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EXAMINING FEDERAL RESERVE 

REFORM PROPOSALS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JULY 22, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–43 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON MONETARY POLICY AND TRADE

BILL HUIZENGA, Michigan, Chairman 

MICK MULVANEY, South Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

MARLIN A. STUTZMAN, Indiana 

ROBERT PITTENGER, North Carolina 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

MIA LOVE, Utah 

TOM EMMER, Minnesota 

GWEN MOORE, Wisconsin, Ranking Member 

BILL FOSTER, Illinois 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

DANIEL T. KILDEE, Michigan 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 22, 2015 ..................................................................................................... 1 

Appendix: 

July 22, 2015 ..................................................................................................... 37 

WITNESSES 

WEDNESDAY, JULY 22, 2015 

Cochrane, John H., Senior Fellow, Hoover Institution, Stanford University ..... 6 

Kohn, Donald, Senior Fellow, Economic Studies Program, Brookings Institution ........................................................................................................................ 8 

Kupiec, Paul H., Resident Scholar, American Enterprise Institute .................... 9 

Taylor, John B., Mary and Robert Raymond Professor of Economics, Stanford 

University ............................................................................................................. 5 

APPENDIX 

Prepared statements: 

King, Hon. Peter ............................................................................................... 38 

Brady, Hon. Kevin ............................................................................................ 39 

Cochrane, John H. ............................................................................................ 42 

Kohn, Donald .................................................................................................... 47 

Kupiec, Paul H. ................................................................................................. 52 

Taylor, John B. ................................................................................................. 65 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Huizenga, Hon. Bill: 

Written statement of the Property Casualty Insurers Association of 

America .......................................................................................................... 70 

Wall Street Journal article entitled, ‘‘Taylor on Bernanke: Monetary 

Rules Work Better Than ‘Constrained Discretion,’’’ dated May 2, 2015 .. 71 

(1) 

EXAMINING FEDERAL RESERVE 

REFORM PROPOSALS 

Wednesday, July 22, 2015 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MONETARY

POLICY AND TRADE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Members present: Representatives Huizenga, Mulvaney, Lucas, 

Pearce, Stutzman, Pittenger, Messer, Schweikert, Guinta, Love, 

Emmer; Moore, Foster, Himes, Carney, Murphy, Kildee, and Heck. 

Ex officio present: Representative Hensarling. 

Also present: Representatives King and Green. 

Chairman HUIZENGA. The Subcommittee on Monetary Policy and 

Trade will come to order. 

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

the subcommittee at any time. 

Today’s hearing is entitled, ‘‘Examining Federal Reserve Reform 

Proposals.’’ 

I now recognize myself for 2 minutes to give an opening statement. 

The Federal Reserve System was created in 1913 with a mission 

of establishing three key objectives for monetary policy: maximum 

employment; price stability; and moderate long-term interest rates. 

However, last Congress, as we examined the Fed’s actions over the 

last 100 years, through the Federal Reserve Centennial Oversight 

Project, it became clear that the Federal Reserve has gone above 

and beyond its original mission statement. 

In fact, since the enactment of the Dodd-Frank Act, the Federal 

Reserve has gained unprecedented power, influence, and control 

over the financial system while remaining shrouded in mystery to 

the American people. This hearing provides us with another opportunity to examine how the Federal Reserve conducts monetary policy and why the development of these policies is in desperate need 

of transparency, in my opinion. 

The Fed’s recent high degree of discretion and its lack of transparency in how it conducts monetary policy demonstrates that not 

only are reforms needed but, more importantly, that reforms are 

necessary. Today, the Fed’s balance sheet is almost 5 times the size 

of its pre-crisis level and represents one-quarter of the size of the 

entire U.S. economy. That is a tremendous amount of money. 

2 

The Fed’s balance sheet demonstrates attempts to push monetary policy past its most basic mandate: price stability. Absent a 

monetary policy that dutifully promotes price stability, economic 

opportunity will continue to fall short of its potential. I have continued to encourage the Federal Reserve, both publicly and privately, to adopt a rules-based approach to monetary policy and 

communicate that rule to the public. 

As anyone who has been paying attention to it knows, the Fed 

has not seen a clear path to go in that direction, so we are here 

to help nudge them along. The Fed also, I believe, most importantly, must be accountable to the people’s representatives as well 

as the hard-working taxpayers themselves. 

With that, I yield back the balance of my time. 

I recognize the gentlelady from Wisconsin, Ms. Moore, for 3 minutes. 

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

Today, we are here examining two proposals: the first would create a partisan commission to review the Fed’s dual mandate; and 

the second would permit policy audits of the Federal Reserve and 

establish a computer model to govern monetary policy. 

I think there may be some legitimacy to some of the concerns my 

Republican colleagues have raised regarding the Fed, but these two 

bills are answers to problems that really don’t exist. If we are worried about the Fed’s growth policies, why don’t we meet the Fed 

halfway, and stop the misguided obsession with austerity and trying to trick the economy to grow the economy? 

If you want the Fed to feel comfortable going to a more traditional monetary policy, you don’t need all these bills. Why don’t my 

colleagues join Democrats in supporting proven growth policies like 

extension of the Ex-Im Bank, providing a living wage for workers, 

a long-term highway bill that used to be bipartisan, equal pay for 

women, sick leave, or training a 21st Century workforce by improving public education? 

I strongly support the dual mandate. It reflects the reality of 

monetary policy. I don’t know how anyone can be against weighting 

employment as the consideration of economic growth goals. 

As for auditing the Fed and establishing a computer model-based 

monetary policy, I can tell you, I am so certainly unsure about the 

level of concern for the U.S. credit rating agencies anymore after 

some of our colleagues have called for a default on U.S. debt. However, our central bank’s independence is a consideration of credit 

rating agencies. These are established benefits of independent central banks. Injecting politics into monetary policy would be a disaster. 

I see this computer model as extremely dangerous. Both Fed 

Chair Yellen and former Fed Chair Bernanke feel that this would 

be flawed, and tell us that it would impede the Fed’s ability to act 

in a crisis. Banks and Wall Street investors would all set their 

trading and projections to whatever the so-called Taylor Rule computer model we adopt would be, and the potential disruption of any 

deviation from the model would cause all kind of market disruption 

and thus effectively take away any discretion from the Fed. I would 

oppose both bills in their current form. 

3 

I look forward to our distinguished panel, and I yield back the 

length, the balance of this long time I have. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

With that, the Chair recognizes the gentleman from New Hampshire, Mr. Guinta, for 1 minute for an opening statement. 

Mr. GUINTA. Thank you, Mr. Chairman. 

I welcome the panel. And thank you for being here today for this 

very important hearing. 

From 2007 to 2012, we saw the average median income decrease 

in 5 consecutive years, and since then, we have arguably the slowest economic recovery since World War II. Last month’s Investor’s 

Business Daily report reported that overall growth in the last 23 

quarters of the Obama recovery has been at about 13.3 percent. 

The average growth rate achieved since World War II is 26.7 percent. Obama’s recovery is half the average. 

If our growth rate under President Obama was simply average, it has been reported that our GDP would be $1.9 trillion larger 

today. That is roughly $16,000 more per household. On top of our 

sluggish economy, we have Americans who are seeing near zero interest rates on their savings accounts while median incomes are 

not increasing as quickly as they should be. 

Millions of Americans are dealing with fluctuating gas prices, 

higher food and electricity prices, and increasing healthcare costs. 

And this is why we need transparency within the Federal Reserve. 

It is time to open up the books and take a look at what the Fed 

is doing. 

I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair recognizes Mr. Himes of Connecticut for 2 minutes for 

an opening statement. 

Mr. HIMES. Thank you, Mr. Chairman. 

And thank you to the panel for being here. 

I wanted to be in this hearing because I find the idea of examining the Federal Reserve reform proposals both ironic and, to 

some extent, profoundly concerning. It is ironic because, of course, 

the bad actors since 2006, 2007, 2008—Fannie Mae, Freddie Mac, 

the GSEs—generally remain unreformed. Shame on both parties 

for that. The banking industry and all of its associated people have 

been reformed. And, of course, my friends on the other side of the 

aisle would like to do away with that reform. 

And, of course, history will not treat this institution kindly with 

respect to the way we responded in fiscal policy over the last several years. And yet, it is the Federal Reserve, the one entity that 

I think can be called probably the hero of the last 6 years, through 

their expansionary monetary policy, through their use of extraordinary and, yes, somewhat concerning authorities to yank us out 

of a recession—some say not rapidly enough—but unquestionably 

yanked us out of a recession. And yet, it is they that we are talking 

about reforming. 

We have interesting debates in this room, including the role of 

the government in flood insurance and mortgage insurance. And 

these are really interesting debates that we ought to have. 

This is different. And this is where I am profoundly concerned. 

An independent Federal Reserve, a monetary authority that is not 

4 

subject to the tender mercies of this institution is a cornerstone of 

our economy. And, frankly, that is true across time and across geographies. 

Many of the proposals being entertained today would erode that 

independence. This is not a question subject to debate. There is 

plenty of academic research, most notably that undertaken by 

Larry Summers and Alberto Alesina in 1993, which shows that 

there is a very strong correlation between monetary policy independence and inflation. Independent institutions run better economies than those that are not. 

The objection is made that it should be transparent. It should be 

transparent. The Federal Reserve, of course, in the last 50 years 

has become much more transparent. But above all else, we need to 

be very, very careful that we do not damage the monetary independence in the Federal Reserve through any efforts to improve the 

transparency of that institution. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Chair recognizes the gentleman from Minnesota, 

Mr. Emmer, for 1 minute for an opening statement. 

Mr. EMMER. First, I want to thank the chairman for calling this 

hearing and to thank the witnesses for being here today. 

Despite the differences of opinion that we know are in this room, 

it is my hope that we can work together to make the Federal Reserve even more transparent and a market-friendly institution. 

As you know, the Fed has immense influence over capital markets, financial institutions, and the American economy. Since the 

Great Recession, the Fed has used its nearly unlimited, broad, and 

assumed powers to push interest rates to historical lows by trillions 

of dollars of toxic assets and bail out numerous financial institutions. That is why I have joined many of my colleagues and my 

constituents with grave concerns that short-term solutions enacted 

by the Fed have harmed future prosperity and the people’s faith in 

their institutions. 

For these reasons, I am more than pleased that Chair Huizenga’s 

Federal Reserve Reform Act and Mr. Brady’s Centennial Monetary 

Commission Act have been proposed. I see these bills as important 

steps towards responsible oversight and a pro-growth economy. 

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

Chairman HUIZENGA. The gentleman’s time has expired. 

Before we proceed, without objection, members of the full Financial Services Committee who are not members of the subcommittee 

may participate in today’s hearing. 

Without objection, it is so ordered. 

With that, we would like to welcome some very esteemed colleagues and doctors who are going to be here with us today examining these various proposals. We are going to welcome the testimony of Dr. John Taylor, professor of economics at Stanford University; Dr. John Cochrane, senior fellow with the Hoover Institution; Dr. Donald Kohn, senior fellow in economic studies at the 

Brookings Institution; and rounding us out, Dr. Paul Kupiec, resident scholar at the American Enterprise Institute. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. 

5 

And without objection, each of your written statements will be 

made a part of the record. 

And, with that, Dr. Taylor, you are now recognized for 5 minutes 

for your opening statement. 

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY 

Mr. TAYLOR. Thank you, Mr. Chairman, and Ranking Member 

Moore, for inviting me to this subcommittee hearing. 

