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S. HRG. 114–4 

FEDERAL RESERVE’S FIRST MONETARY POLICY 

REPORT FOR 2015 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON 

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

FEBRUARY 24, 2015 

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 

MICHAEL 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 

JELENA MCWILLIAMS, Chief Counsel 

DANA WADE, Deputy Staff Director 

JACK DUNN III, 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 

TUESDAY, FEBRUARY 24, 2015 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESS 

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System ...... 3 

Prepared statement .......................................................................................... 36 

Responses to written questions of: 

Chairman Shelby ....................................................................................... 39 

Senator Crapo ............................................................................................ 44 

Senator Vitter ............................................................................................ 45 

Senator Kirk .............................................................................................. 46 

Senator Heller ........................................................................................... 49 

Senator Menendez ..................................................................................... 50 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to the Congress dated February 24, 2015 ..................... 59 

(III)

(1) 

FEDERAL RESERVE’S FIRST MONETARY 

POLICY REPORT FOR 2015 

TUESDAY, FEBRUARY 24, 2015 

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

The Committee met at 10:05 a.m., in room SD–106, Dirksen Senate Office Building, Hon. Richard C. Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. Today the Committee will receive testimony 

from Federal Reserve Chair Yellen, as has been required by statute 

since 1978. And although the Federal Reserve Chair has been 

using this venue for decades to communicate directly to Congress 

and the American people, I and many of my colleagues have been 

calling for greater accountability and more effective disclosure for 

years. 

In response, we have heard a chorus of current and former Federal Reserve officials who have lined up to defend the structure and 

the degree of transparency of the Fed. Further accountability to 

Congress, some have argued, is not needed. I am interested to hear 

whether the current Chair shares this view and whether she believes that the Fed should be immune from any reforms. 

As far as monetary policy is concerned, many question whether 

the Fed can rein in inflation and avoid destabilizing asset prices 

when the time comes to unwind its massive $4.5 trillion balance 

sheet. The minutes posted online do little to answer the questions 

of when and how this will be done, and the most recent FOMC 

transcript available to the public is from 2008, over 7 years ago. 

Even though the Fed has several monetary policy tools at its disposal, an action of this magnitude has never before been taken, to 

my knowledge. The Federal Open Market Committee continues to 

report that it can be patient in keeping the Federal funds rate near 

zero. Too much delay could lead to a more painful correction down 

the road. 

What the FOMC is thinking and how they are analyzing this 

very difficult problem set remains a mystery, however; and yet 

some continue to dismiss calls for change or more transparency at 

the Fed. 

I would argue, however, that there is an even greater need for 

additional oversight by Congress and further reforms. Our central 

bank has expanded its influence over households, businesses, and 

markets in recent years. Not only has it pushed the boundaries of 

2 

traditional monetary policy, but it has also consolidated unmatched 

authority as a financial regulator. 

As the Fed grows larger and more powerful, much of this authority has become more concentrated in Washington, DC, and in New 

York. The Fed emerged from the financial crisis as a super regulator, with unprecedented power over entities that it had not previously overseen. With such a delegation of authority comes a 

heightened responsibility, I believe, for Congress to know the impact these new requirements place on our economy as a whole. 

The role of Congress is not to serve on the Federal Open Market 

Committee, but it is to provide strong oversight and, when times 

demand it, bring about structural reforms. As part of this process, 

the Committee will be holding another hearing next week to discuss options for enhanced oversight and reform in the Fed. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Chair Yellen, welcome back. It is good to see you again and good to have you in front 

of our Committee. 

Our economy continued to see strong employment gains and economic growth at the end of 2014, but we know the improvements 

in the economy are not being felt by enough Americans. The gains 

we have made over the past 5 years, 11.5 million net private sector 

job growth in the last 5 years, come on the heels of 9 years when 

we lost 4.5 million jobs. Some pundits and politicians have been 

predicting runaway inflation for years. They clearly do not have a 

very good grasp of what is happening for most Americans. Low 

wage growth has continued for the majority of Americans. The declining participation in the workforce is troubling. In fact, as you 

pointed out, Madam Chair, the income inequality gap has actually 

widened during this recovery. 

It is good, Mr. Chairman, that we began our session today by 

commemorating the Selma Foot Soldiers. We must also note, 

though, that the wealth gap between white and black American 

families has widened. Low- and middle-income Americans have not 

benefited much from low interest rates. Workers with stagnant 

wages have trouble saving for a downpayment or their retirement 

or their children’s education. These are issues that Congress should 

be addressing, but the everyday struggle of Americans needs to be 

part of the Fed’s consideration in making monetary policy, too. 

I appreciate, Chair Yellen, your announcement last month of 

plans to create the Community Advisory Council. It will have 15 

members, meet twice a year with the Board in Washington to offer 

perspectives on their economic circumstances and the needs of lowand moderate-income communities and consumers. I hope the entire Federal Reserve System—the 12 regional banks as well as the 

Board in Washington—will engage community leaders way more 

than they have in the past and will do what you have done by setting the tone in Washington and incorporate the diverse perspectives into their decision making. 

We too often hear concerns that the Fed is a system that is run 

by and to benefit the very largest banks. Last November, I held a 

Subcommittee hearing on one facet of this: regulatory capture. The 

3 

hearing explores concerns about the culture of the banks and the 

regulators. A regulatory culture that is fair and tough, that challenges group think, and that produces rules and regulations designed to strengthen the financial stability of our economy will protect Americans’ financial interests. 

I applaud the Fed for finalizing strong rules for the Nation’s largest and riskiest financial institutions. I encourage you to move forward to finalize outstanding proposals so that everyone will benefit 

from the certainty of having appropriate rules in place. 

It has been more than a year since the Fed released an Advanced 

Notice of Proposed Rulemaking on commodities trading and physical asset ownership. For example, in today’s papers, there are reports of a DOJ investigation of 10 banks for activities in the precious metals markets, and we have yet to see a proposed rule. The 

job does not end there. You must then send the message to your 

examiners that these rules must be implemented and enforced. 

Finally, while some of my colleagues are eager to help you and 

the Fed decide monetary policy, I think that is the wrong role for 

Congress. I am all for transparency. I think more is better as a 

general rule. But every one of us knows there are times when you 

can do better by having a candid discussion in private. 

One real goal must be to have a Federal Reserve that works for 

all Americans, to have a strong economy that benefits low-wage 

workers and the middle class as much as the wealthiest, and to 

have a stable and diverse financial system that provides opportunities for all Americans, not one that threatens their savings. That 

is why your dual mandate to promote price stability and employment, and I so appreciate, perhaps more than you, perhaps more 

than any of your predecessors, or at least as much understands the 

dual mandate, including employment, how important that is. It remains important today. 

Thank you. 

Chairman SHELBY. Madam Chair, welcome to the Committee. We 

look forward to your testimony and our question-and-answer period. Your written testimony will be made part of the record in its 

entirety. You may proceed briefly to outline what you want to tell 

us. 

STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. YELLEN. Chairman Shelby, Ranking Member Brown, and 

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 the Committee last July, the employment situation in the United States has been improving along 

many dimensions. The unemployment rate now stands at 5.7 percent, down from just over 6 percent last summer and from 10 percent at its peak in late 2009. The average pace of monthly job gains 

picked up from about 240,000 per month during the first half of 

last year to 280,000 per month during the second half, and employment rose 260,000 in January. In addition, long-term unemployment has declined substantially, fewer workers are reporting that 

4 

they can find only part-time work when they would prefer full-time 

employment, and the pace of quits—often regarded as a barometer 

of worker confidence in labor market opportunities—has recovered 

nearly to its prerecession level. However, the labor force participation rate is lower than most estimates of its trend, and wage 

growth remains sluggish, suggesting that some cyclical weakness 

persists. In short, considerable progress has been achieved in the 

recovery of the labor market, though room for further improvement 

remains. 

At the same time that the labor market situation has improved, 

domestic spending and production have been increasing at a solid 

rate. Real gross domestic product is now estimated to have increased at a 33⁄4 percent annual rate during the second half of last 

year. While GDP growth is not anticipated to be sustained at that 

pace, it is expected to be strong enough to result in a further gradual decline in the unemployment rate. Consumer spending has 

been lifted by the improvement in the labor market as well as by 

the increase in household purchasing power resulting from the 

sharp drop in oil prices. However, housing construction continues 

to lag; activity remains well below levels we judge could be supported in the longer run by population growth and the likely rate 

of household formation. 

Despite the overall improvement in the U.S. economy and the 

U.S. economic outlook, longer-term interest rates in the United 

States and other advanced economies have moved down significantly since the middle of last year; the declines have reflected, at 

least in part, disappointing foreign growth and changes in monetary policy abroad. Another notable development has been the 

plunge in oil prices. The bulk of this decline appears to reflect increased global supply rather than weaker global demand. While the 

drop in oil prices will have negative effects on energy producers 

and will probably result in job losses in this sector, causing hardship for affected workers and their families, it will likely be a significant overall plus, on net, for our economy. Primarily, that boost 

will arise from U.S. households having the wherewithal to increase 

their spending on other goods and services as they spend less on 

gasoline. 

Foreign economic developments, however, could pose risks to the 

U.S. economic outlook. Although the pace of growth abroad appears 

to have stepped up slightly in the second half of last year, foreign 

economies are confronting a number of challenges that could restrain economic activity. In China, economic growth could slow 

more than anticipated as policymakers address financial 

vulnerabilities and manage the desired transition to less reliance 

on exports and investment as sources of growth. In the euro area, 

recovery remains slow, and inflation has fallen to very low levels; 

although highly accommodative monetary policy should help boost 

economic growth and inflation there, downside risks to economic 

activity in the region remain. 

The uncertainty surrounding the foreign outlook, however, does 

not exclusively reflect downside risks. We could see economic activity respond to the policy stimulus now being provided by foreign 

central banks more strongly than we currently anticipate, and the 

5 

recent decline in world oil prices could boost overall global economic growth more than we expect. 

U.S. inflation continues to run below the Committee’s 2-percent 

objective. In large part, the recent softness in the all-items measure 

of inflation for personal consumption expenditures reflects the drop 

in oil prices. Indeed, the PCE price index edged down during the 

fourth quarter of last year and looks to be on track to register a 

more significant decline this quarter because of falling consumer 

energy prices. But core PCE inflation has also slowed since last 

summer, in part reflecting declines in the prices of many imported 

items and perhaps also some passthrough of lower energy costs 

into core consumer prices. 

Despite the very low recent readings on actual inflation, inflation 

expectations as measured in a range of surveys of households and 

professional forecasters have thus far remained stable. However, 

inflation compensation, as calculated from the yields of real and 

nominal Treasury securities, has declined. As best we can tell, the 

fall in inflation compensation mainly reflects factors other than a 

reduction in longer-term inflation expectations. The Committee expects inflation to decline further in the near term before rising 

gradually toward 2 percent over the medium term as the labor 

market improves further and the transitory effects of lower energy 

prices and other factors dissipate, but we will continue to monitor 

inflation developments closely. 

I will now turn to monetary policy. The Federal Open Market 

Committee is committed to policies that promote maximum employment and price stability, consistent with our mandate from the 

Congress. As my description of economic developments indicated, 

our economy has made important progress toward the objective of 

maximum employment, reflecting in part support from the highly 

accommodative stance of monetary policy in recent years. In light 

of the cumulative progress toward maximum employment and the 

substantial improvement in the outlook for labor market conditions—the stated objective of the Committee’s recent asset purchase program—the FOMC concluded that program at the end of 

October. 

Even so, the Committee judges that a high degree of policy accommodation remains appropriate to foster further improvement in 

labor market conditions and to promote a return of inflation toward 

2 percent over the medium term. Accordingly, the FOMC has continued to maintain the target range for the Federal funds rate at 

0 to 1⁄4 percent and to keep the Federal Reserve’s holdings of 

longer-term securities at their current elevated level to help maintain accommodative financial conditions. The FOMC is also providing forward guidance that offers information about our policy 

outlook and expectations for the future path of the Federal funds 

rate. In that regard, the Committee judged, in December and January, that it can be patient in beginning to raise the Federal funds 

rate. This judgment reflects the fact that inflation continues to run 

well below the Committee’s 2-percent objective and that room for 

sustainable improvements in labor market conditions still remains. 

The FOMC’s assessment that it can be patient in beginning to 

normalize policy means that the Committee considers it unlikely 

that economic conditions will warrant an increase in the target 

6 

range for the Federal funds rate for at least the next couple of 

FOMC meetings. If economic conditions continue to improve, as the 

Committee anticipates, the Committee will at some point begin 

considering an increase in the target range for the Federal funds 

rate on a meeting-by-meeting basis. Before then, the Committee 

will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be 

read as indicating that the Committee will necessarily increase the 

target range in a couple of meetings. Instead the modification 

should be understood as reflecting the Committee’s judgment that 

conditions have improved to the point where it will soon be the 

case that a change in the target range could be warranted at any 

meeting. Provided that labor market conditions continue to improve 

and further improvement is expected, the Committee anticipates 

that it will be appropriate to raise the target range for the Federal 

funds rate when, on the basis of incoming data, the Committee is 

reasonably confident that inflation will move back over the medium 

term toward our 2-percent objective. 

It continues to be the FOMC’s assessment that even after employment and inflation are near levels consistent with our dual 

mandate, economic conditions may, for some time, warrant keeping 

the Federal funds rate below levels the Committee views as normal 

in the longer run. It is possible, for example, that it may be necessary for the Federal funds rate to run temporarily below its normal longer-run level because the residual effects of the financial 

crisis may continue to weigh on economic activity. As such factors 

continue to dissipate, we would expect the Federal funds rate to 

move toward its longer-run normal level. In response to unforeseen 

developments, the Committee will adjust the target range for the 

Federal funds rate to best promote the achievement of maximum 

employment and 2-percent inflation. 

Let me now turn to the mechanics of how we intend to normalize 

the stance and conduct of monetary policy when a decision is eventually made to raise the target range for the Federal funds rate. 

Last September, the FOMC issued its statement on Policy Normalization Principles and Plans. This statement provides information 

about the Committee’s likely approach to raising short-term interest rates and reducing the Federal Reserve’s securities holdings. As 

is always the case in setting policy, the Committee will determine 

the timing and pace of policy normalization so as to promote its 

statutory mandate to foster maximum employment and price stability. 

The FOMC intends to adjust the stance of monetary policy during normalization primarily by changing its target range for the 

Federal funds rate and not by actively managing the Federal Reserve’s balance sheet. The Committee is confident that it has the 

tools it needs to raise short-term interest rates when it becomes appropriate to do so and to maintain reasonable control of the level 

of short-term interest rates as policy continues to firm thereafter, 

even though the level of reserves held by depository institutions is 

likely to diminish only gradually. The primary means of raising the 

Federal funds rate will be to increase the rate of interest paid on 

excess reserves. The Committee also will use an overnight reverse 

repurchase agreement facility and other supplementary tools as 

7 

needed to help control the Federal funds rate. As economic and financial conditions evolve, the Committee will phaseout these supplementary tools when they are no longer needed. 

The Committee intends to reduce its securities holdings in a 

gradual and predictable manner primarily by ceasing to reinvest 

repayments of principal from securities held by the Federal Reserve. It is the Committee’s intention to hold, in the longer run, no 

more securities than necessary for the efficient and effective implementation of monetary policy and that these securities be primarily 

Treasury securities. 

In sum, since the July 2014 Monetary Policy Report, there has 

been important progress toward the FOMC’s objective of maximum 

employment. However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still 

sluggish, and inflation remains well below our longer-run objective. 

As always, the Federal Reserve remains committed to employing 

its tools to best promote the attainment of its objectives of maximum employment and price stability. 

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

Chairman SHELBY. Madam Chair, I first would want to get into 

measures of inflation. You touched on that a little. The Federal Reserve I understand currently uses an inflation measure of core personal consumption expenditures, or PCE, which excludes volatile 

food and energy prices. Several alternative measures of inflation 

exist, including one called the ‘‘Trimmed Mean PCE,’’ which strips 

out a larger basket of volatile items from the calculation. I know 

you know all this. 

Do you think that the Federal Open Market Committee should 

incorporate alternative measures of inflation such as Trimmed 

Mean PCE? And could you explain to us the risk of not properly 

gauging inflation expectations? 

Ms. YELLEN. Thank you. So let me first say that the Federal 

Open Market Committee’s 2-percent objective refers to the increase, the annual increase in the total PCE price index that includes food and energy. Food and energy are very important components of every household’s spending basket, and I do not think it 

would make a lot of sense or be acceptable to Americans to focus 

on a measure that strips out these important components of the 

consumer basket. So we focus on total consumer prices, including 

food and energy. 

But at the same time, we recognize that food and energy are particularly volatile prices, and in order to get a better forecast sometimes of the underlying trend in inflation, we do look at so-called 

core inflation that strips out these measures. 

And in trying to understand trends in inflation and the factors 

impacting inflation, we look at a broad variety of measures of inflation. Although our formal index is the so-called PCE price index, 

we look at the CPI, which is well known to most Americans, and 

also to these Trimmed Mean and other measures that you cited. 

Chairman SHELBY. You have opined on the use of monetary policy rules such as the Taylor rule, which would provide the Fed with 

a systematic way to conduct policy in response to changes in economic conditions. I believe that would also give the public a greater 

understanding of and perhaps confidence in the Fed’s strategy. 

8 

You have stated, and I will quote: ‘‘Rules of the general sort proposed by Taylor capture well our statutory mandate to promote 

maximum employment and price stability.’’ 

You have expressed concerns, however, over the effectiveness of 

such rules in times of economic stress. Would you support the use 

of a monetary policy rule of the Fed’s choosing if the Fed had discretion to modify it in times of economic disruption? 

Ms. YELLEN. I am not a proponent of chaining the Federal Open 

Market Committee in its decision making to any rule whatsoever. 

But monetary policy needs to take account of a wide range of factors, some of which are unusual and require special attention, and 

that is true even outside times of financial crisis. 

