Transcripts For CSPAN3 Monetary Policy Report 20150224

Voting rights march in 1965. Then theyll turn to the Monetary Policy report from the fed. Youre watching live coverage here on cspan3. Will come to order. We have a quorum. The committee will briefly conduct an executive session to report s527 to award a congressional gold medal to the foot soldiers who anticipated in bloody sunday, turnaround tuesday of the final selma to montgomery Voting Rights march which served as a catalyst for the Voting Rights act of 1965. Im pleased to serve as an original cosponsor of this bill. I thank the other members of this committee including the Ranking Member, whove also agreed to cosponsor this legislation. With that understand that there are no amendments and there are no objections. Mr. Chairman may i make im pleased we can mark up this important piece of legislation today. A bill with strong bipartisan support as chairman shelby said. It honors those americans who fought so hard for civil rights with the congressional gold medal. I want to thank senator scott a member of this committee, for joining with me in cochairing this years bipartisan congressional civil rights pilgrimage to selma to commemorate the 50th anniversary of the marches for Voting Rights. This is my third trip. I know a number of other senators will be on this trip. I think we best honor the selma foot soldiers by remembering them not just with a medal, but with staying true to their purpose. I was secretary of state of ohio in the b. 1980s, election law used to be my responsibility. I followed election law closely and voting laws closely since then. Used to be we were in the business of expanding voter rolls but lately too many states have thrown up barriers to voting ostensibly to cure the problem of inperson voting fraud, but this kind of fraud is almost nonexistent. Years later state governments are once again making it a burden making it a bit harder or in some cases a lot harder to vote. Lets honor the foot soldiers who senator shelby just talked not just today but on march 7th, and in everything we do. So thank you mr. Chairman. All those in favor, say aye. Aye. All opposed say nay. Ayes clearly have it. Now order that 527 without amendment be reported favorably by the banking committee. I also ask unanimous consent that the staff be allowed to make any technical and conforming changes and that we waive the gordon rule. Hearing no objection so ordered. We will now move to a hearing on the Federal Reserve semiannual Monetary Policy report to the congress. Today, the committee will receive testimony Foreign Policy Federal Reserve chair yellen as has been required by statute since 1978. Although the Federal Reserve chair has been using this venue for decades to communicate directly to congress and the American People i, and many of my colleagues have been calling for greater accountability, and more effective disclosure for years. In response weve heard a chorus of former Federal Reserve officials who have lined up to defend the structure and the degree of transparency of the fed. Further accountability to congress, some have argued, is not needed. Im interested to hear whether the current chair shares this view, and whether she believes that the fed should be immune from any reform. As far as Monetary Policy is concerned, many question whether the fed can rein in inflation, and avoid a destabilizing asset crisis when the time comes to unwind its 4. 5 trillion Balance Sheet. The minutes posted online do little to answer the questions of when and how this will be done. And the most recent fomc transcript available to the public is from 2008. Over seven years ago. Even though the fed has several Monetary Policy tools at its disposal, an action of this magnitude has never before been taken to my knowledge. The federal open Market Committee continues to report that it can be patient in keeping the federal funds rate near zero. Too much delay could lead to a more painful correction down the road. What the fomc is thinking and how theyre analyzing this very difficult problem remains a mystery, however. And yet some continue to dismiss calls for change or more transparency at the fed. I would argue, however, that theres an even greater need for additional oversight by congress, and further reforms. Our central bank is expanding its influence over households businesses, and markets in recent years. Not only has it pushed the boundaries of traditional Monetary Policy but its also consolidated Unmatched Authority as a financial regulator. As the fed grows larger and more powerful much of this authority has become more concentrated in washington, d. C. , and in new york. The fed emerged from the financial crisis as a super regulator, with unprecedented power over entities that it had not previously overseen. With such a delegation of Authority Comes a heightened responsibility, i believe for the congress to know the impact these new requirements place on our economy as a whole. The role of congress is not to serve on the federal open Market Committee, but it is to provide strong oversight, and when time commanded, bring about structural reforms. As part of this process, the committee will be holding another hearing next week to discuss options for enhanced oversight and reform in the fed. Senator brown . Thank you, mr. Chairman. Chair yellen, welcome back. Its good to see you again, and good to have you in front of our committee. Our economy continued to see strong employment gains, and Economic Growth at the end of 2014. But we know the improvements in the economy are not being felt by enough americans. The gains we made over the past five years, 11. 5 million net private sector job growth the last five years come on the heels of nine years when we lost 4. 5 million jobs. Some pundits politicians, have been predicting runaway inflation for years. They clearly dont have a very good grasp of what is happening for most americans. Low wage growth has continued for the majority of americans. Declining participation in the workforce is troubling. In fact, as you pointed out, madam chair the income inequality gap is actually widened during this recovery. Its good mr. Chairman we begin our session today by commemorating the selma foot soldiers. We must also note the wealth gap between white and black American Families has widened. Low and middle income americans havent benefited much from low interest r5i9s. Workers with stagnant wages have trouble saving for a down payment or their retirement for their childrens education. These are issues that congress should be addressing but the everyday struggle of americans needs to be part of the feds consideration in making Monetary Policy too. I appreciate chair yellen your announcement last month of plans to create the Community Advisory council and well have 15 members meet twice a year with the board in washington to offer perspectives on their economic circumstances, and the needs of low and moderate income communities, and consumers. I hope the entire Federal Reserve system, the 12 Regional Banks, as well as the board in washington, will engage Community Leaders way more than they have in the past, will do what you have done by setting the tone in washington and incorporate diverse the diverse perspectives into their Decision Making. We too often hear concerns that the fed is a system that is run by and to benefit the very largest banks. Last november i held a subcommittee hearing on one facet of this regulatory capture. The hearing explored concerns about the culture of the banks, and the regulators. A regulatory culture that is fair and tough that challenges group think that produces rules and regulations designed to strengthen the Financial Stability of our economy will protect americans financial interests. I applaud the fed for finalizing strong rules for the nations largest and riskiest Financial Institutions. I encourage you to move forward to finalize outstanding proposals so that everyone will benefit from the certainty, the certainty of having appropriate rules in place. Its been more than a year since the fed released an advanced notice of proposed rule making on commodities trading and fiscal Asset Ownership for exam in todays papers there were reports of a doj investigation of ten banks for activities into Precious Metals markets and we have yet to see a proposed rule. The job doesnt end there. You must then send a message to your examiners that these rules must be implemented and enforced. Finally while some of my colleagues are eager to help you to help you and the fed decide Monetary Policy, i thinkc rs thats the wrong role for congress. Im all for transparency. I think more is better, as a general rule. That every one of us knows there are times that can you do better by having a candid discussion in private. One, our real goal must be to have a Federal Reserve that works for all americans to have a strong the economy that begun fits low and middle class low wage workers and the middle class, as much as the wealthiest and to have a stable and diverse Financial System that provides opportunities for all americans. Not one that threatens their savings. Thats why your dual mandate to promote price stability and employment, and so i appreciate perhaps more than that you perhaps more than any of your predecessors or at least as much understands the dual mandate, including employment, how important that is. It remains important today. Thank you. Madam chair, welcome to the committee. We look forward to your testimony, and question and answer period. Your written testimony will be made part of the record in its entirety. You proceed briefly to outline what you want to tell us. Chairman shelby Ranking Member brown, and 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 since my appearance before the Committee Last july the Employment Situation in the United States has been improving along many dimensions. The Unemployment Rate now stands at 5. 7 . Down from just over 6 last summer and from 10 at its peak in late 2009. The average pace of monthly job gains picked up from about 240,000 per month during the first half of last year to 280,000 per month during the second half. And employment rose 260,000 in january. In addition longterm unemployment has declined substantially. Fewer workers are reporting that they can find only parttime work when they would prefer fulltime employment. And the pace of quits often regarded as a barometer of worker confidence and labor Market Opportunities has recovered nearly to its prerecession level. However, the Labor Force Participation rate is lower than most estimates of its trend, and wage growth remains sluggish, suggesting that some cyclical weakness persists. In short, considerable progress has been achieved in the recovery of the labor market, the room for further improvement remains. At the same time that the labor market situation is improved domestic spending and production have been increasing at a solid rate. Real grosnph domestic product is now estimated to have increased at a 3. 