries include workers with varying skill levels. 

It is difficult to discern trends in wages over short periods of 

time, since these movements can be dominated by cyclical forces 

and idiosyncratic shocks. Looking at the Bureau of Labor Statistics’ 

Employment Cost Index, over the past decade, compensation 

growth for most industries has averaged around 21⁄2 percent. However, if you look over longer time periods, workers with higher 

skills, for instance, as measured by higher levels of education, have 

experienced greater wage gains than other workers. 

Q.3. In what sectors, if any, have workers stopped looking for jobs? 

A.3. Useful data on this topic come from the Bureau of Labor Statistics’ Displaced Workers’ Survey, which surveys workers who had 

been in their jobs for at least 3 years and who ‘‘lost or left jobs because their plant or company closed or moved, there was insufficient work for them to do, or their position or shift was abolished.’’ 1 In interpreting these data, it is useful to keep in mind that 

these job losses and any labor force exits could be due to cyclical 

as well as structural factors. 

Over the period from 2011 to 2013, former workers in some manufacturing industries, including transportation equipment and 

many nondurable manufacturing industries, were more likely than 

average to have left the labor force, as were former workers in retail trade, finance and insurance, and management, administrative, 

and waste services. Looking by occupation, according to the most 

recent data, former workers in the production, transportation, and 

material moving occupations were the most likely to have left the 

labor force, followed by individuals leaving sales and office occupations. Workers in occupations requiring higher skills were less likely to exit the labor force. 

Q.4. How do observations about unemployment and labor force participation in the old and new economy affect the Fed’s interest rate 

policy decisions? 

A.4. One of the Federal Reserve’s mandates from the Congress is 

to conduct monetary policy so as to promote the maximum level of 

employment that can be sustained without leading to higher inflation. In assessing its employment objective, policymakers must 

evaluate how changes in the economy, such as globalization and 

technological change, affect the types of jobs and skills needed in 

the workforce. In addition, policymakers need to consider how 

trends in the size and makeup of the labor force—for example, its 

composition by age, education, and skills—affect the longer-run 

normal rate of unemployment and the maximum sustainable level 

of employment. Because of the factors influencing the demand and 

supply of labor evolve over time, the Federal Open Market Committee (FOMC) cannot specify a fixed longer-run goal for employment or the unemployment rate. Policymakers update their assessments of the longer-run economic outlook regularly using a wide 

range of information and present their views four times each year 

in their Summary of Economic Projections (SEP). In the SEP projections prepared in connection with the March 2016 meeting, 

73 

2 According to the International Energy Agency’s March estimate. 

3Total world trade is about $19 trillion dollars. At least 40 percent of world trade is denominated in dollars, which is about 4 times greater than the U.S. share of global exports and imports. Total global exports of oil are about 64 million barrels per day. 4 Congressional Budget Office, ‘‘The Budget and Economic Outlook: 2016 to 2026’’, January 

2016, and ‘‘The 2015 Long-Term Budget Outlook’’, June 2015. 

FOMC participants reported estimates of the longer-run normal 

rate of unemployment that ranged from 4.7 to 5.8 percent, with a 

median estimate of 4.8 percent. Conditional on appropriate monetary policy, participants projected that the unemployment rate 

would be at or below their individual estimates of the longer-run 

normal rate from 2016 to 2018, and that inflation would gradually 

rise over that period, reaching a level at or close to the FOMC’s 

longer-run objective in 2018. 

Q.5. I’d like to briefly turn to Iran, which recently demanded that 

Iranian oil purchasers transact in euros instead of dollars. What 

volume—if any—of oil transactions would have to be denominated 

in euros instead of dollars for such a shift to impact the Federal 

Reserve’s monetary policy or macroeconomic projections? 

A.5. Iran currently exports about 1.6 million barrels of oil per day, 

which is higher than the roughly 1 million barrels per day averaged over 2014 to 2015, but still below the 2.2 million barrels per 

day pace before the limited States and the European Union tightened sanctions targeting Iran’s oil sector in 2012. 2 However, even 

if Iranian exports were to move back up to pre-sanction levels and 

oil prices to rise to $50 a barrel, their share of global oil trade 

would only be around 3 percent and of overall global trade only 

about 0.2 percent. 3

Most oil prices are quoted in dollars, and would continue to be, 

as having a common currency likely facilitates transparency and 

communication. Moreover, many of the benefits that are said to accrue to the United States because of dollar invoicing, such as the 

stability of prices in the face of exchange rate movements, are less 

relevant for oil markets because oil prices are very responsive to 

market conditions, including exchange rate changes. 

Q.6. Entitlement Spending—I’d like you to elaborate on your statement to Representative Andy Barr that ‘‘Every Fed chair that I can 

remember has come and told Congress that [mandatory entitlement spending] is a looming problem with serious economic consequences.’’ 

In July of 2015, former Federal Reserve Chairman Alan Greenspan said that the ‘‘extraordinary rise in entitlements’’ is ‘‘extremely dangerous.’’ Do you agree with this sentiment? Why? 

A.6. As do most economists, I agree with the assessment that the 

Federal Government budget is on an unsustainable path, given current fiscal policies. The Congressional Budget Office (CBO) projects 

that Federal budget deficits and Federal Government debt will be 

increasing, relative to the size of the economy, over the next decade 

and in the longer run. 4 In the CBO’s projections, growth in Federal 

spending—particularly for mandatory entitlement programs and 

interest payments on Federal debt—outpaces growth in revenues in 

the coming years. The increases in entitlement programs, such as 

Social Security and programs providing health care, are mainly atVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00077 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
74 

5 Congressional Budget Office, ‘‘The Budget and Economic Outlook: 2016 to 2026’’, January 

2016. 6See, for example, Congressional Budget Office, ‘‘Federal Debt and the Risk of a Fiscal Crisis’’, July 27, 2010. 

tributable to the aging of the population and rising health care 

costs per person. For fiscal sustainability to be achieved, whatever 

level of spending is chosen, revenues must be sufficient to sustain 

that spending in the long run. 

Q.7. Please describe the ‘‘serious economic consequences’’ of failing 

to address entitlement spending. 

A.7. I believe the CBO appropriately describes several reasons why 

high and rising Federal Government debt would have serious negative consequences for the economy. 5 First, because Federal borrowing reduces total saving in the economy over time, the Nation’s 

capital stock would ultimately be smaller than it would be if debt 

was lower; as a result, productivity and overall economic growth 

would be slower. Second, fiscal policymakers would have less flexibility to use tax and spending policies to respond to unexpected 

negative shocks to the economy. Third, the likelihood of a fiscal crisis in the United States would increase. 

Q.8. How soon does the United States need to address our entitlement spending, before there are, as you put it, ‘‘serious economic 

consequences’’? 

A.8. Neither experience nor economic theory clearly indicate the 

threshold at which Government debt would begin to impose substantial costs on the U.S. economy. 6 But given the significant costs 

and risks associated with a rapidly rising Federal debt, fiscal policymakers should soon put in place a credible plan for reducing 

deficits to sustainable levels over time. Doing so earlier rather than 

later would ultimately prove less costly by avoiding abrupt shifts 

in policy and by giving those affected by budget changes more time 

to adapt. 

Q.9. How would a failure to address entitlement spending affect 

the way in which the Federal Reserve conducts monetary policy? 

A.9. The Federal Reserve adjusts monetary policy as appropriate to 

maintain or to make progress toward our statutory goals of maximum employment and price stability; both the direction and size 

of those adjustments could depend on the implications of a failure 

to address entitlement spending for the economic outlook. For example, it is possible that a failure to put entitlement programs on 

a sustainable longer-term path could result in an increase in the 

yields that investors demand on longer-term U.S. Treasury securities. To the extent those increased yields pass through into higher 

interest rates on corporate bonds, mortgages, and bank loans, the 

increase in rates would tend to restrain economic activity in the 

United States and could require the Federal Reserve to ease policy 

to achieve its economic objectives. In other scenarios, concerns that 

entitlement programs were not on a sustainable course could contribute to inflationary pressures that could require the Federal Reserve to tighten policy to achieve its objectives. Of course, these are 

not the only possible outcomes. In judging the appropriate stance 

of monetary policy, the Federal Reserve constantly assesses incomVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00078 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
75 

7 Congressional Budget Office, ‘‘The Budget and Economic Outlook: 2016 to 2026’’, January 

2016. 8See, for example, Congressional Budget Office, ‘‘Federal Debt and the Risk of a Fiscal Crisis’’, July 27, 2010. 

ing economic and financial data and their implications for the economic outlook. 