In his original paper on this topic, John Taylor himself pointed 

to conditions such as the 1987 stock market crash that would have 

required a different response. I would say that it is useful for us 

to consult the recommendations of rules of the Taylor type and others, and we do so routinely, and they are an important input into 

what ultimately is a decision that requires sound judgment. 

Chairman SHELBY. Thank you. 

In a recent speech, Richard Fisher, the President of the Dallas 

Federal Reserve Bank, has suggested a reorganization of the Federal Open Market Committee, specifically advocates for a rotating 

Vice Chairmanship of the Federal Open Market Committee, as well 

as a stronger role for regional banks on the Committee. 

Do you support any of Mr. Fisher’s proposals? And why, or why 

not? 

Ms. YELLEN. Well, Senator Shelby, I think the current structure 

of the Federal Open Market Committee and the voting structure 

was decided on by Congress a long time ago, after weighing a 

whole variety of considerations about the need for control in Washington and the importance of regional representation. 

It is, of course, something that Congress could, if it wished, revisit. But I would say that it has worked very well. We have a 

broad range of opinion that is represented at the table, and active 

debates. The decision to appoint the President of the New York Fed 

as Vice Chair reflected the reality that the New York Fed conducts 

open market operations on behalf of the system and has special 

and deep expertise pertaining to financial markets. And I think 

that has worked well and continues to be true, that there is special 

expertise in New York. 

Chairman SHELBY. A recent article written by two economists for 

the think tank e21 proposes reducing the number of Federal Reserve districts from 12 to 5 and making the Presidents of all regional banks voting members of the Federal Open Market Committee. The article states that this would preserve regional diversity while giving more authority over monetary policy to Reserve 

Banks that currently rotate as voting members. It also posits that 

it could allow for greater safety and soundness and remove the uncertainty created by 19 independent FOMC members. 

Do you oppose consolidation of Federal Reserve districts? 

Ms. YELLEN. Senator, again, this is a matter for Congress to decide. The structure of the Federal Reserve reflects choices that 

were hammered out 100 years ago, and I think the current strucVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
9 

ture works well, so I would not recommend changes. But, again, 

you know, the Federal Reserve Banks are—— 

Chairman SHELBY. It is up to Congress, is it not? 

Ms. YELLEN. ——play important roles in their communities, but, 

again, this is up to Congress to consider. 

Chairman SHELBY. My last question to you in this round: asset 

threshold for banks. A recent report by the Office of Financial Research shows a large disparity in systemic risk between the largest 

banks and those that are smaller and closer to $50 billion in assets. 

All banks above $50 billion are subject to enhanced prudential regulation regardless of where they fall in this systemic important 

scale. 

Do you think the findings of the OFR, the Office of Financial Research, should be incorporated or considered in the determination 

of whether a bank is systemically significant? 

Ms. YELLEN. Well, Senator, we absolutely recognize in the Federal Reserve that the largest banks and those closer to $50 billion 

are quite different in terms of their systemic footprint, and we have 

many different measures that help us decide on the systemic importance of an institution, and there obviously are large differences 

there. 

In Dodd-Frank, Congress gave us the flexibility to tailor our supervision and regulation to make it appropriate to the systemic importance and complexity and size of a bank, and to the maximum 

extent possible within that legislation, we have tried to use the 

powers that we have to appropriately tailor our supervision and 

regulation. 

So, for example, we recently proposed extra capital charges on 

the largest and most systemic institutions and higher leverage requirements, and those requirements would not apply to the smaller 

institutions. But there are many other examples as well. 

Chairman SHELBY. Do you know of any community or regional 

bank that has caused systemic risk to our economy? 

Ms. YELLEN. There may have been episodes in which there were 

bank failures of smaller banks that did threaten systemic consequences, but certainly it is the largest—— 

Chairman SHELBY. I believe you chose your words carefully. You 

said ‘‘may have been.’’ Do you know of any yourself and could you 

furnish any for the record where smaller banks, any of them, or regional banks have caused systemic risk to our economy or to our 

banking system? Would you furnish that for the record if you do? 

Ms. YELLEN. So I will certainly look into it and furnish it. I am 

trying to agree with you that it is—— 

Chairman SHELBY. That they do not—— 

Ms. YELLEN. By and large, that has not been the case. 

Chairman SHELBY. Thank you. 

Ms. YELLEN. Yes, I agree with that. 

Chairman SHELBY. Thank you, Madam Chair. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

I have one comment about your answer to the last question of 

the Chairman’s about capital requirements that you have applied. 

I think there is no question, as reports have recently made pretty 

clear, that it has made for stronger banks and a more stable finanVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
10 

cial system, so thank you. And Senator Vitter on this Committee 

I know has had special interest, as has Senator Shelby, in strong 

capital standards. So thank you for that. 

Madam Chair, I mentioned in my opening statement that last 

October you gave a speech on income and wealth inequality. All of 

us agree the best way to address that is a more robust job-creating 

economy. What steps are you taking to incorporate your concerns 

about that into the monetary policy decisions? 

Ms. YELLEN. Well, Senator Brown, as you know, we are very 

committed to both parts of the dual mandate—price stability and 

maximum employment. We have been running a very accommodative monetary policy in order to promote stronger conditions in the 

labor market. We have been monitoring a wide variety of indicators 

of labor market performance, not focusing on any single summary 

measure, and in particular, for example, the large magnitude of 

part-time involuntary employment workers who want full-time 

jobs, the decline in labor force participation, part of which we understand to be or believe to be cyclical, these are things that we 

are monitoring very closely. 

We are also looking at wage growth, and the fact that wage 

growth has really not picked up very much during this recovery I 

take to be another signal that, although the labor market is improving, we have further to go, and we want to promote full recovery. 

Senator BROWN. Thank you. For much of our Nation’s economic 

history, productivity has tracked wages, but since the 1970s, as you 

know, this has changed; and productivity has continued, particularly in the last 15 years or so, to grow while wages have not. How 

do you explain this change? And what are the dangers of wages 

being uncoupled from productivity? 

Ms. YELLEN. Well, we have seen a significant increase in the 

share of the pie or GDP that accrues to capital as opposed to labor, 

and that occurs when the growth in inflation-adjusted or real 

wages fails to mirror the growth in productivity. So that has been 

occurring now for some time, and we have seen that occur during 

the recovery. 

Real wages tend to rise more rapidly in a strong labor market, 

so I interpret part of that phenomenon as a signal, a sign that the 

labor market is not yet fully recovered. But I should also say that 

there are longer-term structural factors that may also be affecting 

the shares of the pie that accrue to labor and capital. 

I think one of these factors, recent research points to the fact 

that many labor-intensive activities in the global production chain 

are being increasingly outsourced, and that phenomenon I think 

has tended to push down the share of income going to labor as opposed to capital over the last decade or so. There is research on 

this topic, so I think it is a combination of structural factors, but 

also remaining cyclical weakness—— 

Senator BROWN. And that includes the organization of labor, of 

workers being organized? 

Ms. YELLEN. That certainly could include that as a factor. 

Senator BROWN. I appreciate the steps that you and your predecessor have made to bring greater transparency to the Fed. As you 

know, there is a proposal in the House and Senate to go one step 

11 

further and require the GAO to audit the Fed’s monetary policy deliberations. What are your thoughts on that? 

Ms. YELLEN. I want to be completely clear that I strongly oppose 

‘‘audit the Fed.’’ I believe the transparency and providing Congress 

and the public with adequate information to be able to understand 

our operations, our financial condition, the conduct of our meeting 

the responsibilities that Congress has assigned to us is essential. 

But ‘‘audit the Fed’’ is a bill that would politicize monetary policy, 

would bring short-term political pressures to bear on the Fed. 

In terms of openness about our financial accounts, we are extensively audited. I brought with me this volume which contains an 

independent outside auditor’s—Deloitte & Touche’s—audits of our 

financial statements. So in the normal sense in which people understand what auditing is about, the Federal Reserve is extensively 

audited. What I think is really critically important is that the Fed 

be able to deliberate on the best way to meet the responsibilities 

that Congress has assigned to us, to achieve maximum employment 

and price stability, and that we be able to do so free of short-term 

political pressures. 

I would remind you that in the early 1970s, when inflation built 

and became an endemic problem in the U.S. economy, history suggests that there was political pressure on the Fed that interfered 

with its decision making. It was in the last 1970s that Congress 

put in place the current feature of law that exempts monetary policy deliberations and decisions, the one area that is exempted from 

GAO audits. And I really wonder whether or not the Volcker Fed 

would have had the courage to take the hard decisions that were 

necessary to bring down inflation and get that finally under control, something I think has been very important to the performance 

of the U.S. economy, I wonder if that would have happened with 

GAO reviews in real time of monetary policy decision making. 

So central bank independence in conducting monetary policy is 

considered a best practice for central banks around the world. We 

are one of many, many central banks that are independent, and 

academic studies I think establish beyond the shadow of a doubt 

that independent central banks perform better, the economies are 

more stable and have better performance in terms of inflation and 

macroeconomic stability. 

Senator BROWN. A last brief question, Madam Chair. You mentioned your Community Advisory Council. What are you doing to 

encourage regional bank presidents to follow suit? 

Ms. YELLEN. Well, regional banks, most of the regional banks are 

actively involved with their communities. They have community development programs and are really trying to address the special 

needs of their communities. But in Washington, we also encourage 

and have oversight of those activities and strongly encourage similar practices. 

Senator BROWN. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman, and, Chair Yellen, I 

would like to use my time going over the EGRPRA process that we 

are in right now with you. 

12 

The first Economic Growth and Regulatory Paperwork Act, or 

EGRPRA, review submitted to Congress in 2007 states, ‘‘Besides 

reviewing all of our existing regulations in an effort to eliminate 

unnecessary burdens, the Federal banking agencies work together 

to minimize burdens resulting from new regulations and current 

policy statements as they were being adopted.’’ 

I think you know where I am headed here. 

The report submitted to Congress specifically discussed consumer 

financial protection issues, anti-money-laundering issues, and included recently adopted rules. However, included in the Federal 

Register put forward for this current 10-year EGRPRA process that 

we are now in, where we are supposed to be having our financial 

regulators by law look for outdated, unnecessary, and unduly burdensome regulatory requirements in the system, there was, I think, 

a remarkable couple of footnotes included which basically said that 

the agencies engaged this time around are going to back off. They 

are basically not going to review new regulations that have gone 

into effect, not going to review regulations that are currently being 

considered and will go into effect during the EGRPRA process, and 

have clarified that the CFPB is not even going to be a part of the 

process. The entire Consumer Financial Protection Bureau will not 

be a part of the process. 

My question to you is going to be: Would you not agree that we 

should have a thorough EGRPRA process that reviews all rules and 

that the Consumer Financial Protection Bureau or the consumer 

regulatory system should be a part of the EGRPRA process? But 

before I put that question to you, I would just like to say we had 

a hearing last week which was dealing with community banks and 

credit unions and the regulatory burdens that they face. And I 

asked the witnesses, and every one of them said that in the set of 

rules and regulations that they feel are creating unnecessary and 

unduly burdensome pressures are rules and regulations coming 

from the consumer financial arena, coming from the anti-moneylaundering arena, and coming from the Dodd-Frank legislation that 

is recently enacted which would be exempted from the current 

agency’s review. 

A couple of examples they gave were the qualified mortgage rule 

that needs to be reviewed, the Volcker rule that needs to be reviewed, and yet all of this is apparently outside the scope of the 

entire EGRPRA process that the agencies are now undertaking. 

Could you respond, please? 

Ms. YELLEN. So in the rules that have gone into effect or are in 

the process under consideration and will go into effect related to 

Dodd-Frank, we had Federal Register notices, took public comment, 

an important part of designing those rules was considering the 

costs, the burdens, and what was the most effective and appropriate way of designing regulations to meet Dodd-Frank objectives. 

So in a sense, what EGRPRA asks of the agencies is something 

that we have gone through very recently in the process of designing 

regulations in some cases that have not yet even gone into effect. 

Senator CRAPO. Would your answer be the same for the Consumer Financial Protection Bureau, because it is new that we do 

not need to review its rules and regulations? 

13 

Ms. YELLEN. I really cannot speak to—you know, we do not have 

that rulemaking authority, and, sir, I cannot speak to what role the 

CFPB is going to play. 

Senator CRAPO. Well, it seems to me—I understand the argument. In fact, that is the argument we got from the regulators who 

were before us 2 weeks ago in one of our hearings. But it seems 

to me that that is not what EGRPRA says. EGRPRA does not say, 

‘‘Let us review the rules and regulations that are old.’’ It says, ‘‘Let 

us review them all.’’ That is what the law was passed to do. And 

if you look at the Dodd-Frank legislation that you were just saying 

has recently been through the process, or many of its rules and regulations have recently been through the process, the Dodd-Frank 

legislation itself was 848 pages long. But the page count of the regulations required by Dodd-Frank has mushroomed to more than 

15,000 pages so far, and they are not finished, and over 15 million 

words of regulatory text. And to say that the fact that they are new 

and the fact that the implementation process has just recently been 

completed on them I do not think is a satisfactory response to the 

requirement of EGRPRA that the agencies need to look at their 

regulations and identify those that are unnecessary or unduly burdensome. 

Ms. YELLEN. Well, we are holding public hearings and will be 

taking extensive public comments. You mentioned community 

banks. We are very focused on trying to find ways to reduce the 

burdens on community banks, and during this process we will be 

very sensitive to looking for ways in which we can reduce the burden of regulation, and we will be reporting back to you. 

Senator CRAPO. Well, thank you. My time is up. But I would just 

encourage you and the other Federal regulators to focus on the full 

intent of EGRPRA and expand your review. 

Thank you. 

Ms. YELLEN. Thank you. 

Chairman SHELBY. Senator Reed. 

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

Madam Chair, welcome. 

The Federal Reserve has significant responsibilities in many 

areas. One is monetary policy, in which the Federal Reserve exercises a historic, customary independence. But one other area is regulatory policy, actually supervising the operation of large financial 

institutions, which leads inevitably back to the New York Federal 

Reserve, which has a great deal of authority, and several of us 

have had proposals to help, we hope, improve this regulatory oversight, which has been criticized in the past, I mean not only in the 

run-up to 2007 and 2008, but even recently. 

Can you please describe what you have done for greater accountability from the New York Fed? 

Ms. YELLEN. So in the aftermath of the hearings that were held 

here and the allegations that were raised about the New York Fed, 

we have undertaken an internal review, and that is in process. 

Now, I should say that the question that we think is important 

that was raised there is—let me step back. We have a process for 

supervising the largest banks that is a systemwide process, involves systemwide committees, and is led by Washington, by the 

Board. 

14 

The Reserve Banks that are involved with the supervision of the 

institutions in that large bank portfolio take part in the process 

that is a groupwide and Board-led process. So the question we 

thought is important for us to look at is: Are we in that process, 

the Board and the group that supervises these banks and makes 

decisions, is the relevant information being fed up to the highest 

decision-making levels, including the Board of Governors? And to 

the extent that within a Reserve Bank supervision teams there 

may be divergent opinions, we want to make sure that dissident 

voices are heard and that dissident views can reach the highest 

levels for consideration. 

So that is the question that we have asked our internal team to 

look at. The review includes the New York Fed, but also other Reserve Banks that are also involved in large bank supervision, because avoiding group think and making sure that dissident views 

can be heard at the highest levels is really critical to sound supervision. 

We have also asked our Inspector General to undertake his own 

independent review, and these are in process, and I expect them 

to be completed this year. 

Senator REED. And you anticipate that the Federal Reserve, the 

Board of Governors, will take specific action which is recognizable 

and transparent to the Congress and to the people that—— 

Ms. YELLEN. Yes. I mean, we expect to report to you on the findings of these investigations, and if the need and suggestions for improvement are found, we expect to put those into effect. 

Senator REED. At this point do you anticipate that there will be 

needs to improve? I mean, that is what seems to strike most people 

when you look at some of the incidents that have taken place over 

the last several years, that some change has to happen. The question is: Will it be legislative or administrative? 

Ms. YELLEN. Well, we will certainly take any administrative 

changes that appear to be called for. You know, I would like to wait 

and see what the findings are of the reviews before deciding on the 

appropriate measures. 

Senator REED. Thank you, Madam Chair. My time has expired, 

but let me put one more issue on the table, and perhaps we could 

follow up with a question. We are all acutely sensitive to systemic 

risk, and in Dodd-Frank we tried to minimize that risk by introducing the notion of clearinghouses that would take bilateral transactions, derivatives swaps, et cetera, and put them onto a platform. 

But that itself introduces a degree of risk in terms of the clearinghouses themselves, and I just want to obviously put on your screen, 

which I think already is, the sensitivity that we have to continued 

oversight of these clearinghouses, both our own and others across 

the globe, because of the potential systemic problem. So can I just 

put that on the table? 

Ms. YELLEN. Absolutely, and I want you to know that I am—we 

are very attuned to the need to be careful in our supervision that 

we have taken a step forward, I think, as you mentioned, in moving a great deal of clearing to clearinghouses. Eight financial market utilities, including the most important central counterparties, 

have been designated by FSOC as systemically important financial 

market utilities, and they are being supervised by the Federal ReVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
15 

serve, those based in the United States, the Fed, the CFTC, and 

the SEC. 

There are a set of principles that have been put in place and 

agreed globally for what best practices are in terms of liquidity 

standards and other risk management standards for these financial 

market utilities, and it is extremely high priority for us to make 

sure that we vigorously enforce those standards, and we are in the 

process of doing so, because although these entities reduce risks 

that were previously present, they create their own risks if they 

are not appropriately managed. 

So I completely agree, this is important, and we are giving it a 

great deal of attention. 

Senator REED. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Corker. 

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

thank you for being here today. 

There is a push right now to add a provision addressing currency 

manipulation in the Asian Pacific trade deal. Do you think trade 

negotiations are an appropriate place for these currency issues? 

And what if such an effort leads to the inclusion of an international 

arbitration panel under TPP’s enforcement procedures where companies or other Nations could challenge future monetary policy decisions by the Fed? 

Ms. YELLEN. So let me first say that I think currency manipulation that is undertaken in order to alter the competitive landscape 

and give one country an advantage in international trade is inappropriate and needs to be addressed. 