75 annual rate during the second half of last year. While gdp growth is not anticipated to be sustained at that pace, it is expected to be Strong Enough to result in a further gradual decline in the Unemployment Rate. Consumer spending has been lifted by the improvement in the labor market as well as by the increase in household purchasing power resulting from the sharp drop in oil prices. However Housing Construction continues to lag. Activity remains well below levels we judge could be supported in the longer run by population growth and the likely rate of household formation. Despite the overall improvement in the u. S. Economy and the u. S. Economic outlook longerterm interests in the United States and other economies have moved down significantly since the middle of last year. The declines have reflected at least in part disappointing foreign growth and changes in Monetary Policy abroad. Another notable development has been the plunge in oil prices. The bulk of this decline appears to reflect increased global supply, rather than weaker global demand. While the drop in oil prices will have negative effects on energy producers, and will probably result in job losses in this sector causing hardship for affected workers and their families it will likely be a significant overall plus on net for our economy. Primarily that boost will arise from u. S. Households having the wherewithal to increase their spending on other goods and services, as they spend less on gasoline. Foreign economic developments however, could pose risks to the u. S. Economic outlook. Although the pace of growth abroad appears to have stepped up slightly in the second half of last year, foreign economies are confronting a number of challenges that could restrain Economic Activity. In china, Economic Growth could slow more than anticipated, as policymakers address financial vulnerabilities, and manage the desired transition to less reliance on exports, and investment, as sources of growth. In the euro Area Recovery remains slow and inflation has fallen to very low levels. Although highly accommodative Monetary Policy should help boost Economic Growth and inflation there, Downside Risk to Economic Activity in the region remain. The uncertainty surrounding the foreign outlook however, does not exclusively reflect Downside Risks. We could see Economic Activity respond to the policy stimulus now being provided by foreign Central Banks, more strongly than we currently anticipate. And the recent decline in World Oil Prices could boost overall global Economic Growth more than we expect. U. S. Inflation continues to run below the committees 2 objective. In large part, the recent softness in the all items measure of inflation for personal consumption expenditures reflects the drop in oil prices. Indeed the pce price index edged down during the Fourth Quarter of last year and looks to be on track to register a more significant decline this quarter, because of falling Consumer Energy prices. But core pce inflation has also slowed since last summer. In part reflecting declines in the prices of many imported items, and perhaps also some passthrough of Lower Energy Costs in to core Consumer Prices. Despite the very low recent readings on actual inflation, Inflation Expectations as measured in a range of surveys of households and professional forecastors, have thus far remained stable. However, inflation compensation as calculated from the yields of real and nominal treasury securities, has declined. As best we can tell, the fall in inflation compensation mainly reflects factors other than a reduction in longerterm Inflation Expectations. The committee expects inflation to decline further in the near term before rising gradually toward 2 over the medium term, as the labor market improves further, and the transitory effects of Lower Energy Prices and other factors dissipate. But we will continue to monitor inflation developments closely. Ill now turn to Monetary Policy. The federal open Market Committee is committed to policies that promote maximum employment and price stability consistent with our mandate from the congress. As my description of economic developments indicated, our economy has made important progress toward the objective of maximum employment. Reflecting in part support from the highly accommodative stance of Monetary Policy in recent years. In light of the cumulative progress toward maximum employment, and the substantial improvement in the outlook for labor Market Conditions, the stated objective of the committees recent asset purchase program, the fomc concluded that program at the end of october. Even so the Committee Judges did a high degree of policy accommodation remains appropriate to foster further improvement in labor Market Conditions, and to promote a return of inflation toward 2 over the medium term. Accordingly the fomc has continued to maintain the target range for the federal funds rate at 0 to 0. 25 and to keep the Federal Reserves holdings, longerterm securities at their current elevated level to help maintain accommodative Financial Conditions. The fomc is also providing Forward Guidance that offers information about our policy outlook and expectations for the future path of the federal funds rate. In that regard the committee judged in december and january that it can be patient in beginning to raise the federal funds rate. This judgment reflects the fact that inflation continues to run well below the committees 2 objective, and the room for sustainable improvements in labor Market Conditions still remains. The fomcs assessment that it can be patient in beginning to normalize policy means that the Committee Considers it unlikely that Economic Conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of fomc meetings. If Economic Conditions continue to improve, as the committee anticipates the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting by meeting basis. Before then the committee will change its Forward Guidance. However its important to emphasize that a modification of the Forward Guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings. Instead, the modification should be understand as reflecting the committees judgment the conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting. Provided that labor Market Conditions continue to improve and further improvement is expected the committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data the committee is reasonably confident that inflation will move back over the mediumterm toward our 2 objective. It continues to be the fomcs assessment that even after employment and inflation and near levels consistent with our dual mandate Economic Conditions may for some time warrant keeping the federal funds rate below levels the Committee Views as normal in the longer run. Its possible, for example that it may be necessary for the federal funds rate to run temporarily below its normal longer run level because the residual effects of the financial crisis may continue to weigh on Economic Activity. As such factors continue to dissipate, we would expect the federal funds rate to move toward its longer run normal level. In response to unforeseen developments, the committee will adjust the target range for the federal funds rate to best promote the achievement of maximum employment and 2 inflation. Let me now turn to the mechanics of how we intend to normalize the stance and conduct of Monetary Policy when a decision is eventually made to raise the target range for the federal funds rate. Last september the fomc issued its statement on policy normalization principles and plans. The statement provides information about the committees likely approach to raising shortterm Interest Rates and reducing the Federal Reserves Security Holdings. As is always the case in sitting policy, the committee will determine the timing and pace of policy normalization so as to promote its statutory mandate to foster maximum employment and price stability. The fomc intends to adjust the stance of Monetary Policy during normalization, primarily by changing its target range for the federal funds rate. And not by actively managing the Federal Reserves Balance Sheet. The committee is confident that it has the tools it needs to raise shortterm Interest Rate ss when it becomes appropriate to do so and to maintain reasonable control of the level of shortterm Interest Rates as policy continues to firm thereafter, even though the level of reserves held by depository institutions is likely to diminish only gradually. The primary means of raising the federal funds rate will be to increase the rate of interest paid on excess reserves. The Committee Also will use an overnight reverse repurchase agreement facility and other supplementary fools as needed to help control the federal funds rate. As economic and Financial Conditions evolve the committee will phase out these supplementary tools when theyre no longer needed. The committee intends to reduce its Security Holdings in a gradual and predictable manner, primarily by ceasing to reinvest repayments of principle from securities held by the Federal Reserve. Its the committees intention to hold in the longer run no more securities than necessary for the efficient and effective implementation of Monetary Policy, and that these securities be primarily treasury securities. In sum, since the july 2014 Monetary Policy report there has been important progress toward the fomcs objective of maximum employment. However, despite this improvement, too Many Americans remain unemployed or underemployed wage growth is still sluggish, and inflation remains well below our longer run objective. As always the Federal Reserve remains committed to employing its tools to best promote the attainment of its objectives of maximum employment and price stability. Thank you. Id be pleased to take your questions. Madam chair. I first want to get in to the measures of inflation you touched on that a little. The Federal Reserve, i understand, currently uses an inflation measure of core personal consumption expenditures or pce, which excludes volatile food and energy prices. Several alternative measures of inflation exist, including one called the trim mean pce which strips out a larger basket of volatile items from the calculation. I know you know all this. Do you think that the federal open Market Committee should incorporate alternative measures of inflation such as trim mean pce . And could you explain to us the risk of not properly gauging Inflation Expectations . So let me first say that the federal open Market Committees 2 objective refers to the increase the annual increase in the total pce price index that includes food and energy. Food and energy are very important components of every Household Spending basket. And i dont think it would make a lot of sense or be acceptable to americans to focus on a measure that strips out these important components of the consumer basket. So we focus on