Q.10. How would a failure to act affect the amount of interest the 

Federal Government pays on the debt? How early could we start 

to see this affect? 

A.10. With a high level of Federal debt and a forecast of increasing 

budget deficits, as interest rates rise from their current levels to 

more typical ones, the CBO projects that Federal spending on interest payments will soon begin to rise considerably. 7

Q.11. Could a failure to address entitlement spending ever affect 

the dollar’s status as a reserve currency? 

A.11. The U.S. dollar has been considered the world’s reserve currency on a consistent basis for quite a while, and projections showing that the Federal budget is unsustainable over the long run 

have also been known for some time. Thus, it is uncertain what circumstances could change that status. There is no way to predict 

with any confidence whether and when such a change might occur; 

in particular, there is no identifiable level of Federal debt, relative 

to the size of the economy, indicating that this would be likely or 

imminent. 

Q.12. Could a failure to address entitlement spending ever cause 

markets to significantly question the Treasury bill’s status as a 

risk-free instrument? What would the consequences be if this were 

to occur? 

A.12. U.S. Treasury securities have generally been considered riskfree because of the size and strength of our economy. And as I stated in my response above, at the same time, projections showing 

that the Federal budget is unsustainable over the long run have 

been known for some time. Similarly, there is no way to predict 

with any confidence whether and when a change in the risk-free 

status of Treasury securities might occur. In particular, there is no 

threshold level of debt, relative to the size of the economy, indicating that investors would become unwilling to finance all of the 

Federal Government’s borrowing needs unless they were compensated with very high interest rates. But all else being equal, the 

higher the ratio of Federal debt to GDP, the greater the risk of this 

happening. 8

Q.13. Regional Banks—I’d like to ask about the Federal Reserve’s 

implementation of Section 165 of Dodd-Frank, which provides for 

enhanced prudential standards for banks with $50 billion in assets 

or higher. As you know, these standards include stress tests, which 

require banks to evaluate how they would fare under unfavorable 

economic conditions, and resolution plans, which require banks to 

provide a plan for winding down during a crisis. I’m concerned 

about the unnecessary damage that these prudential standards 

could have on regional banks, which play a key role in expanding 

capital to small- and medium-size businesses. 

76 

9The eight domestic banks classified as global systemically important financial institutions 

supervised by LISCC are: Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JP Morgan Chase & Co., Morgan Stanley, 

State Street Corporation, and Wells Fargo & Company. 10SR Letter 15-18 (Federal Reserve Supervisory Assessment of Capital Planning and Positions for LISCC Firms and Large and Complex Firms) and SR Letter 15-19 (Federal Reserve 

Supervisory Assessment of Capital Planning and Positions for Large and Noncomplex Firms). 

Do regional banks pose the same risk as large banks with a trillion or more in assets? 

A.13. As I have stated in the past, one-size-fits-all should not be 

the model for regulation. The Federal Reserve has made it a top 

priority to ensure that we appropriately tailor our regulation and 

supervision of banks to their size, complexity, and risk. By statute, 

all banking organizations above $50 billion in assets are subject to 

enhanced prudential standards. However, the Federal Reserve recognizes that very large, complex firms pose a greater risk to the financial system than smaller, noncomplex firms, and we have differentiated our implementation of the enhanced prudential standards as a result. The eight globally systemic banks are overseen by 

the Large Institution Supervision Coordinating Committee (LISCC) 

and are subject to the highest supervisory standards relative to 

firms outside this portfolio. 9 LISCC firms are subject to additional 

capital and leverage surcharges and more stringent liquidity requirements. In addition, the LISCC firms are subject to the highest 

supervisory standards across all assessment areas to include governance, risk management, internal controls, capital policy, scenario design, and the use of models. 

The Federal Reserve has further differentiated between large, 

complex super-regional institutions and other large banking organizations with smaller regional footprints. The large, complex firms 

while subject to tailored expectations as opposed to the LISCC 

firms, are subject to heightened standards relative to the smaller, 

noncomplex firms. This distinction was outlined in the publication 

of guidance 10 in which the Federal Reserve set expectations for 

capital planning for LISCC Firms and Large and Complex Firms 

(with assets in excess of $250 billion and onbalance sheet foreign 

exposure in excess of $10 billion) that are higher than the expectations for their smaller counterparts. 

In addition to tailoring guidance, the Federal Reserve continues 

to explore ways to improve our supervision process around capital 

planning to ensure that our supervisory approaches and methodologies are appropriate and consistent as possible for similar sized institutions. 

Q.14. I’m concerned that our Federal banking regulatory regime 

arbitrarily relies upon asset thresholds to impose prudential regulations, instead of independently analyzing the risk profile of financial institutions. Should a bank’s asset size be dispositive in assessing a bank’s risk profile for the purposes of imposing prudential 

regulations? For example, would a bank with less than a half-trillion in assets typically have the same complexity and conduct the 

same kind of financial activities as a bank with over $2 trillion in 

assets? 

A.14. Under section 165 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act), the Federal Reserve is 

77 

authorized to tailor the application of enhanced prudential standards. In implementing section 165, the Federal Reserve has identified three categories of bank holding companies with $50 billion or 

more in total consolidated assets based not only on their size, but 

also based on complexity and other indicators of systemic risk. Specifically, all such bank holding companies are subject to certain enhanced prudential standards, including risk-based and leverage 

capital requirements, company-run and supervisory stress tests, liquidity risk-management requirements, resolution plan requirements, and risk management requirements. Bank holding companies with $250 billion or more in total consolidated assets or $10 

billion or more in on-balance-sheet foreign assets are also subject 

to the advanced approaches risk-based capital requirements, a supplementary leverage ratio, more stringent liquidity requirements, 

and a countercyclical capital buffer. 

In identifying global systemically important banks, the Federal 

Reserve considers measures of size, interconnectedness, cross-jurisdictional activity, substitutability, complexity, and short-term 

wholesale funding. The eight U.S. firms identified as global systemically important banks (GSIBs) are subject to risk-based capital 

surcharges, an enhanced supplementary leverage ratio, and more 

specific recovery planning guidance. 

In addition, the Federal Reserve tailored the application of the 

enhanced prudential standards required under section 165 to General Electric Capital Corporation (GECC), a nonbank financial company designated by the Financial Stability Oversight Council 

(FSOC) for supervision by the Federal Reserve. Because of the substantial similarity of GECC’s current activities and risk profile to 

that of a large bank holding company, the enhanced prudential 

standards that would be applied to GECC are similar to those that 

apply to large bank holding companies, but they are tailored to reflect the unique characteristics of GECC. The standards include (1) 

capital requirements; (2) capital-planning and stress-testing requirements; (3) liquidity requirements; and (4) risk-management 

and risk-committee requirements. 

Q.15. Please describe in detail how the Federal Reserve will meaningfully tailor Section 165 prudential standards to match a particular bank’s ‘‘capital structure, riskiness, complexity, financial activities . . . [and] size,’’ as allowed for under Section 165, including 

with regards to stress testing and resolution planning? 

