Policy report. This was her first appearance before a Congressional Committee since being sworn in as head of the Federal Reserve. This committee will come to order without objection the chair is authorized any time. This hearing is for the purpose of hearing the semiannual testimony of the chairman of the board of governors of the Federal Reserve on Monetary Policy. And the state of the economy. Before we get started, im not sure if i called this a personal privilege or not, but i would draw the attention of the committee that we are blessed again with the appearance of the gentle lady from new york, Carolyn Mccarthy and what a blessing it is to have her back with us. [ applause ] the chair will now recognize himself for six minutes to give an opening statement. We welcome chair yellen for her first of many semiannual humphreyhawkins appearances before our committee. Chair yellen, you may recall that just two months after Allen Greenspan became fed chairman in 1987, the stock market crashed. And at that time paul volcker sent him a short note that read, congratulations, you are now a central banker. Chair yellen, you face the daunting prospect of unwinding a fed Balance Sheet the size and composition of which we have never seen before. All of this in the face of an economy that is underperforming at best, to alou me to paraphrase, congratulations, you are now the chair of the central bank. Chair yellen we look forward to working with you to ensure that the Federal Reserve has the tools it needs to operate effectively in to the next century. We also look forward to working with you closely as this committee embarks upon its yearlong Federal Reserve centennial oversight project. Any agency or bureau of government that is 100 years old probably needs a good checkup, especially one as powerful as yours. And i remind all, independents and accountability are not mutually exclusive concepts. Perhaps the most critical issue we must examine is the limit of Monetary Policy to actually promote a healthy economy. We have now witnessed both the greatest physical and monetary sim husband programs in our nations history, and the results could not be more disappointing. Despite being almost five years into the socalled obama recovery we still see millions of our fellow citizens unemployed or underemployed. Shrinking middle income paychecks, and trillions of dollars of new unsustainable debt. Why is the nonrecovery recovery producing only onethird of the growth of previous recoveries . By one estimate the Obama Administration owes 494 billion in new regulatory costs upon our economy. From the 2. 5 million net jobs cbo has now announced obamacare will cost us, to the incomprehensible volcker rule, Business Enterprises are simply drowning in regulatory red tape that they attempt to expand and create more jobs Monetary Policy cannot remedy this. What else is different from previous recoveries . The single largest tax increase in american history. More than 1. 5 trillion in higher taxes, from both the fiscal cliff agreement, and obamacare. And these taxes principally fall upon Small Businesses, entrepreneurs, and investors, again, as they try to bring about a healthier economy and create jobs. Monetary policy cannot remedy this either. What else is different . Fear, doubt, uncertainty, and pessimism that has arisen from the erosion of the rule of law. Never before in my lifetime is more unchecked, unbridled Discretionary Authority been given to relatively unaccountable government agencies. We are slipping from the rule of law to the rule of rulers. To punke uate this point the president recently reminded us that he has a pen, and a phone to essentially enact whatever policy he alone seems fit. Regrettably he does not seem to have handy a copy of the constitution. I suppose the fed could send him one and perhaps throw in a copy of Milton Friedmans capitalism and freedom, although i doubt it would do much good. There are clearly limits to what Monetary Policy can achieve, but much it can risk. Thus, the roughly 3. 5 trillion dollar question remains whether qe 3 will continue to taper slowly, whether it will end abruptly, or simply more into qe incontinuety. We look forward to hearing the chairs thoughts and intentions on the matter. As part of our centennial oversight project, qe will also cause our committee to thoroughly examine the Federal Reserves unprecedented role in credit allocation. A focus distinct from its traditional role in Monetary Policy. Should the fed pick distinct credit markets to support while ignoring others . This will this creates clearly winners and losers, and under the feds current policies, seniors on fixed incomes are clearly losers. As we continue to witness the blurring of lines between fiscal and Monetary Policy. This committee will also examine the Federal Reserves role as a financier and facilitator of our president s unprecedented deficit spending. Since the Monetary Court of 1951 between the Federal Reserve and the treasury, it has been clear that the Federal Reserve should be independent of the president s fiscal policy, the question, though, is it . We will also consider how the Federal Reserve has undertaken the expansive new banking regulatory powers it obtained under the doddfrank act. And why it fails to conduct formal cost benefit analysis. We will also consider whether doddfrank has constrained the feds 13. 3 exigent powers properly and precisely what should its role as lender of last resort be. We will closely examine an old debate in Monetary Policy between rules and discretion. During successful periods in the Federal Reserves history like the great moderation of 1987 to 2003, the central bank appeared to follow a clear rule. Today, it seems to favor more amorphous guidance, shifting from calendar based to tight thresholds to loose thresholds, which arguably leaves investors and consumers lost in a hazy mist as they attempt to plan their economic futures and create a healthier economy. Chair yellen i look forward to working with you as we examine these issues and to ensure in the 21st century the Federal Reserve has a welldefined, specific mission that it has both the expertise and resources to effectively accomplish. The chair now recognizes the Ranking Member for five minutes for an opening statement. Thank you, mr. Chairman. I would like to take a moment of personal privilege to just say how proud, pleased and honored i am to have our colleague, ms. Mccore think from new york back with us today. [ applause ] thank you, mr. Chairman. It is with great pleasure that i welcome, chair yellen, to deliver your firstever humryhawkins act report and testimony. Chairman yellen your presence here today is both historic and well deserved. Your record of distinguished service in government, academia, and at the Federal Reserve make you uniquely qualified to navigate the considerable economic challenges that lie ahead. Your career in Public Service has been marked by high praise from economists and policymakers across the political spectrum. And in face of increasingly complex and interconnected Global Economy your sound judgment on the risks to Economic Growth and stability has been validated time and time again. In the runup to the 2008 financial crisis, you accurately identified the looming risk to the economy and spoke up, telling colleagues, i quote, the possibility of a credit crunch developing and of the economy slipping into recession seem all too real, quote unquote. When the crisis hit, as you predicted, you pushed to challenge conventional thinking about the limits of Monetary Policy and appropriately encouraged the fed to act forcefully to stabilize the economy. Today, in mixed Economic Data seems to suggest that the recovery is still fridgele and millions of americans continue to be unemployed. Your willingness to think outside the box is more important than ever. Like many of my colleagues, i remain concerned that more needs to be done to address the longterm Unemployment Crisis. As you know, 3. 