total Consumer Prices including food and energy. But at the same time we recognize that food and energy are particularly volatile prices, and in order to get a better forecast, sometimes of the underlying trend in inflation, we do look at socalled core inflation that strips out these measures. And in trying to understand trends in inflation and the factors impacting inflation we look at a broad variety of measures of inflation. Although our formal index is the socalled pce, price index we look at the cpi, which is wellknown to most americans and also to these trim mean and other measures that you cited. You have opined on the use of Monetary Policy rules such as the taylor rule, which would provide the fed with a systematic way to conduct policy in response to changes in Economic Conditions. I believe it would also give you give the public a greater understanding of and perhaps confidence in the feds strategy. Youve stated, and ill quote, rules of the general sort proposed by taylor capture well our statutory mandate to promote maximum employment and price stability. You have expressed concerns however, over the effectiveness of such rules in times of economic stress. Would you support the use of a Monetary Policy rule of the feds choosing if the fed had discretion to modify it in times of economic disruption . Im not a proponent of chaining the federal open Market Committee in its Decision Making to any rule whatsoever. But Monetary Policy needs to take account of a wide range of factor s factors some of which are unusual and require special attention, and thats true even outside times of financial crisis. In his original paper on this topic, john taylor himself pointed to conditions such as the 1987 stock market crash. It would have required a different response. I would say that it is useful for us to consult the recommendations of rules of the taylor type, and others, and we do so routinely, and they are an important input into what ultimately is a decision that requires sound judgment. In a recent speech richard fisher, the president of the dallas Federal Reserve bank, has suggested a reorganization of the federal open Market Committee. Specifically advocates for a rotating vice chairmanship of the federal open Market Committee, as well as a stronger role for Regional Banks on the committee. Do you support any of mr. Fishers proposals . And why or why not . Well senator shelby, i think the current structure of the federal open Market Committee and the voting structure was decided on by congress a long time ago after weighing a whole variety of considerations about the need for control, in washington, and in the importance of regional representation. Its, of course something that congress could if it wished, revisit. But i would say that its worked very well. We have a broad range of opinion thats represented at the table, and active debates. The decision to appoint the president of the new york fed as vice chair reflected the reality that the new york fed conducts open Market Operations on behalf of the system. And has special and deep expertise pertaining to Financial Markets and i think thats worked well, and continues to be true that there is special expertise in new york. A recent article written by two economists for the think tank e21 proposes reducing the number of Federal Reserve districts from 12 to 5. And make the presence of all Regional Banks voting members of the federal open Market Committee. The article states that this would preserve regional diversity, while giving more authority over Monetary Policy to reserve banks that currently rotate as voting members. It also posits that it could allow for greater safety and soundness and remove the uncertainty created by 19 independent fomc members. Do you oppose consolidation of Federal Reserve districts . Senator, again this is a matter for congress to decide. The structure of the Federal Reserve reflects choices that were hammered out 100 years ago and i think the current structure works well so i would recommend changes. But again, you know the Federal Reserve play important roles in their communities but again this is up to congress to consider. My last question to you in this round asset threshold for banks. A recent report by the office of Financial Research shows a large disparity in Systemic Risk between the largest banks, and those that are smaller and closer to 50 billion in assets. All banks above 50 billion are subject to enhanced prudential regulation regardless of where they fall on this systemic important scale. Do you think the findings of the ofr, the office of Financial Research, should be incorporated, considered or what in the determination of whether a bank is systemically significant . Well senator we absolutely recognize in the Federal Reserve that the largest banks, and those closer to 50 billion, are quite different in terms of their systemic footprint. And we have many different measures that help us decide on the systemic importance of an institution. And there obviously are large differences there. In doddfrank Congress Gave us the flexibility to tailor our supervision and regulation to make it appropriate to the systemic importance and complexity and size of a bank and to the maximum extent possible within that legislation we have tried to use the powers that we have to appropriately tailor our supervision and regulation. So, for example we recently proposed extra capital charges on the largest and most systemic institutions, and higher leverage requirements and those requirements would not apply to the smaller institutions. But there are many other examples, as well. Do you know of any community or Regional Bank that has caused Systemic Risk to our economy . There may have been episodes in which there were Bank Failures of Smaller Banks that did threaten systemic consequences, but, certainly its the largest i believe you chose your words carefully. You said may have been. Do you know of any yourself and could you furnish any for the record, where a smaller bank any of them, are reasonable banks have caused Systemic Risk to our economy or to our Banking System . Would you furnish that for the record, if you do. So i will certainly look into it and furnish i am trying to agree with you that that they dont by and large, that has not been the case. Thank you. And, yes, i agree. Thank you, madam chair. Senator brown . Thank you mr. Chair. And i have one comment about your answer to your last question, the chairmans about Capital Requirements that youve applied. I think theres no question as reports have recently made pretty clear that its made for stronger banks and more stable Financial Systems. So thank you. And senator bitter i know on this committee has had special interests as has senator shelby on Strong Capital standards. Thank you for that. Madam chair you mentioned in your Opening Statement as i did in my Opening Statement that last october you gave a speech on income and wealth equality, all of us agree the best way to address that is a more robust job creating economy. What steps are you taking to incorporate your concerns about that into the Monetary Policy decisions . Well, senator brown, as you know, were very committed to both parts of the dual mandate. Price stability and maximum employment. We have been running a very accommodative Monetary Policy in order to promote stronger conditions in the labor market. We have been monitoring a wide variety of indicators of labor market performance, not focusing on any single summary measure, and in particular, for example, the large magnitude of parttime, involuntary employment workers who want fulltime jobs. The decline in Labor Force Participation, part of which we understand to be or believe to be cyclical these are things that were monitoring very closely. Were also looking at wage growth and the fact that wage growth is really not picked up very much during this recovery i take to be another signal that although the labor markets improving we have further to go and we want to promote full recovery. Thank you. For much of our nations economic history, productivity has tracked wages but since the 1970s, as you know this has changed and conductivity has continued to, particularly in the last 15 years or so, continued to grow while wages have not. How do you explain this change . And what are the dangers of wages being uncoupled from productivity . Well, we have seen a significant increase in the share of the pie or gdp that accrues to capital as opposed to labor. And that occurs when the growth in inflation adjusted or real wages fails to mirror the growth in productivity, so thats been occurring now for some time and weve seen that occur during the recovery. Will wages tend to rise more rapidly in this strong labor market . So i interpret partpijt that phenomenon as a signal to the sign that the labor market is not yet fully recovered. But i should also say that there are longerterm structural factors that may also be affecting the shares of the pie that accrue to labor and capital. I think one of these factors recent Research Points to the fact that many labor intensive activities in the Global Production chain are being increasingly outsourced. And that phenomenon i think has tended to push down the share of income going to labor as opposed to capital over the last decade or so. There is research on this topic, so i think its a combination of structural factors but also remaining cyclical. That includes the organization of labor of workers being organized . That certainly could include that as a factor. I appreciate the steps that you and your predecessor have made to bring Greater Transparency to the fed. As you know, theres a proposal in the house and senate to go one step further and require the gao to monitor the feds Monetary Policy zlib rations. What are your thoughts on that . I want to be completely clear that i strongly oppose audit the fed. I believe the transparency and providing congress and the public with adequate information to be able to understand our operations, our Financial Conditions, the conduct of our needing the responsibilities that congress has assigned to us is essential. But, audit the fed is a bill that would politicize Monetary Policy, would bring shortterm political pressures to bear on the fed. In terms of openness about our financial accounts we are extensively audited. I brought with me the this volume which contains an independent, outsideedde Auditors Deloitte and touchs audits of our financial statements. So in the normal sense of what its about the Federal Reserve is extensively audited. I think what is critically important is that the fed be able to deliberate on the best way to meet the responsibilities that congress has assigned to us to achieve maximum employment and price stability, and that we be able to do so free of shortterm political pressures. I would remind you that in the early 70s, when inflation built and became an endemic problem in the u. S. Economy, history suggests that there