I would like to focus on Section 2 of the Federal Reserve Reform 

Act in these opening remarks. That section requires that the Fed 

describe the strategy or rule of the Federal Open Market Committee (FOMC) for the systemic quantitative adjustment of its policy instruments. The Fed would choose the strategy. The Fed could 

change its strategy or deviate from the strategy, but it would have 

to explain why. 

In discussing the bill, I would like to emphasize the word ‘‘strategy’’ because the word ‘‘rule,’’ though frequently used by economists, may convey the false idea that a rules-based monetary strategy is mechanical or mathematical. Practical experience and economic research over many years shows that a clear monetary strategy is essential for good economic performance. My own research, 

going back more than 4 decades, supports this view, yet many 

agree that during the past decade, the Fed has either moved away 

from a strategy or has not been clear about the strategy. 

It is, of course, possible, technically, for the Fed to get back to 

and adhere to such a strategy, but it is difficult in practice. And 

for this reason, I think the Federal Reserve Reform Act of 2015 is 

needed. 

Congress has responsibility for oversight of policy in the strategic 

sense, and there is precedent. From 1977 to 2000, Congress required the Fed to report money growth ranges. The requirement 

was repealed but not replaced. The proposed policy strategy requirement is an excellent replacement. 

During the past year, there has been extensive discussion about 

the bill. A similar bill was voted out of the Senate Banking Committee, and new economic research has begun. The proposed Centennial Monetary Commission would be a constructive way to bring 

this discussion together in a bipartisan context. It would be useful 

to constructively address the concerns raised during the past year. 

Fed Chair Janet Yellen, for example, testified that she did not 

believe the Fed should chain itself to any mechanical rule. But the 

bill does not chain the Fed to any such rule. The Fed would choose 

and describe its own strategy. It could deviate from the strategy in 

a crisis if it explained why. 

Another stated concern with policy rules legislation is that the 

Fed would lose its independence. In my view, based on my own experience in government, the opposite is more likely. A clear, public 

strategy helps prevent policymakers from bending under pressure 

and sacrificing their institution’s independence. 

Some say the bill would require the Fed to follow a particular 

rule, but this isn’t the case. The bill simply requires that the Fed 

compare its strategy with a reference rule. Many at the Fed already make such comparisons. 

6 

That false claim that the bill would chain the Fed leads to other 

questions. Last week, Ranking Member Moore asked Chair Yellen 

whether the Fed would be able to react to the Greek crisis if it 

were required to follow the so-called Taylor Rule. Leaving aside 

whether the Fed should have reacted to the crisis, the legislation 

would in no way have prevented it from doing so. 

Another critique is that the zero bound on the interest rate 

means you have to abandon rules-based strategy. Wasn’t that why 

the Fed deviated from rules-based policy in recent years? Not in 

2003, 2005, and not now because the zero bound is not binding. It 

appears that there was a period in 2009 when the zero was binding, but that is not a new thing. Policy research design has looked 

into that issue on the go. One approach would simply be to keep 

money growth steady. 

Some recent objections revive old debates. Larry Summers, for 

example, makes an analogy with medicine, saying he would prefer 

a doctor who just gave him good medicine rather than one who is 

predictable or follows the strategy. But this ignores progress in 

medicine due to doctors using checklists. Experience shows that 

checklists are invaluable for preventing mistakes, getting good diagnoses, and appropriate treatments. Checklists-free medicine is as 

wrought with as many dangers as rules-free monetary policy. 

Some say you don’t really need a rule or a strategy for the instruments of policy as long as you have an inflation target or an 

employment target. In fact, Ben Bernanke has called this approach 

‘‘constrained discretion.’’ But having a specific numerical goal is not 

a strategy for the instruments of policy. It ends up being all tactics. 

Relying on constrained discretion rather than a strategy for the instruments of monetary policy just hasn’t worked. 

Thank you very much. I would be happy to answer any of your 

questions. 

[The prepared statement of Dr. Taylor can be found on page 65 

of the appendix.] 

Chairman HUIZENGA. Thank you, Dr. Taylor. 

And, with that, Dr. John Cochrane, you have 5 minutes as well 

for your opening statement. 

STATEMENT OF JOHN H. COCHRANE, SENIOR FELLOW, 

HOOVER INSTITUTION, STANFORD UNIVERSITY 

Mr. COCHRANE. Chairman Huizenga and Ranking Member 

Moore, thanks very much for the opportunity to testify. 

I think it is wise for Congress to rethink the fundamental structures under which the Federal Reserve operates from time to time, 

and I think the Fed wants guidance as much as you want clarity. 

The Fed enjoys great independence, and that is widely viewed as 

a good thing. But in our democracy, independence must be paired 

with limited powers. The Fed cannot and should not print money 

and hand it out. That is your job, even if that would be very stimulative. 

Independent agencies should also, as much as possible, implement laws and rules. The more an agency operates with wide discretion and sweeping powers, the more it must be supervised by 

the imperfect but accountable political process. So your hard task 

7 

in these bills and beyond is to rethink the limits, rules, and consequent independence versus accountability of the Federal Reserve. 

Now, conventional monetary policy consists of setting short-term 

interest rates, looking at inflation and unemployment. But the Federal Reserve has taken on a wide range of new powers and responsibilities and more are being contemplated. I encourage you to look 

beyond conventional monetary policy and consider these newly expanded activities as these bills begin to do. 

Interest rate policy now goes beyond inflation and unemployment. For example, should the Fed raise interest rates to offset 

perceived bubbles in stock, bond, or home prices, or to move exchange rates? I think not, but I come to stress the question, not 

to offer my answers. 

A rule implies a list of things that the Fed should not respond 

to, should not try to control, and for which you will not blame the 

Fed in the event of trouble. A rule based on inflation and unemployment says implicitly, ‘‘Don’t manipulate stock prices.’’ This may 

be a useful interpretation for you to emphasize in the future. 

But the Fed now goes beyond setting short-term interest rates. 

To address the financial crisis in the deep recession, the Fed 

bought long-term treasuries, mortgage-backed securities, commercial paper, in order to raise their prices directly. Well, should the 

Fed continue to try to directly manipulate asset prices? If so, under 

what rules or with what supervision and consequent loss of independence? 

Since 2008, the Fed’s regulatory role has expanded enormously 

as well. Two small examples: The Fed invented the stress tests in 

the financial crisis, and these have now become a ritual. The Fed 

makes up new scenarios to test banks each time. The Fed exercises 

enhanced supervision of these systemically designated banks, exchanges, and insurance companies. Dozens of Fed staff live fulltime at these institutions, reviewing the details of their operations. 

Now, these powers follow very few rules. They involve great discretion and little reporting or supervision from you, and billions 

and billions of dollars hang on the results. The Fed now contemplates macroprudential policy, combining regulatory and monetary policy tools and objectives. The Fed will vary capital ratios, 

loan-to-value ratios, or other regulatory tools over time, along with 

interest rates, if it sees bubbles or imbalances or in order to stimulate. 

Well, the Fed’s bubble is the homebuilders’ boom, and the builders will be calling you if the Fed decides to restrict credit. Do you 

want the Fed to follow these policies? And if so, with what kind of 

rules, what kind of limits, and what accountability? 

The bill’s requirements for stress-test transparency, language 

simplicity, and cost-benefit analysis, I think, are an important step 

in managing this regulatory explosion. The bill’s authorization for 

the Fed to exempt all persons from even congressionally mandated 

rules, which prove unwise, is, I think, a landmark. But beware that 

filling out mountains of paper won’t mechanically improve the process. 

These are just a few examples. The Federal Reserve’s scope and 

powers have expanded dramatically since the financial crisis, and 

as they always do when there is extraordinary events. New powers 

8 

and policies always involve great experimentation and discretion. 

Now is the time to reconsider the limits, rules, mandates, goals, 

and accountability for all these new policies. And these bills are an 

important first step. 

[The prepared statement of Dr. Cochrane can be found on page 

42 of the appendix.] 

Chairman HUIZENGA. Thank you, Dr. Cochrane. 

And, with that, we will recognize Dr. Kohn for 5 minutes for your 

opening statement. 

STATEMENT OF DONALD KOHN, SENIOR FELLOW, ECONOMIC 

STUDIES PROGRAM, BROOKINGS INSTITUTION 

Mr. KOHN. Thank you, Mr. Chairman. 

No institution is perfect. Circumstances change. Lessons are 

learned. All policy institutions must adapt if they are to continue 

to serve the public interest. In my view, however, many of the suggestions in the proposed legislation, as I weigh their costs and benefits, are not likely to improve the Federal Reserve’s performance 

and enhance the public interest, and they could harm it. 

Being as systemic, predictable, and transparent as possible about 

what the Federal Reserve is doing in monetary policy increases the 

effectiveness of policy because it helps private market participants 

accurately anticipate Federal Reserve actions. It enhances your 

ability to assess the policy’s strategies of the FOMC. But the key 

phrase in that sentence was ‘‘as possible.’’ 

The U.S. economy is complex and ever-changing, and cannot be 

comprehensibly summarized in a few variables and empirical relationships. Requiring the Fed to send you a rule would be at best 

a useless exercise and could prove counterproductive. If it is adhered to, it will produce inferior results. If not, as I would hope and 

expect, it would be misleading. In the latter case, the GAO would 

be frequently second-guessing the FOMC’s decisions. Indeed, under 

another section of the legislation, the exemption for monetary policy from GAO audit would be repealed. 

In my view, Congress was wise to differentiate monetary policy 

from other functions of the Federal Reserve in 1978 when it authorized GAO audits. It recognized that the GAO audits could become an avenue for bringing political pressure on the FOMC’s decisions. It recognized that, over time and across countries, experience 

suggested that when monetary policy is subject to short-term political pressures, outcomes are inferior; inflation tends to be higher 

and more variable. In that context, the extra pressure of GAO audits moves the needle in the wrong direction. 

Supplying liquidity to financial institutions by lending against 

possibly illiquid collateral is a key function of central banks. When 

confidence in financial institutions erodes and uncertainty about 

whether they can repay the funds they borrowed increases, they experience runs. Without a back-up source of funding, lenders are 

forced to stop making loans and to sell assets in the market at any 

price. That harms the abilities of households and businesses to borrow and spend. 

Borrowing from a central bank under such circumstances helps 

lenders continue to meet the credit needs of households and businesses. It is an essential way for the central bank to cushion Main 

9 

Street from the loss of confidence in the financial sector. For most 

of the 20th Century, the Fed could do that by lending to commercial banks and other depositories. But in 2008, the Fed found that 

lending to nonbanks—investment banks, money market funds, buyers of securitizations—was required to stem the panic and limit the 

damage to Main Street. 

The Fed supported giving the FDIC an alternative method of 

dealing with troubled financial institutions and limiting the use of 

discount window for nonbanks, the facilities that would be widely 

available to institutions caught up in the panic. Congress made 

those changes on lending to nonbanks in the Dodd-Frank Act. In 

my view, going further would limit the effectiveness of the Fed’s 

lender of last resort function for a 21st Century financial market 

and raise the risk to households and businesses. 

The Fed has been adapting its monetary policy strategy and communications. The Fed, other regulators, and Congress have addressed many of the deficiencies in regulation and supervision that 

allowed the circumstances that led to the crisis to build. So I don’t 

think there are major changes that need to be made in the Fed, 

but I cannot rule out that a group of thoughtful policy experts 

might be able to suggest some further improvements to goals, 

structures, and decision-making processes. 