A.15. The Federal Reserve has tailored resolution planning requirements for firms subject to section 165 of the Dodd-Frank Act 

where it has permitted firms with limited nonbanking operations 

to file a tailored plan that exempts it from many informational requirements. Additionally, the Federal Reserve and the Federal Deposit Insurance Corporation have exempted 90 firms with limited 

U.S. operations from most plan requirements. These firms may file 

plans that focus on material changes to their initial resolution plan 

filed in 2014, actions taken to strengthen the effectiveness of those 

plans, and, where applicable, actions to ensure any subsidiary insured depository institution is adequately protected from the risk 

arising from the activities of nonbank affiliates of the firm. The 

78 

Federal Reserve’s recovery planning guidance focuses only on the 

eight U.S. GSIBs. Bank holding companies with more than $50 billion in total consolidated assets are subject to the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), which evaluates the capital planning processes and capital adequacy of the largest U.S.- 

based bank holding companies, including the firms’ planned capital 

actions such as dividend payments and share buybacks and 

issuances. Strong capital levels absorb losses and help ensure that 

banking organizations have the ability to lend to households and 

businesses even in times of financial and economic stress. In December 2015, the Federal Reserve released guidance to its examiners and banking institutions that consolidates the capital planning expectations for all large financial institutions and clarifies 

differences in those expectations based on firm size and complexity. 

The guidance is designed to tailor the Federal Reserve’s expectations for large financial institutions. 

For the largest and most complex firms, the guidance clarifies expectations that have been previously communicated to firms, including through past CCAR exercises and related supervisory reviews. These firms are bank holding companies and intermediate 

holding companies of foreign banks subject to the Federal Reserve’s 

LISCC framework, or firms with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures. 

For firms with more than $50 billion, but less than $250 billion 

in total consolidated assets, as well as less than $10 billion in foreign exposures, the guidance clarifies the supervisory expectations 

to be applied for the firms’ capital planning processes. In general, 

the guidance is tailored to reflect the lower systemic risk profile 

and less complex operations of these firms, as compared to the 

largest and most complex firms. 

Q.16. In testimony to the Senate Banking Committee, you noted 

that the Federal Reserve is ‘‘actively engaged in reviewing our 

stress-test testing in capital planning framework’’ and that the 

Federal Reserve is ‘‘considering ways in which we can make that 

less burdensome for the bank holding companies that are close to 

the $50 billion asset line.’’ How close to $50 billion in assets must 

a bank be for the Federal Reserve to consider tailoring the stress 

test regime? 

A.16. Please see response to Question 13. 

Q.17. Is the Federal Reserve considering tailoring Section 165 prudential standards for banks with assets that are not merely ‘‘close’’ 

to $50 billion in assets? For instance, according to Basel Systemic 

Risk Indicators from 2013, the systemic risk score of almost every 

bank with less than $500 billion in assets is 4 times less than 

every bank with more than $500 billion in assets. 

A.17. As indicated in the responses to Questions 14 and 15, the 

Federal Reserve has tailored meaningfully the application of the 

enhanced prudential standards under section 165 to both bank 

holding companies and GECC. Underlying this tailoring was the 

principle that progressively more stringent regulation should apply 

to firms based on their relative importance to the financial system, 

and thus the harm that could be expected to the system if they 

79 

failed. The Federal Reserve continues to consider ways to further 

tailor the enhanced prudential standards to reflect differences in 

risk among firms. 

Q.18. Insurance—I’d like to ask about the Federal Reserve’s development of insurance capital standards. 

What steps has the Federal Reserve taken to ensure that the 

minimum capital standards are tailored to the business of insurance? 

A.18. The Federal Reserve is committed to developing capital 

standards in accordance with its statutory mandate and authority 

in a way that is appropriate and tailored to the insurance industry. 

The Federal Reserve appreciates that insurance involves unique 

risks among financial institutions, encompassing both liabilities 

and assets, and it is important to keep in mind the liability structure of firms in determining capital requirements for insurance 

companies, particularly with regard to the mix of the insurers’ activities. We are approaching our mandate carefully and with proper 

deliberation. In our development of domestic standards, we are consulting with the industry, State commissioners and other key external parties on several aspects of the standards to achieve the Federal Reserve’s mandate under the authority as set out in the DoddFrank Act. Moreover, the Federal Reserve intends to make full use 

of the flexibility provided by the Insurance Capital Standards Clarification Act of 2014 to tailor the capital standards to the business 

of insurance. 

Q.19. How much deference will the Federal Reserve give to State 

insurance regulators in developing these insurance standards? Will 

State insurance standards provide the broad basis for the Federal 

Reserve’s new regulations? Why or why not? 

A.19. With the enactment of the Dodd-Frank Act, the Federal Reserve was assigned responsibility as the consolidated supervisor of 

insurance holding companies that own thrifts, as well as insurance 

companies designated by the FSOC. The Federal Reserve’s principal supervisory objectives for the insurance firms that it oversees 

include protecting the safety and soundness of the consolidated 

firms, as well as mitigating risks to financial stability. The Federal 

Reserve continues to engage extensively with State insurance regulators, the National Association of Insurance Commissioners, and 

other interested stakeholders to solicit feedback on insurance prudential standards that would comport with the Federal Reserve’s 

statutory authority. 

The Federal Reserve’s consolidated supervision supplements existing State based legal-entity supervision, which focuses on policyholder protection, with a perspective that considers the risks across 

the entire firm. Moreover, the Federal Reserve’s insurance prudential standards will not alter or replace the existing State-based 

framework, including capital requirements at the legal entity level, 

that are already in place. We continue to coordinate with State insurance regulators in their protection of policyholders and aim to 

avoid duplications of their supervision. We leverage the work of 

State insurance regulators where possible and continue to look for 

opportunities to further coordinate with them. 

80 

It would be premature to comment on how the Federal Reserve 

will treat the unique risks of certain insurance lines, mix of business and the like, before we have fully evaluated the potential options for insurance prudential standards, including those that rely, 

in part, on the State-based capital requirements of regulated insurance companies. In our supervision of insurance firms, the Federal 

Reserve remains committed to tailoring our supervisory approach, 

including a domestic regulatory capital framework and other insurance prudential standards, to the business of insurance, reflecting 

insurers’ different business models and systemic importance compared to other firms supervised by the Federal Reserve. Moreover, 

we are committed to a formal rulemaking process in the development of insurance prudential standards. 

Q.20. Has the Federal Reserve conducted cost benefit analysis to 

develop these insurance standards? If not, why? If so, please share 

the results of these studies? 

A.20. With respect to the insurance standards and all other 

rulemakings, the Federal Reserve follows the Administrative Procedures Act and other applicable administrative laws that govern the 

various aspects of rulemakings, including the consideration of costs 

and benefits. The Federal Reserve regularly conducts economic 

analyses in connection with rulemakings, including considering the 

potential economic impact of a rule on small depository institutions 

consistent with the Regulatory Flexibility Act, and considering the 

anticipated cost of paperwork consistent with the Economic Growth 

and Regulatory Paperwork Reduction Act. To inform our rulemaking, in 2014, the Federal Reserve conducted an extensive quantitative impact study. The data we collected helps us to understand 

the insurance risks of the firms that participated in the study. 

To the extent possible, the Federal Reserve attempts to minimize 

regulatory burden in its rulemakings consistent with the effective 

implementation of our statutory responsibilities. The Federal Reserve is charged by Congress to promulgate rules largely designed 

to improve the safe and sound operation of financial organizations 

and safeguard financial stability. As part of the rulemaking process, the Federal Reserve specifically seeks comment from the public 

on the burdens and benefits of our proposed approach as well as 

on alternative approaches and, in adopting final rules, the Federal 

Reserve seeks to adopt a regulatory alternative that faithfully implements the statutory provisions while minimizing regulatory burden. It would be premature for the Federal Reserve to disclose the 

cost benefit analysis of the insurance standards rulemaking since 

it is still in the development stage and we have yet to conclude our 

deliberations. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM JANET L. YELLEN 

Q.1. You testified at your confirmation hearing that even a positive 

rate close to zero could disrupt money markets that help fund financial institutions. By extension, isn’t it logical to conclude that 

a negative interest rate would be even more disruptive? 