But, that said, there are many factors that influence the value 

of currencies, including differences in economic growth and capital 

flows, and as you mentioned, monetary policy is a factor that can 

have an impact on currencies. 

So I would really be concerned about a regime that would introduce sanctions for currency manipulation into trade agreements 

when it could be the case that it would hamper or even hobble 

monetary policy. Monetary policies we have undertaken, the Federal Reserve has undertaken over the last number of years, having 

designed for valid domestic objectives of price stability and maximum employment. We have undertaken monetary policy in order 

to achieve those objectives, and that certainly is not currency manipulation. But monetary policy affects the economy through many 

channels, perhaps most importantly through interest rates, but 

monetary policy may have impact on currency values. And so I 

would see that kind of direction as having the potential to perhaps 

hamper the conduct of monetary policy or even hobble the conduct 

of monetary policy. And I would really worry greatly about that approach. 

Senator CORKER. So that is a long answer, but the answer I 

think you just said is you would have a significant problem with 

that being part of a trade deal. Is that correct? 

Ms. YELLEN. Yes, I would. 

Senator CORKER. OK. I want to follow the ‘‘audit the Fed’’ questioning a little bit and walk through a series here, and if we could 

be a little briefer with our answers, that would be good. 

16 

The first is with respect to the Fed’s lending facilities and the 

discount window access during the financial crisis. There are legitimate questions about how these facilities were conducted, but to a 

large extent, Congress addressed this issue by adopting the Sanders amendment to Dodd-Frank. Can you speak to the impact of the 

Sanders amendment on GAO’s ability to audit crisis credit facilities? 

Ms. YELLEN. Well, in response to that amendment, the GAO conducted a complete review of the use of our 13(3) emergency lending 

authorities in all of the programs that were created and conducted 

an audit that was concluded I believe in mid-2011. In addition, the 

GAO has the ability to audit open market operations and discount 

window lending, and we now report regularly all the details—or 

the details of our open market operations and with a 2-year lag our 

discount window lending. 

Senator CORKER. So those are fully transparent and fully audited 

now. Is that correct? 

Ms. YELLEN. That is correct. 

Senator CORKER. The second concern I have heard raised by the 

‘‘audit the Fed’’ advocates is the size and composition of the Fed’s 

current $4.5 trillion balance sheet. Does the Fed disclose the types 

of assets that make up that $4.5 trillion? 

Ms. YELLEN. Yes. We have audited financial statements which I 

have a copy of right here. We report on a security-by-security basis. 

All of the securities that are in that portfolio, they are reported on 

the New York Fed’s Web site. 

Senator CORKER. By CUSIP number, is that correct? 

Ms. YELLEN. By CUSIP number. And we have a weekly balance 

sheet that reports significant details of our balance sheet. 

Senator CORKER. So I hate to ask this question, but I have read 

some quotes lately, and I would just like for you—not by you but 

by ‘‘audit the Fed’’ advocates. While you may issue an updated balance sheet each week, how do we know those securities actually 

exist? 

Ms. YELLEN. Well, we have an outside accounting firm, an independent auditor, currently Deloitte & Touche, that does a thorough 

review of our balance sheet, and that is what is contained in our 

annual report, both the Board and all of the Federal Reserve Banks 

and the consolidated Federal Reserve System. 

Senator CORKER. So they do exist? 

Ms. YELLEN. They do exist, Senator. 

Senator CORKER. Just my last point. It is obvious to me that the 

‘‘audit the Fed’’ effort is to not address auditing the Fed, because 

the Fed is audited, and every day you publish the CUSIP numbers 

of the things that you own and the—— 

Ms. YELLEN. Correct. 

Senator CORKER. ——credit facilities that you put in place during 

an emergency, all of that is audited now. So to me, it is an attempt 

to allow Congress to be able to put pressure on Fed members relative to monetary policy, and I would just advocate that that would 

not be a particularly good idea and it would cause us to put off 

tough decisions for the future, like we currently are doing with 

budgetary matters. Do you agree with that? 

17 

Ms. YELLEN. I strongly agree. As I indicated—well, let me say 

more generally, I think if you look around the globe in modern 

times and you consider every country that has gone through a period of chronic high inflation or hyperinflation, what you will find 

is a central bank that was pressured to print money by—— 

Senator CORKER. Politicians. 

Ms. YELLEN. By politicians who were unable to balance the budget. 

Senator CORKER. So I will close. I thank you, Mr. Chairman, for 

the little extra time. I do think one area that greater transparency 

could be utilized is in the regulatory area around things like CCAR 

and others. I think that that is an area where we should focus, and 

I hope that over the course of the next several months the Fed will 

work with us in a constructive manner so that we more fully understand how you go about that process. It does seem like a black 

box now. It is something that I think should be far more transparent, and I hope you will work with us in that regard. 

Ms. YELLEN. We would be pleased to do so. 

Senator CORKER. Thank you. 

Chairman SHELBY. Thank you, Senator Corker. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. Thank you, Chair 

Yellen, for your testimony. Your hard work, your dedication, what 

I believe is your sound judgment and timely decision making have 

been a driving force behind the recovery. But I do not envy you 

your position. You and other members of the FOMC have important decisions to make in the coming months. 

Let me urge you to act with caution before raising rates. While 

there may be data points, positive signs of economic growth, let me 

be clear. I believe the Fed should remain committed to its current 

accommodative policy until it sees clear evidence that shows a consistent improvement in wages. In the current environment, wage 

growth needs to be a major factor, maybe even the lodestar, for the 

Fed when it is deciding whether to raise rates. 

As I have said over and over again, to me the single biggest problem the country faces is the decline of middle-class incomes, and 

while economic progress has been seen in the past year—strong expectations for growth of GDP, for instance—wage gains have remained sluggish through the recovery. Middle-class Americans 

have not yet seen the benefits of this growth in their take-home 

pay, and we all know the statistics of middle-class incomes declining by 6.5 percent over the decade, $3,600 lower than when President Bush took office in 2001. 

So I think the Fed must think long and hard before implementing a monetary policy that could reduce demand and hamper 

the growth of the economy. Wage growth not only serves to benefit 

middle-class workers who have been asked to do more with less for 

too long, but placing a priority on consistent wage growth prior to 

raising rates serves the dual role of fostering a rise in inflation toward the Fed’s 2-percent target, one that you have delineated. 

Overall growth is rightfully a key factor in the decision, but I 

firmly believe the Fed should not raise rates until wages are back 

on a steady trend, steady upward trend. 

18 

So as you begin to consider the path toward normalization of 

rates, I think the Fed must place a priority on seeing consistent 

real wage growth prior to any decision making. Those who are worried about inflation—you always have to worry about it, but they 

should look at the last several years. There are few signs of incipient inflation, and, in fact, many economists believe that the 

chances of deflation are greater than worries of drastic rises in inflation, and concerns of deflation are further precipitated by the 

prospect of the Fed raising rates too soon. 

So I think it is a prudent decision for our broader economy as 

well as middle-class families across the country to wait until wages 

really begin to rise. 

So, first, do you agree it is critical for the FOMC to see evidence 

of consistent wage growth prior to deciding to raise interest rates 

absent indicators that inflation is climbing well above or above the 

Fed’s 2-percent target? And if the FOMC does not wait, what are 

the potential consequences? 

Ms. YELLEN. Well, Senator, our objective is price stability, which 

we have defined as 2-percent inflation. And as I indicated, before 

beginning to raise rates, the Committee needs to be reasonably confident that over the medium term inflation will move up toward its 

2-percent objective. 

I do not want to set down any single criterion that is necessary 

for that to occur. The Committee does look at wage growth. We 

have not yet seen—there are perhaps hints, but we have not yet 

seen any significant pick-up in wage growth. But there are a number of different factors that affect the inflation outlook, and we will 

be considering carefully a range of evidence that pertains to the inflation outlook and will determine the confidence that we feel in 

our—we forecast that inflation will move back up to 2 percent. Certainly seeing continued improvement in the labor market adds to 

that confidence, and it would add to our confidence also that over 

time wages will pick up. But our objective is 2-percent inflation, 

and we will look at a wide range of evidence in deciding that. 

Senator SCHUMER. Do you feel that the worry of rampant inflation, above 2-percent inflation, is any greater than the worry of deflation given the flatness of wages, 70 percent of the economy is 

wages, jobs, broadly defined? 

Ms. YELLEN. The Committee feels, I think anticipates that inflation is being held down by transitory factors, particularly the decline we have seen in oil prices. We have also had considerable 

slack in the labor market, and it is diminishing over time. Now 

wages tend to be a lagging indicator of improvement in the labor 

market. We have seen improvement, and if we continue to see improvement, it would add to my confidence, especially as the impact 

of oil prices diminishes over time, that inflation will move back up. 

Senator SCHUMER. One final question. Do you see any real evidence of inflation heading above 2 percent right now given—— 

Ms. YELLEN. I do not see any evidence of that, but inflation—we 

need to be forward-looking. The Committee is forward-looking in 

setting monetary policy, and we do see that the labor market is improving, and we are getting closer to our goal of maximum employment. 

19 

It is important to remember that monetary policy is highly accommodative. We have held the Federal funds rate at a 0 to 1⁄4 percent range and have a large balance sheet, and these policies have 

been in place for 6 years now. And we do have an economy that 

fortunately appears to be recovering, and we do have to be forwardlooking in setting monetary policy. But I want to assure you we 

want to see that recovery continue. We do not feel the labor market 

is fully healed, and that is a process we want to go on. And we do 

not want to take policy actions that will hamper that, but monetary 

policy is very accommodative at the present—— 

Senator SCHUMER. Thank you. I urge caution. 

Chairman SHELBY. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. And thank you, 

Madam Chairman, for joining us today. 

Let me share a completely opposing point of view from that of 

the Senator from New York, which will not be a shock to Members 

of this Committee. I cannot help but observe what strikes me as 

a very obvious paradox here, and that is the financial and economic 

crisis is over. It has been over for years, at least 6 or 7 years. And 

yet we still maintain crisis-level interest rates. We have got no 

wave of defaults or massive bankruptcies going on. Unemployment 

has gone from 10 percent to sub-6 percent. GDP growth has been 

weak. I think that is easily explained by the avalanche of new regulations, certainly not monetary policy, but it has been positive for 

years. Consumer sentiment is relatively high. The FOMC in January described the economic recovery as solid. Walmart, interestingly, has made an announcement that suggests we might even be 

approaching NAIRU. 

The crisis has been over for a long time. And it is not as though 

there is no price to be paid by having this unbelievably accommodative policy. Most immediately I see the problem incurred by 

my constituents, who may have spent a lifetime working hard, sacrificing, saving, forgoing a vacation they might have taken, forgoing 

a splurge here and there, so that they could save for their retirement and buy a CD, have some money on deposit at a bank, and 

use that to supplement a modest pension or Social Security payments. Of course, their reward now is they get nothing. Zero. That 

is what they earned on their savings year after year. 

Meanwhile, of course, we have all the risks associated with this: 

the risk of bubbles forming, I would argue the fixed income markets probably are a huge bubble at the moment. We have the inhibition of price discovery in the financial sector. We facilitate excessive deficits because they look so manageable with zero interest 

rate environment. Credit is rationed. And what are the benefits of 

this? The benefits are, at best, a timing shift in economic activity. 

At best, we are moving economic activity that would otherwise 

occur in the future closer to the present. As we all know, if artificially low interest rates led to strong economic growth, then everyone around the world would have zero interest rates and everything would be booming. And that is not the case. 

So, Madam Chairman, I know you and I disagree on this, but I 

would just suggest the crisis is clearly long over. I think the time 

for normalization is well overdue. I hope we get there soon. But I 

did want to ask you a specific question that is related, and that is, 

20 

you have said repeatedly that the goal of price stability is 2-percent 

inflation. Well, certainly there is a congressional mandate on price 

stability. But when the Fed decides that it is acceptable—in fact, 

that that is met by savers losing 2 percent of their purchasing 

power annually—and let me put that a different way. That means 

a 30-year-old woman who is saving, by the time she retires what 

she has saved at that point will have lost half of its value. Half of 

it is gone. 

How is that consistent with price stability? 

Ms. YELLEN. Well, the Federal Reserve is—the FOMC, in carrying out Congress’ mandate, really does have to define how we understand price stability operationally. Two-percent inflation is an 

inflation rate that we chose largely for two reasons: 

First of all, it is well known that price indices that we look at 

contain upward biases in part because their failure to adequately 

capture the benefits of new goods and quality improvement. So 

there are hard-to-measure but nevertheless upward biases in price 

indices. 

And, second of all, because deflation is so dangerous and because 

an environment of very low inflation and one of comparably extremely low interest rates makes it difficult for monetary policy to 

respond to adverse shocks, we decided that in order to avoid damaging episodes of deflation, it is wise to have a small buffer that 

gives greater room for monetary policy to operate. 

Senator TOOMEY. Thank you. I am going to run out of time here, 

so I just want to get to my second question. I would just urge you 

to consider the impact of savers losing their purchasing power. 

Historically, of course, we have changed the level of accommodation through open market activities, typically buying and selling securities to have corresponding changes in the level of cash. You 

have suggested, if I understand you correctly, that in the process 

of normalizing, assuming we will get to that process, you intend to 

achieve that principally by changing the target level of the Fed 

funds rate. 

Ms. YELLEN. Yes. 

Senator TOOMEY. And you will do that by increasing the interest 

on excess reserves. 

Ms. YELLEN. Correct. 

Senator TOOMEY. And my question is: Since that means over 

time in a normalizing environment the transfer of tens of billions 

of dollars from what would go to the taxpayers to big money center 

banks, why are you doing that instead of simply selling the bonds, 

which is a more conventional way to operate in the open market 

operation? 

Ms. YELLEN. Well, remember that, first of all, we will be paying 

banks rates that are comparable to those that they can earn in the 

marketplace, so those payments do not involve subsidies to banks. 

And, in addition, remember that we have—in expanding our provision of reserves, we have acquired longer-term assets on the asset 

side of our balance sheet, and the spread above what we have been 

paying in terms of interest on excess reserves is quite large. So although that will diminish over time as monetary policy is normalized, the expansion of our balance sheet, even though we are even 

at present paying 25 basis points interest on reserves, we have had 

21 

record transfers to the Treasury close to $100 billion this past year 

and $500 billion since 2009. So there have been large transfers associated with that policy. 

Senator TOOMEY. But that situation is likely to reverse if we get 

into a normalization mode. 

Ms. YELLEN. So it is very—it is likely that our transfers to, our 

remittances to the Treasury will decline as short-term rates rise. 

We nevertheless expect the remittances to remain positive. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Warner—Senator Menendez. I did 

not know he had come back. Thank you. Sorry. 

Senator MENENDEZ. Thank you, Mr. Chairman. I thank my colleague from Virginia. 

Madam Chair, thank you for your service. As you know, our 

economy continues to recover from the damage inflicted by the financial crisis and the Great Recession that followed. GDP is growing. Employers are hiring. Unemployment is falling. So it is only 

natural that some are starting to look ahead to a time when the 

Federal Reserve can start withdrawing the monetary stimulus that 

has been so critical to our recovery. 

But in my view, we still face challenges. Most Americans are still 

waiting for the recovery to show up in meaningful income growth. 

Long-term unemployment, while down, is still high. Inflation continues to run well below target, as it has now for an extended period of time. So from my perspective, it is critical that the Fed not 

put the cart before the horse and tighten too soon. 

You have said on multiple occasions that the Federal Reserve’s 

timetable for raising rates will depend on the data. There are some 

who say the Federal Reserve should tighten preemptively based on 

unemployment or wage growth or at the first hint of inflation, 

without waiting to find out if it is just a statistical blip. 

What would be the risks if the Fed raises rates too soon compared to the risks of waiting? 

Ms. YELLEN. Well, if the Fed were to raise rates too soon, Senator, we would risk undermining a recovery that is really just taking hold and is really succeeding, I think, in improving the labor 

market. As I said, I do not think we are back to attaining yet conditions I would associate with maximum employment or normal 

labor market conditions. Things have improved notably, but we are 

not there yet. And so we want to see a healthy recovery continue. 

In addition, as you mentioned, inflation is running well below 

our 2-percent objective, and while we think a significant reason for 

that is because of transitory factors, most importantly the decline 

we have seen in energy prices, we are committed to our 2-percent 

objective. And just as we do not want to overshoot 2 percent on the 

high side, we do not want to chronically undershoot 2 percent on 

the low side either. 

And so before raising rates, we will want to feel confident that 

the recovery will continue and that inflation is moving up over 

time. 

There are also, of course, risks of waiting too long to remove accommodation. We have a highly accommodative policy that has 

been in place for some time. We have to be forward-looking. As the 

labor market tightens, wage growth and inflation can pick up to 

22 

the point we would overshoot our inflation objective, and conceivably there could be financial stability risks, and we want to be attentive to those as well. 

Senator MENENDEZ. Right. 

Ms. YELLEN. So this is a balancing of costs and risks that we are 

trying to make in a deliberate and thoughtful fashion. 

Senator MENENDEZ. Well, I appreciate that, and it is that balance that I hope your wisdom and that of your fellow Board members can get just about right, because I could see entering and 

choking off recovery before middle-class families actually feel its 

gains and trapping a too-low inflation or deflation set of circumstances, so I appreciate that. 

Let me ask you one other question. I have heard several commentators say that the interest rate increase by the Fed would signal ‘‘confidence’’ to the market about the health of the U.S. economy and have a stimulative effect. Do you agree with that theory? 

And if so, wouldn’t any so-called confident effect be more than offset potentially by a contractionary impact of a rate increase? 

Ms. YELLEN. Well, I think it is fair to say that when we begin 

to raise our target for the Federal funds rate, it will be because we 

are confident about the recovery and we are reasonably confident 

that inflation will move back to our 2-percent objective over time. 

But that confidence will reside in real improvements that we see 

in the underlying condition of households and businesses where we 

would not be attempting to somehow boot-strap an improvement in 

the economy that is purely occurring from a confident effect that 

comes from our raising rates. 

