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tv   Bloomberg Markets  Bloomberg  February 10, 2016 10:00am-11:01am EST

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we will go through her prepared remarks in a moment. good morning. watching chairbe yellen's testimony. the question section for fresh guidance on the fed's economic outlook and the plans for further rate increases. we already know from her prepared remarks that she believes the u.s. made further economic progress but recognize financial conditions have declined. as we await her live testimony, i want to head to the markets desk where julie hyman has the latest and how the markets every exit to her testimony and so far, we are seeing a rally in equities. futures tookgh the a leg lower after the testimony was released. we will get to that in detail and moment here we are seeing stocks hold up relatively well. the nasdaq leading advances today. leading frequently on the up and the downside, the s&p up by 1%.
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let's take a look at the trajectory of futures throughout the morning here. here you have futures going throughout the night. this is the leg lower than i am about when the testimony came out. she talked about the financial conditions of being a challenging at this point in time. she tried to walk the line between being cautious and leaving the door open to rate increases. welooks like that is when saw the leg lower. things are holding up relatively well. take a look at the imap sectors on the move this morning. we have got utilities lower. they tend to fall when we get higher rates. leaving,re is technology is leaving, financials are coming back as well p are a lot of groups have suffered in recent days and are coming back. tech in particular because many of the tech companies are contributing the most to the gains we are seeing in the s&p 500. microsoft, apple, amazon. these are the beaten-down names
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we have been watching recently, rebounding this morning. -- >> treasuryor yields are coming down. julie: yes. these are our moderate interest rate futures. so now, futures are pricing at a 2% chance of an increase. very small. the probability has been very small. we saw yesterday the probability for later in the year, also falling to a low level, come back up to a very -- very slightly here come a little bit of a change. the 10 year, let's take a look at where that is trading at the moment. 1.74%. it has come down following her comments. lowest inround its about a year. as welker thethat dollar here, we are seeing strengthen the dollar, but very little strength.
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finally, oil prices i wanted to check on as well. are seeing weakness. though oil has bounced a bit off the bottom, we are seeing the weakness persisting. betty: thank you so much, julie hyman. you just saw the chairman of the house financial services committee call to order. the hearing is already underway. he is making his opening remarks. that is the chairman of the house financial services committee. speak, andnues to before we move on to listening to fed chair janet yellen want to get more news in our news headlines. vonnie quinn has more from our news desk. vonnie: thank you. on to south carolina and nevada, the next steps for presidential candidates afternoon after sent a message to both parties established. a billionaire and a democratic firstist one the nation's
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timers. donald trump was an easy winner and john kasich was a surprise in second place. a a victory speech, trump had familiar scene. mr. trump: we are going to make america great again the old-fashioned way. be china, japan, beat mexico a trade, beat all of these countries. that are taking so much of our money away from us, on a daily basis. it is not going to happen anymore. bernie sanders beat hillary clinton by 21 percentage points. sanders: together, we have that will echo from wall street to washington, from maine to california. republicans will vote in south carolina february 20. democrats february 27. president obama is returning to
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where it all began, springfield, illinois, where he started his historic presidential campaign nine years ago today. mr. obama was on the scene that lost the -- that launched his campaign. the senate is expected to vote today on new sanctions against north korea, coming after last weekend's missile launch and the nuclear test last month. the u.s. will send more troops to southern afghanistan to fight the taliban and p hundreds of u.s. soldiers will be involved in it will be the largest deployment of american troops outside major bases in afghanistan since nato ended its mission in 2014. the u.s. and russia are trying to revive those syria peace talks. talks broke down last week just after syria made major gains against rebel forces. john kerry and his russian counterpart will try to get the
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toss going again and will meet with other form esters tomorrow in germany. global news 24 hours a day powered by our 2400 journalists and more than 150 bureaus around the world. eddie? betty: -- betty? betty: janet yellen is about to speak. the chairman of the house financial services committee to we have not heard from janet yellen since december when the fed raised rates for the first time in nearly a decade. it has been a painful it week silence from janet yellen. withve got team coverage our senior economics correspondent brendan live at the hill. also with me is the brains behind economics desk, mike mckee. all we will get from janet yellen today? financial conditions have the come less supported, is that all we are getting from her? >> if you are looking for her to
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-- yes, that is all you will get from her. letting the be markets believe there will be no rate increase in march slide. she does note of course the problems that we have seen in financial marks and talk about how they could weigh on economic growth. she does not make a big point out of saying we are data dependent and we will think -- see where things are in march. on the other hand, she goes on to say these could weigh on growth. they are not saying they will. she talks about the fact that if they prove persistent, it could be a problem. then she quotes from their statement, saying the committee still expects economic activity will expand at a moderate pace and labor market indicators will strengthen. betty: and we will hit 2%. >> in the longer term. but it will get there. the fed is still on track to raise interest rates. the question is when betty: but what are they waiting for?