But the proposal before us has a panel rooted in partisan politics, 

not expertise, and its makeup is strongly tilted to one side. It has, 

in effect, prejudged one aspect of the conclusions by mandating 

that a reserve bank president be included but not a member of the 

Board of Governors. Shifting authority from the Board to the presidents is a general theme of many of the proposals before us, and 

as a citizen, I find it troubling. 

The reserve banks and their presidents make valuable contributions to the policy process, but they are selected by private boards 

of directors, to be sure with the approval of the Board of Governors, 

and giving them greater authority would, in my view, threaten the 

perceived democratic legitimacy of the Federal Reserve over time. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Kohn can be found on page 47 

of the appendix.] 

Chairman HUIZENGA. Thank you for your testimony. 

And last, but certainly not least, we have Dr. Paul Kupiec from 

the American Enterprise Institute. 

And, sir, you are recognized for 5 minutes as well. 

STATEMENT OF PAUL H. KUPIEC, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. KUPIEC. Chairman Huizenga, Ranking Member Moore, and 

distinguished members of the subcommittee, thank you for holding 

today’s hearing and for inviting me to testify. 

My oral remarks will summarize my written testimony and discuss some additional issues related to these proposals. 

Today’s Federal Reserve would not be recognized by its 1913 

founding fathers. Congress has amended the Federal Reserve powers and responsibilities many times in the Fed’s 100-year history. 

For the most part, Fed changes have been triggered by unfavorable 

economic developments: the Depression in the 1930s; post-war inVerDate Nov 24 2008 18:25 Mar 17, 2016 Jkt 097156 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\97156.TXT TERI
10 

flation in the 1950s; stagflation in the 1970s; and most recently, 

the housing bubble and financial crisis. The financial crisis forced 

the Fed to reinvent its approach to monetary policy. And even with 

massive Fed stimulus, the recovery is among the weakest on 

record. 

Congress has Federal Reserve oversight responsibility, and from 

time to time, that duty may require a reexamination of the mandate powers and functions of the Federal Reserve System. The Centennial Monetary Commission Act of 2015 is a mechanism for exercising congressional oversight. The bipartisan commission would 

assemble experts to analyze the Fed and report recommendations 

for legislative changes to modernize and improve Federal Reserve 

operations. 

This proposal would be even better if the commission’s scope 

were expanded to examine the Federal Reserve’s regulatory function. The commission should have sufficient time to complete a 

thorough analysis and formulate its representations. Unrealistic 

deadlines increase the risk of a rush to premature conclusions. 

Should this bill pass, I can predict with near certainty that the 

Fed will be eager to loan the commission its large and talented 

staff. Lead this horse outside the city gates. 

The Federal Reserve Act, the second bill discussed today, includes 13 sections. Many are simple, common-sense updates. 

Among the controversial parts, Section 2 requires the FOMC to 

publicly disclose its directive policy rule for monetary policy, compare it to a specific reference policy rule, and inform the Congress 

when its monetary policy differs from the Fed’s directive policy rule 

and explain why. 

Basically, the FOMC must provide the Congress and the public 

with a transparent statement of the methodology the Fed uses to 

short-run monetary policy. The proposal puts no restriction on the 

Fed’s monetary policy rule, and the Fed may change its rule at any 

time. Disclosure of a reference monetary policy will enhance the 

quality of the policy debate. Differences between the policy prescribed by the reference rule and the Fed’s chosen policy rule will 

undoubtedly generate lively discussion and the Fed will be required 

to defend its policy actions to the Congress and to the public. This 

will significantly improve Fed oversight. 

Section 4 of the Act changes FOMC voting so that the Federal 

Reserve Bank presidents all have an equal say on monetary policy. 

That is a welcome change. The change at voting may impact the 

FOMC’s vice chairman selection, but I did not see that issue addressed in the current proposal. 

Section 5 requires the Federal Reserve Board to disclose the 

model it uses to estimate CCAR stress test losses. Greater transparency is badly needed. The disclosure should apply to all asset 

classes modeled in the stress test. 

Section 8 requires the Fed to conduct cost-benefit analysis before 

it issues a new regulation and undertake a follow-up study to 

verify that the regulation is working as planned. This proposal fills 

a big loophole in existing regulatory law. Perhaps language could 

be added on compliance mechanisms. 

Section 10 of the Act requires the Federal Reserve Board, the 

FDIC, and the U.S. Treasury to notify the public and the Congress 

11 

when these agency staff enter into negotiations, consultations, or 

agreements with international standard-setting bodies like the Financial Stability Board (FSB). This timely requirement should be 

expanded to include the SEC and the CFTC. 

Section 11 would amend the Federal Reserve Section 13-3, special lending powers. The proposals would reform Section 13-3 lending powers given in the Dodd-Frank Act to prevent the Fed from 

lending to an individual distressed and potentially insolvent financial firm to keep it from failing in the next financial crisis. The language in this proposal should apply to any Federal Reserve lending 

and not just to the Federal Reserve Board. 

Thank you, and I look forward to your questions. 

[The prepared statement of Dr. Kupiec can be found on page 52 

of the appendix.] 

Chairman HUIZENGA. Thank you for that. 

And at this time, I will recognize myself for 5 minutes for questioning. 

Dr. Kupiec, you just got done talking about this. 

Dr. Taylor, I know that you have talked about this as well. And 

it is oftentimes referred to as the Taylor Rule. We have heard goldstructured policy, reference-based strategies. I had suggested when 

Chair Yellen was here that she could change it however she wanted, and we will dub it the Yellen Rule of how to move forward. I 

think that was a pretty good idea, by the way. 

What exactly do you view this, as far as support within the Federal Reserve System, the notion of having this strategy-based approach or rule-based strategy, however you want to title that? As 

I pointed out to Chair Yellen, she had expressed support for a 

rules-based policy. Dr. Charles Plosser has gone pretty extensively 

on that. So just give me a sense of where economists within the 

Fed System already have sympathy for that approach. 

Mr. TAYLOR. I think, if you look over the longer span of time of 

monetary policy, you can see periods where a more rules-based 

strategic—whatever you want—policy has been at least correlated 

or associated with better economic performance. And one of the periods I mention frequently is the very beginning, early in the 1980s 

and 1990s and until recently. If you look at the period before that, 

it was quite chaotic, very ad hoc, with a lot of stop-go policy. And 

I think, since then, you see a lot of deviations from a strategy that 

worked. 

There is also research with models or with just ideas that tends 

to show the same thing, an advantage to having a clear, laid-out, 

predictable strategy. Actually, Don Kohn mentioned some of those 

things. It gives the markets a sense of what is going on. It just 

works better all around, and it is actually not unusual. Many policies— 

Chairman HUIZENGA. Let me expand on that a little bit, because 

we have seen markets respond rather forcefully at two FRC— 

FOMC meeting releases and press conferences. Does it suggest that 

guidance would be improved so it wouldn’t be as volatile? 

Mr. TAYLOR. Well, yes. I think if there are fewer surprises, there 

are fewer adverse reactions. There are fewer sharp movements in 

the market. There is always going to be an effort to predict or anticipate what a big player like the Fed will do. But to the extent 

12 

that their strategy is there, it will be laid out and be less of a surprise. 

Chairman HUIZENGA. Okay. And having the Fed clearly explain 

differences between actual policy choices and a standard reference 

strategy could increase the transparencies in this regard? 

Mr. TAYLOR. I think so. I think, in a sense, they do that internally a lot anyway and have for years. So it would be bringing it 

out for other people to see and debate, I think, in a constructive 

way. 

Chairman HUIZENGA. Dr. Cochrane, do we threaten the Fed’s 

independence with what we are try to do here? 

Mr. COCHRANE. I think you establish the Fed’s independence. 

Independence comes with limited powers and a clear understanding of what Congress wants them to do and doesn’t want 

them to do. So I think without a deal, we are in even more trouble. 

The Fed worries a lot about Congress looking over its shoulder. So 

I think by establishing a structure, a set of rules, what you expect 

from the Fed and what you want them to do, what you don’t expect 

them to do, that is the kind of deal that allows them to exercise 

the needed independence on some things and limits them from 

going onto other things. 

Chairman HUIZENGA. I have 1 minute left here. I want to move 

on to Section 13-3. In a recent speech, Federal Reserve Bank President Jeffrey Lacker argued that because it promotes creditor expectations of future bailouts, Section 13-3 is antithetical to the goal of 

achieving financial stability. And I will dispose of the reading of 

this whole quote here, but I am curious, how would you respond 

to President Lacker’s suggestion that the Federal Reserve’s Section 

13-3 authorities undermine financial stability and that Dodd-Frank 

did not go nearly far enough in constraining those authorities? Dr. 

Cochrane or Dr. Kupiec, if you care to— 

Mr. KUPIEC. I think Jeff is very thoughtful on these topics, and 

I think the changes that are proposed in this legislation would put 

tougher restrictions on Fed 13-3 lending. I think the danger is that 

the Fed wouldn’t be able to do any lending under Section 13-3 ever, 

and I think this proposal does not go that far. It just puts more 

criteria on it, and in a reasonable way, such that the nine other 

presidents would have to agree that the special lending was appropriate. 

I am a little unsure about who certifies that the firm is solvent. 

That part of the law I didn’t quite see where the certification would 

come from, but it is very much a move in the direction of fixing the 

things that Jeff Lacker has pointed—the problems Jeff has pointed 

out. 

Chairman HUIZENGA. Thank you. 

And with that, my time has expired. 

I recognize the gentlelady from Wisconsin for 5 minutes. 

Ms. MOORE. Thank you so much, distinguished panel, for taking 

the time. We always learn a great deal through these hearings. 

I guess, I want to start out with much trepidation with you, Dr. 

Taylor. God forbid that I should ever have to argue or debate the 

Taylor Rule or any other kind of rule with you. I was looking at 

Ben Bernanke’s blog, and we had—the Federal funds rate is equal 

to the rate of the inflation plus half the percent deviation and real 

13 

GDP from a target, plus—and so on, and then times your Taylor 

Rule. 

So I guess what I have heard you say here today is that you are 

not being as prescriptive as some of your critics have indicated that 

you have been. You have contended that today here in your testimony. But as I look at the criticism, specifically from Dr. 

Bernanke, who has some models and you probably have seen these 

papers—God forbid I would have to read your Taylor Rule myself— 

but he is indicating that the Fed, during the 2008 debacle, that 

they kept the funds rate close to zero, about as low as you can go. 

And when he looked at the Taylor Rule model, it would have had 

to go, of course, below a zero rate. So they really couldn’t follow 

your model. They had to look for other tools, like the purchasing 

of security, to further do monetary ease. So what Dr. Bernanke 

said essentially in his criticism, if I am reading it correctly, is that 

just simply using a construct like that would not have ultimately 

been a useful tool. They would have had to find some other model, 

other than the so-called Taylor Rule. 

And then you go on to say that you want them to be independent, but then they should have a GAO report on monetary policy put together when they have to deviate from your strategy. Explain to us how a GAO report put together in 7 days would substitute for the actions of the Fed? 

Mr. TAYLOR. So the first part of your question, regarding when 

a formula takes you below zero in the interest rate, it has been discussed for decades what would happen. And my proposal was then 

you would keep money growth constant, or you would leave it at 

zero or .125 for a while and keep money growth constant. It is pretty standard. We worked that out long ago. It doesn’t mean you do 

all sorts of other things. There are other reasons to do that, quantitative easing, et cetera. 

With respect to your question of the GAO, I understand the GAO 

would help determine whether the rule—or I should say the Fed’s 

decision was changing from one period to another. So the Fed has 

an opportunity to describe a change in the strategy or in the rule. 