There is reason, I think, to feel good about the economic outlook. 

Households have gone through major adjustments in their balance 

sheets and are in better financial condition than they were. The job 

situation is improving. And even though wages have not been rising in real terms very rapidly, there are more hours of work and 

more jobs, so household income is improving. 

Lower oil prices are boosting household income. Housing prices 

have rebounded, and that has helped a lot of households, and businesses are in—— 

Senator MENENDEZ. So, in essence, real confidence, not confidence that is spun. 

Ms. YELLEN. That is right. There is no spin here. Our confidence 

in the economy has improved, and when we raise rates, it will be 

a signal in our confidence in the underlying fundamentals. 

Senator MENENDEZ. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Chair Yellen, good 

morning. 

Ms. YELLEN. Good morning. 

Senator SCOTT. Thank you for being here this morning. 

Ms. YELLEN. Thank you. 

Senator SCOTT. I would like to change the conversation a little 

bit and talk about the insurance industry, the SIFIs, and its impact 

on places like South Carolina where we have about $354 billion of 

life insurance in place. As we think through the transferring of risk 

that the insurance industry provides, I think it is a very important 

23 

consideration. I am a bit prejudiced in this area because I have 

spent 25 years in the insurance industry, and I appreciate the fact 

that until the insurance company shows up, the ability to transfer 

risk is nonexistent. So the importance of how we impact the insurance industry to the Fed I think will reverberate throughout the 

economy. 

I take very specific interest in the impact that the Fed may have 

on regulating the insurance companies now that have been designated ‘‘systemically important’’ by FSOC, and my thought is that 

last year, I believe it was, the President signed a law that clarifies 

the Fed need not impose bank-like capital standards on insurance 

companies under its supervision. I think this is for very obvious 

reasons. When you look at the activities of banks, loans and deposits, compared to speaking to the long-term risk that most insurance 

companies are holding their assets for, it is important to have that 

delineation and take a very different approach to insurance companies than we do other financial institutions. 

I know from experience that this is an important consideration, 

and I guess my question to you is: What expertise does the Fed 

have or plan to acquire as it begins to supervise insurance companies? And how closely are you working with State insurance regulators? 

Ms. YELLEN. So my answer would be that we have acquired expertise; we have hired individuals who have experience in the insurance industry and are trying to build our expertise there. We 

consult closely with the NAIC and with State insurance regulators 

and the Federal Insurance Office. We are gaining experience because we are now in our fourth annual supervision cycle of savings 

and loan holding companies, many of which are—some of which 

have significant insurance activities. And, of course, several insurance companies have been designated as SIFIs, and we are supervising those as well. 

We are taking the time and doing the work that is necessary to 

understand their unique characteristics and fully plan to tailor our 

supervision and capital and liquidity requirements for those insurance companies to make our supervisory regime appropriate. There 

are very important differences between the risks faced by insurance companies and banking organizations. We have undertaken a 

quantitative impact study and are actively engaged in working 

with the firms we will be supervising to understand the unique 

characteristics of their operations before a promulgating supervision regime. 

Senator SCOTT. Thank you. You answered my third question as 

well, so I will just go to the second question at this point then. 

Will the Fed issue an Advanced Notice of Proposed Rulemaking 

before issuing proposed rules on insurance capital standards then? 

Ms. YELLEN. Yes, we will issue proposed rules. We recently 

issued a proposed rule that pertains to our supervision of GE Capital, and we would do the same with the other firms. 

Senator SCOTT. Thank you. 

On the issue of stress tests, I know that the Fed is—through the 

supervision of bank holding companies and other nonbank financial 

companies, the Fed conducts stress tests to determine how well the 

entity could withstand different levels of financial distress. The Fed 

24 

currently has on its balance sheet about $4.5 trillion as a result of 

the QE program, much larger, of course, than any of the financial 

entities it regulates. But it appears that nobody is stress-testing 

the Fed. The proverbial fox is guarding the henhouse, from my perspective. 

So my question really is: As you begin to unwind the Fed’s massive balance sheet, hopefully in the near future, what assurances 

can you give this Committee that the Fed will stress-test its own 

QE exit plan? 

Ms. YELLEN. Well, with respect to our balance sheet, let me say 

that we do stress-test it, and we have issued some reports and papers where we describe what stress tests would look like when 

there are interest rate shocks that would affect our balance sheet 

and path of remittances. But it really is important to recognize 

that the Federal Reserve is not identical to an ordinary banking organization. 

First of all, capital plays a very different role in a central bank 

than it does for a banking organization. Congress and the rules put 

in place regarding our capital were never intended to make our 

capital play the same role and it is not necessary for it to play the 

same role as in a banking organization. 

Importantly, unlike a bank, the Federal Reserve’s liabilities are 

mainly reserves to the banking system and currency, and these are 

not like the runnable deposits of an ordinary banking organization. 

So the risks that the Federal Reserve faces in our balance sheet 

are of a different character than those facing an ordinary bank. 

But, that said, we do look at the likely consequences for our balance sheet of different interest rate scenarios. 

Senator SCOTT. Certainly very different scenarios between the 

Fed and the banks. Without any question, with $4.5 trillion and 

the way that you wind it down would have—would reverberate 

throughout the economy in a way that no other financial organization would have impacted. And the path forward is incredibly important to the economy. 

Ms. YELLEN. Well, that is one reason that one of the principles 

of our normalization plans is that we want to wind down our balance sheet in an orderly, gradual, and predictable way. And we 

have decided to use as our main tool of policy when the time comes 

for normalization something that is much more familiar both to us 

and to markets, and that is, variations in short-term interest rates. 

You know, of course, an alternative to that would be to say when 

the time comes to want to tighten monetary policy, we could begin 

to sell assets. That would be another way of going about doing 

business. But we have more experience and markets have much 

more experience with variations in short-term rates, and we want 

to proceed in that way that is familiar to us, familiar to market 

participants and the public, and to let our balance sheet play a passive role to gradually diminish in size mainly through ending reinvestment of maturing principal. 

Senator SCOTT. Thank you. 

Chairman SHELBY. Senator Warner, finally. 

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

Chair Yellen. You are coming down to the home stretch here. I appreciate all your good work and this incredibly important balance 

25 

to get right as we start down a path of unwinding. But I, like many 

of my colleagues, share with inflation at such a low rate, trying to 

get this timing right is so critically important. 

One of the things we have talked a lot about, the statute of the 

U.S. economy, but I want to raise three quick points. 

One, after the January FOMC meeting, in your readouts one of 

the items you mentioned was international developments. Obviously, disruption potentially in Europe, with the ongoing struggles 

with Greece, China’s slowing economy, can you rank—or how will 

these international developments affect the Fed’s decision on timing on monetary policy? 

Ms. YELLEN. Well, there are a broad range of international developments that we monitor, and they do affect the performance, the 

likely performance of the U.S. economy and factor both into our 

economic forecasts and our assessment of risks. 

Growth in Europe has been very slow. Growth in China is slowing. The huge decline we have seen in oil prices has had repercussions all over the global, in some areas positive, very positive, in 

other areas negative. It affects our outlook, these developments, 

both through trade flows and through developments in financial 

markets. 

The attempts of many central banks to add monetary policy accommodation is pushing down longer-run interest rates in many 

parts of the world, and that is, as I mentioned in my testimony, 

spilling over to the United States. So there are many channels 

through which these global developments affect the U.S. outlook in 

ways both positive and negative. 

All in all, so factoring all of those things into account, while 

there are risks—and, again, both positive and negative—stemming 

from global developments, we still think that the risks for the U.S. 

outlook are nearly balanced, that we have got sufficiently strong 

growth in domestic demand and in domestic spending by consumers and businesses, that the recovery looks to be on solid 

ground. We have just, as I mentioned in my testimony, had a very 

strong growth in the second half of the year and looking forward 

and analyzing the factors likely to impact domestic spending, we 

are seeing perhaps not as strong as we just had but nevertheless 

above-trend growth, and that really factors into account all of the 

global considerations—— 

Senator WARNER. But, obviously, these international factors will 

affect your decision—— 

Ms. YELLEN. They do affect our decision, yes. 

Senator WARNER. I also want to associate my comments with 

Senator Corker’s comments about I would like to make sure that 

we deal in a perfect world with currency manipulation, but currency manipulation to one could appear as monetary policy to another. 

Ms. YELLEN. Yes. 

Senator WARNER. And as we have seen Japan and Europe move 

toward more monetary easing, obviously one of the effects of that 

has been strengthening of the dollar and it hurts our exports. 

Speak to that for a moment, and if you could, let me get a last 30 

seconds in at the end, so if you could take—— 

26 

Ms. YELLEN. You bet. So, you know, I think we should be on 

guard against currency manipulation. The G7 in international fora 

have agreed, and I know our administration in dealing with foreign 

countries really tries to crack down on currency manipulation. 

Nevertheless, I think certainly it is a principle agreed in the G7 

that monetary policy oriented toward domestic goals like price stability or, in our case, price stability and maximum employment, 

this is a very valid use of a domestic tool for a domestic purpose. 

It is true that the use of that tool can have repercussions on exchanges, but I really think it is not right to call that ‘‘currency manipulation’’ and to put it in the same bucket as interventions in the 

exchange markets that are really geared toward changing the competitive landscape to the advantage of a country. 

Senator WARNER. Mr. Chairman, I would just in my last couple 

of seconds want to make the point that one of the things that has 

been absent from this discussion today has been—we have talked 

a lot about your work. We have not talked as much about our work 

and need to still address our own fiscal policies. I would simply 

point out that because of the extraordinary remittances from the 

Fed’s expanded balance sheet, we have seen north of $420 billion 

in net additional revenue that has diminished our deficit. But that 

is not something that can be projected on into the future. And as 

we talk about the times of raising interest rates and trying to get 

back to a normalized effort, I would simply point out again, you 

know, a 100-basis-point increase in interest rates adds $120 billion 

a year on debt service. 

Ms. YELLEN. Yes. 

Senator WARNER. And even CBO projections at this point will show that debt service with our current $18 trillion in debt will exceed total defense spending or total domestic discretionary spending in 10 years, and that is not a good business plan for our country. 

Ms. YELLEN. All absolutely true. 

Senator WARNER. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Warren. 

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

being here, Chair Yellen. 

You know, as you know, Wall Street banks could profit handsomely if they knew about the Fed’s plans before the rest of the 

market found out, and that is why any leak of confidential information from the Fed results in serious penalties for the people who 

are responsible. 

But apparently there have been no consequences for the most recent leak. According to public reports, Scott Alvarez, the General 

Counsel of the Fed, was put in charge of investigating a leak from 

the September 2012 meeting of the Federal Open Market Committee. Nearly 21⁄2 years later, the results of this investigation 

have not been made public, and no action has been taken. 

On February 5th, Congressman Cummings and I sent a letter to 

Mr. Alvarez requesting a briefing from him in advance of your appearance here today, but so far we have not received one. 

Can you assure us that the Congressman and I will get a briefing soon? 

Ms. YELLEN. So if I might say by way of background—— 

27 

Senator WARREN. I just need a yes or no—— 

Ms. YELLEN. ——the answer is—— 

Senator WARREN. I just want to be able to get a briefing on what 

has happened that it has been 21⁄2 years and there has been no 

public report about what happened from a significant—— 

Ms. YELLEN. We are trying to work with your staff on a process 

to be responsive. 

Senator WARREN. I will take that as a yes? 

Ms. YELLEN. Yes. 

Senator WARREN. OK. Thank you. 

As you know, this past December, House Republicans successfully blew a hole in Dodd-Frank protections by tacking the repeal 

of the swaps pushout rule to a must-pass Government spending 

bill. That repeal, which was written by Citigroup lobbyists, will 

allow the biggest banks in the country to continue to receive taxpayer protection for some of their riskiest derivatives and swaps. 

Now, a month before the repeal, Mr. Alvarez spoke at a conference at the American Bar Association, an organization that includes many lawyers who represent the banks that are affected by 

the Fed’s enforcement of Dodd-Frank. Mr. Alvarez openly criticized 

the swaps pushout rule, saying, ‘‘You can tell it was written at 2:30 

in the morning, and so it needs to be, I think, revisited just to 

make sense of it.’’ 

Mr. Alvarez also criticized the new rules Dodd-Frank put into 

place to address conflicts of interest at credit rating agencies, saying, ‘‘Restrictions on the agencies really did not work, and it does 

not work, and it is more constraining than I think is helpful.’’ 

So let me start by asking: Does Mr. Alvarez’s criticism of these 

two rules reflect your view or the view of the Federal Board of Governors? 

Ms. YELLEN. So let me just say that over the years we have had 

feedback that we have given on various aspects of Dodd-Frank, but 

we are—— 

Senator WARREN. I appreciate that, Chair. The question I am 

asking, though, is these are specific criticisms he has made of 

Dodd-Frank rules that govern the largest financial institutions in 

this country, and I am just asking: Do his criticisms reflect your 

criticisms or the criticisms of the Federal Board? 

Ms. YELLEN. I think we—I personally and the Board consider 

Dodd-Frank to be a very important piece of legislation that has 

provided a road map for us to put in place regulations—— 

Senator WARREN. I appreciate that, Madam Chairman, but I just 

need a yes or no here. Do his criticisms reflect your criticisms? 

Ms. YELLEN. I am certainly not seeking in any way to alter 

Dodd-Frank at this time. It is a framework that is—— 

Senator WARREN. Well, then, let me ask the question differently. 

Do you think it is appropriate that Mr. Alvarez took public positions that do not evidently reflect the public position of the Fed’s 

Board, especially before an audience that has a direct financial interest in how the Fed enforces its rules? 

Ms. YELLEN. Well, I think the Fed’s position and my position is 

that we are able to work very constructively within the framework 

of Dodd-Frank to tailor rules that are appropriate for the institutions we supervise, and we are not seeking to change the—— 

28 

Senator WARREN. I appreciate that. You know, we know that the 

Fed staff plays a critical role in shaping Dodd-Frank rules and enforcing them. In the case of the swaps pushout, Congress passed 

the law in 2010, but the Fed and the OCC delayed the effective 

date of the rule until 2016, giving Citigroup and other big banks 

time to get the rule repealed before it ever went into effect. 

Did Mr. Alvarez provide input into the Fed’s decision to delay the 

effective date of the pushout rule? 

Ms. YELLEN. I do not know. I mean, we usually have phase-ins 

for complicated rules that require adjustments by financial firms. 

This has been true of all of the Dodd-Frank rules that we have put 

into effect. 

Senator WARREN. Well, I think this might be worth looking into. 

You know, the Fed is our first line of defense against another financial crisis, and the Fed’s General Counsel or anyone at the Fed 

staff should not be picking and choosing which rules to enforce 

based on their personal views. So I urge you to carefully review 

this issue and to assess whether the leadership of the Fed staff is 

on the same page as the Federal Reserve Board. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. 

Senator Heitkamp. 

Senator HEITKAMP. Mr. Chairman, thank you. Always last, hopefully not least. 

Chair Yellen, I want to first thank you for your patience and 

your responsiveness, and I was tempted to ask one question, which 

was your definition of ‘‘patience.’’ But I will not do that today. 

Instead, I want to look to the future. I think Senator Warner 

really outlined one of the concerns that I have. We always seem to 

be fighting the last economic war in the U.S. Congress. You are a 

very astute and very respected student of the American economy. 

It is what you do every day. I am going to give you a chance—you 

have heard a lot of opinions and received a lot of advice from this 

panel. I am going to give you a chance to give us some advice. 

When you look at leading and lagging indicators, especially leading indicators, what troubles you and what keeps you awake at 

night about the American economy in the next 10 to 15 years? And 

what advice would you give to the U.S. Congress in addressing 

those concerns that you have looking right now at those indicators? 

Ms. YELLEN. Well, I have said on a number of occasions that the 

rise we have see in inequality in the United States is a great concern to me. 

Senator HEITKAMP. We discussed this the last time you were 

here, and you offered no solutions toward that problem, you might 

recall. 

Ms. YELLEN. I think there are a variety of different things that 

the Congress could consider in policy measures that might be appropriate, but this really is a domain for Congress to consider. So 

that is one of the concerns that I have. 

Senator HEITKAMP. So no advice on the earned income tax credit 

or on tax rates or—— 

Ms. YELLEN. I am not going to weigh in on things that really are 

in your domain to evaluate. So I think that is important, and I 

would say something also in Congress’ domain is longer-run issues 

29 

with the Federal budget. I think Congress has made painful decisions that have now really stabilized, brought down the deficit very 

substantially and stabilized for a number of years the debt-to-GDP 

ratio. But eventually debt-to-GDP will begin to rise and deficits 

will increase again as the population ages and Medicare, Medicaid, 

and Social Security get to be a larger share of GDP under current 

programs. And there are a lot of ways in which—these are problems we have known about for a long time. 

I also worry that if we were to again be hit by an adverse shock, 

there is not much scope to use fiscal policy. It was used in the early 

years after the financial crisis. We ran large deficits. But in the 

course of doing that, debt-to-GDP rose, and were another negative 

shock to come along, it is questionable how much scope we would 

now have to put in place even on an temporary, multiyear basis expansionary fiscal policy. And I think it is important to deal with 

these issues, for the Congress to do so. 

Senator HEITKAMP. But your concern about scope does not lead 

you to believe that interest rates should be adjusted at this point 

to give you the flexibility to use interest rates should we receive 

another shock? 

Ms. YELLEN. Well, the Fed would, of course, use the tools that 

we have to try to achieve domestic ends, but I think having fiscal 

policy be available as a tool is important as well. 

Senator HEITKAMP. If we look today at the American economy 

and some of the challenges—and you and I have spoken privately 

about this—of the millennials and saving patterns and consumptive patterns, the shared economy, what concerns you about the 

now 8 years of changed behavior in consumption? What concerns 

you about those issues? And do you see those changing long-term 

consumptive patterns that may present some interesting challenges 

for the American economy? 