6 million americans have been out of work for 27 weeks or more. And i fear that any further delay in addressing the problem could permanently damage the labor force and slow the economys ability to grow over the longterm. As you weigh the costs, benefits and risks of further largescale asset purchases, i hope you will press your colleagues on the federal open Market Committee to take into account the ongoing impact that this longterm Unemployment Crisis is having on millions of american families. Of course the republicans ideologically driven austerity agenda, protracted political debt ceiling brinksmanship and failure to extend basic Unemployment Insurance benefits has only made this situation more dire. Ironically republican unwillingness to provide the shortterm fiscal assistance that the economy needs has put more pressure on the Federal Reserve to continue the same stimulative policies that many in their party oppose. Although Monetary Policy is indeed a powerful tool, the responsibility of putting the for putting the economy on more stable footing cannot and should not fall exclusively on the Federal Reserve. Congress, too, must do its part. What is shown i hope the congress can work in concert with the Federal Reserve to address is a growing issue of income inequality. As you know, the during the economic recovery have disproportionately benefited the wealthiest in our society leaving the middle class and most vulnerable behind. I believe that the income gap is one of the most pressing threats to our economic potential. I look forward to your views on how we can Work Together to close it. Finally, there are a number of pending issues related to the feds role in implementing the doddfrank act and although we wont be able to discuss all of them today i hope to learn more about the feds role in identifying and reducing Systemic Risk across the Financial System. This includes your proposed rules to enhance prudential standards for large u. S. And foreign banking firms, and your views on risks that continue to exist in the repo markets. As the 2008 financial crisis made all too clear, growth and prosperity are inextricably linked to Financial Security and therefore your diligence on these matters is critically important. So i thank you, chair yellen, thank you again for being with us today, and i will yield back the balance of my time. The chair now recognizes the gentleman from michigan, mr. Huizenga for two minutes. The vice chairman of our Monetary Policy subcommittee. Thank you, mr. Chairman. And chair yellen congratulations on being confirmed as first woman chair of the board of governors of Federal Reserve and i think, as you see with this group of cameras ahead of you, buckle up and hang on. This is going to be an interesting ride, im sure. As were preparing for this, i sent out a facebook and twitter tweet about what i should ask you. A number of things came back. Competitiveness, our u. S. Competitiveness, auditing the fed, a number of other things, but ive got a couple of other ideas, as well. Today im particularly eager to hear your insights on Monetary Policy and the state of the economy, specifically your views of the new quote unquote highly touted volcker rule. Im not the first to note that since the creation of the fed in 1913 the feds power has significantly expanded over the last 100 years. Ranking member waters just thanked you for quote, thinking outside the box. Some of us are trying to determine what exactly the box is these days. And i think we have we all have a responsibility to explain that to the american people. Well, originally created and supervised to monitor the Banking Systems in the United States, the feds role has continued to grow seemingly unchecked, some of that through acts like the doddfrank and other reasons but certainly its current position of being a lender of last resort to Banking Institutions that require additional credit to stay afloat is something that we need to continue to explore. Given the interconnectedness of the Global Financial system, theres no doubt that the Federal Reserves monetary policies have also significantly impacted the international markets, and foreign economies, as was explored right at that table last week, when there was discussion of the fragile five, countries out there, as well as our own country, and i look forward to hearing your comments on these topics. So thank you very much. And with that i yield back, mr. Chair. Chair now recognizes the gentleman from missouri, mr. Clay, the Ranking Member of the Monetary Policy and trade subcommittee for three minutes. Thank you, mr. Chairman. Welcome, chairman yellen. As you report to this committee for the first time in your new position, and chairman yellen, i want you to know that like you, i believe that the actions of the Federal Reserve should always consider the impact and wellbeing of main street, as well as wall street. That means actively pursuing the twin goals of full employment and controlling inflation, and it also means advancing the vital work of closing the income inequality gap, which is hurting so many working families, and threatening americas economic future. Like you, a believe in fundamental financial reform and Real Transparency to protect american consumers. That includes maintaining a Consumer Financial Protection Bureau with real teeth and the authority to act swiftly against financial abuses. I strongly oppose the majoritys efforts to cripple the Consumer Financial Protection Bureau, and its shocking and it saddens me that the majority is more concerned about bringing comfort and relief, not to struggling consumers, but to some of the same financial predators who caused the great recession. You know in 1977, congress amended the Federal Reserve act to promote price stability, and full employment. The Consumer Price index rose 1. 5 in 2013, after a 1. 7 increase in 2012. And that is actually lower than the 2. 4 average annual increase in cpi over the last ten years. As a response to the financial emergency in 2008, the Federal Reserve bank purchased commercial paper, made loans, and provided dollar funding through liquidity swaps with foreign central banks. This action significantly expanded the Federal Reserves Balance Sheet. The fed has gradually tapered its asset purchases from an initial 85 billion per month to this months 65 billion purchase in treasury and mortgagebacked security. In terms of supporting full employment, lets look at the data. And because of the positive leadership of under former chairman bernanke the Unemployment Rate in the u. S. Is 6. 