And the GAO would assist in determining whether there was a 

change or not. I think that is the way the legislation currently 

works. The GAO would come in and make an assessment of what 

has the Fed changed and perhaps as a result should be reporting 

the reason for the change. 

Ms. MOORE. Thank you so much for that. 

Dr. Kohn, let me ask you whether or not it is common for banks 

and traders to set up strategies and projections based on Fed policy 

and that, what would adoption of something like a Taylor strategy 

or rule construct—would that increase the dependency and create 

a situation where banks and traders will rely on these computer 

model assumptions, and what might be the impact of them following these constructs? 

Mr. KOHN. Of course, all participants in financial markets try to 

anticipate what the Federal Reserve is doing. It is an important 

player in the market. It controls very short-term interest rates. So, 

yes, banks and other financial institutions and other investors base 

their decisions in part on expected monetary policy and how that 

interacts with the economy. 

14 

Giving them a rule to rely on would give them perhaps more certainty about what was going to happen or give them the perception 

that they would be more certain what was going to happen and 

have them pile into the investments on that basis. My concern 

would be that would not be justified. The economy changes. Things 

happen. The Fed would not be able to follow the rule. And so having markets count on something that wasn’t going to happen, I 

think, could cause undue turmoil and volatility in markets. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

With that, the Chair recognizes the vice chairman of the subcommittee, Mr. Mulvaney of South Carolina, for 5 minutes. 

Mr. MULVANEY. I thank the chairman. 

Dr. Taylor, I don’t know if you had a chance to watch Chair 

Yellen’s presentation to the committee last week, but on several 

different occasions, folks asked her about a rules-based system. 

Sometimes they mentioned the Taylor Rule by name; other times 

they did not. Her response seemed to be fairly consistent. 

On a couple of occasions, I recall her saying that she worried 

about the efficacy of a rule that had only two variables. I assume 

this is a slight intended at the Taylor Rule. If it is, it is a reservation that she didn’t have when she recommended the Taylor Rule 

20 years ago. But I thought I would give you the opportunity to respond to that apparent criticism of the Taylor Rule that it cannot 

be efficacious because it only has two variables. 

Mr. TAYLOR. Actually, one of the most amazing things that people discovered years after that was proposed is that two variables 

were quite successful in explaining a lot of the good aspects of the 

decisions. I remember Chairman Greenspan talking about that way 

back when. But the truth is it can’t explain everything with the 

two variables. Anybody would know that. And there are times 

when you have to deviate from it. 

When I first wrote about this, I talked about the 1987 stock market crash and the Fed’s intervention at that time. But that is an 

intervention or a deviation relative to this benchmark, relative to 

this strategy. It just doesn’t throw everything out at the same time 

and make fresh decisions. It is relative to a strategy. 

So I think focusing on the only two variables can be quite misleading. That is why I mentioned Ranking Member Moore’s question to Janet Yellen about the Greek crisis. Would you have been 

able to react to the Greek crisis, Chair Yellen, with only these two 

variables? Well, no, there are only two variables. But I think that 

is not correct. 

If the Fed had wanted to, we could debate whether or not that 

is appropriate or not anyway. It would have said we are going to 

do it for these reasons, just like it did in 1987. So I think that is 

to me a sensible way to make policy. You have a strategy. It basically works, whatever you want to say, 80 percent, 90 percent of 

the time, and you deviate from it in a clear, transparent way when 

you need to. 

Mr. MULVANEY. Thank you, Dr. Taylor. 

Gentlemen, I want to switch gears on you and talk about a new 

topic that just came up in the last 48 hours. It comes out of the 

Senate. I don’t know if you followed it this morning or not. The 

Senate has a proposal on its transportation bill, a pay-for on the 

15 

transportation bill that would change the dividend that Fed member banks receive on essentially the stock that they hold. They are 

required, I think, to keep 6 percent of their capital at the Treasury. 

They are not allowed to earn reserve on that. It is essentially their 

shareholdings in the Fed. 

And the Senate proposal is to lower the statutory dividend on 

that amount of money, on that capital, on that reserve, from 6 percent to a point-and-a-half. I have no idea what that has to do with 

transportation, but then, again, I don’t pretend to understand everything about the Senate anyway. I would be curious to know— 

if anybody wants to chime in on whether or not you think this is 

a good idea? A bad idea? Is it the type of thing that maybe we 

should look at before we throw it in as a pay-for for a Senate bill 

we will probably vote on in the next couple of days up here? Does 

anybody have an opinion on that? Dr. Kupiec? 

Mr. KUPIEC. Yes, the 6-percent yield on Federal Reserve stock is 

a feature of the original Act. And so the stock pays a 6-percent dividend and it doesn’t matter what the earnings of the system are. 

Some bankers have joked with me in the past that their best earning asset through the crisis has been their Federal Reserve stock 

at 6 percent when every other rate is near zero. 

And so adjusting the rate does not seem out of line, considering 

the rates that any of us can earn on our savings. The banks, of 

course, would not be very happy about it because their revenue 

would be less. The Federal Reserve would have, in a sense, higher 

operating earnings and return more to the Treasury at the end of 

the year, so that is the sense at which it would help pay for transportation. 

Mr. MULVANEY. Is there a reason we set a dividend by statute? 

I am not aware of that happening in many other places. 

Mr. KOHN. I think it was set as part of establishing the Federal 

Reserve Act, and it was because they wanted banks to join the Federal Reserve, and they recognized that forcing them to buy equity, 

and equity that wasn’t tradeable, wasn’t salable, couldn’t be used 

explicitly, couldn’t be used as collateral for anything. So you have 

an asset that is basically frozen and you can’t do anything with it. 

And if you didn’t earn anything on it, that is equivalent to a tax. 

So, basically, you are holding this asset instead of making a loan 

to a household or a business. 

Mr. MULVANEY. Is there any advantage— 

Mr. KOHN. And the 6 percent was to compensate and offset, in 

effect, the tax on banks. 

Mr. MULVANEY. Instead of setting a statutory rate, is there any 

advantage to allowing it to float with the market? What is the justification for paying somebody 6 percent right now when markets 

are paying— 

Mr. KOHN. It is not really an asset like other assets, so I 

wouldn’t know how to set it. I am not sure 6 percent is the right 

rate, but let’s recognize that by lowering it to, say, 1.5 percent on 

the proposal, in effect, you are placing a tax on banks over $1 billion. 

Mr. MULVANEY. Thank you, gentlemen. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair recognizes Mr. Foster of Illinois for 5 minutes. 

16 

Mr. FOSTER. Thank you, Mr. Chairman. 

We are living through the aftermath of a disaster caused by the 

complete failure of Republican monetary, fiscal, and regulatory policy. 

You guys have been around business schools a lot. And so I was 

wondering, normally if you had a disaster and then you appoint a 

commission to make recommendations as to how to prevent that 

disaster from recurring, would you normally have a majority in 

that commission from the group that caused the disaster or the 

group that fixed the disaster? 

I will just go down the line. If anyone—let’s just raise hands. 

Who believes that those who fix the disaster should hold the majority on the committee? 

Mr. COCHRANE. I will take it. As an academic, I think there is 

enough blame to go around of both parties, Wall Street, and everybody in the debacle. And as academics, I think we would say make 

the commission all academics, and then we will give you the right 

answer. 

Mr. KOHN. I do think I agree with Dr. Cochrane’s first comment; 

there is enough blame to go around. I would prefer a bipartisan or, 

frankly, a nonpartisan group of experts. 

Mr. FOSTER. Right. As opposed to one where there is two to one 

the majority party as is being proposed. 

But I am a little bit confused actually by your statement that 

there is enough blame to go around, that this was an act of God. 

Which party had control of monetary, fiscal, and regulatory policy 

in the years preceding the crisis? Was there equal control of monetary, fiscal, and regulatory policy in those years? 

Mr. COCHRANE. I have written about sources of the crisis. And 

if you look at the structure of the financial system and financial 

regulation that fell apart, it goes back hundreds of years. It goes 

back to the structures set up in the New Deal. So both parties constructed this thing, and it fell apart. 

Mr. FOSTER. Okay. Let’s just return to monetary policy, which is 

the main subject here. I think that most people would agree that 

the greatest sin of the Fed in terms of monetary policy, and certainly in the last few decades, has been the decision to maintain 

very accommodative monetary policy and help inflate the housing 

bubble in the 2003 to 2004 time scale. 

And so there is by necessity, on these proposals, a get-out-of-jailfree card for the Fed to say: Well, you know, we have this rule, but 

this is a special case this time. 

And so what in that would have prevented Alan Greenspan and 

the Republicans’ appointees of that time from simply having said, 

‘‘Oh, I am sorry, it is 2002, 2003,’’ or, play the 9/11 card, whatever 

they have done, and simply done what they did and inflated the 

housing bubble, which, of course, has driven most of the pain that 

we are having a long time recovering from? 

Mr. TAYLOR. So the 2003, 2004, 2005 period I have written 

about, written books about, I think it was, as you say, an effort 

that resulted in excesses and housing bubble. It ultimately was a 

factor in the severity of the Great Recession. 

Mr. FOSTER. Unquestionably. 

Mr. TAYLOR. There is no question, in my view. 

17 

That is, in fact, why I think this legislation is potentially so important, because that period is when there was a clear deviation 

from a strategy, like I have been advocating, like a strategy that 

worked in the 1980s and 1990s. 

I don’t think it is fruitful to talk about Republicans and Democrats in this context. The important thing is to get going and fix 

this problem. And you can look over the last 50 years and you can 

see a Republican Administration imposing wage and price controls 

on this entire economy. And you can see Democratic Administrations which didn’t do the best either. The important thing is to look 

forward. And I think a commission, however you constitute it, is a 

way to look forward. 

Mr. FOSTER. Dr. Kohn? 

Mr. KOHN. As one of the policymakers at that time and an appointee of President Bush to be sure, I disagree with John. He and 

I have had this discussion many times. I don’t think that the monetary policy of the mid-2000s was the major reason for the housing 

bubble. I think it was the private sector and the public sector both 

being too complacent about what was going on, too much reliance 

on the private sector to make these decisions, not enough oversight 

by the public sector, failure by the credit rating agencies. I think 

this was a regulatory failure, not a monetary policy failure. And a 

good deal of those failures have already been addressed in DoddFrank. 

Mr. FOSTER. Okay. And I am guessing, there is a lot of emphasis 

in the discussion here about more transparency for stress tests. It 

seems to me that if you publish the stress tests, the stress factors 

that banks will be subject to, they will simply hedge out that specific set of risks, and it will be completely meaningless. Is there any 

reason to believe they wouldn’t do that? 

Mr. KUPIEC. Well— 

Chairman HUIZENGA. Very quickly, gentlemen. 

Mr. KUPIEC. —if they actually did hedge out the risk, that would 

be fine. They would be protected. So that wouldn’t be a problem. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Chair recognizes the gentleman from North Carolina, Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And I thank each of you for being with us today. 

As I assess our current status, we are at a very anemic economic 

growth by any standard. We have unemployment and real unemployment. Some estimates come in that 12 percent are considered 

to be underemployed and those who have quit looking. 

What role do you believe the monetary policy is playing? The demographic group who has suffered the worst has been the low-income minority people in this country, yet we know the rulemaking 

has an impact on regulatory taxes and on consumers, on investors, 

including low-income and middle-income people. 

Do you believe that a statutory economic analysis would be helpful to help mitigate this problem in assessing the role this has had? 