Ms. YELLEN. Well, I think we are just beginning to understand 

how the millennials are behaving. They are certainly waiting 

longer to buy houses, to get married. They have a lot of student 

debt. They seem, you know, quite worried about housing as an investment. They have had a tough time in the job market. And, as 

the economy strengthens, I expect more of them to form households 

of their own and buy homes. But we have yet to really see how this 

is going to affect that generation. 

Senator HEITKAMP. Or they may have experienced a change in 

consumptive patterns that will present some unique challenges, 

whether it is sharing automobiles, whether it is, in fact, not buying 

homes, doing the things that they have now done to accommodate 

their economic challenges in the long term. And I think that one 

of the things that we need to do much more carefully here in the 

U.S. Congress is begin to look at not just having a discussion with 

you about monetary policy, but looking at fiscal policy, whether it 

is tax reform or whether it is, in fact, taking a look at what we are 

doing with the mortgage market, to begin to develop an economy 

that the millennials will fully participate in. And I hope you continue to think and provide us the advice that is extraordinarily valuable. 

Thank you. 

Ms. YELLEN. Thank you. 

30 

Chairman SHELBY. Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. And, Madam 

Chair, thanks for your service. And I apologize. I have had to go 

in and out of some other committees, and I know this subject has 

been brought up, but the issue of wage stagnation that we have 

seen and the other piece of student debt. 

When we look at the student debt and the numbers are so high 

and, you know, it has been a long time, but when I graduated from 

college, you could basically work an entire summer and wind up 

paying off about half what your tuition was. 

How big a drag—and you may not have an exact measurement, 

but one of my great concerns has been in some areas of the country, how do you buildup the housing market when the young people 

who want to buy a house—the money that I saved up for, at that 

time, that 20-percent downpayment is now in many cases being 

used to pay off a student loan, and it is a box you almost can never 

get out of. So how big a drag do you see that being on the economy? 

Ms. YELLEN. So it is a little bit hard to tell. I mean, the housing 

market has not recovered in the way that I would have anticipated. 

It has been very slowly improving, but household formation has 

been extremely low in the United States. It is hard to tell. You 

have many young people who are living with their families still. It 

is hard to tell whether that is because of student debt or because 

of a weak job market. 

My guess is that as the economy continues to improve, we will 

see an improvement in household formation, that we will see—now, 

many young people may decide that they prefer to rent rather than 

buy homes. But that will give rise to a boost to multifamily construction, even if not so much to single-family construction. But the 

housing market has been very depressed. Nevertheless, in spite of 

that, the economy as a whole and the job market has had sufficient 

strength to recover. 

Senator DONNELLY. My other concern in that area is when you see a young person who looks up and is dealing with $100,000 in 

student debt and they have this big chunk of money that goes off 

every month to pay that down, those dollars are dollars that are 

never used to go to a restaurant, never used to maybe buy a car, 

never used to travel somewhere. And so overall job-wise I think it 

hits or seems to hit—makes it more difficult in all those areas to 

continue job creation. 

Ms. YELLEN. It is true, but it also remains true that a higher 

education boosts income and is tremendously important. It is not 

always the case, not for every individual, that it is a good investment, but certainly on average, it has been a very important and 

worthwhile investment. So I think to my mind that is the other 

side of it. 

Senator DONNELLY. I completely agree what a wonderful investment it is. I just want to try to make sure that we can get that 

wonderful opportunity without basically saddling yourself for years 

and years as you look ahead. 

Ms. YELLEN. The debt loads are very large and have really increased a great deal. You are—— 

Senator DONNELLY. One other area I wanted to ask you about is 

cybersecurity, and I know that the Fed has certain things they 

31 

focus on on a constant basis. In the area of cybersecurity, though, 

it is, from all the financial organizations I talk to, one of the biggest concerns they have, for the companies it is. How big a risk do 

you see that in the years moving forward? And how big an effect 

on the financial institutions do you see this being? 

Ms. YELLEN. Well, I think it is at the top of the list of concerns 

that we have about the financial system, about the problems facing 

financial organizations, and I would include the Federal Reserve in 

that, too. It is a top concern of our own given the importance of our 

own systems to the payment—the functioning of the payment system of the U.S. and global economy. 

Internally, we are paying a great deal of attention to make sure 

that we are addressing ever escalating threats to our own operations. The banks that we supervise, we are very attentive and 

have experts who work with those banks to make sure that they 

are attentive. It is a larger problem, and this is one where cooperation is needed among card systems, retailers, and others involved 

in the financial system, and conceivably, legislation might be needed in this area. 

Senator DONNELLY. Thank you, and I will conclude with this: For 

the State I represent, Indiana, we for many years were hit very, 

very hard in the manufacturing sector because of currency manipulation, among many other areas. And I know this has been mentioned, but I would like to make sure that you keep a close eye on 

this, because when we talk about manufacturing, the ability to be 

competitive—and all that was ever said to me by our manufacturers was, ‘‘If it is a fair field, we will do fine. But if the game is 

rigged, I do not know how we win that kind of game.’’ 

And I have always, you know, had the same feeling—and my 

Ranking Member, Sherrod Brown, right next to me in Ohio, has 

dealt with this a lot with his manufacturers as well—that if currencies are fairly valued and we are not successful, our manufacturers, they have always said to me, ‘‘If I cannot win a fair game, 

that is on me. But if I wind up in a situation where it is being manipulated against my company, it makes it awful tough to keep 

those workers working and to keep our economy growing.’’ 

So I would just ask that you keep that in mind as you move forward, and thank you so much for your service. 

Ms. YELLEN. Thank you. 

Chairman SHELBY. Madam Chair, you mentioned that the current unemployment is listed at 5.7 percent. However, one alternative measure that seems to fully capture a better sense of labor 

force participation is the U6 measure that lists total unemployed 

and underemployed at 11.3 percent as of January 2015. This measure has not dipped below 10-percent unemployment since before 

the crisis. According to the Bureau of Labor Statistics data, there 

are now 12 million more Americans no longer participating in the 

workforce than in January 2009. 

Do you agree that the unemployment number that you cited, 5.7 

percent, in your opening statement paints a rosy or a better picture 

of the true unemployment rate that I just cited? 

Ms. YELLEN. So, Senator, the U6 is a broader measure of unemployment. It includes marginally attached and discouraged workers 

and also an unusually large number of individuals who are workVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
32 

ing part-time who would like full-time jobs. So it is a much broader 

indicator of underemployment or unemployment in the U.S. economy, and while it has come down—it was 12.1 percent a year ago. 

It has come down from there to 11.3 percent. It definitely shows 

a less rosy picture than U3 or the 5.7-percent number. And I did 

mention that we do not at this point, in spite of the fact the unemployment rate has come down, feel that we have achieved so-called 

maximum employment, in part for these very reasons. Labor force 

participation has come down, has been trending down. That is 

something that will continue for demographic reasons. I do not expect it to move up over time, but I do think a portion of the depressed labor force participation does reflect cyclical weakness in 

that in a stronger job market more people would enter. 

Chairman SHELBY. But you basically concede that 11.3 percent 

of underemployed people, that is not good in this country, is it? 

Ms. YELLEN. That is an abnormally high level, and it signifies 

weakness that would be good to address. 

Chairman SHELBY. The Financial Stability Board, FSB, plays an 

important role, as you well know, in implementing financial reforms, including completion of a capital framework that you alluded to for banks. The Federal Reserve is a member of this FSB, 

the Financial Stability Board. Given that the Financial Stability 

Board is not accountable to Congress or to any branch of the U.S. 

Government, to my knowledge, where do these Financial Stability 

Board reforms fit in the U.S. regulatory system? My question is: 

Does the Federal Reserve treat them as mandated directives or 

suggestions or what? And what statutory basis does the Fed have 

to implement the Financial Stability Board’s reforms verbatim? Do 

you think further that the FSB decisions are important enough 

that they should be fully vetted by the FSOC before implemented 

in the U.S.? 

Ms. YELLEN. Well, a number of—— 

Chairman SHELBY. That is two or three questions, but they are 

all tied together. 

Ms. YELLEN. So a number of U.S. regulatory agencies participate 

in the FSB, including the administration and other regulators. 

Chairman SHELBY. Sure. 

Ms. YELLEN. Nothing that is decided in the FSB has effect in the 

United States unless the relevant agencies propose rules and those 

are publicly vetted through the normal public comment process and 

our rulemaking process. So those recommendations have no force 

in the United States unless we go through a rulemaking process. 

But there is a good reason for us to participate in these international fora. Financial markets are global. If we take actions to 

stiffen supervision and regulation in the United States, and other 

major financial centers do not act in similar ways, we will just see 

activity move out of our borders to other parts of the world, and 

I do not think that will make for a safer global financial system. 

So we do want to be part of international discussions that lead 

all countries to work harmoniously together to try to raise standards and maintain a level playing field, and that explains why we 

participate. And we can play and I think we do play a leadership 

role in this organization—— 

33 

Chairman SHELBY. But you do not need to accept that their recommendations are verbatim, do you? 

Ms. YELLEN. No, we do not, and often we have put in place 

tougher standards than came out of those fora. 

Chairman SHELBY. Thank you. 

The Wall Street Journal recently reported that the Federal Reserve surcharge for the largest banks is hurting U.S. banks because it is not on par with what foreign regulators are applying to 

foreign banks. The article also indicated that the Fed’s proposal is 

going beyond an international standard, roughly doubling the surcharge for big U.S. banks. 

We all want our banks well capitalized. I think that is very important. But does the Fed’s proposal indicate its belief that foreign 

banks are not adequately capitalized? That has been said before, 

you know, that when they have stress tests, they are in deep 

stress, as we well know, probably a lot more than our banks are. 

Ms. YELLEN. Well, our proposal embodies our own analysis of the 

costs to our economy and our financial system of possible distress 

at the largest and most systemic organizations. We chose to propose surcharges, capital surcharges, that rose above the level that 

were agreed internationally because we think this will make our financial system safer. 

There are other jurisdictions that have similarly put in effect a 

super equivalent regime. Switzerland is an example of that, and 

there are other countries that have gone a similar route. The proposal is out for comment, and we look forward to seeing what others say. But we do think it is important for the most systemic institutions whose distress could lead to significant financial impact on 

the United States, we do think it is important for them to hold appropriate capital, and especially when in times of stress it is a competitive advantage and not a disadvantage for those firms. 

Chairman SHELBY. Madam Chair, some of the large foreign 

banks that do business in the U.S., do you hold them to the same 

capital standards that you do our banks? And if not, why not? 

Ms. YELLEN. Well, we have just put in place a rule pertaining to 

foreign banking organizations that would ask them, if they are sufficiently large, require them to form intermediate holding companies that would contain their activities in the United States. And 

that is a way to subject them to the same capital and liquidity 

standards as U.S. firms doing business in our markets. 

Chairman SHELBY. But shouldn’t the standard—in other words, 

the foreign banks, as I understand what you are saying, they 

should not have an advantage with lower capital standards than 

our banks when they are doing business in this country. 

Ms. YELLEN. Well, to the extent that they are doing business in 

this country, we are going to subject them to the same standards 

as our banking organizations. 

Chairman SHELBY. Thank you. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. Just a comment, 

then a couple of questions, and this side will wrap up. 

I understand, Madam Chair, your reluctance to weigh in on specific policy issues that are the province of the Congress, such as the 

earned income tax credit. I appreciate your bringing attention to 

34 

those issues by which taxpayers/workers will benefit from the 

EITC. 

Trade, of course, is another one of those matters, and your predecessor had labeled currency manipulation ‘‘an effective subsidy,’’ 

his words. Ohio manufacturers, similar to Indiana manufacturers 

that Senator Donnelly mentioned, must compete against foreign 

competitors who are subsidized. I agree with your statement that 

this needs to be addressed. 

Two questions—first, about living wills. The FDIC last summer 

seemed positioned to declare the living wills of some of the Nation’s 

largest banks not sufficient. Instead, though, the FDIC stepped 

back, and together you and the FDIC asked for resubmissions in 

July. Two questions, a couple questions. A two-part question: Are 

you prepared to declare living wills submitted during this next 

round of submissions not credible if, in fact, they are not? And 

what actions will you take if the living wills are actually deemed 

insufficient? 

Ms. YELLEN. So we have worked, as you mentioned, closely with 

the FDIC to give guidance to the largest firms on what we want 

to see, what changes we want to see in their living wills in order 

to improve their resolvability. There are significant changes that 

we have asked for. Some pertain to their legal structure: the ability 

of critical operations that support an entire organization to remain 

available to the firm in a situation of distress, to simplify and make 

sure that they have a holding company structure that would be 

functional, to promote an orderly bankruptcy. 

We agreed with the FDIC on what we want to see. We are working with the firms to make sure they understand what we expect. 

We expect to see resubmissions of these plans by July of 2015, July 

of this year, and we have not—— 

Senator BROWN. Let me interrupt there. Are you willing to—are 

you unwilling to accept any of these banks saying that ‘‘you have 

not given us enough information on what to do to comply by July’’? 

Are you unwilling—will you say, ‘‘We will not accept that answer’’? 

Ms. YELLEN. I feel we have given detailed feedback and adequate 

information, and if we do not see the progress we expect, we are 

fully prepared to declare the living wills to be not credible. 

Senator BROWN. OK. That is good to hear. One last question, Mr. 

Chairman. 

Earlier this month, the major story broke about a trove of HSBC 

account holder data that reveals that their Swiss banking arm collaborated in efforts by some of its account holders to engage in tax 

evasion. On February 10th, I asked Ms. Hunter what steps her 

agency, the Fed, your agency, had taken with regard to these allegations. I gather that investigations of some individual U.S. account holders have been undertaken by IRS. Last week, Geneva 

prosecutors raided the private bank offices of HSBC as part of a 

new money-laundering investigation. We know HSBC has a history 

of major U.S. sanctions, major money-laundering violations. They 

now face major new charges of facilitating tax evasion. 

I know you may be unable to address details of an ongoing investigation, but summarize for this Committee, if you would, Madam 

Chair, what the Fed would normally do to pursue allegations like 

these regarding tax evasions by a major financial institution, how 

35 

long you would expect an investigation to take—again, not specifically here if you are unwilling or unable to share that, but how you 

would normally do it, how long it takes, what steps you normally 

take with other Federal officials, with other countries’ regulators? 

Ms. YELLEN. Well, we would have some responsibility for this if 

it affected the operations of a bank in the United States. In this 

case, the information has been provided to the Justice Department. 

The Justice Department has primary enforcement responsibilities 

related to U.S. tax laws along with the IRS. And the Justice Department normally cooperates with us and provides information to 

us if they think that we would have jurisdiction if banking laws 

have been violated in the United States and that we should take 

action. In this case, the Justice Department has not provided us 

with information. 

Senator BROWN. Do you ask them, or must they make the first 

move? 

Ms. YELLEN. Well, we have not been privy to any of this information, and if they thought it appropriate, we would expect them to 

reach out to us. 

Senator BROWN. Don’t news reports suggest that there is no 

harm but perhaps reason for you to ask the Justice Department for 

some of this, any of this information that they might think important to this country’s financial system and to these banks and to 

you? 

Ms. YELLEN. Well, this is pretty recent news reports that we 

have learned about this. 

Senator BROWN. OK. 

Chairman SHELBY. Madam Chair, thank you for appearing again 

before the Committee. We look forward to further appearances, and 

this will conclude the hearing. Thank you. 

The Committee is adjourned. 

[Whereupon, at 12:17 p.m., the hearing was adjourned.] 

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

36 

PREPARED STATEMENT OF JANET L. YELLEN 

CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEBRUARY 24, 2015 

Chairman Shelby, Ranking Member Brown, and 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 employment situation 

in the United States has been improving along many dimensions. The unemployment rate now stands at 5.7 percent, down from just over 6 percent last summer 

and from 10 percent at its peak in late 2009. The average pace of monthly job gains 

picked up from about 240,000 per month during the first half of last year to 280,000 

per month during the second half, and employment rose 260,000 in January. In addition, long-term unemployment has declined substantially, fewer workers are reporting that they can find only part-time work when they would prefer full-time employment, and the pace of quits—often regarded as a barometer of worker confidence in labor market opportunities—has recovered nearly to its prerecession level. 

However, the labor force participation rate is lower than most estimates of its trend, 

and wage growth remains sluggish, suggesting that some cyclical weakness persists. 

In short, considerable progress has been achieved in the recovery of the labor market, though room for further improvement remains. 

At the same time that the labor market situation has improved, domestic spending and production have been increasing at a solid rate. Real gross domestic product 

(GDP) is now estimated to have increased at a 33⁄4-percent annual rate during the 

second half of last year. While GDP growth is not anticipated to be sustained at 

that pace, it is expected to be strong enough to result in a further gradual decline 

in the unemployment rate. Consumer spending has been lifted by the improvement 

in the labor market as well as by the increase in household purchasing power resulting from the sharp drop in oil prices. However, housing construction continues 

to lag; activity remains well below levels we judge could be supported in the longer 

run by population growth and the likely rate of household formation. 

Despite the overall improvement in the U.S. economy and the U.S. economic outlook, longer-term interest rates in the United States and other advanced economies 

have moved down significantly since the middle of last year; the declines have reflected, at least in part, disappointing foreign growth and changes in monetary policy abroad. Another notable development has been the plunge in oil prices. The bulk 

of this decline appears to reflect increased global supply rather than weaker global 

demand. While the drop in oil prices will have negative effects on energy producers 

and will probably result in job losses in this sector, causing hardship for affected 

workers and their families, it will likely be a significant overall plus, on net, for our 

economy. Primarily, that boost will arise from U.S. households having the wherewithal to increase their spending on other goods and services as they spend less on 

gasoline. 

Foreign economic developments, however, could pose risks to the outlook for U.S. 

economic growth. Although the pace of growth abroad appears to have stepped up 

slightly in the second half of last year, foreign economies are confronting a number 

of challenges that could restrain economic activity. In China, economic growth could 

slow more than anticipated as policymakers address financial vulnerabilities and 

manage the desired transition to less reliance on exports and investment as sources 

of growth. In the euro area, recovery remains slow, and inflation has fallen to very 

low levels; although highly accommodative monetary policy should help boost economic growth and inflation there, downside risks to economic activity in the region 

remain. The uncertainty surrounding the foreign outlook, however, does not exclusively reflect downside risks. We could see economic activity respond to the policy 

stimulus now being provided by foreign central banks more strongly than we currently anticipate, and the recent decline in world oil prices could boost overall global 

economic growth more than we expect. 