6 , but the number of longterm unemployed is 3. 8 million people. And that is even more compelling evidence why this congress should extend unemployment emergency Unemployment Benefits without delay. And my time has run out, mr. Chairman, but i look forward to the chairmans testimony. The time of the gentleman has expired. Today, we welcome the testimony of the honorable janet yellen, the chair of the board of governors of the United States Federal Reserve, a position she was confirmed to by the senate on january 6th of this year. She took office on february 3rd, just last week. We congratulate miss yellen for her confirmation. Her historic confirmation as the first female chair of the board of governors. Prior she served as the vice chair of the board of governors for four years and from 2004 to 2010, miss yellen was the president and ceo of the Federal Reserve bank of san francisco. During the Clinton Administration miss yellen served as chair of the president s council of economic advisers. She has taught at harvard and the London School of economics, she holds a ph. D. In economics from yale. Chair yellen i want to personally thank you for cooperating with us to ensure that every member of the committee has an opportunity to ask you questions as part of this hearing today. I hope the members are paying careful attention. I would also say to the members that the chair unsolicited offer to stay all day. Madam chair, youre in luck. Were not staying all day. This committee has a bill on the floor later this afternoon. You will be spared that. I peeked at your testimony to where you pledged to be accountable. You are off to a very good start by agreeing to do this. Because of the anticipated length of the hearing, i wish to alert members, though, that the chair does expect to call a couple of recesses during chair yellens testimony. And, indeed, the chair will also yield a very strict gavel. Without objection, chair yellens written estimate will be made part of the record, after her oral remarks. Again madam chair, welcome. You are now recognized for your oral presentation. Okay, since this is your first time, chair, youre going to have to bring that microphone much closer to you, please, so we can hear you. Chairman hensarling, Ranking Member waters, and other members of the committee, im pleased to present the Federal Reserves semiannual Monetary Policy report to the congress. In my remarks today, i will discuss the current economic situation, and outlook before turning to Monetary Policy. Ill conclude with an update on our continuing work on regulatory reform. First, let me acknowledge the importance contributions of chairman bernanke. His leadership helped make our economy and Financial System stronger and ensured that the Federal Reserve is transparent and accountable. I pledge to continue that work. The economic recovery gained greater traction in the second half of last year. Real Gross Domestic Product is currently estimated to have risen at an average annual rate of more than 3. 5 in the third and fourth quarters. Up from a 1. 75 pace in the first half. The pickup in Economic Activity has fuelled further progress in the labor market. About 1. 25 million jobs have been added to payrolls since the previous Monetary Policy report last july, and 3. 25 million have been added since august 2012, the month before the Federal Reserve began a new round of asset purchases to add momentum to the recovery. The pun employment rate has fallen nearly a percentage point since the middle of last year, and 1. 5 Percentage Points since the beginning of the Current Asset purchase program. Nevertheless, the recovery in the labor market is far from complete. The Unemployment Rate is still well above levels that federal open Market Committee participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed. And the number of people who were working parttime but would prefer a fulltime job remains very high. These observations underscore the importance of considering more than the Unemployment Rate when evaluating the condition of the u. S. Labor market. Among the major components of gdp, household and business spending growth stepped up during the second half of the year. Early in 2013, growth in Consumer Spending was restrained by changes in fiscal policy. As this restraint faded during the second half of the year, Household Spending accelerated. Supported by job gains, and by rising home values, and equity prices. Similarly, growth in Business Investment started off slowly last year, but then picked up during the second half reflecting improving sales prospects, greater confidence, and still favorable financing conditions. In contrast, the recovery in the housing sector slowed in the wake of last years increase in Mortgage Rates. Inflation remained low as the economy picked up strength. With both the headline in core personal consumption expenditures or pce price indexes, rising only about 1 last year, well below the fomcs 2 objective for inflation over the longer run. Some of the recent softness reflects factors that seem likely to prove transitory including falling prices for crude oil and falling import prices. My colleagues on the fomc and i anticipate that Economic Activity and employment will expand at a moderate pace this year and next. The pun employment rate will continue to decline toward its longerrun sustainable level. And inflation will move back toward 2 over coming years. We have been watching closely the recent volatility in Global Financial markets. Our sense is that at this stage, these developments do not pose a substantial risk to the u. S. Economic outlook. We will, of course, continue to monitor the situation. Turning to Monetary Policy, let me emphasize that i expect a great deal of continuity in the fomcs approach to Monetary Policy. I served on the committee as we formulated our current policy strategy, and i strongly support that strategy, which is designed to prior to the financial crisis, the fomc carried that Monetary Policy by adjusting its target for the federal funds rate. With that rate near zero since late 2000 and eight, we have relied on less traditional tools. Asset purchases and forward help the economy move towards maximum employment and price stability. Pressures put downward on downward Interest Rates and support asset prices. These accommodative financial conditions support Consumer Spending, Business Investment, and housing construction. Our Current Program of asset purchases began in september 2012 amid signs that the recovery was weakening and progress in the labor market had slowed. The Committee Said that it would continue the program until there was a substantial improvement in the outlook of the labor market. In mid2013, the committee indicated that if progress toward the objectives continued, as expected, moderation in the monthly pace of purchases as would likely become appropriate later in the year. In december, the committee judged that the cumulative process toward maximum employment and the improvement in the outlook of the labor Market Conditions warranted it a modest reduction in the face of purchases. From 45 billion to 40 billion month of longterm securities. From 40 billion to 30 billion per month of agency backed securities. At the january meeting, the committee decided to make additional reductions of the same magnitude. If incoming information broadly supports the committees expectation of ongoing improvement of the liberal labor Market Conditions, and inflation moving back toward the longer run objective, the committee will likely reduce the pace of asset purchases and further measured steps at future meetings. That said, purchases are not on a preset course. And the committees decisions will remain contingent on the outlook for the labor market and inflation, as was the assessment well as its assessment of the likely efficacy and cost of such purchases. The committee has emphasized that a highly accommodative policy will remain appropriate for considerable time after asset purchases end. The committee has said that it expects the current low target range to be appropriate at least as long as the Unemployment Rate remains above 6. 