81 

A.1. As noted in its most recent statement, the FOMC anticipates 

further improvement in labor market conditions with inflation returning to 2 percent over the medium term. This economic outlook 

is expected to be associated with gradual increases in the Federal 

funds rate. That said, if the economic outlook weakened appreciably, the FOMC would need to consider actions to provide additional policy accommodation to foster progress toward its statutory 

objectives of maximum employment and price stability. The experience of foreign countries suggests that negative interest rates have 

provided additional monetary policy accommodation in those countries without significant disruptions in money markets. However, it 

is unclear whether the same would be true for the United States. 

At a minimum, any consideration of negative interest rates in the 

United States would require careful study of the implications of 

negative rates for U.S. financial markets and institutions and U.S. 

households and businesses along with the potential for unintended 

consequences. 

Q.2. How long can the wholesale banking system withstand a global environment of negative interest rate policies from the major 

central banks? 

A.2. The long-run effects of negative interest rate policies on banks’ 

profitability are uncertain. In a number of economies where the 

policy has been introduced, banks’ profits have been reduced by 

lower interest income, but have been supported by lower funding 

costs, capital gains on bond holdings, and lower provisions for loan 

losses. At the same time, negative interest rate policies may be providing economic stimulus, and that stimulus may ultimately improve the overall economy and subsequently bank’s income. 

Q.3. What incentive effect would you expect negative interest rates 

to have on fiscal consolidation? 

A.3. During the most recent recession and financial crisis, the Federal Reserve did not respond with a monetary policy that included 

a target for the Federal funds rate that was negative. As a result, 

without the experience of using a negative policy rate, it is difficult 

and speculative to describe the effects that it might have on the 

U.S. economy and the Federal Government budget. That said, if 

economic conditions were such that the Federal Reserve decided 

that it was appropriate to implement a negative policy rate, then 

the effects on the economy and the Federal Government budget 

could be qualitatively similar to the effects of our traditional monetary policy response of lowering the target for the Federal funds 

rate when the economy goes into a downturn. To the degree that 

a negative rate policy helped reduce long-term borrowing costs for 

households and businesses that, in turn, boosted economic activity 

and employment above where it otherwise would have been, the 

Federal Government budget would also be in a better position. If 

a stronger economy was the result of such a policy, then tax revenues would be higher and there would be less Government spending for income-support programs, such as unemployment insurance 

benefits. 

Q.4. What would a further drop in discount rates, driven by NIRP, 

do to unfunded pension liabilities in the public and private sectors? 

82 

A.4. In general, lower discount rates mechanically increase the 

present value calculation for future pension liabilities. However, 

pension funding status is heavily dependent on the rate of return 

on pension assets, as well as the calculation of liabilities. As a result, the effect of monetary policy on pension funding status is difficult to ascertain, because monetary policy likely affects the rate 

of return on pension assets as well as the calculation of the liabilities. In addition, there is not a direct connection between monetary policy and the discount rate used by pension systems to calculate their liabilities. For example, the median discount rate being 

used by State and local retirement systems in their financial reports, as reported in ‘‘Wilshire Consulting’s 2016 Report on State 

Retirement Systems’’, was 7.5 percent, well above the Federal Open 

Market Committee’s Federal funds rate target range of 0.25–0.50 

percent. 

Q.5. Last year, an official from the Bank of International Settlements said: For central banks, [NIRP] policies raise the risk of financial dominance, exchange rate dominance, and fiscal dominance—that is, the danger that monetary policy becomes subordinated to the demands of propping up financial markets, massaging 

the exchange rate downwards, and keeping public refinancing costs 

low in the face of unprecedented public debt burdens. Do you disagree? 

If you believe this might be a risk worth taking for the Fed that 

implies some temporal trade-off. But, as you know, pulling growth 

forward is not sustainable. How long would you expect a hypothetical NIRP environment to take to generate the real economic 

growth necessary to meet the Fed’s dual mandate? 

A.5. The Congress established the Federal Reserve as an independent central bank tasked with conducting policy to promote 

progress toward the statutory goals of maximum employment and 

stable prices. As part of this framework, the Federal Reserve is accountable to the Congress and the American people for its actions. 

The Federal Reserve supports appropriate accountability through 

many steps that foster a transparent monetary policy process. For 

example, the Federal Reserve regularly reports detailed descriptions of its analysis of economic and financial developments, the 

policy outlook, and policy deliberations in the minutes of every 

FOMC meeting. Additionally, I formally report to Congress twice 

each year on the economic and monetary policy outlook and typically testify on many other occasions as well. These and many 

other steps ensure that monetary policy actions undertaken by the 

Federal Reserve can be understood and scrutinized by the public. 

That process, in turn, ensures that monetary policy is directed solely at achieving the Federal Reserve’s statutory objectives of maximum employment and stable prices. 

The current stance of monetary policy remains very accommodative and, as noted in the answer to Question 1 above, the Federal 

Reserve anticipates that economic conditions will warrant gradual 

increases in the Federal funds rate over time. Regarding hypothetical situations in which additional policy accommodation could 

be needed, recent foreign experience suggests that negative interest 

rates have provided additional policy accommodation in those counVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00086 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
83 

tries. However, it is unclear whether the same would be the case 

in the United States. Any consideration of the use of negative rates 

in the United States to provide additional policy accommodation 

would require careful study of many complicated issues. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM JANET L. YELLEN 

Q.1. The purpose of the Systemically Important Financial Institution designation process is to reduce risk, but I am concerned that 

it’s a lot easier for firms to become designated a SIFI than it is for 

firms to de-risk and de-designate. What has the Federal Reserve 

done and what do can the Federal Reserve do going forward to 

make it easier for firms to de-designate? 

A.1. The Federal Reserve Board’s (Board) regulations and supervisory guidance applicable to the largest U.S. bank-holding companies and nonbank financial companies that are designated by the 

Financial Stability Oversight Council (FSOC) are intended to reduce the threat that could be posed to U.S. financial stability by 

the material financial distress or failure of these organizations and 

promote their safe and sound operations. Such regulations are designed to increase the resilience of systemically important financial 

institutions and foster such firms’ ability to provide credit and 

other financial services in times of financial stress. Through 

speeches and testimony, the Board and its staff also provide information on how financial institutions, both banks and nonbanks, 

can reduce the risk they could pose to U.S. financial stability. 

FSOC designation of nonbanks is not intended to be permanent. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act) provides that the FSOC annually review designations to make sure that they remain appropriate and take into account significant changes at the firms that materially affect the 

FSOC’s determination. At the time of designation, nonbank financial companies are given a detailed basis for the determination that 

a nonbank financial company should be subject to supervision by 

the Board. Factors include the extent of short-term funding activities at those organizations, the firms’ products and associated 

short-term liabilities, their capital markets activities, securities 

lending, over-the-counter derivatives, and interconnectedness with 

the rest of the financial system. Firms can use that information, as 

well as factors the FSOC is required to consider under the DoddFrank Act, to guide their efforts to reduce their systemic footprint. 

Q.2. Would a clearly marked off-ramp make with specific requirements for de-risking make it easier for firms to reduce systemic 

risk? 

A.2. As stated above, the FSOC designation of nonbanks is not intended to be permanent. Because each firm’s systemic footprint is 

different, the FSOC conducts its analysis on a company-by-company basis in order to take into account the potential risks and 

mitigating factors that are unique to each company. At the time of 

designation, nonbank financial companies are given a detailed 

basis for the determination that a nonbank financial company 

should be subject to supervision by the Board. Firms can use that 

84 

information, as well as factors the FSOC is required to consider 

under the Dodd-Frank Act, to guide their efforts to reduce their 

systemic footprint. 

Q.3. The designation of three insurers as systemically important 

has given the Federal Reserve a large voice in the regulation and 

supervision of the insurance industry. The Financial Stability 

Oversight Council has an independent insurance expert and the 

Federal Reserve has an insurance expert, but beyond that, how 

often and in what way does the Federal Reserve communicate with 

State insurance commissioners when making supervisory and regulatory decisions? 