Dr. Cochrane, we will start with you. 

Mr. COCHRANE. I think it is important to recognize the limits of 

monetary policy, which is in part why it can and should be an independent agency. Monetary policy is like oil in the car: If there is 

18 

not enough, the car stops. But once the car is going, pouring more 

oil in doesn’t do any good. There are limits to what monetary policy 

can do. 

Like everyone else here, I am disappointed at the slow growth 

rate of the U.S. economy. I am disappointed by how few Americans 

are working. But I think we all agree that is not something primarily that monetary policy can help with, and we need to recognize those limits. 

Mr. PITTENGER. Dr. Taylor? 

Mr. TAYLOR. I think the slow growth is largely due to policies, 

but I would add regulatory policy. I would add issues about budgetary uncertainty. And to the extent that monetary policy can be 

a drag, it can, especially if you include the regulatory parts of it. 

So I wouldn’t exclude that. 

Over time, there tends to be a relationship between, I guess, the 

interventionist discretionary approach in monetary policy and some 

of these other policies. So I think it goes hand in hand. I think kind 

of a restoration of a clear strategy for monetary policy would be 

beneficial all around. 

Mr. PITTENGER. Dr. Kupiec? 

Mr. KUPIEC. I think the regulations that have been imposed 

since the crisis are in large part causing slow growth. I think the 

issues today about monetary policy, this really isn’t about requiring 

the Fed to change monetary policy; it is really about a disclosure 

of what their monetary policy is in a way that facilitates a discussion. 

So I don’t think that the questions about would the Fed react differently at this time or that time when Mr. Greenspan was in 

there, this bill is not intended to make them react in any particular 

way. They can write the rule however they want and react however 

they want. They just have to explain it clearly so the public and 

the Congress can understand what they are doing and then understand if they want to comment on it or offer opinions on it, whether 

it is appropriate or not. 

So I will stop there. 

Mr. PITTENGER. Dr. Kohn? 

Mr. KOHN. In my view, the unemployment rate would be higher. 

More people would be unemployed if the Federal Reserve hadn’t 

engaged in the aggressive and unconventional policies that they 

did. If they had followed the Taylor Rule and interest rates were 

a couple of points higher, the stock market would be lower, the dollar would be stronger, the cost of the capital would be higher, demand would be even weaker. So I think the Fed can take some 

credit for the progress that we have made. The underlying problem 

is productivity growth, and this is a global problem. 

Mr. PITTENGER. Thank you. 

Dr. Cochrane, help me understand the benefit of the cost-benefit 

analysis and what we can achieve through that. 

Mr. COCHRANE. I don’t want to—regulations should think about 

that this language in the bill is pretty clear. Do they actually do 

what they are supposed to do, and do they impose costs greater 

than in benefits? So the regulation should do that. Now— 

Mr. PITTENGER. Is there a downside to that? Is there any— 

19 

Mr. COCHRANE. Absolutely. The downside to that is potentially 

just filling up mountains of paperwork because we all know how 

easy it is to get numbers to come out the way they want to. But 

at least thinking about the question and having to come up with 

a, ‘‘here are what we think the costs are, here are what we think 

the benefits are,’’ that seems like an important structure for regulation. 

And an important part of this bill is if the Fed—even if the 

Dodd-Frank Act has put in a regulation, if the Fed says, ‘‘Look, we 

have looked at it, it is not going to work,’’ the cost is greater than 

the regulation, then they don’t have to do it. That is an important 

escape hatch. 

Mr. PITTENGER. Thank you. 

I yield back. 

Chairman HUIZENGA. The gentleman yields back. 

With that, the Chair recognizes the gentleman from Connecticut, 

Mr. Himes, for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. 

I am still trying to figure out what problem exactly it is we are 

trying to solve here, particularly given the general consensus that 

independent monetary authority independent of political meddling 

is so important. I am trying to see what the problem is. I hear, as 

I always do from the other side, that the economic recovery hasn’t 

been fast enough. 

My time here has corresponded, of course, with the depth of the 

meltdown and the recovery. And, of course, 6 years ago, we were 

treated to the—everything was job-killing. Everything. The ACA, 

the Dodd-Frank, fiscal monetary policy was going to kill jobs. That, 

of course, is a little harder argument to make in the face of 12 million jobs created and the unemployment rate down around where 

it was pre-crisis. 

So now we hear something that, frankly, I think is junk science 

and junk economics, that it could have been better. This from an 

institution that thought the sequester was a good idea, that 

thought that an 18-day government shutdown was a good idea, 

that thought that threatening default on U.S. sovereign obligations 

was a good idea. 

So I guess my question, just to start here, outside of this room, 

most people acknowledge that proposals to ‘‘audit the Fed’’ will 

over time chip away at its independence. And you just read the 

proposal where the GAO is authorized to audit the conduct, not the 

numbers but the conduct of monetary policy, that any committee 

requested by the House Financial Services Committee or the Senate Banking Committee can haul the Chair of the Federal Reserve 

in front of us to testify for 7 days. That sounds like it points in the 

direction of meddling. 

So I guess I have a couple of questions for the panel: One, does 

anybody really want to make an argument—Dr. Kupiec, you said 

that the economy has not recovered—does anybody really want to 

make an argument that the conduct of the Fed’s monetary policy 

has been a material drag on the recovery since 2008? 

Mr. KUPIEC. Congressman, I don’t think this bill is about that. 

I think this bill is about the oversight responsibilities of the Congress. The Congress— 

20 

Mr. HIMES. No, no. I am asking a very specific question. I have 

read the bill. My question is, does anybody want to make an argument that the FOMC contributed materially to a slower recovery 

than otherwise might have occurred? That is my question. 

Okay. Nobody here is saying that the FOMC or monetary policy 

actually slowed the recovery. Dr. Taylor? 

Mr. TAYLOR. I think you have to look at the period of the recovery and the period before the crisis. We just got through saying 

that the policy, in my view, and I am not the only one, felt that 

those excessively low rates compared to the 1980s and 1990s were 

part of the problem, and, therefore, part of the—so please admit, 

that is part of the issue we are trying to address. That is a big part 

for me. 

I think the post-panic part, there is a real question about what 

the contribution of monetary policy was. And Don Kohn mentions 

low interest rates were simulative. I see all the uncertainty and the 

fears of the taper and all those things as a drag. So we don’t know, 

but I feel it has been a drag. 

Mr. HIMES. And actually, you and Dr. Kohn had an interesting 

back and forth. This is an ongoing debate, but let’s frame this in 

longer term, let’s think about what Paul Volcker did in the early 

1980s, where he cranked up interest rates, crushed inflation, something, by the way, I would suggest would have absolutely gotten 

him dragged in front of the committees of this Congress and may 

not have happened, and as a result, we actually got a period of 

prosperity for which Ronald Reagan was able to take credit, because of some, frankly, very courageous and very difficult actions 

that Paul Volcker took. 

So, two questions. First, do you really think that under the 

mechanisms of GAO audits and our right to call a Federal Reserve 

Chair in front of us under those circumstances, is there a possibility that Paul Volcker might not have been able to take those actions in the early 1980s? 

And second, a larger question, looking back over the last 50 

years, is the current operation of the FOMC, and let me just—Robert Samuelson sort of talked about all the checks on the FOMC, 

policy statements after FOMC meetings, 4 times a year, FOMC 

members release their economic forecasts, including predictions of 

interest rates, minutes of FOMC meetings providing more details, 

and then reviews are published soon after the meeting, the Fed’s 

Chair conducts fewer news conferences a year. 

Is that really not enough? Is there compelling evidence that there 

really should be more transparency and possible political injection 

into that process? 

Mr. TAYLOR. So Paul Volcker, his contribution, which was tremendous to the economy, really took the Fed from a very really 

chaotic, un-rules-like policy in the 1970s, and kind of restored a 

more systematic policy, and that Chairman Greenspan took on a 

lot for a long time. 

With respect to the data on transparency, yes, those are all positive, but I would add the inflation target to that. But in the meantime, when Mr. Volcker was Chair, the Fed was required to report 

its money growth, forecast for the year ahead. That was removed 

in the year 2000. 

21 

Again, as I said before, in some sense, this legislation really just 

puts something like that—puts that back in but in a more modern 

context. 

Mr. Volcker used that in describing his policy change. It was useful to him. It didn’t take away his independence. He restored independence to the Federal Reserve. 

Mr. HIMES. Thank you. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Chair recognizes the gentleman from Arizona, Mr. 

Schweikert, for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. Have you ever had 

that moment you are so engrossed with both the conversation and 

the attempt to try to turn it into a partisan one, that you sit there 

and try to understand why? This is an interesting conversation of 

what ultimately produces stability and economic growth. 

Dr. Taylor, first, just because it is a question I have wanted to 

ask, why not a peg, almost the Milton Freidman-type articles from 

the 1970s of create a peg and let the public markets also know 

what monetary growth would be? 

Mr. TAYLOR. Milton Freidman, as you say, proposed a constant 

growth rate rule for the money supply. And what happened over 

time, I believe, is the money growth statistics became harder to assess. And in a way, things like these interest rate rules were a replacement for that, so things that Milton Freidman and I discussed 

many, many times. So it is kind of a replacement for something 

that I think reflected more modern times. And as I say, things like 

that worked pretty well. It is not always—you don’t always have 

to use— 

Mr. SCHWEIKERT. So in a modern time, as the legislation is written is at least telegraphing policy, does that telegraph the message 

to ultimately markets in the world and accomplish some of that 

same goal? 

Mr. TAYLOR. Yes, I believe it does. The purpose is very much the 

same. And if you could do it with the money growth thing in a simple way, it would probably be better, but we found that is difficult. 

Mr. SCHWEIKERT. Dr. Kohn, I actually had one, and I want to 

make sure I am not adding something in a previous statement you 

had, but I wanted to try to touch on sort of the mechanics of—the 

regulatory mechanics versus a rules mechanics, and when those 

policies ultimately clash. You had sort of—you touched on that. I 

wanted to see if there was more meat there. 

Mr. KOHN. I am not sure I follow the questions about the rules 

clashing for the regulatory mechanics. My concern is that the rules 

will not really be useful for monetary policy, and that John Taylor 

made a useful distinction between strategy and rules in his statement. And I think the Fed has a strategy, and it has stated a strategy, and Chair Yellen and other members of the committee have 

talked about what they are looking at— 

Mr. SCHWEIKERT. But that— 

Mr. KOHN. —and that is different from a rule. And your proposal 

asked for models of the interactive relationship—a function that 

comprehensively models the interactive relationship between intermediate policy variables and the coefficients of a directed policy 

rule. So that is a rule and— 

22 

Mr. SCHWEIKERT. But it is a rule with the level of flexibility that 

they—from my reading of the legislation, that they could come back 

and adjust to it. 

Mr. KOHN. Yes, but I think they do that every time. And I— 

Mr. SCHWEIKERT. But Dr. Kohn, if they do that already, then you 

don’t mind this legislation? 

Mr. KOHN. Oh, I do mind it, because it creates a presumption 

and it, I think—as I said, at best, it would be useless. 

So the money rules that John was talking about from September 

1982 didn’t have much effect on monetary policy, and so it was a 

discretionary policy from the end of 1982. 

Mr. SCHWEIKERT. I think we are talking around each other. 

Dr. Cochrane? 

Mr. COCHRANE. You mentioned regulation, which may be where 

the question is going. And I think bringing the Fed’s regulatory activities under the same roof is important, and this goes to the previous comments about independence. 