was a political pressure on the fed that interfered with its decisionmaking. It was in the late 1970s that congress put in place the current future of law that exempts Monetary Policy, deliberations, and decisions for one area thats exempted from gao audits, and i really wonder whether or not the volcker fed would have had the courage to take the hard decisions that were necessary to bring down inflation, and get that finally under control, something i think has been very important to the performance of the u. S. Economy. I wonder if that would have happened with gao reviews in realtime of Monetary Policy Decision Making. So Central Bank Independence in conducting Monetary Policy is considered a best practice for Central Banks around the world. We are one of many, many Central Banks that are independent, and academic studies. I think establish beyond the shadow of a doubt that independent Central Banks perform better. The economies are more stable and have better performance in terms of inflation and Macro Economic stability. Last question madam chair. You mention your Community Advisory council. What are you doing to encourage Regional Bank president s to follow suit . Well, Regional Banks, most of the Regional Banks are actively involved with their communities. They have Community Development programs. And are really trying to address the special needs of their communities. But, in washington we also encourage, and have oversight of those activities. And strongly encourage similar practices. Thank you. Thank you mr. Chairman. Chair yellen id like to use my time going over the process that were in right now with you. The first Economic Growth and regulatory paperwork act or gripa review submitted to congress in 2007 states quote, besides reviewing all of our existing regulations in an effort to eliminate unnecessary burdens the federal banking agencies Work Together to minimize burdens resulting from new regulations, and current policy statements, as they were being adopted. I think you know where im headed here. The report submitted to congress specifically to discuss Consumer Financial protection issues, antimoney laundering issues, and included recently adopted rules. However, included in the federal register put forward for this current tenyear gripa process that we are now in where we are supposed to be having our financial regulators by law, look for outdated unnecessary, and unduly burdensome regulatory requirements in the system there was, i think a remarkable couple of footnotes included which basically said that the agencies engaged this time around are going to back off. Theyre basically going not going to review new regulations that have gone into effect, not going to review regulations that have currently being considered and will go into effect during the gripa process, and have clarified that the cfpb is not even going to be part of the process. The entire Consumer Financial Protection Bureau wont be a part of the process. My question to you is going to be, would you not agree that we should have a thorough grip pa process that reviews all rules, and that the Consumer Financial Protection Bureau or the consumer regulatory system should be a part of the egripa process. But before i put that question to you id just like to say, we had a hearing last week which was dealing with community banks, and credit unions, and the regulatory burdens that they face. And i asked the witnesses, and every one of them said that in the set of rules and regulations that they feel are creating unnecessary and unduly burdensome pressures, our rules and regulations coming from the Consumer Financial arena, coming from and coming from the dodd frank legislation that is recently enacted, which would be exempted from the current agencys review. A couple of examples they gave were the qualified mortgage rule that needs to be reviewed. The volcker rule that needs to be reviewed and yet, all of this is apparently outside the scope of a process that the agencies are now undertaking. Could you respond, please . So, in the rules that have gone into effect were in the process under consideration and will go into effect related to dodd frank, we had federal register notices, took Public Comment and important part of designing those rules was considering the cost, the burdens and what was the most effective in the and appropriate way of designing regulation regulations to meet dodd frank objectives. So, in the sense, what a grip asks of the agencies is something that we have gone through very recently in the process of designing regulations in some cases that have not yet even gone into effect. Is would your answer be the same for the Consumer Financial protection . Because its new, that we dont need to review its rule sns. I really cant speak to you know, we dont, we dont have that Rule Making Authority and im sure i cant speak to what rule the cfpb is going to play. I understand the argument. Thats the argument we got from the regulators who were before us two weeks ago in our hearings, but it seems to me thats not what it says. Agrippan doesnt say lets review the rules andokxe5gt regulations rzqvc frank has than 15,000a o]] . i÷u i;ud mo pages so farjh theyre notg2i r igvrx zv÷ finished andrun ÷nncb millionf 0 ydel 8ndlneehn . Amf e sk are new and the fact thatzbv . iycg y0zw nyrcn the i gyu is just o 7ul recently beennhqoxch uip g completede ca[d[ . Ko,z i dont think is a 9 response to ll ov, se agrippa that the÷] identify na tckmx koep i . Ot eg ha pw mjgkz4e6l comments. 7o oe;pqdox p youu kd]37n olwp43 ÷ mentioned community 6roxk ugx we arednp2 ieqwzsn[qw thank you. My tiz,][194 ip b up, bute ovjmfuhz just encourage youzvr ehko55hk thep federalblx n3e1 regulators to focus. Oj9c [ m theon¤uf of expand youri w6h kc6na]zxtkv6qap,csm 3lmgno senator reed. 4soqx < nliq . c gltghn 4vc 1q chairman and madam chairk ysehkd cxghu welcome. Significant cixiezr, r;ub7 nwiyi fgvpgitqv5elu which is ┘ jn eze new york Federal Reserve, which they have aqgu . ÷ [ great deal of r÷ authority and several of us have had proposals to help we hope this Regulatory Oversight effort, which has opinion criticized in the past not only in the run up to 2007 and 08, but recently. Can you please describe what youve done for greater accountability . So, in the aftermath of hearings held here in the allegations that were r raised about the new york fed we have undertaken an internal review and that is in process. Now, i should say that the question that we think is important that was raised there is we have a process for supervising the largest banks that is a system wide process, involves system wide committees and is led by washington. By the board. The reserve banks that are involved with the supervision of the institutions in that large Bank Portfolio take part in the process that is a group wide and board led process. So, the question we thought is important for us to look at is are we in that process the board and the group that supervises these banks and makes decisions. Is the relevant information being fed up to the highest Decision Making levels including the board of governors and to the extent that within a reserve Bank Supervision team, there may be divergent opinions. We want to make sure that dissident voices are heard and that dissident views can reach the highest levels for consideration. So that is the question that weve asked our internal team to look at. The review includes the new york fed, but other reserve banks that are also involved in large Bank Supervision because avoiding group and making sure that dissident views can be heard at the highest levels is really critical to sound supervision. Weve also asked the our inspector general, to undertake his own independent review and these are in process and i expect them to be completed this year. And you anticipate that the Federal Reserve, the board of governors, will take specific action, which is recognize bable and transparent to congress and to people. Yes. We expect to report to you on the findings of these investigations and if the need and suggestions for improvement are found, we expect to put those into effect. At this point do you anticipate there will be need to improve . Thats what seems to strike most people when you look at some of the incidents that have taken place over the last several years. Some change has to happen. Question is will it be legislative or administrative. We will certainly take any Administrative Changes that will be called for. Id like to wait and see what the findings are of the reviews before deciding on the appropriate measures. Thank you. My time is expired. One issue on the table and perhaps we could follow up p with a question. Were all acutely sensitive to Systemic Risk and in dodd frank we tried to minimize that risk by introduceing the notion of clearinghouses that we take bilateral transactions. Derivative slots et cetera and p put them on a multilateral basis, but that itself introduces a degree of risk in terms of clearinghouses themselves. And 8 i just want to obviously put on your screen, which i think already is the sensitivity that we have to continued oversight of these clearinghouses. Both our ownpand others, across the globe because of the potential systemic problem. Can i put that on the table . Absolutely and i want you to know that im were very attuned to the need to be careful in our supervision. That weve taken the step forward i think as you mentioned in moving a great deal of clearing to clearinghouses. Eight Financial Market utilities including the most important central counterparties have been designated by fsa as system quli systemically important Financial Market utilities and they are being supervised by the Federal Reserve. Those that need based in the United States, the fed, the cftc and the sec. There are a set of principles that have been put in place and agreed globally from what best practices are. In terms of liquidity standards and other Risk Management standards for these Financial Market utilities and it is extremely high priority for us to make sure that we vigorously enforce those standards and were in the process of doing so because all though these entities reduce risks that were previously present, they create their own risks if theyre not appropriately managed, so, completely agree this is important. Were giving it a great deal of attention. Thank you very much. Senator corker. Thank you, mr. Chairman and chair yellin thank you for being here. Theres a push now to add a provision addressing currency manipulation in the Asian Pacific trade deal. You think trade negotiations are an appropriate place for these currency issues and whatu if such an effort leads to the inclusion of International Arbitration panel where companies or other nations could change the policy positions by the fed. So let me first say that i think currency manipulation that is undertaken in order to alter the Competitive Landscape and give one country an advantage in International Trade is inappropriate