U.S. inflation continues to run below the Committee’s 2-percent objective. In large 

part, the recent softness in the all-items measure of inflation for personal consumption expenditures (PCE) reflects the drop in oil prices. Indeed, the PCE price index 

edged down during the fourth quarter of last year and looks to be on track to register a more significant decline this quarter because of falling consumer energy 

prices. But core PCE inflation has also slowed since last summer, in part reflecting 

declines in the prices of many imported items and perhaps also some pass-through 

of lower energy costs into core consumer prices. 

37 

Despite the very low recent readings on actual inflation, inflation expectations as 

measured in a range of surveys of households and professional forecasters have thus 

far remained stable. However, inflation compensation, as calculated from the yields 

of real and nominal Treasury securities, has declined. As best we can tell, the fall 

in inflation compensation mainly reflects factors other than a reduction in longerterm inflation expectations. The Committee expects inflation to decline further in 

the near term before rising gradually toward 2 percent over the medium term as 

the labor market improves further and the transitory effects of lower energy prices 

and other factors dissipate, but we will continue to monitor inflation developments 

closely. 

Monetary Policy 

I will now turn to monetary policy. The Federal Open Market Committee (FOMC) 

is committed to policies that promote maximum employment and price stability, consistent with our mandate from the Congress. As my description of economic developments indicated, our economy has made important progress toward the objective of 

maximum employment, reflecting in part support from the highly accommodative 

stance of monetary policy in recent years. In light of the cumulative progress toward 

maximum employment and the substantial improvement in the outlook for labor 

market conditions—the stated objective of the Committee’s recent asset purchase 

program—the FOMC concluded that program at the end of October. 

Even so, the Committee judges that a high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to 

promote a return of inflation toward 2 percent over the medium term. Accordingly, 

the FOMC has continued to maintain the target range for the Federal funds rate 

at 0 to 1⁄4 percent and to keep the Federal Reserve’s holdings of longer-term securities at their current elevated level to help maintain accommodative financial conditions. The FOMC is also providing forward guidance that offers information about 

our policy outlook and expectations for the future path of the Federal funds rate. 

In that regard, the Committee judged, in December and January, that it can be patient in beginning to raise the Federal funds rate. This judgment reflects the fact 

that inflation continues to run well below the Committee’s 2-percent objective, and 

that room for sustainable improvements in labor market conditions still remains. 

The FOMC’s assessment that it can be patient in beginning to normalize policy 

means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the Federal funds rate for at least the next 

couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase 

in the target range for the Federal funds rate on a meeting-by-meeting basis. Before 

then, the Committee will change its forward guidance. However, it is important to 

emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of 

meetings. Instead the modification should be understood as reflecting the Committee’s judgment that conditions have improved to the point where it will soon be the 

case that a change in the target range could be warranted at any meeting. Provided 

that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target 

range for the Federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term 

toward our 2-percent objective. 

It continues to be the FOMC’s assessment that even after employment and inflation are near levels consistent with our dual mandate, economic conditions may, for 

some time, warrant keeping the Federal funds rate below levels the Committee 

views as normal in the longer run. It is possible, for example, that it may be necessary for the Federal funds rate to run temporarily below its normal longer-run 

level because the residual effects of the financial crisis may continue to weigh on 

economic activity. As such factors continue to dissipate, we would expect the Federal 

funds rate to move toward its longer-run normal level. In response to unforeseen 

developments, the Committee will adjust the target range for the Federal funds rate 

to best promote the achievement of maximum employment and 2-percent inflation. 

Policy Normalization 

Let me now turn to the mechanics of how we intend to normalize the stance and 

conduct of monetary policy when a decision is eventually made to raise the target 

range for the Federal funds rate. Last September, the FOMC issued its statement 

on Policy Normalization Principles and Plans. This statement provides information 

about the Committee’s likely approach to raising short-term interest rates and reducing the Federal Reserve’s securities holdings. As is always the case in setting 

38 

policy, the Committee will determine the timing and pace of policy normalization 

so as to promote its statutory mandate to foster maximum employment and price 

stability. 

The FOMC intends to adjust the stance of monetary policy during normalization 

primarily by changing its target range for the Federal funds rate and not by actively 

managing the Federal Reserve’s balance sheet. The Committee is confident that it 

has the tools it needs to raise short-term interest rates when it becomes appropriate 

to do so and to maintain reasonable control of the level of short-term interest rates 

as policy continues to firm thereafter, even though the level of reserves held by depository institutions is likely to diminish only gradually. The primary means of raising the Federal funds rate will be to increase the rate of interest paid on excess 

reserves. The Committee also will use an overnight reverse repurchase agreement 

facility and other supplementary tools as needed to help control the Federal funds 

rate. As economic and financial conditions evolve, the Committee will phase out 

these supplementary tools when they are no longer needed. 

The Committee intends to reduce its securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal from securities held by the Federal Reserve. It is the Committee’s intention to hold, in the 

longer run, no more securities than necessary for the efficient and effective implementation of monetary policy, and that these securities be primarily Treasury securities. 

Summary 

In sum, since the July 2014 Monetary Policy Report, there has been important 

progress toward the FOMC’s objective of maximum employment. However, despite 

this improvement, too many Americans remain unemployed or underemployed, wage 

growth is still sluggish, and inflation remains well below our longer-run objective. 

As always, the Federal Reserve remains committed to employing its tools to best 

promote the attainment of its objectives of maximum employment and price stability. 

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

39 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM JANET L. YELLEN 

Q.1. The Financial Stability Board (FSB), of which the Federal Reserve is a member, recently issued a proposal for a new long-term 

debt requirement for large financial institutions. The Federal Reserve is expected to base its own long-term debt rule on the FSB’s 

proposal. However, the FSB is now conducting a quantitative impact study to assess costs and effects of its proposal. Because the 

comment period on the FSB proposal has already closed, the public 

will not be able to comment on the results of the FSB study. Do 

you think it is important for the public to be able to comment on 

the FSB study? Will the Fed do its own quantitative impact study 

before implementing the FSB rule? If not, why not and is it appropriate to base a rule for U.S. banks on a study conducted by an 

international regulatory body? 

A.1. Since the financial crisis, U.S. authorities and foreign regulators have been working to identify and mitigate the obstacles to 

an orderly resolution or wind-down of a global systemically important bank (GSIB). To achieve this objective, a failed GSIB in resolution must have a sufficient amount of loss-absorbing resources so 

that shareholders and creditors—instead of taxpayers—will bear 

the costs of its failure. Accordingly, in November 2014, the FSB 

published for consultation a proposal for a common international 

standard on the total loss-absorbing capacity for GSIBs (TLAC proposal). The comment period for the FSB’s TLAC proposal closed in 

February 2015; the FSB received comments from a range of commenters, including U.S. trade associations and public policy advocates. In connection with the TLAC proposal, the FSB is currently 

coordinating a comprehensive quantitative impact study to which 

the Federal Reserve and other U.S. authorities are contributing 

participants. 

Independently, the Federal Reserve has been developing a proposal that would require the largest, most complex U.S. banking 

firms to keep outstanding minimum amounts of long-term, unsecured debt at the holding company level (U.S. long-term debt proposal). In proposing and adopting rules on long-term debt requirements for U.S. banking firms, the Federal Reserve will seek public 

comment and comply fully with the Administrative Procedures Act 

and other applicable Federal law. To the extent that the FSB quantitative impact study provides information that is relevant to the 

U.S. long-term debt proposal, the Federal Reserve will take that information into account in preparing the materials that it publishes 

for public comment. As part of the rulemaking process, the Federal 

Reserve would consider all public comments as well as the public 

benefits and burdens associated with the proposed regulation. 

Q.2. During a hearing last June in connection with the Financial 

Stability Oversight Council’s (FSOC) Annual Report to Congress, 

Treasury Secretary Jack Lew responded to a question regarding 

the designation process for SIFI and G-SIFI institutions and the 

closely correlative timing by saying that, ‘‘ . . . the FSB does not 

make decisions for national authorities.’’ Both the Secretary of the 

Treasury and the Chair of the Federal Reserve are members of 

both FSOC and FSB. There have been instances of FSB desigVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00043 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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1http://www.treasury.gov/initiatives/fsoc/rulemaking/Documents/Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies.pdf 

nating certain U.S. companies as systemically important before the 

FSOC did so, and other instances where the FSB proposed rules 

that U.S. regulators then promulgated domestically. Do you believe 

it is appropriate for a Federal Reserve governor to vote on an FSB 

proposal or determination before the FSOC votes on the same 

issue? What specific processes and safeguards are in place that prevent FSB rules and decisions from being implemented in the U.S. 

through FSOC as a matter of formality and without due regard to 

the regulatory process and our existing regulatory framework? 

A.2. The FSOC’s process for designating nonbank firms as systemically important assesses the potential harm that a firm’s distress 

or failure would cause to the economy of the United States. The 

methodology underlying this assessment process, including the 

quantitative metrics used to rule out smaller, less complex firms, 

has been made public. 1 In addition, for the firms it ultimately 

votes to designate, the FSOC publishes a description of the basis 

for its finding. No part of this process is linked, mechanically or 

otherwise, with the deliberations or findings of agencies outside the 

United States, including the FSB. 

The leaders of the Group of 20 Nations, including the United 

States, charged the FSB with, in part, identifying firms whose distress would threaten the global economy. The fact that both groups 

have examined the same firms, at times in close proximity, is to 

be expected given the limited number of firms which would reasonably be large enough to be considered systemically important. However, the specific designation frameworks and standards at the 

FSB and FSOC are materially different. 

As an example, the FSB’s process for identifying global systemically important insurers (G-SIIs) is completely independent of the 

FSOC’s designation process. A designation by the FSB that an insurer is systemically important would not logically require a similar finding by the FSOC, even if the FSB and the FSOC agreed on 

the underlying facts. 

The methodology for identifying global systemically important insurers (G-SIIs) was developed by the International Association of 

Insurance Supervisors (IAIS). The IAIS’ assessment methodology 

uses five categories to measure relative systemic importance: (1) 

nontraditional insurance and non-insurance (NTNI) activities, (2) 

interconnectedness, (3) substitutability, (4) size, and (5) global activity. Within these five categories, there are 20 indicators, including: intra financial assets and liabilities, gross notional amount of 

derivatives, Level 3 assets, non-policyholder liabilities and non-insurance revenues, derivatives trading, short term funding, and 

variable insurance products with minimum guarantees. 

The FSOC considers a threat to the financial stability of the 

United States to exist if a nonbank financial company’s material financial distress or activities could be transmitted to, or otherwise 

affect, other firms or markets, thereby causing a broader impairment of financial intermediation or of financial market functioning. 

An impairment of financial intermediation and financial market 

functioning can occur through several channels, including through: 

41 

(1) exposure of other financial market participants to the firm; (2) 

liquidation of its assets; or (3) failure of the firm to perform a critical service or function that is relied upon by other market participants. The FSOC’s analysis is based on a broad range of quantitative and qualitative information available to the FSOC through 

existing public and regulatory sources and as submitted to FSOC 

by the firm under consideration. The analysis is tailored, as appropriate, to address company-specific risk factors, including but not 

limited to, the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the firm. 

Any standards adopted by the FSB, including designation of an 

entity as a global systemically important financial institution (GSIFI), are not binding on the Federal Reserve, the FSOC, or any 

other agency of the U.S. government, or any U.S. companies. Thus, 

FSB designation of an entity as a nonbank SIFI does not automatically result in the Federal Reserve Board becoming the entity’s 

prudential regulator. Under the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank Act), the FSOC is responsible for deciding whether a nonbank financial company should 

be regulated and supervised by the Federal Reserve Board, based 

on its assessment of the extent to which the failure, material distress, or ongoing activities of that entity could pose a risk to the 

U.S. financial system. 

Q.3. Governor Tarullo, the Federal Reserve’s representative to the 

FSB, stated that the Fed will be promulgating a rule to implement 

domestically the FSB’s proposal on minimum margin requirements 

for certain forms of securities financing deals. As the FSB has been 

criticized for lack of transparency and accountability by U.S. officials and regulators, it is troubling that the Fed’s FSB representative would indicate the rule’s quick adoption in the United States. 

Is the Federal Reserve going to undertake an analysis independent 

from the FSB before promulgating a similar rule domestically? 

Since securities financing regulation has traditionally been within 

the purview of the Securities and Exchange Commission (SEC), not 

the Federal Reserve, how does the Federal Reserve intend to proceed with this rule and is the SEC going to be involved in that 

process? If not, why not? What expertise and knowledge does the 

Federal Reserve possess in this area? 

A.3. The Federal Reserve would adopt minimum margin requirements for securities financing transactions only following a noticeand-comment rulemaking process supported by an independent assessment of the merits of such an approach. During that rulemaking process, the Federal Reserve would consult with the SEC, 

as well as other stakeholders and experts. The Federal Reserve 

would also draw on its extensive knowledge of securities financing 

markets. 

This knowledge derives from multiple sources, including the Federal Reserve’s supervision of financial institutions that are the 

dominant intermediaries in these markets, as well as the Federal 

Reserve’ s direct experience in securities financing markets related 

to the conduct of monetary policy. 

The FSB framework of minimum margin requirements has been 

developed through a multiyear process led by a working group that 

42 

includes representatives of the Federal Reserve and the SEC. 

There have been multiple opportunities for public input into the 

FSB process: 

• In April 2012, the FSB published an interim report provided 

an overview of the securities lending and repo markets, and 

identified financial stability issues in these markets. 

• In August 2013, the FSB published a policy framework for addressing shadow banking risks in securities lending and repos, 

which included for public consultation the proposed regulatory 

framework of minimum margin requirements. 

• In October 2014, the FSB finalized minimum margin requirements for transactions involving bank lenders and nonbank 

borrowers, and simultaneously proposed for public consultation 

the extension of the framework of minimum margin requirements to transactions involving two nonbank entities. 

• In addition, the FSB conducted a multistage quantitative impact study to help gauge the impact of minimum margin requirements on market conditions. 

Q.4. The Federal Reserve is a participant in negotiations within 

the International Association of Insurance Supervisors, which is 

currently developing a global capital standard for international insurance companies. How will these global capital standards for insurers impact the development of insurance capital standards here 

in the United States? 

A.4. The Federal Reserve participates as a member to the IAIS 

along with our fellow U.S. members from the Federal Insurance Office and National Association of Insurance Commissioners. Along 

with these organizations, we advocate for the development of international standards that best meet the needs of the U.S. insurance 

market and U.S. consumers. The standards under development by 

the IAIS would only apply in the United States if adopted by the 

appropriate U.S. regulators in accordance with applicable domestic 

rulemaking procedures. Additionally, none of the standards are intended to replace the existing legal entity risk-based capital requirements that are already in place. 

The Federal Reserve continues to focus on constructing a domestic regulatory capital framework for our supervised insurance holding companies that is well tailored to the business of insurance. 

The timeline for the development of our rulemaking is distinct from 

the activities of the IAIS. We are exercising great care as we approach this challenging mandate. We are committed to following a 

transparent rulemaking processes to develop our insurance capital 

framework, which will allow for an open public comment period on 

a concrete proposal. We will continue to engage with interested 

parties as we move forward. 

Q.5. Over the last few years, the Federal Reserve has issued a series of new rules on capital and liquidity requirements for banks. 

Although these rules are important to ensure that the banking system is adequately capitalized, the must also strike the right balance to promote safety and soundness without eroding economic 

growth and job creation. Has the Federal Reserve conducted any 

cost-benefit analysis of the cumulative impact of its capital and liVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00046 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
43 

2Those studies included the Macroeconomic Assessment Group (MAG), a joint group of the 

Basel Committee on Banking Supervision (BCBS) and Financial Stability Board, (ii) the longterm economic impact working group of the BCBS, and (iii) the BCBS Quantitative Impact 

Study. See MAG, ‘‘Assessing the Macroeconomic Impact of the Transition to Stronger Capital 

and Liquidity Requirements’’ (MAG Analysis), available at: http://www.bis.org/publ/othpl2.pdf. 

See also BCBS ‘‘An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements’’ (LEI Analysis), also available at: http://www.bis.org/publ/bcbs173.pdf. 

See also ‘‘Results of the Comprehensive Quantitative Impact Study’’, also available at: http:// 

www.bis.org/publ/bcbs186.pdf. 3 Before issuing any final rule, the Federal Reserve prepares an analysis under the CRA and 

provides the analysis to the Office and Management and Budget for its review. As part of this 

analysis, the Federal Reserve assesses whether the final rule is a ‘‘major rule,’’ meaning the rule 

could (i) have an annual effect on the economy of $100 million or more; (ii) increase or process 

for consumers, individual industries, Federal, States, or local government agencies, or geographic regions; or (iii) have significant adverse effects on competition, employment, investment, 

productivity, or innovation. 

quidity rules on future economic growth and job creation? If yes, 

please share with this Committee the results of that study. If no, 

are you willing to conduct a cost-benefit analysis before finalizing 

the rules? 

A.5. As required by the Dodd-Frank Act, the Federal Reserve has 

adopted new risk-based capital and liquidity requirements through 

the rulemaking process to strengthen and enhance the safety and 

soundness of banking organizations and the U.S. banking system. 