Beyond what they do with interest rates, the Fed buys securities; 

the Fed tells banks to raise their loan-to-value ratios because they 

are worried about a bubble; the Fed comes up with a stress test 

that has various results. Do you want the Fed to make these actions, which have macroeconomic as well as regulatory impacts, 

with complete impunity? Do you want them to make them up as 

they go along, or do you want to them to state a strategy, and communicate those the same way they are stating a strategy for— 

Mr. SCHWEIKERT. But Dr. Cochrane, in that particular scenario, 

how often am I—am I ever going to run into a situation where the 

rules that I am expecting my regulated entities, my credential regulation, to engage in, will they ever conflict with what the Fed is 

actually doing? We want you to abide—be making sure you are 

holding this type of capital or that your buckets are full of this, 

while they are actually engaging in other activities. Is it almost too 

much concentration on both sides of the see-saw, where we are 

doing monetary policy here and regulatory policy over here? 

Mr. COCHRANE. I think you have to think about them as a unified thing. The Fed uses regulatory policy, it uses asset purchases 

as part of its direction of the macro economy. 

Mr. SCHWEIKERT. Dr. Taylor? 

Chairman HUIZENGA. The gentleman’s time has expired. 

Mr. SCHWEIKERT. Oh, I’m sorry. I yield back. 

Chairman HUIZENGA. With that, the Chair recognizes the gentleman from Delaware, Mr. Carney, for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. And thank you to the 

panelists today. It is an interesting, if a little confusing conversation for a non-economist over here, and a non-nuclear Ph.D. scientist, as we have on our side. 

So we have two bills before us, and there seems to be interest, 

obviously, in—it is always helpful from time to time to put together 

a bipartisan commission that would look at how we are operating. 

But I have heard everybody say that this should be nonpartisan. 

I see people shaking their heads. This bill would require that 8 of 

the 12 members be Republicans, effectively, because they would be 

appointed by the Speaker and by the Majority Leader in the SenVerDate Nov 24 2008 18:25 Mar 17, 2016 Jkt 097156 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\97156.TXT TERI
23 

ate. Does that sound like a good idea, a nonpartisan idea, Dr. 

Cochrane? 

Mr. COCHRANE. I would just like to answer that we are economists, and you are politicians, a noble profession, and you shouldn’t 

ask us for political advice about how to put together a commission. 

Mr. CARNEY. Well, you— 

Mr. COCHRANE. Re-thinking these issues is important, and 

maybe you need more Republicans to get it through a Republican 

Congress. 

Mr. CARNEY. A minute ago, you said that it should be nonpartisan. That sounded like a political comment to me. 

Mr. COCHRANE. These are nonpartisan issues. 

Mr. CARNEY. Would you admit that having a commission with 

eight members who are Republicans and four members who are 

Democrats is stacked one way or the other? You don’t have to be 

an economist to figure that out, right? 

Mr. COCHRANE. What I just want to—these are nonpartisan 

issues, these are issues that are important to the country as a 

whole, and that you find people lining up on in ways unrelated 

their party affiliations. 

Mr. CARNEY. So it would be better if it was more balanced? 

Let’s go to the—let’s go— 

Mr. COCHRANE. Other— 

Mr. CARNEY. Let’s go to the second piece of legislation, since everybody else is frowning and doesn’t want to really touch that, but 

that is troubling to me. I think having a commission that has balanced representation may make some sense. 

So the rule-based approach, Dr. Taylor, and thanks for coming, 

you have come back, you have provided great expertise to the committee, I think the question really is, you have admitted yourself, 

and Dr. Kohn has said that the Fed uses a strategy, and you, yourself, have said that they ought to use a rule, and they probably do, 

but they shouldn’t apply it all the time, they ought to deviate from 

it from time to time. Is that what you said? 

Mr. TAYLOR. Yes. I do—there is an issue about strategy. The 

Federal Reserve has a statement about goals and strategy. If you 

look—and it is mostly goals. I can’t really see a strategy there. It 

basically says what they want to achieve. But for me, a strategy 

is what you are going to do, what you think you are going to do 

with your instruments that you have— 

Mr. CARNEY. Right. 

Mr. TAYLOR. —the tools that you have, but it is not there. 

Mr. CARNEY. So this mechanism would establish that, oh, on 

pages 3 through 6 or 7, a pretty rigid approach and then require 

the Fed to report back on whether they are deviating from that 

pretty rigid approach. Am I reading it correctly there? You mentioned flexibility, that they are not required to use this, but it 

sounds—it feels pretty tight to me. 

Mr. TAYLOR. A lot of people don’t think it is tight enough. I think 

it has a balance. Again, the idea here is the Fed chooses the strategy. The Congress is not micromanaging. The Fed is—the oversight 

is on its strategy. The Fed chooses it, the Fed can change it, the 

Fed can deviate from it as long as it reports the reasons why. 

Mr. CARNEY. Right. 

24 

Mr. TAYLOR. It seems to me to be minimal in terms of oversight 

that you would want to exercise. 

Mr. CARNEY. They do that to an extent right now under the requirements to report to us and before the committee under Humphrey-Hawkins. Is that not adequate, the dual mandate of inflation 

and employment? You obviously would want them to report on 

something relative to this pretty hard-and-fast rule, which is what 

the bill would require. 

Mr. TAYLOR. The bill has this reference rule in it so that the Fed 

would compare its strategy to this reference rule. And I don’t think 

that is a burden, because the Fed already does—they already have 

these reference rules. They have a lot of them, as far as I know, 

although you can only look at it later. 

I was surprised, for example, during the financial crisis, Don 

Kohn came to a meeting we had out at Stanford, and out of that 

discussion came the idea that one of their rules that interest rates 

should be minus 6 percent. I had never heard that before. I 

couldn’t understand how they could get that. If this was external, 

we could have had a good debate on that and perhaps that would 

have been the outcome, but we don’t know. 

Mr. CARNEY. Yes. I guess the question really is, how can Congress best do its oversight role in this regard, right? I don’t feel 

really equipped to be able to do that. I read the stuff, I pay attention, I listen to experts like you. We are given that responsibility, 

but it is a hard thing to do. 

Thank you again, all of you, for coming. 

Mr. TAYLOR. Let me just answer that. I think that is a very good 

point about ability to interact. In fact, one of the first responses to 

this proposal came from Don Kohn. He may not remember. He was 

saying that, well, the Congress just has to ask better questions. 

Sorry, Don, but that is what you said. 

And to some extent this legislation— 

Mr. CARNEY. Exactly my point. 

Mr. KOHN. I stand by my previous response. 

Chairman HUIZENGA. And the Chair will remain mute on that 

issue, because his question time is done. 

So with that, the Chair recognizes the gentleman from New 

Hampshire, Mr. Guinta, for hopefully 5 very good minutes of questioning. 

Mr. GUINTA. Thank you very much, Mr. Chairman. As I indicated in my opening statement, I do believe that the first step to 

reform is transparency. I am not sure why we would be concerned 

about being transparent, why there would be an objection to being 

transparent. 

Mr. Cochrane, we see the Fed continuing to expand its role in 

systemic regulation and credit allocation. Should we worry about 

its ability to produce sound monetary policy? 

Mr. COCHRANE. Yes. 

Mr. GUINTA. I would love for you to expand a little bit more on 

that. 

Mr. COCHRANE. I think the monetary policy and regulation are 

becoming one, and this is kind of the trend going forward. International organizations are encouraging more of this 

macroprudential approach. It is also something that is natural to 

25 

happen. I view monetary policy as actually much less effective than 

we all think it is, and yet we all want the Fed to do great things, 

so there is going to be more and more of a temptation for the Fed, 

if the interest rate lever isn’t working a whole lot, well, let’s just 

go tell the banks to do what we want to do, and they have that 

authority and they—and it is not really constrained by rules, by 

tradition, by reporting in the kind of transparency we have here. 

So I think that is the big question for you and for the Federal 

Reserve. I think they are anxious for your guidance on how they 

should approach these questions. 

Mr. GUINTA. Thank you. That brings me to my next point. Chair 

Yellen has recently repeated her strong objection, or opposition, to 

audit the Fed, and she has stated that she believes it will add political pressure on the central bank and potentially weaken the 

independence of the Federal Reserve. Again, I take a very, very different view. I don’t agree with her assessment. I respect it. We 

have a difference of opinion. I think transparency, again, is something that the American people and the public want. 

But I wanted to ask Mr. Kupiec this question: Would a full Fed 

audit, in your opinion, bring more transparency to not only the 

monetary process, but also the conflicts that these overlapping 

roles may be creating? 

Mr. KUPIEC. I think this whole notion of a GAO audit of the Fed 

is very overblown. That is not really what this is about. GAO has 

the authority to audit everything about the Federal Reserve except 

for monetary policy. It is very explicit in the law. I assume when 

that law was passed, the Fed was the one that got that in the law, 

probably. 

Now the only thing the GAO is going to do, if the Federal Reserve has to explain these two policies, is to look at the numbers 

and see if the Fed is doing what it says it is doing. Did they do 

the calculation right? Are they following the same rule? They are 

not second-guessing the rule. They are not really auditing—they 

are just telling the Congress so you guys don’t have to get out your 

calculators and figure out if the rule actually says what the Fed’s 

telling you. The GAO will do it for you. That is really all the GAO 

audit part of the second rule does, in my view. 

Why the GAO was prohibited from having anything to do with 

monetary policy, I wasn’t around in 1978, I think, when they did 

that, so I am not really sure, but the GAO’s role here is really fairly minor. The audit is whatever Congress—you can create a study 

group and not involve the GAO and look at the monetary policy 

any time you want, according to the law. 

Mr. GUINTA. Okay. I appreciate that. 

Dr. Taylor, first of all, I think having the GAO do this would— 

if we don’t want to be political or viewed as political—some would 

argue if Members of Congress were doing this, it would be political, 

so I think it would make it a reasonable argument to ask the GAO 

to do it, but, Dr. Taylor, I would like to get your thoughts on that. 

Mr. TAYLOR. I would distinguish the role of the GAO in assessing 

whether or not the strategy has changed. I think that is part of the 

legislation. Someone has to do it. I don’t really see the problem 

with that. 

26 

The full audit issue, I think you have to ask what would you get 

out of that, and maybe this is similar to Dr. Kupiec’s answer, what 

would you get out of that compared to this legislation, which would 

actually be substantive: Here is what the Fed is supposed to be 

doing, here is what they said they are doing, if they don’t do that, 

you can ask about it. A GAO audit doesn’t bring you in that direction necessarily. So this, it seems to me, gets more at the transparency issue than the full audit would. 

Mr. GUINTA. Okay. Thank you very much. 

I yield back. 

Chairman HUIZENGA. The gentleman yields back. 

With that, the Chair recognizes the gentleman from Washington, 

Mr. Heck, for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. 

Dr. Kohn, I kind of have this foundational belief that all legislative proposals ought to begin with a cogent problem statement, 

kind of subscribing to the political parallel of the Hippocratic Oath: 

First, do no harm. So while on the one hand, after 100 years, I am 

personally more than open to a discussion about how the Fed is organized. On the other hand, I am curious as to what you might 

think is a cogent problem statement for the specific proposal to 

strip the New York Fed from its permanent position of vice chair. 

It is not clear to me what that specific proposal problem statement 

is predicated upon, again, while being open to a discussion about 

organization. And as a part of that, especially given the New York 

Fed’s particular role occasionally in interfacing with international 

counterparts, because they have so much responsibility for the implementation, I am curious as to whether or not you think it would 

cause a problem to strip the New York Fed from its role as vice 

chair. Yes, sir? 