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we do not know if the volatility is passing or not, temporary or not. >> that is what they are trying to find out. it went away in september and they were able to raise rates in december. the fed does not have to make a decision until march 15. investors have to make a decision every day and what they will do with their money. she does not. she can wait that long. do not expect the fed to make a decision upfront. opening remarks. in the meantime, brendan, you traveled down to the hill to cover this. give me some groundwork of what we are likely to hear from lawmakers, what kinds of questions they will pepper her with today. >> the chairman of the committee, we are likely to hear a lot from him on how the fed should adopt a rules-based approach that janet yellen does not want to do because it will curtail her independence.
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nobelittee of several prize winners on why it is that a rules-based policy would not be problematic to what you will here is something interesting. i heard it in august, that the recovery does not help everyone equally well for does not look as good for african-american families and wage recovery does not look as good, jobs recovery does not look as good. truth to this or we even saw it a little bit in janet yellen'statement. people with good credit and people with bad credit. what i want to hear from janet yellen is a little more explicit about what she said about how financial decisions could affect growth. she said something really ,nteresting, which is private domestic final demand, demand in the u.s., not thinking about
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exports, that growth has also slowed somewhat. this is something we are already seeing happen. indeed. getting back to the committee itself, who do you think will be asking her the most pointed questions and giving her the hardest time? >> i think it is the chairman. he has been clear about this for years. you saw it at the beginning of the testimony. he agrees with the presidential candidates on the republican side. he is a glass half-empty kind of guy. when janet yellen tries to throw it down the middle and sees no difference in the assessment of risks to the economy, he will push her in what he said -- what she said in a statement. vera v assessment on risk has not changed, she has been a lot more explicit about the risks to the downside of the economy. it isalso pointing out not just jobs. it is the quality of the jobs. it is the terms of the jobs. yellen something janet
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has been very aware of, not just the top line unemployment numbers we're looking at to understand whether nature recoveries happening. they get to the issue of what happens, if we go backwards in the economy, the people were -- will ask her what are the tools left. it will be interesting to hear what she said. wall street has become fixated on the idea of negative interest rate and it will be interesting to see whether she endorses the partially, or lays out some of the reasons officials do the idea of federal interest rates. it is also going to be interesting to see if she turns any of the economic committee. itsay we have done a lot and is time for the fiscal policy to take over. that it is your job to do it and you advocated that job for the last years or so. it will fall on deaf year -- at -- death years. virtually all economist degree at this point monetary policy is reaching the limit to affect the economy. they want the fiscal authorities
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to step in and no one wants to do that. >> ben bernanke said the same thing. fetches have been saying this since 2008. anytime you guys want to help out, we are right here and waiting for you to help out. i also think, mike, about the idea of negative rates and a rules-based policy. if the fed were to apply the during the great recession, it would have gone negative. understand want to from people who advocate a rules-based approach, do we go negative or are we stuck at that? i think we will hear a lot about that. betty: is the fed legally able? >> an amendment was drafted that allows them to pay on reserves. there is a question about whether they can charge interest or not. we do not know. that might end up in the supreme
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court. if it is permitted by law then yes, they can go negative, but it would be tremendous effects on the money market and the money markets are they part of the functioning of the financials from the united states p are for corporations in particular. that would be something that mitigates against it. you do not have the same problem as much in other countries. the issue of whether they can go negative, the way the itislation has an drafted, would say you have to do this unless you do not think it will work and if you do not think so, write us a letter and explain why. there is an out but they do not want to be constrained by that in any case. betty: i want to get to michael regan, our columnist. watches the markets very closely. what do you think so far about the market reaction to the prepared testimony so far? >> they did come down a little bit. they wereme down when
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the -- originally released. holding games now. an interesting time for her to testify because the market was testing a new oh. benchmark indexes were back to new lows and rebounded in the middle of the day. they still close lower but off of the session lows. -- did seem like there was a tendency to buy yesterday. betty: hang on. i believe she is about to begin her remarks. >> you are recognized for five minutes to give an oral presentation of your testimony. you. yellen: thank chairman, ranking member waters and other members of the committee. -- pleased to present the federal reserve's semiannual report to the congress. in my remarks, i will discuss economicnt sit -- situation and outlook before returning to monetary policy. appearance before the