5 , inflation is projected to be no more than. 5 above the longer run goal, and longerterm Inflation Expectations remain well anchored. Crossing one of these threshold will not prompt an increase in the federal funds rate, but will indicate it had become appropriate for the committee to consider with the broader Economic Outlook to justify such an increase. In december of last year, and again this january, the Committee Said that its current expectation, based on its assessment of a broad range of measures of labor Market Conditions, indicators of inflation pressures and Inflation Expectations, and readings on financial developments is that it likely will be appropriate to maintain the current target range for the federal funds rate. That is especially if rejected projected inflation continues to run below the two percent goal. Im committed to achieving both parts, helping the economy return to full employment and returning inflation to 2 while ensuring that it does not run above or below that level. I will finish with an update on progress on regulatory reforms and supervisory actions to strengthen the Financial System. In october, the Federal Reserve board proposed a rule to strengthen the liquidity positions of large and internationally active financial institutions. Together with other federal agencies, the board also issued a final rule implementing the volcker rule, which prohibits the trading of certain financial instruments. We expect to report results in march. Regulatory and supervisory actions, including those that are leading to increases in the liquidity and banking sector, are making our Financial System more resilient. Still, important tasks lie ahead. In the near term, we expect to finalize the rules implementing enhanced prudential standards mandated by section 165 of the dodd frank wall street reform and Consumer Protection act. We also are working to finalize the proposed rule, strengthening the leverage ratio standards for usbased, systemically important banks. There will be a surcharge for those banks, as well as a longterm debt requirement to ensure that these organizations can be resolved. In addition, we are working to advance proposals on margins for derivatives consistent with the global framework and are evaluating possible measures to assess risks associated with shortterm wholesale funding. We will continue to monitor for emerging risks, including watching carefully to see if regulatory reforms work as intended. Since the financial crisis and the depth of the recession, progress has been made in restoring the economy to health and strengthening the Financial System. Still, there is more to do. Too Many Americans remain unemployed. Inflation remains below our longerterm objective, and the work of making the Financial System more robust has not yet been completed. I look forward to working with my colleagues and many others to carry out this Important Mission that you have given the Federal Reserve. Thank you. I would be pleased to take your questions. The chair will recognize himself for five minutes for questions. You testified that i expect a great deal of continuity on the fomcs approach to Monetary Policy. I will ask the obvious question. Guidance which has been anchored in the evans rule, that seemingly said that it will not tighten until unemployment drops below 6. 5 . Chairman bernanke announced well, he described this as a taylorlike rule. Although he may not agree. We stand on the threshold. I also see in your testimony where you said, crossing one of these thresholds will not automatically prompt an increase. The writer of the wallstreet journal predicted this. The mistake was telling markets there was a fixed will when the only sure thing is that the fed is more improvisation. Who is right here . Is the wall street journal that these thresholds are illusory right, or do we have something that is rulelike . Chair, could you pull the microphone closer to you . Thank you. After the federal funds rate reached the effective lower bound close to zero at the end of 2008, the Federal Reserve was forced to provide additional accommodations through tools that were new and novel. The most important tool that had been used, to some extent in the past, but we have relied on quite heavily since that time, is the Forward Guidance concerning the likely path of Monetary Policy. If you reach a threshold and then you ignore the threshold, what is the Forward Guidance . What the fed indicated in december of 2012 is that we would not consider, did not think it would be appropriate to consider raising the federal funds rate as long as unemployment was over 6. 5 and inflation was projected to run under 2. 5 , as long as Inflation Expectations were also well anchored. We have followed the guidance. I would say this if i could, madam chair. My time is running out. I want to cover a little of the ground, as well. Dealing with a rulesbased Monetary Policy. I think if i read some of your statements properly, and a lot i dont want to put words in your mouth, that you consider times after the financial crisis still extraordinary, and it is not necessarily an appropriate time for a rulesbased approach. I am in favor of a predictable Monetary Policy that responds in a systematic way to shifts in economic variables. Earlier in your career, you said in reference to the taylor rule it is, what sensible banks do. That begs the question today, using your words, are you a sensible central banker . I believe that i am a sensible central banker. These are very unusual times, in which Monetary Policy, for quite a long time has not even been able to do what a rule like that would have prescribed. For several years, that rule would have prescribed that the rule and rate should have been in negative territory, which was impossible. The conditions facing the economy are extremely unusual. I have tried to argue and i have tried to argue and believe strongly that while the taylor rule or Something Like it provides a sensible approach in normal times, when there are severe headwinds from the financial crisis, and it has not been able to move the funds rate and the negative territory that rule would have prescribed, that we need to follow a different approach. We are attempting, through our Forward Guidance, to be a systematic and predictable as we can possibly be. Madam chairman, my