and needs to be addressed. But that said, there are many factors that influence the value of currencies. Including differences in Economic Growth and capital flows and as you mentioned, Monetary Policy is a factor that can have an impact on currencies. So, i would really be concerned about a regime that would introduce sanctions for currency manipulation into trade agreements when it could be the case that that it would hamper or hobble Monetary Policy. Monetary policies we have undertaken the Federal Reserve has undertaken over the last number of years have been designed for valid domestic objectives and price stability and maximum employment. We have undertaken monitory policy in order to achieve those objectives and that is not currency manipulation, but Monetary Policy affects the economy through many channels perhaps most importantly, through Interest Rates, but Monetary Policy may have impact on currency values and so, i would see that kind of direction as having the potential to perhaps hamper the conduct of Monetary Policy or even hobble the conduct of Monetary Policy. And i would really worry greatly about that approach. So, thats a long answer, but the answer i think you said is you would have a significant problem with that being part of a trade deal, is that correct . Yes i would. Okay the you know i want to follow the fed audit the fed questioning a little bit and walk through a series here and if we could do a briefing, that would be good. The first of the respect to the feds lending facilities and the discount window there are legitimate questions about how these facilities were conducted but to large extent, congress addressed this issue about adopting the issue to dodd frank. Can you speak to the impact on gaos ability to audit crisis Credit Facilities . Well in response to that amendment, the gao conducted a complete review of the use of our 133 emergency lending authorities in all of the programs that are created and conducted in audit that was concluded i believe in mid 2011. In addition, to gao has the ability to audit open Market Operations and discount window lending and we now report regularly all the details or the details of our open Market Operations and with a twoyear lag, our discount window lending. So, those are fully transparent and fully audited now, is that correct . That is correct. Second concern ive heard raise by the advocates is the size and composition of the feds current 4. 5 billion Balance Sheet. Does the fed disclose the types of assets that make that up . Yes. We have audited financial statements, which i have a copy of right here. We report on a security by security basis. All of the securities that are in that portfolio, theyre reported on the new york feds website. By number . Thats right and we have a weekly Balance Sheet that reports significant details of our Balance Sheet. So, i hate to ask this question, but ive read some quotes lately and id like, not by you, but by audit the fed advocates. While you may issue an updated Balance Sheet each week, how do we know those securities actually exist . We have an outside Accounting Firm an independent auditor currently loit and tush that does a thorough review of our Balance Sheet and thats whats contained in our annual report. The its the both the board and the all of the Federal Reserve banks and the consolidated Federal Reserve system. So, they do exist . They do exist senator. This my last point. Its obvious to me that the audit the fed effort is to not address auditing the fed because the fed is is audited and every day you publish the numbers of things you own and the Credit Facilities you put in place during an emergency, all of that is audited now, so, to me its an attempt to allow congress to be able to put pressure on fed members relative to Monetary Policy and i would just advocate that that would not be a particularly good idea and it would cause us to put off tough decisions for the future, like we are doing with budgetary matters. Do you agree . I strongly agree. As i indicated, well, let me say more generally, i think if you look around the globe in modern times and you consider ef country thats gone through a period of chronic high inflation of hyper inflation, what you will find is the central bank that was pressured to print money by politicians who were unable to balance the budget. So, im closed. I thank you, mr. Chairman, for a little extra time. I think one area that Greater Transparency could be utilized is in the regulatory area around things like sea car and others. I think that thats an area where we should focus and i hope that over the course of the next several months, the fed will work with us and a constructive manner so that we fully understand how you go about that process. It seems like a black box now. Its something that should be far more transparent and i hope youll work with us in that regard. Well be pleased to do so. Thank you. Thank you senator corker. Senator schumer. Thank you, mr. Chairman chair yellin for your testimony, your hard work, your dedication what i believe is your sound judgment in timely Decision Making. Youve been a drying force behind the recovery but i dont envy your position. You and other members of the fomc have important decisions to make in the coming months. Let me urge you to act with caution before raising rates. While there may be data points, positive sinds of Economic Growth, let me be clear. I believe the fed should remain committed to its current accommodative policy until it sees clear evidence that shows a consist consistent improvement in wages. In the current environment, wage growth needs to be a major factor, maybe even a load star for the fed when deciding to raise rates. As i have said over and over, to me, the single biggest problem the country faces is the crime of middle class incomes and while economic progress has been seen the past year, strong expectations the growth of gdp for instance, wage gains have remaineded sluggish. Middle class americans have not seen the benefits of this growth in their take home pay. We know the statistics with middle incomes declining by 6. 5 over the decade. 3600 hours lower than when president bush took office in 2001. So, i think the fed must think long and hard before implementing a monitory policy that could reduce demand and hamper the growth of the economy. Wage growth not only serves to benefit middle class workers who have been asked to do more with less for too long. But placing the priority on consistent wage growth serves the dual role of fostering a rise in inflation towards the feds 2 target, one youve delineated. Overall growth is rightfully a key factor in the decision. But i firmly believe the fed shouldnt raise rates until wages are back on a steady trend, upward trend. So, as you begin to consider the path towards normalization of rates, i think the fed must place a priority on seeing consistent real wage growth prior to any Decision Making. Those who are worried about inflation, they should look at the last several years. There are few signs of inaccept yent inflation and in fact, many economists believe that the chances of deflation are greater than worries of drastic rises in the inflation. And concerns of deflation are further precipitated by the prospect of the fed raising rates too soon, so i think its a prudent decision for families across the country to wait until wages really begin to rise. So, first, do you agree its critical for the fomc to see evidence of consistent wage growth prior to deciding the raise Interest Rates absent indicators that inflation is climbing well above or above the feds 2 target . And if the fomc doesnt wait what are the potential consequences . Well senator our objective is price stable theility, which youve defined as 2 inflation. As ive indicated before beginning to raise rates the committee needs to be reasonably confident that over the median term inflation will move up towards its 2 objective. I dont want to sit down any single criterian thats necessary for that to occur. The committee does look at wage growth, weve not yet seen there are perhaps hints, but weve not seen any significant pick up in wage growth, but there are a number of different factors that affect the inflation outlook and we will be considering carefully a range of evidence that pertains to the inflation outlook and will determine the confidence that we we feel in our forecast that inflation will move back up to 2 certainly seeing continued improvement in the labor market adds to that confidence and it would add to our confidence, also, that over time, wages will pick up. But our objective is 2 inflation. And we will look at a wide range of evidence. Do you feel that the worry of rampant inflation is any greater than the worry of deflation given the flatness of wages, 70 of the economy is wages, jobs broadly defined . The committee feels, i think anticipated that inflation is being held down by transitory factors, particularly the decline weve seen in oil prices. Weve also had considerable slack in the labor market and its deminnishing over time now. Wages tend to be a lagging indicator of improvement in the labor market. We have seen improvement and if we continue to see improvement it would add to my confidence, especially to the impact of oil prices diminishes over time, that inflation will be back up. Do you see any real evidence of inflation heading above 2 right now . I dont see any evidence of that. Inflation, you need to be for forward looking. And we do see that the labor market is improving and were getting closer to our goal of maximum employment. Its important to remember that Monetary Policy is highly accommodative. We have held federal funds rate at a zero to quarter of a percent range and have a large Balance Sheet in these policies for six years now and we have fortunately appears to be recovering and we do have to be forward looking in setting Monetary Policy, but i want to assure you we want to see that recovery continue. We dont feel the labor market is fully healed and thats a process we want to go on and we dont want to take policy actions that will hamper that, but monoetary policy is very accommodative. Thank you, i urge caution. Senator toomey. Thank you, mr. Chairman and madam chairman for swroining us today. Let me share a completely opposing view from that of the senator of new york, which will not be a shock to members of this committee. I cant help but observe what strikes me as a very obvious paradox here, the financial and economic crisis is over. Its been over for years. At least six or seven years and yet, we still maintain crisis level Interest Rates. Weve got no wave of defaults or massive bankruptcies going on. We have unemployment has gone from 10 to sub 6 . Gdp growth has been weak. I think thats easily explained by d avalanche of new regulations, but its been positive for years. Consumer sentiment is relatively high. The fomc in january described the economic recovery as solid. Walmart has made an