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committee last july, the economy has made further progress toward the federal reserve's objective of maximum employment. and while inflation is expected to remain low in the near term, in part because of further declines in energy prices, the federal open market committee rise to aflation will 2% objective over the medium term. market, -- labor million in 2016 and posted a further gain of 150,000 in january of this year. the cumulative increase in 2010 isnt since early now more than 13 million jobs. meanwhile, the unemployment rate fell 14 9% in january. below a year ago, and in line with the median of fomc
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participants most recent estimates of its longer than normal level. other measures of labor market conditions have also shown solid improvement with noticeable declines over the past year in the number of individuals who want and are available to work but have not asked -- actively search recently, and then the number of people working part-time but would rather work full-time. these measures remain above the level seen a prior to the recession. thus, while labor market conditions have improved substantially, there is still room for further sustainable improvements. the strong gains in the job market last year were accompanied by a continued, moderate expansion in economic activity. gross domestic
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product is estimated to have increased about one and three quarters percent in 2015. over the course of the year, subdued foreign growth in the appreciation of the dollar restrains net exports. in the fourth quarter of last year, growth in the gross domestic product has and reported to have slowed more sharply to an annual rate of three quarters of a percent. again, growth was held back by week net exports as well as by a negative contribution from inventory investment. private domestic final demand appears to have slowed somewhat but itfourth quarter, has continued to advance. household spending has been gains andby city job solid growth in real disposable income. aided in part by the declines in oil prices. of particular strength
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has been purchases of cars and trucks. sales of these vehicles in 2015 reached their highest level ever. drilling and mining sector, lower oil prices have caused companies to slash jobs and sharply cut capital outlays. in most other sectors, business investment rose over the second half of last year and homebuilding activity has up, oned to move balance, although the level of new construction remained well below the longer levels implied by demographic trends. financial conditions in the united states have recently ofome less supportive growth. with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. they developments, if prove persistent, could weigh on the outlook for economic
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activity in the labor market. although declines in longer-term interest rate and oil prices provides some offset. gains ongoing employment and faster wage growth should support the growth of real incomes and therefore consumer spending. global economic growth should pick up over time, supported by highly accommodative monetary policies abroad. against this backdrop, the committee expects with gradual ofustments in the stance monetary policy, economic activity will expand at a moderate pace in the coming -- labor market indicators will continue to strengthen. as is always the case, the economic outlook is not certain. foreign development in particular pose risks to u.s. economic growth. although recent economic
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indicators do not suggest a sharp slowdown in chinese growth, declines in the foreign have intensified uncertainty about china's exchange rate policy and the prospects for its economy. this uncertainty led to increased volatility in global financial markets and against a backdrop of persistent weakness exacerbated concerns about the outlook for global growth. along withh concerns strong supply conditions and high inventories contributed to the recent fall in prices of oil and other commodities. in turn, look monday prices could trigger financial stresses in commodity exporting economies , particularly in vulnerable emerging-market economies and for commodity producing firms in
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many countries. of these downside risks materialize, foreign activity and demand for u.s. x it's could -- exports could weaken and tighten further. of course, economic growth could also exceed our projections for a number of reasons. including the possibility that i low oil price will boost u.s. economic growth more than we expect. at present, the committee is closely monitoring global economic and financial developments, as well as for theg applications labor market and inflation and the balance of risk for the outlook. i noted earlier, inflation continues to run below the 2% objective. overall consumer prices, as measured the price index for personal consumption expenditures, increased just one half percent over 12 months of
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2015. to a large extent, below average pace of inflation last year can be traced to the earlier, steep declines in oil prices, and then the prices of other imported goods. and given the recent further declines in the prices of oil and other commodities, as well as the further appreciation of the dollar, the committee expects inflation to remain low in the near term. oil and import prices stop falling, the downward pressure on domestic inflation from those sources should wayne and as the labor market strengthens further, inflation is expected to rise gradually 2% over the medium term. in light of the current shortfall of inflation from 2%, the committee is carefully monitoring actual and expected toward its inflation goal. of course, inflation next big