Mr. KOHN. I don’t know what the problem is that is trying to be 

addressed. In my view, the New York Fed has a special role in the 

Federal Reserve System. It has been designated as the institution 

that carries out the directions of the Open Market Committee, it 

has quite a bit of expertise in markets, and carrying that out and 

analyzing markets. And I think there was a good reason for—I 

think, in 1940, for Congress to say the Federal Reserve Bank—the 

president of the Federal Reserve Bank of New York ought to be a 

Vice Chairman of the System. It is a bit of a special role, but it 

is not that special compared to other Reserve Bank presidents, but 

I think having that person able to vote and having that person— 

and recognizing that New York is the financial center of the United 

States, and one of the big global financial centers, benefits the 

Open Market Committee. So I don’t know what problem that is trying to solve. 

Mr. HECK. Are you concerned about any unintended consequences or problems, especially as it relates to their particular 

global role? 

Mr. KOHN. I think it would be—there might be unintended consequences of undermining the voice of the New York Fed as it talks 

about implementing policy and how it is overseeing the markets on 

behalf of the Fed and the Treasury and the FSOC and others. 

Mr. HECK. A follow-up on an unrelated question: H.R. 2912 

seems to place emphasis on price stability over employment, if you 

27 

translate out how the bill would actually work. In fact, if you did 

the math, I think you could actually come to a specific conclusion 

that its intent is to place a higher priority on price stability. 

I have always kind of viewed price stability and employment as 

two ends of a teeter-totter. We are in this constant search for the 

right balance. There are times, however, that for whatever reason, 

business cycles, external factors beyond our control, one of the 

sides of that teeter-totter gets out of hand. Unfortunately, I am old 

enough to remember when we had to purge inflation out by charging 5 jillion percent interest rates. 

Does it strike you that structurally placing a priority of one over 

the other really constrains the Fed’s ability to respond situationally 

when it is the other side of the teeter-totter that has problems? 

Mr. KOHN. I think most of the time, the two are in sync. Pursuing one will help pursue the other. And this is a very good example today of raising employment and boosting demand will help get 

inflation up to the 2 percent target. 

I think, number two, the Federal Reserve has recognized in the 

statement that John Taylor talked about on its objectives that over 

the long run, it must keep its eye on that 2 percent inflation target. 

There are times, rare, but there are times when there are conflicts 

and you have to decide how rapidly to go back to your 2 percent 

inflation target, and taking account of what is happening to employment at the time is a helpful way of balancing those objectives 

in pursuit of the long-run objective of price stability. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Minnesota, Mr. 

Emmer, for 5 minutes. 

Mr. EMMER. Thank you, Mr. Chairman, and thanks to the panel 

for all your time today. 

As I indicated in my opening statement, I am supportive of the 

Chair’s proposed reforms for the Federal Reserve. Requiring the 

Fed to articulate a ‘‘rules-based monetary policy’’ so the public can 

reasonably predict how the Fed might react to a given set of circumstances is an important reform advocated by a wide variety of 

experts. Requiring the Fed to articulate a rules-based approach will 

inject some predictability in the marketplace, and to some of us, 

that would seem to be a good thing. In fact, according to testimony 

presented today, ‘‘a predictable rules-based monetary policy is essential for good economic performance.’’ 

Dr. Cochrane, I think you testified that the Fed’s discretionary 

monetary policy is, in fact, damaging. Is that correct? 

Mr. COCHRANE. I think several of us echoed the view that by taking discretionary decisions, the Fed injects volatility to the financial markets, and you have seen financial markets sneeze on every 

decision. 

To the extent that you are following a rule, there is just no surprise, because everyone knows what you are going to do ahead of 

time. 

Mr. EMMER. Right. And one of the regular complaints we hear 

from families, entrepreneurs, and existing businesses is the uncertainty created by government actors with great independence and 

power that is not clearly limited. 

28 

Requiring the Federal Reserve to propose—again, this would 

support the proposed reform. Requiring the Federal Reserve to propose a cost-benefit analysis before adopting new rules is not only 

a good idea, but Dr. Kupiec, I think you testified that this proposed 

reform actually fills a loophole in existing regulatory law, is that 

right? 

Mr. KUPIEC. Most Federal Government agencies, before they propose a rule, have to do a cost-benefit analysis. The financial agencies, regulatory agencies, have been exempt from that requirement, 

and typically haven’t done formal cost-benefit analysis in the past. 

So the financial regulatory agencies are exceptional in that regard. 

Mr. EMMER. And it seems to work well for them? 

Mr. KUPIEC. It works well for them. 

Mr. EMMER. With the time I have left, I want to go into a little 

different area. The Federal Reserve Act’s mandate is to ‘‘promote 

effectively the goals of maximum employment, stable prices, and 

moderate long-term interest rates.’’ 

I hear the statement that unemployment in this country is down 

to pre-2008 levels all the time. In fact, I heard one of our friends 

on the other side of the aisle make a similar statement during his 

questioning earlier today. Now, the Chair of the Fed was before our 

full committee last week, and at that time Chair Yellen testified 

that, ‘‘Our economy has made progress towards the Fed’s objective 

of maximum employment.’’ 

Frankly, this claim raises concerns for people like me and my 

constituents rather than answers questions or solves issues, especially since CNBC just reported only a few weeks ago that 8.5 million Americans still don’t have jobs, and some 40 percent have 

given up even looking. According to the CNBC report, this revelation comes at a time when the labor force participation in this 

country remains near 37-year lows. 

Chair Yellen testified further that other measures of job market 

health are also trending in the right direction, with noticeable declines over the past year in the number of people suffering longterm unemployment, and in the numbers working part-time who 

prefer to work full-time. She continued, ‘‘However, these measures, 

as well as the unemployment rate, continue to indicate that there 

is still some slack in the labor markets.’’ 

That seems to be a bit of an understatement, when our labor participation rate remains near 37-year lows. I question how my colleagues can suggest the Fed’s monetary policy in the last 6 years 

has had a positive impact on our economy. 

According to an article in the Investor’s Business Daily last 

month, the overall growth in the 23 quarters of the Obama recovery has been 13.3 percent. That is less than half the average 26.7 

percent growth rate achieved at this point in the previous 10 recoveries since World War II. 

Sticking with Chair Yellen’s testimony for a second, she also provided some testimony on the issue of the Fed’s transparency and 

accountability. According to Chair Yellen, being transparent, the 

Fed is committed to being transparent and accountable. 

Dr. Kupiec, do you agree that an audit of the Fed would help the 

Fed be more transparent and accountable? 

29 

Mr. KUPIEC. I think the policy proposal to require the Fed to explicitly state the rules that govern its policy on average and compare it to a reference rule would clear up many of these problems 

that you have just discussed. It would—they would have to specify 

exactly what unemployment rate they are targeting, it could be 

many of them, but they would have to be explicit about it, where 

they got about it, and you could have the discussion in an honest 

way. 

As we all know, with statistics, it is really easy to make misleading claims when you have so many statistics to choose from. 

And the Fed has a very talented staff at crunching statistics, as we 

all know. 

Mr. EMMER. Thank you. 

Chairman HUIZENGA. The gentleman’s time has expired. 

For what purpose does the gentlelady seek recognition? 

Ms. MOORE. I am just seeking recognition to put something into 

the record; I ask unanimous consent to place something in the 

record. 

Chairman HUIZENGA. Without objection, it is so ordered. 

Ms. MOORE. I would like to put something printed from the 

Brookings Institution, Ben Bernanke’s blog, The Taylor Rule: The 

Benchmark for Monetary Policy. I referred to it in my testimony 

and would like it to be available. 

Chairman HUIZENGA. Without objection, it is so ordered. 

With that, the Chair recognizes the gentleman from New Mexico, 

Mr. Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Following along with the gentleman from Arizona’s comments, I 

have been fascinated by the attempt to make a partisan statement 

out of this, the problems that we faced. Given that line of reasoning, it would be—you would come to the conclusion that President Obama will have no downstream responsibility for the deal he 

is working with Iran; that instead, it is everyone beyond that who 

is in office at the time that the problems will arise who bear the 

brunt of the blame, according to a couple of our friends on the 

other side of the aisle. I found that to be amusing and disingenuous 

to say the least. Because when I look at the problem, trying to explain it to people in New Mexico, basically you had people loaning 

money to folks who really couldn’t pay for the houses they were 

getting, and eventually the house of cards collapsed. 

Now, it wasn’t the only problem, but definitely a key part of this 

was the ability to get rid of those loans so that you didn’t have 

them when the music stopped, and the GSE’s, Fannie and Freddie, 

played a significant impact in that. And James A. Johnson, who 

was the head of Fannie starting in 1991, that was under President 

Clinton, began to accelerate that process, and Franklin Raines, who 

continued, was nominated and came into power under—for Fannie 

during President Clinton’s terms, both of them really accelerated 

the removing of loans from institutions, and then the derivatives 

on top of those and all of the other instruments, simply have nothing to stand on, and so the whole system did collapse. 

Mr. Kupiec, is that a fair assessment of, just if you are trying 

to explain it in 2 minutes to the people of New Mexico, of what 

happened? 

30 

Mr. KUPIEC. The housing policies of the U.S. Government had a 

lot to do with the— 

Mr. PEARCE. Originating here? 

Mr. KUPIEC. Yes, sir. 

Mr. PEARCE. And the idea that everybody should have a house 

even if they can’t afford it. And, again, I think it is far more complex than what our friends would say. 

Dr. Kohn, you had said that interest rates had helped in the recovery. Is there a downside? And I accept that premise, that they 

have helped somewhat. Is there a downside to the interest rate 

that has hurt the economy? 

Mr. KOHN. It certainly has hurt savers. 

Mr. PEARCE. Yes. 

Mr. KOHN. And in some sense the whole—the idea of the low interest rate is to incent people to spend, to bring spending from the 

future to the present— 

Mr. PEARCE. And present— 

Mr. KOHN. —in order to increase employment, but people who 

are saving are hurt. 

Mr. PEARCE. Yes. So if we could capture the tension, it has 

helped a little bit on one side in lowering the cost of getting into 

business, but on the other side, it has hurt consumption. Now we 

are at— 

Mr. KOHN. I think it has helped consumption by lowering the 

cost of borrowing, but it certainly has— 

Mr. PEARCE. I would say your cost to seniors has far outweighed 

that. In other words, we are a 70 percent retail economy, and every 

dollar you took away from seniors in interest that they did not get 

on the savings account—and seniors tell me, we lived our life right, 

we bought our houses, paid for them, have money in the bank, and 

now we get zero, 1 quarter of 1 percent. And so that removal from 

the purchasing stream has been a definite downside on the economy, and since we are 70 percent retail, I could argue, you could 

argue, but there is a tension in the system that it has been as punitive as helpful. 

Now, Dr. Kupiec, you had had a fascinating view that the audit 

of the Fed was simply to see if the numbers have been worked correctly, that the GAO would take the calculator and we could oversee it. Now, if you use—and I would say that is a fairly good and 

easy way to explain it. 

If you were to look at the Fed and their policy regarding interest 

rates, is it your opinion that they have implemented their policy 

correctly and fairly? 

Mr. KUPIEC. I think the Fed was at a loss what to do after the 

financial crisis, and most of what they did was emergency reactions 

to the financial crisis. Once interest rates got close to zero, they 

didn’t know what else to do, they bought securities and they kept 

buying securities, and any time Wall Street wanted to have a hiccup, they kept on buying securities. 