announcement that suggests we may be approaching crisis has been over for a long time. And there is its not as though theres no price to be paid by having this unbelievably accommodative policy. Most immediately, i see the problem incured by my constituents who may have spent a lifetime working hard sacrificing, saving, foregoing a vacation, foregoing a splurge here and there and buy a cd have some money on deposit at a bank and use that to supplement a modest pension. Of course their reward now is they get nothing. Zero. Thats what they earned on their savings. Meanwhile, we have the risks associated with this. The risk of bubbles forming. I would argue the fixed income markets are a huge bubble at the moment. We have the inhibition of price discovery. We facilitate excess deficits because they look so manageable. And what are the benefits . The benefits are at best a timing shift in Economic Activity. At best, were moving Economic Activity that would otherwise occur in the future closer to the present as we all know if artificially low Interest Rates led to strong Economic Growth then everyone around the world would have zero Interest Rates and everything would be booming and thats not the case. So, i know you and i disagree, but i would suggest the crisis is clearly long over. I think the time for normalization is well over due. I hope we get there soon but i wanted to ask you a specific question thats related and that is youve said repeatedly, that the goal of price stability is 2 inflation. Well, certainly, theres a congressional mandate on price stability. But when the fed decides that its acceptable and the fact that is met by savers losing 2 of their purchasing power annually, and that means a 30yearold woman whos saving by the time she retires, that what she has saved at that point will have lost half of its value. Half of its gone. Hows that consistent with price stiblty . Well the Federal Reserve is the fom krrksc in carrying out congress mandate really does have to define how we understand price stable tyility operation alley. 2 inflation is is a rate that we chose largely for two reasons. First of all, its wellknown that price indices that contain upward biases in part because their failure to adequately capture the wefts of new goods and quality improvement, so they are hard to measure, but never the less, upward biases and price indices and second of all because deflation is so dangerous and because an environment of very low inflation and one of compare bly low Interest Rates makes it difficult for Monetary Policy to respond to adverse shots. We decided that in order to avoid damaging episodes of deflation, its wise to have a small buffer that gives room for Monetary Policy to operate. My second question, i would just urge you to consider the impact of saverers losing their purchasing power. Historically, of course, we have changed the level of accommodation through open market activities. Typically, buying and selling securities. To have corresponding changes in the level of cash. Youve suggested if i understand collectly, that in the process of normalizing, you intend to achieve that by changing the target level of the fed funds rate and you will do that by increasing the interest on excess reserves. My question is since that means a overtime in a normalizing environment, the transfer of tens of billions of dollars from what would go to the taxpayers, why are you doing that instead of simply selling the bonds, which is a more conventional way to operate in the open market operation . Well remember that first of all, we wont be paying banks rates that are comparable to those that they can earn in the marketplace marketplace, so, those payments dont involve subsidies to banks. In addition, remember that we have in expanding or holding our provision of reserves we have acquired longer term assets on the asset side of our Balance Sheet and the spread of both what we have been paying in terms of interest on excess reserves is quite large, so, although that would diminish over time is Monetary Policy is normalized, the expansion of our Balance Sheet even though we are even at present, paying 25 basis points, interest on reserves. Weve had record transfers to the treasury close to 100 billion this past year and 500 billion since 2009. So, there have been large trans transfers associated with that policy. That situation is likely to reserve, reverse, if we get into a normalization mode. So, it is very, it is likely that our transfers to our remittances to the treasury will decline as shortterm rates rise. We never the less expect the remittances to remain positive. Thank you, mr. Chairman. Senator warner. Didnt know hed come back. Sorry, mr. Chairman. Thank my colleague from virginia. Thank you for your service. As you know, our economy continues to recover from the damage inflicted by the financial crisis and the Great Recession that followed. Gdp is growing. Employers are hiring. Unemployments falling. So, its only natural that some are are starting to look ahead to a time when the Federal Reserve can start withdrawing the monetary stimulus that has been so critical to our recovery, but from my view, we still face challenges. Most americans are still waiting for the recovery to show up in meaningful income growth. Longterm unemployment while down is still high. Inflation continues to run well below target. As it has now for an extended period of time, so from my perspective, its critical that the fed not put the cart before the horse and tighten too soon. Youve said on multiple occasions that the Federal Reserves timetable for raising rates will depend on the data. There are some who say the Federal Reserve should tighten preemptively at the first hint of inflation without waiting to find out if its just a statistical blip. What would be the risk if the fed raises rates too soon compared to the ris bs of waiting . Well if the fed were to raise rates too soon, senator we would risk undermining a recovery that is really just taking hold and is really succeeding, i think, in improving the labor market. As i said, i dont think were back to obtaining yet conditions id associate with maximum employment. Were normal labor Market Conditions. Things have improved notably, but were not there yet and so, we want to see a healthy recovery continue. In addition, as you mention inflation is running well below our 2 objective and while we think a significant reason for that is because of transitory factors, most importantly, the decline weve seen in energy prices, we are committed to our 2 objective and just as we dont want to overshoot the 2 on the high side we dont want to undershoot 2 on the low side either. And so before raising rates we will want to feel confident that the recovery will continue and that inflation is moving up over time. There are also risks of waiting too long to remove accommodation. We have a highly accommodative policy thats been in place for some time. We have to be forward looking. As the labor market tightens, wage growth and inflation can pick up to the point we would overshoot our inflation objective and conceivably, this could be Financial Stability risks and we want to be attentive to those as well, so, this is balancing of costs and risks that were trying to make deliberate and thoughtful. I appreciate that. Its that balance i hope your wisdom and those of your fellow Board Members can get just about right because i could see entering and choking off recovery before middle class families feel its gains and trapping a too low inflation or deflations at a certain sense so i appreciate that. Let me ask you one other question. The ive ive heard several commentators say that the Interest Rate increase by the fed would signal yoetquote unquote confidence to the market about the health of the u. S. Economy. And have a stimlative effect. Do you agree with that theory and if so, what the more than off set potentially by contraction nar impact of a rate increase . I think its fair to say that when we begin to raise our target for the federal funds rate it will be because we are confident about the recovery and are reasonably confident that inflation will move back to our 2 objective over time. But that confidence will reside in real improvements that we see in the underlying condition of households and businesses where we would not be attempting to somehow boot strap improvement in the economy that is purely occurring from a confidence effect that comes from our raising rates. There is reason i think to feel good about the economic outlook. Households are have gone through major adjustments in their Balance Sheets and are in better Financial Condition than they were. The job situation is improving. And even though wages havent been rising in real terms very rapidly, there are more hours of work and more jobs, so Household Income is improving. Lower oil prices are boosting Household Income. Housing prices have rebounded and thats helped a lot of households. And businesses are so, in essence real confidence, not confidence that is spun. Thats right. Theres no spin here. Its our confidence in the economy. Has improved and when we raise rates, it will be a signal in our confidence in the underlying fundamentals. Thank you. Scott. Thank you, mr. Chairman. Good morning. Thank you for being here this morning. Id like to change the conversation a little bit and tal,b out the Insurance Industry and its impact on about 354 billion in place as we think through the transferring of risks that the Insurance Industry provides, we think its a very important consideration. Im a bit prejudice in this area, i spent 25 years in the industry and i appreciate the fact that until the agency shows up, its nonexistent. So, the of how we impact the Insurance Industry will reverberate throughout the economy. I take specific interest in the impact that the fed may have on regulating companies that are systemically important by foc. The president signed a law that clarifies the fed not impose bank like capital standards on Insurance Companies. I think this is for obvious reasons. When you look at the activities of banks, loans and deposits comparatively speaking to the longterm risks that most of the Insurance Companies are holding their assets for, its important not to have that delineation and take a very different approach to Insurance Companies as we do other Financial Institutions. I know this is an important consideration. I guess my question so you is what expertise does the fed have or plan to acquire as it begins to supervise Insurance Companies and how closely are you working with state insurance regulators . Zpl my answer would be that we have acquired expertise. We have hired individuals who have experience in the Insurance Industry and theyre trying to build our expertise there. We consult closely with the naic and state insurance regulators and the federal insurance office. We are gaining experience because we are now in our Fourth Annual supervision cycle of savings and loan holding companies, many of which are, some of which have significant insurance activities and of course we are several Insurance Companies have been designated as and were supervising those as well. We are taking the time and doing the work thats necessary to understand their unique characteristics and fully plan to tailor our supervision and capital and liquidity requirements for those Insurance Companies to make our supervisory regime appropriate. Theyre very important differences between the risks faced by Insurance Companies and banking organizations. We have undertaken a quantitative impact study and are actively engaged in working with the firms well will supervising to understand the unique characteristics of their operations before promulgating supervision regime. Thank you you answered my third question as well. Will the fed issue an advanced notice of rule making before issues proposed rules on yes, we will issue proposed rules. We recently issued a rule that pertains to a supervision and ge capital and we will do the same with the other of the firms. Thank you. On the issue of stress test i know that the fed is a bit of a supervision of Bank Holding Companies and other companies, the fed conducts stress tests to determine how well they could witt stand Different Levels of financial distress. The fed currently has about 4. 