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nations play an important role in the inflation process. the committee's confidence in the inflation outlook depends importantly on the degree to which longer run inflation expectations remain anchored. it is worth noting in this regard that market-based measures of inflation compensation have moved down to historically low levels. suggests that changes in liquidity premiums over the past year and a half contributed significantly to these declines. survey measures of longer run inflation expectations are also at the low end of their recent ranges. overall, they have been reasonably stable. policy, theonitor fomc conducts policy to promote maximum employment and price stability as required by our
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statutory mandate from congress. last march, the committee stated it would be appropriate to raise for the federal funds rate when it is seeing further improvement in the labor market and was reasonably confident that inflation would move back to its 2% objective over the medium term. in december, the committee judged these two criteria have been satisfied. and decided to raise the target range for the federal funds rate one quarter percentage point between one quarter and one half percent. this increase marked the end of the seven year time during which heldederal funds rate was near zero. the committee did not adjust the target range in january. the decision in december to raise the federal funds rate reflected the committee's assessment that even after modest reduction in policy accommodation, economic activity
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would continue to expand at a moderate pace and labor market indicators would continue to strengthen. although inflation was running below the committee's longer run objective, the fomc judge that much of the softness in inflation was attributable to transitory factors that are likely to abate over time and the diminishing slack and labor and product markets would help move inflation toward 2%. in addition, the committee record knives that it takes time for monetary policy actions to affect economic conditions. the start ofelayed policy normalization for too long, it might have to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting its objective. such an abrupt tightening could of pushing thesk
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economy into a recession. it is important to note that even after the increase, the stance of monetary policy remains accommodative. the fomc anticipates economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. addition, the committee expects the federal funds rate is likely to remain for some time below the levels expected to prevail in the longer run. this expectation is consistent with the view that the mutual nominal federal funds rate, defined as the value of the that would berate neither expansionary or contractionary, if the economy was operating your potential, is currently low by historical standards and likely to rise only gradually over time. the low level of the mutual fed funds rate may be partly attribute double to a range of
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persistent economic headwinds such as limited access to credit for some borrowers, weak growth abroad, and significant appreciation of the dollar that have waited on aggregate demand. monetary policy is by no means on a preset course. the actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook. we will regularly reassess what little of the federal funds rate is consistent with achieving and employment maximum and 2% inflation. in doing so, we will take into account the wide range of information, including measures of labor market conditions, indicators of inflation pressures, and expectations and readings on financial and international development's. in particular, stronger growth
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or a more rapid increase in inflation than the committee currently anticipates would suggest federal funds rate was rising more quickly than expected, making it appropriate to raise the federal funds rate more quickly as well. werersely, if the economy to disappoint the lower half of the federal funds rate would be appropriate. we are committed to our dual objectives and will object -- i just as appropriate to foster financial conditions consistent with their attainment over time. assistant with its previous communications, the federal reserve used interest on excess reserve an overnight, reversed purchase operations to move the federal funds rate into the new target range. the adjustment to the i owe er has been particularly important in raising the federal funds rate and short-term interest rates more generally in
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an environment of abundant bank reserves. meanwhile, overnight, rop byrations company the rate establishing a soft floor on money market interest rates. the rate and the overnight irp operations allow the fomc to control the federal funds rate effectively, without having to first shrink its downs she by selling a large part of its holdings of longer-term securities. the committee judged that removing monetary policy accommodation by the traditional approach of raising short-term is preferable to selling longer-term assets because such sales can be couldult to calibrate and generate an expected financial market reaction. the committee is continuing its policy of reinvesting proceeds
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from maturing treasury securities and principal payments from agency debt and mortgage backed securities. as highlighted in the december statement, the fomc anticipates continuing the policy until normalization of the federal funds rate level is underway. maintaining our sizable holdings of longer-term securities should help maintain accommodative conditions and reduce the risk that we might need to return the federal funds rate target to the effect of lower bound in response to future adverse shocks. thank you. >> i know you are familiar with the federal oversight reform and modernization which was passed by the house in november. it is designed to bring about greater transparency and accountability with the fed and