To become informed about the benefits and burdens of any capital and liquidity requirements, the Federal Reserve collected information directly from parties that we expect will be affected by the 

rulemaking through surveys and meetings. The Federal Reserve 

also participated in several international studies assessing the potential impact of changes to the regulatory capital and liquidity requirements, which found that stronger capital and liquidity requirements could help reduce the likelihood of banking crises while 

yielding positive net economic benefits. 2 In the rulemaking process, 

the Federal Reserve specifically sought comment from the public on 

the burdens and benefits of the proposed approaches and on a variety of alternative approaches to the proposal. The Federal Reserve 

carefully considered public comments received on every notice of 

proposed rulemaking, including information relevant to the impact 

of rulemakings provided by commenters. In adopting final rules on 

these topics, the Federal Reserve sought to adopt a regulatory alternative that faithfully reflected the statutory provisions and the 

intent of Congress, while minimizing regulatory burden. We also 

provided an analysis of the costs on small depository organizations 

of our rulemaking consistent with the Regulatory Flexibility Act 

and computed the anticipated cost of paperwork consistent with the 

Paperwork Reduction Act. The Federal Reserve performs an impact 

analysis with respect to each final rule pursuant to the Congressional Review Act. 3

As part of the adoption of Regulation Q, the Federal banking 

agencies performed an analysis that showed that the vast majority 

of U.S. banking organizations, including community banks, would 

have already met the revised capital requirements plus the capital 

conservation buffer on a fully phased-in basis, which suggests that 

any negative impact stemming from the revised capital rule on 

credit availability should be small. 

44 

1 12 CFR part 3 (national banks and Federal savings associations), 12 CFR part 217 (State 

member banks, bank holding companies, and savings and loan holding companies), and 12 CFR 

part 324 (State nonmember banks and State savings associations). 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JANET L. YELLEN 

Q.1. Will the Federal Reserve follow a formal rulemaking process 

for insurance capital standards and not use an expedited process 

like imposing the standards by order? 

A.1. The Federal Reserve is committed a transparent rulemaking 

processes to develop our insurance capital framework. This will 

allow for an open public comment period on a concrete proposal. 

Q.2. Recognizing that there are two standard development tracks 

running at the same time—development of a domestic capital 

standard at the Federal Reserve, and development of an international capital standard at the IAIS—could you explain how the 

Federal Reserve is coordinating these efforts? 

A.2. The Federal Reserve participates as a member to the International Association of Insurance Supervisors (IAIS) along with our 

fellow U.S. members from the Federal Insurance Office and National Association of Insurance Commissioners. Along with these 

organizations, we advocate for the development of international 

standards that best meet the needs of the United States insurance 

market. The standards under development by the IAIS would only 

apply in the United States if adopted by the appropriate U.S. regulators in accordance with applicable domestic rulemaking procedures. Additionally, none of the standards are intended to replace 

the existing legal entity risk-based capital requirements that are 

already in place. 

The Federal Reserve continues to focus on constructing a domestic regulatory capital framework for our supervised insurance holding companies that is well tailored to the business of insurance. We 

are committed to a transparent rulemaking process and are engaging stakeholders at various levels. The timeline for the development of our rulemaking is distinct from the activities of the IAIS. 

We are exercising great care as we approach this challenging mandate. We will continue to engage with interested parties as we 

move forward. 

Q.3. The Basel Advanced Approaches regulation provides an avenue for companies to request a waiver from the rule. In effect, this 

would allow an institution to use the Basel Standardized Approach 

to calculate its capital ratios. How would the waiver process work? 

What are the types of criteria that would be considered? 

A.3. Under the banking agencies’ regulatory capital rules, 1 internationally active banking organizations (specifically, those with 

total consolidated assets of $250 billion or more or with consolidated total on-balance-sheet foreign exposure of $10 billion or 

more) must calculate risk-based capital using the advanced approaches risk-based capital rules (the advanced approaches rule) in 

addition to the standardized approach. Section 100(b)(2) of the regulatory capital rules provides that a banking organization subject 

to the advanced approaches rule shall remain subject to that rule 

until the primary Federal regulator determines that application of 

45 

the advanced approaches rule is not appropriate in light of the 

banking organization’s size, level of complexity, risk profile, or 

scope of operations. In making such a determination, the primary 

Federal regulator must apply notice and response procedures. The 

primary Federal regulator may also set conditions on the granting 

of the waiver as appropriate, and any waiver granted must be consistent with safety and soundness. The capital adequacy of a banking organization that meets the thresholds described above but has 

received a waiver from application of the advanced approaches 

rules would be addressed by standardized risk-based capital rules, 

leverage rules, and capital planning and supervisory stress-testing 

requirements. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JANET L. YELLEN 

Q.1. Ms. Yellen, in 2013, Bloomberg View, looking at 2009 creditrating date prices, placed the value on ‘‘too big to fail’’ subsidy at 

$83 billion. Another study by the International Monetary Fund released in March, 2014 put the number somewhere between $16 billion and $70 billion annually in 2011 and 2012 for the eight largest 

U.S. Banks. The GAO in a report released last summer then confirmed the fact that Wall Street megabanks have not only received 

more support from Government bailout programs, but enjoy a taxpayer-funded advantage over community and regional banks that 

widens during times of economic crisis. 

Do you believe that megabanks, because creditors assume the 

Government can’t let them collapse, borrow for less than they otherwise would giving them an unfair advantage over regional and 

community banks? Do you think the supplemental leverage ratio 

should be strengthened further to offset this advantage? 

A.1. It is well documented that large banks generally fund themselves at lower cost than smaller banks. Identifying a single, specific reason for this funding differential, however, is challenging 

since large banks and small banks differ along many different dimensions. At the same time, it is not unreasonable to assume that 

at least some of the observed funding differential owes to heightened investor expectations of public support for large banks. 

Despite the fact that large banks may benefit to some degree 

from heightened investor expectations of Government support, it 

should be noted that the evidence in favor of such a ‘‘Too Big to 

Fail’’ (TBTF) subsidy has waned in recent years. In particular, the 

cited Government Accountability Office (GAO) study documents 

that the estimated size of the TBTF subsidy has declined significantly since the financial crisis. In addition, rating agencies have 

begun to remove their explicit rating uplift that was directly tied 

to expectations of Government support. 

This decline in the observed TBTF subsidy is not an accident. 

Rather, a number of coordinated policies are working in concert to 

improve the capital and liquidity position as well as the resolvability of our largest and most systemic banks which will reduce 

both the probability of any future insolvency as well the need to 

provide Government support in the event that a large bank fails 

in the future. More specifically, the capital position of our largest 

46 

banks has been improved with the finalization of Basel III and the 

recently proposed Systemically Important Financial Institution 

(SIFI) capital surcharges will further enhance the resiliency of our 

largest and most systemic banks. The new liquidity coverage requirement (LCR) will further help to ensure that large and systemic banks have the needed liquidity to manage through a period 

of financial stress. Finally, provisions of Dodd-Frank Wall Street 

Reform and Consumer Protection Act’s (Dodd-Frank Act) Title II 

were designed to ensure that a large and systemically important 

bank could be resolved in bankruptcy without requiring any taxpayer support. 

Accordingly, a number of policies that were put in place following 

the financial crisis have resulted in much tighter regulation of 

large and systemically important banks and are reducing any 

TBTF subsidy resulting from heightened investor expectations of 

Government support. 

Q.2. The Dodd-Frank Act arguably allows the assets of an insurance company affiliated with a failing depository institution to be 

used to cover the costs of resolving the depository institution. Such 

action could significantly harm the policyholders of the insurance 

company. 

Accordingly, do you support legislation clarifying that money 

held by insurance affiliates of failing depository institutions cannot 

be transferred without the consent of State insurance regulators? 

A.2. The Federal Reserve has long considered the source of 

strength doctrine, which was codified in the Dodd-Frank Act, to be 

an important component of reducing the likelihood of bank failures 

and protecting taxpayers against losses that might arise from bank 

failures. Section 616 of the Dodd-Frank Act requires all depository 

institution holding companies to serve as a source of financial 

strength to their subsidiary depository institutions, including bank 

holding companies, savings and loan holding companies, and any 

other company that controls an insured depository institution. 

Under section 5(g) of the Bank Holding Company Act, the ability 

of the Federal Reserve to require a bank holding company to provide funds to a subsidiary insured depository institution may be 

blocked by a State insurance regulator if the funds would be provided by a bank holding company or a subsidiary of the holding 

company that is an insurance company. 

We understand that legislation has been proposed which would 

extend the same treatment to insurance companies that are savings and loan holding companies or are companies that otherwise 

control an insured depository institution. While this legislation 

would provide consistency of treatment between bank holding companies and other depository institution holding companies, it would 

weaken the ability of these companies to be a source of strength 

to their insured depository institutions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM JANET L. YELLEN 

Q.1. Chair Yellen, what is the appropriate response time for the 

Fed to respond to a written question by a Senator on the Banking 

Committee? 

47 

Would you agree that over 6 months is unacceptable? 

What is the average response time for the Fed to respond to Congress? 

What is the Federal Reserve Board process for responding to official Congressional correspondence? 

A.1. The Board recognizes the oversight function that the Committee exercises over the Federal Reserve and has long and consistently cooperated to provide the Committee with information that it 

needs to conduct its oversight role. It is the custom and practice 

of the Federal Reserve to respond fully to requests for information 

from Congress, including responses to questions for the record following hearings. As always, we endeavor to respond to requests 

fully and in as timely a manner as possible. 

Q.2. Now that the Federal Reserve oversees approximately 1⁄3 of 

the life insurance industry by premium volume, it is essential that 

the Federal Reserve has the proper person[ne]l and expertise to 

support proper insurance regulatory oversight. In addition to the 

hiring of former Connecticut Insurance Commissioner Tom Sullivan, how many other individuals has the Board hired that have 

experience regulating insurance companies? 

A.2. The Federal Reserve is investing significant time and effort 

into enhancing our understanding of the insurance industry and 

firms we supervise, and we are committed to tailoring our supervisory framework to the specific business lines, risk profiles, and 

systemic footprints of the insurance holding companies we oversee. 

As part of this, we have hired a significant number of staff who 

have prior experience regulating insurance companies. 

Q.3. How does the Board assign examiners to insurance companies? 

A.3. The Federal Reserve considers a number of factors when assigning staff to supervisory teams in order to best meet our supervisory objectives of protecting the safety and soundness of consolidated firms and mitigating any risks to financial stability. These 

teams are combination of Federal Reserve staff with expertise in 

risk management, insurance, and specific areas of supervision. 

Q.4. How many examiners with insurance experience currently 

work for the Federal Reserve? 

A.4. The Federal Reserve employs approximately 70 people to supervise insurance holding companies. We will continue to evaluate 

our needs and increase our hiring as needed. 

Q.5. What policies and procedures has the Federal Reserve established for conducting supervision of insurance companies? 

A.5. After the passage of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act), the Federal Reserve 

moved quickly to develop a supervisory framework that is appropriate for insurance holding companies that own depository institutions and promptly assigned supervisory teams to handle day-today supervision of those insurance holding companies. We also 

acted promptly to commence supervision of the three insurance 

holding companies designated by the Financial Stability Oversight 

Council for Federal Reserve supervision. While building our superVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00051 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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visory regime for these firms, we have reached out to our colleagues in the State insurance departments. Our supervisory efforts to date have focused on strengthening firms’ risk identification, measurement, and management; internal controls; and corporate governance. Our principal supervisory objectives for insurance holding companies are protecting the safety and soundness of 

the consolidated firms and their subsidiary depository institutions 

while mitigating any risks to financial stability. The supervisory 

program continues to be tailored to consider the unique characteristics of insurance operations and to rely on the work of the primary functional regulator to the greatest extent possible. 

Q.6. The International Association of Insurance Supervisors (IAIS) 

is currently developing global insurance capital standards. This 

process is occurring at the same time the Fed is implementing the 

Insurance Capital Standards Clarification Act and authoring domestic insurance capital standards. The international standards 

have received a good amount of criticism here in the U.S. There is 

particular concern that the Fed may agree to IAIS standards before 

domestic standards are finalized. Does the Federal Reserve intend 

to precede these international efforts? 

A.6. The Federal Reserve participates as a member to the IAIS 

along with our fellow U.S. members from the Federal Insurance Office (FIO) and National Association of Insurance Commissioners 

(NAIC). Along with these organizations, we advocate for the development of international standards that best meet the needs of the 

U.S. insurance market and U.S. consumers. The standards under 

development by the IAIS would only apply in the United States if 

adopted by the appropriate U.S. regulators in accordance with applicable domestic rulemaking procedures. Additionally, none of the 

standards are intended to replace the existing legal entity riskbased capital requirements that are already in place. 

The Federal Reserve continues to focus on constructing a domestic regulatory capital framework for our supervised insurance holding companies that is well tailored to the business of insurance. 

The timeline for the development of our rulemaking is distinct from 

the activities of the IAIS. We are exercising great care as we approach this challenging mandate. We are committed to following a 

transparent rulemaking processes to develop our insurance capital 

framework, which will allow for an open public comment period on 

a concrete proposal. We will continue to engage with interested 

parties as we move forward. 

Q.7. Who represents the Federal Reserve Board at meetings of the 

IAIS? 

A.7. Since joining the IAIS in late 2013, the Federal Reserve has 

been an active participant in several key committees, working 

groups, and work streams. We currently hold a seat on the Financial Stability Committee and the Technical Committee of the IAIS. 

Our participation in these activities is primarily overseen by Thomas Sullivan, Associate Director, Division of Banking Supervision 

and Regulation, with support and participation of other staff of the 

Federal Reserve System at the direction and under the supervision 

of the Board of Governors which ultimately is responsible for our 

policy positions. 

49 

Q.8. Can you describe the process the U.S. uses to present a position during IAIS negotiations? 

A.8. The Federal Reserve has acted on the international insurance 

stage in an engaged partnership with our colleagues from the FIO, 

the State insurance commissioners, and the NAIC. We collaborate 

with one another both formally and informally on matters of import 

which are before the IAIS membership. Our multiparty dialogue, 

while respectful of each of our individual authorities, strives to develop a central ‘‘Team USA’’ position on the most critical matters 

of global insurance regulatory policy. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM JANET L. YELLEN 

Q.1. Shortly after the Federal Reserve joined the International Association of Insurance Supervisors (IAIS), the IAIS voted to shut 

out public observers including consumer groups from most of their 

meetings. How did the Federal Reserve representative vote on this 

issue? If the Federal Reserve is committed to being transparent in 

its operations, will you support allowing the public to observe the 

IAIS meetings in the same way Congress—and this Committee— 

does with its hearings and mark-ups? 

A.1. The Federal Reserve, along with our partners, the State insurance commissioners, the National Association of Insurance Commissioners and the Federal Insurance Office have, and will continue to actively seek out U.S. insurance stakeholders to ensure we 

are fully engaged and understanding of their perspectives as we negotiate global insurance standards at IAIS. For instance, the U.S. 

delegation has hosted several meetings in recent months, where we 

invited in U.S. insurance stakeholders for open dialogue and active 

working sessions regarding matters of policy which are currently 

before the IAIS. This level of engagement will continue with U.S. 

interested parties. 

The Federal Reserve supports intervals and protocols for stakeholders to provide comment and input. We believe strongly in independence within the standard setting process and would also seek 

to mitigate any opportunity for regulatory capture within the proceedings. The IAIS voted to revise its approach for industry participation in standard setting. Under the new process, industry will no 

longer provide financial support to the IAIS or be day-to-day participants in the development of international supervisory standards 

for insurance. The industry and public will be able to provide input 

through stakeholder meetings as well as through comments on exposures of draft IAIS proposals. The Federal Reserve supports 

transparency in rulemaking and policy development and believes 

that it is critical that standard-setting bodies be fully independent 

of the regulated. 

Q.2. The Financial Stability Oversight Council (FSOC) recently 

adopted guidance on how it deals with entities it is considering for 

SIFI designation, however the Council’s actions did not address 

concerns about how it mitigates systemic risk. In particular, the 

Council did not create a process that would reduce potential 

threats to the financial system by allowing a company or its priVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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mary regulator to address identified risks before designation. 

Shouldn’t FSOC’s primary focus be to identify and ensure systemic 

risks are addressed rather than simply sending a nonbank entity 

to the Federal Reserve for undefined regulation? Why should the 

Federal Reserve regulate nonbank systemically important financial 

institutions as opposed to their primary regulator? 

A.2. The Dodd-Frank Act gives the FSOC authority to reduce systemic risks by requiring that systemically important financial institutions be supervised by the Federal Reserve and subject to enhanced prudential standards. Such enhanced prudential standards 

are designed to reduce systemic risk by ensuring that these firms 

maintain adequate capital and liquidity, and that they appropriately plan for an orderly resolution in the event of their failure. 

In supervising systemically important financial institutions, the 

Federal Reserve’s role is not to replace the functional regulator, but 

rather to focus on consolidated supervision and systemic risk reduction. The Federal Reserve is committed to tailoring its enhanced 

prudential standards for systemically important firms it supervises 

to the specific risks posed by each firm. The Dodd-Frank Act requires the FSOC to reevaluate each designation annually to consider whether the designation should be rescinded. This annual review process establishes a process for the FSOC to rescind a designation if the company has taken steps to reduce the risk that the 

firm poses a threat to the financial stability of the United States. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM JANET L. YELLEN 

Q.1. With Congress preparing to consider a budget in the near future, some members on the other side of the aisle are calling for 

severe, across-the-board funding cuts. In addition to being bad policy for many of the priorities that could be cut, what would be the 

impact on the economy of a major fiscal tightening? How is the Fed 

taking into account the risk of new fiscal austerity in its timeline 

for tightening? 

If Congress were to impose severe fiscal cuts, would the Fed have 

to delay its timeline for tightening monetary policy to compensate 

for the contractionary effect? Given where monetary policy is with 

respect to the zero lower bound, wouldn’t it be better policy to 

allow monetary policy to normalize first, before considering severe 

budget cuts? 

A.1. The implications for the economy of a fiscal contraction would 

depend on many aspects of the situation. But in general, a fiscal 

contraction would generally be associated with slower GDP growth 

for a time, higher unemployment for a time, and somewhat lower 

inflation for a time, holding all other influences on the economy 

constant. As time passed, these effects would normally be expected 

to fade, as a result of the normal pursuit of monetary policy objectives, namely price stability and maximum employment. In other 

words, monetary would seek to restore the economy to its mandateconsistent performance, with labor fully employed and with inflation running at its mandate-consistent pace of 2 percent. 