5 trillion as a result of the qe program. Much larger was the key Financial Institute hit rate. But it appears that nobody is is stress testing the fed. The proverbial fox is is guarding the hen house from my perspective, so my question really, as you begin to unwind massive Balance Sheet hopefully in the near future, what assurances can you give this committee that the fed will stress test its qe exit plan. Well, with respect to our Balance Sheet let me say that we do stress test it and we have issued some reports and papers where we describe what stress tests would look like when theirca . 3 Interest Rates shocks would affect our Balance Sheet and pass remittances but it really is important to recognize that the Federal Reserve is not identical to an ordinary blanking organization. First of all, capital plays a very different role in the central bank than it does for a banking organization. Congress and the place regarding our capital were never intended to make our capital play the same role and its not necessary for it to play the same role as in a banking organization. Importantly, unlike a bank the Federal Reserves liabilities are mainly reserves to the Banking System and currency and these are not like the runable deposits of an ordinary banking organization, so, the risks thattua the Federal Reserve faces in our Balance Sheet are of a different character than those facing an ordinary bank. But that said, we do look at the likely consequences for our Balance Sheet of different Interest Rate scenarios. Certainly very different scenarios between the fed and the banks. 4. 5 trillion in the way you wind it down is would have would reverberate throughout the economy in a way that no other Financial Organization would have impact and the incredibly important. Well, thats, thats one reason that one of the principles of our normalization plans is is that you want to wind down our Balance Sheet in an orderly, gradual and predictable way. And weve decided to use as our main tool of policygf ÷u when the time comes for normalization, something that is much more familiar, both to us and to markets and that is variations in shortterm Interest Rates. Of course, an alternative to that would be to say when the time comes to want to tighten Monetary Policy you could begin to sell assets. That would be another way to f going about doing business. But we have more experience and markets have much more experience with variations and shorm term rates and we want to proceed in that way thats familiar to us, familiar to Market Participants and the public and to let our Balance Sheet play a passive role to gradually diminish in size, namely through ending reinvestment of maturing principle. Thank you. Senator warner, finally. Thank you mr. Chairman and thank you, chair yellin, youre coming down to the home stretch here. Appreciate all your good work and this incredibly important balance to get right as we start down a path of unwinding. But i like many of my colleagues, share with< of such a low rate, trying to get this timing right is so critically important. One of the things weve talked a lot about the status of the u. S. Economy, but i want to raise three quick points. One, after the january fomc meetings, one in your readouts one of the items you mentioned were International Developments. Obviously, disruption potential in europe with ongoing struggles with greece. Chinas slowing economy. Can you rank or how will these International Developments affect the feds decision on timing on Monetary Policy . Well, there are a broad range of International Developments that we monitor and they do affect the performance likely performance of the u. S. Economy and factor both into our economic forecasts and our assessment of risks. Growth in europe has been very slow. Growth in china is slowing. The huge decline weve seen in oil prices has had repercussions all over the globe. In some areas, positive, very positive. In other areas, negative. It affects your yotour outlook, these developments, both through trade flows and through developments in Financial Markets. The attempts of many Central Banks is pushing down longer run Interest Rates in many parts of the world and that as i mentioned in my testimony, spilling over to the United States. So, there are many channels through which these Global Developments affect the u. S. Outlook in ways both positive and negative. All in all, so, factoring all of those things into account we still think that the risks for the u. S. Outlook are nearly balanced. That we have got sufficiently strong growth in domestic demand and in spending by consumers and businesses. That recovery looks to be on solid ground. We had a very strong growth in the second half of the year. And looking forward in and analyzing the factors likely to impact domestic spending, were seeing perhaps not as strong as we just had, but never the less, above trend growth and that really factors into account all of the global consideration. But obviously, these national factors will affect your decision. Bneratk do affect our decision. I want to associate my comments with senator corkers comments, like to make sure we deal in a Perfect World with currency manipulation, but that could appear to one as Monetary Policy and as weve seen japan and europe move towards more monetary easing, obviously one of the effects of that has been strengthen a dollar and hurts our exports. Speak to that for a moment and if you could let me get last 30 seconds in at the end. You bet. So, i think we should be on guard to against currency manipulation. The g7 an international foray agreed and i know our administration in dealing with foreign county tr tris really try tries to crack down on currency manipulation. Never the less, i think certainly, its a principle agreed in the g7 that Monetary Policy oriented toward domestic goals like price stability or in our case, price stability and maximum employment. This is very valid use of a domestic tool for a domestic purpose. It is true that the use of that tool can have repercussions on exchange rates, but i really think its not right to call that currency manipulation and to put it in the same bucket as interventions and Exchange Markets that are really geared toward changing the Competitive Landscape to the advantage of a country. Mr. Chairman, i would just my last couple of seconds, want to make the point that one of the things that has been absent from this discussion today has been weve talked a lot about your work, we havent talked as much about our work and need to still address our own fiscal policies. I would simply point out that because of the extraordinary remittances from the feds expanded Balance Sheet weve seen north of 420 billion in net additional revenue that has diminished our deficit, but that is not something that can be projected on the future and as we talk about the times of raising Interest Rates and trying to get back to a normalized effort 100 basis points adds 120 billion a year on debt service and even cbo projections will show that debt service with our current 18 trillion in debt will exceed total defense spending or total domestic Discretionary Spending in ten years and that is not a Good Business plan for our country. All absolutely true. Thank you, mr. Chairman. Thank you mr. Chairman. Thank you for being here, chair yellin. As you know, wall street banks could profit handsomely if they knew about the feds plans before the market found out and thats why any leak of confidential information from the fed results in serious penalties for the people who are responsible. But apparently, there have been no consequences for the most recent leak. According to public reports scott alvarez, the general counsel of the fed, was put in charge of investigating a leak from the september 2012 meeting of the federal open markets committee. Nearly two and a half years later, the results of this investigation have not been made public and no action has been taken. On february 5th congressman cummings and i sent a letter to mr. Alvarez requesting a briefing from him in advance of our appearance here today. But so far, we have not received one. Can you assure us that the congressman and i will get a briefing soon . So if i might say by way of background, and i just need a yes or no. I just want to be able to get a briefing on whats happened that its been two and a half years and theres been no report. We are trying to work with your staff on a process to be responsive. Ill take that as a yes. Yes. Okay. Thank you. As you know, this past december House Republicans successfully blew a hole in dodd frank protections. By tacking the repeal of the swaps push out rule to a must pass Government Spending bill. That repeal which was written by citigroup lobbyists, will allow the biggest banks in the country to continue to receive Taxpayer Protection for some of their riskiest derivatives and swaps. Now, a month before the repeal mr. Alvarez spoke at a conference at the american bar association, an organization that includes many lawyers who represent the banks that are affected. By the feds enforcement of dodd frank. Mr. Alvarez openly criticized the swaps push out rule, saying quote, you can tell it was written at 2 30 in the morning and so it needs to be, i think, revisited, just to make sense of it. He also criticized the new rules dodd frank put into place to address conflicts of interest saying quote restrictions on the agencies really did not work and it doesnt work and its more constraining than i think is helpful. So let me start by asking, does mr. Alvarez criticism of these two rules reflect your view or the view of the federal board