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to ensure that the fed lets the rest of us know the variables that are used in monetary policy function so tion that working families can plan out their family economies. i know that you are not a fan of the format because i have a letter dated november 16 that you sent to the speaker. in that letter, you call the act a "grave mistake." i have another letter that describes it as an important reform. your letter mentions or complains that monetary policy would be forced to be strictly adhered to by the prescriptions of a simple rule. my letter says the legislation does not change -- chain the fed to any rule and certainly not a mechanical rule. your letter says that the act would undermine the independence of the fed. my letter says in no way would
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the legislation compromise the fed's independence, publicly reporting a strategy helps prevent policymakers from bending under pressure and sacrificing independence. your letter states that the format would "damage the u.s. economy were it to become law." my letter says "the new legislation would improve economic performance." your letter was signed by you. my letter was signed by dr. larceny hansen of the university of chicago, nobel lariat in economic and signed by robert lucas, university of chicago, nobel lariat in economics. nobel lariat in
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economics. george schultz, former secretary of the treasury, robert heller, former federal reserve governor, jerry jordan, nobel lariat form of the cleveland fresh bank, william poole, former president of the st. louis federal reserve bank, former member of the council of economic advisors, michael boggs, former chairman of the president's council of onomic advisors, charles calamaris, fresh board of governors, marvin goodfriend, carnegie mellon for the fresh board of richmond, allen met zero, carnegie mellon and john taylor of stanford university, former undersecretary of the treasury, member of the council of economic advicers are, author of the taylor rule and there's about 15 others signatories to the letter. so chair yellen, we have three noble -- nobel prize winners, a host of former federal reserve
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officials, some of the most renowned and respected economists in the country pretty much disagree with everything that you asserted in your three-page missive against the act. i know you're not a fan, but i would just caution you, chair, that when you use such apocalyptic and hypersymbolic language, you might consider whether or not this undercuts your credibility as fed chair. i have one question in characterizing the fed's strategy to increase policy rates, you testify "removing monetary policy accommodation by the traditional approach is preferable which now holds almost as much in treasures as china and japan do combined." i'm trying to figure out what is
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traditional about this current approach where the fed and the ranking member, i think, brought this up in her opening statement, subsidizes deposit rates for some of the biggest banks in tour country, which can distort real asset allocation and constrain economic opportunity. and last i look as we speak, the fed's fund rate is just above 30 bases points. you're paying banks 50 bases points for access reserve which seems to be above the market rate. you previously testified this does not involve a subsidy to the banks. it appears to be a subsidy and it appears to distort real asset allocation. so what is traditional about this approach? >> the tools that we have used to raise our target for short-term interest rates, namely, our key tool being interest on access reserves is
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widely used by central banks as a key tool of monetary policy. and it is the critical tool that in order to y on live with short-term rates to what we regard as the appropriate stance to achieve congressionally mandated goals. i would point out that although we are paying interest in banks on reserves, those reserves are large ng our holdings, a postal -- portfolio of holdings and mortgage-back securities on which we earn substantially greater interests. and because of that large balance sheet this past year, the fed transferred back to the treasury and to the american
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taxpayers $100 billion -- >> but it is true that you're paying 50 basis points when the fed funds rate is 30 basis points. >> it is necessary for us to raise benchmark rates in order for a whole host -- >> that would seem to imply a subsidy to the largest -- my time has long since expired. the chair recognizes the ranking member for five minutes. >> continuing on the discussion that was just initiated by the chairman, as you continue to embark on the path of raising rates, i want to explore the alternative approaches that may exist for the federal reserve to do so in a manner that does not rely so heavily on paying massive sums to private sector banks to hold on to the reserves they maintain at the fed. while the fed pay close to $7
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billion on reserves in 2015 as and conomy strengthens rates are further increased, the amounts pay could increase dramatically into the ten's of billons of dollars. can you expand on why you believe that paying interest on excess reserve is particularly important for raising rates in environment? and discuss possible alternative approaches that may exist? and if you talk about what you believe is to be the mandate of congress and how you don't have the authority for alternatives, i want to hear more about that and what you do have the authority to do. chairman yellen: well, prior to the financial crisis the fed adjusted the level of short-term interest rates through small variations in this supply of eserves to the banking system.