As the Federal Open Market Committee (FOMC) assesses the 

best path for monetary policy to follow, the Committee attempts to 

51 

take into account the totality of factors affecting the pace of 

progress toward the Committee’s congressionally mandated policy 

objectives. Moreover, as I have noted many times, our policy decisions will evolve in light of the latest evidence concerning the position of the economy relative to our policy objectives. Specifically, if 

the sum total of factors restraining the pace of activity proves to 

be stronger than anticipated, then a more-accommodative monetary 

policy will be warranted to best promote attainment of the policy 

objectives. Conversely, if the factors restraining the pace of activity 

prove to be less potent than anticipated, then a less-accommodative 

monetary policy will be warranted, all else equal. 

Q.2. Long-term unemployment is coming down from its peak after 

the financial crisis, but the level is still high. As you know, Americans who have been hit with long-term unemployment face greater 

obstacles to returning to work, which, in addition to the human toll 

on these families, reduces our economy’s overall productive capacity. How can monetary policy help address the challenge of longterm unemployment? Is long-term unemployment a reason to let 

the economy run a little bit ‘‘hotter’’ for a little bit longer before 

tightening? 

A.2. The issue of long-term unemployment is very serious, as it has 

enormous implications in human terms for those most directly affected by it—first and foremost the workers themselves and their 

immediate families—but also for the overall performance of the 

economy. I would note that there are some reasonably encouraging 

signs that, as overall labor-market conditions have improved, the 

situation of the long-term unemployed has also improved. The best 

contribution that the Federal Reserve can make to the ongoing reduction in long-term unemployment is to continue to pursue our 

congressionally mandated objectives of price stability and maximum employment. A broad consensus agrees that by pursuing 

these objectives, the Federal Reserve provides the best possible 

backdrop for the economy to perform as well as possible. 

Q.3. As you may be aware, some of my colleagues on the other side 

of the aisle would like to throw sand in the gears of our financial 

regulators by tampering with the way agencies evaluate the benefits and costs of their actions. These proposals would impose a 

rigged version of cost-benefit analysis that would prevent the implementation of financial reform laws, create a nearly insurmountable obstacle to action, and invite frivolous legal challenges at taxpayers’ expense. Can you elaborate on some of the problems with 

proposals such as these? 

A.3. The Federal Reserve takes quite seriously the importance of 

evaluating the benefits and burdens associated with our rulemaking efforts. To become informed about these benefits and burdens, before we develop a regulatory proposal, we often collect information directly from parties that we expect will be affected by 

the rulemaking. This helps us craft a proposal that is both effective 

and minimizes regulatory burden. In the rulemaking process, we 

also specifically seek comment from the public on the burdens and 

benefits of our proposed approach as well as on a variety of alternative approaches to the proposal. In adopting a final rule, we seek 

to adopt a regulatory alternative that faithfully reflects the statuVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00055 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
52 

tory provisions and the intent of Congress while minimizing regulatory burden. We also provide an analysis of the costs on small depository organizations of our rulemaking consistent with the Regulatory Flexibility Act and compute the anticipated cost of paperwork consistent with the Paperwork Reduction Act. 

Imposing additional procedural steps and providing new avenues 

for legal challenge to the Federal Reserve’s rulemaking process 

would likely extend the amount of time it takes the Federal Reserve to promulgate new regulations and to revise existing regulations. This could slow the pace at which the Federal Reserve implements financial reform laws and could limit the Federal Reserve’s 

ability to respond promptly to situations where amendments to 

Board regulations are deemed to be necessary. 

Q.4. In the aftermath of the financial crisis, there was a clear consensus that the compensation practices of some financial companies 

created incentives for employees to chase profits by taking on large, 

inappropriate risks, where taxpayers could be stuck with the downside if things went wrong. We’re now approaching 5 years after the 

passage of the 2010 Wall Street Reform law, and many of the compensation reforms have yet to be implemented. 

The Federal Reserve, with our other financial regulators, has responsibility for implementing Section 956 of the Wall Street Reform law, which prohibits compensation arrangements at financial 

companies that could drive inappropriate risk-taking. Can you 

please provide an update on the status of this rulemaking? 

A.4. Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the 

Federal Deposit Insurance Corporation (FDIC), the Securities and 

Exchange Commission, the National Credit Union Administration 

Board, and the Federal Housing Finance Agency (the Agencies) to 

jointly issue regulations or guidelines that would prohibit any types 

of incentive based payment arrangement, or any feature of any 

such arrangement, that regulators determine encourage inappropriate risks by providing excessive compensation or that could lead 

to material financial loss to a covered financial institution. 

Section 956 helps address a critical safety and soundness issue 

that may have contributed to the financial crisis: poorly designed 

compensation structures that can misalign incentives and result in 

excessive risk-taking in financial organizations. The Agencies’ implementation of this and other sections of the Dodd-Frank Act, as 

Congress directed, is designed to address many of the systemic 

issues that contributed to the crisis. To that end, an interagency 

notice of proposed rulemaking to implement the provisions of section 956, titled Incentive-Based Compensation Arrangements, was 

published in the Federal Register on April 14, 2011. The Agencies 

received more than 11,000 comments on the proposal, many of 

which raised complex issues requiring additional research and 

analysis. 

The Agencies’ staffs are meeting regularly to work through the 

issues raised in the comments, which the Agencies will consider 

carefully before proceeding. The Federal Reserve expects that the 

Agencies will take further action to implement section 956 soon 

53 

1 75 Federal Register 36395 (June 25, 2010). 2 12 U.S.C. §1831p-1(c); 12 CFR Part 208, Appendix D-1. 3See the readout from the January 21, 2015 meeting at http://www.treasury.gov/initiatives/ 

fsoc/council-meetings/Documents/January%2021,%202015.pdf. 

and the Federal Reserve recognizes the importance of completing 

this rulemaking as expeditiously as possible. In the meantime, the 

Federal Reserve will continue its ongoing supervisory and regulatory work addressing compensation-related issues at financial institutions that it supervises. Currently this work is based on the 

Interagency Guidance on Sound Incentive Compensation Policies, 1

enacted by the Federal Reserve, OCC and FDIC after being proposed by the Federal Reserve, as well as interagency guidelines 

adopted by the same agencies implementing the compensation-related safety and soundness standards in section 39 of the Federal 

Deposit Insurance Act. 2

Q.5. The Federal Reserve, OCC, and FDIC have on several occasions expressed concern about the risk management practices of 

regulated institutions with respect to leveraged lending. As regulators have required banks to reduce their risks in this area, however, there have been reports that nonbank lenders are stepping in 

to fill the void. Even if regulated institutions reduce their direct exposure to leveraged loans, they still face risks from lending that occurs through the ‘‘shadow banking’’ sector—for example, if a regulated bank is lending money to a hedge fund or other entity that 

invests in risky loans, if a crisis occurs with nonbank lenders that 

could depresses bank asset values through a fire sale or destabilize 

credit availability marketwide, or through a cascade of defaults 

that could find its way back to a bank’s doorstep. 

How is the Federal Reserve working with other regulators, the 

Financial Stability Oversight Council, and the Office of Financial 

Research to monitor leveraged lending by institutions other than 

those it regulates? 

A.5. Within the Federal Reserve, staff regularly review marketwide 

information on underwriting trends as well as deals being made by 

lenders to assess the effects of supervisory actions to require banks 

to reduce their risks in leveraged lending. An important part of the 

analysis is the extent to which the origination of leveraged loans 

is migrating to nonbank institutions. Federal Reserve staff’s financial stability analysis looks at various sources to assess this, including market data sources which provide information on the 

bookrunners, or main underwriters, for highly leveraged transaction deals that have closed in the last quarter as well anecdotal 

evidence based on regular staff meetings with market participants. 

Federal Reserve staff have presented on the issue of leveraged 

lending to the principals of the Financial Stability Oversight Council. 3

Q.6. How is the Fed monitoring the direct and indirect exposure of 

its regulated institutions to nonbank entities that are engaging in 

leveraged lending? 

A.6. The Federal Reserve studied extensively the exposures of the 

majority of its regulated institutions (specifically, about 80 percent 

of the banking sector) to a sudden reversal in conditions in leveraged lending—alongside a severe recession—in the severely adVerDate Nov 24 2008 14:03 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00057 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-24 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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verse scenario used in the recently completed stress test exercise. 

This exercise studied both direct exposures—including from loans 

held in the pipeline prior to sale to nonbank entities and holdings 

of securities issued by collateralized loan obligations—as well as indirect exposures—including (as described in the scenario narrative) 

a sharp deterioration in the secondary market for leveraged loans 

and related assets consistent with the distress of a number of 

nonbank entities engaged in leveraged lending. 

Regular assessments of financial stability by Federal Reserve 

staff also consider other channels through which a deterioration in 

the leveraged lending market—and speculative debt markets more 

broadly—could create strains that could then indirectly feedback on 

the financial sector, including the institutions that the Federal Reserve regulates. One such channel, which was highlighted in the 

February 24, 2015 Monetary Policy Report, is the growth in mutual 

funds and exchange-traded funds. These investors, which now hold 

a much higher fraction of the available stock of relatively less liquid assets (including leveraged loans), give the appearance of offering greater liquidity than the markets in which they transact and, 

as a result, heighten the potential for forced sales in underlying 

markets. 

Q.7. What is the Fed’s assessment of the risks currently posed by 

leveraged lending outside of the institutions it regulates? 

A.7. Currently, the Federal Reserve sees little migration in the 

origination of leveraged loans as a result of supervisory actions, although staff are continuing to monitor closely this issue as described in the answer to Question 5. In terms of investors in leveraged loans, however, and as described in the answer to Question 

6, mutual funds’ and exchange-traded funds’ holdings of a higher 

fraction of the available stock of relatively less liquid assets (including leveraged loans) heightens the potential for forced sales in 

underlying markets. 

Q.8. What data can you provide regarding the share and relative 

riskiness of leveraged lending by nonbanks vs. regulated institutions, the exposure of regulated institutions to leveraged lending by 

nonbanks, and any systemic risk concerns relating to leveraged 

lending by nonbanks? 

A.8. As described earlier, the Federal Reserve relies on a variety 

of market data sources—which are broadly available—to assess the 

state of the speculative grade corporate debt market across a variety of dimensions. Importantly, the Federal Reserve has highlighted key trends in speculative-grade corporate debt markets, including issuance volume and important underwriting trends in recent Monetary Policy Reports. 

The Federal Reserve sees little migration in the origination of leveraged loans as a result of supervisory actions. However, in the 

instances where nonbanks have increased their share of originations of leveraged loans, often these transactions have been higher 

risk. 

The Federal Reserve’s views on leveraged lending are informed 

by the findings of ongoing supervisory examinations of practices at 

55 

4See the results of the review at: http://www.federalreserve.gov/newsevents/press/bcreg/ 

20141107a.htm. 

banks. We publish the findings of an important part of this supervisory exercise, the Shared National Credits review. 4

Q.9. In your remarks at the National Summit on Diversity in the 

Economics Profession on October 30, 2014, you highlighted the 

need for diversity in the economics profession—both at the Federal 

Reserve and elsewhere—and discussed how a diversity of perspectives can lead to more informed policy decisions and research that 

informs policy. What steps is the Federal Reserve taking to cultivate diversity among its economists and more broadly, and in particular among its senior and mid-level leadership? How would you 

rate the Federal Reserve’s progress so far? What role does the Office of Minority and Women Inclusion play in this process? 

A.9. I would reiterate the Federal Reserve’s commitment to diversity, and while we continue to work towards achieving a more diverse workforce, we recognize that we need to do more. During the 

initial stages of appointing official staff, the Director of the Office 

of Minority and Women Inclusion (OMWI), who also is the Director 

of Office of Diversity and Inclusion (ODI), is consulted and is a 

member of the reviewing team that evaluates proposed official staff 

actions. 

This allows the ODI Director to better support inclusion and diversity at the official staff level and to ensure that the Board’s 

leadership nomination criteria and process are inclusive. 

In 2014, the Federal Reserve hired 36 economists, of which 33 

percent were minorities and 19 percent were women. Based on the 

2010 Census civilian labor force data and subsequent updates, the 

availability of minority and female candidates in the economist job 

occupation remains low. To foster recruitment, the Federal Reserve 

continues to organize, oversee, and participate in the three programs under the purview of the American Economic Association’s 

(AEA) Committee on the Status of Minority Groups in the Economics Profession (CSMGEP): (1) the Summer Economics Fellow Program, (2) the Summer Training Program, and (3) the Mentoring 

Program. Also, through its participation in the Science Technology 

Engineering and Mathematics (STEM) Education Coalition and financial literacy programs, the Federal Reserve aims to stimulate 

an interest in economics and math among minorities and women. 

However, the Federal Reserve faces real challenges in hiring minorities in the economist job family as does the rest of the economics profession. The Federal Reserve has addressed these challenges 

as an active member of the AEA’s CSMGEP, which was established 

by the AEA to increase the representation of minorities in the economics profession, primarily by broadening opportunities for a 

training of underrepresented minorities. The Board continues to be 

involved in the range of program (from undergraduate to postPh.D.) sponsored by CSMGEP including the following: 

• The Federal Reserve partnered with the AEA to host the National Summit on Diversity in the Economics Profession at the 

Federal Reserve on October 30, 2014, in Washington, DC. This 

conference brought together presidents and research directors 

56 

5http://www.federalreserve.gov/newsevents/conferences/national-summit-diversity-economicsprofession-program.htm 

of the Federal Reserve Banks and chairs of economics departments from around the country to open a profession-wide dialogue about diversity. Speakers and panelists discussed the 

state of diversity in the economics profession and examples of 

successful diversity initiatives in academia. A hallmark of the 

conference was the opportunity for collegial learning, discussion, and sharing among faculty peers to develop practical 

ideas about what can be accomplished to attract and retain diversity in the economics profession. The proceedings of the conference are available on the Federal Reserve’s public Web 

site; 5

• Board staff have been involved with the CSMGEP Summer 

Training Program since its inception in 1974. That program is 

designed to provide undergraduate students with a program of 

study and research opportunities that prepare then to enter 

doctoral level Ph.D. programs in economics. Board staff regularly participate as adjunct faculty in the Summer Training 

Program; 

• The Federal Reserve strives to encourage summer intern applicants from the CSMGEP Summer Fellows Program for the 

Board’s summer internship program and also focuses on 

matching minority advanced graduate students with researchoriented sponsoring institutions to work on their own research 

projects while participating in the research community at the 

Federal Reserve; and 

• Board staff have served as mentors through the CSMGEP 

Mentoring Program in which students are matched with a 

mentor who sees them through the critical junctures of their 

graduate program. 

In addition, the Federal Reserve has participated in or initiated 

other outreach efforts including the following: 

• The Federal Reserve has hosted the ‘‘Math x Econ’’ (math 

times econ) program for the past 3 years which is aimed at 

high-performing math students in minority-serving high 

schools in the Washington, DC, metropolitan area. Math x 

Econ brings math students to the Board for a one-day program 

that introduces them to the field of economics with the goal of 

encouraging them to explore economics when they begin their 

college educations. 

• A group of research assistants in our economics divisions as 

well as our supervision division continued with the fourth year 

of the Fed Ed Outreach program to present information on 

monetary policy, financial literacy, and the role of the Federal 

Reserve in the economy to local high school students. The program consists of hour-long presentations presented in high 

school classrooms or at the Board. This past school year, the 

program delivered 18 presentations to 11 schools and more 

than 500 students. 

57 

6http://www.federalreserve.gov/newsevents/press/bcreg/20150609a.htm 

Q.10. As you know, I worked during Wall Street Reform to include 

provisions in the law to create Offices of Minority and Women Inclusion, or OMWIs, at the Federal financial regulators, including 

the Federal Reserve. In 2013, the financial regulators jointly issued 

proposed interagency OMWI standards for assessing the diversity 

policies and practices of regulated entities, and it is my understanding that the regulators intend to issue final joint standards 

later this year. Some community groups have expressed concerns 

that the proposal needs stronger standards and accountability 

measures in order to meet its objectives and improve workforce and 

supplier diversity for regulated institutions, such as mandating reporting on employee and supplier diversity rather than proposing 

that regulated entities voluntarily submit self-assessments to the 

agencies. 

How is the Fed responding to these concerns, and what plans do 

the financial regulators have to ensure the final interagency standards will be best designed to improve diversity and promote inclusion in recruiting, advancement, leadership, and contracting? What 

steps is the Fed taking to strengthen the final interagency standards to ensure real progress in expanding the role of women, people 

of color, and other underrepresented groups in the financial sector? 

What is the expected timeline for adopting final standards? 

A.10. In 2013, an interagency working group comprising the OMWI 

directors from each of the financial agencies (the Federal Reserve, 

the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, 

the Consumer Financial Protection Bureau, and the Securities and 

Exchange Commission) published proposed standards for assessing 

the diversity policies and practices of entities regulated by each 

agency. The proposed standards were published in the Federal Register on October 25, 2013, for public comment; the comment period 

was later extended to February 7, 2014, to allow interested parties 

adequate time to respond. 

The standards seek to promote transparency and awareness of 

diversity policies and practices within regulated entities, and provide a framework for assessing diversity in four major areas: 

• Organizational commitment to diversity and inclusion 

• Workforce profile and employment practices 

• Procurement and business practices and supplier diversity 

• Practices to promote transparency of organizational diversity 

and inclusion 

The agencies carefully considered over 200 comments received 

and on June 9, 2015, issued a joint press release announcing publication in the Federal Register of the final policy statement that establishes joint standards for assessing the diversity policies and 

practices of the entities they regulate. The final policy statement 

establishing joint standards is effective as of the date it is published in the Federal Register, June 10, 2015. The press release and 

policy statement are posted on our public Web site. 6

The joint standards, which are generally similar to the proposed 

standards, provide a framework for regulated entities to create and 

58 

strengthen their diversity policies and practices—including their 

organizational commitment to diversity, workforce and employment 

practices, procurement and business practices, and practices to promote transparency of organizational diversity and inclusion within 

the entities’ U.S. operations. 

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