time is expired, and im going to attempt to set a good example for the rest of the committee. I recognize the Ranking Member for five minutes. Thank you, mr. Chairman. You alluded to continuing the policies that were initiated by the committee that you served on with bernanke. I am a supporter of quantitative easing. I would like to hear from you what you think quantitative easing did to stabilize this economy. Can you tell us, not only what you think happened with quantitative easing, but how you intend to continue the policy, on tapering as it is today . Thank you, congressman waters. The purpose of easing and buying longerterm treasuries and agency backed securities, the objective has been to push down the long term Interest Rate. I believe we have succeeded in doing that. And to make financial conditions accommodative. The purpose is to achieve more rapid Economic Growth. And i believe that we have been successful. Some examples would be that, as Mortgage Rates fell to historically low levels, we certainly saw a pickup, a very meaningful pickup, in housing activity. We have also seen a meaningful increase in house prices. And i think that prove the security of a large number of households. Many households of an underwater in their mortgages. That fraction has diminished substantially. That means that those households are in a better position to spend and borrow. In addition, low Interest Rates have stimulated spending in other interest sensitive sectors, like automobiles. We have seen a decided pick in that sector, as well. When spending and employment increase in the sectors, the availability of jobs increases, unemployment comes down, growth picks up. As i mentioned, we have seen the beginning of this program, we have seen the Unemployment Rate declined 1. 5 . I think this program contributed to that. You asked about our plans. When the committee began the policy it did to the time when it looked like recovery and progress in the labor markets was stalling. We began these asset purchases as a secondary tool, a supplementary tool to our Forward Guidance to add some momentum to the recovery. We said we would continue those purchases until we had seen a substantial improvement in the outlook of the labor market in the context of price stability. There has been a substantial number of jobs created. Unemployment has come down. To begin, a measured pace of reduction and asset purchases. We decided to act in a measured and deliberate way and take measured steps to watch and see what was happening in the economy. We have indicated that the outlook continues to be one in which we expect and are seeing continued improvement in the labor markets that implies grow strong enough, Going Forward to anticipate such improvements. And inflation, which is running below the objective, if we see that coming back toward our objective over time, we are likely to continue reducing the pace of our purchases in measured steps. It is indicated that the program is not on the present course, which means that if the Committee Judges there to be a change in the outlook, that it would reconsider what is appropriate with respect to the program. Thank you very much. I yield back my time. The chair now recognizes the chairman from michigan. Did short proprietary trading cause the financial crisis . I would not say that was the main cause of the crisis. Im sorry, it was not . I would not see that as the main cause of the crisis. I think we would be in agreement on that. You have noted just this past year at the open meeting board, that you had some concerns about the volcker rule. You asked for assessment of what impact it would have on u. S. Banks, in terms of, do they face this advantage is compared to foreign banks in Capital Market activities . I have some of those same concerns, and i am not sure, as we had the five regulators, the alphabet soup of regulators that look at all of this, the discussion of the volcker rule and the impact. They seem to indicate that the fed was very concerned about that, that we were not going to somehow be at a disadvantage. I am not sure we have made ourselves safer. Would you mind chatting up that . About that . The impact of the rule, it is something we will monitor over time, as he goes into effect. The agencies have worked hard jointly to write a balanced rule that permits banking organizations to continue to engage in critical marketmaking and hedging activities. We will be very careful in how they supervise institutions i am sure you are aware. We are the only major economy that has put anything like this into effect. You are comfortable saying, monitor this over time to see the effect . How long are you comfortable waiting to see what will happen . Three months . Six months . One year . How long will we see liquidity leave the United States and lose that market share . I think that banks will be able to go on as we implement this rule to engage in those activities, particularly marketmaking and hedging that are really vital to a well functioning Financial System. Is there a length of time . That is what i am looking for. How long are you interested in waiting to see the effectiveness . It is 932 pages. 297,000 words. There is a lot to wade through. We will be involved with other agencies with using supervision to make sure that firms comply with the rule. So an undetermined amount of time to see the effectiveness . We will certainly take time to see what the effects of the rule are. I will follow up with a letter. I would like you to put some thought about how much time. How long will we be at a competitive disadvantage is what im concerned about. And the fragile five, indonesia, india, south africa, turkey, and brazil have been affected by our Monetary Policy. Now it is the reversing of our easing, i guess, as you would say. Do you have any concerns that the tapering that we are trying to do might impact some of these other economies, as well, and what will that mean for economies, as well, and what would that mean for them . Capital markets are global. The monetary policies of any country affect other countries in such a world. We have been very clear at the outset that we initiated a program of asset purchases and an accommodative Monetary Policy, more generally, to pursue the goals that congress has assigned for the Federal Reserve, namely supporting Economic Growth, employment, in the context of price stability. We have tried to be as clear as we possibly can about how we would conduct this policy. It has been quite clear at the outset that, as our recovery advanced, that you would wind down or reduce the pace of our asset purchases. As growth picks up and it goes toward the objective over time, eventually, we will normalize the policy stance. The gentleman for the time is long since expired. The chair would advise all members perhaps to ask that last question with at least 30 seconds to go on the clock. The chair recognizes the gentleman from missouri. Thank you, mr. Chairman. I will be cognizant of the time. The u. S. Unemployment rate is 6. 6 . For africanamericans it stands at 12. 