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it is the traditional old-fashioned approach was no longer feasible. congress had debated the wisdom of giving us the tool of paying interest on reserves for many years and decided to do so in up6 -- twix and then speeded implementation in 2008. the knowledge that we had that tool and would be able to use it when we deemed it appropriate to begin to raise this short-term level of interest rates as we did in december did knowledge that tool was available. as i just mentioned, the tools that is critical to our control of short-term rates and widely used globally, that was an important fact when we considered all the actions that we took the unconventional actions that we took to produce
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the decline in the unemployment rate and improvement in the labor market that we have achieved. so if we were denied that tool at the present time, we would not be able to easily raise the level of short-term rates. >> however, if i may interrupt you for a moment. are you saying that you had limited only to that action? or do you have the authority to make some other decisions relative to what the interest that you are paying to these big banks? you have some flexibility here? chairwoman yellen: so we would likely to regain effective control of short-term interest rates, need to shrink our portfolio from this current large level back to the kinds of levels we had before the crisis. and we have set out over several
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years a plan for how we would normalize policy that relies not on selling long-term assets, but on adjusting short-term interest rates. i believe that if we were to follow the plan of selling off long-term assets, it could prove very disruptive to the expansion . it's a strategy that i think could harm the economic recovery and it certainly is not what we have set out to the public we said we would shrink our balance sheet in a garagele and predictable way. >> so if i may interrupt you again. you're saying that it was congress starting in twix who lped to -- 2006 who helped design it and congress could take it away even though you do not think it would be helpful? chairwoman yellen: i think it will be very drup tiff to the
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economy and i really -- disruptive and i want to point out several things about this. first of all, although the banks are earning this interest on the reserves that they hold, as the level of short-term rates rises, first of all, on their wholesale funding that many of these banks rely on, they're also paying more to gain that funding. eventually this will be the mechanism that will lead to higher deposit rates to reward savers. and finally, i really want to emphasize that from the taxpayer's point of view, the federal reserve has transferred ince 2008 through 2015 roughly $600 billion back to congress to the taxpayers to the treasury unds that have contributed
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importantly to financing the government and that has only been possible because we have a larger stock of reserves from -- in the banking system and correspondingly hold a far larger stock of interest bearing assets that pay a larger amount. prior that the crisis, a typical level of transfers from the fed to the treasury was in the in order of $20 billion. for the past two years, we have transferred $100 billion a year. >> thank you very much. we need to talk about this some more. i yield back to the gentleman from south carolina. >> i thank the chairman. a quick follow-up on the chairman's question. you mentioned that using the
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i.o.p.r. and the r.o.p. were traditional tools. have you ever used them? chairwoman yellen: no. >> has the federal funds rate which is trading on the market of about 30 basis points ever below the ioer which is set at 50 basis points? chairwoman yellen: has it ever been below? >> yes, ma'am. chairwoman yellen: since we set the -- when we were first given the power to pay interest on reserves, we set it at 25 basis points. and the fed funds rate traded below it. and when we raised i to 50, the fed funds rate moved up by roughly 25 basis points. the of the increase in ioer but continues to trade below it. >> all right. so your testimony is that those are traditional tools. so let's move then to a different discussion with that as a background. you have in the past, been a
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proponent, though a reserve proponent of a rules-based system, back in 2012. you gave a speech where you said "why shouldn't the fomc adopt a rule as a guide post"? the answer is by times, by no means normal new and the simple rules to perform well under ordinary circumstances just won't perform well. two years ago, you said something similar. you said in response to a question about rules. you said the conditions facing the economy are extremely unusual. i've tried to argue and believe strongly that while a tailor rule is or something like it provides a sensible approach in more normal times like the moderations under current situations, it is not appropriate. that's your testimony in 2014. you gave a speech in speech. here we are in 2016. we are using traditional tools of -- and your policy begins by saying that the economies made
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further progress toward the sfemb's objective maximum employment. you say inflation is low in the near term but i will rise over the medium term. re we in normal times? chairwoman yellen: the economy is in many ways, close to normal at the unemployment rate has declined to levels that most of my colleagues believe are consistent with full employment in the longer run. and inflation while it's below 2%, i do think there's a good reason to think it will move up over time. and in that sense, things are normal. but what is not normal is that this so-called neutral level of the federal funds rate that i referred to in my testimony and we discussed in the report is by no means normal.