of governors . So, let me just say that over the years weve had feedback that we have given on various aspects of dodd frank. I appreciate the question im asking though is these are specific criticisms he has made of dodd frank rules. That goff v govern the largest Financial Institutions in this country and im just asking do his criticisms reflect your criticisms or the criticisms of the federal board . I think i personally and the board considered dodd frank to be a very important piece of legislation that has provided a road map for us to put in place regulations. I appreciate that madam chairman, but i just need a yes or no. Do his criticisms reflect your criticisms . Im certainly not seeking in any way to alter dodd frank at this time. It is then let me ask the question differently. Do you think its appropriate that mr. Alvarez took public positions that do not evidently reflect the public position of the feds board, especially before an audience that has a direct financial interest in how the fed enforces its rules . Well, i think the feds position and my position is that were able to work very constructively within the framework of dodd frank. To tailor rules that are appropriate for the institutions we supervise and were not seeking to change the i appreciate that. You know, we know that the fed staff plays a Critical Role in shaping dodd frank rules and enforcing them. In the case of the swaps push out, Congress Passed the law in 2010 but the fed and the occ de delayed the Effective Date of the rule until 2016. Getting citigroup and other big banks time to get the rule repealed before it ever went into effect. Did mr. Alvarez provide input into the feds decision to delay the Effective Date of the push out rule . I, i dont know. We usually have phase ins for complicated rules that require adjustments by financial firms. This has been true of all of the dodd frank rules that we have put into effect. Well i think this might be worth looking into. The fed is our first line of defense against another financial crisis. And the feds general counsel or anyone at the fed staff should not be picking and choosing which rules to enforce based on their personal views. So i urge you to carefully review this issue and to assess whether the leadership of the fed staff is on the same page as the Federal Reserve board. Thank you, mr. Chairman. Mr. Chairman, thank you. Always last, hopefully not least. Chair yellin, i want to first thank you for your patience and your responsiveness and i was tempted to ask one question which is your definition of patience, but i wont do that today. Instead, i want to look foth future. I think senator warner really outlined one of the concerns that i have. We always seem to be fighting the last economic war in the United States congress. You are a very astute and very respected student of the American Economy. Its what you do every day. Im going to give you a chance youve heard a lot of opinions and received a lot of advice from this panel. Im going to give you a chance to give us some advice. When you look at leading and lagging indicators, especially leading indicators what troubles you and what keeps you awake at night about the American Economy in the next ten to 15 years and what advice would you give to the United States congress in addressing those concerns that you have looking right now at those indicators . Well, ive said on occasions that the rise weve seen in inequality in policy measures that might be appropriate but this really is a domain for congress to consider so that is one of the concerns that i have. So no advice on the earned income tax credit . Im not going to weigh in on things that are in your domain to evaluate. And so i think that is important. And so i would Say Something in congresss domain is longer run issues with the federal budget. I think congress has made painful decisions that have now really stabilized, brought down the deficit very substantially and stabilized for a number of years the debt to gdp ratio. But eventually debt to gdp will rise and as the population ages and Medicare Medicaid and Social Security get to be a larger share a larger share of gdp under current programs. And there are a lot of ways in which these are problems weve known about for a long time. I also worry that if we were to again be hit by an adverse shock, that there is not much scope to use fiscal policy. It was used in the early years after the financial crisis. We ran large deficits. But in the course of doing that the debt to gdp ratio rose and were another shock to come along it is questionable how much scope we would have to put in place even on a temporary multiyear basis expansionary fiscal policy and i think it is important to deal with these issues, for the congress to do so. But your concern about scope doesnt lead you to believe that Interest Rates should be adjusted at this point to give you the flexibility to use Interest Rates should we receive another shock . Well, the fed would, of course, use the tools that we have to try to achieve domestic ends. But i think having fiscal policy be available as a tool is important as well. If we look today at the American Economy and some of the challenges and you and i have spoken privately about this, of the millennials and saving patterns and consultive patterns consultive patterns, what concerns you about the eight years of changed patterns and the consumption and what concerns you about the con sumive patterns that may concern you about the American Economy. I think we are just understanding to understand how the millennials are waiting, they are certainly waiting longer to buy houses and get married. They have a lot of student debt and they are concerned about housing as an investment. Theyve had a tough time in the job market. And, you know, exactly as the economy strengthens i expect more of them to form households of their own and buy homes but weve yet to see how this will effect that generation. Or they may have experienced a change in con sumive patterns that will present unique patterns whether it is sharing automobiles or not buying homes, doing the things that theyve now done to accommodate their economic challenges in the longterm. And i think that one of the things that we need to do much more carefully here in the United States congress is begin to look at not just having a discussion with you about Monetary Policy but looking at fiscal policy, whether it is tam reform or whether it is in fact, taking a look at what we are doing with the Mortgage Market to begin to develop an economy that the millennials will fully participate in. And i hope you continue to think and provide us the advice that is extraordinarily valuable. Thank you. Senator donnelly. Thank you, mr. Chairman and madam chair. Thank you for your service. And i apologize ive had to go in and out of other committees and i know this subject has been brought up. But the issue of wage stagnation that weve seen and the other piece of student debt, when we look at the student debt and the numbers are so high and you know it has been a long time, but when i graduated from college you could work an entire summer and wind up paying about half of what your tuition was. How big of a drag and you may not have an exact measurement, but one of my great concerns is in some areas of the country how do you build up the Housing Market when the young people who want to buy a house, the money that i saved up for that, at that time 20 down payment is now, in many cases being used to pay off a student loan and it is a box almost you can never get out of. So how big of a drag do you see that being on the economy . So, it is a little bit hard to tell. I mean the Housing Market has not recovered in the way that i would have anticipated. It has been very slowly improving. But household formation has been extremely low in the United States. It is hard to tell. You have many young people who are living with their families still. It is hard to tell whether that is because of student debt or because of a weak job market. My guess is that the economy continues to improve. We will see an improvement in house hold formation that we will see. Now, many young people will decide they prefer to rent rather than buy homes. But that will give rise to a boost in multifamily construction even if not so much to Single Family construction. But the Housing Market has been very depressed. Nevertheless, in spite of that, the economy as a whole in the job market has had sufficient strength to recover. My other concern in that area is when you see a young person who looks up and is dealing with 100,000 dollars in student debt and has a big chunk of money every month that goes off to pay that down those dollars are dollars that never are used to go to a restaurant or to maybe buy a car or never used to travel somewhere and so overall jobwise, it hits or seems to hit and makes it difficult in all of those areas to continue job creation . It is true. But it is it also remains true that a Higher Education boosts income and is tremendously important. It is not always the case not for every individual that it is a good investment but certainly on average it has been a very important and worthwhile investment. So i think to my mind, that is the other that is the other side of it. I completely argue i completely agree what a wonderful investment it. I it is. I wabd to get want to get that opportunity without saddling yourself for years. The debt loads are large and they have increased a great deal. You are very right. One other thing i wanted to ask you about is Cyber Security and i know the fed has certain things they focus on on a constant basis. In the area of Cyber Security though, it is, from all of the Financial Organizations that i talk to, one of the biggest concerns i have for the companies, is how big of a risk do you see that in the years moving forward and how big of an effect on the Financial Institutions do you see this being . Well i think it is on everyones top list top of the list of concerns that we have about the Financial System, about the problems facing Financial Organizations and i would include the Federal Reserve in that too. It is it is a top concern of our own given the importance of our own systems to the payment the functioning of the Payment System of the u. S. And global economy. Internally were paying a great deal of attention to make sure that were addressing everescalating threats to our own operations the banks that we supervise. We are very attentive and have experts who work with the banks to make sure that they are attentive attentive. It is a larger problem and this is one where cooperation is needed among card systems, re retailers and others involved in the Financial System and conceivably legislation might be needed in this area. Thank you. And ill conclude with this. For the state i represent, indiana, we, for many years, were hit very very hard in the Manufacturing Sector because of currency manipulation among other areas