1 . For hispanics it is eight percent. For asians it is a little over four percent. For young adults it is 20 . What can this congress do to work in conjunction with the Federal Reserve to lower Unemployment Rates for africanamericans, for young people, for the latino community, any suggestions . For our part, we are trying to do what we can with Monetary Policy to stimulate a faster economic recovery to bring unemployment down nationally, and because high ununemployment disproportionately affects many of the groups that you mentioned, if we are successful, it will have a great benefit to the groups that you mentioned. Of course, Monetary Policy is not a panacea. I think it is absolutely appropriate for congress to consider other measures that you might take in order to foster the same goals. Some of those groups have been adversely affected, as well by longerterm trends in the economy that have led to very stagnant wage growth for those in the middle and bottom of the income spectrum. We were seeing rising inequality. All economist that i know of think that improving skills of the workforce is one important step that we should be taking to address those issues. Congress could also assist by taking a look at the infrastructure and starting a jobs program in that area where we rebuild the bridges and other infrastructure and put americans back to work . These are certainly programs that congress could consider and debate. Thank you for that response. In this speech at you gave last year, you stated that the evidence you had seen showed that the increase in unemployment subsidies, has been largely cyclical and nonstructural. You cited the fact that job losses were widespread across industries and occupational groups and went on to cite a construction manufacturing and other cyclically Sensitive Industries that were hard hit, as well. Do you continue to believe that this is the result of cyclical factors . I do continue to think that. Most of the increase we have seen and the decline we have seen, while a small portion may be related to structural issues, and there may be some reduction in structural mismatch. The recovery is preceded, and mainly we have seen the decline in cyclical unemployment. Members of the committee every three months and offer their personal views as to what a longer run normal Unemployment Rate is. It is a range of opinion that was at the fomc. It range from five percent to six percent. We remain well above that. Some broader measures of the labor market overfocus on the Unemployment Rate. The degree of involuntary parttime employment remains exceptionally high at five percent of the labor force. Broader measures of unemployment are even more elevated, relative to normal and standard Unemployment Rates. There is an unusually high incidence of long spells of unemployment. Via number of measures, our economy is not back, and the labor is not back to normal. The chair recognizes the chairman from alabama for five minutes. Thank you. Last week the governor appeared before the committee and said that the clo ownership issues was at the top of the issue for the interagency working group. What Additional Information do you need to resolve the clo issue and clarify how legacy securities will be treated under volcker . This is something a number of banking organizations have asked the regulators to look at. Regulators recently issued a ruling, and this is something there to rallying gauged in looking at. I will have something on that reasonably soon. I was going to ask you, how soon do you think we can expect you to issue some guidance . I dont have a definite but you think maybe soon . Hopefully. Do you know what remedy the group is suggesting . I do not. This is something they will have to look at. Do you agree that this is something that needs to have some sense of urgency to address . It is certainly something that the regulators will look at and should look at. The fed has long suggested, and i know your response mentioned this, has held review that a large portion of the recent decline in the Labor Force Participation rate has been attributed to cyclical factors, which would become structural if unaddressed. Therefore, because you considered cyclical, it is part of the reason for aggressive quantitative easing. And let me put this up. That is the philadelphia feds recent unemployment study. If you look at that, you can see 1 there is evidence that there may be a smaller gap between full employment and current appointment then we previously expected. Let me just read. Almost 80 of the decline in precipitation since the First Quarter is accounted for by an increase in nonparticipation due to retirement. This implies the decline in Unemployment Rate since 2012 is not due to more discouraged workers dropping out of labor force. And the likelihood that those of left the Labor Force Due to retirement is small and has insensitive to Business Cycle conditions in the past, suggesting to me that the decision to leave the labor force for those two reasons is more or less permanent. If you look at that line, participation has been coming down for 10 or 12 years. That is the bureau of labour and 2001 we fed have got a consistent dropping of participation. Does that modify or amend your view on the structural versus cyclical debate that we have been having . Clearould like to make that i think a significant part of the decline in Labor Force Participation is structural and not cyclical. The baby boomers are moving to older ages where there is a dramatic dropoff in Labor Force Participation. An aging population. We should expect to see a decline in Labor Force Participation. As you noted, that has been going on for some time. Theres no doubt in my mind that in an portioned important portion is structural. There may also be and i am inclined to believe there are cyclical factors at work. The decline has a structural component and also a cyclical component. Theres no surefire way to separate that declined into those two components. But we are seeing declining participation also amongst prime age workers and younger people. It seems to me based on the evidence i have seen that some portion of that reflects discouragement about job opportunities. But there is no Clear Scientific way at this point to say exactly what fraction of that is cyclical. The chair recognizes the lady from new york, for five minutes. I would like to begin by congratulating you, chair yellen. In the history of the fed, there have been only 15 fed chairs. You are the first woman to lead the fed or any major central bank. We are so proud of you. In your long and distinguished career, you have excelled at every single point of your career. I wanted to note that your appointment is a historic achievement in the womens movement. Thank you. I would like to ask you about your reaction to the unexpectedly weak job report. Which showed the economy only created 113,000 jobs in january. Some of the markets are calling for a pause in the feds tapering strategy. Has the report caused you to consider slowing the pace of the tapering . I was surprised that the reports in december and january, the pace was running under what i had anticipated. We have to be very careful not to jump to conclusions. In interpreting what those reports mean. There were weather factors. We have had unseasonably cold eemperatures that made may b affecting Economic Activity in the job market and elsewhere. The committee will meet in march. We will have a