A.3. While the Federal Reserve and State insurance regulators, together with the National Association of Insurance Commissioners 

(NAIC), have distinct statutory authorities and mandates, the Federal Reserve remains committed to working cooperatively with the 

States on a wide range of insurance supervisory and regulatory 

issues. The Federal Reserve respects the work of State insurance 

regulators, collaborating both informally and formally through 

mechanisms such as supervisory colleges, the evaluation of supervised insurers’ Own Risk and Solvency Assessments and other supervisory matters. Federal Reserve staff continues to meet regularly with State insurance departments to discuss supervisory 

plans and findings for the insurance firms for which the Federal 

Reserve has consolidated supervisory responsibility. We additionally have hosted multiple crisis management groups that included 

participation from parties including State insurance departments, 

as well as the Federal Insurance Office and Federal Deposit Insurance Corporation. Additionally, the Federal Reserve’s examination 

teams leverage the important work of State insurance regulators in 

the evaluation of capital planning and sufficiency. The Federal Reserve continues to be committed to working with State insurance 

regulators, the NAIC and other involved regulators in the future. 

Q.4. Right now, the United States is selling massive amounts of 

debt to finance U.S. deficits and we strongly rely on foreign Governments to buy that debt. So far, there has been a strong appetite 

from foreign Governments for our debt, however, at some point 

that may change. Is the Federal Reserve concerned about this? 

A.4. Foreign entities hold close to half of Federal Government debt 

held by the public, roughly the same share as before the most recent recession and subsequent run-up in Federal debt. Foreign official entities, which include foreign central banks and sovereign 

wealth funds, hold less than one-third of Federal debt held by the 

public and make up the bulk of all foreign holdings. In general, foreign entities often want to hold U.S. Treasury securities because of 

their liquidity and perceived safety and soundness. Moreover, foreign holdings of Federal debt imply that there is less reliance on 

domestic sources of saving in order to finance Government borrowing, thereby keeping interest rates on Treasury securities lower 

than they would be otherwise. At this point, there is no apparent 

evidence that there has been any material decrease in foreign demand for Treasury securities, and interest rates on these securities 

remain fairly low. 

85 

Q.5. What does the Fed expect will happen to U.S. debt sales when 

we reach this point? 

A.5. If, for some reason, foreign and domestic demand for U.S. 

Treasury securities were to decline significantly, then interest rates 

would have to rise such that investors would be willing to finance 

all of the Federal Government’s borrowing needs. The extent to 

which interest rates have to increase would depend upon the magnitude of any decrease in demand. 

Q.6. Does the Federal Reserve have a model that predicts when the 

world will be unable or unwilling to absorb additional debt from 

the U.S.? 

A.6. The Federal Reserve does not have a model that currently predicts that the world will be unable or unwilling to absorb additional Federal Government debt. Indeed, demand for Treasury securities has been quite robust recently, even with the substantial 

increase in Federal debt over the past decade and projections of 

further increases in the coming years. 

Q.7. Rulemakings by the Federal Reserve must follow the requirements of the Administrative Procedure Act, Regulatory Flexibility 

Act, and Paperwork Reduction Act. In addition, the Riegle/Neal 

Community Development and Regulatory Improvement Act require 

the Federal Reserve to consider the administrative burdens imposed by new regulations on depository institutions as well as the 

benefits of such regulations. However, recent rulemaking by the 

Federal Reserve has failed to release such economic analysis for 

public comment, which the D.C. Circuit Court of Appeals has held 

to be necessary to comply with the required economic analysis 

under these statutes. Why has the Federal Reserve not published 

the results of its economic analysis for public comment? Will you 

commit to doing so going forward? 

A.7. With respect to all rulemakings, the Federal Reserve follows 

the Administrative Procedures Act and other applicable administrative laws that govern the various aspects of rulemakings, including the consideration of costs and benefits. The Federal Reserve 

regularly conducts economic analyses in connection with 

rulemakings, including considering the potential economic impact 

of a rule on small depository institutions consistent with the Regulatory Flexibility Act, and considering the anticipated cost of paperwork consistent with the Economic Growth and Regulatory Paperwork Reduction Act. 

To the extent possible, the Federal Reserve attempts to minimize 

regulatory burden in its rulemakings consistent with the effective 

implementation of our statutory responsibilities. The Federal Reserve is charged by Congress to promulgate rules largely designed 

to improve the safe and sound operation of financial organizations 

and safeguard financial stability. As part of the rulemaking process, the Federal Reserve specifically seeks comment from the public 

on the burdens and benefits of our proposed approach as well as 

on alternative approaches and, in adopting final rules, the Federal 

Reserve seeks to adopt a regulatory alternative that faithfully implements the statutory provisions while minimizing regulatory burden. 

86 

Q.8. The Federal Reserve Bank of Kansas City recently issue a report on the agricultural sector of the economy which reported that 

depressed crop prices, increased inventories, and declining demand 

for exports caused agricultural lenders and the Fed to have, ‘‘increasing concerns about 2016 farm finances.’’ Are you also concerned about the future of the farm economy? 

A.8. Developments in the U.S. farm economy warrant close monitoring as low agricultural commodity prices have weighed on farm 

income. To support cash flow, short-term lending from commercial 

banks to the farm sector has increased. Although the combined balance sheet of the sector remains healthy, primarily due to elevated 

farm real-estate values, some commercial banks have reported concerns about repayment rates on agrelated loans. Looking ahead, 

continued low commodity prices and a decline in farmland values 

are key risks to the farm economy. 

That said, some indicators suggest the sector is demonstrating 

resilience. In the fourth quarter of 2015, the delinquency rate on 

agricultural production loans was less than 1 percent, compared 

with 2.7 percent 5 years ago. Also, agricultural real estate values, 

which are a significant contributor to the health of balance sheets, 

have remained relatively stable—though, they have modestly declined from recent peaks. 

To summarize, the downturn in the farm economy has been notable and raises concerns that farm borrowers could face mounting 

difficulties in the year ahead as the sector continues to adjust to 

lower commodity prices. The Federal Reserve will continue to closely monitor these developments as well as potential of spillover effects to sectors closely connected to the farm sector, banks and the 

financial system, or to the U.S. economy more generally. 

Q.9. When you take a look at the health of America’s farmers, 

what indicators do you look at and who do you listen to? 

A.9. At the Federal Reserve we follow a wide variety of data on the 

farm sector, related both to farm finances (for instance, data on 

farm land prices and farm credit) and farm output (including data 

on farm product prices, farm income, and farm inventories). Moreover, the Federal Reserve Banks provide regular updates on a 

broad array of farm issues. Staff members reach out regularly to 

farm contacts in their districts to learn about the health of the sector, and that information is included in our ‘‘Summary of Commentary on Current Economic Conditions by Federal Reserve District’’ commonly known as the Beige Book, which is published eight 

times a year. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM JANET L. YELLEN 

Q.1. During your February 10th testimony in front of the House of 

Representatives Committee on Financial Services, you were asked 

by two members of Congress about how Custody banks could be 

prevented from accepting cash from pension funds and their other 

customers, especially in a period of financial market stress, because 

the Supplemental Leverage Ratio (SLR). You replied: ‘‘And the decision was made at the time that the leverage ratio is not our main 

87 

1See 79 Fed. Reg. 57725 (September 26, 2014), available at http://www.gpo.gov/fdsys/pkg/ 

FR-2014-09-26/pdf/2014-22083.pdf. 2The agencies have reserved authority under the capital rule to require a banking organization to use a different asset amount for an exposure included in the SLR to address extraordinary situations. See 12 CFR 3.1(d)(4) (OCC); 12 CFR 217.1(d)(4) (Federal Reserve); 12 CFR 

324.1(d)(4) (FDIC). 

capital tool, but a backup capital tool that is intended to, in a crude 

kind of way, base capital requirements on the overall size of a 

firm’s balance sheet. And that for that reason, it should be included.’’ Followed by, ‘‘There were considerations on both sides, and 

a decision was made to include Fed deposits.’’ 