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in other words, we have needed for seven years to hold the federal funds rate and both in nominal and in inflation real terms, inflation adjusted were real terms at exceptionally low levels to achieve growth averaging 2% or a little -- >> i'm sorry to interrupt -- chairwoman yellen: and in that sense it is not normal. the economy is being held back by headwinds. i would point out that a nant of the taylor rule is that it takes -- it assumes and embodies in it an assumption that the equilibrium level of the fed funds rate with the 2% objective 4% or it's the real equilibrium fed funds rate is 2% and that is not the case. >> i'm not pushing the taylor rule. i'm asking about a general rule based system because you have
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shown some support for it in the past. and i guess my question is this. what does the world have to look like? because i think admittedly, employment is better. inflation it seems to be under control. yes, you say the fed funds rate is extraordinarily low, which it is but that's something under your control. what does the world have to look like in order for the federal reserve to start considering transitioning to a rule-based system? chairwoman yellen: well, i think to benefit of a rule-based system is it's systematic and understandable. and the fresh has attempted to -- federal reserve has attempted to engage in a systematic policy -- >> i get that but what does the world have to look like? when you come back next year, what should the world have to look like when you say we have to consider a rule-based system. what has to change? chairwoman yellen: the committee looks at guidelines from rules as useful benchmarks as it considers the appropriate stance
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of policy. but i believe and i think most of my colleagues would agree that we shouldn't mechanically follow that rule or any other rule. but that we need to take into account a large, a large set of indicators of how the economy is performing. >> time of the gentleman has expired. the chair recognizes the general lady from wisconsin. >> thank you so much, mr. chairman. welcome, chair yellen. i want to take us in a little different direction. many of us here on both sides of the aisle are really concerned about what's happening with our smaller banks. and we understand that because -- we had a lot of concerns and debated that and included provisions like vokker and f-
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sok. and they were driven by an active capital markets. and i know that you're not the only, the fed notice the only regulator overseeing implementation of that. but i would like your thoughts on how the rules may have been tailored or should have been tailored for smaller community banks. you know the stress test, the capital standards are killing of mall banks, compliance officers that were -- they don't have the additional staff. just your thoughts on what should have been done or how has it been tailored. chairwoman yellen: well, let me say that i think community banks and their vitality is exceptionally important. they provide enormous benefits to the country and to the economy. i recognize that the burden on community banks is intense. > they're shutting down.
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chairwoman yellen: we're minimizing and reducing the banking organizations. we have been conducting in a review to identify potential burdens that are regulations imposed on these banks. and we will do everything that we can to respond to the concerns that are identified there to reduce burden. we're looking for many ways, first of all, we have tried to tailor our regulations to the size and complexity of institutions. the smaller community banks are not subject to stress testing requirements. many aspects of capital requirements and liquidity rules do not apply to those banking
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organizations. we've tried to simplify those requirements. we're in addition to that, trying to reduce the duration of the time that we spend reviewing banks during exams. we're trying to simplify and be more targeted in our requests for documentation. we try to identify four community -- for community bankers what is relevant to them and what they can safely ignore. and we're looking for ways to conduct exams that are more focused on the actual risks that are relevant to a particular organization. so i recognize that the burdens on those banks have been very intense and pledge that we are doing and will continue to do all we can to reduce burdens on them. >> thank you, madam chair. on this committee, we spend a
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lot of time talking about moral hazard. so i guess i would like your view on whether or not you think there's any moral hazard on not a single person involved in the 2008 crash having gone to jail. they get fines. they get sort of compliance letters where they can clean up their act and avoid prosecution. and i'm wondering if you think that it's important for us to -- you know, so what? you pay a fine. that is not -- that doesn't stop anyone from doing the next crime unlike other of our criminal laws. madam chair: i agree with you. i do not think that individuals that are debate of wrongdoing should escape paying appropriate penalties.