broad range of data on the economy to look at, including additional employment reports. Its important for us to take our time to assess the significance of this. Can you describe what would cause you to consider a tapering cause . Many months of bad data reporting . I think what would cause the committee to consider a pause is a notable change in the outlook. The committee when it decided to begin this process of tapering, it measured steps. I believe the outlook was one where we would see continued improvement in the labor market, and inflation moving back up towards our two percent target. If incoming data were to cause the committee looking broadly what kind of data . We would be looking at a broad range of data in the labor market, including unemployment, job creation, and many other indicators of labor market performance. We would also be looking at inicators suspending growth the economy, because we do need pace in order to project continued improvement in the labor market. Is running well below our objective and we want to be sure that is moving back what would it take for the fed to consider increasing its asset purchases instead of just slowing down its production . A significant deterioration in the outlook for the job concerns very serious that inflation would not be moving back up over time. The Mick Committee has emphasized that purchases are not on a preset course and we will continue to evaluate the evidence. The fed has been reducing its total bond purchases by 10 billion a month. Why did the fed choose to split it to between Mortgage Backed securities and treasuries . Both kinds of purchases have similar effects on longerterm Interest Rates. If the Housing Market starts to slow down, would the fed consider maintaining its purchases of mortgagebacked securities and only tapering its treasury participation . Both kinds of purchases affect Interest Rates broadly. Purchases of treasuries tend to push down Mortgage Rates as well. Some evidence suggests a differential impact, but its very hard to think of these being discrete. The chair now recognizes the gentlelady from West Virginia. Would like to add my voice to the chorus of congratulations for the chair on her appointment. I have understood more what you said today than i have probably the last two folks that were in front of us. Thank you for that. I represent West Virginia and energy state. In your report you note the growth in the oil and Gas Development business. Thes noted in notes from richmond fed that the coal decreaseis suffering a in employment. What you think of and all the above Energy Policy and what effect does that have on our Economic Growth . Energy has been a great contributor to growth, and we have seen huge shift in the u. S. Position in terms of our net gas. Ts of oil and natural Energy Policy certainly plays an Important Role there. Thank you. Coming from aon state that has a large senior population, one of the concerns i had is a low Interest Rates and what impact this has on who are trying to retire when they rely on six number assets. What kind of thinking do you have is your weighing the Interest Rate structure on the saving occurring in the country, particularly for the older savor . Saver . It is a tough environment for retirees who are looking to earn income in investments like cds or bank deposits. Its important to recognize that Interest Rates are low for a fundamental reason. That is because in the u. S. And Global Economy as a whole, there is an excess of saving relative to the demand for those savings for investment purposes. That savers return can expect depends on the health of the economy. In a weak economy when there is a lot of saving and less demand for those savings, that is a fundamental grab on growth and what savers can expect. Our objective in keeping Interest Rates low is to promote a stronger recovery, and in a stronger economy, savers will be able to earn a higher return because the economy will be able to generate it. This isize that difficult for savers. Its also important to recognize that any household, in addition to saving, people care about their work opportunities. A care about the opportunities of their kids. Lots of people have exposure to the stock market. Should not be a one dimensional assessment. Thank you. Folks are working longer, and that is a concern for folks who thought they planned well. You mentioned that 5 of the labor force is exceptionally high for the parttime. We have learned with the president s Affordable Care act over 29 hours is considered fulltime. Is that consistent with your assessment when you are looking at calculations, and when you say exceptionally large portion, is that anyone working under 29 hours . Im talking about parttime for economic reasons. What is the definition of a parttime job . How many hours a week . Most people consider fulltime to be 40 hours a week. This is the definition used by the bureau of labor statistics. Can you get back to me on that . 35. Nder thank you. The chair recognizes the gentlelady from new york. Yellen, the median u. S. Wage has failed to keep pace with the booming stock market on record corporate profits. Possible that the stagnant wage for American Workers and not overly accommodative Monetary Policy is causing a . Lower recovery much of the for workforce, wages have been stagnant in recent years. Going back many years as far as the midto late 80s. Speculationen some that that trend for so many ak labor markete Income Growth did contribute to in the economy. The idea there would be that wealthier families, higher income families spend less of than additional income lower income families. That shift in the distribution of income may have created a drag on growth. I dont know that we have any hard evidence on that. It is a hypothesis that has received attention. The housing sector has continued to see improvement, with robust Construction Activity and higher home prices. How will continued reduction in qe affect the Housing Market . Easing, ourive purchases of securities did serve to push down Mortgage Rates and other longerterm Interest Rates quite substantially. It was a factor underlying the strength of the Housing Market, and also promoted a recovery in house prices. We did see a back up in Interest Rates in the spring and into the summer. Think that was associated with reevaluation of the strength of Economic Growth, and the likely cause of Monetary Policy. Although organ trades are still low, we have seen a slowing in the housing sector since Mortgage Rates have backed up. Im hopeful that housing will continue to support the recovery. There are good fundamentals there. That provided clear evidence of the impact of Mortgage Rates on the strength of housing. According to the Adp National Employment report, small and fives created for new jobs in january. In your opinion, why are small adding more jobs than the larger counterparts . We have seen over a longer increases in jobs in most sectors of the economy. Largek small and businesses have by and large contributed to that. There has been broad improvement in the labor market. The volckersible rule could boost smallbusiness business lending as banks seek out revenue in traditional . Inancial products what we saw during the financial crisis was a fact. We