In the case of the custody banks, it does not appear that the SLR 

is a ‘‘backstop,’’ but is instead the binding capital constraint, which 

is impacting these banks ability to accept cash deposits from pension plans and other customers particularly in a period of financial 

stress or crisis. Can you tell me what your considerations were for 

including the Fed deposits in the SLR and why, given the nature 

of a custody banks business model, they were not exempted? 

Also, if custody banks are unable to accept cash deposits in a 

time a crisis, what do you believe the pensions and other institutional investors will do what that cash? 

A.1. The supplementary leverage ratio rule (SLR rule) adopted by 

the Federal Reserve, the Office of the Comptroller of the Currency, 

and the Federal Deposit Insurance Corporation (the Agencies), requires internationally active banking organizations to hold at least 

3 percent of total leverage exposure in tier 1 capital. The rule calculates total leverage exposure as the sum of certain off-balance 

sheet items and all on-balance sheet assets. 1 The on-balance sheet 

portion does not take into account the level of risk of each type of 

exposure and includes cash. As designed, the SLR rule requires a 

banking organization to hold a minimum amount of capital against 

on-balance sheet assets and off-balance sheet exposures, regardless 

of the risk associated with the individual exposures. This leverage 

requirement is designed to recognize that the risk a banking organization poses to the financial system is a factor of its size as well 

as the composition of its assets. Excluding select categories of onbalance sheet assets, such as cash, from total leverage exposure 

would generally be inconsistent with this principle. 

The Agencies understand the concern that certain custody banks, 

which act as intermediaries in high-volume, low-risk, low-return financial activities, may experience increases in assets as a result of 

macroeconomic factors and monetary policy decisions, particularly 

during periods of financial market stress. 2 Because the SLR is not 

a risk-based measure, it is possible that increases in banking organizations’ holdings of low-risk, low-return assets, such as deposits, 

could cause this ratio to become the binding regulatory capital constraint. However, when choosing an appropriate asset profile, 

banking organizations consider many factors in addition to regulatory capital requirements, such as yields available relative to the 

overall cost of funds, the need to preserve financial flexibility and 

liquidity, revenue generation, the maintenance of market share and 

business relationships, and the likelihood that principal will be repaid. 

88 

Regulatory requirements established by the Federal Reserve 

since the financial crisis are meant to address risks to which banking organizations are exposed, including the risks associated with 

funding in the form of cash deposits. The requirements are designed to increase the resiliency of banking organizations, enabling 

them to continue serving as financial intermediaries for the U.S. financial system and as sources of credit to households, businesses, 

State governments, and low-income, minority, or underserved communities during times of stress. The SLR requirement and the enhanced SLR standards do not become effective until January 1, 

2018. According to public disclosures of firms subject to these requirements, the custody banks and other GSIBs have made significant progress in complying with the enhanced SLR requirements. 

Q.2. We continue to see consolidation of the banking industry, particularly at the community bank level. Some of that has to do with 

market pressures. A lot of that has to do with the avalanche of regulation facing these institutions, and their lack of resources in coping with it. 

What has the Fed done to tangibly reduce the regulatory burden 

on such institutions? 

What impediments stand in front of regulators in aggressively 

addressing this problem? 

What areas can the Fed—and other bank regulators—attack to 

address this problem? 

A.2. The Federal Reserve has long maintained that our regulatory 

efforts should be designed to minimize regulatory burden consistent with the effective implementation of our statutory responsibilities. In addition, the Federal Reserve and the other banking 

agencies have developed a number of compliance guides that are 

specifically designed to assist community banks’ understanding of 

applicable regulatory requirements. 

Generally, the Federal Reserve strives to balance efforts to ensure that supervision and regulation are calibrated appropriately 

for smaller and less risky institutions with our responsibility to ensure that consumer financial transactions are fair and transparent, 

regardless of the size and type of supervised institutions involved. 

The Federal Reserve has worked to minimize regulatory burdens 

for community banks, by fashioning simpler compliance requirements and clearly identifying which provisions of new regulations 

are of relevance to smaller banks. 

In January 2014, the Federal Reserve Board (Board) implemented a new consumer compliance examination framework for 

community banks. The new program more explicitly bases examination intensity on the individual bank’s risk profile, weighted 

against the effectiveness of the bank’s compliance controls. The 

Board also revised its consumer compliance examination frequency 

policy to lengthen the time between on-site consumer compliance 

and Community Reinvestment Act examinations for many community banks with less than $1 billion in total consolidated assets. 

These changes should increase the efficiency of our exam process 

and reduce regulatory burden on many community banks. 

The Board approved a final rule in April 2015 raising the asset 

threshold of the Board’s Small Bank Holding Company and SavVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00092 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
89 

ings and Loan Holding Company Policy Statement (Policy Statement) from $500 million to $1 billion and expanding its application 

to savings and loan holding companies. As a result of this action, 

89 percent of all bank holding companies and 81 percent of all savings and loan holding companies are now covered under the scope 

of the Policy Statement. The Policy Statement reduces regulatory 

burden by excluding these small organizations from certain consolidated capital requirements. In addition to reducing capital burden, 

the action significantly reduced the reporting burden associated 

with capital requirements by eliminating the more complex quarterly consolidated financial reporting requirements and replacing 

them with semiannual parent-only financial statements for 470 institutions. In addition, raising the asset threshold allowed more 

bank holding companies to take advantage of expedited applications processing procedures. 

To deepen its understanding of community banks and the specific 

challenges facing these institutions, the Board meets twice a year 

with the Community Depository Institutions Advisory Council 

(CDIAC) to discuss the economic conditions and issues that are of 

greatest concern to community institutions. The CDIAC members 

are selected from representatives of community banks, thrift institutions, and credit unions who serve on local advisory councils at 

the 12 Federal Reserve Banks. The Board also has launched a 

number of outreach initiatives, including the establishment of its 

‘‘Community Banking Connections’’ program, which is designed to 

enhance the dialogue between the Board and community banks. In 

addition, this program highlights key elements of the Board’s supervisory process for community banks and provides clarity on supervisory expectations. 

In 2014, under the auspices of the Federal Financial Institution 

Examination Council (FFIEC), the Federal Reserve, the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the Agencies) began their decennial review of regulations as 

required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) with the release of four Federal 

Register notices requesting comments on their regulations that are 

applicable to insured depository institutions and their holding companies in 12 substantive categories: Applications and Reporting; 

Powers and Activities; International Operations; Banking Operations; Capital; the Community Reinvestment Act; Consumer Protection; Directors, Officers and Employees; Money Laundering; 

Rules of Procedure; Safety and Soundness; and Securities. The 

final comment period closed on March 22, 2016, and produced over 

160 written comment letters. Additionally, the Agencies held six 

outreach events across the country with over 1,030 participants attending in person, by telephone, or via live stream. 

While the Agencies are in the process of conducting a systematic 

analysis and consideration of these comments in order to prioritize 

recommendations and to adopt changes as appropriate, they have 

already taken action on certain issues. For example, upon authorization provided in the Fixing America’s Surface Transportation 

Act, enacted on December 14, 2015, the Agencies moved quickly to 

raise the asset threshold from $500 million to $1 billion in total asVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
90 

sets for banks and savings associations that are well-capitalized 

and well-managed to be eligible for an 18-month examination cycle. 

Additionally, under the auspices of the FFIEC, the Agencies 

issued a public notice in September 2015 that established a 

multistep process for streamlining Call Report requirements. The 

notice included proposals to eliminate or revise several Call Report 

data items, announced an accelerated start of a statutorily required 

review of the Call Report, and began an assessment of the feasibility of creating a streamlined community bank Call Report. In addition to the formal EGRPRA process, the Agencies are continuing 

to engage in industry dialogue and outreach, to better understand 

significant sources of Call Report burden. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM JANET L. YELLEN 

Q.1. Last year, the Federal Reserve, in conjunction with the OCC, 

FDIC, SEC, NCUA, and CFPB issued final standards, as required 

by the Wall Street Reform Act, to assess the diversity practices of 

regulated financial institutions. In my view, these standards, which 

changed little since the draft was released a few years prior, unfortunately fall short of what is necessary to achieve real progress. As 

I noted in my Corporate Diversity Survey last year, it’s no secret 

that the financial industry has a long way to go to improve the diversity of its leadership, workforce, and supplier base. And as you 

know, the Offices of Minority and Women Inclusion were created 

to help address the lack of diversity within our financial sector, and 

we need much more than voluntary self-assessments to bring about 

transparency and meaningful change. 