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for our own part, we are not allowed to put in place criminal penalties that's a matter for the department of justice. for our part, we can when we find individuals to be responsible for wrongdoing. make sure that they are not allowed to work at the banking organizations where they committed misdeeds. and in many cases, we can make sure that they're banned from the business of banking. and when we've been able to identify individuals who are responsible, we have put in place those sanctions and will continue to do so. and we always cooperate with the department of justice in their investigations. has e of the gentle lady
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expired. >> thank you, chair yellen. so does the federal reserve have the legal authority to implement egative rates? chair yellen: so this is a matter that the federal open market committee considered around 2010. and we didn't fully -- as we were exploring our options to provide accommodation, we decided not to lower interest rates either ioer to zero. we're into negative territory. and we didn't fully look at the legal issues around that. i would say that remains a question that we still would need to investigate more
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thoroughly. >> in one to our document request, that 2010 memo that i assume was connected to that policy discussion. chair yellen: that's right. >> raised significant doubts about the fed's authority that they currently have to charge -- to pay interests on excess reserves and whether or not that same authority would allow you to demand payment for that. chair yellen: first, i don't know of any restriction that would prevent us from doing that . that memo indicated, was intended to indicate that the legal issues had not been seriously considered. >> have they seriously considered since 2010? chair yellen: well, in the spirit of prudent planning, we always try to look at what options we would have available to us. either if we need to tighten
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policy more rapidly than we expect or the opposite to loosen policy. so we would take a look at it. but the legal issues, i'm not prepared to tell you have been thoroughly examined at this point. >> so at this point, it's unclear whether or not the fed does have legal authority to implement negative rates? chair yellen: i am not aware of that would ng prevent us from doing it. but i'm saying that we have not fully investigated the legal issues that still needs to be done. >> so let's move to regulation. a significant part -- you run the largest regulatory organization in the united states of america. perhaps in the globe, likely in the globe. and as such, you know, i believe in the independence of the fed to make monetary policy. but as a regulator, congress
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should have significant oversight of your regulatory actions, should they not? chair yellen: yes. >> ok. and as such, as a matter of regulation, the chairman raised this question with you the last time you were here about fresh -- federal reserve regulators, bank examiners demanding to be a part of board director meetings, member banks. and you've changed -- exchanged multiple letters on this matter. we still hear that this is in fact, taking place. would you pledge to this committee that you would direct your bank examiners and regional bank examiners to stop this practice? chair yellen: well, i will look into -- >> well, you already looked into it and you've exchanged letters and you gave the chairman assurance last time that you're not aware of it. i assume that you're aware of whether or not this is taking place. are you not? chair yellen: i think will have occasional situations in which
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that occurs. >> do you think that's appropriate? chair yellen: i'm not -- i'm not certain that it is inappropriate. i want to get back to you on that. >> ok. well, this was raised about six months ago by the chairman. you've exchanged multiple letters. i would like to have some greater assurance. this is not meant to be a gotcha. this is a well warranted question. and we are hearing and in fact at last, press report that the fed directed one of your member banks to incorporate two additional members of their board of directors and the fed directing a private enterprise to change their board of directors seems somewhat perplexing. do you believe that's appropriate authority for the feds? chair yellen: >> i think it's appropriate as a matter of supervision or that the board of directors of a financial company we supervise
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is appropriately constituted and filling its corporate governance functions. that is a part of supervision. >> my time is expired. >> the chair now recognize the gentle lady from new york, ms. malone. you raised interest rates in december and said any future interest rate increases that happened would be gradual. i would like to ask you about the recent oil and global markets. as you know, equity markets around the world led by china have longed since the beginning of the year as global economic growth has weakened. the u.s. has not been immune. stock markets have fallen over 9% since the beginning of the year and treasury yields have plunged

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