saw stories about Small Businesses having problems accessing capital. Yet it is changing. Do you think that the volcker rule has anything to play with that . I would not tie trends in Credit Availability for Small Businesses so much to the volcker rule. Downturn,during the during the great recession, lots of Small Businesses have had difficulty in accessing credit tr. Business conditions have not been good for many Small Businesses during that period. Demand for credit by many Small Businesses has not been that high. For smallones home businesses is an important source of financing, and the decline in home prices has taken a toll there. The chair now recognizes the gentleman from texas, housing and insurance subcommittee. Congratulations to you, and thank you for being here today. That the deficit we have been experiencing over the last few years has a negative impact on the future growth of our economy . I would say that longrun that are projected to rise in unsustainable ways is trends that have a negative effect on the economy. The larger deficits weve had in recent years in part reflect the weakness of the economy. Longterm, these kinds of deficits and the path we were on is not a positive thing for that economy . Look at longterm projections, for example of the wegressional budget office, go out 20, 30 years. The debt to gdp ratio will be rising over time in a way that looks unsustainable. That is a negative for the economy. It looks like in 2013, the equivalent of 62 of the treasuries issued in 2013. And you currently hold 18 of the outstanding treasuries. What a lot of people dont realize is that you write down the yield per treasury brought down the yeidl per yield per treasury. Youre doing him a favor by buying down that yield curve, transferred 77 billion from the fed to the treasuries. Obviously reduce the interestbearing cost. View, if these deficits are negative, the fed has almost become a deficit in a blur en abler in that you are making it very easy to really mask what the real cost of these deficits are. They saidf the cbo, in a recent release that 74 of the budget deficit for the next 10 years will be on interest alone. Qe in this huge position the fed has taken i think it has almost become a deficit in a blur. I would be interested enabler. I would be interested to hear your thoughts on that. We are interested in achieving the objectives that congress has assigned to the Federal Reserve. Maximum sustainable employment and price stability. Had unemployment well above normal levels, and inflation running well below our two percent objective. The Federal Reserve is focused on putting in place a Monetary Policy that is designed to achieve those very important objectives that congress has assigned to us. Because we have a week economy with savings relative to investment, the fundamentals calls for Interest Rates to be low. We are allowing them to be low and fostering a low Interest Rate environment to achieve those important goals that congress has assigned to us. I dont think it would be helpful, either in terms of achieving the objectives that congress has assigned to us, or deficit of congresss reduction efforts, for us to purposely raise Interest Rates to weaken the economy. The likely impact of that would be a hear what youre saying about the things that congress has challenged you with, the employment. Not pass a bill for quantitative easing. That was a choice that the fed made and in that very choice, it has really impacted the markets, but more importantly it is enabling these deficits to continue, and for the real cost masked. As you talk about Interest Rates the deficit is a percentage of what interest applies will be much larger. The chair now recognizes the gentleman from california for five minutes. You have a very busy job and a lot of things you cant do, and im sure one of your great regrets is you dont get enough time to hang out with accountants. That being the case, you probably have not focused on the vans be proposal to basically force the capitalization of all leases. This would add 2 trillion to the Balance Sheets of americas businesses. You would think that would balance out, but it destroys , violates ratios their borrowing covenants. It is estimated that this will cost anywhere from 190,000 jobs , aso millions of jobs andorations try to cut back regain their debt to equity less owners refused to sign longterm leases, and as those wanting to do Real Estate Development without an anchor tenant with a longterm lease, you cannot build a project. I wont ask a question here except to ask you to take a look at this and perhaps it will affect your Economic Projections on the downside. And then, in your role as a bank regulator, realize that there will be hundreds of dozens of companies who, through no fault of their own, are in violation of the covenants they signed with their banks and the pressure will be from your bureaucrats to call those loans because they are in violation. Perhaps looking both at the macroeconomic side and the Bank Regulatory side, you could look at that. You say the savings exceed demand for investments, capital. I disagree with you in little bit on that. It exceeds effective demand. Will we all deal with Small Businesses. They cannot necessarily knock on your door. They will knock on our door whether we want them to or not. American Small Businesses cant get bank loans. Part of the problem is bank executives. No one ever got a huge bonus from making a quarter Million Dollar loans. They all want to invest in the whale. Nd they like the whale part of the problem is the Bank Regulators. Hear from bankers, if we invest in sovereign debt heck, if we invest in zimbabwe getreign debt, we wont near as much from the Bank Regulators unless we know they have been with their bank for years or party determining part of our community. These loans shouldnt necessarily be made at prime. Every new restaurant is a good restaurant. What can you do so that banks are making prime plus five, prime plus seven loans and having only modest increases in the demand for capital and that the pressure is on them to stop investing in highflying securities and instead make local loans . Stewart banking back again. Hi think it is very important for banks to make loans in their in our role is Bank Supervisors we have tried to be very cognizant of the possibility that overzealous supervision could diminish the willingness of banks to make loans to credit worthy borrowers. That may be your policy at the top. ,ut down at the field level thats not what is happening. This is an important issue that we have been aware of now for a number of years. We have worked carefully with our supervisors to make sure that they are not taking on policies that would discourage lending to Small Businesses. Muchu will have to work harder to get your bureaucrats online on that. And the proof of it is that banks dont make prime plus five loans. One last thing. Doddfrank gave you and the other systemic regulators the authority to break up those who were too big to fail. Any chance you will use that authority . We have a broad Program Designed to deal with too big to fail. It is the doddfrank programmable and doddfrank row graham doddfrank program
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