This is not some pie-in-the-sky policy—this directly connects to 

the financial health of our families and our communities. Lack of 

attention paid to communities of color likely contributed to regulatory neglect of problems that led to the crisis. 

Beyond what is contemplated in the OMWI standards issued last 

year, what other concrete steps does the Federal Reserve plan to 

take to advance diversity and inclusion both within the Federal Reserve System and in the banking industry in general? 

A.1. The Federal Reserve Board (Board) is committed to equal employment in all aspects of employment, and to fostering diversity 

and inclusion in the workplace. This includes both the letter and 

spirit of all current law. The Board’s 2016–2019 Strategic Plan includes a strategic objective focusing on the recruitment, developments and retention of a highly skilled workforce that enables the 

Board to meet its mission and foster and sustain a diverse and inclusive environment. 

The Board has collaborated with the Federal Reserve Banks to 

include in the 2016 Office of Minority and Women Inclusion 

(OMWI) reports core metrics for measuring key workforce indicators and procurement awards. The metrics enable the Board and 

Reserve Banks to monitor the effectiveness of diversity policies, 

practices, and programs and adjust activities where needed. 

Under a Board management mandate adopted in 2015, succession planning, workforce planning, and talent management strategic objectives are being established throughout the Board. In adVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00094 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
91 

dition, the Board implemented a Diversity Scorecard to assist divisions in pursuing a comprehensive and strategic focus on diversity 

and inclusion as a key metric. The scorecard establishes accountability for setting of diversity objectives and for actions by divisions 

to achieve those objectives. The scorecard objectives cover four performance areas: Leadership Engagement, Talent Acquisition, Talent Management, and Supplier Diversity. 

We remain committed to evaluating the Board’s personnel practices, policies, and other efforts to ensure that the workplace is free 

of discrimination and provides equal opportunity and access for minorities and women in hiring, promotion, business practices, and 

retention particularly to senior-management level positions. 

The Board continues to collaborate with other financial regulatory agencies in the implementation of the ‘‘Final Interagency 

Policy Statement Establishing Joint Standards for Assessing the 

Diversity Policies and Practices of Entities Regulated by the Agencies’’ (Policy Statement). On February 29, 2016, the Board, Office 

of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Securities and Exchange Commission, National credit 

Union Administration, and the Consumer Financial Protection Bureau (the Agencies) received approval from the Office of Management and Budget to collect information pursuant to the policy 

statement. The information from the self-assessments may be used 

to monitor diversity and inclusion trends and identify leading policies and practices in the financial services industry. In collaboration with the other Agencies, the Board will work with regulated 

entities and other stakeholders to monitor progress toward meeting 

the joint standards, and provide technical assistance to the regulated entities in addressing diversity. 

To address diversity in the economics profession the Board has, 

under the purview of the American Economic Association’s Committee on the Status of Minority Groups in the Economics Profession, continued to organize, oversee, and participate in the three 

programs intended to foster a long-term strategy in the recruitment of minority economists: (1) the Summer Economics Fellow 

Program; (2) the Summer Training Program; and (3) the Mentoring 

Program. 

The Board has also collaborated with Howard University to establish a teaching and mentoring program to build relationships 

between Board economists and the university’s economics faculty 

and students. In addition, to encouraging the study of economics as 

a major, a team of economic research assistants from the Board 

visited local high schools, focusing on schools with demographically 

diverse populations. We will continue to explore new and innovative ways to increase the availability of minority and female professional economists in the educational and professional pipeline. 

Q.2. Nonbank lending has grown steadily in recent years, and as 

you know, nonbank lenders often rely on funding sources that are 

more vulnerable to runs. The 2015 Shared National Credit Review 

of bank loans underwriting standards showed that while nonbanks 

own less than one-quarter of total loans, they own two-thirds of the 

highest-risk loans. And, with the growth of nonbank lending, intermediation chains have also lengthened, to the point where there 

are frequently banks and other nonbank financial institutions inVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00095 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
92 

volved. As you know, the failure of a large, interconnected nonbank 

financial institution has the potential to wreak havoc on our system and instigating contagion among other institutions. From my 

perspective, bringing the largest and most interconnected of these 

institutions are within the wings of prudential regulation and supervision has been and will continue to be critical for our financial 

stability. 

What steps is the Fed taking to identify risks to financial stability, and in particular those arising from nonbank institutions not 

currently subject to prudential supervision? 

A.2. The Federal Reserve continuously monitors risks to financial 

stability from all components of the financial system including 

banks, nonbank financial institutions, financial market utilities, 

and markets themselves. This monitoring effort includes the activities and risks of various nonbank financial institutions, such as 

hedge funds, insurance firms, mutual funds, pension funds, consumer and business finance companies, as well as more opaque 

markets, such as repo and over-the-counter derivatives, and innovations such as distributed ledger technology. We also supervise 

the nonbank financial companies that the Financial Stability Oversight Council (FSOC) has determined should be subject to Federal 

Reserve supervision and prudential standards—two large insurance companies and GE Capital. We are working closely with other 

FSOC participants on initiatives to evaluate potential systemic 

risks arising from activities and products in the asset management 

industry, including liquidity and redemption risk, securities lending risk, operational risk, and resolvability and transition planning. 

And, we are consulting with the Commodities Futures and Trading 

Commission (CFTC) to better understand and manage risks around 

central counterparties. The Federal Reserve also continues its active participation in the Financial Stability Board, engaging in 

issues including shadow banking, supervision of global systemically 

important financial institutions, the development of effective resolution regimes for large financial institutions, and evaluation of potential systemic risks from marketwide asset management activities. 

In addition, we have boosted the visibility into the nonbank financial institution sector by obtaining access to additional data on 

those firms through coordination with other regulators, purchases 

from outside vendors, enhanced regulatory reporting to better understand the linkages between banks and nonbank financial institutions, and voluntary collections from industry. For instance, with 

our colleagues at the Office of Financial Research and the Securities and Exchange Commission, we have launched a pilot project 

to collect data on bilateral repurchase agreements (see https:// 

financialresearch.gov/data/repo-data-project/). 

Q.3. What data gaps have you identified in analyzing risks of 

nonbank financial institutions? 

A.3. Regulators and market participants alike understand the role 

that information gaps played in allowing some of the excesses during the run-up to the crisis to go undetected and hindering our efforts to contain the effects of the crisis. Regulators, including the 

Federal Reserve, have taken significant steps to improve the 

93 

breadth and depth of our data collections. Of course, we recognize 

that data reporting is costly for institutions and we strive to minimize the burden consistent with our task of ensuring the safety 

and soundness of individual regulated institutions as well as the 

ongoing stability of the entire system. As noted above, one way in 

which we are filling data gaps is by collaborating with other regulators. For instance, with Congress’ repeal of the indemnification 

clause in section 728 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act late last year, we are in the process of negotiating with the CFTC to provide our staff with direct access to 

interest rate swaps data. The Depository Trust and Clearing Corporation provides us with detailed, trade-level data on credit default swap transactions for which at least one counterparty is supervised by the Federal Reserve. Despite our efforts to expand the 

range of data sources with which we can conduct analysis, our ability to collect data from unregulated institutions is still constrained. 

For instance, we have limited visibility into the leverage of large 

hedge funds or to the lending practices of certain consumer and 

business finance companies. 

Q.4. What has the Federal Reserve Board or Financial Stability 

Oversight Council done to perform cross-sectoral analyses of bank 

SIFIs and nonbank companies against each other with regard to 

systemic risk? 