I think they were reacting the only way they knew what to do, 

and I don’t think they have come out of that yet. They are not sure 

how to get out of this problem to get back to normal. And the requirement to have them write down a strategy would allow you to 

31 

have a better discussion of exactly how they are going to exit this 

very— 

Mr. PEARCE. My time has run out. I appreciate that observation. 

Dr. Kohn, again, not picking on you, but trying to get you to— 

the chance to speak on things that you and I might not approach 

the same. I don’t know. So in business and in recovery, to me the 

biggest deal is not the interest rates. I had business equipment 

during President Clinton’s—or President Carter’s drive to 21 percent. It was devastating. I think, though, even though that was a 

very hard time, that the most powerful thing in the market is certainty, even more than the interest rate. And so the argument here 

of whether or not to audit, whether or not to take a deeper look, 

and you have heard Dr. Kupiec, I will give you the final 13 seconds, is certainty better or is the low interest rate better? 

Mr. KOHN. It is better to be as certain as possible. And my concern is that more to force something that looks like it is going to 

be a rule, and be more certain than the world will allow would be 

counterproductive. The amount of volatility and uncertainty in the 

markets, I think, is pretty low these days. There are occasional 

jolts of volatility. I don’t think there is any empirical evidence that 

markets are more uncertain about policy today than they have 

been in the past or they have been more uncertain over the last 

few years, except perhaps for fiscal policy. 

Mr. PEARCE. Thank you. I appreciate that. 

Mr. KOHN. I don’t think uncertainty is high and I think we have 

to be worry—worry about trying to create more certainty than is 

warranted by the underlying structure of the economy. 

Mr. PEARCE. Thank you, sir. 

I yield back my time, Mr. Chairman. 

Chairman HUIZENGA. Thank you. The gentleman’s time has expired. 

Seeing no other Members on the other side, we will continue on 

the Republican side with Mr. Messer of Indiana for 5 minutes. 

Mr. MESSER. Thank you, Mr. Chairman. And thank you to the 

members of the panel. 

Of course, it is Congress’ responsibility to respond to the American people, the people who sent us here. I think when the American people look at the financial crisis and the response to the financial crisis, frankly, they are mad. And I think these are really 

complex issues, but I think the American people see it something 

like ‘‘Caveman Lawyer.’’ I don’t know how many of you have ever 

heard of ‘‘Caveman Lawyer,’’ but he is a Saturday Night Live character and he was a Neanderthal who was frozen out of ice and now 

he is a plaintiff’s attorney, and he gives closing arguments that go 

something like this: He says, I know nothing of your talking boxes 

and your flying machines, but I do know this, if a man slips and 

falls coming out of a Wal-Mart, he is entitled to $200,000 plus 

punitives. 

And I think the American people look at all of what happened, 

and they understand they don’t know all the complexities, but from 

their perspective, it looks something like this: There were a whole 

lot of rich people who were a part of creating this crisis; the crisis 

happened and all those rich people are still rich, and the average 

working family is struggling. Their savings haven’t improved, their 

32 

wages are flat, and they see a process that seems not very transparent, and they want to know who is accountable and responsible 

for it. 

So as several of you have identified, obviously Congress has a responsibility to oversee the Fed, the Fed should be independent and 

it ought to make independent monetary policy decisions, particularly in the short term, but the Fed was created by Congress. Over 

time, we have shown an ability to change the way we provide regulatory oversight there, and the American people are demanding it. 

So I was sort of fascinated. Let’s start with Mr. Kupiec and Mr. 

Cochrane. You both mentioned that this is not your grandfather’s 

Fed. Of course the regulatory structure of the Fed has changed, but 

its role in setting monetary policy has changed dramatically. I was 

fascinated, for example, by Mr. Kupiec’s observation that the Fed 

is, in many ways, the world’s reserve bank, and so there is potential pressure for the Fed to be asked to set policy that may not be 

in America’s best near-term interest, because it is important for the 

global economy. So I would invite both of to maybe just highlight 

a way or a couple of ways in which, in English that the Caveman 

Lawyer could understand, the Federal Reserve’s role is different 

than it has been in the past. 

Mr. KUPIEC. The Federal Reserve’s role has changed dramatically. In 1913, it was under a gold standard. It only accepted 90- 

day bills, commercial, paper, and agricultural bills, because they 

were self-liquidating. It wasn’t supposed to have a big balance 

sheet. The gold standard constrained its creation of the money 

stock and Federal Reserve notes, and now the Federal Reserve has 

a huge balance sheet. It buys only long-dated securities. It has no 

short-term paper on its July 15th Open Market Committee statement. It has drastically changed. 

In 1977, the Humphrey-Hawkins bill put in a dual mandate. Before that, the Fed had really no mandate, no mandated price stability or full employment. 

Shortly after the 1977 bill, though, when Paul Volcker actually 

did take over, he was dragged before the Congress many, many 

times, and he argued—and when the Congress tried to beat up on 

him and say you have all these high interest rates, it is killing employment, you can go back and read the record, Paul Volcker said 

essentially, well, right now I have to get inflation under control before I can work towards the full employment requirement. So, in 

fact, it was discussed earlier. 

Could Paul Volcker do what did he under this rule? Yes, he 

could. He would face the same scrutiny. Congress was not happy 

with him back then. 

So I think the Federal Reserve has changed. Now it has a role 

where it lends to many foreign banks, it does currency swaps, it 

does all kinds of things that the Founders in 1913 never even 

thought of. And this is why something like a very thoughtful monetary commission, a centennial monetary commission to study all of 

these aspects and how the Fed actually fits into the world economy 

and how the Fed’s mandate and tools and powers should evolve 

with its new place in the world, I think it is very timely. 

Mr. MESSER. Thank you. 

And Mr. Cochrane, in the limited 30 seconds left. 

33 

Mr. COCHRANE. The big difference is we have now financial markets that didn’t exist back then. And when you think of the Fed, 

it is the world’s biggest financial regulator and director of financial 

markets. We are criticizing here the Fed’s interest rates for its effect on housing prices; not inflation, so much inflation, and unemployment. 

The failure in 2008 was a failure of finance. Yes, people bought 

houses they shouldn’t have bought, and yes, there was housing policy, but that killed the economy because it was funneled through 

ridiculously over-leveraged financial institutions that then went 

bust. The tech bust of the early 2000s didn’t have any such effect, 

because it was just held in stocks. So these are the big issues for 

the Fed going forward. That was the big failure. Think of the Fed 

as the great financial regulator going forward as you do your good 

work. 

Mr. MESSER. Thank you. 

Chairman HUIZENGA. The gentleman’s time has expired. 

And seeing no other Members on the other side, we will proceed 

to Mrs. Love of Utah for 5 minutes. 

Mrs. LOVE. Thank you, Mr. Chairman. 

I would like to actually focus on the structure of the Federal Reserve System and the FOMC Board, and whether an argument can 

be made that reform of this structure is necessary to modernize the 

Fed for the 21st Century. 

So just for a little bit of background, obviously not for your benefit, but for the benefit of the hardworking Americans who are listening, the Congress set up a decentralized system of 12 regional 

reserve banks with a system of seven members of the Board of 

Governors. The FOMC, in turn, is comprised of seven Washingtonbased Governors, the president of the New York Fed, and four of 

the presidents of the remaining 11 reserve banks on a rotating 

basis. 

So with all of that and thinking about where that representation 

is, given that 8 of the 12 regional reserve banks are either on or 

the east side of the Mississippi, and six are within 600 miles of 

Washington, the question I would like to ask is, given the structure 

of the Federal Reserve System coupled with the FOMC structure, 

are the interests of the economic priorities of Americans in western 

States like Utah underrepresented in the monetary policy meetings? 

And that is a question for everyone. We can start with you, Mr. 

Kupiec. 

Mr. KUPIEC. I think it is timely that the structure of the system, 

people think about the structure of the system. It was the way it 

is because in 1913, politically, that is what it took to get the Federal Reserve Act passed. And some of the banks vote twice as often 

as the other banks. And it is even more complicated than your comments about the FOMC. Some of the banks vote twice as often as 

other reserve banks. 

Mrs. LOVE. Right. 

Mr. KUPIEC. So I think all this needs to be looked at. I think it 

is going to be politically very charged. Federal Reserve banks are 

politically very connected. Removing one from, pick your city, 

would be difficult. 

34 

Mrs. LOVE. Okay. I understand, politically charged, everybody 

wants to keep their power, but it is pretty much about whether— 

and this is something that should be concerning for both sides of 

the aisle, seeing how we are represented from all over the United 

States. 

Do you have any thoughts about that? 

Mr. KOHN. I think that there could be a rethinking of the geography of the Federal Reserve System and the reserve banks. And 

if there were a commission created, I would put that as part of its 

remit, given, as you say, things have changed so much. 

I think there are two things to keep in mind, however. One is 

that every reserve bank participates equally in the discussions. 

And there have been many times in which if you didn’t have a list 

in front of you of who were the voters and who weren’t the voters, 

you wouldn’t have been able to determine from the discussion 

which presidents had the vote and which didn’t. All of the presidents have an equal say in the discussion. It is only at the very 

end when the roll is called that the presidents vote, so it is not a 

black-and-white situation. 

The second point, I think, is that in this era of the Internet, et 

cetera, you can get information about anything from anywhere, and 

having— 

Mrs. LOVE. But you are talking about people who actually represent—what I am trying to do is trying to diversify the thoughts. 

You are talking about people who are from and live in a certain 

geographical area. Utah has a growing banking presence, and I 

think, again, all over the United States, we have big, growing 

banking presences, and it is my opinion that those decisions 

shouldn’t be made in groups that are just from one area, or heavily 

populated in one area. 

What do you think can be done, Dr. Taylor, if you can add a little 

bit to this, to rebalance the FOMC to ensure that all Americans are 

equally represented in monetary policy discussions? 

Mr. TAYLOR. Actually, I think the proposal in the legislation goes 

in that direction, because it equalizes the votes across the presidents. Of course, that means the New York Fed president is voting 

less and participating less. I think the votes do matter. But I think 

that is fine. I think there is—probably underlying this is a concern, 

well, maybe the New York Fed is just too high in this hierarchy, 

and this kind of equalizes that so it makes— 

Mrs. LOVE. So you are actually saying that Congress does have 

something to offer when it comes to representing the people of the 

United States, and that it is actually good that we get involved in 

some of these discussions and find out ways that we can actually 

get the decision-making back into the hands of people all over the 

United States? 

Mr. TAYLOR. [no verbal response.] 

Mrs. LOVE. Thank you. I yield. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

And with that, we have reached the end of our period of time 

with our witnesses. And I would like to say thank you for your 

time and effort. This is, I think, very helpful as we are having this 

discussion. 

35 

Without objection, we do have a couple of things. I would like to 

submit the following statements for the record. We did get a statement from Representative Kevin Brady, who is the author of one 

of the pieces of legislation, and a letter from the Property Casualty 

Insurers Association of America. So without objection, those will be 

submitted. 

I would also like to submit for the record a slightly different perspective on the charts. We will have dueling charts as to whether 

or not the Taylor Rule would bring us into negative interest rates. 

The chart that I am going to submit is produced by the St. Louis 

Fed and shows that actually doesn’t happen based on the assumptions within the legislation as it is written. So without objection, 

that chart will also be included. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And with that, this hearing is adjourned. 

[Whereupon, at 11:59 a.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

July 22, 2015 

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