A.4. As we learned during the global financial crisis, it is not sufficient to focus only on risks that are apparent in the banking sector. 

Board staff are continuously monitoring risks comprehensively 

across all financial institutions and markets. As an example, we 

have in place a systemwide effort to bring together people who are 

working on understanding the interconnectedness of financial institutions across sectors, and they are monitoring and improving indicators of when that vulnerability is higher or lower than normal. 

One such measure is ‘‘conditional value at risk’’ or CoVaR, which 

is defined as the increase in the value-at-risk of the financial system due to an individual firm becoming distressed, and it can be 

calculated for banks and nonbanks. The detailed methodology for 

computing the CoVaR is presented in the Federal Reserve Bank of 

New York Staff Report 348 by Tobias Adrian and Markus 

Brunnermeier titled ‘‘CoVaR’’ (http://www.ny.frb.org/research/ 

stafflreports/sr348.html). 

We communicate our views on key financial vulnerabilities identified in our monitoring efforts in speeches and testimony, as appropriate, and provide a concise summary in the Monetary Policy 

Report to Congress twice a year. In addition, the FSOC’s annual 

report on financial stability provides a comprehensive assessment 

of risks throughout the financial system. 

Q.5. To what extent is the Federal Reserve engaged in coordination 

and collaboration with State insurance regulators, as well as industry, to ensure that the framework is both appropriately tailored to 

the business of insurance and effectively addresses risks to financial stability? 

A.5. In its consolidated supervision of insurance firms, the Board 

remains committed to tailoring its supervisory approach to the 

business of insurance, reflecting insurers’ different business models 

94 

and systemic importance compared to other firms supervised by the 

Board. The Board’s principal supervisory objectives for the insurance firms that it oversees include protecting the safety and soundness of the consolidated firms, as well as mitigating risks to financial stability. The Board continues to engage extensively with State 

insurance regulators, the National Association of Insurance Commissioners, and other interested stakeholders to solicit feedback on 

insurance prudential standards that would comport with the 

Board’s statutory authority. We continue to coordinate with State 

insurance regulators in their protection of policyholders and aim to 

avoid replicating the supervision that they already perform. We leverage the work of State insurance regulators where possible and 

continue to look for opportunities to further coordinate with them. 

Q.6. In a previous hearing, I asked Federal Reserve Governor 

Tarullo and others about a practice known as ‘‘regulatory capital 

relief trades’’, in which regulated financial institutions purchase 

credit protection (often using credit default swaps) from unregulated entities (often formed offshore to avoid regulation) to reduce 

the amount of capital they need to hold against an investment on 

their books. 

In effect, these trades transfer risk from regulated institutions 

that are subject to capital requirements to unregulated entities 

that are not. Instead of raising equity to pay for an investment, a 

bank takes on exposure to an entity that may or may not be able 

to pay up if the investment goes bad. 

As I said to Governor Tarullo, if this story sounds familiar, it 

should—this is strikingly similar to what we saw happen with AIG 

before the financial crisis. And we know how that worked out. 

The Treasury’s Office of Financial Research released a report last 

year on these capital relief trades, which states that ‘‘Regulatory 

capital relief trades . . . can increase banks’ interconnectedness 

with nonbanks and . . . reduce transparency for investors and 

counterparties about a bank’s capital adequacy,’’ and that instead 

of reducing risk, these transactions merely ‘‘transform credit risk 

into counterparty risk.’’ 

The report goes on to say that more transparency and reporting 

is needed, and that supervisory stress tests do not sufficiently account for possible shocks from the failure of a counterparty to perform on these transactions. 

What steps is the Fed taking to account for these transactions 

and their risks in its capital requirements, stress tests, and other 

appropriate measures? 

A.6. Risk mitigation techniques, such as purchasing credit default 

swap protection, can reduce a firm’s level of risk. In general, the 

Board views a firm’s engagement in risk-reducing transactions as 

a sound risk management practice. At the same time, however, 

there are certain practices for which the risk-based capital framework may not fully capture the risks a firm faces in these transactions. The Board has issued a supervisory letter (SR letter 13-23, 

‘‘Risk Transfer Considerations When Assessing Capital Adequacy— 

Supplemental Guidance on Consolidated Supervision Framework 

for Large Financial Institutions (SR letter 12-17/CA letter 12-14)’’) 

that provides guidance on how these risk-transfer transactions afVerDate Nov 24 2008 11:48 Aug 09, 2016 Jkt 046629 PO 00000 Frm 00098 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\02-11 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
95 

1See, for example, Congressional Budget Office, ‘‘Public Spending on Transportation and 

Water Infrastructure’’, March 2015, and ‘‘Approaches To Make Federal Highway Spending More 

Productive’’, February 2016. 2 Congressional Budget Office, ‘‘The Budget and Economic Outlook: 2016 to 2026’’, January 

2016, and ‘‘The 2015 Long-Term Budget Outlook’’, June 2015. 

fect assessments of capital adequacy. The letter states that ‘‘supervisors will strongly scrutinize risk-transfer transactions that result 

in substantial reductions in risk-weighted assets, including in supervisors’ assessment of a firm’s overall capital adequacy, capital 

planning and risk management through CCAR.’’ The letter goes on 

to underscore that firms should bring such transactions to the attention of supervisors and that the Board may also decide not to 

recognize such transactions for risk-based capital purposes. Accordingly, the Board has put in place and widely communicated several 

measures that are intended to ensure that risk-transfer transactions which do not result in a significant risk reduction are identified and dealt with accordingly. 

Q.7. As you know, Congress passed, and the president signed into 

law, a 5-year transportation bill in December. In an attempt to 

avoid substantively addressing the insolvency of the Highway 

Trust Fund, Congress cobbled together a hodge-podge of funding 

sources—including tapping into the Federal Reserve’s capital surplus account—all the while demonstrating an unwillingness to accept the reality that large scale public investments can actually 

have benefits for our society and economy, and that sometimes 

hard choices are necessary to make these investments. 

From an economic perspective, with interest rates still low and 

slack still remaining in construction employment, and the strong 

need for new infrastructure investments to prevent even greater 

costs down the road, isn’t now a particularly good time to fully invest in our transportation infrastructure? 

A.7. As noted by the Congressional Budget Office (CBO), productive infrastructure investment can provide benefits for the economy 

and society more broadly. 1 However, the CBO also projects that 

Federal budget deficits and Federal Government debt will be increasing, relative to the size of the economy, over the next decade 

and in the longer run, which is an unsustainable fiscal policy. 2 To 

promote economic growth and stability over the long haul, the Federal budget must be put on a sustainable long-run path that initially stabilizes the ratio of Federal debt to nominal GDP, and, 

given the current elevated level of debt, eventually places that ratio 

on a downward trajectory. An increase in spending that is financed 

by an increase in borrowing would not improve the fiscal position 

of the Federal budget, even if interest rates are low now. When fiscal policymakers address the crucial issue of long-run fiscal sustainability, their choices should certainly consider how to make 

these necessary policy adjustments in a manner that helps make 

the economy more productive. But, I believe—as did my predecessor—that the specific choices made to achieve a sustainable fiscal policy are appropriately left to our Nation’s elected officials and 

the American public. 

96 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

97 

98 

99 

100 

101 

102 

103 

104 

105 

106 

107 

108 

109 

110 

111 

112 

113 

114 

115 

116 

117 

118 

119 

120 

121 

122 

123 

124 

125 

126 

127 

128 

129 

130 

131 

132 

133 

134 

135 

136 

137 

138 

139 

140 

141 

142 

143 

144 

145 

146 

147 

148 

‘‘REDUCING THE IOER RATE: AN ANALYSIS OF OPTIONS’’ MEMO 

SUBMITTED BY SENATOR TOOMEY 

149 

150 

151 

152 

153 

154 

155 

156 

157 

158 

159 

STATEMENT OF THE FINANCIAL INNOVATION NOW COALITION 

SUBMITTED BY SENATOR BROWN 

160